Resolution CVM 119 Approves Consolidated Technical Pronouncement CPC 38 on Financial Instruments: Recognition and Measurement

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

APPROVED the following Resolution:

Art. 1. It makes mandatory for publicly-held companies the Technical Pronouncement CPC 38, which deals with Financial Instruments: Recognition and Measurement, issued by the Accounting Pronouncements Committee - CPC, as consolidated in Annex “A” to this Resolution.

Art. 2. The TECHNICAL PRONOUNCEMENT CPC 38, as attached in Deliberation 604, of November 19, 2009, is hereby revoked, from the effective date of this Resolution.

Art. 3. This Resolution enters into force on July 1, 2022.

Electronically signed by
Marcelo Barbosa
President

Summary Item
OBJECTIVE 1
SCOPE 2 – 7
DEFINITIONS 8 – 9
EMBEDDED DERIVATIVES 10 – 13
RECOGNITION AND DERECOGNITION 14 – 42
Initial recognition 14
Derecognition of financial asset 15 – 37
Transfers that qualify for derecognition 24 – 28 Transfers that do not qualify for derecognition 29 Continuing involvement in transferred assets 30 – 35 All transfers 36 - 37 Regular purchase or sale of financial asset 38 Derecognition of financial liability 39 – 42 MEASUREMENT 43 – 70 Initial measurement of financial assets and liabilities 43 – 44 Subsequent measurement of financial assets 45 – 46 Subsequent measurement of financial liabilities 47 Considerations on measurement at fair value 48 – 49 Reclassification 50 – 54 Gains and losses 55 – 57

SECURITIES AND EXCHANGE COMMISSION OF BRAZIL
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 Embedded derivatives AG27 – AG33B Instruments containing embedded derivatives AG33A – AG33B Recognition and derecognition AG34 – AG63 Initial recognition AG34 – AG35 Derecognition of financial asset AG36 – AG52 Assessment of transfer of risks and rewards of ownership AG39 – AG41 Assessment of transfer of control AG42 – AG44 Transfers that qualify for derecognition AG45 – AG46 Transfers that do not qualify for derecognition AG47 Continuing involvement in transferred asset AG48 All transfers AG49 – AG50 Examples AG51 – AG52 Regular purchase or sale of financial asset AG53 – AG56 Derecognition of financial liability AG57 – AG63 Measurement AG64 – AG93 Initial measurement of financial assets and liabilities AG64 – AG65 Subsequent measurement of financial assets AG66 – AG68 Considerations on measurement at fair value AG69 – AG82 No active market: valuation technique AG74 – AG79 No active market: equity instrument AG80 – AG81 Gains and losses AG83 Impairment loss of assets and loss on non-receipt of financial assets AG84 – AG93 Financial assets carried at amortized cost AG84 – AG92 Interest income after recognition of impairment loss of assets AG93 Hedge AG94 – AG132 Hedging instruments AG94 – AG97 Qualifying instruments AG94 – AG97

APPENDIX B – REMEASUREMENT OF EMBEDDED DERIVATIVES (IFRIC 9)
References
Background B1 – B2
Scope B3 – B5
Issues addressed by the Interpretation B6
Consensus B7 – B8

Objective

The objective of this CPC is to establish principles for recognizing and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items. The requirements for presenting financial instruments are in Technical Pronouncement CPC 39 – Financial Instruments: Presentation, and the requirements for disclosing information about financial instruments are in Technical Pronouncement CPC 40 – Financial Instruments: Disclosure.

Scope
2. This Technical Pronouncement shall be applied by all entities to all types of financial instruments except:
(a) those represented by interests in subsidiaries, associates and joint ventures that are accounted for in accordance with Technical Pronouncements CPC 35 – Separate Financial Statements, CPC 36 – Consolidated Financial Statements, or CPC 18 – Investments in Associates, Jointly Controlled Entities and Subsidiaries.

However, in some cases, these Technical Pronouncements require or permit the entity to account for its interest in a subsidiary, associate or jointly controlled entity in accordance with some or all of the requirements of this Technical Pronouncement. Entities shall also apply this Pronouncement to derivatives of interests in subsidiaries, associates or jointly controlled entities, unless the derivative meets the definition of an equity instrument contained in Technical Pronouncement CPC 39 – Financial Instruments: Presentation;

(b) rights and obligations relating to finance leases to which Technical Pronouncement CPC 06 – Leases applies. However:
(i) receivables from finance leases recognized by the lessor are subject to the derecognition and impairment (impairment loss of assets) provisions of this Pronouncement (see items 15 to 37, 58, 59, 63 to 65 and Appendix A items AG36 to AG52 and AG84 to AG93); (ii) payables from finance leases recognized by the lessee are subject to the derecognition provisions of this Pronouncement (see items 39 to 42 and Appendix A, items AG57 to AG63); and (iii) derivatives embedded in finance leases are subject to the provisions of this Pronouncement on embedded derivatives (see items 10 to 13 and Appendix A, items AG27 to AG33);

(c) rights and obligations of employers arising from employee benefit plans, to which Technical Pronouncement CPC 33 – Employee Benefits applies;

(d) financial instruments issued by the entity that meet the definition of an equity instrument of Technical Pronouncement CPC 39 – Financial Instruments: Presentation (including options and warrants). However, the holder of such equity instruments shall apply this Pronouncement to these instruments, unless they meet the exception indicated in item (a);

(e) rights and obligations arising from (i) insurance contracts defined in Technical Pronouncement CPC 11 – Insurance Contracts, except the rights and obligations of the issuer arising from an insurance contract that meets the definition of a financial guarantee contract contained in item 9, or (ii) contracts covered by Technical Pronouncement CPC 11 – Insurance Contracts because they contain a discretionary participation feature. However, this Pronouncement applies to an embedded derivative in a contract covered by Technical Pronouncement CPC 11 – Insurance Contracts, if the derivative does not constitute a contract within the scope of Technical Pronouncement CPC 11 – Insurance Contracts (see items 10 to 13 and items AG27 to AG33 of Appendix A of this Pronouncement). Furthermore, if the issuer of financial guarantee contracts has explicitly stated that it considers those contracts as insurance contracts and has used accounting applicable to insurance contracts, the issuer may choose to apply this Pronouncement or Technical Pronouncement CPC 11 – Insurance Contracts to those financial guarantee contracts (see items AG4 and AG4A). The issuer may make that decision contract by contract, with each of those decisions being irrevocable;

(f) (eliminated);

(g) forward contracts between a buying shareholder and a selling shareholder to buy or sell an entity that will result in a business combination within the scope of Technical Pronouncement CPC 15 – Business Combinations at a future date. The term of the forward contract must not exceed the period normally required to obtain any necessary approval and to complete the transaction;

(h) loan commitments that are not those described in item 4. The issuer of loan commitments applies Technical Pronouncement CPC 25 – Provisions, Contingent Liabilities and Contingent Assets to loan commitments not covered by the scope of this Pronouncement. However, all loan commitments are subject to the derecognition provisions of this Pronouncement (see items 15 to 42 and items AG36 to AG63 of Appendix A);

(i) financial instruments, contracts and obligations arising from share-based payment transactions to which Technical Pronouncement CPC 10 - Share-based Payment applies, with the exception of contracts within the scope of items 5 to 7 of this Pronouncement, to which this Pronouncement applies;

(j) rights to payments to reimburse the entity for expenditure that it is required to make to settle a liability that it recognizes as a provision in accordance with Technical Pronouncement CPC 25, or in respect of which, in a previous period, it has recognized a provision in accordance with Technical Pronouncement CPC 25.

(Eliminated).
The following loan commitments are within the scope of this Pronouncement:
(a) loan commitments that the entity designates as financial liabilities at fair value through profit or loss. An entity that, in accordance with its practice, sells the assets resulting from its loan commitments shortly after their origination shall apply this Pronouncement to all of its loan commitments of the same class; (b) loan commitments that can be settled at net cash amount or by delivering or issuing another financial instrument. These loan commitments constitute derivatives. A loan commitment is not considered to be settled at net cash amount simply because the loan is paid in installments (for example, a mortgage loan for construction that is paid in installments based on the progress of construction); (c) commitments to lend at a below-market interest rate. Item 47(d) specifies the subsequent measurement of liabilities arising from these loan commitments.
This Technical Pronouncement shall be applied to those contracts to buy or sell a non-financial item that can be settled at net cash amount or with another financial instrument, or by the exchange of financial instruments, as if the contracts were financial instruments, with the exception of contracts entered into and that continue to be held for the purpose of receipt or delivery of a non-financial item, in accordance with the entity’s expected purchase, sale or usage requirements.
There are several ways in which a contract to buy or sell a non-financial item can be settled at net cash amount or another financial instrument or by the exchange of financial instruments. These include:
(a) when the terms of the contract permit any of the parties to settle at net cash amount or with another financial instrument or by the exchange of financial instruments; (b) when the ability to settle at net cash amount or with another financial instrument, or by the exchange of financial instruments, is not explicit in the terms of the contract, but the entity has a practice of settling similar contracts at net cash amount or with another financial instrument, or by the exchange of financial instruments (whether with the counterparty, by entering into offsetting contracts or by selling the contract before it is exercised or expires); (c) when, for similar contracts, the entity has a practice of accepting delivery of the underlying asset and selling it in a short period after delivery with the purpose of profiting from short-term price fluctuations or the dealer’s margin; and (d) when the non-financial item that is the subject of the contract is immediately convertible to cash. A contract to which items (b) or (c) apply is not entered into with the purpose of receiving or delivering the non-financial item in accordance with the entity’s expected purchase, sale or usage requirements and, therefore, is within the scope of this Pronouncement. Other contracts to which item 5 applies are assessed to determine whether they were entered into and continue to be held with the purpose of receiving or delivering the non-financial item in accordance with the entity’s expected purchase, sale or usage requirements and, therefore, whether they are within the scope of this CPC.
A written call or put option on a non-financial item that can be settled at net cash amount or with another financial instrument, or by the exchange of financial instruments, in accordance with item 6(a) or (d) is within the scope of this Pronouncement. This contract cannot be entered into with the purpose of receiving or delivering the non-financial item in accordance with the entity’s expected purchase, sale or usage requirements.

Definitions
8. The terms defined in Technical Pronouncement CPC 39 – Financial Instruments: Presentation are used in this Pronouncement with the meanings specified in item 11 of CPC 39. Technical Pronouncement CPC 39 defines the following terms:

financial instrument;
financial asset;
financial liability;
equity instrument.
and provides guidance on the application of these definitions.

The following terms are used in this Pronouncement with the meanings specified:

Definition of a derivative
A derivative is a financial instrument or other contract within the scope of this Technical Pronouncement (see items 2 to 7) with all three of the following characteristics:
(a) its value changes in response to a change in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable, provided that, in the case of a non-financial variable, the variable is not specific to a party to the contract (sometimes referred to as the “underlying”); (b) requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors; and (c) is settled at a future date.

Definitions of four categories of financial instruments Financial asset or financial liability at fair value through profit or loss is a financial asset or a financial liability that meets either of the following conditions:
(a) it is classified as held for trading. A financial asset or a financial liability is classified as held for trading if it is:
(i) acquired or incurred principally for the purpose of selling or repurchasing in the near term; (ii) at initial recognition it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking; or (iii) a derivative (except for a derivative that is a financial guarantee contract or a designated and effective hedging instrument); (aa) it is contingent consideration of an acquirer in a business combination to which Technical Pronouncement CPC 15 – Business Combinations applies;

(b) at initial recognition, it is designated by the entity at fair value through profit or loss. The entity may use this designation only when permitted by item 11A, or when such designation results in more relevant information, because:
(i) it eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an “accounting mismatch”) that would otherwise arise from measuring assets or liabilities or recognizing gains and losses on them on different bases; or (ii) a group of financial assets, financial liabilities or both is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the group is provided internally to the entity’s key management personnel (as defined in Technical Pronouncement CPC 05 - Disclosure of Related Party Information), for example, the board of directors and the chief executive officer of the entity.

In Technical Pronouncement CPC 40 – Financial Instruments: Disclosure, items 9 to 11 and B4 require the entity to provide disclosure about financial assets and financial liabilities that it has designated at fair value through profit or loss, including how it has satisfied these conditions. For instruments that qualify under (ii) above, this disclosure includes a narrative description of how the designation at fair value through profit or loss is consistent with the entity’s documented risk management or investment strategy.

Investments in equity instruments that do not have a quoted market price in an active market, and whose fair value cannot be reliably measured (see item 46(c) and Appendix A, items AG80 and AG81), shall not be designated at fair value through profit or loss.

It is noted that Technical Pronouncement CPC 46 – Fair Value Measurement establishes the requirements for measuring the fair value of a financial asset or financial liability, whether by designation or by another method, or whose fair value is disclosed.

Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the entity has the positive intention and ability to hold to maturity (see Appendix A, items AG16 to AG25) except:
(a) those that the entity designates at initial recognition at fair value through profit or loss; (b) those that the entity designates as available for sale; and (c) those that meet the definition of loans and receivables.

An entity shall not classify any financial asset as held-to-maturity if the entity has, during the current financial year or during the two preceding financial years, sold or reclassified more than an insignificant amount of held-to-maturity investments before maturity (more than insignificant in relation to the total amount of held-to-maturity investments), that is not due to sales or reclassifications that:
(i) are so close to maturity or the purchase date of the financial asset (for example,

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 Effective interest method is the method of calculating the amortised cost of a financial asset or financial liability (or group of financial assets or financial liabilities) and of allocating interest revenue or expense over the period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the instrument or, where appropriate, a shorter period, to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the entity must estimate cash flows considering all contractual terms of the financial instrument (for example, prepayment, call options, and similar), but must not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate (see Technical Pronouncement CPC 30 - Revenue), transaction costs, and all other premiums or discounts. There is an assumption that cash flows and the expected life of a group of similar financial instruments can be estimated reliably. However, in those rare cases where it is not possible to estimate reliably the cash flows or the expected life of a financial instrument (or group of financial instruments), the entity must use the contractual cash flows over the full contractual term of the financial instrument (or group of financial instruments). Derecognition is the removal of a previously recognised financial asset or financial liability from the entity's balance sheet. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (see CPC 46 – Fair Value Measurement). Regular purchase or sale is a purchase or sale of a financial asset under a contract whose terms require delivery of the asset within the time frame generally established by regulation or convention in the relevant market. Transaction cost is the incremental cost that is directly attributable to the acquisition, issue, or disposal of a financial asset or financial liability (see Appendix A, item AG13). Incremental cost is one that would not have been incurred if the entity had not acquired, issued, or disposed of the financial instrument. Definitions relating to hedge accounting Firm commitment is a binding agreement to exchange a specified quantity of resources at a specified price on a specified future date or dates. Forecast transaction is an uncommitted but anticipated future transaction. Hedging instrument is a derivative designated as a hedging instrument or (only for hedging the risk of changes in foreign currency exchange rates) a designated
non-derivative financial asset or non-derivative financial liability whose fair value or cash flows are expected to compensate for changes in the fair value or cash flows of the designated hedged item (items 72 to 77 and Appendix A, items AG94 to AG97 explain in detail the definition of a hedging instrument). Hedged position is an asset, liability, firm commitment, highly probable forecast transaction, or net investment in a foreign operation that (a) exposes the entity to risk of change in fair value or future cash flows and (b) has been designated as being hedged (items 78 to 84 and Appendix A, items AG98 to AG101 explain in detail the definition of a hedged position). Hedge effectiveness is the extent to which changes in the fair value or cash flows of the hedged position that are attributable to a hedged risk are compensated by changes in the fair value or cash flows of the hedging instrument (see Appendix A, items AG105 to AG113). Embedded derivatives
10. An embedded derivative is a component of a hybrid (combined) instrument that also includes a non-derivative host contract – as a result, some of the cash flows of the combined instrument vary in a manner similar to a stand-alone derivative. The embedded derivative causes some or all of the cash flows that otherwise would be required by the contract to be modified according to the specified interest rate, financial instrument price, commodity price, foreign exchange rate, price or interest rate index, credit rating or credit index, or other variable, provided that, in the case of a non-financial variable, the variable is not specific to one of the parties to the contract. A derivative that is attached to a financial instrument but is contractually transferable independently of that instrument, or has a different counterparty from that instrument, is not an embedded derivative, but a separate financial instrument.
11. The embedded derivative shall be separated from the host contract and accounted for as a derivative under this CPC if, and only if:
(a) the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract (see Appendix A, items AG30 and AG33); (b) a separate instrument with the same terms as the embedded derivative meets the definition of a derivative; and (c) the hybrid (combined) instrument is not measured at fair value with changes in fair value recognised in profit or loss (i.e., a derivative embedded in a financial asset or financial liability at fair value through profit or loss is not a separate derivative). If the embedded derivative is separated, the host contract shall be accounted for under this Technical Pronouncement if it is a financial instrument, and in accordance with other appropriate Pronouncements if it is not a financial instrument. This Pronouncement does not address the question of whether the embedded derivative should be presented separately on the balance sheet.

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 11A. Despite item 11, if the contract contains one or more embedded derivatives, the entity may designate the entire hybrid (combined) contract as a financial asset or financial liability measured at fair value through profit or loss, unless:
(a) the embedded derivative does not significantly modify the cash flows that otherwise would be required by the contract; or (b) it is clear, with little or no analysis, when a similar hybrid (combined) instrument is first considered, that separation of the embedded derivative is prohibited, such as a prepayment option embedded in a loan that allows the holder to prepay the loan for approximately its amortised cost.
12. If this Pronouncement requires an entity to separate an embedded derivative from its host contract, but that entity is unable to measure the embedded derivative separately either at the acquisition date or at a subsequent reporting date, it shall designate the entire hybrid (combined) contract at fair value through profit or loss. Similarly, if an entity is unable to measure separately the embedded derivative that should be separated upon reclassification from the hybrid (combined) contract from the category measured at fair value through profit or loss to another category, such reclassification is prohibited. In these circumstances, the hybrid (combined) contract remains classified as measured at fair value through profit or loss.
13. If the entity is unable to measure the fair value of an embedded derivative reliably based on its terms and conditions (for example, because the embedded derivative is based on an equity instrument that has no quoted price in an active market for an identical instrument, i.e., Level 1 information), the fair value of the embedded derivative is the difference between the fair value of the hybrid (combined) instrument and the fair value of the host contract. If the entity is unable to measure the fair value of the embedded derivative using this method, it shall apply item 12 and the hybrid (combined) instrument will be indicated at fair value through profit or loss.
Recognition and derecognition
Initial recognition
14. The entity shall recognise a financial asset or a financial liability in its financial statements when, and only when, the entity becomes party to the contractual provisions of the instrument (see item 38 regarding regular purchases of financial assets).
Derecognition of financial assets
15. In consolidated financial statements, items 16 to 23 and Appendix A, items AG34 to AG52, shall be applied at the consolidated level. Thus, the entity must first consolidate all controlled entities in accordance with Technical Pronouncement CPC 36 and then apply items 16 to 23 and Appendix A, items AG34 to AG52, to the resulting group.
16. Before assessing whether, and to what extent, derecognition is appropriate under items 17 to 23, the entity determines whether these items should be applied to a part of a financial asset (or a part of a group of similar financial assets) or to a financial asset (or a group of similar financial assets) in its entirety, as follows:
(a) items 17 to 23 are applied to a part of a financial asset (or a part of a group of similar financial assets) if, and only if, the part under consideration for derecognition satisfies one of the following three conditions:
(i) the part comprises only specifically identified cash flows resulting from a financial asset (or from a group of similar financial assets). For example, when the entity enters into an interest rate strip through which the counterparty obtains the right to the interest cash flows, but not the principal cash flows of a debt instrument, items 17 to 23 apply to the interest cash flows; (ii) the part comprises only a percentage (pro rata) of all cash flows resulting from a financial asset (or from a group of similar financial assets). For example, when the entity enters into an agreement through which the counterparty obtains rights to 90% of all cash flows of a debt instrument, items 17 to 23 apply to 90% of those cash flows. If there is more than one counterparty, it is not required that each counterparty have a proportional share of the cash flows as long as the transferring entity has a fully proportional share; (iii) the part comprises only a fully proportional (pro rata) part of specifically identified cash flows from a financial asset (or from a group of similar financial assets). For example, when the entity enters into an agreement through which the counterparty obtains rights to 90% of the interest cash flows of a financial asset, items 17 to 23 apply to 90% of those interest cash flows. If there is more than one counterparty, it is not required that each counterparty have a proportional percentage of the specifically identified cash flows as long as the transferring entity has a fully proportional part; (b) in all other cases, items 17 to 23 apply to the financial asset in its entirety (or to the group of similar financial assets in its entirety). For example, when the entity transfers (i) the rights to the first or last 90% of the cash collections from a financial asset (or group of financial assets), or (ii) the rights to 90% of the cash flows from a group of accounts receivable, but provides a guarantee to compensate the buyer for any credit losses up to 8% of the principal value of the accounts receivable, items 17 to 23 apply to the financial asset (or to a group of similar financial assets) in its entirety. In items 17 to 26, the term “financial asset” refers to a part of a financial asset (or a part of a group of similar financial assets) as identified in (a), or otherwise to a financial asset (or a group of similar financial assets) in its entirety.

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
17. The entity shall derecognise a financial asset when, and only when:
(a) the contractual rights to the cash flows from the financial asset expire; or (b) it transfers the financial asset as defined in items 18 and 19, and the transfer qualifies for derecognition in accordance with item 20.
(See item 38 for sales of regular financial assets).
18. The entity transfers a financial asset if, and only if:
(a) it transfers the contractual rights to receive the cash flows of the financial asset; or (b) it retains the contractual rights to receive cash flows of the financial asset, but assumes a contractual obligation to pay the cash flows to one or more recipients in an arrangement that satisfies the conditions of item 19.
19. When the entity retains the contractual rights to receive cash flows of a financial asset (original asset), but assumes a contractual obligation to pay those cash flows to one or more entities (ultimate recipients), the entity treats the transaction as a transfer of a financial asset if, and only if, all three of the following conditions are met:
(a) the entity has no obligation to pay amounts to the ultimate recipients unless it receives equivalent amounts from the original asset. Short-term advances by the entity with the right of full recovery of the amount lent plus interest at market rates do not violate this condition; (b) the entity is prohibited by the terms of the transfer agreement from selling or pledging the original asset, except as security to the ultimate recipients for the obligation to pay them cash flows; (c) the entity has an obligation to remit any cash flow it receives on behalf of the ultimate recipients without significant delay. Moreover, the entity has no right to reinvest those cash flows, except for investments in cash or cash equivalents (as defined in Technical Pronouncement CPC 03 - Statement of Cash Flows) during the short settlement period from the date of receipt until the date of delivery required to the ultimate recipients, and the interest received as a result of those investments is passed on to the ultimate recipients.
20. When the entity transfers a financial asset (see item 18), it shall assess the extent to which it retains the risks and rewards of ownership of the financial asset. In this case:
(a) if the entity transfers substantially all the risks and rewards of ownership of the financial asset, the entity shall derecognise the financial asset and recognise separately as assets or liabilities any rights and obligations created or retained with the transfer; (b) if the entity retains substantially all the risks and rewards of ownership of the financial asset, the entity shall continue to recognise the financial asset; (c) if the entity neither transfers nor retains substantially all the risks and rewards of ownership of the financial asset, the entity shall determine whether it has retained control of the financial asset. In this case:
(i) if the entity has not retained control, it shall derecognise the financial asset and recognise separately as an asset or liability any rights and obligations created or retained with the transfer; (ii) if the entity has retained control, it shall continue to recognise the financial asset to the extent of its continuing involvement in the financial asset (see item 30).
21. The transfer of risks and rewards (see item 20) is assessed by comparing the entity’s exposure, before and after the transfer, with the variability of the amounts and the distribution of the net cash flows of the transferred asset. The entity retains substantially all the risks and rewards of ownership of the financial asset if its exposure to the variability of the present value of the future net cash flows resulting from the financial asset does not change significantly as a result of the transfer (for example, because the entity sold a financial asset subject to a repurchase agreement at a fixed price or at the selling price plus the lender's return). The entity has transferred substantially all the risks and rewards of ownership of a financial asset if its exposure to that variability is no longer significant in relation to the total variability of the present value of the future net cash flows associated with the financial asset (for example, because the entity sold a financial asset subject only to a call option at its fair value at the time of repurchase or transferred a fully proportional part of the cash flows resulting from a larger financial asset in an agreement, such as a sub-participation in a loan that satisfies the conditions of item 19).
22. It is often obvious whether the entity has transferred or retained substantially all the risks and rewards of ownership and there is no need to perform any calculation. In other cases, it is necessary to calculate and compare the entity’s exposure to the variability of the present value of the future net cash flows before and after the transfer. The calculation and comparison are made using as the discount rate the current appropriate market interest rate. All reasonably possible variability in the net cash flows is considered, with greater weight assigned to results that are more likely to occur.
23. Whether the entity has retained or not retained control (see item 20(c)) of the transferred asset depends on the ability to sell the asset demonstrated by the recipient of the transfer. If the recipient of the transfer has practical ability to sell the asset in its entirety to a third-party unrelated party and is able to exercise that ability unilaterally and without needing to impose additional restrictions on the transfer, the entity has not retained control. In all other cases, the entity has retained control.
Transfers that qualify for derecognition (see item 20 (a) and (c) (i))
24. If the entity transfers a financial asset in a transfer that qualifies for derecognition in its entirety and retains the right to provide servicing of the financial asset in exchange for commissions, it shall recognise a servicing asset or a servicing liability

COMMISSION OF SECURITIES AND EXCHANGES
Rua Sete de Setembro, 111/2-5º and 23-34º Floors, Center, 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 for this service contract. If it is not expected that the commissions to be received adequately compensate the entity for the performance of the service, a service liability must be recognized for the service obligation at its fair value. If it is expected that the commissions to be received are more than adequate compensation for the service, a service asset must be recognized for the right to service for an amount determined on the basis of the allocation of the carrying amount of the larger financial asset, in accordance with paragraph 27.

If, as a result of a transfer, the financial asset is derecognized in its entirety, but the transfer results in the entity obtaining a new financial asset or a new financial liability, or a service liability, the entity must recognize the new financial asset, financial liability, or service liability at its fair value.
Upon derecognition of a financial asset in its entirety, the difference between:
(a) the carrying amount and
(b) the sum of (i) the consideration received (including any new asset obtained less any new liability assumed) and (ii) any cumulative gain or loss that has been recognized directly in other comprehensive income (see paragraph 55(b)) must be recognized in profit or loss.
If the transferred asset is part of a larger financial asset (for example, when the entity transfers interest cash flows that are part of a debt instrument, see paragraph 16(a)) and the transferred part qualifies for derecognition in its entirety, the previous carrying amount of the larger financial asset must be allocated between the part that continues to be recognized and the part that is not recognized, based on the relative fair values of those parts at the date of the transfer. For this purpose, a retained service asset must be treated as part that continues to be recognized. The difference between:
(a) the carrying amount allocated to the derecognized part; and (b) the sum of (i) the consideration received for the part not recognized (including any new asset obtained less any new liability assumed) and (ii) any cumulative gain or loss allocated to it that has been recognized directly in other comprehensive income (see paragraph 55(b)); must be recognized in profit or loss. Cumulative gain or loss that has been recognized as other comprehensive income is allocated between the part that continues to be recognized and the part that is derecognized, based on the relative fair values of those parts.
When the entity allocates the previous carrying amount of a larger financial asset between the part that continues to be recognized and the part that is derecognized, the fair value of the part that continues to be recognized must be measured. When the entity has a history of selling parts similar to the part that continues to be recognized or when other market transactions exist for those parts, recent prices of actual transactions provide the best estimate of their fair value. When there are no price quotes or recent market transactions to support the fair value of the part that continues to be recognized, the best estimate of the fair value will be the difference between the fair value of the larger financial asset as a whole and the consideration received from the transferee for the part that is derecognized.

Transfers that do not qualify for derecognition (see paragraph 20(b))

If the transfer does not result in derecognition because the entity has retained substantially all the risks and benefits of ownership of the transferred asset, the entity must continue to recognize the transferred asset in its entirety and must recognize a financial liability for the consideration received. In subsequent periods, the entity must recognize any income from the transferred asset and any expense incurred as a financial liability.

Continuing involvement in transferred assets (see paragraph 20(c)(ii))

If the entity has neither transferred nor retained substantially all the risks and benefits of ownership of the transferred asset, and retains control of the transferred asset, the entity continues to recognize the transferred asset to the extent of its continuing involvement. The measure of the entity's continuing involvement in the transferred asset is the extent to which it is exposed to changes in the value of the transferred asset. For example:
(a) when the entity's continuing involvement takes the form of a guarantee of the transferred asset, the measure of the entity's continuing involvement is the lesser of (i) the amount of the asset and (ii) the maximum amount of consideration received that the entity may be obligated to repay (the guarantee amount); (b) when the entity's continuing involvement takes the form of a written or purchased option (or both) on the transferred asset, the measure of the entity's continuing involvement is the amount of the transferred asset that the entity may repurchase. However, in the case of a written put option on an asset that is measured at fair value, the measure of the entity's continuing involvement is limited to the lesser of the fair value of the transferred asset and the exercise price of the option (see paragraph AG48); (c) when the entity's continuing involvement takes the form of a cash-settled option or a similar provision on the transferred asset, the measure of the entity's continuing involvement is measured in the same way as involvement resulting from non-cash-settled options as defined in (b).
When the entity continues to recognize an asset to the extent of its continuing involvement, the entity also recognizes an associated liability. Despite other measurement requirements contained in this Pronouncement, the transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the entity has retained. The associated liability is measured such that the net carrying amount of the transferred asset and the associated liability is:
(a) the amortized cost of the rights and obligations retained by the entity, if the transferred asset is measured at amortized cost; or

The entity must continue to recognize any income resulting from the transferred asset to the extent of its continuing involvement and must recognize any expense incurred with the associated liability.
For the purpose of subsequent measurement, changes recognized in the fair value of the transferred asset and in the associated liability are accounted for consistently with each other in accordance with paragraph 55, and must not be offset.
If the entity's continuing involvement is only in part of a financial asset (for example, when the entity retains the option to repurchase part of the transferred asset, or retains a residual interest that does not result in the retention of substantially all the risks and benefits of ownership and the entity retains control), the entity allocates the previous carrying amount of the financial asset between the part that continues to be recognized under the continuing involvement and the part that is no longer recognized on the basis of the relative fair values of those parts at the date of the transfer. For this purpose, the requirements of paragraph 28 apply. The difference between:
(a) the carrying amount allocated to the part that is no longer recognized; and (b) the sum of (i) the consideration received for the part no longer recognized and (ii) any cumulative gain or loss allocated to it that had been recognized directly as other comprehensive income (see paragraph 55(b)); must be recognized in profit or loss. Cumulative gain or loss that has been recognized as other comprehensive income is allocated between the part that continues to be recognized and the part that is no longer recognized based on the relative fair values of those parts.
If the transferred asset is measured at amortized cost, this Pronouncement's option to designate a financial liability at fair value through profit or loss does not apply to the associated liability.

All transfers

If the transferred asset continues to be recognized, the asset and the associated liability must not be offset. Similarly, the entity must not offset any income resulting from the transferred asset with any expense incurred with the associated liability (see Technical Pronouncement CPC 39 – Financial Instruments: Presentation, paragraph 42).
If the transferor provides non-monetary guarantees (such as debt or equity instruments) to the transferee, the accounting for the guarantees by the transferor and by the transferee depends on whether the transferee has the right to sell or repledge the guarantee and whether the transferor has defaulted. The transferor and the transferee must account for the guarantee as follows:
(a) if the transferee has the contractual or customary right to sell or repledge the guarantee, then the transferor must reclassify this asset in its balance sheet (for example, as loaned assets, pledged equity instruments, or receivables from repurchase) separately from other assets; (b) if the transferee sells the pledged guarantee, it must recognize the income from the sale and a liability measured at fair value regarding its obligation to return the guarantee; (c) if the transferor fails to comply with the terms of the contract and loses the right to redeem the guarantee, it must derecognize the guarantee, and the transferee must recognize the guarantee as its asset initially measured at fair value or, if it has already sold the guarantee, derecognize its obligation to return the guarantee; (d) except as provided in (c), the transferor must continue to carry the guarantee as its asset, and the transferee must not recognize the guarantee as an asset.

Regular purchase or sale of financial asset

The regular purchase or sale of financial assets must be recognized and derecognized, as applicable, using trade date accounting or settlement date accounting (see Appendix A, paragraphs AG53 to AG56).

Derecognition of financial liability

The entity must remove a financial liability (or part of a financial liability) from its statement of financial position when, and only when, it is extinguished – that is, when the obligation specified in the contract is discharged, cancelled, or expires.
The exchange between existing borrower and lender and borrower and lender of debt instruments with substantially different terms must be accounted for as the extinguishment of the original financial liability and the recognition of a new financial liability. Similarly, a substantial modification of the terms of an existing financial liability or part of it (whether attributable to the debtor's financial difficulty or not) must be accounted for as the extinguishment of the original financial liability and the recognition of a new financial liability.
The difference between the carrying amount of the financial liability (or part of the financial liability) extinguished or transferred to another party and the consideration paid, including any non-monetary assets transferred or liabilities assumed, must be recognized in profit or loss.
If the entity repurchases part of a financial liability, the entity must allocate the previous carrying amount of the financial liability between the part that continues to be recognized and the part that is derecognized, based on the relative fair values of those parts at the date of the repurchase. The difference between (a) the carrying amount allocated to the derecognized part and (b) the consideration paid, including any non-monetary assets transferred or liabilities assumed, for the part not recognized must be recognized in profit or loss.

Measurement
Initial measurement of financial assets and liabilities

When a financial asset or a financial liability is initially recognized, the entity must measure it at its fair value plus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability.

43A. However, if the fair value of the financial asset or liability at initial recognition differs from the transaction price, the entity must apply paragraph AG76.

When the entity uses settlement date accounting for an asset that is subsequently measured at cost or amortized cost, the asset is initially recognized at its fair value at the trade date (see Appendix A, paragraphs AG53 to AG56).

Subsequent measurement of financial assets

For the purpose of measuring a financial asset after initial recognition, this Pronouncement classifies financial assets into the four categories defined in paragraph 9:
(a) financial assets measured at fair value through profit or loss; (b) held-to-maturity investments; (c) loans and receivables; and (d) available-for-sale financial assets.
These categories apply to measurement and profit or loss recognition under this Pronouncement. The entity may use other descriptions for these categories or other categorizations when presenting information in the financial statements. The entity must disclose in the notes the information required by Technical Pronouncement CPC 40 – Financial Instruments – Disclosure.
After initial recognition, the entity must measure financial assets, including derivatives that are assets, at their fair values without any deduction for transaction costs that may be incurred on sale or other disposal, except for the following financial assets:
(a) loans and receivables as defined in paragraph 9, which must be measured at amortized cost using the effective interest method; (b) held-to-maturity investments as defined in paragraph 9, which must be measured at amortized cost using the effective interest method; and (c) investments in equity instruments that do not have a quoted price in an active market and whose fair value cannot be reliably measured, and derivatives that are linked to and must be settled by delivery of those unquoted equity instruments, which must be measured at cost (see Appendix A, paragraphs AG80 and AG81).

Financial assets that are designated as hedged items are subject to measurement according to the hedge accounting requirements contained in paragraphs 89 to 102. All financial assets, except those measured at fair value through profit or loss, are subject to review for impairment in accordance with paragraphs 58 to 70 and Appendix A, paragraphs AG84 to AG93.

Subsequent measurement of financial liabilities

After initial recognition, the entity must measure all financial liabilities at amortized cost using the effective interest method, except in the case of:
(a) financial liabilities measured at fair value through profit or loss. These liabilities, including derivatives that are liabilities, must be measured at fair value, except for a derivative liability that is linked to, and must be settled by, the delivery of an equity instrument that has no quoted price in an active market for an identical instrument (i.e., Level 1 information), whose fair value cannot otherwise be reliably measured, which must be measured at cost; (b) financial liabilities that arise when a transfer of a financial asset does not qualify for derecognition or when the continuing involvement approach applies. Paragraphs 29 and 31 apply to the measurement of such financial liabilities; (c) financial guarantee contracts as defined in paragraph 9. After initial recognition, the issuer of such contract must measure it (unless paragraphs 47(a) or (b) apply) at the higher of the following amounts:
(i) the amount determined under Technical Pronouncement CPC 25 – Provisions, Contingent Liabilities and Contingent Assets; and (ii) the amount initially recognized (see paragraph 43) less, when appropriate, cumulative amortization recognized in accordance with Technical Pronouncement CPC 30 – Revenue; (d) commitments to grant a loan at an interest rate below the market rate. After initial recognition, the issuer of such commitment must measure it (unless paragraph 47(a) applies) at the higher of the following amounts:
(i) the amount determined under Technical Pronouncement CPC 25 – Provisions, Contingent Liabilities and Contingent Assets; and (ii) the amount initially recognized (see paragraph 43) less, when appropriate, cumulative amortization recognized in accordance with Technical Pronouncement CPC 30 – Revenue.

Financial liabilities designated as hedged items are subject to the hedge accounting requirements of paragraphs 89 to 102.

48-49. (Eliminated).

Reclassification

The entity:
(a) must not reclassify a derivative financial instrument into or out of the category measured at fair value through profit or loss while it is held or issued; (b) must not reclassify an instrument from the category measured at fair value through profit or loss if at initial recognition it was classified as measured at fair value through profit or loss; and (c) may, if a financial asset is no longer held for the purpose of sale or repurchase in the short term (even in the case of an asset that was acquired for the purpose of trading or repurchase in the short term), reclassify it from the category measured at fair value through profit or loss if the requirements in paragraph 50B or 50D are met.

The entity must not reclassify a financial instrument into the category measured at fair value through profit or loss after initial recognition.

50A. The following changes in circumstances are not reclassifications for the purposes of paragraph 50:
(a) a derivative that was designated as an effective hedging instrument in a cash flow hedge or hedge of a net investment in a foreign entity and no longer meets the requirements; (b) a derivative that becomes an effective hedging instrument in a cash flow hedge or hedge of a net investment in a foreign entity; (c) financial instruments are reclassified when an insurance company changes its accounting policy in accordance with paragraph 45 of Technical Pronouncement CPC 11 - Insurance Contracts.

50B. A financial asset to which paragraph 50(c) applies (except a financial asset of the type described in paragraph 50D) may be reclassified from the category measured at fair value through profit or loss only in exceptional circumstances.

50C. If the entity reclassifies a financial asset from the category measured at fair value through profit or loss in accordance with paragraph 50B, the financial asset must be reclassified at fair value on the date of its reclassification. Any gain or loss already recognized in profit or loss must not be reversed. The fair value of the financial instrument on the date of its reclassification becomes its new cost or amortized cost, as applicable.

50D. A financial asset to which paragraph 50C applies that would meet the definition of loans and receivables (if the financial asset had not been classified as held for trading at initial recognition) may be reclassified from the category measured at fair value through profit or loss if the entity has the intention and ability to hold the asset for the foreseeable future or until maturity.

SECURITIES AND EXCHANGE COMMISSION (COMISSÃO DE VALORES MOBILIÁRIOS) Rua Sete de Setembro, 111/2-5º and 23-34º 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

50E. A financial asset classified as available for sale that would meet the definition of loans and receivables (if it had not been designated as available for sale at initial recognition) may be reclassified from the available for sale category to the loans and receivables category if the entity has the intention and ability to hold the financial asset for the foreseeable future or until maturity.

50F. If the entity reclassifies a financial asset from the fair value through profit or loss category as set out in item 50D or from the available for sale category as set out in item 50E, it must reclassify the financial asset at its fair value on the date of reclassification. For a financial asset reclassified in accordance with item 50D, any gain or loss already recognized in profit or loss shall not be reversed. The fair value of the financial asset on the date of reclassification becomes the new cost or amortized cost, as applicable. For a financial asset reclassified from the available for sale category in accordance with item 50E, any previous gain or loss on that asset that has been recognized in other comprehensive income (equity reserve) in accordance with item 55B must be accounted for in accordance with item 54.

If, as a result of a change in intention or ability, it is no longer appropriate to classify an investment as held to maturity, it must be reclassified as available for sale and remeasured at fair value, and the difference between the carrying amount and the fair value must be accounted for in accordance with item 55(b).
Whenever sales or reclassifications of more than an insignificant amount of investments held to maturity do not satisfy any of the conditions of item 9, any remaining investment held to maturity must be reclassified as available for sale. On reclassification, the difference between the carrying amount and the fair value must be accounted for in accordance with item 55(b).
If a reliable measure becomes available for a financial asset or financial liability for which such a measure was not previously available, and if the asset or liability is required to be measured at fair value when a reliable measure is available (see items 46(c) and 47), the asset or liability must be remeasured at fair value, and the difference between its carrying amount and the fair value must be accounted for in accordance with item 55.
If, as a result of a change in intention or ability or in the rare circumstances where a reliable measure of fair value ceases to be available (see items 46(c) and 47) or because the “two preceding financial years” mentioned in item 9 have passed, it becomes appropriate to account for a financial asset or financial liability at cost or amortized cost rather than at fair value, the carrying amount of the fair value of the financial asset or financial liability on this date becomes its new cost or amortized cost, as applicable. Any previous gain or loss on that asset that has been recognized as other comprehensive income in accordance with item 55(b) must be accounted for as follows:

(a) in the case of a financial asset with a fixed maturity, the gain or loss must be amortized in profit or loss over the remaining life of the investment held to maturity using the effective interest method. Any difference between the new amortized cost and the amount at maturity must also be amortized over the remaining life of the financial asset using the effective interest method, similar to the amortization of premium and discount. If the financial asset subsequently has an impairment loss, any gain or loss that has been recognized as other comprehensive income is recognized in profit or loss in accordance with item 67;

(b) in the case of a financial asset that does not have a fixed maturity, the gain or loss must remain as other comprehensive income until the financial asset is sold or otherwise disposed of, at which point it is recognized in profit or loss. If subsequently the financial asset has an impairment loss, any previous gain or loss that has been recognized as other comprehensive income is recognized in profit or loss in accordance with item 67.

Gains and losses

The gain or loss arising from a change in fair value of a financial asset or financial liability that is not part of a hedge relationship (see items 89 to 102) must be recognized as follows:

(a) the gain or loss resulting from a financial asset or financial liability measured at fair value through profit or loss must be recognized in profit or loss;

(b) the gain or loss resulting from an available for sale financial asset must be recognized as other comprehensive income (see Technical Pronouncement CPC 26 – Presentation of Financial Statements), except for impairment losses (see items 67 to 70) and foreign exchange gains and losses (see Appendix A, item AG83), until the financial asset is derecognized, at which point the cumulative gain or loss previously recognized with other comprehensive income must be recognized in profit or loss. However, interest calculated using the effective interest method (see item 9) is recognized in profit or loss (see Technical Pronouncement CPC 30 – Revenue). Dividends resulting from an available for sale equity instrument are recognized in profit or loss when the entity’s right to receive them is established (Technical Pronouncement CPC 30 – Revenue).

For financial assets and financial liabilities accounted for at amortized cost (see items 46 and 47), the gain or loss is recognized in profit or loss when the financial asset or financial liability is derecognized or subject to an impairment loss, and through the amortization process. However, for financial assets or financial liabilities that are hedged positions (see items 78 to 84 and Appendix A, items AG98 to AG101), the accounting for gain or loss must follow items 89 to 102.
If the entity recognizes financial assets using settlement date accounting (see item 38 and Appendix A, items AG53 to AG56), any change in the fair value of the asset to be received during the period between the trade date and the settlement date is not recognized for assets carried at cost or amortized cost (except in the case of impairment losses). For assets carried at fair value, however, the change in fair value must be recognized in profit or loss or as other comprehensive income, as appropriate under item 55.

Impairment loss and non-receipt of Financial Assets

The entity must assess, at each balance sheet date, whether there is any objective evidence that a financial asset or a group of financial assets is subject to an impairment loss. If such evidence exists, the entity must apply item 63 (for financial assets accounted for at amortized cost), item 66 (for financial assets accounted for at cost), or item 67 (for available for sale financial assets) to determine the amount of any impairment loss.
A financial asset or a group of financial assets has an impairment loss and an impairment loss is incurred if, and only if, there is objective evidence of impairment loss as a result of one or more events that occurred after the initial recognition of the asset (loss event) and if that event (or events) of loss has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. It may not be possible to identify a single discrete event that has caused the impairment loss. Instead, the combined effect of several events may have caused the impairment loss. Expected losses resulting from future events, regardless of the degree of probability, are not recognized. Objective evidence that a financial asset or a group of assets has an impairment loss includes observable data that draws the holder’s attention to the following loss events:

(a) significant financial difficulty of the issuer or obligor; (b) breach of contract, such as default or delinquency in interest or principal payments; (c) the lender or financier, for economic or legal reasons relating to the borrower’s financial difficulties, grants a concession to the borrower that the lender or financier would not otherwise consider; (d) it becomes probable that the debtor will enter into bankruptcy or other financial reorganization; (e) disappearance of an active market for that financial asset due to financial difficulties; or (f) observable data indicating that there is a measurable decrease in the estimated future cash flows of a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets of the group, including:

(i) adverse changes in the payment status of debtors in the group (for example, a growing number of late payments or a growing number of credit card holders who have reached their credit limit and are only paying the minimum monthly amount); or

(ii) national or local economic conditions that correlate with defaults relating to the group’s assets (for example, an increase in the unemployment rate in the geographic area of the debtors, a decrease in property prices for mortgages in the relevant area, a decrease in oil prices for loan assets to oil producers, or adverse changes in industry conditions that affect the group’s debtors).

The disappearance of an active market because the entity’s financial instruments ceased to be publicly traded is not evidence of an impairment loss. A downgrade in the entity’s credit rating is not, by itself, evidence of an impairment loss, although it may be when considered with other available information. A decline in the fair value of a financial asset below its cost or amortized cost is not necessarily evidence of an impairment loss (for example, a decline in the fair value of an investment in a debt instrument resulting from an increase in the risk-free interest rate).
In addition to the types of events in item 59, objective evidence of an impairment loss for an investment in an equity instrument includes information about significant adverse changes that have occurred in the technological, market, economic, or legal environment in which the issuer operates, and indicates that the cost of the investment in the equity instrument may not be recoverable. A significant or prolonged decline in the fair value of an investment in an equity instrument below its cost also constitutes objective evidence of an impairment loss.
In some cases, the observable data required to estimate the amount of impairment loss resulting from a financial asset may be limited or no longer fully relevant to current circumstances. For example, this may be the case when a debtor is in financial difficulties and there is little historical data available relating to similar debtors. In such cases, the entity uses its judgment based on experience to estimate the amount of any impairment loss. Similarly, the entity uses its judgment based on experience to adjust observable data so that a group of financial assets reflects current circumstances (see item AG89). The use of reasonable estimates is an essential part of the preparation of financial statements and does not diminish their reliability.

Financial assets accounted for at amortized cost

If there is objective evidence that an impairment loss has been incurred on loans and receivables or investments held to maturity accounted for at amortized cost, the amount of the loss is measured as the difference between the carrying amount of the asset and the present value of estimated future cash flows (excluding future credit losses that have not been incurred), discounted at the original effective interest rate of the financial asset (i.e., the effective interest rate calculated at initial recognition). The carrying amount of the asset must be reduced directly or by using a contra account. The amount of the loss must be recognized in profit or loss.
The entity first assesses whether there is objective evidence of an impairment loss individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant (see item 59). If the entity determines that there is no objective evidence of an impairment loss for a financial asset assessed individually, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and assesses them collectively for impairment loss. Assets that are individually assessed for impairment loss and for which the impairment loss is or continues to be recognized are not included in the collective assessment of impairment loss.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be objectively related to an event occurring after the recognition of the impairment loss (such as an improvement in the debtor’s credit rating), the previously recognized impairment loss must be reversed, either directly or by adjusting the contra account. The reversal must not result in the carrying amount of the financial asset exceeding what the amortized cost would have been had the impairment loss not been recognized on the date the impairment loss was reversed. The amount of the reversal must be recognized in profit or loss.

Financial assets accounted for at cost

If there is objective evidence that an impairment loss has been incurred on an equity instrument without a quoted price in an active market that is not measured at fair value because its fair value cannot be reliably measured, or on a derivative instrument that is associated or will be settled by delivery of an instrument without a quoted price in an active market, the amount of the impairment loss is measured as the difference between the cost amount of the financial asset and the present value of estimated future cash flows discounted at the current market return rate for a similar instrument (see item 46(c) and Appendix A, items AG 80 and AG 81). This type of loss cannot be reversed.

Available for sale financial assets

When the decline in fair value of an available for sale financial asset has been recognized as other comprehensive income and there is objective evidence that the asset has an impairment loss (see item 59), the cumulative loss that had been recognized as other comprehensive income must be treated as a reclassification adjustment and recognized in profit or loss even if the financial asset has not been derecognized.
The amount of the cumulative loss that is reclassified and recognized in profit or loss under item 67 must be the difference between the acquisition cost (net of any amortization of interest and principal payments) and the current fair value, less any impairment loss resulting from that financial asset previously recognized in profit or loss.
Impairment losses recognized in profit or loss for investments in equity instruments classified as available for sale must not be reversed through profit or loss.
If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the recognition of the impairment loss in profit or loss, the impairment loss must be reversed, with the amount of the reversal recognized in profit or loss.

Hedge

If there is a designated hedge relationship between a hedging instrument and a hedged item (hedged object), as described in items 85 to 88 and Appendix A, items AG102 to AG104, the accounting for the gain or loss resulting from the hedging instrument and the hedged item must follow items 89 to 102.

Hedging instrument

Instruments that qualify

This Technical Pronouncement does not restrict the circumstances in which a derivative may be designated as a hedging instrument provided that the conditions of item 88 are satisfied, with the exception of certain written options (see Appendix A, item AG94). However, a non-derivative financial asset or a non-derivative financial liability may only be designated as a hedging instrument for the coverage of foreign exchange risk.
For the purpose of hedge accounting, only instruments that involve a party external to the reporting entity (i.e., external to the group, segment, or individual entity on whom the report is made) may be designated as hedging instruments. Although individual entities within a consolidated group or divisions within the entity may enter into hedge transactions with other entities within the group or other divisions within the entity, any of these intragroup transactions are eliminated in consolidation. Therefore, such hedge transactions do not qualify for hedge accounting in the group’s consolidated financial statements. However, they may qualify for hedge accounting in the individual or separate financial statements of individual entities within the group or in segment reporting, provided they are external to the individual entity or segment on whom the report is made.

Designation of hedging instrument

Normally, there is a single measure of fair value for a hedging instrument in its entirety, and the factors giving rise to changes in fair value are co-dependent. Thus, a hedge relationship is designated by entity for the hedging instrument in its entirety. The only permitted exceptions are:

(a) separating the intrinsic value and time value of an option contract and designating as a hedging instrument only the change in the intrinsic value of the option, excluding the change in its time value;

temporal; and
(b) separate the interest element and the spot price of the forward contract.
These exceptions are permitted because the intrinsic value of the option and the premium on the forward contract can generally be measured separately. A dynamic hedging strategy that evaluates both the intrinsic value and the time value of an option contract may qualify for hedge accounting.

A proportion of the total hedging instrument, such as 50% of the notional amount, may be designated as the hedging instrument in the hedge relationship. However, the hedge relationship cannot be designated for only a part of the time period of the hedging instrument's duration.
A single hedging instrument may be designated as a hedge for more than one type of risk provided that (a) the risks being hedged can be clearly identified; (b) the effectiveness of the hedge can be demonstrated; and (c) it is possible to ensure that there is a specific designation of the hedging instrument and different risk positions.
Two or more derivatives, or proportions thereof (or, in the case of foreign currency risk hedging, two or more non-derivatives or proportions thereof, or a combination of derivatives and non-derivatives or proportions thereof), may be viewed in combination and jointly designated as a hedging instrument, including situations where the risk resulting from some derivatives offsets the risks resulting from others. However, an interest rate collar or other derivative instrument that combines a written option and a purchased option does not qualify as a hedging instrument if it is, in fact, a net written option (for which a net premium is received). Similarly, two or more instruments (or proportions thereof) may be designated as a hedging instrument only if none of them is a written option or a net written option.

Hedged Items
Items that Qualify

A hedged item may be a recognized asset or liability, an unrecognized firm commitment, a highly probable forecasted transaction, or a net investment in a foreign operation. The hedged item may be (a) a single asset, liability, firm commitment, highly probable forecasted transaction, or net investment in a foreign operation, (b) a group of assets, liabilities, firm commitments, highly probable forecasted transactions, or net investments in foreign operations with similar risk characteristics, or (c) only in portfolio hedging of interest rate risk, a portion of the portfolio of financial assets or financial liabilities that share the risk being hedged.
Unlike loans and receivables, a held-to-maturity investment cannot be hedged with respect to interest rate risk or prepayment risk because designating an investment as held-to-maturity requires the intention to hold the investment to maturity, regardless of changes in the fair value or cash flows of that investment attributable to changes in interest rates. However, a held-to-maturity instrument may be hedged with respect to risks arising from changes in foreign currency exchange rates and credit risk.
For hedge accounting, only assets, liabilities, firm commitments, or highly probable transactions involving a party external to the entity may be designated as hedged items. Hedge accounting may only be applied for transactions between entities of the same group in the individual financial statements of those entities and not in the group's consolidated financial statements, except with respect to the consolidated financial statements of an investment entity, as defined in Technical Pronouncement CPC 36 – Consolidated Financial Statements, where transactions between the investment entity and its subsidiaries measured at fair value through profit or loss are not eliminated in the consolidated financial statements. As an exception, the foreign currency risk of an intragroup monetary item (for example, amounts payable/receivable between two subsidiaries) may qualify as a hedged item in the consolidated financial statements if it results in exposure to gains or losses on exchange rates that are not fully eliminated in consolidation, in accordance with Technical Pronouncement CPC 02 – Effects of Changes in Foreign Exchange Rates and Translation of Financial Statements. In accordance with Technical Pronouncement CPC 02, foreign currency gains and losses resulting from intragroup monetary items should not be fully eliminated in consolidation when the intragroup monetary item is transacted between two entities of the group that have different functional currencies. Furthermore, the foreign currency risk of a forecasted intragroup transaction may qualify as a hedged item in the consolidated financial statements, provided that the transaction is denominated in a currency other than the functional currency of the entity participating in the transaction and the foreign currency risk will affect consolidated profits or losses.

Designation of Financial Items as Hedged Items

If the hedged item is a financial asset or a financial liability, it may be hedged with respect to risks associated with only a part of its cash flows or fair value (such as one or more selected contractual cash flows or parts thereof, or a percentage of the fair value) provided that this effectiveness can be measured. For example, an identifiable and separately measurable part of the interest rate exposure of an interest-bearing asset or an interest-bearing liability may be designated as the hedged risk (such as a risk-free interest rate or an interest rate benchmark component of the total interest rate exposure of the hedged financial instrument).

81A. In fair value hedges of interest rate exposure of a portfolio of financial assets or financial liabilities (and only in this type of hedge), the hedged portion may be designated in terms of currency amount (for example, amount in dollars, euros, pounds, or rand) rather than as individual assets (or liabilities). Although the portfolio may, for risk management purposes, include assets and liabilities, the designated amount is an amount of assets or liabilities. Net amount designation including assets and liabilities is not permitted. The entity may hedge part of the interest rate risk associated with this designated amount. For example, in the case of a portfolio hedge containing prepayable assets, the entity may hedge the change in fair value attributable to a change in the hedged interest rate based on expected repricing dates, rather than contractual dates. When the hedged item is based on expected repricing dates, the effect that changes in the hedging interest rate have on these expected repricing dates is included when determining the change in fair value of the hedged item. Thus, if a portfolio containing prepayable items is hedged with a non-prepayable derivative, inefficiency arises if the dates on which items in the hedged portfolio are expected to be prepaid are revised, or if the actual prepayment dates differ from expectations.

Designation of Non-Financial Items as Hedged Items

If the hedged item is a non-financial asset or a non-financial liability, it must be designated as the hedged item (a) for foreign currency risks, or (b) in its entirety for all risks, due to the difficulty of isolating and measuring the appropriate part of the changes in cash flows or fair value attributable to specific risks other than foreign currency risks.

Designation of Groups of Items as Hedged Items

Similar assets or liabilities should be aggregated and hedged as a group only if the individual assets or liabilities of the group share the exposure to the risk designated as being hedged. Furthermore, it is expected that the change in fair value attributable to the hedged risk for each individual item in the group is approximately proportional to the overall change in fair value attributable to the hedged risk of the group of items.
Since the entity assesses hedge effectiveness by comparing the change in fair value or cash flow of the hedging instrument (or group of similar hedging instruments) and the hedged item (or group of similar hedged items), comparing a hedging instrument with the overall net position (for example, the net of all fixed-rate assets and liabilities with similar maturities), rather than comparing with a specific hedged item, does not qualify for hedge accounting.

Hedge Accounting

Hedge accounting recognizes the offsetting effects in profit or loss of changes in the fair values of the hedging instrument and the hedged item.
Hedge relationships are of three types:
(a) fair value hedge: hedge of exposure to changes in fair value of a recognized asset or liability or an unrecognized firm commitment, or of an identified portion of such an asset, liability, or firm commitment, that is attributable to a particular risk and may affect profit or loss; (b) cash flow hedge: hedge of exposure to variability in cash flows that (i) is attributable to a particular risk associated with a recognized asset or liability (such as all or some of the future interest payments on a variable-rate debt) or a highly probable forecasted transaction and that (ii) may affect profit or loss; (c) hedge of a net investment in a foreign operation as defined in Technical Pronouncement CPC 02.
A foreign currency risk hedge of a firm commitment may be accounted for as a fair value hedge or as a cash flow hedge.
A hedge relationship qualifies for hedge accounting under items 89 to 102 if, and only if, all of the following conditions are met:
(a) at the inception of the hedge, there is formal designation and documentation of the hedge relationship and the entity's risk management objective and strategy for undertaking the hedge. This documentation must include identification of the hedging instrument, the hedged position or transaction, the nature of the risk to be hedged, and the manner in which the entity will assess the effectiveness of the hedging instrument in offsetting exposure to changes in fair value or cash flows of the hedged item attributable to the hedged risk; (b) the hedge is expected to be highly effective (see Appendix A, items AG105 to AG113) in achieving offsets in fair value or cash flows attributable to the hedged risk, consistently with the originally documented risk management strategy for that particular hedge relationship; (c) for cash flow hedges, a forecasted transaction that is the object of the hedge must be highly probable and must present exposure to variations in cash flows that could ultimately affect profit or loss; (d) the effectiveness of the hedge can be reliably measured, that is, the fair value or cash flows of the hedged item that are attributable to the hedged risk and the fair value of the hedging instrument can be reliably measured; (e) the hedge is assessed on an ongoing basis and effectively determined to have been highly effective during all periods of the financial statements for which the hedge was designated.

Fair Value Hedge

If a fair value hedge meets the conditions of item 88 during the period, it must be accounted for as follows:
(a) the gain or loss resulting from remeasuring the hedging instrument at fair value (for a derivative hedging instrument) or of the foreign currency component of its carrying amount measured in accordance with Technical Pronouncement CPC 02 (for a non-derivative hedging instrument) must be recognized in profit or loss; and (b) the gain or loss resulting from the hedged item attributable to the hedged risk must adjust the carrying amount of the hedged item to be recognized in profit or loss. This applies if the hedged item is otherwise measured at cost. Recognition of the gain or loss attributable to the hedged risk in profit or loss applies if the hedged item is a financial asset available for sale.

89A. For a fair value hedge of interest rate exposure of a portion of a portfolio of financial assets or liabilities (and only in this type of hedge), the requirement of item 89(b) may be satisfied by presenting the gain or loss attributable to the hedged item:
(a) as a separate line item with assets, for those repricing periods in which the hedged item is an asset; or (b) as a separate line item with liabilities, for those repricing periods in which the hedged item is a liability.
The separate line items mentioned in (a) and (b) must be presented together with financial assets or liabilities. The amounts included in these line items must be removed from the balance sheet when the assets or liabilities to which they relate are derecognized.

If only particular risks attributable to the hedged item are hedged, changes recognized to the fair value of the hedged item not related to the hedged risk are recognized as defined in item 55.
The entity must discontinue prospectively the hedge accounting specified in item 89 if:
(a) the hedging instrument expires or is sold, terminated, or exercised. For this purpose, the replacement or rollover of a hedging instrument for another hedging instrument is not its end if this replacement or rollover is part of the entity's documented hedge strategy. Furthermore, for this purpose, there is no expiration or termination of the hedging instrument if; (i) as a consequence of laws or regulations or the introduction of laws or regulations, the parties to the hedging instrument agree that one or more clearing counterparties replace their original counterparty to become the new counterparty for each of the parties. For this purpose, a clearing counterparty is a central counterparty (sometimes called a "clearing organization" or "clearing agency") or entity or entities, for example, a clearing member of a clearing organization or a client of a clearing member of a clearing organization, that are acting as counterparty in order to effect clearing for the central counterparty. However, when the parties to the hedging instrument replace their original counterparties with different counterparties, this item only applies if each of those clearing effects is with the same central counterparty; (ii) other changes, if any, to the hedging instrument are limited to those that are necessary to effect such counterparty replacement. Such changes are limited to those that are in accordance with the terms that would be expected if the hedging instrument were originally cleared with the clearing counterparty. These changes include changes in collateral requirements, rights to offset credits and payables balances, and fees charged; (b) the hedge no longer meets the criteria for hedge accounting of item 88; or (c) the entity revokes the designation.
Any adjustment resulting from item 89(b) made to the carrying amount of a covered financial instrument for which the effective interest method is used (or, in the case of portfolio interest rate risk hedging, in a separate balance sheet line described in item 89A) must be amortized in profit or loss. Amortization may begin as soon as an adjustment exists and must begin no later than when the hedged item ceases to be adjusted for changes in its fair value attributable to the risk being hedged. The adjustment is based on the recalculated effective interest rate at the date amortization begins. However, if, in the case of fair value hedge of interest rate exposure of a portfolio of financial assets and liabilities (and only in this type of hedge), amortization using a recalculated effective interest rate is not practicable, the adjustment must be amortized using the straight-line method. The adjustment must be fully amortized until the maturity of the financial instrument or, in the case of portfolio interest rate risk hedging, until the expiration of the relevant repricing period.
When an unrecognized firm commitment is designated as a hedged item, the subsequent cumulative change in fair value of the firm commitment attributable to the hedged risk is recognized as an asset or liability with the corresponding gain or loss recognized in profit or loss (see item 89(b)). Changes in the fair value of the hedging instrument are also recognized in profit or loss.
When the entity assumes a firm commitment to acquire an asset or assume a liability that is a hedged item in a fair value hedge, the initial carrying amount of the asset or liability that results from the entity satisfying the firm commitment is adjusted to include the cumulative change in fair value of the firm commitment attributable to the hedged risk that was recognized in the balance sheet.

Cash Flow Hedge

If a cash flow hedge meets the conditions of item 88 during the period, it must be accounted for as follows:
(a) the part of the gain or loss resulting from the hedging instrument that is determined to be an effective hedge (see item 88) must be recognized directly in other comprehensive income (see Technical Pronouncement CPC 26 – Presentation of Financial Statements); and (b) the ineffective part of the gain or loss resulting from the hedging instrument must be recognized in profit or loss.
More specifically, cash flow hedging is accounted for as follows:
(a) the separate component of equity associated with the hedged item is adjusted to the lower of the following (in absolute amounts):
(i) the cumulative gain or loss resulting from the hedging instrument since the inception of the hedge; and (ii) the cumulative change in fair value (present value) of the expected future cash flows of the hedged item since the inception of the hedge; (b) any remaining gain or loss resulting from the hedging instrument or the designated component thereof (that is not an effective hedge) is recognized in profit or loss; and (c) if the entity's documented risk management strategy for a particular hedge relationship excludes from the assessment of hedge effectiveness a specific component of the gain or loss or the respective cash flows of the hedging instrument (see items 74, 75, and 88(a)), this excluded component of gain or loss is recognized in accordance with item 55.
If the hedged forecasted transaction subsequently results in the recognition of a financial asset or liability, the associated gains or losses that were recognized in valuation adjustments (other comprehensive income), in accordance with item 95, must be reclassified from equity to profit or loss as a reclassification adjustment (see Technical Pronouncement CPC 26 – Presentation of Financial Statements) in the same period or periods in which the hedged cash flow affects profit or loss (for example, in the period in which interest revenue or expense is recognized). However, if the entity expects that all, or part, of the loss recognized in valuation adjustments will not be recovered in future periods, it must reclassify that amount to profit or loss as a reclassification adjustment that is not expected to be recovered.
If the hedged forecasted transaction subsequently results in the recognition of a non-financial asset or non-financial liability (impairment loss of assets of the future hedged item), or if the forecasted transaction of a non-financial asset or non-financial liability becomes a firm commitment for which fair value hedge accounting applies, then the entity must adopt (a) or (b) below:
(a) reclassify gains and losses associated that were recognized as other comprehensive income in accordance with item 95 into profit or loss in the same period or periods during which the acquired asset or assumed liability affects profit or loss (as in the periods in which depreciation expense or cost of sales is recognized). However, if the entity expects that the total or part of the loss recognized directly as other comprehensive income will not be recovered in one or more future periods, it must reclassify into profit or loss the amount it does not expect to recover; (b) remove gains and losses associated that were recognized as other comprehensive income in accordance with item 95 and include them in the initial cost or other carrying amount of the asset or liability.
The entity must adopt (a) or (b) of item 98 as its accounting policy and must apply it consistently to all hedges to which item 98 refers.
For cash flow hedges not dealt with in items 97 and 98, the amounts that were recognized in valuation adjustments as other comprehensive income must be reclassified to profit or loss as a reclassification adjustment in the same period, or periods, in which the forecasted cash flows affect profit or loss (for example, when the forecasted sale

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In any of the following circumstances, the entity must discontinue prospectively the specified hedge accounting in items 95 to 100:

(a) the hedging instrument expires or is sold, terminated, or exercised. In this case, the cumulative gain or loss resulting from the hedging instrument that remains recognized as other comprehensive income, from the period in which the hedge was in effect (see item 95(a)), must remain recognized in equity until the forecasted transaction occurs. When the transaction occurs, items 97, 98, or 100 apply. For the purposes of this item, the replacement or rollover of a hedging instrument for another hedging instrument is not an expiration or termination if this replacement or rollover is part of the entity's documented hedging strategy. Furthermore, for the purposes of this item, there is no expiration or termination of the hedging instrument if:

(i) as a consequence of laws or regulations or the introduction of laws or regulations, the parties to the hedging instrument agree that one or more clearing counterparties replace their original counterparty to become the new counterparty for each of the parties. For this purpose, clearing counterparty is a central counterparty (sometimes called "clearing organization" or "clearing agency") or entity or entities, for example, clearing member of a clearing organization or client of a clearing member of a clearing organization, that are acting as counterparty in order to effect clearing by the central counterparty. However, when the parties to the hedging instrument replace their original counterparties with different counterparties, this item only applies if each of those clearing effects is with the same central counterparty;

(ii) other changes, if any, to the hedging instrument are limited to those that are necessary to effect such replacement of the counterparty. Such changes are limited to those that are in accordance with the terms that would be expected if the hedging instrument were originally entered into with the clearing counterparty. These changes include changes in collateral requirements, rights to offset credits and payables account balances, and fees charged;

(b) the hedge no longer meets the hedge accounting criteria in item 88. In this case, the cumulative gain or loss resulting from the hedging instrument that remains recognized as other comprehensive income since the period in which the hedge was in effect (see item 95(a)) must remain recognized separately in equity until the forecasted transaction occurs. When the transaction occurs, items 97, 98, or 100 apply;

(c) it is no longer expected that the forecasted transaction will occur, in which case any cumulative gain or loss related to the hedging instrument that remains recognized as other comprehensive income since the period in which the hedge was in effect (see item 95(a)) must be recognized in profit or loss. A forecasted transaction that ceases to be highly probable (see item 88(c)) may still occur;

(d) the entity revokes the designation. For hedges of forecasted transactions, the cumulative gain or loss resulting from the hedging instrument that remains recognized as other comprehensive income since the period in which the hedge was effective (see item 95(a)) must remain recognized separately in equity until the forecasted transaction occurs or it is no longer expected to occur. When the transaction occurs, items 97, 98, or 100 apply. If it is no longer expected that the transaction will occur, the cumulative gain or loss that had been recognized directly in equity must be recognized in profit or loss.

Hedge of Net Investment

Hedges of net investments in foreign operations, including a hedge of a monetary item that is accounted for as part of the net investment (see Technical Pronouncement CPC 02), must be accounted for similarly to cash flow hedges:

(a) the part of the gain or loss resulting from the hedging instrument that is determined to be an effective hedge (see item 88) must be recognized directly in equity through the statement of changes in equity (see Technical Pronouncement CPC 26 – Presentation of Financial Statements); and

(b) the ineffective part must be recognized in profit or loss.

The gain or loss resulting from the hedging instrument related to the effective part of the hedge that was recognized directly in equity must be recognized in profit or loss upon disposal of the foreign operation.

Temporary Exceptions to the Application of Specific Hedge Accounting Requirements

102A. The entity must apply items 102A to 102N and 108G to all hedging relationships directly affected by the interest rate benchmark reform. These items apply only to these hedging relationships. A hedging relationship is directly affected by the interest rate benchmark reform only if the reform gives rise to uncertainties about:

(a) the interest rate benchmark (whether contractually or non-contractually specified) designated as the hedged risk; and/or

(b) the timing or the amount of cash flows based on the interest rate benchmark of the hedged item or the hedging instrument.

102B. For the purpose of applying items 102D to 102N, the term "interest rate benchmark reform" refers to the reform of the entire interest rate benchmark market, including the replacement of the interest rate benchmark with an alternative reference rate, as a result of the recommendations established in the Financial Stability Board’s report of July 2014, 'Reform of Key Interest Rate Benchmarks'.

102C. Items 102D to 102N provide exceptions only to the requirements specified in these items. The entity must continue to apply all other hedge accounting requirements to hedging relationships directly affected by the interest rate benchmark reform.

Highly Probable Requirement for Cash Flow Hedge

102D. For the purpose of applying the requirement in item 88(c) that a forecasted transaction must be highly probable, the entity must assume that the interest rate benchmark on which the protected cash flows (whether contractually or non-contractually specified) are based is not altered as a result of the interest rate benchmark reform.

Reclassification of Accumulated Gain or Loss Recognized in Other Comprehensive Income

102E. For the purpose of applying the requirement in item 101(c), in order to determine whether the forecasted transaction is no longer expected, the entity must assume that the interest rate benchmark on which the protected cash flows (whether contractually or non-contractually specified) are based is not altered as a result of the interest rate benchmark reform.

Effectiveness Assessment

102F. For the purpose of applying the requirements of items 88(b) and AG105(a), the entity must assume that the interest rate benchmark on which the protected cash flows and/or the hedged risk (whether contractually or non-contractually specified) are based, or the interest rate on which the cash flows of the hedging instrument are based, is not altered as a result of the interest rate benchmark reform.

102G. For the purpose of applying the requirement of item 88(e), the entity is not required to discontinue the hedging relationship because the actual results of the hedge do not meet the requirements of item AG105(b). To avoid doubt, the entity must apply the other conditions of item 88, including the prospective assessment of item 88(b), to assess whether the hedging relationship should be discontinued.

Designation of Component of an Item as Hedged Item

102H. Unless item 102I is applicable for hedging a non-contractually specified portion of interest rate risk, the entity must apply the requirement of items 81 and AG99F – that the designated portion be separately identifiable – only at the inception of the hedging relationship.

102I. When the entity, consistent with its hedging documentation, frequently redefines (i.e., discontinues and restarts) a hedging relationship, because both the hedging instrument and the hedged item change frequently (i.e., the entity uses a dynamic process in which the hedged items and the hedging instruments used to manage this exposure do not remain the same for long), the entity must apply the requirement of items 81 and AG99F – that the designated portion be separately identifiable – only when initially designating a hedged item in that hedging relationship. The hedged item that was assessed at the time of its initial designation in the hedging relationship, whether at the inception of the hedge or subsequently, must not be reassessed in any subsequent redesignation in the same hedging relationship.

End of Application

102J. The entity must cease, prospectively, to apply item 102D to the hedged item:

(a) when the uncertainty arising from the interest rate benchmark reform is no longer present at the time and value of the cash flows based on the interest rate benchmark parameter of the hedged item; and

(b) when the hedging relationship of which the hedged item is part is discontinued.

102K. The entity must cease, prospectively, to apply item 102E:

(a) when the uncertainty arising from the interest rate benchmark reform is no longer present regarding the timing and value of future cash flows based on the interest rate benchmark parameter of the hedged item; and

(b) when all accumulated gain or loss recognized in other comprehensive income relating to that discontinued hedging relationship is reclassified to profit or loss.

102L. The entity must cease, prospectively, to apply item 102F:

(a) to the hedged item, when the uncertainty arising from the interest rate benchmark reform is no longer present regarding the hedged risk or the timing and value of cash flows based on the interest rate benchmark of the hedged item; and

(b) to the hedging instrument, when the uncertainty arising from the interest rate benchmark reform is no longer present regarding the timing and value of cash flows based on the interest rate benchmark of the hedging instrument.

If the hedging relationship of which the hedged item and the hedging instrument are part is discontinued before the date specified in item 102L(a) or the date specified in item 102L(b), the entity must cease, prospectively, to apply item 102F to that hedging relationship on the date of discontinuation.

102M. The entity must cease, prospectively, to apply item 102G to the hedging relationship in whichever occurs first between:

(a) when the uncertainty arising from the interest rate benchmark reform is no longer present with regard to the hedged risk and the timing and value of cash flows based on the interest rate benchmark of the hedged item and the hedging instrument; and

(b) when the hedging relationship to which the exception is applied is discontinued.

102N. When designating a group of items as hedged items by hedge, or a combination of financial instruments as hedging instrument, the entity must cease to apply, prospectively, items 102D to 102G to the individual item or financial instrument, in accordance with items 102J, 102K, 102L, or 102M, as relevant, when the uncertainty arising from the interest rate benchmark reform is no longer present with regard to the hedged risk and/or the timing and value of cash flows based on the interest rate benchmark of that item or financial instrument.

102O. The entity must cease to apply prospectively items 102H and 102I in whichever occurs first between:

(a) when the changes required by the interest rate benchmark reform are made to the non-contractually specified risk portion applying item 102P; or

(b) when the hedging relationship in which the non-contractually specified designated risk portion is discontinued.

Additional Temporary Exceptions Arising from Interest Rate Benchmark Reform

Hedge Accounting

102P. As and when the requirements of items 102D to 102I cease to apply to a hedging relationship (see items 102J to 102O), the entity must change the formal designation of that hedging relationship, as documented previously, to reflect the changes required by the interest rate benchmark reform, i.e., the changes are consistent with the requirements of items 5.4.6 to 5.4.8 of CPC 48. In this context, the hedge designation must be changed only to make one or more of these changes:

(a) designating an alternative reference rate (whether contractually or non-contractually specified) as a hedged risk;

(b) altering the description of the hedged item, including the description of the designated portion of cash flows or fair value being hedged;

(d) altering the description of how the entity will assess the effectiveness of the hedge.

102Q. The entity must also apply the requirement of item 102P(c) if these three conditions are met:

(a) the entity makes a change required by the interest rate benchmark reform using a different approach than changing the basis to determine the contractual cash flows of the hedging instrument (as described in item 5.4.6 of CPC 48);

(b) the original hedging instrument is not derecognized; and

(c) the chosen approach is economically equivalent to changing the basis for determining the contractual cash flows of the original hedging instrument (as described in items 5.4.7 and 5.4.8 of CPC 48).

102R. The requirements of items 102D to 102I may cease to be applied at different times. Therefore, applying item 102P, the entity may be required to change the formal designation of its hedging relationships at different times, or it may be necessary to change the formal designation of a hedging relationship more than once. When, and only when, such a change is made to the hedge designation, the entity must apply items 102V to 102Z2, as applicable. The entity must also apply item 89 (for a fair value hedge) or item 96 (for a cash flow hedge) to recognize any changes in the fair value of the hedged item or the hedging instrument.

102S. The entity must change a hedging relationship as required in item 102P at the end of the reporting period during which a change required by the interest rate benchmark reform is made to the hedged risk, hedged item, or hedging instrument. To avoid doubt, such a change in the formal designation of a hedging relationship does not constitute either the discontinuation of the hedging relationship or the designation of a new hedging relationship.

102T. If changes are made beyond the changes required by the interest rate benchmark reform to the financial asset or financial liability designated in a hedging relationship (as described in items 5.4.6 to 5.4.8 of CPC 48) or to the designation of the hedging relationship (as required by item 102P), the entity must first apply the applicable requirements in this pronouncement to determine if these additional changes result in the discontinuation of hedge accounting. If the additional changes do not result in the discontinuation of hedge accounting, the entity must change the formal designation of the hedging relationship as specified in item 102P.

102U. Items 102V to 102Z3 provide exceptions to the requirements specified only in these items. The entity must apply all other hedge accounting requirements in this pronouncement, including the qualification criteria of item 88, to hedging relationships that have been directly affected by the interest rate benchmark reform.

Accounting for Qualified Hedging Relationships

Retrospective Effectiveness Assessment

102V. For the purpose of assessing the retrospective effectiveness of a hedging relationship on a cumulative basis applying item 88(e), and only for this purpose, the entity may opt to reset to zero the cumulative changes in fair value of the hedged item and the hedging instrument when the application of item 102G ceases, as required by item 102M. This choice is made separately for each hedging relationship (i.e., on an individual hedging relationship basis).

Cash Flow Hedges

102W. For the purpose of applying item 97, at the point in time when the entity changes the description of a hedged item as required in item 102P(b), the accumulated gain or loss in other comprehensive income will be considered based on the alternative reference rate on which the future covered cash flows are determined.

102X. For a discontinued hedging relationship, when the interest rate benchmark on which the future covered cash flows were based is altered as required by interest rate benchmark reform, for the purpose of applying item 101(c) in order to determine if the future protected cash flows are expected to occur, the accumulated value in other comprehensive income for that hedging relationship will be considered based on the alternative reference rate on which the future covered cash flows will be based.

Groups of Items

102Y. When the entity applies item 102P to groups of items designated as hedged items in a fair value hedge or cash flow hedge, the entity must allocate the hedged items to subgroups based on the interest rate benchmark that is being hedged and designate the interest rate benchmark as the hedged risk for each subgroup. For example, in a hedging relationship where a group of items is covered for changes in an interest rate benchmark subject to interest rate benchmark reform, the protected cash flows or the fair value of some items in the group may be altered to refer to an alternative reference rate before other items in the group are altered. In this example, when applying item 102P, the entity designates the alternative reference rate as the hedged risk for that relevant subgroup of covered items. The entity continues to designate the existing interest rate benchmark as the hedged risk for the other subgroup of covered items until the covered cash flows or fair value of those items are altered to reference the alternative reference rate or the items expire and are replaced by covered items that reference the alternative reference rate.

102Z. The entity must assess separately whether each subgroup meets the requirements in items 78 and 83 to be an eligible hedged item. If any subgroup fails to meet the requirements of items 78 and 83, the entity must discontinue hedge accounting prospectively for the hedging relationship in its entirety. The entity must also apply the requirements of items 89 or 96 to recognize the ineffectiveness related to the hedging relationship as a whole.

Designating Financial Instruments as Hedged Items

102Z1. An alternative reference rate designated as a portion of non-contractually specified risk that is not separately identifiable (see items 81 and AG99F) at the date it is designated will be considered to have met that requirement on that date if, and only if, the entity reasonably expects that the alternative reference rate will be separately identifiable within 24 months. The 24-month period applies to each alternative reference rate separately and begins on the date the entity designates the alternative reference rate as a risk portion of the non-contractually specified rate for the first time (i.e., the 24-month period applies on a rate-by-rate basis).

102Z2. If subsequently the entity has a reasonable expectation that the alternative reference rate will not be separately identifiable within 24 months from the date the entity designated it as a non-contractually specified risk portion initially, the entity must cease to apply the requirement of item 102Z1 for that alternative reference rate and discontinue hedge accounting prospectively from the date of that reassessment for all hedging relationships in which the alternative reference rate was designated as a non-contractually specified risk portion.

102Z3. In addition to those hedging relationships specified in item 102P, the entity must apply the requirements of items 102Z1 and 102Z2 to new hedging relationships in which an alternative reference rate is designated as a portion of non-contractually specified risk (see items 81 and AG99F) when, because of the interest rate benchmark reform, that risk portion is not identifiable

108G. The reform of the reference interest rate, which amended CPC 48, CPC 38 and CPC 40, added items 102A to 102N. The effective date of these amendments will be established by the regulatory bodies that approve them, and, in order to fully comply with international accounting standards, the entity must apply these amendments in annual periods beginning on or after 1 January 2020. The entity must apply these amendments retrospectively to hedging relationships that existed at the beginning of the reporting period in which the entity first applies these amendments or were designated subsequently, and to the gain or loss recognized in other comprehensive income that existed at the beginning of the reporting period in which the entity first applies these amendments.

108H. CPC 17 Revision, approved by the CPC on 8 January 2021, amended CPC 48, CPC 38, CPC 40, CPC 11 and CPC 06, added items 102O to 102Z3 and 108I to 108K, and amended item 102M. The effective date of this Revision will be established by the regulatory bodies that approve it, and for full compliance with international accounting standards, the entity must apply this revision for annual periods beginning on or after 1 January 2021. The entity must apply these amendments retrospectively in accordance with CPC 23, except as specified in items 108I to 108K.

108I. The entity must designate a new hedging relationship (for example, as described in item 102Z3) only prospectively (i.e., the entity is prohibited from designating a new relationship as hedge accounting in prior periods). However, the entity must reinstate a discontinued hedging relationship if, and only if, these conditions are met:
(a) the entity had discontinued that hedging relationship solely due to changes required by the interest rate benchmark reform and the entity would not have been required to discontinue that hedging relationship if those changes had been applied at that time; and (b) at the beginning of the reporting period in which the entity first applies these amendments (the initial application date of these amendments), that discontinued hedging relationship meets the qualification criteria for hedge accounting (after taking into account these amendments).

108J. If, in applying item 108I, the entity reinstates a discontinued hedging relationship, the entity must read the references in items 102Z1 and 102Z2 up to the date on which the alternative reference rate is designated as a contractually unspecified risk component for the first time as the initial application date of these amendments (i.e., the 24-month period for that alternative reference rate designated as a contractually unspecified risk component from the initial application date of the amendments).

108K. The entity is not required to restate prior periods to reflect the application of these amendments. The entity may restate prior periods if, and only if, it is possible without the use of hindsight. If the entity does not restate prior periods, the entity must

SECURITY AND EXCHANGE COMMISSION OF BRAZIL (CVM) Seven of September Street, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – ZIP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Cincinato Braga Street, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/ SP – ZIP: 01333-010 – Brazil - Tel.: (11) 2146-2000 recognize any difference between the carrying amount and the carrying amount at the beginning of the period that includes the initial application date of these amendments in retained earnings (or another component of equity, as appropriate) of the annual reporting period that includes the initial application date of these amendments.

APPENDIX A – APPLICATION GUIDE
This appendix is an integral part of Technical Pronouncement CPC 38.

Scope (items 2 to 7)

AG1. Some contracts require payment based on climatic, geological or other physical variables. (Contracts that are based on climatic variables are sometimes called “climate derivatives”). If these contracts are not within the scope of Technical Pronouncement CPC 11 – Insurance Contracts, they will be within the scope of this Pronouncement.

AG2. This Pronouncement does not change the requirements related to employee benefit plans that are in compliance with Technical Pronouncement CPC 33 – Employee Benefits and royalty agreements based on sales volume or service revenues that are accounted for under Technical Pronouncement 30 – Revenue.

AG3. Sometimes, the entity makes what it considers to be a “strategic investment” in equity instruments issued by another entity, with the intention of establishing or maintaining a long-term operational relationship with the entity in which the investment was made. The investing entity or joint investor must use Technical Pronouncement CPC 18 – Investment in Associate, Subsidiary and Jointly Controlled Entity to determine if the equity method is appropriate for this type of investment. If the equity method is not appropriate, the entity must apply this Technical Pronouncement to this strategic investment.

AG3A. This Pronouncement applies to financial assets and financial liabilities of insurers, and does not apply to rights and obligations that item 2(e) excludes, because they result from contracts specified within the scope of Technical Pronouncement CPC 11 – Insurance Contracts.

AG4. Financial guarantee contracts can take various legal forms, such as guarantees, some types of letters of credit, credit contracts that cover default risk or insurance contracts. The form of accounting treatment for them does not depend on their legal form. Below are some examples of appropriate accounting treatments (see item 2(e)):
(a) Although a financial guarantee contract meets the definition of an insurance contract in Technical Pronouncement CPC 11 – Insurance Contracts, if the risk transferred is significant, the issuer applies this Pronouncement. However, if the issuer has previously made an explicit statement that it considers these contracts as insurance contracts and has used the accounting applicable to insurance contracts, the issuer may decide to apply this Pronouncement or Technical Pronouncement CPC 11 – Insurance Contracts to these financial guarantee contracts. If this Pronouncement applies, item 43 requires the issuer to initially recognize the guarantee contract at fair value. If the financial guarantee contract was issued to an unrelated party in a standalone transaction in which there is no relationship between the parties, its fair value at inception will likely be equal to the premium received, unless there is evidence to prove otherwise. Subsequently, unless the financial guarantee contract was designated at inception at fair value through profit or loss or unless items 29 to 37 and AG47 to AG52 are applicable (when a transfer of a financial asset does not qualify for derecognition or when the continuing involvement approach is applied), the issuer measures it at the higher of the following amounts:
(i) the amount determined under Technical Pronouncement CPC 25 – Provisions, Contingent Liabilities and Contingent Assets; and (ii) the amount initially recognized less, when appropriate, cumulative amortization recognized in accordance with Technical Pronouncement CPC 30 – Revenue (see item 47(c)).
(b) As a precondition for payment, certain credit-related guarantees do not require the holder to be exposed or have incurred a loss related to the default of payment within the agreed terms by the debtor with respect to the guaranteed asset. An example of such a guarantee is one that requires payment in response to changes in specific credit ratings or credit indices. These guarantees are not financial guarantee contracts, as defined in this Pronouncement, nor insurance contracts, as specified in Technical Pronouncement CPC 11 – Insurance Contracts. These guarantees are derivatives to which the issuer applies this Pronouncement. (c) If a financial guarantee contract was issued in relation to the sale of goods, the issuer applies Technical Pronouncement CPC 30 – Revenue to determine the timing at which it recognizes revenue from the guarantee and the sale of goods.

AG4A. Information that an issuer considers contracts as insurance contracts is typically frequent throughout the issuer’s communications with clients and regulatory authorities, contracts, commercial documentation and financial statements. In addition, Insurance Contracts are mostly subject to accounting requirements distinct from those related to other types of transactions, such as contracts issued by banks or commercial companies. In these cases, the issuer’s financial statements normally include a statement that it respected such accounting requirements.

Definitions (items 8 and 9)

Measurement at fair value through profit or loss

AG4B. Item 9 of this Pronouncement allows the entity to designate a financial asset, a financial liability, or a group of financial instruments (financial assets, financial liabilities or both) at fair value through profit or loss provided that doing so results in more relevant information.

AG4C. The entity’s decision to designate a financial asset or financial liability at fair value through profit or loss is similar to the choice of accounting policy (although, unlike the choice of accounting policy, it is not required to be applied consistently to all similar transactions). When the entity has this type of choice, item 14(b) of Technical Pronouncement CPC 23 – Accounting Policies, Changes in Accounting Estimates and Errors requires that the chosen policy make the financial statements provide reliable and more relevant information about the effects of transactions, other events and conditions on the entity’s financial position, financial performance or cash flows. In the case of designation at fair value through profit or loss, item 9 establishes the two circumstances in which the requirement for more relevant information is satisfied. Thus, to choose this designation in accordance with item 9, the entity needs to demonstrate that it falls into one (or both) of these two circumstances.

Item 9(b)(i): The designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise.

AG4D. According to Technical Pronouncement CPC 38 – Financial Instruments: Recognition and Measurement, the measurement of a financial asset or financial liability and the classification of changes recognized in its value are determined by the classification of the item and by whether the item is part of a designated hedging relationship. These requirements can create an inconsistency in measurement or recognition (sometimes called “accounting inconsistency”) when, for example, in the absence of a designation at fair value through profit or loss, a financial asset is classified as available for sale (with most changes in fair value recognized as other comprehensive income) and a liability that the entity considers related is measured at amortized cost (with changes in fair value not recognized). In these circumstances, the entity may conclude that its financial statements could provide more relevant information if both the asset and the liability were classified at fair value through profit or loss.

AG4E. The examples below show when this condition would be satisfied. In all cases, the entity may use this condition to designate financial assets and financial liabilities at fair value through profit or loss only if it meets the principle stated in item 9(b)(i):
(a) the entity has liabilities whose cash flows are contractually based on the performance of assets that would otherwise be classified as available for sale. For example, an insurer may have liabilities containing a discretionary participation feature that pay benefits based on the realized and/or unrealized investment returns of a specified portfolio of the insurer’s assets. If the measurement of these liabilities reflects current market prices, classifying the assets at fair value through profit or loss means that changes in the fair value of financial assets are recognized in profit or loss in the same period as the related changes in the value of the liabilities; (b) the entity has liabilities under insurance contracts whose measurement incorporates current information (as permitted by Technical Pronouncement CPC 11 – Insurance Contracts, item 24) and financial assets that it considers related that would otherwise be classified as available for sale or measured at amortized cost; (c) the entity has financial assets, financial liabilities or both that share a risk, such as interest rate risk, which gives rise to opposite changes in fair value that tend to offset each other. However, only some of the instruments would be measured at fair value through profit or loss (i.e., they are derivatives or are classified as held for trading). It may also happen that the requirements for hedge accounting are not met, for example, due to the fact that the effectiveness requirements indicated in item 88 have not been met; (d) the entity has financial assets, financial liabilities or both that share a risk, such as interest rate risk, which gives rise to opposite changes in fair value that tend to offset each other and the entity does not qualify for hedge accounting, because none of the instruments is a derivative. Furthermore, in the absence of hedge accounting there is a significant inconsistency in the recognition of gains and losses. For example:
(i) the entity financed a portfolio of fixed-rate assets that would otherwise be classified as available for sale with fixed-rate bonds whose changes in fair value tend to offset each other. Reporting both the assets and the bonds at fair value through profit or loss corrects the inconsistency that would otherwise result from measuring the assets at fair value with changes recognized as other comprehensive income and the bonds at amortized cost; (ii) the entity financed a specific group of loans by issuing traded bonds whose changes in fair value tend to offset each other. If, in addition, the entity buys and sells the bonds regularly, more rarely, if ever, buys and sells loans, reporting both the loans and the bonds at fair value through profit or loss eliminates the inconsistency in the timing of recognition of gains and losses that would otherwise result from measuring both at amortized cost and recognizing a gain or loss whenever a bond is reacquired.

AG4F. In cases such as those described in the previous item, designating, at initial recognition, financial assets and financial liabilities that would otherwise not be measured at fair value through profit or loss may eliminate or significantly reduce the inconsistency in measurement or recognition and produce more relevant information. For practical purposes, the entity does not need to enter into all the assets and liabilities that give rise to measurement or recognition inconsistency exactly at the same time. A reasonable delay is permitted provided that each transaction is designated at fair value through profit or loss at its initial recognition and, at that time, the occurrence of any remaining transactions is expected.

AG4G. It would not be acceptable to designate only some financial assets or financial liabilities that give rise to inconsistency at fair value through profit or loss if this did not eliminate or significantly reduce the inconsistency and, therefore, did not result in more relevant information. However, it would be acceptable to designate only some similar financial assets or similar financial liabilities if this resulted in a significant reduction (and possibly a greater reduction than other permitted designations) in the inconsistency. For example, suppose the entity has some similar financial liabilities totaling $100 and some similar financial assets totaling $50, but they are measured on a different basis. The entity may significantly reduce the inconsistency in measurement by designating at initial recognition all assets, but only some liabilities (for example, individual liabilities with a combined total of $45) at fair value through profit or loss. However, because designation at fair value through profit or loss can only be applied to the entirety of a financial instrument, the entity in this example must designate one or more liabilities in their entirety. It cannot designate a component of a liability (for example, changes in value attributable to a single risk, such as changes in the reference interest rate) or a proportion (i.e., percentage) of a liability.

Item 9(b)(ii): A group of financial assets, financial liabilities or both is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy.

AG4H. The entity may manage and evaluate the performance of a group of financial assets, financial liabilities or both in such a way that the measurement of this group at fair value through profit or loss results in more relevant information. The focus in this example is on how the entity manages and evaluates performance and not on the nature of its financial instruments.

AG4I. The examples below show when this condition would be met. In all cases, the entity may use this condition to designate financial assets and financial liabilities at fair value through profit or loss only if it meets the principle stated in item 9(b)(ii):
(a) the entity is a venture capital organization, mutual fund, investment fund or similar entity whose activity consists of investing in financial assets with the objective of profiting from their total return in the form of interest or dividends and changes in fair value. Technical Pronouncement CPC 18 – Investment in Associate, Subsidiary and Jointly Controlled Entity allows these investments to be excluded from its scope provided they are measured at fair value through profit or loss, in accordance with this Technical Pronouncement. The entity may apply the same accounting policy to other investments managed on a total return basis, but in which its influence is insufficient for them to be within the scope of Technical Pronouncement CPC 18; (b) the entity has financial assets and financial liabilities that share one or more risks, and these risks are managed and evaluated on a fair value basis in accordance with a documented asset and liability management policy. An example may be an entity that has issued “structured products” containing several embedded derivatives and that manages the resulting risks on a fair value basis using a mix of derivative or non-derivative financial instruments. A similar example may be an entity that originates fixed-rate loans and manages the resulting reference interest rate risk using a mix of derivative and non-derivative financial instruments; (c) the entity is an insurer that holds a portfolio of financial assets, manages this portfolio

COMMISSION OF SECURITIES AND EXCHANGES
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 in order to maximize its total return (i.e., interest or dividends and changes in fair value) and evaluates its performance on this basis. The portfolio may be held to support specific liabilities, capital, or both. If the portfolio is held to support specific liabilities, the condition in item 9(b)(ii) may be met for the assets regardless of whether the insurer also manages and evaluates the liabilities on a fair value basis. The condition in item 9(b)(ii) may be met when the insurer's objective is to maximize total return on assets over the longer term, even if the amounts paid to holders of participating contracts depend on other factors, such as the amount of gains realized over a shorter period (for example, one year) or are subject to the insurer's discretion. AG4J. As indicated above, this condition depends on how the entity manages and evaluates the performance of the group of financial instruments in question. Thus, (subject to the requirement of designation at initial recognition) the entity that designates financial instruments at fair value through profit or loss on the basis of this condition must similarly designate all eligible financial instruments that are managed together. AG4K. The documentation of the entity's strategy need not be extensive, but must be sufficient to demonstrate compliance with item 9(b)(ii). This documentation is not required for each individual item, but may be done on a portfolio basis. For example, if the department's performance management system – as approved by key management personnel of the entity – clearly demonstrates that its performance is evaluated on a total return basis, no further documentation is required to demonstrate compliance with item 9(b)(ii). Effective interest rate AG5. In some cases, financial assets are acquired at a deep discount that reflects incurred credit losses. Entities include these incurred credit losses in the estimated cash flows when calculating the effective interest rate. AG6. When applying the effective interest method, the entity generally amortizes any fees, points paid or received, transaction costs and other premiums or discounts included in the calculation of the effective interest rate over the expected life of the instrument. However, a shorter period is used if this is the period to which the fees, points paid or received, transaction costs, premiums or discounts relate. This is the case when the variable with which the fees, points paid or received, transaction costs, premium or discounts relate is reset according to market rates before the expected maturity of the instrument. In this case, the appropriate amortization period is the period until the date of the next reset. For example, if a premium or discount
on a floating rate instrument reflects interest that has accrued on the instrument since the last interest payment, or changes in market rates since the floating interest rate was reset according to market rates, it is amortized until the date following when the interest rate is reset according to market rates. This is because the premium or discount relates to the period until the next interest rate reset date because, on that date, the variable to which the premium or discount relates (i.e., interest rates)

COMMISSION OF SECURITIES AND EXCHANGES
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 is reset according to market rates. If, however, the premium or discount results from a change in the credit spread over the floating rate specified in the instrument, or other variables that are not reset according to market rates, it is amortized over the expected life of the instrument. AG7. For floating rate financial assets and floating rate financial liabilities, the periodic reassessment of cash flows to reflect movements in market interest rates changes the effective interest rate. If a floating rate financial asset or a floating rate financial liability is initially recognized at an amount equal to the principal to be received or paid at maturity, the reassessment of future interest payments normally has no significant effect on the carrying amount of the asset or liability. AG8. If the entity revises its estimates of payments or receipts, it must adjust the carrying amount of the financial asset or financial liability (or group of financial instruments) to reflect the actual and revised estimated cash flows. The entity recalculates the carrying amount by calculating the present value of future estimated cash flows according to the original effective interest rate of the financial instrument. The adjustment is recognized as income or expense in the result. Derivatives AG9. Typical examples of derivatives are futures, forward, swap and option contracts. A derivative normally has a notional amount, which is an amount of currency, number of shares, number of units of weight or volume, or other units specified in the contract. However, a derivative instrument does not require the holder or writer to invest or receive the notional amount at the beginning of the contract. Alternatively, a derivative may require a fixed payment or the payment of an amount that may change (but not proportionally with the change in the underlying) as a result of some future event that is not related to the notional amount. For example, a contract may require a fixed payment of $ 1,000 if LIBOR in six months increases by 100 basis points. Such a contract is a derivative even if the notional amount is not specified. AG10. The definition of derivative in this Pronouncement includes contracts that are settled gross by delivery of the underlying item (for example, a forward contract to purchase a fixed rate debt instrument). The entity may have a purchase and sale contract of a non-financial item that can be settled in cash or another financial instrument or by exchange of financial instruments (for example, a contract to buy or sell merchandise at a fixed price on a future date). Such a contract is within the scope of this Pronouncement, unless it has been entered into and continues to be held with the purpose of
delivering a non-financial item in accordance with the expected purchase, sale or use requirements of the entity (see items 5 to 7). AG11. One of the characteristics that defines a derivative is that it has a lower initial net investment than would be required for other types of contracts that are expected to have a similar response to changes in market factors. An option contract satisfies the definition because

COMMISSION OF SECURITIES AND EXCHANGES
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 the premium is less than the investment that would be necessary to obtain the financial instrument underlying the option to which it is linked. A currency swap that requires the initial exchange of different currencies of equal fair value satisfies the definition because it has zero net initial investment. AG12. Regular purchase or sale gives rise to a fixed price commitment between the trade date and the settlement date that satisfies the definition of a derivative. However, due to the short duration of the commitment, it is not recognized as a derivative financial instrument. Instead, this Pronouncement provides special accounting for such regular contracts (see items 38 and AG53 to AG56). AG12A. The definition of derivative refers to non-financial variables that are not specific to a party to the contract. These include an earthquake loss index in a certain region and a temperature index in a certain city. Non-financial variables specific to a party to the contract include the occurrence or non-occurrence of a fire that damages or destroys an asset of a party to the contract. The change in fair value of a non-financial asset is specific to the owner if the fair value reflects not only changes in the market prices of these assets (financial variable), but also the condition of the specific non-financial asset held (non-financial variable). For example, if the residual value guarantee of a specific car exposes the guarantor to the risk of changes in the physical condition of the car, the change in residual value is specific to the owner of the car. Transaction costs AG13. Transaction costs include fees and commissions paid to agents (including employees who act as sales agents), consultants, brokers and dealers, fees charged by stock exchange regulatory agencies, and transfer taxes and fees. Transaction costs do not include premiums or discounts on debt, financing costs or internal administrative or maintenance costs of assets. Financial assets and liabilities held for trading AG14. Trading normally reflects active and frequent purchase and sale, and financial instruments held for trading are generally used with the objective of generating profit from short-term price or dealer margin fluctuations. AG15. Financial liabilities held for trading include:
(a) derivative liabilities that are not accounted for as hedge instruments; (b) obligations to deliver financial assets borrowed by a short seller (i.e., the entity that sells financial assets it obtained by borrowing and does not yet own); (c) financial liabilities that are incurred with the intention of repurchasing them in the near future (for example, a quoted debt instrument that the issuer may repurchase in the short term depending on changes in its fair value); and (d) financial liabilities that are part of a portfolio of financial instruments identified that

COMMISSION OF SECURITIES AND EXCHANGES
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 are managed together and for which there is evidence of a recent pattern of taking short-term profits.
The fact that a liability is used to finance trading activities does not make it, in itself, a liability held for trading.
Held-to-maturity investments
AG16. The entity does not have a positive intention to hold an investment to maturity in a fixed- maturity financial asset if:
(a) the entity intends to hold the financial asset for an indefinite period; (b) the entity is ready to sell the financial asset (except if a non-recurring situation arises and that could not have been reasonably foreseen by the entity) in response to changes in market interest rates or risks, liquidity needs, changes in availability and yield of alternative investments, changes in sources and conditions of financing or changes in exchange rate risk; or (c) the issuer has the right to settle the financial asset at an amount significantly below its amortized cost. AG17. A debt instrument with a variable interest rate may meet the held-to-maturity investment criteria. Equity instruments cannot be held-to-maturity investments because they have an indefinite life (as in the case of ordinary shares) or because the amounts the holder may receive may vary in a way that is not predetermined (as in the case of stock options, bonds and similar rights). With respect to the definition of held-to-maturity investments, fixed or determinable payments and fixed maturity mean that a contractual agreement defines the amounts and dates of payment to the holder, such as principal and interest payments. A significant risk of non-payment does not exclude the classification of a financial asset as held-to-maturity provided that its contractual payments are fixed or determinable and the other criteria for this classification are met. If the terms of a perpetual debt instrument allow interest payments during an indefinite period, the instrument cannot be classified as held-to-maturity because there is no maturity date. AG18. The classification criteria as a held-to-maturity investment are met for a financial asset that is redeemable by the issuer if the holder has the intention and is in a position to hold it until it is redeemed or until maturity and if the holder can recover substantially all of its carrying amount. The issuer's call option, if exercised, merely accelerates the maturity of the asset. However, if the financial asset is redeemable on a basis that would result in the holder not recovering substantially all of its carrying amount, the financial asset cannot be classified as a held-to-maturity investment. The entity considers any premium paid and transaction costs capitalized in determining whether the carrying amount would or would not be substantially recovered.

COMMISSION OF SECURITIES AND EXCHANGES
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 AG19. A financial asset that is puttable (i.e., the holder has the right to require the issuer to reimburse or redeem the financial asset before maturity) cannot be classified as a held-to-maturity investment because the put option feature payment on a financial asset is inconsistent with the expression of intent to hold the financial asset until maturity. AG20. For most financial assets, fair value is a more appropriate measure than amortized cost. The held-to-maturity classification is an exception, but only if the entity has a positive intention and ability to hold the investment until maturity. When the entity's actions cast doubt on its intention and ability to hold such investments until maturity, item 9 excludes the use of the exception for a reasonable period. AG21. A disaster scenario that is only remotely possible, such as a bank run or a similar situation affecting an insurance company, is not something that is evaluated by an entity when deciding whether it has or does not have a positive intention and ability to hold an investment until maturity. AG22. Sales before maturity may meet the condition of item 9 – and, therefore, not raise doubts about the entity's intention to hold other investments until maturity – if they are attributable to any of the following situations:
(a) significant deterioration in the credit rating of the issuer. For example, a sale followed by a drop in credit assessment by an external rating agency would not necessarily raise doubts about the entity's intention to hold other investments until maturity if the drop provides evidence of significant deterioration in the credit quality of the issuer judged with reference to the credit rate at initial recognition. Similarly, if the entity uses internal assessments to evaluate exposures, changes in these internal assessments may help identify issuers for which there has been significant deterioration in their credit rating, provided that the entity's approach to assigning internal assessments and changes in these assessments provide a consistent, reliable and objective measure of the credit quality of issuers. If there is evidence that a financial asset is under impairment loss for recoverable assets (see items 58 and 59), deterioration in credit quality is often considered significant; (b) change in tax law that eliminates or significantly reduces the tax-exempt status of interest on the held-to-maturity investment (but not a change in tax law that revises the applicable marginal tax rates on interest income); (c) a significant business combination or significant disposal (such as the sale of a segment) that requires the sale or transfer of held-to-maturity investments to maintain the entity's existing interest rate risk position or credit risk policy (although the concentration of business activities is an event under the entity's control, changes in the investment portfolio to maintain the interest rate risk position or credit risk policy may be a consequence rather than foreseen); (d) change in statutory or regulatory requirements that substantially modifies what

COMMISSION OF SECURITIES AND EXCHANGES
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 constitutes a permissible investment or the maximum level of specific types of investment, causing the entity to have to dispose of a held-to-maturity investment; (e) significant increase in essential sector regulatory capital requirements leading to the entity reducing its assets by selling held-to-maturity investments; (f) significant increase in the risk weights of held-to-maturity investments used to determine regulatory capital based on risk. AG23. The entity does not have demonstrated ability to hold an investment to maturity in a fixed- maturity financial asset if:
(a) it does not have the financial resources available to continue to finance the investment until maturity; or (b) it is subject to an existing legal or other restriction that may frustrate its intention to hold the financial asset until maturity. (However, the issuer's call option does not necessarily frustrate the entity's intention to hold a financial asset until maturity – see item AG18). AG24. Other circumstances other than those described in items AG16 to AG23 may indicate that the entity does not have a positive intention or ability to hold an investment to maturity. AG25. The entity assesses its intention and ability to hold its held-to-maturity investments not only when these financial assets are initially recognized, but also at each date of preparation of the financial statements. Loans and receivables AG26. Any non-derivative financial asset with fixed or determinable payments (including loan assets, trade receivables, investments in debt instruments and deposits held in bank) may potentially meet the definition of loans and receivables. However, a financial asset that is quoted in an active market (such as a quoted debt instrument; see item AG71) does not qualify for classification as loans or receivables. Financial assets that do not meet the definition of loans and receivables may be classified as held-to-maturity investments if they meet the conditions for this classification (see items 9 and AG16 to AG25). At initial recognition of a financial asset that would otherwise be classified as loans and receivables, the entity may designate it as a financial asset at fair value through profit or loss, or as available for sale. Embedded derivatives (items 10 to 13) AG27. If a host contract has no explicit or predetermined maturity and represents a residual interest in the net assets of an entity, then its characteristics and risks economic are those of an equity instrument, and an embedded derivative would have to possess equity-related characteristics related to the same entity to be considered closely

AG28. An embedded derivative without an option feature (such as an embedded forward or swap contract) is separated from its host contract according to its express or implied substantive terms, so that it has a fair value of zero at initial recognition. The embedded option-based derivative (such as an embedded call option, cap, floor, or swap) is separated from its host contract according to the terms expressed in the option feature. The initial book value of the host instrument is the residual amount after separating the embedded derivative.

AG29. Normally, several embedded derivatives in a single instrument are treated as a single embedded composite derivative. However, embedded derivatives that are classified as equity instruments (see Technical Pronouncement CPC 39 – Financial Instruments: Presentation) are accounted for separately from those classified as assets or liabilities. Furthermore, if an instrument has more than one embedded derivative and these derivatives relate to different risk exposures and are easily separable and independent of each other, they are accounted for separately from each other.

AG30. The economic characteristics and risks of an embedded derivative are not closely related to the contract that hosts it (paragraph 11(a)) in the following examples. In these examples, assuming that the conditions of paragraphs 11(b) and (c) are met, the entity accounts for the embedded derivative separately from the hosting contract:
(a) a put option embedded in an instrument that allows the holder to require the issuer to repurchase the instrument for cash or other assets, which varies according to changes in the price or index of equity or commodities, is not closely related to the host debt instrument; (b) a call option embedded in an equity instrument that allows the issuer to repurchase that equity instrument at a specified price is not closely related to the host equity instrument from the holder's perspective (from the issuer's perspective, the call option is a own equity instrument, provided it meets the conditions for such classification under Technical Pronouncement CPC 39 – Financial Instruments: Presentation, in which case it is excluded from the scope of this Pronouncement); (c) an option or an automatic provision to extend the remaining maturity of a debt instrument is not closely related to the host debt instrument unless there is a simultaneous adjustment to the approximate current market interest rate at the time of the extension. If the entity issues a debt instrument and the holder of that debt instrument sells a call option on the debt instrument to a third party, the issuer considers that call option as extending the maturity of the debt instrument, provided that it is possible to require the issuer to participate in or facilitate the re-marketing of the debt instrument as a result of the exercise

COMMISSION OF SECURITIES AND EXCHANGES
7 de Setembro Street, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – ZIP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Cincinato Braga Street, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/ SP – ZIP: 01333-010 – Brazil - Tel.: (11) 2146-2000 of the call option; (d) interest payments indexed to equity instruments or own equity embedded in a host debt instrument or in an insurance contract - whereby the amount of interest or principal is indexed to the value of equity instruments - are not closely related to the host instrument because the risks inherent in the host contract and the embedded derivative are not similar; (e) interest or principal payments indexed to commodities embedded in a host debt instrument or in an insurance contract - whereby the amount of interest or principal is indexed to the price of a commodity (such as gold) - are not closely related to the host instrument because the risks inherent in the host contract and the embedded derivative are not similar; (f) a conversion feature embedded in a convertible debt instrument is not closely related to the host debt instrument from the perspective of the instrument holder (from the issuer's perspective, the equity conversion option is an equity instrument and is excluded from the scope of this Pronouncement, provided it meets the conditions for such classification under Technical Pronouncement CPC 39 – Financial Instruments: Presentation); (g) a call option, a put option, or an embedded prepayment option in a debt or insurance contract is not closely related to the contract unless:
(i) the exercise price of the option is approximately equal at each exercise date to the amortized cost of the debt instrument or to the historical cost of the insurance contract; or (ii) the exercise price of the prepayment option reimburses the lender for an amount approximately equal to the present value of the interest lost over the remaining term of the contract. Lost interest corresponds to the product of the principal amount prepaid multiplied by the interest rate differential. The interest rate differential is the excess of the effective interest rate of the contract hosting the embedded derivative over the effective rate that the entity would receive on the prepayment date if the principal prepaid were reinvested for the remaining term of the contract. The assessment of whether a call or put option is closely related to the contract hosting it is made before the separation of the equity element of the convertible debt instrument from debt according to Technical Pronouncement CPC 39 – Financial Instruments: Presentation; (h) credit derivatives embedded in a host debt instrument that allow a party (beneficiary) to transfer the credit risk of a particular reference asset, which it may not own, to another party (guarantor) are not closely related to the host debt instrument. These credit derivatives allow the guarantor to assume the credit risk associated with the reference asset without owning it directly.

AG31. An example of a hybrid instrument is a financial instrument that gives the holder the right to return the financial instrument to the issuer in exchange for cash or other financial assets and that varies according to changes in an equity or commodity index that may increase or decrease (redeemable instrument). Unless the issuer designates the redeemable instrument as a financial liability at fair value through profit or loss at initial recognition, it is required to separate an embedded derivative (i.e., the indexed principal payment) according to paragraph 11, because the host contract is a debt instrument according to paragraph AG27 and the indexed principal payment is not closely related to the host debt instrument according to paragraph AG30(a). Since the principal payment can increase or decrease, the embedded derivative is a derivative without an option feature whose value is indexed to the underlying variable.

AG32. In the case of a redeemable instrument that can be returned at any time in exchange for cash equivalent to a proportional part of the net asset value of the entity (such as open-end mutual fund units or some investment products associated with units), the separation of the embedded derivative and the accounting for each element has the effect of measuring the combined instrument by the reimbursement amount that would be due on the date of preparation of the financial statements if the holder exercised its right to return the instrument to the issuer.

AG33. The economic characteristics and risks of an embedded derivative are closely related to the economic characteristics and risks of the host contract in the following examples. In these examples, the entity does not account for the embedded derivative separately from the host contract:
(a) an embedded derivative, where the underlying is an interest rate or index of interest rates that can change the amount of interest that would otherwise be paid or received according to a host debt contract that becomes interest or an insurance contract, is closely related to the host contract, unless the combined contract can be settled in such a way that the holder does not recover substantially all of its recognized investment or that the embedded derivative can at least double the holder's initial return rate according to the host contract, and can result in a return rate that is at least double what the market return would be for a contract with the same terms as the host contract; (b) a floor or cap embedded in the interest rate of a debt contract or insurance contract is closely related to the host contract, provided that the cap is at the market interest rate level or above it and the floor is at the market interest rate level or below it when the contract is issued, and the cap or floor is not leveraged relative to the host contract. Similarly, provisions included in an asset purchase and sale contract (e.g., commodity) that establish a cap and a floor on the price to be paid or received for the asset are closely related to the host contract if both the “cap” and the “floor” are “out of the money” at the beginning and are not leveraged; (c) an embedded foreign currency derivative that provides a flow of interest or principal payments denominated in foreign currency and is embedded in a host debt instrument (e.g., a dual-currency bond) is closely related to the host debt instrument. This derivative is not separated from the host instrument because Technical Pronouncement CPC 02 – Effects of Changes in Exchange Rates and Translation of Financial Statements requires that gains and losses in foreign currency on monetary items be recognized in profit or loss; (d) an embedded foreign currency derivative of a contract that is an insurance contract and not an instrument (such as a contract to purchase and sell a non-financial item where the price is denominated in foreign currency), is closely related to the host contract provided it is not leveraged, does not contain an option feature, and requires payments denominated in one of the following currencies:
(i) the functional currency of any of the substantial parties to this contract; (ii) the currency in which the price of the acquired good or service rendered is normally denominated in commercial transactions worldwide (such as, for example, the United States dollar for oil transactions); or (iii) a currency that is normally used in contracts to purchase or sell non-financial items in the economic environment in which the transaction takes place (e.g., a relatively stable and liquid currency that is normally used in local commercial transactions or external negotiations); (e) a prepayment option embedded in a strip of only interest or only principal is closely related to the host contract, provided that the host contract (i) initially resulted from the separation of the right to receive contractual cash flows from a financial instrument that, by itself, did not contain an embedded derivative, and that (ii) does not contain any term not present in the original host debt contract; (f) an embedded derivative in a host lease contract is closely related to the host contract if the embedded derivative is (i) an index related to inflation, such as a lease payment index to a consumer price index (provided that the lease is not leveraged and the index relates to inflation in the entity's own economic environment), (ii) contingent rentals based on related sales, or (iii) contingent rentals based on variable interest rates; (g) a unit-linking feature embedded in a host financial instrument or in a host insurance contract is closely related to the host instrument or host contract if the unit-denominated payments are measured by current unit values that reflect the fair values of the fund's assets. A unit-linking feature is the contractual term that requires payments denominated in units of an internal or external investment fund; (h) an embedded derivative in an insurance contract is closely related to the host insurance contract if the embedded derivative and the host insurance contract are so interdependent that the entity cannot measure the embedded derivative separately (i.e., without considering the host contract).

Instruments containing embedded derivatives

AG33A. When the entity becomes a party to a hybrid (combined) instrument containing one or more embedded derivatives, paragraph 11 requires the entity to identify these embedded derivatives, evaluate whether they should be separated from the host contract, and, in the case of those for which this separation is required, measure the derivatives at fair value at initial recognition and subsequently. These requirements may be more complex, or result in less reliable measurements, than measuring the entire instrument at fair value through profit or loss. For this reason, this Pronouncement allows the entire instrument to be designated at fair value through profit or loss.

AG33B. This designation may be used whether paragraph 11 requires embedded derivatives to be separated from the host contract or prohibits such separation. However, paragraph 11A would not justify the designation of the hybrid (combined) instrument at fair value through profit or loss in the cases explained in paragraph 11A(a) and (b) because doing so would not reduce complexity nor increase reliability.

Recognition and derecognition (paragraphs 14 to 42)

Initial recognition (paragraph 14)

AG34. As a consequence of the principle stated in paragraph 14, the entity recognizes all its contractual rights and obligations under derivatives in its financial statements as assets and liabilities, respectively, except in the case of derivatives that prevent the transfer of financial assets from being accounted for as a sale (see paragraph AG49). If the transfer of a financial asset does not qualify for derecognition, the recipient of the transfer does not recognize the transferred asset as its asset (see paragraph AG50).

AG35. The following are examples of the application of the principle in paragraph 14:
(a) unconditional accounts receivable and accounts payable are recognized as assets or liabilities when the entity becomes a party to the contract and, as a consequence, has the legal right to receive or the legal obligation to pay in cash; (b) assets to be acquired and liabilities to be incurred as a result of a firm commitment to buy or sell goods or services are generally not recognized until at least one of the parties has acted according to the agreement. For example, the entity receiving a firm order from a customer generally does not recognize an asset (and the entity placing the order does not recognize a liability) at the time of the commitment, but instead delays recognition until the ordered goods or services have been shipped, delivered, or rendered. If a firm commitment to buy or sell non-financial items is within the scope of this Pronouncement according to paragraphs 5 to 7, its fair value is recognized as an asset or liability on the date of the commitment (see paragraph (c) below). Furthermore, if a previously unrecognized firm commitment is designated as a hedged item in a fair value hedge, any change in net fair value attributable to the hedged risk is recognized as an asset or liability after the inception of the hedge (see paragraphs 93 and 94);

Derecognition of financial asset (paragraphs 15 to 37)

AG36. The following flowchart illustrates the assessment of whether and to what extent a financial instrument is derecognized.

[Flowchart Text Representation]

Step 1: Consolidate all subsidiaries. (Paragraph 15) Step 2: Determine if derecognition criteria will be applied to a part of the asset or the whole asset. (Paragraph 16) Step 3: Have the entity's rights to receive cash flows from the asset expired? (Paragraph 17(a))

No: Continue recognizing the asset.
Yes: Has the entity transferred its rights to receive cash flows from the asset? (Paragraph 18(a))
- No: Has the entity assumed an obligation to pay the cash flows from the asset? (Paragraph 18(b))
  - No: Has the entity transferred substantially all risks and benefits of ownership of the asset? (Paragraph 20(a))
    - No: Has the entity retained substantially all risks and benefits of ownership of the asset? (Paragraph 20(b))
      - No: Has the entity retained control of the asset? (Paragraph 20(c))
        
        No: Derecognize the asset.
        
        Yes: Continue recognizing the asset to the extent of the entity's involvement in its control.
      - Yes: Continue recognizing the asset.
    - Yes: Derecognize the asset.
  - Yes: Continue recognizing the asset.
- Yes: Has the entity assumed an obligation to pay the cash flows from the asset? (Paragraph 18(b))
  - No: Has the entity transferred substantially all risks and benefits of ownership of the asset? (Paragraph 20(a))
    - No: Has the entity retained substantially all risks and benefits of ownership of the asset? (Paragraph 20(b))
      - No: Has the entity retained control of the asset? (Paragraph 20(c))
        
        No: Derecognize the asset.
        
        Yes: Continue recognizing the asset to the extent of the entity's involvement in its control.
      - Yes: Continue recognizing the asset.
    - Yes: Derecognize the asset.
  - Yes: Continue recognizing the asset.
    Step 4: (Implicitly covered by the flow logic above) Step 5: (Implicitly covered by the flow logic above) Step 6: (Implicitly covered by the flow logic above)

Agreements under which the entity retains the contractual rights to receive cash flows from a financial asset, but assumes a contractual obligation to pay the cash flows to one or more recipients (paragraphs 18(b)).

AG37. The situation described in paragraph 18(b) (when the entity retains the contractual rights to receive cash flows from a financial asset, but assumes a contractual obligation to pay the cash flows to one or more recipients) occurs, for example, if the entity is a trustee and issues beneficial interests to investors in the underlying financial assets it owns and provides the servicing of those financial assets. In this case, the financial assets qualify for derecognition if the conditions of paragraphs 19 and 20 are met.

AG38. In applying paragraph 19, the entity may be, for example, the originator of the financial asset, or it may be a group that includes a subsidiary that has acquired the financial asset and passes cash flows to third-party unrelated investors.

Assessment of the transfer of ownership risks and benefits (paragraph 20)

AG39. Examples of when the entity has transferred substantially all risks and benefits of ownership are:
(a) unconditional sale of a financial asset;
(b) sale of a financial asset together with an option to repurchase the financial asset at its fair value at the time of repurchase; (c) sale of a financial asset together with a put or call option that is deeply “out of the money” (i.e., an option that is so “out of the money” that it is highly unlikely to become in the money before expiration).

AG40. Examples of when the entity has retained substantially all risks and benefits of ownership are:
(a) a sale and repurchase transaction where the repurchase price is a fixed price or the selling price plus a lender’s return; (b) a securities lending agreement; (c) sale of a financial asset together with a total return swap that transfers the market risk exposure back to the entity; (d) sale of a financial asset together with a put or call option that is deeply “in the money” (i.e., an option that is so “in the money” that it is highly unlikely to become “out of the money” before expiration); and (e) sale of short-term accounts receivable where the entity guarantees to compensate the recipient of the transfer for credit losses that are likely to occur.

AG41. If the entity determines that, as a result of the transfer, it has transferred substantially all the risks and rewards of ownership of the transferred asset, it does not recognize the transferred asset in future periods, unless it reacquires the transferred asset in a new transaction.

Assessment of the transfer of control

AG42. The entity does not retain control of a transferred asset if the transferee has the practical ability to sell the transferred asset. The entity retains control of a transferred asset if the transferee does not have the practical ability to sell the transferred asset.

The transferee has the practical ability to sell the transferred asset if it is traded in an active market because the transferee could repurchase the transferred asset in the market if it needs to return the asset to the entity. For example, the transferee may have the practical ability to sell a transferred asset if the transferred asset is subject to an option that allows the entity to repurchase it, but the transferee can obtain the transferred asset immediately in the market if the option is exercised.

The transferee does not have the practical ability to sell the transferred asset if the entity retains such an option and the transferee cannot obtain the transferred asset immediately in the market if the entity exercises its option.

AG43. The transferee has the practical ability to sell the transferred asset only if it can sell the transferred asset in its entirety to an unrelated third party and is able to exercise that ability unilaterally and without imposing additional restrictions on the transfer. The critical issue is what the transferee is capable of doing in practice, not what contractual rights it has regarding what it can do with the transferred asset or what contractual prohibitions exist. In particular:

(a) a contractual right to dispose of the transferred asset has little practical effect if there is no market for the transferred asset; and

(b) the ability to dispose of the transferred asset has little practical effect if it cannot be exercised freely. For this reason:

(i) the transferee's ability to dispose of the transferred asset must be independent of the actions of others (i.e., it must have unilateral capacity); and

(ii) the transferee must be able to dispose of the transferred asset without needing to attach restrictive conditions or "caveats" to the transfer (for example, conditions regarding the servicing of the loaned asset or an option granting the transferee the right to repurchase the asset).

AG44. The fact that the transferee is unlikely to sell the transferred asset does not, in itself, mean that the transferor has retained control of the transferred asset. However, if the put option or guarantee prevents the transferee from selling the transferred asset, then the transferor has retained control of the transferred asset. For example, if the put option or guarantee is sufficiently valuable, it prevents the transferee from selling the transferred asset because it would not, in practice, sell the transferred asset to a third party without attaching a similar option or other restrictive conditions. Instead, the transferee would hold the transferred asset in order to obtain payments under the guarantee or put option. In these circumstances, the transferor has retained control of the transferred asset.

Transfers qualifying for derecognition

AG45. The entity may retain the right to a portion of interest payments on the transferred assets as remuneration for servicing these assets. The portion of interest payments that the entity would give up upon termination or transfer of the servicing contract is allocated to the servicing asset or servicing liability. The portion of interest payments that the entity would not give up is a stand-alone strip of interest receivable. For example, if the entity did not give up any interest upon cessation or transfer of the servicing contract, the total interest spread is a stand-alone strip of interest receivable.

To apply item 27, the fair values of the servicing asset and the stand-alone strip of interest receivable are used to allocate the carrying amount of the receivable between the part of the asset that is not recognized and the part that continues to be recognized. If there is no specified servicing fee or if the expected receivable fee does not adequately compensate the entity for servicing, a liability for the servicing obligation is recognized at fair value.

AG46. When measuring the fair values of the part that continues to be recognized and the part that is not recognized to apply item 27, the entity must apply the fair value measurement requirements set forth in Technical Pronouncement CPC 46, in addition to item 28.

Transfers not qualifying for derecognition

AG47. The principle outlined in item 29 follows. If the guarantee provided by the entity for losses from default on the transferred asset prevents the transferred asset from being derecognized because the entity has retained substantially all the risks and rewards of ownership of the transferred asset, the transferred asset continues to be recognized in its entirety and the consideration received is recognized as a liability.

Continued involvement in transferred asset

AG48. The following are examples of how the entity measures a transferred asset and the associated liability under item 30.

All assets

(a) If a guarantee provided by the entity to pay losses from default on a transferred asset prevents it from being derecognized to the extent of continued involvement, the transferred asset at the date of transfer is measured at the lower of (i) the carrying amount of the asset and (ii) the maximum amount of consideration received for the transfer that the entity could be required to reimburse ("the guarantee amount"). The associated liability is initially measured at the guarantee amount plus the fair value of the guarantee (which normally corresponds to the consideration received for the guarantee). Subsequently, the initial fair value of the guarantee is recognized in profit or loss on a straight-line basis (see Technical Pronouncement CPC 30 - Revenue) and the carrying amount of the asset is reduced by any losses in recoverable value.

Assets measured at amortized cost

(b) If a put option written by the entity or a call option retained by the entity prevents a transferred asset from being derecognized and the entity measures the transferred asset at amortized cost, the associated liability is measured at its cost (i.e., the consideration received) adjusted for the amortization of any difference between that cost and the amortized cost of the financial asset at the option expiration date. For example, assume that the amortized cost and carrying amount of the asset at the date of transfer is $98 and that the consideration received is $95. The amortized cost of the asset at the option exercise date will be $100. The initial carrying amount of the associated liability is $95 and the difference between $95 and $100 is recognized in profit or loss using the effective interest method. If the option is exercised, any difference between the carrying amount of the associated liability and the exercise price is recognized in profit or loss.

Assets measured at fair value

(c) If a right arising from a call option retained by the entity prevents a transferred asset from being derecognized and the entity measures the transferred asset at fair value, the asset continues to be measured at its fair value. The associated liability is measured (i) at the exercise price of the option minus the time value of the option if the option is in the money, or (ii) at the fair value of the transferred asset minus the time value of the option if the option is out of the money. The adjustment and measurement of the associated liability ensure that the net carrying amount of the asset and the associated liability is the fair value of the call option right. For example, if the fair value of the underlying asset is $80, the exercise price of the option is $95 and the time value of the option is $5, the carrying amount of the associated liability is $75 ($80 - $5) and the carrying amount of the transferred asset is $80 (i.e., its fair value).

(d) If a put option written by the entity prevents a transferred asset from being derecognized and the entity measures the transferred asset at fair value, the associated liability is measured at the exercise price of the option plus the time value of the option. The measurement of the asset at fair value is limited to the lower of the fair value and the exercise price of the option because the entity does not have the right to increase the fair value of the transferred asset above the exercise price of the option. This ensures that the net carrying amount of the asset and the associated liability is the fair value of the put option obligation. For example, if the fair value of the underlying asset is $120, the exercise price of the option is $100 and the time value of the option is $5, the carrying amount of the associated liability is $105 ($100 + $5) and the carrying amount of the transferred asset is $100 (in this case, the exercise price of the option).

(e) If a collar, in the form of a purchased call option and a written put option, prevents a transferred asset from being derecognized and the entity measures the asset at fair value, it continues to measure the asset at fair value. The associated liability is measured (i) at the sum of the exercise price of the call, the fair value of the put option minus the time value of the call option, if the call option is "in the money" or "at the money", or (ii) at the sum of the fair value of the asset and the fair value of the put option minus the time value of the call option if the call option is out of the money. The adjustment to the associated liability ensures that the net carrying amount of the asset and the associated liability is the fair value of the options held and written by the entity. For example, if the entity transfers a financial asset that is measured at fair value at the same time it purchases a call option with an exercise price of $120 and writes a put option with an exercise price of $80. Assume also that the fair value of the asset is $100 at the date of transfer. The time values of the put option and the call option are $1 and $5, respectively. In this case, the entity recognizes an asset of $100 (the fair value of the asset) and a liability of $96 [($100 + $1) - $5]. This gives a net asset value of $4, which is the fair value of the options held and written by the entity.

All transfers

AG49. To the extent that a transfer of a financial asset does not qualify for derecognition, the contractual rights or obligations of the transferor related to the transfer are not accounted for separately as derivatives if the recognition of both the derivative and the transferred asset or the liability arising from the transfer would result in the recognition of the same rights or obligations twice. For example, a call option retained by the transferor may prevent the transfer of financial assets from being accounted for as a sale. In this case, the call option is not recognized separately as a derivative asset.

AG50. To the extent that a transfer of a financial asset does not qualify for derecognition, the transferee does not recognize the transferred asset as its asset. It derecognizes the cash or other consideration paid and recognizes a receivable from the transferor. If the transferor has both the cash and the obligation to reacquire control of the entire transferred asset for a fixed amount (for example, under a repurchase agreement), the transferee may account for its receivable as a loan or receivable.

Examples

AG51. The following examples illustrate the application of the derecognition principles of this Technical Pronouncement.

(a) repurchase agreements and securities lending. If a financial asset is sold under a repurchase agreement at a fixed price or at the selling price plus the lender's return, or if it is lent under a return agreement to the transferor, it is not derecognized because the transferor retains substantially all the risks and rewards of ownership. If the transferee obtains the right to sell or pledge the asset, the transferor reclassifies the asset in its general balance sheet, for example, as a loaned asset or repurchase receivable;

(b) repurchase agreements and securities lending - assets that are substantially the same. If a financial asset is sold under a repurchase agreement for the same or substantially the same asset at a fixed price or at the selling price plus the seller's return, or if a financial asset is borrowed or lent under a return agreement for the same or substantially the same asset to the transferor, it is not derecognized because the transferor retains substantially all the risks and rewards of ownership;

(c) repurchase agreements and securities lending - right of substitution. If a repurchase agreement at a fixed repurchase price or at a price equal to the selling price plus the seller's return, or a similar securities lending transaction, provides the transferee with the right to substitute assets that are similar to the transferred asset and have a fair value equal to it at the repurchase date, the asset sold or lent under the repurchase or securities lending transaction is not derecognized because the transferor retains substantially all the risks and rewards of ownership;

(d) fair value first refusal right to repurchase. If the entity sells a financial asset and retains only the right of first refusal to repurchase the transferred asset at fair value if the transferee sells it subsequently, the entity derecognizes the asset because it has transferred substantially all the risks and rewards of ownership;

(e) wash sale transaction. The repurchase of a financial asset shortly after it has been sold is sometimes called a wash sale. Such a repurchase does not preclude derecognition provided the original transaction meets the derecognition requirements. However, if an agreement to sell a financial asset is entered into simultaneously with an agreement to repurchase the same asset at a fixed price or at the selling price plus the lender's return, then the asset is not derecognized;

(f) put options and call options that are deeply in the money. If a transferred financial asset can be received back by the transferor and the call option is deeply in the money, the transfer does not qualify for derecognition because the transferor has retained substantially all the risks and rewards of ownership. Similarly, if the financial asset can be delivered by the transferee and the put option is deeply "in the money", the transfer does not qualify for derecognition because the transferor has retained substantially all the risks and rewards of ownership;

(g) put options and call options that are deeply "out of the money". A financial asset that is transferred subject only to a put option deeply out of the money held by the transferee or a call option deeply "out of the money" held by the transferor is derecognized. This is because the transferor has transferred substantially all the risks and rewards of ownership;

(h) readily available asset subject to a call option that is not deeply "in the money" nor deeply "out of the money". If the entity retains a call option on an asset that can be readily obtained in the market and the option is not deeply in the money nor deeply "out of the money", the asset is derecognized. This is because the entity (i) has not retained nor transferred substantially all the risks and rewards of ownership, and (ii) has not retained control. However, if the asset cannot be readily obtained in the market, derecognition is excluded to the extent of the amount of the asset that is subject to the call option because the entity has retained control of the asset;

(i) a non-readily available asset subject to a put option written by the entity that is not deeply "in the money" nor deeply "out of the money". If the entity transfers a financial asset that is not readily available in the market and writes a put option that is not deeply out of the money, the entity does not retain nor transfer substantially all the risks and rewards of ownership due to the written put option. The entity retains control of the asset if the put option is sufficiently valuable to prevent the transferee from selling the asset, in which case the asset continues to be recognized to the extent of the continued involvement of the transferor (see item AG44). The entity transfers control of the asset if the put option is not sufficiently valuable to prevent the transferee from selling the asset, in which case the asset is derecognized;

(j) asset subject to a put or call option at fair value or to a forward repurchase agreement. The transfer of a financial asset that is only subject to a put or call option or to a forward repurchase agreement with an exercise or repurchase price equal to the fair value of the financial asset at the time of repurchase results in derecognition due to the transfer of substantially all the risks and rewards of ownership;

(k) cash-settled put or call options. The entity assesses the transfer of a financial asset that is subject to a put or call option or to a forward repurchase agreement that is settled for net cash to determine whether it has retained or transferred substantially all the risks and rewards of ownership. If the entity has not retained substantially all the risks and rewards of ownership of the transferred asset, it determines whether it has retained control of the transferred asset. That the put or call option or the forward repurchase agreement is settled for net cash does not automatically mean that the entity has transferred control (see item AG44 and paragraphs (g), (h) and (i) above);

(l) clean-up call. The clean-up call is an unconditional call option (call option) to repurchase that gives the entity the right to claim transferred assets subject to some restrictions. Provided that this option results in the entity not retaining nor transferring substantially all the risks and rewards of ownership, it excludes derecognition only to the extent of the amount subject to repurchase (assuming that the transferee cannot sell the assets). For example, if the carrying amount and proceeds from the transfer of loan assets is $100,000 and any individual loan can be received back, but the aggregate amount of loans that could be repurchased could not exceed $10,000, $90,000 of the loans would qualify for derecognition;

(m) clean-up call option. The entity, which may be the transferor, that holds transferred assets may hold a clean-up call option to purchase the remaining transferred assets when the amount of assets outstanding falls within a specified level at which the cost of servicing these assets becomes onerous relative to the benefits of servicing. Provided that such a clean-up call results in the entity not retaining nor transferring substantially all the risks and rewards of ownership and that the

that the transferee cannot sell the assets, it only excludes derecognition to the extent of the amount of assets subject to the call option;

(n) retained subordinated interests and credit guarantees. The entity may provide the transferee with credit enhancement by subordinating all or part of its retained interest in the transferred asset. Alternatively, the entity may provide the transferee with credit enhancement in the form of a credit guarantee that could be unlimited or limited to a specific amount. If the entity retains substantially all the risks and benefits of ownership of the transferred asset, the asset continues to be recognized in its entirety. If the entity retains some, but not substantially all, the risks and benefits of ownership and retains control, derecognition is excluded to the extent of the monetary amount or other assets that the entity could be obliged to pay;

(o) total return swaps. The entity may sell a financial asset and enter into a total return swap with the transferee, under which all cash flows of interest payments arising from the underlying asset are remitted to the entity in exchange for a fixed payment or a variable rate payment, and any increase or decrease in the fair value of the underlying asset is absorbed by the entity. In such a case, derecognition of the entire asset is prohibited;

(p) interest rate swaps. The entity may transfer to the transferee a fixed-rate financial asset and enter into an interest rate swap with the transferee to receive a fixed interest rate and pay a variable interest rate based on a notional amount equal to the principal amount of the transferred financial asset. The interest rate swap does not exclude derecognition of the transferred asset provided that the payments on the swap are not conditioned by payments to be made on the transferred asset.

(q) amortization of interest rate swaps. The entity may transfer to the assignee a fixed-rate financial asset that is paid over time and enter into an amortizing interest rate swap with it to receive a fixed interest rate and pay a variable interest rate based on a notional amount. If the notional amount of the swap is amortized so that it coincides with the principal balance of the transferred financial asset at any point in time, the swap would normally result in the entity retaining substantial prepayment risk, and in this case the entity continues to recognize the entire transferred asset or continues to recognize the transferred asset to the extent of its continued involvement. Conversely, if the amortization of the notional value of the swap is not related to the principal balance of the transferred asset, this swap would not result in the entity retaining prepayment risk. Thus, it would not prevent derecognition of the transferred asset provided that the payments on the swap are not conditioned on the interest payments of the transferred asset and that the swap does not result in the entity retaining any other significant risks and benefits of ownership over the transferred asset.

AG52. This item illustrates the application of the continued involvement approach when the entity's continued involvement is in a part of a financial asset.

Consider the entity that has a portfolio of prepayable loans whose coupon and effective interest rate is 10% and whose principal amount and amortized cost corresponds to $10,000. The entity enters into a transaction in which, in exchange for payment of $9,115, the transferee obtains the right to $9,000 of any principal collection plus interest accruing at 9.5%. The entity retains rights to $1,000 of any principal collections plus interest accruing at 10%, plus the spread in excess of 0.5% on the remaining $9,000 of principal. Prepayment collections are allocated between the entity and the transferee in the proportion of 1:9, but any defaults are deducted from the entity's interest of $1,000 until that interest is exhausted. The fair value of the loans at the date of the transaction corresponds to $10,100 and the estimated fair value of the spread in excess of 0.5% is $40.

The entity determines that it has transferred some significant risks and benefits of ownership (for example, significant prepayment risk), but also retained some significant risks and benefits of ownership (due to its retained subordinated interest) and retained control. It therefore applies the continued involvement approach.

To apply this Pronouncement, the entity analyzes the transaction as (a) retention of retained interest fully proportional to $1,000, and as (b) subordination of these retained interests to provide credit enhancement to the transferee for credit losses.

The entity calculates that $9,090 (90% of $10,100) of the consideration received of $9,115 represents the consideration for the fully proportional part of 90%. The remainder of the consideration received ($25) represents the consideration received for having subordinated its retained interest to provide credit enhancement to the transferee for credit losses. Furthermore, the spread in excess of 0.5% represents the consideration received for the credit enhancement. Accordingly, the total consideration received for the credit quality improvement corresponds to $65 ($25 + $40).

The entity calculates its gain or loss on the sale of the 90% part of the cash flows. Assuming that the separate fair values of the 90% transferred part and the 10% retained part are not available at the date of transfer, the entity allocates the carrying amount of the asset in accordance with item 28, as follows:

Fair Value	Percentage	Carrying Amount
Transferred part	9,090	90%	9,000
Retained part	1,010	10%	1,000
Total	10,100		10,000

The entity calculates its gain or loss on the sale of the 90% part of the cash flows by deducting the allocated carrying amount of the transferred part from the consideration received, i.e., $90 ($9,090 – $9,000). The carrying amount of the part retained by the entity is $1,000.

Furthermore, the entity recognizes the continued involvement resulting from the subordination of its retained interest for credit losses. Accordingly, it recognizes an asset of $1,000 (the maximum amount of cash flows it would not receive with subordination) and the associated liability of $1,065 (which is the maximum amount of cash flows it would not receive with subordination, i.e., $1,000 plus the fair value of the subordination of $65).

The entity uses all the above information to account for the transaction as follows:

Debit	Credit
Original asset		9,000
Asset recognized related to subordination or residual interest	1,000
Asset related to consideration received in the form of excess spread
Result (gain on transfer)		90
Liability		1,065
Cash received	9,115
Total	10,155	10,155

Immediately after the transaction, the carrying amount of the asset corresponds to $2,040, composed of $1,000 representing the allocated cost of the retained part and $1,040 representing the additional continued involvement of the entity resulting from the subordination of its retained interest for credit losses (which includes the excess spread of $40).

In subsequent periods, the entity recognizes the consideration received for the credit enhancement ($65) on a time-proportion basis, adds interest on the recognized asset using the effective interest method, and recognizes any impairment loss on credit assets on the recognized assets. As an example, consider that, in the following year, there is an impairment loss on credit assets in the underlying loans of $300. The entity reduces its recognized asset by $600 ($300 related to its retained interest and $300 related to the additional continued involvement resulting from the subordination of its retained interest for credit losses) and reduces its recognized liability by $300. The net result is the

Regular purchase or sale of financial asset (item 38)

AG53. The regular purchase or sale of financial assets is recognized using trade date accounting or settlement date accounting, as described in items AG55 and AG56. The method used is applied consistently to all purchases and sales of financial assets that belong to the same category of financial assets defined in item 9. For this purpose, assets that are held for trading form a separate category from assets measured at fair value through profit or loss.

AG54. A contract that requires or permits net settlement of the change in the value of the contract is not a regular contract. Instead, such a contract is accounted for as a derivative in the period between the trade date and the settlement date.

AG55. The trade date is the date on which the entity commits to purchase or sell an asset. Trade date accounting refers to (a) the recognition of the asset to be received and the liability to be paid for it on the trade date, and (b) the derecognition of the asset that is sold, the recognition of any gain or loss at the time of disposal, and the recognition of a receivable from the buyer for payment on the trade date. Generally, interest only begins to accrue on the asset and corresponding liability after the settlement date, when title is transferred.

AG56. The settlement date is the date on which the asset is delivered to or by the entity. Settlement date accounting refers to (a) the recognition of the asset on the day it is received by the entity, and (b) the derecognition of the asset and the recognition of any gain or loss at the time of disposal on the day it is delivered by the entity. When settlement date accounting is applied, the entity accounts for any change in the fair value of the asset to be received during the period between the trade date and the settlement date in the same way it accounts for the acquired asset. In other words, the change in value is not recognized for assets accounted for at cost or amortized cost; it is recognized in profit or loss for assets classified as financial assets at fair value through profit or loss; and it is recognized as other comprehensive income for assets classified as available for sale.

Derecognition of financial liability (items 39 to 42)

AG57. A financial liability (or part of it) is extinguished when the debtor:
(a) settles the liability (or part of it) by paying the creditor, normally with cash, other financial assets, goods, or services; or (b) is legally released from the primary responsibility for the liability (or part of it), whether by process of law or by the creditor. (If the debtor has provided a guarantee, this condition may still be satisfied.)

AG58. If the issuer of a debt instrument repurchases that instrument, the debt is extinguished even if the issuer is a broker of that instrument or intends to resell it in the short term.

AG59. Payment to a third party, including a trust (sometimes called "substance over form debt cancellation"), does not, by itself, release the debtor from its primary obligation to the creditor, in the absence of legal release.

AG60. If the debtor pays a third party to assume the obligation and notifies its creditor that the third party has assumed its debt obligation, the debtor does not derecognize the debt obligation unless the condition of item AG57(b) is satisfied. If the debtor pays a third party to assume the obligation and obtains legal release from its creditor, it has extinguished the debt. However, if the debtor agrees to make payments on the debt to the third party or directly to the original creditor, it recognizes the new debt obligation to the third party.

AG61. Although legal release, whether judicially or by the creditor, results in the derecognition of a liability, the entity may recognize the new liability if the derecognition criteria of items 15 to 37 are not satisfied regarding the transferred financial assets. If these criteria are not satisfied, the transferred assets are not derecognized, and the entity recognizes the new liability related to the transferred assets.

AG62. For the purpose of item 40, the terms are substantially different if the present value discounted of the cash flows according to the new terms, including any commissions paid net of any commissions received and discounted using the original effective interest rate, is at least 10% different from the present value discounted of the remaining cash flows of the original financial liability. If the exchange of debt instruments or the modification of terms is accounted for as extinguishment, any costs or commissions incurred are recognized as part of the gain or loss at the time of extinguishment. If the exchange or modification is not accounted for as extinguishment, any costs or commissions incurred adjust the carrying amount of the liability and are amortized over the remaining term of the modified liability.

AG63. In some cases, the creditor releases the debtor from the present obligation to make payments, but the debtor assumes the obligation to guarantee payment if the party assuming primary responsibility defaults. In this circumstance the debtor:
(a) recognizes the new financial liability based on the fair value of its obligation regarding the guarantee; and (b) recognizes the gain or loss based on the difference between (i) any proceeds paid and (ii) the carrying amount of the original financial liability less the fair value of the new financial liability.

Measurement (items 43 to 70)

Initial measurement of financial assets and liabilities (item 43)

AG64. The fair value of a financial instrument at initial recognition is normally the transaction price (i.e., the fair value of the consideration given or received; see also Technical Pronouncement CPC 46 and item AG76). However, if part of the consideration given or received corresponds to something other than the financial instrument, the entity must measure the fair value of the financial instrument. For example, the fair value of a long-term loan or receivable that does not include interest can be measured as the present value of all future cash receipts discounted, using the current market interest rate for a similar instrument (similar in currency, term, interest rate type, and other factors) with a similar credit rating. Any additional amount lent is an expense or a reduction in revenue unless it qualifies for recognition as any other type of asset.

AG65. If the entity originates a loan with an interest rate different from the market rate (for example, 5% when the market rate for similar loans is 8%), and receives an entry fee as consideration, the entity recognizes the loan at its fair value, i.e., net of the commission it receives. The entity adds the discount to profit or loss using the effective interest rate method.

Subsequent measurement of financial assets (items 45 and 46)

AG66. If a financial instrument that was previously recognized as a financial asset is measured at fair value and its fair value falls below zero, it is a financial liability in accordance with item 47.

AG67. The following example illustrates the accounting for transaction costs in the initial and subsequent measurement of an available-for-sale financial asset. An asset is acquired for $100 plus a purchase commission of $2. Initially, the asset is recognized for $102. The next financial reporting date occurs one day later, when the quoted market price of the asset is $100. If the asset were sold, a commission of $3 would be paid. On this date, the asset is measured at $100 (without considering the possible sales commission) and the loss of $2 is recognized in other comprehensive income. If the available-for-sale financial asset has fixed or determinable payments, the transaction costs are amortized in profit or loss using the effective interest method. If the available-for-sale financial asset does not have fixed or determinable payments, the transaction costs will be recognized in profit or loss when the asset is derecognized or becomes impaired.

AG68. Instruments that are classified as loans and receivables are measured at amortized cost without considering the entity's intention to hold them to maturity.

Considerations on fair value measurement (items 48 and 49)

AG69-AG75. (Eliminated).

No active market: valuation technique

AG76. The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price (i.e., the fair value of the consideration given or received, see also Technical Pronouncement CPC 46). If the entity determines that the fair value at initial recognition differs from the transaction price, as mentioned in item 43A, the entity must account for the instrument on that date as follows:
(a) for the measurement required by item 43, if the fair value is evidenced by a quoted price in an active market for identical assets or liabilities (i.e., Level 1 information) or based on a valuation technique that uses only observable market data. The entity must recognize the difference between the fair value at initial recognition and the transaction price in the period's profit or loss; (b) in all other cases, for the measurement required by item 43, adjusted to defer the difference between the fair value at initial recognition and the transaction price. After initial recognition, the entity must recognize the deferred difference as profit or loss only to the extent that it arises from a change in factor (including time) that market participants would take into account when pricing the asset or liability.

AG76A. The subsequent measurement of the financial asset or financial liability and the subsequent recognition of gains and losses must be consistent with the requirements of this Technical Pronouncement.

AG77-AG79. (Eliminated).

No active market: equity instrument

AG80. The fair value of investments in own equity instruments that do not have a quoted price nor an active market for an identical instrument (i.e., Level 1 information) and in derivatives that are linked to the own equity instrument and must be settled by delivery of it (see items 46(c) and 47) is reliably measured if (a) the variability in the range of reasonable fair value measurements is not significant for that instrument or (b) the probabilities of the various estimates within that range can be reasonably assessed and used to measure the fair value.

AG81. There are many situations where the variability in the range of reasonable fair value measurements of investments in own equity instruments that do not have a quoted price in an active market for an identical instrument (i.e., Level 1 information) and in derivatives that are linked to an equity instrument and must be settled by delivery of it (see items 46(a) and 47) is likely to be insignificant. It is normally possible to measure the fair value of a financial asset that the entity has acquired from an external party. However, if the range of reasonable fair value measurements is significant and the probabilities of the various estimates cannot be reasonably assessed, the entity will be prevented from measuring the instrument at fair value.

AG82. (Eliminated).

COMMISSION ON SECURITIES
Seven of September Street, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – ZIP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Cincinato Braga Street, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/ SP – ZIP: 01333-010 – Brazil - Tel.: (11) 2146-2000 Gains and losses (paragraphs 55 to 57)

AG83. The entity applies Technical Pronouncement CPC 02 – Effects of Changes in Exchange Rates and Conversion of Financial Statements to financial assets and financial liabilities that are monetary items in accordance with Technical Pronouncement CPC 02 and are denominated in a foreign currency. According to Technical Pronouncement CPC 02, any gain and loss in foreign currency relating to monetary assets and monetary liabilities is recognized in profit or loss. An exception is a monetary item that is designated as a hedging instrument or in a cash flow hedge (see paragraphs 95 to 101) or in a net investment hedge (see paragraph 102). For the purpose of recognizing gains and losses in foreign currency in accordance with Technical Pronouncement CPC 02, an available-for-sale monetary financial asset is treated as if it were carried at amortized cost in the foreign currency. In harmony with this, for this type of financial asset, exchange differences resulting from changes in amortized cost are recognized in profit or loss and other changes in the carrying amount are recognized in accordance with paragraph 55(b). In the case of available-for-sale financial assets that are not monetary items in accordance with Technical Pronouncement CPC 02 (for example, equity instruments), the gain or loss that is recognized directly as other comprehensive income in accordance with paragraph 55(b) includes any foreign currency component related thereto. If there is a hedge relationship between a non-derivative monetary asset and a non-derivative monetary liability, changes in the foreign currency component of these financial instruments are recognized in profit or loss.

Impairment of assets and loss from non-receipt of financial asset (paragraphs 58 to 70)

Financial assets carried at amortized cost (paragraphs 63 to 65)

AG84. The impairment loss of financial assets carried at amortized cost is measured using the original effective interest rate of the financial instrument because discounting at the current market interest rate would, in effect, impose the measurement of fair value on financial assets that are otherwise measured at amortized cost. If the terms of a loan, receivable, or held-to-maturity investment are renegotiated or otherwise modified due to financial difficulties of the borrower or issuer, the impairment loss is measured using the original effective interest rate before the modification of the terms. Cash flows related to short-term receivables are not discounted if the effect of discounting is immaterial. If a loan, receivable, or held-to-maturity investment has a variable interest rate, the discount rate to measure any impairment loss in accordance with paragraph 63 is the current effective interest rate determined in accordance with the contract. A practical method is for the creditor to measure the impairment loss of financial assets carried at amortized cost on the basis of the fair value of the instrument, using the observable market price. The calculation of the present value of estimated future cash flows of a secured financial asset reflects the cash flows that may result from enforcement less the costs of obtaining and selling the collateral, whether enforcement is probable or not.

AG85. The process of estimating impairment loss considers all credit exposures and not only those of low credit quality. For example, if the entity uses an internal credit rating system, it considers all credit ratings and not only those that reflect a severe deterioration of credit.

AG86. The process of estimating the amount of impairment loss may result in either a single amount or a range of possible amounts. In the latter case, the entity recognizes the impairment loss equal to the best estimate within the range(*) taking into account all relevant information available before the financial statements are issued regarding conditions existing at the balance sheet date.

(*) Technical Pronouncement CPC 25 – Provisions, Contingent Liabilities and Contingent Assets, paragraph 39 contains guidelines on how to determine the best estimate in a range of possible results.

AG87. For the purpose of collective assessment of impairment loss, financial assets are grouped according to similar credit risk characteristics that are indicative of the debtor's ability to pay all amounts due in accordance with contractual terms (for example, on the basis of credit risk assessment or a rating process that considers the type of asset, sector, geographic location, type of collateral, payment delay, and other relevant factors). The chosen characteristics are relevant to the estimation of future cash flows for groups of such assets because they are indicative of the debtor's ability to pay all amounts due in accordance with the contractual terms of the assets to be assessed. However, loss probabilities and other loss statistics differ at the group level between (a) assets that have been individually assessed for impairment loss, concluding that they are not impaired, and (b) assets that have not been individually assessed for impairment loss, resulting in a different amount of impairment loss being required. If the entity does not have a group of assets with similar risk characteristics, it does not perform the additional assessment.

AG88. Impairment losses recognized on a group basis represent an intermediate step dependent on the identification of impairment losses in individual assets of the financial asset group that are collectively assessed for impairment loss. As soon as there is information that specifically identifies losses in group assets that are individually impaired, these assets are removed from the group.

AG89. Future cash flows in a group of financial assets that are collectively assessed for impairment loss are estimated based on historical loss experience for assets with credit risk characteristics similar to those of the group. Entities that do not have entity-specific loss experience or sufficient experience use the experience of peer groups for comparable groups of financial assets. Historical loss experience is adjusted based on current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not currently exist. Estimates of changes in future cash flows reflect and are directionally consistent with changes in related observable data from period to period (such as changes in unemployment rates, real estate prices, commodity prices, payment status, or other factors that are indicative of losses incurred in the group and their magnitude). The methodology and assumptions used to estimate future cash flows are reviewed regularly to reduce any difference between loss estimates and actual loss experience.

AG90. As an example of the application of paragraph AG89, the entity may determine, based on historical experience, that one of the main causes of non-payment of credit card loans is the death of the borrower. The entity may observe that the death rate remained unchanged from one year to the next. However, some of the borrowers in the entity's credit card loan group may have died during the year, indicating that an impairment loss occurred with respect to these loans, even though, at the end of the year, the entity may not yet have knowledge of the death of these borrowers. It would be appropriate for the impairment loss to be recognized with respect to these "incurred but not reported" losses. However, it would not be appropriate to recognize impairment loss for deaths expected to occur in the future, because the loss event necessary (the death of the borrower) has not yet occurred.

AG91. When using historical loss rates in estimating future cash flows, it is important that information regarding historical loss rates is applied to groups that are defined consistently with the groups with respect to which the historical loss rates were observed. Thus, the method used must allow each group to be associated with information regarding past loss experience in groups of assets with similar credit risk characteristics and relevant observable data reflecting current conditions.

AG92. Formula-based or statistical methods may be used to determine impairment losses in a group of financial assets (for example, for lower-balance loans) provided they are consistent with the requirements of paragraphs 63 to 65 and AG87 to AG91. Any model used must incorporate the effect of the time value of money, consider cash flows over the entire remaining life of the asset (and not just the following year), consider the age of the loans within the portfolio, and not result in an impairment loss at the initial recognition of the financial asset.

Interest income after recognition of impairment loss

AG93. Once a financial asset or a group of similar financial assets has been reduced as a result of impairment loss, interest income is thereafter recognized using the interest rate used to discount the future cash flows for the purpose of measuring the impairment loss.

Hedge (paragraphs 71 to 102)

Hedging instruments (paragraphs 72 to 77)

Qualifying instruments (paragraphs 72 and 73)

AG94. The potential loss with an option that the entity writes may be significantly greater than the potential gain in the related position value. In other words, a written option is not effective in reducing exposure to the profit or loss of the hedged item. Therefore, a written option does not qualify as a hedging instrument, unless it is designated as a purchased option hedge, including one that is embedded in another financial instrument (for example, a written call option used to hedge a redeemable liability). In contrast, a purchased option has potential gains equal to or greater than losses and, therefore, has the potential to reduce exposure to profit or loss due to changes in fair values or cash flows. Thus, it may qualify as a hedging instrument.

AG95. The held-to-maturity investment carried at amortized cost may be designated as a hedging instrument in a foreign exchange risk hedge.

AG96. The investment in an equity instrument that does not have a quoted price in an active market for an identical instrument (i.e., Level 1 information) must be carried at fair value because its fair value, otherwise, cannot be reliably measured or a derivative that is linked to it must be settled by delivery of an equity instrument (see paragraphs 46(c) and 47) that cannot be designated as a hedging instrument.

AG97. The entity's own equity instruments are not financial assets or financial liabilities of the entity and, therefore, cannot be designated as hedging instruments.

Hedged Items (paragraphs 78 to 84)

Qualifying items (paragraphs 78 to 80)

AG98. A firm commitment to acquire a business in a business combination cannot be a hedged item, except for foreign exchange risk, because the other risks to be hedged cannot be specifically identified and measured. These other risks are general business risks.

AG99. The investment accounted for using the equity method cannot be a hedged item in a fair value hedge because the equity method recognizes the investor's share of the associate's results in profit or loss, rather than changes in the fair value of the investment. For a similar reason, the investment in a consolidated subsidiary cannot be a hedged item in a fair value hedge because consolidation recognizes the subsidiary's profit in profit or loss, rather than changes in the fair value of the investment. The hedge of a net investment in a foreign operation is different because it is a hedge of exposure to foreign currency and not a fair value hedge of the change in the value of the investment.

AG99A. Paragraph 80 states that, in consolidated financial statements, the foreign exchange risk of a forecast intragroup transaction that is highly probable may be considered a hedged item in a cash flow hedge, provided that the transaction is denominated in a currency other than the functional currency of the entity participating in the transaction and that the foreign exchange risk will affect consolidated profit or loss. For this purpose, the entity may be a parent, a subsidiary, an associate, a joint venture, or a branch. If the foreign exchange risk of a forecast intragroup transaction does not affect consolidated profit or loss, that intragroup transaction cannot be considered a hedged item. This is normally the case for royalty payments, interest payments, or management fees between members of the same group, except if there is a related external transaction. However, if the foreign exchange risk of a forecast intragroup transaction will affect consolidated profit or loss, the intragroup transaction may be considered a hedged item. An example of this situation consists of forecast sales or forecast purchases of inventory elements between members of the same group, if there is a subsequent sale of inventory elements to a party external to the group. Similarly, the forecast intragroup sale of production facilities and equipment of the group entity that produced them to a group entity that uses these facilities and equipment in its operations may affect consolidated profit or loss. This may occur, for example, due to the fact that the facilities and equipment will be amortized by the purchasing entity and the amount initially recognized with respect to the facilities and equipment may change if the forecast intragroup transaction is denominated in a currency other than the functional currency of the purchasing entity.

AG99B. If the hedge of a forecast intragroup transaction qualifies for hedge accounting, any gains or losses recognized directly as other comprehensive income, in accordance with paragraph 95(a), are reclassified to profit or loss in the same period or periods in which the foreign exchange risk of the hedged transaction affects consolidated profit or loss.

AG99BA. The entity may designate all changes in the cash flows or fair value of a hedged item in a hedge relationship. In addition, the entity may designate only changes in the cash flows or fair value of a hedging instrument with a price above or below a specified price or another variable (unilateral risk). The intrinsic value of a purchased option hedging instrument (assuming it has the same key terms as the indicated risk), but not its time value, reflects a unilateral risk in the hedged item. For example, the entity may designate the variability of future cash flow results resulting from an increase in the purchase price of a commodity in a forecast transaction. In this situation, only cash flow losses resulting from the price increase above the specified level should be designated. The hedged risk does not include the time value of the purchased option, because the time value is not a component of the forecast transaction that affects profit or loss (paragraph 86(b)).

Designation of financial items as hedged items (paragraphs 81 and 81A)

AG99C. If a part of the cash flows of a financial asset or liability is designated as a hedged item, that designated part must be less than the total cash flow of the asset or liability. For example, in the case of a liability whose effective interest rate is below LIBOR, the entity cannot designate (a) a part of the liability equal to the principal plus LIBOR interest and (b) a residual negative part. However, the entity may designate all cash flows of the entire financial asset or financial liability as a hedged item and put them under hedge only with respect to a single specific risk (for example, only for changes that are attributable to changes in the LIBOR rate). For example, in the case of a financial liability whose effective interest rate is 100 basis points below the LIBOR rate, the entity may designate as a hedged item the entire liability (i.e., the principal plus LIBOR interest minus 100 basis points) and put the change under hedge in the fair value or cash flows of the entire liability that is attributable to changes in the LIBOR rate. The entity may also choose a hedge ratio different from one-to-one to improve hedge effectiveness, as described in paragraph AG100.

AG99D. In addition, if a fixed-rate financial instrument is put under hedge some time after its origination and interest rates have changed in the meantime, the entity may designate a part equal to the reference rate that is higher than the contractual rate paid by the position. The entity may do this provided that the reference rate is lower than the effective interest rate calculated by assuming that the entity had purchased the instrument on the day it first designated the position. For example, suppose that the entity originates a fixed-rate financial asset of $100 with an effective interest rate of 6% while the LIBOR rate is at 4%. It begins to put this asset under hedge some time later when the LIBOR rate has risen to 8% and the fair value of the asset has fallen to $90. The entity calculates that, if it had purchased the asset on the date it first designated it as hedged at its fair value of $90, the effective yield would have been 9.5%. Since LIBOR is lower than this effective yield, the entity may designate a part of the 8% LIBOR that consists partially of contractual interest cash flows and partially of the difference between the current fair value (i.e., $90) and the amount repayable at maturity (i.e., $100).

AG99E. Paragraph 81 allows the entity to indicate something other than the entire variation in fair value or the variability of cash flows of a financial instrument. For example:
(a) all cash flows of a financial instrument may be indicated for changes in cash flows or fair value attributable to some (but not all) risks; or (b) some of (but not all) the cash flows of a financial instrument may be indicated for changes in cash flows or fair value attributable to all or only some risks (i.e., a "portion" of the cash flows of the financial instrument may be indicated for changes attributable to all or only some risks).

AG99F. To be eligible for hedge accounting, the designated risks and portions must constitute separately identifiable components of the financial instrument, and changes in cash flows

COMMISSION OF SECURITIES AND EXCHANGE
Seven of September Street, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – ZIP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Cincinato Braga Street, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/ SP – ZIP: 01333-010 – Brazil - Tel.: (11) 2146-2000 box or at the fair value of the entire financial instrument resulting from changes in risks and the indicated portions must be reliably measurable. For example:
(a) for a fixed-rate financial instrument hedged against changes in fair value attributable to changes in the risk-free interest rate or the reference interest rate, the risk-free or reference interest rate is normally considered to be both a separately identifiable component of the financial instrument and reliably measurable; (b) inflation is not separately identifiable and reliably measurable and cannot be designated as a risk or portion of a financial instrument, unless the requirements of item (c) are met; (c) the contractually specified inflation portion of the cash flows of a debt instrument recognized as indexed to inflation (assuming there is no requirement to account separately for an embedded derivative) is separately identifiable and reliably measurable provided that other cash flows of the instrument are not affected by the inflation portion.

Designation of non-financial items as hedged items (item 82) AG100. Changes in the price of an ingredient or component of a non-financial asset or non-financial liability generally do not have a predictable and separately measurable effect on the price of the item, that is comparable to the effect of, for example, a change in market interest rates or in the price of the obligation. Thus, a non-financial asset or a non-financial liability is only a position fully hedged or for foreign currency risk. If there is a difference between the terms of the hedging instrument and the hedged position (such as in the hedge of the forecast purchase of coffee from Brazil using a forward contract to buy coffee from Colombia in otherwise similar terms), the hedging relationship may, however, qualify as a hedging relationship, provided that all conditions of item 88 are met, including that the hedge is expected to be highly effective. For this purpose, the amount of the hedging instrument may be greater or less than that of the hedged position if this improves the effectiveness of the hedging relationship. For example, regression analysis may be performed to establish a statistical relationship between the hedged position (for example, transaction in coffee from Brazil) and the hedging instrument (for example, transaction in coffee from Colombia). If there is a statistical relationship between the two variables (i.e., between the unit prices of Brazilian coffee and Colombian coffee), the slope of the regression line may be used to establish the hedge ratio that will maximize expected effectiveness. For example, if the slope of the regression line corresponds to 1.02, a hedge ratio based on 0.98 units of hedged positions for 1.00 quantity of the hedging instrument maximizes expected effectiveness. However, the hedging relationship may result in ineffectiveness that is recognized in profit or loss during the term of the hedging relationship.

Designation of groups of items as hedged items (items 83 and 84) AG101. The hedge of a global net position (for example, the net of all fixed-rate assets and fixed-rate liabilities with similar maturities), instead of a specific hedged position, does not qualify for hedge accounting. However, practically the same effect on the result of hedge accounting for this type of hedging relationship can be achieved by designating as the hedged position part of the underlying items. For example, if a bank has $ 100 of assets and $ 90 of liabilities with risks and conditions of a similar nature and hedges the net exposure of $ 10, it may designate $ 10 of these assets as the hedged position. This designation may be used if such assets and liabilities are fixed-rate instruments, in which case it is a fair value hedge, or if they are variable-rate instruments, in which case it is a cash flow hedge. Similarly, if the entity has a firm commitment to make a purchase in foreign currency of $ 100 and a firm commitment to make a sale in foreign currency of $ 90, it may cover the net amount of $ 10 by acquiring a derivative and designating it as a hedging instrument associated with $ 10 of the $ 100 firm commitment to purchase.

Hedge accounting (items 85 to 102)
AG102. An example of a fair value hedge is the hedge of exposure to changes in fair value of a fixed-rate debt instrument as a result of changes in interest rates. Such a hedge could be entered into by the issuer or the holder.
AG103. An example of a cash flow hedge is the use of a swap to change floating-rate debt to fixed-rate debt (i.e., hedge of a future transaction where the future cash flows to be hedged are future interest payments).
AG104. A hedge of a firm commitment (for example, hedge of the change in fuel price related to an unrecognized contractual commitment of a public electricity service to buy fuel at a fixed price) is a hedge of exposure to a change in fair value.
Thus, such a hedge is a fair value hedge. However, according to item 87, a hedge of foreign currency risk of a firm commitment may alternatively be accounted for as a cash flow hedge.

Assessment of hedge effectiveness
AG105. A hedge is only considered highly effective if both of the following conditions are met:
(a) At the inception of the hedge and in subsequent periods, the hedge is expected to be highly effective in achieving offsetting changes in fair value or cash flows attributable to the risk covered during the period for which the hedge was designated. This expectation may be demonstrated in various ways, including a comparison of past changes in fair value or cash flows of the hedged position that are attributable to the risk covered with past changes in fair value or cash flows of the hedging instrument, or by demonstrating a high statistical correlation between the fair value or cash flows of the hedged position and those of the hedging instrument. The entity may choose a hedge ratio different from one-to-one in order to improve the effectiveness of the hedge, as described in item AG100. (b) The actual results of the hedge are within the range of 80 to 125%. For example, if the

AG106. Effectiveness is assessed, at a minimum, at the time the entity prepares its annual or interim financial statements.

AG107. This Pronouncement does not specify a single method for assessing hedge effectiveness. The method that the entity adopts to assess hedge effectiveness depends on its risk management strategy.
For example, if the entity's risk management strategy is to adjust the amount of the hedging instrument periodically to reflect changes in the hedged position, the entity needs to demonstrate that the hedge is expected to be highly effective only during the period until the amount of the hedging instrument is adjusted again. In some cases, the entity adopts different methods for different types of hedges. The entity's documentation of its hedge strategy includes its procedures for assessing effectiveness. These procedures address whether the assessment includes the entire gain or loss on the hedging instrument or whether the time value of the instrument is or is not excluded.

AG107A. If the entity hedges less than 100% of the position's exposure, such as 85%, it must designate the hedged position as being 85% of the exposure and must measure ineffectiveness based on the change in that designated 85% exposure. However, when hedging the designated exposure of 85%, the entity may use a hedge ratio different from one-to-one if this improves the expected effectiveness of the hedge, as explained in item AG100.

AG108. If the main conditions of the hedging instrument and the hedged asset, liability, firm commitment or highly probable forecast transaction are the same, changes in fair value and cash flows attributable to the risk being hedged may completely offset each other, both when the hedge is entered into and afterwards. For example, an interest rate swap will likely be an effective hedge if the notional and principal amounts, term, repricing dates, receipt and payment dates of interest and principal, and the basis for measuring interest rates are the same for the hedging instrument and the hedged position. Additionally, a hedge of a highly probable forecast purchase of goods with a forward contract may be highly effective if:
(a) the forward contract relates to the purchase of the same quantity of the same goods on the same date and location as the hedged forecast purchase; (b) the fair value of the forward contract at inception is zero; and (c) the change in the discount or premium on the forward contract is excluded from the assessment of effectiveness and recognized in profit or loss or the change in expected cash flows of the highly probable forecast transaction is based on the forward price of the goods.

AG109. Sometimes the hedging instrument only offsets part of the covered risk. For example, the hedge

AG110. To qualify for hedge accounting, the hedge must relate to a specific identified and designated risk, and not merely to the entity's general commercial risks, and ultimately must affect the entity's profit or loss. The hedge of obsolescence risk of physical assets or risk of expropriation of property by the government is not eligible for hedge accounting; effectiveness cannot be measured because these risks are not reliably measurable.

AG110A. Item 74(a) allows the entity to segregate the intrinsic value and time value of an option contract and designate as the hedging instrument only the change in the intrinsic value of the option contract. This designation may result in a perfectly effective hedging relationship in achieving offsetting changes in cash flows attributable to the unilateral risk protected of a forecast transaction, if the main terms of the forecast transaction and the hedging instrument are the same.

AG110B. If the entity designates a purchased option in its entirety as a hedging instrument for unilateral risk arising from a forecast transaction, the hedging relationship is not perfectly effective.
This is because the premium paid for the option includes the time value, and as provided in item AG99BA, the designated unilateral risk does not include the time value of the option. Therefore, in this situation, there is no offset between the cash flows related to the time value of the option premium paid and the designated protected risk.

AG111. In the case of interest rate risk, the effectiveness of the hedge may be assessed by preparing a maturity schedule of financial assets and liabilities that shows the net interest rate exposure for each time period, provided that the net exposure is linked to a specific asset or liability (or a specific group of assets or liabilities, or specific part thereof) giving rise to the net exposure, and the effectiveness of the hedge is assessed against this asset or liability.

AG112. When assessing hedge effectiveness, the entity normally considers the time value of money. The fixed interest rate on the hedged position does not need to correspond exactly to the fixed interest rate on a swap designated as a fair value hedge. Nor does the variable interest rate on an asset or liability that becomes interest need to be the same as the variable interest rate on a swap designated as a cash flow hedge. The fair value of a swap derives from its net settlements. The fixed and variable rates on a swap may be changed without affecting the net settlement if both are changed by the same amount.

AG113. If the entity fails to meet the hedge effectiveness criteria, the entity discontinues hedge accounting from the last date on which compliance with hedge effectiveness was demonstrated.
However, if the entity identifies the event or change in circumstances that led to the hedging relationship not meeting the effectiveness criteria, and demonstrates that the hedge was effective before

AG113A. For the avoidance of doubt, the effects of replacing the original counterparty, with a clearing counterparty and making the associated changes, as described in items 91(a)(ii) and 101(a)(ii), must be reflected in the measurement of the hedging instrument and, therefore, in the assessment and measurement of the effectiveness of the hedge.

Fair value hedge accounting for interest rate risk portfolio hedges AG114. For a fair value hedge of interest rate risk associated with a portfolio of financial assets or financial liabilities, the entity satisfies the requirements of this Pronouncement if it complies with the procedures defined in items (a) to (i) and in items AG115 to AG132 below:
(a) as part of its risk management process, the entity identifies the portfolio of items whose interest rate risk it intends to hedge. The portfolio may comprise only assets, only liabilities or assets and liabilities. The entity may identify two or more portfolios (for example, the entity may group its available-for-sale assets into separate portfolios), in which case it applies the guidance below to each separate portfolio separately; (b) the entity analyzes the portfolio in repricing time periods based on expected repricing dates, instead of contractual dates. The analysis in repricing time periods may be performed in various ways, including scheduling cash flows in the periods in which they are expected to occur, or scheduling notional principal amounts in all periods until the point at which repricing is expected to occur; (c) based on this analysis, the entity decides the amount it intends to hedge. The entity designates as the hedged position the amount of assets or liabilities (but not the net amount) of the identified portfolio equal to the amount it intends to designate as being hedged. This amount also determines the percentage measurement used to test effectiveness in accordance with item AG126(b); (d) the entity designates the interest rate risk it is hedging. This risk may be part of the interest rate risk in each of the items in the hedged position, such as reference interest rate (for example, LIBOR rate); (e) the entity designates one or more hedging instruments for each repricing period; (f) using the designations made in items (c) to (e) above, the entity assesses, at inception and in subsequent periods, whether it expects the hedge to be highly effective during the period for which the hedge is designated; (g) periodically, the entity measures the change in fair value of the hedged position (as designated in item (c)) that is attributable to the risk covered (as designated in item (d), based on the expected repricing dates determined in item (b). Provided that it is determined that the hedge was highly effective when assessed using the entity's documented method of effectiveness assessment, the entity recognizes the change in fair value of the hedged position

COMMISSION OF SECURITIES AND EXCHANGE
Seven of September Street, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – ZIP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Cincinato Braga Street, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/ SP – ZIP: 01333-010 – Brazil - Tel.: (11) 2146-2000 as a gain or loss in profit or loss and in two line items in the statement of financial position, as described in item 89A. The change in fair value does not need to be allocated to individual assets or liabilities; (h) the entity measures the change in fair value of the hedging instrument (as designated in (e)) and recognizes it as a gain or loss in profit or loss. The fair value of the hedging instrument is recognized as an asset or liability in the statement of financial position; (i) any ineffectiveness is recognized in profit or loss as the difference between the change in fair value mentioned in (g) and the one mentioned in (h).

AG115. This approach is described below in more detail. The approach must be applied only to the fair value hedge of interest rate risk associated with a portfolio of financial assets or financial liabilities.

AG116. The portfolio identified in item AG114(a) may contain assets and liabilities. Alternatively, it may be a portfolio containing only assets, or only liabilities. The portfolio is used to determine the amount of assets or liabilities that the entity intends to hedge. However, the portfolio itself is not designated as the hedged item.

AG117. When applying item AG114(b), the entity determines the expected repricing date of an item as the earliest of the dates on which it is expected that the item will reach maturity or repricing according to market rates. Expected repricing dates are estimated at the inception of the hedge and during the term of the hedge, based on historical experience and other available information, including information and expectations regarding prepayment rates, interest rates, and the interaction between both. Entities that do not have specific entity experience or sufficient experience use the experience of peer groups for comparable financial instruments. These estimates are reviewed periodically and updated in light of expectations. In the case of a fixed-rate item that is payable early, the expected repricing date is the date on which it is expected that the item will be prepaid, unless it is repriced according to market rates at an earlier date. For a group of similar items, the analysis in periods based on expected repricing dates may take the form of allocating a percentage of the group, instead of individual items, to each period. The entity may apply other methodologies for these allocation purposes. For example, it may use a prepayment rate multiplier to allocate amortizable loans to periods based on expected repricing dates. However, the methodology for this type of allocation must be consistent with the entity's risk management procedures and objectives.

AG118. As an example of the designation defined in item AG114(c), if, in a particular repricing period, the entity estimates that it has fixed-rate assets of $ 100 and fixed-rate liabilities of $ 80 and decides to cover the entire net position of $ 20, it designates as hedged position assets in the amount of $ 20 (part of the assets). The designation is expressed as a "currency amount" (for example, dollar amount, euro amount, pound amount, or rand amount) instead of individual assets. It follows that all assets (or liabilities) from which the covered amount is withdrawn – i.e., all $ 100 of assets in the example above – must be:

(a) items whose fair value changes in response to changes in the interest rate to be hedged; and (b) items that could have been qualified for fair value hedge accounting if they had been designated to be individually hedged. In particular, since the Pronouncement specifies that the fair value of a financial liability with a demand feature (such as demand deposits and some types of scheduled deposits) is not less than the amount payable on demand, discounted from the first date on which the amount could be required to be paid, this item does not qualify for fair value hedge accounting for any period beyond the shortest period in which the holder can demand payment. In the example above, the hedged position is an amount of assets. Thus, these liabilities are not part of the designated hedged position, but are used by the entity to determine the amount of the asset that is designated as hedged. If the position that the entity wanted to leave hedged was an amount of liabilities, the amount representing the designated hedged position must be withdrawn from fixed-rate liabilities rather than from liabilities that can be required to be reimbursed by the entity in a shorter period, and the percentage measurement used to evaluate hedge effectiveness in harmony with item AG126(b) would be calculated as a percentage of these other liabilities. For example, suppose the entity estimates that, in a certain repricing period, it fixed liabilities at $ 100, including $ 40 in demand deposits and $ 60 in liabilities without a demand feature, at $ 70 in fixed-rate assets. If the entity decides to hedge the entire net position of $ 30, it designates liabilities from hedged positions of $ 30 or 50% of liabilities without demand features.

AG119. The entity also complies with the other designation and documentation requirements defined in item 88(a). For a hedge of the interest rate risk portfolio, this designation and documentation specify the entity's policy for all variables that are used to identify the amount that is placed under hedge and how effectiveness is measured, including the following:
(a) which assets and liabilities must be included in the portfolio hedge and the basis to be used to remove them from the portfolio; (b) how the entity estimates repricing dates, including the interest rate assumptions underlying the estimates of prepayment rates and the basis for changing these estimates. The same method is used both for the initial estimates made at the time an asset or liability is included in the protected portfolio and for any subsequent review of these estimates; (c) the number and duration of repricing periods; (d) the frequency with which the entity will test effectiveness and which of the two methods in item AG126 it will use; (e) the methodology used by the entity to determine the amount of assets or liabilities that is designated as the hedged position and, in harmony with this, the percentage measure used when the entity tests effectiveness using the method described in item AG126(b); (f) when the entity tests effectiveness using the method described in item AG126(b), whether it will test effectiveness for each repricing period individually, for all periods in

SECURITIES AND EXCHANGE COMMISSION COMMISSION
Seven of September Street, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – CEP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Cincinato Braga Street, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brazil - Tel.: (11) 2146-2000 aggregate or using some combination of the two.
The policies specified when designating and documenting the hedge relationship must be in accordance with the entity's risk management procedures and objectives. No arbitrary changes should be made to policies. They must be justified based on market conditions and other factors on which they must be based and consistent with the entity's risk management procedures and objectives.

AG120. The hedge instrument mentioned in item AG114(e) can be a single derivative or a portfolio of derivatives, all containing exposure to the designated interest rate risk in item G114(d) (for example, portfolio of interest rate swaps, all containing exposure to LIBOR rate). This type of derivative portfolio can contain risk positions that offset each other. However, it may not include written options or net written options, because the Pronouncement does not allow such options to be designated as a hedge instrument (except when the written option is designated as compensation for a purchased option). If the hedge instrument covers the amount designated in item AG114(c) for more than one repricing period, it is allocated to all periods it covers. However, the entirety of the hedge instrument must be allocated to these repricing periods because the Pronouncement does not allow the hedge relationship to be designated only for part of the period during which the hedge instrument remains in circulation.

AG121. When the entity measures the change in fair value of an item payable in advance and in accordance with item AG114(g), a change in interest rates affects the fair value of the item payable in advance in two ways: it affects the fair value of the contractual cash flows and the fair value of the prepayment option contained in the item payable in advance. Item 81 of the Pronouncement allows the entity to designate part of a financial asset or financial liability, which share common exposure to risk, as a hedged position, provided that effectiveness can be measured. For items subject to prepayment, item 81A allows this to be done by designating the hedged position in terms of the change in fair value attributable to changes in the designated interest rate based on expected repricing dates, rather than contractual ones. However, the effect that changes in the hedge interest rate have on these expected repricing dates must be included when determining the change in the fair value of the hedged position. Thus, if the expected repricing dates are revised (e.g., to reflect a change in expected prepayments), or if the actual repricing dates differ from the expected, ineffectiveness arises as described in item AG126. On the other hand, changes in expected repricing dates that (a) clearly arise due to factors unrelated to the hedge interest rate, (b) have no relation to the hedge interest rate and (c) can be reliably separated from changes attributable to the hedge interest rate (e.g., changes in prepayment rates that clearly arise from a change in demographic factors or tax regulations rather than changes in interest rates) are excluded when determining the change in the fair value of the hedged position, because they are not attributable to the covered risk. If there is uncertainty regarding the factor that originated the change in the expected repricing dates or the entity cannot reliably separate the changes that originated from the hedge interest rate from those that originated from other factors, the change will be attributed to changes in the hedge interest rate.

AG122. The Pronouncement does not specify the techniques used to determine the amount mentioned in item AG114(g), namely, the change in the fair value of the hedged position that is attributable to the covered risk. If statistical techniques or other estimates are used for this measurement, management must expect the result to be very close to what would be obtained by measuring all individual assets or liabilities that constitute the hedged position. It is not appropriate to assume that the changes in the fair value of the hedged position are equal to the changes in the value of the hedge instrument.

AG123. Item 89A requires that, if the hedged position for a particular repricing period is an asset, the change in its value is presented in a separate line item within assets. Conversely, if the hedged position for a particular repricing period is a liability, the change in its value is presented in a separate line item within liabilities. These are the separate line items mentioned in item AG114(g). Specific allocation to individual assets (or liabilities) is not required.

AG124. Item AG114(i) states that ineffectiveness results to the extent that the change in the fair value of the hedged position that is attributable to the covered risk differs from the change in the fair value of the hedge derivative. Such a difference can arise for a number of reasons, including:
(a) the actual repricing dates are different from the expected, or the expected repricing dates have been revised; (b) items in the covered portfolio have become impaired due to asset impairment losses or are not recognized; (c) the payment dates of the hedge instrument and the hedged position are different; and (d) other causes (e.g., when some of the hedged positions generate interest at a rate lower than the reference rate to which they are designated as being hedged, and the resulting ineffectiveness is not so large that the portfolio as a whole ceases to qualify for hedge accounting). Such ineffectiveness must be identified and recognized in profit or loss.

AG125. Generally, hedge effectiveness is improved:
(a) if the entity schedules items with different prepayment characteristics in a way that takes into account differences in prepayment behavior; (b) when the number of items in the portfolio is higher. When only a few items are contained in the portfolio, it is likely that relatively high ineffectiveness will occur if one of the items is prepaid before or after the expected. On the other hand, when the portfolio contains many items, prepayment behavior can be predicted with greater accuracy; (c) when the repricing periods are narrower (for example, one month, compared to repricing periods of three months). Narrower repricing periods reduce the effect of any inconsistency between the repricing and payment dates

AG126. The entity tests effectiveness periodically. If the estimates of repricing dates change between a date on which the entity evaluates effectiveness and the next, it calculates the level of effectiveness:
(a) as the difference between the change in the interest value of the hedge instrument (see item AG114(h)) and the change in the value of the entire hedged position attributable to changes in the hedge interest rate (including the effect that changes in the hedge interest rate had on the fair value of any prepayment option incorporated); or (b) using the following approximation. The entity:
(i) calculates the percentage of assets (or liabilities) in each repricing period that was placed under hedge, based on the estimated repricing dates at the last date on which it tested effectiveness; (ii) applies this percentage to its revised estimate of the amount in that repricing period to calculate the amount of the hedged position based on the revised estimate; (iii) calculates the change in the fair value of the revised estimate of the hedged position attributable to the covered risk and presents it as mentioned in item AG114(g); (iv) recognizes ineffectiveness equal to the difference between the amount determined in (iii) and the change in the fair value of the hedge instrument (see item AG114(h)).

AG127. When measuring effectiveness, the entity distinguishes the revisions of the estimated repricing dates of existing assets (or liabilities) from the origin of new assets (or liabilities), with only the first resulting in ineffectiveness. All revisions to the estimated repricing dates (except those excluded in harmony with item AG121), including any reallocation of existing items between periods, are included when revising the estimated amount in a period in harmony with item AG126(b)(ii) and therefrom when measuring effectiveness. Once ineffectiveness is recognized as described above, the entity establishes a new estimate of the total assets (or liabilities) in each repricing period, including new assets (or liabilities) that have been originated since the last time it tested effectiveness, and designates a new amount as the hedged position and a new percentage as the covered percentage. The procedures mentioned in item AG126(b) are then repeated on the next date on which it tests effectiveness.

AG128. Items that were originally scheduled in a repricing period may be derecognized due to a prepayment earlier than expected or amortizations caused by asset impairment losses or sale. When this occurs, the amount of the change in fair value included in the separate line item mentioned in item AG114(g) that relates to the unrecognized item must be removed from the balance sheet, and included in the result arising from the derecognition of the item. For this purpose, it is necessary to know

SECURITIES AND EXCHANGE COMMISSION COMMISSION
Seven of September Street, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – CEP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Cincinato Braga Street, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brazil - Tel.: (11) 2146-2000 the repricing period in which the unrecognized item was scheduled, because this determines the repricing period from which it must be removed and, therefore, the amount to remove from the separate line item mentioned in item AG114(g). When an item is not recognized, if it is possible to determine the period in which it was included, it is removed from that period. If it is not possible, it is removed from the first period if the derecognition resulted from higher prepayments than expected, or allocated to all periods containing the unrecognized item on a systematic and rational basis if the item was sold or became impaired due to asset impairment losses.

AG129. In addition, any amount related to a particular period that has not been recognized when the period expires is recognized in profit or loss at that time (see item 89A). For example, the case of an entity that schedules items for three repricing periods. In the previous redesignation, the change in fair value reported in the single line item on the balance sheet was the asset of $ 25. The amount represents amounts attributable to periods 1, 2 and 3 of $ 7, $ 8 and $ 10, respectively. In the next redesignation, the asset attributable to period 1 was realized or rescheduled to other periods. Therefore, $ 7 is not recognized in the balance sheet and recognized in profit or loss. $ 8 and $ 10 are now attributable to periods 1 and 2, respectively. These remaining periods are then adjusted, as necessary, for changes in fair value, as described in item AG114(g).

AG130. To illustrate the requirements of the two previous items, suppose that the entity schedules assets for allocation to a percentage of the portfolio in each repricing period. Suppose also that it schedules $ 100 in the first two periods. When the first repricing period expires, $ 110 of the assets are not recognized due to expected and unexpected reimbursements. In this case, the entire amount contained in the separate line item, mentioned in item AG114(g), that relates to the first period is removed from the balance sheet, plus 10% of the amount that relates to the second period.

AG131. If the covered amount for a repricing period is reduced without the related assets (or liabilities) being derecognized, the amount included in the separate line item mentioned in item AG114(g) that relates to the reduction must be amortized in accordance with item 92.

AG132. The entity may apply the approach defined in items AG114 to AG131 to the portfolio hedge that was previously accounted for as a cash flow hedge in accordance with Technical Pronouncement CPC 39. This entity must revoke the previous designation of cash flow hedge in accordance with item 101(d) and apply the requirements defined in this item. It must also redesignate the hedge as a fair value hedge and apply the approach defined in items AG114 to AG131 prospectively to subsequent accounting periods.

APPENDIX B – REMEASUREMENT OF EMBEDDED DERIVATIVES
This appendix, equivalent to IASB Interpretation IFRIC 9, is an integral part of this Pronouncement.

References

Technical Pronouncement CPC 38 – Financial Instruments: Recognition and Measurement;
Technical Pronouncement CPC 13 – Initial Adoption of Law No. 11.638/07 and Provisional Measure No. 449/08;
Technical Pronouncement CPC 15 – Business Combinations;

Background
B1. This Pronouncement, in item 10, describes an embedded derivative as a component of a hybrid instrument (combined) that also includes a non-derivative contract that hosts it — with the effect that some of the cash flows of the combined instrument vary in a manner similar to a standalone derivative.
B2. This Pronouncement, in item 11, requires that the embedded derivative be separated from the contract that hosts it and accounted for as a derivative if, and only if:
(a) the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the contract that hosts it; (b) a separate instrument with the same terms as the embedded derivative meets the definition of a derivative; and (c) the hybrid instrument (combined) is not measured at fair value with changes in fair value recognized in profit or loss (i.e., a derivative that is embedded in a financial asset or financial liability at fair value through profit or loss is not separated).

Scope
B3. Without prejudice to the provisions in items B4 and B5 below, this appendix applies to all embedded derivatives within the scope of this Pronouncement.
B4. This appendix does not apply to embedded derivatives acquired in:
(a) business combinations (as defined in Technical Pronouncement CPC 15 – Business Combinations); (b) combinations of entities or businesses under common control as defined in items B1 to B4 of Technical Pronouncement CPC 15; or (c) formation of joint ventures as defined in Technical Pronouncement CPC 19 – Joint Ventures; or their possible remeasurement at the acquisition date.
B5. This Appendix does not deal with the acquisition of contracts with embedded derivatives in contracts acquired in:
(a) business combinations (as defined in CPC 15); (b) a combination of entities or businesses under common control as described in paragraphs B1 to B4 of CPC 15; or (c) the formation of joint ventures as defined in CPC 19 – Joint Ventures; nor their eventual remeasurement at the date of acquisition.

Issues of the appendix
B6. This Pronouncement requires that the entity, when it first becomes a party to a contract, evaluate whether any embedded derivative in the contract must be segregated and accounted for as a derivative in accordance with Pronouncement CPC 38. Thus, this appendix deals with the following issues:
(a) Does the Pronouncement require that such evaluation be made only when the entity first becomes a party to the contract, or must the evaluation be reconsidered throughout the life of the contract?
(b) Must the entity that adopts for the first time make its evaluation based on the conditions that existed when the entity became a party to the contract, or those of when the company adopted the CPC Pronouncements for the first time?

Consensus
B7. The entity must evaluate whether it is necessary for an embedded derivative to be separated from the contract that hosts it and accounted for as a derivative the first time it participates in the contract. Subsequent remeasurement is prohibited unless there is (a) a change in the terms of the contract that significantly modifies the cash flows that, otherwise, would be required by the contract, in which case remeasurement is necessary or (b) a reclassification of a financial asset from the fair value through profit or loss category to another category. The entity determines whether the modification of cash flows is significant, considering to what extent the future cash flows associated with the derivative, the contract that hosts it, or both, have changed and whether this change is significant relative to the cash flows previously expected by the contract.

B7A. The evaluation of whether an embedded derivative must be segregated from the contract that hosts it and accounted for as a derivative in the reclassification of a financial instrument from the fair value through profit or loss category in accordance with item B7 must be made in accordance with the circumstances that existed on the most recent of the following two dates:
(a) when the entity first became a party to the contract; and

(b) a change in the terms of the contract that significantly modified the cash flows that would otherwise have been required under the contract.

To carry out this assessment, item 11(c) of CPC 38 shall not be applied (the hybrid (combined) contract shall be treated as if it had not been measured at fair value with changes in fair value recognized in profit or loss). If the entity is unable to carry out this assessment, the hybrid (combined) contract shall remain classified as fair value through profit or loss in its entirety.

B8. An entity that adopts the CPC Pronouncements for the first time shall assess whether it is necessary for an embedded derivative to be separated from the host contract and accounted for as a derivative based on the conditions (i) that existed when the entity initially entered into the contract or (ii) at the date when remeasurement is required by item B7; whichever is later.

Resolution CVM 119 Approves Consolidated Technical Pronouncement CPC 38 on Financial Instruments: Recognition and Measurement

Lineage: In force

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