11.3 American Society of Appraisers standards
8 min read•august 21, 2024
The provide essential guidelines for business valuation professionals. These standards ensure consistency, reliability, and ethical practices in valuation engagements, forming a critical framework for maintaining credibility in the industry.
ASA standards establish uniform practices for conducting valuations across various industries and purposes. They define minimum requirements for valuation reports, guide appraisers in adhering to ethical principles, and maintain professional competence. The standards cover key aspects like valuation approaches, data analysis, and report writing.
Overview of ASA standards
- American Society of Appraisers (ASA) standards provide comprehensive guidelines for business valuation professionals
- Standards ensure consistency, reliability, and ethical practices in valuation engagements
- Critical framework for maintaining credibility and professionalism in the business valuation industry
Purpose and scope
- Establish uniform practices for conducting business valuations across various industries
- Define minimum requirements for valuation reports to ensure clarity and completeness
- Guide appraisers in adhering to ethical principles and maintaining professional competence
- Applicable to a wide range of valuation purposes (mergers and acquisitions, tax reporting, litigation support)
ASA valuation reports
Required elements
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- Clear identification of the subject company and valuation date
- Description of the purpose and intended use of the valuation
- Explanation of valuation approaches and methods applied
- Discussion of key assumptions and limiting conditions
- Reconciliation of value indications and final value conclusion
- Appraiser's certification and signature
Optional elements
- Executive summary highlighting key findings and conclusions
- Industry analysis providing context for the subject company's operations
- Management interviews summarizing discussions with key personnel
- Sensitivity analysis demonstrating the impact of changes in key variables
- Appendices containing supporting schedules and documentation
Ethics and competency
Code of ethics
- Uphold principles of integrity, objectivity, and confidentiality
- Avoid conflicts of interest or disclose them when unavoidable
- Maintain independence and impartiality throughout the valuation process
- Refrain from accepting assignments beyond one's level of competence
- Adhere to professional standards and continuing education requirements
Competency requirements
- Demonstrate proficiency in business valuation theory and practice
- Possess relevant education, training, and experience in the field
- Stay current with industry developments and valuation methodologies
- Understand and apply appropriate valuation approaches and techniques
- Recognize limitations of one's expertise and seek assistance when necessary
Valuation approaches
Market approach
- Utilizes comparable company and transaction data to estimate value
- Applies multiples derived from guideline public companies or private transactions
- Considers factors such as size, growth, profitability, and risk profile
- Adjusts for differences between subject company and comparable entities
- Useful for companies with readily available market data or recent transactions
Income approach
- Estimates value based on expected future economic benefits
- Employs or capitalization methods
- Requires thorough analysis of historical financial performance and future projections
- Considers factors such as growth rates, profit margins, and capital expenditures
- Particularly suitable for companies with stable or predictable cash flows
Asset-based approach
- Determines value by adjusting assets and liabilities to
- Useful for asset-intensive businesses or companies with significant tangible assets
- Considers both tangible and in the valuation process
- May involve complex valuation of individual asset categories (real estate, equipment)
- Often used as a "floor" value in conjunction with other approaches
Data collection and analysis
Types of data
- Financial statements (historical and projected)
- Industry and economic reports
- Market data on comparable companies and transactions
- Company-specific information (business plans, contracts, patents)
- Management interviews and site visits
- Regulatory filings and legal documents
Data verification
- Cross-reference multiple sources to ensure accuracy and consistency
- Perform ratio analysis to identify unusual trends or discrepancies
- Conduct management interviews to clarify and validate key information
- Review supporting documentation for significant transactions or events
- Assess reliability and relevance of data sources used in the valuation
Valuation methods
Guideline public company method
- Identifies publicly traded companies similar to the subject company
- Calculates relevant valuation multiples (price-to-earnings, EV/EBITDA)
- Adjusts multiples for differences in size, growth, and risk profile
- Applies adjusted multiples to subject company's financial metrics
- Considers control premiums or discounts for lack of marketability
Guideline transaction method
- Analyzes recent transactions involving comparable private companies
- Calculates transaction multiples based on purchase price and financial data
- Adjusts multiples for market conditions and company-specific factors
- Applies adjusted multiples to subject company's financial metrics
- Considers time elapsed since transactions and changing market conditions
Discounted cash flow method
- Projects future cash flows based on historical performance and growth expectations
- Determines appropriate discount rate reflecting company's risk profile
- Calculates present value of projected cash flows and terminal value
- Considers sensitivity analysis to assess impact of key assumptions
- Particularly useful for companies with varying growth rates or changing capital structures
Adjustments and discounts
Minority interest discounts
- Applied to reflect lack of control in non-controlling ownership interests
- Considers factors such as voting rights, dividend policy, and major decisions
- Typically ranges from 10% to 40% depending on specific circumstances
- Supported by empirical studies and market evidence
- May be affected by shareholder agreements or other contractual provisions
Marketability discounts
- Reflects reduced liquidity of privately held company shares
- Considers factors such as size, profitability, and potential for public offering
- Typically ranges from 10% to 50% depending on specific circumstances
- Supported by restricted stock studies and pre-IPO transaction data
- May be affected by company-specific factors or shareholder agreements
Report writing guidelines
Clear and concise language
- Use plain language to explain complex valuation concepts
- Avoid jargon or technical terms without proper explanation
- Organize information logically with clear headings and subheadings
- Include an executive summary highlighting key findings and conclusions
- Ensure consistency in terminology and formatting throughout the report
Supporting documentation
- Provide detailed exhibits and schedules supporting valuation calculations
- Include relevant industry and economic data used in the analysis
- Attach copies of key documents referenced in the report (financial statements)
- Clearly cite sources for all external data and information used
- Maintain a comprehensive workpaper file for future reference or review
Quality control procedures
Peer review process
- Implement internal review procedures for all valuation reports
- Assign experienced professionals to conduct thorough peer reviews
- Check for consistency, accuracy, and adherence to ASA standards
- Provide constructive feedback and recommendations for improvement
- Document review process and resolution of any identified issues
Documentation retention
- Maintain complete and organized files for each valuation engagement
- Retain all relevant workpapers, supporting documents, and correspondence
- Implement secure storage systems for both physical and electronic files
- Establish retention policies in compliance with legal and professional requirements
- Ensure confidentiality and restricted access to sensitive client information
Continuing education requirements
Minimum hours
- Complete at least 100 hours of continuing education every five years
- Allocate minimum of 20 hours to business valuation topics annually
- Include a mix of formal coursework, conferences, and self-study programs
- Document all continuing education activities and maintain records
- Submit proof of compliance during membership renewal process
Approved courses
- Attend ASA-sponsored conferences, seminars, and webinars
- Participate in courses offered by recognized valuation organizations (AICPA, NACVA)
- Complete university-level courses related to business valuation or finance
- Engage in self-study programs with verifiable completion requirements
- Contribute to professional publications or present at industry conferences
ASA vs other standards
USPAP vs ASA standards
- USPAP provides broader guidelines applicable to various appraisal disciplines
- ASA standards offer more specific guidance tailored to business valuation
- USPAP requires a signed certification while ASA standards require a more detailed report
- ASA standards emphasize the use of multiple valuation approaches
- Both standards stress the importance of ethics and competency
IVS vs ASA standards
- IVS focuses on global harmonization of valuation practices
- ASA standards provide more detailed guidance for US-based valuations
- IVS emphasizes principles-based approach while ASA is more prescriptive
- Both standards promote consistency and transparency in valuation reports
- ASA standards include specific requirements for US regulatory compliance
International considerations
Cross-border valuations
- Account for differences in accounting standards (GAAP vs IFRS)
- Consider country-specific risk factors and economic conditions
- Analyze impact of exchange rate fluctuations on cash flows and value
- Understand local regulatory requirements and reporting standards
- Collaborate with local experts to ensure compliance and accuracy
Currency issues
- Determine appropriate currency for valuation (functional vs reporting)
- Apply consistent exchange rates throughout the valuation process
- Consider impact of currency hedging strategies on company value
- Analyze historical currency trends and future expectations
- Disclose currency-related assumptions and methodologies in the report
Legal and regulatory compliance
SEC regulations
- Adhere to specific valuation requirements for public company filings
- Comply with fair value measurement standards (ASC 820)
- Consider impact of Sarbanes-Oxley Act on internal control valuations
- Understand reporting requirements for business combinations (ASC 805)
- Maintain independence and avoid conflicts of interest in SEC engagements
IRS requirements
- Follow Revenue Ruling 59-60 guidelines for tax-related valuations
- Consider specific valuation rules for estate and gift tax purposes
- Comply with IRS regulations on qualified appraisals and appraisers
- Understand penalties and sanctions for non-compliance or overvaluation
- Maintain thorough documentation to support valuation conclusions
Technology in ASA valuations
Valuation software
- Utilize specialized software for financial modeling and valuation calculations
- Implement database management systems for comparable company data
- Employ report writing tools to streamline documentation process
- Use collaborative platforms for team-based valuation projects
- Ensure proper training and understanding of software limitations
Data analytics tools
- Apply advanced statistical techniques for market analysis and forecasting
- Utilize data visualization tools to present complex information clearly
- Implement machine learning algorithms for pattern recognition in financial data
- Leverage big data analytics for industry and economic trend analysis
- Integrate data analytics results into traditional valuation methodologies
ASA accreditation process
Membership levels
- Candidate: Entry-level membership for those pursuing accreditation
- Accredited Member (AM): Demonstrates basic knowledge and experience
- : Highest level of accreditation
- Fellow (FASA): Recognition for outstanding contributions to the profession
- Requires progression through levels with increasing experience and education
Examination requirements
- Complete core courses in business valuation principles and methodologies
- Pass comprehensive written examination covering all aspects of business valuation
- Submit sample appraisal reports for peer review and evaluation
- Demonstrate practical experience through case study analysis
- Fulfill continuing education requirements to maintain accreditation status
Future trends in ASA standards
Emerging valuation issues
- Addressing challenges in valuing intangible assets and intellectual property
- Incorporating environmental, social, and governance (ESG) factors in valuations
- Developing guidelines for valuing cryptocurrency and blockchain-based businesses
- Adapting valuation approaches for platform-based and sharing economy companies
- Addressing complexities in valuing businesses with significant data assets
Potential standard updates
- Enhancing guidance on fair value measurements for financial reporting
- Developing more robust standards for valuations in emerging markets
- Incorporating advancements in data analytics and artificial intelligence
- Addressing valuation challenges in rapidly evolving industries (technology, biotech)
- Harmonizing ASA standards with evolving international valuation frameworks
Key Terms to Review (25)
Accredited senior appraiser (asa): An accredited senior appraiser (ASA) is a professional designation granted by the American Society of Appraisers to individuals who have demonstrated a high level of expertise in valuation and appraisal. This accreditation reflects the appraiser's commitment to ethical practices, education, and adherence to industry standards, particularly those set forth by the American Society of Appraisers.
American Society of Appraisers (ASA) Standards: The American Society of Appraisers (ASA) Standards refer to a set of guidelines and ethical principles established by the ASA to ensure the professionalism and accuracy of appraisals across various disciplines. These standards help maintain the integrity of the appraisal profession by providing appraisers with a framework for conducting their work in a consistent and reliable manner, addressing issues such as valuation methods, ethics, and reporting requirements.
Appraisal engagement: An appraisal engagement is a professional process where an appraiser is hired to provide an unbiased opinion of the value of a property or business. This engagement involves a thorough analysis of relevant data and market conditions to deliver a reliable valuation that meets specific standards and requirements, such as those set forth by professional organizations.
Business goodwill: Business goodwill refers to the intangible value that a company possesses beyond its physical assets and liabilities. It includes factors such as brand reputation, customer loyalty, employee relations, and unique business practices that can drive future earnings. Goodwill is an essential component in business valuation, especially during mergers and acquisitions, as it reflects the potential for continued success and profitability.
Certified appraiser: A certified appraiser is a professional who has undergone specialized training and has met the requirements set by recognized organizations to assess the value of properties or businesses accurately. This certification indicates that the appraiser adheres to high standards and practices, ensuring reliability in their valuations, which is essential for various purposes such as lending, investment, and legal matters.
Comparables analysis: Comparables analysis is a valuation method used to determine the value of a business or asset by comparing it to similar companies or assets in the market. This approach relies on identifying peer companies with similar financial and operational characteristics and using their market metrics to estimate the subject entity's value. It is commonly utilized in financial services and adheres to specific standards set by appraisal organizations.
Cost approach: The cost approach is a valuation method that estimates the value of an asset based on the costs incurred to replace or reproduce it, minus any depreciation. This approach is particularly relevant when assessing assets where market data is limited, allowing for a more straightforward calculation of value through tangible costs associated with acquisition or construction.
Credentialing: Credentialing refers to the process of verifying the qualifications, experience, and competence of professionals in specific fields to ensure they meet established standards. This practice is crucial in maintaining quality and trust within professions, including appraisal and valuation, where credentials can signify a level of expertise and adherence to industry standards.
Discounted cash flow (DCF): Discounted cash flow (DCF) is a valuation method used to estimate the attractiveness of an investment opportunity by calculating the present value of expected future cash flows. This approach connects the value of an asset or business to the income it is anticipated to generate over time, taking into account the time value of money, which asserts that a dollar today is worth more than a dollar in the future due to its potential earning capacity.
Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA): EBITDA is a financial metric that measures a company's operational performance by evaluating earnings before the impact of financial deductions such as interest, taxes, and non-cash expenses like depreciation and amortization. This measure helps assess a company's profitability and is often used in the context of acquisitions, valuations, and financial analysis to gauge the true earning potential of a business without the noise of capital structure and tax rates.
Fair Market Value: Fair market value is the price at which an asset would sell in an open and competitive market between a willing buyer and a willing seller. This concept is vital in business valuation as it reflects the most accurate representation of an asset's worth under normal conditions, ensuring that both parties are informed and acting in their own best interests.
Financial Accounting Standards Board (FASB): The Financial Accounting Standards Board (FASB) is an independent organization responsible for establishing and improving financial accounting and reporting standards in the United States. By creating Generally Accepted Accounting Principles (GAAP), FASB plays a crucial role in enhancing the transparency and consistency of financial statements, which is essential for stakeholders. Its guidelines are particularly relevant when dealing with complex issues like goodwill impairment testing, ensuring that businesses properly assess and report the value of intangible assets. Additionally, FASB's standards help organizations navigate regulatory compliance valuations, ensuring adherence to financial regulations, while also aligning with industry standards such as those set by the American Society of Appraisers.
Income Approach: The income approach is a valuation method that estimates the value of an asset based on the income it generates over time, often used to determine the fair market value of income-producing properties and businesses. This approach connects future cash flows to present value by applying a capitalization rate or discount rate, allowing for a clear understanding of how expected income contributes to overall value.
Intangible Assets: Intangible assets are non-physical resources that provide value to a business, such as patents, trademarks, copyrights, and goodwill. These assets play a crucial role in determining a company's overall worth and are often critical for competitive advantage in various industries.
International Valuation Standards Council (IVSC): The International Valuation Standards Council (IVSC) is a global organization dedicated to establishing and promoting standards for the valuation of assets and businesses. By providing a set of international valuation standards, IVSC aims to enhance transparency, consistency, and credibility in the valuation process across various jurisdictions. This framework supports fair market value assessments and aligns with the standards upheld by professional organizations, ensuring that valuation practices meet high-quality benchmarks globally.
Investment Value: Investment value refers to the specific worth of an asset to a particular investor based on their individual expectations and investment criteria. This value takes into account factors like the investor's financial objectives, risk tolerance, and the potential for income generation or capital appreciation. Understanding investment value is crucial as it relates to various standards of value, the types and levels of valuation reports, the reconciliation of different value conclusions, and the standards set by professional appraisal organizations.
Liquidation Value: Liquidation value is the estimated amount that an asset or company would realize upon the sale of its assets in a forced liquidation scenario. This concept plays a critical role in assessing a business’s worth in various contexts, including distressed situations, where it contrasts with fair market value by focusing on the lower end of potential asset values.
Market Approach: The market approach is a method of valuing an asset or business by comparing it to similar assets that have been sold or are currently available in the market. This approach relies on the principle of substitution, where the value of an asset is determined based on the price that willing buyers have recently paid for comparable assets, making it particularly relevant for assessing fair market value.
Net Asset Value (NAV): Net Asset Value (NAV) is the total value of an entity's assets minus its liabilities, often used to determine the value of a company's shares or a mutual fund's worth. NAV is important as it helps investors assess the underlying value of an investment and is a key figure in various valuation methods, influencing how assets are appraised across different industries and market situations.
Precedent Transactions: Precedent transactions refer to a valuation method that analyzes historical transactions involving similar companies to determine a reasonable market value for a target company. This method is particularly useful in mergers and acquisitions, providing insight into what acquirers have paid for comparable businesses, which can influence financial statement adjustments and industry-specific multiples in valuations.
Price-to-Earnings Ratio (P/E): The price-to-earnings ratio (P/E) is a financial metric used to evaluate a company's current share price relative to its earnings per share (EPS). This ratio is significant because it provides insights into how much investors are willing to pay for each dollar of earnings, helping assess whether a stock is overvalued or undervalued. The P/E ratio is especially important when making financial statement adjustments and is often referenced in the standards set by professional appraisal organizations.
Real Estate Appraisal: Real estate appraisal is the process of developing an opinion of the value of a property, typically for the purpose of buying, selling, or financing it. This process involves analyzing various factors, including market conditions, property characteristics, and comparable sales data to determine fair market value. Accurate appraisals are crucial for ensuring that transactions reflect true property worth and are often guided by established standards and regulations.
Scope of work: The scope of work refers to a detailed description of the specific tasks, deliverables, and activities required to complete a project or assignment. It outlines the boundaries and expectations of a project, ensuring that all parties involved have a clear understanding of what is to be done, how it will be done, and the resources needed. A well-defined scope of work is crucial for effective communication and management throughout the project's lifecycle.
Uniform Standards of Professional Appraisal Practice (USPAP): Uniform Standards of Professional Appraisal Practice (USPAP) are a set of guidelines and ethical standards designed to ensure that appraisals are conducted in a consistent, reliable, and ethical manner. These standards are crucial for establishing credibility in the appraisal profession and are essential in contexts like fair market value assessments, expert witness testimony, and real estate appraisals, providing a framework for appraisal practices across various industries.
Valuation report: A valuation report is a comprehensive document that outlines the process and results of valuing a business or asset, typically prepared by a qualified appraiser. This report includes detailed analyses, methodologies, and justifications for the estimated value, providing essential information for stakeholders making informed decisions regarding transactions, investments, or financial reporting. The quality and adherence to standards are crucial to ensure credibility and reliability in the valuation conclusions.