PURCHASE PRICE ALLOCATION (PPA) VALUATION REPORT

As covered in the article 2018, THE YEAR OF MERGERS AND ACQUISITIONS (M&A) IN BRAZIL, the year 2018 showed a record volume in Mergers & Acquisitions. There were 967 transactions, a volume 16.5% higher than in 2017 according to KPMG data. Once the Merger & Acquisition transaction has been completed, the buying company must focus on activities related to Post-Deal, which include the operational, financial, accounting, and tax integration of businesses. An important activity to be carried out by the Financial Board is the hiring of a professional to prepare the PPA Report (Purchase Price Allocation). The purpose of the PPA Report is to determine the value of the assets and liabilities of the acquired company, in addition to analyzing the difference between the fair amount paid by the buyer and the book amount, called goodwill (Goodwill). As governed by the Accounting Pronouncements Committee (CPC) 15, the Goodwill It is the difference between the amount paid by the company and the net amount of its assets and liabilities. If this difference is positive, there is capital gain or goodwill due to the expectation of future profitability. If the amount paid is less than the equity amount, there will be an effect of an advantageous purchase (or discount). When a merger transaction occurs, above the equity value, it is necessary to analyze what this difference corresponds to, that is, because the buyer chose to disburse an amount other than what the Assets and Liabilities are worth. This difference may originate from Tangible or Intangible Assets (brands, copyrights, etc.). If all the difference can be explained by the Assets, then there won't be any Goodwill. If it is not possible to prove the full difference between the amounts paid, the result is considered as goodwill.

To prepare a PPA Report, the professional responsible for issuing the Report must complete some mandatory steps:

1. Prepare the Valuation Report of the acquired company, projecting the Income Statement (DRE) and Cash Flow (CFFf) for the coming years.
2. Identify Tangible Assets, analyzing the Balance Sheet (Accounts Receivable, Inventory, etc.).
3. Identify the Intangible Assets that the acquired company has. Example: Brand, Client Portfolio, Non-Competition Clauses, etc.
4. Evaluate each of the Intangible Assets, based on methodologies accepted and recognized by the CPC.
   • Brand: methodology of Royalty Savings, where a hypothetical opening of a brand franchise is considered, and a percentage of sales is charged. A percentage is defined to multiply the projected revenue, generating a cash flow of royalties, which in the present value represents the value of the brand;
   • Client Portfolio: Excess Profits for Various Periods (MPEEM) methodology in which it isolates the projected cash flow from the client portfolio, deducting a percentage from the use of Contributing Assets (assets that are part of the company's structure that are used to execute the contract of that client portfolio). From this specific cash flow, already discounting the contributing assets, the cash flow of the client portfolio is generated, which at present value is the value of the portfolio;
   • Non-Competition: methodology where a percentage related to the effect of non-competition would be defined. For example, if the SPA contains a clause of Does not compete, competition would bring a discount of “5%” less in sales, resulting in a Equity Value smaller than the original. This difference between the two values can be considered the value of the non-competition clause.
5. Analyze the difference between Tangible/Intangible Assets and Equity Value. The difference will be allocated as goodwill (Goodwill). Under the accounting rules governed by CPC 15, the Goodwill it may be amortized in the buyer's balance sheet, however, the amount cannot be deducted from taxable income for the calculation of IRPJ and CSLL (tax amortization, in which taxable income is deducted, affects only identifiable assets). Case or Goodwill If not, the buyer will have made an Advantageous Purchase and must collect the due Capital Gain tax incurred.
6. To validate the PPA Report, the WARA must also be calculated (Weighted Average Return on Assets), with the weighted average expected return rates for each asset. The WARA must result in a rate equal to (or at least close to) the discount rate used in the Valuation Report, the WACC.

After completing the PPA Report, the company must file the Document with the Brazilian Federal Revenue Service or, alternatively, the summary of the Report can be registered with the Registry of Deeds and Documents. The deadline for filing the Report is the last business day of the 13th month following the acquisition of the shareholding. The requirements to make the Report and to register it prevail even if the value of the capital gain is equal to zero. ARTICLE WRITTEN BY HENRIQUE PORTO — PARTNER OF FC PARTNERSGo to our site: http://www.fcpartners.com.br