CVM Resolution 137 (Revoked)

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. The obligation for open companies to comply with Technical Pronouncement CPC 08(R1), which deals with transaction costs and premiums in the issuance of debt and equity securities, issued by the Accounting Pronouncements Committee - CPC, is hereby ratified, as per Annex “A” to this Resolution.

Art. 2. Deliberation 649, of December 16, 2010, is hereby revoked, effective from the entry into force of this Resolution.

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

Signed electronically by
MARCELO BARBOSA
President

Summary Item
OBJECTIVE 1
SCOPE 2
DEFINITIONS 3
ACCOUNTING FOR RAISING RESOURCES FOR EQUITY 4 – 7 ACCOUNTING FOR THE ACQUISITION OF OWN SHARES (TREASURY SHARES) 8 – 10 ACCOUNTING FOR RAISING RESOURCES FROM THIRD PARTIES 11 – 18 ALLOCATION OF TRANSACTION COSTS WHEN ISSUING A COMPOUND INSTRUMENT OR IN THE EVENT OF MORE THAN ONE CONCOMITANT DISTRIBUTION 18A - 18B TEMPORARY ACCOUNTING OF TRANSACTION COSTS 19 DISCLOSURE 20 ILLUSTRATIVE EXAMPLES

Objective

The objective of this Technical Pronouncement is to establish the accounting treatment applicable to the recognition, measurement, and disclosure of transaction costs incurred and premiums received in the process of raising resources through the issuance of equity and/or debt securities.

Scope
2. This Pronouncement regulates the accounting and disclosure of transaction costs incurred in the primary distribution of shares or subscription warrants, in the acquisition and disposal of own shares,

Definitions
3. For the purposes of this Pronouncement, the following terms are considered with the following meanings:
Transaction costs are only those incurred and directly attributable to activities necessary exclusively for the completion of the transactions cited in item 2. By nature, they are incremental expenses, as they would not have existed or would have been avoided if these transactions had not occurred. Examples of transaction costs are: i) expenses with the preparation of prospectuses and reports; ii) remuneration for third-party professional services (lawyers, accountants, auditors, consultants, investment banking professionals, brokers, etc.); iii) advertising expenses (including those incurred in road-show processes); iv) fees and commissions; v) transfer costs; vi) registration costs, etc. Transaction costs do not include premiums or discounts on the issuance of debt and equity securities, financial expenses, internal administrative costs, or carrying costs. Financial expenses are the costs or expenses that represent the burden paid or payable as direct remuneration for the borrowed resource from the lender derived from time, risk, inflation, exchange rate, specific price variation index, and similar factors; they therefore include interest, monetary update, exchange variation, etc., but do not include fees, discounts, premiums, administrative expenses, honoraries, etc. Financial charges are the sum of financial expenses, transaction costs, premiums, discounts, premiums, discounts, and similar items, which represents the difference between the values received and the values paid (or payable) to third parties. Premium in the issuance of debentures or other debt and equity securities is the value received that exceeds the redemption value of these securities on the date of receipt or the value formally attributed to the securities. Internal Rate of Return (IRR) is the effective interest rate that equates the present value of resource inflow flows to the present value of outflow flows. In other words, it is the effective interest rate that makes, for example, the net present value of the cash flows of a certain debt security or loan equal to zero, considering, necessarily, the initial net raising of transaction costs. Effective interest method is the method of calculating the amortized cost of a financial asset or financial liability (or group of financial assets or liabilities) and of allocating interest revenue or expense over the period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts during the expected life of the instrument or, when appropriate, a shorter period, to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the entity must estimate cash flows considering all contractual terms of the financial instrument (for example, prepayment, call options, and similar), but must not consider future credit losses. The calculation must include all commissions and portions paid or received between the parties to the contract,
which are an integral part of the effective interest rate (see Technical Pronouncement CPC 30 - Revenue), transaction costs, and all other premiums or discounts. There is an assumption that the cash flows and expected life of a group of similar financial instruments can be estimated reliably. However, in those rare cases where it is not possible to reliably estimate the cash flows or the expected life of a financial instrument (or group of financial instruments), the entity must use the contractual cash flows over the entire contractual term of the financial instrument (or group of financial instruments). Equity instrument is any contract (or security or security) that evidences a residual interest in the entity's assets after the deduction of all its liabilities. Examples include shares, subscription warrants, etc. Fair value is the value at which an asset can be traded, or a liability settled, between knowledgeable, willing parties, independent of each other, with the absence of factors that pressure the liquidation of the transaction or that characterize a compulsory transaction.

Accounting for raising resources for equity
4. The recording of the initial amount of resources raised through the issuance of equity securities must correspond to the net values made available to the entity by the transaction, as these transactions are carried out with existing and/or new shareholders, and their costs should not influence the net balance of the entity's result-generating transactions.
5. Transaction costs incurred in raising resources through the issuance of equity securities must be accounted for, separately, in an equity reduction account, net of any tax effects, and premiums received must be recognized in a capital reserve account.
6. In raising resource operations through the issuance of equity securities where there is a premium (capital surplus) originating from the subscription of shares to which the transaction costs refer, the premium, up to the limit of its balance, must be used to absorb the transaction costs recorded in the account referred to in item 5. In other cases, the account referred to in the previous item will be presented after share capital and can only be used for capital reduction or absorption by capital reserves.
7. When the raising resource operation through the issuance of equity securities is not completed, with no increase in capital or issuance of subscription warrants, transaction costs must be recognized as a separate expense in the result of the period in which the transaction is frustrated.

Accounting for the acquisition of own shares (Treasury Shares)
8. The acquisition of own shares and their disposal are also equity transactions of the entity with its shareholders and equally should not affect the entity's result.
9. Transaction costs incurred in the acquisition of shares issued by the entity itself must be treated as an increase in the acquisition cost of such shares.
10. Transaction costs incurred in the disposal of treasury shares must be treated as a reduction in profit or an increase in loss from this transaction, results which are accounted for directly in equity, in the account that was used as support for the acquisition of such shares, not affecting the entity's result.

Accounting for raising resources from third parties
11. The recording of the initial amount of resources raised from third parties, classifiable in current liabilities, must correspond to their fair value net of transaction costs directly attributable to the issuance of the financial liability.
12. Financial charges incurred in raising resources from third parties must be appropriated to the result based on the passage of time, using amortized cost via the effective interest method. This method considers the internal rate of return (IRR) of the operation for the appropriation of financial charges during the validity of the operation. The use of amortized cost causes financial charges to reflect the effective cost of the financial instrument and not only the contractual interest rate of the instrument, that is, they include interest and transaction costs of the raising, as well as premiums received, premiums, discounts, discounts, monetary update, and others. Thus, the internal rate of return must consider all cash flows, from the net value received by the completion of the transaction to all payments made or to be made until the liquidation of the transaction.
13. Transaction costs incurred in raising resources through the contracting of a debt instrument (loans, financing, or debt securities such as debentures, commercial paper, or other securities) must be accounted for as a reduction of the initially recognized fair value of the issued financial instrument, to disclose the net value received.
14. Premiums in the issuance of debentures must be added to the initially recognized fair value in the issuance of this financial instrument for the same purpose referred to in the previous item, appropriated to the result as provided in item 12.
15. In the case of capitalization of financial charges during the period of formation or construction of qualifying assets, the same procedures must be used to define the values to be capitalized. The value to be capitalized must correspond to the total financial charges and not

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 only financial expenses.
16. Debt instruments must be initially recognized at their fair value, net of their transaction cost, except in cases where they must be classified as instruments at fair value with counterparty in the result. In this case, transaction costs must be recognized in the result at the initial moment. When transaction costs are incorporated into the value of the debt instrument, they must be appropriated to the result in accordance with item 12. In the case of debt instruments evaluated at market against equity, at each fair value assessment date, the difference between the amortized cost (as provided in item 12) and the fair value must be recorded in the equity valuation adjustment account, in equity.
17. Unsuccessful raising transaction costs must be recognized as an expense in the result of the period in which this raising is frustrated.
18. If premiums in the issuance of debentures and other financial instruments are not taxable and if this non-taxability is conditional on their non-distribution to shareholders, the eventual allocation of such premiums to the specific equity account must be made within the fiscal year in which they were appropriated to the result, from the accumulated profits account.

Allocation of transaction costs when issuing a compound instrument or in the event of more than one concomitant distribution 18A. Transaction costs related to the issuance of a compound financial instrument must be attributed to the equity and liability components of the instrument in proportion to the allocation of proceeds. 18B. Transaction costs related jointly to more than one transaction (for example, costs of a concurrent offering of some shares and listing of other shares) must be attributed to these transactions using a basis for allocation consistent with similar transactions.

Temporary accounting of transaction costs
19. The transaction costs referred to in this Technical Pronouncement, while the resources to which they refer have not been raised, must be appropriated and maintained in a specific transitional asset account as a prepayment. The balance of this transitional account must be reclassified to the specific account, according to the nature of the operation, as soon as the raising process is completed, or written off as determined in items 7 and 17 if the operation does not materialize.

Disclosure
20. The entity must disclose the following information for each type of raising resource (equity or debt securities):
(a) the identification of each raising resource process, grouping them according to their nature;

Illustrative Examples
The examples below are not part of the Technical Pronouncement, but are intended to assist in understanding the accounting procedures.

Example 01: Transaction costs (without premium or discount) Consider that at the end of year 0 there was a raising of $ 1,000,000.00, with a contracted annual interest rate of 6.0%, with a term of eight years, and equal and consecutive annual payments of $ 161,035.94. Also consider that the company that obtained the loan incurred transaction costs in the amount of $ 108,695.18. Considering the transaction costs, the net cash flow from these costs is as follows (in $ thousands), considering that from the $ 1,000,000.00 received, $ 108,695.18 of transaction costs are deducted:

Year Net cash flow
0 891
1 (161)
2 (161)
3 (161)
4 (161)
5 (161)
6 (161)
7 (161)
8 (161)

In year 0, the available cash flow is net of transaction costs. Essentially, this is the net raised value. Based on this cash flow, the annual internal rate of return, which was nominally 6.0% p.a., rises to 9.0% p.a. 1. And this is effectively the cost of the raising carried out. Considering this effective interest rate, the raising control is as follows (in $ thousands):

1 The internal rate of return is the rate that equates the present value of future payments to the net raising value. This is the rate that reflects the true cost of the borrowed loan. Mathematically, the internal rate of return is:
∑ (from n=1 to n) 161 / (1 + tir)^n = 891

Year Initial Balance Effects on P&L Payments Final Balance 1 891 (80) (161) 810 2 810 (73) (161) 722 3 722 (65) (161) 626 4 626 (56) (161) 522 5 522 (47) (161) 408 6 408 (37) (161) 283 7 283 (25) (161) 148 8 148 (13) (161) (0) Total = (397) Interest = (288) Costs = (109)

The initial recognition balance of the raising must take into account the transaction costs. Therefore, these costs reduce the balance of the loan taken, which starts year 1 with $ 891,304.82. The annual effects on the Income Statement (P&L) refer to the effective interest rate of 9% on the initial balance. The payments are always the same, as they are contracted. The total financial charges affecting the income statement over the eight years is $ 397 thousand, a value that is broken down as follows: $ 288 thousand of interest and $ 109 thousand of amortization of transaction costs. Year by year, these expenses must be broken down as follows:

Year Interest Expense
Amortization of Transaction Costs
Total Financial Charge on P&L
1 (60) (20) (80)
2 (54) (19) (73)
3 (48) (18) (65)
4 (41) (16) (56)
5 (33) (13) (47)
6 (26) (11) (37)
7 (18) (8) (25)
8 (9) (4) (13)
Total = (288) (109) (397)

The accounting entries, in two periods to exemplify, are as follows (in $ thousands):
Moment 0 (raising):
D – Cash (for net raising) $ 891,304.82
D – Costs to amortize (reducer of liability) $ 108,695.18 C – Loans and financing $ 1,000,000.00

Presentation in the balance sheet, in liabilities, moment 0:
Loans and financing $ 891,304.82

Or, analytically:
Loans and financing $ 1,000,000.00
(-) Costs to amortize ($ 108,695.18)
$ 891,304.82

End of period 1 (appropriation of financial charges):
D – Financial charges (P&L) $ 80,217.43
[Financial expenses (interest) $ 60,000.00 ]
[Amortization of costs $ 20,217.43 ]
C – Loans and financing $ 60,000.00
C - Costs to amortize $ 20,217.43

End of period 1 (loan payment installment):
D – Loans and financing $ 161,035.94
[Interest payment $ 60,000.00]
[Principal amortization $ 101,035.94 ]
C – Cash $ 161,035.94

Presentation in the balance sheet, in liabilities, end of period 1:
Loans and financing $ 810,486.31
Or, analytically:
Loans and financing $ 898,964.06
(-) Costs to amortize ($ 88,477.75)
$ 810,486.31

Example 02: Transaction costs and premium in the issuance of debt securities Consider that at the end of year 0 there was a raising, via debentures, of $ 1 million, with a contracted annual interest rate of 6.0%, with a term of eight years, and equal and consecutive payments of $ 161.04 thousand. Also consider that the company incurred transaction costs in the amount of $ 60 thousand. Since this loan has a fixed rate, and the future projection of interest during the duration of the loan is lower than 6% (5.02%, let's assume), there was more demand for the purchase than the supply of securities offered to the market.

In this way, the amount raised was higher than the value of $ 1.00 million, configuring the issuance of a debt instrument with a premium. The amount raised with the issuance of the securities (without transaction costs) was $ 1.1 million, which, free of raising costs, produces a net available value of $ 1.04 million. The payment flow of this loan is the same as in the previous example. Considering the cash flow available for use after raising, the internal rate of return is 5.02%:

Year
Net cash flow
0 1,040
1 (161)
2 (161)
3 (161)
4 (161)
5 (161)
6 (161)
7 (161)
8 (161)

Considering this effective interest rate, the control of the loan is as follows:

Year Initial Balance Effects on Income Statement Payments Final Balance 1 1,040 (52) (161) 931 2 931 (47) (161) 817 3 817 (41) (161) 697 4 697 (35) (161) 571 5 571 (29) (161) 438 6 438 (22) (161) 299 7 299 (15) (161) 153 8 153 (8) (161) 0 Total = (248)

The initial recognition balance of the loan must take into account the transaction costs and the premium of $ 100 thousand received. Thus, these costs decrease the loan balance and the premium increases it, starting year 1 with a balance of $ 1,040 thousand. The annual effects on the Income Statement refer to the effective interest rate of 5.02% on the initial balance. The payments are always the same, as they are contracted. The total financial expenses that affect the income statement over the eight years is $ 248 thousand, which is broken down as follows: $ 288 thousand in interest and $ 40 thousand (positive) from the amortization of transaction costs and the premium on the issuance of securities.

Year by year, these expenses must be broken down as follows:

Year Interest Expenses
Expense with amortization of costs and premium Total Effect on Income Statement 1 (60) 8 (52) 2 (54) 7 (47) 3 (48) 7 (41) 4 (41) 6 (35) 5 (33) 5 (29) 6 (26) 4 (22) 7 (18) 3 (15) 8 (9) 1 (8) Total = (288) 40 (248)

Year by year, the amortizations of transaction costs and the premium must be broken down as follows, according to the total amortization curve defined:

Year Amortization of premium
Amortization of transaction costs
Total Effect on
Income Statement
1 19 (12) 8
2 18 (11) 7
3 16 (10) 7
4 14 (9) 6
5 12 (7) 5
6 10 (6) 4
7 7 (4) 3
8 4 (2) 1
Total = 100 (60) 40

The amortization curve was obtained as follows:

Definition of amortization curve on Income Statement transaction costs and premium Year Initial Balance Amortization Income Statement Final Balance Amortization Curve 1 40,000.03 7,799.77 32,200.25 -19.50% 2 32,200.25 7,200.36 24,999.90 -22.36% 3 24,999.90 6,511.40 18,488.50 -26.05% 4 18,488.50 5,724.84 12,763.66 -30.96% 5 12,763.66 4,832.00 7,931.66 -37.86% 6 7,931.66 3,823.53 4,108.18 -48.21% 7 4,108.18 2,689.38 1,418.75 -65.46% 8 1,418.75 1,418.75 0.00 -100.00%

The control of amortization, vis-à-vis the amortization curve, is specified below:

Allocation on Income Statement transaction costs and premium deb./interest (control by item individually) Year Initial Balance transaction costs Amortization Income Statement Final Balance transaction costs Initial Balance premium deb. Amortization Income Statement Final Balance premium deb. 1 60,000.00 (11,699.65) 48,300.35 100,000.00 19,499.42 80,500.58 2 48,300.35 (10,800.53) 37,499.82 80,500.58 18,000.88 62,499.70 3 37,499.82 (9,767.09) 27,732.73 62,499.70 16,278.49 46,221.21 4 27,732.73 (8,587.25) 19,145.47 46,221.21 14,312.09 31,909.12 5 19,145.47 (7,247.99) 11,897.48 31,909.12 12,079.98 19,829.14 6 11,897.48 (5,735.29) 6,162.20 19,829.14 9,558.82 10,270.33 7 6,162.20 (4,034.07) 2,128.12 10,270.33 6,723.45 3,546.87 8 2,128.12 (2,128.12) 0.00 3,546.87 3,546.87 0.00 (60,000.00) 100,000.00

The accounting entries, in two periods to exemplify, are as follows:
Moment 0 (raising):
D – Cash (by net raising) $ 1,040,000.00
D - Costs to amortize (transaction costs) $ 60,000.00 C – Loans and financing $ 1,000,000.00 C – Premium to amortize $ 100,000.00

Presentation in the balance sheet, in liabilities, moment 0:
Loans and financing $ 1,040,000.00

Or, analytically:
Loans and financing $ 1,000,000.00
(+) Premium to amortize $ 100,000.00
(-) Costs to amortize ($ 60,000.00)
$ 1,040,000.00

End of period 1 (appropriation of financial charges):
D – Financial charges (Income Statement) $ 52,200.23 [Financial expenses (interest) $ 60,000.00] [Amortization of costs $ 11,699.65] [Amortization of the premium ($ 19,499.42)] D – Premium to amortize $ 19,499.42 C – Loans and financing $ 60,000.00 C – Costs to amortize $ 11,699.65

End of period 1 (loan payment installment):
D – Loans and financing $ 161,035.94
[Interest payment $ 60,000.00]
[Principal amortization $ 101,035.94]
C – Cash $ 161,035.94

Presentation in the balance sheet, in liabilities, end of period 1:
Loans and financing $ 931,164.29

Or, analytically:
Loans and financing $ 898,964.06
(+) Premium to amortize $ 80,500.58
(-) Costs to amortize ($ 48,300.35)
$ 931,164.29

Example 03: Expenses with share issuance.
Suppose that 10 million new shares are issued, and that 20 million more shares from the controlling shareholder are also sold, all at the unit price of $ 1.70. In this case, the company pays all the expenses with the issuance of the shares, totaling $ 2,550.00 thousand, but only part is its actual charge. It is assumed that there is no difference in effort between the primary and secondary issuance. Before the issuance of the shares, the equity is represented as follows, whose share capital is composed of 100 million shares, all ordinary. $ thousand Equity 170,000 Share capital 150,000 Profit reserves 20,000

The relevant information of the issuance is:
Issuance Information Quantity $ / share Gross Raising Net Raising Issuance Costs primary issuance 10,000,000 1.70 17,000,000 850,000 16,150,000 secondary issuance 20,000,000 1.70 34,000,000 1,700,000 32,300,000 30,000,000 51,000,000 2,550,000 48,450,000

From the table above, it is noted that the total net resources that entered the company's cash was $ 48,450 thousand.
The accounting entries are (in $ thousand):
D – Cash $ 48,450
D – Expenses with share issuance $ 850
D – Obligations to the controlling shareholder $ 1,700 C – Share capital $ 17,000 C – Obligations to the controlling shareholder $ 34,000

The proportional costs of the primary issuance are debited to an account reducing capital. Already the proportional costs of the secondary issuance are debited to accounts receivable from controlling shareholders, as the company, in this circumstance, cannot debit as its own the expenses of launching the controlling shareholder's shares. In the liabilities, the net balance 2 of $ 32.3 million remains to be transferred to it.

2 In accordance with Technical Pronouncement CPC 39 – Financial Instruments: Disclosure, in item 42, it is stated as follows: “42. A financial asset and a financial liability must be offset, and the net amount presented in the accounting statements, when, and only when, the entity: (a) has a legally enforceable right to settle by the net amount; and (b) intends to settle on a net basis, or realize the asset and settle the liability simultaneously.

The presentation of equity in the balance sheet will be:
$ thousand
Equity 186,150
Share capital 166,150
Profit reserves 20,000

Or, more analytically:
$ thousand
Equity 186,150
Share capital 167,000
(-) Expenses with share issuance (850)
Profit reserves 20,000

Example 04: Transaction cost and fair value adjustment of debt securities Let the following original flow of a debt security and corresponding control by amortized cost, if there were no transaction costs (TC):
Amortized cost (Annual IRR of 12%)
Date/Period
Initial Balance
Financial Expenses
Cash Flow
Final Balance
0 1,000,000 1,000,000
1 1,000,000 120,000 0 1,120,000
2 1,120,000 134,400 0 1,254,400
3 1,254,400 150,528 0 1,404,928 final 1,404,928 (1,404,928) 0

The internal rate of return of the security is 12% per year, before the effects of transaction costs.
Let the following fair values of this debt security be:
Date/Period Fair value
0 1,000,000
1 1,230,000
2 1,250,000
3 1,404,928

But, let us consider that the entity issuing this debt security has incurred transaction costs of $ 30,000 (3% of the face value of the security); the initial amount to be recorded of the debt is $ 970,000 ($

The debt charge is broken down as follows:
Amortized cost (Annual IRR of 13.143%)
Date/Period Financial Expense Amortization TC Debt Charges 1 120,000 7,486 127,486 2 134,400 9,842 144,242 3 150,528 12,672 163,200 Total 404,928 30,000 434,928

If the debt is measured at amortized cost, the records of the debt charges and the amortization of transaction costs will be as follows:
Date/Period
Debt Flow
Debt (Initial
Balance)
Debt (Final
Balance)
Financial Expenses
Amortization
TC
Total Effect on Income Statement
0 970,000 0 970,000
1 0 970,000 1,097,486 (120,000) (7,486) (127,486) 2 0 1,097,486 1,241,728 (134,400) (9,842) (144,242) 3 before payment 0 1,241,728 1,404,928 (150,528) (12,672) (163,200) 3 after payment (1,404,928) (1,404,928) 0 Totals on Income Statement = (404,928) (30,000) (434,928)

In the case where the debt is evaluated at its fair value, with counterpart in the result, at the end of each reporting period, the entity's debt is evaluated at its fair value. The accounting of these adjustments in the income statement remains. The transaction costs must be amortized entirely in the result

COMMISSION OF SECURITIES AND EXCHANGES
Rua Sete de Setembro, 111/2-5º and 23-34º 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 when the first fair value assessment occurs. In this example, the fair value of the debt is given as equal to $ 1,000,000 and not $ 970,000, because it was considered that the transaction costs were not considered by the market. Therefore, these transaction costs are amortized entirely when the first fair value assessment occurs, generating an expense of $ 30,000, and there is no other revenue or expense because the fair value becomes the liability after this write-off. In subsequent periods, the income statement will be affected only by the fair value adjustments at each reporting date. Therefore, the entity's controls will point to the following:
Date/Period Cash Debt Equity (accumulated)
Income Statement
(FV
Adjustment)
Income Statement
(TC)
Total
Income Statement
0 970,000 1,000,000 (30,000) 0 (30,000) (30,000) 1 0 1,230,000 (260,000) (230,000) 0 (230,000) 2 0 1,250,000 (280,000) (20,000) 0 (20,000) 3 before payment 0 1,404,928 (434,928) (154,928) 0 (154,928) 3 after payment (1,404,928) 0 Totals on Income Statement = (404,928) (30,000) (434,928)

The “debt” column demonstrates the fair value of the debt at the end of each period. The “accumulated Equity” column demonstrates the accumulated effect of changes in the debt value at each reporting date. In the income statement, the “TC” column shows the write-off of transaction costs. The income statement column “FV adjustment” specifies the amounts necessary to demonstrate the debt amounts at their fair values.

Example 05: Transaction costs in the issuance of debt securities with variable interest and principal payment at the end of the transaction Consider that at the end of year 0 there was a raising of $ 1,000,000.00 with an annual interest rate contracted equivalent to CDI + 2%, with a term of three years, annual interest payments and amortization of the principal at the end of the third year. Also consider that the entity issuing the debt security (debentures) has incurred transaction costs in the amount of $ 90,000.00. In this case, we must consider that the interest is variable, due to CDI rates, and that the interest determinable based on the CDI + 2% rate is determinable from the nominal value of the debentures and paid every 12 months. As the CDI rates are unknown at the initial moment, it is necessary to work with the term structure of interest rates to compute the effective interest rate of the operation. Throughout the transaction, the estimated CDI rates were as follows: Year 1: 12.0% (14.0% the total cost: 12+2); Year 2: 9.5% (11.5% the total cost: 9.5 + 2); Year 3: 10.5% (12.5% the total cost: 10.5 + 2).

Calculation of financial expenses
The interest rate must be estimated for each period. The interest (payable annually) must be calculated based on the debt principal ($ 1,000,000). The procedure regarding the calculations is as follows:
Year CDI
Total
Cost
1 12.00% 14.00%
2 9.50% 11.50%
3 10.50% 12.50%

Debt Control (without TC)
Year Initial Balance Interest Cash Final Balance 0 1,000,000 1,000,000 1 1,000,000 140,000 (140,000) 1,000,000 2 1,000,000 115,000 (115,000) 1,000,000 3 1,000,000 125,000 (1,125,000) 0

This is the debt control without taking into account the transaction costs. The “interest” column refers to the interest to be paid annually.

Computation of the effective rate
To arrive at the effective rate to be updated in the measurement of the amortized cost of the debt, the following cash flow obtained from the estimated CDI rates, plus the 2% spread, must be considered:
PV 1,000,000.00
Transaction costs (90,000.00)
Effective interest rate 16.8093%
Year Cash Flow
0 910,000.00
1 (140,000.00)
2 (115,000.00)
3 (1,125,000.00)

With the effective rate of 16.8093% p.a., the total financial charges to be recognized in the Income Statement year by year can be calculated. Thus, they are demonstrated:

Auxiliary ledger for loans (accounting control) A B = A * 16.8093% C D = A + B - | C | Year Initial Balance loan Financial Expense Income Statement Final Payment Final Balance loan 1 910,000.00 152,964.54 (140,000.00) 922,964.54 2 922,964.54 155,143.79 (115,000.00) 963,108.33 3 963,108.33 161,891.67 (125,000.00) 1,000,000.00 Final 1,000,000.00 (1,000,000.00) 0.00 470,000.00

In essence, in the annual financial expenses recognized in the Income Statement, there is part of the financial expense that exists independently of transaction costs and another part referring to the amortization of transaction costs. They can thus be separated:
Total Effects on Income Statement
Year
Financial Expenses
Amortization
TC
Total Effect
Income Statement
1 (140,000) (12,965) (152,965)
2 (115,000) (40,144) (155,144)
3 (125,000) (36,892) (161,892)
Total (380,000) (90,000) (470,000)

The ‘Financial Expenses’ column refers to the interest incurred in the case of the absence of transaction costs (see Debt Control (without TC)).

Finally, the total raising costs will be allocated in the Income Statement as follows:
Allocation on Income Statement transaction costs Year Transaction Costs Interest Expenses Financial Expenses Income Statement 1 12,964.54 140,000.00 152,964.54 2 40,143.79 115,000.00 155,143.79 3 36,891.67 125,000.00 161,891.67 90,000.00 380,000.00 470,000.00

In the next social years, if the term structure of interest rates is altered, given the changes observed in the economic context, having as an implication new estimates of CDI rates, Technical Pronouncement CPC 23 – Accounting Policies, Change in Estimate and Correction of Error shall be applied.

Lineage: Superseded

Timeline