Impairment Test

Asset Recoverability

General Considerations: Valuation Engineering, Impairment and Equity Valuation.

The amendments, defined by Law No. 11.638/07, cover, contrary to what many people think, all companies and not only those considered large. This is because the amendments have been ratified by the Federal Accounting Council, which is the body responsible for accounting standards in force in the country. In this way, the technical pronouncements issued by the CPC, with a view to standardizing accounting standards to international standards, have become CFC rescissions, creating new or amending the current Brazilian Accounting Standards.

Impairment is an English word which means, in its literal translation, deterioration. Technically it is the reduction of the recoverable value of an asset. In practice, this means that companies will have to valuate, periodically, the assets that generate results before accounting for them in the balance sheet. Every time it is found that an asset is valued at nonrecoverable value in the future, that is, every time there is a projection of cash generation in value below the amount for which the asset is recorded, the company will have to write off the difference.

Through Resolution CFC 1.110/07, NBC T 19.10 dealing with the Reduction to Recoverable Value of Assets, was approved. This standard is general in nature and applies to all relevant assets related to industrial, commercial, agricultural, mineral, financial, service, and other activities. It extends to the assets in the balance sheets used for equity method and consolidation.

The accounting standard also states that the entity must assess, at least at the end of each fiscal year, whether there is any indication that an asset may have been devalued. Thus, if there is any indication, the entity should estimate the recoverable value of the asset. This adjustment will certainly amend the balance sheet data published or issued by the companies, but in return, it contributes to the improvement of accounting policies and increases the transparency of statements, giving much more security to foreign investors who will have access to new investment opportunities.