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ABV > Chapter 1 > Flashcards

Chapter 1 Flashcards

1
Q

What are the two types of engagements?

A

Valuation engagement and calculation engagement

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2
Q

What is a valuation engagement?

A
  • Determine an estimate of value by performing appropriate valuation procedures, as outlined in the AICPA
    Statement on Standards for Valuation Services.
  • Free to apply the valuation
    approaches and methods deemed appropriate in the circumstances.
  • Express results as a conclusion of value (range or single amount).
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3
Q

What is a calculation engagement?

A
  • Determine an estimate value based on agreed upon valuation approaches and valuation methods based on an agreed upon scope of procedures.
  • Does not include all the valuation procedures required for a valuation engagement.
  • If a valuation engagement had been performed, the results might have been different.
  • Express results as a calculated value (range or single amount).
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4
Q

What is VS Section 100?

A

AICPA standards relating to the valuation of a business, business ownership interest, security, or intangible asset for engagements accepted on or after 1/1/2008.

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5
Q

What is VS Section 9100?

A

A list of Q&As to assist members in determining if the engagement fell under VS Section 100 that were originally included as an appendix to VS Section 100’s exposure draft.

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6
Q

What are the four different types of reports under VS Section 100?

A
  • Valuation engagement detailed report
  • Valuation engagement summary report
  • Calculation engagement calculation report
  • Oral report (encompasses one of the other 3)
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7
Q

What is a general description of a detailed report?

A

The detailed report is structured to provide sufficient information to permit intended users to understand the data, reasoning, and analyses underlying the valuation analyst’s conclusion of value.

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8
Q

What is a general description of a summary report?

A

A summary report is structured to provide an abridged version of the information that would be provided in a detailed report and therefore, need not contain the same level of detail as a detailed report.

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9
Q

What sections are not included in a summary report that are included in a detailed report?

A

Valuation methodologies considered

Financial statement analysis

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10
Q

What two sentences are required in a calculation report?

A

 A calculation engagement does not include all the procedures required in a valuation engagement, as the term is defined in VS section 100.
 Had a valuation engagement been performed, the results might have been different.

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11
Q

What is a general description of an oral report?

A
  • For either a valuation or calculation engagement.
  • Should include all information the valuation analyst believes necessary to relate the scope, assumptions, limitations, and the results of the engagement so as to limit any misunderstandings
  • Substance of communication should be documented in workpapers
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12
Q

What does VS Section 100 state regarding subsequent events?

A
  • When a subsequent event is meaningful it may be disclosed at the option of the analyst in a separate section
  • Should clearly indicate that the information does not impact the determination of value at the valuation date.
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13
Q

Subsequent events can include what type of changes?

A

Economic, industry, company, interest rates, additional legal precedent

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14
Q

What does VS Section 100 state regarding certain controversy proceedings?

A
  • 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 this Statement.
  • The reporting exemption applies whether the matter proceeds to trial or settles.
  • The methodology to arrive at the conclusion of value still should follow VS Section 100.
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15
Q

What are the characteristics of an internal report?

A
  • Analyst typically not independent
  • More flexible format
  • Highly customized
  • More emphasis on synergistic benefits
  • Heavy emphasis on DCF
  • Covers specific issues deemed important to management
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16
Q

What is the AICPA code of professional conduct rule 1.100.001 related to integrity and objectivity?

A

a member shall maintain objectivity and integrity, shall be free of conflicts of
interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others

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17
Q

What are the roles of an attorney and a valuation analyst with respect to advocacy?

A

 Attorney is the advocate for the client.

 Valuation analyst is the advocate for his or her professional opinion(s).

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18
Q

What is the AICPA code of professional conduct rule 1.200.001 related to independence with respect to valuation services?

A

Independence would be impaired if a member performs an appraisal, valuation, or actuarial service for an attest client where the results of the service, individually or in the aggregate, would be material to the financial statements and the appraisal, valuation, or actuarial service involves a significant degree of subjectivity.

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19
Q

How would you apply the Conceptual Framework under AICPA Code of Conduct Rule 1.200.001 related to independence?

A

a member should evaluate whether that relationship or circumstance would lead a reasonable and informed third party who is aware of the relevant information to conclude that there is a threat to either the member’s or firm’s independence, or both, that is not at an acceptable level

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20
Q

What are the general standards under the AICPA code of professional conduct rule 1.300.001?

A

 Professional Competence – Undertake only those professional services that the member or the member’s firm can reasonably expect to be completed with professional competence.
 Due Professional Care – Exercise due professional care in the performance of professional services.
 Planning and Supervision – Adequately plan and supervise the performance of professional services.
 Sufficient Relevant Data – Obtain sufficient relevant data to afford a reasonable basis for conclusions or recommendations in relation to any professional services performed.

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21
Q

When considering whether the analyst can reasonably expect to complete a valuation engagement with competence, the analyst should consider what aspect of the engagement?

A

a. Subject entity and its industry
b. Subject interest
c. Valuation date
d. Scope of the valuation engagement
i. Purpose of the valuation engagement
ii. Assumptions and limiting conditions expected to apply to the valuation engagement
iii. Applicable standard of value and the applicable premise of value
iv. Type of valuation report to be issued, intended use
and users of the report, and restrictions on the use of the report
e. Governmental regulations or other professional standards that apply to the subject interest or to the valuation engagement

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22
Q

What is the AICPA code of professional conduct rule 1.310.001 related to compliance with standards?

A

A member who performs auditing, review, compilation, management consulting, tax, or other professional services shall comply with standards promulgated by bodies designated by Council

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23
Q

What is the AICPA code of professional conduct rule 1.510.001 related to contingent fees?

A

A member may not accept contingent fees for professional services if the member or a member’s firm audits, reviews, compiles, examines prospective financial information, or prepares tax returns

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24
Q

What is the AICPA code of professional conduct rule 1.700.001 related to confidential client information?

A

A member in public practice shall not disclose any confidential client information without the specific consent of the client except for a valid subpoena, summons, or required disclosure due to laws or regulations, peer review examination, or AICPA ethics violation complaint

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25
Q

What does Sarbanes-Oxley state regarding valuation services provided to publicly-held clients?

A

The act prohibits a CPA from providing any appraisal service, valuation service, or any service involving a fairness opinion for a publicly-held audit client of the CPA when the results of those services will be subject to audit procedures during the audit of the audit client’s financial statements.

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26
Q

What situations does the SEC not allow valuation services to audit clients?

A
  • Asset allocations in a business combination under FASB ASC 805
  • Goodwill impairment under FASB ASC 350
  • Fair value of employee stock options under FASB ASC 718
  • Value of derivatives under FASB ASC 815
27
Q

What does the SEC allow an analyst to do for an audit client?

A

 assist the audit team in testing the valuation conclusions made by a third party or the audit client’s management,
 perform valuations for tax purposes that are not subject to audit procedures, such as transfer pricing,
and
 perform valuations for management planning purposes that are not subject to audit procedures or that would not constitute a fairness opinion or contribution-in-kind report.

28
Q

What is the definition of fair market value under Treasury Regulation Section 20.2031-1(b)?

A

The price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.

29
Q

What is the definition of fair market value per the AICPA?

A

The price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.

30
Q

What is the definition of investment value?

A

Specific value of an investment to a particular investor based on individual investment requirements.
It reflects circumstances of a particular buyer or seller.

31
Q

What is the definition of intrinsic value?

A

Amount an investor considers to be “true” or “real” worth of an item, based on an evaluation of available
facts. It is sometimes called fundamental value. It is an analytical judgment of value based on perceived
characteristics inherent in the investment (not characteristics peculiar to any one investor).

32
Q

What is the definition of fair value under FASB ASC 820?

A

The price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date.

33
Q

What is fair value in a legal context?

A

Under the fair value standard of value in a legal context, sellers often believe they are being forced to
receive less than adequate consideration for their stock. The buyer may not be compelled, but the seller is. Fairness to specific sellers may be a consideration. Fair value applies specifically to minority blocks.
Additionally, the seller may not have equal and adequate knowledge of buyer. Definition of fair value may defer state to state.

34
Q

Fair market value has a _______ buyer?

A

Willing

35
Q

Fair market value has a _______ seller?

A

Willing

36
Q

Fair value has a _______ buyer?

A

Not always a willing

37
Q

Fair value has a _______ seller?

A

Not a willing

38
Q

Under fair market value, buyers ______ compelled and sellers ________ compelled?

A

Are not

Are not

39
Q

Under fair value, buyers ______ compelled and sellers ________ compelled?

A

Are not always

Are

40
Q

Fair market value assumes a _________ buyer and seller

A

Hypothetical

41
Q

Fair value considers ______ to the seller?

A

Fairness

42
Q

What does fair market value assume about knowledge?

A

Assumes buyer and seller have equal, reasonable knowledge

43
Q

What does fair value assume about knowledge?

A

No assumption on knowledge of facts by buyers or sellers

44
Q

What interests does fair market value apply to?

A

Controlling or minority interests

45
Q

What interest does fair value apply to?

A

Minority interests

46
Q

What is the applicable standard of value for gift and estate tax?

A

Fair market value

47
Q

What is the applicable standard of value for inheritance taxes?

A

Fair market value

48
Q

What is the applicable standard of value for ad valorem taxes?

A

Fair market value

49
Q

What is the applicable standard of value for ESOPs?

A

Fair market value

50
Q

What is the applicable standard of value for financial acquisitions?

A

Fair market value

51
Q

What is the applicable standard of value for dissenting stockholder actions?

A

Legal fair value

52
Q

What is the applicable standard of value for corporate/partnership dissolutions under minority oppression statutes

A

Legal fair value

53
Q

What is the applicable standard of value for going private?

A

Legal fair value

54
Q

What is the applicable standard of value for strategic acquisition?

A

Investment value

55
Q

What is the applicable standard of value for buy-sell agreements?

A

Anything agreed upon

56
Q

What is the applicable standard of value for marital dissolution

A

No standard of value specified in most states

57
Q

What is the applicable standard of value for FASB compliance?

A

Accounting fair value

58
Q

What is the premise of value?

A

Premise of value relates to the concept of valuing a subject in the manner in which it would generate the
greatest return to the owner of the property, taking into account what is physically possible, financially
feasible, and legal

59
Q

What are the premises of value?

A

Going concern
Orderly liquidation
Forced liquidation
Assembled group of assets

60
Q

What is the level of value?

A

The level of value considers ownership characteristics such as the degree of control or lack of control
assumed as well as the degree of marketability assumed.

61
Q

What is the traditional levels of value?

A

 Synergistic
 Control
 Non-controlling, marketable
 Non-controlling, non-marketable

62
Q

What is a more recent view of levels of value?

A

 Control strategic (public or private company)
 Minority or control standalone liquid (public company)
 Control liquid (private company)
 Control standalone (private company)
 Minority non-marketable (private company)

63
Q

What are the valuation engagement steps?

A
  1. Define the engagement.
  2. Gather the information on the subject interest.
  3. Analyze the information.
  4. Determine an indication of value for the subject interest.
  5. Issue a report.
64
Q

What are the critical components of defining the engagement?

A
  • Identification of the subject interest
  • Identification of the client and analyst
  • Valuation date
  • Purpose
  • Scope including any limitations
  • Intended use and restrictions
  • Standard of value
  • Level of value
  • Premise of value

ABV (9 decks)

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