Circular Letter CVM/SNC/SEP No. 01/2020

SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4º Andar, Brasília/DF – CEP: 70712-900 – Brasil -Tel.: (61) 3327-2030/2031 www.cvm.gov.br CIRCULAR LETTER/CVM/SNC/SEP No. 01/2020 Rio de Janeiro, February 5, 2020 Subject: Guidance on relevant aspects to be observed in the preparation of Financial Statements for the fiscal year ending December 31, 2019

Dear Investor Relations Director and Dear Independent Auditor,

The Circular Letters issued jointly by the Accounting Standards and Audit Superintendency (SNC) and the Corporate Relations Superintendency (SEP) aim to guide the preparation of financial statements and have been considered an effective instrument by the CVM's technical areas to safeguard the quality of information disseminated in the market.

It is worth recalling that Circular Letters express the understanding of the CVM's technical areas regarding the adequate accounting representation of an economic event reflected in companies' financial statements. Their topics originate from deviations identified and information obtained by the CVM's technical areas regarding operations being structured by the market during the fiscal year, for which these technical areas deem it appropriate to express the position considered, as a rule, most adequate.

Aiming to improve the Circular Letter of 2019 and incorporating themes considered relevant for the fiscal year ending December 31, 2019, the 2020 Circular Letter contains some changes compared to the 2019 version.

The first concerns the consolidation of the technical areas' manifestations related to CPC n. 06 (R2)/IFRS n. 16. The previous topic 11 will now be titled "Leasing Contracts – CPC n. 06 (R2)/IFRS n. 16," containing 3 subtopics, namely: 11.1 "Some Aspects of Leasing Contracts"; 11.2 "Circular Letter/CVM/SNC/SEP No. 02/2019 – Lessee Financial Statements"; and 11.3 "Clarification of Circular Letter No. 02/2019 – CPC 06 (R2)/IFRS 16." This last subitem, in particular, represents, effectively, new information for the market and aims to eliminate controversies regarding the interpretation of the CVM technical areas' position in relation to Circular Letter/CVM/SNC/SEP No. 02/2019.

The second deals with the inclusion of new item 13. "Initial Adoption CPC n. 47 and n. 48 – Electric Power Transmission Concessionaires," to guide the accounting treatment to be provided by companies in the sector regarding the recognition and disclosure of the effects of initial adoption.

In this sense, for the fiscal year ending December 31, 2019, the themes to be addressed are as follows:

"True and fair view"
Capital Structure Management;

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2.1. "Forfait" operations;
2.2. Operations with FIP;
2.3. Operations with FIDC;
3. "Impairment" tests – CPC n. 01;
4. Disclosures - Explanatory Notes;
4.1. Application of item 38 of CPC n. 07;
4.2. Clarifying vs. Non-Clarifying Explanatory Notes;
4.3. Sources of uncertainty;
4.4. Company Management Judgment – "Going concern";
5. Financial Instruments;
5.1. Application of the Concept of "Economic Compulsion";
5.2. Hedge Accounting – CPC n. 38/IAS n. 39 and CPC n. 48/IFRS n. 09;
5.3. "Impairment" test of Financial Instruments – CPC n. 48/IFRS n. 09;
6. Revenue Recognition by Real Estate Development Companies: IFRS n. 15;
7. Business Combinations;
7.1. Business Combination when there is a remaining participation of non-controlling shareholders, with simultaneous issuance of put options and call options on these shares;
7.2. Measurement Period - "Goodwill" or Bargain Purchase Gain;
7.3. CVM Instruction n. 319/99 vs. CPC n. 09;
8. Change in accounting policies;
9. Deferred IRPJ and CSLL;
10. Cash Equivalent – LFTs;
11. Leasing Contracts – CPC n. 06 (R2)/IFRS n. 16;
11.1. Some Aspects of Leasing Contracts;
11.2. CIRCULAR LETTER/CVM/SNC/SEP No. 02/2019 – Lessee Financial Statements;
11.3. Clarification of Circular Letter SNC/SEP No. 02/2019 – CPC 06 (R2)/IFRS 16;

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12. ICMS in the PIS and COFINS calculation base;
13. Initial Adoption CPC n. 47 and n. 48 – Electric Power Transmission Concessionaires.

"True and Fair View"
It is never too much to remember that the two conceptual pillars on which accounting information is based are relevance and faithful representation. If accounting information is not relevant or does not faithfully represent the reality that must be reported, it should not be disclosed. The unsystematic application of IFRSs or their biased application leads to situations where the investor may be misled; situations where the investor is led to misinterpret a certain economic reality, whose reporting has been carried out in a distorted manner. Such situations cannot be admitted for accounting information provided by publicly held companies.

The CVM has already expressed its concern with this aspect, namely: the risk of transactions and/or economic events being reported with exaggerated contours of their legal form. Not by chance, it issued Advisory Opinion CVM No. 37/2011, of September 22, 2011, which in summary always requires that the "true and fair view" be observed in the accounting treatment to be provided.

It is worth reproducing below a passage from the cited regulation:
"... the accounting regulator expressly recognizes that accounting standards must be subordinate to the principles of true and fair representation and the primacy of substance over form. That is, not only must the economic effects prevail over the form, regardless of the legal treatment, but it is imperative, in the new accounting system, that the representation of economic reality be true and fair. So imperative that, even in the case of conflict with issued standards, the preponderance must be of adequate representation. These are the central pillars of this new system."

In this context, we still observe resistance regarding the application of the "true and fair override"1. Applying it implies exercising judgment; judging in exceptional and critical situations. And this posture is perfectly understandable, as professional risks increase enormously (especially litigation risks).

On the other hand, the CVM is fully aware of the "other side of the coin." And the following caveat must be made: the "true and fair override" provided for in accounting standards must not be used indiscriminately. It must be applied in exceptional situations. And it can never serve to

1 Technical Pronouncement CPC 26 (R1), Items 19 to 24.

SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4º Andar, Brasília/DF – CEP: 70712-900 – Brasil -Tel.: (61) 3327-2030/2031 www.cvm.gov.br mislead; it cannot serve less noble purposes, such as the management of accounting information.

In these exceptional cases, the role played by independent auditors is justified more than ever. There lies their capital importance for the quality of information to be disseminated in the market. Auditors must evaluate with diligence and skepticism the cases of "override," whether the exceptional circumstance imposes its adoption or whether it is not the case for its adoption.

Nevertheless, it is never too much to remember that it is the primary responsibility of the company's management and those responsible for governance to adopt accounting policies in conformity with the requirements of accounting standards.

When the adoption of the "true and fair override" is deemed appropriate, wide and unrestricted disclosure must be given, as provided for in items 19 and 20 of Pronouncement CPC n. 26, reproduced below:

"19. In extremely rare circumstances, in which management concludes that compliance with a requirement of a Technical Pronouncement, Interpretation, or Advisory of the CPC would lead to such a misleading presentation that it would conflict with the objective of financial statements established in the Conceptual Framework for Preparation and Disclosure of Financial Reports, the entity shall not apply that requirement and shall follow the provision of item 20, unless such procedure is strictly prohibited from a legal and regulatory point of view.

When the entity does not apply a requirement of a Technical Pronouncement, Interpretation, or Advisory of the CPC or in accordance with item 19, it must disclose:
(a) that management concluded that the financial statements present fairly the financial position and equity, performance, and cash flows of the entity; (b) that it applied the applicable Technical Pronouncements, Interpretations, and Advisories of the CPC, except for the non-application of a specific requirement for the purpose of obtaining appropriate representation; (c) the title of the Technical Pronouncement, Interpretation, or Advisory of the CPC that the entity did not apply, the nature of this exception, including the treatment that the Technical Pronouncement, Interpretation, or Advisory of the CPC would require, the reason why this treatment would be so misleading and would conflict with the objective of financial statements, established in the Conceptual Framework for Preparation and Disclosure of Financial Reports, and the treatment effectively adopted; and (d) for each period presented, the financial impact of not applying the Technical Pronouncement, Interpretation, or Advisory of the CPC in force in each item on the financial statements that would have been reported if the unapplied requirement had been complied with." (we emphasize)

It is imperative to assert that the CVM has a legal mandate to fulfill, namely: to ensure that all and any relevant information is provided faithfully, timely, and equitably, in order to guarantee a fair formation of prices of financial assets traded in the market. Acting otherwise implies putting the health of the market at stake, enormously increasing the risk of adverse selection by investors. In this regard, the "true and fair override," when well applied, is a valuable regulatory instrument.

Independent auditors must be attentive to these aspects, expressing themselves in their reports issued regarding deviations that in their judgment cause relevant distortion in the audited financial statements as a whole.

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Capital Structure Management
2.1. "Forfait" Operations
In the course of recent fiscal years, some publicly held companies have spontaneously reapplied their financial statements with the aim of adequately reflecting the so-called "forfait," "confirming," or "risco sacado" operations, or also called "securitization of accounts payable"2, through which the purchasing company, called the "anchor company," contracts a bank and sets up with it a scheme for advance payment to its registered suppliers 3.

Formally, the selling company (supplier) issues an invoice that contemplates the term to be financed by the bank, but does not recognize the sale in its accounting at present value. And with this, it presents a higher EBITDA. The purchasing company, in turn, does not recognize an onerous liability with the Bank, but the "suppliers" operating liability; its inventory is inflated and the gross margin with sales distorted.

With this expedient, the purchasing company manages to distort its real financial situation. It fails to recognize financial expenses in the result, as besides not recognizing the onerous liability "financing," it does not adjust the "suppliers" liability to present value when appropriate, without the proper segregation of interest embedded in the operation to be appropriated in the result, in accordance with Technical Pronouncement CPC n. 12. Balance Sheet - BS,

2 Term coined by a representative of the Office of The Chief Accountant of the US SEC, in a lecture delivered at the 2004 National Conference of the AICPA. "securitization of accounts payable". Available at: https://www.sec.gov/news/speech/spch120604rjc.htm.

3 "Large company seeks credit to blind suppliers." Valor Econômico Newspaper. 12.01.2016.

SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4º Andar, Brasília/DF – CEP: 70712-900 – Brasil -Tel.: (61) 3327-2030/2031 www.cvm.gov.br Income Statement - IS and Cash Flow Statement - CFS fail to meet the condition of faithful representation.

The purchasing company is incentivized to proceed this way because it would manage to escape contractual "covenants" (interest coverage ratio or onerous indebtedness index, for example). In short, what must definitely not occur is the distorted presentation of the transaction; economic substance must prevail over legal form. In the concrete case, it is unequivocal that there was a financing of the purchasing company's merchandise or capital goods by a banking institution. The onerous liability must be recognized as such in the balance sheet, and the debt service (interest and other charges) must be appropriated timely and exponentially in the result according to the effective interest curve. Thereby, common "covenants" are evaded, for example: EBITDA/Indebtedness; EBITDA/Interest; Indebtedness/Equity.

It is worth remembering that there are still some publicly held companies that, although they have specific platforms on the worldwide web for registration and for guiding their suppliers on how to proceed to carry out "forfait" operations, did not disclose anything regarding these operations in their financial statements, if they had transactions of this material nature.

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2.2. Operations with FIP
The operation known in the Brazilian market with FIP, whose accounting treatment results in distortion of the information to be provided, concerns the sale of equity participation with an embedded "swap" contract.

This operation is contractually defined in such a way that the controlling company, holding company, or subholding, of an operating company alienates to an exclusive closed fund – FIP (usually having a bank as a quota holder, although this configuration is irrelevant for the accounting treatment of the operation) the equity participation held in the operating company 4.

Additionally, the FIP and the holding or subholding company enter into a "swap" contract through which they will exchange future cash flows arising from the difference observed, on a future date, between the market sale value of the held equity participation - "fair value" - and the updated cost value of the held equity participation (CDI variation plus a "spread," adjusted for distributed dividends) 5. The transaction of alienation in the market is made at the "fair value" of the held equity participation.

Even to characterize that the "market view" was applied, in the concrete case, in pricing the held equity participation.

The FIP, in turn, intends to keep the acquired equity participation in its portfolio for a given period, say 5 years, after which it will place said batch on the market. If the sale of the equity participation to the market occurs below the updated cost of the held equity participation (purchase price updated by CDI variation plus a "spread" and discounted by distributed dividends), the holding or subholding company (controller) must return the difference to the FIP. On the other hand, if the sale to the market occurs above the updated cost of the held equity participation, the profit will be shared between the controller and the FIP 6.

Formally, this operation has been recognized in the holding or subholding's accounting as an effective sale of equity participation, although the economic essence indicates it is a financing transaction with an asset given as collateral (in this case, equity participation). First, because there is, by the controller, continuous involvement and retention of substantial risks and benefits associated with the equity participation (distributed dividends are deducted from the interest charged by the FIP and any profit on the alienation is shared by the FIP with the controller), and second, because the only risk to which the FIP is exposed is the credit risk of the controller (reflected in the "spread" practiced in the operation), in addition to having a guarantee which is the equity participation to be alienated in the market.

There is a relevant distortion in the reported economic reality. The controller fails to appropriately recognize the Result with Equity Method and held equity participation; the controller does not recognize the "Loans" Liability and the respective Financial Expense in the IS; the controller recognizes in a distorted manner and outside the appropriate period of competence the capital gain or loss with the alienation of the equity participation. BS, IS, and CFS fail to meet the condition of faithful representation.

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2.3. Operations with FIDC
Regarding the structuring of FIDCs known to us, some managers (banks) would be offering companies certain products, which would result in the "derecognition" of their assets (receivables), without the recognition of the liability to which they would be subject 7.

The outlined proposal consists of an FIDC that would have an intermediate quota between the senior quotas (which are placed on the market for qualified investors) and the

4 This is an arrangement that can have other variants, such as the holding selling participation in the subholding, which in turn holds participation in the operating company.

5 There can also be other nuances here. The FIP can issue a call option for the seller of the equity participation, whose exercise is motivated by a clause of economic compulsion. Or the FIP can acquire (become the holder of) a put option on the same equity participation acquired, whose issuer is the holding or subholding company.

6 Once again, it is worth warning that there may be other nuances; other contractual arrangements. For example, the holding or subholding may have preference in the repurchase of the equity participation, a fact that is also irrelevant for defining the accounting treatment to be given to the operation.

7 Similar operations with CRAs (Agricultural Receivables Certificates) are also known, through which certain contractual arrangements are made that promote the emergence of a "fiduciary estate" (an economic entity, without CNPJ), in the mold of a "SILO" (IFRS n. 10).

SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4º Andar, Brasília/DF – CEP: 70712-900 – Brasil -Tel.: (61) 3327-2030/2031 www.cvm.gov.br subordinated quotas proper, called juniors (which are subscribed by the assignor of the receivables). This intermediate quota has been called the mezzanine quota.

The junior subordinated quota would represent a small portion of the FIDC's Equity (2% for example), while the mezzanine quota would represent a portion equivalent to the historical losses from default in the company's receivables portfolio (7% for example). The mezzanine subordinated quota would, in this case, be subscribed by a bank or an investor, being a risk operation. On the other hand, very likely, the risk to which the bank would be exposed with the subscription of the mezzanine subordinated quota would be included in the interest "spread" to be practiced when discounting the "alienated" receivables to the FIDC. The mezzanine subordinated quotas would have the following characteristics: they would absorb losses, only after any losses consumed the junior subordinated quotas. The junior subordinated quotas would be subscribed by the assignor of the receivables. The assignors would even commit to providing resources to the fund to serve as a "cushion," to cover operating costs and other eventualities (portfolio "default" problems). After redemption and amortization of all quotas of the Fund, this "cushion," if not used, would return to the assignor.

In essence, in the case at hand, the assignor would continue to retain the risks arising from the "alienated" receivables portfolio and would derive the economic benefits generated by it. Even if the assignment of credit rights is made without co-obligation, without right of recourse, which at first glance would indicate a transfer of risks and benefits of the receivables by the assignor.

In essence, by subscribing the junior subordinated quotas, the assignor (company) would give a guarantee. If the historical losses in the receivables portfolio well exceed the mezzanine subordinated quotas subscribed by the bank or by an investor, it is more than likely that the "cushion" provided by the assignor would be consumed. The assignor would retain a considerable portion of risk with the portfolio's default. First, because it would be paying in advance for the risk of the subordinated quotas, since the bank would discount the receivables at a rate contemplating a "spread" that would reflect the credit risk with the receivables. Thus, the alienated receivables would be "risk-adjusted." And second, because it would still be providing additional guarantees, through subscription of junior subordinated quotas, for an amount higher than the historical loss with the portfolio (the assignor offers a "cushion," as already treated).

Moreover, there would still be continuous involvement of the assignor with the transaction, since the remuneration of the senior, mezzanine, or junior quotas would be given by a post-fixed rate (CDI plus various "spreads" for each quota category), remuneration that would return to the assignor (holder of junior subordinated quota, regardless of the name to be used), in case no default occurred.

For a definitive sale of receivables, the assignor cannot have any management, involvement, or future settlement with the titles sold to the FIDC. It cannot be exposed to the risks arising from the alienated asset nor can it derive the economic benefits generated by it. The guidance given regarding this by CPC n. 48 (IFRS n. 9) must be observed in its entirety.

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There should be no "derecognition" of the asset (receivables) by the issuing company, and there must be recognition of the liability, for the resources raised with the FIDC.

Objectively, for a sale of receivables to be definitive, the administrators of the companies must verify if the criteria for "derecognition" provided in CPC No. 48 (IFRS No. 9) are being met. Furthermore, when a structured vehicle is used, it is up to the administrators of the company to judge whether there is a need to consolidate this vehicle entity.

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"Impairment" Tests – CPC No. 01 (R1)

The theme of "impairment" continues to be a concern for the technical areas of the CVM regarding its financial reporting. In a survey published on its website involving 546 publicly-held companies 8, Ibracon revealed that 29% of the publicly-held companies presented "impairment" as one of the main audit issues (PAAs) identified in the social year ending on 12.31.2017, representing one of the 3 items with the highest frequency. It is important to highlight the need to perform "impairment" tests for tangible and intangible assets, especially "goodwill" and, if applicable, to recognize impairment losses in a timely manner. After all, acquisitions of equity interests made in the past 05 social years, for example, indicative of future profits above expected, may not have the same foundations in the current period. The Companies must proceed to evaluate if there is any indication that an asset may have suffered depreciation, in light of the external and internal sources of indications contained in item 12 of CPC 01 (R1).

Additionally, the Companies must consider the reasonableness of the premises used, considering the provisions contained in item 33 of said pronouncement. We draw attention to the need to document the test and the need for consistency of the premises, parameters, and sources of information used, preferably through their detailed description in the Companies' accounting policies manuals.

It is in this particular aspect that the issue of "disclosure" gains relevance. Adequate disclosure must be provided in explanatory notes attached to the financial statements. CPC No. 01 (R1), in its items 126-136, requires that certain disclosures be made that are relevant for the understanding of the users of the financial statements. An example is the estimates used to measure the recoverable value (RV) of a cash-generating unit (CGU) containing goodwill due to expectations of future profitability or intangible asset with indefinite useful life, whose book value is significant compared to the total book value of the

Available at:
http://www.ibracon.com.br/ibracon/Portugues/downloadFile.php?parametro=Li4vLi4vaWJyYWNvbi91cGxvYWQvZG9jdW1lbnRvLzE0OTcw MzQ4NjRlc3R1ZG9fcGFhc18wOTA2MjAxNy5wZGY=

SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4º Andar, Brasília/DF – CEP: 70712-900 – Brasil -Tel.: (61) 3327-2030/2031 www.cvm.gov.br goodwill or the intangible asset with indefinite useful life, recognized by the company. For this specific situation of estimates, CPC No. 01, in its item 134, requires, among others, that the following be considered in the list of information to be provided:

(i) each key premise on which management has based its cash flow projections (if value in use is the basis for the RV of the CGU) or fair value methodology (if fair value less costs to sell is the basis for the RV of the CGU).

(ii) description of the approach used by management to determine the value on which the key premises are based, indicating whether the information contained in the explanatory notes is being presented in nominal or real terms;

(iii) the period over which management projected the cash flows and, when a period longer than five years is used for an estimate of value in use, explanation of why a longer period is justifiable;

(iv) the growth rate used to extrapolate cash flow projections, beyond the period covered by the most recent budget or forecast;

(v) the discount rate applied to cash flow projections; and

(vi) if a possible and reasonable change in a key premise on which management has based its determination of the RV of the CGU could result in a book value higher than its RV:

the amount by which the RV of the CGU exceeds its book value;
the value on which the key premise is based; and
the new value on which the key premise must be based, after incorporating any effects derived from this change in other variables used to measure the recoverable value, in order for the RV of the CGU to equal its book value.

We draw attention to the need to observe the bases for estimates of future cash flows, which are described in items 33 to 38 of CPC No. 01, mainly with regard to the reasonableness and justification of the projections used, taking into account, among other aspects, the budgets approved by the Company's management and consistency with the results presented in the past.

Additionally, we emphasize that the recoverable value must be estimated for the individual asset and, "if it is not possible to estimate the recoverable value for the individual asset, the entity must determine the recoverable value of the cash-generating unit to which the asset belongs," as verified in item 66 of CPC No. 01.

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Disclosures - Explanatory Notes

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Technical Guidance OCPC No. 07 - Disclosure in General Purpose Financial Reporting, approved by CVM Resolution No. 727/14, proved to be pioneering with respect to the preparation of explanatory notes by aggregating in a single document the basic requirements for preparation and disclosure to be observed when disclosing general purpose financial reports.

The primary objective "of this Guidance was to clarify and reinforce that, in the accounting statements and respective explanatory notes, relevant information (and only that) which actually assists users, considering the existing regulations, without the minimum requirements existing in each Pronouncement issued by this CPC being left unmet".

It is worth highlighting, still, what is provided in its item 4, where it is highlighted that OCPC No. 07 consolidates the requirements contained in documents issued by the CPC and in the Law, without altering them.

Thus, at no time can it be argued that the aforementioned document encourages or relaxes the non-application of certain legal requirements, specifically those described in Law No. 6.404/76, which continues with its provisions fully in force and with mandatory compliance required.

It is worth noting additionally that this conflict is treated in item 23 of CPC No. 26, in which the prevalence of the legal requirement is determined, added to the disclosure of adjustments to be made in the financial statements that management deems necessary for a faithful representation.

“23. In extremely rare circumstances, in which management concludes that compliance with a requirement of a Technical Pronouncement, Interpretation, or Guidance of the CPC would lead to such a misleading presentation that it would conflict with the objective of the financial statements established in the Conceptual Framework for Preparation and Disclosure of Financial Reporting, but the existing regulatory structure prohibits the non-application of the requirement, the entity must, to the greatest extent possible, reduce the identified inadequate aspects in strict compliance with the Technical Pronouncement, Interpretation, or Guidance of the CPC by disclosing:

(a) the title of the Technical Pronouncement, Interpretation, or Guidance of the CPC in question, the nature of the requirement, and the reasons that led management to conclude that compliance with this requirement would make the financial statements so misleading and conflict with the objective of the financial statements established in the Conceptual Framework for Preparation and Disclosure of Financial Reporting; and

(b) for each period presented, the adjustments of each item in the financial statements that management concluded were necessary to obtain an appropriate representation.” (we underline)

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4.1. Application of item 38 of OCPC No. 07

The positive effects of the application of Guidance CPC No. 07 - Disclosure in General Purpose Financial Reporting, approved by CVM Resolution No. 727/14, could be observed during the filing of financial statements, due since their issuance. Certainly, there is still much to advance in its application and the consequent improvement in the quality and volume of the explanatory notes. In this regard, it is appropriate to reproduce item 38 of the aforementioned guidance:

“38. The entity's management must, in the statement of conformity, affirm that all relevant information specific to the accounting statements, and only that, is being disclosed, and that it corresponds to that used by it in its management.” (we underline)

Thus, it is relevant to recall this obligation for the management of the publicly-held company to sign a statement of conformity, in accordance with item 38 of OCPC No. 07, reproduced above.

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4.2. Explanatory Notes: Elucidative vs. Non-Elucidative

The theme of disclosure in explanatory notes is a recurring issue and has been the subject of constant monitoring by the technical areas of the CVM. The adoption of IFRSs in our domestic regulatory environment has promoted a considerable increase in the volume and complexity of the explanatory notes attached to the financial statements of publicly-held companies. Professional and academic forums have been held with the purpose of discussing the problem and seeking solutions.

Excessive and unreasonable volumes of information consume time and resources of preparers and users of the financial statements, a fact that compromises the effectiveness of disclosure. The critical issue that arises is: What is the ideal cutoff point and what is the appropriate formatting for the type of disclosure intended to be made?

What continues to be observed is the formal character with which the subject has been treated by the management of some companies. The so-called "check-list" approach, according to which the information required by a Technical Pronouncement of the CPC must be provided, even if it does not constitute relevant information for the company reporting it.

The technical areas of the CVM understand that providing non-elucidative information and mentioning a subject that has no relevant impact on the financial statements of the company reporting the information is providing a disservice. Information to be provided in an explanatory note, as a rule, must be relevant, elucidative, and complementary (not substitutive) to the prepared financial statements.

In this sense, the guidance to be given is that administrators of publicly-held companies effectively exercise a value judgment regarding what should be disclosed in an explanatory note,

SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4º Andar, Brasília/DF – CEP: 70712-900 – Brasil -Tel.: (61) 3327-2030/2031 www.cvm.gov.br considering the existing disclosure requirements. What is relevant and appropriate in terms of information for users of the financial statements to make the best decision between holding, acquiring, or alienating securities.

It is true that by abandoning a "checklist" approach in favor of a judgment approach, the preparers of the financial statements incur a higher cost, as they now have to justify their choices to independent auditors and potentially to the capital markets regulator. It is the cost incurred when exercising judgment and applying materiality criteria for "disclosure" requirements 9.

It is worth highlighting that the auditor seeks to evaluate whether the information required in a pronouncement is being met, with the management of the company establishing the level of disclosure it deems appropriate. Thus, if the company wishes to provide more information, without prejudice to the minimum quantitative and qualitative disclosures, it is not up to the auditor to modify its opinion due to this fact.

We highlight the need for the Company to review its explanatory notes, especially in the "main accounting practices" section, so as not to transcribe excerpts of standards and dedicate this section to the description of specific practices adopted by the Company.

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4.3. Sources of Uncertainty

CPC No. 26, which deals with the presentation of Financial Statements, in its items 125-133 guides regarding sources of uncertainty in estimates, for which adequate disclosures must be provided by the company's management.

In its item 125, it is written as follows:

“125. The entity must disclose, in the explanatory notes, information regarding assumptions about the future and other main sources of uncertainty in estimates at the end of the reporting period that have a significant risk of causing material adjustments to the book values of assets and liabilities over the next social year. With respect to these assets and liabilities, the explanatory notes must include elucidative details regarding:

(a) their nature; and

(b) their book value at the end of the reporting period.”

A good accounting policy can help reduce costs in this regard, by parameterizing some measures and defining "ex-ante" the procedures to be followed in the disclosure process for financial reporting purposes. The ideal is that the accounting policy is also submitted to the scrutiny of independent auditors in the planning phase of their work and is filed with the Regulator via Reference Form - FR (giving it wide publicity).

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And in item 129 of CPC No. 26, the following guidance is given:

“129. The disclosures described in item 125 must be presented in a way to help users of the financial statements understand the judgments management has made regarding the future and other main sources of uncertainty in estimates. The nature and extent of the information to be disclosed vary according to the nature of the assumptions and other circumstances. Examples of these types of disclosures are as follows:

(a) the nature of the assumptions or other uncertainties in estimates;

(b) the sensitivity of the book values to the methods, assumptions, and estimates underlying the respective calculation, including the reasons for this sensitivity;

(c) the expected resolution of uncertainty and the variety of reasonably possible outcomes over the next social year regarding the book values of the affected assets and liabilities; and

(d) an explanation of changes made to the assumptions adopted in the past regarding these assets and liabilities, in case the uncertainty remains unresolved.”

(our underlines)

The technical areas of the CVM understand that these disclosures are particularly relevant when they involve estimates for material values of provisions in general (for contingencies arising from administrative or judicial proceedings, for dismantling of long-term assets, among others), values of asset recovery, values of fair value in general, and long-term obligations with a high degree of uncertainty (such as post-employment benefit obligations).

The aforementioned Ibracon survey indicated the theme "contingencies" as a PAA present in 29% of Companies in 2017 and representing one of the 3 items with the highest observed frequency. In this regard, for this theme, the technical areas of the CVM draw attention to the examination of facts and circumstances that may indicate the need for the timely establishment of a provision, instead of the disclosure of a contingent liability in an explanatory note.

Index

4.4. Judgment of the Company's Management – "Going Concern"

CPC No. 26 in its items 25-26 emphasizes that the entity's financial statements must be prepared on the assumption of its continuity. When management becomes aware, in making its assessment, of relevant uncertainties related to events or conditions that may cast significant doubt on the entity's ability to continue operating in the foreseeable future, these uncertainties must be disclosed.

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In this sense, the technical areas of the CVM highlight the importance of the administrators of the companies making this judgment and proceeding with its adequate disclosure. It is important to mention, still in this context, that the new audit report highlights in more detail the responsibilities of management regarding the assessment of continuity.

The Ibracon survey indicated the "going concern assumption" as a PAA present in 12% of Companies in 2017.

Index

Financial Instruments

5.1. Application of the Concept of "Economic Compulsion"

It has been observed, among some agents, the understanding, in a very tight summary, that economic compulsion should not be taken into consideration for the purpose of classifying financial liabilities (distinction between liability elements and equity elements). This understanding would reside in a supposed manifestation of the IFRS IC, in a consultation formulated for the Committee in 2006 (IASB Update June 2006, p. 4).

The technical areas conducted research on the positions of the IFRS IC and concluded that decisively there was no manifestation whatsoever by the IFRS IC in 2006, but rather discussions carried out by the interpretive committee (which is good to note, does not create standards) were reported to the IASB Board. And the IASB Board deemed it appropriate to assert two things: (1) for the purpose of qualifying an item as a financial liability, contractual obligations established explicitly or implicitly (economic compulsion) must be considered, through the terms and conditions of the financial instrument. Economic compulsion, by itself (in isolation), cannot be used for the purpose of classifying an item as a liability; (2) the IASB Board emphasized what is obvious, and already present in much of its standards, IAS No. 32 requires an evaluation of the economic substance of the contractual arrangement.

IAS No. 32 (RedBook, "consolidated with full early application", 2017), in its §20, deals with economic compulsion in the qualification of a Financial Liability, defining direct and indirect obligations in terms and contractual conditions. In the "Basis for Conclusions" section, §BC9, the IASB board unravels the controversy arising from the mentioned device. In general lines, the IASB Board manifests itself in the sense that a financial instrument can establish an obligation indirectly through its terms and conditions ("Implicit obligations", §20).

It does not seem economically sensible for obligations to be contractually transformed into rights; formally characterized as faculties subject to the free will of the issuer. For example, the obligation to deliver cash, to satisfy the payment of dividends or interest, becomes an option to be exercised by the issuer. And what about the holder of the security? Does it bear risks without a premium in return? It does not seem to make much sense, within an economic rationality.

As already highlighted in previous Circular Letters, the technical areas of the CVM have great concern with this issue, the distinction between a liability item and equity, especially considering the creativity, quality, and sophistication of new financial products, whether they are classified as Composite Financial Instruments 10 or not. What cannot be admitted is that issuers practice the so-called "capital structure management," a procedure inadmissible in the view of the technical areas of the CVM, given its legal mandate.

It is worth noting that the IASB published in June 2018 a Discussion Paper on "Financial Instruments with Characteristics of Equity – FICE" – DP/2018/1, with a deadline for receiving comments until 07.01.2019. The CVM's Superintendency of Accounting Standards and Auditing forwarded its suggestions and criticisms regarding the document in a timely manner. Such documents can be consulted publicly on the IASB website.

Index

5.2. Hedge Accounting – CPC No. 38/IAS No. 39 and CPC No. 48/IFRS No. 09

With the entry into force, starting from the social year beginning on January 1, 2018, of CPC No. 48, which mirrors IFRS No. 9 in Brazil, two models of "hedge accounting" will coexist simultaneously: the model of CPC No. 38 and the model of CPC No. 48 11.

10 Um instrumento composto é um instrumento não derivativo que contém elementos de passivo (“liability”) e de patrimônio líquido (“equity”).
IAS32, §§ 28-32, AG30- AG35.
11 EXCERTOS DA IFRS n. 9 – HEDGE ACCOUNTING:
IN10. In November 2013 the IASB added to IFRS 9 the requirements related to hedge accounting. These requirements align hedge accounting more closely with risk management, establish a more principle-based approach to hedge accounting and address inconsistencies and weaknesses in the hedge accounting model in IAS 39. In its discussion of these general hedge accounting requirements, the IASB did not address specific accounting for open portfolios or macro hedging. Instead, the IASB is discussing proposals for those items as part of its current active agenda and in April 2014 published a Discussion Paper Accounting for Dynamic Risk Management: a Portfolio Revaluation Approach to Macro Hedging. Consequently, the exception in IAS 39 for a fair value hedge of an interest rate exposure of a portfolio of financial assets or financial liabilities continues to apply. The IASB also provided entities with an accounting policy choice between applying the hedge accounting requirements of IFRS 9 or continuing to apply the existing hedge accounting requirements in IAS 39 for all hedge accounting because it had not yet completed its project on the accounting for macro hedging. (grifamos)
6.1.3 For a fair value hedge of the interest rate exposure of a portfolio of financial assets or financial liabilities (and only for such a hedge), an
entity may apply the hedge accounting requirements in IAS 39 instead of those in this Standard. In that case, the entity must also apply the specific requirements for the fair value hedge accounting for a portfolio hedge of interest rate risk and designate as the hedged item a portion that is a currency amount (see paragraphs 81A, 89A and AG114–AG132 of IAS 39). (grifamos)
7.2.21 When an entity first applies this Standard, it may choose as its accounting policy to continue to apply the hedge accounting
requirements of IAS 39 instead of the requirements in Chapter 6 of this Standard. An entity shall apply that policy to all of its hedging relationships. An entity that chooses that policy shall also apply IFRIC 16 Hedges of a Net Investment in a Foreign Operation without the amendments that conform that Interpretation to the requirements in Chapter 6 of this Standard. (grifamos)

SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4º Andar, Brasília/DF – CEP: 70712-900 – Brasil -Tel.: (61) 3327-2030/2031 www.cvm.gov.br Enfim o modelo de “hedge accounting” passa a ser mais uma escolha contábil da administração: ou elege o capítulo 6 da IFRS n. 9 ou mantém as disposições da IAS n. 39, aplicáveis à matéria. E os modelos são distintos (IFRS n. 9 x IAS n. 39), em termos de designação de relações de hedge, objetos elegíveis para o hedge e testes de eficácia. A título de ilustração, a tabela a seguir identifica algumas diferenças entre os dois modelos:
O “hedge accounting” é uma política contábil opcional que permite eliminar ou reduzir volatilidade nos resultados, e quando aplicado deve observar regras específicas e não deve ser utilizado como meio de se legitimar o diferimento de perdas cambiais tampouco o gerenciamento de resultados.
As áreas técnicas da CVM advertem que a eventual mudança da política de “hedge accounting” (migração da IAS n. 39 para IFRS n. 9) a ser feita pela administração da companhia deve ser justificada em nota explicativa anexa às demonstrações financeiras, tendo por norte a melhoria da informação a ser prestada. E toda documentação necessária para balizar os procedimentos de “hedge accounting” deve ser preparada “ex ante” o reconhecimento contábil, conforme expressamente previsto nos CPC n. 38, item 88a e CPC n. 48, item 6.4.1. “b”, a seguir reproduzidos:
“88. Uma relação de hedge qualifica-se para contabilidade de hedge segundo os itens 89 a 102 se, e apenas se, todas as condições seguintes forem satisfeitas:
(a) no início do hedge, existe designação e documentação formais da relação de hedge e do objetivo e estratégia da gestão de risco da entidade para levar a efeito o hedge. Essa documentação deve incluir a identificação do instrumento de hedge, a posição ou transação coberta, a natureza do risco a ser coberto e a forma como a entidade

12 IF – instrumento financeiro; FVTPL – fair value through profit or loss.
IAS n. 39 IFRS n. 09
Eficácia do hedge prospectiva e retrospectiva
(“threshold” 80%-125%)
Eficácia do hedge prospectiva: “forward-looking model” (§§ B.6.4.12, §§BCE198-BCE199) IF não derivativo como instrumento de hedge só para fator de risco de moeda estrangeira IF não derivativo como instrumento de hedge para outros fatores de risco, caso seja mensurado FVTPL (§§BCE189-BCE190) Diferenças de maturidades permitidas entre IF de hedge e objeto do hedge, quando for inferior (política de “rollover” do IF de hedge permitida). Porém maturidade do IF de hedge superior ao objeto do hedge é vedada. Não há menção, s.m.j., a diferenças de maturidade. Vedados ajustes a relações de hedge, subsequentemente à designação, com exceção de política de “rollover”. Permitidos ajustes a relações de hedge, subsequentemente à designação, sem que seja considerado “descontinuidade” da relação de hedge original (§§BCE200-BCE201) Vedada a indicação de posições líquidas como objeto de hedge Admitida a indicação de posições líquidas como objeto de hedge (não é macro-hedge) Aplicável a fair value hedge para macro hedge de portfolio estático de taxa de juros Não aplicável a fair value hedge para macro hedge de portfolio estático de taxa de juros. Nesse caso usar IAS n. 39

SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4º Andar, Brasília/DF – CEP: 70712-900 – Brasil -Tel.: (61) 3327-2030/2031 www.cvm.gov.br vai avaliar a eficácia do instrumento de hedge na compensação da exposição a alterações no valor justo ou nos fluxos de caixa do item coberto atribuíveis ao risco coberto; (...)” (grifamos) “6.4.1. A relação de proteção qualifica-se para contabilização de hedge somente se todos os seguintes critérios forem atendidos:
(...)
(b) no início da relação de proteção, houver designação e documentação formal da relação de proteção e o objetivo e a estratégia de gerenciamento de risco da entidade para assumir o hedge. Essa documentação deve incluir identificação do instrumento de hedge, do item protegido, da natureza do risco que está sendo protegido e de como a entidade deve avaliar se a relação de proteção atende aos requisitos de efetividade de hedge (incluindo sua análise das fontes de inefetividade de hedge e como determinar o índice de hedge); (...)” (grifamos) Por ser uma área de grande risco, quer seja para fins de práticas de “earnings management”, quer seja para fins de planejamento tributário, os auditores independentes devem dedicar especial atenção ao tema, averiguando se a política contábil de hedge accounting está refletindo fidedignamente a prática operacional levada a efeito pela companhia. Objetivamente, cabe ao auditor independente a responsabilidade de averiguar e julgar se a política de “hedge accounting” adotada pela companhia (i) atende aos dispositivos normativos vigentes e (ii) reflete com fidedignidade a realidade econômica a ser reportada, característica fundamental da informação contábil. Índice
5.3. Teste de “impairment” de Instrumentos Financeiros – CPC n. 48/IFRS n. 09
Com a entrada em vigor, a partir do exercício social com início em 1º de janeiro de 2018 do CPC n. 48, além de um novo modelo de “hedge accounting”, está sendo proposto também uma nova abordagem para “impairment” de instrumentos financeiros. Abandona-se a abordagem da perda incorrida e elege-se a abordagem da perda esperada. Há ainda, dentro da abordagem de perda esperada, dois modelos propostos: um modelo mais robusto e complexo, probabilístico, denominado modelo de 3 estágios, voltado precipuamente a instituições financeiras, segundo o qual a deterioração creditícia do emissor do ativo vai calibrando o montante das perdas esperadas, promovendo com isso um “alisamento” de resultado. E outro modelo mais simples, generalizadamente reconhecido pelo mercado como modelo de “matriz de provisões”, voltado precipuamente a instituições não financeiras, segundo o qual o montante das perdas esperadas é definido de modo “ad hoc”. A matriz de provisões pode, por exemplo, especificar taxas de provisão fixas dependendo do número de dias que a conta a

SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4º Andar, Brasília/DF – CEP: 70712-900 – Brasil -Tel.: (61) 3327-2030/2031 www.cvm.gov.br receber de cliente está vencida, conforme orientação dada a respeito pelo item B5.5.35 do CPC n.
48.
O modelo de 3 estágios pode ser ilustrado na figura abaixo.
O modelo de “matriz de provisões” é reproduzido abaixo, com base em exemplo ilustrativo n. 12 da norma.
Deve ser asseverado que o modelo de 3 estágios, muito embora esteja voltado precipuamente a instituições financeiras, pode ser utilizado por instituições não financeiras, se informação de melhor qualidade vier a ser produzida, quando a instituição não financeira apresentar uma carteira de recebíveis comerciais, dentro do escopo do CPC n. 47/IFRS n. 15, que contenha um componente de financiamento significativo. Conforme bem salienta o CPC n. 48, em seu item 5.5.15, letra “a” “ii”, a eleição do modelo de 3 estágios ou do modelo de “aging list” passa a ser uma escolha contábil da administração da companhia. Um setor em potencial que pode se valer do modelo de 3 estágios, na visão das áreas técnicas da CVM, pelas suas características, é o setor de incorporações imobiliárias, detentor de Abordagem Simplificada – “Lifetime expected credit loss”:
recebíveis comerciais ou ativos contratuais, dentro do escopo da IFRS n. 15 e recebíveis de arrendamento, dentro do escopo da IAS n. 17 [IFRS9, §5.5.15] Matriz de Provisão ("Aging List") Corrente Até 30 dias de 31 a 60 dias de 61 a 90 dias mais de 90 dias "Default rate" 0,30% 1,60% 3,60% 6,60% 10,60% Custo LTECLA Corrente 15.000.000 45.000 Até 30 dias 7.500.000 120.000 de 31 a 60 dias 4.000.000 144.000 de 61 a 90 dias 2.500.000 165.000 mais de 90 dias 1.000.000 106.000 Total 30.000.000 580.000 1,93% Atraso do recebível Recebível Illustrative Example n. 12, §§IE74-IE77

SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4º Andar, Brasília/DF – CEP: 70712-900 – Brasil -Tel.: (61) 3327-2030/2031 www.cvm.gov.br carteira de recebíveis comerciais, dentro do escopo do CPC n. 47/IFRS n. 15, com componente de financiamento significativo.
Índice
6. Reconhecimento de Receita por Companhias do Setor de Incorporação Imobiliária:
IFRS n. 15
A esse respeito, recomenda-se a leitura do Ofício Circular CVM SNC/SEP/n 02/2018, de 12.12.2018.
Índice
7. Combinação de Negócios
7.1. Combinação de Negócios quando há participação remanescente de acionistas não
controladores, com emissões simultâneas de opções de venda e opções de compra sobre estas ações 13 Recentemente têm sido observadas operações de aquisições de entidades, estruturadas da seguinte forma:

aquisição de percentual de ações suficiente para obtenção de controle;
emissões simultâneas de opções de venda (da adquirente para os acionistas
remanescentes/não controladores) e de opções de compra (dos acionistas remanescentes/não controladores para a adquirente) sobre percentual de ações não adquirido (nos casos concretos aquisição do saldo remanescente);
geralmente o preço de exercício das opções (de compra e de venda) toma como
referência um múltiplo de EBITDA ajustado.
Enfatiza-se que o tratamento contábil para opções de venda e de compra emitidas sobre a participação remanescente de acionistas não controladores enquadra-se em uma situação de ausência de orientação da IAS n. 32, no tocante à contrapartida do passivo a ser reconhecido 14 , cenário em que a Administração deve selecionar política contábil que resulte em informação contábil relevante e com representação fidedigna (CPC 23, item 10).

13 Na literatura internacional comumente se utiliza a expressão “NCI put” (Non-controlling interests put options), apesar de normalmente serem emitidas tanto opções de venda (“put”) como opções de compra (“call”).
14 O CPC n. 39 (IAS n. 32), em seu item 23, é silente quanto ao tratamento a ser dado à contrapartida do reconhecimento do passivo advindo de uma “non controlling interest - NCI put option”.

SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4º Andar, Brasília/DF – CEP: 70712-900 – Brasil -Tel.: (61) 3327-2030/2031 www.cvm.gov.br Para seleção e aplicação de políticas contábeis, o CPC n. 23 (itens 11 e 12) prevê a seguinte hierarquia: 1) documentos do CPC aprovados que tratem de assuntos semelhantes; 2) critérios e conceitos contidos na Estrutura Conceitual; 3) outras fontes, por exemplo, normas emitidas por outros órgãos normatizadores, desde que não conflitantes com os itens 1 e 2. De qualquer forma, devem ser efetuadas divulgações detalhadas sobre os julgamentos efetuados pela Administração no decorrer do processo de seleção da política contábil adequada. Dentre os diversos pontos a serem considerados na definição da política contábil, merecem ênfase os seguintes:
i) análise minuciosa sobre o momento da transferência dos direitos substantivos vinculados às ações remanescentes em mãos de acionistas não controladores, com divulgações detalhadas sobre os julgamentos efetuados; ii) fundamentação do entendimento de que o reconhecimento e a mensuração dos itens patrimoniais nas demonstrações individuais e consolidadas (ativo, passivo, PL) representam fidedignamente a substância econômica da transação; e iii) a utilização de conta de ágio/deságio em transações de capital, nos exercícios das opções, ao invés da conta de Ajuste de Avaliação Patrimonial, conforme prevê o item 69 da ICPC n. 09. Nunca é demais lembrar que caso a administração da companhia decida promover alteração em uma política contábil, deve observar o que prescreve o item 14 do CPC n. 23, a seguir reproduzido:
“14. A entidade deve alterar uma política contábil apenas se a mudança:
(a) for exigida por Pronunciamento, Interpretação ou Orientação; ou (b) resultar em informação confiável e mais relevante nas demonstrações contábeis sobre os efeitos das transações, outros eventos ou condições acerca da posição patrimonial e financeira, do desempenho ou dos fluxos de caixa da entidade.” (grifamos) Finalmente, vale destacar, conforme já salientado neste ofício, que o IASB publicou em junho de 2018 um Discussion Paper sobre “Financial Instruments with Characteristics of Equity – FICE” – DP/2018/1, com prazo para recebimento de comentários a se encerrar em 07.01.2019. A Superintendência de Normas Contábeis e de Auditoria da CVM encaminhou suas sugestões e críticas acerca do documento tempestivamente, que poderão ser consultadas publicamente no site do IASB. Com o término desse projeto, a expectativa que se tem é a de que exista uma previsão normativa nas IFRSs que trate de opções emitidas sobre a Participação de Não Controladores - PNC. Índice
7.2. Período de Mensuração - “Goodwill” ou Ganho por Compra Vantajosa

SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4º Andar, Brasília/DF – CEP: 70712-900 – Brasil -Tel.: (61) 3327-2030/2031 www.cvm.gov.br O período de mensuração de operações de combinação de negócios, dada a complexidade envolvida e por vezes a precariedade das informações disponíveis, contempla, conforme previsto no CPC n. 15, um prazo de até um ano. Importante enfatizar que essa previsão de um ano é para que a contabilização inicial seja completada, quando há carência de informações relevantes na data do reconhecimento inicial. É reproduzido abaixo o CPC n. 15, em seu item 45. “Quando a contabilização inicial de uma combinação de negócios estiver incompleta ao término do período de reporte em que a combinação ocorrer, o adquirente deve, em suas demonstrações contábeis, reportar os valores provisórios para os itens cuja contabilização estiver incompleta. Durante o período de mensuração, o adquirente deve ajustar retrospectivamente os valores provisórios reconhecidos na data da aquisição para refletir qualquer nova informação obtida relativa a fatos e circunstâncias existentes na data da aquisição, a qual, se conhecida naquela data, teria afetado a mensuração dos valores reconhecidos. Durante o período de mensuração, o adquirente também deve reconhecer adicionalmente ativos ou passivos, quando nova informação for obtida acerca de fatos e circunstâncias existentes na data da aquisição, a qual, se conhecida naquela data, teria resultado no reconhecimento desses ativos e passivos naquela data. O período de mensuração termina assim que o adquirente obtiver as informações que buscava sobre fatos e circunstâncias existentes na data da aquisição, ou quando ele concluir que mais informações não podem ser obtidas. Contudo, o período de mensuração não pode exceder a um ano da data da aquisição.” (grifamos) Ainda a respeito do período de mensuração, o CPC n. 15, em seu item B67, “a”, requer que sejam divulgadas as seguintes informações em nota explicativa, quando a contabilização da combinação de negócios estiver incompleta:
“Quando a contabilização inicial de uma combinação de negócios estiver incompleta (ver item 45) e, consequentemente, determinados ativos, passivos, participação de não controladores ou itens da contraprestação transferida, bem como os respectivos montantes reconhecidos nas demonstrações contábeis para a combinação, tiverem sido determinados apenas provisoriamente, deve ser divulgado o que segue:
(i) as razões para o porquê de a contabilização inicial da combinação de negócios estar incompleta; (ii) os ativos, os passivos, as participações societárias ou os itens da contraprestação transferida para os quais a contabilização inicial está incompleta; e (iii) a natureza e o montante de qualquer ajuste no período de mensuração reconhecido durante o período de reporte, de acordo com o disposto no item 49”. Índice

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7.3. Instrução CVM n. 319/99 x ICPC n. 09
Alguns agentes de mercado têm consultado as áreas técnicas da CVM para saber como proceder com relação ao tratamento contábil a ser adotado para as incorporações reversas, tendo em vista o comando da ICPC n. 09, em seu item 77, após a segunda revisão a que foi submetida a interpretação.
Importante salientar que referido dispositivo trata de transações entre entidades sob controle comum de modo geral, não estando circunscrito exclusivamente a combinações de negócios entre entidades sob controle comum e tampouco a incorporações reversas. Assim orienta o item 77:
“77. Enquanto o Comitê de Pronunciamentos Contábeis não emitir um Pronunciamento Técnico ou Interpretação abrangente que discipline a forma pela qual as transações entre entidades sob controle comum devem ser tratadas (razão pela qual foram suprimidos os itens 44 a 47), deve ser aplicada a regulação existente por órgão regulador da entidade.” (grifamos) No Brasil, o tema combinação de negócios entre entidades sob controle comum sempre teve muito de sua motivação econômica amparada em planejamento tributário. Reorganizações societárias que visam, por vezes, exclusivamente, a reduzir a carga tributária das empresas, pela oportunidade de elisão oferecida pela legislação tributária. Uma operação amplamente praticada em nosso ambiente, que recebeu denominações na literatura especializada da área de “incorporação reversa” ou “incorporação às avessas” de 2ª geração, teve o objetivo precípuo de criar ágio internamente 15, um lucro não realizado em transação com participações societárias. O ágio interno, para fins de demonstrações financeiras individuais e consolidadas, é vedado pelas normas internacionais de contabilidade. E simplesmente inexiste pelo fato de o ágio gerado internamente e reconhecido por uma das empresas envolvidas ter origem no ganho de capital ou lucro reconhecido por outra das empresas envolvidas. Não há no caso terceiros independentes, interessados em praticar uma operação sem favorecimentos, validando o ágio. A CVM no passado, na 1ª geração de operações de “incorporação reversa” ou “incorporação às avessas”, com ágio validado por terceiros independentes, chegou a disciplinar a questão no âmbito das companhias abertas, com vistas a evitar que acionistas não controladores fossem prejudicados em dividendos a que fariam jus. Assim foi com a obrigatoriedade de constituição da provisão para integridade patrimonial, criada pela Instrução CVM n. 319/99, modificada pela Instrução CVM n. 349/01.

15 Essas operações encontravam respaldo em lei de cunho tributário, Lei 10.637/02, art. 36, disposição esta já revogada pela Lei 11.196/05.
Autuações da Receita Federal do Brasil – RFB a essas operações chegaram a ser discutidas em tribunais administrativos – CARF (http://carf.fazenda.gov.br/sincon/public/pages/index.jsf), questionando a dedutibilidade fiscal do ágio interno (a esse respeito ver 1402-01.080 Acórdão, 1402-01.078 Acórdão, 1201-000.689 Acórdão, 1101-000.710 Acórdão, 1101-000.709 Acórdão, 1101-000.708 Acórdão).

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The prohibition on capitalizing the special goodwill reserve without the corresponding amortization of the goodwill that gave rise to it was also applied.

Upon reviewing Technical Pronouncement CPC n. 15, mirrored in IFRS 3, which deals with business combinations, it is observed that the topic of business combinations between entities under common control is outside its scope (CPC 15, item 2c and items B1-B4). Nor has the IASB yet regulated the manner in which such operations should be treated accounting-wise. The Accounting Pronouncements Committee in 2015 created a working group to address these operations - GT transactions between entities under common control - which has not yet taken a position on the subject.

The technical areas of the CVM, with understanding guided by the principle of "substance over form" (CVM Orientation Opinion n. 37/2011), and supported by the guidelines given by CPC n. 36 regarding change of control and CPC n. 15 itself, advocate for the analysis of a business combination considering a broad view. Even if there is no corporate control relationship between the companies involved in the combination, if they are subject to the same corporate control, such an operation is not within the scope of Technical Pronouncement CPC n. 15. For the technical areas of the CVM, it is appropriate to apply the "Predecessor Cost Basis" method16 when a business combination between entities under common control is at stake.

Regarding the provisions of CVM Instruction n. 319/99 aimed at the accounting treatment of reverse acquisitions, these remain fully in force and must be applied when the specific case involves a reverse acquisition, in the manner then regulated. The administrators of the companies involved, together with their legal consultants and independent auditors, must assess the relevance and appropriateness of applying said provisions of the standard.

However, in cases where there is no interposition of a "vehicle" company, the original investor is being acquired, and the economic foundations that gave rise to goodwill remain valid, the same should be maintained in its entirety and treated according to the conditions originally established. In this case, the establishment of the provision mentioned in CVM Instruction n. 349/01 may be unnecessary or even inappropriate.

It is worth noting that the exception mentioned above should not be understood in a generalized manner. There may be situations where, even if a "vehicle" company has not been created, there may be the recognition of an asset and an increase in equity without economic substance, a fact that imposes the need to establish the provision determined by CVM Instruction n. 349/01.

Index

16 This method consists of considering as the measurement basis for the assets and liabilities of the acquired business the existing book values. It therefore considers the acquisition cost recorded in the last change of control.

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Change in Accounting Policies

Technical Pronouncement CPC n. 23 defines criteria for the selection and change of accounting policies, along with the accounting treatment and disclosure of changes in accounting policies, changes in accounting estimates, and corrections of errors.

Considering the objective of the pronouncement to improve the relevance and reliability of the entity's financial statements, and above all, to allow its comparability17 over time with the financial statements of other entities, we draw attention to the need to disclose all relevant information for understanding the adjustments made, including with regard to the reasons why the application of a new accounting policy, if applicable, provides reliable and more relevant information.

In this regard, CPC n. 23, in its item 14, states as follows regarding the change in accounting policies:

“14. An entity shall change an accounting policy only if the change:
(a) is required by a Pronouncement, Interpretation or Orientation; or (b) results in reliable and more relevant information in the financial statements about the effects of transactions, other events or conditions on the entity’s financial position and financial performance or cash flows.”

It is imperative to say that the fact that accounting pronouncements issued by the CPC sometimes allow the adoption of more than one different accounting policy does not imply that the company's administration would have the prerogative to migrate from one policy to another, at the whim of economic circumstances, opportunistically to meet specific interests. This is the case, for example, for investment properties.

CPC n. 28, in its item 31, states:

“Technical Pronouncement CPC 23 – Accounting Policies, Changes in Estimates and Errors states that a voluntary change in accounting policy should be made only if the change results in a more appropriate presentation of the entity’s operations, other events or conditions in the financial statements. It is highly unlikely that a change from the fair value method to the cost method will result in a more appropriate presentation.” (emphasis added)

Index

Deferred IRPJ and CSLL

17 It is important to highlight the structural break of a time series of accounting variables (periods in which practices changed; errors were corrected), so that inferences regarding trends are not compromised, avoiding decisions being taken erroneously.

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The theme “Deferred IRPJ and CSLL” is always sensitive for the technical areas of the CVM for financial reporting purposes. Both its recognition and its adequate disclosure deserve special attention from preparers of financial statements and independent auditors. Not by chance, it is recurrently on the radar of monitoring by the technical areas of the CVM.

Regarding the subject, the Ibracon research indicated “Realization of Deferred Income Tax” as a PAA present in 18% of Companies in 2017, being the 5th item with the highest frequency observed.

It is important to highlight that CVM Instruction n. 371/02 is fully in force and fully convergent with CPC n. 32, with respect to the definition of the foreseeable time horizon to be used in estimating the probability of future taxable profits against which deferred tax assets may be offset. There is no contradiction between the two standards, but rather a dialogue between them whose practical effect lies, precisely, in specifying that the analysis of the probability of generating future taxable profit, provided for in item 36 of CPC n. 32, is limited to the maximum horizon of 10 years18, allowed by CVM Instruction n. 371/02.

In fact, instead of a conflict between the norms, what exists is greater rigor in CVM Instruction n. 371/02 regarding the time period capable of ensuring a reliable estimate of the probability of the existence of future taxable profits in an amount sufficient to offset the deferred tax asset.

It is never too much to reiterate that for “disclosure” purposes, CVM Instruction n. 371/2002, of 27.06.2002, requires that the following information be disclosed in the explanatory notes, without prejudice to the disclosures required by CPC n. 32:

I - estimate of the portions of realization of the deferred tax asset, discriminated year by year for the first 5 (five) years and, from then on, grouped in maximum periods of 3 (three) years, including for the portion of the deferred tax asset not recorded that exceeds the 10 (ten) year realization period referred to in item II of art. 2º; II - effects resulting from eventual alteration in the expectation of realization of the deferred tax asset and respective foundations, as provided in art.4º; and III - in the case of newly constituted companies, or in the process of operational restructuring or corporate reorganization, description of administrative actions that will contribute to the future realization of the deferred tax asset.

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Cash Equivalent - LFTs

18 This horizon will not always be reasonable for some sectors, such as the concessions sector. Common sense and appropriate judgment should guide the procedures to be adopted by preparers and independent auditors on the subject.

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The technical areas of the CVM became aware of the disparate classification being given to LFTs, classified by some companies as cash equivalents and by others not. Initially, there would be a conflict with what is prescribed by CPC n. 3 (IAS n. 7) when classifying the LFT as a cash equivalent.

In the understanding of the technical areas, two issues would need to be addressed to settle the matter:

Is the public debt market in Brazil indeed organized? In short, does it present liquidity (active primary and secondary markets, with market participants acting in price formation – interest rates in this case), transparency of the transactions practiced and predictability of the auctions carried out by the National Treasury, in a way that allows the exit of a holder at any time without substantial loss of market value?
The classification of a bond as a cash equivalent, in accordance with CPC n. 3 (IAS n. 7), must meet two conditions: maturity term and immediate convertibility into cash, without substantial loss of market value. Should the provision of CPC n. 3 (IAS n. 7) be applied by its literal interpretation? And if the bond is considered in the list of assets managed via the institution's treasury activity?

In this sense, considering the first question, we carried out a study to understand the dynamics of the public debt market in Brazil. We also collected evidence regarding the transactions carried out, protocols provided for and other rules delineated, in order to verify if they are indeed being consistently observed in practice, without structural breaks in time series. This study is contained in Ofício-Circular/CVM/SNC/SEP n. 01/2018.

Regarding the public debt market in Brazil, we are led to conclude, by the collected evidence, that it is an extremely organized market, with the active participation of financial institutions in price formation, according to recurrent auctions carried out by the Treasury. Furthermore, there are active negotiations in the secondary market for these bonds.

Answering the 1st question, there is no contrary evidence that allows us to conclude differently regarding the fact that the public debt market in Brazil is organized, presents liquidity, with transparency of the transactions practiced and predictability of the auctions carried out by the STN, possesses an active secondary market, allowing the exit of a holder of these bonds at any time, without substantial loss of market value.

Moving to the 2nd question, we reproduce below an excerpt from CPC n. 3 (IAS n. 7), in its items 6 and 7:

“6. Cash equivalents are short-term, highly liquid investments that are readily convertible to a known amount of cash and which are subject to an insignificant risk of changes in value.

Cash equivalents are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes. For an investment to qualify as a cash equivalent, it must be readily convertible to a known amount of cash and be subject to an insignificant risk of changes in value. Therefore, an investment normally qualifies as a cash equivalent only when it has a short maturity, for example, three months or less, from the date of acquisition. Investments in equity instruments (equity) are not included in the definition of cash equivalents, unless they are, in substance, cash equivalents, such as in the case of redeemable preference shares that have a defined redemption period and whose term meets the definition of short term.” (emphasis added)

This is a matter for the judgment of preparers of financial statements, in the understanding of the CVM's technical areas, aiming to produce quality information that faithfully represents the economic reality to be reported. It does not seem appropriate to interpret the above provisions in an excessively formal manner, understanding that every bond whose maturity term exceeds 3 months does not qualify for classification as a cash equivalent.

It seems to us that considering the administration's intention in managing these bonds and its effective cash management model are the significant points to be addressed. If not, let us see a hypothetical situation. Two companies, both use LFTs for treasury management, allocating them to “trading” positions. Company “A” does this treasury management directly, issuing buy and sell orders in the market. Company “B” does this management indirectly, through a retail fixed-income fund, whose portfolio is managed by a third party, being predominantly composed of LFTs, and whose shares have no lock-up period, as defined in the regulations.

By the literal interpretation of the standard, Company “A” could not classify its LFTs as cash equivalents, even though it performs active treasury management with them. Company “B” would be fully able to classify its shares (which are nothing more than a mirror of the LFTs) as cash equivalents, since these shares are readily redeemable. Such formalism of interpretation does not seem to make much sense. Would companies have to incur transaction costs (creation of a fund) to account faithfully for their treasury activity?

For the technical areas of the CVM, the critical aspect to be considered is eventual inconsistency regarding the accounting classification of LFTs for accounting recognition purposes - IFRS 9 (CPC n. 48), namely, classified as subsequently measured at amortized cost (CPC n. 48, §4.1.2) x classified as subsequently measured at fair value through other comprehensive income (CPC n. 48, §4.1.2A) or through profit or loss (CPC n. 48, §4.1.4), vis-à-vis its measurement method given its classification as a cash equivalent.

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Leasing Contracts – CPC n. 06 (R2)/IFRS n. 16

11.1. Some Aspects of Leasing Contracts

The entry into force on 01.01.2019 of the new pronouncement that deals with the recognition, measurement, presentation and disclosure of lease contracts will impose many application challenges, both for the administrators of open companies and for their independent auditors.

In this sense, the technical areas of the CVM understand it to be imperative to clarify some aspects of the standard that may not be very clear. Reading the standard, its application guide, its transition guide, its illustrative examples, and no less important, the section that encompasses the Bases for Conclusion of IFRS 16, the latter not incorporated by the Accounting Pronouncements Committee into the body of the norm, is fundamental for the adequate application of the pronouncement.

A first aspect, in the view of the CVM's technical areas that should be highlighted, concerns the scope of the standard. It covers any and all contracts that fit the identification provided in §9, namely, a contract is a lease (sub-lease), or contains a lease (sub-lease), if it conveys the right to control the use of an identified asset, for a period (“lease-term”), in exchange for a consideration. This classification is independent of the legal form given to the contract, or the name attributed to the operation (even by legal provisions), whether it is qualified as leasing, rental, lease or partnership, for example.

And to assess whether a contract conveys the right to control the use of an identified asset, for a period (“lease-term”), the company's administration, in accordance with §B9 of the pronouncement, must assess if, throughout the usage period, the customer jointly holds the following rights: (i) right to obtain substantially all the economic benefits arising from the use of the identified asset and (ii) right to direct the use of the identified asset.

It is important that the administrators of open companies and their auditors dedicate special attention to reading §§B9-B31, during the contract evaluation process. Said paragraphs deal, among other aspects, with substantive replacement rights by the supplier of the leased asset (which disqualifies the right to use an identified asset), portions/parts with usage capacity of assets that may qualify as an identified asset, rights to obtain economic benefits arising from use and rights to direct use.

Still regarding its scope, the standard does not cover right-of-use assets, in a lease or sub-lease, when aimed at exploring mineral resources, oil and gas and similar non-regenerative resources; biological assets treated in IAS 41; concession services treated in IFRIC 12; licenses for use of intellectual property treated in IFRS 15 and licensing agreements that cover intangibles treated in IAS 38, generally linked to the film and artistic industry. On the other hand, right-of-use assets of companies belonging to these industries, that do not fit the exception rule, such as a rented or leased building that houses the company's administration, must be subject to the treatment provided by the pronouncement.

The exception rules, for recognition purposes, comprise: (i) short-term leasing contracts (“duration” of the contract less than or equal to 12 months), not thus considered contracts with a purchase option19 and (ii) low-value leasing contracts, when the underlying asset is new, being an indicator of the pronouncement the limit of US$5 thousand, which guided the decisions reached by the Board in terms of magnitude in 2015 (information extracted from the “Bases for Conclusion” section of the standard, in its §BC100). For recognition and measurement, materiality judgment must always be employed (information extracted from the “Bases for Conclusion” section of the standard, in its §§BC84-BC86), and the guidelines of the Conceptual Framework and IAS 120 must be observed.

Regarding the contract term (its “duration”), and consequently its measurement (considerations provided for in the optional period), it must encompass the non-cancellable period, understood as that in which both parties to the contract can demand its enforcement coercively (“the period for which the contract is enforceable”), plus the optional period, in which options to extend the contract or terminate the contract can be, respectively, exercised or not exercised, starting from the premise that the lessee has reasonable certainty of exercising or not exercising these options.

In judging this reasonable certainty of exercising or not exercising these options, the company's administration and its independent auditors must consider all relevant facts and circumstances that create economic incentives (treated more appropriately in §§B34-B41 of the standard's application guide) for the exercise or non-exercise of these options. The company's administration and its independent auditors in judging this issue must refer to the non-exhaustive examples enumerated in §B37 of the application guide.

The company's administration must reevaluate its judgment regarding the “duration” of the contract, always upon the occurrence of or a significant event or a significant change in circumstances that (i) are within the control of the lessee and (ii) affect the judgment of its reasonable certainty to exercise an option not previously included in the determination of the lease term (and its measurement) or not to exercise an option previously included. As emphasized in the Bases for the Conclusions of the standard, in its §BC185, to reach a good conclusion in this evaluation, the IASB Board understands that there must be a

19 In Appendix A of IFRS 16, in the concept of short-term lease, the pronouncement categorically excludes contracts with a purchase option. “a lease that contains a purchase option is not a short-term lease.”

20 “...if a lessee’s leasing activities are material to its financial statements, but the effect of measuring lease liabilities on a discounted basis is not material, the lessee would not be required to measure its lease liabilities on a discounted basis and could instead, for example, measure them on an undiscounted basis.”

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appropriate balancing of the two conditions referred to. Independent auditors must pay attention to this.

Other issues, which in the view of the CVM technical areas deserve clarification, reside in the initial measurement of the right-of-use asset and the lease liability and their subsequent measurements.

Thus, the initial cost of the right-of-use asset must include, on the commencement date 21:
(i) the amount obtained with the initial measurement of the lease liability; (ii) plus any lease payments made before or on the commencement date; (iii) reduced by any lease incentives received; (iv) plus any initial direct costs (incremental costs obtained with the leasing, without which they would never have been incurred) and (v) plus estimated costs of dismantling and removing the underlying asset of the contract and of restoring the conditions of the location where it was used or of restoring the conditions of the underlying asset, required under the terms and conditions of the contract, unless such costs are incurred to produce inventories (§24 of the standard).

As for the initial measurement of the lease liability, on the commencement date, the payments provided for in the contract, not settled on that date, must be discounted to present value by the implicit interest rate, if this is readily determinable, or in the case of its impossibility, by the lessee's incremental borrowing rate on that date. Included in these payments are:
(i) fixed lease payments provided for in the contract (including those supposedly variable, which in substance are fixed, according to the standard's application guide, in its §B42); (ii) variable lease payments that depend on a rate or index; (iii) amounts expected to be paid by the lessee for guaranteed residual values;

21 Here it is worth highlighting the difference between the inception of a lease and the commencement of lease (initial measurement and recognition date), clarified in the "Bases for Conclusions" section of the standard, in its §§BC141-BC144. The initial measurement and recognition date (commencement of lease) is the date from which the underlying assets are made available to the lessee for their use (control is only obtained at this moment). In a very tight summary, if the measurement and recognition moment occurred on the inception of a lease date, and there were changes in the terms and conditions of the lease between that date and the date when the assets are made available to the lessee (commencement of lease), gains and losses would be originated by the initial recognition of the contracts, something that should not occur in the view of the IASB Board members.

SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4º Andar, Brasília/DF – CEP: 70712-900 – Brasil -Tel.: (61) 3327-2030/2031 www.cvm.gov.br (iv) exercise prices of purchase options for the underlying assets (in the case of there being reasonable certainty of their exercise) and (v) penalties for the exercise of the option to terminate the lease (if in the definition of the lease term the exercise of this option by the lessee is considered).

The subsequent measurement of the right-of-use asset considers three models, namely: the cost model (adopted in initial recognition); the fair value model, only for those assets qualified as investment property, in accordance with IAS 40; and the revaluation model, currently prohibited in Brazil. The cost model, for its subsequent measurement, must include the initial cost reduced by accumulated depreciation and "impairment" losses and adjustments arising from remeasurements of the lease liability that are adjustable in the right-of-use asset.

The subsequent measurement of the lease liability considers the increase in the liability balance to reflect incurred interest; the reduction of the liability balance to reflect payments made and adjustments to the liability balance by remeasurement, to reflect any reassessment or modifications of the lease or to reflect revised payments that are in substance fixed.

After initial recognition and measurement, the lessee must recognize in the income statement the interest incurred on the liability and the variable lease payments, not included in the measurement of the lease liability, in the period in which the events or conditions that serve as triggers for said payments occur 22.

The remeasurement of the lease liability must be carried out with the right-of-use asset as the counterpart, unless its amount has been reduced to zero, and the additional adjustment implies a reduction, in which case the counterpart of the remeasurement will pass through the income statement. The remeasurement of the lease liability may occur with the revision of the discount rate used or with its maintenance.

When there is a change in the lease term, resulting from a reassessment that is required, or there is a change in the assessment of the purchase option of the underlying asset, the remeasurement of the lease liability will also imply a review of the discount rate employed. And this will observe the same principle adopted for identifying the initial discount rate: first the definition of the implicit rate for the remaining lease term, if this

22 Variable payments of a lease contract may result from (i) price changes, due to changes in market rates and changes in the value of an index; (ii) performance of the lessee with the underlying asset and (iii) use of the underlying asset by the lessee. The variable payments of categories "ii" and "iii" are those classified under this required accounting treatment, namely, with the counterpart in the income statement. In this sense, the lease liability arising from future performance with the use of the underlying asset (such as a volume "X" of sales obtained in a leased property) or arising from the use of the underlying asset beyond the limit fixed contractually (such as a mileage limit, fixed contractually, for leased vehicles) will have as a counterpart an expense in the income statement. The section of the standard "Bases for Conclusions", in its §§BC163-BC169, deals with the theme in greater detail.

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is readily determinable, or, in the case of its impossibility, by the lessee's incremental borrowing rate on the date of remeasurement.

On the other hand, when there is a change in the amounts expected for the guaranteed residual values of the underlying assets, or when there is a change in the variable lease payments that depend on a rate or index, the remeasurement of the lease liability will not imply a review of the discount rate employed, with the same initial discount rate being adopted in the remeasurement, unless the change in variable payments results from changes in floating interest rates 23.

Regarding the change in variable lease payments that depend on a rate or index, it is worth highlighting that variations in exchange rates, in the case of lease liabilities in foreign currency, are not adjustable in the right-of-use asset. Although the change in the exchange rate can be considered a form of variable lease payment, similar to those that depend on an index or rate, the IASB Board decided not to give a similar treatment in IFRS 16.

The IASB Board's decision was to elect IAS 21 to give the appropriate accounting treatment to the lease liability in foreign currency. And in this case, since the lease liability in foreign currency is a monetary item, the counterpart of its subsequent measurement must pass through the income statement. Further clarifications on this can be obtained in the Bases for Conclusion section of the standard, in its §§ BC 196-199.

Finally, for the modifications adopted in lease contracts, which result concomitantly (i) in an increase in the scope of the contract, through the inclusion of rights of use for one or more underlying assets, and (ii) in an increase in the consideration of the contract, proportionally or in an amount compatible with individual prices resulting from the increase in contractual scope, and reflect any appropriate adjustments to the peculiar circumstances of the contract, the lessee must treat these modifications as a separate lease 24.

Index
11.2. CVM/SNC/SEP Circular Letter/n. 02/2019 – Lessee DFs

In this regard, it is recommended to read the CVM SNC/SEP Circular Letter n. 02/2019, of 18.12.2019.

23 In the "Bases for Conclusions" section of the standard, in its §BC195, the reasons are set out for which the IASB Board decided to take the decision to review the discount rate for remeasurement of the lease liability, when there is a change in variable lease payments, resulting from changes in floating interest rates. The chosen approach sought consistency with the accounting treatment required by IFRS 9 in the measurement of financial liabilities with floating interest rates, subsequently measured at amortized cost. 24 For modifications not qualified as a separate lease, the accounting treatment to be observed is provided in §§45-46 of IFRS 16. In the Bases for Conclusions section of the standard, in its §§ BC200-205, the IASB Board explains the reasons why it decided to proceed in this way regarding modifications in a lease contract. Although the previous standard IAS 17 did not address the issue, with IFRS 16 the Board understood that the adoption of a specific treatment ("a general framework for accounting for lease modifications") would be useful, especially because these modifications are frequent for many types of contracts.

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Index
11.3. Clarification of Circular Letter SNC/SEP n. 02/2019 – CPC 06 (R2)/IFRS 16

The CVM technical areas became aware that some interpretations have been given to CVM SNC/SEP Circular Letter n. 02/2019, different from that which represents its correct understanding, which is why an additional and unequivocal manifestation of these technical areas on the subject becomes imperative.

Initially, it is important to emphasize that for the CVM technical areas, the best accounting information to be produced, in accordance with established principles and good financial calculation technique, is that in which expected inflation is incorporated, for the period of contractual validity, to future contractual cash flows, discounted by a nominal rate that reflects the current interest rate scenario. It is important to highlight that the information on expected future inflation is not the result of "projections" by companies and, therefore, is not circumscribed to the entity's discretionary environment. It is readily observable and accessible information in the Brazilian market, therefore reliable. The circular even presents an illustrative example with real data from futures contracts traded on B3.

In this sense, the CVM technical areas understand that the application of the method provided for in CPC 06 (R2), which prevents the projection of future inflation in contractual cash flows, and in the same act determines the use of a discount rate called the incremental interest rate – IBR, which, by definition, is a borrowing rate (nominal), conflicts with the fundamental foundation of producing relevant and reliable information (in addition to contradicting good financial calculation technique), in jurisdictions where it cannot be affirmed that there are negligible differences between real and nominal interest rates in these economic environments. Thus, to preserve the quality of information provided to the Brazilian market, the CVM technical areas indicate that future inflation projection in the cash flows to be discounted must be used (nominal flow x nominal rate-IBR model). Thus, the company's administration, in its judgment, when defining this model as its accounting policy to be used in its lease contracts, must pay attention to the disclosures and procedures required by paragraphs 19 and 20 of CPC 26.

However, the administration of the open company, even aware of the technical inaccuracies contained in CPC 06 (R2) for the Brazilian market, that chooses to adopt as an accounting policy the guidelines of said accounting standard, must disclose in the explanatory notes to the financial statements (if the observed differences are material) the lease liability, the financial expense arising from it and the depreciation expense of the right-of-use asset, considering the model defined by the CVM technical areas as of better informational quality. In this case, the administration of the open company may also alternatively opt to provide the minimum inputs in the explanatory note so that users can arrive at this information.

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On the other hand, the CVM technical areas, sensitive to the requests brought by some companies (in the phase of technical discussions and reserved hearings of the draft circular letter), regarding the imposed costs, the short deadline for implementing new processes and the need for system adaptation, and no less importantly, for the fact that in some situations the differences presented between the model recommended by the CVM technical areas and other models could be immaterial and not relevant, preserved the inalienable right of the company's administration regarding the selection of accounting policies that address the decision to be made in terms of reporting, in light of CPC 26, § 19-20. However, the CVM technical areas emphasized that this possibility of selecting an accounting policy is limited to the non-existence of material and relevant differences in the information to be generated in light of that obtained by the reference model provided by the CVM technical areas.

Thus, so that there is no misinterpretation of the manifestation of the technical areas in CVM SNC/SEP Circular Letter n. 02/2019, the table below summarizes the possible reporting decisions by the company.

Reporting Decision | Additional Information in Audited Explanatory Notes | Independent Auditor's Report --- | --- | --- Adoption of the CPC 06 (R2) model. | - Inform based on model recommended by CVM technical areas – "nominal flow x nominal rate" - or provide minimum inputs for users to arrive at this information. | Express an opinion regarding the adequate representation, in all relevant aspects, of the company's financial position and results due to compliance with CPC 06 (R2). Adoption of CPC 26, §19-20, based on the model recommended by CVM technical areas – "nominal flow x nominal rate". | - Disclosures required by CPC 26, §19-20 regarding CPC 06 (R2)/IFRS 16. | Express an opinion regarding the adequate representation, in all relevant aspects, of the company's financial position and results due to the accounting policy selected by the company's administration. Adoption of CPC 26, §19-20, based on an accounting policy developed by the company's administration, distinct from the model recommended by CVM technical areas. | - Assess the materiality and relevance of the information brought to market (measure) in relation to the model recommended by CVM technical areas.

Inform based on model recommended by CVM technical areas – "nominal flow x nominal rate" - or provide minimum inputs for users to arrive at this information.
Disclosures required by CPC 26, §19-20 regarding CPC 06 (R2)/IFRS 16. | Express an opinion regarding the adequate representation, in all relevant aspects, of the company's financial position and results due to the accounting policy selected by the company's administration.

Finally, it is important to highlight the responsibility of administrators and independent auditors regarding the reliability and assurance, respectively, of the accounting information to be published and disseminated in the market by companies.

Index
12. ICMS in the tax base for PIS and COFINS

A topic that gained importance in 2018, especially after decisions issued by lower courts, in line with a manifestation by the Federal Supreme Court – STF published in 2017 25, which considered the inclusion of ICMS in the tax base for PIS and COFINS contributions unconstitutional, concerns the accounting treatment to be adopted for the recognition of the effects of these decisions by open companies.

As reported by the specialized press, since the STF decided in 2017 on the unconstitutionality of ICMS in the tax base for PIS and COFINS contributions, "several courts began to apply the decision, including panels of the Superior Court of Justice (STJ)".

Notwithstanding the understanding of the Attorney General's Office for the National Treasury – PGFN, which alleges that courts must wait for the analysis of an appeal - embargos de declaração - already filed with the STF, for clarifications regarding the STF's decision and to establish the modulation of the effects of this decision (from when it should be applied and in what terms),

25 In an extraordinary appeal dealing with the matter, Extraordinary Appeal n. 574.706, with general repercussion recognized, reported by Minister Cármen Lúcia, the STF ministers decided, on 15.03.2017, by 6 votes to 4, to exclude ICMS from the tax base for the PIS and COFINS contribution. The full text of the ruling was published on 02.10.2017 (http://www.stf.jus.br/portal/processo/verProcessoPeca.asp?id=312859807&tipoApp=.pdf) 26 Valor Econômico Newspaper of 07.31.2018.

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processes related to the topic have advanced and even reached final judgment. This was observed with the case of a process that reached final judgment in the Federal Regional Court of the 3rd region (SP and MS), according to the full text of the ruling published on 09.05.2018 27, although the PGFN may still file a rescissory action to reverse the decision, depending on the STF's modulation.

In a monocratic decision 28, issued on 09.08.2018, STF Minister Celso de Melo denied follow-up to Complaint 30996, filed by the Union against another ruling of the Federal Regional Court of the 3rd region 29. In the complaint, the Union asked that the process be suspended until a final decision by the STF in Extraordinary Appeal - RE n. 574.706, that is, until the modulation of the effects of this decision. According to Minister Celso de Melo, the STF's jurisprudence is that, for the application of a decision issued in an RE with general repercussion, it is not necessary for the process to reach final judgment or for any modulation of effects.

There are also situations where taxpayers have reversed unfavorable judicial decisions and obtained the right to exclude ICMS from the tax base for PIS and COFINS contributions.

As reported by the specialized press 30, three of the five TRFs (2nd, 3rd and 4th Regions) have already admitted rescissory actions, filed by taxpayers, to annul decisions that had reached final judgment.

The CVM technical areas understand that the accounting treatment to be given to the matter must be evaluated by administrators of open companies and their independent auditors in light of what IAS 37 prescribes. Contingent assets, as a general principle, are never recognized, in accordance with §31 of IAS 37, being only disclosed in the explanatory notes to the financial statements, when it is probable that economic benefits will enter, in accordance with §34 of IAS 37. Recognized provisions may be reversed in whole or in part, provided that §59 of IAS 37 is observed. And provisions must be recognized when the conditions of §§14-26 of IAS 37 are present.

Thus, a good judgment must be made on a case-by-case basis. There are cases of processes that have reached final judgment in lower courts, but for which the PGFN still has the right to file rescissory actions to reverse the decisions (a right subject to a statute of limitations), depending on the STF's modulation. There are also cases that are still pending in the courts. There are also cases with previously unfavorable decisions to taxpayers that have been reversed. There are cases with decisions favorable to taxpayers who obtained the right to tax compensation for amounts improperly collected 31 and there are cases with decisions favorable to taxpayers, but who did not obtain the right to tax compensation 32.

27 http://web.trf3.jus.br/acordaos/Acordao/BuscarDocumentoGedpro/6809338 28 http://www.stf.jus.br/arquivo/cms/noticiaNoticiaStf/anexo/rcl30996.pdf 29 http://web.trf3.jus.br/acordaos/Acordao/BuscarDocumentoGedpro/6809512 30 Valor Econômico Newspaper of 12.17.2018. https://www2.trf4.jus.br/trf4/processos/visualizar_documento_gedpro.php?local=trf4&documento=9453204&hash=73b1ac9f538e299e60b61755 99f7a89c 32 http://web.trf3.jus.br/acordaos/Acordao/BuscarDocumentoGedpro/7008039

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It is indispensable, in the view of the CVM's technical areas, for good disclosure in explanatory notes of the decisions taken by the company's management, as well as the bases on which they are founded, and the effects of these decisions on the balance sheet, the income statement, and the cash flow statement. Independent auditors must exercise all skepticism inherent in the exercise of their function in judging the decisions taken by the company's management and their effects on the financial statements, expressing themselves when appropriate in their report.

The concern of the CVM's technical areas is regarding the risk of being "misleading," the consequences of which are extremely harmful to investors in the Brazilian capital market and require the action of the Regulatory Body.

Finally, we remind you that independent auditors must be attentive to all aspects addressed here, as well as others, expressing themselves in their reports issued regarding deviations that, in their judgment, cause material misstatement in the audited financial statements as a whole.

Index

Initial Adoption of CPC No. 47 and No. 48 – Electric Energy Transmission Concessionaires

The CVM's technical areas observed in the 2018 financial statements disclosure, in explanatory notes, of inadequate and incomprehensible information regarding the initial adoption of CPC No. 47 and No. 48. It is the understanding of the CVM's technical areas that electric energy transmission companies should present in an explanatory note, attached to their accounting statements, a reconciliation of the numbers, evidencing the movement of the contract asset and financial asset balances, before and after the effects of the implementation of pronouncements CPC No. 47 and No. 48.

To this end, they must segregate in distinct lines the nature of each effect, to fully meet the disclosure requirements for the "contract asset balance" of pronouncement CPC No. 47, in particular of §118. For example, what is an effect of a change in accounting practice, by remeasuring the contract asset by a discount rate different from that previously applied, must be identified as such in its own line. Similarly, for the financial asset, what is an effect of marking infrastructure concessions to market must likewise be segregated into its own line.

Definitively, what must not occur is for the company to use the initial adoption adjustment of a new standard to omit errors attributable to the past.

Independent auditors, in turn, must adopt the audit procedures required by the circumstances, in order to ensure the numbers disclosed.

Index

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Sincerely,

Signed Original

JOSÉ CARLOS BEZERRA DA SILVA
Superintendent of Accounting Standards and Audit

Signed Original

FERNANDO SOARES VIEIRA
Superintendent of Corporate Relations

Circular Letter CVM/SNC/SEP No. 01/2020

Lineage: In force