CVM Resolution 131: Approval of Consolidated Technical Orientation OCPC 01 (R1) on Real Estate Development Entities

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 Orientation OCPC 01 (R1) of the Accounting Pronouncements Committee, which deals with real estate development entities.

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 makes mandatory for publicly-held companies the Orientation OCPC 01 (R1), which deals with real estate development entities, issued by the Accounting Pronouncements Committee - CPC, as consolidated in Annex “A” to this Resolution.

Art. 2. CVM Deliberation No. 561, of December 17, 2008, is revoked, from the effective date of this Resolution.

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

Electronically signed by
Marcelo Barbosa
President

ANNEX “A”
ACCOUNTING PRONOUNCEMENTS COMMITTEE
TECHNICAL ORIENTATION OCPC 01 (R1)
Real Estate Development Entities

Index Item
Objective and scope 1
Formation of the cost of the property, object of the real estate development 2 - 9 Expense with sales commission 10 – 11 Expense with advertising, marketing, promotion and other related activities 12 – 13 Expenses directly related to the construction of the sales stand and the model apartment, as well as those for the acquisition of furniture and decoration of the sales stand and the model apartment of the real estate development 14 – 19 Physical exchange 20 – 23 Provision for warranty 24 – 26 Recording of real estate receivable assignment operation 27 – 32 Present value adjustment 33 – 34 Classification in the income statement of monetary update and interest on receivables from completed and delivered units 35 Transitional provisions 36

Objective and scope

The Accounting Pronouncements Committee issues this Orientation with the purpose of clarifying issues that have generated doubts regarding the accounting practices adopted by real estate development entities, notably the following:
(a) formation of the cost of the property, object of the real estate development; (b) expenses with sales commissions; (c) expenses with advertising, marketing, promotions and other related activities; (d) expenses directly related to the construction of the sales stand and the model apartment, as well as those for the acquisition of furniture and decoration of the sales stand and the model apartment of the real estate development; (e) physical exchanges; (f) warranty provision; (g) recording of real estate receivable assignment operations; (h) present value adjustment; (i) classification in the income statement of monetary update and interest on receivables from completed and delivered units.

Formation of the cost of the property, object of the real estate development
2. The cost of the property, object of the real estate development comprises all expenses incurred for its acquisition, regardless of payment, and includes:
(a) price of the land, including expenses necessary for its acquisition and regularization; (b) cost of projects; (c) costs directly related to construction, including those for land preparation, construction site, and expenses for improvements in common areas; (d) non-recoverable taxes, fees and contributions involving the real estate development, incurred during the construction phase; (e) financial charges directly associated with the financing of the real estate development (more details in items 6 to 9).

The cost of the property is considered that effectively applied in construction. Advances for the acquisition of goods and services must be controlled separately in a specific line item for advances to suppliers (group of inventory of properties for sale) and considered as incurred cost as the goods and/or services to which they refer are obtained and effectively applied in construction.
Additionally, as detailed in the warranty provision item (items 24 to 26), the cost of the sold property must include the estimated value of warranties related to the period after its completion and delivery (for example: delivery of keys or another event of transfer of possession of the property).
Contractual expenses without probability of recovery are recognized immediately in the result as incurred cost of the development. For example: if part of the work is redone due to defects, and the corresponding expense is not recoverable through own insurance or third-party responsible, it must be recorded as an immediate cost. The recognition of the loss is independent of the stage of execution of the development or the amount of profits estimated in other developments and should not impact the calculation of the evolution of the work for the purpose of recognizing real estate development revenue.
Financial charges incurred with loans and financing obtained from third parties, by a controlling entity or by its investees, and directly associated with the financing of construction and for the acquisition of lands of real estate developments of the group must be recorded in a specific line item representing inventory of properties for sale in the consolidated financial statements. In turn, financial charges incurred with loans and financing, including for land acquisition, obtained from third parties by a controlling entity, and applied exclusively in their respective real estate developments, must be recorded in a specific line item representing inventory of properties for sale in the financial statements of this entity. In the consolidated financial statements, charges resulting from loans and financing obtained from third parties by a controlling entity whose resources have been passed on and applied in real estate developments of its subsidiaries and affiliates must be appropriated, observing the same criteria for appropriation of real estate development revenue of the subsidiary or affiliate. The charges not appropriated to the result of the subsidiaries and affiliates must be presented in the financial statements of the controlling entity, in an investment account in non-current assets.
Financial charges directly associated with construction financing are considered those charges linked since the beginning of the project, duly approved by the administration of the real estate development entity, provided there is sufficient evidence that such financing, even obtained for general purposes, was used in the construction of the properties.
The amount of financial charges recorded in inventory of properties for sale during a period should not exceed the amount of financial charges incurred during that period, adhering to the following criteria:
(a) The financial charges eligible to be recorded must be determined based on the application of a capitalization rate to the costs effectively incurred with the property. This determination must take into account the rate effectively contracted, in the case of loans directly linked, or the weighted average rate of financial charges applicable to financing. (b) Financial charges are recorded in inventory of properties for sale when, likely, they will result in future economic benefits and can be reasonably estimated, and will be recoverable through the selling price of the corresponding property. (c) The portion of exchange rate variation considered an adjustment to financial cost must be capitalized as part of the cost of the property under construction, as in the case of foreign currency financing with interest. The capitalization of financial charges (interest plus exchange rate variation) is limited to the value of local loan charges, for similar term and conditions. (d) The date for the start of capitalization of financial charges in inventory of properties for sale must be that in which all the following conditions are met:
(i) that costs with the acquisition of lands or construction of properties are being incurred; (ii) that costs with loans are being incurred; and (iii) that the activities necessary to prepare the property for sale are in progress.
(e) Financial charges must be recorded in inventory of properties for sale until the moment when physical construction is completed.
(f) The values of financial charges capitalized in inventory of properties for sale should not impact the calculation of the evolution of the work for the purpose of recognizing real estate development revenue.
(g) Financial charges eligible to be capitalized and held in inventory of properties for sale must be calculated proportionally to the unsold real estate units, with the financial charges calculated proportionally to the already sold real estate units being fully appropriated to the result, as the cost of the sold real estate units.
The financial statements must disclose the accounting policy adopted for financial charges of loans.

Expense with sales commission
10. Expenses with sales commissions incurred by the real estate development entity must be capitalized as advance payments and appropriated to the result in a line item related to sales expenses, observing the same criteria for appropriation of real estate development revenue.

In the preparation of each balance sheet, even if interim, the real estate development entity must analyze the commissions to be appropriated and recognize them immediately as expense, in the case of cancellation of sales or when it is likely that there will be no payment of the contracted values.

Expense with advertising, marketing, promotion and other related activities
12. Expenses with advertising, marketing, promotions and other related activities, even if directly related to a specific real estate development, are not part of the construction cost of the property.

These expenses must be recognized in the result, in a specific line item related to sales expenses (not affecting, thus, the gross result of real estate development activities), when effectively incurred, respecting the accrual accounting regime of the periods, according to their respective broadcasting period, and cannot be deferred for future recognition until the delivery of the real estate units.

Expenses directly related to the construction of the sales stand and the model apartment, as well as those for the acquisition of furniture and decoration of the sales stand and the model apartment of the real estate development
14. Expenses incurred and directly related to the construction of sales stands and the model apartment, as well as those for the acquisition of furniture and decoration of the sales stands and the model apartment of each development, have a primarily tangible nature and, thus, must be recorded in a fixed asset line item, and depreciated according to the respective estimated useful life of these items.

Useful life is the period during which the asset is expected to be used by the real estate development entity.
When the estimated useful life is less than 12 months, the expenses must be recognized directly in the result as sales expense.
The depreciation expense of these assets must be recognized in a sales expense line item, without affecting gross profit. This recognition should not cause an impact on the determination of the financial evolution percentage of real estate developments.
Any recovered portions from the sale of furniture or parts of the sales stand must be recorded as reducers of the cost of these items.
The real estate development entity must evaluate, at least, at the end of each fiscal year, if there is any indication that an asset may have suffered impairment. If there is any indication, the entity must estimate the recoverable amount of the asset. For example, sales stands are considered impaired at the moment when a substantial part of the units are sold or upon the end of their use.

Physical exchange
20. When real estate units of the same nature and value are exchanged with each other (apartments for apartments, lands for lands, etc.), this exchange is not considered a transaction that generates gain or loss.

When there is an exchange of real estate units that do not have the same nature and the same value (for example, apartments built or to be built for lands), this is considered a transaction with commercial substance and, therefore, generates gain or loss. Revenue must be measured by its fair value. Fair value is understood as the amount by which an asset could be exchanged, or a liability settled, between knowledgeable and willing parties in a transaction where there is no relationship between them. In this type of operation, revenue is determined by the selling value of the received properties or lands. Exceptionally, when this value cannot be measured with security, revenue must be determined based on the selling value of the delivered real estate units.
In the case of land exchange, with the object of delivering an apartment to be built, the value of the land acquired by the real estate development entity, determined according to criteria described in item 21, must be accounted for at its fair value, as a component of the inventory of lands for sale, in counterpart to customer advances in liabilities, at the moment of signing the private instrument or the contract related to said transaction.
The same criteria for appropriation applied to the result of real estate development as a whole prevail for the transactions described in item 22.

Provision for warranty
24. The cost of the sold property must include expenses with existing warranties related to the period after the delivery of the keys of the real estate units, to be estimated based on technical data available for each property and on the history of expenses incurred by the real estate development entity.

The counterpart of the value determined, according to item 24, must be accounted for as a warranty provision in current or non-current liabilities, as applicable, considering only the sold real estate units and the percentage of evolution of the real estate developments, and must be, eventually, reversed only upon its complete extinction, at the moment when the contractual or legal clauses that generated such obligation and/or commitment expire. The effect of the warranty provision should not impact the calculation of the evolution of the work for the purpose of appropriating revenue.
In the existence of contracted insurances and/or third parties involved with the responsibility for costs related to warranties (for example, contractors hired for the construction of the development, companies responsible for the production and installation of goods such as elevators, etc.), the recording of the provision must be based on an evaluation of the probability of an outflow of resources.

Recording of real estate receivable assignment operation
27. Real estate receivable assignment operations must be accounted for and disclosed according to their essence and economic reality. Thus, from the decision on the derecognition of receivables, or when preparing the necessary disclosures, the real estate development entity must also consider:
(a) if the financial administration and management control over the assigned receivables remains with the entity – as evidence of this control can be cited, among others, the physical custody of the title, the collection management with autonomy to establish deadlines or payment conditions and the receipt/transit of resources from these receivables in the current account or the collection account of the entity; (b) if the entity retains, substantially, the rights regarding the assigned receivables (interest, late fees and/or fines, portion of the cash flow itself); (c) if the entity retains, substantially, the risks and responsibilities regarding the assigned credits – for example, contractual obligation to repurchase overdue and unpaid credits or, even, spontaneous repurchase of credits with frequency that characterizes habituality; (d) if the entity creates contractual or informal obligation, providing guarantees to investors regarding the expected receipts and/or yields, even if informally.

The compliance with any of these previous conditions implies the maintenance of the credits as assets and entails recognition, as a liability, of the values received by the assignment of the credits.

Regarding responsibility for losses, it is necessary to analyze the circumstance to avoid reaching a mistaken conclusion. For example, in cases where the real estate development entity is responsible only for a small percentage (as an example, 5%) of the portfolio, this percentage may be considered irrelevant against the set of receivables. However, if the credits involved are exclusively from selected clients (consistently paying) and the historical loss of the portfolio of the real estate development entity, as a whole, is lower (for example, 3% of its sales), it is evident that the credit risk, which is the most substantial in general, is not transferred to investors. Other ways for the real estate development entity to assume risks can be observed through mechanisms, such as, for example, fines in value that may represent the probable loss of the portfolio; possibility of substitution of certain receivables due to negotiations with clients; eventual extensions of maturity of titles, among others.
In any circumstance, the procedure adopted by the Real Estate Entity must be subject to disclosure in a note, which will describe the evidence on which the entity's administration relied to justify the decision to maintain the recording of the receivables or not.
By maintaining the recording of the receivables in its financial statements, it is expected that the value received by the real estate development entity, as a result of the receivable assignment operation, be classified uniformly among companies, in light of the essence of the operation. Thus, when the analysis of the operation indicates that the received resources have the characteristic of financing, they must be classified as an obligation in current and/or non-current liabilities, as the case may be.
If the real estate development entity has assigned a future cash flow, resulting from contracts maintained with clients for the future delivery of products, the value received must be recorded in a liability account that demonstrates the corresponding financial obligation. In this case, the financial costs of the operation must be appropriated pro rata tempore to the appropriate line item of inventory of properties for sale (evaluating the criteria set out in item 8(a)) or of financial expense, according to the destination of the resources obtained with the operation.
Real estate receivable assignment operations, represented by the gross value of the assigned credits, must be classified in liabilities until the completion and delivery (for example, delivery of keys) of the real estate units and, after their delivery, an evaluation must be carried out based on the criteria set out in item 27.

Present value adjustment
33. The general procedures to be observed regarding the adoption of the practice of calculation and recognition of the present value adjustment are set out in Technical Pronouncement CPC 12 – Present Value Adjustment, which provides, in its item 7, that assets and liabilities that present one or more of the characteristics below must be subject to present value adjustment measurement procedures:

SECURITIES AND EXCHANGE COMMISSION (CVM)
Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – ZIP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/ SP – ZIP: 01333-010 – Brazil - Tel.: (11) 2146-2000

(a) a transaction that gives rise to an asset, a liability, revenue or an expense (as defined in the Basic Conceptual Pronouncement Conceptual Structure for the Preparation and Presentation of Financial Statements of this CPC) or another change in equity whose counterpart is an asset or a liability with financial settlement (receipt or payment) on a date different from the recognition date of these elements; (b) periodic recognition of changes in value, utility or substance of similar assets or liabilities employs a discount allocation method; (c) a particular set of estimated cash flows clearly associated with an asset or a liability.

Considering the provisions presented in the previous item, it is understood that:
(a) For installment sales of completed units, it must be evaluated whether the interest rate forecast for the future receipt flow (accounts receivable on the transaction date) is compatible with the usual interest rate of a similar transaction on the date of sale (example: delivery of keys). Accounts receivable must be discounted to present value, if the interest rate forecast for the future receipt flow is different from the usual market rate in similar operations on the date of sale, such that accounts receivable on that date are measured at their fair value, that is, net of any difference between the interest rate forecast for the future receipt flow (even if not explicit) and the usual market interest rate in similar operations. (b) For installment sales of uncompleted units, accounts receivable calculated according to the percentage of financial evolution of the work during the entire construction period must be measured at their present value, considering the (a) term and the (b) difference between the market interest rate and the interest rate implicit in the purchase and sale contracts of real estate units on the date of their signing. The amount of the present value adjustment must be the difference between the cash and installment prices practiced for the same real estate unit. (c) Considering the provisions in sub-items (a) and (b) above, the effects resulting from the calculation of the present value adjustment must be recognized over the period of interest accrual over time. Considering that real estate development entities, at times, finance their clients as part of their operational activity, these real estate development entities, when defining whether the counterpart of the reversal of the present value adjustment should be classified in the group of financial revenues, which is the most usual practice for entities in general, or in the group of gross operating revenue, if they fall within the provision contained in item 23 of Technical Pronouncement CPC 12 – Present Value Adjustment, must evaluate the substance and economic reality to support the adopted procedure in consonance with the aforementioned Technical Pronouncement CPC 12 whose item 23 is reproduced below:
The reversals of present value adjustments of qualifying monetary assets and liabilities

must be recognized as financial revenues or expenses, unless the entity can duly justify that the financing made to its clients is part of its operational activities, in which case the reversals will be recognized as operating revenue. This is the case, for example, when the entity operates in two distinct segments:
(i) sale of products and services and (ii) financing of installment sales, and provided that this adjustment and the effects of its disclosure are relevant.
This classification must be consistent with the corporate object defined in the bylaws (or partnership agreement) of the real estate development entity and must be clearly disclosed in explanatory notes to the entity's financial statements.
(d) Consistently with item 9 of Technical Pronouncement CPC 12 – Present Value Adjustment, not every non-monetary asset or liability is subject to the recording of the present value adjustment effect. In this context, customer advances of real estate development entities (total resources received in advance) represent a non-monetary liability to which the present value adjustment does not apply. (e) In the sale of real estate units under construction, revenue must be recognized by production, as applied in long-term contracts for the supply of goods or services, and the proportion (percentage ratio) of costs incurred up to the time of calculation, relative to the total cost forecast until the completion of the work, must be found, and this proportion must be applied to the selling price, in accordance with the contract (method known as "percentage of financial evolution of the work"), with the result recognized as revenue from the sale of real estate units under construction. In this context, just as the real estate development revenue to be recognized must consider as a base the value of a cash sale contract, the estimated cost to be incurred, the basis for calculating the percentage of financial evolution of the work, must consider the prices practiced for cash purchases, that is, when applicable, discounted to its present value.

Classification in the income statement of monetary update and interest on receivables from completed and delivered units

Monetary update and interest on outstanding balances receivable from clients on completed and delivered units must be classified consistently with sub-item (c) of the previous item.

Transitional Provisions

Due to the eventual effects resulting from the adoption of the criteria provided in this Guidance, the real estate development entity must adopt them retrospectively, in accordance with Technical Pronouncement CPC 13 – Initial Adoption of Law No. 11.638/07 and Provisional Measure No. 449/08.

CVM Resolution 131: Approval of Consolidated Technical Orientation OCPC 01 (R1) on Real Estate Development Entities

Lineage: In force