CVM Resolution 100 Approves Consolidated Technical Pronouncement CPC 19(R2) on Joint Arrangements

The PRESIDENT OF THE COMMISSION OF SECURITIES AND EXCHANGE COMMISSION - CVM makes public that the Collegiate Board, in a meeting held on April 14, 2022, based on §§ 3 and 5 of art. 177 of Law No. 6.404, of December 15, 1976, combined with items II and IV of § 1 of art. 22 of Law No. 6.385, of December 7, 1976, as well as arts. 5 and 14 of Decree No. 10.139, of November 28, 2019, APPROVED the following Resolution:

Art. 1. It makes mandatory for open capital companies the Technical Pronouncement CPC 19(R2), which deals with joint arrangements, issued by the Accounting Pronouncements Committee - CPC, as consolidated in Annex "A" to this Resolution.

Art. 2. Deliberation 694, of November 23, 2012, is revoked, from the effective date of this Resolution.

Art. 3. This Resolution enters into force on July 1, 2022.

Signed electronically by
Marcelo Barbosa
President

Summary Item
OBJECTIVE 1 – 2
SCOPE 3
JOINT ARRANGEMENTS 4 – 19
Joint Control 7 – 13
Types of joint arrangements 14 – 19
FINANCIAL STATEMENTS OF PARTIES TO A
JOINT ARRANGEMENT 20 – 25
Joint Operations 20 – 23
Jointly Controlled Entities 24 – 25
SEPARATE FINANCIAL STATEMENTS 26 – 27
INDIVIDUAL FINANCIAL STATEMENTS 27A
APPENDICES
A Definition of terms
B Application Guide
C Transitional Provisions
ILLUSTRATIVE EXAMPLES

Objective

The objective of this Technical Pronouncement is to establish principles for financial reporting by
entities that have interests in jointly controlled businesses (joint arrangements).
This Technical Pronouncement defines joint control and requires the entity that is a party
to a joint arrangement to determine the type of joint arrangement it is involved in through the evaluation of its rights and obligations and account for these rights and obligations according to that type of joint arrangement.

Joint arrangement
4. A joint arrangement is a business of which two or more parties have joint control.
5. A joint arrangement has the following characteristics:
(a) The parties are bound by a contractual agreement (see items B2 to B4).
(b) The contractual agreement gives two or more of these parties joint control of the business (see items 7 to 13).
6. A joint arrangement is a joint operation or a jointly controlled entity (joint venture).

Joint control
7. Joint control is the contractually agreed sharing of control of a business,
which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.
8. The entity that is a party to a joint arrangement must assess whether the contractual agreement gives all parties
the control of the business collectively. All parties, or group of parties, control the business collectively when they act together to direct the activities that significantly affect the returns of the business (or i.e., the relevant activities).
9. Once it has been determined that all parties, or group of parties,
control the business collectively, joint control exists only when decisions regarding the relevant activities require the unanimous consent of the parties controlling the business collectively.
10. In a joint arrangement, no party controls the business individually. The party
that holds joint control of the business can prevent any of the other parties from controlling the business.
11. A business may be characterized as a joint arrangement even if not all of its
parties have joint control of the business. This Technical Pronouncement distinguishes between parties that hold joint control of a joint arrangement (operators in joint or joint venturers) and parties that participate in a joint arrangement but do not have joint control of it.
12. The entity must apply judgment in assessing whether all parties, or a group of parties,
have joint control of the business. The entity must make this assessment considering all facts and circumstances (see items B5 to B11).
13. If facts and circumstances change, the entity must reassess whether it still has joint
control of the business.

Types of joint arrangements
14. The entity must determine the type of joint arrangement it is involved in. The classification
of a joint arrangement as a joint operation or as a jointly controlled entity (joint venture) depends on the rights and obligations of the parties to the business.
15. A joint operation is a joint arrangement under which the parties
that hold joint control of the business have rights to the assets and have obligations for the liabilities related to the business. These parties are called joint operators.
16. A jointly controlled entity (joint venture) is a joint arrangement under which
the parties that hold joint control of the business have rights to the net assets of the business.
These parties are called joint venturers.
17. The entity must apply judgment in assessing whether a joint arrangement is a joint operation
or a jointly controlled entity (joint venture). The entity must determine the type of joint arrangement it is involved in considering its rights and obligations arising from the business. The entity must evaluate its rights and obligations considering the structure and legal form of the business, the contractual terms agreed by the parties to the contractual agreement and, when relevant, other facts and circumstances (see items B12 to B33).
18. Sometimes, the parties are bound by a contractual framework that
establishes the general contractual terms for carrying out one or more activities. The contractual framework may define that the parties establish different joint arrangements to handle specific activities that are part of the business. Although these joint arrangements are related to the same contractual framework, their type may be different if the rights and obligations of the parties differ when carrying out the different activities addressed in the business. Consequently, joint operations and jointly controlled entities (joint ventures) may coexist when the parties carry out different activities that are part of the same contractual framework.

Financial statements of parties to a joint arrangement Joint operations
20. A joint operator shall recognize, with respect to its interests in a joint operation:
(a) its assets, including its share of any assets held jointly; (b) its liabilities, including its share of any liabilities incurred jointly; (c) its revenue from the sale of its share of the output from the joint operation; (d) its share of the revenue from the sale of the output of the joint operation; and (e) its expenses, including its share of any expenses incurred jointly.
21. A joint operator shall account for the assets, liabilities, revenues and expenses related to its
interests in a joint operation in accordance with the applicable Technical Pronouncements, Interpretations and Guidance of the CPC for the specific assets, liabilities, revenues and expenses.
21A. When the entity acquires an interest in a joint operation in which the activity of the joint operation constitutes a business, as defined in Technical Pronouncement CPC 15, the principles on the accounting for business combinations of Technical Pronouncement CPC 15 and other pronouncements, to the extent of its interest, apply, provided they do not conflict with the guidance of this pronouncement. The entity must disclose the information required by those pronouncements regarding the business combination. This applies to initial and additional acquisitions of interest in a joint operation in which the activity of the joint operation constitutes a business. The accounting for the acquisition of interest in this type of joint operation is specified in items B33A to B33D.
22. The accounting for transactions such as the sale, subscription of interest with asset contribution or the purchase of assets between an entity and a joint operation, of which it is a joint operator, is specified in items B34 to B37.
23. A party to an agreement that participates in a joint operation, but does not hold joint control of it, shall account for its interests in the business also in
compliance with items 20 to 22, if that party has rights to the assets and has obligations for the liabilities related to the joint operation. If a party to a joint operation, but does not hold joint control of it, does not have rights to the assets and obligations for the liabilities related to that joint operation, it shall account for its interests in the joint operation in accordance with the Technical Pronouncements, Interpretations and Guidance of the CPC applicable to those interests.

COMMISSION OF SECURITIES AND EXCHANGE COMMISSION Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Center, 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 Jointly controlled entities (joint ventures)
24. A joint venturer shall recognize its interests in a jointly controlled entity (joint venture) as an investment and shall account for that investment using the equity method, in accordance with Technical Pronouncement CPC 18 - Investment in Associate, Controlled Entity and Jointly Controlled Entity, unless the entity is exempt from applying the equity method, as specified in the Pronouncement and legally permitted.
25. A party to an agreement that participates in a jointly controlled entity (joint
venture), but does not hold joint control of it, shall account for its interests in the business in accordance with Technical Pronouncement CPC 38 - Financial Instruments:
Recognition and Measurement, unless it has significant influence over the jointly controlled entity (joint venture), in which case the accounting shall observe what is established in Technical Pronouncement CPC 18.

Separate financial statements
26. In its separate financial statements, the joint operator or the joint venturer shall account for its interests in:
(a) joint operation, in accordance with items 20 to 22; (b) jointly controlled entity (joint venture), in accordance with item 10 of Technical Pronouncement CPC 35 – Separate Financial Statements.
27. In its separate financial statements, the party to an agreement, which participates in a joint arrangement, but does not hold joint control, shall account for its interests in:
(a) joint operation, in accordance with item 23; (b) jointly controlled entity (joint venture), in accordance with Technical Pronouncement CPC 38 - Financial Instruments: Recognition and Measurement, unless it has significant influence over the jointly controlled entity (joint venture), in which case the accounting must observe item 10 of Technical Pronouncement CPC 35 – Separate Financial Statements.

Individual financial statements
27A. In its individual financial statements, only entities with interests in joint operations organized without legal personality must apply items 20 to 22 or 23 of this Pronouncement.

joint arrangement Agreement under which two or more parties have joint control. joint control Contractually agreed sharing of control of a business, which exists only when decisions about the activities relevant require the unanimous consent of the parties sharing control. joint operation (joint operation) Joint arrangement under which the parties that hold joint control of the business have rights to the assets and obligations for the liabilities related to the business. joint operator (joint operator) Party to a joint operation that holds joint control of that joint operation. jointly controlled entity (joint venture) Joint arrangement under which the parties that hold joint control of the business have rights to the net assets of the joint arrangement. joint venturer (joint venturer) Party to a jointly controlled entity (joint venture) that holds joint control of that entity. party to a joint arrangement Entity that participates in a joint arrangement, regardless of whether that entity holds joint control of the joint arrangement. separate vehicle Separately identifiable financial structure, including separate legal entities or entities recognized by statute, regardless of whether these entities have legal personality.

The following terms are defined in Technical Pronouncement CPC 35 – Separate Financial Statements, in Technical Pronouncement CPC 18 or in Technical Pronouncement CPC 36 – Consolidated Financial Statements, and are used in this Technical Pronouncement with the meanings specified in those Technical Pronouncements:

control of investee
equity method
power
protective rights
relevant activities
separate financial statements
significant influence.

Joint arrangements
Contractual agreement (item 5)
B2. Contractual agreements can be evidenced in various ways. A contractual agreement, whose compliance can be enforced coercively, is often, but not always, concluded in writing, usually in the form of a contract or documented discussions between the parties.
Legal or statutory mechanisms can also create agreements, whose compliance can be enforced coercively, either alone or together with contracts concluded between the parties.
B3. When joint arrangements are structured through a separate vehicle (see items B19 to B33), the contractual agreement or some aspects of the contractual agreement will, in some cases, be incorporated into the articles of association, the constitutive acts or the bylaws of the separate vehicle. B4. The contractual agreement defines the terms under which the parties participate in the activity subject of the business. The contractual agreement usually deals with issues such as:
(a) the purpose, activity and duration of the joint arrangement; (b) how the members of the board of directors or equivalent administrative body of the joint arrangement are appointed; (c) the decision-making process: the matters that require decisions by the parties to the agreement, the voting rights of the parties to the agreement and the quorum required for these matters. The decision-making process reflected in the contractual agreement establishes the joint control of the business (see items B5 to B11); (d) the capital or other resource contributions required from the parties to the agreement; (e) how the parties to the business share assets, liabilities, revenues, expenses or profits and losses related to the joint arrangement.

Joint control (items 7 to 13)
B5. In assessing whether the entity holds joint control of the business, the entity must first assess whether all parties to the agreement, or group of parties, control the business. Technical Pronouncement CPC 36 – Consolidated Financial Statements defines control and must be used to determine whether all parties, or group of parties, are exposed, or have rights, to the variable returns from their involvement in the business and whether they have the capacity to affect those returns through their power over the business. When all parties, or group of parties, considered collectively, have the capacity to govern the activities that significantly affect the returns of the business (i.e., the relevant activities), these parties control the business collectively. B6. After concluding that all parties, or group of parties, control the business collectively, the entity must assess whether it has joint control of the business. Joint control exists only when decisions about the relevant activities require the unanimous consent of the parties that control collectively the business. Assessing whether the business is jointly controlled by all its parties or by a group of parties or whether it is individually controlled by one of its parties may require judgment. B7. Sometimes, the decision-making process agreed by the parties in their contractual agreement implicitly leads to joint control. For example, suppose two parties establish an agreement whereby each has 50% of the voting rights, and the contractual agreement between them specifies that at least 51% of the voting rights are required for decision-making on the relevant activities. In this case, the parties implicitly agreed that they have joint control of the business, since decisions on the relevant activities cannot be made without the agreement of both parties. B8. In other circumstances, the contractual agreement requires a minimum proportion of voting rights for decision-making on the relevant activities. When this minimum proportion required of voting rights can be achieved by the joint agreement of more than one combination of the parties, this business is not a joint arrangement, unless the contractual agreement specifies which parties (or combination of parties) must agree unanimously for decisions on the relevant activities of the business.

Application Examples
Example 1
Suppose three parties establish an agreement: A has 50% of the voting rights in the business, B has 30% and C has 20%. The contractual agreement between A, B and C specifies that, at a minimum, 75% of the voting rights are required for decision-making on the relevant activities of the business. Although A can block any decision, it does not control the business, as it needs the agreement of B. The terms of its contractual agreement that require at least 75% of the voting rights for decision-making on the relevant activities suggest that A and B have joint control of the business, since decisions on the relevant activities of the business cannot be made without the agreement of both A and B.

Example 2
Suppose an agreement has three parties: A has 50% of the voting rights in the agreement and B and C each have 25%. The contractual agreement between A, B and C specifies that at least 75% of the voting rights are necessary to make decisions about the relevant activities of the business. Although A can block any decision, it does not control the business, as it needs the agreement of B or C. In this example, A, B and C collectively control the business. However, there is more than one combination of parties that can agree to reach 75% of the voting rights (i.e., A and B or A and C). In this situation, for it to be a joint arrangement, the contractual agreement between the parties would need to specify which combination of parties must agree unanimously to make decisions about the relevant activities of the business.

Example 3
Suppose an agreement under which A and B each have 35% of the voting rights in the agreement, with the remaining 30% widely dispersed. Decisions about the relevant activities require the approval of the majority of the voting rights. A and B have joint control of the business only if the contractual agreement specifies that decisions about the relevant activities of the business require the agreement of both A and B.

B9. The requirement for unanimous consent means that any party with joint control of the agreement can prevent any of the other parties or group of parties from making unilateral decisions (about the relevant activities) without its consent. If the requirement for unanimous consent refers only to decisions that give, to a party, protection rights 1 and not to decisions about the relevant activities of the business, that party is not a party with joint control of the business.

B10. A contractual agreement may include clauses on dispute resolution, such as arbitration. These provisions may allow decisions to be made in the absence of unanimous consent among the parties that have joint control. The existence of these provisions does not prevent the business from being jointly controlled and, consequently, from being a joint arrangement.

1 As defined in Technical Pronouncement CPC 36 – Consolidated Financial Statements.

Yes
Yes
No
No

B11. When the agreement is outside the scope of Technical Pronouncement CPC 19, the entity must account for its interests in the business in accordance with the relevant Technical Pronouncements, Interpretations and Guidance of the CPC, such as Technical Pronouncements CPC 36 and 18 or Technical Pronouncement CPC 38.

Types of joint arrangements (items 14 to 19)

B12. Joint arrangements are established for a number of purposes (for example, as a means for the participating parties to share costs and risks or as a means of providing the parties access to new technologies or to new markets) and may be established using different structures and legal forms.

B13. Some agreements do not require that the activity of the business be carried out in a separate vehicle. However, other agreements involve the establishment of a separate vehicle.

B14. The classification of joint arrangements required by this Technical Pronouncement depends on the rights and obligations of the participating parties, which arise from the agreement in the normal course of business. This Technical Pronouncement classifies joint arrangements as joint operations or as joint ventures.

When the entity has rights to the assets and obligations for the liabilities related to the business, the business is a joint operation. When the entity has rights to the net assets of the business, the business is a joint venture.

Items B16 to B33 define the assessment that the entity must perform to determine if it has interests in the joint operation or interests in the joint venture.

Classification of joint arrangement

B15. As indicated in item B14, the classification of joint arrangements requires the parties to evaluate their rights and obligations arising from the agreement. In making this assessment, the entity must consider the following:
(a) the structure of the joint arrangement (see items B16 to B21).
(b) when the joint arrangement is structured through a separate vehicle:
(i) the legal form of the separate vehicle (see items B22 to B24); (ii) the terms of the contractual agreement (see items B25 to B28); and (iii) when relevant, other facts and circumstances (see items B29 to B33).

Structure of the joint arrangement

Joint arrangements not structured through a separate vehicle

B16. The joint arrangement that is not structured through a separate vehicle is a joint operation. In these cases, the contractual agreement establishes the rights of the participating parties over the assets and the obligations for the liabilities related to the business and the rights of the participating parties over their respective revenues and the obligations for their respective expenses.

B17. The contractual agreement often describes the nature of the activities subject to the agreement and how the parties intend to carry out these activities jointly. For example, the parties to the joint arrangement could agree to manufacture a product jointly, with each party responsible for a specific task and each using its own assets and incurring its own liabilities. The contractual agreement could also specify how the revenues and expenses that are common to the parties should be shared among them. In this case, each joint operator recognizes in its financial statements the assets and liabilities used for the specific task and its share of revenues and expenses in accordance with the contractual agreement.

B18. In other cases, the parties to the joint arrangement may agree, for example, to share and operate an asset jointly. In this case, the contractual agreement establishes the rights of the parties over the jointly operated asset and how the production or revenue from the asset and the operating costs are shared among the parties. Each joint operator must account for its share of the jointly operated asset and its agreed share of any liabilities and must recognize its share of the production, revenues and expenses in accordance with the contractual agreement.

Joint arrangements structured through a separate vehicle

B19. The joint arrangement under which the assets and liabilities related to the business are held in a separate vehicle may be a joint venture or a joint operation.

B20. The status of joint operator or joint venturer of a participating party in the business depends on its rights to the assets and obligations for the liabilities related to the business that are held in the separate vehicle.

B21. As indicated in item B15, when the participating parties in the business have structured the joint arrangement in a separate vehicle, the parties need to evaluate whether the legal form of the separate vehicle, the terms of the contractual agreement and, when relevant, any other facts and circumstances give them:
(a) rights to the assets and obligations for the liabilities related to the business (i.e., the business is a joint operation); or (b) rights to the net assets of the business (i.e., the business is a joint venture).

Classification of joint arrangement: assessment of the rights and obligations of the parties arising from the business

Evaluating joint control

Joint operation (joint operation)
The entity must consider:
(i) the legal form of the separate vehicle;
(ii) the terms of the contractual agreement; and (iii) when relevant, other facts and circumstances.

Joint venture
Not structured through a separate vehicle
Structured through a separate vehicle
Structure of the joint arrangement

Legal form of the separate vehicle

B22. The legal form of the separate vehicle is relevant when evaluating the type of joint arrangement. The legal form assists in the initial assessment of the rights of the parties over the assets and their obligations for the liabilities held in the separate vehicle, such as whether the parties have interests in the assets held in the separate vehicle and whether they are responsible for the liabilities held in the separate vehicle.

B23. For example, the participating parties in the business may conduct the joint business through a separate vehicle, the legal form of which causes the separate vehicle to be considered as independent (i.e., the assets and liabilities held in the separate vehicle are the assets and liabilities of the separate vehicle and not the assets and liabilities of the participating parties in the business). In this case, the assessment of the rights and obligations conferred on the parties by the legal form of the separate vehicle indicates that the business is a joint venture. However, the terms agreed by the parties in their contractual business (see items B25 to B28) and, when relevant, other facts and circumstances (see items B29 to B33), may override the assessment of the rights and obligations conferred on the participating parties in the business by the legal form of the separate vehicle.

B24. The assessment of the rights and obligations conferred on the participating parties in the business by the legal form of the separate vehicle is sufficient to conclude that the business is a joint operation only if the parties conduct the joint business in a separate vehicle whose legal form does not confer separation between the parties and the separate vehicle (i.e., the assets and liabilities held in the separate vehicle are the assets and liabilities of the parties).

Assessment of the terms of the contractual business

B25. In many cases, the rights and obligations agreed by the participating parties in their contractual businesses are consistent with, or not in conflict with, the rights and obligations conferred on the participating parties in the business by the legal form of the separate vehicle through which the business was structured.

B26. In other cases, the participating parties use the contractual business to reverse or modify the rights and obligations conferred by the legal form of the separate vehicle through which the business was structured.

Application Example
Example 4
Suppose two parties structure a joint arrangement in a legal entity. Each party has a 50% participation in the legal entity. The formation of the entity allows for separation between it and its owners and, as a consequence, the assets and liabilities held in the entity are the assets and liabilities of the legal entity. In this case, the assessment of the rights and obligations conferred on the parties by the legal form of the separate vehicle indicates that the parties have rights to the net assets of the business.

However, the parties modify the characteristics of the company through their contractual business, so that each has a share in the assets of the legal entity and each is responsible for the liabilities of the legal entity in the proportion determined. These contractual modifications to the characteristics of the company may cause a business to be a joint operation.

B27. The table below compares common terms in contractual businesses of parties to joint operations and common terms in contractual businesses of parties to joint ventures. The examples of contractual terms provided in the table below are not exhaustive.

Assessment of the terms of the contractual business

Joint operation
Joint venture
Contractual business terms
The contractual business gives the parties to the joint arrangement rights to the assets and obligations for the liabilities related to the business.
The contractual business gives the parties to the joint arrangement rights to the net assets of the business (i.e., it is the separate vehicle, and not the parties, that has rights to the assets and obligations for the liabilities related to the business).

Rights to the assets
The contractual business establishes that the parties to the joint arrangement share all interests (for example, rights, title or ownership) over the assets related to the business in the specified proportion (for example, proportionally to the parties' participation in the business or proportionally to the activity carried out through the business, which is directly attributable to the parties). The contractual business establishes that the assets incorporated into the business or subsequently acquired by the joint arrangement are the assets of the business. The parties have no interest (i.e., they have no rights, title or ownership) in the assets of the business. Obligations for liabilities The contractual business establishes that the parties to the joint arrangement share all liabilities, obligations, costs and expenses in the specified proportion (for example, proportionally to the parties' participation in the business or proportionally to the activity carried out through the business, which is directly attributable to the parties). The contractual business establishes that the joint arrangement is responsible for the debts and obligations of the business. The business establishes that the parties to the joint arrangement are responsible for the business only to the extent of their respective investments in the business or their respective obligations to contribute any unpaid or additional capital to the business, or both. The contractual business establishes that the parties to the joint arrangement are responsible for any third-party claims. The contractual business declares that the creditors of the joint arrangement do not have recourse rights against any party in relation to debts or obligations of the business.

Revenues, expenses, profits and losses
The contractual business establishes the allocation of revenues and expenses based on the relative performance of each party to the joint arrangement. For example, the contractual business may establish that revenues and expenses be allocated based on the capacity each party uses in the jointly operated factory, which may differ from its interest in the joint arrangement. In other cases, the parties may have agreed to share the profits and losses related to the business based on the specified proportion, such as the parties' interest in the business. This would not prevent the business from being a joint operation if the parties had rights to the assets and obligations for the liabilities related to the business. The contractual business establishes each party's share of the profits and losses related to the business activities. Guarantees Parties to joint arrangements are often required to provide guarantees to third parties who, for example, receive a service from the joint arrangement or provide financing to it. The provision of these guarantees or the commitment of the parties to provide them does not in itself determine that the joint arrangement is a joint operation. The characteristic that determines whether the joint arrangement is a joint operation or a joint venture is whether the parties have obligations for the liabilities related to the business (for some of which the parties may or may not have provided guarantees).

B28. When the contractual business specifies that the parties have rights to the assets and obligations for the liabilities related to the business, they are parties to the joint operation and do not need to consider other facts and circumstances (items B29 to B33) for the purpose of classifying the joint arrangement.

Assessment of other facts and circumstances

B29. When the terms of the contractual business do not specify that the parties have rights to the assets and obligations for the liabilities related to the business, the parties must consider other facts and circumstances to evaluate whether the business is a joint operation or a joint venture.

B30. A joint arrangement may be structured in a separate vehicle whose legal form confers separation between the parties and the separate vehicle. The contractual terms agreed between the parties may not specify the rights of the parties over the assets and their obligations for the liabilities; nevertheless, the consideration of other facts and circumstances may lead to this business being classified as a joint operation. This is the case when other facts and circumstances give the parties rights to the assets and obligations for the liabilities related to the joint arrangement.

B31. When the activities of the business are primarily intended to provide production to the parties, this indicates that the parties have rights to substantially all of the economic benefits of the assets of the business. The parties to these businesses often secure their access to the production resulting from the business by preventing the business from selling the production to third parties.

B32. The practical effect of the business with this structure and purpose is that the liabilities incurred by the business are, in essence, satisfied by the cash flows received from the parties through the purchase of the business's production by them. When the parties are substantially the only source of cash flows that contributes to the continuity of the business's operations, this indicates that the parties have an obligation for the liabilities related to the business.

Application Example
Example 5
Suppose two parties structure a joint arrangement in a legal entity (entity C), in which each party has a 50% equity participation. The objective of the business is the manufacture of materials that the parties need for their individual manufacturing processes. The business ensures that the parties operate the facility that produces the business materials to the quantity and quality specifications of the parties.

The legal form of entity C (legal entity), through which the activities are initially conducted, indicates that the assets and liabilities held in entity C are the assets and liabilities of entity C. The contractual business between the parties does not specify that the parties have rights to the assets or obligations for the liabilities of entity C. Consequently, the legal form of entity C and the terms of the contractual business indicate that the business is a joint venture.

However, the parties also consider the following aspects of the business:

The parties agreed to purchase all of the production of entity C in a 50:50 proportion. Entity C cannot sell any part of the production to third parties, except with the approval of both parties to the business. As the purpose of the business is to provide the parties with the production they need, it is expected that sales to third parties will be uncommon and not relevant.

The price of production sold to the parties is fixed by both parties at a level intended to cover the production costs and administrative expenses incurred by Entity C. Based on this operational model, the business is intended to operate at a break-even level.
From the above situation, the following facts and circumstances are relevant:
The obligation of the parties to acquire all of Entity C's production reflects Entity C's exclusive dependence on the parties for cash flow generation, and thus the parties have an obligation to finance the settlement of Entity C's liabilities.
The fact that the parties have rights to substantially all of Entity C's production means that the parties are consuming – and therefore have rights to – all of the economic benefits of Entity C's assets.
These facts and circumstances indicate that the business is a joint operation. The conclusion regarding the classification of the joint arrangement in these circumstances would not change if, instead of using their share of the production themselves in subsequent manufacturing processes, the parties sold their share of the production to third parties. If the parties were to modify the terms of the contractual business arrangement so that the business could sell production to third parties, this would result in Entity C assuming demand, inventory, and credit risks. In this scenario, this change in facts and circumstances would require a reassessment of the classification of the joint arrangement. These facts and circumstances would indicate that the business is a joint venture.

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 C4. If the aggregation of all previously proportionally consolidated assets and liabilities results in negative net assets, the entity must assess whether it has legal or constructive obligations regarding the negative net assets and, if so, the entity must recognize the respective liability. If the entity concludes that it has no legal or constructive obligations regarding the negative net assets, the entity must not recognize the respective liability, but must adjust accumulated profits or losses at the beginning of the immediately preceding period. The entity must disclose this fact, together with its accumulated unrecognized share of losses with its joint ventures at the beginning of the immediately preceding period and at the date this Technical Pronouncement is applied for the first time. C5. The entity must disclose the composition of the assets and liabilities that were aggregated into the single-line investment balance at the beginning of the immediately preceding period. This disclosure must be prepared in aggregate for all joint ventures on which the entity applies the transition requirements referred to in items C2 to C6. C6. After initial recognition, the entity must account for its investment in the joint venture using the EM in accordance with Technical Pronouncement CPC 18. Joint operations – transition from the equity method to the accounting for assets and liabilities C7. When changing the accounting treatment from the equity method to the accounting for assets and liabilities regarding its interest in a joint operation, the entity must derecognize, at the beginning of the immediately preceding period, the investment previously accounted for using the equity method and any other items that were part of the entity's net investment in the business, in accordance with item 38 of Technical Pronouncement CPC 18, and must recognize its interest in each of the assets and liabilities in accordance with its interest in the joint operation, including any goodwill that may have been part of the carrying amount of the investment. C8. The entity must determine its interest in the assets and liabilities related to the joint operation based on its rights and obligations in the proportion determined in accordance with the contractual agreement. The entity must measure the initial carrying amounts of the assets and liabilities by disaggregating them from the carrying amount of the investment at the beginning of the immediately preceding period, based on the information used by the entity when applying the equity method. C9. Any difference resulting from the investment previously accounted for using the EM, together with any other items that were part of the entity's net investment in the business, in
accordance with item 38 of Technical Pronouncement CPC 18, and the net value recognized of the assets and liabilities, including any goodwill, must be:
(a) offset against any goodwill relating to the investment, with any remaining difference adjusted against accumulated profits or losses at the beginning of the immediately preceding period, if the net value recognized of the assets and liabilities, including any goodwill, is higher than the derecognized investment (and any other items that were part of the entity's net investment); (b) adjusted against accumulated profits or losses at the beginning of the immediately preceding period, if the net value recognized of the assets and liabilities, including any goodwill, is lower than the derecognized investment (and any other items that were part of the entity's net investment). C10. The entity that changes from the equity method to the accounting for assets and liabilities must provide a reconciliation between the derecognized investment and the recognized assets and liabilities, together with any remaining difference adjusted against accumulated profits or losses, at the beginning of the immediately preceding period. C11. The initial recognition exception of items 15 and 24 of Technical Pronouncement CPC 32 must not be applied when the entity recognizes assets and liabilities related to its interest in the joint operation. Transition provisions in the entity's separate financial statements C12. The entity that, in accordance with item 10 of Technical Pronouncement CPC 35, previously accounted for in its separate financial statements its interest in a joint operation as an investment at cost or in accordance with Technical Pronouncement CPC 38 must:
(a) derecognize the investment and recognize the assets and liabilities related to its interest in the joint operation at the values determined in accordance with items C7 to C9; (b) provide a reconciliation between the investment derecognized from accounting and the recognized assets and liabilities, together with any remaining difference adjusted in accumulated profits, at the beginning of the immediately preceding period. References to the "immediately preceding period" C12A. Notwithstanding the references to the "immediately preceding period" in items C2 to C12, the entity may also present adjusted comparative information for any earlier periods presented, but is not obliged to do so. If the entity does present adjusted comparative information for any earlier periods, all references to the "immediately preceding period" in items C2 to C12 must be read as the "oldest presented adjusted comparative period".

SECURITIES AND EXCHANGE COMMISSION (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

ILLUSTRATIVE EXAMPLES

CONSTRUCTION SERVICES IE2
JOINTLY OPERATED SHOPPING CENTER IE9
JOINT PRODUCTION AND DISTRIBUTION OF A PRODUCT IE14
JOINTLY OPERATED BANK IE29
OIL AND GAS EXPLORATION, DEVELOPMENT AND PRODUCTION ACTIVITIES IE34
CONTRACTUAL AGREEMENTS WITH LIQUEFIED NATURAL GAS IE44

These examples accompany, but are not an integral part of, the Technical Pronouncement. They illustrate aspects of Technical Pronouncement CPC 19, but are not intended to provide interpretive guidance.

IE1. These examples depict hypothetical situations illustrating judgments that may be exercised when applying Technical Pronouncement CPC 19 in various situations. Although some aspects of the examples may be present in observed current situations, all relevant facts and circumstances of the particular situation must be evaluated when applying Technical Pronouncement CPC 19.

Example 1 – Construction Services

IE2. Let A and B be parties to a joint arrangement – two separate companies – whose businesses are focused on supplying various types of construction services to the private and public sectors. Both companies define a contractual agreement through which they will work together to execute a contract signed with a government entity, whose purpose is to design and build a highway between two cities. The contractual agreement determines the shared participation of A and B and establishes joint control of the business, the object of which is the delivery of the highway.

IE3. The parties constitute a separate vehicle (Entity Z) through which the joint arrangement will be executed. Entity Z, meeting the interests of A and B, enters into the contract with the government entity. Additionally, the assets and liabilities related to the joint arrangement are held by Entity Z. The main characteristic of the legal form of Entity Z is that the parties to the joint arrangement, and not Entity Z, have rights to the assets and obligations for the liabilities of Entity Z.

IE4. The contractual agreement between A and B additionally establishes that:
(a) the rights to all assets necessary for the execution of the activities envisaged in the joint arrangement are shared between the parties to the arrangement based on the participation each holds, as per the contractual agreement; (b) the parties to the arrangement have distinct and shared responsibilities for all operational and financial obligations related to the activities envisaged in the joint arrangement, based on the participation each holds, as per the contractual agreement; (c) the result resulting from the activities envisaged in the joint arrangement is shared between A and B based on the participation each holds, as per the contractual agreement.

IE5. For the purposes of coordination and supervision of the activities, A and B designate an operator, who will be an employee of one of the parties. After a specified period, the role played by the designated operator will be transferred to an employee of the other party. A and B agree that the activities must be executed by the operator's employees on a "no gain or loss" basis.

IE6. According to the terms specified in the contract signed with the government, Entity Z issues invoices for the construction services provided to the government entity on behalf of the parties to the joint arrangement.

Analysis

IE7. The contractual agreement is executed through a separate vehicle whose legal form does not confer dissociation from the parties to the joint arrangement (i.e., the assets and liabilities held in Entity Z are assets and liabilities of the parties to the joint arrangement). This fact is reinforced by the terms agreed upon by the parties to the arrangement in the contractual agreement signed, which establish that A and B have rights to the assets and obligations for the liabilities related to the joint arrangement that is executed through Entity Z. The joint arrangement is a joint operation.

IE8. A and B, each, must recognize in their financial statements their respective participations in the assets (e.g., fixed assets, accounts receivable) and in the liabilities resulting from the joint arrangement (e.g., accounts payable to third parties) based on the participation of each party agreed upon in the contract. Each must also recognize their respective participations in the revenues and expenses resulting from the construction services provided to the government entity through Entity Z.

Example 2 – Jointly Operated Shopping Center

IE9. Two real estate companies (parties to the arrangement) constitute a separate vehicle (Entity X) for the purpose of acquiring and operating a Shopping Center. The contractual agreement between the parties establishes joint control of the activities to be conducted by Entity X. The main characteristic of the legal form of Entity X consists in the fact that Entity X itself, rather than the parties to the joint arrangement, has rights to the assets and obligations for the liabilities related to the joint arrangement. These activities include leasing stores, managing its parking lot, maintaining the shopping center and its equipment, such as its elevators, and building reputation and developing the customer base for the shopping center as a whole.

IE10. The terms of the contractual agreement are such that:
(a) Entity X owns the Shopping Center. The contractual agreement does not specify that the parties to the joint arrangement have rights to the Shopping Center; (b) the parties to the joint arrangement are not responsible for the debts, liabilities, and any obligations of Entity X. If Entity X is unable to pay any of its debts or liabilities, or is unable to transfer them to third parties, the responsibility of each party to the joint arrangement is limited to the unpaid amount equivalent to the paid-in capital; (c) the parties to the joint arrangement have the right to sell or pledge their interest in Entity X; (d) each party to the joint arrangement is entitled to a share of the results arising from the operation of the Shopping Center (derived from net rental revenue less operating costs), in accordance with each one's participation in Entity X.

Analysis

IE11. The joint arrangement is executed through a separate vehicle, whose legal form characterizes the vehicle as an independent entity (i.e., the assets and liabilities held in the separate vehicle are assets and liabilities of the separate vehicle and not of the parties to the joint arrangement). Additionally, the terms of the contractual agreement do not specify that the parties to the joint arrangement have rights to the assets or obligations for the liabilities related to the joint arrangement. Instead, the terms of the contractual agreement establish that the parties have rights to the net assets of Entity X.

IE12. Based on the above, there are no other facts or circumstances indicating that the parties to the joint arrangement have substantially all rights to the economic benefits arising from the assets related to the joint arrangement, and that they have obligations for the liabilities related to the joint arrangement. The joint arrangement is a joint venture.

IE13. The parties to the joint arrangement must recognize their rights to the net assets of Entity X as an investment and account for them using the equity method.

Example 3 – Joint Production and Distribution of a Product

IE14. Companies A and B (parties to the arrangement) define a strategic and operational agreement (agreement structure) through which they agree to comply with their proposed terms to execute the production and distribution of a product (Product P) in different markets.

IE15. The parties to the arrangement agree to execute the production and distribution activities through joint arrangements, as described below:
(a) Production activity: The parties agree to execute the production activity through a joint arrangement (production agreement). The production agreement is structured through a separate vehicle (Entity M), whose legal form characterizes it as a separate entity (i.e., the assets and liabilities held by Entity M are in fact assets and liabilities of Entity M and not of the parties to the joint arrangement). In accordance with the agreement structure, the parties are committed to acquiring for themselves all the production of Product P, manufactured based on the production agreement, according to their respective interests in Entity M. The parties to the arrangement subsequently sell Product P to another joint arrangement, jointly controlled by the two parties A and B, established exclusively to serve the purpose of distributing Product P, as described below. Neither the agreement structure nor the joint arrangement between A and B, which governs the production activity, specifies whether the parties to the arrangement have rights to the assets and obligations for the liabilities related to the production activities. (b) Distribution activity: The parties to the arrangement agree to execute the distribution activity through a joint arrangement (distribution agreement). The parties structure the distribution agreement through a separate vehicle (Entity D), whose legal form characterizes it as a separate entity (i.e., the assets and liabilities held by Entity D are in fact assets and liabilities of Entity D and not of the parties to the joint arrangement). In accordance with the agreement structure, the distribution agreement (separate vehicle) makes its demands for Product P to the parties to the arrangement, A and B, according to the needs of the different markets through which the distribution agreement (separate vehicle) sells the products. Neither the agreement structure nor the joint arrangement between A and B, which governs the distribution activity, specifies whether the parties to the arrangement have rights to the assets and obligations for the liabilities related to the distribution activities.

IE16. Additionally, the agreement structure establishes:
(a) that the production agreement (Vehicle M) will produce Product P to meet the demands for Product P that the distribution agreement (Vehicle D) places in the markets on behalf of the parties to the arrangement; (b) the commercial terms are related to the sale of Product P by the production agreement (Vehicle M) to the parties to the arrangement A and B. The production agreement (Vehicle M) will sell Product P to the parties at the price agreed upon by A and B, in order to cover the production costs incurred. Subsequently, the parties will sell the product to the distribution agreement (Vehicle D), at the price agreed upon by A and B; (c) that any cash shortfall that the production agreement (Vehicle M) may incur will be financed by the parties to the arrangement A and B, in accordance with their participation interests in Entity M.

Analysis

IE17. The agreement structure establishes the terms according to which the parties to the arrangement A and B will conduct the production and distribution of Product P. These activities will be conducted through joint arrangements whose purpose is to produce and distribute Product P.

IE18. The parties to the arrangement conduct the production agreement through Entity M, whose legal form confers separation between the parties to the arrangement and Entity M (separate vehicle). Additionally, neither the agreement structure nor the joint arrangement governing the production activity specifies that the parties to the arrangement have rights to the assets and obligations for the liabilities related to the production activity. However, considering the following facts and circumstances, the parties to the arrangement conclude that the production agreement is a joint operation:
(a) the parties committed themselves to acquiring all the production of Product P manufactured by the production agreement. Consequently, A and B have rights to substantially all the economic benefits of the assets of the production agreement; (b) the production agreement manufactures Product P to meet the quantity and quality required by the parties to the arrangement, so that they can meet the demand for Product P indicated by the distribution agreement. The exclusive dependence of the production agreement on the parties to the arrangement in terms of cash flow generation and the commitment of the parties to provide cash flow, in case the production agreement incurs cash problems, are indicators that the parties to the arrangement have an obligation for the liabilities of the production agreement, since said liabilities will be settled either through the purchase of Product P by the parties to the arrangement or through direct provision of cash flows by the parties to the arrangement.

IE19. The parties to the arrangement conduct the distribution activities through Entity D, whose legal form confers separation between the parties to the arrangement and the entity. Additionally, neither the agreement structure nor the joint arrangement governing the distribution activity specifies that the parties to the arrangement have rights to the assets and obligations for the liabilities related to the distribution activity.

IE20. There are no facts or circumstances indicating that the parties to the arrangement have rights to substantially all the economic benefits arising from the assets related to the distribution agreement or that the parties to the arrangement have obligations for the liabilities related to the distribution agreement. The distribution agreement is a joint venture.

IE21. A and B must recognize in their financial statements their respective participations in the assets (e.g., fixed assets, cash) and their respective participations in the liabilities resulting from the production agreement (e.g., accounts payable to third parties) based on their ownership interests in Entity M. Each party to the arrangement must also recognize their respective participations in the expenses resulting from the production of Product P incurred by the production agreement and their respective participations in the revenues related to the sales of Product P by the distribution agreement.

IE22. The parties to the arrangement must recognize their rights to the net assets of the distribution agreement as an investment and account for it using the equity method.

Variation

IE23. Assume that the parties to the arrangement agree that the production agreement described above is responsible not only for the production of Product P, but also for its distribution to independent third parties (customers).

IE24. The parties to the arrangement also agree to define the distribution agreement as described previously, to distribute Product P exclusively in assistance to the process of expanding distribution in specific additional markets.

IE25. The production agreement (Entity M) still sells Product P directly to the distribution agreement (Entity D). No fixed proportion of the production generated by the production agreement has its acquisition secured (there is no commitment to this effect) by, or reserved for, the distribution agreement (Entity D).

Analysis

IE26. The above variation did not affect the legal form of the separate vehicle through which the production activity is conducted, nor the contractual terms related to the rights of the parties to the arrangement over the assets and their obligations for the liabilities related to the production activities. However, it makes the production agreement a self-financing agreement, by making it able to execute the commercial activity on its own, distributing Product P to independent third parties (customers) and, consequently, assuming demand, storage, and credit risks. Although the production agreement can sell Product P to the distribution agreement, in this scenario the production agreement is not dependent on the parties to the arrangement to conduct its activities on a continuous basis. In this case, the production agreement is a joint venture.

IE27. The variation had no effect on the qualification of the distribution agreement as a joint venture.

IE28. The parties to the arrangement must recognize their rights to the net assets of the production agreement and their rights to the net assets of the distribution agreement as investments and must account for them using the equity method.

Example 4 – Jointly Operated Bank

IE29. Banks A and B (parties to the arrangement) agree to combine their corporate banking, investment banking, asset management, and financial services activities through the constitution of a separate vehicle (Bank C). Both parties to the arrangement expect the contractual agreement to benefit them in different ways. Bank A believes that the agreement allows it to achieve its strategic plans to grow in size, offering it the opportunity to explore its full potential to grow organically by expanding the offer of products and services. Bank B expects the agreement to reinforce its offer of savings and investment products.

IE30. The main characteristic of the legal form of Bank C is that it makes it a separate vehicle to act on its own (i.e., the assets and liabilities held in the separate vehicle are assets and liabilities of the separate vehicle and not of the parties to the arrangement). Banks A and B each hold 40% participation interests in Bank C, with the remaining 20% of participations distributed dispersedly in the market where Bank C is listed on the stock exchange. The shareholders' agreement entered into between Banks A and B establishes joint control of the activities of Bank C.

IE31. Additionally, Banks A and B enter into an irrevocable agreement according to which, even in the event of litigation, both agree to provide the necessary resources in the amount required and, if demanded, jointly and explicitly, ensure that Bank C complies with all applicable banking legislation and regulation, as well as honor any commitments assumed before banking authorities. This commitment represents the assumption of 50% of the necessary resources by each of Banks A and B, to ensure that Bank C complies with all applicable banking legislation and regulation.

Analysis

IE32. The joint arrangement is executed through a separate vehicle whose legal form confers separation between the parties to the arrangement and the separate vehicle. The terms of the contractual agreement do not specify that the parties have rights to the assets and obligations for the liabilities of Bank C, but establish that the parties have rights to the net assets of Bank C. The commitment made by the parties to provide support to Bank C, should it fail to comply with all applicable banking legislation and regulation, is not in itself indicative that the parties have obligations for the liabilities of Bank C. There are no other facts and circumstances indicating that the parties have substantially all rights to the economic benefits arising from the assets of Bank C and that the parties have obligations for the liabilities of Bank C. The joint arrangement is a joint venture.

IE33. Both Banks A and B must recognize their rights to the net assets of Bank C as investments and must account for them using the equity method.

Example 5 – Oil and Gas Exploration, Development and Production Activities

IE34. Companies A and B (parties to the arrangement) constitute a separate vehicle (Entity H) and enter into a Joint Operating Agreement (JOA) to execute oil and gas exploration, development, and production activities in Country O. The main characteristic of the legal form of Entity H is that it makes it a separate vehicle to act on its own (i.e., the assets and liabilities held in the separate vehicle are assets and liabilities of the separate vehicle and not of the parties to the arrangement).

IE35. The country grants Entity H the right to concession for the activities of exploration, development, and production of oil and gas, to be carried out in specific blocks designated for such purposes (exploration areas).

IE36. The shareholders' agreement and the joint operating agreement (JOA) establish that the participating parties have rights and obligations related to said activities. The main terms of the agreements are summarized below.

Shareholders' Agreement

IE37. The board of directors (or equivalent governing body) of Entity H consists of one member for each participating party. Each participating party to the agreement holds a 50% equity interest in Entity H. Unanimous consent of the directors is required for any matter to be approved.

Joint Operating Agreement (JOA)

IE38. The joint operating agreement (JOA) establishes an operational committee. This committee consists of one representative for each participating party. Each participating party holds a 50% interest in the operational committee.

IE39. The operational committee approves budgets and work programs related to the activities, which likewise require unanimous consent of the representatives for each participating party. One of the parties is designated as the operator and is responsible for administering and conducting the approved work programs.

IE40. The joint operating agreement (JOA) establishes that the rights and obligations arising from the exploration, development, and production activities of oil and gas must be shared among the participating parties, proportionally to each party's interest in Entity H. Objectively, the joint operating agreement (JOA) establishes that the parties must share:
(a) the rights and obligations arising from the exploration and development activities granted to Entity H (for example, concession rights, asset retirement obligations, and environmental obligations, any royalties and taxes to be collected); (b) the production obtained; and (c) all costs associated with the work programs.

IE41. The costs incurred with respect to all work programs are covered by cash contributions required from the parties. If one of the parties fails to meet its monetary obligations (defaults), the other party is required to contribute to Entity H in the corresponding amount (the defaulting party). The defaulted amount is considered a debt between the parties (the party that honored the commitment has recourse against the party that defaulted).

Analysis

IE42. The parties execute the agreement through a separate vehicle whose legal form confers separation between the parties and the separate vehicle. The parties were able to reverse the initial assessment of their rights and obligations arising from the legal form of the separate vehicle through which the business is conducted. They did this by agreeing to the terms of the joint operating agreement (JOA) which confers upon them the rights to the assets (for example, concession rights for development and exploration activities, and any other assets originating from these activities) and obligations for the liabilities (for example, costs and obligations arising from work programs) that are held by Entity H. The joint business is a joint operation.

IE43. Companies A and B must recognize in their financial statements their respective interests in the assets and any liabilities resulting from the joint business, based on their respective agreed interest shares. On this basis, each party must also recognize its respective share of revenues (sales revenue from each party's share of production) and its respective share of expenses.

Example 6 - Contractual agreements with liquefied natural gas

IE44. Company A holds an area designated for undeveloped gas exploration, which contains reserves of great potential. Company A understands that the undeveloped gas exploration area will only be economically viable if all gas production is sold to customers located in overseas markets. To this end, a Liquefied Natural Gas (LNG) processor needs to be built to liquefy the extracted gas and allow its ocean transport to markets beyond the sea.

IE45. Company A enters into a joint business with Company B in order to develop and operate the undeveloped gas exploration area and the Liquefied Natural Gas (LNG) processor. In accordance with the agreement, Companies A and B (participating parties) agree to transfer the undeveloped gas exploration area and cash to a new separate vehicle, Entity C. In consideration for their respective contributions, each party receives a 50% interest in Entity C. The main characteristic of the legal form of Entity C is that which makes it a separate vehicle to act on its own behalf (that is, the assets and liabilities held in the separate vehicle are assets and liabilities of the separate vehicle and not of the participating parties).

IE46. The agreement between the parties specifies that:
(a) Companies A and B must each appoint two members to the board of directors of Entity C. The board members must unanimously agree on the investments and strategies to be adopted by Entity C; (b) the daily administration of the undeveloped gas exploration area and the Liquefied Natural Gas (LNG) processor, including development and construction activities, will be carried out by the staff of Company B, in accordance with directions jointly agreed upon by the parties. Entity C will reimburse Entity B for the costs incurred by it in performing the tasks under its responsibility; (c) Entity C is responsible for taxes and royalties levied on the production and sale of Liquefied Natural Gas (LNG), as well as for other liabilities incurred in the ordinary course of business, such as those arising from accounts payable, the restoration of natural conditions of the exploration area, and asset recovery; (d) Companies A and B have equal interests in the profits earned from the activities carried out through the joint business, and thus, are entitled on equal footing to the dividends distributed by Entity C.

IE47. The contractual agreement does not specify that any party has rights to the assets and obligations for the liabilities of Entity C.

IE48. The board of directors of Entity C decides to enter into a financing agreement, through a syndicated loan (pool of banks), to raise funds to cover the development of the undeveloped gas exploration area and the construction of the Liquefied Natural Gas (LNG) processor. The total estimated cost of development and construction is 1 billion monetary units.

IE49. The syndicated loan secures 700 million monetary units for Entity C. The financing agreement grants the lending banks recourse rights against Companies A and B, only in the event of default by Entity C (C's default) during the development of the undeveloped gas exploration area and the construction of the Liquefied Natural Gas (LNG) processor. The financing agreement provides that the lending banks will not have recourse rights against Companies A and B once the Liquefied Natural Gas (LNG) processor is in operation, since, being in operation, Entity C will be able to generate cash flows, through the sale of liquefied gas, to meet its obligations under the financing agreement. Although the creditor banks do not have recourse rights against Companies A and B, the syndicated loan has the risk of C's default mitigated through a lien imposed on the Liquefied Natural Gas (LNG) processor, which is offered as real collateral.

Analysis

IE50. The joint business is executed through a separate vehicle whose legal form confers separation between the parties and the separate vehicle. The terms of the contractual agreement entered into do not specify that the parties have rights to the assets or obligations for the liabilities of Entity C, although they establish that the parties have rights to the net assets of Entity C. The nature of the recourse right provided in the financing agreement, during the development of the undeveloped gas exploration area and the construction of the Liquefied Natural Gas (LNG) processor, which in summary provides for the offering of separate guarantees by Companies A and B in this phase, does not itself impose that the parties assume the obligations for the liabilities of Entity C (that is, the syndicated loan is an obligation of C). Companies A and B have separate liabilities, which represent the guarantees offered in case Entity C fails to meet its obligations with the syndicated loan (C's default), during the development and construction phase.

IE51. There are no facts or circumstances indicating that the participating parties have rights to substantially all the economic benefits arising from the assets of Entity C or that the participating parties have obligations for the liabilities of Entity C. The joint business is a joint venture.

IE52. The parties must recognize their rights to the net assets of Entity C as an investment and must account for them adopting the equity method.

Example 7 – Accounting for acquisition of interest in joint operation where the activity is a business

IE53. Companies A, B, and C have joint control of joint operation D, whose activity is a business as defined in CPC 15.

IE54. Company E acquires a 40% equity interest in Company A in joint operation D at a cost of $300 and incurs acquisition-related costs of $50.

IE55. The contractual agreement between the parties, as part of the acquisition by Company E, establishes that Company E's interest in various assets and liabilities differs from its interest in joint operation D. The table below presents Company E's interest in the assets and liabilities related to joint operation D, as established in the contractual agreement between the parties:

Company E's interest in assets and liabilities related to joint operation D Fixed asset 48% Intangible asset (excluding goodwill) 90% Accounts receivable 40% Inventory 40% Post-employment benefit obligations 15% Accounts payable 40% Contingent liabilities 56%

Analysis

IE56. Company E recognizes in its financial statements its share of the assets and liabilities resulting from the contractual agreement (see item 20).

IE57. The business combination accounting principles of Technical Pronouncement CPC 15 and other pronouncements apply to identify, recognize, measure, and classify the assets acquired and liabilities assumed in the acquisition of the interest in joint operation D. This is because Company E acquired an interest in a joint operation where the activity is a business (see item 21A).

IE58. However, Company E does not apply the business combination accounting principles of Technical Pronouncement CPC 15 and other pronouncements that conflict with the guidance of this pronouncement. Consequently, according to item 20, Company E recognizes and measures, with respect to its interest in joint operation D, only its share in each of the assets held and each of the liabilities assumed, as established in the contractual agreement. Company E does not include in its assets and liabilities the interests of the other parties in joint operation D.

IE59. CPC 15 requires the acquirer to measure identifiable acquired assets and assumed liabilities at fair value at the acquisition date with some exceptions, for example, deferred tax assets and deferred tax liabilities are not measured at fair value, but are measured in accordance with CPC 32 – Income Taxes. Such measurement does not conflict with this pronouncement and, therefore, these requirements are applicable.

IE60. Consequently, Company E determines the fair value or other measurement prescribed by CPC 15 of its share in the identifiable assets and liabilities related to joint operation D. The table below presents the fair value, or other measurement prescribed by Technical Pronouncement CPC 15, of Company E's share in the identifiable assets and liabilities related to joint operation D:

Fair value, or other measurement prescribed by CPC 15, of Company E's share in identifiable assets and liabilities of joint operation D $ Fixed asset 138 Intangible asset (excluding goodwill) 72 Accounts receivable 84 Inventory 70 Post-employment benefit obligations (12) Accounts payable (48) Contingent liabilities (52) Deferred tax liability (24) Net assets 228

IE61. According to Technical Pronouncement CPC 15, the excess of the consideration transferred over the amount attributed to Company E's share in the identifiable net assets must be recorded as goodwill:

Consideration transferred $300
Company E's share in identifiable assets and liabilities related to its interest in joint operation $228 Goodwill $72

IE62. The acquisition-related costs amounting to $50 should not be considered part of the consideration transferred in the joint operation. These costs must be recognized as expense in the profit or loss for the period in which the costs are incurred and the services are received (see item 53 of CPC 15).

Example 8 – Right to use know-how for joint operation where the activity is a business

IE63. Companies A and B are two companies whose activity is the construction of high-performance batteries for various applications.

IE64. To develop batteries for electric vehicles, the companies set up a contractual agreement (joint operation Z) to work together. Companies A and B have joint control of joint operation Z. This agreement is a joint operation where the activity is a business as defined in CPC 15.

IE65. After several years, the joint operators (Companies A and B) concluded that it is viable to develop batteries for electric vehicles using material M. However, the processing of material M requires specialized know-how, and so far, material M has only been used in the production of cosmetics.

IE66. In order to obtain access to the existing know-how in the processing of material M, Companies A and B agree with Company C for it to acquire an interest in joint operation Z of companies A and B, becoming a party to the contractual agreement.

IE67. Company C's activities until now were solely the development and production of cosmetics. It has long and extensive know-how in the processing of material M.

IE68. In exchange for its interest in joint operation Z, Company C pays cash to Companies A and B and grants the right to use its know-how in the processing of material M for the purposes of joint operation Z. Furthermore, Company C assigns some of its employees with experience in processing material M to joint operation Z. However, Company C does not transfer control of the know-how to Companies A and B or joint operation Z because it retains all its rights. In particular, Company C has the right to withdraw the right to use its know-how in the processing of material M and withdraw its assigned employees, without any restrictions or remuneration for Companies A and B or joint operation Z, if its participation in joint operation Z ceases.

IE69. The fair value of Company C's know-how, at the date of acquisition of the interest in the joint operation, is $1,000. Immediately before the acquisition, the carrying amount of the know-how in Company C's financial statements is $300.

Analysis

IE70. Company C acquired an interest in joint operation Z in which the activity of the joint operation is a business, as defined in CPC 15.

IE71. In accounting for the acquisition of its interest in joint operation Z, Company C applies all the business combination accounting principles of Technical Pronouncement CPC 15 and other pronouncements that do not conflict with the guidance of this pronouncement (see item 21A). Therefore, Company C recognizes in its financial statements its share of the assets and liabilities arising from the contractual agreement (see item 20).

IE72. Company C grants the right to use its know-how in the processing of material M to joint operation Z as part of joining joint operation Z as a joint operator. However, Company C maintains control of this right because it has the right to withdraw the right to use its know-how in the processing of material M and withdraw its assigned employees, without any restrictions or any remuneration for Companies A and B or joint operation Z, if its participation in joint operation Z ceases.

IE73. Consequently, Company C continues to recognize the know-how in the processing of material M after the acquisition of the interest in joint operation Z because it retains all its rights. This means that Company C continues to recognize the know-how based on its carrying amount of $300. As a consequence of retaining control of the right to use the know-how that it granted to the joint operation, Company C has secured the right to use the know-how for itself. Consequently, Company C must not remeasure the know-how and must not recognize gain or loss on the granting of the right to use it.

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