CVM Resolution No. 150 of June 15, 2022

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

CVM RESOLUTION NO. 150, OF JUNE 15, 2022

Ratifies Technical Orientation OCPC 04 of the Accounting Pronouncements Committee, which deals with the application of Technical Interpretation ICPC 02 to Brazilian real estate development entities.

THE PRESIDENT OF THE SECURITIES AND EXCHANGE COMMISSION OF BRAZIL - CVM makes it 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. The obligation for open companies to apply Technical Orientation OCPC 04, which deals with the application of Technical Interpretation ICPC 02 to Brazilian real estate development entities, issued by the Accounting Pronouncements Committee - CPC, is hereby ratified, as set forth in Annex “A” to this Resolution.

Art. 2. CVM Deliberation No. 653, 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. 150, OF JUNE 15, 2022

ANNEX “A”

ACCOUNTING PRONOUNCEMENTS COMMITTEE

TECHNICAL ORIENTATION OCPC 04
Application of Technical Interpretation ICPC 02 to Brazilian Real Estate Development Entities

Index Item
Context, objective and scope 1 – 6
Determination of whether a contract falls within the scope of Technical Standard CPC 17 or Technical Standard CPC 30 – Main points of analysis 7 – 32 Final Considerations - Accounting for revenue, costs and expenses of real estate development 33 – 37

CVM RESOLUTION NO. 150, OF JUNE 15, 2022

Context, objective and scope

The implementation of Technical Interpretation ICPC 02, related to international standard IFRIC 15, has led to numerous questions and debates regarding its adequacy to the Brazilian economic environment. With the process of convergence with international accounting standards (IFRSs), what is considered the main change in the Brazilian regulatory environment arises, namely, the cultural change in the analysis, interpretation and implementation of accounting standards. From this new environment, accounting normative acts must be read and interpreted considering the economic essence of the transaction(s) they intend to regulate, regardless of the legal form they are clothed in. This foundation is expressed in the Basic Conceptual Pronouncement – Conceptual Framework for the Preparation and Presentation of Financial Statements, mainly its item 35 1, and in Technical Standard CPC 26 – Presentation of Financial Statements, mainly its items 23 and 24 2.

“35. For information to represent transactions and other events that it intends to represent adequately, it is necessary that these transactions and events be accounted for and presented in accordance with their substance and economic reality, and not merely their legal form. The essence of transactions or other events is not always consistent with what appears to be based on their legal form or artificially produced. For example, an entity may sell an asset to a third party in such a way that the documentation indicates the legal transfer of ownership to that third party; however, there may be agreements that ensure that the entity will continue to enjoy the future economic benefits generated by the asset and will repurchase it after a certain period for an amount that approximates the original sale value plus market interest during that period. Under such circumstances, reporting the sale would not adequately represent the transaction formalized.”

“23. In extremely rare circumstances, where management concludes that compliance with a requirement of a Pronouncement, Interpretation or Orientation would lead to such a misleading presentation that it would conflict with the objective of financial statements established in the Conceptual Framework for the Preparation and Presentation of Financial Statements, but the current regulatory structure prohibits the non-application of the requirement, the entity must, to the greatest extent possible, reduce the identified inadequate aspects in strict compliance with the Pronouncement, Interpretation or Orientation by disclosing:
(a) the title of the Pronouncement, Interpretation or Orientation in question, the nature of the requirement and the reasons that led management to conclude that compliance with this requirement would make the financial statements so distorted and conflicting with the objective of financial statements established in the Conceptual Framework; and (b) for each period presented, the adjustments of each item in the financial statements that management concluded were necessary to obtain an adequate representation.
24. For the purposes of items 19 to 23, an item of information conflicts with the objective of financial statements when it does not faithfully represent the transactions, other events and conditions it intends to represent or that could reasonably be expected to represent and, consequently, would likely influence the economic decisions taken by users of the financial statements. ….”

CVM RESOLUTION NO. 150, OF JUNE 15, 2022

Subjecting Technical Interpretation ICPC 02 (IFRIC 15) to this analysis, it is found that there are no grounds to argue its non-adherence to either generally accepted accounting principles or to the Brazilian economic and legal environment.
It is important, however, to alert that the application of Technical Interpretation ICPC 02 and this Orientation to activities carried out outside the Brazilian context by an entity that applies Pronouncements issued by this Committee, or that, even if carried out in Brazil, have, due to legal, contractual or other provisions, conditions different from those reproduced here, must be done in light of the specific legal or contractual conditions, considering, if abroad, the specific legislation and jurisprudence. Therefore, what is contained in this Orientation does not necessarily apply to such situations. In this context, this Orientation refers to what is inferred and interpreted from the Interpretation in question, considering the main characteristics and peculiarities of the economic and legal environment in which the Brazilian real estate sector operates.
The objective of this Orientation is to assist in the analysis of whether construction contracts are more appropriately within the scope of Technical Standard CPC 17 – Construction Contracts or Technical Standard CPC 30 – Revenue, and thus assist in the definition by preparers of financial statements of the moment of revenue recognition with the development or construction of real estate.

Determination of whether a contract falls within the scope of Technical Standard CPC 17 or Technical Standard CPC 30 – Main points of analysis

Interpretation ICPC 02 states that the determination of the moment in which a construction contract for a property falls within the scope of Technical Standard CPC 17 – Construction Contracts or Technical Standard CPC 30 – Revenue depends on the terms of the contract and all facts and circumstances related to it. This determination requires judgment with respect to each contract, focusing on the prevalence of economic substance over form, as per the Basic Conceptual Pronouncement and Technical Standard CPC 26 – Presentation of Financial Statements.
The real estate transaction will be within the scope of Technical Standard CPC 17 – Construction Contracts when the construction contract fits the definition exposed in its item 5: "a contract specifically negotiated for the construction of an asset or a combination of assets…". In the case of construction based on what is commonly called “cost price”, where the buyer (individually or collectively with a group of buyers) contracts the construction of a certain real estate development, in which the contracted entity is responsible only for the construction and management of the work, but the acquisition of inputs and raw materials is done by the acquirer (or to their order), there are normally no doubts that the accounting model to be followed is that of Technical Standard CPC 17 – Construction Contract, with the characteristic of a service provision contract. Some difficulties may exist only for the case of fixed-price contracts.

CVM RESOLUTION NO. 150, OF JUNE 15, 2022

To achieve the first objective, namely, the classification of the contract, it must be assumed that “the entity previously analyzed the construction contract of the property and its possible addenda or related contracts, concluding that it will not maintain continuous managerial involvement associated with the ownership, or effective control of the constructed property, to a degree that would prevent the recognition of part or all of the revenue” (item 7 of ICPC 02). It should be observed that, if the answers to the questions are positive, there will be no partial or total recognition of revenue before the point of transfer of the completed property.
But, in Brazil, from the registration of the construction project, descriptive memorandum and other materials at the notary office, and mainly from the first contract with the acquirer, the entity can no longer alter the project or the descriptive memorandum, unless with the unanimous consent of those interested. At this moment, there is normally no longer managerial involvement in the sense of manipulation according to the will of the developer/builder; there is no longer the possibility of alterations by its will (of the developing or construction entity). This entity becomes subordinate to the contract and must comply with it according to the terms contained therein.
On the other hand, buyers also do not have freedom to modify whatever they want in the project under execution. In fact, even after the work is completed, there is no broad possibility of such manipulation by the acquirers. It is agreed that the relevant point, in this case, is that the power of control and managerial involvement that existed before the phase of registration at the notary office of the project and other documents are now exercised only collectively by the acquirers, and never individually. In any case, the important thing is to note that the developer/builder no longer maintains this involvement and control from the registration and the first sale.
A point that has brought much doubt: In the Brazilian real estate sector, entities that carry out the development or construction of properties, directly or through subcontractors, sign contracts before the completion of construction, or even before its start (off-plan) through a contract customarily known as “promise of purchase and sale”.
In reality, the use of the “contract of commitment to purchase and sale” and not “contract of purchase and sale” is, by rule, due to the ease of effectuating the operation between the contracting party and the contracted party, reducing the time and costs of the formal contract registration. This contract has the force of a future unit purchase and sale operation, being, by rule, irrevocable and unrevocable for both parties. A cancellation usually occurs by decision of the buyer or by default of its payment obligations, this being effected with the imposition of significant losses which can inhibit this cancellation. The law only admits withdrawal by the developer in the 180-day grace period after the registration of the development memorandum if this is explicitly considered in the development plan. After this period, the developer is obliged to construct and deliver the units.
Nothing prevents, also, that the definitive deed of sale and purchase of the unit be granted, even if it is yet to be constructed. With this, the acquirer may be the holder of the property right of the future unit or the rights to acquire this future unit. But in both hypotheses, there are real rights. There are cases where the granting of the definitive deed is conditioned to

CVM RESOLUTION NO. 150, OF JUNE 15, 2022

approval by the seller, however when this clause is linked to the fact that the purchase has not been paid off, it can be presumed to be a guarantee for the settlement of the acquirer's obligation.

The acquirer may freely dispose of the rights of the real estate unit, paying the transfer tax and other taxes, if due. This gives it the characteristic of free possibility to transform this right into money or another asset, which characterizes control and holding of benefits.
Data shows that most contracts have been carried out by the acquirers, which makes prevail the idea that the contracted form (“promise of purchase and sale”) does not interfere with the essence of the transaction, which is, in fact, a purchase and sale operation. Thus, there is no need to consider this legal form as restrictive for the decision of the nature addressed by the Interpretation under analysis.
We also note that in our environment, in general, the assumption of debt by the buyer occurs when the contractual agreement is made, whose settlement occurs during the construction process, but not in the form of an advance, but rather in the form of settlement of the commitment assumed in the contract. This is a characteristic that greatly differentiates Brazilian contracts from others existing in many other jurisdictions where the contract characterizes more an option for future purchase and where payment is made in the form of an advance and has some characteristic of a premium for this option.
Another issue for analysis refers to what is contained in item 11 of ICPC 02, namely, “a construction contract for a property falls within the definition of a construction contract when the buyer is able to specify the main structural elements of the property project before construction begins and/or specify significant structural changes after construction begins (whether or not the buyer exercises this possibility)”. In collective housing projects, the application of this condition is impossible, except in cases where the acquirers have previously deliberated and negotiated, not only with the contract, but also with the registration at the notary office of the documents mentioned above. Once construction begins, it is practically impossible any structural change in the project, for obvious engineering reasons. But this incapacity also occurs for the developer/builder. Thus, after the registration at the notary office of the plan, the project and the descriptive memorandum, neither party has the condition to cause significant structural changes. Thus, if the buyer did not acquire this capacity, the developer/builder also no longer has it. Thus, this issue becomes innocuous and meaningless for the exercise of judgment.
Item 16 of the Interpretation states that “if the entity is required to provide services, together with the supply of construction materials, to fulfill its contractual obligation, in order to deliver the property to the buyer, as those applicable to sales contracts resulting from the development of real estate units, the contract is a contract for the sale of goods, and the revenue recognition criteria described in item 14 of Technical Standard CPC 30 – Revenue must be applied”. However, the typical Brazilian contract is not the supply of construction materials in a condition where the developer/construction company would be a

CVM RESOLUTION NO. 150, OF JUNE 15, 2022

commercial intermediary. The sale is of the real estate unit, and what the developer/construction company does is provide, among others, the service of acquisition and application of materials to the real estate unit acquired by the client. The entity acts, in essence, on behalf of the acquirers of the properties, and not in its own name as if it were a commercial entity that buys goods and resells them to clients. This only occurs in the case of unsold units.

Payment: in cases where the buyer makes an advance that will be reimbursed only if the entity fails to deliver the completed real estate unit in accordance with the contractual terms, in which case the remainder of the purchase price is generally paid to the entity only at the end of the contract, when the buyer obtains possession/ownership of the unit, it becomes more evident that this is a contract for the sale of goods, according to the scope of Technical Standard CPC 30 – Revenue.
Control, risks and benefits: the entity may transfer to the buyer the control, risks and benefits of the property under construction in its current stage according to the evolution of the work. In this case, if all the criteria of item 14 of Technical Standard CPC 30 – Revenue are continuously met as construction advances, the entity must recognize revenue by the percentage of work evolution. The requirements of Technical Standard CPC 17 – Construction Contracts apply, in general, to the recognition of revenue and the corresponding costs and expenses as the service provision is performed. This is a vital point to be observed, namely, if there is a continuous transfer of significant risks and benefits over the property under construction, the recognition of revenue and costs must be carried out as the transfer of these significant risks and benefits occurs under Technical Standard CPC 30.
Some examples of transfers of risks and benefits over the property under construction are:
(a) the signed contract has the force of a public deed ensuring the buyer all rights of free use of the asset (alienation, pledge, etc.); (b) the contract normally requires the consent of the developer/construction company if the acquirer wants to sell their asset to third parties and has not yet completed the full payment of the acquisition price; but this occurs due to the need to analyze the credit quality of the candidate new acquirer, as occurs in any transfer of debtor in other situations; (c) Brazilian legislation determines that in cases where the acquirer has paid off the entire contract, they may sell it without the need for consent or agreement of the developer/construction company, merely notifying them; (d) the previous situations show that the buyer has the right to the asset, and only they, and has the capacity to transform their construction asset into money whenever they want and have a new acquirer with acceptable credit conditions;

SECURITY AND COMMODITIES COMMISSION
Rua Sete de Setembro, 111/2-5º and 23-34º Floors, Centro, Rio de Janeiro/RJ – CEP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º and 4º Floors, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brazil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4º Floor, Brasília/DF – CEP: 70712-900 – Brazil -Tel.: (61) 3327-2030/2031 www.gov.br/cvm CVM RESOLUTION NO. 150, OF JUNE 15, 2022

(e) in the case of these resales, any gains from normal or abnormal appreciation of the property during construction benefit the purchaser, and not the developer/construction company; any losses of this nature are also solely the purchaser's, which characterizes the transfer of risks and benefits; (f) real cases of expropriation have demonstrated that the holders of the credit for indemnification are the buyers. These indemnities have been distributed to the purchasers proportionally to the amounts paid; (g) Brazilian legislation grants purchasers, by simple majority decision, the right to replace the developer/construction company if it is unjustifiably and unremediedly more than 30 days behind the established schedule. Obviously, the troubles of this replacement may not indicate this path as the best, and therefore certain adjustments end up occurring, in which indemnities are paid to purchasers due to this delay, such as payment of rent for the additional period, etc.; (h) Law No. 4,591/64 and Brazilian jurisprudence have clearly established that, in the case of bankruptcy of the developer, or unjustified and unremedied suspension of works for more than 30 days, or excessive delay in the progress of these works, the right to dismiss the developer and hire another construction company exists. In bankruptcy, the ongoing assets are not incorporated into the bankruptcy estate to satisfy other creditors; (i) the promise to buy and sell contract or the definitive buy and sell contract ensures the purchaser the right to dispose of their property, whether it be ownership (if there is a sale and purchase) or acquisitive right (if there is a promise of sale and purchase); (j) in the case of a construction problem such as collapse, the responsibility, legally in Brazil, lies with the developer/construction company, which must bear the loss; however, this does not characterize, by itself, that the risks are not passed on to the purchasers. Indeed, this type of responsibility is independent, in fact, of the contracted form, whether genuine execution of service by third parties or construction for future delivery, if the problem derives from the construction company's fault. Thus, it interferes little with the present analysis, also due to the very low probability of occurrence.

Thus, we list above some common examples verified in Brazil that demonstrate that significant risks and benefits are, as a rule, continuously transferred to the purchaser during the construction period.

In the previous items, numerous examples were presented regarding the application of Technical Interpretation ICPC 02. However, given the existence of contrary arguments – based on the understanding that the buyer does not have the power to specify the characteristics of the constructed good as occurs with a ship in a shipyard, for example – and therefore such contracts are outside the scope of Pronouncement CPC 17 – in this part, an analysis is made regarding the accounting treatment of the concrete Brazilian case in the event of not qualifying as a construction contract. Thus, it is intended to answer the following question: what would be the accounting treatment for the case where the promise to buy and sell contract or buy and sell contract in a real estate activity is classified within Technical Pronouncement CPC 30?
Assuming the hypothesis of classification within Technical Pronouncement CPC 30, the discussion shifts to the issue of the transfer of control, significant risks, and benefits in a continuous manner or in a single event (in the concrete case, the so-called “key handover”). ICPC 02 recognizes that the respective transfer can be made continuously or at a single moment in time, as the analysis concludes. That is, the issue is not dogmatic – it depends on the interpretation of Brazilian legislation, contracts, and, primarily, the company's business model. Technical Pronouncement CPC 30 covers both types of recognition. It is evident that, if continuous recognition is adopted, the practical result differs very little from, or even equals, what would be obtained if Technical Pronouncement CPC 17 had been applied.
IFRIC 15, in its Basis for Conclusions (BC26) recognizes that contracts with continuous transfer are not commonly found in practice. However, IFRIC 15 addresses this type of possibility by recognizing that they are possible and occur in some jurisdictions. Item 27 of the Basis for Conclusions of IFRIC 15 comments that contracts in which recognition must be performed at a single moment in time (key handover in our jargon) “only give the buyer an asset in the form of a right to acquire, use and sell the completed real estate at a later date.” As discussed previously, the Brazilian case usually does not seem to fit this situation. In Brazil, the buyer does not acquire only a right to buy (a kind of purchase option on the property). In Brazil, installments are actually disbursed intending to settle the contractual obligation directly associated with the asset under construction.
The same applies in specialized doctrine. There is little clear evidence regarding how to apply continuous transfer, but some additional comments are included in IE3, IE8, and IE11 in the illustrative examples accompanying IFRIC 15. One of the important indicators of ‘continued involvement’ seems to be that, if the agreement is terminated before the construction is completed, the buyer retains the work in progress and the entity has the right to be remunerated for the work done up to that moment. As can be seen, the text above discusses exactly the central issue of the timing of revenue recognition within Technical Pronouncement CPC 30 in situations where the so-called continuous transfer occurs. It is now worth analyzing a concrete case that occurs frequently in Brazil currently.
In this case, when there is an interruption of the work, what treatment is given to the already built property? Is there a difference in treatment between buyers possessing already finished floors (probably the lower ones) and purchasers of upper floors? The answers to these questions may better elucidate the accounting treatment that should be applied in Brazil.

“Such agreements give the buyer only an asset in the form of a right to acquire, use and sell the completed real estate at a later date.”

Initially, it can be verified that, in the event of interruption of the work (for a force majeure reason, for example), the builder will have the right to receive what has already been built. If it were so, and he had not delivered the building, he would have no right to receive anything. This is not what occurs in Brazilian civil construction. Similarly, the buyer will have possession of the asset and may hire another developer or construction company, for example, to finish the building or even alienate the ongoing work by collective decision of the buyers.

Is there any difference between buyers of apartments on lower floors (which have already been partially built) and purchasers of upper floors that have not yet been started? If the answer is: in no case, both purchasers have the same rights. In the concrete case, the delivery of a specific property would not be relevant, but rather the total work.
This type of example – of a hypothetical nature – aims to illustrate how the transfer of significant risks and benefits occurs. The example arbitrarily stops construction at a given moment and verifies how significant risks and benefits behave at that moment in time. If the mentioned facts occur – the builder has the right to receive and the buyer retains the work in progress or can dispose of this asset, even by joint decision of the other buyers – it can be inferred that the same would occur at other moments in time. Thus, it can be concluded that the transfer occurs continuously over time. Why can this be stated in this case? Because if the construction company has the right to proportional remuneration for what it has undertaken, then it is transferring significant risks and benefits as the work develops. That is, continuous transfer occurs. Similarly, if the buyer retains the work in its partial stage of development, he will have received the benefits up to that moment related to the completed work. That is, as construction advances, risks and benefits are transferred.
In this case, if recognition occurred only at the moment of delivery of the finished good (key handover), we would have the premise that all significant risks and benefits are being transferred at that specific moment. It can be seen that in the Brazilian case, in general, this is not what occurs. This transfer occurs continuously as the hypothetical situation of construction interruption illustrates.
When the entity transfers to the buyer the control, risks, and benefits of the property ownership, in its entirety (or even the most significant portion of these risks and benefits), all at once, the entity may only recognize revenue when all criteria of item 14 of Technical Pronouncement CPC 30 – Revenues are satisfied.
If the entity is obliged to perform other services, including estimated expenses to meet contractual and legal warranties on the property already delivered to the buyer, it must recognize a liability and an expense according to item 19 of Technical Pronouncement CPC 30 – Revenues. The liability must be measured according to Technical Pronouncement CPC 25 – Provisions, Contingent Liabilities and Contingent Assets. If the entity is obliged to deliver other goods or services, separately identifiable from the property already delivered to the buyer, it must identify the goods or services remaining as a separate component of the sale, in accordance with item 8 of Technical Interpretation ICPC 02 – Real Estate Sector Construction Contract.

Final Considerations
Accounting of revenue, costs, and expenses of real estate development

Based on the comments previously made, it is concluded that in the Brazilian economic environment, usually, promise to buy and sell contracts or buy and sell contracts for a unit to be delivered in the future require the recognition of revenues and expenses as construction advances since the transfer of risks and benefits occurs continuously.
In cases where the contract cannot be classified as a construction contract, it must be classified within Technical Pronouncement CPC 30 – Revenues.
If the entity is not obliged to purchase and provide construction materials, the contract may be merely a service provision contract according to Technical Pronouncement CPC 30 – Revenues. In this case, if the criteria of item 20 of Technical Pronouncement CPC 30 – Revenues are met, it is required that revenue be recognized based on the proportion of services provided. The requirements of Technical Pronouncement CPC 17 – Construction Contracts apply, in general, to the recognition of revenue and the corresponding costs and expenses (item 21 of Technical Pronouncement CPC 30 – Revenues).
If it is characterized, however, that the entity provides services, together with the supply of construction materials, to fulfill its contractual obligation to deliver the property to the buyer, maintaining all control, risk, and benefit without transferring them to the acquirer until its complete completion, the contract is a goods sales contract, and the revenue recognition criteria described in item 14 of Technical Pronouncement CPC 30 – Revenues must be applied.
Thus, there may be cases where the same entity possesses (i) contracts characterized as service provision, if all requirements of Technical Pronouncement CPC 17 are met, (ii) unit sales contracts where there is continuous transfer of significant risks and benefits over such goods allowing the recognition of revenues and costs as these transfers occur, and (iii) contracts that only allow the transfer of such risks, benefits, and controls upon delivery of the finished property (key handover), in which the last case, the recognition of revenues and costs will occur all at once, upon delivery of the property for the buyer's use, having met, in these last two cases, all requirements of CPC 30. Therefore, each entity must analyze its contracts (formal and verbal), addenda, current and past practices, and, primarily, its business model in order to effectively determine its revenue and cost recognition policy, considering that the final objective is full compliance with the axiom cited in item 2 of this Guidance.

CVM Resolution No. 150 of June 15, 2022

Lineage: In force