CMN Resolution No. 4512 — Accounting Procedures for Passive Provisions for Financial Guarantees

The Central Bank of Brazil, pursuant to Article 9 of Law No. 4,595 of December 31, 1964, makes public that the National Monetary Council, in a session held on July 28, 2016, based on Article 4, items VIII and XII, of the aforementioned Law, and considering the provisions of Article 61 of Law No. 11,941 of May 27, 2009,

R E S O L V E D:

Art. 1 Financial institutions and other institutions authorized to operate by the Central Bank of Brazil must establish provisions to cover losses associated with financial guarantees provided in any form, in the appropriate liability account, with the period's result as the counterpart.

§ 1 The provisions of this Resolution do not apply to consortium administrators, who must observe the regulations issued by the Central Bank of Brazil in the exercise of their legal duties.

§ 2 For the purposes of this Resolution, a financial guarantee is considered to be an operation that requires the guarantor to make contractually defined payments in order to reimburse the holder of a debt instrument, or another instrument of a similar nature, for losses resulting from the non-payment of the obligation by the debtor on the due date, such as providing a surety, guarantee, joint liability, or any other operation that represents a guarantee of the fulfillment of a third-party financial obligation.

Art. 2 The institutions mentioned in Article 1 must evaluate the losses associated with the probability of future disbursements linked to financial guarantees provided in accordance with recognized credit risk management models and practices and based on consistent, verifiable information and criteria.

Art. 3 The provision referred to in Article 1 must be sufficient to cover probable losses throughout the term of the guarantee provided and must be reevaluated at least monthly upon the preparation of interim and annual financial statements.

Art. 4 The following information must be disclosed in notes to the financial statements:

I - guaranteed values, by type of financial guarantee;

II - the value of the provision, by type of financial guarantee; and

III - main criteria and information used to establish the provision for losses associated with financial guarantees provided.

Art. 5 The institutions mentioned in Article 1 must keep all documentation related to the evaluation referred to in Article 2 and to the establishment of provisions for financial guarantees provided available to the Central Bank of Brazil for a minimum period of five years.

Art. 6 The accounting procedures established by this Resolution must be applied by the institutions mentioned in Article 1 prospectively from January 1, 2017.

§ 1 The effects of adjustments resulting from the initial application of this Resolution must be:

I - recorded as a counterpart to the accumulated profits or losses account for the net value of the tax effects; and

II - disclosed in notes to the financial statements as of the base date of June 30, 2017.

§ 2 If the adjustments mentioned in § 1 of this article are relevant in relation to the result of the 2016 fiscal year, an estimate of the impact of adopting the accounting procedures established by this Resolution must be disclosed in notes to the financial statements as of the base date of December 31, 2016.

§ 3 Provisions for coverage of losses associated with financial guarantees provided, established based on the general criteria in effect until the date defined in the caput, must be:

I - kept recorded in their original accounts until the date referred to in the caput; and

II - reclassified to the appropriate accounting line items from the January 2017 base date.

Art. 7 The Central Bank of Brazil is authorized to regulate additional procedures to be observed for the establishment of provisions for financial guarantees referred to in this Resolution.

Art. 8 This Resolution enters into force on the date of its publication.

Ilan Goldfajn
President of the Central Bank of Brazil