CMN Resolution No. 4524 — Accounting Procedures for Foreign Exchange Variation Effects from Foreign Currency Transactions and Foreign Investee Financial Statements and Foreign Exchange Hedge Operations

The Central Bank of Brazil, in accordance with Article 9 of Law No. 4,595 of December 31, 1964, makes public that the National Monetary Council, in a session held on September 29, 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 S:

CHAPTER I

OBJECT AND SCOPE OF APPLICATION

Article 1. This Resolution establishes accounting procedures for recognition by financial institutions and other institutions authorized to operate by the Central Bank of Brazil that hold investments abroad:

I - the effects of exchange rate variations resulting from the conversion of transactions carried out in foreign currency by foreign investees into their respective functional currencies;

II - the effects of exchange rate variations resulting from the conversion of the balances of the financial statements of foreign investees from their respective functional currencies to the national currency; and

III - foreign exchange hedge operations on investments abroad.

Sole Paragraph. For the purposes of this Resolution, the following are considered:

I - foreign investees are branches and affiliated or controlled entities abroad; and

II - investments abroad are investments in branches and equity participations in affiliated or controlled entities abroad.

CHAPTER II

FUNCTIONAL CURRENCY

Article 2. The institutions mentioned in Article 1 must designate the functional currency of each foreign investee.

§ 1. For the purposes of this Resolution, functional currency is considered the currency of the primary economic environment in which the entity operates, observing, cumulatively, the following factors:

I - the economic environment in which the entity generates and spends cash;

II - the currency that most influences the selling prices of products and services, labor costs, and other costs for the provision of products and services;

III - the currency of the country whose competitive and regulatory aspects most influence the determination of selling prices for its products and services;

IV - the currency through which the entity's financing activity resources originate; and

V - the currency through which resources generated by the entity's operational activities are usually accumulated.

§ 2. The following additional factors may be considered to determine if the functional currency of the foreign investee is the same as that of the investing institution, if the factors established in § 1 are insufficient for this definition:

I - the activities of the foreign investee are executed as an extension of the investing institution, so that no significant degree of autonomy is granted to the entity abroad;

II - transactions with the investing institution represent a relevant proportion of the foreign investee's activities; and

III - cash flows arising from the foreign investee's activities:

a) directly affect the cash flows of the investing institution and are readily available for remittance to that institution; and

b) are sufficient to pay interest and other existing and expected debt obligations, regardless of contributions from the investing institution.

§ 3. The change of the functional currency of the foreign investee is permitted only if there is a significant change in the primary economic environment in which the entity operates, considering the factors defined in §§ 1 and 2.

§ 4. In the event of a change in the functional currency of the foreign investee, as provided in § 3, the conversion procedures to the new functional currency must be applied prospectively from the date of the change.

Article 3. The Central Bank of Brazil may determine the alteration of the functional currency of foreign investees, in case of an inadequate definition of such currency.

Article 4. The functional currency of financial institutions and other institutions authorized to operate by the Central Bank of Brazil that operate in the country must be the national currency.

CHAPTER III

CONVERSION OF FOREIGN CURRENCY TRANSACTIONS

Article 5. If foreign investees carry out transactions in a currency different from their respective functional currencies, the institutions mentioned in Article 1 must convert these transactions into the functional currencies of the foreign investees using the exchange rate:

I - of the date of the respective interim or annual financial statements of the investing institution, in conversions of:

a) monetary items;

b) assets and liabilities measured at fair value or market value; and

c) items not classified as monetary, in situations where the functional currency of the foreign investee is equal to the national currency; and

II - of the date of the transaction, in other cases.

§ 1. For the purposes of this Resolution, monetary items are considered units of currency held in cash and assets and liabilities to be received or paid in a fixed or determinable number of units of currency.

§ 2. In the conversions referred to in the main text involving the national currency, the selling exchange rate reported by the Central Bank of Brazil for the purpose of interim or annual financial statements must be used.

§ 3. Adjustments resulting from the conversion referred to in the main text must be recorded against the period result of the foreign investee.

§ 4. Adjustments resulting from the conversion of gains or losses recognized directly in the equity of the foreign investee must be recorded in the financial statements of these entities also as a highlighted component of equity.

CHAPTER IV

CONVERSION OF FINANCIAL STATEMENTS

Article 6. If the functional currency of the foreign investee is different from the national currency, the institutions mentioned in Article 1 must convert the balances of the financial statements of these entities, from the functional currency to the national currency, using the selling exchange rate reported by the Central Bank of Brazil for the purpose of interim or annual financial statements, observing that:

I - assets and liabilities must be converted using the exchange rate of the date of the respective interim or annual financial statements of the investing institution; and

II - revenues and expenses must be converted using the exchange rates of the dates of occurrence of the transactions.

§ 1. The use of the average exchange rate of the period for all transactions, in each foreign currency, is admitted, if the investing institution does not have access to the data necessary to perform the conversion of revenues and expenses using the exchange rates of the dates of occurrence of the transactions.

§ 2. Exchange rate variation adjustments resulting from the conversion process referred to in the main text must be recorded in the converted financial statements of the foreign investee as a highlighted component of equity.

CHAPTER V

EQUITY METHOD RESULT

Article 7. The institutions mentioned in Article 1 must recognize the equity method result of the foreign investee, calculated in accordance with current regulations, as follows:

I - if the functional currency of the foreign investee is equal to the national currency, the equity method result referred to in the main text must be recognized in the period result; and

II - if the functional currency of the foreign investee is different from the national currency, the equity method result referred to in the main text must be recorded:

a) in the period result, the portion related to the result actually earned by the foreign investee; and

b) in equity, by the net value of tax effects, the portion related to exchange rate variation adjustments resulting from the conversion process.

§ 1. The equity method result referred to in item II of the main text must be calculated after the conversion of the financial statements of the foreign investee from its respective functional currency to the national currency.

§ 2. Adjustments resulting from the conversion of gains or losses recognized directly in the equity of the foreign investee must be recognized in the financial statements of the investing institution also as a highlighted component of equity, by the net value of tax effects.

§ 3. The values related to exchange rate variation adjustments referred to in item "b" of item II of the main text must be transferred to the period result upon the derecognition of the respective investment, observing that in partial derecognition, only the accumulated exchange rate variation proportional to the portion of the investment derecognized should be considered as period revenue or expense.

CHAPTER VI

FOREIGN EXCHANGE HEDGE OPERATIONS ON INVESTMENTS ABROAD

Article 8. Operations with financial derivative instruments contracted specifically with the purpose of compensating, in whole or in part, the risks arising from exposure to foreign exchange variation of investments abroad whose functional currency is different from the national currency must be recorded in accordance with the accounting procedures defined in current regulations applicable to the cash flow hedge category:

I - for recording the appreciation or depreciation resulting from fair value adjustments; and

II - for determining, calculating, and recording the effective portion of the hedge.

§ 1. The other conditions established in current regulations for financial derivative instruments intended for hedging apply to the operations mentioned in the main text, including the disclosure requirements for qualitative and quantitative information.

§ 2. Non-derivative financial assets and liabilities may be recorded in accordance with the provisions of this article, provided they are previously designated as a hedge instrument for foreign exchange risk coverage of investments abroad.

§ 3. If the institution uses the accounting procedure provided in § 2, the disclosure requirements mentioned in § 1 must be observed, where applicable.

§ 4. The provision of item I of the main text applies to the assets and liabilities mentioned in § 2 only with respect to the appreciation or depreciation caused by the effects of foreign exchange variation.

§ 5. The effective portion of the hedge, recorded in a highlighted account of equity, in accordance with current regulations, must be transferred to the period result simultaneously with the total or partial derecognition of the respective investment abroad.

CHAPTER VII

DISCLOSURE

Article 9. The institutions mentioned in Article 1 must disclose in the notes to the financial statements:

I - the amount related to exchange rate variations recognized in the period result;

II - the net amount related to exchange rate variations recognized in a highlighted account of equity;

III - the reconciliation of the amounts related to exchange rate variations recognized in a highlighted account of equity at the beginning and end of the period; and

IV - the functional currency of each foreign investee.

CHAPTER VIII

FINAL PROVISIONS

Article 10. The institutions mentioned in Article 1 must maintain for a period of five years, or for a longer period due to express determination by the Central Bank of Brazil, working papers, calculation memos, exchange rates used, sources of these rates, and documents related to:

I - the conversions referred to in Articles 5 and 6; and

II - operations with financial instruments referred to in Article 8.

Article 11. The accounting procedures established by this Resolution must be applied by the institutions mentioned in Article 1 prospectively from January 1, 2017.

Article 12. The Central Bank of Brazil is authorized to adopt the necessary measures to comply with this Resolution.

Article 13. This Resolution enters into force on the date of its publication.

Article 14. Resolutions No. 4,455 of December 17, 2015, and No. 4,491 of May 31, 2016, are hereby revoked.

Ilan Goldfajn
President of the Central Bank of Brazil