The ATO provides comprehensive guidelines about who can prepare and what the Commissioner expects to see in a business valuation report for tax purposes. Can the International Valuation Standards (IVS) be helpful in meeting the Commissioner’s expectations?
Who can determine a business value?
According to the ATO, the acceptability of a business valuation report usually depends on the business valuation process rather than the valuer. However, a business valuation carried out by a professional business valuer, following industry business valuation standards, is considered more reliable.
The ATO identify business valuation professionals as including members of Chartered Accountants Australian and New Zealand and Certified Professional Accountants Australia, together with their associated business valuation certifications.
Which business valuation standards apply?
In relation to business valuation standards, the ATO specifically refers to the International Valuation Standards. In addition, that business valuers must comply with other valuation standards such as APES 225 Valuation Services.
According to the ATO, a business valuer who adopts and follows the valuation standards adds credibility to the valuation report.
The Bases and Premise of Value
The ATO refers to the International Valuation Standards for defining the Bases of Value. Further, the Commissioner accepts the definition of Market Value as defined within the IVS. Definitions of value are set out in IVS 102 Bases of Value (IVS 102, paragraph 20.02 and Appendix paragraphs A10 to A50).
According to the ATO, the business valuation report must also reflect “highest and best use”. IVS 102 describes Premises of Value and includes the Premise of Value Highest and Best Use (IVS 102, paragraph 10.03).
Business Valuation Approach and Method
The ATO refers to three Valuation Approaches: Market Approach, Income Approach and Cost Approach. These are Valuation Approaches are all described in IVS 103 Valuation Approaches (IVS 103, paragraphs 20, 30 and 40).
The ATO does not provide a list of Valuation Methods. However, the ATO does provide the example that under an Income Approach the valuer may choose to apply a Discounted Cash Flow Method and or a Capitalisation of Earnings Method. These Income Approach Valuation Methods are described in the Appendix of IVS 103.
According to the ATO, the business valuation report should include an explanation of why the valuation method was chosen. IVS 103 sets out the factors a valuer should consider when selecting the Valuation Approach and Method (IVS 103, paragraph 10.04).
The ATO also highly recommends that a secondary or cross-check method be provided that supports the primary method valuation. IVS 103 recommends the value should consider the use of multiple approaches and methods (IVS 103, paragraph 10.06)
Common general issues in valuation reports
When conducting valuation reviews, the ATO identifies common issues with valuation reports in four key areas:
- Inputs and Assumptions: omitted, unreasonable, unsupported, incorrect, and or inconsistent inputs and assumptions
- Documentation: omitted, insufficient, incorrect, and or inconsistent documentation and relevant evidence
- Analysis: lack of appropriate analysis, scrutiny of information and or verification of inputs
- Methodology: inappropriate choice and or application of the methodology
The IVS provides detailed standards which may help avoid these common issues: IVS 104 Data and Inputs, IVS 103 Valuation Approaches and IVS 106 Documentation and Reporting.
Summary
The ATO guidelines makes reference to and appear to favour the IVS, but the ATO does not specify that the standards should be followed.
However, many of the common valuation issues identified by the ATO may be avoided if the IVS are followed.
Join Chartered Accountants Australia and New Zealand for our upcoming session on the updated IVS and how they interact with the ATO.
#businessvaluation #ATO #IVSC
About the Author
Simon specialises in wrestling with and attempting to pacify often complex valuation problems. He is a Business Valuation Specialist with Chartered Accountants Australia and New Zealand (CA ANZ). He chairs the CA ANZ Business Valuation group for Queensland, is a member of the CA ANZ Trans-Tasman Business Valuation Committee and likes running long distances.
