Editor’s note: Under recently proposed changes to IRS Circular 230, appraisals will be required to conform to the substance and principles of the Uniform Standards of Professional Appraisal Practice (USPAP).1 In this article, the author examines USPAP’s Standard 10, which contains the requirements for business appraisal reporting. There seems to be a misperception that this standard requires a lengthy narrative report in the context of a litigation assignment, but the author concludes that this is not the case.

Often business appraisers accept appraisal assignments in connection with some type of litigation. This can be for a court or other type of proceeding where the appraisal will be submitted as, or form the basis of, evidence. Accordingly, a best practice in providing such services is that appraisers develop their analyses, opinions, and conclusions to clients and other intended users in a way that is meaningful, unbiased, and credible. This is especially true when under the scrutiny that accompanies a litigation. One helpful way to ensure the appraisal’s credibility is to assure that it complies with generally accepted appraisal standards. One set of generally accepted appraisal principles is USPAP.2

In addition to the development of the opinion of value, certain litigation engagements require the appraisal to be in written form. Again, as a means of ensuring the credibility of a written appraisal report, many look to USPAP. Specifically, Standard 10: Business Appraisal, Reporting discusses the elements that must be included in a written appraisal report. Standard 10 has consistently provided for two types of written reports: an appraisal report and a restricted appraisal report. Moreover, Advisory Opinion 38 (AO-38)3 addresses the appropriate content of an appraisal report and restricted appraisal report. AO-38 advises that, under the scope of work rule:

The report must contain sufficient information to allow the client and other intended users to understand the scope of work performed. The information disclosed must be appropriate for the intended use of the assignment results.4

In discussing compliance with Standard 10 in connection with a litigation assignment, a number of caveats must be addressed. They are as follows:

  1. Development requirements of Standards Rule 9—Regardless of the form of the appraisal report, the appraiser must meet the development requirements discussed in USPAP Standards Rule 9. An appraisal report must provide sufficient information to demonstrate that the appraiser has complied with Standard 9. For a restricted appraisal report, such information must be retained in the appraiser’s workfile but does not have to be in the report itself. This is one reason why many do not consider a restricted appraisal report appropriate for litigation. The reason any valuation approaches or methods were not utilized in the appraisal must be provided in both report types.
  2. Reporting requirements of valuation professional organization (VPO)—In addition to compliance with USPAP Standards Rule 10, the appraiser may be required to comply with the reporting standards of any valuation professional organization (VPO) with which that appraiser is affiliated.
  3. Reporting requirements of the court—While compliance with USPAP Standards Rule 10 may go a long way toward establishing that the appraisal was made in accordance with generally accepted appraisal principles, the ultimate determination of whether a report complies with the intended use in a litigation engagement is based on the requirements the court dictates. In other words, an appraisal report or restricted appraisal report could be in compliance with USPAP Standards Rule 10 and VPO standards, but there may be additional requirements to be in compliance with the requirements of the court. In a litigation assignment, the requirements of the court determine the acceptability of an appraisal report or restricted appraisal report.5

While Standard 10 is clear as to the type and content of an appraisal report and restricted appraisal report, the format of the report is left up to the client and the appraiser. However, there seems to be some notion that an appraisal report in compliance with Standards Rule 10 requires a long narrative report. Perhaps this notion is a product of previous versions of USPAP wherein the real property and personal property discipline rules provided for three types of written reports: a self-contained report, a summary report, and a restricted use report. Since 2014-15, that is no longer the case for those disciplines, and it was never the case for business appraisal reporting.

Subject to the caveats discussed above, Standards Rule 10 does not require the appraiser to produce a long narrative report. The following is a review of some of the salient requirements for a written appraisal report and restricted appraisal report:

Each written and oral appraisal must:

  1. Clearly and accurately set forth the appraisal in a manner that will not be misleading;
  2. Contain sufficient information to enable intended user(s) of the appraisal to understand the report properly; and
  3. Clearly and accurately disclose all assumptions, extraordinary assumptions, hypothetical conditions, and limiting conditions used in the assignment.6

Neither Standards Rule 10 nor AO-38 requires that the appraisal be replicable by its intended users. Further, neither specifies the form by which information must be conveyed in the report. Accordingly, there is nothing to preclude this information being conveyed in using spreadsheet schedules or a presentation format as long as those pages set forth the minimum criteria required by Standards Rule 10. Standards Rule 10-2, Content of Appraisal Report requires that an appraisal report:

  1. State the identity of the client;
  2. State the identity of any other intended user(s) by name or type;
  3. State the intended use of the appraisal;
  4. Contain information sufficient to identify the business or intangible asset and the interest appraised, including property characteristics relevant to the type and definition of value and intended use of the appraisal;
  5. State the extent to which the interest appraised contains elements of ownership control, including the basis for that determination;
  6. State the extent to which the interest appraised lacks elements of marketability and/or liquidity, including the basis for that determination;
  7. State the standard (type) and definition of value and the premise of value and cite the source of the definition;
    Comment: Stating the definition of value also requires any comments needed to clearly indicate to the intended users how the definition is being applied.
  8. State the effective date of the appraisal and the date of the report;
  9. Summarize the scope of work used to develop the appraisal;
    Comment: Summarizing the scope of work includes disclosure of research and analyses performed and might also include disclosure of research and analyses not performed.
  10. When any portion of the work involves significant business and/or intangible asset appraisal assistance, summarize the extent of that assistance;
  11. Provide sufficient information to indicate that the appraiser complied with the requirements of Standard 9 by:
    • Summarizing the appraisal procedures followed;
    • Stating the reason(s) for excluding the market, asset-based (cost), or income approach(es) if any have not been developed;
    • Stating the value opinions and conclusions; and
    • Summarizing the information analyzed and the reasoning that supports the analyses, opinions, and conclusions, including reconciliation of the data and approaches.
  12. Clearly and conspicuously:
    • State all extraordinary assumptions and hypothetical conditions; and
    • State that their use might have affected the assignment results.
  13. Include a signed certification in accordance with Standards Rule 10-3.

What is noteworthy from the paragraphs above is the number of times the word “state” is used. When not requiring the appraiser to “state” a requirement, the appraiser is required to “summarize” things like the scope of work, appraisal procedures followed, and the information analyzed. AO-38 provides an example of the difference between “state” and “summarize” for real property that can be used as a template for business valuation. None of this indicates a requirement for a long narrative written appraisal report and may be particularly amenable to a format that could be in schedules or a brief presentation.

AO-38 explains the differences between an appraisal report and restricted appraisal report as follows:

In most cases the difference between an Appraisal Report and a Restricted Appraisal Report is whether the information must be summarized or whether it may be stated.7

AO 38 also contains a chart with illustrative examples that differentiate the content of both an appraisal report and a restricted appraisal report. AO-38 includes an interesting comment regarding the examples as follows:

The examples show a relative illustration of depth and detail of presentation and are not intended to characterize the format for an entire appraisal report.8

While the required content for an appraisal report and a restricted appraisal report is set forth in Standard 10 and clarified in AO-38, the reporting format is not. Therefore, the appraiser has certain flexibility with respect to the format of his or her report.

In summary, when preparing a written appraisal for litigation, USPAP Standards Rule 10 provides a minimum baseline as to what may be acceptable to the court. It does require, as indicated in the scope of work rule, that “the written report contain sufficient information to allow the client and other intended users to understand the scope of work performed.” However, it does not require the appraiser to prepare a long, written narrative report, nor does it require that the written report be replicable. The appraiser also must be mindful of reporting requirements of the court or other venue, the reporting requirements of any valuation professional organization for which he or she is a member, and the need to still comply with Standards Rule 9 in developing the analysis. In a litigation setting, it is for the court or similar litigation venue to determine whether an abbreviated report format such as schedules or presentations is acceptable as evidence for the proceeding.

The author would like to thank Kyle Garcia (Stout) and Jeff Tarbell (Houlihan Lokey) for their assistance with this article.

Jay E. Fishman is a managing director at Stout and has over 50 years of experience providing valuation of closely held enterprises, professional practices, publicly traded securities, and intangible assets.9 His valuations have been used for many purposes, including estate and gift tax, dissenting shareholder and oppression matters, marital dissolution cases, and the purchase and sale of business enterprises. Prior to joining Stout, he was the founder of and a managing director with Financial Research Associates Inc.

This article was originally published in Business Valuation Update, Vol. 31 No. 3, March 2025; https://www.bvresources.com/business-valuation-update. Reprinted with permission from Business Valuation Resources, LLC.

  1. “Comments wanted on proposed IRS regs regarding appraiser disqualification,” BVWire, Issue #268-1, Jan. 8, 2025; bvresources.com/bvwire.
  2. Substantiation and reporting requirements for cash and noncash charitable contribution deductions rule issued by the Internal Revenue Service on July 30, 2018, which indicates that a qualified appraisal is conducted in accordance with generally accepted appraisal standards like those that are in accordance with the substance and principles of USPAP.
  3. Advisory opinions are not part of USPAP but represent the ASB’s guidance with regard to USPAP’s application. AO-38 applies to real property, personal property, and intangible property.
  4. Scope of work disclosure obligations.
  5. In Whitehouse Hotel Limited Partnership v. Commissioner, the Tax Court instructed that failure to comply with USPAP in the appraisal assignment does not necessarily mean that an appraisal is unreliable.
  6. Standards Rule 10-1 General Reporting Requirements.
  7. AO-38, 115.
  8. Ibid. (underline added).
  9. Jay E. Fishman is a managing director at Stout. The opinions expressed in this article are his own and not those of Stout or the Appraisal Standards Board (ASB) of The Appraisal Foundation.