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Fair Value, Determination of Fair Value NIF B-7
In 2005 the new regulations came into force NIF B-7, which establishes the guidelines for recognizing the initial value, at the time of acquisition, of the net assets obtained in the purchase of a business, instead of its creation, in addition to addressing concepts such as goodwill or acquisitions at a value below From the market.
The regulation distinguishes between the purchase of assets that are part of a business and the acquisition of a set of assets that are not operating as a business.
According to the standard, it is proposed that the valuation of the acquisition of the assets and liabilities of the purchased business be carried out at the fair or specific value on the date of purchase, in accordance with the accounting policies of the buyer, adding that this practice facilitates the identification of excess payment or advantage in purchasing at a price below market value.
The regulation establishes that a business comprises a set of activities and assets, or net assets, that are or can be managed by a single control center, with the objective of generating returns for their owners, however, it emphasizes that the acquisition of the assets and liabilities of the purchased business should be realized at fair value.
By considering the liabilities of the acquired business in the recognition of the purchase, the business is granted a legal personality, which means that it assumes the role of the owner company that sells the economic entity in which the business operates and is responsible for paying off the associated liabilities.
According to decisions of several federal courts of justice, an economic entity is defined as the set of assets capable of generating goods or services, without having its own legal personality. Therefore, its value does not include current assets or liabilities, with the exception of labor assets, as long as there is no interruption in the operation when the owner changes; In the event of interruption, labor liabilities are excluded, the regulation does not address a common contingent liability in hotels and industrial plants: the ecological liability, which involves observations by the PROFEPA or breaches of environmental regulations.
The rule NIF B-7 establishes a criterion to calculate the fair value of the intangible assets of a business, which involves estimating the future income streams generated by its ability to generate profits. This process requires the use of different assumptions and estimates. To determine the fair value appropriately, it is necessary to take into account provisions that are based on the probability of future events that may generate additional costs for the acquirer.
The evaluation of the fair value of the business must take into account the information present in the financial statements related to cash and realizable values, as well as assets such as real estate, machinery and equipment, valued at the replacement cost of a production capacity. or comparable service, without exceeding its recovery value through the generation of future flows.
What are the benefits of NIF B-7?
The NIF B-7 offers several significant advantages in the accounting and financial field:
- Clarity in the treatment of business acquisitions: Provides clear guidelines for the initial recognition of assets and liabilities in business acquisitions, helping to improve transparency and consistency in financial reporting.
2. Consideration of fair value: The standard requires that acquired assets and liabilities be valued at their fair value on the acquisition date, which more accurately reflects their economic value at the time of the transaction.
3. Inclusion of intangible assets: NIF B-7 addresses the recognition and valuation of intangible assets, such as goodwill, by estimating future flows and using appropriate assumptions and estimates.
4. Evaluation of future provisions: The standard requires consideration of provisions based on the likelihood of future events that may result in additional costs to the acquirer, which helps ensure a more complete assessment of the risks associated with the acquisition.
5. Focus on the generation of future flows: Determining the fair value of the business is based on the ability to generate future cash flows, which helps align the valuation with expectations for future performance of the business.
In summary, NIF B-7 provides a solid and consistent framework for the recognition and measurement of assets and liabilities in business acquisitions, which contributes to a more accurate and transparent presentation of the financial position of an entity.
What is fair value?
The fair value is determined considering market conditions and does not represent a fixed value for an asset or liability of the Bank, while for some assets and liabilities market data can be obtained, for others this is not possible, however, the objective determining the fair value is the same in both cases: estimate the price at which a transaction to sell the asset or transfer the liability would occur between market participants on the valuation date and under current market conditions.
Therefore, the fair value is based on an actual operation or an estimate thereof, considering the characteristics of the asset or liability and the circumstances present at the time of valuation.
When it is not possible to observe the market price of an identical asset or liability, the Bank must calculate the fair value using other valuation techniques that make the most of the relevant data available and minimize the use of unobservable data, the fair value is is market-based and uses assumptions that market participants would use in pricing an asset or liability, including considerations of risk, thus the Bank's intention to hold an asset or settle or satisfy a liability does not influence the determination of fair value.
