Covid-19 and the impairment of water

The impacts caused by the COVID-19 pandemic continue to generate uncertainties in various sectors of the economy, which could be transformed forever. With a slowdown already evident, many companies are already expecting to recognize losses due to the devaluation of assets in their financial statements.

These values are measured using the Recoverability Test, or Impairment Test, which has been applied since the publication of Law 11,638/07, ensuring that the book amount registered in is in excess of the recovery amounts. This is a corporate obligation that must be fulfilled, at least annually.

In this case, if the book amount exceeds the recoverable amount, the amount must be recognized as a loss due to devaluation. Equity, which may be reduced by these losses, is a parameter of financial strength and leverage.

For the moment, IBRACON has presented two possible scenarios: the first takes into account the financial statements closed on 31/12/2019, which must contain explanatory notes on subsequent events reporting the impacts of COVID-19. In the second scenario, for the quarterly information closed on 31/03/2020, the resulting impacts must already be recorded.

Francisco Sant'Anna, president of IBRACON, affirms that: “The COVID-19 pandemic in the world is unprecedented and is having a strong impact on people's lives, in several ways. It will be no different with companies and the financial market. Before, we were dealing with predictions and possibilities. Now, we are dealing with a confirmed scenario, which requires attention when preparing financial reports”.

The moment is one of attention and analysis, and taking into account that many activities have already been affected by the change in the dynamics of actions of companies, the Impairment Test must be applied so that losses due to the devaluation of assets are recognized in the financial statements.

The Federal Accounting Council — CFC defines goodwill as a residual value that represents future economic benefits deriving from other assets acquired in a business combination that do not meet individual identification and recognition criteria. In many transactions, goodwill is necessary, and the annual test for the reduction of the recoverable amount is carried out in accordance with Brazilian accounting standards and principles.

There are still many uncertainties about how much the pandemic will affect company results, but COVID-19 is certainly impacting the global economy, causing supply chain obstacles and keeping companies closed by local governments. The stock market is also experiencing periods of high volatility and some specific sectors need to consider the Impairment Test before the annual test required by accounting regulations.

It is also necessary to consider the deterioration of goodwill as permanent or temporary, as management projections need to be revised to absorb the impacts of COVID-19 in the short and long term. Companies must also take into account whether or not declines in other asset values contributed to the overall decline in the company's fair value. It is now more than necessary for reporting companies to assess the fair value of the assets on their balance sheet to properly plan for the future.

The TATICCA — ALLINIAL GLOBAL valuation team is well versed in goodwill impairment analyses and fair value issues.

Contact TATICCA — ALLINIAL GLOBAL, which provides integrated auditing, accounting, tax services, corporate finance, Financial Advisory, Risk Advisory, technology, business consulting and training. For more information, visit www.taticca.com.br or email taticca@taticca.com.br. Our company has professionals with extensive experience in the market and has certified methodologies for carrying out activities.

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