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We have recently discussed valuation issues created by the current economic environment, including Declining Valuation Multiples, How Public Company PE Ratios Impact an ESOP Valuation, and Employee Communications and Involvement in Tough Economic Times. Economic Crisis Raises Questions About Business Valuation Standards discusses some of the new questions and issues that valuation professionals and ESOP fiduciaries face in today's environment:

The current global economic crisis, in combination with the body of accepted professional standards and case law on business valuation, has led to uncertainty over the current application of business valuation standards. In particular, uncertainty exists concerning what kinds of company-specific events directly resulting from the crisis can be addressed in a valuation report. Specifically, it is unclear when events that have occurred after a particular valuation date, but before the preparation of the valuation report for that period, should be included in such a report. Now more than ever, business valuation professionals and those seeking the services of such professionals, such as ESOP fiduciaries, need clarification.

IRS regulations and business valuation standards generally provide that events occurring after the valuation date are not considered in the valuation:

For example, IRS Revenue Ruling 59-60 states, "Valuation of securities is, in essence, a prophesy as to the future and must be based on facts available at the required date of appraisal." Similarly, the Institute of Business Appraisers' Business Appraisal Standards state, "An appraisal shall be based upon what a reasonably informed person would have knowledge of as of a certain date . . . . Information unavailable or unknown on the date of valuation must not influence the appraiser or contribute to the concluding opinion of value."

It notes how court cases (e.g. Estate of Noble v. Commissioner, T.C. Memo 2005-2 (2005), Estate of Jung v. Commissioner, 101 T.C. 412 (1993)) have allowed information after the valuation date to be considered, using a "known or foreseeable" standard as of the date of the valuation. The cases considered the subsequent events to be "evidence" of the value as of the valuation date rather than something that affected the value.

It also discusses some of the many new questions resulting from the current environment:

Was the extensive fallout from the economic crisis foreseeable? More specifically, if the downturn has had a particularly onerous effect on a certain industry or business, was that effect foreseeable and should it be included in a valuation?

Although it is clear that unforeseeable subsequent events such as natural disasters or the death of a critical employee cannot be taken into account for valuation purposes, valuation professionals need guidance as to whether certain subsequent events directly resulting from the economic crisis are truly foreseeable and therefore required to be included in business valuations…The answer to the question of how much of this was foreseeable for a particular company as of a certain valuation date may depend on what that company or industry was facing at that certain point in time…

Valuation professionals are clearly required to take the economic climate into account, but whether specific events resulting from the economy should be taken into account is a much more uncertain matter..Determining what was in fact foreseeable for a particular company as of the valuation date will undoubtedly require careful evaluation of a variety of factors, including all potential legal implications. Valuation professionals must come to a clear understanding of what should and should not be included in each instance, as holders of equity interests in failing businesses and the businesses themselves may argue that such subsequent events should not be used if they will lead to what they consider to be a premature decrease in their stock's value.

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