Valuation vs. calculation engagements: What’s the difference?

By Brad Spence, Director of Valuation Solutions, Sageworks

Accountants, other professionals and their clients encounter many circumstances that may generate the need for an appraisal of a business or part of a business:

• Divorce

• Tax planning

• Buy-side due diligence on a merger or acquisition or sell-side advice on an offer

• Succession or estate planning

• Dispute between owners or between owner and contractors

• Adding or removing business partners.

Some of these circumstances are more complex than others, and some involve higher stakes that could lead to litigation or scrutiny by the IRS. In some cases, the valuation professional may be acting almost like a legal expert when they give an opinion on the value of the business or business interest. As a result, the complexity of the engagement (and the pricing of those services) may differ from one involving a lower-stakes situation.

To help distinguish between the different levels of services for estimating the value of businesses, ownership interests, securities, etc., valuation services are often divided into two types: “valuation engagements” and “calculation engagements.” 

Distinguishing between the two is of most interest to Certified Public Accountants, because they are required to follow AICPA standards governing business valuations. These standards, the AICPA’s Statement on Standards for Valuation Services No. 1 (SSVS1), indicate CPAs should clarify in advance whether they are offering a valuation or calculation engagement. SSVS1 spells out what constitutes a valuation versus a calculation, and it describes when and how each is performed. 

The National Association of Certified Valuators and Analysts (NACVA), too, has professional standards that describe differences between valuation and calculation engagements, but they are similar to those outlined by the AICPA.

But in general, all valuation professionals benefit from knowing the difference between these types of engagements so they can assess which service is right for the client. 

Valuation engagement

According to the AICPA, a valuation engagement results in a “conclusion of value,” which is basically an opinion on the value of the business or ownership interest, and it requires more procedures than a calculation engagement. (These engagements, often referred to as full-blown valuations, are typically more costly.) As Houston accounting firm EEPB describes it, “The CPA is expressing an independent conclusion of value, applying all applicable approaches and methods that are deemed necessary.”

As a result, these are typically used if the client’s situation is at risk of ending up in court.

Here are the main points the AICPA makes about a valuation engagement:

1. It is performed when the situation calls for the analyst to estimate the value of a subject interest, and when the analyst does so as outlined in SSVS1.

2. The analyst performing a valuation engagement is free to apply the valuation approaches and methods deemed appropriate for the circumstances, though all three valuation methods (asset-based, income-based and market-based) must be considered.

3. The results of the valuation are expressed as a conclusion of value, and the conclusion can either be a single amount or a range.

NACVA says a valuation engagement “requires that a member apply valuation approaches or methods deemed in the member’s professional judgment to be appropriate under the circumstances and results in a Conclusion of Value.”

Within valuation engagements, there are two levels of service typically offered: Summary and detailed, for which a valuation analyst provides more in-depth research.

Calculation engagement

A calculation engagement, according to the AICPA, results in a calculated value, which can be expressed as a single amount or a range. This type of engagement does not incorporate all of the procedures required for a valuation engagement. In fact, the valuation professional and client must agree in advance on a) the approaches and methods that will be used and b) the extent of procedures that will be used to calculate the value of a business or interest, and the valuation analyst must follow that arrangement.

NACVA’s standards are similar: “A Calculation Engagement occurs when the client and member agree to specific valuation approaches, methods and the extent of selected procedures and results in a Calculated Value.”

As EEPB notes, procedures tied to a calculation are more limited in scope and therefore the calculation “may or may not represent the actual value of the subject interest.” Indeed, valuation analysts normally qualify calculated values by stating that the results might have been different if a valuation engagement had been performed instead, notes the accounting firm Gilliam Coble & Moser LLP in a post on its website. 

This is why many CPAs will not testify in court proceedings if they have performed only a calculation engagement and why some firms will decline to perform them if it appears the client may need it for litigation – either in court or with the IRS.  Calculations of value can be useful for planning and to help negotiate settlements outside of court, but a client may need to upgrade to a valuation engagement if the settlement falls through.

As noted earlier, different circumstances require varying levels of service when it comes to valuations. These levels roughly correspond to the levels of assurance provided by the engagements. In other words, in the same way accountants provide increasing levels of assurance for financial statements as they provide compilations, reviews and audits, valuation professionals offer increasing assurance for business valuations as they provide calculations, summary valuations and detailed valuations.

Using an automated valuation solution can help valuation professionals no matter which type of engagement they perform. Sageworks Valuation Solution is updated to take into account any changes in compliance standards so that professionals can be confident in their conclusions of value and calculated values alike.

To learn more about optimizing your business valuations, watch a walkthrough of the Sageworks Valuation Solution.

Sageworks Valuation Solution
Sageworks Valuation Solution is a web-based, business valuation solution that helps firms streamline workflow, scale existing processes and increase realization rates. Explore features and benefits by watching a one-minute walkthrough video.