Explanatory Note to CVM Resolution 156

SECURITY AND EXCHANGE COMMISSION OF BRAZIL - CVM Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Centro, 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 Ref.: CVM Resolution No. 156, of June 23, 2022, which provides for the voluntary disclosure of non-accounting information known as LAJIDA and LAJIR.

THE PRESIDENT OF THE SECURITY AND EXCHANGE COMMISSION - CVM makes public that the Board, in a meeting held on June 15, 2022, based on item III, Article 2 of CVM Resolution No. 1, of August 6, 2020, as well as Articles 5 and 14 of Decree No. 10.139, of November 28, 2019, APPROVED the following Explanatory Note:

I – INTRODUCTION
The frequent disclosure of measurements by publicly held companies based on adjusted accounting data and non-accounting data raises precautions that must be observed by the administrators of publicly held companies, with a view to preserving the quality of information directed at investors.

Non-accounting measurements and information comprise all information that is not a structured representation of accounting information provided in Pronouncements issued by the Accounting Pronouncements Committee – CPC and approved by the Security and Exchange Commission, but which compete with the same purposes of so-called general purpose financial statements, in the terms of item 9 of Technical Pronouncement CPC 26 (R1) – Presentation of Financial Statements.

The relevance of this theme is evident, as this information influences the economic decisions of users, adding elements not foreseen in the usual structure of financial statements based on own regulation and audited by independent auditors.

An example of this information is that related to earnings before interest, income tax, depreciation and amortization – LAJIDA (EBITDA – earnings before interest, taxes, depreciation and amortization) and earnings before interest and income tax – LAJIR (EBIT – earnings before interest and tax). The mention of these concepts may occur in the directors' comments in the reference form (CVM Resolution No. 80/22), in the management report, in prospectuses, press releases, communications or other public documents.

The disclosure of this non-accounting information, in order to preserve the quality of information directed at the public, must receive the same treatment and care expended on accounting information. In this sense, it was observed at the time of the issuance of CVM Instruction No. 527/12 that the information on LAJIDA and LAJIR was being prepared and disclosed in a very particular manner by publicly held companies and divergent among them.

This situation can make it difficult to understand both the formation of the presented number and its integration or reconciliation with other numbers in the income statement. In many cases, it is relevant to observe that the reported numbers are not comparable with the information provided by other publicly held companies.

Thus, the CVM's concern, at the time that motivated the issuance of CVM Instruction No. 527, now CVM Resolution No. 156/22, was based on the understandability and comparability of the indicator disclosed to the market, whose main commands are intended to be detailed in this Explanatory Note, for its better understanding and application.

II - LAJIDA AND LAJIR
If it is intended to reflect the administration's view on the company's gross cash generation potential, or at least an approximation of this generation, the adjustments made to LAJIDA must establish a relationship with the measurements provided in accounting standards, as does the cash flow statement itself, by the direct method.

With this, the first conclusion is that values that do not appear in the financial statements, specifically the income statement, should not enter the composition of LAJIDA or LAJIR.

Adjustments are often introduced, exceeding the content of the title given to these indicators, which are not related only to interest, taxes on profit, depreciation, amortization, and depletion. Some of these adjustments concern non-recurring items, with the aim of showing the gross recurring cash generation potential of non-financial assets.

Initially, the most relevant point is that the title given to the indicator does not exclude, by itself, any non-recurring, non-operational, and discontinued operation items. Thus, it is inferred that the first and simplest concept of LAJIDA refers to the amount given by adding, to the net profit of the period, solely taxes on profit, net financial expenses from financial revenues, and depreciation, amortization, and depletion. It is worth remembering that the concepts of depreciation, amortization, and depletion mentioned here refer to non-monetary items classified in non-current assets, in the investment groups (investment properties), fixed assets, and intangible assets.

Within this line, the concept of LAJIR corresponds to that of LAJIDA reduced by depreciation, amortization, and depletion.

However, the literature often refers to the figure of gross resource generation potential with adjustments for some items that the administration believes do not contribute to this gross resource generation. It is important to ensure that these adjustments do not make the indicator incomprehensible and incomparable among the companies that disclose it.

III - ADJUSTED LAJIDA AND LAJIR
It is important to remember that Brazilian legislation no longer segregates, since 2008, from Law No. 11.941/08, the previously called "non-operating results," only referring to "other revenues" and "other expenses," leaving this characterization to specific accounting standards.

With the approval of Technical Pronouncement CPC 26 (R1) – Presentation of Financial Statements, the following minimum structure of the income statement is obtained:

“82. In addition to the items required in other pronouncements, the income statement of the period must, at a minimum, include the following items, also obeying legal determinations:
(a) revenues, presenting separately interest revenue calculated using the effective interest method; (aa) gains and losses arising from the derecognition of financial assets measured at amortized cost; (b) financing costs; (ba) impairment loss (including reversals of impairment losses or gains on impairment recovery), determined in accordance with Section 5.5 of CPC 48; (c) share of results of invested companies, recognized through the equity method; (ca) if the financial asset is reclassified from the amortized cost measurement category so that it is measured at fair value through profit or loss, any gain or loss arising from the difference between the previous amortized cost of the financial asset and its fair value at the reclassification date (as defined in CPC 48); (cb) if the financial asset is reclassified from the fair value measurement category through other comprehensive income so that it is measured at fair value through profit or loss, any accumulated gain or loss previously recognized in other comprehensive income that is reclassified to profit or loss; (d) taxes on profit; (e) (eliminated); (ea) a single value for the total of discontinued operations (see Technical Pronouncement CPC 31); (f) in compliance with Brazilian corporate law in force at the date of issuance of this Pronouncement, the income statement must also include the following items:
(i) cost of products, merchandise, and services sold; (ii) gross profit; (iii) sales, general, administrative, and other expenses and operating revenues; (iv) result before financial revenues and expenses; (v) result before taxes on profit; (vi) net profit of the period.”

Note that this structure, where the only revenues and expenses left aside concern the content of letter (ea), covering the net profit (including taxes) of discontinued operations, highlights relevant information in the structure of the income statement regarding the result arising from continuing activities and those arising from discontinued operations. This identification is fundamental for the current and future evaluation of the entity's performance.

It is important to emphasize that Technical Pronouncement CPC 00 (R2), which provides for the Conceptual Framework for Financial Reporting, highlights this predictive power of the income statement when dealing with financial performance reflected by the accrual basis:

“1.18. Information about the financial performance of the reporting entity during the period, reflected by changes in its economic resources and claims, except those resulting from obtaining additional resources directly from investors and creditors (see item 1.21), are useful in evaluating the entity's past and future ability to generate net cash inflows. This information indicates to what extent the reporting entity has increased its available economic resources and, thus, its ability to generate net cash inflows through its operations and, not, by obtaining additional resources directly from investors and creditors. Information about the financial performance of the reporting entity during the period may also help users evaluate the administration's resource management regarding the entity's economic resources” (we underline)

However, it is common practice in the capital market for publicly held companies to disclose an indicator that includes additional adjustments to the period's result in order to generate information regarding its future gross cash generation potential. These adjustments, added to those provided in item II above, result in the determination of Adjusted LAJIDA/LAJIR and stem from the administration's judgment regarding their representativeness in determining the specific future gross cash generation potential of the entity.

Thus, since these adjustments result from the administration's judgment regarding their effects on determining the entity's gross cash generation potential, nothing is more relevant than the disclosure of the premises considered in their judgment when preparing the Adjusted LAJIDA/LAJIR. Additionally, the motivation and nature of the adjustments made must be described, as well as a reconciliation between the period's result and the Adjusted LAJIDA/LAJIR, all in favor of the adequate understanding of the indicator and its comparability with those from other peers, sectoral or not.

IV - PERMITTED DISCLOSURES AND RESTRICTIONS
In view of what has been contained up to this point, it is verified that the company may disclose a value for LAJIDA and one for LAJIR of the period and also that related to Adjusted LAJIDA or LAJIR of the period.

Thus, the company may disclose exclusively the concept of LAJIDA or LAJIR provided in item II, or the concept of Adjusted LAJIDA/LAJIR, provided in item III, provided that the latter is presented together with the first. In the latter case, complete disclosure of the motivation, nature, and values of the introduced adjustments must be given, as well as its reconciliation with the LAJIDA/LAJIR provided in item II and the period's result, without, under any circumstances, compromising the concepts of these measurements (LAJIR AND LAJIDA) or the determinations of CVM Resolution No. 156/22 duly clarified in this Explanatory Note.

Furthermore, all disclosure related to LAJIDA or LAJIR must be done consistently and comparably with the presentation of prior periods, and in case of change, the justification must be presented, as well as the complete description of the introduced change.

The disclosure of LAJIDA or LAJIR values must also be done outside the complete set of financial statements provided in items 10 to 14 of Technical Pronouncement CPC 26 (R1) – Presentation of Financial Statements, so that these measurements do not compete with the information of an exclusively accounting nature presented there.

V – AUDIT
Although LAJIR and LAJIDA do not integrate the complete set of Financial Statements contained in Technical Pronouncement CPC 26 (R1) – Presentation of Financial Statements, it must be submitted to verification work by the independent auditor.

This verification aims to provide adequate assurance regarding the origin of the values and their reliability, factors essential for the reliability of any information disclosed to the market.

Considering that all adjustments made in the calculation of LAJIR and LAJIDA originate from the company's accounting records and that these were subject to assurance by the independent auditor, there is no reason why the indicator should not be identified as verified, in accordance with standard NBC TA 720 (Auditor's responsibility regarding other information – included in documents containing audited financial statements) issued by the Federal Council of Accountancy.

Thus, it is the responsibility of the independent auditor to verify only if the adjustment amount originates from the company's accounting records; it is not necessary to validate the administration's judgment regarding the adjustments included in the calculation of the LAJIDA/LAJIR indicators.

Electronically signed by
Marcelo Barbosa
President