Page 8 - Business Valuation for Estates & Gift Taxes

Chapter 2

The Valuation Engagement

A valuation analyst is a natural choice for providing valuation services for gift and estate tax purposes.
Most valuation analysts who have experience in this area of tax planning and consulting understand the
complexities involved with the ever-changing federal and state tax laws and how to best leverage those
rules to help taxpayers minimize their potential estate and gift tax liabilities.

Planning the Engagement

Under AICPA’s "General Standards Rule" (AICPA, Professional Standards, ET sec. 1.300.001 and
2.300.001), fn 1 CPAs must undertake only those services that can be completed with professional com-
petence, exercise due professional care in the performance of professional services, plan and supervise
the performance of professional services, and obtain sufficient relevant data in support of their conclu-
sions. In order to adhere to the General Standards Rule, the valuation analyst must plan each engage-
ment thoroughly and understand that the planning process will continuously evolve as each phase of the
engagement is initiated. The following common areas should be considered when planning an estate and
gift valuation engagement.

Assessing the Risk of the Assignment—A critical first step every valuation analyst must take prior to
accepting a valuation engagement is to identify the potential risks of an engagement. The valuation ana-
lyst should understand both the quantitative and qualitative risks of an engagement before agreeing to
perform valuation services.

Quantitative risks are usually risks that can be linked to a specific unit of measure (for example, dollars
and percent). For instance, if a company uses historical performance results to estimate future results,
there will be a measurable variance between the forecasted results and actual results. The variance is
generally considered a quantitative risk because it is the difference between what was planned for and
what actually occurred. This variance can be minimized with careful analysis of historical results and
thorough assessment of micro and macro influences on the company. Of course, unforeseen events will
always be part of the valuation landscape, and so if appropriate, the valuation analyst adjusts for this as
needed.

Qualitative risks are usually considered non-numeric in nature. They are generally part of the prelimi-
nary risk assessment and are described with subjective intervals (low, medium, high). For example, the
valuation analyst may determine that the management of a company is not sufficiently qualified to exe-
cute a growth strategy used in their projections. This assessment may come from knowledge of the in-
dustry or come from fact-specific information about management. How this information gets incorpo-
rated into the valuation will depend on the engagement and the valuation analyst.

Making the distinction between the two types of risk is not always clear-cut (and some argue not possi-
ble); however, in either case, identifying the risks is critical to developing a good framework for the val-
uation procedures and calculations used to determine a conclusion of value.

fn 1
Formerly Rule 201, General Standards.

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