Comprehensive valuations require substantial time and money to complete — but they also provide a reliable conclusion of value. Some clients and attorneys may be tempted to limit an appraiser's scope by using a calculation of value. Although this strategy may save resources over the short run, it often proves costly over the long run, especially if the court won't allow an expert who provides a calculation of value to testify.
CPA experts generally must follow the Statement on Standards for Valuation Services No. 1, which explains the scope of a calculation engagement as follows:
Calculation engagement. A valuation analyst performs a calculation engagement when 1) the valuation analyst and the client agree on the valuation approaches and methods the valuation analyst will use and the extent of procedures the valuation analyst will perform in the process of calculating the value of a subject interest (these procedures will be more limited than those of a valuation engagement), and 2) the valuation analyst calculates the value in compliance with the agreement. The valuation analyst expresses the results of these procedures as a calculated value. The calculated value is expressed as a range or as a single amount. A calculation engagement does not include all of the procedures required for a valuation engagement.
Similarly, the standards of the American Society of Appraisers has adopted a similar description of calculation engagements:
Calculation. The objective of a calculation is to provide an approximate indication of value of a business, business ownership interest, security or intangible asset based on the performance of limited procedures agreed upon by the appraiser and the client. A calculation has the following qualities:
Both of these standards clearly establish that a calculated value isn't a complete valuation. The primary difference is that calculations don't include all of the procedures and approaches required for a valuation engagement.
Thus, the result is a "calculated value" or guide, not a conclusion of value. It's a value that's arrived at when the valuation professional and client agree to certain approaches and procedures. As such, the use of a calculated value in a litigation proceeding provides a value for a business interest that can't be an opinion of value. In fact, most calculation reports contain a disclosure that admits that if a comprehensive valuation had been performed, the results may have differed significantly.
So, it's unlikely that a calculation would meet the Daubert (or similar state) standards and might be rendered inadmissible by a court.
While an expert's professional standards may not explicitly prohibit the use of a calculation in a litigation matter, it should be clear from its nature that it wasn't intended for that purpose.
Calculations are better suited as a preliminary value for purposes of settlement of a litigation (for example in a marital dissolution matter or buy/sell dispute) and internal planning purposes. But they shouldn't be used in court proceedings.
Before hiring a valuation expert, it's important to understand the level of service you're paying for. A calculation isn't equivalent to a comprehensive valuation. The former produces a calculated value that may be appropriate for settlement and internal planning purposes. The latter is what an expert needs to provide a reliable, objective and useful estimate of value that will withstand scrutiny from outsiders when the expert testifies in court.
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