LIST OF SUBSTANTIVE CHANGES AND ADDITIONS. PPC's Guide to Business Valuations. Twenty fifth Edition (February 2015)

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1 Route To: Partners Managers Staff File LIST OF SUBSTANTIVE CHANGES AND ADDITIONS PPC's Guide to Business Valuations Twenty fifth Edition (February 2015) Highlights of this Edition Updated the on Applying the Capitalized and Discounted Future Returns Methods for the Cessation of Morningstar's Stocks, Bonds, Bills, and Inflation (SBBI) Valuation Yearbook. Our authors updated the Guide for the discontinuance of Morningstar's SBBI Valuation Yearbook and the introduction of the Duff & Phelps Valuation Handbook: Cost of Capital (Handbook) as the primary source of small company equity risk premium data, including the authors' insight on the Handbook. Revised Family Limited Partnership. Over the last few years, the IRS has successfully challenged many family limited partnership (FLP) valuations. Your Guide has been updated for the latest formation tips to avoid an IRS challenge and the most recent information and analysis of valuation techniques unique to FLPs. Save your clients and yourself time and frustration by obtaining the latest FLP valuation guidance. Added an Extensive Analysis of Common Valuation Mistakes. Although your Guide provides practical guidance regarding for the do's and don'ts for performing a valuation engagement, the year's edition includes an extensive analysis of common valuation mistakes when using the income approach. Using their 100+ years of combined valuation experience, our outside authors have developed a new section in the Guide that includes a summary of common valuation mistakes when using the income approach, as well as an accompanying appendix that (a) elaborates on these common mistakes, (b) provides the authors' views of how to avoid them, and (c) includes useful examples. This helpful discussion provides a practical and easy to use resource to help you avoid making mistakes and improve your business valuation engagements. Updated Discussion of AICPA SSARS No. 21 and Its Potentially Significant Impact for Valuation Consultants. If preparing historical financial statements as part of the valuation engagement, CPA valuation consultants most likely had to compile and issue a compilation report on the financial statements. With the issuance of SSARS No. 21, Statements on Standards for Accounting and Review Services: Clarification and Recodification, your Guide introduces the new financial statement preparation service in AR 70 and explains how a compilation engagement or even adherence to SSARS may not be necessary in the future. Expanded the Discussion of Calculation Engagements. Although calculation engagements are not synonymous with business valuations engagements, they are part of the valuation consultant's arsenal. This year's edition of the Guide includes an expanded discussion concerning whether calculation engagements and reports are USPAP compliant and the author's views regarding the use of such engagements in a litigation setting. New National Economic Analysis. A narrative discussion of the national economic trends that occurred during 2014 and an economic forecast for 2015 through 2016 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. valsub 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. Updated the discussion of objectivity and independence in valuation engagements for the AICPA's revised Code of Professional Conduct, including changes that make financial statement preparation a nonattest service for all types of engagements covering periods beginning on or after December 15, Added a footnote concerning the issuance of SSARS No. 21, Statements on Standards for Accounting and Review Services: Clarification and Recodification, and its significant impact on the consultant's reporting responsibilities when preparing historical financial statements for a valuation engagement beginning on or after December 15, Added a discussion of recent actions of the AICPA's Forensic and Valuation Services Executive Committee (FVSEC) other AICPA nonauthoritative guidance applicable to business valuation. 4. Updated the list of other AICPA nonauthoritative guidance for business valuation. 5. Added a discussion concerning proposed USPAP changes for the edition. 6. Added a discussion of Appraisal Foundation's recently formed Business Valuation Resource Panel to consider a number of professionally relevant issues, aimed at maintaining and enhancing the public trust in the business valuation discipline. 7. Expanded the discussion of the licensing and certification of real Estate appraisers under Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), including recent Small Business Administration (SBA) amendments to its valuation policies. 8. Updated the discussion for the status of the IRS's paid tax preparer registration regime since the January 2013 Federal Court decision stating that the IRS does not have the authority to regulate non attorney, non CPA tax return preparers. Paragraphs Paragraph and Appendix 1A 5, paragraph B.3 Paragraph Paragraph Paragraphs Paragraphs Paragraphs Paragraph

3 CHAPTER 2 Overview Of Valuation Terms And Methodology CHAPTER 3 Pre Engagement Procedures CHAPTER 4 Data Gathering and Analysis 9. Updated the discussion of practicing before the IRS for recent amendments to the Circular 230 requirements governing practice before the IRS that became effective on June 12, Updated the discussion of qualification requirements for the designations of the major valuation associations. 11. Expanded the section on calculation engagements, including the latest views concerning whether calculation engagements and reports are accepted under USPAP. 12. Updated the list of business valuation reference materials. 1. Updated the discussion of sources of guideline transaction data. 1. Revised references to conform to the AICPA's revised Code of Professional Conduct. 1. Updated the discussion of reviewing the accountant's report for GAAP errors for the issuance of SSARS No. 21, which allows a CPA, in a nonattest capacity, to prepare financial statements without issuing a report if the CPA is specifically engaged to prepare financial statements on or after December 15, Updated the exhibit of common sources of basic economic and industry date. 3. Updated the discussion of regional and local economic and demographic data. 4. Added a footnote to the discussion of complying with professional standards for SSARS No Updated the discussion of the Financial Accounting Standards Board's lease accounting project which would ensure that assets and liabilities under leases are recognized in the financial statements. 6. Updated and expanded the suggested sources of external data to include online sources. 7. Added a national economic analysis for 2014 and a forecast of Paragraphs Paragraphs Section 104 Appendix 1C Paragraph All Paragraph Exhibit 4 1 Paragraph Paragraph Paragraph Appendix 4A Appendix 4H 1 3

4 CHAPTER 5 Capitalized and Discounted Returns Methods CHAPTER 6 Valuation Methods Based on Guideline Company Data CHAPTER 7 Underlying Assets, Excess Earnings, and Other Methods 1. Expanded the discussion assumptions, normalization adjustments, and other factors to consider when preparing or reviewing a financial forecast. 2. Clarified that financial statement adjustments for GAAP differences may not be necessary if cash basis financial statements are the industry norm. 3. Revised the discussion of determining the tax provisions of pass through entities. 4. Expanded the discussion of forecasting next year's operations for determining a cap rate. 5. Updated the discussions of equity risk premiums and risk adjustments for size to reflect data from the Duff & Phelps Valuation Handbook: Guide to Cost of Capital. 6. Expanded the discussion industry adjusted equity risk premiums and sources of company betas. 7. Updated the discussion concerning the industry risk premium used in the build up method for the Duff & Phelps Valuation Handbook: Industry Cost of Capital. 8. Updated the discussion of the Butler/ Pinkerton Calculator (total beta). 9. Updated the discussion of using Duff & Phelps data for the introduction of two new valuation handbooks to replace the Ibbotson Stocks, Bonds, Bills and Inflation (SBBI) Valuation Yearbook. 10. Added a new section and Appendix, Business Valuation Mistakes and How to Avoid Them Income Approach." 11. Added monthly and annual interest rates on U.S. government securities for Updated an Appendix concerning Dr. Aswath Damodaran's thoughts on the equity risk premium for his 2014 edition. 1. Updated the online sources for public company information available to consultants. 2. Updated the research sources for guideline transaction data. 1. Updated the discussion concerning income tax considerations for net asset value and liquidation value methods for the extension of the built in capital gains income tax laws by the Tax Increase Prevention Act of Paragraphs and Exhibit 5 11, Note a. and Paragraph Paragraphs Paragraph Paragraphs , , and and Exhibits 5 17 and Paragraphs Paragraphs and Exhibit 5 23 Paragraphs Paragraphs Section 511 and Appendix 5E Appendix 5B Appendix 5D Paragraph and Exhibit 6 4 Paragraphs and Exhibit 6 13 Appendix 7B 4

5 CHAPTER 8 Wrapping Up the Engagement CHAPTER 9 Valuation Reports 1. Updated the discussion concerning the application of premiums and discounts when using the discounted cash flow method for the Duff & Phelps valuation handbooks. 2. Updated the discussion of quantifying control premiums and minority interest discounts to reflect recent data. 3. Added a discussion of the Appraisal Foundation's Discussion Draft to address control premiums as applied to financial reporting. 4. Updated the discussion of guidelines for estimating control premiums. 5. Replaced the chart showing discounts versus block size. 6. Updated the discussion and illustrative exhibit that summarizes the Valuation Advisors' restricted stock studies. 7. Expanded the discussion of studies of transactions in closely held stocks prior to IPOs for a summary of the Pluris DLOM Database. 8. Updated the discussion of using option pricing models to quantify a discount for lack of marketability. 9. Updated the exhibit summarizing commonly used business valuation discounts and premia databases. 1. Added a footnote to the discussion of AICPA Standards applicable to valuation report writing for the AICPA's revised Code of Professional Conduct. 2. Added a footnote concerning the issuance of SSARS No. 21 (which supersedes SSARS No. 19 for engagements beginning on or after December 15, 2015) and its impact on the financial statements prepared as part of litigation support involving pending or potential legal or regulatory proceedings. 3. Added a footnote concerning the issuance of SSARS No. 21 and its significant impact on the consultant's reporting responsibilities when preparing historical financial statements for a valuation engagement beginning on or after December 15, Paragraph Paragraphs and Exhibits 8 9 and 8 10 Paragraphs Paragraph Exhibit 8 15 Paragraph and Exhibit 8 19 Paragraph Paragraphs Exhibit 8 22 Paragraph Paragraph Paragraph

6 CHAPTER 10 Estate and Gift Tax Valuations CHAPTER 11 Valuing Professional Practices CHAPTER 12 Valuations for Divorce Engagements CHAPTER 13 Litigation Support Services 1. Updated the discussion for the 2015 annual gift and estate tax exclusion amounts. 2. Updated the discussion for determining the taxable estate under IRS Form Updated the unified estate and gift tax table for rates currently in effect. 4. Expanded the applicable estate tax credit amounts to include the year Updated the illustrative estate calculation for rates and tax credits currently in effect. 6. 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 Clarified that financial statement adjustments for GAAP differences may not be necessary as cash basis financial statements are an industry norm for professional practices. 2. Updated the rules of thumb for various professional practices. 3. Updated the list of states permitting the sale of law practices. 4. Updated the Selected Professional Practice Valuation Bibliography. 5. Updated the websites for healthcare research. 6. Updated the discussion concerning the factors to consider in valuing health care practices. 7. Updated the Glossary of Healthcare Terms. 1. Added a discussion of personal goodwill applied to a company in the Kearney decision. 1. Updated the discussion concerning independence considerations for litigation services under the AICPA's revised Code of Professional Conduct. 2. Added a discussion of electronic document production requirements under Rule 26 of the Federal Rules of Civil Procedure. Paragraph Paragraphs Exhibit 10 1 Exhibit 10 2 Exhibit 10 3 Paragraph Paragraph and Exhibit 10 4 Paragraph Exhibit 11 4 Exhibit 11 6 Appendix 11A Appendix 11B Appendix 11C Appendix 11D Paragraphs Paragraphs and Paragraph

7 CHAPTER 14 Family Limited Partnerships CHAPTER 15 Fair Value Under Shareholder Dissent and Oppression Actions CHAPTER 16 Valuing Non traded Financial Options CHAPTER 17 Fair Value Measurements for Business Combinations, Financial Reporting, and Intangible Assets 3. Updated the footnote concerning online access to the Federal Rules of Evidence and the Federal Rules of Civil Procedures. 4. Expanded the discussion concerning testimony by expert witnesses for the reasonably reliable test." 5. Updated the discussion concerning professional liability when performing litigation services potential liability for failing to meet the AICPAs standard of ordinary care and failure to adhere to professional standards. 1. Expanded the discussion IRS challenges to family limited partnerships for the Turner decision. 2. Expanded the discussion of key points of partnership agreements for the terms by which a partnership can be amended. 3. Expanded the discussion of developing a rate of return for the family limited partnership using the build up method. 4. Updated the sources of information for closed end funds and comparable entities for real estate. 5. Updated the illustrative examples of FLP valuations. 6. Streamlined the discussion of family limited partnership discounts for lack of marketability. 1. Expanded the discussion of minority oppression actions. 2. Updated the illustrative exhibit for the states following the Revised Model Business Corporation Act. 1. Updated the discussion of reasons for valuations of non traded options. 2. Added a discussion of the AICPA's Accounting & Valuation Guide, Valuation of Privately Held Company Equity Securities Issued as Compensation. 1. Updated the footnote for FASB Accounting Standards Update No , Accounting for Goodwill. Paragraphs and Paragraphs Paragraph Paragraph Paragraphs Paragraph Paragraphs and Section 1404 Section 1405 Paragraph Exhibit 15 1 Paragraphs Paragraphs Paragraph

8 PRACTICE AIDS 2. Added a footnote for FASB Accounting Standards Update No , Business Combinations (Topic 805) Accounting for Identifiable Intangible Assets in a Business Combination, which private entities may adopt for the initial business combination transaction occurring in fiscal years beginning after December 15, Expanded the list of acquired assets and assumed liabilities initially recognized at fair value. 4. Expanded the discussion of amortization benefits of intangible assets for the nonauthoritative guidance in Identification of Contributory Assets and the Calculation of Economic Rents, issued by the Appraisal Foundation. 5. Expanded the discussion of in process research and development for guidance in the AICPA's updated Accounting & Valuation Guide, Assets Acquired to Be Used in Research and Development Activities. 6. Expanded the discussion of the multiperiod excess earnings method for the SSVS No. 1 requirements for presenting a capital charge on an entity's contributory assets. 1. New form in this edition. (Replaces the previous ET Interpretation Documentation Form.") 2. Updated the letter and its practical considerations concerning management's responsibilities for nonattest services and the practical considerations and the revised Code of Professional Conduct. 3. Updated the practical considerations for the revised Code of Professional Conduct. Paragraph Exhibit 17 3 Paragraph Paragraphs Paragraph VAL PA 2.3 VAL PA 4.1 and VAL PA 4.2 VAL PA 4.3 8