CVM Circular Letter SNC/SEP No. 04/2020

SECURITY AND EXCHANGE COMMISSION OF BRAZIL (CVM) Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – ZIP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/SP – ZIP: 01333-010 – Brazil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4th Floor, Brasília/DF – ZIP: 70712-900 – Brazil - Tel.: (61) 3327-2030/2031 www.cvm.gov.br

CIRCULAR LETTER/CVM/SNC/SEP No. 04/2020
Rio de Janeiro, December 1, 2020

Subject: Guidance on relevant aspects of CPC No. 47 - IFRS No. 15 and CPC No. 48 – IFRS No. 9 to be observed in the preparation of the Financial Statements of Electric Power Transmission Companies, for the financial statements as of December 31, 2020.

Dear Investor Relations Director and Dear Independent Auditor,

The technical areas of the CVM clarify, for ELECTRIC POWER TRANSMISSION COMPANIES, certain provisions contained in Technical Pronouncements CPC No. 47 and No. 48, which reflect in Brazil IFRS No. 15 and IFRS No. 9, respectively.

In this sense, the following points are to be elucidated:

Adoption of CPC No. 47 - Revenue Recognition and CPC No. 48 – Financial Asset;
Remuneration rate of contracts;
Treatment of the Variable Portion – Variable Consideration;
RBSE Asset;
Geography of Financial Revenue in the Income Statement;
Disclosure in Notes to the Financial Statements;
Initial Adoption of the terms of this Circular – Transitional Provisions.
Adoption of CPC 47 - Revenue Recognition and CPC No. 48 – Financial Asset

The application of pronouncement CPC No. 47 (IFRS No. 15) represented a challenging task for the ELECTRIC POWER TRANSMISSION sector, particularly considering the changes promoted in ICPC No. 01 (IFRIC No. 12), an interpretation focused on concession contracts.

The accounting model adopted by concessionaires in general presents two alternatives for recognizing concession contracts: either the contract is classified as an intangible asset (when the concessionaire is subject to demand risk, i.e., the amounts to be received are conditioned on the use of the service by the public, as per §17 of ICPC 01) or the contract is classified as a financial asset (when the concessionaire is not subject to demand risk, i.e., the granting authority guarantees in contract the payment of predetermined or determinable amounts, as per §16 of ICPC 01).

With the concepts and principles brought by pronouncement CPC No. 47 (IFRS No. 15), it became necessary to identify the performance obligations provided for in Electric Power Transmission concession contracts, the allocation of a portion of the transaction price to said performance obligations (and consequently, the allocation of respective margins), among other procedures, within the revenue recognition system with customers provided for by the standard. The industry's understanding, in summary, is that electric power transmission concession contracts present two clearly identified performance obligations, namely: (i) construction and infrastructure improvement – C&M and (ii) operation and maintenance – O&M.

Contracts generally provide that in the event of unavailability of the transmission network or its operation below quality and excellence standards established by ANEEL (O&M performance obligation), the mechanism known as Variable Portion – PV will be applied to the Permitted Annual Revenues – RAPs. The PV is the instrument by which the sector regulator - ANEEL penalizes inefficient concessionaires and rewards efficient ones, redistributing portions of the RAPs among concessionaires. The Variable Portion – PV is applied to the total RAP.

Strictly speaking, under current regulation - ANEEL Resolution No. 729/2016 - there is provision for 3 types of PV, namely: (1) Variable Portion for Delay in Commercial Operation Entry – PVA (the delay period considered in the discount calculation is limited to 90 days), applied due to delays in the commercial entry into operation of the facilities; (2) Variable Portion for Unavailability – PVI, applied when there are shutdowns in the facilities; and (3) Variable Portion for Operational Restriction – PVRO, applied when the facility operates with capacity restrictions. The sum of the PVI and PVRO values cannot exceed 12.50% of the value of the RAP of the concession contract (ANEEL Resolution No. 729/2016, of June 28, 2016, art. 10, item IV).

It is also settled industry understanding that, despite there being two clearly identified performance obligations, the PV mechanism does not allow them to be classified as a financial asset, since there is no unconditional right to cash (even though there is a guarantee by the granting authority). Even if the performance obligation of construction or improvement has been fulfilled, for example, this right to consideration is subject to the fulfillment of the operation and maintenance performance obligation, which is why revenue must be recognized against a contract asset. The performance obligations as they are fulfilled (revenues) are recognized against contract assets and only become classified as financial assets after the issuance of the AVC (unconditional right to cash) 1.

1 The RAPs of all transmission companies are homologated and published annually by ANEEL, through a Homologation Resolution, with effect from July 1 of one year to June 30 of the following year, based on the adjustment and review rules provided for in the concession contracts and sectoral regulation (PRORET). Based on the RAP values and the Transmission System Use Tariffs – TUST homologated and published by ANEEL, the National System Operator - ONS issues monthly credit notices - AVC to transmission concessionaires and debit notices - AVD to users of the Basic Network for billing purposes.

The accounting practice currently employed is supported by the interpretation of the provisions reproduced below from pronouncement CPC No. 47:

“105. When either party to the contract has completed its performance, the entity shall present the contract on the balance sheet as a contract asset or a contract liability, depending on the relationship between the performance by the entity and the payment by the customer. The entity shall present separately as receivables any unconditional rights to consideration.” (emphasis added)

“108. A receivable is an entity’s right to consideration that is unconditional. A right to consideration is unconditional if only the passage of time is required before payment of that consideration is due. For example, the entity shall recognize a receivable if it has a present right to payment even if that amount may be subject to refund in the future. The entity shall account for the receivable in accordance with CPC 48. At initial recognition of the receivable arising from a contract with a customer, any difference between the measurement of the receivable in accordance with CPC 48 and the corresponding amount of revenue recognized, if the first amount is greater than the second amount, shall be presented as an expense (for example, an impairment loss).” (emphasis added)

The elucidation of what constitutes an unconditional right to cash, for the purpose of classifying the asset arising from the concession contract, is brought by the “Basis for Conclusions” section of IFRS 15. If a satisfied performance obligation is conditioned on the satisfaction of another performance obligation, a contract asset shall be recognized 2.

This is the case of the construction and improvement performance obligation, conditioned on the satisfaction of the operation and maintenance performance obligation. The subjection of the entire RAP to the PV mechanism is persuasive evidence of the occurrence of this situation provided for in the standard.

Thus, assets arising from electric power transmission concession contracts, as their performance obligations are satisfied, are recognized as contract assets in counterpart to the recognition of revenue. They only pass to the category of financial asset, and fall within the scope of pronouncement CPC 48 (IFRS 9), after the credit notice issued monthly by ONS authorizing the billing of the Permitted Annual Revenue – RAP. It is the understanding of the CVM technical areas that this accounting procedure must be adopted consistently for all concession contracts that are in force.

2
“BC323. In many cases, that contract asset is an unconditional right to consideration—a receivable—because only the passage of time is required before payment of that consideration is due. However, in other cases, an entity satisfies a performance obligation but does not have an unconditional right to consideration, for example, because it first needs to satisfy another performance obligation in the contract. The boards decided that when an entity satisfies a performance obligation but does not have an unconditional right to consideration, an entity should recognise a contract asset in accordance with IFRS 15. The boards noted that making the distinction between a contract asset and a receivable is important because doing so provides users of financial statements with relevant information about the risks associated with the entity’s rights in a contract. That is because although both would be subject to credit risk, a contract asset is also subject to other risks, for example, performance risk.” (emphasis added)

There is even greater quality of information for the user of the financial statements of the transmission companies, insofar as it evidences that the asset in question is subject to the performance risk factor. The performance risk that can penalize by up to 12.5% the value to which the transmission company is contractually entitled as RAP (ANEEL Resolution No. 729/2016, of June 28, 2016, art. 10, item IV).

Remuneration rate of contracts

The process of accounting recognition and measurement of electric power transmission concession contracts is the result of a complex and dynamic financial modeling. Considering the contract term (30 years) and the contractual provisions existing, such as periodic tariff review - PTR every 5 years and the variable portion mechanism - PV, the numbers periodically produced by accounting are the result of the best estimates of the administration of the concessionaire companies, at the time of the preparation of the financial statements.

As a rule, as already addressed in the previous section of this circular letter, contracts provide for the construction of transmission infrastructure or investments in its improvement (“upgrade”), which will be paid and remunerated via RAP, for the duration of the contract. The remuneration rate is agreed upon at the time of the transmission network expansion auction (it is the rate that mathematically zeros the contract asset balance at the end of the concession, in the projections made.

In brief summary, ANEEL, in an auction destined for this purpose, defines how much remuneration it is willing to pay the concessionaire – the WACC of the auction – and requires how much investment must be made for the auctioned line, along with the specifics of the equipment and other assets to be used in the line – the CAPEX of the auction. The concessionaire company that makes the lowest bid in terms of RAP is declared the winner of the auction. This is the model practiced for the concession of transmission networks.

The concessionaire company, before making bids in the auction, projects in its business plan its best estimates in terms of CAPEX to be consumed with the project and optimal capital structure to finance it, construction period of the line and operation and maintenance costs so that it can estimate the IRR of the project with the possible scenarios in terms of RAP. In summary, for each RAP bid it makes in an auction, the company will have an estimate of IRR for that project. And this will be the expected return with the project at date zero.

The company's performance with the contract is measured by this metric and thus monitored by the market. Not by chance do investors demand this information from the companies, even if indirectly, by requesting the effective CAPEX of the project, as informed to the technical areas by some concessionaires in meetings held.

Although the initial RAP of the project is public knowledge, published by ANEEL, it is not always possible to arrive at an estimate of the IRR, given other variables such as the construction period.

Here a parenthesis is in order. There is an informational asymmetry between ANEEL and the winning concessionaire of the auction. ANEEL does not know for sure, upon having the result of the winning RAP in the auction, what the concessionaire's estimate is for the CAPEX to be consumed with the project, nor what the concessionaire's estimate of O&M costs is. On the other hand, with the discount observed in the auction, ANEEL has an indication that there may be efficiency either in construction (lower CAPEX) or in O&M (lower O&M costs), or in both activities. For this reason, it adjusts the regulatory CAPEX required with the project proportionally to the discount observed in the RAP of the auction, and consequently also adjusts proportionally the regulatory cost with O&M, which is a function of CAPEX3. These adjusted parameters integrate the concession contract to be signed between the parties and serve as a basis for future PTRs4.

Continuing with the considerations on IRR, after being calculated during the project feasibility study, it can be explained by the sum of the margin the concessionaire will have in the construction of the infrastructure or its improvement, by the margin the concessionaire will have with O&M, by the early entry into operation of the project, by the optimization of the concessionaire's capital structure, by the tax advantages obtained with the project, by the remuneration rate practiced by the concessionaire in the financing of the contract asset, among others.

A survey carried out by the CVM technical areas with electric power transmission concessionaires, in the financial statements of the social year ending on December 31, 2018, allowed identifying 4 remuneration rates defined for the contracts and 5 models used for their present value measurement, namely:

(1) IRR originally identified in the business plan of the transmission network concession auction, adjusted through non-linear programming at each periodic tariff review event – PTR (through the “solver” or “goal seek” tool of the excel spreadsheet); (2) implicit rate originally identified for the contract asset (CAPEX and construction revenues considered for the calculation of the rate), through non-linear programming (through the “solver” or “goal seek” tool of the excel spreadsheet) and maintained until the end of the contract; (3) original WACC, defined by ANEEL in the transmission network concession auction, maintained until the end of the contract; (4) WACC updated at each periodic tariff review – PTR by ANEEL; and (5) remuneration identified for an NTN-B (interest of the negotiated curve of the paper plus IPCA) with a term similar to that of the contract.

Here a warning from the CVM technical areas is in order, regarding the importance of having consistency in the application of the standard so as to safeguard the comparability of the financial statements among the companies in the sector.

3 The regulatory operation and maintenance costs are contractually defined as being COM(t) = θ * ICO M(t) = θ * I, where θ is a percentage applied to the invested value I (CAPEX) 4 The regulation of the sector has as principles the quality of the service provided and tariff moderation, which is why ANEEL will adjust downwards the tariff (RAP) if the cost of third-party capital falls

Objectively, two are the critical events for the purpose of accounting measurement and recognition of contracts: the gain or loss due to efficiency or inefficiency in the construction of the infrastructure 5 and the gain or loss due to periodic tariff review – PTR 6.

To reduce the risk that the RAP closed in auction generates losses for its shareholders due to inefficiency in the construction of the infrastructure (which implies loss with the contract), some companies seek to celebrate construction contracts with their suppliers, known as turn-key, through which they impute to them the risk of construction inefficiency. Quotations (bidding) are made among suppliers, including sometimes a company from the group itself. The companies, by ANEEL's requirement, also contract with financial agents a surety bond for the faithful performance of the works and impute to their suppliers the cost of the insurance premium.

The analysis carried out by the CVM technical areas of the 5 models of recognition and measurement of contracts revealed the adoption of the following procedures for each critical event:

Gain or loss due to efficiency or inefficiency in the construction of the infrastructure: recognition of the event immediately in accounting or recognition of the event at the end of the construction of the infrastructure. The loss is recognized accounting when it occurs, in a cost or revenue item (the procedure varies among concessionaires) in counterpart to cash or liability. The gain is an event of remote probability of occurrence.
Gain or loss due to periodic tariff review – PTR: remeasurement of the contract asset, bringing to present value the remaining future revenues associated with the construction performance obligation, discounted by the remuneration rate adopted for the contract asset, with said result compared subsequently with the accounted balance of the contract asset. The gain or loss with the PTR is recognized immediately in the Income Statement. An alternative procedure considers the reconfiguration of the cash flows of the contract asset, incorporating the new revenues with the PTR for the remaining term, this reconfiguration upon which a remuneration rate is applied that leads to zeroing the balance of the contract asset at the end of the concession (use of non-linear programming for this purpose, with the aid of the “solver” or “goal seek” tool of the excel spreadsheet). The gain or loss with the PTR is diluted over the remaining term of the contract.

5 Effective CAPEX below or above that estimated in the business plan, which can be explained: (i) by delays and/or additional costs not estimated, associated with environmental issues; (ii) variation in commodity costs, when cables and structures are acquired directly by the company; (iii) additional costs of servitude and land negotiations; (iv) eventual earthmoving surprises - rocks or swamp or (v) by undervaluation of the complexity of the project, when the construction of transmission networks with submarine cables, in forests or hard-to-access areas is at stake.

6 All contracts are subject to a Periodic Tariff Review – PTR, every 5 years, promoted by ANEEL, which basically adjusts the cost of third-party capital incorporating, previously deflated TJLP, and currently the average of NTN-Bs placed in the market in recent periods, also deflated, with maturity periods greater than 5 years (“proxy” for a debenture placement by a company in the sector).
It is important to emphasize that annually the tariffs are corrected by IPCA (IPCA for contracts after 2006 and IGP-M for contracts prior to 2006).

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

Here it is important to highlight an aspect of utmost importance before we delve into the merits of each rate or each model. There must be no artificiality in the definition of the remuneration rate; this definition cannot be based on arbitrary criteria or other preferences that do not reflect the remuneration rate of the contracts. It is never too late to remember that a fundamental attribute of accounting information is the faithful representation of the economic reality to be reported. Departing from this introduces bias into the accounting process of recognition and measurement, potentially causing misleading results.

Additionally, and no less important, it is necessary to emphasize that the accounting model provided by CPC n. 47/IFRS n. 15, with the specific interpretation given by ICPC n. 01/IFRIC 12 for the public service concession sector, requires that the RAP (Regulatory Authorized Revenue) to be earned by the electricity transmission concessionaire over the duration of the concession contract be allocated by performance obligations identified in the contract. In summary, there must be a “mark-up” of the construction cost (construction revenue) 7 and a “mark-up” of the O&M cost (O&M revenue) 8 for their accounting recognition in the Income Statement.

The value of the RAP per performance obligation is not defined in the concession contract signed with ANEEL. There is the global value of the RAP, resulting from the winning bid in the auction. What is defined in the contract, after the winning bid in the auction, is a formula that establishes what will be the O&M regulatory cost for that project9 and the regulatory CAPEX, which do not necessarily correspond to reality in terms of the concessionaire's operation and maintenance costs and construction costs.

What the technical areas were able to gather from information with the concessionaires is that some use these regulatory cost parameters for revenue allocation purposes. Some companies, for example, apply a “mark-up” to costs (incurred or regulatory), based on the best judgment of the concessionaire's management. Others do not even recognize margins for performance obligations, appropriating all results with the project in a financial revenue line.

Regarding this matter, CPC n. 47, in its §§ 73-80, provides guidance on how to proceed to arrive at “stand-alone selling prices,” providing, moreover, the appropriate methods to estimate the selling price in §79, namely: adjusted market evaluation approach, expected cost plus margin approach, and residual approach.

For the CVM technical areas, the effective costs incurred in each activity by the concessionaires (costs incurred with construction and improvement and costs incurred with O&M) must be considered, which is information that each company possesses objectively in its accounting and with a certain degree of reliability. Margins (estimates of individual selling prices) should be applied to these, within the best judgment of the company's management, in line with what is prescribed by CPC n. 47.

7
IFRIC12, §15. The operator shall account for construction or upgrade services in accordance with IFRS 15.
8
IFRIC12, §20. The operator shall account for operation services in accordance with IFRS 15.
9 The regulatory operation and maintenance costs are contractually defined as being 𝐶𝑂𝑀 (𝑡) = 𝜃 ∗ 𝐼𝐶𝑂𝑀 (𝑡) = 𝜃 ∗ 𝐼,, where 𝜃 is a percentage applied to the invested value 𝐼 (CAPEX)

Reinforcing, the construction and O&M performance obligations must have an attribution of profitability margin at the time of their fulfillment, and the calculation of these margins must be performed based on the best judgments of management, observing the value generation vectors of the company and the economic group in which it is inserted, ultimately obtaining the implicit rate of the enterprise's financial flow. Estimates of profitability can be revised as the project's operational flow develops.

Regarding the remuneration rate of the contract asset, we reproduce below §64 of the pronouncement CPC n. 47:

“64. To achieve the objective of item 61, when adjusting the promised amount of consideration to reflect a significant financing component, the entity must use the discount rate that would be reflected in a separate financing transaction between the entity and its customer at the inception of the contract. This rate would reflect the credit characteristics of the party receiving financing in the contract, as well as any guarantee provided by the customer or the entity, including assets transferred in the contract. The entity may be able to determine this rate by identifying the rate that discounts the nominal value of the promised consideration to the cash price that the customer would have paid for the goods or services when (or as) they transfer them to the customer. After the inception of the contract, the entity must not update the discount rate to reflect changes in interest rates or other circumstances (such as changes in the assessment of the customer's credit risk).”

(our emphasis)

The standard suggests the adoption of an implicit rate, if the entity is able to determine it. Considering that concessionaires have all the necessary inputs to calculate the implicit rate of the contract asset (value of the contract asset to be financed, annual correction subject to IPCA, and segregated RAPs for the construction performance obligation, current and future defined in RTPs), it is the understanding of the CVM technical areas that this should be the remuneration rate to be adopted for the contract asset. It also appropriately translates the financing pricing at the date of the auction.

On the other hand, some understand that because the counterparty to the contract is a government entity, only a remuneration rate obtained from a public bond issued for a period equal to that of the concession contract, such as the NTN-B, would apply, regardless of the fact that the rate was agreed upon between the parties in an auction environment.

Some considerations are appropriate here, for an adequate interpretation of the device of the standard, according to the understanding of the CVM technical areas. First, the discount rate must reflect the counterparty's credit characteristics and any guarantees. These are some of the components of the rate. There are other components, such as the risk premium imputed to the rate by the financier. And the cited device (§64) does not impose disregarding other components, as elucidated by §BC239 of the Basis for Conclusions section of IFRS 15 10 . It is 10 IFRS15. BC 239. The boards considered whether the discount rate used to adjust the promised amount of consideration for the effects of a significant financing component should be a risk-free rate or a risk-adjusted rate. A risk-free rate would have been observable and simple to apply in many jurisdictions and it would have avoided the costs of determining a rate specific to each contract. However, the boards decided that using a risk-free rate would

Second, the device is categorical in asserting that the discount rate, once defined, must not change to reflect changes in basic interest rates or changes in the counterparty's credit risk. This is a conceptual aspect of great importance, because if the discount rate were altered due to changes in market circumstances, such as changes in basic interest rates or changes in the counterparty's credit risk, a fair value would be employed in the amount to be reported (by updating the discount rate).

Thus, the rate to be considered to account for financial revenue will be the implicit rate remaining of the asset, after the allocation of construction and O&M margins of the concession, according to the provisions of CPC n. 47 and ICPC n. 01.

The implicit rate used to discount the projected RAP flows should result in a percentage approximately equal to what would be the cash price that the customer would pay for the infrastructure built or improved by the concessionaire in a sales operation, thus reflecting a financing transaction between the concessionaire and the customer at the inception of the contract, considering the effect of inflation, interest, and credit risk.

Construction and O&M revenues must be recognized based on the proportion of services rendered until the end of the accounting disclosure period and immediately confronted with their respective costs and any losses incurred in a timely manner.

Even if companies estimate a construction margin and account for values during the construction phase, it is expected that there will be an impact during the work and also upon the energization of the project, being positive or negative due to events such as: (i) delays and additional costs due to environmental issues; (ii) variation in commodity costs since cables and structures are acquired directly by the Company; (iii) additional costs for easements and land negotiations; (iv) eventual earthmoving unforeseen events (rocks or swamp) and also (v) anticipation of the project energization deadline.

Thus, changes in the project that directly affect its profitability must be recognized directly in the results when detected in a timely manner.

In summary, the recognition of construction revenue must consider the costs effectively incurred in the work, incremented by the construction margin calculated for the project, with gains or losses (efficiencies or inefficiencies in construction) identified not result in useful information, because the resulting interest rate would not have reflected the characteristics of the parties to the contract. In addition, the boards noted that it would not necessarily have been appropriate to use any rate explicitly specified in the contract because the entity might offer ‘cheap’ financing as a marketing incentive and, therefore, using that rate would not have resulted in an appropriate recognition of profit over the life of the contract. Consequently, the boards decided that an entity should apply the rate used in a financing transaction between the entity and its customer that does not involve the provision of goods or services because that rate reflects the characteristics of the party receiving financing in the contract. That rate also reflects the customer’s creditworthiness, among other risks. (our emphasis)

A peculiarity in concession contracts is that they are subject, by virtue of their own provisions, to point modifications every 5 years. There is a price (tariff) change in the contract every periodic tariff review – RTP. These modifications are regulated in the contracts, are known to the parties, and were agreed upon when the contracts were signed.

Reinforcing, there is a price (tariff) change, every 5 years, for the remaining term of the contract to be performed.

These tariff reviews may aim to (1) a modification in the structure of investments made, (2) a change in the projected cash flow for O&M, or (3) a change in the capital remuneration rate. Each RTP review will present a distinct effect for recognition in the results.

Given the nature of TRANSMISSION OF ELECTRICITY sector concession contracts, especially the way they are recognized and remeasured in accounting – long-term projected financial flows within the best estimates and brought to present value – a contract modification may imply a new accounting value (“carrying amount”), a new measurement (“fresh-start”11), and the trigger event is the RTP. Some concessionaires have proceeded in this manner upon recognizing the RTP.

Referring to CPC n. 12, which in its item 5 guides on how to proceed in situations of new measurement, we highlight:

“In this sense, this Pronouncement determines that present value accounting measurement must be applied in the initial recognition of assets and liabilities. Only in certain exceptional situations, such as that adopted in a debt renegotiation where new terms are established, must the present value adjustment be applied as if it were a new measurement of assets and liabilities. It is worth noting that these situations of new measurement of assets and liabilities are rare and are a matter for judgment by those who prepare and audit financial statements, vis-à-vis Specific Pronouncements.” (our emphasis)

The RTP that entails a modification in the structure of investments (Regulatory Remuneration Base) or a change in the capital remuneration rate will require immediate recognition in the results (new measurement – “fresh-start”), in an expense line or other revenues below the operating margin, bringing to present value the remaining future revenues associated with the construction performance obligation, discounted by the remuneration rate adopted for the contract asset. The difference (gain or loss) calculated must be recognized immediately in the results.

The RTP that entails a modification in the projected cash flow for O&M will require recognition in the results by accrual, that is, as they occur, applying to these variations the same accounting treatment used to record the effect of projected inflation for the cash flow, compared to the inflation realized in each period.

In summary, the effect of contract modification, in this case the effect of the RTP, arising from a modification in the structure of investments (Regulatory Remuneration Base) or a change in the capital remuneration rate, must be recognized in a timely manner as an adjustment of revenue on a cumulative basis. There must be no dilution of this over the remaining term of the contract, as some concessionaires do. Thus, for these RTPs, the remeasurement of the contract asset must occur – a “fresh-start”, bringing future RAPs to present value by the implicit rate originally identified for the contract asset and confronting with the accounted balance, to recognize the gain or loss in the Income Statement. This is the understanding of the CVM technical areas.

Treatment of the Variable Portion – Variable Consideration

According to information that the technical areas became aware of, some electricity transmission companies, upon initial measurement of their contracts and determination of the remuneration rate to be applied for the purpose of recognizing financial revenue, make an estimate of the variable portion - PV (to be received or paid) in their projected flows, while others opt not to adopt this estimate, adjusting in results the effects resulting from the variable portion when it actually occurs (incorporation into RAP) 12 .

There are two consequences with the adoption of such procedures. The first is the distortion of the contract's remuneration rate (by not considering the PV estimate), and in this particular, the effect of the PV on the calculation of the remuneration rate may not be negligible, according to current legislation for the electricity transmission sector. The second concerns the compromise of the accrual basis, by recognizing the PV only when its effective financial effect (incorporation into RAP) occurs, also violating what is determined by the pronouncement CPC n. 47, regarding variable consideration.

In current regulation - ANEEL Resolution No. 729/2016 - there is provision for 3 types of PV, namely: (1) Variable Portion for Delay in Commercial Operation Entry – PVA (the delay period considered in the discount calculation is limited to 90 days), applied to eventual delays in the commercial operation entry of facilities; (2) Variable Portion for Unavailability – PVI, applied when there are shutdowns in facilities; and (3) Variable Portion for Operational Restriction – PVRO, applied when the facility operates with capacity restrictions. The sum of the PVI and PVRO values cannot exceed 12.50% of the value of the 12 Information brought to the attention of the technical areas by ABRACONEE – Brazilian Association of Accountants of the Electricity Sector

Payment through the RAP is made by availability, with any discounts related to PV resulting from the non-provision of the contracted service. These discounts are provided for in rules and contracts when the failure occurs due to the concessionaire's own management, that is, shutdowns caused by third parties are not considered, among others.

It is the understanding of the CVM technical areas that the procedure employed for PV in different ways by concessionaires for contract measurement and revenue recognition generates inconsistency, not being subject to the list of accounting choices by the management of electricity transmission companies.

The Variable Portion – PV is included in the concept of variable consideration of the pronouncement CPC n. 47. As already emphasized, PV is a mechanism by which the sector regulator - ANEEL penalizes inefficient concessionaires and rewards efficient ones, redistributing portions of the RAPs among concessionaires.

Referring to the technical pronouncement CPC n. 47 (IFRS n. 15), we find the discipline of variable consideration, among others, in the following devices:

“50. If the consideration promised in the contract includes a variable amount, the entity must estimate the value of the consideration to which the entity will be entitled in exchange for the transfer of the goods or services promised to the customer.” (our emphasis)

“51. The value of the consideration may vary due to discounts, rebates, refunds, credits, price concessions, performance incentives, penalties, or other similar items. The consideration promised may also vary if the entity's right to consideration depends on the occurrence or non-occurrence of a future event. For example, the value of the consideration is variable if the product is sold with a right of return or if a fixed value is promised as a performance bonus in case a specified milestone is reached.” (our emphasis)

It is important to note that operationally, during the calculation of the PV, the transmission company has the right to contradiction and full defense, being able to allege force majeure or fortuitous event (exclusion of liability). In this sense, there is a time delay between the application of the PV and its effective financial effect (its incorporation into the RAP).

With this in mind, upon initial measurement of the contract, the best estimate for the occurrence of the PV, positive or negative, must be made for the purpose of determining the remuneration rate of the contracts.

The technical areas recommend that in the process of revenue recognition in the transmission company's accounting, it be recognized by accrual in an asset line, with a designation that identifies the variable portion, in counterpart to the results of the fiscal year – revenue variable consideration, within the best estimate of the management of the

11 A fresh-start is a measurement that follows the initial recognition period to establish a new measurement base unrelated to previous amounts or accounting methods. The fresh-start is sometimes adopted periodically, as is the case with financial instruments marked to fair value, or in other situations where its application is promptly required by force of critical events (trigger events), as is the case with asset impairments. Regarding this matter, CPC n. 12, in its §5, draws attention to situations in which the present value adjustment must be used in accounting measurement to define a new measurement (“fresh-start”), such as the case of debt renegotiations, for example.

company's management.

RBSE Asset
The electricity transmission facilities that are part of the basic network were the subject of a concession, through bidding, in accordance with the legal command defined by Law No. 9,074/95, art. 17, § 1st. The tariff for the granted public service until then was fixed by the price of the winning bid, in accordance with Law No. 8,987/95, and preserved by revision rules provided for in the bidding notice and the concession contract.
The Existing System Basic Network – RBSE comprises part of the Electricity Transmission System, according to the classification provided for in art. 3 of ANEEL Resolution No. 67/2004, which states as follows:
“Art. 3rd The Basic Network of the National Interconnected System - SIN integrates the Transmission Facilities, defined according to item II of the previous article, that meet the following criteria:
I – transmission lines, busbars, power transformers and substation equipment at voltage equal to or greater than 230 kV; and II – power transformers with primary voltage equal to or greater than 230 kV and secondary and tertiary voltages lower than 230 kV, as well as their respective connections and other equipment connected to the tertiary, from July 1, 2004.”

COMMISSION OF SECURITIES AND EXCHANGE COMMISSION Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Centro, Rio de Janeiro/RJ – CEP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brazil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4th Floor, Brasília/DF – CEP: 70712-900 – Brazil -Tel.: (61) 3327-2030/2031 www.cvm.gov.br The Union, through non-bid concession contracts, regulated the exploration by companies of the public electricity transmission service, through transmission facilities under their responsibility, classified as part of the basic network, during the verticalization of the electrical sector 13. With the advent of Law No. 12,783/2013, art. 6th (conversion of MP No. 579/2012), electricity transmission concessions covered by §5th of article 17 of Law No. 9,074/95 (“Basic Network”) could be extended, only once, for 30 years, conditioned on the acceptance by the concessionaires of the following rules: (i) revenue fixed according to criteria established by ANEEL and (ii) submission to quality standards for the service fixed by ANEEL. Additionally, for those concessions renewed by the Granting Authority, art. 15 of Law No. 12,783/2013 established that the portion of undepreciated (unamortized or uncompensated) investments linked to reversible assets should compose the revenue of the concessionaires, being revised periodically. For those concessions not renewed 14, art. 8 of Law No. 12,783/2013 established a bidding process, in the modality of auction or competitive bidding, for up to 30 years and provided in §2nd of art. 8 a compensation for the portion of undepreciated (or unamortized) investments based on the new replacement value, established in regulation by the granting authority. In summary, it can be inferred that what occurred with Law No. 12,783/2013 was the celebration of a modification in the contract, regarded by ANEEL itself as an addendum to the previous contract – formally, contractual addendums were celebrated – establishing a new regulation for the assets included in the so-called Basic Network, with a change in price (according to criteria established by ANEEL), definition of a RAP for the next 30 years, and the use of a new regulatory model for these assets, with the same being subject to operational efficiency measurement mechanisms (application of PV to the additional RAP). Thus, in regulation of the law, ANEEL, through Normative Resolution No. 762/2017, established in article 1 that the assets provided for in art. 15 of Law No. 12,783/2013 now compose the Regulatory Remuneration Base – RRB of electricity transmission concessionaires, with their values homologated by ANEEL (New Replacement Value – NRV). The additional RAP arising from Law No. 12,783/2013 to remunerate the assets designated as “Basic Network” is decomposed into 2 installments, namely:

Economic Installment: New Replacement Value – NRV (appraisals homologated by ANEEL of RBSE assets not fully depreciated) from July 2017, which will be received for the remaining useful life of the assets;
Financial Installment (recoverable in 8 years via RAP), divided into:
13 Information obtained in contact with ABRACONEE – Brazilian Association of Accountants of the Electrical Energy Sector.
14 According to information obtained from ANEEL, all contracts were renewed.

capital cost not incorporated into RAP from 01.01.2013 to 30.06.2017 (depreciation plus WACC): installments not paid between 2013 and 2017;
correction of installments not paid between 2013 and 2017 (by the cost of real own capital).
A first question that naturally emerges concerns the efficiency control mechanism employed by ANEEL: the Variable Payment – PV, which evidences whether or not the obligation of O&M performance or construction and improvement – C&M 15 was fulfilled, in case it applied to the total additional revenue provided for by Law No. 12,783/2013.
The vote prepared for process 48500.004550/2016-69, which followed ANEEL’s Normative Resolution No. 762/2017, is categorical in reinforcing that (1) with Law No. 12,783/2013 there was a new regulation for the assets included in the so-called “Basic Network”, with their inclusion in the RRB and application of a new tariff process, with their subjection even to efficiency control mechanisms; (2) the additional revenues comprise the economic component and the financial component of the “Basic Network” and (3) the application of PV or other penalties applies to the additional revenues. We reproduce below excerpts from the vote:
“Law 12,783/2013 refers the payment method for undepreciated assets to a regulation and, for this reason, it is a basic premise of the present calculation that, by establishing that the values of undepreciated assets would be included in the RRB of concessionaires, Ordinance 120/2016 defined a treatment consistent with the tariff process, thereby excluding, therefore, the compensation nature for these assets.
Thus, the argument that the receipt of the full Net Base, without any reductions, constitutes an acquired right does not hold, since this is not the logic of receiving revenue over the useful life of an asset.
(...)
A second analysis concerns the return obtained with the various possible alternatives for paying this revenue. As stated in Technical Note No. 23/2017-SGT/ANEEL, the alternative with the payment of additional revenues from July 2017 and which considers, in addition to the economic calculation, the inclusion of a financial component for 8 years constituted from the real cost of own capital rate, after taxes, is what most closely approximates a hypothetical alternative in which there would be no shift in the start of payment (...) Again, the discussion resumes regarding the mechanism chosen by the Granting Authority for paying these assets. As already mentioned, by defining their inclusion in the RRB, coherence with the tariff process already regulated by ANEEL was defined. Therefore, on the additional revenue arising from the regulation of the Ordinance, the application of PV or other penalties applies, as well as the calculation of any write-offs occurring in this period, as treated in Normative Resolution No. 729/2016 and Submodule 9.1 of PRORET.” (our highlights) The use of the efficiency control mechanism is capital for the adoption of IFRS 15 regarding revenue recognition by the electricity transmission sector, since, as already highlighted in this document, the mechanism evidences whether or not the obligation of O&M and/or construction and improvement – C&M performance was fulfilled. In contacts established with ANEEL, to corroborate our understanding regarding what is contained in the regulation of Law No. 12,783/2013, in an explicit and categorical manner, we were informed that upon signing the contractual addendums, the revenue associated with these assets was segregated into two components: (1) economic installment (portion of undepreciated, unamortized, or uncompensated assets) and (2) financial installment (remuneration plus depreciation, plus update by the real cost of own capital of the sector). And that our understanding regarding the application of PV and other penalties to the entire additional RAP (economic and financial installment) indeed holds. Therefore, all RBSE – “Basic Network” – asset is subject to regulatory mechanisms for measuring efficiency (O&M performance obligation), with the imposition of PV or other penalties on the additional revenue arising. It is important to highlight, once again, that Law No. 12,783/2013 renewed the contracts then in force for the RBSE asset, being regarded by ANEEL itself as an addendum to the previous contract. Contractual addendums were formally signed and all concessionaires opted to renew. In this regard, referring once again to CPC Pronouncement No. 47 (IFRS No. 15), the technical areas of CVM understand that it is appropriate to apply §21, letter “b”, by analogy to the procedure dispensed with in an RTP. Thus, in light of the cited provision of Pronouncement CPC No. 47, and considering the peculiarities of electricity transmission concession contracts, the technical areas of CVM
understand that upon the initial adoption of CPC No. 47, a remeasurement of the entire contract asset – RBSE – must be made. The future RAPs defined in the addendum (contractual modification) must be brought to present value by the implicit rate of return of the contract asset, and this value must be compared with the balance of the contract asset accounted for, to recognize, on a cumulative basis, the gain or loss in the contractual modification (a “fresh-start”). In a survey conducted by the technical areas of CVM, for the purpose of obtaining a portrait of the application of IFRS 15 to all electricity transmission contracts, a disparity in accounting treatments adopted by concessionaires for the RBSE asset was found. The technical areas of CVM, through information obtained from ABRACONEE, learned that the accounting treatment dispensed with for the RBSE asset was the result of accounting choices made by the administrations of the concessionaires, based on business management models. Two choices were made: Option A (single asset, classified as financial according to IFRS 9 and measured at “fair value” against result) and Option B (segregated asset, in which the economic installment was classified as a contract asset according to IFRS 15 and the financial installment classified as a financial asset according to IFRS 9 and measured at amortized cost). The scheme below, provided by ABRACONEE, synthesizes the accounting treatments dispensed with. Although we are facing the same category of asset – RBSE, subject to the same regulation and the same tariff and regulatory mechanism, being remunerated according to an RRB detailed by ANEEL, the concessionaires understand that according to their business management model they can make accounting choices. For example, by the accounting treatment given by Option A (in this case there is a single asset, all of it classified under IFRS 9 and measured at “fair value” against result), the concessionaires who so opted understand that they can “trade” the entire RBSE asset, which would be absurd given the nature of the asset and the characteristics of a concession contract. On the other hand, the concessionaires who made Option B (segregated asset) understand that they can bifurcate the asset into two parts: economic installment classified under IFRS 15 as a contract asset and financial installment classified under IFRS 9 as a financial asset and at amortized cost. In addition to being an accounting problem, with its consequences in terms of loss of comparability and unreliable representation, we are facing a problem of formal logic. How to admit, for example, that for the same asset there is a negative result in the SPPI test (solely payments of principal and interest) and for another there is no negative result in the SPPI test? It is worth reinforcing: we are facing the same category of asset – RBSE, subject to the same regulation and the same tariff and regulatory mechanism, being remunerated according to an
RRB detailed by ANEEL. It is the understanding of the technical areas of CVM that the administration of an open company should not establish accounting policies aimed at achieving specific results. Under the mantle of the “business model” decisively, one cannot make accounting choices when these choices conflict with the normative accounting criteria defined for the business model itself. Especially when one is not facing a situation where it is possible to make choices, as is the concrete case of the RBSE asset. The biased application of IFRSs leads

COMMISSION OF SECURITIES AND EXCHANGE COMMISSION Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Centro, Rio de Janeiro/RJ – CEP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brazil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4th Floor, Brasília/DF – CEP: 70712-900 – Brazil -Tel.: (61) 3327-2030/2031 www.cvm.gov.br to situations where the investor may be misled, i.e., situations where the investor is led to incorrectly interpret a certain economic reality, whose reporting was carried out in a distorted manner, potentially causing, thus, misleading. The issue gains relevance, in that other infrastructures not included in the RBSE category, but subject to the same regulatory and tariff mechanism, are receiving the accounting treatment presented in the first section of this document, namely, as contract assets, recognized in counterpart to revenue. They only pass to the category of financial asset (and at amortized cost), and fall within the scope of Pronouncement CPC No. 48 (IFRS No. 9), after the issuance of the AVC by ONS. With the objective of obtaining a post-IFRS No. 15 picture, the technical areas of CVM conducted a survey, based on the Financial Statements of 31.12.2018, to map the accounting treatment dispensed with by transmission companies or by subsidiaries of companies registered with CVM, the result of which was synthesized as follows:
(i) companies that do not present RBSE asset infrastructure treat their assets as “contract asset” in their entirety and recognize revenue according to the fulfillment of performance obligations; and (ii) for companies that present RBSE asset infrastructure, as already highlighted in this section of the Circular Letter, there are two choices of accounting treatment defined by the companies, namely:
a. Option A - RBSE as a single asset, measured at “fair value” against result. b. Option B - RBSE as a bifurcated asset, with the economic installment classified as a contract asset and its revenue recognized in the Income Statement according to the fulfillment of performance obligation and the financial installment classified as a financial asset, at amortized cost.
An exception worthy of note is a subsidiary of the sector that presents RBSE asset in its entirety as a contract asset, applying IFRS No. 15 consistently to its application to other assets.
Decisively, when it comes to the RBSE asset, we are not facing a situation that qualifies as making accounting choices. And considering the tariff and regulatory characteristic applied to it with the contractual addendums celebrated after Law No. 12,783/2013, and subsequent regulations, it is also not the case to dispense a special treatment to the RBSE asset in relation to other assets to which the dictates of IFRS No. 15 are applied in full. It is the understanding of the technical areas of CVM that IFRS No. 15 must be applied consistently to the RBSE asset as to other assets. It is the understanding of the technical areas that: (i) there was in the concrete case of the RBSE assets, with the advent of Law No. 12,783/2013, a modification of contract; (ii) in accordance with Pronouncement CPC No. 47, §21, letter “b”, the additional RAP related to the RBSE (without distinction) must be recognized as a contract asset in counterpart to revenue (the goods or services are not distinct), as long as the performance obligations of the contract are satisfied

15 In old transmission networks, reinforcements/upgrades are sometimes required by ANEEL. A certain concessionaire managerially controls these reinforcements as if they were new contracts (it is its accounting unit). And according to information passed to us, today approximately 1,800 projects are managerially controlled, although the company has 19 contracts and 6 contracts under the responsibility of subsidiaries jointly.

COMMISSION OF SECURITIES AND EXCHANGE COMMISSION (CVM) Rua Sete de Setembro, 111/2-5º and 23-34º Floors, Centro, Rio de Janeiro/RJ – CEP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º and 4º Floors, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brazil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4º Floor, Brasília/DF – CEP: 70712-900 – Brazil - Tel.: (61) 3327-2030/2031 www.cvm.gov.br

renewed, being reclassified as a financial asset only after ANEEL's authorizing dispatch.

In summary, the CVM technical areas understand that on the date of contract renewal (RBSE Asset), a fresh-start measurement of the entire contract asset - RBSE must be performed.

The future RAPs defined in the amendment (contractual modification) must be brought to present value by the asset's remuneration rate, and this value must be compared with the balance of the contract asset accounted for, to recognize, on a cumulative basis, the gain or loss on the contractual modification.

Additionally, the CVM technical areas understand that regarding the remuneration of the financial component portion (correction of unpaid installments between 2013 and 2017), subject to judicial discussion regarding the calculation of such remuneration, management must exercise judgment, considering all relevant facts and circumstances involved in the case, evaluating the consequent impacts on the accounting statements resulting from the outcome of the process, providing adequate and detailed disclosure of the issue in an explanatory note.

The concessionaire's management must exercise periodic judgment regarding the process and provide disclosure in an explanatory note of its conclusions, until the matter is settled judicially and/or resolved between the involved parties. 16

Geography of Financial Revenue in the Income Statement (DRE)

The CVM technical areas understand that the presentation of financial revenue in the income statement – DRE must be distinguished from the margins calculated with the satisfaction of performance obligations for construction and improvement and for operation and maintenance.

In line with Pronouncement CPC n. 47, the objective of identifying a significant financing component in contracts is to reflect the price the customer would have paid for the promised goods or services, if the customer had paid cash for those goods or services.

Furthermore, the objective is also to present the effects of financing to the customer separately in the DRE. Thus, §§ 61 and 65 of Pronouncement CPC n. 47 (IFRS n. 15) prescribe:

“61. The objective, when adjusting the promised consideration value for a significant financing component, is that the entity recognizes revenue at a value that reflects the price the customer would have paid for the promised goods or services, if the customer had paid cash for those goods or services when (or as) they were transferred to the customer (i.e., the cash selling price). The entity must consider all relevant facts and circumstances when assessing whether the contract contains a financing component and whether that component is significant for the contract, including both of the following: (a) the difference, if any, between the value of the promised consideration and the cash selling price of the promised goods or services; and (b) the combined effect of the provisions in the two following subsections: (i) the expected time duration between the moment the entity transfers the promised goods or services to the customer and the moment the customer pays for those goods or services; and (ii) the prevailing interest rates in the relevant market.” (our emphasis)

“65. The entity must present the effects of financing (interest revenue or interest expense) separately from revenue from contracts with customers in the statement of comprehensive income. Interest revenue or interest expense must be recognized only to the extent that a contract asset (or receivable) or contract liability is recognized in the accounting of the contract with the customer.” (our emphasis)

The reason for the separate presentation in the DRE of the significant financing component of the contract lies in the distinct economic characteristics (nature) to be recognized accounting-wise: one reflects the transfer of products or services to the customer and the other reflects a financing arrangement. Thus, it appears in the “Basis for Conclusions” section of IFRS n. 15, in its §BC246. 17

Regarding this, in the Illustrative Examples (EI) of ICPC n. 01 (IFRIC 12), the exercises highlight in a segregated line of financial revenue (finance income) the financial result earned by the concessionaire with the financing of the built infrastructure, whether in the financial asset model or in the intangible asset model.

Notwithstanding, CPC n. 12 – Adjustment to Present Value, in its annex, provides for the possibility of highlighting within the Sales Revenue group the identified financing component. Regarding this, it is worth reproducing an excerpt from the pronouncement:

“For some entities, the difference ($20) between the present value of accounts receivable ($80) and the value to be received at the end of six months ($100) may be appropriated as commercial financial revenue, in the same group as sales revenue, instead of financial revenue, provided that the entity demonstrates that the financing made to its customers is part of its business and that it operates with, for example, two segments: (i) sale of products and services and (ii) financing of installment sales. (our emphasis)

Thus, the administrators of transmission companies must observe the cited provisions, namely CPC n. 47, ICPC n. 01, and CPC n. 12, to define the accounting treatment of financial revenue arising from their concession contracts, to be recognized in the DRE. If the selected accounting policy is to classify within the Revenue from Operations group, financial revenue (financing of operating infrastructure) must be segregated in its own line, from the Construction margin (revenue from the sale of goods and products to the customer).

Disclosure in Explanatory Note – Construction and O&M Margins

Pronouncement CPC n. 47 (IFRS n. 15) brings, in a section dedicated to disclosure, principles that must be observed by preparers, to fully comply with its requirements. We reproduce below §110:

“110. The objective of the disclosure requirements is that the entity discloses sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenues and cash flows arising from contracts with customers. To achieve this objective, the entity must disclose qualitative and quantitative information about all of the following items: (a) its contracts with customers (see items 113 to 122); (b) significant judgments and changes in judgments made in applying this pronouncement to these contracts (see items 123 to 126); and (c) any assets recognized from costs to obtain or fulfill a contract with a customer in accordance with item 91 or item 95 (see items 127 and 128).” (our emphasis)

It is the understanding of the CVM technical areas that electric power transmission companies, without prejudice to other required disclosures, should disclose in an explanatory note the margins of the performance obligation for construction and improvement and the performance obligation for operation and maintenance, as well as the criteria and methodology used for the estimates made. Strictly speaking, they must disclose the revenue earned and cost incurred in each activity, to fully comply with the revenue disaggregation requirements of Pronouncement CPC n. 47, §§ 114-115.

There is no doubt that the IRR originally calculated for the business plan and “reset” at each critical event (gain or loss with CAPEX and/or gain or loss with RTP) is information of great relevance to the investor. It properly translates what is happening with the projects. In summary, it translates for the market the creation or destruction of shareholder wealth.

It is the understanding of the CVM technical areas that electric power transmission companies, without prejudice to other required disclosures, should also disclose in an explanatory note the IRR per project or per families of projects (depending on the form by which the concessionaire's management follows and manages its contracts), “reset” whenever a critical event occurs.

Other information may also be provided in an explanatory note attached to the transmission companies' financial statements, such as: (i) contract validity; (ii) current and/or estimated RAP; (iii) contract correction index; (iv) date of the next RTP; (v) construction costs incurred, among other relevant data from the financial flows.

Initial Adoption of the Terms of this Letter – Transitional Provisions

The requirements provided for in this Circular Letter must be applied to financial statements relating to the fiscal year ending 12/31/2020.

The administrators of the companies must apply the requirements of this Circular Letter using the retrospective method, with cumulative effect recognized in the financial statements indicated in the previous paragraph. The cumulative effect of initially applying this Circular Letter will be treated as a prior period adjustment in the opening balance of retained earnings, to fully observe what is prescribed by Law n. 6.404/76, art. 186, §1º.

The administrators of the companies must also observe §§ C4 to C8 of CPC n. 47, insofar as applicable to the method used for initial adoption. And they must also pay attention to the disclosure requirements provided for in CPC n. 23, insofar as applicable and insofar as it does not conflict with §§ C4 to C8 of CPC n. 47, particularly in what is provided for in §§28-31 of CPC n. 23.

Sincerely,

Electronically signed by
PAULO ROBERTO GONAÇALVES FERREIRA
Superintendent of Accounting Standards and Auditing

Electronically signed by
FERNANDO SOARES VIEIRA
Superintendent of Corporate Relations

--- Footnotes ---
16 Regarding this, according to information published on the National Congress website (https://www.camara.leg.br/noticias/592211-indenizacao-de-empresas-de-transmissao-de-energia-eletrica-poderater-nova-regra/), Federal Chamber of Deputies Bill n. 4.636/2019 is pending, which aims to regulate the matter.

17 IFRS n. 15, §BC246 - The boards decided that an entity should present the effect of the financing (ie the unwinding of the discount) separately from revenue from contracts with customers, as interest revenue or interest expense, rather than as a change to the measurement of revenue. This is because contracts with financing components that are significant have distinct economic characteristics - one relating to the transfer of goods or services to the customer and one relating to a financing arrangement - and those characteristics should be accounted for and presented separately. (our emphasis)

CVM Circular Letter SNC/SEP No. 04/2020

Lineage: In force