Page 11 - Calculating Lost Profits

Chapter 1

Introduction

Intent of the Practice Aid

When a business experiences an actionable harm, one of the most commonly sought remedies is the
award of damages measured as the business’ lost profits. Because of their unique skills and knowledge,
practitioners with expertise in the forensic accounting and valuation disciplines are frequently requested
to measure lost profits in commercial disputes as both non-testifying consultants and testifying expert
witnesses. fn 1 These lost profits analyses are often subjected to intense scrutiny by attorneys, other fi-
nancial practitioners, and triers-of-fact. For this reason, practitioners engaged to measure lost profits
confront the need to perform sound analyses that are credible from a theoretical perspective (for exam-
ple, in the fields of economics, finance, and accounting), tied to facts, and legally admissible.

The intent of this practice aid fn 2 is to provide nonauthoritative guidance to practitioners of all levels
who are engaged to measure lost profits. This practice aid is not intended to be a treatise on the topic of
lost profits but, rather, is designed to assist practitioners by identifying and addressing issues of concern
that may arise in the determination of lost profits. Many of the topics discussed in this practice aid are
explored in greater depth in other resources, including other practice aids published by the AICPA. fn 3

Practice Aid Overview

Lost profits analysis occurs at the nexus of law, economics, finance, and accounting; it may also involve
other disciplines (for example, statistics and valuation) and industry-specific considerations. This prac-
tice aid discusses legal topics, including damages theories, the legal standards for recovery of lost prof-
its, and the causes of action that commonly give rise to lost profits claims. Also included are illustrative
references to case law, included to further an understanding of key legal considerations when measuring
lost profits. Appendix A, "Case Opinions," lists all cases referenced within this practice aid.

fn 1 Practitioners performing forensic services as defined by Statement on Standards for Forensic Services (SSFS) No. 1 (FS sec. 100),
such as economic damages calculations, are subject to the requirements of SSFS No. 1. SSFS No. 1 establishes standards for a mem-
ber who provides forensic services as part of both litigation and investigation engagements, which are defined therein. In addition,
practitioners performing litigation or investigation engagements to measure lost profits that also involve the provision of valuation
services should follow the standards set forth in VS section 100, Valuation of a Business, Business Ownership Interest, Security, or
Intangible Asset. VS section 100 addresses distinctions between requirements for valuations and lost profits calculations. Both SSFS
No. 1 and VS section 100 can be found in AICPA Professional Standards. Although VS section 100 does not apply to lost profits
analyses, certain of the standards outlined in VS section 100 may be applicable to other measures of economic damages under consid-
eration by practitioners engaged to measure damages, including the loss of business value.

fn 2 The AICPA previously issued Practice Aid 06-4, Calculating Lost Profits, to provide nonauthoritative guidance to practitioners
engaged to prepare an analysis of lost profits. This practice aid supersedes Practice Aid 06-4.

fn 3 For example, see the practice aids Attaining Reasonable Certainty in Economic Damages Calculations, Calculating Intellectual
Property Infringement Damages, and Discount Rates, Risk, and Uncertainty in Economic Damages Calculations.

© 2020 Association of International Certified Professional Accountants 9