CVM Resolution No. 127 of June 3, 2022 — CVM — BR

SECURITY 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. 127, OF JUNE 3, 2022
Approves the Consolidation of Technical Interpretation ICPC 16 of the Accounting Pronouncements Committee – CPC, which deals with the extinguishment of financial liabilities with equity instruments.

THE PRESIDENT OF THE SECURITY AND EXCHANGE COMMISSION OF BRAZIL - CVM makes public that the Board, in a meeting held on May 4, 2022, based on §§ 3 and 5 of art. 177 of Law No. 6.404, of December 15, 1976, combined with items II and IV of § 1 of art. 22 of Law No. 6.385, of December 7, 1976, as well as arts. 5 and 14 of Decree No. 10.139, of November 28, 2019, APPROVED the following Resolution:

Art. 1. It makes mandatory for publicly held companies the Technical Interpretation ICPC 16, which deals with the extinguishment of financial liabilities with equity instruments, issued by the Accounting Pronouncements Committee – CPC, as consolidated in Annex “A” to this Resolution.

Art. 2. CVM Deliberation No. 652, of December 16, 2010, 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

CVM RESOLUTION NO. 127, OF JUNE 3, 2022
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ANNEX “A”
ACCOUNTING PRONOUNCEMENTS COMMITTEE
TECHNICAL INTERPRETATION ICPC 16
EXTINGUISHMENT OF FINANCIAL LIABILITIES WITH EQUITY INSTRUMENTS Correlation to International Financial Reporting Interpretations Committee – IFRIC 19

Index Item
REFERENCES
BACKGROUND 1
SCOPE 2 – 3
ISSUES 4
CONSENSUS 5 – 11
TRANSITION DATE 12 – 13

References

CPC 00 – Conceptual Framework for Financial Reporting
CPC 10 – Share-based Payment
CPC 15 – Business Combinations
CPC 23 – Accounting Policies, Changes in Accounting Estimates and Errors
CPC 26 – Presentation of Financial Statements
CPC 48 – Financial Instruments
CPC 39 – Financial Instruments: Presentation
CPC 46 – Fair Value Measurement

CVM RESOLUTION NO. 127, OF JUNE 3, 2022
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Background

A debtor and a creditor may renegotiate the terms of a financial liability by issuing the debtor’s own equity instruments to the creditor, resulting in the partial or total extinguishment of that liability. These transactions are often referred to as “debt for equity swaps”.

Scope
2. This Interpretation deals with the accounting by an entity when the terms of a financial liability are renegotiated and result in the issuance of equity instruments of the entity to its creditor for the total or partial extinguishment of the financial liability. This Interpretation does not deal with the accounting by the creditor.
3. The entity shall not apply this Interpretation to transactions in situations where:
(a) the creditor is also a direct or indirect partner or shareholder who is acting in that capacity as a direct or indirect partner or shareholder; (b) the creditor and the entity are controlled by the same party or parties, before and after the transaction, and the essence of the transaction includes a distribution of capital by the entity, or a contribution to the entity; (c) the extinguishment of the financial liability through the issuance of equity instruments is in accordance with the original terms of the financial liability.

Issues
4. This Interpretation addresses the following issues:
(a) Are the entity’s equity instruments issued to extinguish the total or part of the financial liability “consideration paid”, in accordance with item 3.3.3 of CPC 48?
(b) How should the entity initially measure the entity’s own equity instruments issued to extinguish such financial liability?
(c) How should the entity account for any difference between the carrying amount of the extinguished financial liability and the initial measurement of the equity instruments issued?

Consensus
5. The issue of the entity issuing its equity instruments to the creditor to extinguish the total or part of a financial liability is consideration paid in accordance with item 3.3.3 of CPC 48. The entity shall derecognize the financial liability (or part of a financial liability) from its balance sheet when, and only when, it is extinguished, in accordance with item 3.3.1 of CPC 48.
6. When equity instruments issued to the creditor to extinguish the total or part of a financial liability are initially recognized, the entity shall measure them at the fair value of the equity instruments issued, unless the fair value cannot be measured.
7. If the fair value of the entity’s own equity instruments issued cannot be measured, the entity’s own equity instruments shall be measured at the fair value of the extinguished financial liability. When measuring the fair value of an extinguished financial liability that includes a demand feature (for example, a demand deposit), item 47 of CPC 46 shall not be applied.
8. If only part of the financial liability is extinguished, the entity shall assess whether part of the consideration paid relates to a modification of the terms of the remaining liability. If part of the value paid relates to a modification of the terms of the remaining part of the liability, the entity shall allocate the consideration paid between the part of the liability extinguished and the part of the remaining liability. The entity shall consider all relevant facts and circumstances relating to the transaction when making this allocation.
9. The difference between the carrying amount of the extinguished financial liability (or part of the financial liability) and the consideration paid shall be recognized in profit or loss in accordance with item 3.3.3 of CPC 48. The entity’s own equity instruments shall be initially recognized and measured at the date the financial liability (or part of that liability) is extinguished.
10. When only part of the financial liability is extinguished, the value shall be attributed in accordance with item 8 of this Interpretation. The amount attributed to the remaining part of the financial liability will be part of the assessment of whether the terms of that remaining portion have been substantially modified. If the remaining liability has been substantially altered, the entity shall account for the alteration as the extinguishment of the original obligation and the recognition of a new liability as required by item 3.3.2 of CPC 48.
11. The entity shall disclose the gain or loss recognized in accordance with items 9 and 10 as a separate item in the statement of profit or loss or in the notes.

Transition Date
12. (Eliminated).
13. The entity shall apply a change in accounting policy in accordance with Technical Pronouncement CPC 23 from the beginning of the first comparative period presented.

Lineage: No known changes