Circular Letter CVM/SNC/SEP No. 01/2022: Guidance on Aspects to Be Observed in Preparing Financial Statements for the Fiscal Year Ended 12/31/2021

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CIRCULAR LETTER/CVM/SNC/SEP No. 01/2022
Rio de Janeiro, February 1, 2022

Subject: Guidance on relevant aspects to be observed in the preparation of Financial Statements for the fiscal year ended 12/31/2021

Dear Investor Relations Director and Dear Independent Auditor,

The Circular Letters issued jointly by the Accounting Standards and Audit 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. Their topics originate from deviations identified and information obtained by the CVM’s technical areas regarding operations currently underway, throughout the fiscal year, and others that will be so, for which these technical areas deem it convenient to alert the market about the position considered, as a rule, most adequate in their view.

Following the pattern of the last Circular Letter, the guidelines from previous years will not be reproduced. The guidelines remain valid insofar as indicated in a specific section titled “Circular Letters from Previous Years.”

Thus, as the technical areas were able to confirm based on information obtained from preparers of financial statements and independent auditors, the topics identified for the 2021 fiscal year were (i) drawn-risk operations, (ii) effects of the COVID-19 Pandemic on financial statements, and (iii) potential changes in income tax legislation, especially changes in existing rates, with impact on deferred tax assets and liabilities recognized.

The CVM’s technical areas understand that the above-identified topics already have adequate guidelines established in the current accounting standards, and that topics (i) and (ii) have already been treated recently in previous Circular Letters issued.

In this sense, for the fiscal year ended 12/31/2021, the technical areas dedicate a specific section to address the process of professional judgment both by preparers and by auditors, as they understand it to be the environment in which item (iii) is inserted. The letter is organized into two sections, namely:

1. Circular Letters from Previous Years;
2. Professional Judgment.

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1. Circular Letters from Previous Years

The guidelines of the CVM’s technical areas contained in the following circular letters remain valid:

• CIRCULAR LETTER/CVM/SNC/SEP No. 01/2016, of 02/18/2016, with the following exception:

  • item 5 – “Impairment Tests”, whose guideline 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 guideline 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 has lost its purpose;
  • item 7.3 – “Impairment Test of Financial Instruments – CPC No. 48/IFRS No. 09”, whose guideline 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 guideline 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 guideline 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 has lost its purpose;
  • 5.3. – “Impairment Test of Financial Instruments – CPC No. 48/IFRS No. 09”, whose guideline 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 guideline 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 – “Deferred IRPJ and CSLL”, which expired 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 guideline for the year 2020 is contained in CIRCULAR LETTER/CVM/SNC/SEP No. 02/2020, of 03/10/2020 – “Coronavirus Effect on FS”;
  • 5.3. – “Impairment Test of Financial Instruments – CPC No. 48/IFRS No. 09”, whose guideline 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 guideline 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 – “Deferred IRPJ and CSLL”, which expired 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 05/20/2020, with the following exceptions:

  • item 3 – “Impairment Tests” – CPC No. 01, whose guideline for the year 2020 is contained in CIRCULAR LETTER/CVM/SNC/SEP No. 02/2020, of 03/10/2020 – “Coronavirus Effect on FS”;
  • 5.3. – “Impairment Test of Financial Instruments – CPC No. 48/IFRS No. 09”, whose guideline 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 guideline 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”;

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• item 9 – “Deferred IRPJ and CSLL”, which expired with the revocation of CVM Instruction No. 371/02;

• item 13 – “Initial Adoption CPC No. 47 and No. 48 – Electricity Transmission Concessionaires”, whose guideline 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.

• CIRCULAR LETTER/CVM/SNC/SEP No. 01/2021, of 01/29/2021, with the following exception:

• item 7.1 – “PIS and COFINS – ICMS in the Tax Base”.

2. Professional Judgment

We can understand professional judgment as the application of knowledge and experience acquired in the presence of facts and circumstances available to conclude regarding the adequate treatment of an economic event, with reference to the applicable accounting standards and other relevant information, mainly those related to the informational objectives to be achieved.

With the convergence of Brazil to international accounting standards, a profound cultural change has been imposed on, and has been increasingly demanded of, the professionals who operate IFRS standards, especially preparers of financial statements and independent auditors. The direct application of a objectively defined and delimited requirement in a “codified” standard has given way to the exercise of value judgment regarding guidelines, sometimes subjective, contained in “principled” standards. Professional judgment with IFRS standards now has much greater weight than it had in the past, when the old Brazilian “GAAP” was used.

Added to this scenario is the growing complexity of transactions and events before which preparers of financial statements and independent auditors find themselves, further elevating the urgency of applying professional judgment with the objective of better economically portraying the operation.

Thus, the CVM’s technical areas understand that it is a fundamental condition for the adequate and efficient application of CPC/IFRS that relevant professional judgment be exercised, being an intrinsic role related to the application of accounting standards, from which preparers of financial statements and independent auditors cannot omit themselves. It should also be emphasized that the knowledge of the information and characteristics related to transactions and events places these two actors in privileged positions for the application of such judgment.

As documented by the area literature, professional judgment in accounting and auditing is typically exercised in three major areas:

• Evaluations of collected evidence (is the quantity of evidence gathered and its quality such that it qualifies as sufficient and appropriate?)

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• Estimates and Probabilities (are the numbers produced based on estimates and probabilities in consonance with the economic reality to be reported? Are they free of bias?)
• Decisions regarding choices to be made, especially “accounting choices” (do accounting choices originate from robust decisions by the company’s administration or were they based on “opportunistic” situations? Do they faithfully translate the economic reality to be reported? Are they employed consistently?)

Making high-quality judgments on complex topics is a challenging task that obviously requires knowledge, accumulated experience (and in this particular, the ideal is the involvement of a team of experienced professionals on the topic evaluating possible “outputs”), common sense, independence, and, primarily, a questioning and critical mind.

In the last resort, the regulator may be summoned to give its understanding regarding a matter that is the subject of controversy, in a formal consultation directed to it, which clearly delimits the problem, identifies the regulated entity, and exposes the understandings expressed by preparers of financial statements and independent auditors. The eventual participation of the regulatory body will occur after the necessary and relevant application of professional judgment by those who prepare the information and by those who audit it.

In this sense, for the sensitive topics for the 2021 fiscal year, which require professional judgment, both by preparers of financial statements and by independent auditors, the CVM’s technical areas recommend adopting the following steps, extracted from a conceptual framework for professional judgment, documented by the area literature:

1. Elucidate the problem and the informational objectives to be achieved;
2. Consider the alternatives and the choices available;
3. Gather and evaluate the necessary information;
4. Reach a conclusion; and
5. Articulate and document the rationale for the decision.

It is important that in this process of professional judgment, “mental traps” are avoided, which originate from informational constraints, influences, preconceived ideas, and biases. As already highlighted, teams of experienced professionals on the topic, involved in the process of professional judgment, help mitigate the risks arising from “mental traps.”

Sincerely,

Original signed by
PAULO ROBERTO GONÇALVES FERREIRA
Superintendent of Accounting Standards and Audit

Original signed by
FERNANDO SOARES VIEIRA
Superintendent of Corporate Relations