Rules for Valuation and Amortization of Goodwill in Brazil
Goodwill is an intangible asset that basically corresponds to the capacity of abnormal profit generation by a company. The entity responsible for its regulation in Brazil is CPC or Comitê de Pronunciamentos Contábeis, which is the Brazilian Accounting Pronouncements.
Goodwill in Brazilian standards
The CPC was instituted by entities seeking an international convergence of accounting standards in Brazil.
According to the CPC, goodwill in a business combination is the difference between the amount paid and the book value of the acquired company. During the process, the buyer might pay more than the market price for a company, resulting in a valuation of the acquired.
Those factors cannot be negotiated separately, nor identified individually. Some of them are:
- Localization of the company
- Brand value
- Customer loyalty
- Good employee relations
- Patents or proprietary knowledge
- Synergetic relations
Due to the difficulty of pricing these factors and their subjectivity, goodwill is recognized as an intangible asset. The over-valuation of a company’s goodwill, prior to an acquisition, is a big concern for the regulatory bodies. The current rule that covers goodwill in the Brazilian legislation and the valuation of companies was defined in 2010 by CPC.
Amortization rules
Before the technical pronouncement about business combination in Brazil, named CPC 15 – Combinação de Negócios, goodwill was considered an asset that needed to be systematically amortized over a period of 10 years.
After the pronouncement, goodwill continued to be considered an asset, but it was defined that, due to the difficulty of determining a deadline for a possible discount, the procedure adopted was the impairment testing. CPC states that it must be tested at least annually by the buyer, or whenever circumstances arise for the need of a value reduction.
In other words, if there is no loss of the capability of generating future economic benefits, goodwill is held as an asset for an undetermined time.
Other cases
A transaction or investment might not qualify as a business combination when the control of the company is not acquired, for example, in a joint venture. In this case, according to CPC, goodwill must be included on the investment being made and should not be amortized linearly nor constantly, but evaluated for recovery purposes.
CPC 15 also declares, that any goodwill generated internally by a company — therefore, not by business combination — must not be recognized as an asset, because its value is subjective and cannot be submitted to mensuration as in a purchase and sale transaction.
Some companies might be sold at a lower value than the market price. The Comitê de Pronunciamentos Contábeis defines these cases as negative goodwill. In this situation, the buying company must recognize the gain on the result at the acquisition date.