CVM Resolution No. 109 of May 20, 2022

COMMISSION OF SECURITIES AND EXCHANGE
Sete de Setembro Street, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – ZIP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Cincinato Braga Street, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/ SP – ZIP: 01333-010 – Brazil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Corporate Financial Center Building, S.404/4th Floor, Brasília/DF – ZIP: 70712-900 – Brazil - Tel.: (61) 3327-2030/2031 www.gov.br/cvm

CVM RESOLUTION NO. 109, OF MAY 20, 2022
Approves the Consolidation of Technical Pronouncement CPC 32 of the Accounting Pronouncements Committee – CPC, which deals with taxes on profit.

The PRESIDENT OF THE COMMISSION OF SECURITIES AND EXCHANGE - CVM makes public that the Collegiate 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 open-capital companies the Technical Pronouncement CPC 32, which deals with taxes on profit, issued by the Accounting Pronouncements Committee - CPC, as consolidated in Annex “A” to this Resolution.

Art. 2. Deliberation 599, of September 15, 2009, is 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

CVM RESOLUTION NO. 109, OF MAY 20, 2022
ANNEX “A”
ACCOUNTING PRONOUNCEMENTS COMMITTEE
TECHNICAL PRONOUNCEMENT CPC 32
TAXES ON PROFIT
Correlation to International Accounting Standards – IAS 12

Summary Item
OBJECTIVE
SCOPE 1 – 4
DEFINITIONS 5 – 11
Tax base 7 – 11
RECOGNITION OF CURRENT TAX LIABILITIES AND ASSETS 12 – 14 RECOGNITION OF DEFERRED TAX LIABILITIES AND ASSETS 15 – 45 Taxable temporary difference 15 – 23 Business combinations 19 Asset recognized at fair value 20 Goodwill 21 – 21B Initial recognition of asset or liability 22 – 23 Deductible temporary difference 24 – 33 Goodwill 32A Initial recognition of asset or liability 33 Unused tax losses and unused tax credits 34 – 36 Remeasurement of unrecognized deferred tax asset 37 Investment in subsidiaries, associates and interests in joint ventures 38 – 45 MEASUREMENT 46 – 56 RECOGNITION OF CURRENT AND DEFERRED TAX 57 – 68C Items recognized in profit or loss 58 – 60 Items recognized outside profit or loss 61 – 65A Deferred tax arising from business combinations 66 – 68 Current and deferred tax arising from share-based payment transactions 68A – 68C

CVM RESOLUTION NO. 109, OF MAY 20, 2022
PRESENTATION 69 – 78
Tax assets and liabilities 69 – 76
Offsetting 71 – 76
Tax expense 77 - 78
Tax (income) expense related to results from ordinary activities (operating) 77 – 77A Exchange differences on deferred tax assets or liabilities held abroad 78 DISCLOSURE 79 – 94
Appendix A – Examples of temporary differences
Appendix B – Illustrative examples
Appendix C – Recovery of non-depreciable revalued assets
Appendix D – Changes in the tax status of an entity or its owners

Objective
The objective of this Pronouncement is to establish the accounting treatment for taxes on profit.
The main issue in the accounting for taxes on profit is how to account for the current and future tax effects of:
(a) future recovery (settlement) of the carrying amount of assets (liabilities) that are recognized in the entity's balance sheet; and (b) transactions and other events of the current period that are recognized in the entity's financial statements.
It is inherent in the recognition of an asset or liability that the entity expects to recover or settle the carrying amount of that asset or liability. If it is probable that the recovery or settlement of that carrying amount will make future tax payments larger (smaller) than they would be if such recovery or settlement had no tax effects, this Pronouncement requires the entity to recognize a deferred tax liability (deferred tax asset), with certain limited exceptions. This Pronouncement requires the entity to account for the tax effects of transactions and other events in the same way that it accounts for the transactions and other events themselves. Thus, for transactions and other events recognized in profit or loss, any related tax effects are also recognized in profit or loss. For transactions and other events recognized outside profit or loss (treated as other comprehensive income within equity – see Technical Pronouncement CPC 26 – Presentation of Financial Statements on the statement of comprehensive income), any related tax effects must also be recognized outside profit or loss (in other comprehensive income or directly in equity, respectively). Similarly, the recognition of deferred tax assets and liabilities in business combinations affects the amount of goodwill arising from that business combination or the amount of the gain on a bargain purchase recognized.

This Pronouncement also deals with the recognition of deferred tax assets arising from unused tax losses or unused tax credits, the presentation of taxes on profit in the financial statements and the disclosure of information related to taxes on profit.

Scope

This Pronouncement applies to the accounting for taxes on profit.
For the purposes of this Pronouncement, the expression tax on profit includes all national and foreign taxes and contributions levied on taxable profits. The term tax on profit also includes taxes, such as withholding taxes, that are payable by a subsidiary, associate or joint venture on distributions (credits or payments) to the reporting entity.
(Eliminated).
This Pronouncement does not deal with accounting methods for government grants (see Technical Pronouncement CPC 07 – Government Grants and Assistance) or investment tax credits. However, this Pronouncement deals with the accounting for temporary differences that may arise from tax credits from such grants or investments.

Definitions
5. The following terms are used in this Pronouncement with the meanings specified:
Accounting profit is profit or loss for a period before deducting taxes on profit.
Taxable profit (tax loss) is the profit (loss) for a period, determined in accordance with the rules established by the tax authorities, on which taxes on profit are payable (recoverable).
Tax expense (tax income) is the total amount included in the determination of profit or loss for the period related to current or deferred tax on profit.
Current tax is the amount of tax payable (recoverable) on the taxable profit (tax loss) of the period.
Deferred tax liability is the amount of tax on profit payable in future periods relating to taxable temporary differences.

Deferred tax asset is the amount of tax on profit recoverable in future periods relating to:
(a) deductible temporary differences;
(b) the carryforward of unused tax losses; and (c) the carryforward of unused tax credits.
Temporary difference is the difference between the carrying amount of an asset or liability in the balance sheet and its tax base. Temporary differences can be either:
(a) taxable temporary difference, which is the temporary difference that will result in taxable amounts in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled; or (b) deductible temporary difference, which is the temporary difference that will result in amounts that are deductible in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled. Tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes.
6. Tax expense (tax income) comprises current tax expense (current tax income) and deferred tax expense (deferred tax income).

Tax base
7. The tax base of an asset is the amount that will be deductible for tax purposes against any taxable economic benefits that will flow to the entity when it recovers the carrying amount of that asset. If those economic benefits are not taxable, the tax base of the asset is equal to its carrying amount.

Examples

A machine costs $100. For tax purposes, depreciation of $30 has already been deducted in the current and prior periods, and the remaining cost will be deductible in future periods, either as depreciation or through deduction on disposal. The profit generated by the use of the machine is taxable, any gain on the disposal of the machine is taxable and any loss on sale is deductible for tax purposes. The tax base of the machine is $70.
Receivable interest has a carrying amount of $100. The related interest income is taxed on a cash basis. The tax base of receivable interest is zero.
Accounts receivable have a carrying amount of $100. The related revenue has already been included in taxable profit (tax loss). The tax base of accounts receivable is $100.
Dividends receivable from a subsidiary have a carrying amount of $100. The dividends are not taxable. Essentially, the entire carrying amount of the asset is deductible against the economic benefits. Consequently, the tax base of dividends receivable is $100 1.

1 According to this analysis, there is no taxable temporary difference. An alternative analysis is that the recognized receivable dividends have a tax base of zero, and the tax rate of zero is applied to the resulting taxable temporary difference of $100. Under both analyses, there is no deferred tax liability.

5. A loan receivable has a carrying amount of $100. The receipt of the loan has no tax effect. The tax base of the loan is $100.
8. The tax base of a liability is its carrying amount, less any amount that will be deductible for tax purposes relating to that liability in future periods. In the case of revenue that is received in advance, the tax base of the resulting liability is its carrying amount, less any amount of revenue that will not be taxable in future periods.

Examples

Current liabilities include accrued expenses with a carrying amount of $100. The corresponding expense is deducted for tax purposes on a cash basis. The tax base of the accrued expenses is zero.
Current liabilities include interest revenue received in advance, with a carrying amount of $100. The corresponding interest revenue was taxed on a cash basis. The tax base of interest received in advance is zero.
Current liabilities include accrued expenses with a carrying amount of $100. The corresponding expense has already been deducted for tax purposes. The tax base of the accrued expenses is $100.
Current liabilities include accrued fines and penalties with a carrying amount of $100. Fines and penalties are not deductible for tax purposes. The tax base of the accrued fines and penalties is $100 2.

2 According to this analysis, there is no taxable temporary difference. An alternative analysis is that the payable fines and penalties have a tax base of zero, and the tax rate of zero is applied to the resulting taxable temporary difference of $100. Under both analyses, there is no deferred tax asset.

5. A loan payable has a carrying amount of $100. The payment of the loan has no tax effect. The tax base of the loan is $100.
9. Some items have a tax base, but are not recognized as assets or liabilities in the balance sheet. For example, research costs must be recognized as an expense to determine accounting profit in the period in which they are incurred, but these costs may not be deductible to determine taxable profit (tax loss) until a later period. The difference between the tax base of research costs, which is the amount that the tax authorities allow as a deduction in future periods, and the carrying amount of zero is a deductible temporary difference that results in a deferred tax asset.
10. When the tax base of an asset or liability is not immediately identifiable, it is necessary to consider the fundamental principle on which this Technical Pronouncement is based: that the entity must, with certain exceptions, recognize a deferred tax liability (asset) whenever the recovery or settlement of the carrying amount of an asset or liability causes future tax payments to be larger (smaller) than they would be if such recovery or settlement had no tax effect. The following Example C after item 51A illustrates the circumstances in which it may be necessary to consider this fundamental principle, for example, when the tax base of an asset or liability depends on the expected manner of recovery or settlement.
11. In consolidated financial statements, temporary differences must be determined by comparing the carrying amounts of assets and liabilities in the consolidated financial statements and the appropriate tax base. The tax base is determined based on the consolidated tax return in the jurisdictions where such statement is prepared. In other jurisdictions, the tax base is determined based on the tax returns of each company in the group under common control.

Recognition of current tax liabilities and assets
12. Current taxes relating to current and prior periods shall, to the extent unpaid, be recognized as liabilities. If the amount already paid relating to the current and prior periods exceeds the amount payable for those periods, the excess shall be recognized as an asset.
13. The benefit from a tax loss that can be carried forward to recover current tax of a prior period shall be recognized as an asset.
14. When a tax loss is used to recover current tax of a prior period, the entity recognizes the benefit as an asset in the period in which the tax loss occurs because it is probable that the benefit will flow to the entity and the benefit can be measured reliably.

Recognition of deferred tax liabilities and assets Taxable temporary difference
15. A deferred tax liability shall be recognized for all taxable temporary differences, except the deferred tax liability that arises from:
(a) initial recognition of goodwill; or
(b) initial recognition of an asset or liability in a transaction that:
(i) is not a business combination; and
(ii) at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss).
However, for taxable temporary differences related to investments in subsidiaries, branches and associates, and interests in joint ventures, a deferred tax liability shall be recognized in accordance with item 39.
16. It is inherent in the recognition of an asset that its carrying amount will be recovered in the form of economic benefits that flow to the entity in future periods. When the carrying amount of an asset exceeds its tax base, the value of the taxable economic benefits exceeds the amount that will be allowed as a deduction for tax purposes.
This difference is a taxable temporary difference, and the obligation to pay tax on profit in future periods is a deferred tax liability. As the entity recovers the carrying amount of the asset, the taxable temporary difference will reverse and the entity will have taxable profit.

This makes it probable that economic benefits will flow from the entity in the form of tax payments. Therefore, this Pronouncement requires the recognition of all deferred tax liabilities, except in certain circumstances described in items 15 and 39.

Example
An asset that cost $150 has a carrying amount of $100, having been depreciated by $50 for accounting purposes. But the accumulated depreciation for tax purposes is $90 and the tax rate on profit is 25%.
The tax base of the asset is $60 (cost of $150 less accumulated tax depreciation of $90).
To recover the carrying amount of $100, the entity must obtain taxable income of $100, but can only deduct tax depreciation of $60. Consequently, the entity will pay tax on profit in the amount of $10 ($40 at 25%) when it recovers the carrying amount of the asset. The difference between the carrying amount of $100 and the tax base of $60 is the taxable temporary difference of $40. Therefore, the entity must recognize a deferred tax liability of $10 ($40 at 25%) representing the tax on profit that it will pay when it recovers the carrying amount of the asset.
17. Some temporary differences arise when revenue or expense is included in accounting profit in one period, but will be included in taxable profit in a different period. These temporary differences are generally described as timing differences. The following examples are of temporary differences of this type, which are taxable temporary differences and therefore result in a deferred tax liability:
(a) interest revenue is included in accounting profit on a time-apportioned basis, but in some countries it may be included in taxable profit when the money is received. The tax base of any receivable recognized in the balance sheet related to this revenue is zero because revenues do not affect taxable profit until the money is received; (b) the depreciation used to determine taxable profit (tax loss) may differ from that used to determine accounting profit. The temporary difference is the difference between the carrying amount of the asset and its tax base, which is the original cost of the asset less all deductions relating to that asset allowed by the tax authorities to determine taxable profit of the current and prior periods. The taxable temporary difference arises, and results in a deferred tax liability, when tax depreciation is accelerated (if tax depreciation is slower than accounting depreciation, the temporary difference arises and results in a deferred tax asset); and (c) development costs may be capitalized and amortized in future periods to determine accounting profit, but sometimes may be deducted to determine taxable profit in the period in which they are incurred. These development costs have a tax base of zero, as they have been deducted in calculating taxable profit. The temporary difference is the difference between the carrying amount of the development costs and their tax base of zero.
18. Temporary differences also arise when:
(a) identifiable assets acquired and liabilities assumed in a business combination are recognized at their fair values in accordance with Technical Pronouncement CPC 15 – Business Combinations, but no equivalent adjustment is made for tax purposes (see item 19);

SECURITIES AND EXCHANGE COMMISSION OF BRAZIL
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 SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4th Floor, Brasília/DF – CEP: 70712-900 – Brazil -Tel.: (61) 3327-2030/2031 www.gov.br/cvm

RESOLUTION CVM NO. 109, OF MAY 20, 2022

(b) the assets are revalued and no equivalent adjustment is made for tax purposes (see item 20); (c) goodwill arising from business combinations (see items 21 and 32A); (d) the tax base of an asset or liability at initial recognition differs from its initial carrying amount; for example, when the entity benefits from non-taxable government grants related to assets (see items 22 and 33); or (e) the carrying amount of investments in subsidiaries, branches and associates or interests in joint ventures becomes different from the tax base of the investment or interest (see items 38 to 45).

Business Combinations

With limited exceptions, identifiable assets acquired and liabilities assumed in a business combination shall be recognized at their fair values at the acquisition date. Temporary differences arise when the tax bases of the identifiable assets acquired and liabilities assumed are not affected by the business combination or are affected differently. For example, when the carrying amount of the asset is increased to its fair value, but the tax base of the asset remains at the cost to the previous owner, a taxable temporary difference arises that results in a deferred tax liability. The resulting deferred tax liability affects goodwill (see item 66).

Assets Carried at Fair Value

Pronouncements, interpretations and guidance allow or require certain assets to be recognized at fair value or, where legally permitted, to be revalued (see, for example, CPC 27 – Property, Plant and Equipment, CPC 04 – Intangible Assets, CPC 48 – Financial Instruments, CPC 28 – Investment Property and CPC 06 – Leases). In some jurisdictions, revaluation or other remeasurement of an asset to fair value affects taxable income (tax loss) for the current period. As a result, the tax base of the asset must be adjusted and no temporary difference arises. In other jurisdictions, revaluation or remeasurement of an asset does not affect taxable income in the period of revaluation or remeasurement and, consequently, the tax base of the asset should not be adjusted. However, future recovery of the carrying amount will result in a taxable flow of economic benefits to the entity, and the amount that will be deductible for tax purposes differs from the value of those economic benefits. The difference between the carrying amount of the revalued asset and its tax base is a temporary difference and gives rise to a deferred tax asset or liability. This is true even if:
(a) the entity does not intend to dispose of the asset. In these cases, the revalued amount of the asset will be recovered through use and this will generate taxable income that exceeds the depreciation that is allowed for tax purposes in future periods; or (b) taxation on capital gains is deferred if the proceeds from the disposal of the asset are invested in similar assets. In these cases, the tax ultimately becomes due upon the sale or use of the similar assets.

Goodwill

Goodwill arising from a business combination measured as the amount by which (a) exceeds (b) below:

RESOLUTION CVM NO. 109, OF MAY 20, 2022

(a) the sum:
(i) the consideration transferred in exchange for control of the acquiree, measured in accordance with Technical Pronouncement CPC 15 – Business Combinations, for which fair value at the acquisition date is generally required; (ii) the amount of non-controlling interests in the acquiree, measured in accordance with Technical Pronouncement CPC 15 – Business Combinations; and (iii) in the case of a business combination achieved in stages, the fair value at the acquisition date of the acquirer’s previously held equity interest in the acquiree immediately before the combination; (b) the net amount, at the acquisition date, of the identifiable assets acquired and liabilities assumed, measured in accordance with Technical Pronouncement CPC 15 – Business Combinations.

In some countries, tax authorities do not allow the write-down of the carrying amount of goodwill as a deductible expense for determining taxable income. Furthermore, in some countries the cost of goodwill is generally not deductible when the subsidiary disposes of its underlying business activity. In these countries, goodwill has a tax base of zero. Any difference between the carrying amount of goodwill and its zero tax base is a taxable temporary difference. However, this Pronouncement does not permit the recognition of a deferred tax liability resulting from goodwill because goodwill is measured as a residual, and the recognition of the deferred tax liability would increase the carrying amount of goodwill.

21A. Subsequent reductions in the deferred tax liability that is not recognized because it arises from the initial recognition of goodwill are also considered to arise from the initial recognition and, therefore, should not be recognized in accordance with item 15(a). For example, if in a business combination the entity recognizes goodwill of $100 that has a tax base of zero, item 15(a) prohibits the entity from recognizing the resulting liability. If the entity subsequently recognizes an impairment loss of $20 for that goodwill, the amount of the taxable temporary difference related to the goodwill is reduced from $100 to $80, with the resulting reduction in the value of the unrecognized deferred tax liability. The reduction in the value of the unrecognized deferred tax liability is also considered to relate to the initial recognition of goodwill and, therefore, prohibited from being recognized in accordance with item 15(a).

21B. Deferred tax liabilities for taxable temporary differences related to goodwill are, however, recognized to the extent that they do not arise from the initial recognition of goodwill. For example, if in a business combination the entity recognizes goodwill of $100 that is deductible for tax purposes at a rate of 20 percent per year starting in the year of acquisition, the tax base of the goodwill is $100 at initial recognition and $80 at the end of the year of acquisition. If the carrying amount of the goodwill at the end of the year of acquisition remains unchanged at $100, a taxable temporary difference of $20 would arise at the end of that year. Since this taxable temporary difference is not related to the initial recognition of goodwill, the resulting deferred tax liability must be recognized.

RESOLUTION CVM NO. 109, OF MAY 20, 2022

Initial Recognition of Asset or Liability

A temporary difference may arise on the initial recognition of an asset or liability; for example, if the entire cost or part of the cost of the asset is not expected to be deductible for tax purposes. The method of accounting for this temporary difference depends on the nature of the transaction that led to the initial recognition of the asset or liability:
(a) in a business combination, the entity shall recognize any deferred tax liability or asset and this affects the total goodwill or gain on a bargain purchase recognized (see item 19); (b) if the transaction affects either accounting profit or taxable profit, the entity shall recognize a deferred tax asset or liability and shall recognize the resulting deferred tax expense or income in profit or loss (see item 59); (c) if the transaction is not a business combination and does not affect either accounting profit or taxable profit, the entity, in the absence of the exceptions provided for in items 15 and 24, would recognize the resulting deferred tax asset or liability and adjust the carrying amount of the asset or liability by the same amount. These adjustments would make the financial statements less transparent. Therefore, this Pronouncement does not permit the entity to recognize the resulting deferred tax asset or liability, neither at initial recognition nor subsequently (see the example below). Furthermore, the entity shall not recognize subsequent changes in the unrecognized deferred tax asset or liability as the asset is depreciated.

Illustrative Example of Item 22(c)
The entity intends to use an asset whose cost is $1,000 throughout its useful life of five years and then write it down with a residual value of zero. The tax rate is 40%. Depreciation of the asset is not deductible for tax purposes. On sale, any capital gain will not be taxable and any capital loss will not be deductible. As it recovers the carrying amount of the asset, the entity obtains taxable income of $1,000 and pays tax of $400. The entity does not recognize the resulting deferred tax liability of $400 at the date of acquisition of the asset because it results from the initial recognition of the asset. In the following year, the carrying amount of the asset is $800. By obtaining taxable income of $800, the entity pays tax of $320. The entity does not recognize the deferred tax liability of $320 because it results from the initial recognition of the asset.

According to Technical Pronouncement CPC 39 – Financial Instruments: Presentation, the issuer of a compound financial instrument (for example, convertible bond) classifies the debt component of the instrument as a liability and the equity component as equity. In some countries, the tax base of the debt component at initial recognition is equal to the initial carrying amount of the sum of the liability and the equity portions. The resulting taxable temporary difference arises from the initial recognition of the equity component separately from the debt component. Therefore, the exception mentioned in item 15(b) does not apply. Consequently, the entity recognizes the resulting deferred tax liability. According to item 61A, the deferred tax must be debited directly to the carrying amount of the equity component. According to item 58, subsequent changes in the deferred tax liability shall be recognized in profit or loss as deferred tax expense (income).

RESOLUTION CVM NO. 109, OF MAY 20, 2022

Deductible Temporary Difference

A deferred tax asset shall be recognized for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilized, unless the deferred tax asset arises from the initial recognition of an asset or liability in the transaction that:
(a) is not a business combination; and
(b) at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss).
However, for deductible temporary differences associated with investments in subsidiaries, branches and associates, and interests in joint ventures, the deferred tax asset shall be recognized in accordance with item 44.
It is inherent in the recognition of a liability that the carrying amount will be settled in future periods through an outflow of resources from the entity incorporating economic benefits. When resources flow from the entity, part or all of their values may be deductible for determining the taxable income of a period subsequent to the period in which the liability is recognized. In these cases, there is a temporary difference between the carrying amount of the liability and its tax base. Consequently, a deferred tax asset relative to income tax arises which will be recoverable in future periods when that part of the liability is deductible for determining taxable income. Similarly, if the carrying amount of an asset is less than its tax base, the difference gives rise to a deferred tax asset arising from taxes on profit that should be recoverable in future periods.

Example
The entity recognizes a liability of $100 relating to a provision for product warranty expenses. For tax purposes, product warranty expenses are not deductible until the entity pays the claims. The tax rate is 25%.
The tax base of the liability is zero (carrying amount of $100, less the amount that will be deductible for tax purposes related to that liability in future periods). Upon settling the liability at its carrying amount, the entity reduces its future taxable income by $100 and consequently reduces its future tax payments by $25 ($100 at 25%). The difference between the carrying amount of $100 and the tax base of zero is the deductible temporary difference of $100. Therefore, the entity recognizes a deferred tax asset of $25 ($100 at 25%) provided that it is probable that the entity will obtain sufficient taxable profit in future periods to benefit from the reduction in tax payments.

The following are examples of deductible temporary differences that result in deferred tax assets:
(a) pension benefit expenses may be deducted to determine accounting profit as the service is rendered by the employee, but deducted to determine taxable profit only when contributions are paid to a fund established by the entity or pension benefits are paid by the entity. There is a temporary difference between the carrying amount of the liability and its tax base; generally, the tax base of the liability is zero. Such a deductible temporary difference results in a deferred tax asset, since economic benefits will flow to the entity in the form of deduction of taxable profits when contributions or pension benefits are paid; (b) research expenditures must be recognized as an expense to determine accounting profit in the period in which they are incurred, but may not be deductible for determining taxable profit (tax loss) until a later period. The difference between the tax base of research expenditures, which is the amount that tax authorities allow as a deduction in future periods, and the carrying amount of zero is the deductible temporary difference that results in a deferred tax asset; (c) with limited exceptions, the entity shall recognize the identifiable assets acquired and liabilities assumed in a business combination at their fair values at the acquisition date. When the assumed liability is recognized at the acquisition date, but the related costs cannot be deducted to determine taxable profits until a later period, a deductible temporary difference arises that results in a deferred tax asset. The deferred tax asset also arises when the fair value of an acquired identifiable asset is less than its tax base. In both cases, the resulting deferred tax asset affects goodwill (see item 66); and (d) certain assets may be carried at fair value, or may be revalued, when this is legally permitted, without an equivalent adjustment being made for tax purposes (see item 20). A deductible temporary difference arises if the tax base of the asset exceeds its carrying amount.

Illustrative Example of Item 26(d)
Identification of deductible temporary difference at the end of year 2:
Entity A purchases for $1,000, at the beginning of year 1, a debt instrument with a nominal value of $1,000 payable at maturity in 5 years and with an interest rate of 2% payable at the end of each year. The effective interest rate is 2%. The debt instrument is measured at fair value. At the end of year 2, the fair value of the debt instrument decreased to $918 as a result of the increase in market interest rates to 5%. It is probable that Entity A will receive all contractual cash flows if it continues to hold the debt instrument. Any gains (losses) on the debt instrument are taxable (deductible) only when realized. Gains (losses) resulting from the sale or maturity of the debt instrument must be calculated for tax purposes as the difference between the amount received and the original cost of the debt instrument. Consequently, the tax base of the debt instrument will be its original cost. The difference between the carrying amount of the entity's debt instrument in the balance sheet of $918 and its tax base of $1,000 gives rise to a deductible temporary difference of $82 at the end of year 2 (see items 20 and 26(d)), regardless of the fact that Entity A expects to recover the carrying amount of the debt instrument by sale or use, i.e., holding it and receiving contractual cash flows, or a combination of both.

RESOLUTION CVM NO. 109, OF MAY 20, 2022
This occurs because deductible temporary differences are the differences between the carrying amount of an asset or liability in the balance sheet and its tax base that will result in amounts that will be deductible in determining the taxable profit (tax loss) of future periods, when the carrying amount of the asset or liability is recovered or settled (see item 5). The entity obtains a deduction equivalent to the tax base of the asset of $1,000 in determining taxable profit (tax loss), whether on sale or at maturity.

The reversal of deductible temporary differences results in deductions for determining taxable profits in future periods. However, economic benefits in the form of reductions in tax payments will flow to the entity only if it obtains sufficient taxable profits against which the deductions can be offset. Therefore, the entity shall recognize deferred tax assets only when it is probable that taxable profits will be available against which the deductible temporary differences can be utilized.

27A. When the entity assesses whether taxable profits will be available in respect of which it can utilize the deductible temporary difference, it must analyze whether tax legislation restricts the sources of taxable profits against which deductions on the reversal of that deductible temporary difference can be made. If tax legislation does not impose such restrictions, the entity must evaluate the deductible temporary difference in combination with all its other deductible temporary differences. However, if tax legislation restricts the use of losses for deduction relative to revenue of a specific type, the deductible temporary difference must be evaluated in combination only with other deductible temporary differences of the appropriate type.

Taxable profit is likely to be available against which a deductible temporary difference can be utilized when there are sufficient taxable temporary differences related to the same tax authority and the same taxable entity which are expected to reverse:
(a) in the same period in which the expected reversal of the deductible temporary difference is recorded; or (b) in periods in which the tax loss arising from the deferred tax asset can be carried back to previous periods or forward to future periods.
Under such circumstances, the deferred tax asset is recognized in the period in which the deductible temporary differences arise.
When there are not enough taxable temporary differences related to the same tax authority and the same taxable entity, the deferred tax asset shall be recognized to the extent that:
(a) it is probable that the entity will have sufficient taxable profit related to the same tax authority and the same taxable entity in the same period in which the deductible temporary difference is reversed (or in periods in which a tax loss arises from the deferred tax asset that can be carried forward to future or backward to previous periods). In assessing whether it will have sufficient taxable profit in future periods, the entity must:
(i) compare the deductible temporary differences with future taxable profit that allows excluding tax deductions resulting from the reversal of these deductible temporary differences. This comparison will show the extent to which future taxable profit will be sufficient for the entity to deduct the amounts resulting from the reversal of these

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 SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4º Andar, Brasília/DF – CEP: 70712-900 – Brasil -Tel.: (61) 3327-2030/2031 www.gov.br/cvm RESOLUÇÃO CVM Nº 109, DE 20 DE MAIO DE 2022 Reassessment of unrecognized deferred tax assets
37. At the end of each reporting period, the entity must reassess unrecognized deferred tax assets. The entity recognizes a previously unrecognized deferred tax asset to the extent that it becomes likely that future taxable profits will allow the deferred tax asset to be recovered. For example, an improvement in market conditions may make it more likely that the entity will be able to generate sufficient taxable profit in the future for the deferred tax asset to meet the recognition criteria mentioned in paragraphs 24 or 34. Another example is when the entity reassesses deferred tax assets at the date of business combination or subsequently (see paragraphs 67 and 68).
Investment in subsidiaries, branches and associates and interests in joint ventures
38. Temporary differences arise when the carrying amount of investments in subsidiaries, branches and associates or interests in joint ventures (i.e., the parent company’s or investor’s share in the net assets of the subsidiary, branch, associate or invested company, including the carrying amount of goodwill arising from the expectation of future profitability) becomes different from the tax base (which is usually the cost) of the investment or interest. Such differences may arise from a number of different circumstances, for example:
(a) existence of undistributed profits in subsidiaries, branches, associates and joint ventures; (b) changes in exchange rates when the parent company and its subsidiary are located in different countries; and (c) reduction in the carrying amount of the investment in the associate to its recoverable amount. In consolidated financial statements, the temporary difference may be different from the temporary difference associated with that investment in the separate financial statements of the parent company, if the parent company records the investment in its separate financial statements at cost or revalued amount.
39. The entity must recognize a deferred tax liability for all taxable temporary differences associated with investments in subsidiaries, branches and associates and interests in joint ventures, except when both of the following conditions are met:
(a) the parent company, the investor, the joint venturer or the joint operator is able to control the timing of the reversal of the temporary difference; and (b) it is likely that the temporary difference will not reverse in the foreseeable future.
40. As the parent company controls the dividend policy of its subsidiary, it is able to control the timing of the reversal of temporary differences from associates with that investment (including temporary differences arising not only from undistributed profits, but also from any foreign currency translation differences). Furthermore, it would often be impracticable to determine the amount of income tax that would be due when the temporary difference is reversed. Therefore, when the parent company determines that those profits will not be distributed in the foreseeable future, it must not recognize the deferred tax liability. The same consideration applies to investments in branches.
41. The entity’s non-monetary assets and liabilities must be measured in its functional currency
(see Technical Pronouncement CPC 02 – Effects of Changes in Exchange Rates and Conversion of Financial Statements). If the entity’s taxable profit or tax loss (and, thus, the tax base of its non-monetary assets and liabilities) is determined in a different currency, changes in the exchange rate give rise to temporary differences that result in a recognized deferred tax liability or (subject to paragraph 24) recognized deferred tax asset. The resulting deferred tax is debited or credited to profit or loss (see paragraph 58).
42. The investor in an associate does not control that entity and is generally not in a position to determine its dividend policy. Therefore, in the absence of a contract requiring that the profits of the associate will not be distributed in the foreseeable future, the investor must recognize the deferred tax liability arising from taxable temporary differences associated with its investment in those associates. In some cases, the investor may not be able to determine the amount of tax that would be due if it recovered the cost of its investment in the associate, but may determine that it will be equal to or greater than a minimum value. In these cases, the deferred tax liability is measured by that value.
43. The agreement between the parties to a joint venture usually deals with the distribution of profits and identifies whether decisions on these matters require the consent of all parties or a group of parties. When the joint venturer or joint operator can control the timing of the distribution of its share of profits from the joint venture and this share will not be distributed in the foreseeable future, the deferred tax liability must not be recognized.
44. The entity recognizes a deferred tax asset for all deductible temporary differences arising from investments in subsidiaries, branches and associates and interests in joint ventures, to the extent that, and only to the extent that, it is likely that:
(a) the temporary difference will reverse in the foreseeable future; and (b) taxable profit will be available against which the temporary difference can be utilized.
45. In deciding whether the deferred tax asset is recognized for deductible temporary differences associated with its investments in subsidiaries, branches and associates and its interests in joint ventures, the entity considers the guidance mentioned in paragraphs 28 to 31.
Measurement
46. Current tax liabilities (assets) for the current and prior periods must be measured at the amount expected to be paid to (recovered from) the tax authorities, using the tax rates (and tax legislation) that are approved at the end of the period being reported.
47. Deferred tax assets and liabilities must be measured by the rates that are expected to be applicable in the period when the asset is realized or the liability is settled, based on the rates (and tax legislation) that are in force at the end of the period being reported.
48. Current and deferred tax assets and liabilities are generally measured using the tax rates (and tax legislation) that are in force. However, in some countries, announcements of tax rates (and tax legislation) by the government have the substantive effect of actual enactment,

Taxable
Temporary
Difference
Tax Rate
Deferred Tax
Liability
Accumulated depreciation for tax purposes 30 30% 9 Excess earnings over cost 50 Zero - Total 80 9 (Note: according to paragraph 61A, the additional deferred tax arising from revaluation must be recognized in other comprehensive income).
Example C
The facts occur as in Example B, except that if the item is sold for a value greater than cost, the accumulated depreciation for tax purposes will be included in taxable income (taxed at 30%) and the sales revenue will be taxed at 40%, after deducting the cost adjusted for inflation of $110. If the entity expects to recover the carrying amount using the item, it must generate taxable profit of $150, but can only deduct depreciation of $70. Thus, the tax base is $70, there is a taxable temporary difference of $80 and there is a deferred tax liability of $24 ($80 at 30%), as in Example B. If the entity expects to recover the carrying amount by selling the item immediately to obtain revenue of $150, the entity can deduct the indexed cost of $110. The net earnings of $40 will be taxed at 40%. In addition, the accumulated depreciation for tax purposes of $30 will be included in taxable profit at a rate of 30%. In this case, the tax base is $80 ($110 minus $30), there is a taxable temporary difference of $70 and there is a deferred tax liability of $25 ($40 at 40%, plus $30 at 30%). If the tax base is not immediately identifiable in this example, it may be necessary to consider the fundamental principle exposed in paragraph 10. (Note: according to paragraph 61A, the additional deferred tax arising from revaluation must be recognized in other comprehensive income). 51B. If the deferred tax liability or deferred tax asset arises from a non-depreciable asset measured using the revaluation model of Technical Pronouncement CPC 27, the measurement of the deferred tax liability or deferred tax asset must reflect the tax effects of recovering the carrying amount of the non-depreciable asset through sale, regardless of the measurement basis of the carrying amount of that asset. Consequently, if tax law specifies a tax rate applicable to the taxable value derived from the sale of the asset that is different from the tax rate applicable to the taxable value derived from the use of the asset, the first rate must be applied in the measurement of the deferred tax liability or asset related to the non-depreciable asset. 51C. If the deferred tax liability or asset arises from investment property that is measured using the fair value method of Technical Pronouncement CPC 28, there is a rebuttable presumption that the carrying amount of the investment property will be recovered through sale. Consequently, unless the presumption is rebutted, the measurement of the deferred tax liability or deferred tax asset must reflect the tax effects of recovering the entire carrying amount of the

SECURITY AND EXCHANGE COMMISSION OF BRAZIL (CVM) 7 de Setembro Street, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – ZIP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Cincinato Braga Street, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/SP – ZIP: 01333-010 – Brazil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Corporate Financial Center Building, S.404/4th Floor, Brasília/DF – ZIP: 70712-900 – Brazil - Tel.: (61) 3327-2030/2031 www.gov.br/cvm

CVM RESOLUTION NO. 109, OF MAY 20, 2022

investment property through sale. This presumption is rebutted if the investment property is depreciable and held within a business model whose objective is to consume substantially all of the economic benefits embodied in the investment property over time, rather than through sale. If the presumption is rebutted, the requirements of paragraphs 51 and 51A must be followed.

Illustrative Example
An investment property has a cost of $100 and a fair value of $150. It is measured using the fair value model of Technical Pronouncement CPC 28. It includes land with a cost of $40 and a fair value of $60, and a building with a cost of $60 and a fair value of $90. The land has an unlimited useful life. The accumulated depreciation of the building for tax purposes is $30. Unrealized changes in the fair value of the investment property do not affect taxable profit. If the investment property is sold for more than cost, the reversal of accumulated tax depreciation of $30 must be included in taxable profit and taxed at the normal tax rate of 30%. For sale proceeds exceeding cost, tax law specifies tax rates of 25% for assets held for less than two years and 20% for assets held for two years or more. Because the investment property is measured using the fair value model of Technical Pronouncement CPC 28, there is a rebuttable presumption that the entity should recover the entire carrying amount of the investment property through sale. If this presumption is not rebutted, deferred tax must reflect entirely the tax effects of the recovery of the carrying amount through sale, even if the entity expects to obtain rental income from the property before sale. The tax base of the land, if sold, is $40 and there is a taxable temporary difference of $20 (60 – 40). The tax base of the building, if sold, is $30 (60 – 30) and there is a taxable temporary difference of $60 (90 – 30). As a result, the total taxable temporary difference relating to the investment property is $80 (20 + 60). According to paragraph 47, the tax rate is the rate expected to apply to the period when the investment property is realized. Thus, the deferred tax liability must be calculated as follows, if the entity expects to sell the property after holding it for more than two years:

Taxable Temporary Difference	Tax Rate	Deferred Tax Liability
Accumulated depreciation for tax purposes	30	30%	9
Proceeds exceeding cost	50	20%	10
Total	80		19

If the entity expects to sell the property after holding it for less than two years, the above calculation must be modified to apply the tax rate of 25%, instead of 20%, to the proceeds exceeding cost.

CVM RESOLUTION NO. 109, OF MAY 20, 2022

If, instead, the entity holds the building within a business model whose objective is to consume substantially all of the economic benefits embodied in the building over time, and not through sale, this presumption must be rebutted for the building. However, the land is not depreciable. Therefore, the presumption of recovery through sale should not be rebutted for the land. However, the deferred tax liability must reflect the tax effects of the recovery of the carrying amount of the building through use and the carrying amount of the land through sale. The tax base of the building, if used, is $30 (60 – 30) and there is a taxable temporary difference of $60 (90 – 30), resulting in a deferred tax liability of $18 (60 at 30%). The tax base of the land, if sold, is $40 and there is a taxable temporary difference of $20 (60 – 40), resulting in a deferred tax liability of $4 (20 at 20%). As a result, if the presumption of recovery through sale is rebutted for the building, the deferred tax liability relating to the investment property is $22 (18 + 4).

51D. The rebuttable presumption of paragraph 51C is also applicable when the deferred tax liability or deferred tax asset results from the measurement of an investment property in a business combination if the entity uses the fair value model to subsequently measure that investment property.

51E. Paragraphs 51B to 51D do not change the requirements for applying the principles of paragraphs 24 to 33 (deductible temporary differences) and paragraphs 34 to 36 (unused tax losses and unused tax credits) of this Technical Pronouncement when recognizing and measuring deferred tax assets.

(Renumbered to 51A).

52A. In some countries, tax on profit may be at a higher or lower rate if part or all of the net profit or retained earnings are paid as dividends to the members of the entity. In other countries, tax on profit may be refundable or payable if part or all of the net profit or retained earnings are paid as dividends to the members of the entity. In those countries, current or deferred tax assets and liabilities are measured at the tax rate applicable to undistributed profits.

52B. (Eliminated).

Illustrative Example of paragraphs 52A and 57A The following example deals with the measurement of deferred and current tax assets and liabilities for the entity in places where income taxes are payable at a higher rate on undistributed profits (50%) with the amount being refunded when profits are distributed. The tax rate on distributed profits is 35%. At the end of the reporting period, December 31, 20X1, the entity does not recognize the liability for proposed or declared dividends after the end of the period. As a consequence, no dividend is recognized in the year 20X1. The taxable profit for 20X1 is $100,000.00. The net taxable temporary difference for the year 20X1 is $40,000.00. The entity recognizes a current tax liability and current tax expense of $50,000.00. No asset is recognized for the potentially recoverable amount as a result of future dividends. The entity also recognizes a deferred tax liability and deferred tax expense of $20,000.00 ($40,000.00 at 50%), representing the tax on profit that the entity will pay when it recovers or settles the carrying amounts of its assets and liabilities based on the tax rate applicable to undistributed profits. Subsequently, on March 15, 20X2, the entity recognizes dividends of $10,000.00 from previous operating profits as a liability. On March 15, 20X2, the entity must recognize the recovery of tax on profit of $1,500.00 (15% of the dividends recognized as a liability) as a current tax asset and as a reduction of the current tax expense of 20X2.

Deferred tax assets and liabilities shall not be discounted (adjusted to present value).
The reliable determination of deferred tax assets and liabilities on the basis discounted to present value requires a detailed schedule of the timing of the reversal of each temporary difference. In many cases, this scheduling is impracticable or highly complex. Therefore, it is not appropriate to require discounting, to present value, of deferred tax assets and liabilities. Permitting, but not requiring, discounting would result in deferred tax assets and liabilities that would not be comparable between entities. Therefore, this Technical Pronouncement does not require nor permit the discounting to present value of deferred tax assets or liabilities.
Temporary differences shall be determined by reference to the carrying amount of the asset or liability. This applies even when that carrying amount is itself determined on a basis discounted to present value, such as, for example, in the case of obligations for retirement benefits (see Technical Pronouncement CPC 33 – Employee Benefits).
The carrying amount of a deferred tax asset shall be reviewed at the end of each reporting period. The entity shall reduce the carrying amount of the deferred tax asset to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of that deferred tax asset to be utilized. Any reduction of the deferred tax asset shall be reversed to the extent that it becomes probable that sufficient taxable profit will be available.

Recognition of deferred and current tax

The accounting for the effects of deferred and current tax of a transaction or other event is consistent with the accounting for the transaction or event itself. Paragraphs 58 to 68C implement this principle.

57A. The entity shall recognize the tax effect on dividend income, as defined in CPC 48, when recognizing the liability to pay the dividend. The tax effect on dividend income is linked more directly to past transactions or events that generated distributable profits than to distributions to owners. Consequently, the entity shall recognize the tax effect on dividend income in profit or loss, in other comprehensive income, or in equity instruments in the same way that the entity originally recognized those past transactions or events.

Items recognized in profit or loss

Current and deferred tax shall be recognized as income or expense and included in profit or loss for the period, except when the tax arises from:
(a) a transaction or event that is recognized in the same period or in a different period, outside profit or loss, in other comprehensive income or directly in equity (see paragraphs 61A to 65); or (b) a business combination (except the acquisition by an investment entity, as defined in Technical Pronouncement CPC 36 – Consolidated Financial Statements, of a subsidiary that is required to be measured at fair value through profit or loss) (see paragraphs 66 to 68).
Most deferred tax liabilities and deferred tax assets arise when revenue or expense is included in the accounting profit of the period, but is included in taxable profit (tax loss) in a different period. The resulting deferred tax shall be recognized in profit or loss. Examples are:
(a) interest, royalty or dividend income is received late and included in accounting profit, in accordance with CPC 47 – Revenue from Contracts with Customers or CPC 48, as relevant, but is included in taxable profit (tax loss) on a cash basis; and (b) costs of intangible assets that have been capitalized in accordance with CPC 04 – Intangible Assets and are being amortized in profit or loss, but were deducted for tax purposes when they were incurred.
The carrying amount of deferred tax assets and liabilities may change, even if there is no change in the value of the related temporary differences. This may result, for example, from:
(a) changes in tax rates or tax legislation;
(b) assessment of the recoverability of deferred tax assets; or (c) changes in the manner in which recovery of the asset is expected.
The resulting deferred tax is recognized in profit or loss, except when it relates to items previously recognized outside profit or loss (see paragraph 63).

Items recognized outside the statement of profit or loss

(Eliminated).

61A. Current tax or deferred tax shall be recognized outside profit or loss if the tax relates to items that are recognized in the same period or in a different period, outside profit or loss. Therefore, current and deferred tax that relates to items that are recognized in the same or in a different period:
(a) in other comprehensive income, shall be recognized in other comprehensive income (see paragraph 62); (b) directly in equity, shall be recognized directly in equity (see paragraph 62A).

CVM RESOLUTION NO. 109, OF MAY 20, 2022

The Pronouncements, Interpretations and Guidance of the Accounting Pronouncements Committee require or allow specific items to be recognized in other comprehensive income. Examples of these items are:
(a) change in carrying amount arising from the revaluation of Property, Plant and Equipment, when legally permitted (see Technical Pronouncement CPC 27 – Property, Plant and Equipment); and (b) (eliminated); (c) exchange differences arising from the translation of financial statements of an operation in a foreign currency (see Technical Pronouncement CPC 02 – Effects of Changes in Foreign Exchange Rates and Translation of Financial Statements); (d) (eliminated).

62A. The Pronouncements, Interpretations and Guidance of the Accounting Pronouncements Committee require or allow specific items to be credited or debited directly to equity. Examples of these items are:
(a) adjustment in the opening balance of retained earnings resulting from both a change in accounting policy that is applied retrospectively or from the correction of an error (see Technical Pronouncement CPC 23 – Accounting Policies, Changes in Accounting Estimates and Errors); and (b) amounts arising from initial recognition of the equity component of a hybrid financial instrument (see paragraph 23).

In exceptional circumstances, it may be difficult to determine the amount of current and deferred tax that relates to items recognized outside profit or loss (in other comprehensive income or directly in equity). This may be the case, for example, when:
(a) there are progressive tax rates on profit and it is impossible to determine the rate at which a specific component of taxable profit (tax loss) was taxed; (b) the change in tax rate or other tax rules affects the deferred tax asset or liability related (in whole or in part) to an item that was previously recognized outside profit or loss; or (c) the entity determines that a deferred tax asset should be recognized, or should no longer be recognized in its entirety, and the deferred tax asset is related (in whole or in part) to an item that was previously recognized outside profit or loss. In these cases, the current tax and deferred tax related to items that are recognized outside profit or loss shall be based on the proportional allocation of the entity's current and deferred tax in the competent tax jurisdiction, or measured according to another method that achieves a more appropriate allocation in the circumstances.
The entity shall transfer each period, from the revaluation reserve to accumulated profits, the amount equal to the difference between the depreciation or amortization of the revalued asset and the depreciation or amortization based on the cost of that asset. The amount transferred shall be net of any related deferred tax. Similar considerations shall be applied to transfers made upon the disposal of an item of property, plant and equipment.
When the asset is revalued for tax purposes and this revaluation is related to the accounting revaluation of a previous period, or to that which is expected to be carried out in a future period, if legally permitted, the tax effects of both the revaluation of the asset and the adjustment of the tax base are recognized in other comprehensive income in the periods in which they occur.

CVM RESOLUTION NO. 109, OF MAY 20, 2022

However, if the revaluation for tax purposes is not related to the accounting revaluation of a previous period, or to that which is expected to be carried out in a future period, the tax effects of the adjustment of the tax base are recognized in profit or loss.

65A. When the entity pays dividends to its members, it may be required to pay a portion of the dividends to the tax authorities on behalf of the members. This value is referred to as withholding tax. This amount paid or due to the tax authorities shall be debited to equity as part of the dividends.

Deferred tax arising from business combinations

As explained in paragraphs 19 and 26(c), temporary differences may arise in business combinations. According to Technical Pronouncement CPC 15 – Business Combinations, the entity shall recognize any resulting deferred tax assets (to the extent that such deferred tax assets meet the recognition criteria of paragraph 24) or deferred tax liabilities as identifiable assets and liabilities at the acquisition date. Consequently, those deferred tax assets and deferred tax liabilities affect the value of the goodwill derived from the expectation of future profitability (goodwill) or bargain purchase gain that the entity recognizes. However, according to paragraph 15(a), the entity shall not recognize deferred tax liabilities arising from the initial recognition of goodwill derived from the expectation of future profitability (goodwill).
As a result of a business combination, the probability of realizing the acquirer's deferred tax asset may change. The acquirer may consider it probable that it will recover its own deferred tax asset that was not recognized before the business combination. For example, the acquirer may be able to use the benefit of its unused tax losses against the future taxable profit of the acquired entity. Alternatively, as a result of the business combination, it may no longer be probable that future taxable profits will allow the deferred tax asset to be recovered. In these cases, the acquirer shall recognize a change in the deferred tax asset in the period of the business combination, but does not include it as part of the accounting for the business combination. Therefore, the acquirer does not take this into consideration in measuring the value of the goodwill derived from the expectation of future profitability (goodwill) or bargain purchase gain that it recognizes in the business combination.
The potential benefit of the offsetting of tax losses of an entity with the profit of the acquiree or other deferred tax assets may not meet the recognition criteria separately when the business combination is initially accounted for, but may be realized subsequently. The entity shall recognize the benefits of acquired deferred tax that it realizes after the business combination as follows:
(a) benefits of acquired deferred tax recognized within the measurement period that result from new information about facts and circumstances that existed at the acquisition date shall be applied to reduce the carrying amount of any goodwill related to that acquisition. If the carrying amount of that goodwill is zero, any remaining deferred tax benefits shall be recognized in profit or loss; (b) all other benefits of acquired deferred tax, when realized, shall be recognized in profit or loss (or, if this Technical Pronouncement so requires, outside profit or loss).

SECURITY AND EXCHANGE COMMISSION OF BRAZIL (CVM) 7 de Setembro Street, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – ZIP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Cincinato Braga Street, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/ SP – ZIP: 01333-010 – Brazil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Corporate Financial Center Building, S.404/4th Floor, Brasília/DF – ZIP: 70712-900 – Brazil - Tel.: (61) 3327-2030/2031 www.gov.br/cvm

CVM RESOLUTION NO. 109, OF MAY 20, 2022

Current and deferred tax arising from share-based payment transactions

68A. In some countries, if the entity receives a tax deduction (a value that is deductible in determining taxable profit) that relates to share-based payment, share options or other equity instruments of the entity, the value of the tax deduction may differ from the accumulated related remuneration expense, and may arise in a subsequent accounting period. For example, in some countries the entity may recognise an expense corresponding to the employee services received as payment for the share options granted, in accordance with Technical Pronouncement CPC 10 – Share-based Payment, and not be entitled to a tax deduction until the share options are exercised, with the measurement of the tax deduction based on the entity’s share price at the exercise date.

68B. Similarly to the research expenditures treated in paragraphs 9 and 26(b) of this Pronouncement, the difference between the tax base of the employee services received to date (the amount allowed by tax authorities as a deduction in future periods, such as in the case of a provision for post-employment benefits – retirement, for example) and the zero carrying amount (because these values were considered as an expense, for example), is a deductible temporary difference that results in a deferred tax asset. In another situation, if the amount that tax authorities will eventually allow as a deduction in future periods is not known at the end of the period, it shall be estimated based on the information available at the end of the period. For example, if the amount that tax authorities will eventually allow as a deduction in future periods depends on the entity’s share price at a future date, the measurement of the deductible temporary difference shall be based on the entity’s share price at the end of the period.

68C. As indicated in paragraph 68A, the value of the tax deduction (or estimated tax deduction, measured in accordance with paragraph 68B) may differ from the accumulated related remuneration expense. Paragraph 58 of the Pronouncement requires that current and deferred tax be recognised as income or expense and included in the period’s result except when the tax arises from:
(a) a transaction or event that is recognised in the same period or in a different period, outside the result, or (b) a business combination (except the acquisition by an investment entity of a subsidiary that is to be measured at fair value through profit or loss). If the value of the tax deduction (or estimated tax deduction) exceeds the value of the accumulated related remuneration expense, this indicates that the tax deduction relates not only to the remuneration expense, but also to an item of equity. In this situation, the excess of the associated current or deferred tax shall be recognised directly in equity.

Presentation

Current and deferred tax assets and liabilities

69-70. (Eliminated).

Offsetting

An entity shall offset current tax assets and current tax liabilities if, and only if, the entity:
(a) has a legally enforceable right to set off the recognised amounts; and (b) intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.
Although current tax assets and current tax liabilities are recognised and measured separately, offsetting in the statement of financial position is subject to criteria similar to those established for financial instruments in Technical Pronouncement CPC 39 - Financial Instruments: Presentation. An entity normally has the legally enforceable right to offset current tax assets against current tax liabilities when they relate to income taxes levied by the same tax authority and the tax legislation allows the entity to make or receive a single net payment.
In consolidated financial statements, the current tax asset of an entity in a group is offset against the current tax liability of another entity in the group if, and only if, the entities concerned have the legally enforceable right to make or receive a single net payment and the entities intend to make or receive that net payment or to realise the asset and settle the liability simultaneously.
An entity shall offset deferred tax assets and deferred tax liabilities if, and only if:
(a) the entity has a legally enforceable right to set off current tax assets against current tax liabilities; and (b) the deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same tax authority:
(i) on the same taxable entity; or
(ii) on different taxable entities which intend to settle current tax liabilities and assets on a net basis, or to realise the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax assets or liabilities are expected to be settled or recovered.
To avoid the need for detailed scheduling of the timing of reversal of each temporary difference, this Pronouncement requires that an entity offset deferred tax assets against deferred tax liabilities of the same taxable entity if, and only if, they relate to income taxes levied by the same tax authority and the entity has the legally enforceable right to offset current tax assets against current tax liabilities.
In rare circumstances, an entity may have a legally enforceable right to offset, and an intention to settle on a net basis, for some periods, but not for others. In these rare circumstances, detailed scheduling may be required to establish reliably whether the deferred tax liability of the taxable entity results in increases in tax payments in the same period in which a deferred tax asset of another taxable entity results in reductions in payments by that second taxable entity.

Tax expense

Tax expense (income) related to profit from ordinary activities (operating)

Tax expense (income) related to profit from ordinary activities (operating) shall be presented in the statement of profit or loss.

77A. (Eliminated).

Exchange differences on deferred tax assets or liabilities in a foreign country

Technical Pronouncement CPC 02 – The Effects of Changes in Foreign Exchange Rates and Translation of Financial Statements requires that certain exchange differences be recognised as income or expense, but does not specify where such differences should be presented in the statement of comprehensive income. Consequently, where exchange differences on deferred foreign tax assets or liabilities are recognised in the statement of comprehensive income, such differences may also be classified as deferred tax expense (income), if that presentation is considered to be the most useful to the users of the financial statements.

Disclosure

The main components of tax expense (income) shall be disclosed separately.
The components of tax expense (income) may include:
(a) current tax expense (income);
(b) any adjustments recognised in the period for the current tax of prior periods; (c) the amount of deferred tax expense (income) related to the origin and reversal of temporary differences; (d) the amount of deferred tax expense (income) related to changes in tax rates or the imposition of new taxes; (e) the amount of benefits arising from previously unrecognised tax losses, tax credits or temporary differences of a prior period, which are used to reduce the current tax expense; (f) the amount of benefit from previously unrecognised tax losses, tax credits or temporary differences of a prior period, which is used to reduce the deferred tax expense; (g) deferred tax expense arising from the write-down, or reversal of previous write-down, of a deferred tax asset in accordance with paragraph 56; and (h) the amount of tax expense (income) related to those changes in accounting policies and accounting errors that are included in profits or losses in accordance with Technical Pronouncement CPC 23 – Accounting Policies, Changes in Accounting Estimates and Errors, because such values cannot be accounted for retrospectively.
The following shall also be disclosed separately:
(a) deferred and current tax combined related to items that are debited or credited directly to equity (see paragraph 62A); (ab) the amount of income tax related to each component of other comprehensive income (see paragraph 62 and Technical Pronouncement CPC 26 – Presentation of Financial Statements); (b) (eliminated); (c) an explanation of the relationship between tax expense (income) and accounting profit in one or both of the following forms:
(i) a numerical reconciliation between tax expense (income) and the product of accounting profit multiplied by the applicable tax rates, also evidencing the bases upon which the applicable tax rates are being computed; or (ii) a numerical reconciliation between the effective average tax rate and the applicable rate, also disclosing the basis on which the applicable tax rate is computed; (d) an explanation of changes in the applicable tax rates compared with the previous accounting period; (e) the amount (and the expiration date, if any) of deductible temporary differences, unused tax losses, and unused tax credits for which no deferred tax asset is being recognised in the statement of financial position; (f) the total amount of temporary differences associated with investments in subsidiaries, branches and associates and interests in joint ventures, in relation to which deferred tax liabilities have not been recognised (see paragraph 39); (g) with respect to each type of temporary difference and each type of unused tax losses and unused tax credits:
(i) the amount of deferred tax assets and liabilities recognised in the statement of financial position for each period presented; (ii) the amount of deferred tax income or expense recognised in the result, if this is not evident from the changes in the values recognised in the statement of financial position; (h) with respect to discontinued operations, the tax expense related to:
(i) gain or loss on discontinuance; and
(ii) profit from ordinary activities (operating) of the discontinued operation for the period, together with the corresponding values for each previous period presented; (i) the amount of the tax effects of dividends to the entity’s partners that were proposed or declared before the financial statements were authorised for issue, but are not recognised as a liability in the financial statements; (j) if the business combination in which the entity is the acquirer causes a change in the recognised value of its pre-acquisition deferred tax asset (see paragraph 67), the amount of that change; and (k) if the benefits of deferred tax acquired in a business combination are not recognised at the acquisition date, but are recognised after the acquisition date (see paragraph 68), a description of the event or change in circumstances that caused the recognition of the deferred tax benefits.
An entity shall disclose the amount of the deferred tax asset and the nature of the evidence that supports its recognition, when:
(a) the utilisation of the deferred tax asset depends on future taxable profits exceeding the profits arising from the reversal of existing taxable temporary differences; and (b) the entity has suffered a loss either in the current period or in the preceding period in the fiscal jurisdiction with which the deferred tax asset is related.

82A. In the circumstances described in paragraph 52A, the entity shall disclose the nature of the potential effects of income tax that would result from the payment of dividends to its partners. In addition, the entity shall disclose the values of the potential effects of income tax that are easily determinable, and whether there are any potential effects of income tax that are not easily determinable.

(Eliminated).
The disclosures required by paragraph 81(c) enable users of financial statements to understand whether the relationship between tax expense (income) and accounting profit is unusual and to understand the significant factors that could affect the relationship in the future. The relationship between tax expense (income) and accounting profit may be affected by factors such as: income that is exempt from taxation, expenses that are not deductible in determining taxable profit (tax losses), the effect of tax losses and the effect of foreign tax rates.
When explaining the relationship between tax expense (income) and accounting profit, the entity uses the applicable tax rate that provides the most significant information to the users of its financial statements. Often, the most significant rate is the domestic tax rate in the country in which the entity is domiciled, aggregating the rate applied for national taxes with the rates applied for any local taxes that are computed at a substantially similar level of taxable profit (tax loss). However, for an entity that operates in several jurisdictions, it may be more significant to aggregate separate reconciliations prepared using the domestic rate in each individual jurisdiction.

The example below illustrates how the selection of the tax rate affects the presentation of the numerical reconciliation.

Illustrative example of paragraph 85

In 19X2, the entity has accounting profit in its own jurisdiction (Country A) of $1,500 (19X1: $2,000) and in Country B of $1,500 (19X1: $500). The rate is 30% in Country A and 20% in Country B. In Country A, expenses of $100 (19X1: $200) are not deductible for tax purposes.

The following is an example of the reconciliation for the domestic tax rate.

19X1
$
19X2
$
Accounting profit
2,500
3,000
Tax at the domestic rate of 30%
750
900
Tax effect of expenses not deductible for tax purposes 60 30 Effect of lower tax rates in Country B (50) (150) Tax expense 760 780

The following is an example of the reconciliation prepared by aggregating separate reconciliations for each national jurisdiction. By this method, the effect of the differences between the domestic tax rate of the reporting entity itself and the domestic rate in other jurisdictions does not appear as a separate item in the reconciliation. The entity may need to discuss the effect of significant changes in rates, or in the composition of profits obtained in different jurisdictions, in order to explain the changes in applicable tax rates as required by paragraph 81(d).

19X1
$
19X2
$
Accounting profit
2,500
3,000
Tax at domestic rates applicable to profits in the country of interest 700 750 Tax effect of expenses not deductible for tax purposes 60 30 Tax expense 760 780

The effective average tax rate is the tax expense (income) divided by the accounting profit.
It is often impracticable to compute the value of unrecognised deferred tax liabilities arising from investments in subsidiaries, branches and associates and interests in joint ventures (see paragraph 39). Therefore, this Pronouncement requires that the entity disclose the total amount of underlying temporary differences, but does not require the disclosure of deferred tax liabilities. However, where practicable, entities are encouraged to disclose the values of unrecognised deferred tax liabilities because users of the financial statement may consider such information useful.

87A. Paragraph 82A requires that the entity disclose the nature of the potential effects of income tax that would result from the payment of dividends to its partners. The entity discloses the important characteristics of the taxation systems and the factors that affect the value of the potential fiscal effects of dividends.

87B. Sometimes it would not be practicable to compute the total value of the potential effects of income tax that would result from the payment of dividends to partners. This may be the case, for example, when the entity has a large number of foreign subsidiaries. However, even in such circumstances, some portions of the total value may be easily determinable. For example, in a consolidated economic group, the controlling company and some of its subsidiaries may have paid tax at a higher rate on undistributed profits and be aware of the value that would be refunded on the payment of future dividends to partners of consolidated retained profits. In this case, the refundable value shall be disclosed. If applicable, the entity shall also disclose that there are additional potential effects of income tax that are not easily determinable. In the separate financial statements of the controlling company, if any, the disclosure of the potential effects of income tax is related to the retained profits of the controlling company.

87C. The entity required to make the disclosure described in paragraph 82A may also be required to make disclosures related to temporary differences associated with investments in subsidiaries, branches and associates or interests in joint ventures. In these cases, the entity considers this to determine the information to be disclosed in accordance with paragraph 82A. For example, the entity may be requested to disclose the aggregated value of temporary differences associated with investments in subsidiaries for which no deferred tax liability has been recognised (see paragraph 81(f)). If it is impracticable to compute the values of unrecognised deferred tax liabilities (see paragraph 87), there may be values of potential effects of dividend taxation not easily determinable related to these

89-93. (Eliminated).

The entity shall not adjust the accounting for business combinations that occurred prior to the effective date of this Pronouncement if the tax benefits did not meet the criteria for separate recognition at the acquisition date and were recognized after the acquisition date, unless the benefits are recognized within the measurement period and result from new information about facts and circumstances that existed at the acquisition date. Other tax benefits recognized shall be recorded in profit or loss (or, if this Pronouncement so requires, outside profit or loss).

95-98G. (Eliminated).

98H. The entity shall apply these changes retrospectively, in accordance with CPC 23 – Accounting Policies, Changes in Accounting Estimates and Errors. However, in the initial application of the changes (items 27A, 29 and 29A), the change in the opening equity of the earliest comparative period may be recognized in opening retained earnings (or in another component of equity, as appropriate), without attributing the change between opening retained earnings and other components of equity. If the entity applies this provision, it must disclose this fact.

A. Examples of circumstances giving rise to taxable temporary differences All taxable temporary differences give rise to deferred tax liabilities.

Transactions affecting profit or loss

Interest revenue is received later and included in accounting profit on a straight-line time basis, but is included in taxable profit on a cash basis.
Revenue from the sale of goods is included in accounting profit when the goods are delivered, but is included in taxable profit when payment is received (note: as explained in B3 below, there is also a deductible temporary difference associated with any related inventory).
Asset depreciation is accelerated for tax purposes.
Development costs have been capitalized and will be amortized in the statement of profit or loss, but were deducted to determine taxable profit in the period in which they were incurred.
Prepaid expenses have already been deducted on a cash basis to determine taxable profit for current and prior periods.

Transactions affecting the balance sheet
6. Asset depreciation is not deductible for tax purposes and no deduction will be available for tax purposes when the asset is sold or scrapped. (Note: item 15(b) of the Pronouncement prohibits recognition of the resulting deferred tax liability unless the asset was acquired in a business combination; also see item 22 of the Pronouncement).
7. The borrower records the loan as resources are received (which will be equal to the amount due at maturity), less transaction costs. Subsequently, the carrying amount of the loan is increased by the amortization of transaction costs to determine accounting profit. Transaction costs were deducted for tax purposes in the period in which the loan was first recognized. (Notes: (1) the taxable temporary difference is the value of transaction costs already deducted to determine taxable profit for current and prior periods, less the accumulated amortized amount for accounting profit; and (2) as the initial recognition of the loan affects taxable profit, the exception in item 15(b) of the Pronouncement does not apply. Therefore, the borrower recognizes the deferred tax liability).
8. A payable loan was measured at initial recognition by the amount obtained net of transaction costs. Transaction costs are amortized to accounting profit over the life of the loan. These transaction costs are not deductible to determine taxable profit of future, current or prior periods. (Notes: (1) the taxable temporary difference is the value of unamortized transaction costs; and (2) item 15(b) of the Pronouncement prohibits recognition of the resulting deferred tax liability).
9. The liability component of a compound financial instrument (e.g., convertible bond) is measured by discounting the amount repayable at maturity (see Technical Pronouncement CPC 39 – Financial Instruments: Presentation). The discount is not deductible to determine taxable profit (tax loss).

Fair value adjustments and revaluation
10. Financial assets or investments in property are recorded in accounting at fair value which exceeds cost, but the equivalent adjustment may, under tax legislation, have no effect for tax purposes.
11. The entity, when legislation permits, may revalue the fixed asset (under the treatment of the revaluation model in Technical Pronouncement CPC 27 – Property, Plant and Equipment), but no equivalent adjustment is made for tax purposes (Note: item 61A of the Pronouncement requires that the related deferred tax be recognized in other comprehensive income).

Business combinations and consolidation
12. The carrying amount of an asset is increased to fair value in a business combination and no equivalent adjustment is made for tax purposes. (Note that at initial recognition the resulting deferred tax liability increases the goodwill derived from the expectation of future profitability (goodwill) or reduces the value of any recognized gain on a bargain purchase. See item 66 of the Pronouncement).
13. Reductions in the carrying amount of goodwill may not be deductible to determine taxable profit and the cost of goodwill may not be deductible upon disposal of the business. (Note that item 15(a) of the Pronouncement prohibits recognition of the resulting deferred tax liability).
14. Unrealized losses resulting from intra-group transactions are eliminated by inclusion in the carrying amount of inventory or fixed assets.
15. Retained earnings of subsidiaries, branches, associates and jointly controlled ventures are included in consolidated retained earnings, but tax on profit will be due if the profits are distributed to the reporting parent company. (Note: item 39 of the Pronouncement prohibits recognition of the resulting deferred tax liability if the parent company, investor or joint venture participant are able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future).
16. Investments in subsidiaries, branches or foreign associates or interests in jointly controlled ventures abroad are affected by changes in foreign currency exchange rates.

Hyperinflation
18. Non-monetary assets are monetarily updated in terms of the current unit of measurement at the end of the reporting period (see Technical Pronouncement CPC 42 – Accounting and Reporting in Hyperinflationary Economies) and no equivalent adjustment is made for tax purposes. (Notes: (1) deferred tax is recognized in profit or loss; and (2) if, in addition to monetary updating, non-monetary assets are also revalued, the deferred tax related to the revaluation is recognized in other comprehensive income, and the deferred tax related to the monetary updating is recognized in profit or loss).

B. Examples of circumstances giving rise to deductible temporary differences All deductible temporary differences give rise to deferred tax assets. However, some deferred tax assets may not meet the recognition criteria of item 24 of the Pronouncement.

Transactions affecting profit or loss

Retirement benefit costs are deducted to determine accounting profit while the service is provided by the employee, but may not be deductible in determining taxable profit until the entity pays the retirement benefits or contributions to the pension fund. (Note: similar deductible temporary differences arise when other expenses, such as product warranty expenses or interest, are deductible on a cash basis to determine taxable profit).
The accumulated depreciation of the asset in the financial statements is greater than the accumulated depreciation allowed up to the end of the period being reported for tax purposes.
The cost of inventory sold before the end of the period being reported is deducted to determine accounting profit when the goods or services are delivered, but is deductible in determining taxable profit when the money is received. (Note: as explained in A2 above, there is also a taxable temporary difference associated with related customer accounts receivable).
The net realizable value of an inventory item, or the recoverable amount of a fixed asset item, is lower than the carrying amount, and the entity therefore reduces the carrying amount of the asset, but this reduction is ignored for tax purposes until the asset is sold.
Research expenditure (or organization or other start-up costs) is recognized as an expense in determining accounting profit, but is only allowed as a deduction to determine taxable profit in a later period.
Revenue is deferred in the balance sheet, but has already been included in taxable profit in the current or prior period.
Government grants that are included in the balance sheet as deferred revenue will not be taxable in future periods. (Note: item 24 of the Pronouncement prohibits recognition of the resulting deferred tax asset; also see item 33 of the Pronouncement).

Fair value adjustments and revaluation
8. Financial assets or investments in property are recorded in accounting at fair value, which is lower than cost, but no equivalent adjustment is made for tax purposes.

Business combinations and consolidation
9. The liability is recognized at its fair value in a business combination, but none of the related expenses are deducted to determine taxable profit until a later period. (Note that the resulting deferred tax asset reduces the goodwill derived from the expectation of future profitability (goodwill) or increases the value of any recognized gain on a bargain purchase. See item 66 of the Pronouncement).
10. (Eliminated).
11. Unrealized profits resulting from intra-group transactions are eliminated from the carrying amount of assets, such as inventory or fixed assets, but no equivalent adjustment is made for tax purposes.
12. Investments in subsidiaries, branches or foreign associates or interests in jointly controlled ventures abroad are affected by changes in exchange rates. (Notes: (1) there may be a taxable temporary difference or a deductible temporary difference; and (2) item 44 of the Pronouncement requires recognition of the resulting deferred tax asset to the extent that, and only to the extent that, it is probable that: (a) the temporary difference will reverse in the foreseeable future; and (b) there will be taxable profit available against which the temporary difference can be utilized).
13. The entity's non-monetary assets and liabilities are measured in their functional currencies, but taxable profit or tax loss is determined in a different currency. (Notes: (1) there may be both a taxable temporary difference or a deductible temporary difference; (2) where there is a deductible temporary difference, the resulting deferred tax asset is recognized to the extent that it is probable that sufficient taxable profit is available (item 41 of the Pronouncement); and (3) deferred tax is recognized in profit or loss; see item 58 of the Pronouncement).

Provisioned expenses have already been deducted to determine the entity's current tax liability for the current or prior periods.
The payable loan is measured by the amount originally received, and this amount is the same as the amount payable at the final maturity of the loan.
Accrued expense that will never be deductible for tax purposes.
Accrued revenue that will never be taxable.

Example 1 – Depreciable assets
The entity purchases equipment for $10,000 and depreciates it on a straight-line basis over its expected useful life of five years. For tax purposes, the equipment is depreciated at 25% per year on a straight-line basis. Tax losses in the jurisdiction where the entity is located can be offset against taxable profit of the previous five years. In year 0, the entity's taxable profit was $5,000. The tax rate is 40%. The entity will recover the carrying amount of the equipment by using it to manufacture goods for resale. Therefore, the entity's current tax calculation is as follows:

Year ($)
1 2 3 4 5
Taxable revenue 2,000
Tax depreciation 2,500 0
Taxable profit (tax loss) (500) (500) (500) (500) 2,000 Current tax expense (income) at 40% (200) (200) (200) (200)

The entity recognizes the current tax asset at the end of years 1 to 4 because it recovers the benefit of the tax loss against the taxable profit of year 0.
The temporary differences associated with the equipment and the resulting deferred tax asset and liability and deferred tax expense and income are as follows:

Year ($)
1 2 3 4 5
Carrying amount 8,000 6,000 4,000 2,000 0
Tax base 7,500 5,000 2,500
Taxable temporary difference 500 1,000 1,500 2,000 0 Opening deferred tax liability 0 200 400 600 800 Deferred tax expense (income) 200 (800) Closing deferred tax liability 200 400 600 800 0

The entity recognizes the deferred tax liability in years 1 to 4 because the reversal of the taxable temporary difference creates taxable revenue in subsequent years. The entity's statement of profit or loss is as follows:

Year ($)
1 2 3 4 5
Revenue 2,000
Depreciation 2,000
Profit before tax 0
Current tax expense (income)
(200) (200) (200) (200) 800
Deferred tax expense (income)
200 (800)
Total tax expense (income) 0
Profit for the period 0

Example 2 – Deferred tax assets and liabilities The example deals with an entity during a two-year period, X5 and X6. In X5 the prevailing tax rate on profit was 40% of taxable profit. In X6 the prevailing tax rate on profit was 35% of taxable profit.
Charitable donations are recognized as an expense when they are paid and are not deductible for tax purposes.
In X5, the entity was notified by the competent authorities that they intended to file a lawsuit against the entity related to sulfur emissions. Although in December of X6 the lawsuit had not yet been filed in court, the entity recognized a liability of $700 in X5, being its best estimate of the fine arising from the lawsuit. Fines are not deductible for tax purposes. In X2, the entity incurred $1,250 in costs related to the development of a new product. These costs were deducted for tax purposes in X2. For accounting purposes, the entity capitalized this expenditure and amortized it on a straight-line basis over five years. On 12/31/X4, the unamortized balance of these product development costs was $500. In X5, the entity entered into a contract with its employees to provide health plan benefits for retirees. The entity recognizes as an expense the cost of this plan to the extent that employees provide services. No payment for retirees' benefits was made in X5 or X6. The health plan costs are deductible for tax purposes when payments are made to retirees. The entity assessed that it is probable that there will be taxable profit available against which any resulting deferred tax asset can be utilized. Buildings are depreciated for accounting purposes at 5% per year on a straight-line basis and at 10% per year on a straight-line basis for tax purposes. Vehicles are depreciated for accounting purposes at 20% per year on a straight-line basis and at 25% per year on a straight-line basis for tax purposes. Total annual depreciation is debited for accounting purposes in the year the asset is acquired.

On 01/01/X6, the building was revalued to $65,000 and the entity estimated that the remaining useful life of the building was 20 years from the date of revaluation. The revaluation did not affect taxable profit in X6 and the tax authorities did not adjust the tax base of the building to reflect the revaluation. In X6, the entity transferred $1,033 from the revaluation reserve to retained earnings. This represents the difference of $1,590 between the actual depreciation of the building ($3,250) and the equivalent depreciation based on the cost of the building ($1,660, which is the carrying amount on 01/01/X6 of $33,200 divided by the remaining useful life of 20 years), less the related deferred tax of $557 (see paragraph 64 of the Pronouncement).

Current tax expense
$ $
X5 X6
Accounting profit 8,775 8,740
Additions
Depreciation for accounting purposes 4,800 8,250 Charitable donations 500 350 Fine for environmental pollution 700 - Product development costs 250 250 Health plan benefits 2,000 1,000 17,025 18,590 Deductions Depreciation for tax purposes (8,100) (11,850) Taxable profit 8,925 6,740 Current tax expense at 40% 3,570 Current tax expense at 35% 2,359

Carrying amounts of fixed assets
$ $ $
Cost Building Vehicles Total
Balance at 31/12/X4 50,000 10,000 60,000
Additions X5 6,000 - 6,000
Balance at 31/12/X5 56,000 10,000 66,000
Elimination of accumulated depreciation on revaluation on 01/01/X6 (22,800) - (22,800) Revaluation on 01/01/X6 31,800 - 31,800 Balance at 01/01/X6 65,000 10,000 75,000 Additions X6 - 15,000 15,000 65,000 25,000 90,000 Accumulated depreciation 5% 20% Balance at 31/12/X4 20,000 4,000 24,000 Depreciation X5 2,800 2,000 4,800 Balance at 31/12/X5 22,800 6,000 28,800 Revaluation on 01/01/X6 (22,800) - (22,800) Balance at 01/01/X6 - 6,000 6,000 Depreciation X6 3,250 5,000 8,250 Balance at 31/12/X6 3,250 11,000 14,250 Carrying Amount 31/12/X4 30,000 6,000 36,000 31/12/X5 33,200 4,000 37,200 31/12/X6 61,750 14,000 75,750

Tax base of fixed assets
$ $ $
Cost Building Vehicles Total
Balance at 1/12/X4 50,000 10,000 60,000
Additions X5 6,000 - 6,000
Balance at 31/12/X5 56,000 10,000 66,000
Additions X6 - 15,000 15,000
Balance at 31/12/X6 56,000 25,000 81,000
Accumulated depreciation 10% 25%
Balance at 31/12/X4 40,000 5,000 45,000
Depreciation X5 5,600 2,500 8,100
Balance at 31/12/X5 45,600 7,500 53,100
Depreciation X 6 5,600 6,250 11,850
Balance at 31/12/X6 51,200 13,750 64,950
Tax Base
31/12/X4 10,000 5,000 15,000
31/12/X5 10,400 2,500 12,900
31/12/X6 4,800 11,250 16,050

Deferred tax assets and liabilities and expenses at 31/12/X4 $ $ $ Carrying Amount Tax Base Temporary differences Accounts receivable 500 500 - Inventory 2,000 2,000 - Product development costs 500 - 500 Investments 33,000 33,000 - Fixed assets 36,000 15,000 21,000 TOTAL ASSETS 72,000 50,500 21,500 Current tax on profit payable 3,000 3,000 - Accounts payable 500 500 - Fines payable - - - Health plan benefits liability

Long-term debts 20,000 20,000 -
Deferred tax on profit 8,600 8,600 -
TOTAL LIABILITIES 32,100 32,100
Share capital 5,000 5,000 -
Revaluation reserve - - -
Retained earnings 34,900 13,400 -
TOTAL LIABILITIES AND EQUITY
72,000 50,500
TEMPORARY DIFFERENCES 21,500
Deferred tax liability 21,500 at 40% 8,600
Deferred tax asset - -
Net deferred tax liability 8,600

Deferred tax assets and liabilities and expenses at 31/12/X5 Carrying Amount Tax Base Temporary differences Accounts receivable 500 500 - Inventory 2,000 2,000 - Product development costs 250 - 250 Investments 33,000 33,000 - Fixed assets 37,200 12,900 24,300 TOTAL ASSETS 72,950 48,400 24,550 Current tax on profit payable 3,570 3,570 - Accounts payable 500 500 - Fines payable 700 700 - Health plan benefits liability 2,000 - (2,000) Long-term debts 12,475 12,475 - Deferred tax on profit 9,020 9,020 - TOTAL LIABILITIES 28,265 26,265 (2,000) Share Capital 5,000 5,000 - Revaluation reserve - - - Retained earnings 39,685 17,135 - TOTAL LIABILITIES AND EQUITY 72,950 48,400 TEMPORARY DIFFERENCES 22,550 Deferred tax liability 24,550 at 40% 9,820 Deferred tax asset (2,000 at 40%) (800) Net deferred tax liability 9,020 Less: Opening deferred tax liability (8,600) Deferred tax expense (income) relating to origination and reversal of temporary differences 420

Deferred tax assets, liabilities and expenses at 31/12/X6 Carrying Amount Tax Base Temporary differences Accounts receivable 500 500 - Inventory 2,000 2,000 - Product development costs

Investments 33,000 33,000 -
Fixed assets 75,750 16,050 59,700
TOTAL ASSETS 111,250 51,550 59,700
Current tax on profit payable
2,359 2,359 -
Accounts payable 500 500 -
Fines payable 700 700 -
Health plan benefits liability
3,000 - (3,000)
Long-term debts 12,805 12,805 -
Deferred tax on profit 19,845 19,845 -
TOTAL LIABILITIES 39,209 36,209 (3,000)
Share Capital 5,000 5,000 -
Revaluation reserve 19,637 -
Retained earnings 47,404 19,341 -
TOTAL LIABILITIES AND EQUITY
111,250 51,550
TEMPORARY DIFFERENCES 56,700
Deferred tax liability 59,700 at 35% 20,895
Deferred tax asset (3,000 at 35%) (1,050)
Net deferred tax liability 19,845
Less: Opening deferred tax liability (9,020)
Adjustment to opening deferred tax liability resulting from reduction in tax rate 22,550 at 5% 1,127 Deferred tax attributable to revaluation reserve 31,800 at 35% (11,130) Deferred tax expense (income) relating to origination and reversal of temporary differences 822

Example 3 – Business combination
On January 1, X5, Entity A acquired 100 percent of the shares of Entity B at a cost of $600. At the acquisition date, the tax base in the tax jurisdiction of A, of A's investments in B is $600. Reductions in the carrying amount of goodwill derived from the expectation of future profitability (goodwill) are not deductible for tax purposes, and the cost of this goodwill would also not be deductible if B were to dispose of its underlying businesses. The tax rate in the tax jurisdiction of A is 30 percent, and the tax rate in the tax jurisdiction of B is 40 percent. The fair values of the identifiable assets acquired and liabilities assumed (excluding deferred tax assets and liabilities) by A are shown in the table below, together with their tax bases in the tax jurisdiction of B and the resulting temporary differences. Values recognized in acquisition Tax Base Temporary Differences Fixed assets 270 155 115 Accounts receivable 210 210 - Inventory 174 124 50 Pension benefit obligations (30) - (30) Accounts payable (120) (120) - Identifiable assets acquired and liabilities assumed, excluding deferred tax 504 369 135 The deferred tax asset from pension benefit obligations is offset against the deferred tax liabilities arising from fixed assets and inventory (see paragraph 74 of the Pronouncement). No deduction is available in the tax jurisdiction of B for the cost of goodwill derived from the expectation of future profitability (goodwill). Therefore, the tax base of goodwill in jurisdiction B is zero. However, according to paragraph 15(a) of the Pronouncement, A does not recognize any deferred tax liability for the taxable temporary difference associated with goodwill derived from the expectation of future profitability in the tax jurisdiction of B. The carrying amount, in A's consolidated financial statements, of its investments in B is determined as follows:
Fair value of identifiable assets acquired and liabilities assumed, excluding deferred tax Deferred tax liability (135 at 40%) (54) Fair value of identifiable assets acquired and liabilities assumed Goodwill derived from the expectation of future profitability (goodwill) Carrying amount 600

Because, at the acquisition date, the tax base in the tax jurisdiction of A of A's investment in B is $600, no temporary difference is associated in the tax jurisdiction of A with the investment.
During X5, the equity of B (incorporating the fair value adjustments produced as a result of business combinations) changed as follows:
On January 1, X5 450
Retained profit in X5 (net profit of $150, less dividend to pay of $80) On December 31, X5 520 A recognizes a liability for any withholding tax or other taxes that will be incurred on dividends receivable of $80.
On December 31, X5, the carrying amount of A's investments in B, excluding dividends receivable, is as follows:
Net Assets of B 520
Goodwill derived from the expectation of future profitability (goodwill)

Carrying amount
The temporary difference associated with the corresponding investment of A is $70. This value is equal to the accumulated retained profit since the date of acquisition.
If A determined that it will not sell the investment in the foreseeable future and that B will not distribute its retained profits in the foreseeable future, no deferred tax liability is recognized with respect to A's investment in B (see paragraphs 39 and 40 of the Pronouncement). Note that this exception would apply to an investment in an associate only if there was a contract requiring that the profits of the associate not be distributed in the foreseeable future (see paragraph 42 of the Pronouncement). A discloses the value of the temporary difference for which no deferred tax is recognized, namely, $70 (see paragraph 81(f) of the Pronouncement). If A expects to sell the investment in B, or if B distributes its retained profits in the foreseeable future, A recognizes a deferred tax liability to the extent that it is expected that the temporary difference will be reversed. The tax rate reflects the manner in which A expects to recover the carrying amount of its investment (see paragraph 51 of the Pronouncement). A recognizes deferred tax in other comprehensive income to the extent that the deferred tax results from foreign currency translation differences that were recognized in other comprehensive income (paragraph 61A of the Pronouncement). A discloses separately:
the value of deferred tax that was recognized in other comprehensive income (paragraph 81(ab) of the Pronouncement); and the value of any remaining temporary difference that is not expected to be reversed in the foreseeable future and for which, therefore, no deferred tax is recognized (see paragraph 81(f) of the Pronouncement).

Example 4 – Compound financial instruments
The entity receives an interest-free convertible loan of $1,000 on December 31, X4, repayable at nominal value on January 1, X8. According to Technical Pronouncement CPC 39 – Financial Instruments: Presentation, the entity classifies the debt component of the instrument as a liability and the equity component as equity. The entity assigns an initial carrying amount of $751 to the liability component of the convertible loan and $249 to the equity component. Subsequently, the entity recognizes the imputed discount as interest expense at an annual rate of 10% on the carrying amount of the liability component at the beginning of the year. The tax authorities do not allow the entity to claim any deduction for the imputed discount on the liability component of the convertible loan. The tax rate is 40%. The temporary differences associated with the liability component, the resulting deferred tax liability, and the deferred tax expense and income are as follows:
Year ($)
X4 X5 X6 X7
Carrying amount of the liability component 751 826 909 1,000 Tax base 1,000 Taxable temporary difference 249 174 91 - Opening deferred tax liability at 40% 0 100 70 37 Deferred tax debited to equity 100 - - - Deferred tax expense (income) - (30) (33) (37) Closing deferred tax liability at 40% 100 70 37 - As explained in paragraph 23 of the Pronouncement, on December 31, X4 the entity recognizes the resulting deferred tax liability by adjusting the initial carrying amount of the equity component of the convertible debt. Therefore, the values recognized on that date are as follows:
Liability component 751
Deferred tax liability 100
Equity component (
249 less 100)

1,000

Subsequent changes in the deferred tax liability are recognized in profit or loss as taxes on profit (see paragraph 23 of the Pronouncement). Therefore, the entity's profits or losses include the following:
Year
X4 X5 X6 X7
Interest expense (imputed discount)

75 83 91
Deferred tax expense (income)

(30)

(33)

(37)

Example 5 – Share-based payment transaction
According to Technical Pronouncement CPC 10 – Share-Based Payment, the entity recognized an expense for the consumption of employee services received as payment for the share options granted. The tax deduction will not arise until the options are exercised, and the deduction is based on the intrinsic value of the options at the exercise date. As explained in paragraph 68B of the Pronouncement, the difference between the tax base of the services received from employees to date (being the amount that the tax authorities allow as a deduction in future periods related to those services) and the carrying amount of zero is the deductible temporary difference that results in a deferred tax asset. Paragraph 68B requires that, if the amount that the tax authorities allow as a deduction in future periods is not known at the end of the period, it must be estimated based on information available at the end of that period. If the amount that the tax authorities allow as a deduction in future periods depends on the entity's share price at a future date, the measurement of the deductible temporary difference must be based on the entity's share price at the end of the period. Therefore, in this example, the estimated future tax deduction (and, therefore, the measurement of the deferred tax asset) must be based on the intrinsic value of the options at the end of the period. As explained in paragraph 68C of the Pronouncement, if the tax deduction (or estimated future tax deduction) exceeds the value of the accumulated remuneration expense related, this indicates that the tax deduction refers not only to the remuneration expense, but also to an item of equity. In this situation, paragraph 68C requires that the excess of the deferred or current tax associated must be recognized directly in equity. The entity's tax rate is 40 percent. The options were granted at the beginning of year 1, vested at the end of year 3 and were exercised at the end of year 5. Details of the expense recognized for the consumption of services received from employees in each accounting period, the number of options outstanding at the end of each year and the intrinsic value of the options at the end of each year are as follows:

Expense with employee services
Number of options at the end of the year
Intrinsic value per option
Year 1 188,000 50,000 5
Year 2 185,000 45,000 8
Year 3 190,000 40,000 13
Year 4 0 40,000 17
Year 5 0 40,000 20
The entity recognizes the deferred tax asset and deferred tax income in years 1 to 4 and current tax income in year 5, as follows. In years 4 and 5, some of the current and deferred tax income are recognized directly in equity, because the estimated (and actual) tax deduction exceeds the accumulated remuneration expense. Year 1 Deferred tax asset and deferred tax income:
($50,000 x 5 x 1/3 (a) x 0.40) = 33,333
(a) the tax base of the services received from employees is based on the intrinsic value of the options, and those options were granted for three years of services. Considering that only one year of services has been received to date, it is necessary to multiply the intrinsic value of the option by one third to arrive at the base value of the services provided by the employees in year 1. The deferred tax income is recognized entirely in profit or loss, because the estimated future tax deduction of $83,333 (50,000 x 5 x 1/3) is less than the accumulated remuneration expense of $188,000. Year 2 Deferred tax asset at the end of the year:
(45,000 x 8 x 2/3 x 0.40) = 96,000
Less the deferred tax asset at the beginning of the year (33,333) Deferred tax income for year 62,667* *this value consists of the following:
Deferred tax income from the temporary difference between the tax base of the services received from the employee during the year and its compensation value of zero: (45,000 x 8 x 1/3 x 0.40) 48,000 Tax on profit, resulting from adjustment on the tax base of the services received from the employee in previous years:
(a) increase in intrinsic value:
(45,000 x 3 x 1/3 x 0.40) 18,000
(b) reduction in the number of options:
(5,000 x 5 x 1/3 x 0.40) (3,333)
Deferred tax income for year 62,667

The deferred tax income is recognized entirely in profit or loss because the estimated future tax deduction of $240,000 ($45,000 x 8 x 2/3) is less than the accumulated remuneration expense of $373,000 ($188,000 + $185,000).
Year 3
Deferred tax asset at the end of the year:
(40,000 x 13 x 0.40) = 208,000
Less the deferred tax asset at the beginning of the year (96,000) Deferred tax income for year 112,000 The deferred tax income is recognized entirely in profit or loss because the estimated future tax deduction of $520,000 ($40,000 x 13) is less than the accumulated remuneration expense of $563,000 ($188,000 + $185,000 + $190,000). Year 4 Deferred tax asset at the end of the year:
($40,000 x 17 x 0.40) = 272,000
Less the deferred tax asset at the beginning of the year (208,000) Deferred tax income for year 64,000 The deferred tax income is recognized partially in profit or loss and partially directly in equity, as follows:
Estimated future tax deduction ($40,000 x
17) =
680,000
Accumulated remuneration expense 563,000
Excess of tax deduction 117,000
Deferred tax income for year 64,000
Excess recognized directly in equity ($117,000 x 0.40) = 46,800 Recognized in profit or loss 17,200

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 SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4th Floor, Brasília/DF – ZIP: 70712-900 – Brazil - Tel.: (61) 3327-2030/2031 www.gov.br/cvm

CVM RESOLUTION NO. 109, OF MAY 20, 2022

Year 5
Deferred tax expense (reversal of deferred tax asset) 272,000 Value recognized directly in equity (reversal of accumulated deferred tax income, recognized directly in equity) 46,800 Value recognized in profit or loss 225,200 Current tax income based on the intrinsic value of options at exercise date ($40,000 x 20 x 0.40) = 320,000 Value recognized in profit or loss ($563,000 x 0.40) = 225,200 Value recognized directly in equity 94,800

Summary
Statement of Profit or Loss | Balance Sheet
Employee service expenses | Current tax expense (income) | Deferred tax expense (income) | Total tax expense (income) | Equity | Deferred tax asset Year 1 | 188,000 | 0 | (33,333) | (33,333) | 0 | 33,333 Year 2 | 185,000 | 0 | (62,667) | (62,667) | 0 | 96,000 Year 3 | 190,000 | 0 | (112,000) | (112,000) | 0 | 208,000 Year 4 | 0 | 0 | (17,200) | (17,200) | (46,800) | 272,000 Year 5 | 0 | (225,200) | 225,200 | 0 | 46,800 | 0
| | | | (94,800) |
Totals | 563,000 | (225,200) | 0 | (225,200) | (94,800) | 0

Example 6 – Replacement plans in a business combination In January 20X1, Entity A acquired 100 percent of Entity B. Entity A paid the sum of $400 in cash to the previous owners of Entity B.
At the acquisition date, Entity B had outstanding employee share options with a market-based measurement of $100. The share options were fully vested. As part of the business combination, the outstanding share options of Entity B were replaced by share options of Entity A (replacement plans) with a market-based measurement of $100 and an intrinsic value of $80. The replacement plans were fully vested. In accordance with paragraphs B56 to B62 of Technical Pronouncement CPC 15 – Business Combinations, the replacement plans form part of the consideration transferred to Entity B. The replacement plans are not deductible for tax purposes until the option is exercised. The deduction is based on the intrinsic value of the share options at the acquisition date. The tax rate of Entity A is 40 percent. Entity A recognizes a deferred tax asset of $32 (intrinsic value of $80 x 40%) relating to the replacement plans at the acquisition date.

CVM RESOLUTION NO. 109, OF MAY 20, 2022

Entity A measures the identifiable net assets obtained from the business combination (excluding deferred tax assets and liabilities) at $450. The tax base of the identifiable net assets is $300. Entity A recognizes a deferred tax liability of $60 (($450 - $300) x 40%) on the identifiable net assets at the acquisition date. The goodwill arising from the expectation of future profitability (goodwill) is calculated as follows:
$
Cash consideration 400
Replacement plans measured at market value 100 Total consideration transferred 500 Identifiable net assets, excluding deferred tax assets and liabilities (450) Deferred tax asset 32 Deferred tax liability 60 Goodwill arising from the expectation of future profitability (goodwill) 78

Reductions in the carrying amount of goodwill arising from the expectation of future profitability (goodwill) are not deductible for tax purposes. In accordance with paragraph 15(a) of the Pronouncement, Entity A does not recognize any deferred tax liability for the taxable temporary difference associated with the goodwill arising from the expectation of future profitability (goodwill) recognized in the business combination. The accounting entry for the business combination is as follows:
$ $
Dr Goodwill 78
Dr Identifiable net assets 450
Dr Deferred tax asset 32
Cr Cash 400
Cr Equity (replacement plan) 100
Cr Deferred tax liability 60

On December 31, 20X1, the intrinsic value of the replacement plans is $120. Entity A recognizes a deferred tax asset of $48 ($120 x 40%). Entity A recognizes deferred tax income of $16 ($48 - 32) from the increase in the intrinsic value of the replacement plans. The accounting entry is as follows:
Dr Deferred tax asset 16
Cr Deferred tax income

If the replacement plans had not been deductible for tax purposes under current tax law, Entity A would not have recognized the tax asset at the acquisition date. Entity A would have accounted for any subsequent events that resulted in the tax deduction related to the replacement plan in the deferred tax expense or income of the period in which the subsequent event occurred.

CVM RESOLUTION NO. 109, OF MAY 20, 2022

Paragraphs B56 to B62 of Technical Pronouncement CPC 15 – Business Combinations provide guidance on how to determine which portions of a replacement plan form part of the consideration transferred in a business combination and which portions are attributable to future service and thus to post-combination remuneration expense. Deferred tax assets and liabilities on replacement plans that are post-combination expenses are accounted for in accordance with general principles, as illustrated in Example 5.

Example 7 – Debt instruments measured at fair value Debt instruments On December 31, 20X1, Entity Z holds a portfolio of three debt instruments:

Debt Instrument | Cost | Fair Value | Contractual Interest Rate A | $2,000,000 | $1,942,857 | 2.00% B | $750,000 | $778,571 | 9.00% C | $2,000,000 | $1,961,905 | 3.00%

Entity Z acquired all debt instruments at their nominal value. The terms of the debt instruments require the issuer to pay the nominal value of the debt bonds at maturity, on December 31, 20X2.
Interest is paid at the end of each year at the fixed contractual rate, which equaled the market interest rate when the debt instruments were acquired. At the end of 20X1, the market interest rate is 5%, which caused the fair value of the debt of instruments A and C to fall below their cost and the fair value of the debt of instrument B to rise above its cost. It is probable that Entity Z will receive all contractual cash flows if it continues to hold the debt instruments. At the end of 20X1, Entity Z expects to recover the carrying amounts of debt instruments A and B through their use, i.e., by continuing to hold them and collecting the contractual cash flows, and debt instrument C by selling it at the beginning of 20X2 at the fair value on December 31, 20X1. It is assumed that no other tax planning opportunities are available to Entity Z that would allow it to sell debt instrument B to generate a capital gain against which it could offset the capital loss arising from the sale of debt instrument C. Debt instruments must be measured at fair value through other comprehensive income in accordance with CPC 38 (before the effective date of CPC 48) or in accordance with CPC 48 (after the effective date of this). CPC 48 must be applied (when it enters into force by regulatory bodies) to all items that were previously classified under CPC 38.

Tax Legislation
The tax base of the debt instruments is the cost, which tax law allows to be offset, either at maturity, when the principal is repaid, or against the proceeds of sale, when the debt instruments are sold. Tax law specifies that gains (losses) on debt instruments are taxable (deductible) only when realized.

CVM RESOLUTION NO. 109, OF MAY 20, 2022

Tax law distinguishes ordinary gains and losses from capital gains and losses. Ordinary losses can be offset against ordinary gains and capital gains. Capital losses can only be offset against capital gains. Capital losses can be offset for 5 years and ordinary losses can be offset for 20 years. Ordinary gains are taxed at 30% and capital gains are taxed at 10%. Tax law classifies interest income from debt instruments as 'ordinary' and gains and losses resulting from the sale of debt instruments as 'capital'. Losses that arise if the bond issuer does not pay the principal at maturity must be classified as ordinary by tax law.

General
On December 31, 20X1, Entity Z has, from other sources, taxable temporary differences of $50,000 and deductible temporary differences of $430,000, which will affect ordinary taxable profit (tax loss or ordinary loss) in 20X2.
At the end of 20X1, it is probable that Entity Z will file a tax report with the tax authorities with an ordinary tax loss of $200,000 for the year 20X2. This tax loss includes all taxable economic benefits and tax deductions for which there are temporary differences on December 31, 20X1 and which are classified as ordinary by tax law. These values contribute equally to the loss for the period in accordance with tax legislation. Entity Z has no capital gains with which it could use the capital losses arising in 20X1 and 20X2. Except for the information provided in the previous paragraphs, there is no further information that is relevant to Entity Z's accounting for deferred taxes in the 20X1 and 20X2 periods.

Temporary Difference
At the end of 20X1, Entity Z identifies the following temporary differences:

Carrying Amount | Tax Base | Taxable Temporary Differences | Deductible Temporary Differences $ | $ | $ | Debt instrument A | 1,942,857 | 2,000,000 | -.- | 57,143 Debt instrument B | 778,571 | 750,000 | 28,571 | -.- Debt instrument C | 1,961,905 | 2,000,000 | -.- | 38,095 Other resources | -.- | -.- | 50,000 | 430,000

The difference between the carrying amount of an asset or liability and its tax base gives rise to a deductible (taxable) temporary difference (see paragraphs 20 and 26(d)). This occurs because deductible (taxable) temporary differences are differences between the carrying amount of an asset or liability in the balance sheet and its tax base, which will result in amounts that are deductible (liability) in the determination of taxable profit (tax loss) of future periods, when the carrying amount of the asset or liability is recovered or settled (see paragraph 5).

Utilization of Deductible Temporary Difference With some exceptions, deferred tax assets arising from deductible temporary differences must be recognized to the extent that future taxable profit is available and the deductible temporary differences can be used to reduce that future taxable profit (see paragraph 24). Paragraphs 28 and 29 identify the sources of taxable profits with respect to which the entity can use the deductible temporary differences. These items include:
(a) future reversal of existing taxable temporary differences; (b) taxable profit in future periods; and (c) tax planning opportunities.

CVM RESOLUTION NO. 109, OF MAY 20, 2022

The deductible temporary difference resulting from debt instrument C must be evaluated separately for its utilization. This is because tax law classifies the loss, resulting from the recovery of the carrying amount of debt instrument C by sale, as capital losses, and allows capital losses to be offset only against capital gains (see paragraph 27A). The separate evaluation results in the non-recognition of deferred tax asset for the deductible temporary difference resulting from debt instrument C because Entity Z has no source of taxable profit available that tax law classifies as capital. However, the deductible temporary difference, which arises from debt instrument A and other sources, must be evaluated for utilization in combination with each other. This is because their related tax deductions are classified as ordinary by tax law. The tax deductions represented by the deductible temporary differences related to debt instrument A must be classified as ordinary, because tax law classifies the effect on taxable profit (tax loss) of deducting from the tax base, at maturity, as ordinary. When evaluating the utilization of deductible temporary differences on December 31, 20X1, the following two steps must be performed by Entity Z.

Step 1: Utilization of deductible temporary differences due to reversal of taxable temporary differences (see paragraph 28) Entity Z must first evaluate the existence of taxable temporary differences, as specified below:
$
Expected reversal of deductible temporary differences in 20X2 From debt instrument A 57,143 From other sources 430,000 Total reversal of deductible temporary differences 487,143 Expected reversal of taxable temporary differences in 20X2 From debt instrument B (28,571) From other sources (50,000) Total reversal of taxable temporary differences (78,571) Utilization based on reversal of taxable temporary differences (Step 1) 78,571 Remaining deductible temporary differences eligible for evaluation for utilization in Step 2 (487,143 - 78,571) 408,572

In Step 1, Entity Z can recognize the deferred tax asset with respect to the deductible temporary difference of $78,571.

Step 2: Utilization of deductible temporary differences based on future taxable profit (see paragraph 29(a)).
In this step, Entity Z must evaluate the availability of future taxable profit, as specified below:
$
Probable future tax profit (loss) in 20X2 (with respect to which tax on profit is paid (or recoverable)) (200,000) Add back: reversal of deductible temporary differences expected to be reversed in 20X2 487,143 Less: reversal of taxable temporary differences (used in Step 1) (78,571) Probable taxable profit, excluding tax deductions, to evaluate the utilization of deductible temporary differences in 20X2 208,572 Remaining deductible temporary differences eligible for evaluation for utilization from Step 1 408,572 Utilization based on future taxable profit (Step 2) 208,572 Utilization based on reversal of taxable temporary differences (Step 1) 78,571 Total utilization of deductible temporary differences 287,143

The tax loss of $200,000 includes the taxable economic benefit of $2 million, from the collection of the principal of debt instrument A and the equivalent tax deduction, because it is probable that Entity Z will recover the debt instrument at a value higher than its carrying amount (see paragraph 29A). The utilization of deductible temporary differences should not, however, be offset against the probable future taxable profit for the period in which taxes on profit must be paid (see paragraph 5). Instead, the utilization of deductible temporary differences must be offset against the probable future taxable profit, which excludes the tax deductions resulting from the reversal of deductible temporary differences (see paragraph 29(a)). It is important to clarify that allowing the utilization of deductible temporary differences against probable future taxable profits, without excluding these deductions, would lead to double counting of the deductible temporary differences in this evaluation.

CVM RESOLUTION NO. 109, OF MAY 20, 2022

In Step 2, Entity Z concludes that it can recognize the deferred tax asset with respect to future taxable profit, excluding the tax deductions resulting from the reversal of deductible temporary differences, of $208,572. Consequently, the total utilization of deductible temporary differences amounts to $287,143 ($78,571 (Step 1) + $208,572 (Step 2)).

Measurement of Deferred Tax Asset and Deferred Tax Liability Entity Z presents the following deferred tax assets and deferred tax liabilities in its financial statements on December 31, 20X1:
$
Total of taxable temporary differences 78,571
Total utilization of deductible temporary differences 287,143 Deferred tax liabilities (30% of 78,571) 23,571 Deferred tax assets (30% of 287,143) 86,143

Deferred tax assets and deferred tax liabilities must be measured using the tax rate for ordinary gains of 30%, in accordance with the expected manner of recovery (settlement) of the underlying assets (liabilities) (see paragraph 51).

Allocation of Changes in Deferred Tax Assets between Profit or Loss and Other Comprehensive Income Changes in deferred tax, which arise from items that are recognized in profit or loss, must be recognized in profit or loss (see paragraph 58). Changes in deferred tax, which arise from items that are recognized in other comprehensive income, must be recognized in other comprehensive income (see paragraph 61A). Entity Z did not recognize deferred tax assets for all its deductible temporary differences on December 31, 20X1, and, in accordance with tax legislation, all tax deductions represented by the deductible temporary differences contribute equally to the tax loss for the period. Therefore, the evaluation of the utilization of deductible temporary differences does not specify whether taxable profits should be used for deferred tax items, which are recognized in profit or loss (i.e., deductible temporary differences from other sources) or, instead of taxable profit, should be used for deferred tax items, which are recognized in other comprehensive income (i.e., deductible temporary differences relating to debt instruments classified at fair value through other comprehensive income). For these situations, paragraph 63 requires that the values of deferred taxes, to be allocated to profit or loss and to other comprehensive income, must be calculated on a reasonable pro rata basis or by another method, which achieves a more appropriate allocation in the circumstances.

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 SCN Q.02 – Bl. A – Corporate Financial Center Building, S.404/4th Floor, Brasília/DF – ZIP: 70712-900 – Brazil - Tel.: (61) 3327-2030/2031 www.gov.br/cvm

CVM RESOLUTION NO. 109, OF MAY 20, 2022

Appendix C – Recovery of Revalued Non-Depreciable Assets

This Appendix is an integral part of Technical Pronouncement CPC 32 – Income Taxes.
It corresponds to IASB Interpretation SIC 21

Question

In accordance with Technical Pronouncement CPC 32 – Income Taxes, item 51, the measurement of deferred tax liabilities and assets must reflect the tax effects resulting from the manner in which the entity expects, at the end of the reporting period, to recover or settle the carrying amount of those assets and liabilities that give rise to temporary differences.
Technical Pronouncement CPC 32, item 20, notes that the revaluation of an asset, when legally permitted, does not always affect taxable income (tax loss) in the period of revaluation and that the tax base of the asset cannot be adjusted as a result of the revaluation. If the future recovery of the carrying amount is taxable, any difference between the carrying amount of the revalued asset and its tax base is a temporary difference and gives rise to a deferred tax liability or asset.
The question is how to interpret the term “recovery” in relation to an asset that is not depreciated (non-depreciable asset) and is revalued in accordance with item 31 of Technical Pronouncement CPC 32.
This Appendix also applies to investment properties that are carried at revalued amounts in accordance with item 33 of Technical Pronouncement CPC 28 – Investment Properties, but would be considered non-depreciable if Technical Pronouncement CPC 27 – Property, Plant and Equipment were applied.

Consensus

The deferred tax liability or asset arising from the revaluation of a non-depreciable asset in accordance with item 31 of Technical Pronouncement CPC 27 – Property, Plant and Equipment shall be measured based on the tax effects resulting from the recovery of the carrying amount of that asset through sale, regardless of the measurement basis of the carrying amount of that asset. Consequently, if tax law specifies a tax rate applicable to the taxable value derived from the sale of an asset that is different from the tax rate applicable to the taxable value derived from the use of an asset, the first rate is applied in the measurement of the deferred tax liability or asset related to a non-depreciable asset.

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 SCN Q.02 – Bl. A – Corporate Financial Center Building, S.404/4th Floor, Brasília/DF – ZIP: 70712-900 – Brazil - Tel.: (61) 3327-2030/2031 www.gov.br/cvm

CVM RESOLUTION NO. 109, OF MAY 20, 2022

Appendix D – Changes in the Tax Status of an Entity or Its Owners

This Appendix is an integral part of Technical Pronouncement CPC 32 – Income Taxes.
It corresponds to IASB Interpretation SIC 25

Question

A change in the tax status of an entity or its owners may have effects for an entity, increasing or reducing its tax liabilities or assets. This may occur, for example, upon the public issuance of an entity’s equity instruments or upon the restructuring of its equity. It may also occur upon the change of a controlling partner to a foreign country. As a result of this event, an entity may be taxed differently; it may, for example, gain or lose tax incentives or become subject to a different tax rate in the future.
A change in the tax status of an entity or its owners may have an immediate effect on the entity’s current tax liabilities or assets. The change may also increase or reduce the deferred tax liabilities and assets recognized by the entity, depending on the effect that the change in tax status has on the tax effects that will arise from the recovery or settlement of the carrying amount of the entity’s assets and liabilities.
The question is how an entity should account for the tax effects of a change in its tax status or in the status of its owners.

Consensus

A change in the tax status of an entity or its owners does not give rise to increases or decreases in amounts recognized outside profit or loss. The current and deferred tax effects of a change in tax status shall be included in the period’s profit or loss, except if these effects are related to transactions and events that result, in the same period or in a different period, in a credit or debit directly to the recognized amount of equity or to amounts recognized in other comprehensive income. These tax effects that are related to changes in the recognized amount of equity, in the same period or in a different period (not included in profit or loss), shall be debited or credited directly to equity. These tax effects that are related to amounts recognized in other comprehensive income shall be recognized in other comprehensive income.

Lineage: No known changes

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