For those seeking valuation or appraisal services, the varying levels of services offered can often be confusing to navigate. Appraisers/valuators offer many different services to meet the needs of a diverse client base. Confusion in the process of selection can lead clients to select a service based solely on price, only later to discover, as with many things in life, you get what you pay for.
Standard-setting bodies set forth defined levels of service that meet the needs of different situations. Thus, once the appraiser/valuator and client discuss the analysis purpose, objectives, intended use, intended users, budget, etc., determining the right level of service becomes much easier.
What do the Standards Allow?
There are two commonly accepted sets of standards governing valuation and appraisal in the United States:
- “USPAP” - The Appraisal Foundation’s Uniform Standards of Professional Appraisal Practice; and
- “SSVS” - The American Institute of Certified Public Accountants’ Statements on Standards of Valuation Services no. 1
What is USPAP?
USPAP provides professional standards for “Appraisal” services, which may be communicated through two different types of reports:
- Appraisal Reports
- Restricted Appraisal Reports
What is SSVS?
SSVS provides professional standards for ‘Valuation Engagements’ and ‘Calculation Engagements’.
Valuation engagements are communicated in one of two types of reports: Summary Reports or Detailed reports. While calculation engagements are only communicated in Calculation Reports.
The industry has made significant strides towards simplifying these standards for the sake of its clients, but there is still room for further clarification. Following is a brief description of some of the major differences in the types of services offered through each set of Standards.
Levels of Service for USPAP-compliant Appraisals
The main difference between Restricted Appraisal Reports and Appraisal Reports is the level of detail that is included in the report. Both, however, are the result of the same level of analysis. In other words, a Restricted Appraisal Report is not the result of a lower level of analysis.
A key requirement for generating a Restricted Appraisal Report is that the only intended user is the client. If there are other intended users besides the client, an appraiser following USPAP cannot issue a Restricted Appraisal Report.
Restricted Appraisal Reports are thus viable options for clients who only use appraisals internally, and are familiar with the industry, economy, valuation approaches, and methodologies typically employed. Such sections are normally truncated when generating the report, usually resulting in lower fees.
It is important to note that fees alone cannot dictate the level of service offered. For example, appraisers following USPAP must use all approaches and methods as necessary to develop a credible assignment result. USPAP measures “credible assignment result” by comparing the analysis to what one’s peers - appraisers also specializing in the industry - would have done in the same situation. Appraisers following USPAP can certainly discuss and agree to scope limitations given budget constraints, however, not to the extent which would cause the assignment result to lose credibility.
Levels of Service for SSVS-compliant Valuations
Valuation Engagements and Calculation Engagements are indeed entirely different levels of service.
Calculation engagements importantly do not involve the appraiser/valuator providing an opinion of the value of a business, security, asset, liability, etc. A Calculation Engagement merely calculates an assignment result based on certain assumptions and inputs. Also, it does not necessarily require an appraiser/valuator to employ or explain all three Approaches to value: the Income, Market, and Asset/Cost Approaches. As an example, a calculation engagement may be satisfactorily completed using only an application of the Income Approach where the Market Approach would have also been appropriate in the context.
Valuation Engagements, on the other hand, do involve the appraiser/valuator offering an opinion of value. As with USPAP’s standards for appraisals, the differences in report formats between Summary Report and Detailed Report for Valuation Engagements under SSVS are primarily driven by the level of detail included in the narrative report.
For example, if an analyst did not rely on the application of the Asset Approach for engagement, they may leave out much of the explanation within the narrative of a Summary Report.
These are important differences to understand. Too often, clients who express concern over fees are advised to engage in a Calculation Engagement without a frank discussion on the implications. In practical use, these clients may not be best served by that choice.
For example, a Calculation Engagement will likely not survive the scrutiny of litigation (depending on jurisdiction), IRS review (depending on jurisdiction), or other regulatory challenges; as it does not represent a third-party opinion, it may not best serve negotiations either. Also, consider the example of an investor who may rely upon the results of a valuation/appraisal to make real investment decisions. It is possible a more sophisticated investor may only need a limited level of analysis from an appraiser/valuator since they will perform their own valuation and due diligence. However, other types of investors may be better served through a more detailed analysis and narrative report.
None of this is to say that clients should always choose a high level of service. Indeed, there are plenty of use-cases where a Calculation Engagement or Restricted Appraisal Report may be the most appropriate.
The important note is that not all levels of service are created equal; each serves a particular need and audience. For these reasons, have an up-front conversation with your advisers to anticipate and communicate the intended use of the engagement. This will help ensure that the level of service provided meets all needs without undue cost.