Circular Letter CVM/SNC/SEP No. 01/2021

COMISSÃO DE VALORES MOBILIÁRIOS
Rua Sete de Setembro, 111/2-5º e 23-34º Andares, Centro, Rio de Janeiro/RJ – CEP: 20050-901 – Brasil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º e 4º Andares, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brasil - Tel.: (11) 2146-2000 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. 01/2021 Rio de Janeiro, January 29, 2021.

Subject: Guidance on relevant aspects to be observed in the preparation of Financial Statements for the fiscal year ended 12.31.2020

Dear Investor Relations Director and Dear Auditor,

The Circular Letters issued jointly by the Accounting Standards and Auditing Superintendence - SNC and the Corporate Relations Superintendence – 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 the Circular Letters express the understanding of the CVM's technical areas regarding the adequate accounting representation of an economic event reflected in the companies' financial statements. Its topics originate from deviations identified and information obtained by the CVM's technical areas regarding operations that are being structured, throughout the fiscal year, for which these technical areas deem it appropriate to alert the market about the position considered, as a rule, more adequate.

Aiming to make this year's Circular Letter more concise, the guidance from previous years will not be reproduced, as has been the practice. The guidance remains valid insofar as indicated in a specific section titled "Circular Letters from Previous Years."

In this sense, for the fiscal year ended 12.31.2020, the topics to be addressed are as follows:

1. Circular Letters from Previous Years;

2. Revocations of CVM Accounting Standards;

3. Calculation and Disclosure of EBITDA;

4. Sensitivity Analysis – CPC No. 40;

5. Transactions Between Related Parties;

6. Accounting Impacts - COVID-19;

7. Tax Credits;

8. Forfait Operations (Debtor Risk).

9. Circular Letters from Previous Years
   The guidance from the CVM's technical areas contained in the following Circular Letters remains valid:

• CIRCULAR LETTER/CVM/SNC/SEP No. 01/2016, of 02/18/2016, with the following exception:
• item 5 – Impairment Tests – CPC No. 01, whose guidance for the year 2020 is contained in CIRCULAR LETTER/CVM/SNC/SEP No. 02/2020, of 03/10/2020 – Coronavirus Effect on FS.
• CIRCULAR LETTER/CVM/SNC/SEP No. 01/2017, of 01/12/2017, with the following exceptions:
• item 5 – Impairment Tests – CPC No. 01, whose guidance for the year 2020 is contained in CIRCULAR LETTER/CVM/SNC/SEP No. 02/2020, of 03/10/2020 – Coronavirus Effect on FS;
• item 6.5 – New Accounting Standards: CPC No. 47, CPC No. 48 and IFRS 16, which lost its object;
• item 7.3 – Impairment Test of Financial Instruments – CPC No. 48/IFRS No. 09, whose guidance for the year 2020 is contained in CIRCULAR LETTER/CVM/SNC/SEP No. 02/2020, of 03/10/2020 – Coronavirus Effect on FS and in CIRCULAR LETTER/CVM/SNC/SEP No. 03/2020, of 04/16/2020 – Measures to combat the COVID19 pandemic in the calculation of expected losses;
• item 8 – Revenue Recognition – POC: IFRS No. 15 x IFRIC No. 15, whose guidance for the year 2020 is contained in CIRCULAR LETTER/CVM/SNC/SEP No. 02/2018, of 12/12/2018 – Revenue Recognition in Contracts for the Purchase and Sale of Unfinished Real Estate Units.
• CIRCULAR LETTER/CVM/SNC/SEP No. 01/2018, of 01/10/2018, with the following exceptions:
• item 3 – Impairment Tests – CPC No. 01, whose guidance for the year 2020 is contained in CIRCULAR LETTER/CVM/SNC/SEP No. 02/2020, of 03/10/2020 – Coronavirus Effect on FS;
• item 4.5. – New Accounting Standards: CPC No. 47, CPC No. 48 and CPC No. 06-R2 (IFRS No. 16), which lost its object;
• item 5.3. – Impairment Test of Financial Instruments – CPC No. 48/IFRS No. 09, whose guidance for the year 2020 is contained in CIRCULAR LETTER/CVM/SNC/SEP No. 02/2020, of 03/10/2020 – Coronavirus Effect on FS and in CIRCULAR LETTER/CVM/SNC/SEP No. 03/2020, of 04/16/2020 – Measures to combat the COVID19 pandemic in the calculation of expected losses;
• item 6 – Revenue Recognition – POC: IFRS No. 15 x IFRIC No. 15, whose guidance for the year 2020 is contained in CIRCULAR LETTER/CVM/SNC/SEP No. 02/2018, of 12/12/2018 – Revenue Recognition in Contracts for the Purchase and Sale of Unfinished Real Estate Units;
• item 9 – IRPJ and CSLL Deferred, which lost object with the revocation of CVM Instruction No. 371/02.
• CIRCULAR LETTER/CVM/SNC/SEP No. 02/2018, of 12/12/2018;
• CIRCULAR LETTER/CVM/SNC/SEP No. 01/2019, of 01/11/2019, with the following exceptions:
• item 3 – Impairment Tests – CPC No. 01, whose guidance for the year 2020 is contained in CIRCULAR LETTER/CVM/SNC/SEP No. 02/2020, of 03/10/2020 – Coronavirus Effect on FS;
• item 5.3. – Impairment Test of Financial Instruments – CPC No. 48/IFRS No. 09, whose guidance for the year 2020 is contained in CIRCULAR LETTER/CVM/SNC/SEP No. 02/2020, of 03/10/2020 – Coronavirus Effect on FS and in CIRCULAR LETTER/CVM/SNC/SEP No. 03/2020, of 04/16/2020 – Measures to combat the COVID19 pandemic in the calculation of expected losses;
• item 6 – Revenue Recognition – POC: IFRS No. 15 x IFRIC No. 15, whose guidance for the year 2020 is contained in CIRCULAR LETTER/CVM/SNC/SEP No. 02/2018, of 12/12/2018 – Revenue Recognition in Contracts for the Purchase and Sale of Unfinished Real Estate Units;
• item 9 – IRPJ and CSLL Deferred, which lost object with the revocation of CVM Instruction No. 371/02.
• CIRCULAR LETTER/CVM/SNC/SEP No. 02/2019, of 12/18/2019;
• CIRCULAR LETTER/CVM/SNC/SEP No. 01/2020, of 02/05/2020, with the following exceptions:
• item 3 – Impairment Tests – CPC No. 01, whose guidance for the year 2020 is contained in CIRCULAR LETTER/CVM/SNC/SEP No. 02/2020, of 03/10/2020 – Coronavirus Effect on FS;
• item 5.3. – Impairment Test of Financial Instruments – CPC No. 48/IFRS No. 09, whose guidance for the year 2020 is contained in CIRCULAR LETTER/CVM/SNC/SEP No. 02/2020, of 03/10/2020 – Coronavirus Effect on FS and in CIRCULAR LETTER/CVM/SNC/SEP No. 03/2020, of 04/16/2020 – Measures to combat the COVID19 pandemic in the calculation of expected losses;
• item 6 – Revenue Recognition – POC: IFRS No. 15 x IFRIC No. 15, whose guidance for the year 2020 is contained in CIRCULAR LETTER/CVM/SNC/SEP No. 02/2018, of 12/12/2018 – Revenue Recognition in Contracts for the Purchase and Sale of Unfinished Real Estate Units;
• item 9 – IRPJ and CSLL Deferred, which lost object with the revocation of CVM Instruction No. 371/02;
• item 13 – Initial Adoption CPC No. 47 and No. 48 – Electricity Transmission Concessionaires, whose guidance for the year 2020 is contained in CIRCULAR LETTER/CVM/SNC/SEP No. 04/2020, of 12/01/2020.
• CIRCULAR LETTER/CVM/SNC/SEP No. 02/2020, of 03/10/2020;
• CIRCULAR LETTER/CVM/SNC/SEP No. 03/2020, of 04/16/2020;
• CIRCULAR LETTER/CVM/SNC/SEP No. 04/2020, of 12/01/2020.

2. Revocations of CVM Accounting Standards
   It is important to alert administrators of publicly held companies and auditors to the fact that many accounting standards issued by the CVM have been revoked, by virtue of CVM Resolution No. 2/2020, of 08/06/2020 (http://www.cvm.gov.br/legislacao/resolucoes/resol002.html).

In this regard, administrators of publicly held companies and auditors must pay attention to the revoked standards listed in said Resolution, among which we cite CVM Instruction No. 247, of March 27, 1996; CVM Instruction No. 248, of March 29, 1996; CVM Instruction No. 346, of September 29, 2000 and CVM Instruction No. 371, of June 27, 2002.

3. Calculation and Disclosure of EBITDA
   In the routine process of monitoring information provided by publicly held companies, the CVM's technical areas have encountered serious problems related to the disclosure of EBITDA (EBIT and EBITDA adjusted for interest and taxes). In this regard, it is never superfluous to remember that the topic has already been regulated by the CVM with the issuance of CVM Instruction No. 527, of 10/04/2012.

It is important to draw attention to points treated in the cited standard, namely:
The calculation of EBIT and EBITDA must be based on the numbers presented in the company's financial statements; Values that do not appear in the company's financial statements cannot compose the calculation of EBIT and EBITDA, disclosed to the market; The disclosure of the calculation of EBIT and EBITDA must be accompanied by the reconciliation of the values contained in the company's financial statements; The calculation of EBIT and EBITDA cannot exclude any non-recurring, non-operational or discontinued operation items; The company may opt to disclose the EBIT and EBITDA values excluding the net results linked to discontinued operations, always identified by the term "adjusted"; The company's administrators must grant the same treatment to the disclosure of EBIT and EBITDA as given to the disclosure of accounting information; All disclosure related to EBIT or EBITDA must be made consistently and comparably with the presentation of previous periods and, in case of change, a justification must be presented, as well as the complete description of the change introduced; The disclosure of EBIT or EBITDA values must be made outside the complete set of financial statements; The analysis of the disclosure of the calculation of EBIT or EBITDA must follow NBC TA 72.

4. Sensitivity Analysis – CPC No. 40
   Considering that CVM Instruction No. 475, of December 17, 2008, which regulated the presentation of information on financial instruments in a specific explanatory note and the disclosure of the demonstrative table of sensitivity analysis, was revoked, the CVM's technical areas consider it opportune and pertinent to address qualitative and quantitative risk disclosure, a topic that is very relevant to the Regulator.

Pronouncement CPC No. 40 (R1), approved by CVM Deliberation No. 604, of 11/19/2009, has a section dedicated to the matter, in its items 31 to 42, titled "Nature and Extent of Risks Arising from Financial Instruments".

In this regard, it is worth reinforcing the mandatory disclosures that must be made by the administrators of the companies, in the explanatory notes, subject to assurance by their auditors as part of the audit of the financial statements considered as a whole:
Qualitative Risk Disclosure: For each type of risk factor arising from a financial instrument, disclose: (a) the exposure to risk and how it arises; (b) its objectives, policies and processes for managing risks and the methods used to measure risk; and (c) any changes in (a) or (b) from the previous period. Quantitative Risk Disclosure: For each type of risk factor arising from a financial instrument, disclose: (a) a summary of quantitative data on its exposure to risks at the end of the reporting period. This disclosure must be based on information provided internally to the key management personnel of the entity (as defined in Technical Pronouncement CPC 05 – Disclosure of Related Party Transactions), for example, the entity's Board of Directors or its Chief Executive Officer; (b) the disclosures required in items 36 to 42 of CPC 40 (R1), to the extent not provided in (a); (c) risk concentrations, if not evident from the disclosures made in accordance with (a) and (b).

It should be noted that if the quantitative data disclosed at the end of the reporting period are not representative of the entity's exposure to risk during the period, the entity must provide additional information that is representative, also subject to audit procedures in the set of financial statements.

Regarding sensitivity analysis, Pronouncement CPC No. 40 (R1) offers two alternatives for company administrators to make the disclosure:
(1) disclosure through continuous probability distributions (in the manner of a "Value at Risk" – VaR) that reflects the interdependence of risk factors (as is the case of interest rate risk and exchange rate risk); or (2) alternatively present a sensitivity analysis table through which the following are disclosed: (a) a sensitivity analysis for each type of market risk to which the entity is exposed at the end of the accounting period, showing how the result and equity would be affected by changes in the relevant risk variable that are reasonably possible on that date; (b) the methods and assumptions used in the preparation of the sensitivity analysis; and (c) changes from the previous period in the methods and assumptions used, and the reason for such changes.

5. Transactions Between Related Parties
   In the routine process of monitoring information provided by publicly held companies, the CVM's technical areas have also encountered serious problems related to the disclosure of transactions between related parties.

Pronouncement CPC No. 05 (R1), approved by CVM Deliberation No. 642, of 10/07/2010, regarding disclosures to be made by the company's administration in explanatory notes, subject to audit procedures in the set of financial statements, requires that the following information be provided, among others:
relationships between the controlling company and its subsidiaries, regardless of whether there have been transactions between these related parties; remuneration of key management personnel in total and for each of the following categories: (a) short-term employee benefits to employees and administrators; (b) post-employment benefits; (c) other long-term benefits; (d) termination benefits of employment contracts; and (e) share-based remuneration; for transactions with related parties during the periods covered by the financial statements, disclose the nature of the relationship, as well as information about the transactions and existing balances, including commitments. At a minimum, the following must be disclosed: (a) amount of transactions; (b) amount of existing balances, including commitments, and (b1) their terms and conditions, including any guarantees, and the nature of the consideration to be used for settlement; and (b2) details of any guarantees given or received; (c) provision for doubtful debts related to the amount of existing balances; and (d) expense recognized during the period related to uncollectible debts or doubtful settlement of related parties.

Non-exhaustive examples of transactions between related parties are presented by CPC No. 05 (R1), in its item 21, namely: (a) purchases or sales of goods (finished or unfinished); (b) purchases or sales of properties and other assets; (c) provision or receipt of services; (d) leases; (e) transfers of research and development; (f) transfers through license agreements; (g) transfers of a financial nature (including loans and contributions to capital in cash or equivalent); (h) provision of guarantees, sureties or bonds; (i) assumption of commitments to do something in the event that a particular event occurs or does not occur in the future, including executory contracts (recognized or not); and (j) settlement of liabilities on behalf of the entity or by the entity on behalf of a related party.

It is worth reinforcing the need to disclose the terms (terms and rates) in contracts (generally mutual) between related parties and disclose the characteristics of the related parties involved. In this regard, CPC No. 05 (R1), in its items 22A and 23 warns that for any transactions between related parties, it is necessary to disclose the conditions under which the same transactions were carried out, especially in the case of atypical transactions after the cut-off period or fiscal year has ended. Furthermore, disclosures that transactions were carried out on terms equivalent to those prevailing in usual market transactions are made only if these terms can be effectively proven.

Auditors must pay attention to these aspects when applying procedures in the context of the audit of financial statements as a whole.

6. Accounting Impacts - COVID-19
   6.1 Idle Production
   In 2020, a forced reduction in the level of economic activity was observed as a reflection of the coronavirus pandemic – COVID19. Some companies in the manufacturing sector very likely, as a result of such fact, were forced to reduce or even halt, for a period, their production process. An accounting problem that arises as a result of this type of event concerns the accounting treatment to be given to fixed costs.

In this regard, the CVM's technical areas consider it opportune and pertinent to call the attention of the administrators of the affected companies and their auditors to guidance contained in Pronouncement CPC No. 16, approved by CVM Deliberation No. 575, of 06/05/2009. It is worth reproducing below items 13 and 38 of the cited standard, with our highlights:
CPC 16.13. The allocation of fixed indirect manufacturing costs to produced units must be based on normal production capacity. Normal capacity is the average production expected to be achieved over several periods under normal circumstances; thus, for the determination of this normal capacity, the portion of total capacity not used due to preventive maintenance, collective holidays and other similar events considered normal for the entity is taken into account. The actual level of production may be used if it approximates normal capacity. As a consequence, the value of fixed cost allocated to each produced unit cannot be increased due to a low production volume or idleness. Fixed costs not allocated to products must be recognized directly as expense in the period in which they are incurred (...). (our highlights)

CPC 16.38. The value of inventory written down, recognized as expense during the period, which is often referred to as cost of products, goods or services sold, consists of the costs that were included in the measurement of inventory that is now sold. Indirect production costs eventually not allocated to products and abnormal production costs must be recognized as period expense when they occur, without passing through inventories, within this same group, but in an identified manner. The entity's circumstances may also allow the inclusion of other values, such as distribution costs. (our highlights)

6.2. Extraordinary Items
Academic literature documents that administrators of some companies are sometimes incentivized to promote a certain "cleaning" of their financial statements, in order to attribute blame for performance inefficiencies or past errors to the "villains" of the moment. They seek to present better result measurements in subsequent periods. For this, they resort to the "big bath" expedient, combined with the use of extraordinary items or extraordinary results lines.

The "villain" of the moment is the coronavirus pandemic – COVID19. In this regard, it is worth recording that the CVM's technical areas are attentive and consider it pertinent and opportune to call the attention of the administrators of the affected companies and their auditors to guidance contained in Pronouncement CPC No. 26, approved by CVM Deliberation No. 676, of 12/13/2011. It is worth reproducing below item 87 of the cited standard, with our highlights:
CPC 26.87. The entity must not present revenue or expense lines or items as extraordinary items, whether in the statement of comprehensive income, or in the statement of profit or loss, or in the explanatory notes. (our highlights)

The CVM's technical areas understand that the task of judging whether a result is abnormal or extraordinary must be reserved for the users of the financial statements (primarily holders of debt and equity securities and creditors in general), who therefore need to have access to relevant, timely, neutral and unbiased accounting information.

6.3 “Going Concern”
The 2020 fiscal year, for which economic activity was seriously affected by the coronavirus pandemic – COVID19, was atypical. The CVM's technical areas consider it very opportune and pertinent to call the attention of administrators and auditors to the evaluation of the going concern assumption, the basis on which the financial statements to be prepared, audited and disclosed to the market are based.

For this, the CVM's technical areas reinforce the guidance given in CIRCULAR LETTER/CVM/SNC/SEP No. 01/2020, of 02/05/2020, item 4.4 "Company Administration Judgment – going concern". They also reinforce the guidance given in CIRCULAR LETTER/CVM/SNC/SEP No. 02/2020, of 03/10/2020.

6.4 Significant uncertainties and judgments
In the same line as the previous subsection of this Circular, the CVM's technical areas call the attention of administrators and auditors to the assessments regarding uncertainties and the use of significant judgments for the 2020 fiscal year.

The CVM's technical areas reinforce the guidance given in CIRCULAR LETTER/CVM/SNC/SEP No. 01/2020, of 02/05/2020, Item 4.3 - Sources of uncertainty. They also reinforce the guidance given in CIRCULAR LETTER/CVM/SNC/SEP No. 02/2020, of 03/10/2020 and in CIRCULAR LETTER/CVM/SNC/SEP No. 03/2020, of 04/16/2020.

7. Tax Credits
   7.1 PIS and COFINS - Expansion of the Concept of Input
   With the decision issued in REsp 1.221.170/PR (a decision that has binding effect in lower courts and administrative bodies), the STJ, in a Ruling dated 02/22/2018, published in DJe on 04/24/2018[1], defined

the concept of input for the purpose of calculating PIS and COFINS credits, based on the criteria of essentiality or relevance.

In summary, the STJ decided:
the illegality of Normative Instructions 247/2002 and 404/2004 of the Brazilian Federal Revenue Service - RFB, by considering that the interpretive limits provided for in the two regulations unduly restricted the concept of input; and that “the assessment of the essentiality or relevance of those elements in the production chain imposes a casuistic analysis, as it is sensibly dependent on evidentiary instruction”. Thus, it will be up to the lower instances to assess whether the product or service constitutes a structural and inseparable element of the production process or the execution of the service.

The decision subjects taxpayers to a casuistic analysis of “the assessment of the essentiality or relevance of those elements in the production chain” (we emphasize) and, in the view of some tax experts, would offer the “subtraction test” of inputs, to define their essentiality or not. Among other aspects, the idea that only expenses with goods or services applied directly in the production process would generate credits would be dismissed, in the view of these same tax experts.

Operationally, given this scenario, uncertainties may arise as a consequence of misunderstanding between the tax authority and taxpayers, due to different interpretations given to the STJ decision and the non-automatic recognition by the RFB of administrative and judicial decisions that recognize certain goods and services as inputs.

The issue that arises for the CVM technical areas is how to guide the administrators of companies registered with the CVM and their respective auditors regarding the accounting treatment of the topic, when preparing the financial statements for the social year 2020 and for the previous comparative social years.

The CVM technical areas do not enter into the merits of the tax bookkeeping and the tax procedures adopted by the companies. After all, they do not have legal competence for this, nor specific technical competence in tax matters. This is a decision that falls to the company's administration, supported by the statement of its legal advisors. The Technical Areas of the Autarchy are dealing only with the accounting recognition of said tax credits in the financial statements to be prepared, audited and published.

From an accounting point of view, in line with the statement contained in OFFICIAL CIRCULAR/CVM/SNC/SEP/n.º 01/2020, of 05.02.2020, item 12, for the case of the exclusion of ICMS from the tax base of PIS and COFINS, and due to the potential conflict ahead in the definition of the interpretation to be given to the STJ decision, the CVM technical areas understand that they must be recognized as an asset “tax credit - input for PIS and COFINS” those credits that are endowed with certainty and that do not depend on acts of third parties for the entity to control the economic benefits to be originated by it (CPC 25/IAS 37). That is, tax credits would only be recognized if a judicial decision or other applicable elements allowed the recognition of the right and the reliable measurement of the value to be offset or refunded.

As stated, due to the subjectivity resulting from the analysis to be made in accordance with the STJ decision (which leaves it to the taxpayers' discretion to analyze case by case), controversies may arise as a consequence of a potential misunderstanding between the tax authority and the taxpayers, arising from different interpretations given to this decision.

However, it is always convenient to emphasize that the financial statements are the responsibility of the companies, duly represented by their administrators who, supported by their legal advisors, may have an understanding, depending on the case, different from that described by the CVM technical areas and, consequently, judge that they have elements that allow the recognition of the right and the reliable measurement of the value to be offset or refunded.

Whatever the case, the CVM technical areas recommend that the administration of the companies disclose in an explanatory note, in a broad and unequivocal manner, all the premises that supported their decision on the recognition of tax credits, highlighting any values that, at the discretion and judgment of the administration, were recognized in the financial statements. The CVM technical areas understand that this information is relevant, as it provides users with the condition to assess the tax risk to which the company was subjected.

The concern of the CVM technical areas is that users of the financial statements have the conditions to assess the possible impact on the prices of shares issued by these companies due to a recognition of tax credits in the amount of billions of reais, which may be reversed later, with harmful consequences for investors in the Brazilian capital market, as it accentuates the risk of misleading information and, furthermore, the possibility of distribution of dividends and/or remuneration of administrators based on results that may not materialize.

It is never too much to reinforce and emphasize: the CVM technical areas do not enter into the merits of the tax bookkeeping.
This is a decision that falls to the company's administration, supported by the statement of its legal advisors. The technical areas are dealing only with the accounting recognition of said tax credits in the financial statements to be prepared, audited and published.

Companies that decide to revisit their accounting policies, regarding the recognition of these tax credits and consider it appropriate to adjust their previously disclosed financial statements, have the possibility of restating them spontaneously, in accordance with CPC n. 23, comparatively to the financial statements prepared for the social year ending on 31.12.2020.

Finally, it is worth reiterating that the company's administration must proceed to disclose any and all relevant information, in an explanatory note, clarifying the approach adopted regarding the application of CPC n. 25, in a clear and unequivocal manner, so that users can understand the issue and evaluate the risks to which the entity is exposed. Auditors must evaluate said information when applying audit procedures on the set of financial statements and, if necessary, express their opinion in their report.

7.2 PIS and COFINS – ICMS in the Tax Base

Although this topic has already been addressed by the CVM technical areas in OFFICIAL CIRCULAR/CVM/SNC/SEP/n.º 01/2020, of 05.02.2020, item 12, it becomes imperative to revisit it due to developments observed and, above all, due to the accounting treatment dispensed by some companies.

As is public knowledge, the current stage of the matter is the merit decision of the STF by unconstitutionality of the inclusion of ICMS in the tax base of PIS/COFINS (ruling issued by the STF in the context of general repercussion in RE 574.706). There are motions for clarification filed by the PGFN[2], whose decision, awaited since 2017, may come to impact the value of tax credits, depending on the specific situation of each company's judicial actions and other specific circumstances pertinent to concrete cases, and which may also result in the modulation of the effects of the STF decision[3].

Two of the situations observed by the CVM technical areas, among others, in the analysis of financial statements of some companies, involve: (1) companies that, in the calculation of the value of PIS and COFINS, disregarded ICMS in the tax base and filed judicial actions, to safeguard their rights, constituted liabilities and now find themselves before the decision to reverse, total or partially, their provisions; and (2) companies that, in the calculation of the value of PIS and COFINS, considered ICMS in the tax base (and/or made judicial deposits), filed judicial actions, to safeguard their rights and, now, find themselves before the decision to recognize or not an asset.

The CVM technical areas reinforce again what was stated in OFFICIAL CIRCULAR CVM/SNC/SEP/n. 01/2020, that the accounting treatment to be dispensed with the matter must be evaluated by administrators of open companies and by their independent auditors, in light of what is prescribed by CPC n. 25. Contingent assets, as a general principle, are never recognized, in accordance with §31 of CPC n. 25, being only disclosed in an explanatory note to the financial statements, when it is probable the entry of economic benefits, in accordance with §34 of CPC n. 25. Recognized provisions may be totally or partially reversed, provided that what is prescribed by §59 of CPC n. 25 is observed. In accordance with the standard, it is never too much to point out that an asset is not contingent if the entry of economic benefits is virtually certain.

Given what is being observed by the CVM technical areas in the supervision activity carried out on the subject, it is relevant to cite a necessary condition for the recognition of any asset or write-off of a liability which is the reliable measurement of the value involved.

In this sense, the CVM technical areas understand that, for the purpose of recognizing the asset and/or reversal of the liability, it becomes imperative that the value in reference is capable of being measured with reasonable reliability (absence of significant uncertainties regarding the definition of the value).

Thus, for the CVM technical areas, the accounting treatment to be dispensed with will depend on a careful analysis of the specific situation of each company, taking into account its situation procedural or specific circumstances pertinent to the concrete case, and the existence or not of reasonable confidence in the measurement of the value.

A critical aspect for the recognition or not of tax credits or for the reversal or not of the liability, in the view of the CVM technical areas, lies in the content of the final judicial decisions.
When there is a final judicial decision or specific circumstances pertinent to the concrete case that allow a definition of the value of the tax to be measured objectively and reliably for the purpose of reversing a provision or recognizing an asset (for example, period covered and the manner in which the calculation must be made – ICMS highlighted or not), the CVM technical areas understand that the asset must be recognized or the liability reversed.

If there is no reliability in the measurement process, the administration should not, in the view of the CVM technical areas, recognize the asset or write off the liability. In addition, information must be provided in an explanatory note about the fact and detailing the bases that led to the conclusion for the non-recognition or non-reversal.

For the case of companies that do not have final judicial decisions and those that have not yet filed judicial actions, except for specific circumstances pertinent to the concrete case that allow an objective and reliable measurement, the CVM technical areas understand that there are no elements yet that allow the recognition of said asset or write-off of the respective liability. The company's administration must provide useful and sufficient information in an explanatory note to allow the user to understand the company's situation in the event under discussion, if relevant.

Notwithstanding all the above, the CVM technical areas have encountered accounting treatments of the most varied nature involving the topic. Companies that reversed the entirety of their liability and did not have the auditor's report qualified. Companies that did not recognize the tax credits and had a qualification in the auditor's report. Companies that did not recognize the tax credits and did not have the auditor's report qualified. Companies that recognized tax credits, even in amounts of billions of reais, and did not have the audit report qualified. This diversity may result only from the different situations in which the various companies are found, including due to the specific outcome of their judicial processes, or from inconsistent accounting treatment.

It is worth highlighting, only by way of example, the situation identified in the ongoing supervision procedures, of a company that had the auditor's report qualified due to the non-recognition of the tax credit. In this case, the company informed, in an explanatory note, that it has a final decision in a second-instance court, which, although it has recognized that ICMS should not compose the tax base for the incidence of PIS and COFINS, presented, in the words of the company itself, “generic and illiquid character”, and the recoverable value has not been fixed. In this explanatory note, the company also explicitly that (i) it initiated a prior habilitation administrative procedure before the RFB and awaits processing to initiate compensation procedures; and (ii) it is monitoring, together with its legal advisors, the judgment of the Motions for Clarification by the STF in RE no. 574.706, as well as the discussions arising around the criteria for quantifying this overpayment defended by the RFB in Internal Consultation Solution no. 13/2018 – COSIT, given their potential impacts on the quantification of the values actually due due to the exclusion of ICMS from the tax bases of PIS and COFINS and, therefore, on the very definition of the value actually recoverable by the Company[4].

Still purely illustratively, it is worth highlighting that it was identified, in an explanatory note of another company that did not recognize the tax credit resulting from the non-inclusion of ICMS in the tax base of PIS and COFINS, but did not have the auditor's report qualified, the information that it discusses the matter in two judicial processes, which cover generating facts occurring from 2001, being that in one of the processes it has already obtained a final favorable decision and that the current understanding regarding the second process is also favorable to the Company, but the final judgment is still pending. In this case, the company informs that it is awaiting the outcome of the leading case at the STF to measure the tax overpayment resulting from both processes and that it did not recognize this asset in its financial statements.

A common point identified in most of the explanatory notes analyzed was the insufficient disclosure of the specifics of each company regarding the content and status of judicial decisions, the criteria considered in the decision to recognize or not the asset or write-off the liability, among others, that would allow the adequate understanding of the tax risk to which the company may be exposed.

The concern of the CVM technical areas is that users of the financial statements have the conditions to assess the possible impact on the prices of shares issued by the companies of a recognition of tax credit or reversal of liability in the amount of billions of reais, based on measurements that are not reliable (whose quantification criteria may still be pending discussion) to be subsequently, respectively, reversed or constituted again. The concern of the CVM technical areas lies in the risk of misleading information, with harmful consequences for investors in the Brazilian capital market and, furthermore, in the possibility of distribution of dividends and/or remuneration of administrators based on results that may not materialize.

As illustrated above, in some cases analyzed by the CVM technical areas, the respective judicial decision that has become final (as declared by the companies) has a generic and illiquid character[5]. In these hypotheses, there may not be sufficient elements for the reliable measurement of the value to be effectively recovered or reversed.

Notwithstanding these aspects presented so far, new developments have occurred regarding the issue of the non-inclusion of ICMS in the tax bases of PIS and COFINS. The PGFN has inscribed in the debt of the Union[6] a part of what taxpayers consider as a credit to which they are entitled: the difference between the ICMS highlighted in the invoice (considered as a credit by the taxpayer) and the ICMS that was effectively paid by the taxpayer[7] (considered as a credit by the tax authority). This event may generate other accounting repercussions, to be treated in light of CPC n. 32 and ICPC n. 22.

Moreover, the Brazilian Federal Revenue Service – RFB is auditing taxpayers who recognized the tax credits, but did not pay IRPJ and CSLL on the gain obtained. Judicial decisions issued, giving gain of cause to the taxpayers, determined that IRPJ and CSLL be charged only when the compensation of the enabled credits by the tax authority is homologated and not when the final judgment of the judicial decisions, according to the tax authority's understanding in light of the COSIT Divergence Solution no. 19, of November 12, 2003 and the DISIT/SRRF10 Consultation Solution no. 233, of November 30, 2007[8].

These elements corroborate the aforementioned uncertainties and reinforce the understanding of the technical areas that it is up to the administration to carefully evaluate the specific situation of its company and use the best judgments, based on the applicable accounting standards, for the adequate treatment accounting of the events.

We reiterate that the financial statements are the responsibility of the companies, duly represented by their administrators who, supported by their legal advisors, may have understanding, depending on the case, different from that described by the CVM technical areas and, consequently, judge that they have elements that allow the recognition of the right and the reliable measurement of the value to be offset or refunded.

Companies that decide to revisit their accounting policies, regarding the recognition of these tax credits and consider it appropriate to adjust their previously disclosed financial statements have the possibility of restating them spontaneously, in accordance with CPC n. 23, comparatively to the financial statements prepared for the social year ending on 31.12.2020.

Furthermore, the administration of the companies must proceed to disclose any and all information relevant, in an explanatory note, clarifying the approach adopted regarding the application of CPC n. 25 in a clear and unequivocal manner, so that users can understand the issue and evaluate the risks to which the entity is exposed. Auditors must evaluate said information when applying the audit procedures on the set of financial statements and, if necessary, express their opinion in their report.

Finally, it is important to emphasize that the CVM technical areas are not entering into the merits of the STF decision regarding the unconstitutionality of the inclusion of ICMS in the tax base of PIS and COFINS. The right to which the companies are entitled is not questioned. The CVM technical areas are dealing with aspects related to the reliable measurement of tax credits to be effectively recovered or of provisions to be reversed, vis-à-vis the dictates of CPC n. 25, and considering the current scenario of uncertainties still present.

8. Forfait/Debtor Risk Operations
   These operations, already addressed in previous Circular Letters by the CVM's technical areas, return to the agenda of discussions now with the effects produced by the Coronavirus (COVID-19) pandemic on companies' businesses.

A point that is always raised in debates is that the deadlines set in the operation do not change, after the credit assignment by the assigning company (supplier of goods and/or services). Strictly speaking, they should not change, since the transaction is formatted between the bank (which acquires the creditor's right of the supplier of goods and/or services) and the company that acquires the goods and services from the supplier (referred to as the "anchor company") to meet the financing needs of the latter. The assigning company (supplier of goods and/or services) essentially enters into an "adhesion contract" in the assignment of its creditor's rights.

It is objectively public knowledge that large companies ("anchor companies") have platforms available on the internet for registering their suppliers, with the purpose of facilitating the operationalization of forfait/debtor risk.

A question that the CVM's technical areas offer in the technical debates that take place concerns the result that would be obtained with the alternative that suppliers of goods and/or services and banks would have at their disposal, which would be to contract for duplicate discounting. If the arrangements are similar, deadlines and costs should not present significant differences.

If indeed the conditions do not change with the forfait/debtor risk transaction (term and credit risk practiced by the bank consider the supplier of goods and/or services), for the bank, the risk with duplicate discounting would be lower (and consequently the cost with the operation would be lower for the supplier of goods and/or services), since the bank holds the right of recourse against the supplier (who becomes co-obligated in this credit assignment), compared to the forfait/debtor risk transaction.

In the forfait/debtor risk transaction, there is no credit assignment with the co-obligation of the supplier of goods and/or services. After all, the bank would lose the more beneficial tax treatment due to the non-incidence of IOF[9]. Thus, a first advantage in terms of cost would be the non-incidence of IOF. And what about the credit risk practiced by the financial institution? And what about the deadline set for the operation? Based on economic rationale, the bank must consider the "anchor company" as the final borrower, since by acquiring the creditor's right of the assignor (supplier of goods and/or services), it already knows in advance that it will be exposed to the default risk of the "anchor company" which will be its final counterparty in the operation. The supplier of goods and/or services exits the scene with the assignment of the creditor's right.

The CVM's technical areas understand that auditors must dedicate special attention to these operations, especially when they involve highly leveraged (indebted) companies, due to the potential risk of distorting the economic reality to be reported (capital structure management).

[1] https://processo.stj.jus.br/processo/revista/documento/mediado/? componente=ITA&sequencial=1350777&num_registro=201002091150&data=20180424&formato=PDF [2] The Attorney General's Office of the National Treasury filed motions for clarification in which it requested the integration of the ruling to remedy obscurity regarding the criterion for calculating the portion of ICMS that may be excluded from the tax bases of PIS and Cofins (ICMS "to be paid" x ICMS "highlighted") and the modulation of the effects of the decisum so that it only produces general effects from the date of judgment of its clarifications, due to the supposed economic impact of the ruling (https://www.conjur.com.br/2019-jun14/opiniao-stf-nao-modular-decisao-exclusao-icms). [3] The minimum quorum for modulation is 6 votes when the law is constitutional and 8 votes when it is unconstitutional (https://www.jota.info/tributos-e-empresas/tributario/stf-6-modulacao-19122019) [4] It is also worth noting that the aforementioned company mentioned, in another explanatory note, a dispatch issued by the RFB granting the request for registration of the credit resulting from a final judicial decision, emphasizing that the granting of the request for registration of the credit does not imply recognition of the creditor's right or homologation of the compensation. [5] It should be emphasized, at this point, that the CVM has already pronounced itself in previous cases on the recognition of values based on final decisions with generic and illiquid character,

which still depended on discussions for the determination of the value quantification, recognizing the conflict of such procedure with CPC 25 (IAS 37). To this end, it is worth citing precedents in administrative decisions of the CVM and the CRSFN (CVM RJ Process No. 2014/1442, CVM RJ Process No. 2002/05581, CRSFN Ruling No. 327/2016) [6] https://valor.globo.com/legislacao/noticia/2020/12/03/diferenca-de-pis-cofins-com-exclusao-do-icmse-inscrita-na-divida-ativa.ghtml [7] RFB COSIT Consultation Solution No. 13, of 18.10.2018. [8] https://valor.globo.com/legislacao/noticia/2020/06/16/contribuinte-vence-disputa-sobre-credito-de-piscofins.ghtml [9] See consultation solutions issued by the Brazilian Federal Revenue Service – RFB, namely:
DISIT/SRRF08 CONSULTATION SOLUTION No. 8013, OF FEBRUARY 05, 2014 (http://normas.receita.fazenda.gov.br/sijut2consulta/link.action?idAto=50544&visao=anotado); DISIT/SRRF06 CONSULTATION SOLUTION No. 6047, OF OCTOBER 29, 2015 (http://normas.receita.fazenda.gov.br/sijut2consulta/link.action?visao=anotado&idAto=69194); COSIT CONSULTATION SOLUTION No. 674, OF DECEMBER 27, 2017 (http://normas.receita.fazenda.gov.br/sijut2consulta/link.action?visao=anotado&idAto=89170)

Sincerely,

Document electronically signed by Paulo Roberto Gonçalves Ferreira, Superintendent, on 01/28/2021, at 19:34, based on art. 6, § 1, of Decree No. 8.539, of October 8, 2015.
Document electronically signed by Fernando Soares Vieira, Superintendent, on 01/28/2021, at 19:43, based on art. 6, § 1, of Decree No. 8.539, of October 8, 2015.
The authenticity of the document can be verified on the site https://sei.cvm.gov.br/conferir_autenticidade, informing the verification code 1186132 and the CRC code 451E5338.
This document's authenticity can be verified by accessing https://sei.cvm.gov.br/conferir_autenticidade, and typing the "Verification Code" 1186132 and the "CRC Code" 451E5338.
Reference: Process No. 19957.000831/2021-43 SEI Document No. 1186132