Accredited in

Business Valuation

Global ABV
Examination
content specification outline
Effective Aug. 1, 2018

i Valuation Principles Examination

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ii Valuation Principles Examination

Contents
2 The pathway to the ABV credential

3 Detailed content specification outline

I. Foundation of Valuation Theory

II. Implementation of Valuation Methods

8 Resource index

9 Formulas and definitions of variables

Global ABV Examination content specification outline 1

 The pathway to the ABV credential
The content of the global Accredited in Business Valuation (ABV®) Examination was developed
to test a candidate’s understanding of the business valuation body of knowledge generally
accepted by the business valuation community. The content of each topical section is
described in outline form and provides an overview of the knowledge and skills tested on the
ABV Examination. The percentage following each major content area in the outline represents
the approximate weighting for that content area. The examination questions are intended to
test each content area and its logical extensions.

The examination consists of multiple-choice questions intended to test technical knowledge

concerning business valuation and the practical application of business valuation knowledge.
The exam is fully computerized and split into two test modules. Part 1, “Foundation of
Valuation Theory,” covers Section I and Part 2, “Implementation of Valuation Methods,” covers
Section II. Exam modules may be taken in any order.

A list of formulas and definition of variables is provided at the end of this document. These
are the proscribed formulas and the definitions that are to be used on the examination.
Candidates will be provided this list during the examination.

High-level content specification outline

I. Foundation of Valuation Theory II. Implementation of Valuation Methods
(Exam Part 1 — 50%) (Exam Part 2 — 50%)

A. Professional standards A. Valuation approaches

B. Financial reporting
B. Intellectual property and other
C. Defining the engagement intangible assets
D. Sources of economic and industry data
E. Macro-economic and environmental analysis C. Discounts, premiums and other adjustments
F. Industry analysis
D. Conclusion of value
G. Subject entity analysis

Global ABV Examination content specification outline 2

Detailed content specification outline
Section I. Foundation of Valuation Theory
(Exam Part 1 — 50%)
This section covers professional standards, financial reporting, defining the engagement, sources of data, techniques and
methods used to analyze the interest, value drivers and risk assessments.

Topic/content Referenced readings

A. Professional standards Understanding Business Valuation: A Practical

1. AICPA VS Section 100, Valuation of a Business, Business Ownership Guide to Valuing Small to Medium-Sized
Interest, Security, or Intangible Asset (VS Section 100) Businesses, chapter 2
2. AICPA Code Of Professional Conduct ET 1.200.001 “Independence Financial Valuation: Applications
rule” and interpretations of the “nonattest services” subtopic [1.295] and Models, chapter 12
(Pronouncements and regulations related to independence
requirements when providing business valuation services to
attest clients)

B. Financial Reporting Understanding Business Valuation: A Practical

Guide to Valuing Small to Medium-Sized
1. Fair value measurements (FASB ASC 820)
Businesses, chapter 19
2. Business combinations (FASB ASC 805)
Financial Valuation: Applications
3. G
 oodwill and other intangibles and measuring impairment
and Models, chapter 24
(FASB ASC 350)
4. A
 ccounting for the impairment of long-lived assets (FASB ASC 360)
5 Compensation — stock compensation (FASB ASC 718)
6. Contingent considerations
7. A
 ICPA Statement on Auditing Standards AU Sec. 336 (Using the Work
of a Specialist) And AU Sec. 328 (Auditing Fair Value Measurements
And Disclosures)

C. Defining the engagement Understanding Business Valuation: A Practical

Guide to Valuing Small to Medium-Sized
1. S tandards of value (e.g., fair market value, fair value — financial
Businesses, chapters 3, 4 and 16
reporting, investment value, intrinsic [fundamental] value)
Financial Valuation: Applications
a. Internal Revenue Service (IRS) Revenue Ruling 59–60 (fundamental
and Models, chapter 2
valuation considerations and the definition of fair market value)
2. Relationship between purpose of the valuation and the standard of value VS Section 100
3. U
 nderstanding the ownership characteristics of the interest being valued
4. P
 remise of value for business interests (i.e., ongoing concern and liquidation)
5. Engagement letters (e.g., purpose and content)

Global ABV Examination content specification outline 3

Foundation of Valuation Theory (continued)

Topic/content Referenced readings

D. Sources of economic and industry data Understanding Business Valuation: A Practical Guide
to Valuing Small to Medium-Sized Businesses,
E. Macro-economic and environmental alalysis chapters 5, 6 and 8
Financial Valuation: Applications
F. Industry analysis and Models, chapters 4 and 5
1. Industry structure and life-cycle analysis
2. Competitive strategies and analysis

G. Subject entity analysis

1. Entity documents (e.g., operating agreements, buy-sell agreements and
bylaws)
2. SWOT (strengths, weaknesses, opportunities and threats) analysis
3. Firm economics (cost structure and pricing power marginal analysis)
4. Historic and forecast financial statements
a. Common size
b. Trend analysis
c. Financial ratios (a list of definitions, ratios and formulas provided during
the exam is included at the end of this document)
d. DuPont analysis; return on equity and return on assets
5. Adjustments to historic and forecast financial statements
a. Normalizing
b. Control vs. non-control
c. Separation of operating and non-operating items
d. Off balance sheet items
1) Other adjustments
2) Implied tax adjustments
3) Inusual and/or non-recurring items
4) GAAP based adjustments

Global ABV Examination content specification outline 4

Section II. Implementation of Valuation Methods
(Exam Part 2 — 50%)
This section covers knowledge of the three primary approaches to value; intellectual property and intangible assets; levels of
value; discounts; premiums and the conclusion of value.

Topic/content Referenced readings

A. Valuation approaches Understanding Business Valuation: A Practical

1. Income approach Guide to Valuing Small to Medium-Sized
Businesses, chapters 12 and 13
a. General theory
Financial Valuation: Applications
b. Sources of data
and Models, chapters 5 and 6
c. Commonly used methods
1) Capitalized economic income/cash flow method (CCF),
including Gordon Growth Model (consistent growth model)
2) D
 iscounted economic income/cash flow method (DCF),
including Gordon Growth Model (two-stage model)
3) E
 xcess earnings method (hybrid method)
d. C
 ommonly used models — direct equity model versus invested
capital model

e. Types of benefit streams and selection

f. C
 ost of capital concepts and methodology and other models
1) Capital asset pricing model (CAPM) and beta (B) including unlevering and
relevering betas
2) Build-up method
3) Duff and Phelps risk premiums
4) Weighted average cost of capital
5) Understanding the security market
6) Understanding option pricing theory
g. Selection of appropriate time (including mid-year convention)

Global ABV Examination content specification outline 5

Implementation of Valuation Methods (continued)

Topic/content Referenced readings

2. Market approach Understanding Business Valuation: A Practical

Guide to Valuing Small to Medium-Sized
a. General theory
Businesses, chapters 9 and 10
b. Sources of data
Financial Valuation: Applications
c. Commonly used methods
and Models, chapter 8
1) Transactions in subject company’s stock
2) Guideline publicly traded company method
3) G
 uideline merged and acquired company
(transaction) method
d. Selecting guideline companies
e. Statistics related to valuation analysis
1) Understanding measures of central tendency
(e.g., Arithmetic, harmonic and geometric means
and median)
2) U
 nderstanding measures of dispersion (e.g., Variance and
standard deviation)
3) U
 nderstanding statistical strengths of numerical relationships
(including covariance, correlation, coefficient of determination
and coefficient of variation)
4) Understanding linear regression
f. Equity versus invested capital (including price multiples)

g. Selection of appropriate time periods

h. Selection and adjustment of appropriate multiples

3. Asset approach Understanding Business Valuation: A Practical

Guide to Valuing Small to Medium-Sized
a. General theory
Businesses, chapter 11
b. Sources of data
Financial Valuation: Applications
c. Adjusted (net) asset method
and Models, chapter 9
d. Considerations in liquidation
e. Issues in valuing intangible assets
f. Tax affecting the balance sheet

Global ABV Examination content specification outline 6

Implementation of Valuation Methods (continued)

Topic/content Referenced readings

B. Intellectual property and other intangible assets Understanding Business Valuation: A Practical
Guide to Valuing Small to Medium-Sized
1. Valuation approaches and methods
Businesses, chapter 20
2. Valuing specific intangible assets
Financial Valuation: Applications
and Models, chapter 24

C. Discounts, premiums and other adjustments Understanding Business Valuation: A Practical

1. Levels of value appropriate to the engagement Guide to Valuing Small to Medium-Sized
a. Control strategic (public or private company) Businesses, chapters 14 and 15
b. Minority/control standalone liquid (public company) Financial Valuation: Applications
c. Control liquid (private company) and Models, chapter 10
d. Control standalone (private company)
e. Minority non-marketable (private company)
2. Discount for lack of control (DLOC) and control premium
a. Sources of data
b. Ownership characteristics
c. Magnitude
3. Discount for lack of marketability (DLOM)
a. Sources of data
b. Ownership characteristics
c. Restrictions and transferability
d. Magnitude
4. Discount and premiums — understanding the empirical studies
5. Allocation between voting and non-voting stock
6. Other valuation discounts and adjustments
a. Market absorption and blockage discounts
b. Key person/thin management discounts
c. Built-in gains tax discount
d. Nonvoting stock discount

D. Conclusion of value Understanding Business Valuation: A Practical

1. Reconciliation of indicated values Guide to Valuing Small to Medium-Sized
2. Reasonableness of conclusion Businesses, chapter 17

VS Section 100

Global ABV Examination content specification outline 7

Resource index
• Understanding Business Valuation: A Practical Guide to Valuing Small to Medium Sized Businesses by Gary R.
Trugman; 5th ed.; 2017; New York: AICPA.
• Financial Valuation: Applications and Models edited by James R. Hitchner; 4th ed.; 2017; New Jersey:
John Wiley & Sons.
• AICPA VS Section 100, Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset
(VS Section 100)
• AICPA Code of Professional Conduct

Global ABV Examination content specification outline 8

Formulas and definition of variables
Financial ratios Inventory turnover
Accounts receivable turnover: sales ÷ accounts receivable Cost of goods sold ÷ inventory

Average annual growth rate (AAGR): Long-term debt to equity

Example: AAGR of sales Long-term debt ÷ total equity
{Sum of all periods [(current year sales ÷ prior year sales) –
1] ÷ # of periods analyzed} × 100 Net profit margin
Net income after tax ÷ net sales
Average collection period:
365 days ÷ accounts receivable turnover Operating profit margin
Operating profit ÷ net sales
Compound annual growth rate (CAGR):
Example: CAGR of sales Pretax income to sales
{[(Current year sales ÷ base year sales) (1 ÷ # of periods analyzed)] Pretax income ÷ net sales
– 1} × 100
Pretax return on assets
Current ratio Pretax income ÷ total assets
Current assets ÷ current liabilities
Pretax return on common equity
Debt-free working capital turnover Pretax income ÷ common equity
Sales ÷ debt-free working capital
Quick (acid-test) ratio (cash + cash equivalents
Dividend payout ratio + short-term investments, e.g., marketable securities, +
receivables) ÷ current liabilities
Dividends paid ÷ net income
Return on common equity
DuPont formula (net income ÷ equity) = (net income ÷
sales) × (sales ÷ assets) × (assets ÷ equity) Net income ÷ common equity

EVA formula (economic value added) Return on investment

EVA = NOPAT – $ WACC Net income + interest (1 – tax rate) ÷ (equity +
long-term debt)
EVA = EBIT × (1 – t) – WACC × capital invested
EVA = (equity) × (ROE – KE) Return on total assets net income + interest
(1 – tax rate) ÷ total assets
Fixed-charge coverage
(Net income before taxes + interest charges + Sales to fixed assets (fixed asset turnover)
long-term lease payments) ÷ (interest charges Sales ÷ fixed assets
+ long-term lease payments)
Sales to total assets (total asset turnover)
Gross profit margin Sales ÷ total assets
Gross profit ÷ net sales
Times interest earned
Interest-bearing debt to equity Earnings before interest and taxes ÷ interest expense
Interest-bearing debt ÷ total equity
Total debt to total assets
Total debt ÷ total assets

Global ABV Examination content specification outline 9

Formulas and definition of variables

Total debt to total equity Ke = Discount rate for common equity capital (cost of
Total debt ÷ total equity common equity capital): unless otherwise stated, it generally
is assumed that this discount rate is applicable to net cash
Total equity to total assets flow available to common equity. Also expressed as ki or as
Total equity ÷ total assets E(Ri), expected rate of return on security i.
kd = After-tax cost of debt
Working capital turnover
Sales ÷ (current assets – current liabilities) Rf. = Risk-free rate: the rate of return available in the market
on an investment that is free of default risk
Valuation formulas and notation system after-tax
RPm = Equity risk premium for the “market” (large company
cost of debt
premium): usually used in the context of a market for equity
kd = marginal borrowing rate (1–marginal tax rate) securities, such as NYSE or S&P 500. Return in excess of
risk-free rate
Beta
BU = BL ÷ {1 + [(1–t)(Wd/We)]} RPs = Risk premium for “small” stock (small stock premium),
over and above rpm (e.g., average size of lowest quartile of
BR = BU{1 + [(1–t)(Wd/We)]}
NYSE as measured by market value of common equity)
Build-up method RPu = Risk premium for unsystematic risk attributable to the
ke = rf + (rpm) + RPs + RPu specific company (specific company risk)

Capitalization rate T = Tax rate (expressed as a percentage of pretax income)

Cap rate = discount rate – long-term growth rate
Income variables:
CAPM capital asset pricing model (theoretical)
EBIT = Earnings before interest and taxes
Ke = Rf + b(RPm)
EBITDA = Earnings before interest, taxes, depreciation, and
Modified CAPM capital asset pricing model amortization
(used to value smaller businesses)
NCF = Net cash flow (to equity or to invested capital)
Ke = Rf + B(RPm) + RPs +RPu
Weightings:
Weighted average cost of capital (WACC)
We = Weight of common equity in capital structure
WACC = We(ke) + Wd(kd)
Wd = Weight of debt in capital structure
Definition of variables
PV = present value.
Growth:
g = Long-term rate of growth
Cost of capital and rate of return variables:
B = Beta. A coefficient, usually used to modify a
rate of return variable. Betas from public companies are
levered betas.
BL = levered beta.
BU = unlevered beta.
BR = relevered beta.

Global ABV Examination content specification outline 10

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11 Valuation Principles Examination