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Is there a "sanctioned" IRC 409a summary report?

When I get a 409a done for my company is there a summary form I should make sure I get for investors, IRS, etc., or is it just one long report that becomes my document of record?

Answers

Topic Expert
Jim Timmins
Title: Managing Director
Company: Teknos Associates
(Managing Director, Teknos Associates) |

That is a good question. And I can see the appeal of having a summary, which conveys the essence of a 50 to 80 page report, especially for busy board members, the folks who ultimately bear the responsibility of setting the option strike price in compliance with IRC 409A.

Unfortunately, the IRS provides very little guidance about the contents of an acceptable IRC 409A valuation report. The language of IRC 409A mentions a few things which the valuation report must cover, but it says almost nothing about the methods to be used or the form in which the results should be presented.

While there isn't much guidance from the IRS in IRC 409A, there is some elsewhere in other IRS literature, plus other authorities also have provided extensive guidance about what should be in a valuation report.

The various organizations which provide valuation accreditation (e.g. American Institute of Certified Public Accountants (AICPA) and the American Society of Appraisers (ASA)) have published standards that describe what a valuation report should contain. And the AICPA has published a practice aid (Valuation of Privately-Held-Company Equity Securities Issued as Compensation) that is used by the public accounting firms in their review of valuation reports used to price stock options.

None of these sources describe the sort of summary that you mention. You probably anticipated the reason why with the second part of your question: the long report becomes the document of record. The ASA puts it this way, "The comprehensive written business valuation report must clearly communicate pertinent information, valuation methods, and conclusions in a logical progression..." (ASA, Business Valuation Standards, 2002)

The key element in this description is "in a logical progression." A valuation conclusion is dependent upon the purpose for which it was prepared, the assumptions made, the information gathered, the methods used, and the discounts taken. The user of a valuation report needs to know these (and consider the reasonableness of them too) before relying on the valuation conclusion.

That said, most well organized valuation reports contain a few pages at the beginning of the report that summarize the most important information (in our firm's reports they are called Summary of Valuation Analysis and Conclusion). While this is no replacement for the long form report, it is a useful starting point and basis of board discussions.

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