When to Hire a Valuation Firm for Financial Reporting Purposes

Key takeaways:

• Engaging an independent valuation firm is critical for complex measurements like ASC 805 purchase price allocations, ASC 718 equity based compensation, ASC 350 goodwill impairment, and complex financial instruments measured at fair value under ASC 820.
• Delaying engagement until reporting deadlines can compress timelines and trigger significant auditor scrutiny.
• Fair value reflects a market-participant exit price, requiring specialized treatment beyond historical cost or tax valuations.

Expert Perspective: Why Valuation Firm Independence Matters

Independent valuation firms provide crucial objectivity for complex fair value measurements, helping to streamline auditor reviews and ensure GAAP compliance.

Engaging a valuation firm for financial reporting purposes is strongly encouraged when accounting for purchase price allocations, goodwill impairment testing, or equity-based compensation. These fair value measurement situations can be highly complex and typically include many elements of subjectivity that increase the uncertainty of the estimates.

Because fair value measurement can significantly affect financial statements, auditors will obtain appropriate evidence and evaluate the analysis, sometimes including independent estimates whether performed internally or externally. When you work with a qualified valuation firm early in the process, you gain time for thorough analysis, proper documentation, and audit-ready deliverables that meet both GAAP requirements and auditor expectations. Experienced valuation professionals can help facilitate the audit review allowing for a more efficient, less time-consuming process.

In our valuation practice, we consistently find that bringing in independent specialists early drastically reduces audit friction during reporting cycles.

What Is an Independent Financial Reporting Valuation?

A financial reporting valuation determines the fair value of assets and liabilities based on current market-participant exit prices, adhering strictly to FASB disclosure requirements.

A fair value analysis prepared for financial reporting purposes involves the determination of the current market-based exit price for an asset or liability under market-participant assumptions, reflecting real-time market conditions rather than historical cost. FASB defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Unlike historical cost accounting, fair values can (and likely will) fluctuate over time based on a host of economic, industry, and company-specific factors. In essence, fair value measures reflect changing prices driven by competitive forces and sometimes volatile market dynamics.

With fair value measurement becoming more pervasive across financial reporting, regulatory demands placed on financial executives has increased. As explained below, ASC 820 creates a single framework for measuring fair value under U.S. GAAP, and its disclosure rules require you to explain the methods, inputs, and assumptions behind every fair value number in your financial statements. The depth of disclosure scales directly with how much judgment went into the measurement. Items priced from active market quotes need little explanation, while valuations built on internal models demand extensive transparency.

These strict disclosure requirements form the core of proper fair value measurement for financial reporting.

We've advised numerous controllers and CFOs, emphasizing the critical distinction between static historical costs and true market-based exit pricing.

What ASC Standards Apply to Financial Reporting Valuations?

Financial reporting valuations are governed by ASC 820 for fair value framework, alongside specific standards like ASC 805 for business combinations and ASC 350 for goodwill.

Financial reporting valuations that are measured at fair value must be prepared in accordance with ASC 820, which provides the overarching measurement and disclosure framework. ASC 820 defines fair value, sets out a framework for measuring it, and establishes fair value disclosure requirements. However, ASC 820 does not specify when you are required or permitted to measure assets, liabilities, or equity instruments at fair value—this requirement is addressed in other standards.

For business combinations, ASC 805 requires you to recognize assets acquired and liabilities assumed at fair value as defined in ASC 820. This process is generally referred to as a purchase price allocation. The standard provides a broader definition of a business and requires use of the acquisition method.

Navigating this process effectively requires understanding valuations in accordance with ASC 805 and its specific allocation methodologies.

ASC 350-20 addresses the accounting treatment and financial reporting for goodwill after initial recognition (as part of a purchase price allocation) and requires that companies perform an annual assessment of potential impairment. In addition, ASC 350-30 covers indefinite-lived intangible assets which also require annual impairment assessments.

For equity-based compensation, ASC 718 requires fair value measurement of stock options, warrants, and other share-based payments.

Each of these standards incorporates the fair value measurement principles from ASC 820, including the fair value hierarchy that classifies inputs into Level 1 (quoted prices in active markets), Level 2 (observable inputs), and Level 3 (unobservable inputs). The classification of any asset or liability within this hierarchy is based on the lowest-level input that is significant to the overall measurement. Your valuation must also consider the unit of account, principal or most advantageous market, and highest and best use for nonfinancial assets.

In our experience, correctly applying the ASC 820 framework across varied structures is what truly ensures rigorous compliance and accurate fair value classification.

When Should You Hire a Valuation Firm for Financial Reporting?

Major business events such as mergers, annual goodwill testing, and equity compensation issuance trigger the need for independent fair value measurement.

Certain business events prompt fair value measurement requirements and the potential need for an independent valuation analysis. Common situations include business combinations requiring purchase price allocation, annual or interim goodwill impairment testing, equity-based compensation valuations, and fresh start accounting. Each of these reporting matters has distinct timing requirements and audit expectations.

We've seen how proactively addressing these trigger events with dedicated valuation resources consistently prevents delays during critical reporting periods.

Common Business Situations Requiring Valuation Firm Expertise

Valuation expertise is essential for executing ASC 805 purchase price allocations and conducting precise ASC 350 goodwill impairment testing.

For purchase price allocations under ASC 805, you must determine acquisition-date fair values for all tangible and intangible assets (and some liabilities). Under fair value rules, your analysis should reflect a market participant’s assessment of the asset’s highest-and-best-use. Standard valuation techniques (market, income, and cost methods) should be considered and used where appropriate. Finally, the allocation process requires a determination of the acquisition-date fair value of all forms of consideration, which may include difficult to value contingent consideration and derivative equity instruments.

Goodwill impairment testing under ASC 350 requires assessment at least annually or when triggering events occur. Triggering events include macroeconomic conditions such as deterioration in general economic conditions, limitations on accessing capital, fluctuations in foreign exchange rates, or other developments in equity and credit markets. You should also test goodwill for impairment between annual tests if circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount.

Controllers must remain diligent regarding goodwill impairment testing and compliance with ASC 350 to avoid unexpected write-downs.

Through extensive work with contingent consideration, it's evident to us that specialized valuation techniques are mandatory for accurate acquisition-date reporting.

Is a Third-Party Valuation Firm Required for an ASC 805 Purchase Price Allocation?

While not technically mandated, the complexity of identifying and valuing intangible assets under ASC 805 almost always necessitates a third-party valuation expert.

A third-party valuation is not technically required to document a purchase price allocation. However, for practical purposes the complexities of the exercise typically demand that a qualified valuation expert be used for most material transactions. ASC 805 requires you to allocate the purchase price among acquired assets and assumed liabilities for every business combination. For GAAP financial reporting purposes, the fair value of assets and liabilities of an acquired business must be determined in accordance with FASB ASC 805.

Acquired intangible assets require special attention and must normally be identified and recorded separate from goodwill. Examples include customer relationships, intellectual property, internally developed software, trademarks and trade names, noncompete agreements, and vendor or contractual relationships. Other unique intangibles meeting specific criteria may also be identified. Private companies may elect alternative accounting treatment which eliminates the need to record certain customer-related intangibles and non-compete agreements.

The purpose of ASC 805 is to provide investors with better financial information as to the success of past acquisitions. In the process, FASB has forced firms to deal with a number of thorny and confusing valuation issues that require specialized expertise.

We know from experience that isolating customer relationships and intellectual property from goodwill requires nuanced analytical models that only dedicated professionals routinely deploy.

When Is an Independent Valuation Firm Needed for ASC 350 Goodwill Impairment Testing?

Outside valuation firms are recommended for quantitative goodwill impairment testing when internal teams lack the expertise to defend fair value estimates against audit scrutiny.

An outside valuation firm becomes necessary for goodwill impairment testing when you need to perform a quantitative assessment and lack internal valuation expertise. Companies are required to assess goodwill for possible impairment at least annually or upon occurrence of a triggering event. You may first perform an optional qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If you bypass the qualitative assessment or determine that further testing is required, you must follow the quantitative goodwill impairment test.

The quantitative test requires a fair value determination for each reporting unit that has goodwill. If the carrying value of the reporting unit exceeds its determined fair value, you must record an impairment charge. Accurate fair value estimates can be critical in determining whether goodwill or intangible assets are impaired as required by ASC 350. Valuation specialists work closely with corporate officers and auditors in determining specific valuation needs for impairment testing. Their appraisal process and documentation are specifically designed to satisfy auditor requirements and fully comply with FASB financial reporting standards.

An independent valuation firm brings deep expertise in valuing reporting units, including consideration of market participant assumptions and allocation of shared assets.

From our perspective, effectively allocating shared assets across complex reporting units validates the necessity of defensible, independent models during impairment assessments.

Can Management Prepare a Fair Value Measurement Analysis Internally?

Although management can theoretically prepare fair value analyses, auditors strongly prefer independent valuations due to the heightened scrutiny and PCAOB regulations.

You and your internal finance team can perform financial reporting valuations in limited circumstances, but auditors usually require independent third-party valuations for material fair value measurements. Accounting standards do not explicitly prohibit internal valuations, the practical reality is that auditors apply heightened scrutiny to self-prepared valuations. Fair value measurements and disclosures continue to be topics of interest in financial reporting, and both FASB and the PCAOB periodically address concerns and issue guidance relating to complex valuation matters.

If a financial reporting/fair value analysis is produced internally, you must demonstrate that your team possesses the necessary technical expertise, maintains appropriate independence from the transaction, and can produce audit-quality documentation. Your valuation must comply with the principles-based framework in ASC 820 including proper application of the fair value hierarchy, appropriate selection of valuation methods, and market participant assumptions.

Engaging a valuation firm provides several advantages. Valuation firms experienced in fair value analyses normally possess a deep understanding of auditor and regulator expectations and documentation requirements. They appreciate the audit risks and take a careful approach to valuation engagements to provide deliverables that meet financial reporting requirements. For complex valuations involving Level 3 inputs, intangible assets, or contingent consideration, independent valuation expertise is effectively mandatory to satisfy audit requirements.

We've frequently observed that defending internally generated Level 3 inputs against rigorous audit review proves far more burdensome than engaging independent specialists at the outset.

Why Do Auditors Ask for Independent Valuation Firm Support?

Auditors demand independent support because fair value estimates carry significant misstatement risks and require objective, highly specialized expertise to satisfy PCAOB standards.

Auditors request independent valuation support because fair value measurements are complex, significantly impact financial statement reliability, and carry material risk of misstatement. Under auditing standards, auditors must evaluate whether management's specialist possesses the appropriate expertise and objectivity. Independence is pivotal because an auditing firm must feel confident in the competency of practitioners and the technical quality of the work they produce.

The PCAOB has amended its auditing standards governing the use of specialists, strengthening supervision, communication, and evaluation requirements between auditors and valuation specialists. Despite these changes, the fundamental need for independent verification remains because fair value settings involve inherent uncertainty and require significant judgment. Auditors have their own internal standards and opinions on how valuations should be performed, making early alignment between your valuation firm and auditors critical. When your appraiser and auditor agree on methodology and assumptions before starting, you avoid surprises when the valuation report is delivered.

We have found that aligning our valuation methodology with auditor expectations prior to execution consistently eliminates surprises during their final review phase.

PCE Valuation Firm Example: Supporting a Middle-Market Acquisition

Real-world engagements demonstrate that utilizing an independent valuation firm prevents audit delays and secures regulatory approval for complex intangible asset allocations.

A middle-market manufacturing company acquired a competitor with significant customer relationships and proprietary technology. The acquiring company's management initially believed their internal finance team could perform the purchase price allocation. However, their auditor required independent valuation support for the acquired intangible assets, which represented approximately 60% of the total purchase price.

The company engaged PCE Valuations to perform the purchase price allocation analysis. PCE's team identified and valued customer relationships, developed technology, trade names, and noncompete agreements using appropriate income and market approaches. The analysis included detailed documentation of all assumptions, market data, and calculations to satisfy audit requirements.

Because PCE understood fair value issues and maintained independence from both the acquirer and the auditor, the valuation withstood audit scrutiny without requiring revisions. The engagement demonstrated how early involvement of an independent valuation firm prevents delays and ensures audit-ready deliverables.

PCE provides a full range of fair value measurement services with analyses and conclusions that have been widely accepted, withstanding scrutiny from auditors, the SEC, and other regulatory bodies. With deep experience providing fair value-related services to businesses including public and private companies, private equity firms, early-stage enterprises, and closely held businesses, PCE's team background in fair value accounting assists clients with valuation matters impacting their financial statements.

Local and national accounting firms regularly refer financial reporting valuation assignments to PCE Valuations because of this expertise. PCE routinely delivers fair value opinions and reports prepared to address auditor and regulatory review, reflecting consistent application of accepted valuation methodologies.

Successfully defending complex technology valuations against SEC-level scrutiny reinforces to us the profound value of rigorous, independent modeling.

Frequently Asked Questions

Q: How far in advance should I engage a valuation firm before my reporting deadline?
A: You should engage a valuation firm as early as possible in the financial reporting cycle. Delaying the process reduces the time available for specialists to prepare reasoned, well-supported analyses and documentation, while increasing the likelihood auditors will raise significant concerns in their review. For business combinations, engagement at or before the transaction closing date is ideal. For annual impairment testing, engagement 60-90 days ahead of the test date supports planning and audit coordination, with the valuation performed as of the required measurement date.

Q: What qualifications should I look for in a valuation firm?
A: Look for firms with professionals holding credentials such as ASA, CFA, or CPA designations. The firm should have specific experience in financial reporting valuations and familiarity with your industry. Verify that the firm maintains independence from both your company and your auditor. Review their track record of producing audit-ready reports that withstand scrutiny from accounting firms and regulators.

Q: Do I need a new valuation every year for goodwill impairment testing?
A: Not necessarily. You may perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Only if the qualitative assessment indicates potential impairment must you proceed to a quantitative valuation. However, many companies perform periodic quantitative assessments even without triggering events to establish a baseline and demonstrate diligence to auditors.

Q: Can I use the same valuation firm that my auditor uses for other clients?
A: Generally yes, as long as the valuation firm maintains independence from both your company and your auditor with respect to your specific engagement. The key requirement is that the valuation specialist is independent of your company. Many accounting firms refer financial reporting valuation work to preferred independent valuation firms that they trust to deliver audit-quality work.

Luke Persons

Luke is a business valuation professional engaged in determining the fair value and fair market value of public and privately held businesses for various purposes, including ESOP transactions, fairness opinions, financial reporting, corporate planning, and general business valuations.

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