There was a lot of interest in the audience on calculation engagements, which was the lead-off presentation by Jim Alerding (Alerding Consulting LLC) at a full-day conference sponsored by the Connecticut chapter of the National Association of Certified Valuation Analysts (NACVA). “This topic has been generating a lot of buzz lately,” says Alerding, who was a co-author of the AICPA’s standards for valuation services, SSVS1 (VS100).
Many questions: Most of the audience members use calculation engagements, but they still had a number of questions, which indicated it’s still a murky area. For example, should the expert include the methods being used in the engagement letter? Yes, that’s a good idea, so that the client understands what you’ll be doing. Another question: Does the IRS accept calculation reports? It has been known to accept them for estate and gift tax purposes in some jurisdictions although it never has confirmed this officially (so you need to know about your specific jurisdiction). Alerding noted that the IRS experts use calculations themselves. One audience member noted that the IRS told him that, if a discount is used, there needs to be detail about that in the report.
There are places where you should not use calculation reports, such as for ESOPs. “If you use them for ESOPs, you should be ‘put away,’” says Alerding. “And the DOL will do it!” As for litigation, calculation reports should in general not be used, although the courts have accepted them in some cases. But you have to “know your jurisdiction,” he says. You also have to know the facts and circumstances of prior cases that accepted calculations. For example, in a recent case, a calculation report was accepted “by default” because the other side had no expert valuation at all, so this is not a validation of their use in court. Alerding, who has testified over 400 times, advises that you put a provision in your engagement letter that, if the matter goes to litigation, you will do a full valuation.
Watch out: One expert asked: If I don’t have enough information because the adverse party prevented me from getting it, do the standards provide that I can do a calculation and not a full valuation? “There is no such provision,” says Alerding, “but there is no prohibition either.” If you go that route, you do so at your own risk, he says, pointing to a case that had those exact circumstances and the court disqualified the expert. So what should the expert have done? “He should have walked away from the engagement,” Alerding says.
Audience members also asked about the language to use at the end of the calculation report. Can you say: “My opinion of the calculated value is …”? Yes, you can use the word “opinion,” but you cannot say “my conclusion of value is …,” which is used for valuation engagements.
For more information, see the AICPA’s FAQs on calculation engagements, which Alerding co-wrote. Also, Alerding did a webinar for BVR, Calculation Engagements: Risks, Rewards and New Guidance, in which he goes through the FAQs as well as other matters on the uses of calculations.