Introduction to Valuation of Commercial Damages

The majority of forensic accounting practice involves the valuation of some type of damages or value of a business. Lost profits/business interruption is a prominent service provided by forensic accountants. Lets consider the: Business Interruption Case for Company YYZ:

The general methodology to measure lost profits is first to determine a firms lost revenues and subtract its avoided costs or non-continuing expenses. The method is referred to as the top-down approach to lost profits. The bottom-up approach is defined as net income or loss plus continuing expenses. Theoretically, both methods should arrive at the same result.

Lost revenues are often measured as the difference between actual revenues during the damage period, and the but-for revenues that the firm would have generated had not the wrongdoing occurred.

The Company YYZ had projected lost sales during the loss period of $80,500. The company was completely shut down and will reopen after the loss period.

1) Officers continued to work during the loss period to restore operations.

2) Key employees were paid during the loss period

3) Advertising is a discretionary expense.

4) Annual insurance is prepaid.

5) Servers collected unemployment.

6) Building is untenable.

Rather than ask you to calculate, I am providing the answer for discussion. You will have opportunities to calculate business interruption/ lost profits. Our goal is to understand the technique.

Discussion Matter:

Based on the information available, identify with a logical argument (Toulmin recommended) which scenario is the best estimate of the damages

					S-1	S-2	S-3
			As a % of Gross Receipts		Continuing Expenses as a % of Gross Receipts	Continuing Expenses as a % of Gross Receipts	Continuing Expenses as a % of Gross Receipts
Gross Receipts	$ 1,246,000		100.00%
Cost of Goods Sold	412,000		33.07%
Gross Profit	$ 834,000		66.93%
Expenses:
Salaries - Officer	118,000		9.47%		9.47%	9.47%	9.47%
Salaries - Servers	222,000		17.82%		17.82%	17.82%
Salaries - Chef	125,000		10.03%		10.03%	10.03%	10.03%
Rents	112,000		8.99%			8.99%
Advertising	17,500		1.40%			1.40%
Insurance	17,637		1.42%		1.42%	1.42%	1.42%
Telephone/Internet/Cable	15,788		1.27%
Uniforms	3,643		0.29%
Utilities	5,460		0.44%
Total Expenses:	$ 637,028		51.13%		38.74%	49.13%	20.92%
Net Profit	$ 196,972		15.81%		15.81%	15.81%	15.81%
Business Interruption Value - Net Profit plus Continuing Expenses:					54.55%	64.94%	36.73%
Lost Gross Receipts					$80,500	$80,500	$80,500
Multiplied by Business Interruption Value					54.55%	64.94%	36.73%
Loss of Income					$43,913	$52,277	$29,568