2024-09-23
Added · Updated
Publicly-held companies must adopt Technical Interpretation ICPC 09 (R3) for fiscal years beginning on or after January 1, 2025. This mandates presenting individual statements alongside consolidated ones, requiring specific segregation of investment values into book equity, fair value adjustments, and goodwill. Goodwill must be tested for impairment rather than amortized, and unrealized profits in intercompany transactions must be fully eliminated. CVM Resolution No. 124 of June 3, 2022, is revoked upon entry into force.
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SECURITIES AND EXCHANGE COMMISSION OF BRAZIL (CVM) Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – ZIP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/ SP – ZIP: 01333-010 – Brazil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4th Floor, Brasília/DF – ZIP: 70712-900 – Brazil - Tel.: (61) 3327-2030/2031 www.cvm.gov.br
CVM RESOLUTION NO. 212, OF SEPTEMBER 23, 2024
Approves Technical Interpretation ICPC 09 (R3) – Individual Financial Statements, Separate Financial Statements, Consolidated Statements and Application of the Equity Method, issued by the Accounting Pronouncements Committee.
THE PRESIDENT OF THE SECURITIES AND EXCHANGE COMMISSION OF BRAZIL – CVM makes public that the Board, in a meeting held on September 18, 2024, based on §§ 3 and 5 of art. 177 of Law No. 6.404, of December 15, 1976, combined with items II and IV of § 1 of art. 22 of Law No. 6.385, of December 7, 1976, APPROVED the following Resolution:
Art. 1. It becomes mandatory for publicly-held companies to adopt Technical Interpretation ICPC 09 (R3) – Individual Financial Statements, Separate Financial Statements, Consolidated Statements and Application of the Equity Method, issued by the Accounting Pronouncements Committee – CPC, as per Annex “A” to this Resolution.
Art. 2. CVM Resolution No. 124, of June 3, 2022, is revoked on the date this Resolution enters into force.
Art. 3. This Resolution enters into force on January 1, 2025, applying to fiscal years beginning on or after that date.
Electronically signed by
JOÃO PEDRO BARROSO DO NASCIMENTO
President
SECURITIES AND EXCHANGE COMMISSION OF BRAZIL (CVM) Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – ZIP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/ SP – ZIP: 01333-010 – Brazil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4th Floor, Brasília/DF – ZIP: 70712-900 – Brazil - Tel.: (61) 3327-2030/2031 www.cvm.gov.br
ANNEX “A”
ACCOUNTING PRONOUNCEMENTS COMMITTEE
TECHNICAL INTERPRETATION ICPC 09 (R3)
Individual Financial Statements, Separate Financial Statements, Consolidated Statements and Application of the Equity Method
Summary Item
REFERENCES
INITIAL CONSIDERATIONS IN1 – IN4
INTRODUCTION 1
FINANCIAL STATEMENTS 2 – 3
INDIVIDUAL FINANCIAL STATEMENTS AND
CONSOLIDATED FINANCIAL STATEMENTS
4 – 8
SEPARATE FINANCIAL STATEMENTS 9 – 17
INVESTMENT IN SUBSIDIARY AND GOODWILL ON
ACQUISITION OF A SUBSIDIARY IN INITIAL RECOGNITION, IN THE INDIVIDUAL AND CONSOLIDATED FINANCIAL STATEMENTS OF THE PARENT 18 – 34 GOODWILL ON ACQUISITION OF AN INTEREST IN AN ASSOCIATE OR JOINT VENTURE ASSESSED BY THE EQUITY METHOD 35 – 39 EXPECTED FUTURE PROFITS WITH DEFINED TERM; CONCESSION RIGHTS, EXPLORATION RIGHTS AND SIMILAR 40 – 47 UNREALIZED PROFITS IN TRANSACTIONS WITH ASSOCIATES OR JOINT VENTURES ASSESSED BY THE EQUITY METHOD 48 – 54 UNREALIZED PROFITS IN TRANSACTIONS BETWEEN PARENT AND SUBSIDIARY AND BETWEEN SUBSIDIARIES 55 – 59 EQUITY METHOD ON OTHER COMPREHENSIVE INCOME 60 – 61 OTHER ASPECTS OF THE EQUITY METHOD 62 – 63 VARIATIONS IN PERCENTAGE OF INTEREST IN SUBSIDIARIES 64 – 70 LOSS OF CONTROL AND CHANGES IN INTEREST IN SUBSIDIARY 70A – 70D ACQUISITION METHOD ACCOUNTING IN BUSINESS COMBINATIONS 70E – 75
SECURITIES AND EXCHANGE COMMISSION OF BRAZIL (CVM) Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – ZIP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/ SP – ZIP: 01333-010 – Brazil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4th Floor, Brasília/DF – ZIP: 70712-900 – Brazil - Tel.: (61) 3327-2030/2031 www.cvm.gov.br
PROVISION ON POSSIBLE DIFFERENCES BETWEEN
INDIVIDUAL AND CONSOLIDATED STATEMENTS
76
TRANSITIONAL PROVISIONS 77 – 78
References
CPC 04 – Intangible Assets;
CPC 15 – Business Combinations;
CPC 18 – Investment in Associates and Joint Ventures; CPC 19 – Joint Arrangements; CPC 32 – Income Taxes; CPC 35 – Separate Financial Statements; CPC 36 – Consolidated Financial Statements; and CPC 48 – Financial Instruments.
Initial Considerations
IN1 After the issuance of Technical Pronouncement CPC 15 – Business Combinations, it became necessary to issue certain guidelines and interpretations regarding it, mainly concerning the individual financial statements of the acquiring entity, since Technical Pronouncement CPC 15 is basically focused on the preparation and presentation of consolidated financial statements.
IN2 With the issuance of Technical Pronouncements CPC 04 – Intangible Assets, CPC 18 – Investment in Associates and Joint Ventures, CPC 19 – Joint Arrangements, CPC 35 – Separate Financial Statements and CPC 36 – Consolidated Financial Statements, various points also began to require guidelines and interpretations.
IN3 This Interpretation aims to clarify and guide issues inherent to the pronouncements cited in IN1 and IN2, as well as defines specific accounting procedures for the individual financial statements of parent companies, mainly regarding:
(a) the use of individual, consolidated and separate financial statements; (b) the differentiation between the methods of measuring equity investments in the individual financial statement, the separate financial statement and the consolidated financial statement; (c) the initial application of the equity method in the individual and consolidated statements; (d) some special topics related to the application of the equity method after initial recognition; (e) the treatment of goodwill in certain circumstances, including mergers and consolidations; (f) some capital transactions between partners; (g) points regarding the validity of Technical Pronouncement CPC 15; and (h) others.
IN4 The revision of ICPC 09, concluded in 2014 (R2), introduced two specific sections to address:
(a) loss of control and changes in interest in a subsidiary (items 70A to 70D) to highlight the accounting treatment when control is lost over a former subsidiary in situations where the remaining investment is still subject to the equity method. The main highlight is the provision of Technical Pronouncement CPC 36, which states that the value of the investment in the former subsidiary must first be derecognized in the individual balance sheet and, in the case of the consolidated balance sheet, the assets and liabilities of the former subsidiary must be derecognized; and subsequently the remaining investment in the former subsidiary, if any, must be recognized at its fair value on the date control was lost, both in the individual and consolidated financial statements. It is important to highlight that the fair value determined in accordance with Technical Pronouncement CPC 48 becomes the new cost of the investment to then adopt the equity method provided for in Technical Pronouncement CPC 18, if applicable. Item 70D addresses changes in interest in a subsidiary; (b) acquisition method accounting in business combinations (items 70E to 70L) to address clarifications on the acquisition method accounting in business combinations, including illustrative examples.
Introduction
Financial Statements
2. The statements that constitute the complete set of financial statements required by Technical Pronouncement CPC 26 – Presentation of Financial Statements comprise:
(a) the balance sheet;
(b) the income statement;
(c) the statement of comprehensive income;
(d) the statement of changes in equity;
(e) the cash flow statement;
(f) the statement of added value, if legally required or by some regulatory body; and (g) the notes to the financial statements.
Individual Financial Statements and Consolidated Financial Statements
4. From a conceptual point of view, individual statements should only be disclosed publicly in the case of entities that do not have investments in subsidiaries. In the case of the existence of such investments, entities should disclose only consolidated financial statements, as established in international accounting standards issued by the IASB.
However, Brazilian corporate law and some regulatory bodies determine the public disclosure of individual financial statements of entities that contain investments in subsidiaries, even when these entities disclose their consolidated financial statements; moreover, corporate law requires that individual financial statements, in Brazil, be the basis for various calculations with corporate effects (determination of minimum mandatory dividends and total, of the book value per share, etc.). This Interpretation, while the legal determination to disclose the parent's individual statements remains in force, requires specific accounting procedures for the individual statements of parent companies.
As a consequence, the CPC clarifies, through this Interpretation, that, as long as this legislation is maintained, the presentation of individual statements is required for all entities, even when consolidated statements are presented. However, it requires that the individual statements of entities that have investments in subsidiaries be mandatorily disclosed together with the consolidated statements whenever required by law or by the provisions of Technical Pronouncement CPC 36.
The obligation to “disclose, together with its financial statements, consolidated statements...”, as prescribed by art. 249 of the Corporation Law, does not necessarily imply disclosure in side-by-side columns; one financial statement may follow the other. Having met the minimum legally required disclosure, the entity may disclose only its consolidated statements as a separate set, which is desirable or even necessary if there are accounting practices in the consolidated statements different from those used in the individual statements by authorization of the regulatory body or because they contain effects of practices prior to the introduction of Laws Nos. 11.638/07 and 11.941/09.
The provisions of items 6 and 7 should be applied to situations where regulatory entities allow or determine that consolidated statements are prepared entirely in accordance with international accounting standards. If these statements are presented in accordance with IASB standards applied in conformity with Technical Pronouncement CPC 37 – Initial Adoption of International Accounting Standards, the presentation of consolidated statements prepared according to the CPC Pronouncements, Interpretations and Guidelines is waived.
Separate Financial Statements
9. According to Technical Pronouncements CPC 18, CPC 35 and CPC 36, any entity that has an investment in an associate, in a subsidiary or in a joint venture, in addition to its individual statements, or individual and consolidated statements, may also prepare and present separate financial statements. There is no requirement from this CPC that makes the publication of separate financial statements mandatory. This option was introduced by the CPC in alignment with the provision existing in international accounting standards issued by the IASB. It is worth highlighting that separate financial statements are not to be confused with individual financial statements.
From a conceptual point of view, separate financial statements should only be presented in circumstances where equity investments measured by the equity method or presented in the form of consolidated statements do not fully represent the rationale and purpose of these investments (see items 12 and 13). Cases where there is justification for the presentation of separate financial statements are rare. According to international standards, there are only three reasons that would lead to the preparation and disclosure of separate financial statements:
(a) by option, that is, the entity opts for the additional presentation of separate financial statements; (b) by local legal requirement, that is, when local law requires that investments in associates, in subsidiaries and in joint ventures be measured at cost, at fair value or by the equity method; and (c) by being exempted from the application of the equity method or consolidation, in which case the entity must measure investments in associates, in subsidiaries or in joint ventures at cost, at fair value or by the equity method and then publish the separate financial statements. In the Brazilian case, our corporate law does not require such investments to be valued at cost or fair value, nor does it exempt the application of the equity method in the individual balance sheet when it comes to investments in associates, in subsidiaries and in joint ventures.
In this sense, it is necessary to remember, first of all, that the equity method corresponds to a simplified form of consolidation; through it, the investor consolidates in its assets not the value of each asset and each liability of the invested entity, but only its net assets (equity) constituting the book value of the investment and determined by the investor's effective participation in the invested entity's equity; and in the investor's results, not each revenue and each expense of the invested entity is consolidated, but only the net portion belonging to the investor in a single line. The investor's share in each comprehensive income recorded by the invested entity is also recognized in the investor's investment in a consolidated manner (and not in each of its assets and liabilities). Thus, the equity method and the consolidation of financial statements are different views of the process of consolidation of two or more entities, but with practically equal effects on the final value of the investor's equity and net income. Therefore, they are based on the same objective of consolidation, but showing their effects one in a simplified manner, the other in an integral manner.
There are circumstances, however, in which these consolidations - simplified (equity method) or integral - do not complete the view that the investor has regarding its investments in other entities. For example, the investor may hold interests in several entities in which it exercises significant influence, but does not control them (associates), and in other entities in which it exercises control or joint control, but does not have in these investments a complement of its own activities, or does not have in each investment a complement of the activities of its other investments. The entity holds these investments as business opportunities, which may be in different branches even due to diversification policy, but which are managed by the investor individually and followed by their individual evolution in value as a business opportunity. But it does not manage them as an integrated process of value creation.
In the case of investments made and/or held with the objectives described in item 12 or other similar objectives, which provide the investor with the same form of vision when managing its investments, the investor may conclude that it is relevant to inform investors, creditors and the general public in a different way than by the equity method and/or by the consolidation of financial statements. The investor may consider it useful
COMISSÃO DE VALORES MOBILIÁRIOS
Rua Sete de Setembro, 111/2-5º e 23-34º Andares, Centro, Rio de Janeiro/RJ – CEP: 20050-901 – Brasil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º e 4º Andares, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brasil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4º Andar, Brasília/DF – CEP: 70712-900 – Brasil -Tel.: (61) 3327-2030/2031 www.cvm.gov.br report such investments evaluated at their respective fair values and report as income the mutation of these fair values. Or it may even conclude that these investments are better presented if evaluated at cost.
14A. In a similar way, as provided in item 19 of Technical Pronouncement CPC 18, when the entity holds an investment in an affiliate or in a jointly controlled venture, whose participation is held indirectly through a venture capital organization (or, still, mutual or investment fund, trust unit or similar, including insurance funds linked to investments), such entity may adopt the measurement at fair value for this portion of the participation in the investment, in consonance with Technical Pronouncement CPC 48, under the conditions specified in that technical pronouncement.
Situations may occur, however, where it is not possible to obtain the fair value of the investments, or it is not possible to obtain it reliably. In this situation, the investments in subsidiaries, in affiliates, and in jointly controlled ventures may be measured at cost, in the separate financial statements additionally disclosed (and in the individual ones, for the case of the entities referred to in items 14 and 14A). This evaluation, in certain circumstances, may be preferable to the equity method, since this is based on the accounting values of the investees and the economic value of the investments may not bear any relation to these accounting values; hence it may be, in certain situations, preferable to measure the investments at cost and subject them to the impairment test (Technical Pronouncement CPC 01 – Reduction to Recoverable Value of Assets).
When evaluating the investments in the separate financial statements at cost, the investor must recognize revenue or expense only upon the declaration or receipt of dividends (or other forms of distribution of the investee's result) or upon the alienation or other form of write-off of such investments.
COMISSÃO DE VALORES MOBILIÁRIOS
Rua Sete de Setembro, 111/2-5º e 23-34º Andares, Centro, Rio de Janeiro/RJ – CEP: 20050-901 – Brasil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º e 4º Andares, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brasil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4º Andar, Brasília/DF – CEP: 70712-900 – Brasil -Tel.: (61) 3327-2030/2031 www.cvm.gov.br
Investment in subsidiary and goodwill for future profitability expectation (goodwill) in the acquisition of a subsidiary in the initial recognition, in the individual and consolidated accounting statements of the parent
In the preparation of the individual accounting statements, while required by Brazilian legislation, the acquirer must apply the requirements of this Interpretation with regard to the identification of the fair value of the net equity of the acquired entity for the purposes of the initial registration in an investment account, the application of the equity method, and the determination of the goodwill for future profitability expectation (goodwill) or gain from a bargain purchase (discount) in the acquisition of a subsidiary.
Firstly, the assets and liabilities of the entity whose equity instruments (normally shares or capital stock quotas) were acquired must be adjusted, even off-balance sheet, with respect to all relevant accounting practices used by the acquirer. Only those adjustments resulting from a change from an accepted accounting practice to another also accepted accounting practice should be considered in this category of off-balance sheet adjustment; therefore, changes in estimates and corrections of accounting errors must be adjusted in the accounting statements of the acquiree themselves. Pay attention to some rare hypotheses in which the Pronouncements, Interpretations, and Guidelines of the CPC admit diversity of criteria.
Next, for the purposes of determining the goodwill for future profitability expectation (goodwill) or the gain from a bargain purchase, all assets and liabilities of the investee must be recognized and measured according to Technical Pronouncement CPC 15, whose general rule of measurement is fair value (with some exceptions to this general rule, provided in items 21 to 31A of the cited Pronouncement). This procedure may cause assets and/or liabilities that were not recognized in the accounting statements of the entity whose control was obtained to be recognized (off-balance sheet in the determination of the adjusted net equity of the subsidiary for the purposes of applying the equity method and/or recognized accounting for the purposes of consolidating the accounting statements). This is the case, for example, of intangible assets formed by the investee that could not be recognized accounting because they did not meet the conditions provided for such in Technical Pronouncement CPC 04 – Intangible Assets, or still of contingent liabilities not subject to accounting recognition in the statements of the investee by force of Technical Pronouncement CPC 25 – Provisions, Contingent Liabilities and Contingent Assets, but that may be recognized in the business combination, by meeting the recognition conditions provided in Technical Pronouncement CPC 15 (as defined in items 22 to 23A of CPC 15, for the recognition of a contingent liability it is sufficient that two conditions are met: (i) be a present obligation arising from past events and (ii) have its fair value measured with reliability). This is because, among the general recognition rules provided in the aforementioned Pronouncement, is the requirement
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Rua Sete de Setembro, 111/2-5º e 23-34º Andares, Centro, Rio de Janeiro/RJ – CEP: 20050-901 – Brasil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º e 4º Andares, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brasil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4º Andar, Brasília/DF – CEP: 70712-900 – Brasil -Tel.: (61) 3327-2030/2031 www.cvm.gov.br
of conformity to the concepts of asset and liability of CPC 00 – Conceptual Framework for Financial Reporting, as well as the requirement that the asset be identifiable in the terms of Technical Pronouncement CPC 15. Therefore, the recognition and measurement of the net assets of the entity whose control was obtained (in the business combination) must follow the determinations of Technical Pronouncement CPC 15. This procedure may then cause:
(a) the inclusion of assets existing in the investee, but not recognized in the accounting statements of this investee (as is the case of certain intangible assets not accounted for in the investee because, for example, generated by it without condition for activation, but that can now be recognized and evaluated objectively in an individual way), provided that the recognition and measurement conditions established in Technical Pronouncement CPC 15 are met; and (b) the inclusion of contingent liabilities also not recognized in the investee (such as certain fiscal, civil, etc. contingencies), but that have been the object of valuation by the investor to assume them in the acquisition, that is, have influenced the value paid in the acquisition of these equity instruments; consequently, any contingent liability not subject to accounting recognition in the statements of the investee by force of Technical Pronouncement CPC 25, but that has caused a reduction in the value paid or to be paid by the acquirer, will be recognized off-balance sheet for the purposes of determining the net equity of the investee when applying the equity method and will be recognized for the purposes of consolidating accounting statements. After all, in this situation this contingent liability will have caused an effect on the acquirer's cash by having reduced the value of the acquisition.
The amount corresponding to the difference between the fair value and the book value of the net equity whose control was obtained must be considered as an off-balance sheet adjustment to the net equity of the acquired entity for the purposes of computing the equity method (in the individual statements of the parent), even if not reflected in the individual accounting statements of the entity, whose control was obtained, and the individual differences between the fair value and the book value of each asset and liability of the entity, whose control was obtained, must also compose the balances of these assets and liabilities of the acquired entity, for the purposes of consolidating the accounting statements.
(Eliminated)
On the date of obtaining control, the amount of the investment resulting from the acquisition of subsidiaries must be registered in the individual accounting statements of the acquirer in a segregated manner, for control and disclosure purposes, between the value of the investment proportional to the percentage of participation on the adjusted net equity according to item 20 and the goodwill for future profitability expectation (goodwill), in the group of investments of the non-current assets in the following way:
(a) the value represented by the application of the percentage of participation attributable to the parent (participation acquired plus the pre-existing participation on the date of the combination) applied on the net equity of the acquiree adjusted by the accounting practices of the investor and with assets and liabilities at their fair values (including assets previously not recognized and
COMISSÃO DE VALORES MOBILIÁRIOS
Rua Sete de Setembro, 111/2-5º e 23-34º Andares, Centro, Rio de Janeiro/RJ – CEP: 20050-901 – Brasil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º e 4º Andares, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brasil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4º Andar, Brasília/DF – CEP: 70712-900 – Brasil -Tel.: (61) 3327-2030/2031 www.cvm.gov.br
contingent liabilities that have been recognized according to item 20). Considering that, as a rule, in the original accounting records of the acquired entity the assets and the liabilities remain registered by the original book values, without any adjustment by the fair values ascertained in the business combination, the acquiring entity must identify all items that result in differences between the book values and the fair values of the assets and liabilities of the acquiree for the purposes of controlling their realization by amortization, depreciation, depletion, sale, liquidation, alteration in the recorded value, write-off, impairment or any other mutation in the accounting records of these assets and liabilities. When these differences between book value and fair value of assets and liabilities of the acquiree are realized, the acquiring entity must realize its part when recognizing the result of the equity method. After all, the result of the acquiree will have been produced based on the historical values recorded in it, but for the acquirer these assets and liabilities will have been acquired at fair values on the date of obtaining control. On the date of acquisition, the investment in the subsidiary for the purposes of its individual statements is measured by the parent's part in the fair value of the net assets of the acquiree, consequently, it must be subdivided for the purposes of control, in the acquiring entity, into:
(i) portion related to the equity method on the book net equity of the acquiree; and (ii) portion related to the difference between the value obtained in item (i) above and the acquirer's part in the fair value of the net assets of the acquiree, measured according to Technical Pronouncement CPC 15, on the date of obtaining control. This portion represents the gross appreciation derived from the difference between the fair value and the book value of the net assets of the acquiree. Tax effects must be considered and, when necessary, registered, according to Technical Pronouncement CPC 32 – Taxes on Profit; (b) the goodwill for future profitability expectation (goodwill) of the investment in the subsidiary, represented by the positive difference between (i) the sum of the amount given in exchange for control (value paid or to be paid relative to the purchase of participation that conferred control) with the fair value of any pre-existing participation, if any; and (ii) the acquirer's part in the fair value of the assets and liabilities of the acquired entity already net of the deferred tax liability (or added to the deferred tax asset). Note that this goodwill should only be classified in the intangibles sub-group in the consolidated balance sheet, never in the individual balance sheet, where it must remain integrating the accounting balance of the investment, which is presented in the investments sub-group as goodwill for future profitability expectation; after all, the goodwill thus calculated is pertinent to the acquiree, paid by the acquirer (in cases where there was a purchase, for example) and for this, individually, represents part of the cost of its investment, even if subject to impairment.
COMISSÃO DE VALORES MOBILIÁRIOS
Rua Sete de Setembro, 111/2-5º e 23-34º Andares, Centro, Rio de Janeiro/RJ – CEP: 20050-901 – Brasil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º e 4º Andares, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brasil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4º Andar, Brasília/DF – CEP: 70712-900 – Brasil -Tel.: (61) 3327-2030/2031 www.cvm.gov.br
goodwill of the business combination to be presented in the consolidated statements will correspond to the sum of the goodwill attributable to the parent (determined according to item 23) and the goodwill attributable to non-controlling interests, which will correspond, on the date of acquisition, to the positive difference between the fair value of the non-controlling interests' participation (based on the quotation price of the equity instruments held by them, for example) and the part that falls to the non-controlling interests in the fair value of the net assets of the acquiree (already adjusted due to the deferred tax liability or deferred tax asset).
The goodwill for future profitability expectation (goodwill) ascertained in the manner of item 23(b), having an indefinite useful life, will not be amortized (except as provided in items 40 to 43) and must be submitted to a recoverability test (impairment), according to Technical Pronouncement CPC 01.
In the consolidated balance sheet, the goodwill of the combination must be registered in the intangible asset sub-group because it refers to the future profitability expectation of the acquired subsidiary, whose assets and liabilities are consolidated in those of the parent. Already in the individual balance sheet of the parent, the part of this goodwill attributable to the parent must integrate the accounting balance of the investment and, therefore, remain in the investments sub-group of the non-current assets group, because, for the investor, it is part of its investment in the acquisition of the subsidiary, not being an intangible asset (as said above, this part of the future profitability expectation – the genuine intangible – belongs to the subsidiary). The impairment recognition process, on the other hand, must be applied both to the goodwill account in the consolidated balance sheet (see Technical Pronouncement CPC 01 – Reduction to Recoverable Value of Assets), as well as to the sub-account also of goodwill for future profitability expectation (goodwill) in the individual balance sheet.
The investment account must be detailed in explanatory notes regarding its three components (if they exist): book value of the parent's participation in the book net equity of the acquired subsidiary (item 23(a)(i)); value of the appreciation of the acquired net assets attributed to the parent (item 23(a)(ii)); and goodwill for future profitability expectation (goodwill) attributed to the parent (item 23(b)).
It is emphasized that it does not characterize goodwill for future profitability expectation (goodwill) the value paid that refers specifically to the right of concession, right of exploration and similar, as explicit in item 41. In these situations, if the concession contract is identifiable (by legal, contractual criterion) and can be measured at fair value in objective and reliable condition, the corresponding intangible asset will be classified separately in the intangible asset sub-group in the consolidated statements. The parent's part in this intangible will compose the accounting balance of the investment in the individual statements. As part of the excess of the business value over the fair value of the net assets (which is what represents the goodwill) contains benefits from the synergy of the concession rights with the acquirer's own cash flows, but such rights cannot be recognized separately from the goodwill because they are not identifiable in the terms of Technical Pronouncement CPC 15, then, this right will be part of the goodwill of the business combination. In exceptional situations (case of concessions in Brazil), the future profitability expectation may present a defined useful life (for example, the term of the concession), being, consequently, characterized as "intangibles with a defined useful life", in the terms of Technical Pronouncement CPC 04, being subject to periodic accounting amortization. Said future profits (expectation) should not be confused with the goodwill for future profitability expectation (goodwill), in
COMISSÃO DE VALORES MOBILIÁRIOS
Rua Sete de Setembro, 111/2-5º e 23-34º Andares, Centro, Rio de Janeiro/RJ – CEP: 20050-901 – Brasil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º e 4º Andares, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brasil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4º Andar, Brasília/DF – CEP: 70712-900 – Brasil -Tel.: (61) 3327-2030/2031 www.cvm.gov.br
consequence of (i) being identified; (ii) having a defined useful life; and (iii) being amortized accounting-wise. Goodwill, although composed of an expectation of future profitability, does not have a defined useful life and is therefore not subject to periodic accounting amortization. See items 40 to 43.
In the event of the determination of a gain on a bargain purchase, the accounting record must be made as provided for in Technical Pronouncement CPC 15, which will result in the recognition of a gain in the acquiring entity.
There are situations where control may not be obtained by payment or commitment of future payment, but rather by other means without a "purchase" of shares (and nothing has been effectively "paid") such as through a voting agreement, for example. Even in this case, there will be goodwill if the fair value of the pre-existing participation plus the fair value of the non-controlling participation exceeds the fair value of the net assets of the acquired entity on the date of the combination. Therefore, for the purposes of the equity method (in the parent's individual statements), the procedure of items 20 to 23 will also be required, as well as the difference between the fair value of the pre-existing participation and the parent's share of the fair value of the net assets must be accounting-recognized in the parent's individual statements as goodwill derived from the expectation of future profitability - goodwill - note that this is the goodwill attributed to the parent. Conversely, a gain on a bargain purchase of control may arise in this situation.
Item 19 of Technical Pronouncement CPC 15 allows the measurement of non-controlling interests, on the date of the business combination (obtaining control of the subsidiary), by two criteria, the first being "at fair value" of this participation. In this case, the positive difference between the fair value of the non-controlling participation and the amount corresponding to their share of the fair value of the net assets of the acquired entity, on the date of the combination, constitutes the part of the goodwill attributed to non-controlling interests. Upon consolidation, this value (goodwill attributable to non-controlling interests) must be added to the line of goodwill attributable to the parent (which arises from the elimination of the investment in the subsidiary for consolidation purposes), credited to the non-controlling interests' share in consolidated equity.
The option, by the acquirer, to measure the non-controlling participation at fair value must follow the guidelines of Technical Pronouncement CPC 46 – Measurement of Fair Value. This requirement also applies to other fair value measurements made to apply the acquisition method required by Technical Pronouncement CPC 15. The difference between the fair value of this non-controlling shareholders' participation and the proportional share of these shareholders in the fair value of the identifiable assets and liabilities of the acquired entity must be recorded as a complement to the goodwill attributable to the parent, thus composing the total goodwill of the combination, which will be presented in the consolidated statements. This fair value assessment of the non-controlling shareholders' participation will occur only on the date of the business combination. Subsequent to the combination, the goodwill of the combination (parent's part and non-controlling part) will undergo an annual impairment test (see Technical Pronouncement CPC 1). The balance of the non-controlling participation to be presented in the consolidated balance sheet will correspond to the value of this participation at its initial recognition (in this case, the fair value) increased by the share belonging to them in the changes in the accounting equity of the subsidiary subsequent to the acquisition and decreased by the realization of the appreciation attributable to non-controlling interests and by any impairment losses recognized in goodwill.
COMISSÃO DE VALORES MOBILIÁRIOS
Rua Sete de Setembro, 111/2-5º e 23-34º Andares, Centro, Rio de Janeiro/RJ – CEP: 20050-901 – Brasil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º e 4º Andares, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brasil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4º Andar, Brasília/DF – CEP: 70712-900 – Brasil -Tel.: (61) 3327-2030/2031 www.cvm.gov.br
fair value) increased by the share belonging to them in the changes in the accounting equity of the subsidiary subsequent to the acquisition and decreased by the realization of the appreciation attributable to non-controlling interests and by any impairment losses recognized in goodwill.
It should be noted that only when the non-controlling participation is assessed at fair value can the goodwill be determined in the consolidated balance sheet, representing the total goodwill of the acquired entity on the date of obtaining its control (in this total goodwill will be summed the part of the controlling shareholders and the part of the non-controlling shareholders). On the other hand, when the non-controlling participation is not assessed at fair value, only the goodwill related to the part of the controlling shareholders will appear in the consolidated balance sheet. Therefore, in the absence of the assessment of the non-controlling participation at fair value, there is no need to attribute to non-controlling interests in the consolidated balance sheet goodwill calculated based on the price paid by the controllers, mainly due to the probable existence, in this, of the control premium. However, in the goodwill impairment test, item C4 of Technical Pronouncement CPC 01 requires this extra-accountingly for the purposes of the impairment test. That is, the "implicit goodwill" of non-controlling shareholders (calculated from the price paid by the controllers) is not recognized in the consolidated balance sheet. This is only considered for the purposes of the impairment test.
The second criterion stated in item 19(b) of Technical Pronouncement CPC 15 states that the acquirer must measure the non-controlling participation "at the proportionate current interest conferred by the equity instruments in the recognized amounts of the identifiable net assets of the acquiree". In this case, the goodwill calculated for the combination, as already cited, will be solely the goodwill attributed to the parent, so that the goodwill attributable to non-controlling interests will not be recognized in the consolidated statements. However, considering that in the accounting records of the acquired entity the assets and liabilities will remain at their original accounting values and not at their respective fair values, the acquiring entity must identify the difference between the fair value and the accounting value for each asset and liability of the acquired entity recognized in the combination (which includes the deferred tax liability) for the purposes of controlling its realization (by amortization, depreciation, depletion, sale, settlement, change in accounting value, write-off, impairment, or any other mutation it may undergo), as per item 23(a). However, in the investment sub-group of the parent in its individual statements, only the portion of this difference belonging to it, the parent, will be represented. This implies that the difference between the fair value and the accounting value of each asset (or liability) of the acquired entity, which constitutes the asset appreciation and the corresponding deferred tax liability (or asset), in the part attributable to non-controlling interests, will not be recorded in the parent's individual balance sheet, but must be recorded in the consolidated balance sheet and this will be done through the pertinent adjustments for each consolidation. It follows that:
(a) the value mentioned in item 23(a), represented by the difference between the fair value of the acquired assets and liabilities and those recorded in the acquired entity at the original amounts, must be recognized in the consolidated balance sheet in its entirety and not only proportionally to the share obtained in the capital of the acquired entity by the parent (the same must occur with respect to the deferred tax liability (or asset) determined on this difference); the portion increased by this calculation corresponds, in counterparty, to an adjustment in the non-controlling interests' participation in the consolidated balance sheet. The total value of the difference between
COMISSÃO DE VALORES MOBILIÁRIOS
Rua Sete de Setembro, 111/2-5º e 23-34º Andares, Centro, Rio de Janeiro/RJ – CEP: 20050-901 – Brasil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º e 4º Andares, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brasil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4º Andar, Brasília/DF – CEP: 70712-900 – Brasil -Tel.: (61) 3327-2030/2031 www.cvm.gov.br
the assets and the acquired liabilities must be allocated directly to the corresponding assets and liabilities. Subsequent to the acquisition, the realized portions (resulting from write-off, depreciation, amortization, depletion, sale, impairment, etc.) will be added to the respective items of the income statement and, if applicable, to other comprehensive income; and
(b) the difference mentioned in item 23(b), represented by goodwill, must continue to be classified in the intangible group in the consolidated statements, adjusted by the goodwill attributable to non-controlling interests only if this non-controlling participation is assessed at fair value.
Example of the fair value adjustment of assets and liabilities in the consolidation on the date of obtaining control:
Assume the following balance sheets, as below, before the acquisition of control of Company B by part of Company A:
Individual Balance Sheet 1 of Company A
Diverse Assets $ 1,300 Capital $ 1,300
Individual Balance Sheet of Company B
Diverse Assets $ 2,000 Liabilities $ 800
Capital $ 1,200
Company A acquires 60% of the shares of Company B, whose identifiable assets at fair value correspond to $ 2,500 and liabilities to $ 800. Additionally, a contingent liability assessed at $ 200 was recognized, which was not recorded in Company B's statements. This liability can be recognized in the application of the acquisition method required by Technical Pronouncement CPC 15 because it meets the definition of a liability and has a reliable fair value. Therefore, the fair value of the net assets of Company B is calculated at $ 1,500 ($ 1,200 of accounting equity, plus excess of fair values over accounting values of assets of $ 500, minus $ 200 of the unrecognized contingency or otherwise, totaling, therefore, $ 2,500 in assets and $ 1,000 in liabilities). Since the fair value of the net assets (accounting basis for the group of net assets of the acquired entity) exceeds the accounting equity (tax basis for the group of net assets of the acquired entity, given that the acquired entity will continue to exist) by $ 300 and, assuming a marginal income tax and social contribution rate of 30%, then, the deferred tax liability to be recognized will be $ 90 by requirement of CPC 15 – Business Combinations and CPC 32 – Income Taxes. Then, the final fair value of the net assets becomes $ 1,410 ($ 1,500 - $ 90).
Given that the present value of future cash flows expected to be generated by the business is greater than the maximum cash generated by the sale of assets and liabilities on a separate basis, naturally the value of the acquired business, on a going concern basis, will be greater than the fair value of the identified net assets. Thus, due to future profitability, the value paid by Company A to purchase 60% of the shares of Company B was $ 1,100, which characterizes a goodwill due to expectation of future profitability of $ 254 ($ 1,100 minus 60% of $ 1,410) attributable to the acquirer. And, assuming that Company A opts, on the acquisition date, to measure the non-controlling participation by the value corresponding to their share in the fair value of the net assets of Company B ($ 564), then,
COMISSÃO DE VALORES MOBILIÁRIOS
Rua Sete de Setembro, 111/2-5º e 23-34º Andares, Centro, Rio de Janeiro/RJ – CEP: 20050-901 – Brasil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º e 4º Andares, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brasil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4º Andar, Brasília/DF – CEP: 70712-900 – Brasil -Tel.: (61) 3327-2030/2031 www.cvm.gov.br
there will be no goodwill attributable to non-controlling interests and the value of $ 254 will be the goodwill of the combination itself.
The individual balance sheet of Company A becomes, on the acquisition date, and with the details of the investment made in the balance sheet only to facilitate visualization:
Individual Balance Sheet 2 of Company A
Diverse Assets
Investment in Company B: (*)
$ 200 Capital $ 1,300
On the acquisition date, the equity value of the non-controlling participation of Company B (accounting value) initially corresponds to 40% of $ 1,200 = $ 480. However, since Technical Pronouncement CPC 15 – Business Combinations requires the recording of assets and liabilities at their fair value in their entirety, as well as the deferred tax liability (given that in the case in question, the fair value exceeded the accounting value of the net assets), then, to the equity value of the non-controlling participation must be added the share belonging to them in the appreciation of the net assets (already net of the deferred tax liability).
Thus, in the consolidated position on the acquisition date, the identified assets will be increased by $ 500 of gross appreciation (being $ 300 of the acquirer and $ 200 of the non-controlling interests), liabilities will be increased by $ 200 related to the recognized contingent liability (being $ 120 of the acquirer and $ 80 of the non-controlling interests) and, finally, the deferred tax liability of $ 90 1 (being $ 54 of the acquirer and $ 36 of the non-controlling interests) will be included. By doing this, the portion of the total net appreciation attributed to the acquirer, which is $ 126 ($ 300 - $ 120 - $ 54), is already contained in the accounting balance of the investment in the subsidiary. However, the part attributed to non-controlling interests, which is $ 84 ($ 200 - $ 80 - $ 36), is not in the accounting balance sheet of the acquired entity nor of the acquirer, and must be kept extra-accountingly for control purposes. In this way, the adjustments in the net assets, totaling $ 210 ($ 500 - $ 200 - $ 90) will have as counterparty the elimination of the goodwill due to asset appreciation contained in the investment in the subsidiary of the acquirer ($ 126) and an increase in the non-controlling interests' participation ($ 84). The consolidated balance sheet on the acquisition date will therefore be:
Consolidated Balance Sheet of Company A on the date of acquisition of control of Company B Diverse Assets $ 2,700(*) Liabilities $ 1,000 () Intangible (goodwill) $ 254 Deferred tax liability $ 90 1 Assumes that there are only temporary differences.
COMISSÃO DE VALORES MOBILIÁRIOS
Rua Sete de Setembro, 111/2-5º e 23-34º Andares, Centro, Rio de Janeiro/RJ – CEP: 20050-901 – Brasil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º e 4º Andares, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brasil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4º Andar, Brasília/DF – CEP: 70712-900 – Brasil -Tel.: (61) 3327-2030/2031 www.cvm.gov.br
Totals $ 2,954
Capital
Non-controlling interests
$ 1,300
$ 564 ()
$ 2,954
() $ 200 + $ 2,000 + $ 500 = $ 2,700
() $ 800 + 200 = $ 1,000
(*) 40% x ($ 1,200 + $ 500 - $ 200 - $ 90) = $ 564
If the acquirer opts to measure the non-controlling participation at fair value and this corresponds to $ 670, for example, then Company A, in its consolidated balance sheet on the date of obtaining control, may recognize this participation with this value, with the differential being treated as goodwill due to expectation of future profitability (goodwill) attributable to non-controlling interests and integrating the goodwill of the combination (Technical Pronouncement CPC 15 – Business Combinations, item 19). In this case, $ 360 will represent the total goodwill of the combination, resulting from the sum of the part paid by the parent in the acquisition ($ 254) with the part attributed to the participation of the other shareholders ($ 106). The Consolidated Balance Sheet of Company A on the date of acquisition will then be represented as follows (the individual balance sheet does not change):
Consolidated Balance Sheet of Company A on the date of acquisition of control of Company B (with non-controlling participation at fair value) Diverse Assets $ 2,700 Liabilities $ 1,000 Intangible (goodwill) $ 360 Deferred tax liability $ 90 Totals $ 3,060 Capital Non-controlling interests $ 1,300 $ 670 () $ 3,060 () remember that, for presentation purposes, the non-controlling participation must be included within the consolidated equity, segregated from the part of the equity attributable to the owners of the parent.
Goodwill due to expectation of future profitability in the acquisition of participation in an associate or in a jointly controlled entity evaluated by the equity method
In the case of investment in an associate or in a jointly controlled entity, the identifiable net assets of the investee (including the corresponding deferred tax liability or asset) on the date of obtaining significant influence (or joint control) must also be measured at fair value, and the investee's statements must previously be adjusted to the investor's accounting practices, as mentioned in items 19 and 20.
An investment in a jointly controlled entity or in an associate must be accounted for in the investor's individual statement, using the equity method from the date it becomes a jointly controlled entity or associate. On the acquisition of the investment, any difference between the cost of the investment (amount given in exchange for the purchased participation plus the fair value of any pre-existing participation in the investee, if any) and the investor's share of the net fair value of the identifiable assets and liabilities of the jointly controlled entity or associate (already net of the deferred tax liability or increased by the deferred tax asset) must be accounted for in the same way as described in this Interpretation for investment in a subsidiary, except for what is stated in item 37.
In the case of applying the equity method to associates or jointly controlled entities, the goodwill due to expectation of future profitability must be contained in the accounting balance of the investment to be presented in the balance sheet of the investing entity, recorded within the investment sub-group in non-current assets, and cannot be presented separately in the intangible assets sub-group.
Therefore:
(a) the goodwill due to expectation of future profitability (goodwill) pertinent to a jointly controlled entity or associate must be contained in the accounting balance of the investment account and must not be amortized in a linear or constant manner, with the investment as a whole (that is, including the goodwill) being tested annually (or more frequently if there is evidence for such) against the recoverable amount;
(b) the investor's share of the net fair value of the identifiable assets and liabilities of the associate or jointly controlled entity (already net of the deferred tax liability or asset) that exceeds the cost of the investment (which results in a gain on a bargain purchase) must be analyzed (reviewed) in accordance with the requirement of Technical Pronouncement CPC 15 – Business Combinations, which will result, in particular situations, in the recognition of a gain in the acquiring entity.
Expectation of future profits with a defined term; concession rights, exploration rights and similar
As a rule, goodwill due to expectation of future profitability (goodwill) is an intangible asset of indefinite useful life, which is why it is not subject to systematic amortization over time, but is, on the other hand, subjected to at least an annual test regarding its recoverable amount (Technical Pronouncement CPC 01 – Impairment of Assets).
However, there may be situations where the expectation of future profits has its economic benefit limited in time (defined term). This may occur in situations where the value paid in excess of the fair value of the acquired net assets results not only, for example, from a concession right with a defined useful life, but also from synergistic effects that are expected to produce an increase in profitability.
The CPC understands that the value paid that refers specifically to a concession right, an exploration right
COMISSÃO DE VALORES MOBILIÁRIOS
Rua Sete de Setembro, 111/2-5º e 23-34º Andares, Centro, Rio de Janeiro/RJ – CEP: 20050-901 – Brasil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º e 4º Andares, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brasil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4º Andar, Brasília/DF – CEP: 70712-900 – Brasil -Tel.: (61) 3327-2030/2031 www.cvm.gov.br
is not characterized as goodwill due to expectation of future profitability (goodwill).
COMISSÃO DE VALORES MOBILIÁRIOS
Rua Sete de Setembro, 111/2-5º e 23-34º Andares, Centro, Rio de Janeiro/RJ – CEP: 20050-901 – Brasil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º e 4º Andares, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brasil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4º Andar, Brasília/DF – CEP: 70712-900 – Brasil -Tel.: (61) 3327-2030/2031 www.cvm.gov.br and similar, including when acquired in a business combination where the acquired entity is a concessionaire, whose concession right has a known and defined term. Goodwill only exists to the extent that there is no condition for recognition of an identifiable intangible asset, according to the recognition rules of Technical Pronouncement CPC 15.
44 to 47. (Eliminated)
Unrealized profits in transactions with an affiliate or jointly controlled entity
Technical Pronouncements CPC 18 – Investment in Affiliate and Jointly Controlled Entity and CPC 36 – Consolidated Financial Statements deal with unrealized profits between the investing entity and its investees or between direct or indirect subsidiaries of the same parent.
In transactions involving the sale of assets from the investor to an affiliate (or jointly controlled entity) (downstream), unrealized profits are considered, in proportion to the investor's participation in the affiliate, those obtained in asset transactions that, at the time of the financial statements, still remain in the affiliate. By definition, this affiliate must have a controller that is not this investor, or must not have a controller, in order for there to be only a relationship of significant influence and not control between the investor and the affiliate, and for both not to be considered under common control. Contributions of assets for capitalization in the investee are equated to a sale, for the purpose of unrealized profit. And a jointly controlled entity is equated to an affiliate.
Thus, in the sale (or capital contribution in assets) from the investor to the affiliate (or jointly controlled entity), the portion of the profit proportional to the participation of the other partners in the affiliate who are independent parties of the investor or of the controllers of the investor must be considered realized, in the investor. After all, the sale transaction occurs between independent parties, as the affiliate has a controller different from the controller of the investor. These procedures must also be applied in the case of an affiliate and/or investor without a controlling partner. For example, an asset with a book value of $1,000,000 is sold by Company A for $1,400,000 to its affiliate B, in which A participates with 20% of the voting capital. The tax on this profit is $150,000, so that the investor's result is affected by the net value of $250,000. By selling to the affiliate, it is as if it were selling with profit only on the part of the sale to investors who hold 80% of B's share capital. Company A should not consider realized the portion related to its own participation, that is, 20% of $250,000 = $50,000.
50A. The unrealized profit, in the manner set forth in item 50, must be recognized as the
COMISSÃO DE VALORES MOBILIÁRIOS
Rua Sete de Setembro, 111/2-5º e 23-34º Andares, Centro, Rio de Janeiro/RJ – CEP: 20050-901 – Brasil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º e 4º Andares, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brasil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4º Andar, Brasília/DF – CEP: 70712-900 – Brasil -Tel.: (61) 3327-2030/2031 www.cvm.gov.br asset is sold to third parties, or is depreciated, or suffers impairment or suffers write-off for any other reason.
The sale transaction must be recorded normally by the investor (revenues and corresponding expenses) and the elimination of unrealized profits must be made in the individual result of the investor, in the equity method income line (and if applicable in the consolidated result), by recording the unrealized portion as a credit to the investment account, until the effective realization of the asset in the affiliate (or jointly controlled entity). In the example of item 50, the result is debited (in an account of the same group as the revenue or expense of equity method income, as it is an effect resulting from its involvement with the investee), crediting a sub-account correcting the investment in B by the $50,000 of unrealized profit. Portions of sales, cost of goods sold, taxes, and other applicable items should not be eliminated in the investor's income statement, as the transaction as a whole occurs with genuine third parties, leaving only the due portion of the profit unrealized. Deferred taxes must be recognized, when applicable, according to Technical Pronouncement CPC 32 – Taxes on Income.
In the investor, in its individual financial statements and, if applicable, in the consolidated ones, the elimination referred to in item 51 occurs in a line immediately after the equity method income (suppose $500,000, for example purposes), with emphasis in the income statement itself or in explanatory notes.
Example:
Equity method income on investments in affiliate and jointly controlled entity...............................$500,000 (-) Unrealized profit in transactions with affiliate and jointly controlled entity.................................................$(50,000) $450,000
COMISSÃO DE VALORES MOBILIÁRIOS
Rua Sete de Setembro, 111/2-5º e 23-34º Andares, Centro, Rio de Janeiro/RJ – CEP: 20050-901 – Brasil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º e 4º Andares, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brasil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4º Andar, Brasília/DF – CEP: 70712-900 – Brasil -Tel.: (61) 3327-2030/2031 www.cvm.gov.br
Unrealized profits in transactions between parent and subsidiary and between subsidiaries
55A. Item 55 must be applied when the parent is, in turn, controlled by another entity of the same economic group. For example, parent E controls F which, in turn, controls G; F must fully eliminate any unrealized profit when selling a good to G, as it is the parent of G.
55B. In individual financial statements, in transactions involving the sale of assets from the parent to its subsidiaries (downstream), the elimination of unrealized profit must be made in the individual result of the parent, deducting one hundred percent of the profit contained in the asset still in the possession of the economic group, in counterpart to the investment account (as if it were a return of part of this investment), until its effective realization by the write-off of the asset(s) in the subsidiary(ies).
55C. The elimination referred to in item 55B in the income statement must be made in a line immediately after the equity method income, with emphasis in the income statement itself or in explanatory notes, according to item 52. Portions of sales, cost of goods sold, taxes, and other applicable items may be eliminated in the parent's income statement, as the transaction as a whole does not occur with genuine third parties. If not eliminated, these values must be evidenced in the income statement itself or in explanatory notes.
2 CPC 27 – Property, Plant and Equipment defines what is a transaction of a commercial nature (see item 25).
COMISSÃO DE VALORES MOBILIÁRIOS
Rua Sete de Setembro, 111/2-5º e 23-34º Andares, Centro, Rio de Janeiro/RJ – CEP: 20050-901 – Brasil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º e 4º Andares, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brasil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4º Andar, Brasília/DF – CEP: 70712-900 – Brasil -Tel.: (61) 3327-2030/2031 www.cvm.gov.br
56A. In the parent's individual financial statements, in transactions involving the sale of assets from the subsidiary to the parent or between subsidiaries, the calculation of the equity method income must be made by deducting, from the subsidiary's net assets, one hundred percent of the profit contained in the asset still in the possession of the economic group. With this, the parent must register a null result value, not having, therefore, any impact on its result and its net assets as a consequence of the result recognized by the subsidiary.
56B. In the consolidated balance sheet, the portion of the subsidiary's result that is attributable to non-controlling interests must be adjusted as a result of the elimination of unrealized profits.
Example:
Co. A Co. B Debit Credit Consolidated cash 600 200 800 inventories 350 350 Inv. B 385 0 385 0 Total 985 550 1,150 Equity capital 985 550 550 985 NCI 165 165 Total 985 550 1,150 Information:
Co. "A" controls Co. "B", with 70% participation in its capital Co. "B" sells 40% of its inventories for cash at $160 There is no taxation Co. A Co. B Debit Credit Consolidated cash 440 360 800 inventories 160 210 20 350 Inv. B 385 385 0 Total 985 570 1,150 Equity capital 985 550 550 985 Retained Earnings 20 20 NCI 6 171 165 Total 985 570 576 576 1,150 Income Statement:
Revenue Sales 160
Equity Method Calculation:
Final Net Assets "B" 570
COGS -140 Unrealized Profits -20
LB 20 Base 550
Equity Result Part. % "A" 70%
Net Income 20 Final Bal. Inv. "B" 385
Initial Bal. Inv. "B" -385
COMISSÃO DE VALORES MOBILIÁRIOS
Rua Sete de Setembro, 111/2-5º e 23-34º Andares, Centro, Rio de Janeiro/RJ – CEP: 20050-901 – Brasil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º e 4º Andares, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brasil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4º Andar, Brasília/DF – CEP: 70712-900 – Brasil -Tel.: (61) 3327-2030/2031 www.cvm.gov.br
Equity Result 0
57 to 59. (Eliminated)
Equity method income on other comprehensive income
In the application of the equity method on an affiliate, subsidiary, or jointly controlled entity, the equity method income must, basically, represent the investor's portion of the investee's net income. The equity method income on other comprehensive income of the investee must be recognized, in the investor, also directly against its net assets, as part of other comprehensive income of the investor.
Thus, changes in the investee's net assets that do not pass or will only pass in the future through the investee's result, such as: exchange variation adjustments on investments abroad and gains or losses from conversion (Technical Pronouncement CPC 02 – Effects of Changes in Exchange Rates and Conversion of Financial Statements); certain actuarial gains and losses (Technical Pronouncement CPC 33 – Employee Benefits); variations in the fair value of available-for-sale financial assets (Technical Pronouncement CPC 48 – Financial Instruments); variations in the fair value of hedging instruments in hedge accounting (Technical Pronouncement CPC 48); realization of revaluation reserves (Technical Pronouncement CPC 27 – Property, Plant and Equipment), etc., should not pass through the investor's result as equity method income.
Other aspects of the equity method
In subsequent applications of the equity method to the initial application, the same procedures required in items 19 and 20 regarding the off-balance sheet adjustments of the investee to use the same accounting practices as the investor and regarding the maintenance of the fair values of the investee's assets and liabilities determined at the acquisition date, including the deferred tax liability (or asset), must be observed.
In the case of recognition by a subsidiary of an adjustment of a prior period due to a change in accounting practice or correction of an error and consequent retrospective restatement of its financial statements, the parent must recognize its portion of this adjustment and must also proceed with the retrospective restatement of its financial statements, according to Technical Pronouncement CPC 23 – Accounting Policies, Change in Estimate and Correction of Error. If the same occurs with an affiliate or with a jointly controlled entity, the investor may proceed in the same way or recognize its portion in the equity method income, giving due disclosure of the fact and the value involved.
Variations in percentage of participation in subsidiaries
COMISSÃO DE VALORES MOBILIÁRIOS
Rua Sete de Setembro, 111/2-5º e 23-34º Andares, Centro, Rio de Janeiro/RJ – CEP: 20050-901 – Brasil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º e 4º Andares, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brasil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4º Andar, Brasília/DF – CEP: 70712-900 – Brasil -Tel.: (61) 3327-2030/2031 www.cvm.gov.br prepare and present consolidated financial statements as if they were a single entity. There must be due evidence of the portion of the equity and result belonging to those who are partners only in the subsidiaries, but not in the parent (called non-controlling partners), but by this same Technical Pronouncement CPC 36 and by these same international accounting standards, the net assets must be considered in their entirety and the net result as well. The participation of non-controlling partners is a portion integral to the net assets of the consolidated entity, therefore, transacting with non-controlling partners is transacting with partners of this same net assets.
As a consequence of the previous item, subsequent negotiations in which the parent acquires, from the non-controlling partners of this same net assets, new equity instruments (shares or quotas, for example) of a subsidiary, come to be characterized as transactions between the entity and its partners, unless it is an alienation of an investor that characterizes the loss of control of its subsidiary. That is, these are operations that resemble those in which the entity acquires shares or quotas of its own partners.
Therefore, Technical Pronouncement CPC 36 requires, in its items 23 and 24, that changes in the parent's relative participation in a subsidiary that do not result in the loss of control must be accounted for as capital transactions (that is, transactions with partners, in the capacity of owners) in the consolidated financial statements. In such circumstances, the book value of the parent's participation and the book value of the non-controlling partners' participation must be adjusted to reflect the changes in the relative participations of the parties in the subsidiary. Any difference between the amount by which the non-controlling partners' participation has been adjusted and the fair value of the amount received or paid must be recognized directly in the net assets attributable to the owners of the parent, and not as result.
Therefore, if the parent acquires more shares or other equity instruments of an entity it already controls, it must consider the difference between the acquisition value and the acquired book value in counterpart to its net assets (individual and consolidated), similarly, for example, to the purchase of treasury shares. In the case of alienation, as long as control over the subsidiary is not lost, the difference must also be allocated directly to the net assets, and not to the result.
In the parent's individual financial statements, the capital transactions mentioned in item 66 must reflect the situation of this individual parent, but without losing sight of the fact that (what is set forth in item 66) is linked to the concept of the entity as a whole, and in this concept are involved the net assets of the parent and the subsidiary. This is indeed the objective of the application of the equity method. In this individual balance sheet, there is no pure and simple and totally isolated reproduction of the parent, which should only be presented in the separate statements.
In the parent's separate financial statements, if presented, the capital transactions mentioned in item 66 must be considered as alterations of its investments, whether evaluated at fair value or at cost. In these statements, the underlying idea is exactly that of non-integration between investor and subsidiaries (and affiliates or jointly controlled entities, if applicable) and, rather, the characterization of
COMISSÃO DE VALORES MOBILIÁRIOS
Rua Sete de Setembro, 111/2-5º e 23-34º Andares, Centro, Rio de Janeiro/RJ – CEP: 20050-901 – Brasil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º e 4º Andares, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brasil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4º Andar, Brasília/DF – CEP: 70712-900 – Brasil -Tel.: (61) 3327-2030/2031 www.cvm.gov.br investments as businesses of the parent. In this case, in the parent's separate statements, the acquisition of, or the sale to, non-controlling partners of its subsidiaries are characterized, for the parent, as transactions with third parties, and not with partners of the same economic group. Consequently, the adjustments derived from these transactions, if any, must be recorded in its result, and not in its net assets.
Example:
Co. A acquires, for $1,300, 80% of the shares of Co. B which has book net assets equal (for simplification) to their fair values, in the amount of $1,250. With this, it pays goodwill for expected future profitability in the value of $300 ($1,300 – 80% of $1,250). Thus, the balance sheet (classifications disregarded) of Co. A will be represented as follows:
Individual Balance Sheet 1 of Co. A
Various Assets $1,000 Capital $1,500
Investment in controlled B (80% of shares) (*) Fair value in net assets $1,000 Goodwill $300 $1,300 Reserves $800 $2,300 $2,300
(*) Note that the investment in controlled B is composed of two portions in sub-accounts that are not evidenced in the balance sheet, but that need to be evidenced in explanatory notes: one referring to the fair value of the net assets of controlled B, in the amount of $1,000 (in the given example the book value coincides with the fair value of the net assets, there being no appreciation and its corresponding deferred tax liability), and another referring to the goodwill in the purchase of control of B, in the amount of $300. This evidence should not be made in the balance sheet, but only in explanatory notes; this evidence was made in this example and will be made in the other examples only for better understanding.
Admit the balance sheet of Co. B as being:
Balance Sheet of Co. B
Various Assets $1,250 Capital $1,250
The consolidated balance sheet of Co. A and its controlled, at this date, will be represented as follows:
Consolidated Balance Sheet 1 of Co. A
Various Assets $2,250
Goodwill (*) $300 Capital $1,500
Reserves $800
Non-controlling participation $250
$2,550 $2,550
(*) Note that the goodwill is registered, in the consolidated balance sheet, in the intangible asset, at account level, and not at sub-account level as in the individual balance sheet.
Admit, now, an operation apparently disconnected from the subject matter, but introduced only to show the relationship between the acquisition of own shares and the acquisition of shares of non-controlling partners, that Co. A acquires 5% of its own share capital for $200; if its own balance sheet is also at fair values, this implies buying 5% of $2,300 (R$115) for $200,
COMISSÃO DE VALORES MOBILIÁRIOS
Rua Sete de Setembro, 111/2-5º e 23-34º Andares, Centro, Rio de Janeiro/RJ – CEP: 20050-901 – Brasil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º e 4º Andares, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brasil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4º Andar, Brasília/DF – CEP: 70712-900 – Brasil -Tel.: (61) 3327-2030/2031 www.cvm.gov.br paying implicitly the goodwill of $ 85. But this goodwill should not be evidenced, leaving its individual balance sheet thus represented:
Individual Balance Sheet 2 of Company A
Diverse Assets $ 800 Capital $ 1.500
Investment in controlled B (80% of shares) (*) Reserves $ 800 Fair value in net assets $ 1.000 Treasury shares () $ (200) Goodwill $ 300 $ 1.300 $ 2.100 $ 2.100
(*) Opening only for better visualization.
() Note that these treasury shares consist of: fair value, $ 115, and goodwill, $ 85, but they should never be evidenced or even treated with this division. This goodwill must be included in the total cost accounted for as a reduction of its equity, and not in the intangible asset, also in accordance with previous Brazilian legislation and accounting practices and also in accordance with international accounting standards.
In the consolidated balance sheet of Company A, assuming also no change in the balance sheet of Company B, the following would be obtained:
Consolidated Balance Sheet 2 of Company A
Diverse Assets $ 2.050
Capital $ 1.500
Reserves $ 800
Goodwill $ 300 Treasury shares $ (200)
Non-controlling interest $ 250
$ 2.350 $ 2.350
Now suppose that Company A acquires, from the non-controlling partners of Company B, an additional 10% of the capital of this controlled Company B for $ 150. Assuming no change in the balance sheet of Company B, 10% of the equity of Company B at book values and fair values corresponds to $ 125, verifying the implicit payment of goodwill of $ 25.
According to the determination of Technical Pronouncement CPC 36, the accounting for these $ 25 must be as a reduction of consolidated equity. For coherence, and so that the individual balance sheet has the same equity as the consolidated one, there must also be a reduction in the equity of Company A's individual balance sheet. In this case, this reduction, explained after seeing, ahead, the consolidated balance sheet, will be the one related to the additional goodwill (goodwill) in this acquisition, which will not be treated as an increase in the intangible asset. However, in practice these transactions occur on dates subsequent to the combination date, so that the value paid for the purchase of more capital of the controlled may contain not only goodwill, but also appreciation (at current prices). Despite this, what can be registered in the investment account for the additional purchase of participation is only the book value of the additional participation purchased, provided that the parent has measured the non-controlling participation at fair value on the date of the combination, since if the alternative criterion had been used, then in the consolidated statements the existing goodwill must be fully attributable only to the parent.
COMISSÃO DE VALORES MOBILIÁRIOS
Rua Sete de Setembro, 111/2-5º e 23-34º Andares, Centro, Rio de Janeiro/RJ – CEP: 20050-901 – Brasil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º e 4º Andares, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brasil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4º Andar, Brasília/DF – CEP: 70712-900 – Brasil -Tel.: (61) 3327-2030/2031 www.cvm.gov.br Thus, the $ 125 related to the fair value of the acquired net assets must remain, in the individual balance sheet, registered as an increase in the investment in controlled B (in the consolidated it will obviously be eliminated against the equity of Company B) and the $ 25 will remain as a reduction of the equity of the parent both in the individual and in the consolidated statement. Company A's individual balance sheet will then be represented as follows:
Individual Balance Sheet 3 of Company A
Diverse Assets $ 650 Capital $ 1.500
Investment in controlled B (90% of shares) (*) Reserves $ 800 Fair value in net assets 1.125 Treasury shares () $ (200) Goodwill $ 300 $ 1.425 Goodwill in capital transactions $ (25) $ 2.075 $ 2.075
() Opening only for better visualization.
() Contains goodwill paid to third parties on its own net equity of $ 85, as already seen.
() Goodwill on net equity of its controlled, which, being its controlled, is goodwill on its own net equity also. Thus, the two goodwills are reducers of equity. The equity equivalence on the value of the net equity contained in the treasury shares must also be registered as a reducer of equity, but the value on the net equity of controlled B must remain in the asset, including for elimination in the consolidation of the two balance sheets.
Item B96 of Technical Pronouncement CPC 36 – Consolidated Statements requires that “The entity must recognize directly in equity any difference between the value by which non-controlling participations are adjusted and the fair value of the consideration paid or received and must attribute this difference to the owners of the parent”. That is, the difference between the value of the non-controlling participation to be reduced by the operation, in the case of $ 125 (it was $ 250 before, with 20% of the net equity of $ 1,250 of Company B, and now changes to $ 125, by becoming 10% of this same net equity; thus, the reduction is $ 125) and the value of the payment for it, $ 150, in the amount of $ 25, must be recognized directly in equity in the portion attributable to the owners of the parent.
The accounting in this individual balance sheet is better understood from the consolidated balance sheet. This will be represented as follows:
Consolidated Balance Sheet 3 of Company A
Diverse Assets $ 1.900
Capital $ 1.500
Reserves $ 800
Treasury shares $ (200)
Goodwill $ 300 Goodwill in capital transactions (*) $ (25) Non-controlling interest $ 125 $ 2.200 $ 2.200
(*) In fact, the two goodwills in the purchases of shares of companies of the same economic group are recognized as reducers of equity. But the one related to the treasury shares is implicitly within the item “treasury shares”. The fair book value of the treasury shares remains as a direct reducer of equity, as always.
It is seen that, in the consolidated balance sheet, the total equity of $ 2,200 is divided into two parts: $ 125 belonging to the non-controlling interests, and $ 2,075 belonging to the partners of Company A. It is now
COMISSÃO DE VALORES MOBILIÁRIOS
Rua Sete de Setembro, 111/2-5º e 23-34º Andares, Centro, Rio de Janeiro/RJ – CEP: 20050-901 – Brasil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º e 4º Andares, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brasil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4º Andar, Brasília/DF – CEP: 70712-900 – Brasil -Tel.: (61) 3327-2030/2031 www.cvm.gov.br clearer why the individual equity of Company A, which needs to appear as $ 2,075, also needs to consider the goodwill in the acquisition of shares from non-controlling interests as a reducer of the equity of parent A (individual balance sheet 3 of Company A above). If one considers, in this individual balance sheet of Company A, the goodwill (goodwill) in this acquisition with the non-controlling interests of $ 25 as an increase in the goodwill originally paid in the acquisition of Company B of $ 300, the equity of Company A will appear different from the consolidated one. When the investment in a controlled is evaluated by the equity method, what is sought is exactly the equality between net profit and equity between this individual balance sheet and the consolidated one (in the part of the equity belonging to all the partners of the parent, that is, to the part of the portion belonging to the non-controlling partners). This is the basic philosophy of the equity method when applied in the individual balance sheet of the parent.
If the non-controlling participation had been evaluated at fair value at the time of the combination, and not based on the fair value of the assets and liabilities of the controlled, and assuming that the 20% of the non-controlling participation before the second acquisition of shares by the parent had the fair value of $ 300, the consolidated balance sheet 2 of Company A would be represented as follows:
Consolidated Balance Sheet 2 of Company A, with non-controlling participation at fair value
Diverse Assets $ 2.050
Capital $ 1.500
Reserves $ 800
Goodwill $ 350 Treasury shares $ ( 200)
Non-controlling interest $ 300
$ 2.400 $ 2.400
The goodwill of the combination is now $ 350 because it contains the goodwill attributable to the parent of $ 300 (the same as before) and the goodwill attributable to the non-controlling interests of $ 50 ($ 300 fair value - $ 250 of their share in the fair value of the net assets, which in the example coincided with the book value). It is worth remembering that, according to Technical Pronouncement CPC 15, the non-controlling participation is measured at fair value only on the date of the acquisition of control and not in subsequent periods. The determination of this participation in subsequent consolidated positions will be given by its value at initial recognition (fair value on the date of the combination), increased or reduced by the share that falls to them in the changes in the book equity of the controlled, the realization of appreciation, the impairment losses of the goodwill attributed to them and the adjustments for change in relative participation (with effects on the book value of this participation and on the appreciation and the corresponding goodwill).
In this case, an additional acquisition of 10% by the parent for $ 150 would cause an accounting record in the subsequent consolidated balance sheet: the non-controlling participation would fall to $ 150, and thus there would be no record of the goodwill included in this acquisition against the equity of the controlling partners of Company A, but, rather, against the non-controlling participation itself. However, it is worth highlighting the simplicity of the example in treating both transactions (combination and additional acquisition of participation) as occurring on the same date, which does not occur in practice. Thus, the lack of difference between the value paid and the adjustment in the account representing the non-controlling participation is due only to this simplification.
COMISSÃO DE VALORES MOBILIÁRIOS
Rua Sete de Setembro, 111/2-5º e 23-34º Andares, Centro, Rio de Janeiro/RJ – CEP: 20050-901 – Brasil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º e 4º Andares, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brasil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4º Andar, Brasília/DF – CEP: 70712-900 – Brasil -Tel.: (61) 3327-2030/2031 www.cvm.gov.br The balance sheet, after this acquisition, would be represented as follows:
Consolidated Balance Sheet 3 of Company A, with non-controlling participation at fair value
Diverse Assets $ 1.900 Capital $ 1.500
Goodwill $ 350 Reserves $ 800
Treasury shares $ (200)
Goodwill in capital transactions (*) $ 0
Non-controlling interest $ 150
$ 2.250 $ 2.250
The view of the reflections of these operations on the individual balance sheet of the parent in a different way, that is, without the view in this individual balance sheet of the economic entity as a whole, or of this simplified representation provided by the equity method, is never given by the individual balance sheet with the evaluation of investments in controlled by equity method. For this, there are separate statements, with investments evaluated at fair value or even by cost; the following expands the previous example with this assumption.
Continuation of the example with the use of separate statements:
Suppose that Company A concludes that the separate statements should also be prepared and disclosed, with corporate investments evaluated at fair value, considering that its investment in controlled B is of such a nature that the consolidated balance sheet, considering both as an economic entity, is not the best representation of its reality.
In the first separate balance sheet, there is nothing to change if it has just acquired the 80% of the shares of Company B, and the acquisition value must represent the fair value at that moment. (If the acquisition had occurred previously, the difference would be registered in profit reserves or in accumulated losses in equity).
Separate Balance Sheet 1 of Company A
Diverse Assets $ 1.000 Capital $ 1.500
Investment in controlled B (80% of shares)(*) $ 1.300 Reserves $ 800 $ 2.300 $ 2.300
(*) evaluated at fair value (on the date of the combination, the value paid is representative of the fair value).
When acquiring its own shares, nothing changes in the fair value of its controlled B, and we will have:
Separate Balance Sheet 2 of Company A
Diverse Assets $ 800 Capital $ 1.500
Investment in controlled B (80% of shares) () $ 1.300 Reserves $ 800 Treasury shares() $ (200) $ 2.100 $ 2.100
(*) evaluated at fair value (on the date of the combination, the value paid is representative of the fair value).
Suppose that, immediately before the acquisition of an additional 10% of the shares of Company B for $ 150, the fair value of the 80% of the shares previously acquired is $ 1,400 (proportionally this value is more
COMISSÃO DE VALORES MOBILIÁRIOS
Rua Sete de Setembro, 111/2-5º e 23-34º Andares, Centro, Rio de Janeiro/RJ – CEP: 20050-901 – Brasil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º e 4º Andares, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brasil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4º Andar, Brasília/DF – CEP: 70712-900 – Brasil -Tel.: (61) 3327-2030/2031 www.cvm.gov.br than the value of the second acquisition, given the fact that the previous lot includes the value related to the control premium). And suppose that the total value, then, of the 90% of the shares of Company B now owned by Company A, has a fair value of $ 1,550. The difference between the previous fair value of the 80% ($ 1,300) and the new one ($ 1,400) will have impacted the result and the equity of Company A, whose reserves will go from $ 800 to $ 900. However, whether the fair value changes will be computed in the period's result or as other comprehensive income (equity valuation adjustments) will depend on the classification given to the financial asset according to Technical Pronouncement CPC 48 – Financial Instruments (as designated at fair value through result or as available for sale).
The relevant now is to verify that this additional lot of 10% of the shares of Company B, acquired for $ 150, has this fair value of $ 150 at this moment and, from the absolutely individual point of view of Company A, but without considering the investment in Company B as reflecting an extension of the economic entity Company A, and, rather, a mere corporate investment, with a total fair value of $ 1,550. For this situation there is no question of similarity to treasury shares, because, for Company A, the other partners in Company B are not its partners, but rather investors in the form of third parties, since Company A is, in the separate statements, providing exactly this view. Its separate balance sheet will now be represented as follows:
Separate Balance Sheet 3 of Company A
Diverse Assets $ 650 Capital $ 1.500
Investment in controlled B (90% of shares) () $ 1.550 Reserves $ 900 Treasury shares () $ (200) $ 2.200 $ 2.200
(*) evaluated at fair value
The fair value of the treasury shares was not considered here, which are shares of Company A itself, which could have changed in value. But, as in the case of alienation of these shares, its value mutation is against the reserves that support it. Thus, the equity of Company A would continue to have exactly the same $ 2,200.
Loss of control and changes in participation in controlled
70A. In the case where the parent loses control of the controlled, as provided for in items 25 and B97 to B99 of Technical Pronouncement CPC 36 – Consolidated Statements, it must (i) derecognize the value of the investment of the former controlled in the individual balance sheet and, in the case of the consolidated balance sheet, derecognize the assets and liabilities of the former controlled; and (ii) recognize the remaining investment in the former controlled, if any, at its fair value on the date when control was lost, both in the individual statements and in the consolidated statements.
COMISSÃO DE VALORES MOBILIÁRIOS
Rua Sete de Setembro, 111/2-5º e 23-34º Andares, Centro, Rio de Janeiro/RJ – CEP: 20050-901 – Brasil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º e 4º Andares, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brasil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4º Andar, Brasília/DF – CEP: 70712-900 – Brasil -Tel.: (61) 3327-2030/2031 www.cvm.gov.br
70B. The fair value referred to in the previous item must be considered as the fair value at initial recognition of a financial asset according to Technical Pronouncement CPC 48 – Financial Instruments or, when appropriate, as cost at initial recognition of investment in an affiliate or jointly controlled venture (see item 70C).
70C. When the remaining investment in the former controlled is still subject to the application of the equity method due to the investor losing control but maintaining significant influence or joint control, in accordance with Technical Pronouncement CPC 18 – Investment in Affiliate, Controlled and Jointly Controlled Venture, the investor must: (i) consider the fair value, on the date when control is lost, of the remaining portion as the new cost of the investment; (ii) recognize any differences between the new cost of the investment and the investor's share in the fair value net of identifiable assets and liabilities of the investee in accordance with items 25 and 26 of Technical Pronouncement CPC 36; and (iii) begin to apply the equity method, in accordance with the provisions of Technical Pronouncement CPC 18, when applicable.
70D. Changes in an investor's participation in a controlled must be recognized in accordance with what is established by Technical Pronouncement CPC 36. In the individual statements required by Brazilian corporate legislation, these investments must be recognized by the equity method; however, the criteria for recognizing variations in corporate participation (loss of control or acquisition of new participations) must follow what is provided for in Technical Pronouncement CPC 36, considering even that the equity and result of the individual statements should not present divergences with the corresponding figures in the consolidated statements.
Accounting method of acquisition in business combination operations
70E. Technical Pronouncement CPC 15, based on IFRS 3 of the IASB, determines, in its item 4, that business combination operations are recognized accounting according to the acquisition method (The Acquisition Method). According to CPC 15, in its item 5, the acquisition method requires the identification of the acquiring company and, consequently, of the acquired company, since the net assets of the acquired company will be measured at fair value.
70F. The Basis for Conclusions document of IFRS 3, in its items BC22 to BC55, presents the discussions that permeated the decision taken by the boards of FASB and IASB 3 , in deciding to elect the acquisition method for accounting treatment of business combinations.
70G. Until then, the accounting practices adopted in USGAAP (APB Opinion 16) and in IFRSs (IAS 22) admitted, in addition to the acquisition method (acquisition method, originally named purchase method) the pooling of interests method, which 3 The process of reviewing accounting standards to discipline business combinations was one of the joint projects that involved the boards of FASB and IASB, aiming at convergence between USGAAP and IFRSs. Thus it was also with the of fair value, IFRS 13 (CPC 46) and of IFRS 9 (CPC 48).
SECURITIES AND EXCHANGE COMMISSION BOARD (CVM) Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – ZIP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/ SP – ZIP: 01333-010 – Brazil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4th Floor, Brasília/DF – ZIP: 70712-900 – Brazil - Tel.: (61) 3327-2030/2031 www.cvm.gov.br
would cover those operations in which the acquirer could not be identified: the so-called genuine mergers of control (true mergers).
70H. In the first phase of the joint accounting regulation project for business combinations, the FASB and the IASB considered including a third accounting method, namely the fresh-start method, aimed at covering those combinations in which the history of the resulting combined entity would, so to speak, begin from the operation. The acquirer could not be identified, or if identified, would be substantially modified by the transaction. Concrete cases of the application of the fresh-start method would be the formation of joint ventures or the formation of new entities resulting from business combinations involving multiple other entities 4 .
70I. Both boards concluded that the majority of business combinations reside in acquisitions of control 5 , which is why the acquisition method was deemed the most appropriate to account for such operations. Neither the pooling of interests method nor the fresh-start method could be adopted in an unambiguous manner and within non-arbitrary limits. And genuine mergers of control – true mergers – would be so rare as to not justify a particular accounting treatment.
70J. Depending on the case, some economic incentives, in certain regulatory environments, may motivate the formal characterization of an operation as a “genuine merger,” but it must be treated accounting-wise as an acquisition of control. For example, the avoidance of the obligation to formulate a Public Tender Offer (OPA) due to the transfer of control, in accordance with art. 254-A of the LSA, or even the avoidance of the statutory obligation to formulate a Public Tender Offer (OPA) due to actual or potential acquisition of control in the market, within the procedure of art. 257 of the LSA (the acquisition of a percentage of shares in circulation fixed in the bylaws, which triggers a statutory requirement obligating an OPA for 100% of the company's issued shares. The so-called “anti-takeover” defenses of companies with dispersed control, which received the generalized nickname in the Brazilian market of poison pill), may stimulate the formal treatment as pooling of interests, but accounting-wise they cannot be recognized as such. Thus, there is no alternative accounting practice to speak of regarding business combinations in Brazil and when International Accounting Standards are adopted: the acquisition method must be applied to all cases within the scope of Technical Pronouncement CPC 15.
70K. By way of illustration, let us admit the following example:
4 Thus are framed the combinations documented in the literature as roll-up transactions or put-together transactions, operations by means of which investors – generally private equity funds – acquire multiple small companies in the same market (excessively fragmented markets with high competition) and combine them a posteriori, with the primary objective of reducing costs and obtaining economies of scale. 5 Genuine mergers of control (true mergers) and acquisitions of control are, in the view of the FASB and IASB boards, economically similar.
SECURITIES AND EXCHANGE COMMISSION BOARD (CVM) Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – ZIP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/ SP – ZIP: 01333-010 – Brazil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4th Floor, Brasília/DF – ZIP: 70712-900 – Brazil - Tel.: (61) 3327-2030/2031 www.cvm.gov.br
Company “X”
70L. In both cases, in both hypotheses, what occurs accounting-wise is the acquisition of control of Company Y by Company Alfa, since the controllers of Company X (Cia. Alfa) come to control the entity resulting from the business combination. Therefore, the net asset portfolio of Company Y must be measured at fair value, given that Company X was already controlled by Company Alfa. For the purpose of professional judgment (identification of acquired and acquirer company), the final configuration of the control block after the business combination and other parameters from the guidance guides of Technical Pronouncements CPC 15 and 36 must be observed, among other evidence.
71 to 75. (Eliminated)
Provision on eventual differences between individual and consolidated statements
Transitional Provisions
SECURITIES AND EXCHANGE COMMISSION BOARD (CVM) Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – ZIP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/ SP – ZIP: 01333-010 – Brazil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4th Floor, Brasília/DF – ZIP: 70712-900 – Brazil - Tel.: (61) 3327-2030/2031 www.cvm.gov.br
While the Accounting Pronouncements Committee does not issue a Technical Pronouncement or Interpretation that comprehensively disciplines the manner in which transactions between entities under common control must be treated (which is why items 44 to 47 were suppressed), the existing regulation by the entity's regulatory body must be applied.
For companies not covered in the previous item, whether due to the non-existence of a regulatory body, specific standard, or both, a specific accounting policy must be developed for the treatment of transactions between entities under common control, taking as a basis the prevalence of economic substance over legal form.
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This document supersedes: CVM Resolution No. 124 of June 3, 2022
Against CVM Resolution No. 124 of June 3, 2022 (2022-06-03)
2 new obligations · 1 changed obligation · 1 change of scope · 1 not carried over
126 obligations are the same in both texts.
“Not carried over” means the sentence has no counterpart in this text; the rule can still be in force in another text.
Source: Comissão de Valores Mobiliários — original document · Summary generated with machine assistance and reviewed before publication; the authoritative text is the regulator's original document. How RegAlert works
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