Preamble

General and Ethical Standards

Member Services

Development Standards

Reporting Standards

Other Guidelines and Requirements

Effective Date

International Glossary of Business Valuation Terms

PREAMBLE
GENERAL AND ETHICAL STANDARDS

1.2 General and Ethical Standards. A member shall perform valuation and other services in compliance with a code of professional conduct consisting of the following principles and rules.

a. Integrity and Objectivity. A member shall remain objective, apply professional integrity, shall not knowingly misrepresent facts, or subrogate judgment to others.  The member must not act in a manner that is misleading or fraudulent.

b. Professional Competence. A member shall only accept engagements the member can reasonably expect to complete with a high degree of professional competence.  If a member lacks the knowledge and/or experience to complete such engagements with a high degree of professional competence, the member is not precluded from performing such engagements.  In such instance, the member must take steps necessary to gain such expertise through additional research and/or consultation with other professionals believed to have such knowledge and/or experience prior to completion of such engagements.

c. Due Professional Care. A member must exercise due professional care in the performance of services, including completing sufficient research and obtaining adequate documentation.

d. Understandings and Communications with Clients. A member shall establish, with the client, a written or oral understanding of the nature, scope and limitations of services to be performed and the responsibilities of the parties.  If circumstances encountered during the engagement require a significant change in these understandings, the member shall notify the client.  A member shall inform the client of conflicts of interest, significant reservations concerning the scope or benefits of the engagement, and significant engagement findings or events.

e. Planning and Supervision. A member shall adequately plan and supervise the performance of any service provided.

f. Sufficient Relevant Data. A member shall obtain sufficient relevant data to afford a reasonable basis for conclusions, recommendations or positions relating to any service rendered.

g. Confidentiality. Unless required to do so by competent legal authority, a member shall not disclose any confidential client information to a third party without first obtaining the express consent of the client.

h. Acts Discreditable. A member shall not commit any act discreditable to the profession.

i. Client Interest. A member shall serve the client interest by seeking to accomplish the objectives established with the client, while maintaining integrity and objectivity.

j. Financial Interest. A member shall not express a Conclusion of Value or a Calculated Value unless the member and the member’s firm state either of the following:

1) “I (We) have no financial interest or contemplated financial interest in the property that is the subject of this report.”; or

2) “I (We) have a (specify) financial interest or contemplated financial interest in the property that is the subject of this report.”

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VALUATION SERVICES

2.1   Valuation Services. When valuing a business, business ownership interest, security or intangible asset, a member may express either a Conclusion of Value or Calculated Value.  When performing such valuation services, members shall comply with the Development Standards and the Reporting Standards, in addition to all other standards promulgated by NACVA.  Valuation services are:

a. Valuation Engagement. 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; or

b. Calculation Engagement. 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.

2.2  Other Services.   A member may perform other services, such as consulting, fraud and damage determinations, and other non-valuation services.  When performing such services all standards promulgated by NACVA shall apply to the member’s work except for the Development and Reporting Standards.

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DEVELOPMENT STANDARDS

3.2 Expression of Value. Value can be expressed as a single number or a range of values.

3.3 Identification. A member must define the assignment and determine the scope of work necessary by identifying the following:

a. Subject to be valued;

b. Interest to be valued;

c. Valuation date;

d. Purpose and use of the valuation;

e. Standard of value;

f. Premise of value;

g. Intended users;

h. Valuation approaches or methods;

i. Assumptions, limiting conditions and scope limitations;

j. Ownership size, nature, restrictions and agreements;

k. Other factors that may influence value when appropriate in the opinion of the member; and

l. The sources of information.

3.4 Fundamental Analysis. In developing a conclusion of value, the member must obtain and analyze information necessary to accomplish the assignment, including:ethical_standards

a. The nature of the business and the history of the enterprise;

b. The economic outlook in general and the condition and outlook of the specific industry in particular;

c. The book value of the interest to be valued and the financial condition of the business;

d. The earning capacity of the enterprise;

e. The dividend paying capacity of the enterprise;

f. Whether or not the enterprise has goodwill or other intangible value;

g. Sales of interests and the size of the block of interest to be valued;

h. The market price of interests of enterprises engaged in the same or a similar line of business having interests actively traded in a free and open market; and

i. All other information deemed by the member to be relevant.

3.5 Scope Limitations. The member must identify and evaluate limitations on the scope of work, which affect the research, analysis and/or level of reliance the member places on the valuation results.

3.6 Use of Specialist. If the work of a third party specialist, such as a real estate or equipment appraiser, was relied upon in the engagement, a description of the reliance and level of member’s responsibility should be documented.

3.7 Valuation Approaches and Methods. Valuation methods are commonly categorized into the asset-based approach, market approach, and income approach or a combination of these approaches.  Professional judgment must be used to select the approach(es) and the method(s) that best indicate the value, including whether a combination of the results from more than one approach and/or method is necessary to arrive at an appropriate indication of value.

3.8 Rule of Thumb. Typically, a rule of thumb or benchmark indicator is used as a reasonableness check against the values determined by the use of other valuation approaches.  For Valuation Engagements, it should not be used as the only method to determine the value of the subject interest.  The source of rule of thumb data should be documented.

3.9 Financial Statement Adjustments. The historical financial statements should be analyzed and, if appropriate, adjusted to reflect the appropriate asset value, income, cash flows and/or benefit stream, as applicable, to be consistent with the valuation method(s) selected by the member.

3.10 Earnings Determination. The member should select the appropriate benefit stream, such as pre-tax or after-tax income and/or cash flows, and select appropriate capitalization/discount rate(s) to be consistent with the valuation method(s) selected.

3.11 Capitalization / Discount Rate. The member must consider appropriate capitalization and/or discount rates, consistent with the valuation method(s) selected, taking into consideration the following risk factors:

a) The nature of the business;

b) The stability or regularity of earnings;

c) The stability, depth and experience of management; and

d) Other risk factors when appropriate in the opinion of the member.

3.12 Marketability, Control, and Other Premiums and Discounts.   If applicable, the member must consider the following:

1. Marketability and Liquidity, or the lack thereof, considering the nature of the business, business ownership interest or security, the effect of relevant contractual and legal restrictions on transferability of the interest being valued and the condition of the market for the interest being valued;

2. Ability of the interest to control the operation, sale and liquidation of the related business enterprise; and

3. Such other similar factors when appropriate in the opinion of the member.

3.13 Documentation.   Sufficient documentation should be retained for information relied upon in the valuation process.  Inclusion of such information in the report satisfies this standard.

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REPORTING STANDARDS

4.1 General. A member shall comply with these Reporting Standards when expressing a Conclusion of Value or a Calculated Value.

4.2 Form of Report. One of the final stages in the valuation process is the communication of the results of the valuation to the client or other user of the report.  The form of any particular report will depend on the nature of the engagement, its purpose, its findings and the needs of the decision-makers who receive and rely upon it.  The purpose of these standards is to establish minimum reporting criteria.  The report may be written or oral.  The objective of these standards is to ensure consistency and quality of valuation reports issued by members of NACVA.

4.3 Contents of Report. A report expressing a Conclusion of Value may be presented in either a Summary or Detailed Report.  A Calculated Value must be presented in a Calculation Report.  The member should disclose the report type (Summary, Detailed, or Calculation). Reports should be carefully prepared, communicate the results and identify the information relied upon in the valuation process.  The wording used in the report should effectively communicate important thoughts, methods and reasoning, as well as identify the supporting documentation in a simple and concise manner, so that the user of the report can replicate the process followed by the member.

a. Summary Reports. Summary Reports should set forth the Conclusion of Value and the following minimum information concerning the Valuation Engagement and its results:

1. Identification of the subject being valued;
2. Description of the interest being valued;
3. Ownership size, nature, restrictions and agreements;
4. Valuation date;
5. Report date;
6. Purpose and use of the valuation;
7. Definition of the standard of value;
8. Identification of the premise of value;
9. Valuation approaches and method(s) utilized by the member;
10. Historical financial statement summaries, when applicable;
11. Identification of the assumptions, limiting conditions and scope limitations;
12. Reliance on a specialist;
13. Jurisdictional exceptions and requirements;
14. Limitations on use of the report—all valuation services vary as to specific assumptions, limiting conditions and scope, therefore, the member must identify material matters considered;
15. Sources of information;
16. A statement of Financial Interest;
17. Whether or not member is obligated to update the report;
18. Disclosure of any contingency fee;
19. Qualifications of member; and
20. Responsible member signature—the member who has primary responsibility for the determination of value must sign or be identified in the report;

b. Detailed Reports. Detailed Reports may include the following additional information in addition to that identified in paragraph 4.3 a:

1. Non-operating assets and liabilities;
2. Adjustments to historical financial statements, when applicable;
3. Adjusted financial statement summaries, when applicable;
4. Projected/forecasted financial statements including the underlying assumptions, when applicable;
5. Valuation approaches and method(s) considered by the member;
6. A description of the fundamental analysis; and
7. Other items that influence the valuation.

c. Calculation Reports. A Calculation Report should set forth the Calculated Value and should include the following information in addition to that identified in paragraphs 4.3 a 1 through 4.3 a 20:

1. Purpose of the calculation procedures;
2. State that the expression of value is a Calculated Value; and
3. A general description of the calculation, including a statement similar to the following:

   "This Calculation Engagement did not include all the procedures required for a Conclusion of Value.  Had a Conclusion of Value been determined, the results may have been different."

d. Statement that the Report is in Accordance with NACVA Standards.  A statement similar to the following should be included in the member’s report:

"This analysis and report were completed in accordance with the National Association of Certified Valuation Analysts Professional Standards."

4.4 Litigation Engagements Reporting Standards. A valuation performed for a matter before a court, an arbitrator, a mediator or other facilitator, or a matter in a governmental or administrative proceeding, is exempt from the reporting provisions of these standards.  The reporting exemption applies whether the matter proceeds to trial or settles.  This litigation waiver does not, however, relieve the member from complying with the Development Standards and all other standards promulgated by NACVA.

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OTHER GUIDELINES AND REQUIREMENTS

5.1 Other Requirements. Besides NACVA’s Professional Standards, members may also find it necessary to consider guidelines and/or other requirements established by other organizations or authorities, such as:

a) Department of Labor (DOL);

b) Internal Revenue Service (IRS);

c) Rules of the applicable courts;

d) Federal and State laws;

e) The Appraisal Foundation (USPAP); and

f) Financial Accounting Standards Board (FASB).

5.2 International Glossary of Business Valuation Terms. Developed jointly by the AICPA, ASA, CICBV, IBA and NACVA, the glossary of definitions should be used by the member (see Appendix).

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EFFECTIVE DATE

6.1.  These Professional Standards are effective for engagements accepted on or after January 1, 2008.

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