CVM Resolution 120: Approval of Consolidated Technical Pronouncement CPC 39 on Financial Instruments: Presentation

SECURITIES AND EXCHANGE COMMISSION OF BRAZIL - CVM Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – ZIP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/SP – ZIP: 01333-010 – Brazil - Tel.: (11) 2146-2000 Approves the Consolidation of Technical Pronouncement CPC 39 of the Accounting Pronouncements Committee - CPC, which deals with Financial Instruments:
Presentation.

THE PRESIDENT OF THE SECURITIES AND EXCHANGE COMMISSION OF BRAZIL - CVM makes it known 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 is made mandatory for publicly-held companies the Technical Pronouncement CPC 39, which deals with Financial Instruments: Presentation, issued by the Accounting Pronouncements Committee - CPC, as consolidated in Annex “A” to this Resolution.

Art. 2. The TECHNICAL PRONOUNCEMENT CPC 39, as attached in Deliberation 604, of November 19, 2009, 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

ANNEX “A”
ACCOUNTING PRONOUNCEMENTS COMMITTEE
TECHNICAL PRONOUNCEMENT CPC 39
FINANCIAL INSTRUMENTS: PRESENTATION
Correlation to International Accounting Standards – IAS 32

Summary Item
OBJECTIVE 1 – 3
SCOPE 4 – 10
DEFINITIONS 11 – 14
PRESENTATION 15 – 50
Liability and equity 15 – 27
Puttable instruments 16A – 16B
Instruments, or components of instruments, that impose on the entity an obligation to deliver to third parties a pro rata share of the net assets of the entity only on liquidation 16C – 16D Reclassification of puttable instruments and instruments that impose on the entity an obligation to deliver to third parties a pro rata share of the net assets of the entity only on liquidation 16E – 16F Absence of contractual obligation to deliver cash or other financial asset 17 – 20 Settlement in the entity’s own equity instruments 21 – 24 Contingent settlement provision 25 Option to settle 26 – 27 Compound financial instruments 28 – 32 Treasury shares 33 – 34 Interest, dividends, losses and gains 35 – 41 Offsetting financial asset and financial liability 42 – 50

APPENDIX – APPLICATION GUIDE AG1 – AG39
DEFINITIONS AG3 – AG24
Financial assets and financial liabilities AG3 – AG12 Equity instruments AG13 – AG14J Class of instruments that is subordinate to all other classes AG14A – AG14D Total expected cash flows attributable to the instrument over its life AG14E Transactions in which the holder of the instrument does not participate as holder of the equity instrument AG14F – AG14I Absence of other financial instruments or contracts with total cash flows that fix or restrict substantially the residual return for the holder of the instrument (items 16B and 16D) AG14J Derivative financial instruments AG15 – AG19 Contracts to buy or sell non-financial items AG20 – AG24 PRESENTATION AG25 – AG39 Liability and equity AG25 – 29A Absence of contractual obligation to deliver cash or other financial asset AG25 – AG26 Settlement in own entity shares AG27 Contingent settlement provision AG28 Treatment in consolidated financial statements AG29 – 29A Compound financial instruments AG30 – 35 Treasury shares AG36 Interest, dividends, losses and gains AG37 Offsetting a financial asset and a financial liability AG38 – 39

Objective

(Eliminated).
The objective of this pronouncement is to establish principles for the presentation of financial instruments as liability or equity and for offsetting financial assets and financial liabilities. It applies to the classification of financial instruments, from the issuer’s perspective, as financial assets, financial liabilities and equity instruments; the classification of interest, dividends, losses and gains; and the circumstances in which financial assets and financial liabilities should be offset.
The principles of this pronouncement complement the principles for recognition and measurement of financial assets and financial liabilities of CPC 48 – Financial Instruments, and for disclosure of information about them of CPC 40 – Financial Instruments: Disclosure.

Scope
4. This pronouncement shall be applied by all entities for all types of financial instruments, except:
(a) interests in subsidiaries, associates or jointly controlled entities that are accounted for in accordance with CPC 35 – Separate Financial Statements, CPC 36 – Consolidated Financial Statements or CPC 18 – Investment in Associate, in Subsidiary and in Jointly Controlled Entity. However, in some cases, these pronouncements require or allow the entity to account for interests in subsidiary, associate or jointly controlled entity, using CPC 48; in these cases, the entity must apply the requirements of this pronouncement. The entity must also apply this pronouncement to all derivatives linked to interests in subsidiaries, associates or jointly controlled entities; (b) rights and obligations of the employer/sponsor arising from employee benefit plans, to which Technical Pronouncement CPC 33 - Employee Benefits applies; (c) (eliminated); (d) insurance contracts, as defined in CPC 11 – Insurance Contracts. However, this pronouncement applies to derivatives that are embedded in insurance contracts, if CPC 48 requires the entity to account for them separately. Furthermore, the issuer must apply this pronouncement to financial guarantee contracts if the issuer applies CPC 48 in the recognition and measurement of the contracts, but must apply CPC 11, if the issuer opts, in accordance with item 4(d) of CPC 11, to apply CPC 11 in the recognition and measurement of them; (e) financial instruments that are within the scope of CPC 11, because they contain a discretionary participation feature. The issuer of these instruments is exempt from applying, to this feature, items 15 to 32 and AG25 to AG35 of this pronouncement with respect to the distinction between financial liabilities and equity instruments. However, these instruments are subject to all other requirements of this pronouncement. Furthermore, this pronouncement applies to derivatives that are embedded in these instruments (see CPC 48); (f) financial instruments, contracts and obligations related to share-based payment transactions to which CPC 10 – Share-based Payment must be applied, except for:
(i) contracts within the scope of items 8 to 10 of this pronouncement, to which this Pronouncement is applicable; (ii) items 33 and 34 of this pronouncement, which must be applied to treasury shares purchased, sold, issued or cancelled in connection with employee share option plans, employee share purchase plans, and other share-based payment agreements.

5-7. (Eliminated).
8. This pronouncement shall be applied to contracts to buy or sell a non-financial item that can be settled net in cash or another financial instrument, or by exchanging financial instruments, as if the contracts were financial instruments, except for contracts that have been entered into and are maintained for the purpose of receipt or delivery of a non-financial item, in accordance with the entity’s expected purchase, sale or usage requirements. However, this pronouncement must be applied to those contracts that the entity designates as measured at fair value through profit or loss, in accordance with item 2.5 of CPC 48.
9. There are several ways in which a contract for the purchase or sale of a non-financial item can be settled net in cash, another financial instrument or by exchanging financial instruments. These include:
(a) when the terms of the contract allow both parties to the contract to settle it net in cash, another financial instrument or by exchanging financial instruments; (b) when the ability to settle net in cash, another financial instrument or by exchanging financial instruments, is not explicit in the terms of the contract, but the entity has a practice of settling similar contracts in cash or another financial instrument, or by exchanging financial instruments (either with the counterparty, by entering into offsetting contracts or selling the contract before its exercise or expiration); (c) when, for similar contracts, the entity has a practice of accepting delivery of the underlying asset and selling it in a short period after delivery for the purpose of obtaining short-term profit from fluctuations in the price or dealer’s margin; and (d) when the non-financial item, which is the subject of the contract, is easily convertible to cash. A contract in which (b) or (c) applies is not entered into for the purpose of receiving or delivering a non-financial item, in accordance with the requirements of purchase, sale or expected use by the entity, and therefore is within the scope of this Pronouncement. Other contracts, to which item 8 is applicable, must be evaluated to determine if they were entered into and are maintained for the purpose of receiving or delivering the non-financial items, in accordance with the expectation of purchase, sale or use, and, as applicable, if they are within the scope of this Pronouncement.
10. The written call or put option on a non-financial item that can be settled net in cash, or by another financial instrument or by exchanging financial instruments, in accordance with item 9(a) or (d), is within the scope of this Pronouncement. This contract cannot be entered into for the purpose of delivery or receipt of the non-financial items, in accordance with the purchase, sale or usage requirements.

Definitions (see also items AG3 to AG23)
11. The following terms are used in this Pronouncement with the following meanings:
Financial instrument is any contract that gives rise to a financial asset for one entity and to a financial liability or equity instrument for another entity.
Financial asset is any asset that is:
(a) cash;
(b) an equity instrument of another entity;
(c) a contractual right:
(i) to receive cash or another financial asset from another entity; or (ii) to exchange financial assets or financial liabilities with another entity under conditions that are potentially favorable to the entity; (d) a contract that will or may be settled in the entity’s own equity instruments, and that:
(i) is not a derivative in which the entity is or may be obliged to receive a variable number of its own equity instruments; or (ii) a derivative that will or may be settled otherwise than by the exchange of a fixed amount of cash or another financial asset for a fixed number of its own equity instruments. For this purpose, the entity’s own equity instruments do not include financial instruments with put options classified as equity instruments in accordance with items 16A and 16B, instruments that impose an obligation on an entity to deliver to another party a pro rata share of the net assets of the entity only on liquidation and are classified as equity instruments in accordance with items 16C and 16D, or instruments that are contracts for future receipt or delivery of the entity’s equity instruments.

Financial liability is any liability that is:
(a) a contractual obligation to:
(i) deliver cash or another financial asset to an entity; or (ii) exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavorable to the entity; or (b) a contract that will or may be settled in the entity’s own equity instruments, and is:
(i) a non-derivative in which the entity is or may be obliged to deliver a variable number of the entity’s own equity instruments; or (ii) a derivative that will or may be settled otherwise than by the exchange of a fixed amount of cash, or another financial asset, for a fixed number of the entity’s own equity instruments. For this purpose, the entity’s equity instruments do not include financial instruments with put options that are classified as equity instruments in accordance with items 16A and 16B, instruments that impose on the entity an obligation to deliver to the other party a pro rata share of the net assets of the entity only on liquidation and are classified as equity instruments in accordance with items 16C and 16D, or instruments that are contracts for future receipt or delivery of the entity’s own equity instruments. As an exception, an instrument that meets the definition of financial liability is classified as an equity instrument if it has all the characteristics and meets the conditions of items 16A and 16B or items 16C and 16D. Equity instrument is any contract that evidences an interest in the net assets of an entity after deducting all of its liabilities. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (see Technical Pronouncement CPC 46 – Fair Value Measurement). Puttable instrument is a financial instrument that gives its holder the right to return the instrument to the issuer for cash, or another financial asset, or return it automatically to the issuer in the event of a future uncertain event, death or retirement of the instrument holder.

The following terms are defined in Appendix A of CPC 48 or in item 9 of CPC 38 – Financial Instruments: Recognition and Measurement and are used in this pronouncement with the meanings specified in CPC 38 and CPC 48:

amortized cost of financial asset or financial liability
derecognition
derivative
effective interest method
financial liability measured at fair value through profit or loss
financial guarantee contract
firm commitment
forecast transaction
hedge effectiveness
hedging instrument
hedged item (protected position)
held for trading
regular way purchase or sale
transaction costs

In this pronouncement, “contract” and “contractual” refer to an agreement between two or more parties that clearly recognize that they have little, or no, discretion to avoid the economic effects of this agreement, because, normally, the agreement is binding under the law. Contracts, and therefore financial instruments, can take a variety of forms and do not need to be formalized.
In this Pronouncement, “entity” includes companies, individuals, partnerships, incorporated bodies, funds and government agencies.

Presentation
Liability and equity (see also items AG13, AG14J and AG25 to AG29A)
15. The issuer of a financial instrument must classify the instrument, or part of its components, at initial recognition as a financial liability, financial asset or equity instrument in accordance with the substance of the contractual agreement and the definitions of financial liability, financial asset and equity instrument.
16. When an issuer applies the definitions of item 11 to determine whether a financial instrument is an equity instrument rather than a financial liability, the instrument will be an equity instrument if, and only if, it complies with both conditions (a) and (b) below:
(a) the instrument does not have a contractual obligation to:
(i) deliver cash or another financial asset to another entity; or (ii) exchange financial assets or financial liabilities with another entity under conditions potentially unfavorable to the issuer.
(b) if the instrument will or may be settled in the issuer’s own equity instruments, it is:
(i) a non-derivative that does not include a contractual obligation for the issuer to deliver a variable number of its own equity instruments; or (ii) a derivative that will be settled only by the issuer by exchanging a fixed amount of cash or another financial asset for a fixed number of its own equity instruments.

For this purpose, the issuer’s equity instruments do not include instruments that have all the characteristics and satisfy the conditions described in items 16A and 16B or items 16C and 16D, or instruments that are contracts for future receipt or delivery of the issuer’s equity instruments.
A contractual obligation, including that arising from a derivative financial instrument, that will or may result in future delivery or receipt of the issuer’s own equity instruments, but does not satisfy conditions (a) and (b) above, is not an equity instrument.
As an exception, an instrument that meets the definition of financial liability is classified as an equity instrument if it has all the characteristics and meets the conditions of items 16A and 16B or items 16C and 16D.

Puttable instruments
16A. A financial instrument with a put option includes a contractual obligation for the issuer to repurchase or redeem that instrument for cash or another financial asset upon exercise of the put option. As an exception to the definition of financial liability, an instrument that includes such an obligation is classified as an equity instrument if it has all of the following characteristics:
(a) gives the holder a pro rata share of the net assets of the entity in the event of liquidation of the entity. The net assets of the entity are those assets that remain after deducting all other contingencies linked to its assets. The pro rata share is determined by:
(i) dividing the net assets of the entity in liquidation into units of equal value; and (ii) multiplying that amount by the number of units held by the holder of the financial instruments; (b) the instrument is in the class of instruments subordinate to all other classes of instruments. To be in such a class the instrument:
(i) has no priority over other claims related to the assets of the entity in liquidation; and (ii) does not need to be converted into another instrument before being in the class of instruments that are subordinate to all other classes of instruments; (c) all financial instruments of a class of instruments that are subordinate to all other classes of instruments have identical characteristics. For example, all of them must have a put option, and the formula or other method used to calculate the repurchase or redemption prices are the same for all instruments of that class; (d) in addition to the contractual obligation for the issuer to repurchase or redeem the instrument for cash or another financial asset, the instrument does not include any contractual obligation to deliver cash or another financial asset to another entity, or to exchange financial assets or financial liabilities with another entity under conditions potentially unfavorable to the entity, and is not a contract that will or may be settled in the entity’s own equity instruments, as established in item (b) of the definition of financial liability;

(e) the total expected cash flows attributable to the instrument over its life are based substantially on the profit or loss, the change in the recognition of the entity's net assets, or the change in the fair value of the recognized and unrecognized net assets of the entity during the life of the instrument (excluding any effects of the instrument).

16B. For an instrument to be classified as an equity instrument, in addition to having all the characteristics above, the issuer must not have another financial instrument or contract that has:
(a) total cash flows based substantially on the profit or loss, the change in the recognized net assets, or the change in the fair value of the recognized or unrecognized net assets of the entity (excluding any effects of such instrument or contract); and (b) the effect of substantially restricting or fixing the residual return to the holders of the puttable instruments.
For the purpose of applying this condition, the entity must not consider non-financial contracts with a holder of an instrument described in item 16A that have contractual terms and conditions similar to the contractual terms and conditions of an equivalent contract that could occur between a holder of a non-financial instrument and the issuing entity. If the entity cannot determine that this condition is satisfied, it must not classify the puttable instrument as an equity instrument.

Instruments, or components of instruments, that impose on the entity the obligation to deliver to third parties a pro rata share of the entity's net assets only upon liquidation

16C. Some financial instruments include a contractual obligation for the issuing entity to deliver to another entity a pro rata share of the distribution of net assets only upon liquidation. The obligation arises because the liquidation is certain to occur and is outside the control of the entity (for example, an entity with a limited life) or is uncertain to occur, but is at the option of the instrument holder. As an exception to the definition of a financial liability, an instrument that includes this obligation is classified as an equity instrument if it has all of the following characteristics:
(a) it gives the holder a pro rata share of the net assets of the entity on its liquidation. The net assets of the entity are those assets that remain after deducting all other contingencies attached to its assets. The pro rata share is determined by:
(i) dividing the net assets of the entity in liquidation into units of equal amount; and (ii) multiplying that amount by the number of units held by the holders of the financial instruments; (b) the instrument is in the class of instruments subordinate to all other classes of instruments. To be in such a class, the instrument:
(i) has no priority over the other liabilities and contingent liabilities of the entity in liquidation; and (ii) does not need to be converted into another instrument before being in the class of instruments that are subordinate to all other classes of instruments; (c) all financial instruments in the class of instruments that is subordinate to all other classes of instruments must have identical contractual obligations for the issuing entity to deliver the pro rata share of its net assets in liquidation.

16D. For the instrument to be classified as an equity instrument, in addition to the instrument having all the characteristics above, the issuer must not have another financial instrument or contract that has:
(a) total cash flows that are based substantially on the profit or loss, the change in the recognized net assets, or the change in the fair value of the recognized and unrecognized net assets of the entity (excluding the effects of such instrument or contract); and (b) the effect of substantially restricting or fixing the residual return to the holders of the instruments.
For the purposes of applying this condition, the entity must not consider non-financial contracts with a holder of an instrument described in item 16C that have contractual terms and conditions similar to the contractual terms and conditions of an equivalent contract that could occur between a holder of a non-financial contract and the issuing entity. If the entity cannot determine whether this condition is satisfied, it must not classify the instrument as an equity instrument.

Reclassification of puttable instruments and instruments that impose on the entity the obligation to deliver to third parties a pro rata share of the entity's net assets only upon liquidation.

16E. The entity must classify a financial instrument as an equity instrument in accordance with items 16A and 16B or items 16C and 16D from the date on which the instrument has all the characteristics and satisfies the conditions set forth in those items. The entity must reclassify a financial instrument from the date on which the instrument ceases to have all the characteristics or satisfies the conditions set forth in those items. For example, if the entity renegotiates all its issued instruments without put options and any outstanding puttable instruments have all the characteristics and satisfy all the conditions of items 16A and 16B, the entity must reclassify the puttable instruments as equity instruments from the date of renegotiation of the instruments without put options.

16F. To reclassify an instrument in accordance with item 16E, the entity must account for it as follows:
(a) it must reclassify an equity instrument as a financial liability from the date on which the instrument ceases to present all the characteristics and conditions of items 16A and 16B or items 16C and 16D. The financial liability must be measured at the fair value of the instrument on the reclassification date. The entity must recognize in equity any difference between the carrying amount of the equity instrument and the fair value of the financial liability on the reclassification date; (b) it must reclassify a financial liability as equity from the date on which the instrument presents all the characteristics and satisfies the conditions set forth in items 16A and 16B or items 16C and 16D. The equity instrument must be measured at the carrying amount of the financial liability on the reclassification date.

Absence of contractual obligation to deliver cash or other financial asset (item 16(a))

Except for the circumstances described in items 16A and 16B or items 16C and 16D, a critical characteristic for differentiating a financial liability from an equity instrument is the existence of a contractual obligation of a party to the financial instrument (issuer) to deliver cash or another financial asset to another party (holder) or to exchange financial assets or financial liabilities with the holder under conditions that are potentially unfavorable to the issuer. Although the holder of an equity instrument may have the right to receive a pro rata share of any dividends or other capital distributions, the issuer has no contractual obligation to make such distributions, as it cannot be obliged to deliver cash or another financial asset to the other party.
The substance of a financial instrument, rather than its legal form, governs its classification in the entity's balance sheet. Substance and legal form are commonly consistent, but not always. Some financial instruments assume the legal form of equity, but are liabilities in substance, and others may combine characteristics associated with equity instruments and characteristics associated with financial liabilities. For example:
(a) a preferred share that provides for mandatory redemption by the issuer for a fixed or determinable amount on a fixed or future date, or gives the holder the right to require the issuer to redeem the instrument on or after a specific date for a fixed or determinable amount, is a financial liability; (b) a financial instrument that gives its holder the right to put it back to the issuer for cash or another financial asset (a puttable instrument) is a financial liability, with the exception of instruments classified as equity instruments in accordance with items 16A and 16B or items 16C and 16D. The financial instrument is a financial liability even when the amount of cash or another financial asset is determined based on an index or another item that has the potential to increase and decrease. The existence of an option for the holder of the instrument to put it back to the issuer for cash or another financial asset means that the puttable instrument satisfies the definition of a financial liability, with the exception of instruments classified as equity instruments in accordance with items 16A and 16B or items 16C and 16D. For example, open-end mutual funds, trusts, partnerships, and some cooperative entities may provide their members with the right to redeem their shares at any time for cash, which results in these shares being classified as financial liabilities, with the exception of those instruments classified as equity instruments in accordance with items 16A and 16B or items 16C and 16D. However, classifications as financial liabilities do not prevent the use of descriptions such as "net assets attributable to security holders" in the accounting statements of the entity that has no own equity (such as some mutual funds or trusts), or the use of additional disclosure to show that the members' shares include items such as reserves that meet the definition of equity and puttable instruments that do not.
If the entity does not have the unconditional right to avoid delivering cash or another financial asset to settle a contractual obligation, the obligation satisfies the definition of a financial liability, with the exception of instruments classified as equity instruments in accordance with items 16A and 16B or items 16C and 16D. For example:
(a) a restriction on the entity's ability to fulfill a contractual obligation, such as lack of access to foreign currency or the need to obtain authorization for payment from the regulatory entity, does not negate the entity's contractual obligation or the holder's contractual right under the instrument; (b) a contractual obligation that is conditional on the counterparty exercising its redemption right is a financial liability because the entity does not have the unconditional right to avoid delivering cash or another financial asset.
A financial instrument that does not explicitly establish a contractual obligation to deliver cash or another financial asset may establish an indirect obligation through its terms and conditions. For example:
(a) a financial instrument may contain a non-financial obligation that must be settled if, and only if, the entity fails to make distributions or redeem. If the entity can avoid the transfer of cash or another financial asset only through the settlement of the non-financial obligation, the financial instrument is a financial liability.
(b) a financial instrument is a financial liability if upon settlement the entity will deliver:
(i) cash or another financial asset; or
(ii) its own shares whose value substantially exceeds the value of cash or another financial asset.
Although the entity does not have the explicit contractual obligation to deliver cash or another financial asset, the value of the share settlement alternative is such that it will be settled in cash by the entity. In any case, in substance, the holder has the guarantee of receiving an amount that is at least equal to the cash settlement option (see item 21).

Settlement in the entity's equity instruments (item 16(b))

A contract is not an equity instrument simply because it may result in the receipt or delivery of the entity's own equity instruments. The entity may have a contractual obligation or right to receive or deliver a quantity of its own shares or other equity instruments in such a way that the fair value of the entity's own equity instruments to be received or delivered is equal to the value of the contractual right or obligation. Such contractual obligation or right may be a fixed amount or an amount that fluctuates, in part or in whole, in response to changes in a variable other than the market price of the entity's own equity instruments (e.g., interest rate, commodity price, or financial instrument price). Two examples are:
(a) a contract to deliver the entity's own equity instruments equivalent to the value of $100; and (b) a contract to deliver the entity's own equity instruments equivalent to the value of 100 grams of gold. This contract is a financial liability of the entity although the entity must or may settle it by delivering its own equity instruments. It is not an equity instrument because the entity uses a variable number of its own equity instruments as a means to settle the contract. Thus, the contract does not show a participation in the entity's assets after deducting all its liabilities.
Except as indicated in item 22A, a contract that will be settled by the entity by delivering or receiving a fixed number of its own instruments in exchange for a fixed amount of cash or another financial asset is an equity instrument. For example, a share option issued that gives the counterparty the right to buy a fixed number of shares of the entity at a fixed price or for a pre-specified amount (face value of a bond) is an equity instrument. Changes in the fair value of the contract resulting from variations in market interest rates that do not affect the amount of cash or another financial asset to be paid or received, or the number of equity instruments to be received or delivered upon settlement of the contract, do not prevent the contract from being an equity instrument. Any receipt (such as the premium received for a written option on the entity's own shares) must be added directly to equity. Any consideration paid (such as premium paid for a call option) must be deducted directly from equity. Changes in the fair value of an equity instrument must not be recognized in the accounting statements.

22A. If the entity's own equity instruments to be received or delivered by the entity upon settlement of the contract are financial instruments with put options with all the characteristics and satisfying all the conditions described in items 16A and 16B, or instruments that impose an obligation to deliver to another party a pro rata share of the entity's net assets only upon liquidation with all the characteristics and conditions described in items 16C and 16D, the contract is a financial asset or a financial liability. This includes a contract that will be settled by the entity by delivering or receiving a fixed number of such instruments in exchange for a fixed amount of cash or another financial asset.

Except for the circumstances described in items 16A and 16B or items 16C and 16D, the contract that contains the obligation for the entity to buy its own equity instruments in cash or another financial asset gives rise to a financial liability at the present value of the redemption amount (for example, the present value of the future repurchase price, the exercise price of the option, or another redemption amount). This is the case even when the contract itself is an equity instrument. An example is the entity's obligation, under a forward contract, to buy its own equity instruments in cash. The financial liability must be recognized initially at the present value of the redemption amount and must be reclassified from equity. Subsequently, the financial liability must be measured in accordance with CPC 48. If the contract expires without delivery, the carrying amount of the financial liability must be reclassified to equity. The entity's contractual obligation to buy its own equity instruments gives rise to a financial liability at the present value of the redemption amount even if the purchase obligation is conditional on the counterparty exercising its redemption right (for example, a written put option that gives the counterparty the right to sell the entity's own equity instrument to the entity at a fixed price).
A contract that will be settled by the entity by delivering or receiving a fixed number of its own equity instruments in exchange for a variable amount of cash or another financial asset is a financial asset or financial liability. An example is a contract for the entity to deliver 100 of its own equity instruments in exchange for the amount of cash equivalent to the value of 100 grams of gold.

Contingent settlement provision

A financial instrument may require the entity to deliver cash or another financial asset, or otherwise settle it in such a way that it would be a financial liability in the event of occurrence or non-occurrence of uncertain future events (or as a result of uncertain circumstances) that would be beyond the control of the issuer and the holder of the instrument, such as a change in the stock market index, consumer price index, interest rate, or taxes levied, or the issuer's future revenues, net profit, or debt/equity ratio. The issuer of such an instrument does not have the unconditional right to avoid delivering cash or another financial asset (or, otherwise, settling it in such a way that it would be a financial liability). Therefore, it is a financial liability of the issuer, unless:
(a) the part of the contingent settlement provision that could require settlement in cash or another financial asset (or, otherwise, in such a way that it would be a financial liability) is not true; (b) it can require the issuer to settle the obligation in cash or another financial asset (or, otherwise, settle in such a way that it would be a financial liability) only in the event of the issuer's liquidation; or (c) the instrument has all the characteristics and satisfies all the conditions of items 16A and 16B.

Settlement option

When the derivative financial instrument gives one of the parties the choice of how it will be settled (e.g., the issuer or the holder may choose to settle in cash or by exchanging shares for cash), it is a financial asset or financial liability, unless all settlement alternatives result in this instrument being an equity instrument.
An example of a derivative financial instrument with a settlement option that is a financial liability is a share option in which the issuer may decide to settle in cash or by exchanging its own shares for cash. Similarly, some contracts for the purchase or sale of a non-financial item in exchange for the entity's own equity instruments are within the scope of this

COMMISSION OF SECURITIES AND EXCHANGE
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 Pronouncement because they can be settled either by the delivery of the non-financial item or in cash or another financial instrument (see items 8 to 10). Such contracts are financial assets or financial liabilities and not equity instruments.

Composite financial instruments (see also items AG30 to AG35)

The issuer of a non-derivative financial instrument must evaluate the terms of the financial instrument to determine whether it contains both a liability and an equity component. Such components must be classified separately as financial liabilities, financial assets or equity instruments in accordance with item 15.
The entity must separately recognize the components of the financial instrument that (a) create a financial liability of the entity and (b) grant the holder of the instrument the option to convert it into an equity instrument of the entity. For example, a bond or similar instrument convertible by the holder into a fixed number of ordinary shares of the entity is a composite financial instrument. From the entity's perspective, such an instrument comprises two components: a financial liability (contractual agreement to deliver cash or another financial asset) and an equity instrument (purchase option granting the holder the right, for a specific period of time, to convert it into a fixed number of ordinary shares of the entity). The economic effect of issuing this type of instrument is essentially the same as the simultaneous issuance of a debt instrument with an early settlement clause and a warrant contract for the purchase of ordinary shares, or the issuance of a debt instrument with detachable warrants for the purchase of shares. Thus, in all cases, the entity must present the liability and the equity components separately in its period-end or annual financial statements.
The classification of the liability and equity components of a convertible instrument is not revised as a result of a change in the likelihood that the conversion option will be exercised, even when the exercise of the option appears to have become an economic advantage to some holders. Holders may not always act as expected because, for example, the tax effects resulting from conversion may differ among holders. Furthermore, the possibility of conversion changes from time to time. The entity's contractual obligation to make future payments remains pending until it is extinguished through conversion, maturity of the instrument, or any other transaction.
CPC 48 deals with the measurement of financial assets and financial liabilities. Equity instruments are instruments that evidence the residual interest in the assets of the entity after the deduction of all liabilities. Therefore, when the initial carrying amount of the composite financial instrument must be attributed to its equity and liability components, the equity component must be assigned the residual value after deducting, from the total fair value of the instrument, the amount separately determined for the liability component. The value of any derivative feature (such as a call option) embedded in the composite financial instrument other than the equity component (such as an equity conversion option) must be included in the liability component. The sum of the amounts attributed to the liability and equity components upon initial recognition is always equal to the fair value that would be attributed to the instrument as a whole. No gain or loss shall arise from the initial recognition of the components of the instrument separately.
In accordance with the approach described in item 31, the issuer of a bond convertible into ordinary shares must first determine the carrying amount of the liability component by measuring the fair value of a similar liability (including any embedded derivative features that are not equity) that does not have an associated equity component. The carrying amount of the equity instrument represented by the option to convert the instrument into ordinary shares must then be determined by deducting the fair value of the financial liability from the fair value of the composite financial instrument as a whole.

Treasury shares (see also item AG36)

If the entity reacquires its own equity instruments, these instruments (treasury shares) must be deducted from equity. No gain or loss shall be recognized in profit or loss on the purchase, sale, issuance or cancellation of the entity's own equity instruments. Such treasury shares may be acquired and held by the entity or another member of the consolidated group. Amounts paid or received must be accounted for directly in equity.
The amount of treasury shares held must be disclosed separately in the balance sheet or in the notes, in accordance with Technical Pronouncement CPC 26 - Presentation of Financial Statements. The entity must disclose information, in accordance with Technical Pronouncement CPC 05 – Disclosure of Related Party Transactions, if it reacquires its own equity instruments from related parties.

Interest, dividends, losses and gains (see also item AG37)

Interest, dividends, losses and gains relating to a financial instrument or to a component that is a financial liability must be recognized as income or expense in profit or loss. Distributions to holders of equity instruments must be debited by the entity directly to equity, net of any tax benefit. Transaction costs of an equity transaction must be accounted for as a deduction from equity, net of any tax benefit.

35A. Taxes on profit relating to distributions to holders of equity instruments and transaction costs of equity must be accounted for in accordance with CPC 32 – Income Taxes.

The classification of a financial instrument as a financial liability or an equity instrument determines whether interest, dividends, losses and gains relating to that instrument must be recognized as income or expense in profit or loss. Thus, dividends payable on shares, which are entirely recognized as liabilities, must be recognized as an expense, in the same way as interest on a bond. Similarly, gains and losses associated with the redemption or refinancing of financial liabilities must be recognized in profit or loss, while redemptions or refinancings of equity instruments must be recognized as changes in equity. Changes in the fair value of an equity instrument must not be recognized in the financial statements.
The entity normally incurs various costs in the issuance or acquisition of its own equity instruments. These costs may include registration and other regulatory fees, amounts paid to legal, accounting and other professionals, printing costs and other taxes. Transaction costs of an equity transaction are accounted for as a deduction from equity (net of any tax benefit) to the extent that they represent incremental costs directly attributable to the equity transaction that otherwise would have been avoided. Transaction costs of an equity transaction that is abandoned must be recognized as an expense.
Transaction costs relating to the issuance of a composite financial instrument must be attributed to the equity and liability components of the instrument in proportion to the allocation of proceeds. Transaction costs that relate jointly to more than one transaction (for example, costs of a concurrent offering of some shares and listing of other shares) must be attributed to these transactions using a basis for allocation consistent with similar transactions.
The amount of transaction costs accounted for as a deduction from equity in the period must be disclosed separately in accordance with Technical Pronouncement CPC 26 – Presentation of Financial Statements. The amount related to taxes on profit, recognized directly in equity, must be included in the total amount of income tax, deferred or current, or accounted for in equity and disclosed in accordance with Technical Pronouncement CPC 32 – Income Taxes.
Dividends classified as expenses may be presented in the statement of comprehensive income or in the statement of profit or loss (if presented), either together with interest on other liabilities or in a separate line. In addition to the requirements of this Pronouncement, the presentation of interest and dividends is subject to the requirements of CPC 26 – Presentation of Financial Statements and CPC 40 – Financial Instruments: Disclosure. In some circumstances, due to the difference between interest and dividends, with regard to issues such as tax deductibility, separate disclosure of them in the statement of profit or loss is desirable. Disclosure of tax effects must be made in accordance with Technical Pronouncement CPC 32 – Income Taxes.
Gains and losses related to changes in the carrying amount of a financial liability must be recognized as income or expense in profit or loss, even when they relate to an instrument that includes a residual right in the assets of the entity in exchange for cash or another financial asset (see item 18(b)). In accordance with Technical Pronouncement CPC 26 – Presentation of Financial Statements, the entity must present any gain or loss arising from the remeasurement of such instrument separately in the statement of profit or loss when it is relevant to the explanation of the entity's performance.

Offsetting a financial asset and a financial liability (see also items AG38 and AG39)

A financial asset and a financial liability must be offset, and the net amount presented in the financial statements, when, and only when, the entity:
(a) has a legally enforceable right to settle the net amount; and (b) intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously.
In accounting for the transfer of a financial asset that does not qualify for derecognition, the entity must not offset the transferred asset and the associated liability (see CPC 48, item 3.2.22).
This pronouncement requires the presentation of financial assets and liabilities on a net basis when this reflects the entity's expectation of future cash flows from the settlement of two or more separate financial instruments. When the entity has the right to receive or pay a single net amount and intends to do so, it effectively has only a single financial asset or liability. In other circumstances, financial assets and liabilities must be presented separately from each other, consistent with their characteristics as resources or obligations of the entity. The entity must disclose the information required in items 13B to 13E of CPC 40 for recognized financial instruments that are within the scope of item 13A of CPC 40.
Offsetting a recognized financial asset and a recognized financial liability, and presenting the net amount differs from the derecognition (write-off) of a financial asset or financial liability. Although offsetting does not give rise to the recognition of a gain or loss, the derecognition (write-off) of a financial instrument results not only in the removal of the item previously recognized in the balance sheet, but may also result in the recognition of a gain or loss.
The right of set-off is a legal right of the debtor, by contract or otherwise, to settle or otherwise eliminate the whole or part of the amount due to the creditor by applying against that amount an amount due from the creditor. In unusual circumstances, a debtor may have a legal right to offset an amount due by third parties to the creditor provided there is an agreement between the three parties that clearly establishes the right of set-off. Because the right of set-off is a legal right, the conditions to support the right may vary from one jurisdiction to another and the laws applicable to the relationships between the parties must be considered.
The existence of the right to settle a financial asset and a financial liability affects the rights and obligations associated with a financial asset and a financial liability, and may affect the entity's exposure to credit and liquidity risk. However, the existence of the right, by itself, is not sufficient grounds for offsetting. In the absence of an intention to exercise the right or to settle simultaneously, the amount and timing of future cash flows should not be affected. When the entity intends to exercise the right or settle simultaneously, the presentation of the asset and liability on a net basis more appropriately reflects the amounts and timing of future cash flows, as well as the risk to which each of the cash flows is exposed. The intention by one or both parties to settle on a net basis without the legal right to do so is not sufficient to justify offsetting, because the rights and obligations associated with the individual financial asset and individual financial liability remain unchanged.
The entity's intentions regarding the settlement of particular assets and liabilities may be influenced by its usual trading practices, requirements of financial markets and other circumstances that may limit the ability to settle or simultaneous settlement. When the entity has the right of set-off but does not intend to settle or realize the asset and settle the liability simultaneously, the effect of the right on the entity's exposure to credit risk must be disclosed in accordance with item 36 of Technical Pronouncement CPC 40 – Financial Instruments: Disclosure.
Simultaneous settlement of two financial instruments may occur through, for example, the clearing house operation in an organized financial market or a face-to-face swap. In these circumstances, the cash flows are, in fact, equivalent to a single net amount and there is no exposure to credit or liquidity risk. In other circumstances, the entity may settle two instruments by receiving or paying separate amounts, becoming exposed to credit risk for the total value of the asset or liquidity risk for the value of the liability. Such exposures to risk may be significant even if relatively brief. Thus, the realization of a financial asset and the settlement of a financial liability must be treated as simultaneous only when the transactions occur at the same time.
The conditions set out in item 42 are usually not met and offsetting is normally inappropriate when:
(a) several different financial instruments are used to simulate the characteristics of a single financial instrument (synthetic instrument); (b) financial assets and financial liabilities result from financial instruments having the same exposure to risk (for example, assets and liabilities within a portfolio of futures contracts or other derivative instruments) but involve different counterparties; (c) financial assets or other assets are pledged as collateral for financial liabilities; (d) financial assets are made available for the purpose of covering an obligation without these assets having been accepted by the creditor in the settlement of the obligation (for example, sinking fund agreements); or (e) obligations resulting from events that gave rise to losses and there is an expectation of recovering them from a third party due to a claim made in accordance with the insurance contract.
An entity that enters into a number of financial instrument transactions with a single counterparty may enter into a "master netting agreement" with that counterparty. Such an agreement results in a single, net settlement for all financial instruments covered by the agreement in the event of default or termination of any contract. These agreements are commonly used by financial institutions to provide protection against losses in cases of bankruptcy or other circumstances that result in the counterparty's inability to meet its obligations. A "master netting agreement" generally creates a right of set-off that becomes enforceable and affects the realization or settlement of individual financial assets and financial liabilities only after a specific event of default or other circumstances that are not expected in the normal course of business. A master netting agreement does not provide a basis for offsetting unless both criteria of item 42 are met. When financial assets and financial liabilities subject to a master netting agreement are not offset, the effect of the agreement on the entity's exposure to credit risk must be disclosed in accordance with item 36 of Technical Pronouncement CPC 40 – Financial Instruments: Disclosure.

51-95. (Eliminated).

APPENDIX - APPLICATION GUIDE
This appendix is an integral part of Technical Pronouncement CPC 39.

AG1. This application guide provides guidance on particular aspects of the Pronouncement.
AG2. The pronouncement does not deal with the recognition and measurement of financial instruments. Requirements of this nature are defined in CPC 48.

Definitions (items 11 to 14)
Financial assets and financial liabilities

AG3. Currency (cash) is a financial asset because it represents a medium of exchange and, therefore, constitutes the basis on which all transactions are measured and recognized in the financial statements. A cash deposit in a bank or similar financial institution is a financial asset because it represents the depositor's contractual right to obtain cash from the institution or to discount a check, or similar instrument, reducing the balance in favor of a creditor, in payment of a financial liability.

AG4. Common examples of financial assets that represent a right to receive cash in the future and the corresponding financial liabilities that represent a contractual obligation to deliver cash in the future are:
(a) accounts receivable and payable;
(b) notes receivable and payable;
(c) loans receivable and payable; and
(d) debt securities receivable and payable.
In each case, the contractual right of one party to receive (or obligation to pay) is offset by the corresponding obligation to pay of the other party (or right to receive).

AG5. Another type of financial instrument is one for which the economic benefit to be received or ceded is a financial asset that is not cash. For example, a debt instrument payable in government bonds that gives its holder the contractual right to receive, and the issuer the contractual obligation to deliver government bonds, not by cash. The bonds are financial assets because they represent the issuer's, government's, obligation to pay by cash. The debt instrument is, therefore, a financial asset for the holder and a financial liability for the issuer.

AG6. "Perpetual" debt instruments (such as debentures, "capital notes" and "perpetual" bonds) normally provide the holder with the contractual right to receive interest payments on pre-established dates extending over an indefinite period with or without the right to receive principal under conditions that are very unfavorable in the future. For example, the entity may issue a financial instrument determining that annual payments be made

perpetuity equal to the interest rate of 8% p.a. applied to a reference value or principal amount of $1,000. Assuming 8% as the market rate for the instrument when issued, the issuer assumes the contractual obligation to make a future stream of interest payments with a fair value (present value) of $1,000 at initial recognition. The holder and the issuer of the instrument possess a financial asset and a financial liability, respectively.

AG7. The contractual right or contractual obligation to receive, deliver, or exchange financial instruments constitutes, by itself, a financial instrument. A chain of contractual rights or contractual obligations satisfies the definition of a financial instrument if it leads to the receipt or payment of cash, or to the acquisition or issuance of an equity instrument.

AG8. The ability to exercise a contractual right or the requirement to satisfy a contractual obligation may be absolute, or it may be dependent on the occurrence of a future event. For example, a financial guarantee is a contractual right of the creditor to receive cash from the guarantor, and the corresponding contractual obligation of the guarantor to pay the creditor in the event of default by the borrower. The contractual right and obligation exist due to the occurrence of a past transaction or event (assumption of the guarantee), even though the creditor's ability to exercise its right and the guarantor's obligation to fulfill its obligation are both contingent with respect to a future act of default by the borrower. A contingent right and obligation meet the definition of a financial asset and financial liability despite the fact that these assets and liabilities are not always recognized in the financial statements. Some of these contingent rights and obligations may be insurance contracts according to the definition presented in Technical Pronouncement CPC 11 – Insurance Contracts.

AG9. A lease contract generally creates the lessor's right to receive, and the lessee's obligation to pay, a stream of payments that are equivalent to the combination of principal and interest in a financing contract. The lessor must account for its investment in the receivable amount in a financial lease, rather than the underlying asset itself that is subject to the financial lease. Consequently, the lessor must consider the financial lease as a financial instrument. Under CPC 06, the lessor must not recognize its right to receive lease payments under an operating lease contract. The lessor must continue to account for the underlying asset itself rather than any receivable amount in the future under the contract. Consequently, the lessor must not consider the operating lease as a financial instrument, except with respect to individual current receivables to be received and paid by the lessee.

AG10. Tangible assets (such as inventory, facilities, land, and equipment), right-of-use assets, and intangible assets (such as patents and trademarks) are not financial assets. The control of such tangible assets, right-of-use assets, and intangible assets creates the opportunity to generate cash or another financial asset, but does not give the right to receive another financial asset or cash.

AG11. Assets (such as prepaid expenses) for which the future economic benefit is the receipt of products or services rather than the right to receive cash or another financial asset are not financial assets. Similarly, deferred revenues and most warranties offered are not financial liabilities because the outflow of economic benefits associated with them is the delivery of products or services rather than the obligation to disburse cash or another financial asset.

AG12. Assets and liabilities that are not contractual (such as income taxes that are created by laws approved or sanctioned by the government) are not financial assets or financial liabilities. The method of accounting for income taxes is treated in Pronouncement CPC 32 – Income Taxes. Similarly, unformed obligations, as defined in Technical Pronouncement CPC 25 – Provisions, Contingent Liabilities and Contingent Assets, do not originate from contracts and do not constitute financial liabilities.

Equity Instruments

AG13. Examples of equity instruments include non-redeemable ordinary shares, some redeemable instruments (see items 16A and 16B), some instruments that impose on the entity an obligation to deliver to another counterparty a pro-rata share of the entity's net assets only upon liquidation (see items 16C and 16D), some types of preferred shares (see items AG25 and AG26), warrants, and call options (subscription bonuses) that allow the holder to subscribe for or acquire a fixed number of non-redeemable ordinary shares of the issuing entity in exchange for a fixed amount of cash or another financial asset. The entity's obligation to issue or purchase a fixed number of its own shares for a known amount of cash or another financial asset is an equity instrument of the entity (except as provided in item 22A). However, if this contract contains an obligation on the part of the entity to pay a fixed amount of cash or another financial asset (which is not a contract classified as equity according to items 16A and 16B or items 16C and 16D), it also gives rise to an obligation for the present value of the redemption value (see item AG27(a)). The issuer of non-redeemable ordinary shares assumes a liability when it formalizes the act to make a distribution and becomes legally obligated to do so vis-à-vis the shareholders. This may be the case after the declaration of dividends or when the entity is being liquidated and the remaining assets will be distributed to the shareholders.

AG14. The call option or other similar contract acquired by an entity that gives the right to reacquire a fixed number of its own shares in exchange for a fixed amount of cash or another financial asset does not constitute a financial asset of the entity (except as provided in item 22A). Any consideration paid for this contract must be deducted from equity.

Class of instruments that is subordinate to all other classes (items 16A(b) and 16C(b))

AG14A. One of the characteristics of items 16A and 16C is that the financial instrument is in a class of instruments that is subordinate to all other classes.

AG14B. To assess whether an instrument is in a subordinate class, the entity must evaluate the instrument's preference in liquidation as if the liquidation occurred at the classification date. The entity must reassess the reclassification if relevant circumstances change. For example, if the entity issues or repurchases another financial instrument, this may affect the assessment regarding the presence of the instrument in question in the class of instruments that are subordinate to all other classes.

AG14C. An instrument that has a preferential right in the liquidation of the entity is not an instrument that has rights to a proportional share of the entity's equity. For example, an instrument has a preferential right in liquidation if it gives the holder the right to a fixed dividend in liquidation in addition to its share in the entity's net assets, while other instruments in the subordinate class with the right to a proportional share in the entity's net assets do not have the same right in liquidation.

AG14D. If the entity has only one class of financial instruments, this class must be treated as if it were subordinate to all other classes.

Total expected cash flow attributable to the instrument over its life (item 16A(e))

AG14E. The total expected cash flow of an instrument over its life must be based substantially on the result, the variation in net assets, or the fair value of recognized and unrecognized net assets over the life of the instrument. The results and changes in recognized net assets must be measured according to the appropriate CPC Pronouncement.

Transactions in which the instrument holder does not participate as the holder of the entity's equity instrument (items 16A and 16C)

AG14F. The holder of a redeemable financial instrument or an instrument that imposes on the issuing entity an obligation to deliver to a third party a proportional share of the entity's net assets only in the event of liquidation may participate in transactions with the entity assuming a role different from that of an owner. For example, the holder of the instrument may be an employee of the entity. Only the cash flows and the contractual terms and conditions of the instrument that relate to the holder of the instrument as an owner of the entity must be considered in the assessment of whether the instrument should be classified as an equity instrument according to item 16A or 16C.

AG14G. An example is a limited partnership that has limited partners (limited partners, whose liability is limited to the investment in the partnership, in addition to not being authorized to actively participate in the management of the entity) and general partners (general partners, who have unlimited liability for the entity's liabilities, and who are responsible for conducting the entity's operations). Some general partners may provide guarantees to the entity and may be remunerated for providing this guarantee. In these situations, the guarantee and the associated cash flows relate to the holders of the instrument in their role as guarantors and not as owners. In this way, this guarantee and the associated cash flows do not cause the general partners to become subordinate to the limited partners and must be disregarded when verifying whether the instruments of the limited and general partners are identical.

AG14H. Another example is the profit-sharing agreement that allocates profit or loss to the holders of the instrument based on services rendered or business generated during the current or previous fiscal year. Such agreements are transactions carried out with the holders of the instruments in their role as non-owners and must not be considered when verifying the characteristics listed in item 16A or 16C. However, profit-sharing agreements that allocate results to the holders of the instruments based on the nominal amount of these instruments relative to others in the same class represent transactions with the holders of the instruments in the role of owners and must be considered when analyzing the characteristics listed in item 16A or 16C.

AG14I. The cash flows and the contractual terms and conditions of the transaction between the holder of the instrument (in its role as non-owner) and the issuing entity must be similar to an equivalent transaction that could occur between a non-holder of the instrument and the issuing entity.

Absence of other financial instruments or contracts with total cash flows that fix or substantially restrict the residual return to the holder of the instrument (items 16B and 16D)

AG14J. A condition for classifying a financial instrument as equity that otherwise meets the criteria established in item 16A or 16C is that the entity does not have other financial instruments or contracts that contain (a) total cash flows based substantially on the result, the variation in recognized net assets, or the change in the fair value of recognized and unrecognized net assets and (b) the effect of substantially restricting or fixing the residual return. The following instruments, when contracted under normal commercial conditions with parties unrelated to the entity, will probably not prevent instruments that otherwise meet the criteria defined in item 16A or 16C from being classified as equity:

(a) instruments with total cash flows substantially based on specific assets of the entity; (b) instruments with total cash flows based on a percentage of revenue; (c) contracts created to remunerate employees for services rendered to the entity; (d) contracts requiring the payment of an insignificant percentage of profit for services rendered or products supplied.

Derivative Financial Instruments

AG15. Financial instruments include primary instruments (such as receivables, payables, and equity instruments) and derivative financial instruments (such as options, futures, and forward contracts, interest rate and currency swaps). Derivative financial instruments meet the definition of a financial instrument and are within the scope of this Pronouncement.

AG16. Derivative financial instruments create rights and obligations that have the effect of transferring between the parties to the instrument one or more of the financial risks inherent in the underlying financial instrument. At the transaction date, derivative financial instruments offer one party the contractual right to exchange financial assets or financial liabilities with another party under conditions that are potentially favorable or a contractual obligation to exchange financial assets or financial liabilities that are potentially unfavorable. However, they normally (*) do not result in the transfer of the underlying financial asset at the date of contract execution, and this transfer does not necessarily occur upon settlement of the contract. Some instruments have the right and obligation to perform the exchange. As the terms of the exchange are established upon execution of the derivative financial instrument, as market prices for financial instruments change, these terms may become favorable or unfavorable.

(*) This is true for most, but not all, derivatives; an example is the (cross-currency swap) contract between two different currencies in which the principal is exchanged at execution (and exchanged again at maturity).

AG17. The call or put option to exchange financial assets or financial liabilities (example: financial instruments that are not the entity's own equity instruments) gives the holder the right to obtain potential economic benefits associated with changes in the fair value of the underlying financial instrument to the contract. Alternatively, the option writer assumes an obligation to forego future economic benefits or suffer potential losses associated with changes in the fair value of the underlying financial instrument. The contractual right of the holder and the obligation of the writer/seller meet the definition of a financial asset and financial liability, respectively. The underlying financial instrument of an option contract may be any financial asset instrument including shares of other entities and fixed-income securities. The option may require the writer/seller to issue a debt instrument, rather than the transfer of a financial asset, but the underlying instrument of the option would be a financial instrument of the holder if the option were exercised. The holder's right to exchange the financial instrument under favorable conditions and the writer/seller's obligation to exchange the instrument under potentially unfavorable conditions are distinct from the financial asset instrument that will be exchanged upon exercise of the option. The nature of the holder's right and the writer/seller's obligation is not affected by the probability that the option will be exercised.

AG18. Another example of a derivative financial instrument is a forward contract to be settled in six months in which one party (the buyer) promises to deliver $1,000,000 in exchange for government bonds with the same face value and the other party (the seller) promises to deliver the same amount in government bonds in exchange for $1,000,000 in cash. During the six-month period, both parties have a contractual right and obligation to exchange financial instruments. If the market value of the government bonds rises above $1,000,000, the conditions will be favorable to the buyer and unfavorable to the seller; if the market value falls below $1,000,000, the effect will be opposite. The buyer has a contractual right (financial asset) similar to the right held in a call option and a contractual obligation (financial liability) similar to that existing in a written put option; the seller has a contractual right (financial asset) similar to the right existing in a put option and a contractual obligation (financial liability) similar to that existing in a written call option. As with options, these contractual rights correspond to distinct and separate financial assets and liabilities from the underlying financial instruments (the government bonds and cash). Both parties to the forward contract have an obligation to perform at the contracted time, whereas in an option contract, performance only occurs when the holder decides to exercise the option.

AG19. Many other types of derivative financial instruments contain a right or obligation to perform a future exchange, including currency and interest rate swap contracts, interest rate caps, collars, and floors, loan commitments, bond issuance conditions, and letters of credit. The interest rate swap contract can be seen as a variation of the forward contract in which the parties agree to perform a future series of cash flow exchanges, with the amount calculated with respect to a floating rate and the other with reference to a fixed rate. Futures contracts are another variation of forward contracts, differing mainly in terms of standardization and exchange trading.

Contracts to purchase or sell non-financial items (items 8 to 10)

AG20. Contracts to purchase or sell non-financial items do not fit the definition of a financial instrument because the contractual right of one party to receive a non-financial asset or service and the corresponding obligation of the other party do not constitute a present obligation or right of both parties to receive, deliver, or exchange a financial asset. For example, contracts that establish settlement only by delivery or receipt of a non-financial item (silver option, forward contract, or silver future) are not financial instruments. Many commodity contracts are of this type. Many are standardized and traded in organized markets in the same way as many derivative financial instruments. For example, a commodity futures contract can be bought and sold in cash because it is listed on an exchange and can change hands many times. However, the parties to the contract are in fact trading the underlying commodity. The ability to buy or sell a commodity contract in cash, the ease with which it can be bought and sold, and the possibility of negotiating a cash settlement of the obligation do not alter the fundamental characteristic of the contract to create a financial instrument. However, many contracts for the purchase and sale of non-financial items that can be settled by difference or by the exchange of financial instruments, or in which the non-financial item is readily convertible to cash, are within the scope of this Pronouncement as if they were financial instruments (see item 8).

AG21. Except as required by CPC 47 – Revenue from Contracts with Customers, the contract involving the delivery or receipt of tangible assets does not originate a financial asset in one

part and a financial liability in the other, unless the payment is made after the date the asset was transferred. This is the case of purchases and sales made with commercial financing.

AG22. Some contracts are linked to the price of commodities, but settlement does not involve physical delivery of the same. They determine that payment be made in cash, the amount of which is determined according to a formula in the contract rather than the payment of fixed amounts. For example, the principal amount of the bond may be calculated by applying the market price of oil at maturity to a given fixed quantity of oil. The principal is indexed with reference to the commodity price, but is only settled in cash. This type of contract is a financial instrument.

AG23. The definition of financial instrument also includes contracts that give rise to a non-financial asset or liability in addition to a financial asset or liability. These contracts normally give one of the parties the option to exchange a financial asset for another non-financial asset. For example, a bond indexed to the price of a barrel of oil may give its holder the right to a stream of fixed periodic interest receipts and a cash amount at maturity, with the option to exchange the principal amount for a fixed quantity of oil. The convenience of exercising this option will vary from period to period depending on the fair value of oil relative to the exchange ratio established (the exchange price) inherent in the bond. The holder's intention regarding the exercise of the option does not affect the substance of the component assets. The financial assets of the holder and financial liabilities of the issuer make the bond a financial instrument regardless of other assets or liabilities that may also have been created.

AG24. (Eliminated).

Presentation
Liability and equity (items 15 to 27)
Absence of contractual obligation to deliver cash or another financial asset (items 17 to 20)

AG25. Preferred shares may be issued with various types of rights. To determine whether the preferred share is an equity instrument or a financial liability, the issuer must check the particular rights associated with the share to determine if it presents the fundamental characteristics of a financial liability. For example, preferred share, which may be redeemed on a specified date or at the holder's option, contains a financial liability because the issuer has an obligation to transfer financial assets to the shareholder. The potential inability of the issuer to redeem the preferred share when contractually determined, whether due to lack of resources, statutory requirement, or insufficient profits or reserves, does not negate the obligation. The issuer's option to redeem the shares in exchange for cash does not meet the definition of financial liability because the issuer does not have a present obligation to transfer financial assets to shareholders. In this case, the redemption of the shares is at the issuer's discretion. The obligation may arise, however,

AG26. When the preferred share is not redeemable, the appropriate classification must be determined by other rights associated with it. The classification must be based on checking the substance of the contractual agreements and the definitions of financial liabilities and equity instruments. When distributions to shareholders of the preferred shares, cumulative or non-cumulative, occur according to the issuer's criterion, the shares are equity instruments. The classification of preferred share as a financial liability or equity instrument should not be affected by the following aspects:
(a) history of making these distributions;
(b) intention to make these distributions in the future; (c) possible negative impact on the price of the issuer's ordinary shares if distributions are not made (due to restrictions on the payment of dividends on ordinary shares if dividends on preferred shares are not paid); (d) amount of the issuer's reserves; (e) issuer's expectation of profit or loss in the period; or (f) ability or inability of the issuer to influence its profit or loss in the period.

Settlement in own entity shares (items 21 to 24)

AG27. The following examples illustrate how to classify different types of contracts involving equity instruments of the own entity:
(a) The contract that will be settled by the entity by delivery or receipt of a fixed number of its own shares, or exchanging a fixed number of its own shares for a fixed amount in cash or another financial asset, is an equity instrument (except as defined in item 22A). Similarly, any consideration paid or received in connection with this contract must be added to or deducted directly from equity. An example is an option that gives the holder the right to buy a fixed number of shares of the issuer for a fixed amount in cash. However, if the contract requires the entity to redeem its own shares in exchange for cash or another financial instrument, on a fixed or determinable date in the future according to the holder's demand, the entity must also recognize a financial liability for the present value of the redeemable amount (with the exception of the instrument that has all the characteristics and meets the definitions of items 16A and 16B or items 16C and 16D). An example is the entity's obligation, in a forward contract, to repurchase a fixed number of its own shares for a fixed amount of cash. (b) The obligation of the entity to buy its own shares in cash gives rise to a financial liability for the present value of the redeemable amount even if the number of shares that the entity is obliged to repurchase is not fixed or if the obligation is conditional on the exercise of the right by the counterparty (except as established in items 16A and 16B or items 16C and 16D). An example of conditional obligation is a written option that requires the entity to repurchase

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 its own shares in cash if the counterparty exercises the option.
(c) The contract that is settled in cash or another financial asset is a financial asset or financial liability even if the amount of cash or another financial asset that is received or delivered is based on variations in the market price of the own entity's shares (except as defined in items 16A and 16B or items 16C and 16D). An example is a net-settled stock option.
(d) The contract that is settled by a variable number of the company's own shares whose value equals a fixed amount or an amount based on variations of a variable underlying (such as the price of a commodity) is a financial asset or financial liability. An example is a written gold call option that, if exercised, must be settled in the entity's own instruments by delivering as many contracts as necessary to equal the value of the option contract. This type of contract is a financial asset or financial liability even if the underlying variable is the company's own share instead of gold. Similarly, a contract that is settled in a fixed number of the company's own shares, but with the rights related to these shares being variable, so that the settled amount equals a fixed amount or an amount based on changes in a variable underlying, is a financial asset instrument or financial liability instrument.

Contingent settlement provision (item 25)

AG28. Item 25 establishes that if a part of the contingent settlement provision that may require settlement in cash or another financial asset instrument (or otherwise resulting in the instrument being a liability) is not genuine, the settlement provision should not affect the classification of the financial instrument. Thus, a contract that requires settlement in cash or in a variable number of the entity's own shares only upon the occurrence of an event that is extremely rare, highly abnormal, and very unlikely to occur, is an equity instrument. Similarly, settlement in a fixed number of the entity's own shares may be contractually prohibited in circumstances that are outside the control of the entity, but if these circumstances do not have a genuine possibility of occurring, the classification as an equity instrument is appropriate.

Treatment in consolidated financial statements

AG29. In consolidated financial statements, the entity must present the non-controlling interests – interests of other parties in the equity and results of its subsidiaries – in accordance with Technical Pronouncements CPC 26 – Presentation of Financial Statements and CPC 36 – Consolidated Statements. When classifying a financial instrument (or a component thereof) in the consolidated financial statements, the entity must consider all terms and conditions agreed upon between the members of the group and the holders of the instruments to determine if the group as a whole has the obligation to deliver cash or another financial asset related to the instrument or settle it in a manner that will result in a classification in the liability. When a subsidiary issues a financial instrument and the controlling company or another company in the group contracts additional terms directly with the bondholders (guarantee, for example),

AG29A. Some types of instruments that impose a contractual obligation on the entity are classified as equity instruments in accordance with items 16A and 16B or items 16C and 16D. The classification in accordance with these items is an exception to the principles applied in this Pronouncement regarding the classification of instruments. This exception is not extended to the classification of non-controlling interests in consolidated financial statements. Thus, instruments classified as equity in accordance with items 16C and 16D in the individual financial statements, which correspond to non-controlling interests, must be classified as liabilities in the group's consolidated financial statements.

Compound financial instruments (items 28 to 32)

AG30. Item 28 is applicable only to issuers of compound financial instruments that are non-derivative. Item 28 does not deal with compound financial instruments from the perspective of the holders. CPC 48 deals with the classification and measurement of financial assets that are compound financial instruments from the perspective of their holder.

AG31. A common form of compound financial instrument is a debt instrument with an embedded conversion option, such as, for example, a debt bond convertible into ordinary shares of the issuing company itself and with no other embedded derivative. Item 28 requires the issuer of the financial instrument to present the liability component and the equity component separately in the balance sheet as follows:
(a) The issuer's obligation to make interest and principal payments is a liability that exists while the instrument is not converted. At initial recognition, the fair value of the liability component is the present value of the contracted cash flows discounted at the rate applied by the market in that period to instruments with similar credit characteristics and that provide substantially the same cash flows, on the same terms, but that do not have a conversion clause.
(b) The equity instrument is an embedded option to convert the liability into the issuer's shares. This option has value at the date of initial recognition even if it is "out-of-money".

AG32. Upon conversion of the convertible instrument at its maturity, the entity must derecognize the liability component and recognize it as equity. The original equity component remains as

AG33. When the entity extinguishes a compound convertible instrument before maturity through early redemption or repurchase in which the initial conversion privileges remain unchanged, the entity must allocate the resources paid and other transaction costs incurred in the repurchase or redemption to the liability and equity components of the instrument at the date of conversion. The method used to allocate the resources paid and transaction costs to the separate components must be consistent with that used in the original allocation of resources received by the entity when the convertible instrument was issued, in accordance with items 28 to 32.

AG34. Once the allocation of resources received is performed, any gain or loss resulting must be treated in accordance with the accounting principles applicable to the related component, as follows:
(a) the amount of gain or loss related to the liability component must be recognized in the result; and (b) the amount related to the equity component must be recognized in equity.

AG35. The entity may adjust the terms of the convertible instrument to induce early conversion, by offering a more favorable conversion ratio or by paying an additional amount in the event of early conversion, for example. The difference, on the date the terms are adjusted, between the fair value that the holder receives in the conversion of the instrument under the revised terms and what it would receive under the original terms must be recognized as a loss in the result.

Treasury shares (items 33 and 34)

AG36. The entity's own shares should not be recognized as a financial asset regardless of the reason why they were acquired. Item 33 requires that the entity that acquires its own shares deduct these equity instruments from equity (see also item 33A). However, when the entity holds its own shares in an account on behalf of third parties, such as the financial institution that holds its own shares on behalf of the client, for example, there is an agency relationship and as a result these shares should not be included in the entity's balance sheet.

Interest, dividends, losses and gains (items 35 to 41)

AG37. The following example illustrates the application of item 35 to a compound financial instrument. Assume that a non-cumulative convertible preferred share is mandatorily redeemable in exchange for cash in five years, but that dividends are payable at the entity's discretion before the redemption date. This instrument is a compound instrument with the liability component being the present value of the redeemable amount. The costs, expenses or losses of discounting this component

Offsetting a financial asset and a financial liability (items 42 to 50)

AG38. (Eliminated)

Criterion that the entity "currently has a legally enforceable right to offset the recognized amounts" (item 42(a))

AG38A. The right of offset may be currently available or may be conditioned on a future event (for example, the right may be triggered or exercisable only upon the occurrence of some future event, such as default, insolvency or bankruptcy of one of the counterparties). Even if the right of offset is not conditioned on a future event, it may only be legally enforceable in the normal course of business, in the event of default or in the event of insolvency or bankruptcy, of one or all of the counterparties.

AG38B. To meet the criterion of item 42(a), the entity must currently have a legally enforceable right of offset. This means that the right of offset:
(a) must not be conditioned on a future event; and (b) must be legally enforceable in all of the following circumstances:
(i) in the normal course of business;
(ii) in the event of default; and
(iii) in the event of insolvency or bankruptcy; of the entity and of all counterparties.

AG38C. The nature and extent of the right of offset, including any conditions linked to its exercise and whether it would continue in the event of default, insolvency or bankruptcy, may vary from one legal jurisdiction to another. Consequently, it cannot be presumed that the right of offset is automatically available outside the normal course of business. For example, bankruptcy or insolvency laws of the jurisdiction may prohibit, or restrict, the right of offset, in the event of bankruptcy or insolvency in some circumstances.

AG38D. The laws applicable to the relationships between the parties (for example, contractual provisions, the laws governing the contract, or the laws of default, insolvency or bankruptcy applicable to the parties)

Criterion that the entity "intends to settle on a net basis, or to realize the asset and settle the liability simultaneously" (item 42(b))

AG38E. To meet the criterion in item 42(b), the entity must intend to settle on a net basis or to realize the asset and settle the liability simultaneously. Although the entity may have the right to settle by net value, it may still realize the asset and settle the liability separately.

AG38F. If the entity can settle amounts in such a way that the result is, in effect, equivalent to net settlement, the entity must meet the net settlement criterion described in item 42(b). This must occur if, and only if, the gross settlement mechanism has characteristics that eliminate or result in insignificant credit and liquidity risk, and that process receivables and payables in a single process or settlement cycle. For example, a gross settlement system, which has all of the following characteristics, meets the net settlement criterion described in item 42(b):
(a) financial assets and financial liabilities eligible for offset are submitted to processing at the same time; (b) once the financial assets and financial liabilities are submitted to processing, the parties are committed to fulfill the settlement obligation; (c) there is no potential for the cash flows resulting from the assets and liabilities to change once they have been submitted to processing (unless the processing fails – see item (d) below); (d) assets and liabilities that are secured by securities will be settled upon the transfer of securities or similar system (for example, delivery versus payment), so that, if the transfer of securities fails, the processing of the respective receivables or payables for which the securities are secured will also fail (and vice versa); (e) any transactions that fail, as described in item (d), must be re-entered for processing until they are settled; (f) the settlement is carried out through the same clearing institution (for example, clearing bank, central bank or securities depositary agent); and (g) the intraday credit line is in force and will provide sufficient withdrawal values to allow the processing of payments on the settlement date for each of the parties, and it is practically certain that the intraday credit line will be honored, if requested.

AG39. The pronouncement does not provide special treatment for so-called synthetic instruments that are groups of separate financial instruments acquired and held to simulate the characteristics of another instrument. For example, a long-term debt bond indexed to floating rates

COMMISSION OF SECURITIES AND EXCHANGE
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 combined with an interest rate swap that involves the receipt of values calculated at floating rates and the making of payments with fixed values results in a long-term debt instrument with fixed rates. Each of the individual financial instruments that together constitute a synthetic financial instrument represents a contractual right or obligation with its own terms and conditions and can be traded or settled separately. Each financial instrument is exposed to risks that may differ from the risks to which other financial instruments are exposed. Thus, when a financial instrument present in a "synthetic financial instrument" is an asset and another is a liability, they must not be offset and must not be presented in the entity's financial statements on a net basis, unless they meet the offsetting criteria set forth in item 42. AG40. (Eliminated).

CVM Resolution 120: Approval of Consolidated Technical Pronouncement CPC 39 on Financial Instruments: Presentation

Lineage: In force