Two Valuations With the Same Date? Yes, It's Possible
A valuation done pre-COVID-19 may be obsolete, so can you update it using the same valuation date and factor in the impacts of the pandemic? Yes, says James Hitchner (Valuation Products and Services) in the premier issue of Hardball With Hitchner, and he believes doing so is not in conflict with the valuation standards that do not allow you to reflect the impact of subsequent events that were not known or knowable as of the valuation date.
Use a hypothetical. “I believe you can use a hypothetical condition to allow you to do two valuations on the same date, one with COVID and one without COVID,” he writes. Hitchner stresses that this is not a get-around to the standards. “I am advocating helping attorneys and their clients settle cases with all the information they need,” he writes. Using a hypothetical allows you to do this without running afoul of the standards, he claims.
Hitchner says it’s quite possible that a judge will ask to see two valuations on the same date to determine current value. Of course, you could simply change the valuation date to present day and there would be no issue at all. But, if that is not an option, you will have to confront the standards if asked to update your report using the same valuation date. Hitchner acknowledges that there will be “naysayers” who say the standards do not allow this.
The AICPA’s valuation standards (SSVS) and USPAP define a hypothetical condition as that which is contrary to what exists but is used for purposes of analysis. Examining the SSVS section on subsequent events (paragraph .43), Hitchner sees no conflict between this section and the use of a hypothetical condition. He also points out that the AICPA’s Subsequent Events Toolkit, issued in response to the pandemic, does not address a hypothetical condition (Hitchner was a co-author of the FAQs in the toolkit). The toolkit supports the disclosure of a subsequent event such as COVID-19 but makes it clear that you cannot update your valuation report to reflect the impact—you would have to do a new valuation as of a new valuation date.
This is where the hypothetical comes in. “I believe that the hypothetical condition can be invoked to allow you to use the same date for a with- and without-COVID valuation and value,” he writes. He also believes that using a hypothetical condition is applicable to the American Society of Appraisers (ASA) and National Association of Certified Valuators and Analysts (NACVA).
Issue of reliability. Another point he makes is about the reliability of valuations of firms impacted by COVID-19. He disagrees with some analysts who say that valuations may be less reliable than those prepared pre-COVID-19. “I believe that valuations under COVID are more difficult, but they are not less reliable,” he writes. Analysts strive to make sure valuations are as reliable as possible regardless of the environment or nature of the economy. The problem now is not different from, for example, valuing early-stage companies whose future performance is not predictable. Of course, there may be times when the difficulties may not be manageable. “If you do not believe you can prepare a reliable valuation under COVID, you should not take the engagement,” he stresses.
Hardball With Hitchner is a monthly publication available by subscription from Valuation Products and Services.
Source note: This article originally appeared in Business Valuation Update and is reprinted with permission from Business Valuation Resources. This article is intended for informational purposes only.