LIST OF SUBSTANTIVE CHANGES AND ADDITIONS. PPC s Guide to Business Valuations. Twenty-eighth Edition (February 2018)

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1 Route To: Partners Managers Staff File valsub LIST OF SUBSTANTIVE CHANGES AND ADDITIONS PPC s Guide to Business Valuations Twenty-eighth Edition (February 2018) Highlights of This Edition Expanded the Discussion of Determining the Tax Provision for Pass-through Entities for the Tax Cuts and Jobs Act. A topic of controversy and differing opinions over the past decade, your Guide provides expanded discussion of the authors latest insights and practice application considerations based on the recent Federal tax reform changes in the Tax Cuts and Jobs Act, which impacts both C corporations and S corporations and their individual owners/shareholders. Expanded and Revised Discussion of Calculation Engagements and Reports. Calculation engagements, popularized with the issuance of the AICPA Statement on Standards for Valuation Services (SSVS) No. 1, Valuation of a Business, calculation engagements Business Ownership Interest, Security, or Intangible Asset, have continued to gain interest and use. As such, application issues in practice have increased. Your Guide includes a recently issued AICPA Q&A on calculation engagements, AICPA Valuation Services, VS Section, Statements on Standards for Valuation Services, VSSection 100,Valuation ofa Business,Business Ownership Interest, Security, or Intangible Asset, Calculation Engagements, Frequently Asked Questions (FAQs), Non-Authoritative. The nonauthoritative Q&A covers topics such as the purpose of a calculation engagement, obtaining an understanding with the client, applicability of calculation engagements in a litigation engagement, and what should not go in a calculation report. Your Guide also includes the authors views and insights on topics such as whether an opinion of calculated value is appropriate in either a litigation or non-litigation environment, the types of services that are appropriate for calculations, the interplay between calculated values and standards of value, and issues to consider when determining whether to perform a calculation engagement. Updated Discussion Regarding Valuation Considerations for Financial Reporting, Including the AICPA s New CEIV Designation. This edition of your Guide has been updated and revised to include the latest practical insights into valuation considerations for financial reporting. Examples include (1) the inception of a unified valuation credential, the Certified in Entity and Intangible Valuations (CEIV) credential, and the associated Mandatory Performance Framework for valuation professionals who perform fair value measurements for financial reporting and (2) the Appraisal Foundation s issuance of a new Valuation Advisory, The Measurement and Application of Market Participant Acquisition Premiums, to provide nonauthoritative valuation guidance applicable to accounting for business combinations. Revised Discussion of Using Restricted Stock Studies to Quantify a Discount for Lack of Marketability (DLOM). The use of restricted stock studies (RSS) to determine a DLOM has been accepted by valuation professionals and the courts for many years. However, in recent years, their acceptance has faced some challenges. This edition of the Guide provides the outside author s latest thoughts on properly using RSS data and some new DLOM calculators using this data. New National Economic Analysis. A narrative discussion of the national economic trends that occurred during 2017 and an economic forecast for 2018 through 2019 has been added. You may find this discussion useful when analyzing the performance of a company in the context of its operating environment and providing a discussion in your valuation report of economic factors that significantly affect the subject company s value. 1

2 In addition to these featured items, your Guide includes the following update items detailed below. CHAPTER 1 Overview of a Business Valuation Engagement 1. Added a discussion concerning changes in the edition USPAP affecting valuation consultants. 2. Updated the discussion of other valuation guidance for the issuance of Valuation for Financial Reporting (VFR) Valuation Advisory #3: The Measurement and Application of Market Participant Acquisition Premiums and The Appraisal Foundation disbanding of its Appraisal Practice Board. 3. Updated the discussion of the Fair Value Quality initiative for the issuance of the Certified in Entity and Intangible Valuations (CEIV) Credential and the related nonauthoritative Mandatory Performance Framework (MPF) documenting fair value measurements for financial reporting purposes. 4. Streamlined the discussion of customer privacy policies applicable to business valuation consultants. 5. Expanded the discussion of whether the calculation engagements are in compliance for USPAP for recent information published by The Appraisal Foundation. 6. Expanded the discussion of tips for performing calculation engagements for the issuance of the AICPA, Valuation Services, VS Section, Statements on Standards for Valuation Services, VS Section 100, Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset, Calculation Engagements, Frequently Asked Questions (FAQs), Non-Authoritative. 7. Updated and streamlined the discussion concerning AICPA standards on reporting on prospective financial information. 8. Updated the Appendix, Comparison of the Major Valuation Standards for recent changes made to the USPAP. 9. Updated the list of business valuation reference materials. Paragraphs Paragraphs Paragraphs Paragraphs Paragraph Paragraph Appendix 1A-5 Appendix 1B Appendix 1C 2

3 CHAPTER 3 Pre-Engagement Procedures CHAPTER 4 Data Gathering and Analysis CHAPTER 5 Capitalized and Discounted Return Methods CHAPTER 6 Valuation Methods Based on Guideline Company Data 10. Added the AICPA, Valuation Services, VS Section, Statements on Standards for Valuation Services, VS Section 100, Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset, Calculation Engagements, Frequently Asked Questions (FAQs), Non-Authoritative. 1. Revised the Illustrative Engagement Letter. 1. Updated the sources of basic economic and industry data and financial market information and trade associations. 2. Updated the discussion of a CPAs responsibilities for reporting to management subsequent events that require financial statement adjustments during a compilation engagement. 3. Updated the discussion of income statement adjustments for recent income tax law changes introduced by the Tax Cuts and Jobs Act (TCJA). 4. Updated and expanded the suggested sources of external data to include online sources. 5. Added a national economic analysis for 2017 and a forecast of 2018 and Expanded and updated the discussion of determining the tax provisions for a passthrough entity for an overview of recent income tax changes introduced by the TCJA and its potential impacts on valuing passthrough entities. 2. Added a discussion of recent changes to the Federal Reserve s method to obtain historic risk-free interest rates from its website. 3. Updated the discussion of the risk adjustment for size for information from the Duff & Phelps 2017 Valuation Handbook Cost of Capital. 4. Added a discussion of a new Duff & Phelps cost of capital product that will replace the Duff & Phelps Valuation Handbook: U.S. Guide to Cost of Capital. 1. Updated the discussion of online sources for public company information available to consultants. 2. Updated the research sources for guideline transaction data. Appendix 1D Appendix 3B Paragraphs and Exhibit 4-1 Paragraph Paragraph and Exhibit 4-5 Appendix 4A Appendix 4H-1 Paragraphs Paragraph Paragraphs and Exhibit 5-20 Paragraphs Paragraph Paragraphs and Exhibit

4 CHAPTER 7 Asset-based, Excess Earnings, and Other Methods CHAPTER 8 Wrapping Up the Engagement CHAPTER 9 Valuation Reports 3. Expanded the Appendix, Business Valuation Mistakes and How to Avoid Them Market Approach. 1. Updated the Appendix, Income Tax Considerations for the Net Asset Value and Liquidation Value Methods, for the TCJA income tax changes. 2. Added an Appendix, Business Valuation Mistakes and How to Avoid Them Asset-based Approach. 1. Updated the discussion of quantifying control premiums and minority interest discounts to reflect recent data. 2. Expanded the discussion of restricted stock studies. 3. Expanded the discussion concerning the Relationship between size of block and discount for lack of marketability (DLOM). 4. Revised the discussion of using restricted stock studies to estimate a DLOM. 5. Updated the discussion concerning studies of transactions in closely held stocks prior to IPOs. 6. Updated the exhibit summarizing commonly used business valuation discounts and premia databases. 7. Expanded the discussion of weaknesses in using option pricing models for quantifying a DLOM for information in the AICPA s Audit and Accounting Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. 1. Streamlined the discussion of AICPA Standards that apply to litigation service engagements. 2. Updated the discussion of a CPA s reporting responsibilities under SSARS for historical financial statements and other historical financial information. 3. Updated the discussion of a CPA s reporting responsibilities when using prospective financial information in valuation engagements. 4. Updated the discussion of a CPA s reporting responsibilities for normalized financial statements used in a business valuation engagement. Appendix 6B Appendix 7B Appendix 7E Paragraphs and Exhibits 8-9 and 8-10 Paragraphs and Exhibit 8-14 Paragraphs Paragraphs Paragraph and Exhibit 8-16 Exhibit 8-18 Paragraphs Paragraphs Paragraph Paragraphs Paragraph

5 CHAPTER 10 Estate and Gift Tax Valuations CHAPTER 12 Valuations for Divorce Engagements CHAPTER 13 Litigation Services 1. Updated the discussion for determining the taxable estate under IRS Form 706, including recent tax reform changes for 2018 tax years. 2. Expanded the applicable estate tax credit amounts to include the year Updated the illustrative estate calculation for rates and tax credits currently in effect. 4. Updated the discussion of filing IRS Form Updated the discussion and examples of calculating the tax basis of a gift received for rates, exclusions, and credits effective in Added a discussion of due diligence in estate return preparation. 7. Added a discussion concerning the withdrawal of the IRS proposed IRC Sec regulations that would have negated valuation discounts applied to a closely-held business interest for estate and gift tax purposes. 1. Added a discussion of valuing a type of intangible asset referred to as the right of publicity. 1. Expanded the discussion concerning the difference between expert consultants and expert witnesses. 2. Added a discussion of filing Daubert challenges for tactical reasons. Paragraphs Exhibit 10-2 Exhibit 10-3 Paragraph Paragraph and Exhibit 10-4 Paragraphs Paragraph Paragraphs Paragraphs Paragraph Expanded the discussion of defending a Daubert challenge. 4. Expanded the discussion of expert witness considerations for depositions and discovery requirements under Federal Rules of Civil Procedure (FRCP) Rule 26 related to written reports and communicating the expert s qualifications. 5. Expanded the discussion electronically stored information related to FRCP Rule Streamlined the discussion of AICPA Professional Standards applicable to CPAs providing prospective financial information during expert testimony. Paragraphs Paragraphs Paragraph Paragraph

6 CHAPTER 14 Family Limited Partnerships CHAPTER 15 Fair Value Under Shareholder Dissent and Oppression Actions CHAPTER 17 Fair Value Measurements for Business Combinations, Financial Reporting, and Intangible Assets PRACTICE AIDS 1. Added a discussion concerning the withdrawal of the IRS proposed IRC Sec regulations that would have negated valuation discounts applied to a closely-held business interest for estate and gift tax purposes. 1. Added discussions regarding valuation discounts applied in the recent shareholder dissolution court decisions, Ferolito v. Ari- Zona Beverages USA LLC, et al., andwisniewski v.walsh. 2. Added a discussion of using financial projections in the recent fair value appraisal action In Re Appraisal of PetSmart, Inc. 1. Added a discussion of fair value measurements for financial reporting and the valuation profession, including the issuance of the CEIV credential and the related nonauthoritative Mandatory Performance Framework (MPF) and the Appraisal Foundation s issuance of Valuations in Financial Reporting Valuation Advisory #3, The Measurement and Application of Market Participant Acquisition Premiums. 2. Updated the Intangible Asset Valuation Bibliography. 1. Updated and revised the Engagement Independence Compliance and Nonattest Services Documentation Form. 2. Revised language in the Sample Valuation Engagement Letter Drafting Form regarding use of the valuation report. 3. Added a practical consideration to the Sample Engagement Letter Drafting Forms concerning the use of third-party service providers. 4. Updated a practical consideration to the Sample Engagement Letter Drafting Forms concerning prospective financial information. 5. Updated a practical consideration in the Valuation Report Drafting Form concerning prospective financial information. Paragraph Paragraphs and Paragraphs Paragraphs Appendix 17C VAL-PA-2.3 VAL-PA-4.1 VAL-PA-4.1, VAL-PA-4.2, VAL-PA-4.3 VAL-PA-4.1, VAL-PA-4.2, VAL-PA-4.3 VAL-PA