Circular Letter CVM/SNC/SEP No. 03/2020

SECURITIES AND EXCHANGE COMMISSION OF BRAZIL
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CIRCULAR LETTER/CVM/SNC/SEP No. 03/2020
Rio de Janeiro, April 16, 2020

Subject: Guidance regarding the impacts of measures to combat the COVID-19 pandemic on the calculation of expected losses for the purposes of applying CVM Resolution 763, of December 22, 2016.

Dear Investor Relations Director and Dear Independent Auditor,

Continuing the work of monitoring the effects of the COVID-19 pandemic on the financial statements of entities regulated by the CVM and, in coordination with other global regulators, the CVM Technical Areas wish to clarify a point that requires urgent consideration by these regulated entities, regarding the risk of systemic effect from the inadequate application of IFRS 9 in the Brazilian capital market.

CVM Resolution 763, of December 22, 2016, which approved CPC 48 (IFRS 9), reinstated in the Brazilian accounting framework the expected loss model, previously abolished with the adoption of IFRS in Brazil. This regulation provides in item 5.5.5 that the entity must measure the provision for losses of a financial instrument at an amount equivalent to the expected credit losses for 12 months, if there has been no significant increase in its credit risk since initial recognition.

However, if there has been a significant increase in the aforementioned credit risk since the initial recognition of the financial instrument, item 5.5.3 of the regulation determines that the provision for losses shall be measured over the lifetime of this financial asset.

The CVM Technical Areas understand that identifying whether or not a significant increase in the credit risk of a financial instrument has occurred requires a comprehensive assessment of a set of quantitative and qualitative aspects of credit that allows one to prudently infer changes in the risk pattern for the lifetime of the instrument.

In this sense, and in line with the guidelines of other international regulators 12 and with those of the IASB itself 3, the CVM Technical Areas clarify that the deferral of the deadline for payment of future installments (moratorium), within the scope of anti-cyclical measures adopted in response to the COVID-19 pandemic, by itself is not sufficient to trigger a change in the expected loss calculation model.

When mitigating measures are granted by creditors, issuers of financial statements must evaluate them comprehensively, considering all facts and circumstances, in order to distinguish whether there was truly a significant increase in credit risk or a temporary liquidity restriction.

In making such predictions, issuers must also evaluate the nature of the economic impact of the COVID-19 pandemic (permanent or temporary), considering any anti-cyclical impacts that government support measures and others will have on credit risk throughout the entire lifetime of the financial instrument under analysis. These considerations are also valid for those entities that adopt the simplified model for the recognition and measurement of expected credit losses, according to paragraphs 5.5.15 and 5.5.16 of CPC 48.

The CVM Technical Areas emphasize that the provisions of CVM Resolution 763/16 do not foresee any mechanistic or automatic approach regarding how these contextual factors (deferral, extension, temporary suspension of payment, etc.) should impact the provisioning for credit losses. In particular, given the scarcity of available and reliable information in the current scenario, it is understandable that issuers face problems in making reasonable short-term economic estimates. The adoption of an excessively conservative posture in measuring the expected loss of financial instruments, at this moment of global instability, could have the effect of generating systemic impacts on the Brazilian capital market, given the interconnectivity of financial instruments in circulation.

This understanding is even more relevant within the scope of quarterly information (ITRs). In light of CVM Resolution 673, of October 20, 2011, interim financial statements aim to provide updates based on the last complete annual financial statements, in order to allow users of this information to infer the financial position to be reported at the end of the fiscal year.

In addition, in light of CVM Resolutions 684, of August 30, 2012, and 676, of December 13, 2011, which approve respectively the Technical Pronouncement CPC 40(R1) - IFRS 7 and the Technical Pronouncement CPC 26(R1) - IAS 1, the CVM Technical Areas emphasize the need for preparers to provide any additional information that allows users of the financial statements to assess the impact of the COVID-19 pandemic on the financial position and performance of the reporting entity.

Finally, the CVM Technical Areas inform that they are monitoring the current economic environment, in a coordinated manner with various global entities, especially the International Organization of Securities Commissions (IOSCO), in order to seek solutions for addressing the economic-financial impacts of the COVID-19 pandemic on the financial statements (interim and complete) disclosed to the Brazilian capital market.

Sincerely,

Signed Original
PAULO ROBERTO GONÇALVES FERREIRA
Superintendent of Accounting Standards and Auditing

Signed Original
FERNANDO SOARES VIEIRA
Superintendent of Corporate Relations

1 https://www.iosco.org/news/pdf/IOSCONEWS561.pdf 2 https://www.esma.europa.eu/press-news/esma-news/esma-issues-guidance-accounting-implications-covid-19 3 https://cdn.ifrs.org/-/media/feature/supporting-implementation/ifrs-9/ifrs-9-ecl-and-coronavirus.pdf?la=en