Valuation or calculation: which is best for litigation?

• Author: Trugman, Gary R.
• Position: Conference notes

In the following article an experienced, authoritative valuation analyst discusses practitioners' need to understand why and when to insist that a client choose a valuation over a calculation.

Recently I moderated a telephone audio conference in which most of the participants were trying to get around the then new Statement on Standards for Valuation Services No. 1 (SSVS) No. 1, Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset (AICPA, Professional Standards, vol. 2, VS sec. 100), by offering to do a calculation instead of a valuation for litigation purposes. You can do the calculation if you want, but I think you would be crazy to do so! According to SSVS No. 1:

21. There are two types of engagements to estimate value--a valuation engagement and a calculation engagement. The valuation engagement requires more procedures than does the calculation engagement. The valuation engagement results in a conclusion of value. The calculation engagement results in a calculated value. The type of engagement is established in the understanding with the client (paragraphs 16 and 17):

1. Valuation engagement--A valuation analyst performs a valuation engagement when (1) the engagement calls for the valuation analyst to estimate the value of a subject interest and (2) the valuation analyst estimates the value (as outlined in paragraphs 23-45) and is free to apply the valuation approaches and methods he or she deems appropriate in the circumstances. The valuation analyst expresses the results of the valuation as a conclusion of value; the conclusion may be either a single amount or a range. b. 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 (paragraph 46) (emphasis added). SSVS No. 1 identifies valuation engagement and calculations engagement...