Valuation Reports Are Not All Equal

Oct 28,2019 Leave a comment By Segal GCSE LLP

Once it is determined that an independent valuation is needed, business owners and legal advisors are often unsure what the deliverable should be to meet their needs. When a Chartered Business Valuator (CBV) is engaged to act as a valuation expert where there is an expectation of independence , the CBV typically provides an expert report containing an independent professional conclusion. In doing so, the CBV exercises significant professional judgment and employs his/her experience and independent research. Valuation reports prepared on objective basis are defined by the Canadian Institute of Chartered Business Valuators (CICBV) as follows :

Calculation Valuation Report – Contains a conclusion as to the value of shares, assets or an interest in a business that is based on minimal review, analysis and little or no corroboration of relevant information, and is generally set out in a brief Valuation Report;

Estimate Valuation Report – Contains a conclusion as to the value of shares, assets or an interest in a business that is based on limited review, analysis and corroboration of relevant information, and generally set out in a less detailed Valuation Report; and,

Comprehensive Valuation Report – Contains a conclusion as to the value of shares, assets or an interest in a business that is based on a comprehensive review and analysis of the business, its industry and all other relevant factors, adequately corroborated and generally set out in a detailed Valuation Report.

When is a formal report actually required?

The general rule is that if a CBV is providing a value conclusion in writing, the CBV professional standards mandate that it is required to be in a formal report – schedules presented on their own are not appropriate. The CICBV standards do not apply to any type of verbal discuss ion whether it be commenting on proposed values or assisting in a negotiation.

Level of Assurance

When is a Calculation or Estimate report sufficient or when in a Comprehensive report required? In general, the level of assurance provided by each report increases as it moves from a Calculation report to a Comprehensive report. Corresponding with this is the effort and fees required to provide the increase in assurance.

General Types of Analysis and Extent of Work Performed

The difference between the three report alternatives is largely the depth of analysis and disclosure as opposed to the breadth of the analysis or scope of review set out as follows:

Calculation reports are inherently limited in that they involve a simplified approach to valuing a business. An Estimate or Comprehensive report allows for more investigation into the critical value drivers of the business which will provide a clearer indication of a company’s value, assuming the required information is available.

How to choose?

Consider the context and risk of the situation. Who are the users of the report? How likely is the valuation conclusion to be challenged by another party such as the courts, tax authorities or other third parties? Is the exposure of the report low or high? What is the level of information available? The valuation report should be credible for the intended purpose. Each of the valuation reports options and the circumstances when each may be appropriate is as follows :

Retaining a CBV and determining the type of report that meets the needs of all stakeholders involves a number of key considerations, including the nature and size of the subject company, the level of public exposure in terms of users, how contentious is the matter and the availability of information. As the level of assurance increases, so does the complexity and hence the professional fees required. A formal valuation might not be needed in all situations, but when it does, it should meet the needs of all stakeholders.

Contributed by Michael Frost CPA. CA. CBV, from Mowbrey Gil. This piece was produced as a part of the quarterly Canadian Overview, a newsletter produced by the Canadian member firms of Moore North America.