2022-05-20
Added · Updated
CVM Resolution No. 115 makes Technical Pronouncement CPC 46 on fair value measurement mandatory for publicly-held companies, consolidating the standard issued by the Accounting Pronouncements Committee (CPC). The resolution revokes Deliberation 699 of December 20, 2012, and enters into force on July 1, 2022. It establishes the framework for measuring fair value, including definitions, valuation techniques, the fair value hierarchy, and disclosure requirements, aligning Brazilian standards with IFRS 13.
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SECURITY AND EXCHANGE COMMISSION OF BRAZIL - CVM Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – CEP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/SP – CEP: 01333-010 – Brazil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Corporate Financial Center Building, S.404/4th Floor, Brasília/DF – CEP: 70712-900 – Brazil - Tel.: (61) 3327-2030/2031 www.gov.br/cvm
CVM RESOLUTION NO. 115, OF MAY 20, 2022
Approves the Consolidation of Technical Pronouncement CPC 46 of the Accounting Pronouncements Committee - CPC, which deals with fair value measurement.
The PRESIDENT OF THE SECURITY AND EXCHANGE COMMISSION OF BRAZIL - CVM makes public that the Board, in a meeting held on April 14, 2022, based on §§ 3 and 5 of art. 177 of Law No. 6,404, of December 15, 1976, combined with items II and IV of § 1 of art. 22 of Law No. 6,385, of December 7, 1976, as well as arts. 5 and 14 of Decree No. 10,139, of November 28, 2019,
APPROVED the following Resolution:
Art. 1 It makes mandatory for publicly-held companies the Technical Pronouncement CPC 46, which deals with fair value measurement, issued by the Accounting Pronouncements Committee - CPC, as consolidated in Annex “A” to this Resolution.
Art. 2 Deliberation 699, of December 20, 2012, is hereby revoked, from the effective date of this Resolution.
Art. 3 This Resolution enters into force on July 1, 2022.
Signed electronically by
Marcelo Barbosa
President
SECURITY AND EXCHANGE COMMISSION OF BRAZIL - CVM Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – CEP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/SP – CEP: 01333-010 – Brazil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Corporate Financial Center Building, S.404/4th Floor, Brasília/DF – CEP: 70712-900 – Brazil - Tel.: (61) 3327-2030/2031 www.gov.br/cvm
CVM RESOLUTION NO. 115, OF MAY 20, 2022
ANNEX “A”
ACCOUNTING PRONOUNCEMENTS COMMITTEE
TECHNICAL PRONOUNCEMENT CPC 46
FAIR VALUE MEASUREMENT
Correlation to International Financial Reporting Standards – IFRS 13 (IASB - BV 2012)
Summary Item
OBJECTIVE 1 – 4
SCOPE 5 – 8
MEASUREMENT 9 – 90
Definition of fair value 9 – 10
Asset or liability 11 – 14
Transaction 15 – 21
Market participants 22 – 23
Price 24 – 26
Application to non-financial assets 27 – 33
Application to liabilities and entity’s own equity instruments 34 – 47 Application to financial assets and financial liabilities with market risk or counterparty credit risk positions 48 – 56 Fair value at initial recognition 57 – 60 Valuation techniques 61 – 66 Information for valuation techniques 67 – 71 Fair value hierarchy 72 – 90 DISCLOSURE 91 – 99
APPENDIX A – Definition of terms
APPENDIX B – Application guide
APPENDIX C – Transitional provisions
ILLUSTRATIVE EXAMPLES
SECURITY AND EXCHANGE COMMISSION OF BRAZIL - CVM Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – CEP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/SP – CEP: 01333-010 – Brazil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Corporate Financial Center Building, S.404/4th Floor, Brasília/DF – CEP: 70712-900 – Brazil - Tel.: (61) 3327-2030/2031 www.gov.br/cvm
CVM RESOLUTION NO. 115, OF MAY 20, 2022
Objective
The objective of this Pronouncement is:
(a) to define fair value;
(b) to establish in a single Pronouncement the framework for fair value measurement; and (c) to establish disclosures about fair value measurements.
Fair value is a market-based measurement, not an entity-specific measurement. For some assets and liabilities, market-based or observable transaction information may be available and for others it may not. However, the objective of fair value measurement in both cases is the same – to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions (i.e., an exit price at the measurement date from the perspective of a market participant that holds the asset or owes the liability).
When the price for an identical asset or liability is not observable, the entity measures fair value using another valuation technique that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs. Because fair value is a market-based measurement, it is measured using the assumptions that market participants would use when pricing the asset or liability, including assumptions about risk. As a result, the entity’s intention to hold an asset or to settle or otherwise fulfill a liability is not relevant in measuring fair value.
The definition of fair value focuses on assets and liabilities because they are the primary subject of accounting measurement. In addition, this Pronouncement shall be applied to the entity’s own equity instruments measured at fair value.
Scope
5. This Pronouncement is applicable when another Pronouncement requires or permits fair value measurements or disclosures about fair value measurements (and measurements – such as fair value less costs to sell – based on fair value or disclosures about those measurements), except as specified in paragraphs 6 and 7.
The measurement and disclosure requirements of this Pronouncement do not apply to:
(a) share-based payment transactions within the scope of CPC 10 – Share-based Payment; (b) lease transactions within the scope of CPC 06 – Leases; and (c) measurements that have some similarities with fair value but do not represent fair value, such as net realizable value referred to in Pronouncement CPC 16 – Inventories or value in use referred to in Pronouncement CPC 01 – Impairment of Assets.
The disclosures required by this Pronouncement are not required for:
(a) plan assets measured at fair value in accordance with CPC 33 – Employee Benefits;
SECURITY AND EXCHANGE COMMISSION OF BRAZIL - CVM Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – CEP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/SP – CEP: 01333-010 – Brazil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Corporate Financial Center Building, S.404/4th Floor, Brasília/DF – CEP: 70712-900 – Brazil - Tel.: (61) 3327-2030/2031 www.gov.br/cvm
CVM RESOLUTION NO. 115, OF MAY 20, 2022
(b) (eliminated); and
(c) assets whose recoverable amount is fair value less costs to sell, in accordance with Pronouncement CPC 01.
Measurement
Definition of fair value
9. This Pronouncement defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Asset or liability
11. Fair value measurement is for a particular asset or liability. Therefore, when measuring fair value, the entity shall take into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Those characteristics include, for example:
(a) the condition and location of the asset; and (b) restrictions, if any, on the sale or use of the asset.
The effect on measurement resulting from a particular characteristic may differ depending on how that characteristic is taken into account by market participants.
The asset or liability measured at fair value may be any of the following:
(a) an individual asset or liability (for example, a financial instrument or a non-financial asset); or (b) a group of assets, a group of liabilities, or a group of assets and liabilities (for example, a cash-generating unit or a business).
The determination of whether the asset or liability is an individual asset or liability, a group of assets, a group of liabilities, or a group of assets and liabilities for recognition or disclosure purposes depends on its unit of account. The unit of account for the asset or liability shall be determined in accordance with the Pronouncement that requires or permits the fair value measurement, except as provided in this Pronouncement.
Transaction
15. Fair value measurement assumes that the asset or liability is exchanged in an orderly transaction between market participants to sell the asset or to transfer the liability at the measurement date under current market conditions.
SECURITY AND EXCHANGE COMMISSION OF BRAZIL - CVM Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – CEP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/SP – CEP: 01333-010 – Brazil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Corporate Financial Center Building, S.404/4th Floor, Brasília/DF – CEP: 70712-900 – Brazil - Tel.: (61) 3327-2030/2031 www.gov.br/cvm
CVM RESOLUTION NO. 115, OF MAY 20, 2022
Fair value measurement assumes that the transaction to sell the asset or to transfer the liability occurs:
(a) in the principal market for the asset or liability; or (b) in the absence of a principal market, in the most advantageous market for the asset or liability.
The entity need not undertake an exhaustive search of all possible markets to identify the principal market or, in the absence of a principal market, the most advantageous market, but it shall take into account all information that is available. In the absence of contrary evidence, the market in which the entity would normally enter into a transaction to sell the asset or to transfer the liability shall be presumed to be the principal market or, in the absence of a principal market, the most advantageous market.
If there is a principal market for the asset or liability, fair value measurement shall represent the price in that market (whether that price is directly observable or estimated using another valuation technique) even if the price in a different market is potentially more advantageous at the measurement date.
The entity must have access to the principal market (or most advantageous market) at the measurement date. Because different entities (and businesses within those entities) with different activities may have access to different markets, the principal market (or most advantageous market) for the same asset or liability may be different for different entities (and businesses within those entities). Therefore, the principal market (or most advantageous market) (and, thus, market participants) shall be considered from the perspective of the entity, allowing for differences between entities with different activities.
Although the entity must be able to access the market, it need not be able to sell the specific asset or transfer the specific liability at the measurement date in order to measure fair value based on the price of that market.
Even if there is no observable market for providing price information regarding the sale of an asset or the transfer of a liability at the measurement date, fair value measurement shall presume that a transaction takes place at that date, considered from the perspective of a market participant that holds the asset or owes the liability. This presumed transaction establishes a basis for estimating the price for the sale of the asset or the transfer of the liability.
Market participants
22. The entity shall measure fair value of an asset or liability using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.
SECURITY AND EXCHANGE COMMISSION OF BRAZIL - CVM Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – CEP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/SP – CEP: 01333-010 – Brazil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Corporate Financial Center Building, S.404/4th Floor, Brasília/DF – CEP: 70712-900 – Brazil - Tel.: (61) 3327-2030/2031 www.gov.br/cvm
CVM RESOLUTION NO. 115, OF MAY 20, 2022
(a) the asset or liability;
(b) the principal market (or most advantageous market) for the asset or liability; and (c) market participants with which the entity would enter into a transaction in that market.
Price
24. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal market (or most advantageous market) at the measurement date under current market conditions (i.e., an exit price), regardless of whether that price is directly observable or estimated using another valuation technique.
The price in the principal market (or most advantageous market) used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. Transaction costs shall be accounted for in accordance with other Pronouncements. Transaction costs are not a characteristic of an asset or a liability; rather, they are specific to a transaction and may differ depending on how the entity enters into the transaction for the asset or liability.
Transaction costs do not include transport costs. If location is a characteristic of the asset (as may be the case, for example, for a commodity), the price in the principal market (or most advantageous market) shall be adjusted for the costs, if any, that would be incurred to transport the asset from its current location to that market.
Application to non-financial assets
Highest and best use for non-financial assets
27. Fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.
The highest and best use of a non-financial asset takes into account a use of the asset that is physically possible, legally permissible, and financially viable, as follows:
(a) A use that is physically possible takes into account the physical characteristics of the asset that market participants would take into account when pricing the asset (for example, the location or size of a property).
(b) A use that is legally permissible takes into account any legal restrictions on the use of the asset that market participants would take into account when pricing the asset (for example, the zoning regulations applicable to a property).
(c) A use that is financially viable takes into account whether a use of the asset that is physically possible and legally permissible generates sufficient revenues or cash flows (taking into account the costs to convert the asset to that use) to produce the investment return that market participants would require from an investment in that asset put to that use.
The highest and best use is determined from the perspective of market participants, even if the entity intends a different use. However, it is presumed that the entity’s current use of a non-financial asset is its highest and best use unless market or other factors suggest that a different use by market participants would maximize the value of the asset.
The entity may intend not to actively use a non-financial asset acquired or may intend not to use it in accordance with its highest and best use for, for example, competitive protection or other reasons. For example, an acquired intangible asset that the entity plans to use defensively to prevent others from using it. Nevertheless, the entity shall measure fair value of a non-financial asset presuming its highest and best use by market participants.
Valuation premise for non-financial assets
31. The highest and best use of a non-financial asset establishes the valuation premise used to measure fair value of the asset, as follows:
(a) The highest and best use of a non-financial asset may provide the maximum value to market participants through its use in combination with other assets as a group (as installed or otherwise configured for use) or in combination with other assets and liabilities (for example, a business).
(i) If the highest and best use of the asset is its use in combination with other assets or with other assets and liabilities, the fair value of the asset is the price that would be received in a current transaction to sell the asset, presuming that the asset would be used with other assets or with other assets and liabilities and that those assets and liabilities (i.e., its complementary assets and their respective liabilities) would be available to market participants. (ii) Liabilities associated with the asset and complementary assets include liabilities that finance working capital but do not include liabilities used to finance other assets other than those comprised in the group of assets. (iii) Assumptions about the highest and best use of a non-financial asset shall be consistent for all assets (for which highest and best use is relevant) in the group of assets or the group of assets and liabilities within which the asset would be used. (b) The highest and best use of a non-financial asset could provide the maximum value to market participants on an individual basis. If the highest and best use of the asset is to use it on an individual basis, its fair value shall be the price that would be received in a current transaction to sell the asset to market participants that would use it on an individual basis.
Fair value measurement of a non-financial asset presumes that the asset is sold consistent with the unit of account specified in other Pronouncements (which may be an individual asset). This is the case even when that fair value measurement presumes that the highest and best use of the asset is to use it in combination with other assets or with other assets and liabilities, because fair value measurement presumes that the market participant already holds the complementary assets and the corresponding liabilities.
Paragraph B3 describes the application of the valuation premise concept for non-financial assets.
SECURITY AND EXCHANGE COMMISSION OF BRAZIL - CVM Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – CEP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/SP – CEP: 01333-010 – Brazil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Corporate Financial Center Building, S.404/4th Floor, Brasília/DF – CEP: 70712-900 – Brazil - Tel.: (61) 3327-2030/2031 www.gov.br/cvm
CVM RESOLUTION NO. 115, OF MAY 20, 2022
Application to liabilities and entity’s own equity instruments General principles
34. Fair value measurement presumes that a financial or non-financial liability or the entity’s own equity instrument (for example, equity instruments issued as consideration in a business combination) is transferred to a market participant at the measurement date. The transfer of a liability or an entity’s own equity instrument presumes the following:
(a) the liability would remain outstanding and the market participant transferee would be required to fulfill the obligation. The liability would not be settled with the counterparty or otherwise extinguished at the measurement date; (b) the entity’s own equity instrument would remain outstanding and the market participant transferee would assume the rights and responsibilities associated with the instrument. The instrument would not be cancelled or otherwise extinguished at the measurement date.
Even when there is no observable market for providing price information regarding the transfer of a liability or an entity’s own equity instrument (for example, because of contractual or other legal restrictions that prevent transfer of those items), there may be an observable market for those items if they are held by other parties as assets (for example, corporate debt securities or call options on the entity’s shares).
In all cases, the entity shall maximize the use of relevant observable inputs and minimize the use of unobservable inputs to meet the objective of fair value measurement, which is to estimate the price at which an orderly transaction to transfer the liability or equity instrument would take place between market participants at the measurement date under current market conditions.
Liabilities and equity instruments held by other parties as assets
37. When a quoted price for the transfer of an identical or similar liability or entity’s own equity instrument is not available and the identical item is held by another party as an asset, the entity shall measure the fair value of the liability or equity instrument from the perspective of a market participant that holds the identical item as an asset at the measurement date.
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SECURITIES 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. 115, OF MAY 20, 2022
(i) income approach (for example, a present value technique that takes into account the future cash flow that a market participant would expect to receive by holding the liability or equity instrument as an asset (see paragraphs B10 and B11)); (ii) market approach (for example, using quoted prices for similar liabilities or equity instruments held by other parties as assets (see paragraphs B5 to B7)).
Liabilities and equity instruments not held by other parties as assets
When a quoted price for the transfer of an identical or similar liability or the entity's own equity instrument is not available, and the identical item is not held by another party as an asset, the entity shall measure the fair value of the liability or equity instrument using a valuation technique from the perspective of a market participant that owes the liability or has exercised rights over the equity.
For example, when applying the present value technique, the entity may take into account any of the following:
(a) the future cash outflows that a market participant would expect to incur in satisfying the obligation, including the compensation that a market participant would require for assuming the obligation (see paragraphs B31 to B33).
(b) the amount that a market participant would receive to enter into or issue an identical liability or equity instrument, using the assumptions that market participants would use when pricing the identical item (for example, having the same credit characteristics) in the principal (or most advantageous) market for the issuance of a liability or equity instrument with the same contractual terms.
SECURITIES 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. 115, OF MAY 20, 2022
Non-performance risk
The fair value of a liability reflects the effect of non-performance risk. Non-performance risk includes, among other things, the entity's own credit risk (as defined in Pronouncement CPC 40 – Financial Instruments: Disclosure). Non-performance risk is presumed to be the same before and after the transfer of the liability.
When measuring the fair value of a liability, the entity shall take into account the effect of its credit risk (credit standing) and any other factors that might influence the likelihood that the obligation will or will not be satisfied. This effect may differ depending on the liability; for example:
(a) if the liability is an obligation to deliver cash (a financial liability) or an obligation to deliver goods or services (a non-financial liability).
(b) the terms of credit enhancements related to the liability, if any.
The fair value of a liability reflects the effect of non-performance risk based on its unit of account. The issuer of a liability issued for an inseparable third-party credit enhancement instrument that is accounted for separately from the liability shall not include the effect of the credit enhancement (for example, third-party debt guarantee) in the measurement of the fair value of the liability. If the credit enhancement is accounted for separately from the liability, the issuer shall take into account its own credit standing, and not that of the third-party guarantor, when measuring the fair value of the liability.
Restriction that prevents the transfer of a liability or the entity's own equity instrument
When measuring the fair value of a liability or its own equity instrument, the entity shall not include a separate input or an adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the item. The effect of a restriction that prevents the transfer of a liability or the entity's own equity instrument is included implicitly or explicitly in the other inputs of the fair value measurement.
For example, at the transaction date, both the creditor and the guarantor accepted the transaction price for the liability with full knowledge that the obligation includes a restriction that prevents its transfer. As a result of including the restriction in the transaction price, no separate input or adjustment to an existing input is required at the transaction date to reflect the effect of the restriction on the transfer. Similarly, no separate input or adjustment to an existing input is required at subsequent measurement dates to reflect the effect of the restriction on the transfer.
Financial liability with an on-demand feature
SECURITIES 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. 115, OF MAY 20, 2022
Application to financial assets and financial liabilities with market risk or counterparty credit risk positions
An entity that holds a group of financial assets and financial liabilities is exposed to market risk and credit risk (as defined in Pronouncement CPC 40) of each of the counterparties. If the entity manages this group of financial assets and financial liabilities based on its net exposure to market risk or credit risk, it may apply an exception to this Pronouncement for the measurement of fair value. This exception allows the entity to measure the fair value of a group of financial assets and financial liabilities based on the price that would be received for the sale of a net long position (i.e., an asset) for a specific risk exposure or paid for the transfer of a net short position (i.e., a liability) for a specific risk exposure in an orderly transaction between market participants at the measurement date under current market conditions. Consequently, the entity shall measure the fair value of the group of financial assets and financial liabilities consistently with the way market participants would price the net risk exposure at the measurement date.
An entity is permitted to use the exception in paragraph 48 only if it satisfies all of the following:
(a) manages the group of financial assets and financial liabilities based on the entity's net exposure to a specific market risk (or risks) or to the credit risk of a specific counterparty, in accordance with the entity's documented investment or risk management strategy; (b) provides information, on that basis, about the group of financial assets and financial liabilities to key management personnel of the entity, as defined in Pronouncement CPC 05 – Related Party Disclosures; and (c) is required to, or has elected to, measure these financial assets and financial liabilities at fair value in the balance sheet at the end of each reporting period.
The exception in paragraph 48 is not related to the presentation of financial statements. In some cases, the basis for the presentation of financial statements in the balance sheet differs from the basis for the measurement of financial instruments, for example, if a Pronouncement does not require or allow financial instruments to be presented on a net basis. In these cases, the entity may need to allocate the adjustments at the portfolio level (see paragraphs 53 to 56) to the individual assets or liabilities that form the group of financial assets and financial liabilities managed based on the entity's net risk exposure. The entity shall make these allocations in a reasonable and consistent manner, using a methodology appropriate to the circumstances.
To use the exception in paragraph 48, the entity shall make a decision on accounting policy in accordance with Pronouncement CPC 23 – Accounting Policies, Changes in Accounting Estimates and Errors. The entity that uses the exception shall apply this accounting policy, including its policy for allocating adjustments to reflect the spread between buying and selling prices (see paragraphs 53 to 55) and credit adjustments (see paragraph 56), if applicable, consistently from period to period for a specific portfolio.
SECURITIES 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. 115, OF MAY 20, 2022
Exposure to market risks
When using the exception in paragraph 48 to measure the fair value of a group of financial assets and financial liabilities managed based on the entity's net exposure to a specific market risk (or risks), the entity shall apply the price contained in the spread between buying and selling prices that, in the circumstances, best represents the fair value for the entity's net exposure to these market risks (see paragraphs 70 and 71).
When using the exception in paragraph 48, the entity shall ensure that the market risk (or risks) to which the entity is exposed in this group of financial assets and financial liabilities is substantially the same. For example, the entity would not combine the interest rate risk associated with a financial asset with the commodity price risk associated with a financial liability, because doing so would not mitigate the entity's exposure to interest rate risk or commodity price risk. When using the exception in paragraph 48, any basis risk resulting from the fact that market risk parameters are not identical will be taken into account in the measurement of the fair value of the financial assets and financial liabilities contained in the group.
Similarly, the duration of the entity's exposure to a specific market risk (or risks) as a result of the financial assets and financial liabilities will be substantially the same. For example, an entity that uses a 12-month futures contract against cash flows associated with 12 months of interest rate risk exposure in a five-year financial instrument within a group formed only of these financial assets and financial liabilities measures the fair value of the 12-month interest rate risk exposure on a net basis and the remaining interest rate risk exposure (i.e., years 2 to 5) on a gross basis.
Exposure to specific counterparty credit risk
SECURITIES 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. 115, OF MAY 20, 2022
Fair value at initial recognition
When an asset is acquired or a liability is assumed in an exchange transaction for that asset or liability, the transaction price is the price paid to acquire the asset or received to assume the liability (an entry price). On the other hand, the fair value of the asset or liability is the price that would be received to sell the asset or paid to transfer the liability (an exit price). Entities do not necessarily sell assets at the prices paid to acquire them. Similarly, entities do not necessarily transfer liabilities at the prices received to assume them.
In many cases, the transaction price is equal to the fair value (this may be the case, for example, when, at the transaction date, the transaction to purchase an asset occurs in the market in which the asset would be sold).
In determining whether the fair value at initial recognition is equal to the transaction price, the entity shall take into account factors specific to the transaction and the asset or liability. Paragraph B4 describes situations in which the transaction price may not represent the fair value of the asset or liability at initial recognition.
If another Pronouncement requires or allows the entity to initially measure the asset or liability at fair value and the transaction price differs from the fair value, the entity shall recognize the resulting gain or loss in profit or loss, unless that Pronouncement specifies otherwise.
Valuation techniques
The entity shall use valuation techniques that are appropriate in the circumstances and for which there is sufficient data available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.
The objective of using a valuation technique is to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions. Three widely used valuation techniques are (i) market approach, (ii) cost approach, and (iii) income approach. The key aspects of these approaches are summarized in paragraphs B5 to B11. The entity shall use valuation techniques consistent with one or more of these approaches to measure fair value.
In some cases, a single valuation technique is appropriate (for example, when valuing an asset or a liability using quoted prices in an active market for identical assets or liabilities). In other cases, multiple valuation techniques are appropriate (this may be the case, for example, when valuing a cash-generating unit). If multiple valuation techniques are used to measure fair value, the results (i.e., the respective indications of fair value) shall be evaluated considering the reasonableness of the range of values indicated by them. The fair value measurement is the point within that range that best represents fair value in the circumstances.
If the transaction price is the fair value at initial recognition, and a valuation technique that uses unobservable inputs is used to measure fair value in subsequent periods,
SECURITIES 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. 115, OF MAY 20, 2022
the valuation technique shall be calibrated so that, at initial recognition, the result of the valuation technique equals the transaction price. Calibration ensures that the valuation technique reflects current market conditions and helps the entity determine whether an adjustment to the valuation technique is necessary (for example, there may be a characteristic of the asset or liability that is not captured by the valuation technique). After initial recognition, when measuring fair value using one or more valuation techniques that use unobservable inputs, the entity shall ensure that these valuation techniques reflect observable market data (for example, the price of a similar asset or liability) at the measurement date.
The valuation techniques used to measure fair value shall be applied consistently. However, a change in valuation technique or its application (for example, a change in its weighting when multiple valuation techniques are used or a change in the adjustment applied to a valuation technique) is appropriate if the change results in a measurement that is equally or more representative of fair value in the circumstances. This may be the case if, for example, any of the following events occur:
(a) new markets emerge;
(b) new information becomes available;
(c) information previously used is no longer available; (d) there is an improvement in valuation techniques; or (e) there are changes in market conditions.
Revisions resulting from a change in valuation technique or its application shall be accounted for as a change in accounting estimate, in accordance with Pronouncement CPC 23. However, the disclosures of Pronouncement CPC 23 for changes in accounting estimates are not required for revisions resulting from a change in valuation technique or its application.
Inputs for valuation techniques
General principles
The valuation techniques used to measure fair value shall maximize the use of relevant observable inputs and minimize the use of unobservable inputs.
Examples of markets in which information may be observable for some assets and liabilities (for example, financial instruments) include stock exchanges, dealer markets, brokered markets, and principal-to-principal markets (see paragraph B34).
The entity shall select inputs that are consistent with the characteristics of the asset or liability, which would be taken into account by market participants in a transaction with the asset or liability (see paragraphs 11 and 12). In some cases, these characteristics result in the application of an adjustment, such as a premium or discount (for example, control premium or discount for non-controlling interests). However, the fair value measurement shall not incorporate a premium or discount that is inconsistent with the unit of account in the Pronouncement that requires or allows the measurement of fair value (see paragraphs 13 and 14). Premiums or discounts that reflect size as a characteristic of the entity's interest (specifically, a blockage factor that adjusts the quoted price of an asset or liability because the normal daily trading volume in the market is not sufficient to absorb the quantity held by the entity, as
SECURITIES 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. 115, OF MAY 20, 2022
COMMISSÃO 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 115, DE 20 DE MAIO DE 2022 described in item 80) and not as a characteristic of the asset or liability (for example, a control premium when measuring the fair value of a controlling interest) are not permitted in measuring fair value. In all cases, if there is a quoted price in an active market (that is, Level 1 information; see items 72 to 90) for an asset or liability, the entity shall use that price without adjustment when measuring fair value, except as specified in item 79.
Prices based on buy and sell prices
70. If an asset or liability measured at fair value has a buy price and a sell price (for example, information from a dealer market), the price within the bid-ask spread that, in the circumstances, best represents fair value shall be used to measure fair value, regardless of where that information is classified in the fair value hierarchy (that is, Level 1, 2, or 3; see items 72 to 90). The use of buy prices for long positions and sell prices for short positions is permitted, but not required.
71. This Pronouncement does not preclude the use of mid-market pricing or other pricing conventions that are used by market participants as a practical expedient for fair value measurements within the bid-ask spread.
Fair value hierarchy
72. To increase consistency and comparability in fair value measurements and related disclosures, this Pronouncement establishes a fair value hierarchy that classifies into three levels (see items 76 to 90) the inputs (inputs) used in the valuation techniques used in measuring fair value. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1 information) and the lowest priority to unobservable data (Level 3 information).
73. In some cases, the information used to measure the fair value of an asset or a liability may be classified in different levels of the fair value hierarchy. In these cases, the fair value measurement is classified in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the measurement as a whole. Assessing the significance of a specific input to the measurement as a whole requires judgment, taking into account specific factors of the asset or liability. Adjustments to arrive at fair value-based measurements, such as costs to sell when measuring fair value less costs to sell, shall not be taken into account when determining the level of the fair value hierarchy in which the fair value measurement is classified.
74. The availability of relevant information and its relative subjectivity may affect the choice of appropriate valuation techniques (see item 61). However, the fair value hierarchy prioritizes the inputs (inputs) from the valuation techniques and not the valuation techniques used to measure fair value. For example, the fair value measurement developed using a present value technique may be classified in Level 2 or Level 3, depending on the inputs that are significant to the measurement as a whole and the level of the fair value hierarchy in which those inputs (inputs) are classified.
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 115, DE 20 DE MAIO DE 2022
75. If observable data required an adjustment that used unobservable data and that adjustment resulted in a fair value measurement significantly higher or lower, the resulting measurement would be classified in Level 3 of the fair value hierarchy. For example, if a market participant took into account the effect of a restriction on the sale of an asset when estimating the price of the asset, the entity would adjust the quoted price to reflect the effect of that restriction. If that quoted price were Level 2 information and the adjustment were significant unobservable data for the measurement as a whole, the measurement would be classified in Level 3 of the fair value hierarchy.
Level 1 Information
76. Level 1 information is quoted prices (unadjusted) in active markets for identical assets or liabilities to which the entity has access at the measurement date.
77. The quoted price in an active market provides the most reliable evidence of fair value and shall be used without adjustment to measure fair value whenever available, except as specified in item 79.
78. Level 1 information is available for many financial assets and financial liabilities, some of which may be traded in multiple active markets (for example, on different exchanges). Therefore, the emphasis on Level 1 is on determining both of the following:
(a) the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability; and (b) whether the entity can enter into a transaction with the asset or liability at the price in that market at the measurement date.
79. The entity shall not make an adjustment to Level 1 information (input), except in the following circumstances:
(a) when the entity holds a large number of similar (but not identical) assets or liabilities (for example, debt securities) that are measured at fair value, and a quoted price in an active market is available but not readily accessible for each of these assets or liabilities individually (that is, given the large number of similar assets or liabilities held by the entity, it would be difficult to obtain pricing information for each asset or liability individually at the measurement date). In this case, as a practical expedient, the entity may measure fair value using an alternative pricing method that is not based exclusively on quoted prices (for example, matrix pricing). However, the use of an alternative pricing method results in the fair value measurement being classified at a lower level in the fair value hierarchy; (b) when the quoted price in an active market does not represent fair value at the measurement date. This may be the case if, for example, significant events (such as transactions in an unmediated market, negotiated transactions in a mediated market, or announcements) occur after market close, but before the measurement date. The entity shall establish and consistently apply a policy for identifying events that may affect fair value measurements. However, if the quoted price is adjusted to reflect new information, the adjustment results in the fair value measurement being classified at a lower level in the fair value hierarchy.
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 115, DE 20 DE MAIO DE 2022 (c) when measuring the fair value of a liability or the entity's own equity instrument using the quoted price for the identical item traded as an asset in an active market, and that price needs to be adjusted to reflect specific factors of the item or asset (see item 39). If no adjustment to the quoted price of the asset is necessary, the result of the fair value measurement is classified in Level 1 of the fair value hierarchy. However, any adjustment to the quoted price of the asset results in the fair value measurement being classified at a lower level in the fair value hierarchy.
80. If the entity holds a position in a single asset or liability (including a position that comprises a large number of identical assets or liabilities, such as the holding of financial instruments) and that asset or liability is traded in an active market, the fair value of the asset or liability is measured in Level 1 as the product of the quoted price for the individual asset or liability and the quantity held by the entity. This is the case even when the normal daily trading volume of the market is not sufficient to absorb the quantity held and the issuance of sell orders for the position in a single transaction may affect the quoted price.
Level 2 Information
81. Level 2 information is information that is observable for the asset or liability, either directly or indirectly, other than quoted prices included in Level 1.
82. If the asset or liability has a defined term (contractual), Level 2 information must be observable substantially for the entire term of the asset or liability. Level 2 information includes the following:
(a) quoted prices for similar assets or liabilities in active markets; (b) quoted prices for identical or similar assets or liabilities in markets that are not active; (c) information, other than quoted prices, that is observable for the asset or liability, such as, for example:
(i) observable interest rates and yield curves at commonly quoted intervals; (ii) implied volatilities; and (iii) credit spreads; (d) market-corroborated information.
83. Adjustments to Level 2 inputs (inputs) vary depending on specific factors of the asset or liability. Such factors include the following:
(a) the condition or location of the asset;
(b) the extent to which the information relates to items that are comparable to the asset or liability (including the factors described in item 39); and (c) the volume or level of activity in the markets in which the information is observed.
84. An adjustment to Level 2 information (input) that is significant to the measurement as a whole may result in the fair value measurement being classified in Level 3 of the fair value hierarchy if that adjustment uses significant unobservable data.
85. Item B35 describes the use of Level 2 inputs (inputs) for specific assets and liabilities.
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 115, DE 20 DE MAIO DE 2022 Level 3 (inputs) Information
86. Level 3 inputs (inputs) are unobservable data for the asset or liability.
87. Unobservable data shall be used to measure fair value to the extent that relevant observable data are not available, thus admitting situations where there is little or no market activity for the asset or liability at the measurement date. However, the objective of the fair value measurement remains the same, namely, an exit price at the measurement date from the perspective of a market participant that holds the asset or owes the liability. Therefore, unobservable data reflect the assumptions that market participants would use when pricing the asset or the liability, including assumptions about risk.
88. Risk assumptions include the risk inherent in a specific valuation technique used to measure fair value (such as, for example, a pricing model) and the risk inherent in the information used in the valuation technique. A measurement that did not include an adjustment to reflect risk would not represent a fair value measurement if, when pricing the asset or the liability, market participants included an adjustment. For example, a risk adjustment may need to be included when there is significant uncertainty in the measurement (for example, when there has been a significant decrease in volume or level of activity compared to normal market activity for the asset or liability, or for similar assets or liabilities, and the entity has determined that the transaction price or quoted price does not represent fair value, as described in items B37 to B47).
89. The entity shall develop unobservable data using the best information available in the circumstances, which may include the entity's own data. When developing unobservable data, the entity may start with its own data, but shall adjust that data if reasonably available information indicates that other market participants would use different data or if there is something specific to the entity that is not available to other market participants (for example, a specific entity synergy). The entity is not required to undertake exhaustive efforts to obtain information about market participant assumptions. However, the entity shall take into account all information about market participant assumptions that is reasonably available. Unobservable data developed as described above are considered market participant assumptions and achieve the objective of fair value measurement.
90. Item B36 describes the use of Level 3 information for specific assets and liabilities.
Disclosure
91. The entity shall disclose information that assists users of its financial statements in evaluating both of the following:
(a) for assets and liabilities that are measured at fair value on a recurring or non-recurring basis in the balance sheet after initial recognition, the valuation techniques and information used to develop those measurements; (b) for recurring fair value measurements that use significant unobservable data (Level 3), the effect of the measurements on the period's profit or loss or other comprehensive income for the period.
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 115, DE 20 DE MAIO DE 2022
92. To achieve the objectives of item 91, the entity shall consider all of the following items:
(a) the level of detail necessary to meet the disclosure requirements; (b) how much emphasis to give to each of the various requirements; (c) how much aggregation or disaggregation to make; and (d) whether users of financial statements need additional information to evaluate the quantitative information disclosed. If the disclosures made in accordance with this Pronouncement and others are insufficient to achieve the objectives of item 91, the entity shall disclose additional information necessary to achieve those objectives.
93. To achieve the objectives of item 91, the entity shall disclose, at a minimum, the following information for each class of assets and liabilities (see item 94 for information on determining appropriate classes of assets and liabilities) measured at fair value (including measurements based on fair value within the scope of this Pronouncement) in the balance sheet after initial recognition:
(a) for recurring and non-recurring fair value measurements, for the fair value measurement at the end of the period of the financial statements and for non-recurring fair value measurements, the reasons for the measurement. Recurring fair value measurements of assets or liabilities are those that other Pronouncements require or permit in the balance sheet at the end of each period of the financial statements. Non-recurring fair value measurements of assets or liabilities are those that other Pronouncements require or permit in the balance sheet in specific circumstances (for example, when the entity measures an asset held for sale at fair value less costs to sell, in accordance with Pronouncement CPC 31 – Non-Current Asset Held for Sale and Discontinued Operation, because the fair value less costs to sell of the asset is lower than its carrying amount); (b) for recurring and non-recurring fair value measurements, the level of the fair value hierarchy in which the fair value measurements are classified in their entirety (Level 1, 2, or 3); (c) for assets and liabilities held at the end of the period of the financial statements that are measured at fair value on a recurring basis, the values of any transfers between Level 1 and Level 2 of the fair value hierarchy, the reasons for these transfers, and the entity's policy for determining when it is considered that transfers between levels have occurred (see item 95). Transfers to each level shall be disclosed and discussed separately from transfers from each level. (d) for recurring and non-recurring fair value measurements classified in Level 2 and Level 3 of the fair value hierarchy, the description of the valuation techniques and the information (inputs) used in the fair value measurement. If there was a change in the valuation technique (for example, change from market approach to revenue approach, or the use of additional valuation technique), the entity shall disclose that change and the reasons for adopting it. For fair value measurements classified in Level 3 of the fair value hierarchy, the entity shall provide quantitative information about significant unobservable data used in the fair value measurement. The entity is not required to create quantitative information to comply with this disclosure requirement if quantitative unobservable data are not developed by the entity when measuring fair value (for example, when the entity uses prices of previous transactions or third-party pricing information without adjustment). However, when providing this disclosure, the entity cannot ignore quantitative unobservable data that are significant to the fair value measurement and that are available to the entity; (e) for recurring fair value measurements classified in Level 3 of the fair value hierarchy, a reconciliation of beginning balances with ending balances, disclosing separately the changes during the period attributable to the following:
(i) total gains or losses for the period, recognized in profit or loss, and the line items in profit or loss in which those gains or losses are recognized; (ii) total gains or losses for the period, recognized in other comprehensive income, and the line items in other comprehensive income in which those gains or losses are recognized; (iii) purchases, sales, issuances, and settlements (each of these types of changes disclosed separately); (iv) the values of any transfers to (or, from) Level 3 of the fair value hierarchy, the reasons for these transfers, and the entity's policy for determining when it is considered that transfers between levels have occurred (see item 95). Transfers to Level 3 shall be disclosed and discussed separately from transfers from Level 3; (f) for recurring fair value measurements classified in Level 3 of the fair value hierarchy, the value of total gains or losses for the period in (e)(i) included in profit or loss that are attributable to the change in unrealized gains or losses relating to those assets and liabilities determined at the end of the period of the financial statements and the line items of the profit or loss statement in which those unrealized gains or losses are recognized; (g) for recurring and non-recurring fair value measurements classified in Level 3 of the fair value hierarchy, a description of the valuation processes used by the entity (including, for example, how the entity decides its valuation policies and procedures and analyzes changes in fair value measurements from period to period); (h) for recurring fair value measurements classified in Level 3 of the fair value hierarchy:
(i) for all these measurements, a narrative description of the sensitivity of the fair value measurement to changes in unobservable data, if a change in that data to a different value could result in a significantly higher or lower fair value measurement. If there are interrelationships between that data and other unobservable data used in the fair value measurement, the entity shall also provide a description of those interrelationships and of how they could intensify or mitigate the effect of changes in unobservable data on the fair value measurement. To satisfy this disclosure requirement, the narrative description of sensitivity to changes in unobservable data shall include, at a minimum, the unobservable data disclosed to satisfy item (d); (ii) for financial assets and financial liabilities, if the change of one or more of the unobservable data to reflect reasonably possible alternative assumptions could change the fair value significantly, the entity shall indicate that fact and disclose the effect of those changes. The entity shall disclose how the effect of a change to reflect a reasonably possible alternative assumption was calculated. For this purpose, importance shall be evaluated in relation to profit or loss and total assets or total liabilities
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 115, DE 20 DE MAIO DE 2022
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 115, DE 20 DE MAIO DE 2022 or, when changes in fair value are recognized in other comprehensive income, to total equity; (i) for recurring and non-recurring fair value measurements, if the highest and best use of a non-financial asset differs from its current use, the entity must disclose that fact and why the non-financial asset is being used in a manner that differs from its highest and best use.
94. The entity must determine appropriate classes of assets and liabilities based on the following:
(a) nature, characteristics, and risks of the asset or liability; and (b) the level of the fair value hierarchy in which the fair value measurement is classified.
The number of classes may need to be greater for fair value measurements classified in Level 3 of the fair value hierarchy, as these measurements have a higher degree of uncertainty and subjectivity. Determining appropriate classes of assets and liabilities for which disclosures about fair value measurements are required requires judgment. A class of assets and liabilities often requires greater disaggregation than the line items presented in the balance sheet. However, the entity must provide sufficient information to allow reconciliation with the line items presented in the balance sheet. If another Pronouncement specifies the class of an asset or liability, the entity may, when providing the disclosures required by this Pronouncement, use that class if it satisfies the requirements of this item.
95. The entity must consistently disclose and follow its policy for determining when transfers between levels of the fair value hierarchy have occurred in accordance with items 93(c) and (e)(iv). The policy on the timing of recognition of transfers is the same for transfers to levels and for transfers from levels. Examples of policies for determining the timing of transfers include:
(a) the date of the event or change in circumstances that caused the transfer; (b) the beginning of the period of the financial statements; (c) the end of the period of the financial statements.
96. If the entity makes a policy decision to use the exception of item 48, it must disclose that fact.
97. For each class of assets and liabilities not measured at fair value in the balance sheet, but
whose fair value is disclosed, the entity must disclose the information required by items 93(b), (d) and (i). However, the entity is not required to provide quantitative disclosures about significant unobservable data used in fair value measurements classified in Level 3 of the fair value hierarchy, as required by item 93(d). For these assets and liabilities, the entity does not need to provide the other disclosures required by this Pronouncement.
98. For a liability measured at fair value and issued for a third-party credit enhancement instrument that is inseparable, the issuer must disclose the existence of that credit enhancement and whether it is reflected in the fair value measurement of the liability.
99. The entity must present the quantitative disclosures required by this Pronouncement in
tabular format, unless another format is more appropriate.
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 115, DE 20 DE MAIO DE 2022
Appendix A – Definition of terms
This appendix is an integral part of this Pronouncement. active market Market in which transactions for the asset or liability occur with frequency and volume sufficient to provide pricing information on a continuous basis. cost approach Valuation technique that reflects the amount that would currently be required to replace the service capacity of an asset (often referred to as current replacement cost). entry price Price paid to acquire an asset or received to assume a liability in an exchange transaction. exit price Price that would be received to sell an asset or paid to transfer a liability. expected cash flow Probability-weighted average (i.e., the mean of the distribution) of possible future cash flows. fair value Price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. highest and best use Use of a non-financial asset by market participants that would maximize the value of the asset or the group of assets and liabilities (for example, a business) within which the asset would be used. income approach Valuation techniques that convert future values (for example, cash flows or revenues and expenses) into a single current value (i.e., discounted). The fair value measurement is determined based on the value indicated by current market expectations regarding these future values. inputs Assumptions that would be used by market participants when pricing the asset or the liability, including assumptions about risk, such as:
(a) risk inherent in a specific valuation technique used to measure fair value (for example, a pricing model); and (b) risk inherent in the data of the valuation technique.
Inputs may be observable or unobservable.
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 115, DE 20 DE MAIO DE 2022 Level 1 inputs Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date. Level 2 inputs Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs Unobservable data for the asset or liability. market approach Valuation technique that uses prices and other relevant information generated by market transactions involving identical or comparable (i.e., similar) assets, liabilities or group of assets and liabilities (for example, a business). market- confirmed inputs Inputs that are obtained primarily from (or corroborated by) observable market data through correlation or by other means. market participants Buyers and sellers in the principal (or most advantageous) market for the asset or liability, which have all of the following characteristics:
(a) are independent of each other, i.e., are not related parties, as defined in Pronouncement CPC 05, although the price in a transaction with related parties may be used as an input in the fair value measurement if the entity has evidence that the transaction was conducted under market conditions; (b) are knowledgeable, having a reasonable understanding of the asset or liability and the transaction using all available information, including information that may be obtained through usual and customary efforts with due diligence; (c) are able to enter into a transaction with the asset or liability; (d) are willing to enter into a transaction with the asset or liability, i.e., are motivated, but not forced or, otherwise, obligated to do so. most advantageous market Market that maximizes the amount that would be received to sell the asset or that minimizes the amount that would be paid to transfer the liability, after taking into account transaction costs and transportation costs. non-performance risk Risk that the entity will not fulfill an obligation. Non-performance risk includes, among others, the entity's own credit risk.
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 115, DE 20 DE MAIO DE 2022 observable inputs Inputs that are developed using market data, such as publicly available information about events or actual transactions, and that reflect the assumptions that market participants would use when pricing the asset or the liability. orderly transaction Transaction that presumes exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving these assets or liabilities; it is not a forced transaction (for example, forced liquidation or distressed sale). principal market Market with the greatest volume and level of activity for the asset or liability. risk premium Compensation sought by risk-averse market participants for bearing the uncertainty inherent in the cash flow of an asset or liability. Also known as a “risk adjustment”. transaction costs Costs to sell an asset or transfer a liability in the principal (or most advantageous) market for the asset or liability that are directly attributable to the sale of the asset or to the transfer of the liability and that meet both of the following criteria:
(a) result directly from the transaction and are essential to it; (b) would not have been incurred by the entity if the decision to sell the asset or to transfer the liability had not been taken (similar to costs to sell, as defined in Pronouncement CPC 31). transportation costs Costs that would be incurred to transport an asset from its current location to its principal (or most advantageous) market. unit of accounting Level at which an asset or liability is aggregated or disaggregated for purposes of recognition. unobservable inputs Inputs with respect to which there is no market data available and which are developed using the best available information about the assumptions that would be used by the market participants when pricing the asset or the liability.
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 115, DE 20 DE MAIO DE 2022
Appendix B – Implementation guidance
This appendix is an integral part of Technical Pronouncement CPC 46. It describes the application of items 1 to 99 and has the same authority as the other parts of this Pronouncement.
B1. Judgments applied in different valuation situations may be different. This
appendix describes the judgments that may be applicable when the entity measures fair
value in different valuation situations.
Fair value measurement approach
B2. The objective of fair value measurement is to estimate the price at which an orderly transaction for the sale of the asset or for the transfer of the liability would occur between market participants at the measurement date under current market conditions. Fair value measurement requires that the entity determine all of the following items:
(a) the specific asset or liability subject to the measurement (consistent with its unit of accounting); (b) for a non-financial asset, the appropriate valuation premise for the measurement (consistent with its highest and best use); (c) the principal (or most advantageous) market for the asset or liability; (d) the appropriate valuation techniques for the measurement, considering the availability data with which to develop inputs that represent the assumptions that would be used by market participants when pricing the asset or the liability and the level of the fair value hierarchy in which the data are classified. Valuation premise for non-financial assets (items 31 to 33) B3. When measuring the fair value of a non-financial asset used in combination with other assets as a group (as installed or otherwise configured for use) or in combination with other assets and liabilities (for example, a business), the effect of the valuation premise depends on the circumstances. For example:
(a) the fair value of an asset may be the same, regardless of whether the asset is used independently or in combination with other assets or with other assets and liabilities. This may be the case when the asset is a business that market participants would continue to operate.
In this case, the transaction would involve the valuation of the business in its entirety. The use of the assets as a group in the operating business would generate synergies that would be available to the market participants (i.e., synergies of market participants that, therefore, affect the fair value of the asset independently or in combination with other assets or with other assets and liabilities); (b) the use of an asset in combination with other assets or with other assets and liabilities could be incorporated into the fair value measurement through adjustments to the value of the asset used independently. This may be the case when the asset is a machine and the fair value measurement is determined using the observed price for a similar machine (not installed or otherwise configured for use), adjusted to reflect transportation and installation costs, so that the fair value measurement reflects the current condition and location of the machine (installed and configured for use);
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 115, DE 20 DE MAIO DE 2022 (c) the use of an asset in combination with other assets or with other assets and liabilities could be incorporated into the fair value measurement through the assumptions of market participants used to measure the fair value of the asset. For example, if the asset consists of inventory of work-in-process products of a unique nature and market participants would convert this inventory into finished products, the fair value of the inventory would presume that market participants acquired or would acquire any specialized machinery necessary to convert the inventory into finished products; (d) the use of an asset in combination with other assets or with other assets and liabilities could be incorporated into the valuation technique used to measure the fair value of the asset. This may be the case when using the multi-period excess earnings method to measure the fair value of an intangible asset, as the valuation technique specifically takes into account the contribution of any complementary assets and corresponding liabilities in the group in which this intangible asset would be used. (e) in more limited situations, when using an asset within a group of assets, the entity may measure the asset at an amount that approximates its fair value by allocating the fair value of the group of assets to the individual assets of the group. This may be the case when the valuation involves real estate and the fair value of the improved property (i.e., group of assets) is allocated to its component assets (such as land and improvements). Fair value at initial recognition (items 57 to 60) B4. When determining whether the fair value at initial recognition is equal to the transaction price, the entity must take into account specific factors of the transaction and the asset or liability. For example, the transaction price may not represent the fair value of an asset or liability at initial recognition if any of the following conditions apply:
(a) the transaction is between related parties, although the price in a transaction with related parties may be used as an input in the fair value measurement if the entity has evidence that the transaction was conducted under market conditions; (b) the transaction occurs under duress or the seller is forced to accept the price in the transaction. For example, this may be the case when the seller is experiencing financial difficulties; (c) the unit of accounting represented by the transaction price is different from the unit of accounting for the asset or liability measured at fair value. For example, this may be the case if the asset or liability measured at fair value is only one of the elements in the transaction (for example, in a business combination), the transaction includes rights and privileges implicit that are measured separately according to another Pronouncement or the transaction price includes transaction costs; (d) the market in which the transaction occurs is different from the principal (or most advantageous) market. For example, these markets may be different if the entity is a reseller that enters into transactions with customers in the retail market, but the principal (or most advantageous) market for the exit transaction is with other resellers in the resellers' market.
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 115, DE 20 DE MAIO DE 2022 Valuation techniques (items 61 to 66) Market approach B5. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable (i.e., similar) assets, liabilities or group of assets and liabilities – such as, for example, a business. B6. For example, valuation techniques consistent with the market approach often use market multiples obtained from a set of comparison elements. The multiples must be in ranges, with a different multiple for each comparison element. The choice of the appropriate multiple within the range requires judgment, considering specific qualitative and quantitative factors of the measurement. B7. Valuation techniques consistent with the market approach include matrix pricing. Matrix pricing is a mathematical technique used primarily to evaluate some types of financial instruments, such as debt securities, without relying exclusively on quoted prices for the specific securities, but rather based on the relationship of the securities with other quoted benchmark securities. Cost approach B8. The cost approach reflects the amount that would currently be required to replace the service capacity of an asset (often referred to as current replacement cost). B9. From the perspective of a market participant seller, the price that would be received for the asset is based on the cost for a market participant buyer to acquire or construct a substitute asset of comparable utility, adjusted to reflect obsolescence. This is because a market participant buyer would not pay more for an asset than the amount at which it could substitute the service capacity of that asset. Obsolescence comprises physical deterioration, functional (technological) obsolescence, and economic (external) obsolescence, being broader than depreciation for financial statement purposes (allocation of historical cost) or for tax purposes (using specified useful lives). In many cases, the current replacement cost method is used to measure the fair value of tangible assets that are used in combination with other assets or with other assets and liabilities. Income approach B10. The income approach converts future values (for example, cash flows or revenues and expenses) into a single current value (i.e., discounted). When the income approach is used, the fair value measurement reflects current market expectations regarding these future values. B11. These valuation techniques include, for example:
(a) present value techniques (see items B12 to B30);
SECURITIES AND EXCHANGE COMMISSION OF BRAZIL (COMISSÃO DE VALORES MOBILIÁRIOS) 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 – Corporate Financial Center Building, S.404/4th Floor, Brasília/DF – CEP: 70712-900 – Brazil - Tel.: (61) 3327-2030/2031 www.gov.br/cvm
CVM RESOLUTION NO. 115, OF MAY 20, 2022
(b) option pricing models, such as the Black-Scholes-Merton formula or binomial model (i.e., tree model), which incorporate present value techniques and reflect both the time value and the intrinsic value of the option; and (c) the excess earnings method in multiple periods, which is used to measure the fair value of certain intangible assets.
Present Value Techniques
B12. Items B13 to B30 describe the use of present value techniques to measure fair value. These items focus on the discount rate adjustment technique and the expected cash flow technique (expected present value). These items do not prescribe the use of a single specific present value technique nor limit the use of present value techniques for fair value measurement to the techniques discussed. The present value technique used to measure fair value depends on specific facts and circumstances regarding the asset or liability being measured (for example, whether prices for comparable assets or liabilities can be observed in the market) and the availability of sufficient data.
Components of Present Value Measurement
B13. Present value (i.e., application of the income approach) is a tool used to relate future values (for example, values or cash flows) to a present value using a discount rate. The measurement of the fair value of an asset or liability using a present value technique captures all of the following elements, from the perspective of market participants, at the measurement date:
(a) an estimate of the future cash flows for the asset or liability being measured; (b) expectations about possible variations in the amount and timing of cash flows that represent the uncertainty inherent in the cash flows; (c) the time value of money, represented by the rate on risk-free monetary assets with maturity dates or terms that coincide with the period covered by the cash flows and that do not present uncertainty regarding timing or default risk for the holder (i.e., risk-free interest rate); (d) the price to bear the uncertainty inherent in the cash flows (i.e., risk premium); (e) other factors that market participants would take into consideration in the circumstances; (f) for a liability, the default risk relative to that liability, including the entity’s own credit risk (i.e., debtor).
General Principles
B14. Present value techniques differ in how they capture the elements of item B13. However, all of the following general principles govern the application of any present value technique used to measure fair value:
(a) cash flows and discount rates reflect assumptions that market participants would use when pricing the asset or liability; (b) cash flows and discount rates take into account only factors attributable to the asset or liability being measured; (c) to avoid double counting or omitting the effects of risk factors, discount rates reflect assumptions that are consistent with those inherent in the cash flows. For example, the discount rate that reflects uncertainty in expectations regarding future defaults is appropriate when using contractual loan cash flows (i.e., discount rate adjustment technique). That same rate should not be applied when using expected cash flows (i.e., probability-weighted) (i.e., expected present value technique), because expected cash flows already reflect assumptions regarding uncertainty about future defaults; instead, a discount rate compatible with the risk inherent in the expected cash flows should be used; (d) assumptions about cash flows and discount rates must be internally consistent. For example, nominal cash flows, which include the effect of inflation, must be discounted at a rate that includes the effect of inflation. The nominal risk-free interest rate includes the effect of inflation. Real cash flows, which exclude the effect of inflation, must be discounted at a rate that excludes the effect of inflation. Similarly, after-tax cash flows must be discounted using an after-tax discount rate. Pre-tax cash flows must be discounted at a rate consistent with those cash flows; (e) discount rates must be consistent with the underlying economic factors of the currency in which the cash flows are denominated.
Risk and Uncertainty
B15. The measurement of fair value using present value techniques is made under conditions of uncertainty, because the cash flows used are estimates, not known values. In many cases, both the amount and timing of cash flows are uncertain. Even contractually fixed values, such as loan payments, are uncertain if there is default risk.
B16. Market participants generally seek compensation (i.e., risk premium) for bearing the uncertainty inherent in the cash flow of an asset or liability. The fair value measurement must include a risk premium that reflects the value that market participants would require as compensation for the uncertainty inherent in the cash flows. Otherwise, the measurement would not faithfully represent fair value. In some cases, it may be difficult to determine the appropriate risk premium. However, the degree of difficulty by itself is not sufficient reason to exclude the risk premium.
B17. Present value techniques differ in how they adjust to reflect risk and in the type of cash flows they use. For example:
(a) the discount rate adjustment technique (see items B18 to B22) uses a risk-adjusted discount rate and contractual, promised, or most likely cash flows; (b) Method 1 of the expected present value technique (see item B25) uses risk-adjusted expected cash flows and a risk-free rate; (c) Method 2 of the expected present value technique (see item B26) uses unadjusted expected cash flows and a discount rate adjusted to include the risk premium required by market participants. This rate is different from the rate used in the discount rate adjustment technique.
Discount Rate Adjustment Technique
B18. The discount rate adjustment technique uses a single set of cash flows from the range of possible estimated values, whether they are contractual or promised cash flows (as is the case for a debt instrument) or most likely. In all cases, these cash flows depend on the occurrence of certain events (for example, contractual or promised cash flows for a debt instrument depend on the debtor not defaulting). The discount rate used in the discount rate adjustment technique is obtained from the observed returns for comparable assets or liabilities that are traded in the market. Consequently, contractual, promised, or most likely cash flows are discounted at an observed or estimated market rate for those conditional cash flows (i.e., market return rate).
B19. The discount rate adjustment technique requires an analysis of market data for comparable assets or liabilities. Comparability is determined by considering the nature of the cash flows (for example, whether the cash flows are contractual or non-contractual and whether they are likely to respond similarly to changes in economic conditions), as well as other factors (for example, credit status, collateral, duration, restrictive covenants, and liquidity). Alternatively, if a single comparable asset or liability does not adequately reflect the risk inherent in the cash flows of the asset or liability being measured, it may be possible to obtain a discount rate using data regarding several comparable assets or liabilities together with the risk-free yield curve (i.e., using a “cumulative” approach).
B20. To illustrate a cumulative approach, suppose that Asset A is a contractual right to receive $800 in one year (i.e., there is no uncertainty regarding the timing). There is an established market for comparable assets and information is available about these assets, including information about prices. Of these comparable assets:
(a) Asset B is a contractual right to receive $1,200 in one year and has a market price of $1,083. Thus, the implied annual return rate (i.e., a one-year market return rate) is 10.8% [($1,200/$1,083) - 1]; (b) Asset C is a contractual right to receive $700 in two years and has a market price of $566. Thus, the implied annual return rate (i.e., a two-year market return rate) is 11.2% [($700/$566)^0.5 - 1]; (c) all three assets are comparable regarding risk (i.e., dispersion of possible settlements and credit).
B21. Based on the timing of the contractual payments to be received by Asset A relative to the timing for Asset B and Asset C (i.e., one year for Asset B versus two years for Asset C), Asset B is considered to be more comparable to Asset A. Using the contractual payment to be received by Asset A ($800) and the one-year market rate obtained from Asset B (10.8%), the fair value of Asset A is $722 ($800/1.108). Alternatively, in the absence of available market information for Asset B, the one-year market rate could be obtained from Asset C using the cumulative approach. In this case, the two-year market rate indicated by Asset C (11.2%) would be adjusted to a one-year market rate using the term structure of the risk-free yield curve. Additional analysis and information may be needed to determine whether the risk premiums for one-year and two-year assets are the same. If it were determined that the risk premiums for one-year and two-year assets are not the same, the two-year market return rate would be adjusted again to reflect this effect.
B22. When the discount rate adjustment technique is applied to fixed receipts or payments, the adjustment to reflect the risk inherent in the cash flows of the asset or liability being measured is included in the discount rate. In some applications of the discount rate adjustment technique to cash flows that are not fixed receipts or payments, it may be necessary to adjust the cash flows to achieve comparability with the observed asset or liability from which the discount rate is obtained.
Expected Present Value Technique
B23. The expected present value technique uses as a starting point a set of cash flows that represents the probability-weighted average of all possible future cash flows (i.e., expected cash flows). The resulting estimate is identical to the expected value, which, in statistical terms, is the weighted average of the possible values of a discrete random variable having as weights their respective probabilities. Because all possible cash flows are probability-weighted, the resulting expected cash flows do not depend on the occurrence of any certain event (unlike the cash flows used in the discount rate adjustment technique).
B24. When making an investment decision, risk-averse market participants would take into account the risk that actual cash flows could differ from expected cash flows. Portfolio theory distinguishes between two types of risk:
(a) unsystematic risk (diversifiable), which is the specific risk of a particular asset or liability; (b) systematic risk (non-diversifiable), which is the common risk shared by an asset or liability with other items in a diversified portfolio.
Portfolio theory states that, in an equilibrium market, market participants are compensated only for bearing the systematic risk inherent in the cash flows. (In markets that are inefficient or out of equilibrium, other forms of return or compensation may be available.)
B25. Method 1 of the expected present value technique adjusts the expected cash flows of the asset to reflect systematic (i.e., market) risk by subtracting the cash risk premium (i.e., risk-adjusted expected cash flows). These risk-adjusted expected cash flows represent a risk-free equivalent of the cash flow, which is discounted at a risk-free interest rate. The risk-free equivalent of the cash flow refers to the expected cash flow (as defined), adjusted to reflect risk, such that a market participant would be indifferent to trading a certain cash flow for an expected cash flow. For example, if a market participant was interested in trading an expected cash flow of $1,200 for a certain cash flow of $1,000, the $1,000 is the risk-free equivalent of the $1,200 (i.e., the $200 would represent the cash risk premium). In this case, the market participant would be indifferent to the asset held.
B26. In contrast, Method 2 of the expected present value technique makes an adjustment to reflect systematic (i.e., market) risk by applying a risk premium to the risk-free interest rate. Consequently, the expected cash flows are discounted at a rate that corresponds to the expected rate associated with probability-weighted cash flows (i.e., expected return rate). Models used for pricing risky assets, such as the financial asset pricing model, can be used to estimate the expected return rate. Because the discount rate used in the discount rate adjustment technique is a rate relative to conditional cash flows, it is likely to be higher than the discount rate used in Method 2 of the expected present value technique, which is the expected return rate relative to expected or probability-weighted cash flows.
B27. To illustrate Methods 1 and 2, suppose that an asset has expected cash flows of $780 in one year, determined based on the possible cash flows and probabilities presented below. The applicable risk-free interest rate for cash flows with a one-year horizon is 5% and the systematic risk premium for an asset with the same risk profile is 3%.
Possible Cash Flows | Probability | Probability-Weighted Cash Flows $500 | 15% | $75 $800 | 60% | $480 $900 | 25% | $225 Expected Cash Flows | | $780
B28. In this simple illustration, the expected cash flows ($780) represent the probability-weighted average of the three possible outcomes. In more realistic situations, there could be many possible outcomes. However, to apply the expected present value technique, it is not always necessary to take into account distributions of all possible cash flows using complex models and techniques. Instead, it may be possible to develop a limited number of scenarios and discrete probabilities that capture the set of possible cash flows. For example, the entity could use cash flows realized over a relevant past period, adjusted to reflect changes in circumstances that occurred subsequently (for example, changes in external factors, including economic or market conditions, sector trends, and competition, as well as changes in internal factors that affect the entity more specifically), taking into account the assumptions of market participants.
B29. Theoretically, the present value (i.e., fair value) of the asset’s cash flows is the same, whether determined using Method 1 or Method 2, as follows:
(a) Using Method 1, the expected cash flows are adjusted to reflect systematic (i.e., market) risk. In the absence of market data that directly indicates the value of the risk adjustment, this adjustment could be obtained from an asset pricing model, using the concept of risk-free equivalents. For example, the risk adjustment (i.e., the cash risk premium of $22) could be determined using the systematic risk premium of 3% ($780 - [$780 × (1.05/1.08)]), which results in risk-adjusted expected cash flows of $758 ($780 - $22). The $758 is the risk-free equivalent of $780 and is discounted at the risk-free interest rate (5%). The present value (i.e., fair value) of the asset is $722 ($758/1.05).
(b) Using Method 2, the expected cash flows are not adjusted to reflect systematic (i.e., market) risk. Instead, the adjustment to reflect this risk is included in the discount rate. Thus, the expected cash flows are discounted at the expected return rate of 8% (i.e., the risk-free interest rate of 5% plus the systematic risk premium of 3%). The present value (i.e., fair value) of the asset is $722 ($780/1.08).
B30. When using an expected present value technique to measure fair value, either Method 1 or Method 2 can be used. The choice of Method 1 or Method 2 depends on specific facts and circumstances of the asset or liability being measured, the degree of availability of sufficient data, and the judgments applied.
Application of Present Value Techniques to Liabilities and to the Entity’s Own Equity Instruments Not Held by Other Parties as Assets (Items 40 and 41)
B31. When using a present value technique to measure the fair value of a liability that is not held by another party as an asset (for example, a decommissioning liability), the entity, among other things, estimates the future cash outflows that market participants would expect to incur to satisfy the obligation. These future cash outflows include market participants’ expectations regarding the costs to satisfy the obligation and the compensation that a market participant would require to assume the obligation. This compensation includes the return that a market participant would require for the following:
(a) performing the activity (i.e., the value to satisfy the obligation, for example, using resources that could be used for other activities); and (b) assuming the risk associated with the obligation (i.e., the risk premium that reflects the risk that actual cash outflows may differ from expected cash outflows; see item B33).
B32. For example, a non-financial liability does not contain a contractual return rate and there is no observable market return for that liability. In some cases, the components of the return that market participants would require are indistinguishable from one another (for example, when using the price a contracted third party would charge based on a fixed rate). In other cases, the entity needs to estimate these components separately (for example, when using the price a contracted third party would charge based on cost plus margin, since in this case the contractor would not bear the risk of future changes in costs).
B33. The entity may include a risk premium in the measurement of the fair value of a liability or of the entity’s own equity instrument that is not held by another party as an asset, in one of the following ways:
(a) by adjusting the cash flows (i.e., as an increase in the value of cash outflows); or (b) by adjusting the rate used to discount the future cash flows to their present values (i.e., as a reduction in the discount rate).
The entity must ensure that it does not double count or omit adjustments to reflect risk. For example, if the estimated cash flows are increased to reflect compensation for assuming the risk associated with the obligation, the discount rate should not be adjusted to reflect that risk.
SECURITIES COMMISSION OF BRAZIL (CVM)
Rua Sete de Setembro, 111/2-5º and 23-34º Floors, Centro, Rio de Janeiro/RJ – ZIP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º and 4º Floors, Bela Vista, São Paulo/SP – ZIP: 01333-010 – Brazil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4º Floor, Brasília/DF – ZIP: 70712-900 – Brazil - Tel.: (61) 3327-2030/2031 www.gov.br/cvm
CVM RESOLUTION NO. 115, OF MAY 20, 2022
Information for Valuation Techniques (Items 67 to 71)
B34. Examples of markets in which information can be observable for some assets and liabilities (for example, financial instruments) include the following:
(a) Exchange markets. In an exchange market, closing prices are readily available and are generally representative of fair value. An example of an exchange market is a stock exchange.
(b) Dealer markets. In a dealer market, dealers stand ready to trade (either to buy or sell for their own account), thereby providing liquidity by using their capital to maintain an inventory of the items for which they establish a market. Normally, bid and asking prices (which represent the price at which the dealer is interested in buying and the price at which the dealer is interested in selling, respectively) are more readily available than closing prices. Over-the-counter markets (for which prices are publicly reported) are dealer markets. There are also dealer markets for some other assets and liabilities, including some financial instruments, commodities, and physical assets (for example, used equipment).
(c) Brokered markets. In a brokered market, brokers attempt to bring buyers and sellers together but do not stand ready to trade for their own account. In other words, brokers do not use their own capital to maintain an inventory of the items for which they establish a market. The broker knows the prices offered and asked by the respective parties, but each party normally does not have knowledge of the other party’s price requirements. Transaction prices for completed transactions are sometimes available. Brokered markets include electronic communication networks, in which buy and sell orders are matched, and residential real estate markets.
(d) Principal-to-principal markets. In a principal-to-principal market, transactions, both originating and resale, are negotiated independently, without intermediaries. Little information about these transactions may be made available to the public.
Fair Value Hierarchy (Items 72 to 90)
Level 2 Inputs (Items 81 to 85)
B35. Examples of Level 2 inputs for specific assets and liabilities include the following:
(a) Fixed-for-variable interest rate swap based on the LIBOR swap rate. The Level 2 input would be the LIBOR swap rate, if that rate is observable at quoted intervals for substantially the full term of the swap.
(b) Fixed-for-variable interest rate swap based on the yield curve denominated in a foreign currency. The Level 2 input would be the swap rate based on the yield curve denominated in a foreign currency that is observable at quoted intervals for substantially the full term of the swap. This would be the case if the term of the swap were 10 years and that rate were observable at quoted intervals for 9 years, provided that any reasonable extrapolation of the yield curve to the 10th year is not significant to the fair value measurement of the swap as a whole.
(c) Fixed-for-variable interest rate swap based on the specific bank’s prime rate. The Level 2 input would be the specific bank’s prime rate obtained through extrapolation, if the extrapolated values are corroborated by observable market data, for example, by correlation with an interest rate that is observable for substantially the full term of the swap.
(d) Three-year option on exchange-traded shares. The Level 2 input would be the implied volatility for the shares, obtained through extrapolation to the third year provided both of the following conditions are met:
(i) prices for one-year and two-year options on the shares are observable;
(ii) the extrapolated implied volatility of the three-year option is corroborated by observable market data for substantially the full term of the option.
In this case, the implied volatility could be obtained by extrapolating from the implied volatility of the one-year and two-year options on the shares and corroborated by the implied volatility for three-year options on shares of comparable entities, provided that correlation with the implied volatilities of the one-year and two-year options is established.
(e) Licensing agreement. For a licensing agreement that is acquired in a business combination and that has been recently negotiated with an unrelated party by the acquired entity (the licensing agreement component), the Level 2 input would be the royalty rate of the contract with the unrelated party at the inception of the contract.
(f) Finished goods inventory at a retail point of sale. For finished goods inventory that is acquired in a business combination, the Level 2 input would be a price to customers in a retail market or a price to retailers in a wholesale market, adjusted to reflect differences between the condition and location of the inventory item and comparable (i.e., similar) inventory items, so that the fair value measurement reflects the price that would be received in a transaction to sell the inventory to another retailer that would complete the necessary selling efforts. Conceptually, the fair value measurement is the same, whether the adjustments are made to the retail price (downward) or the wholesale price (upward). In general, the price that requires the least amount of subjective adjustments should be used for the fair value measurement.
(g) Buildings held and used. The Level 2 input would be the price per square meter for the building (valuation multiple) obtained from observable market data, for example, multiples obtained from prices in observed transactions involving comparable (i.e., similar) buildings in similar locations.
(h) Cash-generating unit. The Level 2 input would be a valuation multiple (for example, earnings or revenue multiple or similar performance measure) obtained from observable market data, for example, multiples obtained from prices in observed transactions involving comparable (i.e., similar) businesses, taking into account operational, market, financial, and non-financial factors.
Level 3 Inputs (Items 86 to 90)
B36. Examples of Level 3 inputs for specific assets and liabilities include the following:
(a) Long-term currency swap. The Level 3 input would be the interest rate in a currency that is not observable and cannot be corroborated by observable market data at quoted intervals or otherwise for substantially the full term of the currency swap. Currency swap interest rates are swap rates calculated from the respective countries’ yield curves.
(b) Three-year option on exchange-traded shares. The Level 3 input would be historical volatility, i.e., the volatility for the shares obtained from the historical prices of the shares. Historical volatility normally does not represent current market participants’ expectations regarding future volatility, even though it is the only information available for pricing the option.
(c) Interest rate swap. The Level 3 input would be the adjustment to the consensus (non-binding) average market price for the swap, developed using data that are not directly observable and cannot otherwise be corroborated by observable market data.
(d) Decommissioning liability assumed in a business combination. The Level 3 input would be the current estimate that uses the entity’s own data on future cash outflows to be paid to settle the obligation (including market participants’ expectations regarding the costs to settle the obligation and the compensation that a market participant would require to assume the obligation to dismantle the asset), if there is no reasonably available information indicating that market participants would use different assumptions. This Level 3 input would be used in the present value technique together with other information, for example, the current risk-free interest rate or the credit-adjusted risk-free rate, if the effect of the entity’s credit status on the fair value of the liability is reflected in the discount rate and not in the estimate of future cash outflows.
(e) Cash-generating unit. The Level 3 input would be a financial forecast (for example, of cash flows or period earnings) developed using the entity’s own data, if there is no reasonably available information indicating that market participants would use different assumptions.
Fair Value Measurement When the Volume or Level of Activity for an Asset or Liability Has Decreased Significantly
B37. The fair value of an asset or liability may have been affected when there has been a significant decrease in the volume or level of activity for that asset or liability relative to normal market activity for the asset or liability (or similar assets or liabilities). To determine whether, based on available evidence, there has been a significant decrease in the volume or level of activity for the asset or liability, the entity shall assess the significance and relevance of factors such as the following:
(a) there are few recent transactions;
(b) price quotations are not developed using current information;
(c) price quotations vary substantially over time or among market makers (for example, some brokered markets);
(d) indices that previously were highly correlated with the fair values of the asset or liability demonstrably are not correlated with recent indications of fair value for that asset or liability;
(e) there is a significant increase in implied liquidity risk premiums, yields, or performance indicators (such as delinquency rates or loss severities) for observed transactions or quoted prices compared with the entity’s estimate of expected cash flows, taking into account all available market data about credit risk and other default risks for the asset or liability;
(f) the bid-ask spread is wide or its increase is significant;
(g) there is a significant decline in market activity for new issuances (i.e., primary market) for the asset or liability or for similar assets or liabilities, or such a market is absent;
(h) there is little publicly available information (for example, for transactions that occur in a principal-to-principal market).
B38. If the entity concludes that there has been a significant decrease in the volume or level of activity for the asset or liability relative to normal market activity for the asset or liability (or similar assets or liabilities), additional analysis of the transactions or quoted prices is necessary. The decrease in the volume or level of activity may not indicate by itself that a transaction price or quoted price does not represent fair value or that the transaction in that market is not orderly. However, if the entity determines that the transaction or quoted price does not represent fair value (for example, there may be transactions that are not orderly), an adjustment to the transactions or quoted prices is necessary if the entity uses those prices as a basis for measuring fair value and that adjustment could be significant to the fair value measurement as a whole. Adjustments may also be necessary in other circumstances (for example, when the price for a similar asset requires significant adjustment to make it comparable to the asset being measured or when the price is stale).
B39. This Pronouncement does not prescribe the methodology for making significant adjustments to transactions or quoted prices. See Items 61 to 66 and B5 to B11 for a discussion of the use of valuation techniques when measuring fair value. Regardless of the valuation technique used, the entity shall include appropriate risk adjustments, including a risk premium that reflects the amount that market participants would require as compensation for the uncertainty inherent in the cash flows of the asset or liability (see Item B17). Otherwise, the measurement does not faithfully represent fair value. In some cases, it may be difficult to determine the appropriate risk adjustment. However, the degree of difficulty by itself is not sufficient grounds to exclude the risk adjustment. The risk adjustment shall reflect an orderly transaction between market participants at the measurement date under current market conditions.
B40. If there has been a significant decrease in the volume or level of activity for the asset or liability, a change in the valuation technique or the use of multiple valuation techniques may be appropriate (for example, the use of the market approach and the present value technique). When weighing indications of fair value resulting from the use of multiple valuation techniques, the entity shall consider the reasonableness of the range of fair value measurements. The objective is to determine the point within the range that best represents fair value under current market conditions. A wide range of fair value measurements may be an indication that additional analysis is necessary.
B41. Even when there has been a significant decrease in the volume or level of activity for the asset or liability, the objective of the fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (i.e., not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions.
B42. Estimating the price at which market participants would be willing to enter into a transaction at the measurement date under current market conditions if there has been a significant decrease in the volume or level of activity for the asset or liability depends on the facts and circumstances at the measurement date and requires judgment. The entity’s intention to hold the asset or settle or otherwise satisfy the liability is not relevant when measuring fair value, because fair value is a market-based measurement and not an entity-specific measurement.
Identifying Transactions That Are Not Orderly
B43. Determining whether a transaction is not orderly (or is orderly) is more difficult if there has been a significant decrease in the volume or level of activity for the asset or liability relative to normal market activity for the asset or liability (or similar assets or liabilities). In those circumstances, it is not appropriate to conclude that all transactions in that market are orderly (i.e., not forced liquidations or distressed sales). The circumstances that may indicate that a transaction is not orderly include the following:
(a) there was inadequate exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving those assets or liabilities under current market conditions;
(b) there was a usual and customary marketing period, but the seller transacted with a single market participant;
(c) the seller is in or near bankruptcy or receivership (i.e., the seller is in distress);
(d) the seller was required to sell to meet regulatory or legal requirements (i.e., the seller was forced);
(e) the transaction price is an outlier compared with other recent transactions for the same asset or liability or for a similar asset or liability.
The entity shall evaluate the circumstances to determine whether, based on the available evidence, the transaction is not orderly.
B44. The entity shall consider all of the following points when measuring fair value or estimating market risk premiums:
(a) if the evidence indicates that a transaction is not orderly, the entity shall give little or no weight (in comparison with other indications of fair value) to that transaction price;
(b) if the evidence indicates that a transaction is orderly, the entity shall give consideration to that transaction price. The amount of weight given to that transaction price in comparison with other indications of fair value shall depend on the facts and circumstances, such as:
(i) the volume of the transaction;
(ii) the comparability of the transaction to the asset or liability being measured;
(iii) the proximity of the transaction to the measurement date;
(c) if the entity does not have sufficient information to conclude whether a transaction is orderly, it shall give consideration to the transaction price. However, that transaction price may not represent fair value (i.e., the transaction price is not necessarily the sole or primary basis for the fair value measurement or for the estimation of market risk premiums). When the entity does not have sufficient information to conclude whether specific transactions are orderly, it shall give less weight to those transactions in comparison with other transactions that are known to be orderly.
The entity is not required to undertake exhaustive efforts to determine whether the transaction is orderly, but it shall not ignore information that is reasonably available. When the entity is a party to the transaction, it is presumed to have sufficient information to conclude whether the transaction is orderly.
Use of Quoted Prices Provided by Third Parties
B45. This Pronouncement does not preclude the use of quoted prices provided by third parties, for example, pricing services or brokers, if the entity has determined that the quoted prices provided by those parties are developed in accordance with this Pronouncement.
B46. If there has been a significant decrease in the volume or level of activity for the asset or liability, the entity shall evaluate whether the quoted prices provided by third parties are developed using current information that reflects orderly transactions or a valuation technique that reflects the assumptions of market participants (including assumptions about risk). When weighing a quoted price as an input for fair value measurement, the entity shall give less weight (in comparison with other indications of fair value that reflect the results of transactions) to quotations that do not reflect the result of transactions.
B47. In addition, the nature of the quotation (for example, whether the quotation is an indicative price or a binding offer) shall be taken into account when weighing the available evidence, giving greater weight to quotations provided by third parties that represent binding offers.
Appendix C – Transitional Provisions
This appendix is an integral part of Technical Pronouncement CPC 46 and has the same authority as the other parts of this Pronouncement.
C1. (Eliminated).
C2. This Pronouncement shall be applied prospectively from the effective date.
C3. The disclosure requirements of this Pronouncement need not be applied to comparative information provided for periods prior to the initial application of this Pronouncement.
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. 115, OF MAY 20, 2022
Illustrative Examples of Technical Pronouncement CPC 46 – Fair Value Measurement
These examples accompany Technical Pronouncement CPC 46, but are not part of it. They illustrate aspects of the Pronouncement, but are not intended to provide interpretative guidance.
EI1. These examples depict hypothetical situations that illustrate the judgments that must be applied when the entity measures assets and liabilities at fair value in different valuation situations. Although some aspects of the examples may be present in real situations, all relevant facts and circumstances of a specific situation must be evaluated when applying Technical Pronouncement CPC 46.
Highest and Best Use and Valuation Premise
EI2. Examples 1 to 3 illustrate the application of the concepts of highest and best use and valuation premise for non-financial assets.
Example 1 – Group of Assets
EI3. The entity acquires assets and assumes liabilities in a business combination. One of the groups of acquired assets comprises assets A, B, and C. Asset C consists of billing software that is an integral part of the business developed by the acquired entity for its own use in conjunction with assets A and B (i.e., related assets). The entity measures the fair value of each of the assets individually, consistent with the accounting unit specified for the assets. The entity determines that the highest and best use of the assets is their current use and that each asset would provide the maximum value to market participants mainly through its use in combination with other assets or with other assets and liabilities (i.e., its complementary assets and associated liabilities). There is no evidence suggesting that the current use of the assets is not their highest and best use.
EI4. In this situation, the entity would sell the assets in the market in which it initially acquired the assets (i.e., the entry and exit markets from the entity's perspective are the same). The market participants buyers with whom the entity would enter into a transaction in this market have characteristics that are generally representative of both strategic buyers (such as, for example, competitors) and financial buyers (such as, for example, private equity or venture capital firms that do not have complementary investments) and include those buyers who initially make offers for the assets. Although market participant buyers may be broadly classified as strategic or financial buyers, in many cases there are differences between market participant buyers within each of these groups, reflecting, for example, different uses for an asset and different operational strategies.
EI5. As discussed below, differences in the fair values indicated for the individual assets refer mainly to the use of the assets by those market participants who have different groups of assets:
(a) Group of assets of strategic buyers. The entity determines that strategic buyers have related assets that would increase the value of the group in which the assets would be used (i.e., market participant synergies). These assets include a substitute for asset C (billing software), which would be used only for a limited transition period and could not be sold separately at the end of that period. As strategic buyers possess substitute assets, asset C would not be used for its entire remaining economic life. The indicated fair values of assets A, B, and C in the group of assets of strategic buyers (reflecting the synergies resulting from the use of the assets within this group) are $360, $260, and $30, respectively. The indicated fair value of the assets as a group within the group of assets of strategic buyers is $650.
(b) Group of assets of financial buyers. The entity determines that financial buyers do not have related or substitute assets that would increase the value of the group in which the assets would be used. As financial buyers do not possess substitute assets, asset C (i.e., billing software) would be used for its entire remaining economic life. The indicated fair values of assets A, B, and C within the group of assets of financial buyers are $300, $200, and $100, respectively. The indicated fair value of the assets as a group within the group of assets of financial buyers is $600.
EI6. The fair values of assets A, B, and C would be determined based on the use of the assets as a group within the group of strategic buyers ($360, $260, and $30). Although the use of the assets within the group of strategic buyers does not maximize the fair value of each of the assets individually, it maximizes the fair value of the assets as a group ($650).
Example 2 – Land
EI7. The entity acquires land in a business combination. The land is currently developed for industrial use as a site for a factory. It is presumed that the current use of the land is its highest and best use, unless market factors or others suggest a different use. Nearby locations have recently been developed for residential use as sites for multi-story apartment buildings. Based on this development and recent zoning changes and others to facilitate this development, the entity determines that the land currently used as a site for a factory could be developed for residential use (i.e., for multi-story apartment buildings), as market participants would take into account the potential to develop the site for residential use when pricing the land.
EI8. The highest and best use of the land would be determined by comparing the following two items:
(a) the value of the land as currently developed for industrial use (i.e., the land would be used in combination with other assets, such as the factory, or with other assets and liabilities); (b) the value of the land as a vacant site for residential use, taking into account the costs of demolishing the factory and other costs (including the uncertainty about whether the entity could convert the asset to the alternative use) necessary to convert the land to a vacant site (i.e., the land must be used by market participants individually).
The highest and best use of the land would be determined based on the greater of these values. In situations involving real estate valuation, the determination of the highest and best use could take into account factors related to the factory's operations, including its assets and liabilities.
Example 3 – Research and Development Project
EI9. The entity acquires a research and development (R&D) project in a business combination. The entity does not intend to complete the project. If completed, the project would compete with one of its own projects (to provide the next generation of technology marketed by the entity). Instead, the entity intends to shelve the project to prevent its competitors from gaining access to the technology. By doing so, it is expected that the project will provide protection value, especially by improving the prospects for the entity's own competing technology. To measure the fair value of the project at initial recognition, the highest and best use of the project would be determined based on its use by market participants. For example:
(a) The highest and best use of the R&D project would be to continue development if market participants continued to develop the project and this use maximized the value of the group of assets or assets and liabilities in which the project would be used (i.e., the asset would be used in combination with other assets or with other assets and liabilities). This could be the case if market participants did not have similar technology, whether in development or marketed. The fair value of the project would be measured based on the price that would be received in a current transaction for the sale of the project, assuming that R&D would be used with its complementary assets and associated liabilities and that these assets and liabilities would be available to market participants.
(b) The highest and best use of the R&D project would be to halt development if, for competitive reasons, market participants shelved the project and this use maximized the value of the group of assets or assets and liabilities in which the project would be used. This could be the case if market participants had technology in a more advanced stage of development that competed with the project, if completed, and if it was expected that the project, if shelved, could improve the prospects for its own competing technology. The fair value of the project would be measured based on the price that would be received in a current transaction for the sale of the project, assuming that R&D would be used (i.e., shelved) with its complementary assets and associated liabilities and that these assets and liabilities would be available to market participants.
(c) The highest and best use of the R&D project would be to discontinue development if market participants discontinued its development. This could be the case if the project was not expected to provide a market rate of return if completed and, otherwise, did not provide defense value if shelved. The fair value of the project would be measured based on the price that would be received in a current transaction for selling the project separately (which could be zero).
Use of Multiple Valuation Techniques
EI10. The Pronouncement notes that a single valuation technique may be appropriate in some cases. In other cases, multiple valuation techniques are appropriate. Examples 4 and 5 illustrate the use of multiple valuation techniques.
Example 4 – Machine Held and Used
EI11. The entity acquires a machine in a business combination. The machine is held and used in its operations. The machine was originally purchased by the acquired entity from an external supplier and, prior to the business combination, was customized by the acquired entity for use in its operations. However, the customization of the machine was not extensive. The acquiring entity determines that the asset would provide maximum value to market participants through its use in combination with other assets or with other assets and liabilities (as installed or otherwise configured for use). There is no evidence suggesting that the current use of the machine is not its highest and best use. Therefore, the highest and best use of the machine is its current use in combination with other assets or with other assets and liabilities.
EI12. The entity determines that there is sufficient data available to apply the cost approach and, as the customization of the machine was not extensive, the market approach. The income approach is not used because the machine does not have a separately identifiable revenue stream from which reliable estimates of future cash flows can be developed. Furthermore, there is no information available on short-term and medium-term lease rates for similar used machinery that, otherwise, could be used to project the revenue stream (i.e., lease payments over the remaining useful lives). The market and cost approaches are applied as follows:
(a) The market approach is applied using quoted prices for similar machines, adjusted to reflect differences between the machine (as customized) and similar machines. The measurement reflects the price that would be received for the machine in its current condition (used) and location (installed and configured for use). The fair value indicated by this approach ranges from $40,000 to $48,000.
(b) The cost approach is applied by estimating the value that would be currently required to construct a substitute (customized) machine of comparable utility. The estimate takes into account the condition of the machine and the environment in which it operates, including natural physical wear (i.e., physical deterioration), technology improvements (i.e., functional obsolescence), conditions external to the machine's condition, such as a decline in market demand for similar machines (i.e., economic obsolescence), and installation costs. The fair value indicated by this approach ranges from $40,000 to $52,000.
EI13. The entity determines that the higher end of the range indicated by the market approach best represents the fair value and, therefore, assigns more weight to the results of the market approach. This determination is made based on the relative subjectivity of the information, taking into account the degree of comparability between the machine and similar machines. In particular:
(a) the information used in the market approach (quoted prices for similar machines) requires less subjective and fewer adjustments than the information used in the cost approach; (b) the range indicated by the market approach overlaps with the range indicated by the cost approach, but is narrower than this; (c) there is no known unexplained difference (between the machine and similar machines) within this range.
Consequently, the entity determines that the fair value of the machine is $48,000.
EI14. If the customization of the machine had been extensive or if there were not sufficient data available to apply the market approach (for example, because market data reflects transactions for machines used individually, such as the scrap value for specialized assets, and not for machines used in combination with other assets or with other assets and liabilities), the entity would apply the cost approach. When an asset is used in combination with other assets or with other assets and liabilities, the cost approach presumes the sale of the machine to a market participant buyer with the complementary assets and associated liabilities. The price received for the sale of the machine (i.e., exit price) would not be greater than any of the following:
(a) the cost that the market participant buyer would incur to acquire or construct a substitute machine of comparable utility; or (b) the economic benefit that the market participant buyer would obtain from the use of the machine.
Example 5 – Asset Represented by Software
EI15. The entity acquires a group of assets. The group of assets includes revenue-generating software developed internally for licensing to clients and its complementary assets (including the related database with which the software is used) and associated liabilities. To allocate the cost of the group to the individual assets acquired, the entity measures the fair value of the software. The entity determines that the software would provide maximum value to market participants through its use in combination with other assets or with other assets and liabilities (i.e., its complementary assets and associated liabilities). There is no evidence suggesting that the current use of the software is not its highest and best use. Therefore, the highest and best use of the software is its current use. (In this case, the licensing of the software, by itself, does not indicate that the fair value of the asset would be maximized through its use by market participants individually.)
EI16. The entity determines that, in addition to the income approach, sufficient data could be available for the application of the cost approach, but not of the market approach. There is no information available on market transactions for comparable software. The income and cost approaches are applied as follows:
(a) the income approach is applied using a present value technique. The cash flows used in this technique reflect the revenue stream expected to result from the software (client license fees) over its economic life. The fair value indicated by this approach is $15 million; (b) the cost approach is applied by estimating the value that would be currently required to construct a substitute software of comparable utility (i.e., taking into account functional and economic obsolescence). The fair value indicated by this approach is $10 million.
EI17. By applying the cost approach, the entity determines that market participants would not be able to construct a substitute software of comparable utility. Some characteristics of the software are unique, having been developed using proprietary information, and cannot be readily replicated. The entity determines that the fair value of the asset (software) is $15 million, as indicated by the income approach.
Principal (or Most Advantageous) Market
EI18. Example 6 illustrates the use of Level 1 information to measure the fair value of an asset traded in different active markets, at different prices.
Example 6 – Principal (or Most Advantageous) Market of Level 1
EI19. An asset is sold at different prices in two different active markets. The entity enters into transactions in both markets and can access the price in these markets for the asset at the measurement date. In Market A, the price that would be received is $26, the transaction costs in this market are $3, and the costs to transport the asset to this market are $2 (i.e., the net value that would be received is $21). In Market B, the price that would be received is $25, the transaction costs in this market are $1, and the costs to transport the asset to this market are $2 (i.e., the net value that would be received is $22).
EI20. If Market A were the principal market for the asset (i.e., the market with the greatest volume and level of activity for the asset), the fair value of the asset would be measured using the price that would be received in this market, after taking into account transportation costs ($24).
EI21. If neither of the markets were the principal market for the asset, the fair value of the asset would be measured using the price in the most advantageous market. The most advantageous market is the market that maximizes the value that would be received by selling the asset, after taking into account transaction costs and transportation costs (i.e., the net value that would be received in the respective markets).
EI22. As the entity would maximize the net value that would be received by the asset in Market B ($22), the fair value of the asset would be measured using the price in this market ($25) minus transportation costs ($2), resulting in the measurement of fair value of $23. Although transaction costs are taken into account in determining which market is the most advantageous market, the price used to measure the fair value of the asset is not adjusted to reflect these costs (although it is adjusted to reflect transportation costs).
Transaction Prices and Fair Value at Initial Recognition
EI23. The Pronouncement clarifies that, in many cases, the transaction price, i.e., the price paid (received) for a specific asset (liability), represents the fair value of that asset (liability) at initial recognition, but not presumptively. Example 7 illustrates when the price in a transaction involving a derivative instrument may (or may not) equal the fair value of the instrument at initial recognition.
Example 7 – Interest Rate Swap at Initial Recognition
EI24. Entity A (retail counterparty) enters into an interest rate swap in the retail market with Entity B (dealer) without any initial consideration. Entity A can access only the retail market. Entity B can access both the retail market (i.e., with retail counterparties) and the dealer market (i.e., with dealer counterparties).
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. 115, OF MAY 20, 2022
EI25. From Entity A's perspective, the retail market in which it initially entered into the transaction is the primary market for the swap. If Entity A were to transfer its rights and obligations arising from the swap, it would do so with a dealer counterparty in that retail market. In this case, the transaction price (zero) would represent the fair value of the swap for Entity A at initial recognition, that is, the price that Entity A would receive to sell or pay to transfer the swap in a transaction with a dealer counterparty in the retail market (i.e., an exit price). This price would not be adjusted to reflect additional (transaction) costs that would be charged by the dealer counterparty.
EI26. From Entity B's perspective, the dealer market (and not the retail market) is the primary market for the swap. If Entity B were to transfer its rights and obligations arising from the swap, it would do so with a dealer in that market. Because the market in which Entity B initially entered into the swap is different from the primary market for the swap, the transaction price (zero) would not necessarily represent the fair value of the swap for Entity B at initial recognition. If the fair value differs from the transaction price (zero), Entity B applies CPC 48 – Financial Instruments to determine whether it recognizes this difference as a gain or loss at initial recognition.
Restricted Assets
EI27. The effect on fair value measurement resulting from a restriction on the sale or use of an asset by an entity may be different depending on whether the restriction would be taken into account by market participants when pricing the asset. Examples 8 and 9 illustrate the effect of restrictions when measuring the fair value of an asset.
Example 8 – Restriction on the sale of an equity instrument
EI28. The entity holds an equity instrument (financial asset) whose sale is legally or contractually restricted for a specified period. (For example, this restriction could limit the sale to qualified investors.) The restriction is a characteristic of the instrument and, therefore, would be transferred to market participants. In this case, the fair value of the instrument would be measured based on the quoted price for an identical unrestricted equity instrument from the same issuer that is traded in a public market, adjusted to reflect the effect of the restriction. The adjustment would reflect the value that market participants would require due to the risk related to the inability to access a public market for the instrument for the specified period. The adjustment varies depending on all of the following items:
(a) the nature and duration of the restriction; (b) the extent to which buyers are limited by the restriction (for example, there could be a large number of qualified investors); and (c) specific qualitative and quantitative factors of both the instrument and the issuer.
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. 115, OF MAY 20, 2022
Example 9 – Restrictions on the use of an asset
EI29. A donor contributes land, in a developed residential area, to a neighborhood non-profit association. The land is currently used as a playground. The donor specifies that the land must continue to be used by the association as a playground in perpetuity. Upon reviewing relevant documentation (for example, legal and other), the association determines that the fiduciary responsibility to comply with the donor's restriction would not be transferred to market participants if the association sold the asset, that is, the donor's restriction on the use of the land is specific to the association. Furthermore, there is no restriction on the sale of the land by the association. Without the restriction on the use of the land by the association, the land could be used for residential development. Furthermore, the land is subject to an easement (i.e., a legal right that allows a utility company to pass transmission lines through the land). The following is an analysis of the effect on the fair value measurement of the land resulting from the restriction and the easement:
(a) Donor's restriction on the use of the land. Because in this situation the donor's restriction on the use of the land is specific to the association, it would not be transferred to market participants. Therefore, the fair value of the land would be the greater of its fair value when used as a playground (i.e., the fair value of the asset would be maximized through its use by market participants in combination with other assets or with other assets and liabilities) and its fair value as a site for residential development (i.e., the fair value of the asset would be maximized through its use by market participants individually), regardless of the restriction on the use of the land by the association.
(b) Easement for transmission lines. Because the easement for the utility company's transmission lines is specific to the land (i.e., it is a characteristic of this land), it would be transferred to market participants with the land. Therefore, the fair value measurement of the land would take into account the effect of the easement, whether its best possible use is as a playground or as a site for residential development.
Measurement of Liabilities
EI30. The fair value measurement of a liability assumes that the liability, whether a financial liability or a non-financial liability, is transferred to a market participant at the measurement date (i.e., the liability would remain outstanding and the acquiring market participant would be required to satisfy the obligation; it would not be settled with the counterparty or, otherwise, extinguished at the measurement date).
EI31. The fair value of a liability reflects the effect of non-performance risk. Non-performance risk relative to a liability includes, among other things, the entity's own credit risk. The entity takes into account the effect of its credit risk (credit standing) on the fair value of the liability in all periods in which the liability is measured at fair value, because those who hold the entity's obligations as assets would take into account the effect of the entity's credit standing when estimating the prices they would be willing to pay.
EI32. For example, suppose that Entity X and Entity Y each enter into a contractual obligation to pay cash ($500) to Entity Z in five years. Entity X has an AA credit rating and can borrow at 6% and Entity Y has a BBB credit rating and can borrow at 12%. Entity X would receive approximately $374 in exchange for its
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. 115, OF MAY 20, 2022
commitment (the present value of $500 in five years at 6%). Entity Y would receive approximately $284 in exchange for its commitment (the present value of $500 in five years at 12%). The fair value of the liability for each entity incorporates the credit standing of that entity.
EI33. Examples 10 to 13 illustrate the measurement of liabilities and the effect of non-performance risk (including the entity's own credit risk) on fair value measurement.
Example 10 – Structured note
EI34. On January 1, 20X7, Entity A, an investment bank with an AA credit rating, issues a five-year fixed-rate note to Entity B. The principal amount to be paid by Entity A at maturity is linked to an equity index. No credit enhancement instrument is issued in conjunction with the contract or otherwise related to it (i.e., no guarantee is provided and there is no third-party guarantee). Entity A designates this note at fair value through profit or loss. The fair value of the note (i.e., Entity A's obligation) during 20X7 is measured using the expected present value technique. The changes in fair value are as follows:
(a) Fair value on January 1, 20X7. The expected cash flows used in the expected present value technique are discounted at the risk-free rate using the government debt bond yield curve on January 1, 20X7, plus the current observable market spread for AA corporate debt bonds relative to government bonds, if the non-performance risk is not yet reflected in the cash flows, adjusted (up or down) to reflect the specific credit risk of Entity A (i.e., resulting in the risk-free rate adjusted for credit). Therefore, the fair value of Entity A's obligation at initial recognition takes into account non-performance risk, including the credit risk of this entity, which is presumed to be reflected in the proceeds.
(b) Fair value on March 31, 20X7. During March 20X7, the credit spread for AA corporate debt bonds widens, with no change in Entity A's specific credit risk. The expected cash flows used in the expected present value technique are discounted at the risk-free rate using the government debt bond yield curve on March 31, 20X7, plus the current observable market spread for AA corporate debt bonds relative to government bonds, if the non-performance risk is not yet reflected in the cash flows, adjusted to reflect the specific credit risk of Entity A (i.e., resulting in the risk-free rate adjusted for credit). Entity A's specific credit risk remains unchanged since initial recognition. Therefore, the fair value of Entity A's obligation changes as a result of changes in credit spreads in general. Changes in credit spreads reflect current market participant assumptions about changes in non-performance risk in general, changes in liquidity risk, and the compensation required to assume these risks.
(c) Fair value on June 30, 20X7. On June 30, 20X7, there was no change in AA corporate debt bond spreads. However, based on structured note issuances, corroborated by other qualitative information, Entity A determines that its own specific credit capacity has strengthened within the AA credit spread. The expected cash flows used in the expected present value technique are discounted at 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. 115, OF MAY 20, 2022
risk-free rate using the government debt bond yield curve on June 30, 20X7, plus the current observable market spread for AA corporate debt bonds relative to government bonds (unchanged since March 31, 20X7), if the non-performance risk is not yet reflected in the cash flows, adjusted to reflect the specific credit risk of Entity A (i.e., resulting in the risk-free rate adjusted for credit). Therefore, the fair value of Entity A's obligation changes as a result of the change in its own specific credit risk within the AA corporate debt bond spread.
Example 11 – Decommissioning liability
EI35. In January 20X1, Entity A assumes a decommissioning liability in a business combination. The entity is legally required to dismantle and remove an offshore oil platform at the end of its useful life, which is estimated at 10 years.
EI36. Based on items B23 to B30 of Technical Pronouncement CPC 46, Entity A uses the expected present value technique to measure the fair value of the decommissioning liability.
EI37. If Entity A were permitted, contractually, to transfer its decommissioning liability to a market participant, Entity A concludes that a market participant would use all of the following information, weighted by probability as appropriate, when estimating the price it would expect to receive:
(a) labor costs;
(b) allocation of overhead costs;
(c) the compensation that a market participant would require to perform the activity and to assume the risk associated with the obligation to dismantle and remove the asset. This compensation includes both of the following items:
(i) profit on labor and overhead costs; and
(ii) risk that actual cash outflows could differ from those expected, excluding inflation;
(d) effect of inflation on estimated costs and profits; (e) time value of money, represented by the risk-free rate; and (f) non-performance risk relative to the risk that Entity A will not fulfill the obligation, including Entity A's own credit risk.
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. 115, OF MAY 20, 2022
EI38. The significant assumptions used by Entity A to measure fair value are as follows:
(a) Labor costs are developed based on current market wages, adjusted for expectations of future wage increases, required to hire contractors to dismantle and remove offshore oil platforms. Entity A assigns probability assessments to a range of cash flow estimates as follows:
Cash Flow Estimate ($)
Probability Assessment
Expected Cash Flows ($)
100,000
25%
25,000
125,000
50%
62,500
175,000
25%
43,750
$ 131,250
The probability assessments are developed based on Entity A's experience in fulfilling obligations of this type and its knowledge of the market.
(b) Entity A estimates equipment operating costs and allocated overhead costs using the rate it applies to labor costs (80% of expected labor costs). This is consistent with the cost structure of market participants.
(c) Entity A estimates the compensation that a market participant would require to perform the activity and to assume the risk associated with the obligation to dismantle and remove the asset as follows:
(i) a third-party contractor normally adds a margin over labor costs and allocated internal costs to provide a profit margin on the function. The profit margin used (20%) represents Entity A's understanding of the operating profit that contractors in the industry generally receive to dismantle and remove offshore oil platforms. Entity A concludes that this rate is consistent with the rate that a market participant would require as compensation to perform the activity.
(ii) the contractor normally requires compensation for the risk that actual cash outflows could differ from those expected due to the inherent uncertainty of locking in the current price for a project that will not occur for 10 years. Entity A estimates the value of this premium to be 5% of the expected cash flows, including the effect of inflation.
(d) Entity A presumes an inflation rate of 4% over the 10-year period based on available market data.
(e) The risk-free interest rate for a 10-year maturity on January 1, 20X1 is 5%. Entity A adjusts this rate by 3.5% to reflect its non-performance risk (i.e., the risk that it will not fulfill the obligation), including its credit risk. Therefore, the discount rate used to calculate the present value of the cash flows is 8.5%.
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. 115, OF MAY 20, 2022
EI39. Entity A concludes that its assumptions would be used by market participants. Furthermore, Entity A does not adjust its fair value measurement for the existence of a restriction that prevents it from transferring the liability. As illustrated in the table below, Entity A measures the fair value of its decommissioning liability as $194,879.
Expected Cash Flows ($)
January 1, 20X1
Expected labor costs
131,250
Equipment costs and allocated overhead costs (0.80 × $131,250) 105,000 Contractor profit margin [0.20 × ($131,250 + $105,000)] 47,250 Expected cash flows before inflation adjustment 283,500 Inflation factor (4% for 10 years) 1.4802 Expected cash flows adjusted for inflation 419,637 Market risk premium (0.05 × $419,637) 20,982 Expected cash flows adjusted for market risk 440,619 Expected present value using the discount rate of 8.5% for 10 years 194,879
Example 12 – Debt obligation: quoted price
EI40. On January 1, 20X1, Entity B issues, at par, a five-year fixed-rate debt instrument traded on an exchange classified as BBB of $2 million with an annual coupon of 10%. Entity B designates this financial liability at fair value through profit or loss.
EI41. On December 31, 20X1, the instrument is being traded as an asset in an active market at $929 per $1,000 of principal amount after payment of accrued interest. Entity B uses the quoted price of the asset in the active market as its initial input in measuring the fair value of its liability ($929 × [$2 million ÷ $1,000] = $1,858,000).
EI42. In determining whether the quoted price of the asset in the active market represents the fair value of the liability, Entity B evaluates whether the quoted price of the asset includes the effect of factors not applicable to the fair value measurement of liabilities, for example, whether the quoted price of the asset includes the effect of third-party credit enhancement if that credit enhancement were accounted for separately from the issuer's perspective. Entity B determines that no adjustment to the quoted price of the asset is required. Consequently, Entity B concludes that the fair value of its debt instrument on December 31, 20X1 is $1,858,000. Entity B classifies and discloses the fair value measurement of its debt instrument in Level 1 of the fair value hierarchy.
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 115, DE 20 DE MAIO DE 2022
Example 13 – Debt obligation: present value technique
EI43. On January 1, 20X1, Entity C issued, at par value, in a private placement, a five-year fixed-rate debt instrument classified as BBB for $2 million with an annual coupon of 10%. Entity C designated this financial liability at fair value through profit or loss.
EI44. On December 31, 20X1, Entity C still recognizes a BBB credit rating. Market conditions, including available interest rates, credit spreads for a BBB quality credit rating, and liquidity, remain unchanged since the date the debt instrument was issued. However, Entity C’s credit spread deteriorated by 50 basis points due to a change in its default risk. After considering all market conditions, Entity C concludes that if it were to issue the instrument on the measurement date, the instrument would bear an interest rate of 10.5% or Entity C would receive less than the par value in the proceeds from the issuance of the instrument.
EI45. For the purpose of this example, the fair value of Entity C’s liability is calculated using the present value technique. Entity C concludes that a market participant would use all of the following information (consistent with paragraphs B12 to B30 of the Pronouncement) when estimating the price that the market participant would expect to receive for assuming Entity C’s obligation. (a) the terms of the debt instrument, including all of the following:
(i) a coupon of 10%;
(ii) a principal amount of $2 million; and
(iii) a term of four years;
(b) the market interest rate of 10.5% (which includes the 50 basis point change in default risk from the issuance date).
EI46. Based on its present value technique, Entity C concludes that the fair value of its liability on December 31, 20X1 is $1,968,641.
EI47. Entity C does not include any additional information in its present value technique for risk or profit that a market participant might require as compensation for assuming the liability. Because Entity C’s obligation is a financial liability, Entity C concludes that the interest rate already captures the risk or profit that a market participant would require as compensation for assuming the liability. Furthermore, Entity C does not adjust its present value technique for the existence of a restriction that prevents it from transferring the liability.
Measurement of fair value when the volume or level of activity for an asset or liability has decreased significantly
EI48. Example 14 illustrates the use of judgment in measuring the fair value of a financial asset when there is a significant reduction in the volume or level of activity of the asset compared to the normal market activity of the asset (or similar assets).
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 115, DE 20 DE MAIO DE 2022
Example 14 – Estimating market return rate when the volume or level of activity for an asset has decreased significantly
EI49. Entity A invests in a subordinate tranche (tranche) of a residential mortgage-backed security with an AAA rating on January 1, 20X8 (the issuance date of the security). The subordinate tranche is the third most senior of a total of seven tranches. The underlying collateral for the residential mortgage-backed security consists of residential real estate loans without non-conformance guarantees that were issued in the second half of 20X6.
EI50. On March 31, 20X9 (the measurement date), the subordinate tranche is currently rated A. This tranche of the residential mortgage-backed security was previously traded in the secondary market. However, the trading volume in this market was not frequent, with few transactions occurring per month from January 1, 20X8 to June 30, 20X8 and little, or no, trading activity during the nine months prior to March 31, 20X9.
EI51. Entity A considers the factors in paragraph B37 of the Pronouncement to determine whether there is a significant reduction in the volume or level of activity for the subordinate tranche of the residential mortgage-backed security in which it invested. After evaluating the significance and relevance of the factors, Entity A concludes that the volume and level of activity of the subordinate tranche of the security have decreased significantly. Entity A supported its judgment primarily on the fact that there was little, or no, trading activity for a prolonged period prior to the measurement date.
EI52. Because there is little, or no, trading activity to support the valuation technique using a market approach, Entity A decides to use an income approach using the discount rate adjustment technique described in paragraphs B18 to B22 of the Pronouncement to measure the fair value of the security on the measurement date. Entity A uses the contractual cash flows of the security (see also paragraphs 67 and 68 of the Pronouncement).
EI53. Next, Entity A estimates the discount rate (i.e., the market return rate) to discount these contractual cash flows. The market return rate is estimated using both of the following items:
(a) the risk-free interest rate;
(b) estimated adjustments for differences between available market data and the subordinate tranche of the residential mortgage-backed security in which Entity A invested. These adjustments reflect available market data on expected default risks and other risks (e.g., default risk, collateral value risk, and liquidity risk) that market participants would take into consideration when pricing the asset in an orderly transaction on the measurement date under current market conditions.
EI54. Entity A considered the following information when estimating the adjustments in item EI53(b):
(a) the credit spread for the subordinate tranche of the residential mortgage-backed security on the issuance date, as observable from the original transaction price; (b) the change in the credit spread implicit in any observed transactions of the date from issuance to the measurement date for comparable residential mortgage-backed securities or based on relevant indices; (c) the characteristics of the subordinate tranche of the residential mortgage-backed security compared to comparable indices or residential mortgage-backed securities, including the following items:
(i) the quality of the underlying assets, i.e., information on the performance of the underlying mortgage loans, such as cure and delinquency rates, prepayment rates, and loss experience; (ii) the seniority or subordination of the residential mortgage-backed security tranche held; and (iii) other relevant factors; (d) relevant reports issued by analysts and rating agencies; (e) third-party quoted prices, such as pricing services or brokers.
EI55. Entity A estimates that the indication of the market return rate that market participants would use when pricing the subordinate tranche of the residential mortgage-backed security would be 12% (1,200 basis points). This market return rate was estimated as follows:
(a) Starts with 300 basis points for the risk-free interest rate on March 31, 20X9.
(b) Adds 250 basis points for the credit spread over the risk-free rate when the subordinate tranche was issued in January 20X8.
(c) Adds 700 basis points for the estimated change in the credit spread over the risk-free rate of the subordinate tranche between January 1, 20X8 and March 31, 20X9. This estimate was developed based on the change in the most comparable index available for this period of time.
(d) Subtracts 50 basis points (net) to adjust for differences between the index used to estimate the change in credit spreads and the subordinate tranche. The benchmark index consists of high-risk (subprime) real estate loans, and the residential mortgage-backed security of Entity A is similar but with a more favorable credit profile (making it more attractive to market participants). Thus, the index does not reflect the appropriate liquidity risk premium for the subordinate tranche under current market conditions. The 50 basis point adjustment is net of two adjustments:
(i) the first adjustment is the subtraction of 350 basis points, which was estimated by comparing the implicit yield of the most recent transactions for the residential mortgage-backed security in June 20X8 with the implicit yield in the price index on those same dates. There was no available information indicating that the relationship between Entity A’s security and the index had changed; (ii) the second adjustment is the addition of 300 basis points, which is Entity A’s best estimate of the additional liquidity risk inherent in its security (spot position) compared to the index (synthetic position). This estimate was reached after considering liquidity risk premiums implicit in recent spot transactions for a series of similar securities.
EI56. As an additional indication of the market return rate, Entity A considers two recent indicative quotes (i.e., non-binding quotes) provided by renowned brokers for the subordinate tranche of the residential mortgage-backed security that imply yields of 15% to 17%. Entity A is unable to evaluate the valuation techniques or information used to develop the quotes. However, Entity A is able to confirm that the quotes do not reflect transaction results.
EI57. Because Entity A has multiple indications of the market return rate that market participants take into consideration when measuring fair value, it evaluates and weighs the respective indications of the return rate, considering the reasonableness of the range of values indicated by the results.
EI58. Entity A concludes that 13% is the point in the range of indications that is most representative of fair value under current market conditions. Entity A assigns more weight to the indication of 12% (i.e., its own estimate of the market return rate) for the following reasons:
(a) Entity A concluded that its own estimate adequately incorporated the risks (e.g., default risk, collateral value risk, and liquidity risk) that market participants would use when pricing the asset in an orderly transaction under current market conditions; (b) the broker quotes were non-binding and did not reflect transaction results, and Entity A was unable to evaluate the valuation techniques or information used to develop the quotes.
Fair value disclosures
EI59. Examples 15 to 19 illustrate the disclosures required by paragraphs 92, 93(a), (b) and (d) to (h)(i) and 99 of the Pronouncement.
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 115, DE 20 DE MAIO DE 2022
Example 15 – Assets measured at fair value
EI60. For assets and liabilities measured at fair value at the end of the period of the financial statements, the Pronouncement requires quantitative disclosures about the fair value measurements for each class of assets and liabilities. The entity could disclose the following for assets, to comply with paragraph 93(a) and (b) of the Pronouncement:
Fair value measurements at the date of the financial statements, using Description 31/12/X9 Quoted prices in active markets for identical assets (Level 1) Other significant observable inputs (Level 2) Significant unobservable inputs (Level 3) Total gains (losses)
Recurring fair value measurements
Equity securities for trading [a]
Real estate sector 93 70 23
Oil and gas sector 45 45
Others 15 15
Total equity securities for trading 153 130 23
Other equity securities [b]
Financial services sector 150 150
Healthcare sector 163 110 53
Energy sector 32 32
Private equity fund investments [b] 25 25
Others 15 15
Total other equity 385 275 110
Continues...
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 115, DE 20 DE MAIO DE 2022
...continuation
Fair value measurements at the date of the financial statements, using Description 31/12/X9 Quoted prices in active markets for identical assets (Level 1) Other significant observable inputs (Level 2) Significant unobservable inputs (Level 3) Total gains (losses)
Debt securities:
Residential mortgage-backed securities 149 24 125 Commercial mortgage-backed securities 50 50 Secured debt obligations 35 35 Risk-free government bonds 85 85 Corporate debt securities 93 9 84 Total debt securities 412 94 108 210
Hedge fund investments:
Long/short equity 55 55
Global opportunities 35 35
High-yield debt securities 90 90
Total debt securities 180 90 90
Derivatives:
Interest rate contracts 57 57
Foreign exchange contracts 43 43
Credit contracts 38 38
Commodity futures contracts 78 78
Commodity forward contracts 20 20
Total derivatives 236 78 120 38
Investment properties:
Commercial – Asia 31 31
Commercial – Europe 27 27
Total investment properties 58 58
Total recurring fair value measurements 1,424 577 341 506
Non-recurring fair value measurements
Assets held for sale [c] 26 26 15
Total non-recurring fair value measurements 26 26 15
[a] Based on its analysis of the nature, characteristics, and risks of the securities, the entity determined that it is appropriate to present them by industry.
[b] Based on its analysis of the nature, characteristics, and risks of the securities, the entity determined that it is appropriate to present them as a single class.
[c] According to Technical Pronouncement CPC31, assets held for sale with a carrying amount of $35 million were reduced to their fair value of $26 million, less costs to sell of $6 million (or $20 million), resulting in a loss of $15 million, which was included in profit or loss for the period.
(Note: A similar table should be presented for liabilities, unless another format is considered more appropriate by the entity).
COMISSÃO DE VALORES MOBILIÁRIOS
Rua Sete de Setembro, 111/2-5º e 23-34º Andares, Centro, Rio de Janeiro/RJ – CEP: 20050-901 – Brasil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º e 4º Andares, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brasil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4º Andar, Brasília/DF – CEP: 70712-900 – Brasil -Tel.: (61) 3327-2030/2031 www.gov.br/cvm RESOLUÇÃO CVM Nº 115, DE 20 DE MAIO DE 2022
Example 16 – Reconciliation of fair value measurements classified in Level 3 of the fair value hierarchy
EI61. For recurring fair value measurements classified in Level 3 of the fair value hierarchy, the Pronouncement requires a reconciliation of opening balances with closing balances for each class of assets and liabilities. The entity could disclose the following for assets, to comply with paragraph 93(e) and (f) of the Pronouncement:
($ in millions) Other equity securities Debt securities Hedge fund investments Derivatives Investment properties Healthcare sector Energy sector Private equity fund investments Residential mortgage-backed securities Commercial mortgage-backed securities Secured debt obligations High-yield debt securities Credit contracts Asia Europe Total
Opening balance 49 28 20 105 39 25 145 30 28 26 495 Transfers into Level 3 60 [a] [b] Transfers out of Level 3 (5) [b] [c] (5) Total gains or losses for the period Included in profit or loss 5 (23) (5) (7) 7 5 3 1 (14) Included in other comprehensive income 3 1 4 Purchases, issuances, sales, and settlements Purchases 1 3 16 17 18 55 Issuances Sales (12) (62) (74) Settlements (15) (15) Closing balance 53 32 25 125 50 35 90 38 31 27 506 Change in unrealized gains or losses for the period included in profit or loss for assets held at the end of the reporting period 5 (3) (5) (7) (5) 2 3 1 (9)
[a] Transferred from Level 2 to Level 3 due to lack of observable market data, resulting from the reduction in market activity for the securities.
[b] The entity’s policy is to recognize transfers into and out of Level 3 on the date of the event or change in circumstances that caused the transfer.
[c] Transferred from Level 3 to Level 2 due to observable market data becoming available for the securities.
(Note: A similar table should be presented for liabilities, unless another format is considered more appropriate by the entity).
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 115, DE 20 DE MAIO DE 2022
EI62. Gains and losses included in the statement of profit or loss for the period (above) are presented in financial income and non-financial income as follows:
Financial income Non-financial income Total gains or losses for the period included in the statement of profit or loss (18) 4 Change in unrealized gains or losses for the period included in the statement of profit or loss for assets held at the date of the financial statements (13) 4
(Note: A similar table should be presented for liabilities, unless another format is considered more appropriate by the entity).
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 115, DE 20 DE MAIO DE 2022
Example 17 – Valuation techniques and information
EI63. For fair value measurements classified in Level 2 and Level 3 of the fair value hierarchy, the Pronouncement requires the entity to disclose a description of the valuation techniques and the information used in the fair value measurement. For fair value measurements classified in Level 3 of the fair value hierarchy, information about significant unobservable inputs used must be quantitative. The entity may disclose the following for assets to comply with the requirement to disclose significant unobservable inputs used in the fair value measurement in accordance with paragraph 93(d) of the Pronouncement.
Quantitative information about fair value measurements using significant unobservable inputs (Level 3) Description Fair value at 31/12/X9 Valuation techniques Significant unobservable inputs Range (weighted average)
Other equity securities:
Healthcare sector 53 Discounted cash flow Weighted average cost of capital 7%–16% (12.1%) Long-term revenue growth rate 2%–5% (4.2%) Long-term pre-tax operating margin 3%–20% (10.3%) Discount for lack of marketability [a] 5%–20% (17%) Control premium [a] 10%–30% (20%)
Comparable market companies
EBITDA multiple [b] 10–13 (11.3)
Revenue multiple [b] 1.5–2.0 (1.7)
Discount for lack of marketability [a] 5%–20% (17%) Control premium [a] 10%–30% (20%)
Energy sector 32 Discounted cash flow Weighted average cost of capital 8%–12% (11.1%) Long-term revenue growth rate 3%–5.5% (4.2%) Long-term pre-tax operating margin 7.5%–13% (9.2%) Discount for lack of marketability [a] 5%–20% (10%) Control premium [a] 10%–20% (12%)
Comparable market companies
EBITDA multiple [b] 6.5–12 (9.5)
Revenue multiple [b] 1.0–3.0 (2.0)
Discount for lack of marketability [a] 5%–20% (10%) Control premium [a] 10%–20% (12%)
Private equity fund investments 25 Net asset value [c] N/A N/A
Continues...
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. 115, OF MAY 20, 2022
...continuation
Quantitative information about fair value measurements using significant unobservable data (Level 3)
| Description | Fair Value at 12/31/X9 | Valuation Techniques | Unobservable Data | Range (Weighted Average) |
|---|---|---|---|---|
| Debt Securities: | ||||
| Residential mortgage-backed securities | 125 | Discounted cash flow | Prepayment rate | Constant 3.5%–5.5% (4.5%) |
| Probability of default | 5%–50% (10%) | |||
| Loss severity | 40%–100% (60%) | |||
| Commercial mortgage-backed securities | 50 | Discounted cash flow | Prepayment rate | Constant 3%–5% (4.1%) |
| Probability of default | 2%–25% (5%) | |||
| Loss severity | 10%–50% (20%) | |||
| Collateralized debt obligations | 35 | Consensus pricing | Quoted prices | 20–45 |
| Comparability adjustments (%) | -10% – +15% (+5%) | |||
| Hedge Fund Investments: | ||||
| High-yield debt securities | 90 | Net asset value [c] | N/A | N/A |
| Derivatives: | ||||
| Credit contracts | 38 | Option model | Annualized credit volatility [d] | 10%–20% |
| Counterparty credit risk [e] | 0.5%–3.5% | |||
| Own credit risk [e] | 0.3%–2.0% | |||
| Investment Properties: | ||||
| Commercial – Asia | 31 | Discounted cash flow | Long-term net operating profit margin | 18%–32% (20%) |
| Cap rate | 0.08–0.12 (0.10) | |||
| Comparable market approach | Price per m2 (US$) | $ 3,000–$ 7,000 ($ 4,500) | ||
| Commercial – Europe | 27 | Discounted cash flow | Long-term net operating profit margin | 15%–25% (18%) |
| Cap rate | 0.06–0.10 (0.08) | |||
| Comparable market approach | Price per m2 (EURO) | €4,000–€12,000 (€8,500) |
[a] Represents values used when the entity determined that market participants would take into account these premiums and discounts when pricing the investments.
[b] Represents values used when the entity determined that market participants would use these multiples when pricing the investments.
[c] The entity determined that the reported net asset value represents fair value at the end of the reporting period.
[d] Represents the range of volatility curves used in the valuation analyses that the entity determined that market participants would use when pricing contracts.
[e] Represents the range of credit default swap spread curves used in the valuation analysis that the entity determined that market participants would use when pricing contracts.
(Note: A similar table should be presented for liabilities, unless another format is considered more appropriate by the entity).
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. 115, OF MAY 20, 2022
EI64. Furthermore, the entity must provide additional information that will help users of its financial statements assess the quantitative information disclosed. The entity may disclose all or some of the following items to comply with item 92 of the Pronouncement:
(a) the nature of the item being measured at fair value, including the characteristics of the item being measured that are taken into consideration in determining relevant information. For example, for residential mortgage-backed securities, the entity may disclose the following:
(i) the types of underlying loans (e.g., prime loans or subprime loans); (ii) collateral; (iii) guarantees or other credit enhancements; (iv) level of seniority of the security tranches; (v) the year of issuance; (vi) the weighted average coupon rate of the underlying loans and securities; (vii) the weighted average maturity of the underlying loans and securities; (viii) the geographic concentration of the underlying loans; (ix) information regarding the credit ratings of the securities; (b) how third-party information, such as broker quotes, pricing services, net asset values, and relevant market data, was taken into consideration when measuring fair value.
Example 18 – Valuation Processes
EI65. For fair value measurements classified in Level 3 of the fair value hierarchy, the Pronouncement requires the entity to disclose a description of the valuation processes used by the entity. The entity may disclose the following to comply with item 93(g) of the Pronouncement:
(a) for the group within the entity that decides the entity's valuation policies and procedures:
(i) its description;
(ii) to whom this group reports; and
(iii) the internal reporting procedures in place (e.g., if and, if so, how pricing, risk management, or how audit committees discuss and evaluate fair value measurements); (b) the frequency and methods for calibration, back testing, and other pricing model testing procedures; (c) the process for analyzing changes in fair value measurements from period to period; (d) how the entity determined that third-party information, such as broker quotes or pricing services, used in fair value measurements were developed in accordance with the Pronouncement; and (e) the methods used to develop and substantiate the unobservable data used in the fair value measurement.
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. 115, OF MAY 20, 2022
Example 19 – Information on Sensitivity to Changes in Significant Unobservable Data
EI66. For recurring fair value measurements classified in Level 3 of the fair value hierarchy, the Pronouncement requires the entity to provide a narrative description of the sensitivity of the fair value measurement to changes in significant unobservable data and a description of any interrelationships between these unobservable data. The entity may disclose the following regarding its residential mortgage-backed securities to comply with item 93(h)(i) of the Pronouncement:
The significant unobservable data used in the fair value measurement of the entity's residential mortgage-backed securities are prepayment rates, probability of default, and loss severity in the event of default. Significant increases (decreases) in any of this information individually would result in a significantly lower (higher) fair value measurement. Generally, the change in the assumption used for the probability of default is accompanied by a similarly directional change in the assumption used for loss severity and a directionally opposite change in the assumption used for prepayment rates.
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Source: Comissão de Valores Mobiliários — original document · Summary generated with machine assistance and reviewed before publication; the authoritative text is the regulator's original document. How RegAlert works
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