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Unformatted text preview: Forensic and Investigative Accounting Forensic Chapter 17 Business Valuations © 2009 CCH. All Rights Reserved. 4025 W. Peterson Ave. Chicago, IL 60646-6085 1 800 248 3248 www.CCHGroup.com Valuation and Appraiser Accreditations
Business appraisers have traditionally come Business from either a finance or accounting background. background. Chapter 17 Forensic and Investigative Accounting 2 Valuation and Appraiser Accreditations
The following certifications are offered: – Accredited Senior Appraiser (ASA) and Accredited Accredited Member (AM) awarded by the American Society of Appraisers (ASA). American – Certified Business Appraiser (CBA) awarded Certified by the Institute of Business Appraisers (IBA). by (continued on next slide) Chapter 17 Forensic and Investigative Accounting 3 Valuation and Appraiser Accreditations
– Certified Valuation Analyst (CVA) awarded Certified by the National Association of Certified Valuation Analysts (NACVA). Valuation – Accredited in Business Valuation (ABV) Accredited awarded by the American Institute of Certified Public Accountants (AICPA). Certified – Chartered Financial Analyst (CFA) awarded Chartered by the Association for Investment Management and Research (AIMR). Management
Chapter 17 Forensic and Investigative Accounting 4 Engagement Agreements
An engagement agreement is necessary in any An valuation or client-related undertaking because it: valuation – Clearly sets forth the expectations of the business Clearly valuator and client. valuator – Reduces the chance for misunderstanding and, Reduces therefore, the risk of malpractice litigation and claims against the business valuator. claims – Increases the likelihood of the valuator being Increases paid, since it establishes a clear obligation on behalf of the client. behalf
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Chapter 17 Forensic and Investigative Accounting 5 Engagement Agreements
The following specifics need to be considered in The drafting an engagement agreement: drafting – Identify the client. – Specify the interest, date, purpose, and Specify intended use of the valuation. intended – Define the standard of value. (continued on next slide) Chapter 17 Forensic and Investigative Accounting 6 Engagement Agreements
– – – – – – – Assign responsibility for fees and costs. Price the engagement. Specify responsibility for real estate and other Specify appraisal costs. appraisal Obtain a retainer. Protect against the use and misuse of forecasts Protect by clients. by Include indemnification language. Include other terms and conditions.
Forensic and Investigative Accounting 7 Chapter 17 Purposes for Obtaining Purposes Business Valuations Business Tax purposes. Divorce distributions. Liquidations. Employee stock Employee ownership plans (ESOPs). (ESOPs). Lost profit analyses. Mergers and Mergers acquisitions. acquisitions. Minority shareholder Minority distributions. distributions. Buy-sell agreements. Bankruptcies. Recapitalizations. Management Management buyouts. buyouts. Allocations of Allocations purchase price. purchase
8 Chapter 17 Forensic and Investigative Accounting General Types of Valuations Asset-based approach—This type of valuation is Asset-based used to value asset-intensive businesses such as retail and manufacturing. The focus is on what the equipment and real estate are worth. equipment Income approach—This type of valuation is useful Income for service companies. The focus is on how much money a buyer can make from the business. money (continued on next slide) Chapter 17 Forensic and Investigative Accounting 9 General Types of Valuations Market approach—This type of valuation Market looks at what the market is paying for similar businesses and is used to value many different types of businesses. The focus is on the marketplace: what others have paid for similar companies. have Chapter 17 Forensic and Investigative Accounting 10 Standards of Value
Fair market value. Fair value—100 percent controlling interest —100 value. value. Fair value—minority interest and marketable Fair value. value. Fair value—minority interest but Fair nonmarketable. nonmarketable. Investment value. Intrinsic value. Chapter 17 Forensic and Investigative Accounting 11 Income Approach
Capitalization of income method. Discounted future income method. Discounted future cash flow method. Capitalization of excess earnings method. Chapter 17 Forensic and Investigative Accounting 12 Market Approach
Guideline (public company) method. Market data method. Past transactions method. Chapter 17 Forensic and Investigative Accounting 13 Cost Approach
Book value (not really a valuation method). Adjusted book value (adjusted net asset value). Chapter 17 Forensic and Investigative Accounting 14 Gathering Initial Information
Goals of pre-engagement phone contact include: – Develop trust and rapport. – Gain a brief understanding of the business. – Determine who will be responsible for Determine gathering information. gathering – Explain the valuation process and timing. – Determine methods of corresponding with Determine the client. the
Chapter 17 Forensic and Investigative Accounting 15 Discerning What Data Is Required
Request forecasts of future financial results. Review articles on industry-related Review valuation issues. valuation Request client information prior to Request company interviews. company Chapter 17 Forensic and Investigative Accounting 16 Spreading Financial Statements
Financial spreadsheet reports include: – Actual and common-sized income Actual statements. statements. – Actual and common-sized balance sheets. – Financial statement ratios. – Trend statements. Chapter 17 Forensic and Investigative Accounting 17 Analyzing Financial Statements for Analyzing Trends and Risks Trends
The purpose of analyzing a company’s historic The financial statements is to provide information about these factors that are crucial in the preparation of a valid valuation: preparation – Trends and what they say about the possible Trends future. future. – How well or how poorly a company performs How compared to industry peers. compared – Key elements of company strategy.
Chapter 17 Forensic and Investigative Accounting 18 Income Statement Profitability Analysis
Income statement profitability analysis helps Income valuators determine the following: valuators – Judgments about the historic performance of Judgments the company and the variability of results. – Results against which to assess Results management’s strengths and weaknesses, and how this would impact an investor’s perception of the shares as an investment, and their associated risk. their (continued on next slide)
Chapter 17 Forensic and Investigative Accounting 19 Income Statement Profitability Analysis
– An objective basis for comparing a company’s An performance relative to its industry peers. performance – Insight into a company’s economics and how Insight the business achieves its net profit on a given level of revenues. – Clues concerning the internal and external Clues forces that affect the business, and what this suggests about risk, future threats, and opportunities. opportunities.
Chapter 17 Forensic and Investigative Accounting 20 Income Statement Analysis Revenues – Past trends. – Growth rates. – Variability in individual annual results. – Overall observed results. – Identification of the appropriate questions. Gross profits – Components of goods sold. – Calculation of goods sold. (continued on next slide)
Chapter 17 Forensic and Investigative Accounting 21 Income Statement Analysis
Operating expenses. Operating profits. Other income and expense. Pretax profitability. Chapter 17 Forensic and Investigative Accounting 22 Business Valuation Standards
Uniform Standards or Professional Uniform Appraisal Practice (USPAP) from The Appraisal Foundation Appraisal Code of Professional Conduct from the Code American Institute of Certified Public Accountants (AICPA) Accountants Statement of Financial Accounting Statement Standards No. 157 from the Financial Accounting Standards Board (FASB) Chapter 17 Forensic and Investigative Accounting 23 Features of the Standards Independence. Fee not contingent on appraised value. Limiting conditions. Professionals participating in the assignment. Information sources used. Report content. Data collection and analysis. Methodology. Reconciliation of findings of value. Adjustments to valuation findings. Conclusion of value.
Forensic and Investigative Accounting 24 Chapter 17 Report Content
Purpose and scope of the assignment. Standard of value used. Identification of the specific interest being Identification valued. valued. Specific valuation date used. Relevant state law governing the entity. Scope of the valuation report. Chapter 17 Forensic and Investigative Accounting 25 Organization of the Report
1. 2. 3. 4. 5. Front pages A. Cover sheet (with company name and valuation Cover date) date) B. Transmittal letter C. Table of contents Introduction Company information Financial condition Valuation methodology
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Chapter 17 Forensic and Investigative Accounting 26 Organization of the Report
1. 2. Valuation conclusion Exhibits A. Limiting conditions B. Definitions of valuation terms C. Qualifications of the valuation professionals Qualifications who worked on the report who D. Common size balance sheets of the company E. Common size income statements of the Common company company F. Ratio analysis of the company
Chapter 17 Forensic and Investigative Accounting 27 Standards of Valuation Standards The are a number of standards that may be The applied to valuation engagements applied
– The Uniform Standards of Professional The Appraisal Practice (USPAP)
» Codifies many common sense standards of Codifies professional appraisers – American Institute of Certified Public American Accountants (AICPA) Accountants
» Issues more general standards of valuation as it Issues relates to the braod activities of CPAs relates
Chapter 17 Forensic and Investigative Accounting 28 Statement of Financial Accounting Standards No. 157 Standards This standard address the issue of “fair This Value Measurements”
– It defines Fair Value – Establishes a framework for measuring value in Establishes in GAAP in – Relates fair value to publications issued by the Relates FASB Concepts Statements No. 2, No. 6, and No. 7 No. Chapter 17 Forensic and Investigative Accounting 29 ...
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