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Business Valuation and Federal Taxes: Procedure, Law and Perspective, 2nd Edition by Shannon P. Pratt, David Laro

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Chapter 11

Adjustments to Financial Statements

Summary

Almost all business valuations use information from financial statements. This chapter discusses adjusting the financial statements to provide a relevant basis for fair market value opinions. Chapter 12 discusses analyzing the statements to provide insights to be used in the valuation.

In most valuation cases, certain adjustments to the subject company's historical financial statements should be made. This chapter discusses, in broad terms, the categories of such adjustments and why each is appropriate. If no adjustments were made to the subject company's statements, the report should contain a statement that the analyst has reviewed the company's statements and that no adjustments were considered appropriate.

If a publicly traded guideline company method is used, the same categories of adjustments should be made to the guideline companies as to the subject company.1 If the analyst has made no adjustments to the guideline companies, the report should contain a statement to the effect that the analyst has reviewed the guideline company statements and no adjustments were necessary.

There are six categories of financial statement adjustments:

1. Separating nonoperating items from operating items

2. Adjusting for excess assets or asset deficiencies

3. Adjusting for contingent assets and/or liabilities

4. Adjusting the cash-basis financial statements to accrual-basis statements (if the company accounts are on a cash basis)

5. ...

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