Appraisal Reports

Summary:

For an appraisal to be respected by the IRS or a court
the report should meet a host of requirements. Some of these are listed below.
This checklist can be used to evaluate a report you intend on using in a
divorce, tax plan or other matter.

Appraisal Report

• The report should comply with any appropriate
  standards such as USPAP which are general standards endorsed by many.  Other standards of specific
  organizations include ASA, IBA, and AICPA standards. For example, The
  American Institute of Certified Public Accountants (AICPA) issued
  SSVS  Number 1 to provide
  guidance and standards for CPAs performing valuations. Other standards
  include: The Uniform Standards of Professional Appraisal Practice (USPAP),
  National Association of Certified Valuation Analysis (NACVA), or the
  American Institute of Certified Public Accountants (AICPA), etc. This
  checklist focuses on SSVS 1.

• A statement as to whether the report is a
  “calculation report” or a “valuation report”? SSVS No. 1, §901. A
  valuation report contains a conclusion as to value based on the CPAs
  selection of methodologies deemed most appropriate. In contrast, a
  calculation report is the application of a valuation methodology selected
  by the CPA and client.

• A statement as to whether the report is a
  “detailed report” or a “summary report” under SSVS 1.

• Discussion of any limiting conditions.

• If the appraiser did not prepare the financial
  statements for the business being appraised it should state this and that
  it does not assume any responsibility for the financial information.

• The report details should include discussion
  of: ◙  Sources of information. ◙  Assumptions and facts upon which the
  report is based. ◙  History of the business and entity.
  Description of the entity (or asset). ◙  Formation of the entity, legal
  structure, governing legal documents. ◙ Operations
  of the business (customers, suppliers, personnel, competition, customers, seasonality,
  etc.). ◙  Analysis of non-operating assets and liabilities (e.g.,
  loan to shareholder). ◙  Analysis of nonfinancial
  information relevant to the appraisal. ◙ Management.
  ◙  Equity interest (classes of equity, rights of different
  classes, etc.). ◙  Entity’s expectations. ◙  Conditions and expectations (general economic
  circumstances, etc.). ◙  Analysis of company financial data
  and other information. ◙  Valuation adjustments (e.g.,
  normalization of earnings for unusual years, adjustment of key shareholder’s
  salary). ◙  Discounts. ◙ Valuation
  approaches and methods considered. ◙  Valuation methodologies and
  procedures actually used. ◙ Analysis,
  reasons and justification for the conclusions reached. This should include
  a reconciliation of the various estimates and conclusions of value (e.g.,
  if three different valuation methodologies were applied they could be
  reconciled to a single figure).

• Details are vital. The report should evaluate market
  size and economic information and their relation to growth potential.  An appraisal of a local tire shop
  may quote data about Goodyear and Firestone, but must also address the
  local situation.  If market
  data is relevant, the report must analyze the data to show what type of
  growth rates are sustainable. The report should explain how the
  methodologies were implemented and the basis for any assumptions.  Adjustments to the discount rate,
  historical sales growth rates, changes in profit margins, cash flow,
  should all be clearly explained.
  When market methods are used there should be a clear list of
  possible choices, presentation of criteria for exclusion/inclusion,
  support for how value drivers were determined, and specifics as to how
  value was actually determined based on the guideline companies.  Weighting in reconciliation of
  value must be supported and justified.  Boilerplate and unsubstantiated conclusions should be
  avoided.

• Representations of the appraiser.

• Calculations. The report should enable a
  reader to replicate the appraiser’s analysis.

• The report should reach the conclusions
  required to meet the stated objective.
  

• Specialists. If another person or firm was
  employed by the appraiser assuming primary responsibility for the report,
  that other specialist should be identified (e.g., an appraiser values 40%
  of an LLC owning an interest in a shopping center and relies on an
  independent MAI for the value of the property, the MAI must be disclosed).
  

• Certification of the appraiser.

• Signature of the person primarily responsible
  for the report.

• Appraiser’s qualifications including a
  curriculum vitae.

• Exhibits. These might include financial
  statements or tax returns for the entity, and the analysis of them. Data
  for comparable (guideline) businesses, or comparable data for whichever
  methodology was used.