CVM Resolution 138 (Repealed) - Ratification of CPC Technical Pronouncement 12 — CVM — BR

SECURITIES AND EXCHANGE COMMISSION OF BRAZIL (CVM) Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – ZIP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/SP – ZIP: 01333-010 – Brazil - Tel.: (11) 2146-2000 Ratifies Technical Pronouncement CPC 12 of the Accounting Pronouncements Committee - CPC, which deals with present value adjustment.

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 capital companies to comply with Technical Pronouncement CPC 12, which deals with present value adjustment, issued by the Accounting Pronouncements Committee - CPC, is ratified, as per Annex “A” to this Resolution.

Art. 2. Deliberation 564, of December 17, 2008, is revoked, from the effective date of this Resolution.

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

Electronically signed by
Marcelo Barbosa
President

ANNEX “A”
ACCOUNTING PRONOUNCEMENTS COMMITTEE
TECHNICAL PRONOUNCEMENT CPC 12
Present Value Adjustment

Summary Item
Objective 1 – 3
Scope 4 – 6
Measurement 7 – 24
General guidelines 7 – 12
Risk and uncertainty: discount rate 13 – 16
Relevance and reliability 17 – 18
Costs x benefits 19 – 20
More specific guidelines 21 – 24
Non-contractual liabilities 25 – 28
Tax effects 29 – 30
Classification 31 – 32
Disclosure 33
Annex

Objective

The objective of this Pronouncement is to establish the basic requirements to be observed when calculating the Present Value Adjustment of asset and liability elements when preparing financial statements, resolving some controversial issues arising from such procedure, such as:
(a) whether the adoption of present value adjustment is applicable solely to contracted cash flows or if it would also be applied to estimated or expected cash flows; (b) in which situations the adoption of present value adjustment of assets and liabilities is required, whether at the initial recognition of assets and liabilities, at the change in the valuation basis of assets and liabilities, or at both moments; (c) whether non-contractual liabilities, such as those arising from unformalized or legal obligations, are covered by the present value adjustment; (d) what is the appropriate discount rate for an asset or a liability and what care is necessary to avoid calculation distortions and bias; (e) what is the recommended method for allocating discounts (interest); (f) whether the present value adjustment should be carried out net of tax effects.
The use of information based on present value contributes to increasing the predictive value of Accounting; it allows for the correction of judgments regarding past events already recorded; and brings improvement to the way present events are recognized. If such information is recorded in a timely manner, in light of what is prescribed by the Conceptual Framework for the Preparation and Presentation of Financial Statements, Basic Conceptual Pronouncement of this CPC, in its items 26 and 28, financial statements with a higher degree of relevance are obtained - an indispensable qualitative characteristic.
One must always pay equal attention to reliability, another indispensable qualitative characteristic provided in the aforementioned Conceptual Framework, in its items 31 and 32. In this regard, the use of estimates and judgments regarding probabilistic events must be free of bias. The premises, calculations carried out, and pricing models used must be verifiable by independent third parties, which requires that the custody of this information be done with utmost care and under ideal conditions. For independent third parties to arrive at similar or approximate results to those produced by the information provider, an essential condition for the reliability attribute, it is imperative that the process at the origin be conducted with total neutrality.

Scope
4. This Pronouncement deals essentially with measurement issues, not covering recognition issues in detail. It is important to clarify that the accounting dimension of “recognition” involves the decision of “when to record” whereas the accounting dimension of “measurement” involves the decision of “at what amount to record”. The Conceptual Framework for the Preparation and Presentation of Financial Statements, Basic Conceptual Pronouncement of this CPC, in its item 82, defines recognition as follows:
“Recognition is the process of incorporating into the balance sheet or the income statement an item that fits the definition of an element and that meets the recognition criteria mentioned in item 83. It involves the description of the item, the assignment of its value, and its inclusion in the balance sheet or the income statement. Items that meet the recognition criteria must be recorded in the balance sheet or the income statement. The lack of recognition of such items is not corrected by the disclosure of adopted accounting practices nor by notes or explanatory material.”

In this sense, this Pronouncement determines that present value accounting measurement be applied at the initial recognition of assets and liabilities. Only in certain exceptional situations, such as that adopted in a debt renegotiation where new terms are established, must the present value adjustment be applied as if it were a new measurement of assets and liabilities. It should be noted that these situations of new measurement of assets and liabilities are rare and are a matter of judgment for those who prepare and audit financial statements, vis-à-vis Specific Pronouncements.
It is necessary to observe that the application of the present value adjustment concept does not always equate the asset or liability to its fair value. Therefore, present value and fair value are not synonyms. For example, the financed purchase of a vehicle by a special customer who, because of this situation, obtains a rate that is not a market rate for this financing, causes the application of the present value concept with the rate characteristic of the transaction and the risk of this customer to lead the asset, in the buyer, to a value lower than its fair value; in this case, the value calculated at present value prevails accounting-wise, lower than the fair value, as it better represents the actual acquisition cost for the buyer. Conversely, the seller recognizes the counterpart of the present value adjustment of its receivable as a reduction in revenue, evidencing that, in this case, it will have obtained a sales value lower than that practiced in the market.

Measurement
General guidelines
7. The most relevant issue for the application of the present value concept, in the mold of a principle-based Pronouncement like this one, is not the meticulous enumeration of which assets or liabilities are covered by the standard, but the establishment of general guidelines and goals to be achieved. In this sense, as a general guideline to be observed, assets, liabilities, and situations that present one or more of the characteristics below must be subject to the measurement procedures treated in this Pronouncement:
(a) a transaction that gives rise to an asset, a liability, a revenue, or an expense (as defined in the Basic Conceptual Pronouncement Conceptual Framework for the Preparation and Presentation of Financial Statements of this CPC) or another change in equity whose counterpart is an asset or a liability with financial settlement (receipt or payment) on a date different from the recognition date of these elements; (b) periodic recognition of changes in value, utility, or substance of similar assets or liabilities employs a discount allocation method; (c) a particular set of estimated cash flows clearly associated with an asset or a liability.

In terms of the goal to be achieved, when applying the present value concept, such procedure must be associated with the measurement of assets and liabilities taking into account the time value of money and the uncertainties associated with them. Thus, the information provided enables the analysis and economic decision-making that result in the best evaluation and allocation of scarce resources. For this, economic differences between assets and liabilities need to be adequately reflected by Accounting so that economic agents can define with less margin of error the premiums required in counterpart to the risks assumed.
Monetary assets and liabilities with implicit or explicit interest embedded must be measured at their present value at the time of their initial recognition, as this is the original cost value within the fair value philosophy. Therefore, when applicable, the cost of non-monetary assets must be adjusted in counterpart; or else the revenue, expense, or other account as per the situation. In this regard, once the non-monetary item is adjusted, it should no longer be subject to subsequent adjustments with respect to the figure of embedded interest. It should be noted that not every non-monetary asset or liability is subject to the effect of present value adjustment; for example, a non-monetary item that, by its nature, is not subject to present value adjustment is an advance in money for receipt or payment of goods and services.
When there is a specific CPC Pronouncement that disciplines the way in which a particular asset or liability should be measured based on the present value adjustment of its cash flows, such specific pronouncement must be observed. The specific rule always prevails over the general rule. A special case is that related to the figure of Deferred Tax Asset and Deferred Tax Liability, object of a specific Technical Pronouncement, but which, as provided for in International Accounting Standards, are not subject to present value adjustment, which must be observed since the implementation of this Pronouncement.
Regarding subsidized loans and financing, the following considerations apply. For the most varied reasons, there is no consolidated market for long-term debt in Brazil, leaving the credit supply to the general market with this long-term characteristic normally limited to a single government entity. Thus, exceptionally, until a real competitive long-term credit market emerges in Brazil, liabilities of this nature (and corresponding assets in the creditor) are not covered by this Pronouncement as subject to the application of the present value concept by rates other than those to which such loans and financing are already subject. Long-term operations are not included in this exception, even if financed by government entities that have characteristics of subsidy or government assistance, treated in Technical Pronouncement CPC 07 – Government Grants and Assistance.
Another relevant issue for measurement purposes concerns the way in which discounts arising from the present value adjustment of assets and liabilities (interest) should be allocated to the result. The current approach must be chosen as the discount allocation method as it presents quality information at a negligible cost for its acquisition. By this system, that is, the contractual or implicit rate (for the case of non-contractual cash flows) must be used for discounting, and once applied, it must be adopted consistently until the realization of the asset or settlement of the liability.

Risk and uncertainty: discount rate
13. When using, for accounting purposes, information based on cash flow and present value, inherent uncertainties must necessarily be taken into consideration for measurement purposes, as already highlighted in previous items of this Pronouncement. Likewise, the “price” that market participants are willing to “charge” to assume risks arising from uncertainties associated with cash flows (or in financial language “the risk premium”) must be equally evaluated. By ignoring this fact, there is a contribution to the production of accounting information incompatible with what would be an adequate representation of reality, an imperative of the Conceptual Framework for the Preparation and Presentation of Financial Statements, Basic Conceptual Pronouncement of this CPC, treated in its items 33 and 34. On the other hand, arbitrary adjustments for risk premiums are not admissible, even with the justification of near impossibility of gathering information from market participants, because, by proceeding thus, bias is brought into the measurement.

In many situations it is not possible to arrive at a reliable estimate for the risk premium or, if possible, the estimated amount may be relatively small compared to potential errors in estimated cash flows. In these cases, exceptionally, the present value of expected cash flows can be obtained by adopting a discount rate that reflects solely the risk-free interest rate, provided there is wide disclosure of the fact and the reasons that led to this procedure.
Nevertheless, in general, market participants are characterized as having risk aversion or loss aversion and seek compensation for assuming these risks. Ultimately, the objective of including uncertainty and risk in accounting measurement is to replicate, to the extent and measure possible, market behavior with respect to assets and liabilities with uncertain cash flows. By hypothesis, an asset with a certain cash flow for 5 years of $ 10,000 (government bond issued by the Treasury of a developed country, for example) and another bond with an uncertain cash flow for 5 years of $ 10,000 would have distinct valuations by the market. A rational participant would be willing to pay, at most, $ 6,806 (10,000 * 1.08^-1) for the first bond, if the risk-free interest rate were 8% p.a., whereas for the second one would pay a much lower price (adjusted for uncertainties in the realization of the flow and for the premium required to compensate for such uncertainties).
The task of calculating risks is not the simplest. On the other hand, financial theory offers some models that, despite their limitations (every model has its own), can be used for this purpose. Purely statistical econometric models that are parsimonious can also be adopted, provided they are supported by economically valid premises and recognized in the market. A multidisciplinary team of professionals may be required in certain circumstances in the execution of this task.

Relevance and reliability
17. As already addressed in items 2 and 3 of this Pronouncement, the adoption by Accounting of information based on present value of cash flow inevitably provokes discussions around its qualitative characteristics: relevance and reliability. Making a value judgment about the ideal balancing of one characteristic in function of the other, case by case, must be a recurring exercise for those who prepare and audit financial statements. Likewise, the judgment of the relevance of the present value adjustment of short-term assets and liabilities must be exercised by these individuals, taking into account the comparative effects before and after the adoption of this procedure on items of assets, liabilities, equity, and results.

Objectively, under certain circumstances, the measurement of an asset or a liability at present value can be obtained without major difficulties, if contractual flows with a reasonable degree of certainty and discount rates observable in the market are available. On the other hand, it may be that in some cases cash flows have to be estimated with a high degree of uncertainty, and discount rates have to be obtained by models geared towards this end. The weight given to relevance in the second case is greater than that given to reliability, as it would not be appropriate to present information based on nominal flows. As the case may be, the traditional approach or expected cash flow approach must be chosen as the technique for computing the present value adjustment.

Costs x benefits
19. In the preparation of financial statements using information based on cash flow and present value, it is important to keep in mind what guides the Conceptual Framework for the Preparation and Presentation of Financial Statements, Basic Conceptual Pronouncement of this CPC, in its item 44, reproduced below:
“The balance between cost and benefit is a practical limitation, rather than a qualitative characteristic. The benefits derived from information must exceed the cost of producing it. The evaluation of costs and benefits is, however, essentially an exercise of judgment. Moreover, costs do not necessarily fall on those users who enjoy the benefits. Benefits can also be exploited by other users, in addition to those for whom the information was prepared. For example, providing more information to creditors for loans may reduce the financial costs of the entity. For these reasons, it is difficult to apply the cost-benefit test in any specific case. Nevertheless, standard-setting bodies, in particular, as well as preparers and users of financial statements, must be aware of this limitation.”

Thus, depending on the set of information available and the cost of obtaining it, the entity may, or may not, trace multiple scenarios to estimate cash flows; may, or may not, resort to more sophisticated econometric models to arrive at a discount rate for a given period; may, or may not, resort to more sophisticated pricing models to measure its assets and/or liabilities; may, or may not, adopt one method or another of interest allocation. It is important to highlight that the costs to be incurred to obtain the information are more objectively identifiable whereas the benefits are not at the same level. But information provided can reach numerous users and generate, at times, benefits for more than one fiscal year, whereas the cost of producing it is incurred at a single moment. Moreover, gains in terms of efficiency may occur, as this information is provided with greater frequency.

More specific guidelines

SECURITIES AND EXCHANGE COMMISSION (CVM)
Seven of September 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

The elements comprising assets and liabilities arising from long-term operations, or short-term operations when there is a relevant effect, must be adjusted to present value based on discount rates that reflect the market's best assessments of the time value of money and the specific risks of the asset and liability at their original dates.
The quantification of the present value adjustment must be performed on an exponential "pro rata die" basis, from the origin of each transaction, with its effects appropriated to the accounts to which they are linked.
The reversals of present value adjustments of qualifying monetary assets and liabilities must be appropriated as financial revenues or expenses, unless the entity can adequately justify that the financing provided to its clients is part of its operational activities, in which case the reversals will be appropriated as operational revenue. This is the case, for example, when the entity operates in two distinct segments: (i) sale of products and services and (ii) financing of installment sales, provided that this adjustment and the effects of its disclosure are relevant.
The concepts, analyses, and specifications regarding present value adjustment, especially regarding the preparation of estimated cash flows and definition of discount rates contained in Technical Pronouncement CPC 01 – Impairment of Assets, including its Annex, must be used, insofar as applicable and not conflicting. Subsidies may also be obtained in item 36 of Technical Pronouncement CPC 14 – Financial Instruments: Recognition and Measurement.

Non-contractual Liabilities

Non-contractual liabilities are those that present greater complexity for accounting measurement purposes due to the use of information based on present value. Estimated cash flows or series of estimated cash flows are laden with uncertainty, as are the periods for which there is an expectation of settlement or delivery of product/provision of service. Therefore, much critical thinking, sensitivity, and experience are required in conducting probabilistic calculations. It may be that in certain situations the participation of a multidisciplinary team of professionals is imperative for the execution of the task.
The recognition of provisions and liabilities is regulated in the Brazilian accounting environment. Legal obligations and those not formalized (the latter also referred to by Normative Accounting Theory as "fair or constructive obligations"), which are nothing more than species of the genus "non-contractual liability," are contemplated. Fair obligations result from ethical or moral limitations, and not from legal restrictions. Constructive obligations, on the other hand, arise from practices and customs. Discretionary guarantees granted to customers, frequent financial assistance to indigenous communities located in regions where exploratory economic activities are developed, among others, are some examples.
Discounting to present value is required whether it concerns contractual liabilities or non-contractual liabilities, with the discount rate necessarily having to consider the entity's credit risk. When the issuance of a rule that gives legitimacy to the application of the present value adjustment concept, as is the case with this Technical Pronouncement, the technique must be applied to all liabilities, including provisions.
The obligation for the removal of service of long-term assets, qualified by literature as Asset Retirement Obligation (ARO), is an example of a non-contractual liability already observed in companies operating in the metal mining, petroleum, and thermonuclear segments, adjusting it to present value.

Tax Effects

For the purpose of discounting assets and liabilities to present value, the rate to be applied must not be net of tax effects, but rather before taxes.
Regarding the temporary differences observed between the accounting and tax bases of assets and liabilities adjusted to present value, these temporary differences must receive the treatment required by current accounting rules for the recognition and measurement of deferred income tax and social contribution.

Classification

In the classification of items arising from the present value adjustment of assets and liabilities, whether in situations of initial recognition or in cases of new measurement, within the philosophy of fair value, what is prescribed in the Conceptual Framework for the Preparation and Presentation of Financial Statements of CPC, in its item 35, regarding the issue of the primacy of substance over form, must be observed.
The commercial operation that characterizes itself as a financing, in accordance with item 7 of this Pronouncement, must be recognized as such, and the value stated in the fiscal documentation that serves as support for the operation must be adequately decomposed for accounting purposes. Embedded interest must be expunged from the acquisition cost of the goods and appropriated over the passage of time. It is important to remember that the adjustment of liabilities, at times, implies an adjustment in the acquisition cost of assets. This is the case, for example, with operations for the acquisition and sale on credit of inventories and fixed assets, since interest imputed in prices must be expunged in the initial measurement of these assets.

Disclosure

In the case of disclosure in explanatory notes, minimum information must be provided that allows users of the financial statements to obtain an unequivocal understanding of the present value measurements carried out for assets and liabilities, comprising the following non-exhaustive list:

(a) detailed description of the item subject to present value measurement, nature of its cash flows (contractual or non-contractual) and, if applicable, its quoted market entry value; (b) premises used by management, interest rates decomposed by premiums incorporated and by risk factors (risk-free, credit risk, etc.), amounts of estimated cash flows or series of amounts of estimated cash flows, estimated or expected time horizon, expectations in terms of amount and timing of flows (associated probabilities); (c) models used for risk calculation and model inputs; (d) brief description of the method of allocation of discounts and the procedure adopted to accommodate changes in management premises; (e) purpose of the present value measurement, whether for initial recognition or new measurement and management's motivation to carry out such procedure; (f) other information considered relevant.

ANNEX
This annex provides guidance on present value adjustment, but is not an integral part of the Pronouncement

Questions and Answers on Present Value Adjustment - PVA

Introduction
This annex was prepared based on this Pronouncement and texts found in international standards issued by the International Accounting Standards Board (IASB) on the topic of Present Value Adjustment - PVA (IAS 12, IAS 18, IAS 39, etc.). The objective is to reflect on some of the main existing discussions on the topic based on the mentioned standards.

What is the difference between PVA and fair value?
Answer - To answer this question, it is necessary to understand the concept of fair value (as expressed in the Corporation Law after modifications introduced by Law No. 11.638/07 and Provisional Measure No. 449/08) and present value, according to the definitions transcribed below, taken from the glossary of international accounting standards:

Fair value - is the value at which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction.

Present value - is the estimate of the current value of a future cash flow, in the normal course of the entity's operations.

Based on these definitions, we must distinguish PVA from fair value as follows:

PVA: Its objective is to make the adjustment to demonstrate the present value of a future cash flow. This cash flow can be represented by inflows or outflows of resources (or equivalent amount; for example, credits that reduce future cash outflows would be equivalent to inflows of resources). To determine the present value of a cash flow, three pieces of information are required: the value of the future flow (considering all terms and conditions contracted), the date of said financial flow, and the discount rate applicable to the transaction.

Fair value: Its first objective is to demonstrate the market value of a certain asset or liability; if this is impossible, to demonstrate the probable value that would be the market value by comparison to other assets or liabilities that have market value; if this alternative is also impossible, to demonstrate the probable value that would be the market value by using the present value adjustment of estimated future cash flows linked to this asset or liability; finally, if these alternatives are impossible, by using econometric formulas recognized by the market.

It is seen, therefore, that in some circumstances fair value and present value may coincide.

The accounting practices adopted in Brazil and the international accounting standard (International Financial Reporting Standards – IFRS) establish the need to present, on the base date of each balance sheet, certain assets and liabilities at their fair value, as well as certain assets and liabilities adjusted to present value. This aspect is well characterized in the international standard for the recording and measurement of financial assets and liabilities (IAS 39), including receivables related to sales (IAS 18) and long-term assets held for sale (IFRS 5), among others. With the changes in the Corporation Law (Law No. 6.404/76) introduced by Law No. 11.638/07 and Provisional Measure No. 449/08, the accounting practice adopted in Brazil approaches and in some cases equals the international standard at the time of the issuance of this document.

Despite the differences existing between the concepts, doubts may still exist in the practical application of fair value and present value, even in their differentiation. Thus, the illustrative example, presented below, aims to elucidate the issue:

Scenario: The entity makes a credit sale for $10,000 thousand to receive the amount in a single installment, due in five years. If the sale were made for cash, according to the available option, the value of the sale would have been $6,210 thousand, which is equivalent to an annual financial cost of 10%. It is verified that this rate is equal to the market rate, on the date of the transaction. At the first moment, the transaction must be accounted for considering its present value, whose amount of $6,210 thousand is recorded as accounts receivable, in credit to sales revenue for the same amount. It is noted that, at this first moment, the present value of the transaction is equivalent to its market value or fair value.

In the case of applying the present value adjustment technique, after the first year, the recognition of financial revenue must respect the interest rate of the transaction on the date of its origin (i.e., 10% per year), regardless of the market interest rate in subsequent periods. Thus, after one year, the value of the accounts receivable, for accounting record purposes, will be $6,830 thousand, regardless of variations in the market interest rate. At the end of each of the five fiscal years, the accounting should reflect the following effects:

Year $ thousand
Value
Interest (effective rate)
Updated Balance
1 6,210 620 6,830
2 6,830 683 7,513
3 7,513 751 8,264
4 8,264 827 9,091
5 9,091 909 10,000

The application of the mark-to-market technique, only for reference and comparison purposes, could be illustrated with a situation in which the interest rate went from 10% per year, at the initial moment of the transaction, to 15% per year, at the end of the first year. In this situation, the fair value of the accounts receivable, calculated by means of the present value adjustment on this new date and with the current market condition, would be $5,718 thousand ($10,000 thousand / 1.15^4), that is, its fair value at the end of the first year is well below the value accounted for based on the present value adjustment technique.

Thus, although at the initial moment the present value and the fair value of an operation are usually equal, over time these values do not necessarily bear any type of relationship. While present value is related to the interest rate specific and intrinsic to the contract, considering the conditions on the date of its origin, fair value can undergo changes over time due to market conditions (interest rates and other factors), which should only be considered in cases where the recognition of a balance at its fair value is applicable.

Regardless of this, always when on the date of each balance sheet, as in the previous table, the book value is different from the fair value. One must pay attention to the legal and normative provisions on the application of one or the other concept. But, in case of discrepancy as in the given example, due to the relevance of the difference, it may be necessary that this information be disclosed in the explanatory notes.

If the concept of PVA is applicable to a transaction, at what moment should it be accounted for? What are the accounting effects after the initial registration of a transaction at its present value?
Answer - As discussed in Question 1 above, PVA must be calculated at the initial moment of the operation, considering the cash flows of the corresponding operation (value, date, and all terms and conditions contracted), as well as the discount rate applicable to the transaction, on the date of its occurrence.
The doubt arises regarding the accounting effects after the initial registration of the operation (months or years after the initial date of the transaction). This Pronouncement and international standards present the method that must be used to reflect such effects; in those of the IASB this appears in several standards (IAS 17 – Leases, IAS 18 – Revenue and IAS 39 – Financial Instruments: Recognition and Measurement, among others). These standards and this Pronouncement provide for the adoption of the effective interest rate method in the initial registration of the operation. Thus, the interest embedded in the operation (financial revenue or expense) must be accounted for according to the effective interest rate related to the transaction (see also example in Question 1). It is noted that the PVA mechanism cannot change the value contracted between the parties. If the title or contract provides a value for a certain date, it needs to be accounted for by that amount on that date. In the previously seen example, it was provided that the value after five years would be $10,000 thousand; thus, the appropriation of interest must restore this value until the maturity date.
How should the interest rate be defined for the purpose of calculating PVA?
Answer - There are operations whose interest rate is explicit (for example, described and known in the contract of the operation) or implicit (for example, unknown, but embedded in the initial pricing of the operation by the entity at the time of purchase or sale). In both cases, it is necessary to use a discount rate that reflects interest compatible with the nature, term, and risks related to the transaction, taking into consideration, still, the market rates practiced on the initial date of the transaction between knowledgeable parties, who intend to carry out the transaction and under usual market conditions. In cases where the rate is explicit, the valuation process involves a comparison between the interest rate of the operation and the market interest rate, on the date of the origin of the transaction. In cases where the rate is implicit, it is necessary to estimate the rate of the transaction, considering the market interest rates, as previously mentioned. Even in cases where the parties state that the cash and credit values are the same, PVA must be calculated and, if relevant, registered. By definition, present value "is the estimate of the current value of a future cash flow". For some entities (for example, retailers), it is not practicable to carry out a detailed analysis (term, risks, etc.) of each transaction, and in these cases, the most evident rate for the calculation of PVA is the rate itself used by the entity's treasury to determine the conditions and prices to be practiced. According to the mentioned in the previous paragraph, unless the rate defined by the treasury and used in a certain credit operation is clearly out of a market standard for the industry or type of activity, this rate is adequate for present value discounting. To illustrate this discussion, see the scenario below:
Scenario: An entity presents the following operations:
(a) Sale with a term of 12 months, for which the entity normally charges interest of 10% per year, considering the risks related to higher terms.
(b) Sale with a term of 6 months, for which the entity charges interest of 6% per year, considering that the risk is relatively lower than that of a 12-month sale.
Note: These interests are clearly evidenced by the entity in the application of discounts for advance payments; the values are invoiced according to the value to be received at the final maturity of the operation.
(c) Receivables arising from the sale of fixed assets, with real guarantee of the asset itself, with a maturity term of 18 months, whose interest rate embedded in the operation was 5% per year.
Considering the presented scenario, it is observed that, for different situations in the same entity, the interest rate used as a basis for the calculation of present value can be different. Thus, an analysis of the transaction itself must be carried out, on the date it occurred (and not on the date of the balance sheet closing - see Question 1 above), for the purpose of determining the adequate interest rate to be used in the calculation of PVA and its subsequent restoration. Some cost versus benefit considerations may be adequate in the evaluation and definition of interest rate. However, it is worth noting that the use of a single interest rate for all transactions involving assets and liabilities is not, in general, an acceptable procedure, although the use of a single rate for a group of assets and liabilities with similar characteristics can be admitted (for example, a single interest rate for the entire group of accounts receivable and a single rate for the entire group of suppliers), in which this use reflects, in fact, the interest rate usually applicable.
Arts. 183 and 184 of the Corporation Law, amended by Law No. 11.638/07 and Provisional Measure No. 449/08, refer to elements of the entity's assets and liabilities. How do these articles interact with the calculation of an entity's result?
Answer - Although the new wording of the Law clearly mentions adjustments for asset and liability balances, these adjustments are directly related to purchase and sale transactions that involve, predominantly, the accounts of the result of the fiscal year (for example, PVA of sales transactions and the respective balance of accounts receivable). In this case, considering that the reflection of the PVA of a certain asset or liability balance has a direct counterpart in an account of the result of the fiscal year, the PVA also affects these lines of the result (which is the specific case of gross revenue versus the registration of the balance of accounts receivable). To illustrate this issue, see the scenario below:
Scenario: Sale operation with a term of six months for receipt, with the following characteristics:
Sale with a term of six months = $100, with ICMS of 10% = $10 Cash sale = $80, with ICMS of 10% = $8 Note that PVA is related to the financing operation of the accounts receivable in its entirety ($100) and not only on the balance, after deducting the taxes to be recovered. The entity, by granting time for receipt, is financing the client. In this case, the base for the calculation of PVA is the value that is being financed, that is, the total value of the invoice ($100). In the previous example, assuming that a good reference for the present value of the transaction is the cash sale value, the accounting of the credit transaction would be as follows:
a) In the seller:
Debit - Accounts Receivable - $80
Credit - Sales Revenue - $80
Debit - ICMS Expense (*1) - $10
Credit - ICMS Payable - $10
Over time, the difference ($20) between the present value of the accounts receivable ($80) and the value that will be received at the end of six months ($100) is appropriated to the result of the period as financial revenue, using the effective interest rate method.

(*): There is discussion regarding the need to reclassify, in the case of the seller, the portion of ICMS calculated on the interest embedded in the transaction to commercial financial results. If, on the one hand, the justification for not performing the present value discount for ICMS stems from the fact that it is used for calculation already in the month of the transaction, on the other hand, this reclassification is based on the assumption that ICMS also applies to the interest embedded in a financed sales transaction. This aspect must also be evaluated, taking into account the materiality of the amounts involved.

SECURITIES AND EXCHANGE COMMISSION BOARD
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

b) On the buyer's side:
On the buyer's side, unlike the seller, the interest rate imputed by its suppliers is not known and the task of determining which rate to use becomes more complex, but it must be estimated based on the supplier portfolio as a whole.

Debit - Inventories - $ 70
Debit - ICMS to be recovered - $ 10
Credit - Accounts Payable - Suppliers - $ 80

The difference ($ 20) between the present value of accounts payable ($ 80) and the amount to be paid at the end of six months ($ 100) is appropriated to the period's result as a financial expense, using the effective interest rate method.

This issue of reclassifying the portion of ICMS calculated on the interest embedded in the transaction to commercial financial results alters gross profit, financial results, and also EBITDA (or EBITDA, in English acronym, if the entity uses this non-accounting measure). Thus, this issue may be relevant for some entities. Whatever method is used, it must be disclosed in a note for better understanding by the user of the financial statements and applied uniformly throughout the fiscal years.

The table below illustrates these effects, after the entire period has elapsed since the sale until receipt, with the appropriation of interest over the term of the transaction:

ICMS without segregation	ICMS with segregation between the portion on sale and the portion on financial revenue
Sales Revenue 80	Sales Revenue 80
Sales Deductions - ICMS (10)	Sales Deductions - ICMS (8)
COGS (50)	COGS (50)
Gross Profit 20	Gross Profit 22
Financial Revenue 20	Financial Revenue 20
Profit before Income Tax/CS 40	ICMS on Financial Revenue (2)
	Profit before Income Tax/CS 40

This same concept is applicable to other taxes levied on sales, such as IPI, PIS, and COFINS.

For some entities, the difference ($20) between the present value of accounts receivable ($80) and the amount to be received at the end of six months ($100) may be appropriated as commercial financial revenue, in the same group as sales revenues, instead of financial revenue, provided that the entity demonstrates that the financing provided to its clients is part of its business and that it operates with, for example, two segments: (i) sale of products and services and (ii) financing of installment sales. This demonstration

may be evidenced through the combination of some of the following circumstances (in the entity and/or upon the preparation of financial statements): the financial activity is part of its business; provision of the financing activity in the entity's bylaws; organization and conduct of the financing activity as a distinct operational segment; portfolio of services such as offering personal credit and other related services to all its clients; etc. Observing this situation, the financial costs with third parties, arising from liabilities (such as suppliers and financing) used as funding to support the portfolio of client receivables, should also compose the cost of sales revenues, for an adequate calculation of the gross margin. In these cases, both revenue and cost must be presented by business segment.

Sale transaction with maturities of 30, 60, or 90 days – terms normally applied by the entity – must be accounted for considering PV (Present Value), as previously described?
Answer - Considering the search for convergence with international standards, it is important to observe what IAS 18 establishes, which deals with the recording of revenues:

“9. Revenue shall be measured at the fair value of the consideration received or receivable.
10. The amount of revenue arising from a transaction is usually determined by agreement between the entity and the buyer or user of the asset. It is measured at the fair value of the consideration received or receivable, taking into account the amount of any commercial discounts or allowances granted by the entity.
11. In most cases, payment is in cash or cash equivalent, and revenue is the amount of cash or cash equivalent received or receivable. However, when the inflow of cash or cash equivalent is deferred, the fair value may be less than the nominal amount of cash receivable. For example, an entity may grant interest-free credit to the buyer or accept from the buyer a receivable note with an interest rate lower than the market rate in payment for the sale of goods. When the transaction effectively constitutes a financing transaction, the fair value of the receivable is determined by discounting all future receipts, using an imputed interest rate. The imputed interest rate is the one that is most clearly determinable among the following:
(a) the prevailing rate for a similar instrument of an issuer with a similar credit rating; or (b) an interest rate that discounts the nominal value of the instrument to the current selling price of the goods or services.” (Emphasis added.)

From the highlighted text, PV is applicable for operations that can be considered as financing activities and not for operations that are settled in a short period of time, whose effect is not material. In general, when applicable, PV will be calculated with the interest rate that may be embedded in the operations. An example, but not limited to, of evidence of the existence or non-existence of interest is the granting of financial discounts (discounts given after sales) for payment before the stipulated maturity date, or the existence of a distinct price table for cash payments.

The discount mentioned here is related to the financial aspect of the transaction and not to the eventual commercial discount granted. Discounts conditioned on commercial aspects must be recorded as a reducer of sales.

In many cases, the entity normally grants terms for invoice payment. This term can be considered as part of the normal commercial conditions or inherent to the entity's operations, without this leading to the characterization of a financing activity. In other cases, even if no financial discounts are granted, operations are carried out for longer terms. This essentially represents a financing activity (for example, retail and real estate development entities) and, in this situation, the concept of PV is applicable.

The application of the PV concept in sales transactions must consider the concepts of IAS 18 and also the principles of the Brazilian Corporations Law, both in the same direction. According to item VIII of art. 183 and item III of art. 184 of the Brazilian Corporations Law, with the new wording given by Law No. 11.638/07 and Provisional Measure No. 449/08, the elements resulting from long-term operations will be adjusted to present value (main objective), and the others, adjusted when there is a relevant effect.

A careful evaluation of this aspect is important, taking into account the interest rates practiced in Brazil. As a reference, the interest rate in a large number of countries can revolve around 2% per year or even less. In the case of Brazil, retail financing can use rates close to or above 2% per month. Thus, a standard that can be considered reasonable for international purposes (for example, 90 days or up to one year) may not be adequate for transactions carried out in Brazil, depending on the interest rates that have been embedded in these transactions and the specific situation of each entity. For example, an entity that has a fast turnover in its inventories and short terms, both for accounts receivable and accounts payable to suppliers, may present non-relevant effects when applying the PV concept. On the other hand, if the entity finances its clients without supplier financing, the values may be eventually relevant, according to the terms and interest rates practiced.

The entity's decision and evaluation not to account for PV of receivables or payables must be documented with the calculations and effects of the respective values, in order to substantiate the corresponding conclusion. Additionally, the accounting practice must be adopted consistently throughout the fiscal years and disclosed in a note to the financial statements.

Is it acceptable to assess the need and apply PV only for transactions that present outstanding balances on the balance sheet dates?
Answer - No. The application of the PV concept is done on the date of the transaction. Even if the balance generating the PV is no longer outstanding, there may be relevant effects between the lines of the income statement (see table in Question 4). This is relevant in entities that finance their clients and that work with small margins, as well as in situations or transactions involving the purchase of long-maturity inventories or fixed assets. Applying it only to outstanding balances on the balance sheet date, especially for those entities that do not prepare interim financial statements or that have seasonal activities, in addition to generating distortions of margin and nature, violates an important qualitative characteristic of financial statements, which is comparability, since all transactions generated during the period must have the same treatment.

Should deferred income tax and social contribution balances be adjusted to present value?
Answer - No. Using international accounting standards as a reference, we find that, textually (IAS 12 - Item 53 - Deferred tax assets and liabilities shall not be discounted), it is not permitted to perform present value discounts for deferred income tax balances (and social contribution, in the Brazilian case).

Basically, this prohibition was made with the argument that it is not possible to determine with exactness the dates on which the aforementioned values will be realized. Thus, this type of discount is not required or permitted by international accounting standards.

Which balances arising from taxes would be subject to present value discounting?
Answer - For understanding purposes, we are here dealing with the following taxes (accompanied by their characteristics):

8.1. State Taxes:
Introduction - general: the main state tax is ICMS, which presents the characteristic of non-cumulativity through the process of monthly calculation of credits and debits. Except for ICMS on the purchase of fixed assets, for which the credit is generally appropriated in installments over a certain number of months, and some situations of entities that accumulate credits for recovery, the balances calculated after the compensation of credits are available for settlement monthly.

Therefore, as a general rule, and using the concepts of the Pronouncement, PV does not apply to ICMS credit balances, which are available for immediate compensation.

On the other hand, balances of taxes to be compensated or recovered, like all assets, are subject to the application of the recoverability test, in accordance with Technical Pronouncement CPC 01.

Finally, it is important to observe situations of ICMS installments as tax incentives, granted by various States, where the ICMS payable balance is deferred for long-term payment, without the incidence of interest or monetary update, or with interest well below normal market conditions.

These incentives normally have the objective of attracting entities to certain localities, where lower efficiency or higher cost or logistical difficulties would be compensated by the incentive.

It is necessary to determine the effective cash outflows and adjust them to present value using an interest rate that reflects normal market conditions, in order to allow the tax cost to be presented

adjusted by the financial gain generated by the tax incentive and that the subsidy is duly registered under the accrual basis. The objective of this practice is also to allow the transaction to be recorded considering its essence. In this case, the counterpart of PV, on the date of the transaction, must be registered as a credit in the same line in the result where the deduction of ICMS expense was registered.

Example: ICMS payable balance of $ 10,000, with an incentivized payment term of five years, without monetary update and with interest of 3% per year, payable in a single installment at the end of 60 months. Assuming that the interest rate, according to current market conditions, is 15% per year, the following calculation must be practiced on the date of the transaction:

$ 10,000 * (1.03^5) = $ 11,593 (balance to be paid after five years); $ 11,593 / (1.15^5) = $ 5,764 (value that reflects the amount, on the date of the transaction, to be registered as a deduction of sales and ICMS payable).

As time passes, the debtor balance (calculated as shown in the previous paragraph) will be updated monetarily, based on the interest rate defined and applicable on the date of the transaction, with the counterpart being financial expense. After one year, the ICMS payable balance will be $ 6,629, and the amount of $ 865 will be registered as financial expense, and so on, until reaching the future value at the end of 60 months ($ 11,593).

(In the case where this incentive is linked to investment and can be characterized as a tax subsidy for investment, the provisions of Technical Pronouncement CPC 07 – Government Grants and Disclosure of Government Assistance must be observed. In this case, instead of a credit to the ICMS account in the result at the beginning of the transaction, the credit would be in the liability for appropriation to the result when the necessary conditions for the effective gain of the subsidy are met).

8.2. Federal Taxes:
Introduction: the main taxes are income tax, social contribution, PIS, COFINS, and IPI. These taxes generate various accounting effects considering that they can exist in balances to be recovered resulting from advances, overpayments, or other credits, as well as in balances to be paid resulting from the calculation of taxes due or installments.

Balances to be recovered and paid may be subject to monetary updates and interest (depending on each situation), and it is also common to observe significant balances related to federal debt installment programs, for example, REFIS.

Below are listed some of the main scenarios regarding federal tax balances:

(a) Tax credits (for example, IRRF – Withholding Income Tax) or other taxed installments that are monetarily updated based on the Selic rate:
Considering that the values are originally registered at present value and monetarily updated by the Selic rate (post-fixed interest), as well as that this rate (Selic) approximates the market interest rate for transactions of this nature, it is understood that these values should already be registered by values equivalent to their present value.

(b) Income tax credits to be used in compensation or refund requests:
For these cases, the situation treated here starts from the assumption that the entity has a recent history of success in its compensation or refund requests, and applied CPC 01 which deals with asset recovery appropriately. Following the general rule explained in Question 7 and referenced above for the situation of ICMS of entities that accumulate credits, the guidance is that PV should not be applied.

On the other hand, one should not disregard situations where there is no incidence of interest on the value of the credit to be recovered (or it is below the market for transactions of this nature) and the administration manages to estimate with reasonable precision the dates of realization of these credits. In these situations, due to this possibility of estimating with reasonable precision the realization dates, the accounting recognition of PV must be performed.

(c) REFIS and other installments:
Regarding this topic, there is already a CVM Instruction (Instruction No. 346/00) that deals with a specific case related to situations where the consolidated debt is subject to settlement based on a percentage of gross revenue.

According to the explanatory note of CVM Instruction No. 346/00, the uncertainties of future billing amounts and the risks of default and non-compliance with the conditions and restrictions imposed in the REFIS program indicate that it is not prudent to immediately recognize a possible gain by reducing the debt to its present value determined based on market interest rates applicable for loans in the financial market. Instead, the entity must perform adequate disclosure of the circumstances in explanatory notes.

Above all, let us recall that the CPC Conceptual Framework Pronouncement, which deals with the Conceptual Framework for the Preparation and Presentation of Financial Statements, reaffirms Prudence as one of the qualitative characteristics that must be present when preparing financial statements, thereby reinforcing the terms brought in CVM Instruction No. 346/00.

It should be observed that, on the date of adherence to REFIS, the debtor balance is already at present value, based on the interest conditions provided for this type of transaction and that said balance is subject to interest (those provided for REFIS), as time passes. Thus, as long as it is properly accounted for, according to the conditions applicable to this type of refinancing, the debtor balance should already be registered at present value on the date of each balance sheet. The issue that arises is that the amount of expected cash outflows, adjusted to present value based on a normal market interest rate, would result in an amount lower than the debtor balance on a certain base date; this is information to be disclosed in an explanatory note, with no accounting adjustment required, since item III of art. 184 of the Brazilian Corporations Law (with the new wording) defines the adjustment to present value and not the adjustment to fair value of the liability.

For other cases where the payment of the installment has no relation to the percentage of gross revenue, there are other restrictions contained in the REFIS program, discussed in the aforementioned CVM norm. For example, if the only requirement is the timely payment of installments, the entity will be able to demonstrate this capacity at the time of the initial recording of the installment, but on the other hand, the installment rates reflect market rates; for example, in the case of current Selic rates, PV does not apply – this rate approximates the market interest rate for transactions of this nature and, thus, the corresponding values are already registered by values equivalent to their present value.

Receivables and payables, subject to monetary update based on price or inflationary indices, without interest, should be subject to PV?
Answer - Yes. Price or inflationary indices can be some components of a charge rate, but they cannot be confused with real interest rates. Obviously, for calculation and determination of present value for assets and liabilities indexed only to inflationary indices, the interest rate to be considered must be the real rate (expunged, then, from the nominal rate, the effects of these price variations), taking into account similar instruments, terms, and risks, as discussed in Question 3.
In the case of loans, financing, and mortgages with financial charges different from current market interest rates, must PV be performed?

(a) BNDES financing, contracted with interest rates different from the rates practiced by the market in general for other types of loans, are subject to PV?
Answer - No. These financing arrangements have their own characteristics and the conditions defined in BNDES financing contracts, between independent parties, reflect the conditions for those types of financing. In some cases, the financial charges are lower than the interest rates applicable for general loans and/or for working capital, but it must be taken into account that BNDES finances projects, with their own characteristics, generally applying rates that would be applicable to any entity, adjusted only by the specific credit risk of the entities and projects involved.

In Brazil, there is no consolidated market for long-term debts with the characteristics of BNDES financing, with the result that credit supply to entities in general, with this long-term characteristic, is normally limited to BNDES.

This treatment is aligned with international standards, specifically IAS 20 and 37 and with this Pronouncement.

(b) Related party mortgages contracted without financial charges or with interest different from normal market conditions are subject to PV?

SECURITY AND EXCHANGE COMMISSION OF BRAZIL
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, 340/2º, 3º and 4º Floors, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brazil - Tel.: (11) 2146-2000

Answer - Many loan contracts between related parties do not have a fixed maturity date, which makes the calculation of Present Value (PV) impossible. For example, an entity may have a loan receivable from an investee whose settlement is not planned nor is there a probability of occurring in the foreseeable future, or the loan involves transactions and the maturity is considered on demand, that is, it is considered payable on demand at the creditor's discretion.

In other cases, however, when the loan contract has a defined maturity date, the entity must, in principle, adjust the transaction to present value. However, a question arises that must be considered, which is what to do with the difference between the present value at the initial date (fair value) and the cash transferred/received.

It is not appropriate for the entity that granted the cash to have an immediate loss nor for the entity that received the cash to have an immediate gain.

The immediate recording of gain/loss, discussed in international standards - IAS 39 (AG 74 to AG 79), should only be made, at the initial recognition of the operation, if the fair value could be directly observable in the market, in similar instruments, or if the valuation technique used by the entity used variables that included only information observable in the market, from recent transactions under usual market conditions and between independent counterparties, who know and wish to effect the transaction.

Therefore, loans between related parties contracted without financial charges or with interest rates different from normal market conditions are not subject to Present Value adjustment, but all conditions must be disclosed in explanatory notes with the necessary detail (terms, interest rates, and other conditions), in compliance with Technical Pronouncement CPC 05 – Disclosure about Related Parties, in order to provide the reader of the financial statements with sufficient informative elements to understand the magnitude, characteristics, and effects of these types of transactions on the financial position and on the results of the entity. However, when a different accounting practice than this is issued regarding adjustments on financial instruments resulting from activities with related parties, that new accounting practice must prevail.

Considering that Present Value (PV) is a change in accounting practice, is it necessary to make adjustments retrospectively for the periods presented?
Answer - Yes. The recognition of PV is characterized as a change in accounting practice. Thus, changes in accounting practice should be considered retrospectively for all periods presented, and the adjustments accounted for in the account of accumulated profits (or losses), net of tax effects, as well as demonstrated as if they had been accounted for at the beginning of the oldest period presented.

However, it must be considered, in the case of the fiscal year starting from January 1, 2008, the provisions of Technical Pronouncement CPC 13 – Initial Adoption of Law No. 11.638/07 and Provisional Measure No. 449/08.

How are the purchase and sale of goods on credit accounted for whose counterpart requires adjustment to present value?

In the case of a sale, for example, of real estate on credit, at nominal value, without specification of interest, after the procedures for determining the present value adjustment, this adjustment should rectify the realizable asset and the sales revenue, and the adjustment to the realizable asset can be made in a contra account. This account should be appropriated as financial revenue until maturity.

In the buyer's case, the adjustment rectifies the cost of the fixed asset, which must be recorded at its present value, and the liability adjustment can also use a contra account to generate financial expense until maturity.

For example, suppose a sale of real estate for $10,000 thousand, paid with a down payment of $4,000 thousand in cash and 3 (three) annual promissory notes of $2,000 thousand each, without interest, carried out at a moment when the interest rate, for the type of seller and buyer, is, for both, 18% per year (these rates may be different for them).

The seller, in the transaction, records:
D – Cash $4,000,000
D – Promissory Notes Receivable $6,000,000
C – Interest to be Appropriated $1,651,454
C – Revenue from Sale of Real Estate $8,348,546

The buyer:
D – Real Estate $8,348,546
D – Interest to be Appropriated $1,651,454
C – Cash $4,000,000
C – Promissory Notes Payable $6,000,000

In both Promissory Notes, they will appear (in one in its assets; in the other, in its liabilities) at their net balance constituted by the nominal value reduced by Interest to be Appropriated, and this balance will grow by the appropriation of interest to the result, until at maturity these contra accounts zero out.

CVM Resolution 138 (Repealed) - Ratification of CPC Technical Pronouncement 12

Lineage: Superseded

Timeline

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