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


The measurement of these values ​​is done through the Impairment Test, which has been applied since the publication of Law 11.638/07, ensuring that the book value recorded is in excess of the recovery values. This is an obligation of companies that must be fulfilled, at least annually.


In this case, if the carrying amount exceeds the recoverable amount, the amount must be recognized as an impairment loss. Equity, which can be reduced by these write-offs, is a parameter of financial strength and leverage.


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


Francisco Sant'Anna, president of IBRACON, states that: “The COVID-19 pandemic in the world is unprecedented and is strongly impacting people's lives in many ways. With companies and the financial market it will be no different. Before, we dealt with predictions and possibilities. Now, we are dealing with a confirmed scenario, which requires attention in the preparation of financial reports”.


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


The Conselho Federal de Contabilidade – CFC defines goodwill as a residual value that represents future economic benefits arising from other assets acquired in a business combination that do not meet the criteria for individual identification and recognition. In many transactions, goodwill is necessary, and the annual impairment test is performed in accordance with Brazilian accounting standards and principles.


There are still many uncertainties about how much the pandemic will affect business results, but COVID-19 is certainly impacting the global economy, causing supply chain disruptions and keeping businesses 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 standards.


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 consider whether or not declines in other asset values ​​have 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 assets on their balance sheet in order to properly plan for the future.


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


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