Page 46 - Family Law Services

• Market-based approach. A general way of determining a value indication of a business, business
ownership interest, or security using one or more methods that compare the subject to similar
businesses, business ownership interests, securities, or intangible assets that have been sold

Asset-Based Approach fn 4

Under the asset-based approach, a frequently used method of valuation is the adjusted net asset method.
The assets and liabilities of the subject company are identified and adjusted to the appropriate standard
of value, either individually or in the aggregate. When valuing the intangible assets of the company, the
CPA should consider the type of cost to be used (for example, reproduction cost or replacement cost),
and, when appropriate, the forms of remaining useful lives of the intangible assets and their obsoles-
cence.

It may be necessary to rely on the work of third-party specialists, such as real estate or equipment ap-
praisers. In those situations, the CPA should disclose the level of responsibility being assumed in the
"Assumptions and Limiting Conditions" section of his or her report.

The asset-based approach is generally only applied in the valuation of controlling equity interests in
holding companies (typically real estate), operating companies that are underperforming and where the
asset-based approach will give a higher value than an income or market approach, or in jurisdictions
where personal goodwill is excluded from the marital estate.

Income-Based Approach fn 5

Under the income-based approach, typically, two methods are used in valuing the business: the capitali-
zation of earnings method and the discounted future earnings method. The capitalization of earnings
method is a single period model, whereas the discounted future earnings method is a multiperiod analy-
sis.

Key points to be considered (as appropriate) under the capitalization of earnings method are as follows:

• Normalization adjustments

• Nonrecurring revenues and expenses

• Income taxes

• Capital structure and financing costs

• Appropriate capital investments

fn 4 See Statement on Standards for Valuation Services (SSVS) No. 1, Valuation of a Business, Business Ownership Interest,
Security, or Intangible Asset (VS sec. 100).

All VS sections can be found in AICPA Professional Standards.

fn 5 See footnote 4.

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