CVM Resolution 99: Approval of Consolidated Technical Pronouncement CPC 16(R1) on Inventories

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

APPROVED the following Resolution:

Article 1. It is made mandatory for publicly-held companies to adopt Technical Pronouncement CPC 16(R1), which deals with inventories, issued by the Accounting Pronouncements Committee – CPC, as consolidated in Annex “A” to this Resolution.

Article 2. Deliberation No. 575, of June 5, 2009, is revoked, from the effective date of this Resolution.

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

Electronically signed by
Marcelo Barbosa
President

Summary Item
OBJECTIVE 1
SCOPE 2 – 5
DEFINITIONS 6 – 8
MEASUREMENT OF INVENTORY 9 – 33
Costs of inventory 10 – 22
Acquisition costs 11
Transformation costs 12 – 14
Other costs 15 – 18
Service provider inventory costs 19
Cost of harvested agricultural product from biological asset 20 Other methods for cost measurement 21 – 22 Inventory valuation criteria 23 – 27 Net realizable value 28 – 33 RECOGNITION IN PROFIT OR LOSS 34 – 35 DISCLOSURE 36 – 39

Objective

The objective of this Pronouncement is to establish the accounting treatment for inventories. The fundamental issue in accounting for inventories concerns the cost value to be recognized as an asset and maintained in the records until the respective revenues are recognized. This Pronouncement provides guidance on determining the cost value of inventories and on their subsequent recognition as an expense in profit or loss, including any write-down to net realizable value. It also provides guidance on the method and criteria used to assign costs to inventories.

COMISSÃO DE VALORES MOBILIÁRIOS
Rua Sete de Setembro, 111/2-5º e 23-34º Andares, Centro, Rio de Janeiro/RJ – CEP: 20050-901 – Brasil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º e 4º Andares, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brasil - Tel.: (11) 2146-2000 Scope
2. This pronouncement applies to all inventories, with the following exceptions:
(a) (eliminated);
(b) financial instruments (see CPC 48 – Financial Instruments and CPC 39 – Financial Instruments: Presentation); and (c) biological assets related to agricultural activity and the agricultural product at the point of harvest (see CPC 29 – Biological Asset and Agricultural Product).

This pronouncement does not also apply to the measurement of inventories held by:
(a) producers of agricultural and forestry products, of agricultural products after harvest, of minerals and mineral products, to the extent that they are measured at net realizable value according to practices already established in these sectors. When such inventories are measured at net realizable value, changes in that value must be recognized in the profit or loss of the period in which the change was verified; (b) commodity traders who measure their inventories at fair value less costs to sell. In this case, changes in that value must be recognized in the profit or loss of the period in which the change was verified.
The inventories referred to in item 3(a) must be measured at net realizable value at certain stages of production. This occurs, for example, when agricultural crops have been harvested or minerals have been extracted and the sale is secured by the terms of a forward contract or by government guarantee or when there is an active market and there is a low risk of sales failure. These inventories must be excluded only from the measurement requirements of this Pronouncement.
Commodity operators (broker-traders) are those who buy or sell commodities for others or on their own account. The inventories referred to in item 3(b) are essentially acquired for the purpose of sale in the near future and to generate profit based on price variations or operator margins. When these inventories are measured at fair value less costs to sell, they are excluded only from the measurement requirements of this Pronouncement.

Definitions
6. The following terms are used in this Pronouncement, with the specified meanings:
Inventories are assets:
(a) held for sale in the ordinary course of business; (b) in the process of production for sale; or (c) in the form of materials or supplies to be consumed or transformed in the process of production or in the provision of services.

COMISSÃO DE VALORES MOBILIÁRIOS
Rua Sete de Setembro, 111/2-5º e 23-34º Andares, Centro, Rio de Janeiro/RJ – CEP: 20050-901 – Brasil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º e 4º Andares, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brasil - Tel.: (11) 2146-2000 Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Net realizable value refers to the net amount that the entity expects to realize from the sale of the inventory in the ordinary course of business. Fair value reflects the price at which an orderly transaction for the sale of the same inventory in the main market (or most advantageous market) for that inventory would occur between market participants at the measurement date. The first is a value specific to the entity, whereas the second is not. Therefore, the net realizable value of inventories may not be equivalent to fair value less costs necessary for its sale.
Inventories include goods acquired and intended for sale, including, for example, goods purchased by a retailer for resale or land and other real estate for resale. Inventories also include finished products and products in the process of production by the entity and include raw materials and materials, awaiting use in the production process, such as: components, packaging, and consumable materials. Costs incurred to fulfill the contract with the customer, which do not result in inventories (or assets within the scope of another pronouncement), must be accounted for according to CPC 47 – Revenue from Contracts with Customers.

Measurement of inventory
9. The inventories subject to this Pronouncement must be measured at cost or net realizable value, whichever is lower.

Costs of inventory
10. The cost value of inventory must include all acquisition and transformation costs, as well as other costs incurred to bring the inventories to their current condition and location.

Acquisition costs
11. The acquisition cost of inventories comprises the purchase price, import taxes and other taxes (except those recoverable from the tax authority), as well as transport, insurance, handling, and other costs directly attributable to the acquisition of finished products, materials, and services. Trade discounts, rebates, and other similar items must be deducted in determining the acquisition cost.

Transformation costs
12. The transformation costs of inventories include costs directly related to the units produced or to the production lines, such as direct labor. It also includes the systematic allocation of fixed and variable indirect production costs that are incurred to transform materials into finished products. Fixed production indirect costs are those that remain relatively constant regardless of production volume, such as depreciation and maintenance of factory buildings and facilities, machinery, equipment, and right-of-use assets used in the production process, and the cost of factory management and administration. Variable production indirect costs are those that vary directly, or almost directly, with production volume, such as indirect materials and certain types of indirect labor.

The allocation of fixed indirect manufacturing costs to units produced must be based on normal production capacity. Normal capacity is the average production expected to be achieved over several periods under normal circumstances; thus, in determining this normal capacity, the portion of total capacity not used due to preventive maintenance, collective holidays, and other similar events considered normal for the entity is taken into account. The actual level of production may be used if it approximates normal capacity. As a consequence, the value of fixed cost allocated to each unit produced cannot be increased due to a low production volume or idleness. Fixed costs not allocated to products must be recognized directly as an expense in the period in which they are incurred. In periods of abnormally high production volume, the amount of fixed cost allocated to each unit produced must be decreased, so that inventories are not measured above cost. Variable production indirect costs must be allocated to each unit produced based on the actual use of variable production inputs, i.e., the actual capacity used.
A production process may result in more than one manufactured product simultaneously. This is, for example, the case when joint products are manufactured or when there is a main product and one or more by-products. When the transformation costs of each product are not separately identifiable, they must be assigned to products on a rational and consistent basis. This allocation may be based, for example, on the relative value of the sales revenue of each product, either at the stage of the production process where the products become separately identifiable, or at the end of production, as appropriate. Most by-products, by reason of their nature, are generally immaterial. When this is the case, they are often measured at net realizable value, and this value is deducted from the cost of the main product. As a result, the book value of the main product should not be materially different from its cost.

Other costs
15. Other costs that are neither acquisition nor transformation costs must be included in the costs of inventories only to the extent that they are incurred to place the inventories in their current location and condition. For example, it may be appropriate to include in the cost of inventories general expenses that are not production or the costs of designing products for specific customers.

Examples of items not included in the cost of inventories and recognized as an expense of the period in which they are incurred:
(a) abnormal waste of materials, labor, or other production inputs;

COMISSÃO DE VALORES MOBILIÁRIOS
Rua Sete de Setembro, 111/2-5º e 23-34º Andares, Centro, Rio de Janeiro/RJ – CEP: 20050-901 – Brasil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º e 4º Andares, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brasil - Tel.: (11) 2146-2000 (b) storage costs, unless they are necessary for the production process between one and another phase of production; (c) administrative expenses that do not contribute to bringing the inventory to its current location and condition; and (d) selling expenses, including the sale and delivery of goods and services to customers.

Technical Pronouncement CPC 20 - Borrowing Costs identifies the specific circumstances in which borrowing costs on obtained loans are included in the cost of inventory.
The entity usually purchases inventories with payment terms. The transaction may effectively contain a financing element, such as a difference between the acquisition price under normal payment conditions and the amount paid; this difference must be recognized as an interest expense during the financing period.

Service provider inventory costs
19. (Eliminated)

Cost of harvested agricultural product from biological asset
20. According to Technical Pronouncement CPC 29 – Biological Asset and Agricultural Product, inventories comprising the agricultural product that the entity has harvested, from its biological assets, must be measured at initial recognition at fair value less estimated costs at the point of sale at the time of harvest. This is the cost of the inventories on that date for the application of this Pronouncement.

Other methods for cost measurement
21. Other methods for measuring inventory cost, such as standard cost or the retail method, may be used for convenience if the results approximate cost. Standard cost takes into account normal levels of utilization of materials and consumables, labor, and efficiency in the use of production capacity. It must be regularly reviewed in light of current conditions. Relevant variations of standard cost relative to cost must be allocated to the appropriate accounts and periods so that inventories are brought back to their cost.

The retail method is often used in the retail sector to measure inventories of large quantities of items that change rapidly, items that have similar margins, and for which it is not practical to use other costing methods. The cost of inventory must be determined by reducing its selling price by the appropriate percentage of the gross margin. The percentage used must take into account inventory that has had its selling price reduced below the original selling price. An average percentage is often used for each retail department.

Inventory valuation criteria

COMISSÃO DE VALORES MOBILIÁRIOS
Rua Sete de Setembro, 111/2-5º e 23-34º Andares, Centro, Rio de Janeiro/RJ – CEP: 20050-901 – Brasil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º e 4º Andares, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brasil - Tel.: (11) 2146-2000
23. The cost of inventories of items that are not normally interchangeable and of goods or services produced and segregated for specific projects must be assigned by using specific identification of their individual costs.

Specific identification of cost means that specific costs are assigned to identified items of inventory. This is the appropriate treatment for items that are segregated for a specific project, regardless of whether they were purchased or produced. However, when there are large quantities of inventory items that are generally interchangeable, specific identification of costs is not appropriate. In such circumstances, a valuation criterion for the items remaining in inventories must be used.
The cost of inventories, which are not those treated in items 23 and 24, must be assigned by using the First-In, First-Out (FIFO) criterion or by the weighted average cost criterion. The entity must use the same costing criterion for all inventories that have similar nature and use for the entity. For inventories that have other nature or use, different valuation criteria may be justified.
For example, inventories used in one business segment may have a use for the entity different from the same type of inventories used in another business segment. However, a difference in the geographical location of inventories (or respective tax rules) alone is not sufficient to justify the use of different inventory valuation criteria.
The FIFO (First-In, First-Out) criterion assumes that inventory items that were purchased or produced first are sold first and, consequently, the items that remain in inventory at the end of the period are the most recently purchased or produced. By the weighted average cost criterion, the cost of each item is determined from the weighted average of the cost of similar items at the beginning of a period and the cost of the same items purchased or produced during the period. The average can be determined on a periodic basis or as each batch is received, depending on the entity's circumstances.

Net realizable value
28. The cost of inventories may not be recoverable if these inventories are damaged, if they become totally or partially obsolete, or if their selling prices have decreased. The cost of inventories may also not be recoverable if the estimated completion costs or the estimated costs to be incurred to realize the sale have increased. The practice of writing down the cost value of inventories to net realizable value is consistent with the viewpoint that assets should not be recorded at amounts greater than those expected to be realized from their sale or use.

Inventories should generally be written down to their net realizable value, item by item. In some circumstances, however, it may be appropriate to group similar or related units. This may be the case for inventory items related to the same product line that have similar final purposes or uses, that are produced and marketed in the same geographic area, and that cannot be evaluated separately from other items of that product line. It is not appropriate to write down inventory based on an inventory classification, such as finished goods, or on all inventory of a certain sector or operating segment.
Estimates of net realizable value must be based on the most reliable evidence available at the time the estimates of the value of inventories expected to be realized are made. These estimates must take into account variations in prices and costs directly related to events that occur after the end of the period, insofar as such events confirm the conditions existing at the end of the period.
Estimates of net realizable value must also take into account the purpose for which the inventory is held. For example, the net realizable value of the quantity of inventory held to fulfill sales or service contracts must be based on the contract price. If sales contracts concern quantities lower than the quantities of inventory held, the net realizable value of the excess must be based on general selling prices. Provisions may arise resulting from firm sales contracts superior to existing inventory quantities or from firm purchase contracts in progress if additional acquisitions to be made to fulfill these sales contracts are expected based on estimated values that lead to a loss situation in fulfilling these sales contracts. Such provisions must be treated according to Technical Pronouncement CPC 25 – Provisions and Contingent Liabilities and Contingent Assets.
Materials and other consumables held for use in the production of inventories or in the provision of services will not be written down below cost if it is foreseeable that the finished products in which they are to be incorporated or the services in which they will be used are sold at cost or above cost. However, when the decrease in the price of finished products or the price of services rendered indicates that the cost of manufacturing these products or services will exceed their net realizable value, the materials and other consumables must be written down to net realizable value. In such circumstances, the replacement cost of materials may be the best available measure of their net realizable value.
A new assessment of net realizable value must be made in each subsequent period. When the circumstances that previously caused the write-down of inventories below cost cease to exist or when there is clear evidence of an increase in net realizable value due to changes in economic circumstances, the amount of the write-down must be reversed (the reversal is limited to the amount of the original write-down) so that the new recorded amount of inventory is the lower value between cost and the revised net realizable value. This occurs, for example, with an inventory item recorded at net realizable value when its selling price was reduced and, while still held in a subsequent period, its selling price increased.

Recognition as an expense in profit or loss

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When inventories are sold, the book cost of these items must be recognized as an expense in the period in which the respective revenue is recognized. The amount of any write-down of inventories to net realizable value and all inventory losses must be recognized as an expense in the period in which the write-down or loss occurs. The amount of any reversal of inventory write-downs, resulting from an increase in net realizable value, must be recorded as a reduction of the item in which the expense or loss was recognized, in the period in which the reversal occurs.
Some inventory items may be transferred to other asset accounts, such as, for example, inventories used as components of fixed assets for own construction. Inventories allocated to the cost of another asset must be recognized as an expense during the useful life and in proportion to the depreciation of that asset.

Disclosure

The financial statements must disclose:
(a) the accounting policies adopted in the measurement of inventories, including valuation methods and criteria used; (b) the total book value of inventories and the value recorded in other appropriate accounts for the entity; (c) the value of inventories carried at fair value less costs to sell; (d) the value of inventories recognized as expense during the period; (e) the value of any inventory write-down recognized in the result of the period in accordance with item 34; (f) the value of any reversal of any inventory write-down recognized in the result of the period in accordance with item 34; (g) the circumstances or events that led to the reversal of inventory write-downs in accordance with item 34; and (h) the book amount of inventories pledged as security for liabilities.
Information relating to book values recorded in different inventory classifications and the proportion of changes in these assets is useful to users of the financial statements. Common inventory classifications are: merchandise, production consumables, materials, work in progress, and finished goods.
The value of inventory written off, recognized as expense during the period, which is often referred to as the cost of products, merchandise, or services sold, consists of the costs that were included in the measurement of the inventory that is now sold. Indirect production costs not eventually allocated to products and abnormal production costs must be recognized as an expense in the period in which they occur, without passing through inventories,

SECURITY 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 within this same group, but in an identified manner. The entity's circumstances may also allow for the inclusion of other values, such as distribution costs.

Some entities adopt a format for the income statement that results in the disclosure of values that are not the costs of inventories recognized as expense during the period. According to this format, the entity must present the cost of sales statement using a classification based on the nature of these costs, element by element. In this case, the entity must disclose costs recognized as expenses item by item, by nature: raw materials and other materials, showing the value of purchases and the net change in initial and final inventories of the period; labor; other transformation costs, etc.

40 to 42. (Eliminated)

Lineage: No known changes

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