Restatement of Previously Issued Financial Statements
- Identification of accounting errors for tax-deductible goodwill
- Restatement of financial statements for 2022 and 2023
- Impact on income tax expense, net income, and classification corrections
- Recognition of material weakness in internal control
- Non-cash accounting errors affecting financial statements
- Restatement leading to reduced net income for 2022 and 2023
- Classification corrections impacting current and non-current liabilities
Insights
The identification of non-cash accounting errors and the subsequent restatement of financial statements for CI&T Inc. is a significant event that underscores the importance of rigorous financial reporting and compliance with International Financial Reporting Standards (IFRS). The restatement, particularly involving deferred income tax accounting, suggests a material discrepancy in the company's tax liability representation. The financial impact, with an increase in income tax expense and a reduction in net income, could affect investor perception and potentially the company's stock price.
Investors and analysts closely monitor income tax expenses as they directly affect net income and, consequently, earnings per share (EPS). An understated income tax expense inflates net income, which can mislead investors about a company's profitability. The restatement will correct these figures, providing a more accurate picture of the company's financial health. However, the non-cash nature of these adjustments means there will be no immediate cash outflow, which is a mitigating factor for liquidity concerns.
The disclosure of a material weakness in internal controls is also critical. It may lead to increased scrutiny by regulators and a loss of confidence among investors. It could also result in higher audit and compliance costs going forward. The market reaction will depend on how investors weigh the restated financials against the company's prospects and their trust in management's ability to prevent future discrepancies.
Deferred income tax accounting is a complex area of IFRS that requires an understanding of temporary and permanent differences between tax bases and financial statement bases. The adjustments described by CI&T Inc. indicate that the company initially treated tax-deductible goodwill amortization as a permanent difference when it should have been recognized as a temporary difference. This misclassification led to an understated deferred tax liability and income tax expense.
From a compliance perspective, the restatement may attract the attention of regulatory bodies due to the material weakness in internal controls over financial reporting. This weakness indicates that the company's processes were not sufficient to prevent or detect the misclassification on a timely basis. The company's decision not to amend its 2022 Form 20-F but to include restated figures in its upcoming 2023 Form 20-F suggests an effort to streamline the review process for stakeholders. However, this approach must still satisfy SEC requirements and investor needs for transparency.
The restatement's impact on the balance sheet, specifically the reclassifications affecting current assets and liabilities, is another area of concern. Although these do not affect the profit or loss statements, they could influence the company's perceived liquidity and financial stability. Investors and creditors often scrutinize the current ratio and working capital metrics, which will be altered by these reclassifications.
The restatement highlights the intricacies of tax accounting under IFRS and the significance of accurately reporting deferred tax liabilities. CI&T Inc.'s adjustments reflect a more precise alignment with Brazilian income tax regulations and IFRS requirements. The initial misapplication of tax rules regarding goodwill amortization and the deductibility of identifiable intangible assets has led to substantial corrections to the income tax expense.
For companies operating internationally, like CI&T Inc., it is crucial to reconcile local tax laws with the accounting standards under which they report. This case serves as a reminder of the challenges multinational corporations face in tax planning and reporting. The restatement will likely result in a more conservative portrayal of the company's tax position, which could influence investment decisions, particularly for those focused on tax efficiency and fiscal responsibility.
While the adjustments are non-cash and do not affect cash flows, they may have implications for future tax strategy and the valuation of the company's tax positions. Investors and analysts will need to consider how these restated figures might influence the company's effective tax rate and any potential changes to tax strategies that could arise from the identified weaknesses in financial controls.
Similarly, any previously furnished reports, such as earnings releases, investor presentations or other communications describing the Company’s consolidated audited financial statements, and condensed consolidated interim financial statements and other related financial information covering the Non-Reliance Periods should no longer be relied upon.
The corrective adjustments required in accordance with IFRS are expected to be non-cash in nature and will not increase the amount of income tax to be paid in the future. The corrective adjustments are not expected to impact “net revenue,” “operating profit before financial income and tax,” or any other line of statement of profit and loss that is above “profit before income tax" for the Non-Reliance Periods. The corrective adjustments are not expected to impact Adjusted EBITDA for the Non-Reliance Periods or cash and cash equivalents at the end of the Non-Reliance Periods.
The Company intends to file its restated financial statements as of and for the year ended December 31, 2022 together with its audited consolidated financial statements as of and for the year ended December 31, 2023, in the 2023 Form 20-F. The Company believes this will allow readers to easily review all pertinent data in a single document. The Company intends to file the 2023 Form 20-F as soon as possible (and in any case, before April 30, 2024) and, therefore, does not plan to amend its 2022 Form 20-F. The Company also intends to furnish to the SEC, as soon as possible, a current report on Form 6-K showing the impact of the restatement of its unaudited condensed consolidated interim financial statements as of and for the periods ended March 31, 2023, June 30, 2023 and September 30, 2023.
Description of the adjustments
In 2021 and 2022, the Company completed business combinations, which resulted in book goodwill and income tax deductible goodwill as part of the acquisition accounting. Since January 2022, the Company has been deducting the goodwill from the acquisitions for income tax purposes in accordance with the Brazilian income tax regulations, reducing current income tax expense, income tax liability, and income tax paid in cash. During this period, the Company considered the financial statement impacts of tax-deductible goodwill amortization arising from these acquisitions as a permanent difference in the determination of its income tax provision, instead of a temporary difference between tax basis goodwill and financial statement basis goodwill, as required under IFRS. As a result, the income tax expense was
In addition, the amortization of the identifiable intangible assets recognized as part of the Dextra business combination was considered nondeductible in the income tax calculation, which is not consistent with Brazilian income tax regulations. As a result, the income tax expense was overstated by
The Company estimates the net impact of these adjustments will increase Income Tax Expense by approximately
The Company also expects to reflect certain classification corrections to non-derivatives and loans and borrowings as part of the restatement to the financial statements. The reclassifications will reduce current assets in
The Company expects that the restatement described above will be attributable to a material weakness in the Company’s internal control.
The Audit Committee and management have discussed the matters disclosed in this Report on Form 6-K with KPMG.
A summary of the anticipated impacts on the consolidated statements of profit or loss for the year ended December 31, 2022, is included below.
Consolidated statement of profit or loss (unaudited) (in thousands of Brazilian Reais) |
||||||||
Consolidated statements of profit or loss |
December 31, 2022 (as issued) |
|
Adjustments |
|
December 31, 2022 (as restated) |
|||
|
|
|
|
|
|
|||
Profit before income tax |
200,272 |
|
|
- |
|
|
200,272 |
|
Current income tax |
(69,873 |
) |
|
10,303 |
|
|
(59,570 |
) |
Deferred income tax |
(4,483 |
) |
|
(40,509 |
) |
|
(44,992 |
) |
Total income tax expense |
(74,356 |
) |
|
(30,206 |
) |
|
(104,562 |
) |
Net profit for the year |
125,916 |
|
|
(30,206 |
) |
|
95,710 |
|
Forward-Looking Statements
This form 6-k includes forward-looking statements within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact that may be deemed forward-looking statements, include, but are not limited to: the statements under Business Outlook, including expectations relating to revenues and other financial or business metrics; statements regarding relationships with clients; and any other statements of expectations or beliefs. The words “believe,” “will,” “may,” “may have,” “would,” “estimate,” “continues,” “anticipates,” “intends,” “plans,” “expects,” “budget,” "scheduled,” “forecasts” and similar words are intended to identify estimates and forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements represent our management's beliefs and assumptions only as of the date of this press release. You should read this press release with the understanding that our actual future results may be materially different from our expectations. These statements are subject to known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from those expressed or implied by such statements in this press release. Such risk factors include, but are not limited to, those relating to: the completion of our year-end audit process, implementation of corrective adjustments and restatement of our previously issued financial statements, the ongoing war in
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Investor Relations Contact:
Eduardo Galvão
investors@ciandt.com
Media Relations Contact:
Illume PR for CI&T
Zella Panossian
ciandt@illumepr.com
Source: CI&T Inc.
FAQ
What accounting errors did CI&T Inc. identify?
What adjustments are required due to the errors?
What is the expected impact on net income for the year ended December 31, 2022?
What does the Company expect regarding internal control?
What financial statements will be restated by CI&T Inc.?
How will the corrections impact current and non-current liabilities?
