Page 92 - Bankruptcy and Reorganization Services

bankruptcy-related matter for the purpose of issuing a solvency opinion, and (2) estimation of the fair
value of a debtor’s assets, regardless of whether the conclusion of value is for the purpose of issuing a
solvency opinion or for some other purpose. The VSS identified the typical solvency opinion assignment
as one involving the three distinct solvency tests, namely, (1) whether the debtor entity’s liabilities were
greater than the debtor entity’s assets, at a fair valuation; (2) whether the debtor entity could pay its
debts as they matured; and (3) whether the debtor entity was adequately capitalized. fn 16

The VSS concluded that SSVS No. 1 does not apply when member analysts are retained as financial ad-
visers in bankruptcy-related matters to perform a complete solvency analysis and to issue a solvency
opinion (that is, the member analyst does not offer a conclusion of value, expressed either as a single
amount or a range). This is true even if the member performs some valuation-related work as one part of
the overall solvency analysis. However, the VSS concluded that SSVS No. 1 does apply when member
analysts are retained to perform a valuation analysis of assets (or net assets) and to issue a valuation
opinion (that is, the member analyst offers a conclusion of value, expressed either as a single amount or
a range). This is true even if the member performs the valuation report for a financial adviser who will
then use it as an input into one part of an overall solvency analysis.

As a practical matter, the authors of this practice aid recommend that member analysts follow the stand-
ards set forth in SSVS No. 1 when assessing the solvency of a debtor entity for bankruptcy litigation
purposes (which would include avoidance actions). fn 17

Premise of Value in the Context of Solvency Studies

A going concern premise of value should be employed when assessing the value of a business enterprise
unless the context in which the valuation is being performed, or the specific facts and circumstances of
the business enterprise, dictate the use of a liquidation premise of value. fn 18 For example, and as stated
previously, a valuation performed in the context of a best interest of creditors test dictates the use of a
liquidation premise of value. Rarely are such determinations of the appropriate premise of value so
clearly defined. In virtually all other instances, a departure from a going concern premise of value
should be based on the specific facts and circumstances of the business enterprise and market conditions.
Such is the case when determining the appropriate premise of value to be employed in a solvency study
performed in the context of a recovery action.

Determining the appropriate premise of value is a threshold assessment that must be made when as-
sessing the solvency of a company. Such a determination ultimately turns on a company’s prospective
cash flow. fn 19 If the likelihood of a company generating future operating cash flow is sufficiently re-

fn 16 It should be noted that the three-pronged test described in Solvency Analysis and SSVS No. 1 is only applicable to avoidance ac-
tions filed pursuant to Section 548 of the Bankruptcy Code and state fraudulent transfer law.

fn 17 Statement on Standards for Valuation Services (SSVS) No. 1 has been codified in VS section 100, which can be found in AICPA
Professional Standards.

fn 18 A business enterprise may be defined as something as large as the entire business operations of the debtor or as small as a single
division; a single retail, wholesale, or manufacturing site; or a single office complex.

fn 19 Such a determination must be made after giving consideration to, among other things, the company’s current and prospective fi-
nancial condition and performance, as well as industry and economic factors.

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