This article is taken from our quarterly overview of Canadian news, a newsletter published by the Canadian member firms of Moore Stephens North America. These articles are part of our mission to become the partner of choice for your success by keeping you up to date.
Once it has been established that an independent assessment is required, business owners and legal advisors are often unsure of the deliverables necessary to meet their needs. When a business valuation expert (BVE) is hired and expected to be independent, the BVE generally provides an expert report containing an independent professional conclusion. In doing so, the EEE exercises a great deal of professional judgment, drawing on its experience and independent research capabilities. Objectively written valuation reports are defined by the Canadian Institute of Chartered Business Valuators (CICBV) as follows:
- Valuation report on value calculations – Contains a conclusion as to the value of shares, property or an interest in a business that is based on minimal review and analysis and little or no corroboration of relevant information; the information is usually presented in a brief valuation report;
- Appraisal report on an estimate of value – Contains a conclusion as to the value of shares, property or an interest in a business that is based on limited review and analysis and limited corroboration of relevant information; the information is usually presented in a detailed appraisal report; and
- Comprehensive Valuation Report – Contains a conclusion as to the value of shares, property or an interest in a business based on a comprehensive review and analysis of the business, its industry and all other relevant factors, together with adequate corroboration; the information is usually presented in a comprehensive valuation report.
When is an official report required?
The general rule is that if an EEE provides a conclusion of value in writing, EEE professional standards require it to be delivered in the form of a formal report. Appendices presented on their own are not appropriate. ICEEE standards do not apply to any type of verbal discussion, whether it’s commenting on proposed values or helping with a negotiation.
Insurance level
When is a calculation report or an estimate report sufficient, and when is a full report required? Generally speaking, the level of assurance offered by each report increases between the calculation report and the exhaustive report. Efforts and costs are commensurate with the level of insurance required.
General types of analysis and scope of work
The difference between the three reporting solutions is largely related to depth of analysis and disclosure rather than breadth of analysis or scope of assessment, and is as follows:
Reports on calculations are fundamentally limited, as they use a simplified approach to value a company. A comprehensive or valuation report enables a more in-depth investigation of the company’s critical value drivers, providing a more accurate indication of a company’s value, provided the required information is available.
How to choose?
Consider the context and risk of the situation. Who uses the report? To what extent could the appraisal conclusion be challenged by another party such as the courts, tax authorities or third parties? Is report exposure low or high? What level of information is available? The evaluation report must be consistent with the objective. Each of the options and circumstances for appraisal reports, and when they are appropriate, are defined as follows:
Retaining the services of an EEE and determining the type of report that meets the needs of all stakeholders requires consideration of several key elements, including the nature and size of the company in question, the level of public exposure in terms of users, the level of controversy of the issue and the availability of information. As the level of insurance increases, so does the complexity and, consequently, the professional fees. A formal assessment is not necessary in every situation, but when it is, it must meet the needs of all stakeholders.
Written by Michael Frost, CPA, CA, EEE of Mowbrey Gil. This document was written as part of our quarterly overview of Canadian news, a newsletter published by Moore North America’s Canadian member firms.
