Central Bank Resolution CMN No. 4817: Accounting Criteria for Investments in Affiliates, Controlled Entities, and Jointly Controlled Entities

The Central Bank of Brazil, in accordance with Article 9 of Law No. 4,595 of December 31, 1964, makes it public that the National Monetary Council, in a session held on May 29, 2020, based on Article 4, items VIII and XII, of the aforementioned Law, and considering the provisions of Article 61 of Law No. 11,941 of May 27, 2009,

R E S O L V E D:

CHAPTER I

OBJECT AND SCOPE OF APPLICATION

Art. 1. This Resolution establishes the criteria for the accounting measurement and recognition, by financial institutions and other institutions authorized to operate by the Central Bank of Brazil, of investments in affiliated, controlled, and jointly controlled entities, in Brazil and abroad, including acquisition of participation, incorporation, merger, and spin-off operations, in which these institutions are parties.

Sole Paragraph. The provisions of this Resolution do not apply:

I - to consortium administrators and payment institutions, which must observe the regulations issued by the Central Bank of Brazil in the exercise of their legal duties; and

II - to the following investments, which must be classified, measured, recognized, and disclosed in accordance with the specific accounting regulation applicable to financial instruments:

a) investments in participations in entities that are not affiliates, controlled, or jointly controlled; and

b) participations in investment funds.

CHAPTER II

DEFINITIONS

Art. 2. For the purposes of this Resolution, the following are considered:

I - goodwill: an asset that represents future economic benefits resulting from assets that are not individually identified or recognized separately, acquired in a transaction involving the acquisition of participation in an affiliate, controlled, or jointly controlled entity;

II - acquisition of participation: acquisition of a portion of the capital of another entity, including in the form of subscription of new shares or quotas;

III - identifiable asset:

a) the asset that can be separated from the institution and sold, transferred, licensed, leased, or exchanged, individually or together with a related contract, asset, or liability, regardless of the institution's intention to use it; or

b) the asset that results from contractual rights or other legal rights, regardless of whether such rights are transferable or separable from the institution or from other rights and obligations;

IV - affiliate: an entity over which the investing institution has significant influence;

V - controlled entity: an entity over which the investing institution has control, directly or indirectly;

VI - jointly controlled entity: an entity whose control is contractually shared by two or more entities, such that decisions regarding activities that significantly affect the business returns require the unanimous consent of the controlling parties;

VII - control: a situation in which the investing institution is exposed to, or has rights to, variable returns arising from its involvement with the investee and has the ability to affect those returns through its power over the investee;

VIII - operation base date: a common date for all entities involved in the operation, defined for the assessment and evaluation of the institution's financial position in acquisition of participation, incorporation, merger, and spin-off operations, as well as for the purposes of:

a) establishing the exchange ratio of shares or quotas of the entities involved in the operation; and

b) capital increase and definition of its form of fulfillment, when applicable;

IX - bargain purchase gain (discount): the negative difference value between the acquisition cost and the fair value of identifiable assets, minus the fair value of assumed liabilities of the acquired entity, determined on the base date of the corporate participation acquisition operation;

X - economic group: a group composed of the controlling entity and all its controlled entities;

XI - reverse acquisition: an incorporation operation in which the acquired entity holds a participation in the capital of the acquiring institution;

XII - significant influence: the power to participate in the decision-making process regarding the financial and operating policies of an investee, without controlling those policies individually or jointly;

XIII - monetary items: units of currency held in cash and assets and liabilities to be received or paid in a fixed or determinable number of currency units;

XIV - equity method: an accounting method through which the investment in an entity is adjusted to reflect the investor's participation in the investee's equity;

XV - recording currency: the currency in which accounting records are kept;

XVI - foreign currency: any currency different from the functional currency of the entity;

XVII - functional currency: the currency of the primary economic environment in which the entity operates;

XVIII - independent parties:

a) entities that are not part of the same economic group as the institution; and

b) natural persons who do not directly or indirectly control entities that are part of the same economic group as the institution;

XIX - assumed liability: a present obligation, derived from a past event, whose fair value can be measured reliably on the base date of the operation;

XX - adjusted equity of the investee: the value of the investee's equity, after making the necessary adjustments to eliminate the effects resulting from:

a) partial fulfillments of capital increases;

b) accounting criteria materially different from those provided in the current accounting regulation applicable to institutions authorized to operate by the Central Bank of Brazil;

c) exclusion from the investee's equity of unrealized results arising from transactions conducted with the investor, and with other affiliates, controlled, and jointly controlled entities; and

d) exclusion of any reciprocal participations permitted by current regulations;

XXI - power: rights that give the investor the current ability to direct the activities that significantly affect the returns of the investee;

XXII - exchange rate: the exchange ratio between two currencies; and

XXIII - spot exchange rate: the exchange rate normally used for the immediate settlement of foreign exchange operations; and

XXIV - foreign currency transaction: a transaction denominated in or requiring settlement in a foreign currency.

§ 1. Indications of the existence of significant influence include:

I - representation on the board of directors or executive board of the investee;

II - participation in the policy-making processes, including decisions on dividends and other distributions;

III - material transactions between the investor and the investee;

IV - exchange of directors or other senior management members; and

V - provision of technical information essential for the institution's activity.

§ 2. Significant influence is presumed when the investing institution holds 20% (twenty percent) or more of the voting capital of the investee, without controlling it.

CHAPTER III

EVALUATION OF INVESTMENTS IN AFFILIATES, CONTROLLED, AND JOINTLY CONTROLLED ENTITIES

Section I

Acquisition of Participations

Subsection I

Acquisition of Participation Operations

Between Independent Parties

Art. 3. Acquisitions of participations in affiliates, controlled, and jointly controlled entities whose seller of the participation is independent of the acquiring institution must be initially recognized at the acquisition value, segregating the following items:

I - fair value of identifiable assets minus the fair value of assumed liabilities of the investee on the base date of the operation, calculated based on the proportion of the participation acquired in the capital of the investee relative to the value of the adjusted equity of the investee on that date; and

II - goodwill, if any.

§ 1. The value referred to in item I of the caput must be segregated and classified according to the following economic foundations, proven by documentation that serves as the basis for accounting:

I - book value of the adjusted equity of the investee on the base date of the operation;

II - difference between the fair value and the book value of assets and liabilities of the investee on the base date of the operation, if any; and

III - identifiable assets and assumed liabilities measurable with reliability, not recorded in the investee's accounting on the base date of the operation, if any.

§ 2. The value of any positive difference between the acquisition value and the value referred to in item I of the caput that has no economic foundation in future benefits must be immediately recognized in the period's result as non-operating expense.

§ 3. The acquisition value must consider, in addition to the fair value of assets transferred by the acquirer, all other consideration, including liabilities incurred by the acquirer owed to the former owners of the acquired entity and equity participations issued by the acquirer, as well as any adjustments made after the base date of the acquisition already provided for in the negotiation.

§ 4. The fair value assessment of identifiable assets and assumed liabilities of the investee must be subject to a report prepared by an independent company specialized in asset valuation.

Art. 4. If a bargain purchase gain (discount) is determined in the assessment of the fair value of identifiable assets and assumed liabilities of the investee referred to in § 4 of Art. 3, a new assessment must be carried out by another independent company specialized in asset valuation.

Sole Paragraph. If the new assessment results in a bargain purchase gain (discount), the institution must recognize as non-operating revenue the lowest bargain purchase gain (discount) determined in the assessments mentioned in the caput.

Art. 5. Participations already held by the acquiring institution must only be revalued, as provided in Art. 3, in the case of step acquisitions, at the time of obtaining control.

§ 1. The gain or loss resulting from the revaluation referred to in the caput must be recorded in the period's result or in equity, according to the recognition and measurement criteria applicable to the portion already held.

§ 2. Goodwill eventually resulting from the acquisition of a new participation in an entity over which the investor has control must be recorded in a separate account of the investor's equity at the net value of the tax effects.

Subsection II

Acquisition of Participation Operations

Between Entities of the Same Economic Group

Art. 6. Acquisitions of participations in affiliates, controlled, and jointly controlled entities whose seller is part of the same economic group as the acquiring institution must be initially recognized by applying to the book value of the adjusted equity of the investee on the base date of the operation the portion of participation acquired.

Sole Paragraph. The value of any difference between the acquisition value and the book value of the investee's equity determined in accordance with the caput must be recognized in equity.

Section II

Investees Abroad

Subsection I

Preliminary Procedures

Art. 7. In the assessment of participations in affiliated, controlled, and jointly controlled entities abroad, prior to the application of the equity method, the institutions mentioned in Art. 1 must:

I - designate the functional currency of each investee abroad;

II - convert foreign currency transactions into the functional currency of the investee; and

III - convert the financial statements of the investee abroad from the functional currency to the national currency, if the functional currency of the investee is different from the national currency.

Sole Paragraph. The provisions of the caput also apply in the assessment of branches abroad.

Subsection II

Functional Currency

Art. 8. The institutions mentioned in Art. 1 must consider, in the designation of the functional currency of each investee abroad, cumulatively, the following factors:

I - the economic environment in which the entity generates and spends cash;

II - the currency that most influences the prices of sale of products and services, labor costs, and other costs for the provision of products and services;

III - the currency of the country whose competitive and regulatory aspects most influence the determination of selling prices for its products and services;

IV - the currency through which the entity's financing activity resources originate; and

V - the currency through which resources generated by the entity's operational activities are usually accumulated.

§ 1. The following additional factors may be considered to define whether the functional currency of the investee abroad is the same as that of the investing institution, if the factors established in the caput are insufficient for this definition:

I - the activities of the investee abroad are executed as an extension of the investing institution, so that no significant degree of autonomy is granted to the entity abroad;

II - transactions with the investing institution represent a relevant proportion of the activities of the investee abroad; and

III - cash flows arising from the activities of the investee abroad:

a) directly affect the cash flows of the investing institution and are readily available for remittance to this institution; and

b) are sufficient to pay interest and other existing and expected debt commitments, regardless of contributions from the investing institution.

§ 2. The functional currency of financial institutions and other institutions authorized to operate by the Central Bank of Brazil that operate in the country must be the national currency.

§ 3. The alteration of the functional currency of the investee abroad is permitted only if there is a significant change in the primary economic environment in which the entity operates, considering the factors defined in the caput and § 1.

§ 4. In the case of alteration of the functional currency of the investee abroad, as provided in § 3, the conversion procedures to the new functional currency must be applied prospectively from the date of the alteration.

Art. 9. The Central Bank of Brazil may determine the alteration of the functional currency of investees abroad, if an inadequate definition of this currency is found.

Subsection III

Conversion of Foreign Currency Transactions

Art. 10. If investees abroad carry out transactions in a currency different from their respective functional currencies, the institutions mentioned in Art. 1 must convert, upon initial recognition, individually, foreign currency transactions into the functional currency by applying, to the amount of foreign currency, the spot exchange rate on the date of the transaction.

Sole Paragraph. If the recording currency of the investee abroad is different from its functional currency, the conversion referred to in the caput must be made from the foreign currency to the recording currency.

Art. 11. The institutions mentioned in Art. 1 must convert, upon the preparation of the trial balance or balance sheet, individually, foreign currency transactions into the functional currency by the exchange rate:

I - of the base date of the respective trial balance or balance sheet, in the conversion of:

a) monetary items; and

b) non-monetary items measured at fair value; and

II - of the date of the transaction, in the case of non-monetary items measured at historical cost.

§ 1. In the assessment of impairment due to reduction in the recoverable amount of non-monetary assets in foreign currency, when required by specific regulation, the impairment loss must be determined by the comparison between:

I - the book value in foreign currency converted in accordance with item II of the caput; and

II - the recoverable amount in foreign currency converted according to the exchange rate in effect on the date of its determination.

§ 2. The adjustments resulting from the conversion referred to in the caput must be recorded:

I - in a separate account of equity, at the net value of tax effects, in the case of non-monetary items whose gains and losses are recognized in equity; and

II - in counterpart to the result, in other cases.

§ 3. If the recording currency of the investee abroad is different from its functional currency, the conversion referred to in the caput is permitted based on the daily balances of each subheading or heading related to the dates on which the transactions were carried out, considering the daily variation of the exchange rate.

Subsection IV

Conversion of Foreign Currency Financial Statements

Art. 12. If the functional currency of the investee abroad is different from the national currency, the institutions mentioned in Art. 1 must convert the balances of the financial statements of these entities from the functional currency to the national currency, observing that:

I - assets and liabilities must be converted by the exchange rate of the date of the respective trial balance or balance sheet of the investor; and

II - revenues and expenses must be converted by the exchange rates of the dates of occurrence of the transactions.

§ 1. The use of the average exchange rate of the period, in each foreign currency, is admitted if the investing institution does not have access to the necessary data to perform the conversion of revenues and expenses by the exchange rates of the dates of occurrence of the transactions.

§ 2. If the institution uses the option provided in § 1, the average exchange rate must be applied for the conversion of all revenues and expenses carried out in the same currency.

§ 3. The exchange variation adjustments resulting from the conversion process referred to in the caput must be recorded in the converted financial statements of the investee abroad as a distinct component of equity at the net value of tax effects.

Section III

Evaluation by the Equity Method

Art. 13. Investments in participations in affiliates, controlled, and jointly controlled entities must be evaluated in the periods subsequent to acquisition by the equity method and adjusted monthly, as follows:

I - the book value of equity referred to in item I of § 1 of Art. 3 must be recalculated by the equity method, with the respective adjustments recorded in counterpart:

a) to the period's result, in the case of changes in the investee's equity resulting from values recognized in its result; and

b) to the appropriate separate equity accounts, in the case of changes in the investee's equity resulting from values recognized directly in its equity, without effects on the period's result;

II - the value of the difference referred to in item II of § 1 of Art. 3 must be appropriated to the result proportionally to the write-off, partial or full, of the corresponding item in the investee's accounting, including by depreciation, amortization, or impairment of the asset;

III - the values of identifiable assets and assumed liabilities not recorded in the investee's accounting referred to in item III of § 1 of Art. 3 must be adjusted according to the specific regulation for the measurement of these items; and

IV - the goodwill of the investee must be amortized, in counterpart to the period's result, according to the period defined in a technical study for the realization of future economic benefits that justified its recognition, or written off by alienation or loss of the investment.

§ 1. The remuneration of capital earned on the investments referred to in the caput must be:

I - recognized in assets when the institution obtains the right to receive it; and

II - measured according to the value declared by the investee entity, in counterpart to the book value of the corporate participation.

§ 2. The accounting recording method provided in § 1 also applies to capital remuneration eventually received before its declaration.

§ 3. The provisions of item III of the caput do not apply to contingent liabilities, as defined in specific regulation, assumed in the acquisition of the investment.

§ 4. The liabilities referred to in § 3 must be evaluated, until their final write-off, at the higher value between the fair value on the base date of the operation and the value determined according to the specific regulation applicable to the recognition and measurement of contingent liabilities and provisions.

§ 5. The write-off referred to in § 4 must occur when the contingent liability is settled, canceled, or extinguished.

§ 6. If the value of the investing institution's participation in the losses of the investee exceeds the book value of the investment, the institution must recognize the difference between these values in counterpart to any long-term asset receivable from the investee that, in essence, is part of the investment in an affiliate, controlled, or jointly controlled entity, according to the priority defined for its settlement.

§ 7. If the value of the difference referred to in § 6 exceeds the value of the operations mentioned therein, the institution must recognize a liability, according to specific regulation, unless the absence of obligations towards third parties is proven.

§ 8. The institution that does not recognize a liability due to the provisions of § 7 can only resume recognizing positive equity method results of the investee in amounts that exceed the unrecognized losses.

§ 9. The equity of the affiliate or controlled entity must be determined based on the most recent balance sheet or trial balance of these entities, with a difference of up to two months admitted for the base date of the trial balance or balance sheet of the investor.

Art. 14. After making the adjustments referred to in Art. 13, the institutions mentioned in Art. 1 must assess whether there is objective evidence of a reduction in the recoverable amount of the book value of the corporate participation, according to specific regulation.

§ 1. Any impairment loss must be allocated:

I - to the value of goodwill; or

II - to the book value of the institution's corporate participation in the investee, if there is no balance related to goodwill.

§ 2. The reversal of losses allocated in the manner of § 1, item I, is prohibited.

Art. 15. If the investor reduces its participation in the capital of the investee, any values related to the adjustments referred to in the letter "b" of item I of Art. 13 must be reclassified, in proportion to the portion of the participation reduced, to:

I - the account of accumulated profits or losses, in the case of items that, according to current regulation, should not affect the result; and

II - the period's result, in other cases.

Sole Paragraph. In the case of a reduction in participation in the capital of the controlled entity, without loss of control, the values referred to in item II of the caput must remain recorded in equity while the entity maintains control.

Art. 16. If the investee entity ceases to be characterized as an affiliate, controlled, or jointly controlled entity, the investing institution must classify, measure, recognize, and disclose investments in participations in this entity in accordance with the specific accounting regulation applicable to financial instruments.

§ 1. The investment referred to in the caput must be measured, upon its initial recognition as a financial instrument, at its fair value.

§ 2. Any difference in the value of the instrument resulting from the application of the provisions of § 1 must be recognized in the period's result.

§ 3. Any values related to the adjustments referred to in the letter "b" of item I of Art. 13...