Calculation Engagement Reporting Requirements

Pursuant to the professional standards of both the American Institute of CPAs (“AICPA”) and the American Society of Appraisers (“ASA”), when performing a valuation related service, a valuation analyst (AICPA term) / appraiser (ASA term) have different options as to the type of engagement they can perform. Under the ASA, an appraiser can perform an appraisal, a limited appraisal, or a calculation. The primary differences between the three rest in both the information used and the procedures considered. Under the AICPA, an appraiser can conduct a valuation engagement or a calculation engagement.

Under the professional standards of the ASA, an appraiser, in order to conduct an appraisal, must consider all relevant information and the appraiser must choose the conceptual approaches they deem necessary. In a limited appraisal, an appraiser may use limited information, but they still must consider all conceptual approaches and utilize the ones they deem most appropriate. Pursuant to the ASA, a calculation engagement involves the use of limited information and the conceptual approaches used are the ones agreed upon by the client and the appraiser. The concept that an appraiser and a client agree to the approaches to be used is the fundamental distinction between an appraisal or limited appraisal and a calculation engagement.

Under AICPA’s Valuation Services Section 100 (“VS 100”), the difference between a valuation engagement and calculation engagement is akin, if not the same, as with the ASA. Under VS 100, a valuation engagement requires the analyst to provide a conclusion of value, and the analyst is free to apply the approaches and methodologies they deem most appropriate. The analyst should consider and rely on all relevant information in coming to their opinion of value. A calculation engagement, on the other hand, is one in which the analyst and the client agree on the methods and approaches that will be applied, the analyst calculates the value in accordance with the agreement, and the analyst expresses the result as a calculated value (as a single amount or as a range). Furthermore, the analyst should make it clear to the client that a calculation does not include all of the procedures required for a full valuation and a calculation is limited in scope. Most importantly, a calculation does not result in an opinion or conclusion of value.

In conducting an appraisal or valuation, the appraiser needs to consider all relevant information, but in performing a calculation, the analyst should identify, at a minimum, the identity of the client, the subject interest, control and marketability characteristics of the interest, purpose and intended use of the calculated value, intended users of the report and limitations, valuation date, applicable standard of value, applicable premise of value, sources of information, valuation approaches and methods agreed upon with the client, subsequent events, if applicable, and should meet all documentation requirements.

While the ASA allows for a calculation engagement, it does not provide reporting guidance for such an engagement. Most appraisers around the country believe analysts that are members of the ASA can look to the AICPA for such guidance. We have seen many times an analyst produce a calculations work product that is merely a collection of schedules. Merely providing a set of schedules though will likely be in conflict with the professional standards of the AICPA. Certain information must be contained in the work product in order for the calculation engagement to be in compliance with VS 100.

Pursuant to VS 100, a calculation report is the only type of written report that may be used to communicate the findings of a calculation engagement. In a calculation report, the analyst must identify any hypothetical conditions used in the calculation engagement, including the basis for their use, any application of the jurisdictional exception, and any assumptions and limiting conditions applicable to the engagement. The calculation report should include a section summarizing the calculated value in addition to the calculation procedures that were performed, the identity of the subject interest and the calculation date. The analyst should also describe the calculation procedures and the scope of work performed as well as describe the purpose of the calculation procedures, including that the calculation procedures were performed solely for that purpose and that the resulting calculated value should not be used for any other purpose or by any other party for any purpose. The report should also contain language along the lines of “a calculation engagement does not include all of the procedures required for a valuation engagement similar,” and “had a valuation engagement been performed, the results may have been different.”

It is imperative for the analyst to understand that in all cases under VS 100, the result of a calculation engagement is a “calculated value.” It should also be noted that the calculation engagement was conducted in accordance with VS 100 of the AICPA. A description of the business interest’s characteristics should be included. Finally, the calculated value, either a single amount or a range, should be described; the report should be signed; the date of the valuation report is given; and, it should be noted that the analyst has no obligation to update the report or the calculation of value for information that comes to his or her attention after the date of the report.

In regards to relying on a calculation, the analyst must carefully consider the purpose of the valuation when conducting this type of engagement. As discussed earlier, a calculation engagement does not include all of the procedures required for a valuation engagement, and had a valuation engagement been performed, the results may have been different. While there is no prohibition against testifying to a calculation, it would be an exceedingly risky proposition. In a calculation engagement, the analyst cannot provide a valuation conclusion. Given that a calculation is not an opinion value, it would be difficult if not impossible to defend to the trier of fact or to the opposing counsel. For this very same reason, a calculation would also not be appropriate or acceptable to the IRS. In our experience, a calculation engagement is typically only appropriate for a client who only needs a rough estimate of value whether it be for corporate planning purposes, settlement discussions or internal planning purposes.