Financial Statement vs Valuation Standards
A comprehensive guide for CPAs navigating the differences between GAAP financial reporting and professional valuation standards. Understand when each framework applies and how they impact business value determinations.
Key Differences Between Standards
GAAP: Historical cost reporting and financial statement presentation for stakeholders.
Valuation: Determining fair market value for specific purposes like transactions, litigation, or tax matters.
GAAP: Historical transactions, verifiable data, neutral estimates.
Valuation: Market data, prospective analysis, hypothetical buyer/seller assumptions.
GAAP: Historical focus with periodic adjustments for impairment.
Valuation: Current market conditions and future earnings potential at valuation date.
GAAP Financial Reporting Framework
- • Historical Cost: Assets recorded at acquisition cost
- • Conservatism: Lower of cost or market for certain assets
- • Verifiability: Emphasis on objective, auditable evidence
- • Consistency: Uniform application across periods
- • Materiality: Focus on items significant to users
GAAP requires fair value measurement for specific items:
- • Investment securities (ASC 320)
- • Financial instruments (ASC 825)
- • Business combinations (ASC 805)
- • Impairment testing (ASC 350, 360)
- • Stock-based compensation (ASC 718)
Professional Valuation Standards
BVS-I: General
Fundamental requirements for all business valuations including competency, independence, and due professional care.
BVS-II: Asset-Based Approach
Guidelines for applying asset-based valuation methods and adjusted net asset approach.
BVS-III: General Requirements
Documentation, reporting, and disclosure requirements for valuation engagements.
BVS-IV: Discounts & Premiums
Application of marketability discounts, minority discounts, and control premiums.
Professional Standards
Comprehensive standards covering engagement acceptance, valuation approaches, and reporting requirements.
Training Requirements
Mandatory education and continuing professional development for certified valuators.
When Each Standard Applies
- • Preparing audited financial statements
- • Filing SEC reports or regulatory filings
- • Meeting loan covenant requirements
- • Internal management reporting
- • Tax basis financial statements (modified GAAP)
- • Impairment testing under ASC 350/360
- • Purchase price allocation (ASC 805)
- • Transaction planning and negotiations
- • Litigation support and expert testimony
- • Estate and gift tax planning
- • Divorce and family law matters
- • Buy-sell agreement valuations
- • ESOP and equity compensation
- • Strategic decision making
- • 409A valuations for stock options
Critical Distinctions for CPAs
GAAP Approach
- • Goodwill only from acquisitions
- • Internally developed intangibles expensed
- • Annual impairment testing required
- • Limited recognition criteria
Valuation Approach
- • All value-creating intangibles considered
- • Customer relationships, technology, processes
- • Market-based valuation methods
- • Income-producing capability focus
GAAP Constraints
- • Observable market inputs preferred
- • Level 1, 2, 3 hierarchy (ASC 820)
- • Unobservable inputs limited
- • Documentation requirements
Valuation Flexibility
- • Comparable company analysis
- • Transaction multiples
- • Industry-specific metrics
- • Professional judgment emphasized
Best Practices for CPAs
Understand the Purpose
Clearly identify whether the engagement requires GAAP compliance or valuation standards before beginning work.
Document Methodology
Maintain detailed documentation of which standards apply and why specific approaches were selected.
Consider Professional Development
Obtain valuation credentials (ABV, CVA, ASA) to better serve clients requiring business valuations.
Collaborate with Specialists
Partner with credentialed appraisers for complex valuations while maintaining GAAP compliance for financial reporting.
Stay Current on Standards
Monitor updates to both FASB standards and valuation professional standards including NACVA Professional Standards updates.
Quality Control Procedures
Implement review procedures to ensure appropriate standards are applied consistently across engagements.
Need Expert Valuation Support for Your CPA Practice?
Partner with a credentialed valuation professional (CVA, ASA, or ABV) who understands both GAAP requirements and valuation standards. Get reliable valuations that meet professional standards and serve your clients' needs.
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