CVM Resolution 96 Approves Consolidated Technical Pronouncement CPC 07(R1) on Government Grants and Assistance

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

Art. 1 It makes mandatory for publicly-held companies the Technical Pronouncement CPC 07(R1), which deals with government grants and assistance, issued by the Accounting Pronouncements Committee - CPC, as consolidated in Annex “A” to this Resolution.

Art. 2 Deliberation 646, of December 2, 2010, is hereby revoked, from the effective date of this Resolution.

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

Electronically signed by
MARCELO BARBOSA
President

ANNEX “A”
ACCOUNTING PRONOUNCEMENTS COMMITTEE
TECHNICAL PRONOUNCEMENT CPC 07 (R1)
Government Grants
Correlation to International Accounting Standards – IAS 20 (BV2010)

Summary Item
SCOPE 1 – 2
DEFINITIONS 3 – 6
GOVERNMENT GRANT 7 – 33
Non-monetary asset obtained as a government grant 23 Presentation of the grant in the balance sheet 24 – 28 Presentation of the grant in the income statement 29 – 31 Loss of government grant 32 – 33 GOVERNMENT ASSISTANCE 34 – 38 APPLICATION OF A PORTION OF INCOME TAX DUE IN REGIONAL INVESTMENT FUNDS 38A – 38C REDUCTION OR EXEMPTION OF TAX IN INCENTIVIZED AREA 38D – 38E DISCLOSURE 39 TRANSITIONAL PROVISIONS 40 REVOCATION OF OTHER PRONOUNCEMENT 41 – 43 TECHNICAL INTERPRETATION – GOVERNMENT ASSISTANCE WITHOUT SPECIFIC RELATION TO OPERATING ACTIVITIES EXPLANATORY NOTE TO THE PRONOUNCEMENT

Scope

This Technical Pronouncement must be applied in the accounting and disclosure of government grants and in the disclosure of other forms of government assistance.
This Pronouncement does not deal with:

SECURITIES AND EXCHANGE COMMISSION OF BRAZIL (CVM) Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – CEP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/SP – CEP: 01333-010 – Brazil - Tel.: (11) 2146-2000 (a) problems arising from the accounting of government grants in financial statements in constant purchasing power currency or in supplementary information of a similar nature; (b) the accounting of government assistance or other form of benefit when determining taxable income, or when determining the amount of tax, which does not have the characterization of a government grant. Examples of such benefits are temporary exemptions or tax reductions without the characteristic of a government grant, such as the permission of accelerated depreciation, rate reductions, etc.; (c) government participation in the entity's capital; (d) government grants dealt with by Technical Pronouncement CPC 29 – Biological Assets and Agricultural Produce.

Definitions
3. The following terms are used in this Technical Pronouncement with the definitions described below:
Government refers to federal, state, or municipal government, government agencies and similar bodies, whether local, national, or international.
Government assistance is the action of a government aimed at providing specific economic benefit to an entity or a group of entities that meet established criteria. It does not include benefits provided solely and indirectly through actions that affect general trading conditions, such as the provision of infrastructure in developing areas or the imposition of commercial restrictions on competitors. Government grant is government assistance generally in the form of a monetary contribution, but not restricted to it, granted to an entity normally in exchange for past or future compliance with certain conditions related to the entity's operating activities. Government grants are not those that cannot be reasonably quantified in money and transactions with the government that cannot be distinguished from normal commercial transactions of the entity. Grants related to assets are government grants whose main condition for the entity to qualify is that it purchases, constructs, or otherwise acquires long-term assets. Ancillary conditions may also be included that restrict the type or location of the assets, or the periods during which they must be acquired or maintained. Grants related to income are the other government grants that are not those related to assets. Tax exemption is the legal dispensation from paying tax in any legal form (exemption, immunity, etc.). Reduction, in turn, excludes only part of the tax liability, leaving a portion of tax to be paid. The reduction or exemption may eventually occur through the return of collected tax under certain conditions. Subsidized loan is one in which the creditor waives the receipt of the total or partial loan and/or interest, upon compliance with certain conditions. Generally, it is granted directly or indirectly by the Government, with or without the intermediation of a bank; it is linked to a tax; and is characterized by the use of interest rates visibly below the market and/or by the partial or total postponement of the payment of said tax without burden or with a burden visibly below what is normally practiced by the market. Subsidy in loan is the portion of the loan or interest waived and the difference between the market interest or burden and the interest or burden practiced. Monetary update is the recognition of adjustment in the value of the entity's assets and liabilities based on an inflation index. Interest is the remuneration earned or incurred by funds applied or raised by the entity. Fair value is the price that would be received for the sale of an asset or that would be paid for the transfer of a liability in a non-forced transaction between market participants on the measurement date.

Government assistance takes many forms, varying in nature or conditions. The purpose of the assistance may be to encourage the entity to follow a certain path that it would not normally have taken if the assistance were not provided. Accounting must always follow the economic substance.
The receipt of government assistance by an entity may be significant for the preparation of financial statements due to the need to identify an appropriate method for its accounting, as well as to indicate the extent to which the entity benefited from such assistance during the period covered by the statements. This allows for the comparison of financial statements between periods and between different entities.
Government grant is also designated as: subsidy, tax incentive, donation, prize, etc.

Government Grant
7. Government grant, including non-monetary grant at fair value, must not be recognized until there is reasonable assurance that:
(a) the entity will comply with all the conditions established and related to the grant; and (b) the grant will be received.

Government grant must not be recognized until there is reasonable assurance that the entity will comply with all the conditions established and related to the grant and that it will be received. The mere receipt of the grant is not conclusive proof that the conditions linked to it have been or will be met.
The manner in which the grant is received does not influence the accounting method to be adopted. Thus, for example, the accounting must be the same regardless of whether the grant is received in cash or as a reduction of liability.
Subsidy in loan is recognized as a government grant when there is assurance that the entity will fulfill the commitments assumed. This assurance of meeting assumed commitments can generally be demonstrated by management only in cases where these commitments depend exclusively on internal measures of the entity, as they are more reliable and viable, or better manageable, than requirements involving third parties or market situation. Thus, it is likely that the historical or current conditions of the entity demonstrate, for example, that payments within fixed deadlines can be made and depend only on management's intention. On the other hand, requirements that depend on external factors, such as maintaining a certain sales volume or employment level, cannot be currently determinable and, therefore, the grant should only be recognized when the commitment is fulfilled.

10A. The economic benefit obtained with a government loan at an interest rate below that practiced by the market must be treated as a government grant. The loan must be recognized and measured in accordance with CPC 48 – Financial Instruments. The economic benefit arising from the contracted interest rate below that practiced by the market must be measured by the difference between the initial carrying amount of the loan, determined in accordance with CPC 48, and the amount received. The economic benefit obtained must be accounted for in accordance with this pronouncement. The entity must consider the conditions and obligations that were or must be met when identifying the costs that the loan benefit intends to compensate.

Once the government grant is recognized, any related active or passive contingency must be treated in accordance with Technical Pronouncement CPC 25 – Provisions, Contingent Liabilities and Contingent Assets.
A government grant must be recognized as revenue over the period and offset against the expenses it intends to compensate, on a systematic basis, provided that the conditions of this Pronouncement are met. The government grant cannot be credited directly to equity.
(Eliminated)
(Eliminated)
The accounting treatment of government grant as revenue derives from the following main arguments:
(a) since the government grant is received from a source that is not the shareholders and derives from a management act for the benefit of the entity, it should not be credited directly to equity, but rather recognized as revenue in the appropriate periods; (b) government grant is rarely free. The entity effectively earns this revenue when it complies with the grant rules and fulfills certain obligations. The grant, in this way, must be recognized as revenue in the income statement in the periods over which the entity recognizes the costs related to the grant that are subject to compensation; (c) just as taxes are expenses recognized in the income statement, it is logical to record the government grant, which is essentially an extension of fiscal policy, as revenue in the income statement.

15A. While the requirements for recognizing revenue with grant in the income statement are not met, the counterpart of the government grant recorded in assets must be made in a specific liability account.

15B. There are situations where it is necessary that the value of the government grant not be distributed or in any way passed on to partners or shareholders, making it necessary to retain, after passing through the income statement, in an appropriate equity account, to prove compliance with this condition. In these situations, such value, after being recognized in the income statement, may be credited to the own reserve (tax incentive reserve), from the retained earnings or accumulated losses account.

It is fundamental, under the accrual basis, that government grant revenue be recognized on a systematic and rational basis, over the necessary period and offset against the corresponding expenses. Thus, the recognition of government grant revenue at the time of its receipt is only admitted in cases where there is no basis for allocating the grant over the benefited periods.
In most cases this correlation can be made, and the grant must be recognized in offset against the corresponding expenses. Similarly, the grant related to depreciable asset must be recognized as revenue over the useful life of the asset and in the same proportion as its depreciation.
Grant related to non-depreciable asset may require the fulfillment of certain obligations. Recognition as revenue must then follow the appropriation of expenses necessary to fulfill the obligations. For example: a grant that transfers the definitive ownership of a land may have as a condition the construction of an industrial plant and must be appropriated as revenue in the same proportion as the depreciation of that plant. There may be situations where this correlation requires that portions of the grant be recognized according to different criteria.
The grant is sometimes received as a package of financial or fiscal aid and subject to the fulfillment of a certain number of conditions. In such cases, care is needed in identifying the conditions that give rise to the costs and expenses that determine the periods during which the grant must be recognized. It may be appropriate to allocate part of the grant on a certain basis and part on another.
A government grant in the form of compensation for expenses or losses already incurred or for the purpose of providing immediate financial support to the entity without any future related expense must be recognized as revenue in the period in which it becomes receivable.
Under certain circumstances, the government grant may be granted more with the purpose of granting immediate financial support to an entity than to serve as an incentive for certain expenses to be incurred. Such grant may be granted exclusively to a particular entity and not be available for an entire class of beneficiaries. These circumstances may lead to the recognition of grant revenue in the income statement of the period in which the entity qualifies for its receipt, with adequate disclosure to ensure that its effects are clearly understood.
The government grant may become receivable by an entity for the purpose of compensating for losses or deficits recorded in previous periods. Such grant must be recognized in the period in which it becomes receivable, with adequate disclosure to ensure that its effects are clearly understood.

Non-monetary asset obtained as a government grant
23. The government grant may be represented by a non-monetary asset, such as land and others, for use by the entity. Under these circumstances, both this asset and the government grant must be recognized at their fair value. Only in the impossibility of verifying this fair value can the asset and the government grant be recorded at nominal value.

Presentation of the grant in the balance sheet
24. The government grant related to assets, including those non-monetary assets measured at fair value, must be presented in the balance sheet in a liability account, as deferred revenue, or by deducting the carrying amount of the related asset.

Two presentation methods are considered acceptable, in the financial statements, of the grant (or appropriate portion of grant) not linked to future obligations, related to assets.
One of the methods recognizes the government grant as deferred revenue in liabilities, being recognized as revenue on a systematic and rational basis during the useful life of the asset.
The other method deducts the government grant from the carrying amount of the related asset with the grant to arrive at the net book value of the asset, which may be zero. The grant must be recognized as revenue during the life of the depreciable asset through credit to depreciation recorded as an expense in the result.
The purchase of assets and the receipt of the grant related to them can cause significant movements in the cash flows of an entity. For this reason, and in order to show the gross investment in assets, such movements must often be disclosed as separate items in the statement of cash flows, regardless of whether the grant is or is not deducted from the respective asset in the presentation of the balance sheet.

Presentation of the grant in the income statement
29. The grant is sometimes presented as a credit in the income statement, either separately under a general title such as "other revenues", or alternatively, as a deduction of the related expense. The grant, whether by increase in yield provided to the enterprise, or through reduction of taxes or other expenses, must be recorded in the income statement in the group of accounts according to its nature.

29A. (Eliminated)

As justification for the first option, there is the argument that it is not appropriate to offset revenue and expense elements and that the separation of the grant from the related expenses facilitates comparison with other expenses not affected by the benefit of a grant. By the second method, it is argued that the expenses might not have been incurred by the entity if there were no grant, and therefore it would be misleading to present the expense without compensation with the grant.
Both methods are accepted for the presentation of grants related to revenues. Disclosure of the government grant is necessary for the proper understanding of the financial statements. Therefore, disclosure of the effect of the grant on any item of revenue or expense is necessary when this revenue or expense is disclosed separately.

Loss of government grant
32. A government grant that has to be returned must be accounted for as a revision of accounting estimate (see Technical Pronouncement CPC 23 – Accounting Policies, Change in Estimate and Correction of Error). The reimbursement must be applied first against any unamortized deferred credit related to the grant. To the extent that the reimbursement exceeds such deferred credit, or when there is no deferred credit, the reimbursement must be recognized immediately as an expense. The reimbursement of grant related to asset must be recorded by increasing the book value of the asset or reducing the deferred revenue balance by the reimbursable amount. The additional accumulated depreciation that should have been recognized until the date as

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

expense in the absence of the subsidy must be immediately recognized as an expense.

Circumstances giving rise to the return of a grant related to an asset may require recognition of an impairment loss on the asset, in accordance with Technical Pronouncement CPC 01 – Impairment of Assets, with respect to the new carrying amount of the asset.

Government Assistance

Certain forms of government assistance that cannot have their value reasonably attributed must be excluded from the definition of government grants given in this Pronouncement, as well as transactions with the Government that cannot be distinguished from the entity's normal commercial operations.
Examples of assistance that cannot reasonably have a value attributed are: free technical and marketing assistance and the granting of guarantees. An example of assistance that cannot be distinguished from the entity's normal commercial operations is the Government's purchasing policy that is responsible for part of the entity's sales. The existence of the benefit may be indisputable, but any attempt to segregate commercial activities from government assistance may be arbitrary.
The materiality of the benefit in the examples mentioned above may be such that disclosure of the nature, extent, and duration of the assistance is necessary in order for the financial statements not to be misleading.
(Eliminated)
In this Pronouncement, government assistance does not include the provision of infrastructure through the improvement of general transport and communications networks and the provision of developed resources, such as, by way of example, irrigation or water networks that are available on a continuous and indefinite basis for the benefit of the entire local community.

Application of a portion of income tax due to regional investment funds

38A. Certain entities subject to the payment of income tax may apply part of the tax due to regional investment funds, created by the Federal Government with the objective of stimulating the development of certain regions.

38B. This allocation of a portion of the tax to the fund represents a government grant to the entity, because, given the option exercised, the National Treasury waives part of the tax revenue and the entity becomes an investor in the fund benefiting from its option.

38C. These grants must be recorded at their fair value at the time of the triggering event, provided that the conditions for their recognition are met. In the case in question, the triggering event of the grant occurs at the payment of the portion of income tax. At that time, management must record

the grant at its fair value, by the best estimate, remembering that there may be a discount on this fair value compared to the nominal value, even in cases where the beneficiary of the grant is investing other resources in these entities in incentivized regions.

Reduction or exemption of tax in an incentivized area

38D. Certain enterprises enjoy tax incentives for income tax in the form of exemption or reduction of said tax, according to timeframes and conditions established in specific legislation. These incentives meet the concept of government grant.

38E. The accounting recognition of this tax reduction or exemption as a grant for investment is carried out by recording the total tax in the result as if it were due, in exchange for grant revenue equivalent, to be demonstrated net of each other.

Disclosure

The entity must disclose the following information:
(a) the accounting policy adopted for government grants, including the presentation methods adopted in the financial statements; (b) the nature and extent of government grants or government assistance recognized in the financial statements and an indication of other forms of government assistance from which the entity has directly benefited; (c) conditions to be regularly satisfied and other contingencies related to government assistance that has been recognized.

Transitional Provisions

(Eliminated)

Revocation of another pronouncement

This Technical Pronouncement revokes and replaces CPC 07 – Grants and Government Assistance, approved on 3.10.2008.

42 to 46. (Eliminated)

TECHNICAL INTERPRETATION
GOVERNMENT ASSISTANCE WITHOUT SPECIFIC RELATIONSHIP TO OPERATIONAL ACTIVITIES Correlation to International Accounting Standards – SIC 10

This Interpretation is an integral part of the Pronouncement.

Question

In some countries, government assistance to entities may be concentrated in the stimulation or long-term support of business entities in certain regions or industrial sectors. The conditions for receiving this assistance may not be specifically related to the operational activities of the entity. Examples of this assistance are transfers of resources by governments to entities that:
(a) operate in a specific sector;
(b) continue to operate in recently privatized sectors; or (c) begin or continue to conduct their business in underdeveloped areas.
The question is whether this government assistance is a government grant within the scope of this Pronouncement and, therefore, whether it should be accounted for in accordance with it.

Consensus

Government assistance to entities meets the definition of government grants in this Pronouncement, even if there are no conditions specifically related to the operational activities of the entity beyond the requirement to operate in certain regions or certain industrial sectors. These grants should therefore not be credited directly to equity.

Bases for conclusions

Item 3 of Technical Pronouncement CPC 07 defines government grant as assistance by the government in the form of transfer of resources to an entity in exchange for compliance, past or future, with certain conditions related to the operational activities of the entity. The general requirement to operate in certain regions or industrial sectors to be entitled to government assistance constitutes this condition, according to the cited item 3. Therefore, this assistance falls under the definition of government grants and the requirements of the Pronouncement apply, especially items 12 and 20 which deal with the time of recognition as revenue.

EXPLANATORY NOTE TO THE PRONOUNCEMENT

NE1. This explanatory note accompanies, but is not an integral part of the Pronouncement. This note is intended to highlight situations where the Pronouncement has certain differences with respect to the International Accounting Standards issued by the IASB and, after that, to comment on them.

NE2. In item 3 of the Pronouncement, definitions of terms that are cited (tax exemption and reduction, monetary update and interest) were included, but their definitions do not appear in the IASB text. As for subsidized loans, its definition was complemented. The additions were made in order to facilitate understanding, without, however, altering the understanding of the Pronouncement in relation to IAS 20.

NE3. Items 13 and 14 were eliminated. The option to record the government grant as capital is prohibited in Brazil, but not necessarily in other jurisdictions.

NE4. Items 15A and 15B were included and refer to government grants regarding their recognition as revenue in the statement of results and their non-distribution to partners due to Brazilian legislation; thus, this requirement exists in Brazil, but not necessarily in other jurisdictions.

NE5. Item 29A was eliminated because item 81 of CPC 26 prohibits the use of the alternative presentation of a single statement of comprehensive income, as provided for in the IASB version. The entity must present two statements: statement of the period's results and statement of the period's comprehensive results.

NE6. Items 38A to 38E do not exist in the IASB version; thus, this requirement exists in Brazil, but not necessarily in other jurisdictions.

NE7. The IASB, through its document called Statement of Best Practice: Working Relationships between the IASB and other Accounting Standard-Setters, admits that jurisdictions may limit the options given by it, as well as that jurisdictions may make additional information requirements beyond those required by it and declares that this does not prevent financial statements thus prepared from being declared as being in conformity with the International Accounting Standards issued by it.

NE8. Thus, the existence of the differences commented on in items NE2 to NE6 does not mean that government grants and assistance as defined in this Pronouncement are not in conformity with IASB standards.

CVM Resolution 96 Approves Consolidated Technical Pronouncement CPC 07(R1) on Government Grants and Assistance

Lineage: In force