CVM Resolution No. 190 of October 9, 2023

The PRESIDENT OF THE SECURITIES COMMISSION – CVM makes public that the Board, in a meeting held on October 4, 2023, based on §§ 3 and 5 of Article 177 of Law No. 6,404 of December 15, 1976, combined with items II and IV of § 1 of Article 22 of Law No. 6,385 of December 7, 1976, APPROVED the following Resolution:

Art. 1. It is made mandatory, for open companies, the Technical Pronouncement CPC 12 (R1) – Present Value Adjustment, issued by the Accounting Pronouncements Committee – CPC, as per Annex “A” to this Resolution.

Art. 2. Resolution CVM No. 138 of June 15, 2022, is revoked, on the date this Resolution enters into force.

Art. 3. This Resolution enters into force on November 1, 2023.

Electronically signed by
JOÃO PEDRO BARROSO DO NASCIMENTO
President

Summary Item
Objective 1 – 3
Scope 4 – 7
Measurement 8 – 29
General guidelines 8 – 15
Risk and uncertainty 16 – 21
Relevance and faithful representation 22 – 23
Cost constraints on useful financial reports 24 – 25 More specific guidelines 26 – 29 Non-contractual liabilities 30 – 33 Tax effects 34 – 35 Classification 36 Disclosure 37 Transitional Provisions 38
Annex

Objective

The objective of this Pronouncement is to clarify the basic requirements to be observed when calculating the present value adjustment of asset and liability elements when preparing financial statements, resolving some controversial issues arising from such procedure, such as:
(a) whether the adoption of present value adjustment applies solely to contracted cash flows or if it would also be applied to estimated or expected cash flows; (b) in which situations the adoption of present value adjustment of assets and liabilities is required, whether at the initial recognition of assets and liabilities, at the change of the valuation basis of assets and liabilities, or at both moments; (c) whether non-contractual liabilities, such as those arising from unformalized or legal obligations, are covered by the present value adjustment;

The use of information based on present value contributes to increasing the predictive value of Accounting; it allows for the correction of judgments regarding past events already recorded; and it brings improvement to the way present events are recognized. If such information is recorded in a timely manner, in light of what is prescribed by the Conceptual Framework for Financial Reporting, Basic Conceptual Pronouncement of this CPC (referred to in this pronouncement as “Conceptual Framework”), in its items 2.6 to 2.8, financial statements with a higher degree of relevance – a fundamental qualitative characteristic – are obtained.
One must also observe the other fundamental qualitative characteristic cited in the Conceptual Framework, faithful representation, taking into account the neutrality of this representation (i.e., free from bias). Neutrality supported by the exercise of prudence when making judgments under conditions of uncertainty, such as those associated with premises and inputs used in pricing models and on which present value adjustment calculations are based.

Scope
4. Other specific CPC Pronouncements regulate aspects related to the calculation of present value adjustment and its cash flows that must be applied in the recognition and measurement of particular assets or liabilities. In applying the concepts associated with present value adjustment, the principles established by these specific standards must prevail over the other aspects cited in this Pronouncement. In turn, the aspects regulated in this Pronouncement must be applied when the accounting treatment dispensed to the asset or liability subject to analysis is not specifically prescribed in another CPC Pronouncement.

This Pronouncement deals essentially with measurement issues, not covering recognition issues. It is important to clarify that the accounting dimension of “recognition” involves the decision of “when to record,” whereas the accounting dimension of “measurement” involves the decision of “at what amount to record.” The Conceptual Framework defines recognition in its item 5.1.
In this sense, this Pronouncement should be considered when measuring assets and liabilities at present value, including when measuring subsequent items (such as, for example, the modification of financial liabilities treated in Pronouncement CPC 48 and/or lease liabilities treated in Pronouncement CPC 06), including the terms and circumstances (contractual or otherwise) to which the liabilities are associated. In these situations, when applying the present value adjustment, this must reflect a new measurement of assets and liabilities, considering the principles established by the specific Pronouncements applicable to the transactions and events reported.

Measurement
General guidelines
8. The most relevant issue for applying the concept of present value, in the manner of a principles-based Pronouncement like this, is not the detailed enumeration of which assets or liabilities are covered by the standard, but the establishment of general guidelines and goals to be achieved. In this sense, as a general guideline to be observed, assets, liabilities, and situations that present one or more of the characteristics below must be subject to the measurement procedures treated in this Pronouncement:
(a) a transaction that gives rise to an asset, a liability, a revenue, or an expense (as defined in the Conceptual Framework) or another change in equity whose counterpart is an asset or a liability with financial settlement (receipt or payment) at a date different from the recognition date of these elements; (b) periodic recognition of changes in value, utility, or substance of similar assets or liabilities employs a discount allocation method; (c) a particular set of estimated cash flows clearly associated with an asset or a liability.

In terms of the goal to be achieved, when applying the concept of present value, one must associate this procedure with the measurement of assets and liabilities taking into consideration (i) an estimate of future cash flows for the asset or liability being measured; (ii) expectations about possible variations in the value and timing of cash flows that represent the uncertainty inherent in the cash flows; (iii) 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 the timing or risk of default (i.e., risk-free interest rate); and (iv) the price to bear the uncertainty inherent in the cash flows (i.e., risk premium). In this way, the information provided enables analysis and economic decision-making that result in the best evaluation and allocation of scarce resources. For this purpose, economic differences between assets and liabilities must be adequately reflected by Accounting, so that economic agents can define with less margin of error the premiums required in exchange for the risks assumed.
Non-monetary assets and liabilities acquired on credit with implicit or explicit embedded interest must be measured at their present value upon initial recognition. Once adjusted, the non-monetary item should no longer be subject to subsequent adjustments with respect to the figure of embedded interest. It should be noted that not every non-monetary asset or liability is subject to the effect of present value adjustment. For example, a non-monetary item that, by its nature, is not subject to present value adjustment is the advance of money for receipt or payment for goods and services.
Deferred tax assets and liabilities are not subject to present value adjustment, as established in CPC 32 – Taxes on Income, and this direction must be observed in the application of this Pronouncement.
Regarding subsidized loans and financing, the following considerations apply. For various reasons, there is no consolidated market for long-term debt in Brazil, with the supply of credit to the market in general with this long-term characteristic usually limited to a single government entity. Thus, exceptionally, until a competitive long-term credit market emerges in Brazil, liabilities of this nature (and corresponding assets in the lender) are not covered by this Pronouncement as subject to the application of the present value concept at rates other than those to which such loans and financing are already subject. Long-term operations, even if financed by government entities, that have characteristics of government subsidy or assistance, treated in Technical Pronouncement CPC 07 – Government Grants and Assistance, are not included in this exception.
Another relevant issue for measurement purposes concerns the manner in which interest arising from the present value adjustment of assets and liabilities should be recognized in the result. The approach to be used is that of the effective interest method, by allocating interest revenue or expense in the result over the relevant period, as regulated by Pronouncement CPC 48, as it presents quality information without incurring relevant cost for its obtaining.
The recognition of commercial operation effects, resulting from a contract with a customer, in which there is a significant financing component, must observe the provisions of items 60 to 65 of CPC 47, so that the value stated in the fiscal documentation, which serves as support for the operation, is adequately decomposed for accounting purposes, in order to reflect the price the customer would have paid in cash. However, in observance of the provisions of item 112A also of CPC 47, the value stated in the fiscal documentation, in compliance with Brazilian tax legislation, will be recorded for control purposes in an account representing “Gross Revenue,” with the portion corresponding to the financing component registered in an account deducting from this. The interest revenue corresponding must be recognized by the passage of the financing period.
In the event of the acquisition of goods, if there is a financing component in the commercial operation, this must be expunged from the corresponding acquisition cost, and the interest expense resulting must be recognized by the passage of the financing period. It is important to remember that

Risk and uncertainty
16. When using, for accounting purposes, information based on cash flow and present value, inherent uncertainties must necessarily be taken into consideration for measurement purposes, as already highlighted in previous items of this Pronouncement. Even contractually established amounts contain a certain degree of uncertainty insofar as they contain default risks.

Market participants generally require compensation to accept the uncertainty inherently associated with the expected cash flows of an asset or liability, and this compensation is the “risk premium,” which must also be considered in the measurement. Otherwise, there is a concurrence in the production of accounting information incompatible with what would be a faithful representation, as determined by the Conceptual Framework, in its items 2.12 to 2.19.
Present value techniques differ in how they adjust to reflect risk and in the type of cash flows they use, and can be applied, for example (a) a discount rate adjustment technique considering a risk-adjusted rate and contractual, promised, or most likely cash flows; or (b) an expected present value technique, considering as a starting point a set of cash flows that represent the probability-weighted average of all possible future cash flows (i.e., expected cash flows). CPC 46, items B18 to B22 and B25 and B26, contains information on how to apply these methods.
To avoid double counting or omission of the effects of risk factors, the discount rate applied must reflect premises that are consistent with those inherent in the cash flows. For example, the discount rate that reflects uncertainty regarding expectations of future defaults is appropriate when using contractual loan cash flows (discount rate adjustment technique). One must not apply this same rate when using probability-weighted expected cash flows (expected present value technique), since the expected cash flows already reflect premises regarding uncertainty about future defaults; instead, a discount rate compatible with the risk inherent in the expected cash flows must be used.
On the other hand, arbitrary adjustments for risk premiums to be reflected in the discount rate or other methodologies that equally arbitrarily impute adjustments for risks to expected cash flows are not admissible, even with the justification of the near impossibility of obtaining information from market participants, as proceeding in this manner introduces bias into the measurement. In cases where the uncertainties in measurement require the use of judgment and accounting estimates, the entity must consider the extent and appropriate detailing of associated disclosures according to the relevance of the potential effects that this estimate may bring to the amounts recognized in the financial statements, considering what CPC 26 – Presentation of Financial Statements regulates.

Relevance and faithful representation
22. As already addressed in items 2 and 3 of this Pronouncement, the adoption by Accounting of information based on the present value of cash flow inevitably provokes discussions around its fundamental qualitative characteristics: relevance and faithful representation. Making a value judgment about the ideal balance of one characteristic in relation to the other, case by case, must be a recurring exercise for those who prepare financial statements. Similarly, the judgment of the relevance of the present value adjustment of short-term assets and liabilities must be exercised, taking into consideration the comparative effects before and after the adoption of this procedure on items of assets, liabilities, equity, and results.

Objectively, under certain circumstances, the measurement of an asset or a liability at present value can be obtained without major difficulties, if contractual flows with a reasonable degree of certainty and observable discount rates in the market are available. On the other hand, certain measurements may be subject to levels of uncertainty so significant that it may be questionable whether the estimate provided would offer a sufficiently faithful representation of this phenomenon. In some of these cases, the most useful information may be the highly uncertain estimate, accompanied by the description of the estimate and the explanation of the uncertainties affecting it, prioritizing relevance in this context. In other cases, it may be evaluated that the information does not provide a sufficiently faithful representation of the phenomenon it intends to portray, and the information evaluated as more useful may include an estimate of another type that is of lesser relevance but subject to less uncertainty in measurement. Depending on the case, the traditional or expected cash flow approach should be chosen as the technique for calculating the present value adjustment.

Cost constraints on useful financial reports
24. In preparing financial statements using information based on cash flow and present value, it is important to keep in mind what the Conceptual Framework guides, in its items 2.39 to 2.41, regarding the cost associated with specific information as a factor of constraint on the nature of this information to be included in financial reports, being

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.cvm.gov.br RESOLUÇÃO CVM Nº 190, DE 09 DE OUTUBRO DE 2023 important that these costs be justified by the benefits of presenting this information.
25. Thus, depending on the set of information available and the cost of obtaining it, the entity may or may not draw up multiple scenarios to estimate cash flows; it may or may not resort to more sophisticated econometric models to arrive at a discount rate for a given period; it may or may not resort to more sophisticated pricing models to measure its assets and/or liabilities; it may or may not adopt one method or another for interest allocation. It is important to highlight that the costs to be incurred to obtain the information are more objectively identifiable, whereas the benefits are not at the same level. However, information provided may reach numerous users and generate, at times, benefits for more than one financial year, whereas the cost of producing it is incurred at a single point in time. Moreover, gains in terms of efficiency may occur, as this information is provided with greater frequency.
Specific Guidelines
26. The elements comprising assets and liabilities arising from long-term operations, or short-term operations when there is a relevant effect, must be adjusted to present value based on discount rates that reflect the market's best assessments of the time value of money and the specific risks of the asset and liability at their original dates.
27. The quantification of the present value adjustment must be performed on an exponential "pro rata die" basis, from the origin of each transaction, with its effects appropriated to the accounts to which they are linked.
28. The reversals of present value adjustments of qualifying monetary assets and liabilities must be appropriated as financial revenues or expenses, unless a specific CPC Pronouncement dictates the classification in the statement of the period's result for the underlying transaction or the entity can justify that the transactions (for example, financing made to its customers) are part of its operating activities, in which case the reversals will be appropriated as operating revenue. This is the case, for example, when the entity operates in two distinct segments: (i) sale of products and services and (ii) financing of sales on credit, provided that this adjustment and the effects of its disclosure are relevant.
29. The concepts, analyses, and specifications regarding present value adjustment, especially regarding the preparation of estimated cash flows and definition of discount rates contained in other Technical Pronouncements, must be used, insofar as applicable and not conflicting, to the extent that these govern such practices.
Non-contractual Liabilities
30. Non-contractual liabilities, such as unformalized obligations governed by CPC 25 – Provisions, Contingent Liabilities and Contingent Assets, are those that present greater complexity for accounting measurement purposes through the use of information based on present value. Estimated cash flows or series of estimated cash flows are inherently uncertain, as are the periods for which there is an expectation of delivery of product/provision of service. Therefore, critical thinking, sensitivity, and experience are required in the conduct of probabilistic calculations. It may be that in certain situations the participation of a multidisciplinary team of professionals is imperative for the execution of the task.
31. This complexity associated with unformalized obligations results from the fact that these arise from the entity's actions through a pattern of established past practices or published policies and specific declarations that have created a valid expectation in other parties regarding the fulfillment of these responsibilities. Guarantees granted to customers discretely, frequent financial assistance to indigenous communities located in regions where exploratory economic activities are developed, among others, are some examples.
32. Present value discounting is required, whether for liabilities arising from legal or unformalized obligations, and the discount rate must necessarily consider the entity's credit risk.
33. Obligations for the decommissioning and removal from service of long-term assets or restoration of areas where the assets operate are examples of long-term liabilities that may have a non-contractual nature to which the present value adjustment applies (typically observed in companies operating in the segment of metal ore extraction, oil, and thermonuclear, for example).
Fiscal Effects
34. For the purposes of present value discounting of assets and liabilities, the rate to be applied must not be net of fiscal effects, but rather before taxes.
35. Regarding the temporary differences observed between the accounting and fiscal bases of assets and liabilities adjusted to present value, these temporary differences must receive the treatment required by current accounting rules for the recognition and measurement of deferred tax assets and liabilities.
Classification
36. In the classification of items arising from the present value adjustment of assets and liabilities, whether in situations of initial recognition or in cases of new measurement, within the philosophy of fair value, what is prescribed by the Conceptual Framework in its item 2.12, regarding faithful representation of financial reports, must be observed.
Disclosure
37. Regarding disclosure in explanatory notes, minimum information must be provided that allows users of the financial statements to understand the present value measurements carried out for assets and liabilities, comprising the following non-exhaustive list:
(a) detailed description of the item subject to present value measurement, nature of its cash flows (contractual or non-contractual) and, if applicable, its quoted market entry value;

What is the difference between PVA and fair value?
Answer - The definitions below are based on what is described in other CPC Pronouncements and other available glossaries:
Fair value - is the price that would be received to sell an asset or that would be paid to transfer a liability in an unforced transaction between market participants on the measurement date.
Present value - is the estimate of the current value of a future cash flow, in the normal course of the entity's operations.
Based on these definitions, we must distinguish PVA from fair value as follows:
PVA: Its objective is to make the adjustment to demonstrate the present value of a future cash flow. This cash flow may be represented by inflows or outflows of resources (or equivalent amount; for example, credits that reduce future cash outflows would be equivalent to inflows of resources). To determine the present value of a cash flow, three pieces of information are required: the future flow value (considering all terms and contracted conditions), the date of the said financial flow, and the discount rate applicable to the transaction. Fair value: In the measurement of fair value, the main objective is to estimate the price at which, in an orderly transaction between market participants on a specific date, an asset or liability would be transferred (estimate of exit price). This exercise can be performed preferably through the observation of quoted prices in active markets for identical or similar assets or liabilities (adjusted to reflect the specific conditions of the asset) and, in the impossibility of this observation, by the use of evaluation methodologies involving projections of future cash flows discounted to present value or econometric formulas recognized by the market. It is seen, therefore, that in some circumstances fair value and present value may coincide. The accounting practices adopted in Brazil and the international accounting standard (International Financial Reporting Standards – IFRS) establish the need to present, on the balance sheet date of each, certain assets and liabilities at their fair value, as well as certain assets and liabilities adjusted to present value. This aspect is well characterized in the international standards converged in CPC Pronouncements for the recording and measurement of financial assets and liabilities (CPC 48), including accounts receivable related to sales (CPC 47) and non-current assets held for sale (CPC 31), among others. Despite the differences existing between the concepts, doubts may still exist in the practical application of fair value and present value, even in their differentiation. Thus, the illustrative example, presented below, aims to elucidate the issue:
Scenario: the entity makes a credit sale for $ 10,000 thousand to receive the value in a single installment, due in five years. If the sale were made for cash, according to the available option, the value of the sale would have been $ 6,210 thousand, which is equivalent to an annual financial cost of 10%. It is verified that this rate is equal to the market rate, on the date of the transaction. At first, the transaction must be accounted for considering its present value (which is equivalent to its fair value, insofar as it is a financial asset, it is initially recognized at fair value according to CPC 48), whose amount of $ 6,210 thousand is recorded as accounts receivable, in credit to sales revenue for the same amount. It is noted that, at this first moment, the present value of the transaction is equivalent to its market value or fair value. In the case of applying the present value adjustment technique, after the first year, the recognition of financial revenue must respect the interest rate of the transaction on the date of its origin (i.e., 10% per year), regardless of the market interest rate in subsequent periods. Thus, after one year, the value of accounts receivable, for accounting purposes, will be $ 6,830 thousand, regardless of variations in market interest rates. At the end of each of the five financial years, accounting must reflect the following effects:
Year $ thousand
Value
Interest
(effective rate)
Updated Balance
1 6,210 620 6,830
2 6,830 683 7,513
3 7,513 751 8,264
4 8,264 827 9,091
5 9,091 909 10,000
The application of the mark-to-market technique, only for reference and comparison, could be illustrated with a situation in which the interest rate went from 10% per year, at the initial moment of the transaction, to 15% per year, at the end of the first year. In this situation, the fair value of accounts receivable, calculated by adjusting to present value on this new date and with the current market condition, would be $ 5,718 thousand ($ 10,000 thousand/1.15^4), that is, its fair value at the end of the first year is much lower than the value accounted for based on the present value adjustment technique. Thus, although at the initial moment the present value and fair value of an operation are usually equal, over time these values do not necessarily bear any type of relationship. While present value is related to the specific interest rate intrinsic to the contract, considering the conditions on the date of its origin, fair value may change over time due to market conditions (interest rates and other factors), which should only be considered in cases where fair value measurement is applicable. Regardless of this, whenever on the date of each balance sheet, as in the previous table, the book value is different from the fair value, attention must be paid to the legal and regulatory provisions on the application of one or the other concept. But in case of discrepancy as in the example given, due to the relevance of the difference, it may be necessary that this information be disclosed in the explanatory notes.
If the concept of PVA is applicable to a transaction, at what point should it be accounted for? What are the accounting effects after the initial recording of a transaction at its present value?
Answer - As discussed in Question 1 above, PVA must be calculated at the initial moment of the operation, considering the cash flows of the corresponding operation (value, date, and all terms and contracted conditions), as well as the discount rate applicable to the transaction, on the date of its occurrence.
The doubt arises regarding the accounting effects after the initial recording of the operation (months or years after the initial date of the transaction). This Pronouncement and other CPC Pronouncements present the method that must be used to reflect such effects, as in CPC 06, CPC 47, and CPC 48, among others. Both those Pronouncements and this one provide for the adoption of the effective interest rate method in the initial recording of the operation. Thus, the interest embedded in the operation (financial revenue or expense) must be accounted for according to the effective interest rate related to the transaction (see also example in Question 1). It is noted that the PVA mechanism cannot change the contracted value between the parties. If the title or contract provides a value for a specific date, its accounting must consider these amounts and dates as the premises to be considered in the enjoyment of subsequent measurement effects. In the previously seen example, it was provided that the value after five years would be $ 10,000 thousand; thus, the appropriation of interest must restore this value until the maturity date.
How should the interest rate be defined for the purposes of calculating PVA?
Answer - There are operations whose interest rate is explicit (for example, described and known in the operation's contract) or implicit (for example, unknown, but embedded in the initial pricing of the operation by the entity at the time of purchase or sale). In both cases, it is necessary to use a discount rate that reflects interest compatible with the nature, term, and risks related to the transaction, taking into consideration, furthermore, the market rates practiced on the initial date of the transaction between knowledgeable parties, who intend to carry out the transaction and under usual market conditions. In cases where the rate is explicit, the evaluation process involves a comparison between the operation's interest rate and the market interest rate, on the date of the origin of the transaction. In cases where the rate is implicit, it is necessary to estimate the transaction rate, considering market interest rates, as previously mentioned. Even in cases where the parties state that cash and credit values are the same, PVA must be calculated and, if relevant, recorded. By definition, present value “is the estimate of the current value of a future cash flow”. For some entities (for example, retailers), it is not practicable to carry out a detailed analysis (term, risks, etc.) of each transaction, and in these cases, the most evident rate for calculating PVA is the rate used by the entity's treasury to determine the conditions and prices to be charged. According to the aforementioned paragraph, unless the rate defined by the treasury and used in a particular credit operation is clearly out of a market pattern for the industry or type of activity, this rate is adequate for present value discounting. To illustrate this discussion, see the following scenario:
Scenario: an entity has the following operations:
(a) Sale with a term of 12 months, for which the entity normally charges interest of 10% per year, considering the risks related to higher terms.
(b) Sale with a term of 6 months, for which the entity charges interest of 6% per year, considering that the risk is relatively lower than that of a 12-month sale.
Note: these interests are clearly evidenced by the entity in the application of discounts for early payments; the values are invoiced according to the value to be received at the final maturity of the operation.
(c) Accounts receivable arising from the sale of fixed assets, with real guarantee of the asset itself, due in a term of 18 months, whose interest rate embedded in the operation was 5% per year.
Considering the presented scenario, it is observed that, for different situations in the same entity, the interest rate used as the basis for calculating present value may be different. Thus, an analysis of the transaction itself must be carried out, on the date it occurred (and not on the balance sheet closing date - see Question 1 above), for the purpose of determining the adequate interest rate to be used in the calculation of PVA and its subsequent restoration. Some cost-benefit considerations may be adequate in the evaluation and definition of interest rate. However, it is worth noting that the use of a single interest rate for all transactions involving assets and liabilities is not, in general, an acceptable procedure, although the use of a single rate for a group of assets and liabilities with similar characteristics may be admitted (for example, a single interest rate for the entire group of accounts receivable and a single rate for the entire group of suppliers), in which this use reflects, in fact, the interest rate usually applicable.
Articles 183 and 184 of the Corporations Law refer to elements of the entity's assets and liabilities. How do these articles interact with the calculation of the entity's result?
Answer - Although the wording of the Law clearly mentions adjustments for asset and liability balances,

these adjustments are directly related to purchase and sale transactions that involve, predominantly, the income statement accounts (for example, AVP of transaction sales and the respective balance of accounts receivable). In this case, considering that the reflection of the AVP of a certain active or passive balance has a direct counterpart in an income statement account, the AVP also affects these lines of the result (which is the specific case of gross revenue versus the registration of the balance of accounts receivable). To illustrate this issue, see the following scenario:
Scenario: sales operation with a six-month payment term, with the following characteristics:
Sales with a six-month term = $ 100, with ICMS of 10% = $ 10Cash sales = $ 80, with ICMS of 10% = $ 8 Note that the AVP relates to the financing operation of the accounts receivable in its entirety ($ 100) and not only on the balance, after deducting the recoverable taxes. The entity, by granting a term for collection, is financing the client. In this case, the base for calculating the AVP is the value being financed, that is, the total value of the invoice ($ 100). In the previous example, assuming that a good reference for the present value of the transaction is the cash sale value, the accounting of the deferred sale transaction would be as follows:
a) In the seller:
Debit - Accounts receivable - $ 80
Credit - Sales revenue - $ 80
Debit - ICMS expense 1

$ 10
Credit - ICMS payable - $ 10
As time passes, the difference ($ 20) between the present value of accounts receivable ($ 80) and the value that will be received at the end of six months ($ 100) is appropriated to the period's result as financial revenue, using the effective interest rate method. b) In the buyer:
On the buyer's side, unlike the seller, the interest rate imputed by its suppliers is not known and the task of determining which rate to use becomes more complex, but it must be 1 There is discussion regarding the need to reclassify, in the case of the seller, the portion of ICMS calculated on the interest embedded in the operation to the commercial financial result. If, on the one hand, the justification for not performing the present value discount for ICMS stems from the fact that it is used for calculation already in the month of the transaction, on the other hand, this reclassification assumes that ICMS also applies to interest embedded in a financed sales operation. This aspect must also be evaluated, taking into account the materiality of the amounts involved.

COMMISSION OF SECURITIES AND MARKETS
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.cvm.gov.br CVM RESOLUTION NO. 190, OF OCTOBER 9, 2023 promised consideration to the cash price that the customer would have paid for the goods or services when (or as) they transferred them to the customer. After the beginning of the contract, the entity must not update the discount rate to reflect changes in interest rates or other circumstances (such as changes in the assessment of the customer's credit risk). (Emphasis added.)” As highlighted, the AVP is applicable to operations that can be considered as financing activities and not to operations that are settled in a short period of time, whose effect is not material. In general, when applicable, the AVP will be calculated with the interest rate that may be embedded in the operations. An example, but not limited to, of evidence of the existence or non-existence of interest is the granting of financial discounts (discounts given after sales) for payment before the stipulated maturity date, or the existence of a distinct price table for cash payments. The discount mentioned here is related to the financial aspect of the transaction and not to the eventual commercial discount granted. Discounts conditioned by commercial aspects must be recorded as a reducer of sales. In many cases, the entity normally grants terms for payment of the invoice. This term may be considered as part of the normal commercial conditions or inherent to the entity's operations, without this leading to the characterization of a financing activity. In other cases, even if no financial discounts are granted, operations are carried out for longer terms. This represents, in essence, a financing activity (for example, retail and real estate development entities) and, in this situation, the concept of AVP is applicable. The application of the AVP concept in sales transactions must consider the concepts of CPC 47 and also the principles of the Corporations Law, both in the same direction. According to item VIII of art. 183 and item III of art. 184 of the Corporations Law, the elements resulting from long-term operations will be adjusted to present value (main objective), and the others, adjusted when there is a relevant effect. A careful evaluation of this aspect is important, taking into account the interest rates practiced in Brazil. As a reference, the interest rate in a large number of countries may range around 2% per year or even less. In the case of Brazil, retail financing may use significantly higher rates. Thus, a standard that may be considered reasonable for international purposes (for example, 90 days or up to one year) may not be
adequate for transactions carried out in Brazil, depending on the interest rates that have been embedded in these transactions and the specific situation of each entity. For example, an entity that has a fast turnover in its inventories and short terms, both for accounts receivable and for accounts payable to suppliers, may present non-relevant effects when applying the concept of AVP. On the other hand, if the entity finances its clients without supplier financing, the values may be eventually relevant, depending on the terms and interest rates practiced. The entity's decision and evaluation to not account for the AVP of receivable or payable balances must be documented with the calculations and effects of the respective values, in order to substantiate the corresponding conclusion. Additionally, the accounting practice must be adopted consistently over the fiscal years and disclosed in the notes to the financial statements.
6. Is it acceptable to assess the need and apply the AVP only for transactions that present outstanding balances on the balance sheet dates?
Answer - No. The application of the AVP concept is done on the date of the transaction. Even if the balance generating the AVP is no longer outstanding, there may be relevant effects between the lines of the income statement (see the table in Question 4). This is relevant in entities that finance their clients and that work with small margins, as well as in situations or transactions involving purchases of long-maturity inventories or fixed assets. The application only for outstanding balances on the balance sheet date, especially those entities that do not prepare interim financial statements or that have seasonal activities, in addition to generating margin and nature distortions, violates an important qualitative characteristic of financial statements, which is comparability, since all transactions generated during the period must have the same treatment.
7. Should deferred income tax and social contribution balances be adjusted to present value?
Answer - No. Technical Pronouncement CPC 32 defines in its item 53 that “deferred fiscal assets and liabilities must not be discounted (adjusted to present value)”, which in the Brazilian case also includes social contribution.
Basically, this prohibition was made with the argument that it is not possible to determine with exactness the dates on which the aforementioned values will be realized. Thus, this type of discount is not required or permitted by international accounting standards.
8. Which balances originating from taxes would be subject to present value discounting?
Answer - For understanding purposes, we are here dealing with the following taxes (accompanied by their characteristics):
8.1. State taxes:
Introduction - general: the main state tax is ICMS, which presents the characteristic of non-cumulativity through the process of monthly calculation of credits and debits. Except for ICMS on the purchase of fixed assets, for which credit is generally appropriated in installments for a certain number of months, and some situations of entities that accumulate credits for recovery, the balances calculated after the compensation of credits are available for settlement monthly. Therefore, as a general rule, and using the concepts of this Pronouncement, AVP does not apply to ICMS creditor balances, which are available for immediate compensation. On the other hand, balances of taxes to be compensated or recovered, like all assets, are subject to the application of the recoverability test, in accordance with Technical Pronouncement CPC 01. Finally, it is important to observe the situations of ICMS installments as tax incentives, granted by various States, in which the ICMS payable balance is deferred for long-term payment, without the incidence of interest or monetary update, or with interest well below normal market conditions. These incentives usually aim to attract entities to specific locations, where lower efficiency or higher costs or logistical difficulties would be compensated by the incentive. It is necessary to determine the effective cash outflows and adjust them to present value through an interest rate that reflects normal market conditions, in order to allow the tax cost to be presented adjusted by the financial gain generated by the tax incentive and that the subsidy is properly registered under the accrual basis. The objective of this practice is also to allow the transaction to be registered considering its essence. In this case, the counterpart of the AVP, on the date of the transaction, must be registered as a credit in the same line in the result where the deduction of ICMS expense was registered. Example: ICMS payable balance of $ 10,000, with an incentivized payment term of five years, without monetary update and with 3% annual interest, payable in a single installment at the end of 60 months. Assuming that the interest rate, according to current market conditions, is 15% per year, the following calculation must be practiced on the date of the transaction:
$ 10,000 * (1.03^5) = $ 11,593 (balance to be paid after five years); $ 11,593 / (1.15^5) = $ 5,764 (value that reflects the amount, on the date of the transaction, to be registered as a deduction of sales and ICMS payable).
As time passes, the debtor balance (calculated as shown in the previous paragraph) will be updated monetarily, based on the interest rate defined and applicable on the date of the transaction, with financial expense as the counterpart. After one year, the ICMS payable balance will be $ 6,629, and the amount of $ 865 will be registered as financial expense, and so on, until reaching the future value at the end of 60 months ($ 11,593).
(In the case where this incentive is linked to investment and can be characterized as a fiscal subsidy for investment, the provisions of Technical Pronouncement CPC 07 must be observed. In this case, instead of a credit to the ICMS account in the result at the beginning of the transaction, the credit would be in the liability for appropriation to the result when the necessary conditions for the effective gain of the subsidy are met).
8.2. Federal taxes:
Introduction: the main taxes are income tax, social contribution, PIS, COFINS, and IPI. These taxes generate various accounting effects considering that they may exist in recoverable balances resulting from advances, overpayments, or other credits, as well as in payable balances resulting from the calculation of taxes due or installments.
Recoverable and payable balances may be subject to monetary updates and interest (depending on each situation), and it is also common to observe significant balances related to federal debt installment programs, for example, REFIS.

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CVM RESOLUTION NO. 190, OF OCTOBER 9, 2023

Below are listed some of the main scenarios regarding balances of federal taxes:

(a) Tax credits (for example, IRRF – Withholding Income Tax) or other installment payments that are monetarily updated based on the Selic rate:
Considering that the values are originally recorded at present value and monetarily updated by the Selic rate (post-fixed interest), as well as that this rate (Selic) approximates the market interest rate for transactions of this nature, it is understood that these values should already be recorded at values equivalent to their present value.

(b) Income tax credits to be used in compensation or refund requests:
For these cases, the situation treated here proceeds from the assumption that the entity has a recent history of success in its compensation or refund requests, and has applied Technical Pronouncement CPC 01, which deals with asset recovery, in an adequate manner. Following the general rule explained in Question 7 and referenced above for the situation of ICMS for entities that accumulate credits, the guidance is that the AVP (Present Value Adjustment) should not be applied.

On the other hand, situations where there is no incidence of interest on the value of the credit to be recovered (or are below market for transactions of this nature) and management can estimate with reasonable precision the dates of realization of these credits should not be disregarded. In these situations, due to the possibility of estimating the realization dates with reasonable precision, the accounting recognition of the AVP must be performed.

(c) REFIS and other installment plans:
In the Brazilian environment, REFIS and installment programs have historically been created by fiscal authorities to renegotiate and settle debts of a tax nature, including situations where the consolidated debt is subject to settlement based on a percentage of gross revenue.
Considering the uncertainties associated with future revenue amounts and the risks of default and non-compliance with the conditions and restrictions imposed by programs of this nature, there are indications that it is not prudent to immediately recognize a possible gain from the reduction of the debt to its present value determined based on market interest rates applicable for loans in the financial market. Instead, the entity must perform adequate disclosure of the circumstances in the explanatory notes.

In this context, it must also be considered what the Conceptual Framework prescribes regarding prudence as a characteristic that supports neutrality in the preparation of information and, in turn, is one of the qualitative characteristics fundamental that must be present when preparing financial statements.

It should be observed that, on the date of adherence to the REFIS, the debtor balance is already at present value, based on the interest conditions provided for this type of transaction and that said balance is subject to interest (those provided for the REFIS), due to the passage of time. Thus, as long as it is accounted for adequately, according to the conditions applicable to this type of refinancing, the debtor balance should already be recorded at present value on the date of each balance sheet. The question that arises is that the amount of the expected cash disbursements, adjusted to present value based on a normal market interest rate, would result in an amount lower than the debtor balance on a certain base date; this is information to be disclosed in the explanatory notes, with no accounting adjustment required, since item III of art. 184 of the Corporations Law defines the adjustment to present value and not the adjustment to fair value of the liability.

For other cases where the payment of the installment plan has no relation to the percentage of gross revenue, other restrictions may arise, for example, when the only requirement is the timely payment of installments. In these cases, the entity will be able to demonstrate this capacity at the time of initial recording of the installment plan but, on the other hand, the installment rates reflect market rates (for example, in the case of current Selic rates), so the present value adjustment is not applicable since this rate approximates the market interest rate for transactions of this nature and, thus, the corresponding values are already recorded at values equivalent to their present value.

Amounts receivable and payable, subject to monetary update based on price indices or inflationary indices, without interest, should be the object of AVP?
Answer - Yes. Price indices or inflationary indices may be some components of a charge rate, but cannot be confused with real interest rates. The premises regarding 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 these cash flows.
In the case of loans, financing, and mutual agreements with financial charges different from current market interest rates, should the AVP be applied?

(a) BNDES financing, contracted with interest rates different from the rates practiced by the market in general for other types of loans, are subject to AVP?
Answer - No. These financing arrangements have their own characteristics and the conditions defined in BNDES financing contracts, between independent parties, and reflect the conditions for those types of financing. In some cases, the financial charges are lower than the interest rates applicable for general loans and/or for working capital, but it must be taken into consideration that BNDES finances projects, with their own characteristics, generally applying rates that would be applicable to any entity, adjusted only by the specific credit risk of the entities and projects involved.

In Brazil, there is no consolidated market for long-term debts with the characteristics of BNDES financing, with the result that credit supply to entities in general, with this long-term characteristic, is normally limited to BNDES.

This treatment is aligned with international standards and Technical Pronouncements of the CPC, specifically Technical Pronouncements CPC 07 and CPC 48, and with this Technical Pronouncement.

(b) Mutual agreements between related parties contracted without financial charges or with interest rates different from normal market conditions are subject to AVP?
Answer - Many mutual agreements between related parties do not have a fixed maturity date, which makes the calculation of the AVP impossible. For example, an entity may have a receivable mutual agreement from an investee whose liquidation is not planned nor is there a probability of occurring in the foreseeable future, or the mutual agreement involves movements and the maturity is considered at any time (on demand), that is, it is considered that the maturity is at sight, at the discretion of the creditor.

In other cases, however, when the mutual agreement contract has a fixed maturity date, the entity should, in principle, adjust the transaction to present value. However, a question arises to be considered, which is what to do with the difference between the present value (in this case, consistent with the fair value on the initial recognition date) on the initial date and the cash transferred/received. It is not appropriate for the entity that provided the cash to have an immediate loss nor for the entity that received the cash to have an immediate gain.

The immediate recording of gain/loss, discussed in Technical Pronouncement CPC 48, should only be made, upon initial recognition of the operation, if the fair value could be directly observable in the market, in similar instruments, or if the valuation technique used by the entity used variables that included only observable information in the market, from recent transactions under usual market conditions and between independent counterparties, who know and wish to effect the transaction.

Therefore, mutual agreements between related parties contracted without financial charges or with interest rates different from normal market conditions are not subject to AVP, but all conditions must be disclosed in explanatory notes with the necessary detail (terms, interest rates, and other conditions), in compliance with Technical Pronouncement CPC 05 – Disclosure on Related Parties, in order to provide the reader of the financial statements with sufficient informative elements to understand the magnitude, characteristics, and effects of these types of transactions on the financial position and on the results of the entity. However, when a different accounting practice regarding adjustments on financial instruments resulting from activities with related parties is issued, that new accounting practice shall prevail.

Considering that the AVP is a change in accounting practice, is it necessary to make the adjustments retrospectively for the periods presented?
Answer - Yes. The recognition of the AVP is characterized as a change in accounting practice. Thus, changes in accounting practice should be considered retrospectively for all periods presented, and the adjustments accounted for in the retained earnings (or accumulated deficit) account, net of tax effects, as well as demonstrated as if they had been accounted for since the beginning of the oldest period presented.
How are the purchase and sale of goods on installment whose counterpart requires the present value adjustment accounted for?

In the case of sale, for example, of real estate on installment, at nominal value, without specification of interest, after the procedures for determining the present value adjustment, should this adjustment rectify the realizable asset and the sales revenue, with the adjustment to the realizable asset being made in a contra account? This account should be appropriated as financial revenue until maturity.

In the case of the buyer, the adjustment rectifies the cost of the fixed asset, which must be recorded at its present value, and the adjustment of the liability may also feature a contra account to generate financial expense until maturity.

For example, suppose a sale of real estate for $ 10,000 thousand, paid with a down payment of $ 4,000 thousand in cash and 3 (three) annual promissory notes of $ 2,000 thousand each, without interest, effected at a moment when the interest rate, for the type of seller and buyer, is, for both, 18% per year (these rates may be different for them).

The seller, in the transaction, records:

Dr – Cash $ 4,000,000
Dr – Promissory notes receivable $ 6,000,000
Cr – Interest to be appropriated $ 1,651,454
Cr – Revenue from sale of real estate $ 8,348,546

The buyer:

Dr – Real Estate $ 8,348,546
Dr – Interest to be appropriated $ 1,651,454
Cr – Cash $ 4,000,000
Cr – Promissory notes payable $ 6,000,000

In both promissory notes, they will appear (in one, in its assets; in the other, in its liabilities) at their net balance, representing the nominal value decreased by the interest to be appropriated, and this net balance will grow by the appropriation of interest to the result, until at maturity these contra accounts zero out.

Lineage: No known changes

Timeline

What changed in the obligations