CVM Resolution 118 (Repealed) - Approval of Consolidated Technical Pronouncement CPC 18(R2)

SECURITIES AND EXCHANGE COMMISSION OF BRAZIL (CVM) 7 de Setembro Street, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – ZIP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Cincinato Braga Street, 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 18(R2) of the Accounting Pronouncements Committee - CPC, which deals with investments in associates, in controlled entities, and in jointly controlled entities.

The PRESIDENT OF THE SECURITIES AND EXCHANGE COMMISSION OF BRAZIL - CVM makes it public that the Board, in a meeting held on May 4, 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 18(R2), which deals with investments in associates, in controlled entities, and in jointly controlled entities, issued by the Accounting Pronouncements Committee - CPC, as consolidated in Annex “A” to this Resolution.

Art. 2. Deliberation 696, of December 13, 2012, is hereby 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) 7 de Setembro Street, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – ZIP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Cincinato Braga Street, 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 18 (R2)
Investment in Associate, in Controlled Entity and in Jointly Controlled Entity Correlation to International Accounting Standards – IAS 28 (IASB – BV 2012)

Summary Item
OBJECTIVE 1
SCOPE 2
DEFINITIONS 3 – 4
SIGNIFICANT INFLUENCE 5 – 9A
EQUITY METHOD 10 – 15
APPLICATION OF THE EQUITY METHOD 16 – 43A
Exceptions to the application of the equity method 17 – 19 Classification as held for sale 20 – 21 Discontinuation of the use of the equity method 22 – 24 Changes in ownership interest 25 Procedures for the equity method 26 – 39A Impairment losses 40 – 43A SEPARATE FINANCIAL STATEMENTS 44 TRANSITIONAL PROVISIONS 45 – 47

Objective

1. The objective of this Pronouncement is to establish the accounting for investments in associates and in controlled entities and to define the requirements for the application of the equity method when accounting for investments in associates, in controlled entities, and in jointly controlled entities (joint ventures).

Scope
2. This Pronouncement shall be applied by all entities that are investors with either individual or joint control of an investee or with significant influence over it.

Definitions
3. The following terms are used in this Pronouncement with the following meanings:

Associate is an entity over which the investor has significant influence.

Consolidated financial statements are the financial statements of an economic group, in which the assets, liabilities, equity, revenues, expenses, and cash flows of the parent and its subsidiaries are presented as if they were a single economic entity.

Equity method is the method of accounting by which the investment is initially recognized at cost and, thereafter, is adjusted to reflect the post-acquisition change in the investor’s interest in the net assets of the investee. The investor’s revenues or expenses include its share of the profits or losses of the investee, and the investor’s other comprehensive income includes its share of the other comprehensive income of the investee.

Joint arrangement is a contractual arrangement whereby two or more parties have joint control.

Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.

Jointly controlled entity (joint venture) is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement.

Joint venturer is a party to a jointly controlled entity (joint venture) that has joint control of that entity.

Significant influence is the power to participate in the financial and operating policy decisions of the investee, but not control or joint control of those policies.

4. The following terms are defined in item 4 of Technical Pronouncement CPC 35 – Separate Financial Statements and in Appendix A of Technical Pronouncement CPC 36 – Consolidated Financial Statements and are used in this Pronouncement with the meanings specified in the Pronouncements, Interpretations, and Guidance of the CPC in which they are defined:

• control of investee;
• economic group;
• parent;
• separate financial statements;
• subsidiary.

Significant Influence
5. If the investor holds, directly or indirectly (e.g., through subsidiaries), twenty percent or more of the voting power of the investee, it is presumed that the investor has significant influence, unless it can be clearly demonstrated that this is not the case. On the other hand, if the investor holds, directly or indirectly (e.g., through subsidiaries), less than twenty percent of the voting power of the investee, it is presumed that the investor does not have significant influence, unless such influence can be clearly demonstrated. Substantial or majority ownership of the investee by another investor does not necessarily preclude an investor from having significant influence over it.

6. The existence of significant influence by an investor is usually evidenced by one or more of the following forms:
   (a) representation on the board of directors or executive committee of the investee; (b) participation in the policy-making processes, including participation in decisions about dividends and other distributions; (c) material transactions between the investor and the investee; (d) interchange of managerial personnel; (e) provision of essential technical information.

7. An entity may have in its possession subscription rights, non-standardized call options (warrants), call options, convertible debt or equity instruments, or other similar instruments with the potential to, if exercised or converted, confer additional voting power to the entity or reduce the voting power of another party over the financial and operating policies of the investee (i.e., potential voting rights). The existence and exercise of readily exercisable or convertible potential voting rights, including potential voting rights held by other entities, must be considered in the assessment of whether the entity possesses significant influence or control. Potential voting rights are not exercisable or convertible when, for example, they cannot be exercised or converted until a future date or until the occurrence of a future event.

8. When assessing whether potential voting rights contribute to significant influence or to control, the entity must examine all facts and circumstances (including the terms of exercise of the potential voting rights and any other contractual agreements considered individually or in combination) that may affect the potential rights, except the intention of management and the financial capacity to exercise or convert them.

9. The entity loses significant influence over the investee when it loses the power to participate in the decisions about the financial and operating policies of that investee. The loss of significant influence may occur with or without a change in the absolute or relative level of shareholding. This may occur, for example, when an associate becomes subject to the control of government, court, administrative body, or regulatory entity. This may also occur as a result of a contractual agreement.

9A. All applicable provisions of this Pronouncement regarding the loss of significant influence over the investee apply to the loss of control of a subsidiary, governed by items 25 and 26 of Technical Pronouncement CPC 36 – Consolidated Financial Statements.

Equity Method
10. Under the equity method, the investment in an associate, in a jointly controlled entity, and in a controlled entity (in this case, in the individual balance sheet) must be initially recognized at cost and its carrying amount will be increased or decreased by the recognition of the investor’s share of the profits or losses of the period, generated by the investee after acquisition. The investor’s share of the profit or loss of the period of the investee must be recognized in the investor’s period result. Distributions received from the investee reduce the carrying amount of the investment. Adjustments to the carrying amount of the investment are also necessary by recognizing the investor’s proportional share in the changes in the balance of the components of the other comprehensive income of the investee, recognized directly in its equity. Such variations include those arising from the revaluation of fixed assets, when legally permitted, and from foreign currency translation differences, when applicable. The investor’s share in these changes must be recognized reflectively, that is, in other comprehensive income directly in the investor’s equity (see Technical Pronouncement CPC 26 – Presentation of Financial Statements), and not in its result.

11. Recognizing income based on distributions received may not be an adequate measurement of the revenue earned by the investor in the investment in an associate, in a controlled entity, and in a jointly controlled entity, given that the distributions received have little relation to the performance of the investee. Because the investor has individual or joint control, or exercises significant influence over the investee, it has an interest in the performance of the investee and, as a result, an interest in the return on its investment. The investor must account for this interest by extending the scope of its financial statements by including its share of the profits or losses of the investee. As a result, the application of the equity method provides reports with a higher degree of information about the investor’s net assets and about its revenues and expenses.

12. When there are potential voting rights or other derivatives containing potential voting rights, the entity’s interests in the investee must be determined exclusively based on existing ownership interests and must not reflect the possible exercise or conversion of potential voting rights or other derivative instruments, unless item 13 is applied to the case.

13. In some circumstances, the entity has, in essence, ownership interests resulting from a transaction that gives it, at the current moment, access to the returns associated with ownership interests. In these circumstances, the proportion allocated to the entity must be determined taking into account the eventual exercise of potential voting rights and other derivative instruments that currently give the entity access to returns. 1

14. CPC 48 – Financial Instruments shall not be applied to interests (participations or other economic benefits) in the investee that are accounted for using the equity method. When there are instruments containing potential voting rights that, in essence, currently enable access to returns associated with ownership interests in the investee, such instruments are not subject to CPC 48. In all other cases, instruments containing potential voting rights in the investee must be accounted for in accordance with CPC 48.

14A. The entity must also apply CPC 48 to other financial instruments in an associate, in a controlled entity, or in a jointly controlled entity, for which the equity method is not applied. These instruments include long-term participations that, in substance, are part of the entity’s net investment in an associate, in a controlled entity, or in a jointly controlled entity (see item 38). The entity must apply CPC 48 to such long-term participations before applying item 38 and items 40 to 43 of this pronouncement. When applying CPC 48, the entity must not take into consideration any adjustments to the carrying amount of long-term participations resulting from the application of this pronouncement.

15. Unless an investment or portion of that investment in an investee is classified as “held for sale”, in accordance with Technical Pronouncement CPC 31 – Non-Current Assets Held for Sale and Discontinued Operations, the investment, and any interest retained in the investment not classified as held for sale, must be classified as a non-current asset.

Application of the Equity Method
16. The entity with individual or joint (shared) control, or with significant influence over an investee, must account for this investment using the equity method, unless the investment falls under the exceptions provided for in items 17 to 19 of this Pronouncement.

Exceptions to the Application of the Equity Method
17. The entity does not need to apply the equity method to investments in which it holds individual or joint (shared) control, or exercises significant influence, if the entity is a parent that, if legally permitted, is exempt from preparing consolidated financial statements due to its classification under the scope exception of item 4(a) of CPC 36, or if all of the following items are observed:
(a) the entity is controlled (wholly or partially) by another entity, which, together with other shareholders or partners, including those without voting rights, was informed about and did not object to the non-application of the equity method; (b) the debt or equity instruments of the entity are not traded publicly (domestic or foreign stock exchanges or over-the-counter market, including local and regional markets); (c) the entity has not filed and is not in the process of filing its financial statements with the Securities and Exchange Commission of Brazil (CVM) or another regulatory body, with a view to the issuance and/or public distribution of any type or class of instruments in the capital market; and (d) the ultimate parent or any intermediate parent of the entity makes available to the public its financial statements, prepared in accordance with the Pronouncements, Interpretations, and Guidance of the CPC, in which the subsidiaries are consolidated or are measured at fair value through profit or loss in accordance with Technical Pronouncement CPC 36.

18. When the investment in an associate, in a controlled entity, or in a jointly controlled entity is held, directly or indirectly, by the entity that is a venture capital organization, that entity may adopt fair value measurement through profit or loss for these investments, in accordance with CPC 48. The entity must make this choice separately for each associate, controlled entity, or jointly controlled entity at its initial recognition.

19. When the entity holds an investment in an associate or in a controlled entity, or in a jointly controlled entity, whose share of the participation is held indirectly through a venture capital organization, the entity may adopt fair value measurement through profit or loss for that share of the participation in the investment, in accordance with CPC 48, regardless of whether the venture capital organization exercises significant influence over that share of the participation. If the entity makes this accounting choice, it must adopt the equity method for the remaining share of the participation it holds in the investment in an associate or in a controlled entity, or in a jointly controlled entity that is not held indirectly through a venture capital organization.

Classification as Held for Sale
20. The entity must apply CPC 31 to an investment, or portion of an investment, in an associate or in a controlled entity, or in a jointly controlled entity that meets the criteria required for its classification as “held for sale”. Any retained portion of an investment in an associate or in a controlled entity, or in a jointly controlled entity, that has not been classified as “held for sale”, must be accounted for using the equity method until the effective derecognition of the portion classified as held for sale. After effective derecognition, the entity must account for any remaining interest in the investment in an associate, in a controlled entity, or in a jointly controlled entity, in accordance with CPC 48, unless the remaining interest qualifies for the application of the equity method, which must be adopted in that case.

21. When an investment, or portion of an investment, in an associate, in a controlled entity, or in a jointly controlled entity, previously classified as “held for sale”, no longer meets the conditions required to be classified as such, the equity method must be applied to it retrospectively, from the date of its classification as “held for sale”. The financial statements for the periods covered since the classification of the investment as “held for sale” must be adjusted to reflect this information.

Discontinuation of the Use of the Equity Method
22. The entity must discontinue the use of the equity method from the date when the investment ceases to qualify as an associate, controlled entity, or jointly controlled entity, as guided below:
(a) (eliminated);
(b) if the remaining interest in the investment, previously qualified as an associate, controlled entity, or jointly controlled entity, is a financial asset, the entity must measure it at fair value. The fair value of the remaining interest must be considered as its fair value at initial recognition as a financial asset, in accordance with CPC 48. The entity must recognize in the statement of profit or loss for the period, as revenue or expense, any difference between:
(i) the fair value of any remaining interest and any consideration arising from the disposal of part of the interest in the investment; and (ii) the net carrying amount of the entire investment at the date when the discontinuation of the use of the equity method occurred; (c) when the entity discontinues the use of the equity method, it must account for all amounts previously recognized in its equity in the line item of other comprehensive income, and that are related to the investment subject to the change in accounting measurement, on the same basis as would be required if the investee had directly disposed of the related assets and liabilities.

23. Thus, just as the revenue or expense previously recognized in other comprehensive income by the investee would be reclassified to the statement of profit or loss for the period as revenue or expense upon the derecognition and settlement of related assets and liabilities, the entity must reclassify the revenue or expense recognized in its equity to the statement of profit or loss (as a reclassification adjustment) when the equity method is discontinued. For example, if the associate, controlled entity, or jointly controlled entity has accumulated translation differences related to the entity’s operations abroad and the investor decides to discontinue the use of the equity method, the investor must reclassify to the statement of profit or loss for the period, as revenue or expense, the revenue or expense previously

1 The application of this provision is based on the understanding of what “substantive rights” are. In Appendix B – Application Guide of Pronouncement CPC 36, in its items B22 to B25, the definition of “substantive rights”, in general lines, is supported by the practical ability of its holder to exercise them in time to make a decision necessary to define the direction of relevant activities of an entity.

COMMISSION OF SECURITIES AND EXCHANGE COMMISSION 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 recognized in other comprehensive income related to the entity abroad.
24. If the investment in an associate becomes an investment in a subsidiary or a jointly controlled entity (jointly controlled), the entity must continue to adopt the equity method and must not proceed to remeasure the retained interest.
Changes in equity participation
25. If the entity's equity participation in an associate or jointly controlled entity is reduced, but the investment continues to be classified as an associate or jointly controlled entity, respectively, the investor must reclassify to the income statement, as revenue or expense, the proportion of revenue or expense previously recognized in other comprehensive income that is related to the reduction in equity participation, if such gain or loss would have to be reclassified to the income statement, as revenue or expense, in the event of derecognition and liquidation of related assets and liabilities.
Procedures for the equity method
26. Many of the procedures that are appropriate for the application of the equity method are similar to the consolidation procedures, described in Technical Pronouncement CPC 36 – Consolidated Financial Statements. In addition, the concepts that underlie the procedures used to account for the acquisition of a subsidiary must also be adopted to account for the acquisition of an investment in an associate or a jointly controlled entity.
27. The economic group's participation in an associate or jointly controlled entity is given by the sum of the participations held by the parent company and its other subsidiaries in the investment. Participations held by other associates or jointly controlled entities of the group must be ignored for this purpose. When the associate or jointly controlled entity has investments in subsidiaries, associates, or jointly controlled entities (joint ventures), the result, other comprehensive income, and net assets considered for the application of the equity method must be those recognized in the financial statements of the associate or jointly controlled entity (including the participation held by the associate or jointly controlled entity in the result, other comprehensive income, and net assets of its associates and jointly controlled entities), after making the necessary adjustments to standardize accounting practices (see items 35 to 36A). The same procedure must be applied to the figure of the subsidiary in the case of individual financial statements.
28. The results arising from upstream (upstream) and downstream (downstream) transactions, involving assets that do not constitute a business, as defined by Technical Pronouncement CPC 15, between the investor (including its consolidated subsidiaries) and the associate or jointly controlled entity must be recognized in the investor's financial statements only to the extent of the participation of other investors in this associate or jointly controlled entity, provided that these other investors are independent parties of the economic group to which the investor belongs. Upstream transactions are, for example, sales of assets from the associate or jointly controlled entity to the investor. The entity's participation in the result of an associate or jointly controlled entity resulting from these transactions must be eliminated. Downstream transactions are, for example, sales of assets from the investor to the associate or jointly controlled entity.
28A. The results arising from downstream (downstream) transactions between the parent company and the subsidiary must not be recognized in the parent company's individual financial statements while the transacted assets are in the balance sheet of the acquirer belonging to the same economic group. The provisions of this item must be applied even when the parent company is, in turn, controlled by another entity of the same economic group.
28B. The results arising from upstream (upstream) transactions between the subsidiary and the parent company and from transactions between subsidiaries of the same economic group must be recognized in the seller's financial statements, but must not be recognized in the parent company's individual financial statements while the transacted assets are in the balance sheet of the acquirer belonging to the economic group.
28C. The provisions of items 28A and 28B must produce the same net result and the same net equity for the parent company as are obtained from the consolidated financial statements of this parent company and its subsidiaries. The provisions contained in Technical Interpretation ICPC 09 – Individual Financial Statements, Separate Financial Statements, Consolidated Financial Statements, and Application of the Equity Method must also be observed for these same items.
29. When downstream (downstream) transactions provide evidence of a reduction in the net realizable value of assets to be sold or contributed, or of impairment loss on these assets, such losses must be recognized in full by the investor. When upstream (upstream) transactions provide evidence of a reduction in the net realizable value of assets to be acquired or of impairment loss on these assets, the investor must recognize its share of these losses.
30. The gain or loss resulting from the contribution of a non-monetary asset, which does not constitute a business, as defined in Technical Pronouncement CPC 15, of equity participation subscribed in an associate or jointly controlled entity must be accounted for in accordance with the provisions of item 28, except if the transaction does not have a commercial nature, as applied by Technical Pronouncement CPC 27 – Property, Plant and Equipment. If such transaction does not have a commercial nature, the gain or loss must be considered unrealized and must not be recognized, unless item 31 is also applicable. The unrealized gain or loss must be eliminated against the investment accounted for according to the equity method and must not be presented as deferred gain or loss in the consolidated balance sheet or the individual balance sheet of the entity in which the investments are accounted for based on the equity method. An analogous treatment must be dispensed with for equity participation subscribed in a subsidiary, in line with the provisions of items 28A and 28C.
31. If in addition to the equity participation received in an associate, subsidiary, or jointly controlled entity, the entity also receives monetary and non-monetary assets, the entity must recognize in full, in the income statement for the period, as revenue or expense, the portion of the gain or loss of the non-monetary asset contributed in relation to the monetary or non-monetary asset received.
31A. The gain or loss resulting from a downstream operation involving assets that constitute a business, as defined in Technical Pronouncement CPC 15, between the entity (including its consolidated subsidiaries) and its associate or jointly controlled entity must be recognized in full in the investor's financial statements.
31B. The entity may sell or deliver assets as payment in two or more agreements (transactions). When determining whether the assets that are sold or delivered as payment constitute a business, as defined in Technical Pronouncement CPC 15, the entity must consider whether the sale or delivery as payment of these assets is part of several agreements that must be accounted for as a single transaction, in accordance with the requirements of item B97 of Technical Pronouncement CPC 36.
32. The investment in an associate, a subsidiary, and a jointly controlled entity must be accounted for by the equity method from the date the investment becomes its associate, subsidiary, or jointly controlled entity. Upon acquisition of the investment, any differences between the cost of the investment and the investor's share of the net fair value of identifiable assets and liabilities of the investee must be accounted for as follows:
(a) goodwill based on future profitability (goodwill) related to an associate, a subsidiary, or a jointly controlled entity (in this case, in the parent company's individual balance sheet) must be included in the carrying amount of the investment and its amortization is not permitted; (b) any excess of the investor's share of the net fair value of identifiable assets and liabilities of the investee over the cost of the investment (gain from a bargain purchase) must be included as revenue in determining the investor's share of the investee's results in the period in which the investment is acquired. Appropriate adjustments must be made after acquisition, in the investee's results, by the investor, to consider, for example, the depreciation of assets based on their respective fair values at the acquisition date. Similarly, corrections to the investor's share of the investee's results must be made, after acquisition, due to losses recognized by the investee as a result of impairment of assets, such as, for example, for goodwill or property, plant and equipment. The provisions of Technical Interpretation ICPC 09 must be observed in these cases.
33. The most recent financial statements of the associate, subsidiary, or jointly controlled entity must be used for the application of the equity method. When the end of the investor's fiscal year is different from that of the investee, the latter must prepare, for use by the investor, financial statements on the same date as the investor's financial statements, unless this is impracticable.
34. According to the provisions of item 33, when the financial statements of the investee used for the application of the equity method are of a different date than the date used by the investor, relevant adjustments must be made due to the effects of significant transactions and events that occur between that date and the date of the investor's financial statements. Regardless of this, the maximum lag between the closing dates of the investee's and the investor's statements must not exceed two months. The duration of the periods covered in the financial statements and any difference between their respective closing dates must be the same from one period to another.
35. The investor's financial statements must be prepared using uniform accounting practices for events and transactions of the same nature in similar circumstances.
36. Except as described in item 36A, if the investee uses accounting practices different from those adopted by the investor in events and transactions of the same nature in similar circumstances, necessary adjustments must be made to adapt the investee's financial statements to the investor's accounting practices when using these for the application of the equity method.
36A. Without prejudice to the provisions of item 36, if the entity, which is not itself an investment entity, has participation in an associate, a subsidiary, or a jointly controlled entity, which is an investment entity, the entity may, in the application of the equity method, elect to maintain the fair value measurement, applied by the associate, the subsidiary, or the jointly controlled entity, in its subsidiaries. This choice must be made separately for each investment in an associate, a subsidiary, or a jointly controlled entity, for the earliest date the investment in an associate, a subsidiary, or a jointly controlled entity:
(a) was initially recognized;
(b) became an investment entity; and
(c) became a parent company for the first time.
37. If the investee has preferred shares with cumulative dividend rights in circulation that are held by parties other than the investor, which are classified as an integral part of shareholders' equity, the investor must calculate its share of the investee's results for the period after adjusting it by deducting the dividends relevant to these shares, regardless of whether they have been declared or not.
38. When the investor's share of the associate's or jointly controlled entity's period losses equals or exceeds the carrying amount of its participation in the investee, the investor must discontinue the recognition of its share of future losses. The participation in the investee must be the carrying amount of the investment in this investee, evaluated by the equity method, together with some long-term participation that, in essence, constitutes part of the investor's total net investment in the investee. For example, a component, whose liquidation is not planned, nor is it likely to occur in the foreseeable future, is, in essence, an extension of the entity's investment in this investee. Such components may include preferred shares, as well as receivables or long-term loans, but do not include components such as receivables or payables of a commercial nature or any long-term receivables for which there are adequate guarantees, such as secured loans. The loss recognized by the equity method that exceeds the investor's ordinary share investment must be applied to other components that constitute the investor's participation in the investee in reverse order of residual interest - seniority (i.e., priority in liquidation).
39. After reducing, to zero, the carrying amount of the investor's participation, additional losses must be considered, and a liability must be recognized, only to the extent that the investor has incurred legal or constructive (unformalized) obligations or has made payments on behalf of the investee. If the investee subsequently reports profits, the investor must resume the recognition of its share of these profits only after the point at which the investor's share of these subsequent profits equals its share of the unrecognized losses.
39A. The provisions of items 38 and 39 do not apply to investment in a subsidiary in the parent company's individual balance sheet; the accounting practice that produces the same net result and the same net equity for the parent company as are obtained from the consolidated financial statements of the economic group must be observed, to meet the requirement regarding the attributes of relevance and faithful representation (which already includes the primacy of substance over form), as provided in the Basic Conceptual Pronouncement – Conceptual Framework for the Preparation and Disclosure of Financial Reports and Technical Pronouncement CPC 26 – Presentation of Financial Statements. Impairment losses
40. After applying the equity method, including the recognition of losses from the associate or jointly controlled entity in accordance with the provisions of item 38, the entity must apply items 41A to 41C to determine if there is any objective evidence that its net investment in an associate, a subsidiary, or a jointly controlled entity is not recoverable.
41. (Eliminated)

COMMISSION OF SECURITIES AND EXCHANGE COMMISSION 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 41A. The net investment in an associate, a subsidiary, or a jointly controlled entity presents recovery problems and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the net investment (loss event), and this event (or events) of loss has an impact on the estimated future cash flows of the net investment, which can be reliably estimated. It may not be possible to identify a single and distinct event that has caused the impairment. Instead, the combined effect of several events may have caused the impairment. Expected losses as a result of future events, regardless of their probability, must not be recognized. Objective evidence that the net investment presents recovery problems includes observable data, which are brought to the entity's attention regarding the following loss events:
(a) significant financial difficulty of the associate, the subsidiary, or the jointly controlled entity; (b) breach of contract, such as, for example, default or delay in payments by the associate, the subsidiary, or the jointly controlled entity; (c) the entity, for economic or legal reasons related to the financial difficulty of its associate or jointly controlled entity, grants to the associate, the subsidiary, or the jointly controlled entity a concession that the entity would not otherwise consider; (d) it becomes probable that the associate, the subsidiary, or the jointly controlled entity will enter bankruptcy or undergo other financial reorganization; or (e) disappearance of the active market for the net investment, due to financial difficulties of the associate, the subsidiary, or the jointly controlled entity. 41B. The disappearance of the active market because the financial or equity instruments of the associate, the subsidiary, or the jointly controlled entity ceased to be publicly traded is not evidence of impairment. The downgrade of the credit rating or the decrease in the fair value of the associate, the subsidiary, or the jointly controlled entity does not, in itself, represent evidence of impairment, although it may be evidence of impairment when considered with other available information. 41C. In addition to the types of events in item 41A, objective evidence of impairment of the net investment in the equity instruments of the associate, the subsidiary, or the jointly controlled entity includes information about significant adverse changes that have occurred in the technological, market, economic, or legal environment in which the associate, the subsidiary, or the jointly controlled entity operates, and indicates that the cost of the investment in the equity instrument may not be recoverable. A significant or prolonged decrease in the fair value of an investment in an equity instrument below its cost is also objective evidence of impairment. 41D. In the case of the parent company's individual balance sheet, the recognition of additional impairment losses

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 to the recoverable amount (impairment) with respect to the investment in a controlled entity must be made with observance of the provisions set forth in item 39A.

42. Because goodwill from future profitability expectations (goodwill) integrates the accounting value of the net investment in the investee (it should not be recognized separately), it should not be tested separately with respect to its recoverable amount, observing the content of item 43A. Instead, the total accounting value of the investment must be tested as a single asset, in accordance with the provisions of CPC 01 – Reduction to Recoverable Amount of Assets, by comparing its accounting value with its recoverable amount (fair value less costs to sell or value in use, whichever is higher), whenever the application of items 41A to 41C indicates that the net investment may be affected, that is, that it indicates some loss due to reduction to its recoverable amount. The loss due to reduction to recoverable amount, recognized under these circumstances, should not be allocated to any asset that constitutes part of the accounting value of the net investment in the investee, including goodwill from future profitability expectations (goodwill). Consequently, the reversal of these losses must be recognized in accordance with CPC 01, to the extent of the subsequent increase in the recoverable amount of the net investment. In determining the value in use of the net investment, the entity must estimate:
    (a) its share of the present value of future cash flows expected to be generated by the investee, including the cash flows from the investee's operations and the expected residual value from the disposal of the investment; or (b) the present value of future cash flows expected due to the receipt of dividends from the investment and the expected residual value from the disposal of the investment.
    Under appropriate assumptions, the above methods should produce the same result.

43. The recoverable amount of an investment in an associate or in a jointly controlled entity must be determined for each investment, unless the associate or jointly controlled entity does not generate cash inflows on a continuous basis that are largely independent of those generated by other assets of the entity.

43A. Goodwill based on future profitability (goodwill) must also integrate the accounting value of the investment in the controlled entity (it should not be recognized separately) in the presentation of the parent's individual financial statements. However, in this case, this goodwill, in the parent's individual balance sheet, for the purpose of testing for impairment, must receive the same accounting treatment that is given to it in the consolidated financial statements. The requirements of Technical Pronouncement CPC 36 – Consolidated Financial Statements and Technical Interpretation ICPC 09 – Individual Financial Statements, Separate Financial Statements, Consolidated Financial Statements and Application of the Equity Method must be observed.

Separate Financial Statements

44. The investment in an associate, in a controlled entity, or in a jointly controlled entity must be accounted for in the investor's separate financial statements in accordance with the provisions set forth in item 10 of Technical Pronouncement CPC 35 – Separate Financial Statements.

Transitional Provisions

45 to 45D. (Eliminated)

45E. The entity must apply the changes described in items 18 and 36A retrospectively, in accordance with CPC 23, for annual periods beginning on or after January 1, 2018.

45G. The entity must apply the changes from items 14A and 41 retrospectively, in accordance with CPC 23, for reporting periods beginning on January 1 of the start of the validity of these changes, except when specified in items 45H to 45K.

45H. The entity that applies for the first time the changes described in item 45G at the same time it applies CPC 48 for the first time must apply the transitional requirements, specified in CPC 48, to the long-term participations described in item 14A.

45I. The entity, which applied for the first time the changes described in item 45G, after the first application of CPC 48, must apply the transitional requirements of CPC 48 necessary for the application of the requirements established in item 14A to the long-term participations. For this purpose, the references to the date of initial application of CPC 48 must be read as referring to the beginning of the annual reporting period in which the entity applies the changes for the first time (the date of initial application of the changes). The entity is not required to restate prior periods to reflect the application of the changes. The entity may restate prior periods only if it is possible without the use of hindsight.

45J. When applying for the first time the changes described in item 45G, the entity that applies the temporary exemption of CPC 48, in accordance with insurance contracts of CPC 11, is not required to restate prior periods to reflect the application of the changes. The entity may restate prior periods only if it is possible without the use of hindsight.

45K. If the entity does not restate prior periods, applying item 45I or item 45J, at the date of initial application of the changes, it must recognize in accumulated profits (or another component of equity, as appropriate) any difference between:
(a) the previous accounting value of the long-term participations described in item 14A at that date; and (b) the accounting value of these long-term participations at that date.

46. (Eliminated)

47. This pronouncement replaces CPC 18 (R1) – Investment in Associate and Controlled Entity approved by the Accounting Pronouncements Committee on July 6, 2012.