Per the AICPA Statement on Standards for Valuation Services #1 (SSVS #1), a valuation analyst may complete a calculation engagement for which he/she would submit a calculation report. A calculation engagement is much more limited in scope than a valuation engagement. A valuation engagement is performed for the purpose of expressing an opinion of value and requires consideration of all relevant information and the application of all relevant valuation methods and procedures. A calculation engagement is an agreement between the valuator and the client as to which valuation approach or approaches will be used and the extent of the procedures to be applied in the process of determining a calculated value. A calculation engagement does not result in the expression of an “opinion” of value but rather a calculated value. It is possible that a materially different value could be derived using a calculation rather than a valuation engagement. A calculation engagement is typically requested by a client who is just trying to get a feel for a business’ value but does not want to spend the amount of money necessary to have a valuation engagement performed.
There is some debate among valuation analysts regarding the use of a calculation of value in a litigation environment. Because the engagements are limited in scope, some analysts do not feel comfortable testifying in court to a calculated value. If an opposing expert provides an opinion of value through a valuation engagement, the expert relying on a calculation of value may be subject to some harsh scrutiny under cross-examination regarding why a valuation engagement was not performed.
A recent Federal court case in the State of Pennsylvania dealt with whether or not a calculation of value is admissible as evidence under Daubert. In Hipplie v. SCIX, LLC, the plaintiff’s expert submitted a calculation of value. Under deposition testimony, the expert stated that he had limited information about the financial records of the Company and therefore could not perform a full valuation engagement. Defendants issued a Daubert challenge stating that the report failed two requirements, reliability and fit (relevance). The defendants asked that the calculation report be precluded from evidence.
The court sided with the Plaintiffs and allowed the report to remain in evidence. The court stated that a calculation report was approved by the AICPA, that the expert had reasonably explained why a full valuation could not be performed and that the methodologies and assumptions made were clear. The court found no reason for the trier of fact not to hear the testimony.
The weight of reliance the court put upon the calculation of value was not available as of this writing. Admittance as evidence and reliance upon are, as they say, two different things. A recent family court case in Arizona highlights this fact. A calculation of value was submitted by one of the experts in a marital dissolution case. The use of the calculation was not objected to and no Daubert challenge was issued. However, in its ruling the court determined that the calculation of value was not thorough or complete and did not reliably apply the principles and methods regarding business valuation to the facts of the case.
Although calculation reports may be admitted as evidence, it is the opinion of Henry & Horne that they do not contain enough facts or data to reliably provide a value to a court of law.
For more information about calculation vs. appraisals, please read the article entitled “Calculation vs. Appraisal Opinion in Marital Dissolutions” written by Stephen Koons.
By Melissa E. Loughlin-Sines, CPA, CFE, CVA, CFF, ABV