Several professional organizations recently began issuing the Certified in Entity and Intangible Valuations (CEIV) credential. This marked the culmination of a multiyear process intended to improve valuations used for financial reporting purposes.
The credential was developed by a joint task force that included the American Institute of CPAs (AICPA), the American Society of Appraisers (ASA), and the Royal Institution of Chartered Surveyors (RICS), and it addresses concerns raised by Securities and Exchange Commission (SEC) staff over the fragmented nature of the valuation profession. Notably, credential holders are required to comply with a new Mandatory Performance Framework (MPF) when completing valuation assignments. While this framework simply codifies many practices that leading valuation professionals have always used, it does provide a structure for the development of supportable and auditable fair value measurements without limiting the use of professional judgment. Companies seeking an independent valuation professional will be well-served by considering individuals who hold the CEIV credential.
Financial reporting requirements have increasingly incorporated fair value measurements in recent years. But unlike with cost-based measures, the determination of fair value for many assets and liabilities requires a significant amount of judgment. A number of organizations offer credentials that allow valuation providers to demonstrate they have obtained the expertise necessary to exercise professional judgment when determining fair value. However, individuals who perform fair value measurements for financial reporting purposes are not required to have any credential, and prior to the development of the CEIV and the MPF, there was no uniform set of guidelines for professionals to follow. As a result, there is wide disparity in the valuation profession with regard to training, qualifications, and experience, thus resulting in disparity in the quality of fair value measurements used in financial reporting.
Beginning in 2011, SEC staff began to voice their concern about the quality of fair value measurements. While the multitude of credentialing organizations in itself does not cause concern, the lack of consistency and regulation, in the SEC’s view, may in some instances lead to valuation measurements that are not based on sound methodologies or supported by documented assumptions.
Furthermore, differences in the methods by which fair value measurements are determined inherently increase the difficulty of auditing these inputs. Because valuation professionals are an increasingly integral part of a collaborative financial reporting process involving valuators, auditors, management, and regulators, it became clear that the valuation community needed to address the SEC’s concerns. Specifically, through various speeches, the SEC called for:
In response, the AICPA, ASA, and RICS launched a collaborative effort in early 2014 to develop the CEIV credential. During the next three years, accounting firms, regulators, valuation professionals, and others provided input, ultimately resulting in the development of four work streams designed to implement and maintain the infrastructure to support the CEIV credential:
To address the performance requirement work stream associated with the CEIV credential, the MPF was developed as a practical, nonauthoritative framework that defines the level of documentation and performance necessary to provide supportable and auditable fair value measurements. It is supplemented by a separate document that outlines the appropriate application of the MPF when performing valuation engagements for financial reporting purposes.
The goal of the MPF is to provide guidelines regarding how much work should be performed and how to sufficiently document the work performed. It is not a “how-to” guide for determining the fair value of assets and liabilities. Rather, it should be used in conjunction with relevant valuation standards and technical guidance that already exist to promote quality, consistency, and auditability. When performing valuations under the MPF, the valuation professional must:
While fair value measurements have increasingly become integral to financial statements, the determination of fair value for some assets and liabilities has become more complex. For certain issuers, fair value measurements can represent a material amount on their financial statements or in related disclosures. Therefore, it is important for issuers to understand how fair value measures are determined and, when necessary, to seek assistance from a professional who can develop supportable fair value conclusions under a framework that allows for consistency and transparency. Valuation professionals who hold the CEIV credential have met extensive eligibility requirements, including passing a comprehensive exam, and issuers can be assured they will use appropriate methodologies to develop well-documented, auditable conclusions.
Improving the quality of fair value inputs by using professionals holding the CEIV credential benefits all parties involved with financial reporting. Management (with the assistance of its valuation professional) will be better equipped to support its fair value disclosures. Auditors will gain comfort that CEIV holders conducted their analyses with appropriate professional skepticism and rigor. Regulators will gain comfort that CEIV holders understand the importance of their role in the financial reporting process and operate under a unified set of standards. And ultimately, users of financial statements will have better information to consider when making investment decisions.
 Credentials used by valuation professionals include the Accredited in Business Valuation (ABV) credential offered by the AICPA, the Accredited Senior Appraiser designation offered by the ASA, the Chartered Financial Analyst (CFA) credential offered by the CFA Institute, and the Certified Valuation Analyst (CVA) and Accredited Valuation Analyst (AVA) credentials offered by the National Association of Certified Valuation Analysts (NACVA), among others.