CVM Resolution 101 Approves Consolidated Technical Pronouncement CPC 20(R1) on Borrowing Costs

SECURITIES AND EXCHANGE COMMISSION OF BRAZIL (CVM) Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Centro, 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 Approves the Consolidation of Technical Pronouncement CPC 20(R1) of the Accounting Pronouncements Committee - CPC, which deals with borrowing costs.

The PRESIDENT OF THE SECURITIES AND EXCHANGE COMMISSION OF BRAZIL - CVM makes it 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 publicly-held companies the Technical Pronouncement CPC 20(R1), which deals with borrowing costs, issued by the Accounting Pronouncements Committee - CPC, as consolidated in Annex “A” to this Resolution.

Art. 2. Deliberation 672, of October 20, 2011, is revoked, from the effective date of this Resolution.

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

Electronically signed by
Marcelo Barbosa
President

SECURITIES AND EXCHANGE COMMISSION OF BRAZIL (CVM) Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Centro, 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
ANNEX “A”
ACCOUNTING PRONOUNCEMENTS COMMITTEE
TECHNICAL PRONOUNCEMENT CPC 20 (R1)
Borrowing Costs
Correlation to International Accounting Standards – IAS 23 (IASB – BV 2011)

Summary Item
OBJECTIVE 1
SCOPE 2 – 4
DEFINITIONS 5 – 7
RECOGNITION 8 – 25
Borrowing costs eligible for capitalization 10 – 15 Excess of the carrying amount of the qualifying asset over its recoverable amount 16 Commencement of capitalization 17 – 19 Suspension of capitalization 20 – 21 Cessation of capitalization 22 – 25 DISCLOSURE 26 TRANSITIONAL PROVISIONS 27 – 30

Objective

1. Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset. Other borrowing costs shall be recognized as an expense.

Scope
2. The entity shall apply this Pronouncement in the accounting for borrowing costs.
3. The Pronouncement does not deal with the actual or imputed cost of equity instruments (cost of equity capital), including preference shares classified in equity.
4. The entity is not required to apply this Pronouncement to borrowing costs directly attributable to the acquisition, construction or production of:
(a) a qualifying asset measured at fair value, such as biological assets within the scope of Technical Pronouncement CPC 29; or (b) inventories that are manufactured or otherwise produced, in large quantities and on a repetitive basis.

SECURITIES AND EXCHANGE COMMISSION OF BRAZIL (CVM) Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Centro, 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 Definitions
5. This Pronouncement uses the following terms with the meanings specified:
Borrowing costs are interest and other costs that an entity incurs in connection with the borrowing of funds.
Qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale.
6. Borrowing costs may include:
(a) finance charges calculated using the effective interest method, as described in CPC 08 – Transaction Costs and Premiums on the Issuance of Debt Securities and in CPC 48 – Financial Instruments; (b) (eliminated); (c) (eliminated); (d) interest on lease liabilities recognized in accordance with CPC 06 – Leases; and (e) foreign exchange differences arising from foreign currency borrowings, to the extent that they are regarded as an adjustment to interest costs.
7. Depending on the circumstances, one or more of the following assets may be considered qualifying assets:
(a) inventories;
(b) manufacturing plants;
(c) power generation plants;
(d) intangible assets;
(e) investment properties;
(f) plantations.
Financial assets and inventories that are manufactured, or otherwise produced, over a short period of time, are not qualifying assets. Assets that are ready for their intended use or sale when acquired are not qualifying assets.

Recognition
8. The entity shall capitalize borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. The entity shall recognize other borrowing costs as an expense in the period in which they are incurred.
9. Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset shall be capitalized as part of the cost of the asset when it is probable that they will result in future economic benefits to the entity and that such costs can be measured reliably. When the entity applies Technical Pronouncement CPC 42 – Accounting and Disclosure in Highly Inflationary Economies (or the Full Monetary Correction system, while this Technical Pronouncement is not approved), it shall recognize as part of the borrowing costs attributable to qualifying assets only the portion exceeding inflation.

SECURITIES AND EXCHANGE COMMISSION OF BRAZIL (CVM) Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Centro, 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 Borrowing costs eligible for capitalization
10. The borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are those that would have been avoided if the expenditures on the qualifying asset had not been made. When the entity borrows funds specifically for the purpose of obtaining a particular qualifying asset, the borrowing costs that are directly attributable to the qualifying asset can be readily identified.
11. It may be difficult to identify a direct relationship between specific borrowings and a qualifying asset and to determine the borrowings that could have been avoided. Such difficulty arises, for example, when the entity’s financing activity is coordinated centrally among a group of companies under common control. Difficulties also arise when the entity uses a variety of debt instruments to obtain funds at varied interest rates and lends such funds to other entities in the same economic group on various bases. Other complications arise through the use of borrowings denominated in or related to foreign currencies, when the economic group operates in highly inflationary economies and when there are fluctuations in exchange rates. As a result, it may be difficult to determine the amount of borrowing costs that should be directly attributable to the acquisition, construction or production of a qualifying asset, requiring the exercise of judgment in these circumstances.
12. To the extent that the entity borrows funds specifically for the purpose of obtaining a qualifying asset, the entity shall determine the amount of borrowing costs eligible for capitalization as those actually incurred on such borrowings during the period, less any investment income from the temporary investment of such borrowings.
13. Financial contracts for a qualifying asset may result in the entity obtaining borrowing funds and incurring associated borrowing costs before part or all of the funds are used for expenditures on the qualifying asset. In these circumstances, the funds are often invested until expenditures on the qualifying asset are incurred. In determining the amount of borrowing costs eligible for capitalization during the period, any investment income earned on such funds shall be deducted from the borrowing costs incurred.
14. As the entity borrows funds not specifically designated and uses them for the purpose of obtaining a qualifying asset, the entity shall determine the amount of borrowing costs eligible for capitalization by applying a capitalization rate to expenditures on the asset. The capitalization rate shall be the weighted average of the costs of borrowings applicable to all of the entity’s borrowings that were outstanding during the period. However, the entity shall exclude from this calculation the borrowing costs applicable to borrowings made specifically for the purpose of obtaining a qualifying asset until all activities necessary to prepare that asset for its intended use or sale are complete. The amount of borrowing costs that the entity capitalizes during the period shall not exceed the amount of borrowing costs incurred during that period.
15. In some circumstances, it may be appropriate to include all borrowings of the parent and its subsidiaries when calculating the weighted average of borrowing costs; in other

SECURITIES AND EXCHANGE COMMISSION OF BRAZIL (CVM) Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Centro, 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 circumstances, it is appropriate for each subsidiary to use the weighted average of borrowing costs applicable to its own borrowings.

Excess of the carrying amount of the qualifying asset over its recoverable amount
16. When the carrying amount or the expected final cost of the qualifying asset exceeds its recoverable amount or net realizable value, the carrying amount shall be written down in accordance with the requirements of other CPC Pronouncements. In certain circumstances, the amount of the write-down may be reversed in accordance with other CPC Pronouncements.

Commencement of capitalization
17. The entity shall commence capitalization of borrowing costs as part of the cost of a qualifying asset on the commencement date. The commencement date for capitalization is the first date when the entity satisfies all of the following conditions:
(a) it incurs expenditures on the asset;
(b) it incurs borrowing costs; and
(c) it undertakes activities that are necessary to prepare the asset for its intended use or sale.
18. Expenditures on the qualifying asset include only those expenditures that result in payment of cash, transfer of other assets, or incurrence of interest-bearing liabilities. Expenditures are reduced by any intermediate receipts and government grants received related to the asset (see Technical Pronouncement CPC 07 - Government Grants and Assistance). The average carrying amount of the asset during a period, including previously capitalized borrowing costs, normally constitutes a reasonable approximation of the expenditures on which the capitalization rate should be applied in that period.
19. The activities necessary to prepare the asset for its intended use or sale encompass more than the physical construction of the asset. They include technical and administrative work prior to the commencement of physical construction, such as activities associated with obtaining permits for the commencement of physical construction. However, such activities exclude maintaining an asset when no production or no development that alters the conditions of the asset is being undertaken. For example, borrowing costs incurred while land is being prepared shall be capitalized during the period in which such development-related activities are being performed. However, borrowing costs incurred while land acquired for construction purposes is held without any associated preparation activities do not qualify for capitalization.

Suspension of capitalization
20. The entity shall suspend capitalization of borrowing costs during extended periods in which it suspends development activities on a qualifying asset.
21. The entity may incur borrowing costs during an extended period in which the activities necessary to prepare the asset for its intended use or sale are suspended. Such costs are costs of holding partially completed assets and do not qualify for

SECURITIES AND EXCHANGE COMMISSION OF BRAZIL (CVM) Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Centro, 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 capitalization. However, the entity normally does not suspend capitalization of borrowing costs during a period in which substantial technical and administrative work is being performed. The entity also shall not suspend capitalization of borrowing costs when a temporary delay is part of the necessary process of completing the asset for its intended use or sale. For example, capitalization shall continue throughout the period in which high water levels delay the construction of a bridge, if such high water levels are common during the construction period in the geographic area involved.

Cessation of capitalization
22. The entity shall cease capitalization of borrowing costs when substantially all of the activities necessary to prepare the qualifying asset for its intended use or sale are complete.
23. An asset is normally ready for its intended use or sale when the physical construction of the asset is complete, even though administrative work may still continue. If minor modifications, such as decorating the property according to the buyer’s or user’s specifications, constitute everything that is missing, this is an indicator that substantially all activities are complete.
24. When the entity completes the construction of a qualifying asset in parts and each part can be used while the construction of other parts continues, the entity shall cease capitalization of borrowing costs when it completes substantially all of the activities necessary to prepare that part for its intended use or sale.
25. A business center comprising several buildings, each of which can be used individually, is an example of a qualifying asset in which each part is ready for use while the construction of other parts continues. An example of a qualifying asset that needs to be complete before any part can be used is an industrial plant involving several processes that are executed sequentially in the various parts of the plant in the same location, such as a steel mill.

Disclosure
26. The entity shall disclose:
(a) the total amount of borrowing costs capitalized during the period; and (b) the capitalization rate used in determining the amount of borrowing costs eligible for capitalization.

Transitional Provisions
27. When the application of this Pronouncement constitutes a change in accounting policy, the entity shall apply the Pronouncement to borrowing costs related to qualifying assets for which the commencement date of capitalization is the same as or subsequent to the date of its entry into force.
28. However, the entity may designate any date prior to the entry into force date of the

SECURITIES AND EXCHANGE COMMISSION OF BRAZIL (CVM) Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Centro, 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 Pronouncement and apply it to borrowing costs related to all qualifying assets for which the commencement date of capitalization is the same as or subsequent to that date. 29 and 29A. (Eliminated)
30. This Pronouncement replaces Technical Pronouncement CPC 20 – Borrowing Costs, approved on 08.05.2009.