Circular Letter CVM/SIN/SNC 02/19

SECURITIES AND EXCHANGE COMMISSION OF BRAZIL (CVM) Rua Sete de Setembro, 111/2-5th and 23-34th Floors – Center – Rio de Janeiro - RJ – CEP: 20050-901 – Brazil Tel.: (21) 3554-8686 - www.cvm.gov.br Circular Letter No. 2/2019/CVM/SIN/SNC Rio de Janeiro, May 17, 2019

To Securitization Companies and Independent Auditors

Subject: Financial statements of the separate asset.

Dear Sirs,

CVM Instruction 600, of August 1, 2018 (“ICVM 600”), included Article 25-A in CVM Instruction 480, of December 7, 2009 (“ICVM 480”), which provides for the preparation of the individual financial statements of Real Estate Receivables Certificates (“CRI”) and Agribusiness (“CRA”), issued by the securitization company and subject to the separate asset, as provided for in Article 12 of Law No. 9,514/97.

This Circular Letter aims to guide and clarify doubts of securitization companies, issuers of these certificates, regarding the adequate form of preparation and presentation of the individual financial statements of these assets.

I) Separate asset not subject to consolidation in the issuer's financial statements.

The financial statements of each separate asset, that is, that which has a fiduciary regime over the same collateral, must be prepared individually in accordance with the provisions of Article 25-A of ICVM 480.

In this context, we reinforce that distinct series issued that are part of the same securitization term, where the collateral of each series is independent and does not communicate with each other, that is, the credits are affected for each series individually, have a separate asset for each issued series, and individualized financial statements must be prepared for each series.

The assets and liabilities included in operations subject to the fiduciary regime and, consequently, with accounting of the separate asset in accordance with Article 12 of Law 9,514/97, provided that the situations provided for in Technical Pronouncement CPC No. 48 Financial Instruments (“CPC 48”) are respected, do not integrate the equity of the securitization company.

The fundamental condition that leads to recognition in the equity of the securitization company refers to the eventual retention of substantial risks and benefits 1 on the receivables linked to the fiduciary regime. In this sense, we clarify that this retention can occur, for example, through the acquisition of subordinate class certificates or co-obligation clause, in a way that characterizes the retention of substantial risks and benefits provided for in said CPC.

On the other hand, we highlight that only the residual participation, characteristic of all securitization companies on their issuances, does not lead to the recognition of the assets and liabilities of the separate asset in the financial statement of the securitization company, provided that it does not constitute retention of substantial risks and benefits.

This residual interest usually occurs due to the excess of assets relative to the liabilities of the issuance and, by itself, does not characterize a retention of risks by the issuing company, even when this excess (residual interest) can be measured and duly recognized accounting from the date of issuance of the certificate.

II) Presentation of assets, liabilities, and results.

When preparing the individual financial statements of the separate asset, the issuing company must consider as assets of this asset all resources controlled by this separate asset and subject to the fiduciary regime, such as, for example, resources in cash and financial applications, considered “cash and cash equivalents”, the credit rights that back the issuance and amounts to be received.

In this context, we clarify that any resources that are originated through the realization of assets initially linked to the issuance also come to compose the separate asset. As an example, we can cite the financial applications made by the issuer resulting from the maturity mismatch between the receipt of the asset and the payment to investors; and the assets received as security for the default of the credit rights, which must be recognized and presented in the assets of the respective separate asset provided that the provisions of item 3.2.23 of CPC 48 2 are met.

1 If the transfer does not result in derecognition, because the entity has substantially retained all the risks and benefits of ownership of the transferred asset, the entity must continue to recognize the transferred asset in its entirety and must recognize the financial liability for the consideration received. In subsequent periods, the entity must recognize any income from the transferred asset and any expense incurred with the financial liability. (CPC 48; item 3.2.15) 2 If the transferor provides non-monetary guarantee (such as debt instrument or equity instrument) to the transferee, the accounting of the guarantee by the transferor and by the transferee depends on the fact that the transferee has, or not, the right to sell or offer the guarantee again and on the fact that the transferor is, or not, in default. The transferor and the transferee must account for the guarantee as follows:
(a) if the transferee has the right by contract or practice to sell or offer the guarantee again, then the transferor must reclassify this asset in its balance sheet (for example, as loaned asset, equity instrument offered as guarantee or receivable from purchase) separately from other assets; (b) if the transferee sells the guarantee offered to it, it must recognize the value of the sale and the liability measured at fair value for its obligation to return the guarantee; (c) if the transferor is in default according to the terms of the contract and loses the right to redeem the guarantee, it must derecognize the guarantee, and the transferee must recognize the guarantee as its asset initially measured at fair value or, if it has already sold the guarantee, it must derecognize its obligation to return the guarantee; (d) except as provided in item (c), the transferor must continue to recognize the guarantee as its asset and the transferee must not recognize the guarantee as an asset. (underlines added) (CPC 48; item 3.2.23)

The financial applications that back the issuance are recognized in the assets of the separate asset, as well as the corresponding earnings arising from these applications.

As a liability of the issuance, for example, amounts to be paid to service providers, as well as other amounts to be paid, whose expenses can be considered as charges of the issuance, must be presented.

In the liability of the separate asset, amounts due to investors and the residual participation of the securitization company must also be presented, which must be calculated by the difference between the total value of the assets and the other updated liabilities.

As in the separate asset (without co-obligation of the issuer) all investors are registered in their liability, including the residual participation of the securitization company, all the result of the period will be attributed to the investors, the issuing company or the transferors who are entitled to the result, provided it is provided for in the securitization term, and, consequently, the Balance Sheet will present equity with a value equal to zero.

If the separate asset presents a loss in the period, such loss must impact any previously recognized excess of assets in favor of the issuing company or transferors, in the liability, up to the limit of these. If the loss exceeds this value, the amount that exceeds must be recognized as a reducer account of the amount to be paid to investors.

In summary, any insufficiency of resources of the separate asset must impact first the amount to be paid to the securitization company or to the transferors, provided it is provided for in the securitization term, up to the limit of these, and, subsequently, the amount to be paid to the investors of the issuance in the order of preference of each class, if applicable.

III) Provision for asset recovery.

The credit rights that back the issuance are financial assets and, since 01/01/2018, are subject to the accounting regime of CPC No. 48, accounting pronouncement to which the issuing company and the separate asset are subject.

Based on this CPC, a provision for losses on the financial asset must be recognized to reflect its real recovery value, based on expected future cash flows.

However, given the operational dynamics of CRI and CRA, which resembles that of Credit Rights Investment Funds, we understand that the application of CVM Instruction No. 489/11 for the accounting of credit rights and the consequent recognition of provision is adequate.

IV) Report of independent auditors.

With regard to the main audit matters reported in the auditors' reports, we reinforce that the provisions of Article 25, VIII, of CVM Instruction No. 308/99 also apply to securitization companies and their issuances subject to the fiduciary regime.

In this sense, the reports of independent auditors on the financial statements of each separate asset must include the main audit matters dealt with in said provision.

V) Submission of the financial statements of the separate asset.

While a specific system is not made available for the submission of periodic and occasional information of each separate asset, the submission of the financial statements of these separate assets must occur via the Empresas.Net system. The user must send a single file in “.pdf” format, in the field “DF – separate asset”, using the address https://www.rad.cvm.gov.br/ipe/menu.asp.

We remind you that the financial statements of each separate asset must be sent to CVM and made available to the public within 3 months after the end of the respective fiscal year, in accordance with Article 25-A, §1, III, of ICVM 480/09. The fiscal year, in turn, must observe the closing of the months of March, June, September or December of each year, as provided for in § 6 of the same article of ICVM 480/09, and must appear in the securitization term that gave rise to the separate asset.

Finally, we communicate that doubts regarding the content of this Circular Letter should be directed to the care of the Structured Investments Manager, Bruno de Freitas Gomes, Structured Investments Department – GIES, by email gies@cvm.gov.br.

Sincerely,

Digitally signed by
JOSÉ CARLOS BEZERRA DA SILVA
Superintendent of Accounting and Audit Standards

Digitally signed by
DANIEL WALTER MAEDA BERNARDO
Superintendent of Institutional Investor Relations