Certified Valuation Analyst (CVA) Practice Exam

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In how many years of balance sheets must the valuation be based according to Revenue Ruling 59-60?

One year
Two years
Three years
Five years

The correct answer is: Two years

Revenue Ruling 59-60 outlines the methodology and considerations for business valuations, including the treatment of financial statements. According to this ruling, a valuation should typically be based on the past two years of balance sheets. This two-year timeframe is important because it allows for a more comprehensive view of the business's financial performance and condition, smoothing out any anomalies or unusual one-off events that may be present in a single year's data. The rationale for using two years is to provide a snapshot that balances recent financial trends with the need to consider the business's ongoing financial stability and operational performance. This helps ensure that valuations are not unduly influenced by fleeting circumstances or trends that may not be indicative of future performance. While other choices might suggest a longer or shorter lookback period, two years is the standard established in the ruling for establishing a robust and credible valuation.