CVM Resolution 139 Ratifies CPC 42 on Accounting in Hyperinflationary Economies

SECURITIES AND EXCHANGE COMMISSION OF BRAZIL
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 42 of the Accounting Pronouncements Committee - CPC, which deals with accounting in hyperinflationary economies.

The PRESIDENT OF THE SECURITIES AND EXCHANGE COMMISSION OF BRAZIL – CVM makes it public that the Collegiate 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 42, which deals with accounting in hyperinflationary economies, issued by the Accounting Pronouncements Committee - CPC, is hereby ratified, as per Annex “A” to this Resolution.

Art. 2. Deliberation 805, of December 27, 2018, is hereby revoked, from the effective date of this Resolution.

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

Signed electronically by
MARCELO BARBOSA
President

SECURITIES AND EXCHANGE COMMISSION OF BRAZIL
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
ANNEX “A”
ACCOUNTING PRONOUNCEMENTS COMMITTEE
TECHNICAL PRONOUNCEMENT CPC 42
ACCOUNTING IN HYPERINFLATIONARY ECONOMIES
Correlation to International Accounting Standards – IAS 29

Summary Item
SCOPE 1 – 4
MONETARY RESTATEMENT OF FINANCIAL STATEMENTS 5 – 37 Historical cost financial statements 11 – 28 Balance sheet 11 – 25 Statement of comprehensive income 26 Gain or loss on net monetary position 27 – 28 Current cost financial statements 29 – 31 Balance sheet 29 Statement of comprehensive income 30 Gain or loss on net monetary position 31 Income taxes 32 Statements of cash flows and added value 33 Corresponding amounts 34 Consolidated financial statements 35 – 36 Selection and use of the General Price Index 37 ECONOMY CEASING TO BE HYPERINFLATIONARY 38 DISCLOSURE 39 – 40 EFFECTIVE DATE 41

Scope

1. This Pronouncement shall be applied to the financial statements, including
   consolidated financial statements, of any entity whose functional currency is the currency of a hyperinflationary economy.

2. In a hyperinflationary economy, the income statement and balance sheet in local
   currency without monetary restatement are not useful. Money loses purchasing power to such an extent that comparison of values arising from transactions and other events that occurred in different times, even within the same accounting period, is misleading.

3. This Pronouncement does not establish an absolute rate at which hyperinflation
   is considered to have emerged. The time at which monetary restatement of financial statements, in accordance with this Pronouncement, becomes necessary is a matter of judgment. Hyperinflation is indicated by the characteristics of the economic environment of a country which include, among others, the following:
   (a) the general population prefers to hold its wealth in non-monetary assets or in a relatively stable foreign currency. Amounts held in local currency are immediately invested to maintain purchasing power; (b) the general population considers monetary values not in terms of the local currency, but in terms of a relatively stable foreign currency. Prices may be quoted in this currency; (c) credit sales and purchases occur at prices that compensate for the expected loss of purchasing power during the credit period, even if that period is short; (d) interest rates, wages, and prices are linked to a price index; and (e) the cumulative inflation rate over three years approaches or exceeds 100%.

4. It is preferable that all entities reporting in the currency of the same hyperinflationary economy
   apply this Pronouncement from the same date. Nevertheless, this Pronouncement applies to the financial statements of any entity, from the beginning of the accounting reporting period in which it identifies the existence of hyperinflation in the country whose currency it reports.

Monetary restatement of financial statements
5. Prices change over time as a result of various political, economic, and social forces,
specific or general. Specific forces, such as changes in supply and demand and technological changes, can cause individual prices to increase or decrease significantly and independently of one another. Furthermore, general forces can result in changes in the general price level and, therefore, in the general purchasing power of money.

6. Entities that prepare financial statements based on historical cost do so without taking into account changes in the general price level or increases in specific prices of recognized assets or liabilities. Exceptions are assets and liabilities that the entity must, or chooses, to measure at fair value. For example, property, plant and equipment may be revalued to fair value (when revaluation in Brazil is authorized by Law 1), and certain biological assets must be measured at fair value. Some entities, however, present financial statements based on the current cost approach, which reflects the effects of changes in the specific prices of held assets.

7. In a hyperinflationary economy, financial statements, whether based on the
   historical cost approach or the current cost approach, are useful only if they are expressed in terms of the current measurement unit at the end of the reporting period. As a result, this Pronouncement applies to the financial statements of entities that report currency of a hyperinflationary economy. The presentation of the information required by this Pronouncement as a supplement to financial statements not monetarily restated is not permitted. Furthermore, the separate presentation of financial statements before monetary restatement is not recommended.

8. The financial statements of the entity whose functional currency is the currency of a hyperinflationary economy, whether based on the historical cost approach or the current cost
   approach, shall be restated in terms of the current measurement unit at the end of the reporting period. Corresponding amounts for the prior period required by CPC 26 – Presentation of Financial Statements and any information regarding prior periods must also be presented in terms of the current measurement unit at the end of the reporting period. For the purpose of presenting comparative amounts in a presentation currency other than the functional currency, items 42(b) and 43 of CPC 02 – Effects of Changes in Foreign Exchange Rates and Translation of Financial Statements are applicable.

9. Gains or losses on net monetary position shall be included in profit or loss
   and disclosed separately.

10. Monetary restatement of financial statements, in accordance with this Pronouncement, requires
    the application of certain procedures, as well as judgment. Consistent application of these procedures and judgments, from period to period, is more important than the exact accuracy of the resulting values included in the monetarily restated financial statements.

Historical cost financial statements
Balance sheet
11. Balance sheet values that are not expressed in terms of the current measurement unit at the end of the reporting period must be monetarily restated by the application of the General Price Index 2.

12. Monetary items shall not be restated, as they are already expressed in terms of the current
    monetary unit at the end of the reporting period. Monetary items are amounts held and items to be received or paid in cash.

13. Assets and liabilities contractually subject to price changes, such as bonds and
    loans linked to indices, must be adjusted according to the contract to determine the outstanding value at the end of the reporting period. These items shall be recognized at this adjusted value in the monetarily restated balance sheet.

14. All other assets and liabilities are non-monetary. Some non-monetary items must be
    recognized at current values at the end of the reporting period, such as net realizable value and fair value, so they are not monetarily restated. All other assets

1 International accounting standards allow for the revaluation of property, plant and equipment and certain intangible assets, but Brazilian law (Law no. 11,638/2007, which amended Law no. 6,404/1976) currently prohibits this procedure.

2 Generally, general consumer price indices are used.

and non-monetary liabilities must be monetarily restated.

15. Most non-monetary items are recognized at cost or cost less accumulated depreciation or amortization, therefore, they are expressed in current values at their acquisition date. The corrected cost, or cost less accumulated depreciation or amortization of each item, is determined by applying, to its historical cost and accumulated depreciation/amortization, the change in the General Price Index, from the acquisition date to the end of the reporting period. For example, property, plant and equipment, raw material and merchandise inventories, goodwill, patents, trademarks and similar assets must be monetarily restated from the dates of their acquisition/formation. Finished and partially finished goods inventories must be restated from the dates when the costs of purchase and their manufacture were incurred.

16. Detailed records of the acquisition dates of property, plant and equipment items may not be available
    or subject to estimation. In these rare circumstances, it may be necessary, in the first period of application of this Pronouncement, to use an independent professional appraisal of the value of the items as a basis for their monetary restatement.

17. The General Price Index may not be available for the periods for which the restatement
    of property, plant and equipment is required by this Pronouncement. In these circumstances, it may be necessary to use an estimate based, for example, on the variation in the exchange rate between the functional currency and a relatively stable foreign currency.

18. Some non-monetary items must be recognized at current values on dates other than
    the acquisition date or the balance sheet date, for example, property, plant and equipment that was revalued at some prior date, when this procedure is legally permitted 3. In these cases, the carrying amounts must be restated from the date of revaluation.

19. The updated value of a non-monetary item is reduced, in accordance with appropriate accounting pronouncements, when it exceeds its recoverable amount. For example, the updated values of property, plant and equipment, goodwill, patents and trademarks must be reduced to the recoverable amount, and the updated values of inventories must be reduced to net realizable value.

20. An investment accounted for using the equity method may report in the currency of a hyperinflationary economy. The balance sheet and statement of comprehensive income
    of this investment must be monetarily restated in accordance with this Pronouncement, to calculate the investor's share in its net assets and in profit or loss. When the updated financial statements of the investee are expressed in a foreign currency, they must be converted using closing exchange rates.

21. The impact of inflation is normally recognized in borrowing costs. It is not appropriate to monetarily restate the expenditure on the asset financed by the loan and, at the same time, capitalize the portion of borrowing costs that compensates for inflation during the same period.
    This portion of borrowing costs shall be recognized as an expense, in the period in which the costs are incurred.

22. The entity may acquire assets through an agreement that allows it to defer payments without
    incurring explicit interest charges. When it is impracticable to impute the value of interest, these assets must be monetarily restated, from the date of payment and not from the date of purchase.

23. (Eliminated)

24. At the beginning of the first period of application of this Pronouncement, the components of equity, except for retained earnings and any revaluation reserve, must be monetarily restated by applying the General Price Index, from the dates on which the components were contributed or, otherwise, arose. Any revaluation reserve that arose in prior periods is eliminated. The monetarily restated retained earnings are derived from all other values in the monetarily restated balance sheet.

25. At the end of the first period and in subsequent periods, all components of equity must be monetarily restated by applying the General Price Index, from the beginning of the period or the date of contribution, if later. Changes in equity during the period must be disclosed in accordance with CPC 26.

Statement of comprehensive income
26. This Pronouncement requires that all items in the statement of comprehensive income be
expressed in terms of the current measurement unit at the end of the reporting period. Therefore, all values need to be monetarily restated, applying the change in the General Price Index, from the date on which the income and expense items were initially recorded in the financial statements.

Gain or loss on net monetary position
27. In a period of inflation, an entity with an excess of monetary assets over monetary liabilities
loses purchasing power, and an entity with an excess of monetary liabilities over monetary assets gains purchasing power to the extent that the assets and liabilities are not linked to the price level. This gain or loss on net monetary position may arise from the difference resulting from the monetary restatement of non-monetary assets, equity and items in the statement of comprehensive income and the adjustment of assets and liabilities linked to an index. The gain or loss may be estimated by applying the change in the General Price Index to the weighted average of the differences between monetary assets and liabilities in the period.

28. The gain or loss on net monetary position shall be included in profit or loss. The adjustment to these assets
    and liabilities, contractually linked to price changes, in accordance with item 13, must be offset against the gain or loss on net monetary position. Other income and expense items, such as interest income and expense and exchange differences related to funds invested or borrowed, are also related to the net monetary position. Although these items are disclosed separately, they may be useful if they are presented together with the gain or loss on net monetary position in the statement of comprehensive income.

Current cost financial statements
Balance sheet
29. Items presented at current cost shall not be monetarily restated, as they are already
expressed in terms of the current measurement unit at the end of the reporting period. Other items in the balance sheet must be monetarily restated, in accordance with items 11 to 25.

Statement of comprehensive income
30. The current cost statement of comprehensive income, before monetary restatement,
usually reports current costs at the time the underlying transactions or events occur. Cost of sales and depreciation shall be recorded at current cost, at the time of consumption; sales and other expenses shall be recorded at their monetary values, when they occur. Therefore, all values need to be monetarily restated in the current measurement unit at the end of the reporting period, applying the General Price Index.

Gain or loss on net monetary position
31. The gain or loss on net monetary position shall be accounted for in accordance with items 27
and 28.

Income taxes
32. Monetary restatement of financial statements, in accordance with this Pronouncement, may
result in differences between the carrying amount of individual assets and liabilities in the balance sheet and their tax bases. These differences shall be accounted for in accordance with CPC 32 – Income Taxes.

Statements of cash flows and added value
33. This Pronouncement requires that all items in the statement of cash flows be
expressed in terms of the current measurement unit at the end of the reporting period. The same applies to all items in the statement of added value, when disclosed.

Corresponding amounts
34. The corresponding numbers of the prior reporting period, regardless of whether they are based on
the historical cost approach or the current cost approach, must be monetarily restated, applying the General Price Index, so that comparative financial statements are presented in terms of the current measurement unit at the end of the reporting period. Information that is disclosed regarding prior periods must also be expressed in terms of the current measurement unit at the end of the reporting period. For the purpose of presenting comparative amounts in a presentation currency other than the functional currency, items 42(b) and 43 of CPC 02 are applicable.

Consolidated financial statements
35. A parent that reports in the currency of a hyperinflationary economy may have subsidiaries that
also report in the currencies of hyperinflationary economies. The financial statements of any of these subsidiaries must be monetarily restated by applying the General Price Index of the country in whose currency it reports, before being included in the consolidated financial statements issued by its parent. When the subsidiary is foreign, its monetarily restated financial statements must be converted using closing exchange rates. The financial statements of subsidiaries that do not report in the currencies of hyperinflationary economies must be treated in accordance with CPC 02.

36. If financial statements with dates different from the reporting periods are consolidated,
    all items, whether non-monetary or monetary, must be monetarily restated in the current measurement unit at the date of the consolidated financial statements.

Selection and use of the General Price Index
37. Monetary restatement of financial statements, in accordance with this Pronouncement, requires
the use of a General Price Index that reflects changes in general purchasing power. It is preferable that all entities reporting in the currency of the same economy use the same index.

Economy ceasing to be hyperinflationary
38. When an economy ceases to be hyperinflationary and the entity discontinues the preparation
and presentation of financial statements in accordance with this Pronouncement, it must treat the values expressed in the current measurement unit at the end of the previous reporting period as the basis for the carrying amounts in its subsequent financial statements.

Disclosure
39. The following disclosures shall be made:
(a) the fact that the financial statements and corresponding values for prior periods were monetarily restated to reflect changes in the general purchasing power of the functional currency and, as a result, are presented in terms of the current measurement unit at the end of the reporting period; (b) whether the financial statements are based on the historical cost approach or the current cost approach; and (c) the identity and level of the price index used at the end of the reporting period and the change in the index during the current and prior reporting periods.

40. The disclosures required by this Pronouncement are necessary to make clear the basis on which
    the effects of inflation on the financial statements were treated. They also serve to provide other information necessary to understand this basis and the resulting values.

Effective date
41. The effective date of this Pronouncement shall be determined by the regulators who approve it.