Combinação de Negócios CPC 15 EN

Business Combination (CPC 15 [R1])

By carrying out the Business Combination CPC 15 with Setape, you are ensuring that your company’s valuation will be done correctly and accurately.

What is the Business Combinations CPC 15?

When a company acquires another for a different amount than its fair value, the difference, if positive, constitutes goodwill and, if negative, constitutes an advantageous purchase.

The fair value of the acquired company arises from the recognition and valuation of the identifiable assets acquired, the liabilities assumed and the equity interests of non-controlling shareholders.

From the point of view of the acquiring company, therefore, the registration of its investment is made at the fair value of the identifiable assets acquired and the liabilities assumed and not at their book value.

The work to recognize the fair value of the assets acquired and liabilities assumed and to calculate the goodwill or advantageous purchase is also known as the purchase price allocation, or by its acronym PPA, Purchase Price Allocation.

What is the normative basis for the analysis of the Business Combinations CPC 15?

The procedures for recognizing and evaluating identifiable assets acquired, liabilities assumed and non-controlling interests, as well as for calculating goodwill are standardized in Technical Pronouncement CPC 15 [R1] – Business Combination. This CPC is correlated to the international accounting standard IFRS 3 (IASB – BV2011).

Calculations of the value of assets acquired and liabilities assumed are in accordance with CPC 46 – Measurement of fair value.

What is the deadline for the final Business Combination CPC 15 re-port?

The acquiring company must, in its financial statements, report the provisional values for the items whose accounting is incomplete.

The measurement period ends as soon as the acquirer obtains information about facts and circumstances existing on the acquisition date, or when it concludes that more information cannot be obtained.

The measurement period cannot exceed one year from the date of acquisition.

How are acquired assets and liabilities assumed recognized?

The assets and liabilities of the acquired company are accounted for at their historical values, in accordance with usual accounting practices (BR GAAP).

For some of these assets, the historical value is so close, if not identical, to its fair value, that there is no adjustment to be made (example: cash and cash equivalents). For others, the market value may be significantly different, such as, for example, properties accounted for many years ago. In this case, the company must recognize the gain (or less) resulting from the difference between the fair value and the book value of the asset.

Some assets of an intangible nature (example: trademarks or patents) are important drivers of the acquired company’s value, but are not reflected in its equity. These intangible assets must be evaluated and recognized by the acquiring company.

Other intangible assets (eg non-competition agreement) derive from the contract that governs the transaction and have value only for the acquiring company, which must, therefore, recognize them.

The BR GAAP criteria for the recognition of provisions for contingencies by the acquiring company are different from the usual accounting criteria by the acquired company and, additionally, they consider conditions that derive from the contract that governs the transaction related to the sellers’ liability for losses arising from events that precede the acquisition date. The acquiring company must take these facts into account when recognizing these liabilities.

In summary, the process of recognizing acquired assets and assumed liabilities requires a detailed analysis of each asset or liability and the adjustment resulting from the more (or less) value found.

How are acquired assets and liabilities assumed valued?

The valuation process of acquired assets and assumed liabilities uses different methodologies that depend on the nature of each asset or liability and on the characteristics of the transaction.

The appraiser must initially understand the objectives of the acquiring company and what were the factors that led them to pay the contracted price. The appraiser must also know all the details of the contract that governs the transaction.

An important consideration is that the valuation of assets acquired and liabilities assumed must be made from the point of view of a market participant. The appraiser must consider what a market participant would do with the acquired company and not what the acquiring company intends to do. For example, it is possible that the acquiring company intends to deactivate the brands of the acquired company after a transition period and, therefore, does not attribute any value to them. From the point of view of a market participant, however, these brands can have value and should be valued at fair value and recognized.

The appraiser should initially analyze each group of assets and liabilities on the balance sheet of the company acquired on the acquisition date and examine the need to adjust these assets to fair value. When applicable, it is necessary to choose the appropriate methodology to evaluate these assets at fair value. Examples of assets that are usually adjusted at this stage are inventories and fixed assets.

In parallel, the appraiser must determine which intangible assets are to be valued. Examples of intangible assets that are often valued include trademarks, patents and customer relationships. Intangibles originating in the contract that governs the transaction, as a non-compete clause, should also be valuated.

Then, the appraiser must analyze the contingencies of a tax, social security, civil, labor and environmental nature, based on a report by the lawyers of the acquired company, on the acquisition date, and making the necessary adjustments, considering the conditions established in the contract that governs the transaction related to the sellers’ liability for losses arising from events that precede the acquisition.

In addition, the acquiring company must recognize and evaluate the provisions for deferred income tax and social contribution on temporary differences resulting from the proposed adjustments to the values of assets and liabilities.

How is the fair value of the price paid calculated?

In some transactions, the price (or, as CPC 15 [R1] calls it, the consideration) is paid at the moment, in cash. In these cases, the fair value of the price is equal to the price paid.

In most cases, however, the price is paid in installments that may or may not be readjusted, either because they are denominated in a foreign currency or because they will be adjusted by an inflation index. In this case, the actual (discounted) value of these future installments has to be calculated to arrive at the fair value of the price paid.

There are even more complex cases, in which the value of future installments is tied to a future event, such as, for example, the achievement of a certain revenue or EBITDA target, or the end of a certain project, or obtaining a certain license. In these cases, the appraiser should consider not only the temporal effect, but also the probability that the goals established in the contract will be achieved and what the resulting values will be.

How is the goodwill or advantageous purchase calculated?

The goodwill for expected future profitability, or alternatively, the advantageous purchase, must be recognized by the company using the following equation:

Fair price value

(+) value of non-controlling interests in the acquiree

(+) fair value of previous participation (in the case of a business combination carried out in stages)

(-) net value of identifiable assets acquired and liabilities assumed

If the result of this equation is positive, there is goodwill for expected future profitability, otherwise, there is an advantageous purchase.

A business combination creates an obligation for the acquiring company to prepare a report for the Brazilian Federal Revenue Service, even when there is no goodwill.

To better understand this obligation, see the Reports page to comply with IN RFB 1700/2017.

Technical Standards

Setape’s valuations are always carried out with strict observance of all guidelines set by the ABNT Standards – Brazilian Association of Technical Standards and Ibape Nacional – Brazilian Institute of Engineering Valuations and Expertise.

Why hire Setape?

Complete Advisory

The only company that performs all services of valuation of movable and immovable property, urban and rural, valuation of companies, and has support for asset control (fixed assets).

Proven Experience

With 45 years of activities and more than 80,000 services performed, it is the company with the most experience in evaluating the fixed assets market and in economic evaluations.

Qualified Team

It has its own team with more than a hundred professionals from all specialties.

Satisfied Customers

Quality of services proven by its customers

International Coverage

It belongs to the VRG – Valuation Research Group of international valuation companies with service coverage on all continents

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