AICPA Business Valuation Standards and the ABV Credential

The AICPA business valuation standards are set out in Statement on Standards for Valuation Services No. 1, known as VS Section 100. Issued by the AICPA Consulting Services Executive Committee in June 2007 and effective for engagements accepted on or after January 1, 2008, it is the binding professional rulebook every AICPA member must follow when estimating the value of a business, ownership interest, security, or intangible asset.¹ The IRS, courts, and opposing experts routinely measure a valuation’s credibility against these rules, so if you are hiring a CPA for this kind of work or relying on someone else’s report, the standard is the yardstick that matters.

When VS Section 100 Applies

VS Section 100 governs any engagement in which an AICPA member applies valuation approaches and methods using professional judgment to reach either a conclusion of value or a calculated value. It reaches across tax work, consulting, litigation support, financial reporting, mergers and acquisitions, and management planning.¹ The standard refers to the professional doing the work as a Valuation Analyst.

Not every number a CPA produces triggers the standard. Mechanical computations that don’t involve professional judgment fall outside its requirements, and so does a value figure that comes up incidentally inside an audit or review.² The dividing line is judgment: if the CPA is choosing approaches and methods, VS Section 100 applies; if the CPA is running a formula someone else specified, it does not.

Valuation Engagement or Calculation Engagement

The standard recognizes two distinct engagement types, and choosing between them is the most consequential decision made before any work begins. Each produces a different kind of output and is suited to a different purpose. The engagement type must be agreed with the client at the outset.

The Valuation Engagement

In a Valuation Engagement, the analyst independently selects which approaches and methods to apply, performs all procedures considered necessary under the circumstances, and reaches a conclusion of value. That conclusion can be a single dollar figure or a range.¹ This is the engagement that holds up under IRS review and in court. For an estate tax return, a gift tax return, or litigation, it is almost always the appropriate choice.

Results come out in one of two formats. A Detailed Report gives the reader enough information to follow the data, reasoning, and analyses behind the conclusion. A Summary Report is shorter but must still disclose the scope of work, key assumptions, and limitations.¹

The Calculation Engagement

A Calculation Engagement is narrower. The analyst and client agree in advance on the specific approaches, methods, and extent of procedures. Because the analyst is not exercising independent judgment over method selection and is not performing every procedure a full engagement would require, the output is called a calculated value rather than a conclusion of value.¹

The deliverable is a Calculation Report, which must state explicitly that the analyst did not perform all the procedures a Valuation Engagement would require. This kind of work fits internal planning, cooperative partner buyouts where both sides agree on the approach, and preliminary deal analysis. It is faster and less expensive. But a calculation report may not satisfy IRS disclosure rules and is unlikely to survive challenge in litigation. If the value will land on a tax return or be tested by an opposing expert, the full Valuation Engagement is the safer route.

One narrow exception on the reporting side: in litigation and certain other controversy proceedings, the analyst has a reporting exemption under VS Section 100 and need not issue a formal calculation report, though the development standards still govern the underlying work.²

Standard of Value

Before any analysis, the engagement has to identify the Standard of Value. This is the definition of value being measured, and it shapes every assumption and method that follows. Using the wrong standard can invalidate the entire valuation.

Fair Market Value

Fair Market Value is the standard federal tax law requires, including for estate, gift, and income tax. Treasury regulations define it as the price at which property would change hands between a willing buyer and a willing seller, neither under compulsion and both having reasonable knowledge of the relevant facts.³ The buyer and seller are hypothetical, and strategic synergies a specific buyer might capture are excluded.

For closely held stock, the IRS has identified eight factors in Revenue Ruling 59-60 that appraisers must consider: the nature and history of the business, general economic and industry conditions, the company’s financial condition, its earning capacity, dividend history, key-person dependence, prior sales of the interest, and the market price of comparable securities. Skipping any of them invites an IRS challenge.

Fair Value

Fair Value is a separate standard used mainly in financial reporting under GAAP. FASB’s Accounting Standards Codification Topic 820 defines it as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It focuses on the most advantageous market for the asset and can produce a higher figure than Fair Market Value. Fair Value also appears in some state statutes governing dissenting shareholder actions, with definitions that vary by state.

Investment Value and Intrinsic Value

Investment Value measures what a business is worth to a particular buyer given that buyer’s synergies, tax position, or strategic goals. It is buyer-specific, which is why it diverges from Fair Market Value. Intrinsic Value reflects the fundamental worth of an asset based on its own characteristics, independent of what the market happens to price it at. Both come up less often than Fair Market Value or Fair Value, but the analyst has to identify which standard applies before starting.

Premise of Value

The Premise of Value describes the assumed operational context of the business. This is a separate question from the standard of value, and the wrong premise can move a valuation by millions of dollars.

The Going Concern Premise assumes the business keeps operating and uses its assets as a coordinated whole. This is the default for a healthy operating company. The Liquidation Premise assumes the business shuts down and its assets are sold off individually. Liquidation value is almost always lower, because assets sold piecemeal lose the economic benefit of working together. Whichever premise is chosen must be disclosed in the report.¹

The Three Valuation Approaches

AICPA standards recognize three approaches for estimating value. In a Valuation Engagement the analyst is expected to consider all three, though the final conclusion may lean on one or two depending on the business and the quality of available data.¹

Income Approach

The Income Approach estimates value from the future economic benefits the business is expected to generate. An asset is worth the present value of the cash it will produce. This approach fits operating companies with a track record of earnings.

The two common methods are Discounted Cash Flow and Capitalization of Earnings. DCF projects specific annual cash flows over a forecast period and discounts them back to present value at a rate reflecting the risk that they materialize. It works best when growth is uneven or changing quickly. Capitalization of Earnings takes a single normalized earnings figure and divides it by a capitalization rate. That suits stable businesses whose future earnings should track their past.

Both methods depend on the quality of the financial data. The analyst typically normalizes the company’s statements first, stripping out items that don’t reflect sustainable earning power: an owner’s above- or below-market salary is replaced with a market rate, one-time expenses like litigation costs are removed, personal expenses run through the business are backed out, and related-party transactions are restated at arm’s length. The goal is to show what the business would earn under typical conditions with a hypothetical buyer at the helm.

Market Approach

The Market Approach values the subject business by comparing it to similar companies that have been sold or that trade publicly. The principle is substitution: a buyer shouldn’t pay more than the cost of a comparable alternative.

The Guideline Public Company Method identifies publicly traded companies similar to the subject and derives valuation multiples from their market data. The Guideline Transaction Method looks at actual completed sales of comparable private companies and applies those multiples to the subject.¹ This approach is strongest when reliable comparable data is deep. For niche businesses or thinly traded industries, finding truly comparable companies is difficult and the multiples get less reliable.

Asset Approach

The Asset Approach values the company by adjusting every asset and liability on the balance sheet to fair market value and computing the net. It focuses on what the company owns rather than what it earns. The primary method is the Adjusted Net Asset Method, which restates book values to current market conditions.

This approach fits holding companies, real estate entities, and asset-heavy businesses where the balance sheet is the best indicator of value. It is also the go-to for financially distressed businesses or any company being valued under a liquidation premise. For an operating company whose earnings power outstrips the value of its tangible assets, the Asset Approach usually understates value and takes a back seat to the Income or Market Approach.

Discounts and Premiums

Once the analyst reaches a base value, that number often needs adjustment to reflect the specific interest being valued. A 5% stake in a private company is not simply 5% of the company’s total value.

A Discount for Lack of Control recognizes that a minority shareholder cannot set dividends, hire management, or force a sale. Because a non-controlling interest carries less influence, it is worth less per share than a controlling stake. Depending on facts, this discount can run roughly 5% to 40%.

A Discount for Lack of Marketability reflects the reality that private-company interests are harder to sell than public shares. There is no open market, no posted price, and finding a buyer takes time and money. Studies have commonly placed this discount in the 20% to 35% range, and it can be higher for very illiquid interests. Both discounts are frequent targets of IRS challenge in estate and gift tax valuations.

Control premiums move in the opposite direction. When a controlling interest is being valued using minority-interest data, the analyst may add a premium to reflect the economic advantages of control. Whether to adjust and by how much is a judgment call the analyst has to document.

Who Can Perform a Valuation for Tax Purposes

When a valuation supports a federal tax position, the IRS imposes its own requirements on the appraiser, separate from AICPA standards. Under 26 U.S.C. § 170(f)(11), a qualified appraiser must have earned a recognized appraisal designation or met minimum education and experience requirements, regularly perform appraisals for compensation, and demonstrate verifiable education and experience in valuing the specific type of property involved.⁴

Treasury regulations spell out how to qualify: either professional or college-level coursework in valuing the relevant type of property plus at least two years of experience, or a recognized appraiser designation from a professional organization.⁵ Certain people are barred from serving as qualified appraisers, including the donor, the donee, parties to the transaction, employees or relatives of those parties, and anyone prohibited from practicing before the IRS within the prior three years.

These rules apply most directly to noncash charitable contributions, but the IRS applies similar scrutiny to estate and gift tax valuations. A valuation from someone who doesn’t meet the standard can be rejected outright, leaving the taxpayer exposed to penalties.

The ABV Credential

The AICPA’s Accredited in Business Valuation (ABV) credential is the AICPA’s own designation for specialized valuation competence. It was established in 1998 and is open to CPAs and qualified valuation professionals who are AICPA members in good standing.⁶

Earning it requires passing a two-part exam with 90 multiple-choice questions per part, completing at least 75 hours of valuation-specific education, and logging substantial hands-on experience. CPAs must log 1,500 hours of valuation experience within five years of applying; non-CPA valuation professionals must complete 4,500 hours.⁷ Candidates who have already passed the ASA business valuation exam, CFA Level III, or the CBV credential exam can skip the ABV exam itself.

The ABV is not legally required to perform a business valuation. But it carries weight with the IRS and in court, an expert witness holding the credential is harder to challenge on qualifications, and it satisfies the recognized appraiser designation element of the IRS qualified appraiser test.

What Happens When a Valuation Is Wrong

An inaccurate business valuation on a tax return is not an academic problem. The IRS imposes accuracy-related penalties under 26 U.S.C. § 6662 that scale with how far off the reported value is.

A substantial valuation misstatement carries a penalty of 20% of the tax underpayment attributable to the misstatement. It applies when the value claimed on a return is 150% or more of the amount the IRS determines is correct, and only if the resulting underpayment exceeds $5,000 ($10,000 for C corporations).⁸

A gross valuation misstatement doubles the penalty to 40% and applies when the claimed value reaches 200% or more of the correct amount.⁸ Estate and gift tax valuations have their own thresholds: a substantial understatement exists when the reported value is 65% or less of the correct value, and a gross understatement at 40% or less.

This is why a rigorous, well-documented Valuation Engagement matters. A Detailed Report that works through the Revenue Ruling 59-60 factors and explains every assumption provides the best defense against both IRS challenge and accuracy-related penalties. The reasonable cause defense can shield a taxpayer from these penalties, but it generally requires showing reliance on a qualified professional who followed recognized standards.

A CPA who fails to follow VS Section 100 also faces AICPA ethics enforcement, with sanctions ranging up to expulsion, and state boards of accountancy can impose separate discipline including license revocation.⁹

What a Business Valuation Costs

Fees vary widely based on engagement type, business complexity, the purpose of the valuation, and the quality of the company’s financial records. A full Valuation Engagement with a Detailed Report costs substantially more than a Calculation Engagement, and valuations meant for IRS filing or litigation require more documentation and defensibility than internal-planning work.

As a rough guide, smaller and straightforward engagements like SBA lending valuations may run $2,000 to $3,000. Estate and gift tax valuations for moderately complex businesses typically fall between $7,500 and $20,000. Partner disputes and divorce-related valuations often cost $7,500 to $15,000 or more, with expert testimony billed separately. ESOP valuations and purchase price allocations for financial reporting can reach $15,000 to $40,000 or higher for multi-entity structures. The single biggest driver is whether the engagement produces a full conclusion of value or a limited calculated value.

Clean, current, accrual-based financial records reduce the analyst’s work and the final bill. If the analyst has to restate or heavily normalize the financials before starting, that adds time and expense. Rush timelines carry premiums; standard turnaround for a full Valuation Engagement is typically two to four weeks.

1
AICPA & CIMA. Statement on Standards for Valuation Services
2
AICPA & CIMA. VS Section 100 – Calculation Engagements FAQs
3
eCFR. 26 CFR 20.2031-3 – Valuation of Interests in Businesses
4
Office of the Law Revision Counsel. 26 USC 170 – Charitable, Etc., Contributions and Gifts
5
eCFR. 26 CFR 1.170A-17 – Qualified Appraisal and Qualified Appraiser
6
American Institute of CPAs. ABV Credential Handbook
7
AICPA & CIMA. Gain Credibility in Valuation
8
Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments
9
AICPA & CIMA. Definitions of Ethics Sanctions/Disposition