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Valuation vs. Calculation: When is a Calculation Appropriate?

Mueller Prost

January 25, 2021

When it comes to valuations, CPAs must follow the guidelines of The American Institute of Certified Public Accountants (AICPA), specifically the AICPA’s Statement of Standards for Valuation Services No. 1 (SSVS). SSVS describes the two types of valuation engagements CPAs can perform to estimate value: valuations and calculations.

These questions and answers help clarify differences between the two engagements and when they might be used.

How are they different? A valuation requires more procedures than a calculation and results in a conclusion of value. In a valuation, the analyst estimates the value of the asset by applying whichever valuation methods he or she deems appropriate given the circumstances. The conclusion can be expressed in a range or a single amount.

In a calculation, the analyst and client agree on the valuation methods and approaches to be used and the extent of the limited procedures to be performed. It is a less rigorous process than a valuation and results in a less detailed analysis and report. A calculation results in a calculated value. Like a valuation, calculation results can be expressed in a range or a single amount.

When is each used? All things being equal, a valuation is better in most litigation settings and for IRS compliance (see the following), financial reporting, and specific types of corporate planning.

Because a calculation is limited in scope and includes only approaches and methodologies to which the client agrees, it is generally more appropriate for lower-level corporate planning, preliminary or transaction discussion, and mediation or negotiations.

For employee stock ownership plans (ESOPs), the U.S. Department of Labor expects a full valuation rather than a calculation.

In litigation, if a calculation has been done for preliminary planning purposes, it is likely the valuation analyst will insist on performing a full valuation if the case goes to trial.

What are the benefits of a calculation? Calculations typically take less time and are less expensive than valuations. They are sufficient in the right circumstances for the right purposes.

What does the IRS say? The IRS and tax courts generally demand a valuation rather than a calculation. However, depending on the jurisdiction, there are cases when the IRS has accepted calculations for estate and gift tax purposes. Note the agency doesn’t officially confirm this.

Which is right for you? SSVS is nuanced but in many cases doesn’t prohibit analysts from choosing a calculation or a valuation. The right choice largely depends on the purpose of the engagement, the intended use of the analysis, and the audience it is prepared for.

There is certainly a place for calculations. But to decide which type of engagement to pursue requires a discussion between the client and the valuation analyst and, in dispute cases, the client’s attorney.

Our team can help you decide which type of engagement will work for you. Contact us to discuss your upcoming valuation needs.

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