CVM Resolution 132: Approval of Consolidated Technical Orientation OCPC 05 on Concession Contracts

SECURITIES AND EXCHANGE COMMISSION OF BRAZIL (CVM) 7 de Setembro Street, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – ZIP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Cincinato Braga Street, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/ SP – ZIP: 01333-010 – Brazil - Tel.: (11) 2146-2000

Approves the Consolidation of Technical Orientation OCPC 05 of the Accounting Pronouncements Committee, which deals with concession contracts.

THE PRESIDENT OF THE SECURITIES AND EXCHANGE COMMISSION OF BRAZIL - CVM makes it public that the Board, in a meeting held on May 4, 2022, based on §§ 3 and 5 of art. 177 of Law No. 6,404, of December 15, 1976, combined with items II and IV of § 1 of art. 22 of Law No. 6,385, of December 7, 1976, as well as arts. 5 and 14 of Decree No. 10,139, of November 28, 2019,

APPROVED the following Resolution:

Art. 1. It makes mandatory for publicly-held companies the Technical Orientation OCPC 05, which deals with concession contracts, issued by the Accounting Pronouncements Committee - CPC, as consolidated in Annex “A” to this Resolution.

Art. 2. CVM Deliberation No. 654, of December 28, 2010, 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 ORIENTATION OCPC 05
CONCESSION CONTRACTS

Summary Item
OBJECTIVE AND SCOPE 1 – 6
GENERAL ASPECTS APPLICABLE TO ALL CONCESSIONS 7 – 51 Grant right or concession right (onerous concession) 10 – 15 Intangible asset and financial asset model (bifurcated) 16 – 20 Present value adjustment of the financial asset 21 Classification of the financial asset in the balance sheet 22 Classification of the remuneration of the financial asset in the income statement 23 Infrastructure in the construction phase – classification in the bifurcated model 24 – 27 Measurement of the intangible asset grant right – cash consideration 28 Measurement of the intangible asset grant right – consideration in construction/improvement services 29 Construction services that represent potential for additional revenue generation 30 Construction services that do not represent potential for additional revenue generation 31 – 33 Borrowing costs 34 – 35 Movable assets received from the granting authority 36 – 37 Assets linked to the concession 38 – 40 Subsequent additions to the intangible asset 41 Amortization of the intangible asset 42 Recognition of construction revenue 43 Provision for current maintenance and operation expenses 44 Provision for maintenance, repairs and replacements 45 – 46 Retroactive application of ICPC 01, at the transition date 47 Application of ICPC 01, at the transition date, when retroactive application is impracticable 48 – 50 Disclosure 51

HIGHWAY CONCESSIONS 52
Application of ICPC 01 52
RAILWAY CONCESSIONS 53 – 62
Characteristics of contracts and application of ICPC 01 53 – 61 Treatment of infrastructure outside the scope of ICPC 01 62 ENERGY INDUSTRY 63 – 130 Distribution activity 64 – 83 Characteristics of contracts and application of ICPC 01 64 – 65 Model to be used 66 – 69 Intangible asset amortization method with defined useful life (CPC 04, items 97 to 99) 70 – 73 Recognition of the margin of construction, operation and maintenance infrastructure revenue 74 – 78 Special obligations 79 – 83 Transmission activity 84 – 96 Characteristics of contracts and application of ICPC 01 84 - 91 Model to be used 92 – 93 Financial asset model considerations 94 Treatment of additions for expansion and reinforcement 95 Treatment of additions and disposals for replacement 96 Generation activity 97 – 130 Characteristics of contracts and application of ICPC 01 97 – 103 Model to be used in the case of applying ICPC 01 104 – 106 Concession contracts for generation outside the scope of ICPC 01 107 – 108 Initial adoption of CPC 27 109 – 115 Amortization of assets comprising the generation infrastructure 116 – 117 Recognition of revenue from energy sales contracts (PPA) by generators 118 Recording of socio-environmental costs related to the construction of energy projects 119 – 120 Recording of costs for renewing environmental licenses after the commercial operation entry of the project 121 Recording of deferred costs 122 – 123

Maintenance expenses 124
Onerous concession 125 – 127
Extension and renewal of the term of the concession for generators, transmitters and distributors 128 – 130

Objective and scope

The Accounting Pronouncements Committee issues this Orientation with the purpose of clarifying issues that have generated doubts regarding the adoption of Technical Interpretation ICPC 01 - Concession Contracts by Brazilian regulated companies.
It is important to alert administrators and accountants of regulated companies acting in the role of concessionaire or operator about the challenges they will face to conclude whether each concession contract or similar meets or does not meet all the conditions established and to verify if the entity is within the scope of ICPC 01. This task must be preceded by the following considerations:
(a) knowledge of the new concepts on revenue recognition and classification of infrastructure assets linked to the concession introduced by ICPC 01; (b) knowledge of the regulatory framework (regulatory framework) of each industry and the respective sectors of each industry. Some industries have undergone changes in these frameworks since the privatization process started in 1995 in Brazil; (c) individual analysis of each type of public service provision contract by private law entities, such as concession contracts, authorization, use of public property, permission and others of similar nature; (d) knowledge of all rights and obligations established in these contracts; (e) knowledge of price formation (tariff mechanism) and the process of reviewing these prices over the concession term; (f) knowledge that the business cash flow may not be altered, but the dividend cash flow may be impacted by the changes brought by ICPC 01 due to changes in net income.
All these considerations aim to analyze and treat, in the best possible way, the recognition of revenue in confrontation with the costs and expenses of each business over the concession term.
The understanding of the main concepts introduced in ICPC 01 is, in most cases, simple, but the great challenge is the operationalization of its adoption in the economic reality of each company and specifically in each contract.

This Orientation is restricted only to addressing accounting aspects of the adoption of ICPC 01 and does not include any discussion on the tax aspects (direct and indirect taxes) resulting from its adoption.
This Orientation is directed towards highway, railway and electricity concessions, but the aspects addressed here should be used by similarity or analogy, where applicable and considering the characteristics of each contract, for other industries or regulated activities, namely: water and sanitation, telecommunications, gas distribution, ports, airports, hospitals, bridges, tunnels, prisons, football stadiums and other related activities, including public-private partnership contracts.

General aspects applicable to all concessions
7. ICPC 01 (IFRIC 12) specifies conditions to be met jointly for public concessions to be included in its scope:

condition (a) - the grantor controls or regulates which services the concessionaire must provide with the infrastructure, to whom the services must be provided and their price;
condition (b) - the grantor controls, through ownership, usufruct or any other form, a significant residual participation in the infrastructure at the end of the concession term.

The literal interpretation of the above provision may generate distortion regarding the entities covered by ICPC 01. Generally, there is consensus on condition (b) of the previous item, supported by arts. 36 and 37 of Law No. 8,987/95, which provides for the regime of concession and permission of public service provision provided for in art. 175 of the Federal Constitution of the Federative Republic of Brazil. This law, when deliberating on cases of extinction of the concession by the advent of the contractual term and encampation, prescribed:
“Art. 36. The reversal upon the advent of the contractual term shall be made with the indemnification of the installments of investments linked to reversible assets, not yet amortized or depreciated, which have been made with the objective of guaranteeing the continuity and currency of the granted service.
Art. 37. Encampation is considered the takeover of the service by the granting authority during the concession term, for public interest reasons, through a specific authorizing law and after prior payment of indemnification, in the form of the previous article.”
Regarding condition (a) of item 7, the discussion is circumscribed, basically, to the control or regulation over the price of services provided by the concessionaire. Broadly, it is understood that the control or regulation over the prices of public services provided by the concessionaire is, to a greater or lesser extent, a prerogative of the granting authority. This can be ratified by reading Law No. 8,987/95, where, when discussing tariff policy and charges inherent to the granting authority, it was determined:
“Art. 9. The tariff of the granted public service shall be fixed by the price of the winning bid proposal and preserved by the review rules provided in this Law, in the tender notice and in the contract.”
“Art. 29. It is incumbent upon the granting authority:
I - regulate the granted service and permanently supervise its provision; (...)

V - homologate readjustments and proceed to the review of tariffs in the form of this Law, the pertinent norms and the contract (...)
”;
These legal provisions find their basis in art. 175 of the Constitution:
“Art. 175. It is incumbent upon the Public Power, in the form of the law, directly or under a concession or permission regime, always through bidding, the provision of public services.
Sole paragraph. The law shall provide for:
I - the regime of concessionary and permissionary companies of public services, the special character of their contract and its extension, as well as the conditions of expiration, supervision and rescission of the concession or permission; II - the rights of users; III - tariff policy; IV - the obligation to maintain adequate service.”

Grant right or concession right (onerous concession)
10. A relevant issue regarding the accounting of concession contracts is related to the accounting recognition of the grant right at the beginning or over the concession term. This subject is not specifically treated in ICPC 01. Thus, even if an entity is outside the scope of ICPC 01, it must consider the discussions contained below.
11. It is emphasized that the concession contract does not represent a right of use over the infrastructure, as in the case of leasing, since the granting authority maintains control over it. The concessionaire does have a right which is represented by access to the infrastructure to provide the public service in the name of the granting authority, in accordance with the contract. Thus, if and when recognized, the asset is an intangible asset (in accordance with Technical Pronouncement CPC 04) and/or a financial asset. In the latter case, only a financial asset is recorded in the case where it represents, in fact, a contractual right to receive cash or another financial asset, in accordance with Technical Pronouncements CPCs 38 and 39.
12. The grant right is that resulting from bidding processes where the concessionaire delivers, or promises to deliver, economic resources in exchange for the right to explore the object of the concession over the term provided in the contract. In cases where the price of the delegation of public services (grant) is paid at the beginning of the concession in a single lump sum or in payments over a period shorter than the concession term itself, its registration at the beginning of the concession or proportionally to the advanced value (in the case of an execution contract), respectively, is inevitable. The question of doubt arises in situations where the payment of the grant right occurs by predetermined values over the concession, during the performance of the contract. In this case, there are two lines of understanding and both are practiced today by Brazilian concessionaires:
(a) the one that understands that the contract is of execution; and (b) the one that understands that the right and the corresponding obligation are born for the concessionaire simultaneously upon the signing of the concession contract.

In the line of understanding that the contract is of execution, the arguments are related to the fact that neither the granting authority nor the concessionaire, at the beginning of the concession, have fulfilled their obligations or both have fulfilled their obligations partially to the same extent. The provision of infrastructure by the granting authority occurs progressively as the contractual conditions are fulfilled by the concessionaire. The operator must comply with the contract rules and the granting authority has the right to cancel the contract, indemnifying the operator for investments made and not yet amortized or depreciated. Therefore, if after analyzing the specific facts and circumstances of the contract it is considered that the infrastructure is gradually provided over the contract, as the operator satisfies the contractual conditions and as the granting authority maintains the concession. In this case, the aspect that contradicts the approach of recognizing the grant at the beginning of the contract is the lack of characterization of an asset and an executory liability on the balance sheet date. Finally, the non-existence of contractual penalty (or existence of a negligible penalty) for contractual discontinuity caused by the concessionaire or the provision of indemnification to the concessionaire for unamortized investments, in the event of contractual discontinuity, is an indicator that the contract would be of an executory nature (contract to be executed), not subject to accounting registration at the time of its signing.
On the other hand, in the line of understanding that the grant right and the corresponding obligation are born at the signing of the contract, the concession represents a long-term business, which goes through a bidding process, involves financing projects, guarantees and tariff definition, therefore, factors that indicate a long-term contract in which the parties demonstrate intention and condition to execute it in full. Therefore, it is considered that the facts and circumstances indicate that it is not an execution contract, but the acquisition of an exploration right, the acquisition of a license to operate for a determined term, given that it is understood that the granting authority performed its part of the contract by giving access and the right to explore the object of the concession, while the concessionaire has not performed its part, which is represented in many cases by the obligation to: (a) make cash payments to the granting authority and/or (b) construction of improvements and expansions of the infrastructure.
When adopting one of the procedures provided for in the previous item, all aspects and circumstances inherent to the concession contract must be considered so that the financial statements reflect the economic essence of the transaction that is intended to be represented.

Intangible asset and financial asset model (bifurcated)
16. The identification of the accounting model applicable to a concession is linked to the identification of the responsible party or parties for the remuneration of the concessionaire as a result of construction and improvement services performed by it.

When a concessionaire is remunerated by the users of public services, as a result of obtaining the right to charge them at a certain price and period agreed with the granting authority, the value spent by the concessionaire in acquiring this right must be recognized in the intangible asset.
On the other hand, when the responsible party for the remuneration of investments made by the concessionaire is the granting authority and the contract establishes that there is an unconditional contractual right to receive cash or another financial asset, regardless of the actual use of the infrastructure (demand) over the concession term, it is necessary to recognize the financial asset.
In cases where the investments made by the concessionaire are, in part, remunerated by the users of the public service and in part by the granting authority, either based on the contractual provision for indemnification at the end of the concession or revenue complementation during its course, we are facing a hybrid model: part intangible asset and part financial asset, where the recognition of the latter is dependent on the reliability of its estimate and of representing an unconditional right to receive cash or another financial asset.
At the beginning of a concession, the investments made or to be made may not be indemnifiable. The indemnifiable investments, if any, may occur in the future, from the moment the granting authority commits to reimburse the concessionaire, in accordance with the contractual terms. In this case, the financial asset must be recognized only when the reimbursement conditions are met, that is, at the moment when the indemnifiable investments are effectively made.

Present value adjustment of the financial asset
21. Technical Pronouncement CPC 12 – Present Value Adjustment and Technical Pronouncement CPC 38 – Financial Instruments: Recognition and Measurement must be applied in the measurement of the financial asset at the transition date. However, an analysis of the indemnification value based on the understanding of the functioning of the remuneration mechanism must be carried out to verify if the indemnification value at the transition date is already at present value and subject to future remuneration. If this is the case, the values are already at present value, and no additional adjustments are necessary.

Classification of the financial asset in the balance sheet
22. Item 24 of ICPC 01 allows the classification of the financial asset into three categories, as defined in Technical Pronouncement CPC 38 – Financial Instruments: Recognition and Measurement. Analyzing the Brazilian regulatory environment, and the definitions of CPC 38, it is understood that the indemnification financial asset, in principle, would be better classified as receivable.

Classification of financial asset remuneration in the income statement

The portion of remuneration of the financial asset must be presented in the income statement in a manner consistent with the industry's business model and according to its management model. Being an intrinsic part of the business, it must be presented among operating revenues. Disclosure must be given in the financial statements and respective explanatory notes regarding these revenues.

Infrastructure in the construction phase - classification in the bifurcated model

According to the basis for conclusion of IFRIC 12, equivalent to ICPC 01, specifically BC 62, “the IFRIC also concluded that, during the construction phase of the agreement, the operator's asset (which represents its accumulated right to be paid for the supply/provision of construction services) must be classified as a financial asset when it represents cash or another financial asset due from the grantor, or as instructed.”
According to the basis for conclusion of IFRIC 12, specifically BC 68, “the IFRIC also concluded that, during the construction phase of the agreement, the operator's asset (which represents its accumulated right to be paid for the provision of construction services) must be classified as an intangible asset to the extent that it represents a right (license) to charge users of the public service (an intangible asset).”
It is the consensus of the CPC that, normally, it is impracticable to identify the portion of construction revenue that should be classified as a financial asset and the portion that should be classified as an intangible asset during the construction phase.
Only as a rule is it possible to make this classification after the determination of the value of each component (asset) and the determination of the respective estimated useful economic life for the purpose of calculating the amortization of each component (asset). It should be highlighted that the value of the indemnification financial asset is determined based on the residual value of each asset linked to the infrastructure concession contract, at the end of the concession period. Therefore, it is acceptable that the value of construction revenue, during the construction phase, be fully recognized as intangible asset under construction until it is feasible to allocate the portion corresponding to the indemnification financial asset, with disclosure of this fact.

Measurement of the intangible asset grant right - cash consideration

For contracts falling under item 12(a), the cost must be recognized as an expense over the contractual term, in offset to the corresponding liability or cash. For contracts falling under item 12(b), the intangible asset is initially (at the term of possession) measured by cost. In the case of a fixed grant, the cost corresponds to values already expended and those to be expended in the future must be recognized at present value, according to the provisions of Technical Pronouncement CPC 12 – Adjustment to Present Value. In the case of a variable grant, for example, based on

the revenue of the period, its amount must be recorded as an expense of the period concomitantly with the revenue that generated it.

Measurement of the intangible asset grant right - consideration in construction/improvement services

In general, concession contracts contain, in addition to the operation component, also the construction/improvement services component, that is, the concessionaire not only operates the concession but also has the obligation to construct/improve before and/or during the concession period. The following items indicate accounting treatment for different conditions.

Construction services that represent potential for additional revenue generation

When construction services represent potential for additional revenue generation, with the recovery of the investment made through this additional revenue generation, this contract is of execution, and therefore, the recognition of the right (to explore) and the obligations (to construct) is made as the construction services are provided.

Construction services that do not represent potential for additional revenue generation

For contracts falling under item 12(a), from the date of its operation (term of possession), a provision must be constituted proportionally to the period elapsed between the date of the start of operation (term of possession) and the end of the concession period, in offset to the expense of the period. The value of the provision must be based on the estimated value of construction revenue. In the case of acquisition of assets for which there is no construction service attached (for example, acquisition of vehicles), the concept is equally applicable, except for the fact that the provisioning is done by the acquisition cost. When the construction service is executed, the amount of revenue that exceeds the respective provision must be recognized in the intangible asset and/or the financial asset, depending on the circumstances.
For contracts falling under item 12(b), the construction service is part of the obligation to be paid for the obtaining of the original grant right, and thus, the liability must have its estimated value recognized at the beginning of the validity of the contractual terms (term of possession) and obtaining of the license or date of transition, at present value in offset to intangible asset, based on the predicted value of construction revenue. In these cases, in general, the construction services are not related to improvements or expansion of the infrastructure, typical of situations that originate potential for generation of new revenues, nor are they related to conservations and maintenance, when they aim merely to preserve the level of services of the infrastructure. These cases are usually related to assumed obligations of construction of infrastructure external to the main granted infrastructure, having no relation with the extent and quality of the provision of public services delegated to the concessionaire. Given the nature of this construction obligation, it is not a financial liability, but a non-monetary liability. In this

SECURITIES AND EXCHANGE COMMISSION OF BRAZIL
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 case, there must be recognition of construction revenue as the construction takes place in offset to the liability initially recorded.

Revisions of expense estimates to settle the present obligation at the balance sheet date, in contracts falling under item 12(a), must be recorded prospectively. For contracts falling under item 12(b), remeasurements of the liability that do not originate from accounting for monetary variation and interest (reversal of present value) must be adjusted to the intangible asset. Examples of these remeasurements are: changes in estimates of the fair value of construction, time in which the construction will happen or evolve, and changes in interest rates.

Loan costs

Loan costs must be capitalized during the construction period of an infrastructure, when the requirements of Technical Pronouncement CPC 20 – Borrowing Costs are met.
In some cases, especially at the beginning of concession contracts, the concessionaire needs to make certain adjustments before starting to charge users. It is considered that the capitalization of interest to the intangible asset in this phase is due. It is important to observe the general principle that the capitalization of interest only applies to assets that are not ready for the intended use or sale. The general principles of CPC 20 must be applied in their entirety.

Movable assets received from the grantor

Movable assets received from the grantor must be classified as fixed assets to the extent that they can be retained or negotiated by the concessionaire, with little or no interference from the grantor. In this case, a substantial (or total) transfer of risks and benefits resulting from the control of the asset to the concessionaire has occurred, which entails its registration at fair value upon initial recognition (ICPC 01, item 27), when these assets are part of the remuneration to be paid by the grantor for the concessionaire's services. The concessionaire must record a liability related to unfulfilled obligations that it has assumed in exchange for these other assets.
In some cases, movable assets that can be freely negotiated by the concessionaire may, on the other hand, be part of the so-called essential items for the provision of concession services. That is, although free to negotiate, the concessionaire may have the obligation to maintain it if its sale or disposal represents a loss of the capacity to provide essential services. In these cases, management must evaluate the situation and apply its best judgment on the classification of these items.

Assets linked to the concession

According to concession contracts, assets are considered linked those constructed or acquired by the concessionaire and effectively used in the provision of public services.
In the case of doubts about legal or regulatory interpretation regarding which infrastructure assets would be subject to reversal at the end of the concession period, it is important that this clarification be given by the grantor (regulatory agency) or, alternatively, through industry consensus for the purposes of applying ICPC 01. Disclosure must be given on this matter.
For assets considered not linked to the concession, these must continue to be classified as fixed assets and subject to the valuation criteria established by Technical Pronouncement CPC 27 - Fixed Assets.

Subsequent additions to the intangible asset

In contracts falling under item 12(b), subsequent additions to the intangible asset will only occur when providing a construction service related to the expansion/improvement of the infrastructure that represents potential for additional revenue generation. That is, the obligation of construction will not have been recognized at the signing of the contract, but will be at the time of construction, in offset to intangible asset. Contracts falling under item 12(a) also generate additions to the intangible asset, however only by the value of the difference between construction revenue and the amount provisioned so far. This consideration in construction services cannot be related to maintenance and conservation.

Amortization of the intangible asset

The intangible asset must be amortized within the concession period. The calculation must be made according to the pattern of consumption of the economic benefit it generates, which normally occurs due to the demand curve. The estimate of the amortization curve must offer reasonable reliability; otherwise, the straight-line method (linear amortization) becomes the most recommended.
According to Technical Pronouncement CPC 04 - Intangible Assets, item 97 (partial), “The depreciable amount of an intangible asset with a finite useful life must be allocated systematically over its estimated useful life” and also “The amortization method used reflects the pattern by which the entity consumes the future economic benefits. If it is not possible to determine this pattern with certainty, the linear method must be used.”

Recognition of construction revenue

When the concessionaire provides construction services, it must recognize construction revenue at fair value and the respective costs transformed into expenses related to the construction service provided, and thus, consequently, determine profit margin. In general, the concessionaire is the primary responsible party for the provision of construction services, even in

SECURITIES AND EXCHANGE COMMISSION OF BRAZIL
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Provision for current expenses with maintenance and operation

Expenses with operation, as well as their routine maintenance, must be recorded in the income of the period in which they occur and offset against the revenues of the respective periods.

Provision for maintenance, repairs, and replacements

Due to wear derived from the use of the infrastructure, from the date of its operation and/or date of transition to ICPC 01, a provision must be recorded, based on the best estimate of expense to settle the present obligation at the balance sheet date, in offset to the expense of the period for maintenance or recomposition of the infrastructure to a specified level of operability, or against accumulated profits or losses if related to the past. The liability, at present value, must be progressively recorded and accumulated to cover payments to be made during the execution of infrastructure recomposition works at a future date, observing the provisions of CPC 25 – Provisions, Contingent Liabilities and Contingent Assets.
In some exceptional cases, the concessionaire may be required to perform emergency works that were not part of the original investment plan provided in the contract. In this case, the contractual terms are fundamental to determine whether investments of this nature should or should not be capitalized.

Retroactive application of ICPC 01, at the transition date

To avoid distortion of future results of public concessions in Brazil, the CPC ratifies the determination of retroactive application provided in item 31 of ICPC 01, even when not explicitly requested throughout the items of this Guidance. A large part of these companies already prepare financial statements or a note of reconciliation of the differences between the accounting practices adopted in Brazil and North American or international accounting standards, and therefore, have already made and published initial adjustments before the process of convergence to international accounting standards.

Application of ICPC 01, at the transition date, when retroactive application is impracticable

If any company concludes that it is impracticable to apply ICPC 01 retroactively, it must justify the reasons and obtain formal approval from its administrative bodies. If such justification is approved, the company must use the accounting balances, at the date of transition, deducted from provision for impairment of assets, if necessary, and reclassify part of the balance as a financial asset and part as an intangible asset, if applicable.

If retroactive application is impracticable, the entity must establish the premise it will use to make the best estimate of the value of indemnification, if any (historical cost, corrected cost, and/or replacement cost). In these cases, the impairment test in the determination of balances in the opening balance sheet is required.
Regarding the bifurcated model, ICPC 01 did not specify the model for allocating the portion of the financial asset and the intangible asset; therefore, it depends on the judgment of management to choose the method that best reflects the business. Among the methods that can be used and presented in the literature on the subject, the following stand out:
(a) residual value method - in this method, the financial asset is, generally, the first value to be determined at the time of allocation between it and the intangible asset. This fact is determined because, in the individual evaluation of this asset, other valuation concepts must be considered necessary (contractual remuneration, fair value, and others); therefore, different from the previous valuation criterion as a fixed asset (historical cost or revalued cost). Consequently, the balance of the intangible asset is then determined by difference after the allocation of the portion of the financial asset; (b) relative fair value method - in this method, after allocation between financial asset and intangible asset, the intangible asset is amortized according to item 42 of this Guidance and the difference between the balance of the financial asset and its fair value is amortized in the income of the period using the effective interest rate.

Disclosure

The entity must disclose an explanatory note regarding: (i) main characteristics of concession contracts and lease contracts signed with the grantor; (ii) specifics inherent to the grant of the concession, that is, whether fixed or variable, adjustment criteria, indexers, terms, among others; (iii) future investments contracted with the grantor indicating the type and estimated amount of each of them at the balance sheet date, the expected dates of realization; and (iv) the increase (if any) in revenue due to the execution of the works. Items 28 to 30 of ICPC 01 provide details regarding the presentation and disclosure that must be followed by entities.

Highway concessions

Application of ICPC 01

ICPC 01 applies to highway concessions in Brazil, in general, to the extent that the two conditions provided in item 7 of this Guidance make this type of concession within the scope of ICPC 01. Relevant aspects also applicable to highway concessions are treated in the preceding items.

Railway concessions

Characteristics of contracts and application of ICPC 01

Railway transport activities in Brazil are subject to a wide variety of norms and laws, mostly at the federal level. The regulation of railway transport in Brazil deals with (a) the relations between the Brazilian government and railway companies; (b) the relations between railway companies, including rights of way and mutual traffic; (c) the relations between railway companies and their clients; and (d) railway safety. These rules also contain several provisions on the responsibilities of the railway operator.
The main legal instruments of the railway industry comprise (a) art. 175 of the Federal Constitution, (b) Law No. 8,987/95 and (c) Law No. 10,233/01, with the grantor exercising control mainly through the National Land Transport Agency (ANTT), which acts in the railway sector regarding: (i) operation of railway infrastructure; (ii) provision of the public service of freight railway transport; (iii) provision of the public service of passenger railway transport.
Most current railway concessionaires, originating from the extinct Federal Railway Network S.A. (RFFSA) 1, signed two contracts with the grantor, which are linked for all purposes. One refers to the concession contract, where the clauses for service operation and the grant values that must be paid by the concessionaire to the grantor are established. A second contract concerns the lease of assets previously existing and operated by the extinct Federal Railway Network S.A. (RFFSA). This last contract establishes, among other aspects, the values to be paid to the grantor by the concessionaire for the use of movable and immovable assets received for operation. These contracts, in general, foresee a series of obligations and definitions that must be fulfilled by the concessionaire, among them:
(a) validity period of the concession (most with a validity of 30 years) and conditions for its extension (for another 30 years); (b) duties related to the operation of the infrastructure and provision of services, including preparation of investment plans; (c) manner, form, and conditions of operation of the infrastructure and provision of services, including regarding the safety of populations and the preservation of the environment; (d) obligations of concessionaires regarding government participations and the value due for the grant as the service is operated, if applicable; (e) guarantees to be provided by the concessionaire regarding compliance with the contract, if they exist;

1 Concessions not originating from RFFSA have only one contract, the concession or subconcession contract, for the operation of the service. As they have not leased assets such as the permanent way, they do not have a lease contract.

(f) Brazilian railway tariffs are subject to maximum limits established by ANTT, and these limits are monetarily corrected according to the variation of IGP-DI (or another index that may replace it), with such adjustments currently made annually; (g) tariff limits may be reviewed at the request of the concessionaire, in the event of a justified change in the market and/or costs, of a permanent nature, that modifies the economic-financial balance of the concession contract; (h) the concession contract allows, under specified conditions, the right to charge commercial tariffs freely negotiated with clients, provided they do not exceed the maximum limits of reference tariffs for the respective types of cargo (adjusted as described in item (f)). The concession contract also determines that no tariff charged by the concessionaire may fall below the minimum limit, defined as the long-term variable cost of providing the service in question. That is, the practice known as "zero tariff" is not permitted by the concession contract; (i) the concessionaire may charge for auxiliary operations, such as loading, unloading, transshipment, and storage, with the concession contract not establishing any maximum limits for these charges or those related to the business nature. These revenues are referred to as complementary or ancillary revenues and revenues from associated projects; (j) tariff limits are adjusted according to variations in IGP-DI (or index that may replace it), in accordance with the law. Parallel to this, tariffs may be reviewed if there is a justified change in the market and/or costs, of a permanent nature, or if it modifies the economic-financial balance of the concession contract, at any time, upon request by the concessionaire, or by determination of the granting authority, every five years; (k) assets owned by the concessionaire and those resulting from investments made by it in leased assets, if declared reversible by the granting authority because they are necessary for the continuity of the granted service, will be indemnified at the residual value of their cost, determined by the concessionaire's accounting records, after deducting depreciation and any increases resulting from revaluation. Such cost will be subject to technical and financial evaluation by the granting authority. Any and all improvements made to the superstructure of the permanent way are not considered investment; (l) the transfer of ownership of authorization, concession, or permission grants is permitted, preserving their object and contractual conditions. The transfer of ownership of the grant can only occur with prior and express authorization from ANTT; (m) concession contracts refer to the provision of "public railway transport service". Thus, in cases where the concessionaire and a specific client do not reach an agreement regarding the commercial conditions of transport, that client has the right to appeal to the Regulatory Agency, for it to arbitrate a decision
on the matter. According to information from market agents consulted, these situations can be considered rare. Therefore, it can be concluded that, despite the existence of this safeguard in concession contracts, they do not rigidly establish to whom services must be provided, not obligating the concessionaire to meet demands

COMMISSION OF SECURITIES AND EXCHANGES
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 whose commercial conditions have not been agreed upon by the parties, as there is competition with other forms of transport (for example: road); (n) concession contracts provide for the characterization, registration, and treatment of the so-called "users with a high degree of dependence on the public railway freight transport service," for whom services must be provided on a priority basis. However, according to information collected from various market agents, these clients represent a little significant portion of the concessionaires' business and, in general, are normally attended to under the commercial conditions usually practiced with other clients, which would not characterize the figure of a service necessarily provided by force of regulation by the granting authority; (o) the concessionaire must promote the replacement of assets and equipment linked to the concession, as well as acquire new assets, in order to ensure the adequate provision of the service; (p) must maintain civil liability and personal accident insurance compatible with its responsibilities towards the granting authority, users, and third parties; (q) must give, annually, prior notice to the granting authority of a triennial investment plan to achieve the railway operation safety parameters and other performance goals established; (r) must provide all resources necessary for the exploration of the concession at its own exclusive risk.

Although there may be two types of contracts with distinct legal forms (public transport service concession and leasing), the economic essence of both can be the same, that is, obtaining the right to explore the railway transport service. If so, they must be treated as a single public service concession contract.
Based on the characteristics established in legislation, in concession and leasing contracts, and the premise above, the objective of this part of the Guidance is to conclude whether ICPC 01 applies or not to railway concessions in Brazil.
The entity must analyze whether condition (a) provided in item 7 of this Guidance is met, since the infrastructure may not be available to any entity that wishes to use it, and despite there being a specific area of operation for each concessionaire (due to the location of the existing railway network), the concessionaire, predominantly in its business, may not be obliged to provide transport service to any and all users who request it (see definitions for specific cases above). It may occur that such service is provided only if the concessionaire and the said user agree on the commercial conditions of the transport, mainly the price, cargo volume, and specific characteristics of the product to be transported.
Another aspect related to the previous item concerns the price at which transport services are provided. Although there is a price cap determined in the concession contract, according to information collected from various market agents, these are rarely or never reached, given the existence of direct competition in the transport service, which is exercised by the alternative usually available to clients for the use of road transport. Thus, usually, prices are freely negotiated between the railway concessionaire and its clients, including operations in which rolling stock (wagons and locomotives) are acquired by the clients themselves, with the concessionaire responsible for the transport operation and management service.
Thus, to the extent that there is no control over who the service must be provided to and no price control (not reaching the maximum tariff limits established by the granting authority), it is concluded that there are, under current conditions, no evidence that ICPC 01 is applicable to railway service concessionaire companies, whose concession contracts contain clauses substantially similar to those listed in item 55 of this document.
In the analysis of the application of ICPC 01, the following must be considered: (i) the requirements of each concession contract, (ii) the characteristics of the concessionaire's operation (for example, the existence of a significant portion of business characterized as the provision of services to clients categorized as "users with a high degree of dependence on the public railway freight transport service"), as well as (iii) the pricing practice, which, in reality, despite not reaching the price cap established by the granting authority, may represent, in fact, a limiter to negotiation with clients.

Treatment of infrastructure outside the scope of ICPC 01

Infrastructure not covered by ICPC 01 must be analyzed in light of Technical Pronouncement CPC 04 – Intangible Asset and Technical Pronouncement CPC 27 - Fixed Asset (assets acquired by the concessionaire after the signing of contracts), given that concession and leasing contracts provide for the cession to the concessionaire of the right to legal control (risks and benefits) of the use of infrastructure for the provision of transport services.

Energy Industry

The energy industry encompasses three activities with different regulatory frameworks, namely: generation, transmission, and distribution. The commercialization activity is an independent activity not linked to the signing of a contract with the granting authority.

Distribution Activity
Characteristics of contracts and application of ICPC 01

Distribution concession contracts in Brazil are usually similar and referred to as concession contracts for electricity distribution, and the main characteristics of these contracts are usually:

(a) distribution companies have the contractual obligation to build, operate, and maintain the infrastructure. The obligation to build infrastructure may be implicit or explicit in the concession contract; (b) most contracts have a concession term of 30 years; (c) on average, the estimated economic useful life of the assets comprising the infrastructure is admitted as being longer than the concession term; (d) the distribution activity involves two basic activities: network (or wire) and commercialization; (e) network distribution activity is non-competitive. In commercialization distribution activity with large consumers, the activity is competitive; (f) the concessionaire (distributor/operator) is interposed between the granting authority and the final consumers of the services (users); (g) the activity is subject to the condition of generality and continuity; (h) the contract has a guarantee of maintaining its economic-financial balance; (i) the contract establishes which services and to whom (geographic service area and class of consumers) services must be provided; (j) the price is regulated through the tariff mechanism established in concession contracts based on a parametric formula (based on what are referred to as parts A and B), as well as the modalities of tariff review are defined; (k) assets are reversible at the end of the concession to the granting authority, with the right to receive indemnification from this granting authority, or from an entity that may assume the concession, for investments with certain remaining operational conditions, usually not yet depreciated or amortized. What is not fully defined by legislation is the criterion for evaluating these investments for the purpose of determining the value of indemnification; (l) the modalities of tariff review include, as a general rule:
(i) annual adjustment (review of part A - costs not manageable by the distributor, such as the cost of purchased energy and regulatory charges); (ii) periodic review every four or five years (review of part B - costs manageable by the distributor - operation and maintenance costs, regulatory depreciation calculated based on the cost of the current fixed assets in service evaluated at replacement cost, and shareholder remuneration calculated based on the WACC – weighted average cost of capital - calculated on the balance of fixed assets in service, net of accumulated depreciation and the balance of special obligations, both evaluated at replacement cost; and (iii) extraordinary review for situations of economic-financial imbalance of the contract.

Based on the characteristics established in electricity distribution concession contracts, it is understood that the two conditions provided in item 7 of this Guidance are met and, therefore, this industry qualifies for the application of ICPC 01.

Model to be used

The infrastructure received or built from the distribution activity is recovered through two cash flows: (a) part through energy consumption by consumers (issuance of monthly billing for consumed/sold energy measurement) during the concession term; and (b) part as indemnification for reversible assets at the end of the concession term, to be received directly from the granting authority or from whom he delegates this task.
Electricity distribution concession contracts guarantee concessionaires the right to receive indemnification upon the reversal of assets at the end of the concession or in the events provided for in the extinction of the concession. The assessment of whether the contractual provision for indemnification represents an unconditional right to receive cash or another financial asset directly from the granting authority or from whom he delegates this task must be made by management, as it is fundamental to conclude whether the bifurcated model is or is not the most adequate to the circumstances. The conclusion that the indemnification referred to in the contract represents an unconditional right to receive cash or another financial asset presupposes that the granting authority has no realistic alternative but the obligation to deliver cash or another financial asset.
This indemnification is made based on the portions of investments linked to reversible assets, not yet amortized or depreciated, that have been made with the objective of ensuring the continuity and currency of the granted service.
Based on the understanding of these contracts and items 15 to 19 of ICPC 01, if in the reading of the contracts and relevant legislation the indemnification is considered as an unconditional right to receive cash or another financial asset, the model that best reflects the distribution business is, considering conditions (a) and (b) of item 7 of this Guidance, the bifurcated model, encompassing:
(a) the estimated portion of investments made and not amortized or depreciated until the end of the concession that must be classified as a financial asset because it is an unconditional right to receive cash or another financial asset directly from the granting authority; and (b) the remaining portion to the determination of the financial asset (residual value) that must be classified as an intangible asset due to its recovery being conditioned on the use of the public service, in this case, by energy consumption by consumers.

Amortization method of intangible asset with defined useful life (CPC 04, items 97 to 99)

In the case of distribution companies, the amortization method that can be used and that best reflects the consumption pattern regarding expected economic benefits is that which coincides with the energy sales tariff mechanism. The amortization expense (formerly depreciation) included in the tariff is determined based on the estimated economic useful life of each asset and appropriated linearly over the concession term (period in which the public service is provided using the infrastructure), unless another amortization curve can offer reasonable reliability.

The granting authority, represented by the regulatory agency, is responsible for establishing the estimated economic useful life of each asset comprising the distribution infrastructure for the purpose of determining the tariff, as well as for calculating the value of indemnification for reversible assets at the expiration of the concession term. This estimate is periodically revised and accepted by the market as a reasonable and adequate estimate for accounting and regulatory purposes and that represents the best estimate of the economic useful life of the assets. However, the final responsibility for defining the economic useful life of each asset lies with the reporting entity, and must take into consideration the residual value of the structure. It is important to remember that concession contracts in Brazil have an expiration date and, therefore, from the shareholder's point of view, it is a finite-life business, and from the consumer's point of view, it is a public service provision with an indefinite term.
The understanding of CPC is that the accounting recording of additions by replacement and write-offs to the intangible asset must coincide with the tariff mechanism that reflects the way these assets are recovered during the concession term and, consequently, their amortization must follow the consumption pattern regarding expected economic benefits. Specifically, the tariff mechanism usually guarantees, for each addition made by expansion and/or replacement, the respective pass-through of regulatory depreciation and shareholder remuneration, with regulatory depreciation being calculated based on the estimated economic useful life, established by regulators. When the asset is fully amortized, even if it continues to be used in the provision of service, the distributor will not have the right to receive a tariff corresponding to the regulatory depreciation and shareholder remuneration of that asset.
It should be remembered that, in the bifurcated model, the residual value of each asset that exceeds the concession expiration term will already have been allocated as a financial asset for indemnification at the moment prior to its classification as an intangible asset.

Recognition of revenue margin from infrastructure construction, operation, and maintenance

The distribution activity is different from transmission and generation activities. The latter two require significant investments at the beginning of the concession, which is the primary construction of the infrastructure (for example: a hydroelectric plant or a transmission line), and after entering operation, the investments made are basically for maintenance and some replacement of this infrastructure, unless there is an expansion of the infrastructure.
In the case of the distribution activity, concession contracts establish performance standards for public service provision, regarding maintenance and improvement of service quality to consumers, and the concessionaire has the obligation, upon delivery of the concession, to return the infrastructure in the same conditions in which it received it upon signing these contracts. To comply with these obligations, constant investments are made

The determination of the margin of revenue from construction, operation and maintenance during the period of
the concession is a direct consequence of how the fair value of the respective revenues is determined and not the other way around. Even if construction, operation and maintenance activities are implicit in the concession contracts, ICPC 01 requires the determination of revenue and margin for each activity (phase). The margins may be equivalent or different in each activity, depending on how the business model has been structured. Essentially, a positive margin must always exist, even if it is considered of minimum value, in the case where the distributor opts for outsourcing. The determination of a negative margin in any activity (phase) is very rare and may indicate problems with the recovery of assets in general.
The CPC understands that, regardless of the contracting method used by the distributor for
the construction of the infrastructure, through outsourcing or internal structure, the distributor acts essentially as the primary responsible party regarding construction and installation services, by being exposed to significant risks and benefits associated with them; therefore, the margin of profit and revenue resulting from the services must be recognized and thus presented in the income statement of the distributor.
Distribution companies that hire construction or installation companies of the distribution
infrastructure from the same economic group (related parties) must justify that the fair value of the registered revenue is the result of a transaction carried out in accordance with normal market conditions, which would be practiced in similar transactions with third parties.

Special Obligations

Special obligations represent the resources related to the financial participation of
the consumer, budget allocations of the Union, federal, state and municipal funds, and of special credits destined for investments applied in projects linked to the concession. Special obligations are not onerous liabilities, nor are they credits of shareholders.
Until the second tariff review cycle, the values received at zero cost by distributors were
recorded in fixed assets as assets comprising the infrastructure linked to the concession and depreciated normally. The tariff mechanism guaranteed only the pass-through of the regulatory depreciation of these values (shareholders had no right to remuneration on these values). The counterpart of these values was still recorded in a creditor nature account, presented in the balance sheet as a reduction of the infrastructure balance (old fixed assets). The expected period for settlement of these obligations was the end date of the

In 2006, the characteristics of these obligations underwent regulatory modifications in the tariff
mechanism, namely:
(a) these values are no longer components of tariff formation and, therefore, the pass-through of regulatory depreciation of these values is no longer guaranteed; (b) from the second ordinary tariff review cycle, new additions of these obligations to fixed assets are depreciated in counterpart to the amortization of the special obligations liability, that is, they are presented net in the income statement (neutral effect); (c) from the second ordinary tariff review cycle, the remaining balance of special obligations began to be amortized accounting-wise by the same average depreciation rate of the corresponding fixed assets in service; (d) the remaining balance at the end of the concession, if any, must be offset with the value of the indemnification to be received. If the distribution company adopts the tariff base (BRR) to evaluate the financial asset of indemnification, the remaining balance of special obligations at the end of the concession must also be adjusted by the same base.
The treatment to be given at the transition date of the application of ICPC 01 in the bifurcated model is as follows:
(a) the initial balance of special obligations recorded at the transition date must be amortized until the maturity of the concession and, if a remaining balance is determined, it must be classified as a financial asset, in a reducing account; (b) the portion of the initial balance that must be amortized between the date of transition of the accounting standard and the maturity of the concession must be classified as an intangible asset, in a reducing account.
For concession contracts that are within the scope of ICPC 01, ICPC 11 – Receipt of Assets from Customers (IFRIC 18 - Transfers of Assets from
Customers) does not apply.

Transmission Activity
Characteristics of contracts and application of ICPC 01

Electricity transmission concession contracts are similar and are called
contracts for public service concession of electricity transmission or contracts for concession for transmission, generally having the following main characteristics of these contracts:
(a) transmission companies have the contractual obligation to build, operate and maintain the infrastructure. The obligation to build the infrastructure may be implicit or explicit in the concession contract; (b) most contracts have a concession term of 30 years;

COMMISSION OF SECURITIES AND EXCHANGES
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 (c) on average, the estimated economic useful life of the set of assets comprising the infrastructure is superior to the concession term; (d) the transmission activity is non-competitive. There is no competition between companies (there is between investors, to obtain the concession); (e) the concessionaire (transmission company/operator) is interposed between the grantor and the users; (f) the activity is subject to the condition of generality (right of free access) and continuity; (g) some contracts have a guarantee of maintenance of economic-financial equilibrium; (h) the contract establishes which services and for whom (users) the services must be provided; (i) the price is regulated (tariff) and called permitted annual revenue (RAP). The transmitter cannot negotiate prices with users. For some contracts, the RAP revenue is fixed and updated monetarily by a price index once a year. For other contracts, the RAP revenue is updated monetarily by a price index once a year and reviewed every five years. Generally, the RAP of any transmission company is subject to annual review due to the increase in assets and operating expenses resulting from modifications, reinforcements and expansions of facilities; (j) the assets are reversible at the end of the concession, with the right to receive indemnification (cash) from the grantor on investments not yet amortized. There is discussion of legal and regulatory interpretation regarding which concession contract has the right to indemnification. For contracts signed after 1995 there are several interpretations regarding the right or not to receive indemnification in the process of reversal of assets at the end of the concession. The discussion specific is whether the residual value of the cost of the basic/original project will also have the right to indemnification or only the additions/subsequent investments made after the construction of the basic/original project will have, provided they are approved by the grantor; (k) transmission lines are used by generators, distributors, free consumers, exporters and importers.

Regarding the RAP tariff, concession contracts currently present three modalities, namely:
(a) contracts signed before 2000 establish a tariff review process for RAP. For these contracts, the tariff review is done every five years, from 2005; (b) for contracts signed between 2000 and 2006, the RAP was established by a fixed value (lower price of the auction), this value being updated monetarily by an inflation index established in the contract and adjusted once a year. These contracts do not establish tariff review and have a revenue reduction clause of 50% after the 16th year of the concession term (the cash flow is not linear); (c) more recently signed contracts (new auctions for bidding on new transmission lines) establish: (i) the initial RAP (lower price of the auction); (ii) monetary update by inflation index established in the contract and adjusted once a year; and, furthermore, (iii) tariff review every five years.

In the transmission activity, the revenue provided for in the concession contract (RAP) is realized
(received/earned) by making the transmission system facilities available and does not depend on the use of the infrastructure (energy transport) by generators, distributors, free consumers, exporters and importers. Therefore, there is no demand risk. Exceptionally, the annual RAP (cash flow) may be reduced due to unavailability of systems (performance).
According to the understanding of the market and regulators, the regulatory framework of
Brazilian transmission was planned to be solvent, guarantee financial health and avoid credit risk of the transmission system. Users of the transmission system are required to provide financial guarantees administered by the National System Operator (ONS) to avoid default risk.
The grantor delegated to the entity called National System Operator (ONS)
(intermediary) the responsibility for technical coordination and operation of the systems of transmission; it also participates intimately in the entire administrative, commercial and financial process linked to the activity. The transmission company makes the assets corresponding to the use by ONS available in order to provide and guarantee, to users, the use and access to the facilities of the basic network transmission system, for them to carry out their electricity energy transactions.
The RAP of a transmission company is received from companies that use its infrastructure
through the system usage tariff (TUST). This tariff results from the sharing among transmission users of some specific values: (i) the RAP of all transmitters; (ii) the services provided by ONS; and (iii) regulatory charges. This tariff is adjusted annually on the same date as the adjustments of the RAPs of the transmitters and must be paid by the users of the system, by generators and importers (who put energy into the system), by distributors, by free consumers and exporters (who withdraw energy from the system). Therefore, the grantor delegated to the users represented by generation agents, distribution, free consumers, exporters and importers the payment for the provision of the public service of transmission. The RAP is billed and received directly from these agents.
The main contracts that integrate the transmission system are the following:
(a) contract for public service concession of electricity transmission, entered into between the Union and the concessionaire; (b) transmission service provision contract (CPST), entered into between the concessionaire and the ONS. This contract establishes the technical and commercial conditions for making available its transmission facilities for interconnection operation; (c) connection contract to the transmission system between the concessionaire and the users (CCT); (d) transmission system usage contract (CUST); (e) guarantee constitution contract (CCG).

Based on the characteristics of electricity transmission concession contracts and
conditions established in item 7 of this Guidance, it is understood that companies in the sector are within the scope of ICPC 01.

Model to be used

The infrastructure received or built is recovered through two cash flows: (a) part to
be received directly from users delegated by the grantor (generators, distributors, free consumers, exporters and importers) through monthly billing of the guaranteed revenue (RAP) during the concession period; and (b) part as indemnification (for cases where there is a contractual right) for reversible assets at the end of the concession term, to be received directly from the grantor or to whom he delegates this task.
Based on the understanding of most of these contracts and on items 15, 16 and 19 of ICPC 01 and still
on items BC42, BC43, BC49 and BC54 of IFRIC 12, the model that best reflects the business of transmission is the financial asset model, because:
(a) the RAP, assured annually, encompasses construction, operation and maintenance and is realized (received/earned) by making the infrastructure available and not by its use (energy transport) by users (generators, distributors, free consumers, exporters and importers); therefore, there is no demand risk for the transmission company; (b) the grantor delegated to generators, distributors, free consumers, exporters and importers the monthly payment of RAP, which, being guaranteed by the regulatory framework of transmission, constitutes an unconditional contractual right to receive cash or another financial asset; (c) the estimated portion of investments made and not amortized or depreciated until the end of the concession will be classified as a financial asset because it is an unconditional right to receive cash or another financial asset directly from the grantor or to whom he delegates this task; (d) the portion of the financial asset related to the indemnification of assets, when applicable, must be included in the cash flow model, considering the premise adopted by management for its receipt (residual value evaluated at historical cost, adjusted cost or replacement cost/tariff base, if applicable).

Considerations of the financial asset model

For the operationalization of the financial asset model, it is necessary to pay attention to the following
considerations:
(a) retroactive application of all concession contracts signed after 1995 (new auctions) to avoid distortion in the determination of the effective interest rate of the financial asset related to construction; (b) criterion for the separation (allocation) of revenue from construction, operation and maintenance from the total of the contract;

Treatment of additions by expansion and reinforcement

In the case of the transmission activity, regardless of the type of concession contract
signed, additions by expansion and reinforcement generate additional cash flow and, therefore, this new cash flow (construction revenue) must be incorporated into the balance of the financial asset, requiring a new effective interest rate to be determined for the remaining term of the concession for this portion (new financial asset).

Treatment of additions and disposals by replacement

Transmission companies may only register a new financial asset if additions
by replacement generate additional cash flow, net of any disposals.

Generation Activity
Characteristics of contracts and application of ICPC 01

Electricity generation concession contracts may present various modalities
and, depending on the date of their signing, the regulatory framework is different, namely:
(a) Public service concession contract
i. Until 1995, concession contracts of federal and state state-owned companies and some
private companies were not formalized. With the issuance of Law No. 8.987/95 (Concession Law), which provides for the regime of concession and permission, and Law No. 9.074/95, which establishes norms for grant and extensions of concessions and permissions of public services, these contracts had to be, obligatorily, formalized, including the new contractual conditions required by the new legislation, supported by the Federal Constitution. (b) Public asset usage contract (UBP)
i. These contracts were signed by new investors who acquired existing assets in
the privatization process, as well as in bidding processes for construction of new projects. The exploration regime was changed to independent energy production (PIE).

COMMISSION OF SECURITIES AND EXCHANGES
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
ii. In the period from 1995 to 2003, the main condition for participation in auctions for privatization
of existing assets and/or bidding for construction of new projects was the investor offering the highest value of UBP (onerous concession).
iii. From 2004, with the new energy regulatory framework, established by Law No. 10.848/04,
the main condition for participation in bidding auctions for construction of new energy projects is for the investor to offer the lowest energy selling price for commercialization in the regulated market (captive - distributors) and, furthermore, the requirement that, at least, 70% of the assured energy of the project be destined to this market and only 30% remaining can be commercialized in the free market. Therefore, the signing of the UBP contract is linked to the signing of the energy purchase and sale contract (PPA) at the lowest price offered in the auction. The minimum price offered in the auction prevails during the concession term of 30 to 35 years and is only updated by the price index established in the contract. Only the 30% of the assured energy can be sold freely during the concession term. Also for these cases there continues to exist the contractual requirement of payment of the UBP (onerous concession) during the concession term, but the value is defined by the grantor.
iv. It is important to note that there may be cases of contracts where the percentage destined to the
free market is different from 30%. The analysis of each contract must be done individually.
(c) Authorization
i. Authorizations are generally intended for thermal and renewable energy projects,
such as small hydroelectric plants (PCH), wind, biomass, solar and others.
The process of obtaining authorizations is more simplified.

The main characteristics of the contracts mentioned in the previous item are usually:
(a) generation companies of new projects have the contractual obligation to build, operate and maintain the infrastructure. The obligation to build the infrastructure may be implicit or explicit in the concession contract; (b) most contracts have a concession term between 30 and 35 years (hydroelectric, PCH and wind) and 20 years (thermal), with possible exceptions; (c) in the case of hydroelectric projects, the estimated average economic useful life of the main assets comprising the plant exceeds the concession term; (d) in the case of thermal and wind projects, the estimated average economic useful life of the main assets comprising these plants is, normally, inferior to the concession/authorization term; (e) according to Law No. 9.648/98, art. 10, "the purchase and sale of electricity between concessionaires, permissionaries and authorized parties becomes freely negotiable observed terms and conditions", except energy generated by Itaipu Binational and by Eletrobrás Termonuclear S.A. – Eletronuclear; (f) from 2004, two environments were officially created for the commercialization of energy, namely: (i) regulated environment (captive - distributors) and (ii) free environment; although the agents already could sell, since 1995 (Law No. 9.074/95) to distributors and free consumers;

(g) from 2004 onwards, the economic-financial equilibrium clause was removed from the concession contract, ceasing to be a tariff and becoming a price with risk for the investor. Public asset use contracts signed before 2004 no longer contained such a clause;

(h) the assets are reversible at the end of the concession (hydropower - large-scale and small hydroelectric plants), with or without the right to indemnification. In the case of new thermoelectric, wind, and biomass plants, the assets are owned and, therefore, in these cases only, the assets are not reversible at the end of the concession. Exceptions may exist;

(i) there is a discussion of legal interpretation regarding the right to indemnification only for the residual value of the construction cost of the original basic project of UBP contracts signed after 1995, under the independent energy production regime (PIE), and under the aegis of Decree No. 2003, art. 20;

(j) do not define the concession area;

(k) do not define criteria and procedures for tariff readjustment and review;

(l) do not establish the concessionaire's obligations, including those related to the foreseeable needs for future service alteration and expansion;

(m) do not establish the rights and duties of users to obtain and use the service;

(n) there are no tariffs defined by the granting authority, except for some small generators located in the distribution company's concession area, which have been disintegrated (distributed generation) and use the same infrastructure as the distributor, and whose energy sales contracts establish that prices be adjusted according to the tariff review process of the respective distributor.

It is alerted that, due to the complexity of understanding the regulatory framework of the generation activity, considering the various types of concession contracts, the different regulatory frameworks, the two energy trading environments, the aspects related to the PROINFA Incentive Program, and the rules for distributed generation, an individual analysis of each concession/UBP/authorization contract is necessary to conclude whether it is or is not within the scope of ICPC 01, considering the conditions (a) and (b) provided in item 7 of this Guidance.
Generally, concession contracts for generation signed before 2003, with possible exceptions, do not apply ICPC 01 because they do not meet condition (a) of the standard.
Also generally, for generation concession contracts signed after the new regulatory framework of 2004, whose primary condition for participation in the auction is tied to the signing of the UBP contract, together with the energy purchase and sale contract (PPA - lowest price), and, furthermore, to the obligation to serve the regulated market with the allocation of 70% of the assured energy (captive - distributors) during the concession period, the conclusion in the first analysis would be that these contracts are within the scope of ICPC 01. For the actual conclusion of the application of ICPC 01, it is necessary to carry out a specific complementary analysis of each concession contract and other aspects of this business, such as:

(a) the expectation of selling the remaining 30% of the assured energy in the free market, at a price higher than the price established in the auction for serving the regulated market, resulting in an unregulated revenue of relevant value in relation to the total expected revenue of the contract. As the 30% is not generic, each contract needs to be analyzed individually;

(b) the impossibility of physically separating the generation infrastructure that will produce energy to serve the regulated and free markets;

Based on the complementary aspects analyzed above, it is the understanding of the CPC that the condition established in item 5(a) of ICPC 01 is not met when combined with item GA7 of the same standard. There may be exceptions, therefore, it is important to analyze the contracts individually.

PCH and wind projects linked to Proinfa may be within the scope of ICPC 01, depending on how the business model was developed by the investor.
Projects referred to as "distributed generation" may be within the scope of ICPC 01, depending on the conditions under which the energy sales contract was established.

Model to be used in the event that ICPC 01 applies

For generation concession/UBP/authorization contracts that fall within the scope of ICPC 01, the infrastructure received or constructed is recovered through two cash flows, namely: (a) part to be received directly from agents of the regulated and free markets; and (b) part as indemnification (for cases where there is an unconditional contractual right to receive cash or another financial asset) of the assets reversible at the end of the concession term, to be received directly from the granting authority or whoever it delegates this task.
The assessment of whether the contractual provision for indemnification represents an unconditional right to receive cash or another financial asset must be made by management, as it is fundamental to concluding whether the bifurcated model is or is not the most appropriate for the circumstances. The conclusion that the indemnification referred to in the contract represents an unconditional right to receive cash or another financial asset presupposes that the granting authority or whoever it delegates this task has no realistic alternative other than the obligation to deliver cash or another financial asset.
Based on the understanding of these contracts and items 15 to 19 of ICPC 01, if in the reading of the contracts the indemnification is considered an unconditional right to receive cash or another financial asset, the model that best reflects the generation business is the bifurcated model, encompassing:

(a) the estimated portion of investments made and not amortized or depreciated until the end of the concession that must be classified as a financial asset because it is an unconditional right

to receive cash or another financial asset directly from the granting authority or to whom it delegates this task;

(b) the remaining portion to the determination of the financial asset (residual value) that must be classified as an intangible asset due to its recovery being conditioned on the sale of energy in the regulated and free markets.

Generation concession contracts outside the scope of ICPC 01

Generation concession contracts outside the scope of ICPC 01 must be analyzed in light of CPC 06 – Leases, CPC 27 – Property, Plant and Equipment, and CPC 04 – Intangible Assets.
It is important to remember that some generation concession contracts signed in Brazil, especially of hydroelectric, thermoelectric, and biomass nature, have characteristics of financial leases.

Initial adoption of CPC 27

If the analyzed concession contracts classify the infrastructure according to CPC 27 – Property, Plant and Equipment, the generation company may opt for the retroactive application of the standard or use the concept of deemed cost in initial adoption as provided for in ICPC 10.
Generation companies that opt for the retroactive application of the standard must make the following main adjustments: (a) elimination of the remaining balance of capitalized indirect administrative expenses; (b) remaining balance of capitalized equity interest (interest on construction in progress (JOA) and expenses for remuneration of fixed assets in progress (DRIC)); (c) financial costs (monetary/exchange variations, interest, and others) capitalized in excess of market interest; (d) deferred costs, such as contingencies and socio-environmental costs capitalized after the commercial operation entry of the projects and others not allowed by the Pronouncement and other applicable standards.
Generation companies that opt for the use of the deemed cost concept in the evaluation of assets comprising the generation infrastructure, linked to a concession, must take into consideration fair values limited to the recoverable values admitted by the regulators and respect the estimated economic useful life accepted by the regulators as adequate, unless there is robust evidence that another useful life is more appropriate. It is necessary to pay attention to the fact that the residual value, for indemnification purposes, is that which is determined according to the useful lives estimated by the regulators.
For example, in the evaluation of the fair value of flooded lands or around reservoirs, normally, the value of the lands is not depreciated unless it is not recoverable at the end of the concession, that is, without the right to indemnification. In cases where the lands have the right to indemnification at the end of the concession, for the purpose of evaluating their fair value, the appraiser cannot consider the appreciation of the lands from the date of their incorporation into the infrastructure of the generation activity, through acquisition or expropriation, until the date of transition of the standard, since this appreciation would only be realized if the lands could be sold to third parties; as these lands are linked to a concession, this gain will never be realized. For this evaluation, the appraisal criteria used by the regulators in the process of evaluating assets at replacement cost, for the purpose of tariff review, as has been used in distribution companies, must be considered. The regulators determine that the values of the lands be evaluated at historical cost corrected by a price index. Therefore, the concept applicable to this case is the value in use.
It should be remembered that the concept of deemed cost allows for the adoption of methodologies other than replacement cost in determining the fair value of assets.
In situations where the generator is an investee and has opted for the registration of the deemed cost, the registration of the adjustments (positive or negative) as a result of this new evaluation of the assets registered in the appraisal account in the equity of the investee must be made in the investing company (parent) as a reflex adjustment in the appraisal account, also in equity.
Although there is no express provision in the accounting standards for this adjustment to be registered as a reducer of the goodwill account for future profitability expected in the acquisition of the investee, a specific analysis of the situation must be carried out.

Amortization of assets comprising the generation infrastructure

For assets comprising the generation infrastructure linked to concession contracts (public asset use) signed after 2004, under the aegis of Law No. 10.848/04 (new regulatory framework), which do not have the right to indemnification at the end of the concession term in the process of reversing the assets to the granting authority, these assets, including lands, must be amortized based on the economic useful life of each asset or the concession term, whichever is shorter, that is, the amortization is limited to the concession term.
The same accounting treatment must be analyzed for concession contracts (public asset use) signed between 1995 and 2004, under the aegis of Decree No. 2003, art. 20.

Recognition of revenue from energy sales contracts (PPA) by generators

Some long-term energy sales contracts were signed containing, in addition to the monetary update clause by price index, the provision for real increase or reduction of the contracted price. These contracts, which provide for price increase or reduction above the index provided, must have the contractual revenue recognized according to Technical Pronouncement CPC 30 – Revenues, that is, at the moment when the risks and benefits related to the

energy produced are transferred. The same accounting treatment must be observed for the cost of energy purchased supported by this nature of contract in companies that purchased. In this context, it must be considered that:

(a) in the case of a provision for price increase in the energy to be supplied in the future, this effect will affect the revenues derived from this supply in the future; and

(b) in the case of a provision for price reduction in the energy to be supplied in the future, a portion of the revenue obtained before this alteration must be deferred for the purpose of linearizing the revenue over time.

Registration of socio-environmental costs related to the construction of energy projects

The value of socio-environmental costs in energy projects is significant, potentially representing on average between 5% and 30% of the total budget for the construction of these projects. Often, this value is disbursed during the concession term. For the purpose of accounting registration of all costs related to the construction of these projects, which will be disbursed in the future during the concession term, the generator must prepare the best estimate of future disbursements brought to present value; this value must be registered as the cost of the fixed asset, which must be depreciated from the commercial operation entry of the project. This criterion is supported by item 11 of Technical Pronouncement CPC 27 – Property, Plant and Equipment (initial costs).
After the commercial operation entry of the project, if management identifies that the initial estimate of these costs will undergo relevant adjustments upwards or downwards or due to reversal of the present value adjustment, the provision must be adjusted in counterpart to the fixed asset, in the account that received the original debit.

Registration of costs for renewing environmental licenses after the commercial operation entry of the project

After the commercial operation entry of the projects, it is required by Brazilian environmental legislation that operation licenses be obtained, which, depending on the environmental agencies of each municipality and state, may have a term between two and five years or another term, but always limited to 10 years. If the environmental costs associated with obtaining these licenses are paid before the effective obtaining of the license, the disbursed value must be registered as an intangible asset - operation licenses and amortized over the validity term of the license. If the license is obtained before the disbursements, at the initial moment of the license validity, the estimated cost of these disbursements must be provided for and registered as an intangible asset – operation licenses and amortized over the validity term of the license.

Registration of deferred costs

It is no longer permitted to register deferred costs, such as socio-environmental costs, contingencies, and others after the commercial operation entry of generation projects according to the concepts introduced by Technical Pronouncement CPC 27. Only the capitalization of costs that increase the useful life of the assets comprising the generation infrastructure and that generate additional cash flow (revenue) is permitted. Apparently, only new investments for repowering can be capitalized. Costs with major replacements that increase the useful life of the assets must be capitalized and the value previously registered must be written off, to avoid duplication of costs.
It is important to remember that most generation projects do not have a tariff, they have a negotiated price; only costs that generate an increase in operating revenue (additional cash flow) can be capitalized.

Maintenance expenses

The accounting registration of maintenance expenses for generation projects must observe the concepts introduced by Technical Pronouncement CPC 27 - Property, Plant and Equipment and by Technical Pronouncement CPC 25 - Provisions, Contingent Liabilities and Contingent Assets.

Onerous concession

The accounting registration of costs related to the onerous concession in the electricity industry applies solely to generation companies that have in their generation park hydroelectric plants, whose concession contracts were signed in the modality called public asset use (UBP). These contracts exist in already privatized companies (with existing or under construction generation assets) and in companies called "newly bid" (new assets - the companies have the responsibility to build, operate, and maintain the new hydroelectric plants). These contracts may have been signed before the new regulatory framework of 2004, whose concession was subject to bidding for payment of the highest value for the UBP, or after the new regulatory framework of 2004, whose concession is subject to bidding for the lowest electricity sales price, but even so, the granting authority establishes the value of the UBP.
These contracts have a clause that provides for the payment of the UBP installments over the concession period. Depending on the contract, the payment schedule is differentiated, namely:

(a) in fixed monthly installments during the concession term;

(b) in fixed or variable (non-linear) monthly installments in the first five to seven years of the concession term;

In all cases, the installments are updated monetarily and annually, from the date of signing the contract, by a price index established in the concession contracts, and the

values are charged from the commercial operation entry of the hydroelectric project (grace period). There is no incidence of interest.

Extension and renewal of the concession term of generators, transmitters, and distributors

Currently, the situations of concession contracts in the energy industry regarding extension and renewal are as follows:

(a) privatized companies, whose contracts were signed with a term of 30 years and with a provision for extension at the discretion of the granting authority (discretionary power);

(b) non-privatized companies, mostly federal and state state-owned companies. For this group, whose concessions had been granted previously to 1995, before the issuance of Law No. 8.987/95 (called the Concessions Law), which had the objective of making the privatization process viable, special treatment was given under certain conditions that resulted in the granting of a special extension term for an additional period of 20 years. Some of these contracts still provide for the possibility of extension. Therefore, from 2015 and 2016, a large part of these concessions will expire;

(c) generation companies bid from the new regulatory framework of 2004 (Law No. 10.848/04) had their concession term extended to 35 years, without the possibility of extension.

Specific legislation establishing the criteria for extension or renewal of concessions expiring from 2015 has not yet been issued, including whether this will be a special extension with or without cost, or whether it will be a new bidding with cost. There is also no history of extension or renewal in Brazil. Since 1995 (New Concessions Law), no distribution or transmission company has gone through the process of extension or renewal. There have been some extensions with and without cost to meet specific situations in the generation activity, nothing that could be considered a trend history. Currently, in Brazil, there is a certain legal/regulatory/constitutional indefiniteness that is being discussed by the market. There are already several bill projects and constitutional amendments being discussed in the Chamber of Deputies, but it is still not possible to predict the result of this discussion in the Brazilian Congress.
The situations described above and their consequences must be evaluated by the concessionaire in light of the provisions in items 93 to 96 of Technical Pronouncement CPC 04 – Intangible Assets.

CVM Resolution 132: Approval of Consolidated Technical Orientation OCPC 05 on Concession Contracts

Lineage: In force