Resolution CVM 223

The PRESIDENT OF THE SECURITIES AND EXCHANGE COMMISSION - CVM makes public that the Board, in a meeting held on December 3, 2024, 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, APPROVED the following Resolution:

Art. 1. It makes mandatory for publicly held companies the Technical Orientation OCPC 10 – Carbon Credits, Emission Allowances (allowances) and Decarbonization Credits (CBIO), issued by the Accounting Pronouncements Committee – CPC, as per Annex “A” to this Resolution.

Art. 2. This Resolution enters into force on January 1, 2025, applying to fiscal years beginning on or after that date.

Signed electronically by
JOÃO PEDRO BARROSO DO NASCIMENTO
President

Summary Item
OBJECTIVE 1 - 6
SCOPE 7
ECONOMIC AGENTS AND BUSINESS MODELS 8 - 14
CARBON CREDIT MARKET: MANDATORY MARKET AND VOLUNTARY MARKET 15 - 25 NORMATIVE BASES USED 26 - 29 CARBON CREDITS (tCO2e) 30 - 45 Recognition 30 -37 Presentation 38 - 42 Initial and subsequent measurement 43 Disclosure 44 - 45 EMISSION ALLOWANCES (ALLOWANCES) 46 - 72 Description of the observed model in the international market: emission trade system (ETS) 46 - 52 Accounting by the intermediary 53 - 56 Accounting by the end user 57 - 72 DECARBONIZATION CREDITS (CBIO) 73 - 84 Brazilian case – RenovaBio (CBIO) 73 - 114 Accounting by the originator 85 - 96 Recognition and initial measurement 88 - 92 Subsequent measurement 93 Derecognition 94 Disclosure 95 - 96 Accounting by the intermediary 97 - 100

The objective of this Orientation is to address the basic requirements for recognition, measurement, and disclosure of carbon credits (tCO2e) 1, Emission Allowances (allowances) 2 and decarbonization credits (CBIO) to be observed by entities in the origination and acquisition for compliance with decarbonization (retirement) or trading targets, as well as to provide for associated liabilities, whether arising from legal or unformalized obligations, as defined in CPC 25 - Provisions, Contingent Liabilities and Contingent Assets.
This Orientation is a first step to direct the accounting treatment of carbon credits (tCO2e), Emission Allowances (allowances) and decarbonization credits (CBIO) of entities operating in the Brazilian market. However, this Committee recognizes that the breadth, evolution of the topic, and enactment of related laws may lead to future revisions of this Orientation.
This Orientation does not aim to address tax and legal issues associated with carbon credits (tCO2e), Emission Allowances (allowances) and decarbonization credits (CBIO).
Thus, the primacy of economic substance over legal form was sought to achieve faithful representation of the economic event proposed to be represented in the financial statements of reporting entities.
Due to the absence of specific accounting treatment for the topic in international financial reporting standards (IFRS Accounting Standards), this Committee based this Orientation on existing pronouncements, interpretations, and orientations already in the Brazilian accounting framework and in international accounting standards, in line with the conceptual framework for financial reporting, to define the treatments set forth herein.
It is worth noting that if the International Accounting Standards Board (IASB) issues any specific document related to the recognition, measurement, and disclosure of the topics treated in this document, the present material will be revised in due course.
SCOPE
This Orientation addresses the accounting criteria for recognition, measurement, and disclosure of economic events related to the participation or operation of entities in mandatory or voluntary carbon credit (tCO2e) markets (commonly called carbon credit markets), Emission Allowances (allowances) and decarbonization credits (CBIO). Such economic events are commonly linked to the origination, trading, or retirement of these assets, as well as situations that may give rise to potential liabilities associated with entities' participation in these markets, arising from legal or unformalized obligations. The requirements of this Orientation were developed taking as a basis the dynamics, structure, and functioning of the carbon credit (tCO2e), emission allowance (allowances), and decarbonization credit (CBIO) market. However, as provided for in item 11(a) of CPC 23, such requirements should be consulted and may be considered as a reference in the accounting of other types of environmental credits, whether in a voluntary or mandatory market (when instituted), provided that the economic substance of the related events is similar to those described herein.
ECONOMIC AGENTS AND BUSINESS MODELS
To guide the identification of economic events related to the assets treated in this Orientation, its development began with the identification of economic agents and their respective business models, considering the value chain in the process of decarbonizing the economy.
The economic agents were grouped, according to their role in the chain, between Government, Originators, Intermediaries, and End Users, whose characteristics are similar, regardless of the products traded or the market where they are traded. It is emphasized, however, that such segregation is indicative and does not mean that an economic agent cannot assume more than one role simultaneously.
Thus, economic agents may have more than one business model for the assets treated in this Orientation, that is, both the Originator and the Intermediary may use part of these credits for the purpose of compensating their own GHG (Greenhouse Gas) emissions.
The Government is the agent responsible for defining and implementing public policies for the decarbonization of the economy, imposing reduction and/or compensation targets for GHG emissions and restrictions and/or fines in case of non-compliance with these targets. It is not the scope of this Orientation to describe the accounting treatment to be adopted by the Government due to its participation in this market, being cited here for understanding the functioning of the market and to complement the list of agents operating in it.
The Originator is the economic agent that controls the economic resources with the potential to generate the assets treated in this Orientation through projects that reduce or avoid GHG emissions, as well as those generated by projects that sequester or remove GHG from the atmosphere. Therefore, its business model involves the origination of these assets for sale in the normal course of business.
The Intermediary is the economic agent that essentially buys and sells the assets treated in this Orientation. This intermediary, depending on its business model, may meet the definition of a broker-trader, as defined in item 5 of CPC 16. Item 5 of CPC 16 defines this agent as follows:

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
5. Commodity operators (broker-traders) 3 are those who buy or sell commodities for others or for their own account. The stocks referred to in item 3(b) are essentially acquired with the purpose of sale in the near future and to generate profit based on price variations or operator margins. [...]
14. The End User is the economic agent whose business model involves the acquisition of the assets treated in this Orientation for the purpose of retirement.
CARBON CREDIT MARKET: MANDATORY MARKET AND VOLUNTARY MARKET
15. Regarding the environment in which the assets treated in this Orientation are traded, two markets with distinct economic and legal characteristics were identified, namely, the mandatory market and the voluntary market.
16. The mandatory market is one in which there is direct or indirect interference (through an agency, for example) of a government entity to incentivize or disincentivize actions of economic agents that would not be carried out if no interference were effected.
17. There is a series of types of possible interferences that can be practiced by government entities, such as, for example, fines for non-compliance with reduction or compensation targets for GHG emissions, restrictions or prohibitions on access of the regulated entity to debt security, product, or service trading markets, limitation of access to raising financial resources in development banks, among other examples.
18. According to the Brazilian Business Council for Sustainable Development (CEBDS) 4:
Regulated jurisdictional markets may adopt intensity-based targets or absolute targets, with a quantity-based carbon budget.
Jurisdictional market initiatives with intensity-based targets that adopt carbon intensity generally operate at the commercialization link of the chain. The regulated agent must meet a carbon intensity target per unit consumed or sold of an energy source. If it fails, there is a carbon debit that can be compensated by carbon credits produced by different technological pathways of low-carbon energy producers. This is the dynamic of the California Low Carbon Fuel Standard, Renovabio, California Renewable Energy Credits, and China Green Power Certificate. Markets with absolute targets are the so-called cap-and-trade systems or emissions trading systems (ETS) 3 The mention of the term “commodities” does not mean asserting that environmental credits would be equivalent to commodities. cebds.org-mercado-de-carbono-marco-regulatorio-mercado-carbono-marco-regulatorio-sem-olhos.pdf (accessed on 05/06/23), p. 14.

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 and generally the point of regulation is directly at the emission sources.
19. The voluntary market is one in which transactions between interested parties to trade are carried out spontaneously, free from any government interference and motivated by the exercise of discretionary interests between the parties involved in the transaction.
20. Transactions carried out in these markets may take place in an organized trading market or through bilateral agreements entered into directly between the parties. Transactions in these markets may occur between jurisdictions.
21. Still according to the Brazilian Business Council for Sustainable Development (CEBDS) 5:
In voluntary markets, supply is generated by projects that reduce emissions with the baseline credit system. The generated credits are certified and offered to be used as offsets for a voluntary emission reduction target (companies and individuals).
The fungibility and additionality of such credits vary according to the criteria used by certifiers (VCS, Gold Standard, ACR, CAR, etc.). The market, in turn, differentiates prices by source, origin, and regulatory compatibility.
22. Regardless of the market, mandatory or voluntary, its development stems from the demand of investors and, in a broader sense, of society in general, for actions and information on sustainability policies practiced or intended by reporting entities.
23. There are cases where entities are obligated to implement actions related to sustainability policies by imposition of the State (legislation or other normative act), which means that the entity has no realistic alternative but to comply with the obligation. The existence of this legal obligation is common in mandatory markets.
24. On the other hand, some entities voluntarily commit to sustainability actions (reductions and/or compensation of GHG emissions), through statements, practices, and policies disclosed, potentially creating valid expectations in market agents, requiring an assessment of whether this event gives rise to an unformalized obligation. This characteristic is present in voluntary markets.
25. In these markets, on one side are GHG emitters, who may have a legal or unformalized obligation to reduce and/or compensate their emissions, and on the other, entities that promote the removal or reduction of GHG emissions in the atmosphere. When this removal or reduction is duly certified, carbon credits (tCO2e) are originated.
NORMATIVE BASES USED ibid., p. 13.

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
26. In addition to the Conceptual Framework for Financial Reporting (CPC 00), the main Technical Pronouncements used as a basis for the development of this Orientation were:
(a) Impairment of Assets (CPC 01)
(b) Intangible Assets (CPC 04);
(c) Government Grants and Assistance (CPC 07); (d) Inventories (CPC 16); (e) Accounting Policies, Changes in Accounting Estimates and Errors (CPC 23) (f) Provisions, Contingent Liabilities and Contingent Assets (CPC 25); (g) Presentation of Financial Statements (CPC 26); (h) Financial Instruments: Presentation (CPC 39); (i) Fair Value Measurement (CPC 46); (j) Revenue from Contracts with Customers (CPC 47); (k) Financial Instruments (CPC 48); and (l) Disclosure in General Purpose Financial Reporting (OCPC 07)
27. In observance of the provisions of item 31 of CPC 26, an entity does not need to comply with a specific disclosure required by this Technical Orientation if that information is not material. On the other hand, the entity must consider whether it discloses additional information to allow users of the financial statements to understand the impact of certain transactions, other events, and conditions on its financial position and performance. In this sense, the concept of materiality provided for in OCPC 07 should be used. It is worth noting that the concept of materiality encompasses both quantitative and qualitative aspects of the information to be reported.
28. Similarly, for presentation purposes, the entity must also observe the provisions of item 29 of CPC 26.
29. Any changes in accounting practices due to the observance of the requirements of this Orientation shall observe the treatment criteria established by CPC 23.
CARBON CREDITS (tCO2e)
Recognition
30. The first question to be answered is whether the carbon credit (tCO2e) possesses the necessary characteristics to be considered an asset in light of the definition provided in items 4.3 and 4.4 of CPC 00, namely:
(a) 4.3 An asset is a present economic resource controlled by the entity as a result of past events.
(b) 4.4 An economic resource is a right that has the potential to produce economic benefits.

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
31. The carbon credit (tCO2e) represents an asset when it results from certified projects that reduce or avoid GHG emissions or from certified projects that sequester or remove GHG from the atmosphere, originated by economic resources controlled by an entity, which becomes eligible for recognition in its assets when the criteria for recognition present in the specific technical pronouncements are met.
32. The economic resources controlled by an entity that generate environmental benefits may result, for example, from economic resources that sequester CO2 from the atmosphere (as in the case of forests), from industrial plants restructured to reduce GHG emissions into the atmosphere, from alternative sources of renewable energy generation, etc.
33. The certification of the environmental benefits produced by economic resources controlled by the entity produces a right, with the potential to produce economic benefits, called carbon credit (tCO2e), eligible for trading on stock exchanges, over-the-counter market, or through bilateral contracts, among other roles in the context of the activities developed by the entity.
34. The carbon credit (tCO2e) in addition to not being cash or an equity instrument of another entity, also does not establish to its holder the contractual right to receive cash or another financial asset from another entity (as would be the case, for example, of a bank deposit where the nature of the contractual arrangement establishes to the depositor the right to obtain cash from that deposit with the respective financial institution).
35. Thus, the criteria for its classification as a financial asset are not met, according to the requirements established by CPC 39 (item 11, see also AG 3 and AG 12). For the purposes of this Orientation, the carbon credit (tCO2e) is, therefore, a non-financial, intangible, and non-physical asset.
36. It is worth noting that purchase and sale contracts for future settlement that have the carbon credit (tCO2e) (non-financial intangible asset) as the underlying asset may be considered as if they were financial instruments, provided that the prescriptions contained in items 8 to 10 of CPC 39 are observed (see also AG 20 to AG 23).
37. The identification of the business model regarding the asset, as operated by the economic agents described in items 8 to 14, is both fundamental for its recognition as well as for its initial and subsequent measurement, as will be addressed from item 38.
Presentation
38. The appropriate presentation of carbon credits (tCO2e) 6 must take into account the specific business models of each economic agent and their objectives in originating, trading, or retiring such credits, in a manner consistent with what CPC 00 establishes, as well as the 6 Refers to the title or certificate, as defined in Appendix A.

1 For the purposes of this Orientation, the meaning of the term “carbon credit” encompasses the Verified Emission Reduction or Removal Certificate – CRVE and the carbon credit external to the Brazilian Greenhouse Gas Emissions Trading System – SBCE, as approved by the Chamber of Deputies on 11/22/24 and sent for presidential sanction. 2 For the purposes of this Orientation, the meaning of the term “emission allowance” encompasses the Brazilian Emissions Quota (CBE), as approved by the Chamber of Deputies on 11/22/24 and sent for presidential sanction.

3 The mention of the term “commodities” does not mean asserting that environmental credits would be equivalent to commodities. cebds.org-mercado-de-carbono-marco-regulatorio-mercado-carbono-marco-regulatorio-sem-olhos.pdf (accessed on 05/06/23), p. 14.

5 ibid., p. 13.

6 Refers to the title or certificate, as defined in Appendix A.

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 deficit and will need to buy more allowances on the market for later delivery to the government and fulfillment of their target.
51. It is not appropriate here to detail the regulatory specifics of ETS programs, especially because there is
variability between jurisdictions. However, it is worth highlighting the accounting treatment that has been observed in major markets, since these instruments, although not similar in concept to carbon credits (tCO2e), their accounting still serves as a guide for the recording of other instruments.
52. It is worth noting upfront that in the ETS market, as a rule, there is no figure of the Originator, since this role is performed by the government, which creates the allowances and distributes them. Thus, the analysis of accounting treatment is centered on the Intermediary and the End User of allowances (that agent who will use them for final proof of their emissions).
Accounting by the intermediary
53. The Intermediary in the ETS market is the one who buys allowances with the intention of reselling them for profit. It is worth noting that allowances do not meet what is stated in item 11 of CPC 39 and, therefore, do not fit the definition of financial instruments, of that Technical Pronouncement.
54. In this context, for the purposes of this Guidance, emission permits (allowances) are
non-financial assets, intangible, fungible, standardized, tradable on an exchange or over-the-counter market, which represent permissions to emit GHGs.
55. Given this, it is worth noting that CPC 04 - Intangible Asset (item 3(a)), determines that intangible assets held for sale in the ordinary course of business are outside the scope of that
Technical Pronouncement and must be treated as inventories, under the scope of CPC 16.
56. Thus, for the purposes of this Guidance, the Intermediary who maintains inventory for sale in the ordinary course of business, recognizes the asset at cost and subsequently measures it at cost or net realizable value, whichever is lower, as per item 9 of CPC 16. If the intermediary meets the
definition of broker-trader, as per items 3(b) and 5 of CPC 16, he may adopt as a subsequent measurement policy fair value less costs to sell. If the intermediary who meets the broker-trader definition opts to measure by cost, then he must disclose in explanatory notes the fair value less costs to sell. In cases where the intermediary includes in his business model also the use of allowances for the periodic reconciliation of obligations, he must follow the accounting of the end user for these allowances. Accounting by the end user
57. The accounting of ETS by end users of allowances has until today been the subject of discussions.
Initially, the IFRS Interpretations Committee (IFRIC) tried to regulate the topic by issuing IFRIC 3, Emission Rights. However, the proposed model generated criticism from the market that resulted in the revocation of that Interpretation in 2005. Thus, up to the date of issuance of this Guidance, there was no consistent international practice in the market regarding the form of accounting of allowances for the European cap and trade market, being possible to identify three methods normally accepted. One of them is the model proposed by IFRIC 3, which was revoked; the second criterion, known as Government Grant, is similar to the IFRIC 3 model with some modifications; and the third, Net Liability, is a model of presentation of assets and liabilities on net bases.
58. In the IFRIC 3 model, allowances received free of charge from the government are recorded
initially at fair value, with the counterpart being the government subsidy account in the liability. This fair value represents the initial recognition value of the allowance, which is registered as an intangible asset.
59. Allowances acquired on the market are recorded at acquisition cost on the date of
initial recognition.
60. As the participant produces and emits GHGs into the atmosphere, a liability arises, which is the
obligation to deliver to the government allowances related to such emissions. The emergence of this liability has as its counterpart the result of the period, as GHG emissions occur.
61. Concomitantly, emissions are the parameter for the allocation of the previously recognized subsidy. As the participant emits GHGs, the government subsidy recorded in the liability is allocated to the period's result as subsidy revenue, implying its write-off.
62. Since the constitution of the liability against the asset, the model proposed by IFRIC 3 implies
an accounting mismatch. While the asset is subsequently measured at adjusted cost by impairment, the liability is measured by the best estimate at the reporting date of the cash outflow necessary to settle it, which in this case corresponds to the fair value of the allowances required to settle the obligation at the reporting date.
63. This accounting mismatch generated criticism of the IFRIC 3 approach, leading the IFRIC to revoke the
document. Despite this, due to the lack of another standard in its place, many participants still use it as a guide for accounting.
64. In the Government Grant model, the aforementioned accounting mismatch was sought to be solved, eliminating the measurement difference that existed between assets and liabilities. At the moment of recognizing the liability, the participant must observe if it has sufficient allowances in its assets to settle the recognized obligation. If positive, it must account for the provision taking into consideration the book value of the allowances held.
65. If the amount of the participant's GHG emissions exceeds the total that the held allowances allow to emit, the excess of such provision must be registered at the fair value of the allowances to be acquired, since it will have to buy permissions to settle its environmental obligation with the government.

Subsequent Measurement
93. The fair value of the CBIO, as expressed in item 91, must be used as its assigned cost in subsequent measurement, adjusted to net realizable value if lower, in line with item 9 of CPC 16. The establishment of an adjustment to net realizable value, or its reversal, must have as consideration the result of the period in light of item 34 of CPC 16.

Derecognition
94. The derecognition of the CBIO is recognized in the result upon the transfer of its control to the buyer concomitantly with the recognition of sales revenue, as per item 31 of CPC 47.

Disclosure
95. On the date of the financial statements, there may be CBIOs in the issuance process due to the period granted by ANP of up to 60 days counted from the issuance of the NF-e (electronic invoice) for the sale of biofuel for registration in the CBIO Platform.
96. The administration of the reporting entity must disclose, in the explanatory notes, the quantity of CBIOs in stock and those in the issuance process.

Accounting by the Intermediary
97. Entities that essentially buy or sell CBIOs act as intermediaries. Depending on their business model, this entity may meet the definition of broker-trader, as defined in item 5 of CPC 16.
98. In cases where the entity acts as an intermediary, and its business model meets the definition of broker-trader in the purchase and sale of CBIOs, it must observe the requirements of Technical Pronouncement CPC 16, item 3(b), which allows broker-traders to measure their inventories at fair value less costs to sell, with subsequent changes in this fair value being recognized in the result of the period in which they are verified.
99. Therefore, in the case of entities that qualify as intermediaries and meet the definition of

Accounting by the End User
101. For the purposes of this guidance, the end user of CBIOs are the fuel distributors who use these credits to compensate for indirect GHG emissions arising from their sales of fossil fuels.
102. As provided in Article 7 of Law 13.576, the establishment of targets for the acquisition of CBIOs in the current year results from the sale of fossil fuels in the previous year. The aforementioned article is repeated:
Article 7. The annual compulsory target referred to in Article 6 of this Law shall be broken down, for each current year, into individual targets, applied to all fuel distributors, proportional to their respective market share in the sale of fossil fuels in the previous year. (Underlines added).
103. In this manner, it is possible to infer the understanding that the taxable event for the acquisition of CBIOs by distributors arises as these entities sell fossil fuels.
104. The analysis of when the obligation to acquire CBIOs arises for entities that trade fossil fuel is a determining condition for the accounting treatment recommended in this Guidance, because the adequate understanding of the taxable event of this obligation is an essential part to establish the moment when such entities must accountably recognize a provision arising from this obligation, in the manner of item 14 of CPC 25.
105. It is worth noting that ANP discloses in December of the year prior to the validity of the definitive target a preliminary estimate of the quantity of CBIOs that should be acquired by entities that traded fossil fuels. By March of the year of validity of the target, ANP discloses the definitive target of such obligations.
106. However, as provided in Article 7 of Law 13.576, the obligation to acquire CBIOs results from the sale of fossil fuels, so that the disclosures by ANP can be understood as mere administrative formalization of the obligations that arise at the act of sale of such fuels.
107. Therefore, in line with item 14 of CPC 25, entities must, as they trade

LIABILITY ARISING FROM THE COMMITMENT TO COMPENSATE OR NEUTRALIZE GHG EMISSIONS (DECARBONIZATION COMMITMENTS) General Aspects
115. The acquisition of carbon credits (tCO2e), whether in a stock exchange market, over-the-counter market, or bilateral agreements, has as a basic presupposition that the acquirer does so for trading or to comply with its established compensation targets for emissions (scopes 1, 2, or 3).

Unformalized Obligations
121. The accounting recognition of an entity's decarbonization commitments is directly related to the creation of a valid expectation in third parties that it will comply with such responsibilities.
122. The basic foundation to be analyzed is whether the public commitment assumed by the entity is sufficiently specific and detailed and, therefore, capable of generating valid expectation in third parties. A policy approved by the Board of Directors and published by the company is an example of creating valid expectation in third parties that the entity will comply with the assumed responsibilities.
123. Declarations made by the entity, or its legal representatives, observing the basic foundation described in the previous item (122) to carry out future sustainability actions, can create valid expectation in its stakeholders that a commitment has been assumed and that it will be fulfilled. This context can, for example:
a) direct the allocation of resources by capital providers (debt or equity) that have these sustainability actions as an allocation “driver”; b) attract customers/consumers who have as a “driver” the consumption of products/services from entities with this type of engagement;

The commitment is a present obligation
126. CPC 00 defines an obligation as a duty or responsibility owed to another party (whether it is an individual, group of people, entity, identifiable or not) that the entity does not have the practical capacity to avoid.
127. CPC 00 also establishes that obligations can exist even in the absence of contractual formalizations, specific legislation, or other similar means. They can result from usual practices, published policies, or specific declarations of the entity to the extent that the entity does not have the practical capacity to act in a manner inconsistent with these practices, policies, or declarations. The obligation that arises in these situations is characterized as an unformalized obligation.
128. Similarly, CPC 25 also distinguishes legal obligations from unformalized obligations and defines “event that creates obligation” as an “event that creates a legal or unformalized obligation that makes the entity have no realistic alternative but to settle this obligation”.
129. On the date of issuance of this Guidance, within the legal and regulatory environment in Brazil, there is no knowledge of the existence of specific legislation or other type of normative instrument, besides Law No. 13.576/2017, which instituted the National Policy of Biofuels (RenovaBio), that determines that entities have the legal obligation to carry out the neutralization or compensation of their GHG emissions. In this way, entities that, voluntarily, commit to such targets, must evaluate if within their commitment and positioning arises an unformalized obligation.

SECURITY AND EXCHANGE COMMISSION OF BRAZIL
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, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/SP – CEP: 01333-010 – Brazil - Tel.: (11) 2146-2000
130. According to CPC 25, an unformalized obligation is an obligation that results from the entity's actions in which: (a) by way of a pattern established by past practices, published policies, or a current declaration sufficiently specific, the entity has indicated to other parties that it will accept certain responsibilities; and (b) as a consequence, the entity creates a valid expectation in these other parties that it will comply with these responsibilities.
131. It is important to consider that there does not necessarily always exist a causal relationship between statements made by entities regarding their engagement with environmental sustainability practices and the generation of valid expectations in third parties, whose effects imply the outflow of economic resources from the reporting entity. In this context, this Guidance adopts a principles-based approach, indicating that it is up to entities to evaluate whether their statements create or do not create accounting provisions, in line with the guidelines established by CPC 25.
132. Given the aforementioned definitions, the existence of an unformalized obligation, within the concept established by CPC 25, must be analyzed from the disclosures of commitments assumed, actions, positions, practices, policies, and visions that the reporting entity transmits to third parties. If these events originate valid expectations in third parties that the entity will comply with its responsibilities, a provision must be recognized, provided that the other criteria of CPC 25 are met. In its judgment, the entity must consider all applicable facts and circumstances and determine based on available evidence whether the criteria for the recognition of a liability derived from an unformalized obligation have been met.
133. Sufficiently specific declarations, published policies, disclosures in official documents of the entity, or other forms of public positioning can give rise to an unformalized obligation that makes the entity have no realistic alternative but to comply with this obligation.
134. It is emphasized that declarations of an entity that have a public nature, as exemplified above, can involve different forms and be associated with different requirements (including legal, regulatory, or even voluntary informative nature), and should not be seen as definitive aspects, but rather as indicators.
135. Judgment must be applied to evaluate whether these statements would generate valid expectation in other parties that the entity would assume certain responsibilities associated with past events and to which the disclosed commitments refer.
136. Factors that affect the judgments set forth in items 132 to 134 above may include, for example 8:
(a) The language used in the declarations – a declaration specifying the actions that the entity “will take”, “is committed to take”, or “commits to take” may bring more reliable evidence that the entity will fulfill such commitments compared to declarations that are limited to describing ambitions, targets, or aspirations. 8 Understanding expressed by the International Financial Reporting Interpretations Committee (IFRIC) in a November 2023 meeting, agenda available at https://www.ifrs.org/news-and-events/calendar/2023/november/ifrs-interpretations-committee/.

The obligation is derived from events already occurred
138. For there to be a liability, it is also required that the present obligation exists as a result of past events, that is: (i) the entity has already obtained economic benefits (which may include, for example, products or services) or taken an action that generates an obligation; and (ii) as a consequence, the entity will or may have to transfer an economic resource that it would not otherwise have to transfer.
139. The reference to “as a result of past events” is based on the concept of “event that creates an obligation”, which CPC 25 defines as an event that creates a legal or unformalized obligation that makes the entity have no realistic alternative but to comply with this obligation.

SECURITY AND EXCHANGE COMMISSION OF BRAZIL (CVM) Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – ZIP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/SP – ZIP: 01333-010 – Brazil - Tel.: (11) 2146-2000

Reputational risk, by itself, is not a defining element of the existence of a liability at the balance sheet date, and must be assessed together with other factors, as described in CPC 25. However, reputational risk is an indicator that must be considered in the entity's judgment regarding the absence of a realistic alternative to fulfilling the unformalized obligation.
Financial statements deal with the entity's net asset position at the end of its reporting period and not its possible position in the future. Therefore, no provision is recognized for expenses that need to be incurred to operate in the future. The only liabilities recognized accounting-wise are those that already exist at the balance sheet date. In this sense, only obligations arising from past events, which exist independently of future actions by the entity, as defined by CPC 25, should be recognized as provisions. Thus, commitments for future investments in long-term assets – CAPEX (capital expenditure) are not a basis for liability recognition, as there is no past event that creates the obligation. However, legal or unformalized obligations related to restructuring must be recognized if the requirements set forth in CPC 25 are met.
Still in this context, commitments related to the neutralization or compensation of emissions must be recognized as a liability only to the extent that they refer to GHG emissions already realized up to the reporting date. In this way, expectations of future emissions related to compensation commitments already assumed should not be recognized as a liability, since the past event that would result in the recognition of the obligation has not occurred.

Obligation whose fulfillment is expected to result in the outflow of resources from the entity

CPC 00 provides that one of the ways in which the outflow of an economic resource can produce benefits for the entity is through the possibility of extinguishing liabilities by transferring this economic resource.
The entity may acquire carbon credits (tCO2e) to neutralize or compensate for its carbon emissions: (i) by acquiring them from other entities that trade such assets in the voluntary or mandatory market; or (ii) by investing resources in its own or third-party projects that will generate carbon credits (tCO2e) in the future, upon their completion. Such acquisition formats must be disclosed in explanatory notes in a manner that allows users of the financial statements to be aware of the measures being taken, completion deadlines, project complexity or partnerships, so that they can assess the affected accounting items.
The fulfillment of the compensation or neutralization obligation will only occur through the retirement of certified credits, whether acquired from entities that trade them or through investments in projects, which materializes the outflow of resources from the entity capable of generating economic benefits.

Initial and subsequent measurement

A liability related to the obligations mentioned in the previous items must be recognized to the extent that the aforementioned triggering events occur and measured in accordance with CPC 25, that is, at the best estimate of the resource outflow to fulfill the obligation existing at the balance sheet date.
The best estimate of the resource outflow to fulfill the existing obligation is the amount that the entity would rationally pay to settle the existing obligation at the balance sheet date or to transfer it to third parties.
In cases where the entity already possesses carbon credits (tCO2e) to compensate for emissions that have occurred (retirement), it is understood that the best estimate of the value to fulfill the obligation at the balance sheet date is equivalent to the accounting value of the recognized carbon credits that will be used to compensate for obligations arising from emissions that have occurred.
If there are not enough carbon credits (tCO2e) at the balance sheet date to fulfill the assumed obligation, the value of the liability exceeding the accounting value of the recorded assets must be measured at the best estimate of the value of the resource outflow that will be necessary to fulfill that portion of the obligation not covered.
As established by CPC 25, the evidence to be considered in the estimation process may also include information that has emerged after the reporting date, but that evidences facts and circumstances existing on that date.
In the evaluation and consideration of the uncertainties inherent in the measurement process of these liabilities, one must consider what CPC 25 determines, applying the concepts of expected value, midpoint of scale, or the most likely value.
In light of item 142, the triggering event for the commitment to compensate for GHG emissions is the past emission of these gases, that is, already realized by the entity and properly allocated in the execution of its various processes (production, administrative, commercial, asset formation, etc.). The recognition of the provision related to such commitment will have different counterparties, depending on the entity's ability to allocate emissions to the processes that gave rise to them. Thus, the following counterparty options are possible:

a) Inventory: if the origin of the emission is the production process linked to the entity's main activity; b) Assets under construction: if the origin of the emission is the process of forming fixed or intangible assets; c) Result: if the origin of the emission is the administrative or commercial process of the entity, or if the entity cannot allocate it in a reliable and non-arbitrary manner to the processes described in the previous items.

In light of item 146, the provision must be measured by the best estimate of the resource outflow to fulfill the existing obligation at the balance sheet date. That is, (a) for the portion of the provision already backed by carbon credits (tCO2e) acquired or generated by the entity, its value must correspond to the acquisition or generation cost of the backing; (b) for the portion of the provision without backing or uncovered, by the best estimate of the resource outflow for the acquisition or generation of the carbon credit (tCO2e).

Presentation and disclosure

As determined by CPC 26, the entity must not offset assets and liabilities or revenues and expenses, unless the offset is required or permitted by a Technical Pronouncement, Interpretation, or Guidance from CPC.
This Guidance establishes that the entity must present the carbon credits (tCO2e) held separately from liabilities for neutralization or compensation obligations, regardless of the business model applied.

Extinguishment of liability

The mere acquisition of a carbon credit (tCO2e) by the entity does not extinguish the present obligation to neutralize or compensate for its emissions. Each credit is individually identifiable by a traceable serial number and is taken out of circulation as soon as this credit is registered and withdrawn from the market by the entity for its benefit. This process is referred to as "retirement of the carbon credit (tCO2e)," which is the process in which the economic benefits of the credit flow to the entity through the neutralization or compensation of its emissions and, consequently, can no longer be used by any other entity.

Disclosure

CPC 25 requires the disclosure of the description of the nature of the obligation and the expected schedule of any outflows of economic resources resulting therefrom, as well as the main assumptions about future events and uncertainties existing regarding the value or schedule of these outflows.
When the uncertainty in the judgment exercised by the entity to determine the existence of the liability and/or its measurement is significant, the entity must disclose, together with its significant accounting policies or in other explanatory notes, the judgments made in the process of applying the entity's accounting policies that have the most significant effect on the amounts recognized in the financial statements, as determined by CPC 26.
When the entity makes investments in long-term assets (CAPEX) to fulfill a previously assumed emission reduction commitment, the following disclosures must be made, at a minimum: (a) the objectives, stage, and deadline of the project to which the investment made refers; (b) the uncertainties related to the recovery of the value invested in the project's assets (impairment); (c) the confrontation between the values realized and estimated until the end of the reporting period; and (d) changes in the original project compared to the investments made by the entity.

GLOSSARY

For the purposes of this Guidance, unless otherwise indicated, the following terms have the meanings assigned below:

a. Carbon credits (tCO2e): carbon credits, methane credits, and other similar credits originating from projects that reduce or avoid greenhouse gas (GHG) emissions, as well as those originating from projects that sequester or remove GHGs from the atmosphere. These credits are a standardized form of measurement used to quantify the reduction of GHG emissions resulting from mitigation projects. The concept of additionality is fundamental to the definition of carbon credits (tCO2e), as it refers to the need for the projects originating these credits to reduce or avoid GHG emissions relative to a reference scenario, which represents the situation that would occur in the absence of the project. Therefore, carbon credits (tCO2e) acquired or originated by entities can be used to compensate for their GHG emissions, provided that these credits originate from projects that meet the additionality criteria and are certified by accredited organizations;

b. Decarbonization Credits (CBIO), originating within the scope of the RenovaBio program, instituted by Law No. 13.576/2017; and

c. Emission permits (allowances) issued by Governments (governmental entity) to direct the actions of economic agents according to emission limits defined by governmental agents. It should be noted that allowances are not carbon credits (tCO2e) per se, although they can be categorized as rights similar to carbon credits (tCO2e), as they represent permissions for GHG emissions, within a formal program for the reduction of these gases.

Environmental credit can be understood as a broader expression designating a measure of proven reduction in environmental degradation. In the case of carbon credit, it represents the proven reduction of GHG emissions or its sequestration from the atmosphere. Still within the concept of environmental credit, other mechanisms related to the reduction of environmental impacts that are not directly linked to GHG reduction can be included, such as, for example, recycling credits.
Retirement is the cancellation (withdrawal from circulation in the market where it is registered) of the assets treated in this guidance (carbon credit, CBIOs and Emission permits (allowances) held by agents in the capacity of end-users for the purpose of proving compliance with assumed environmental commitments.

APPENDIX A - EXAMPLES OF ASSESSMENTS OF LEGAL ENVIRONMENTAL OBLIGATIONS AND UNFORMALIZED OBLIGATIONS

A1. The examples presented in this appendix were based on material prepared by the IASB technical team, presented at the April 2023 meeting, within the scope of a project involving the complementation of IAS 37 Provisions, Contingent Liabilities and Contingent Assets. Only the examples with direct linkage to the themes treated in this Guidance will be presented below.

A2. The presentation of the examples as an appendix in this Guidance aims to assist preparers, auditors, and regulators in assessing factual situations in which it is necessary to determine the level of commitment of entities with the reduction of greenhouse gas emissions in their operations and to determine whether such engagements constitute an unformalized obligation requiring the establishment, or not, of a provision to meet such self-imposed commitments by organizations.

A3. It is relevant to highlight that these examples do not intend to exhaust the assessments of each case in itself. These are illustrations of how to methodically organize the commands exposed in IAS 37, whose corresponding standard in Brazil is Technical Pronouncement CPC 25 Provisions, Contingent Liabilities and Contingent Assets, so that the environmental sustainability policies of corporations can be treated in consonance with accounting policies, especially in light of Faithful Representation, a fundamental qualitative characteristic established by Technical Pronouncement CPC 00 (R2) - Conceptual Framework for Financial Reporting.

Example 1 – Negative Credits for Low Emission Vehicles

A specific legislation applies to entities that produce cars for sale in a specific market. According to this legislation, producers:

(a) receive positive credits if, in a calendar year, they manufacture cars whose average fuel emissions are below a government target; or (b) receive negative credits if in that year they manufactured cars whose average fuel emissions exceeded the target.

The legislation requires a producer that receives negative credits for a year to eliminate these negative credits by obtaining and delivering positive credits. A producer can obtain positive credits by buying them from another entity or generating them himself in the following year (producing cars whose average fuel emissions are below the government target).

9 For more details, consult: https://www.ifrs.org/content/dam/ifrs/meetings/2023/april/iasb/ap22-appendix-b-provisions-drafting-suggestions-for-illustrative-examples.pdf.
It should be noted that the examples presented in this section result from materials presented by the IASB technical staff and that these examples, so far, have not been incorporated into definitive versions of standards or agenda decisions. However, CPC understands that these illustrations are relevant for a correct interpretation of what is set forth in this Guidance, as well as these examples represent adequate ways to analyze CPC 25 in light of analogous situations.

According to the legislation, the government cannot force a producer to eliminate its negative credits, but can impose sanctions on the producer who does not do so. These sanctions would not require the payment of fines or penalties, or any other transfer of economic resources, but could deny opportunities to the producer in the future, for example, by restricting the producer's access to the market.

A producer is preparing a financial statement for its annual reporting period ending June 30, 20X1. The cars produced in the six months until June 30 have average fuel emissions that exceeded the government target.

Present obligation as a result of a past event

Positive credits are an economic resource – they give the holder rights that have the potential to produce economic benefits. Therefore, an obligation to deliver positive credits is an obligation to transfer resources that incorporate economic benefits. The producer's production of cars with average fuel emissions exceeding the government target is the action that means he will have or may have to renounce positive credits.

The producer has the practical ability to avoid the renunciation of positive credits to eliminate negative credits only if he has the practical ability to accept the risk of future sanctions. He may have this ability if, for example, he is planning to withdraw from the market and therefore will not be adversely affected by future restrictions on market access, or if it is unlikely that the government will impose significant sanctions.

The producer's present obligation on June 30, 20X1 is determined by reference to the negative credits he would receive for cars manufactured up to that date.

Conclusion

The producer recognizes a provision as it produces cars whose average emissions exceed the government target, unless it has the practical ability to accept the risk of sanctions instead of renouncing positive credits. The provision is determined by reference to the negative credits the producer would receive for vehicles manufactured until June 30, 20X1.

Example 2 – Net-zero Commitment

In March 20X0, a manufacturer publicly announced its commitment to become 'net-zero' by 20X5. It announced that it would:

(a) immediately begin to change the way it manufactures its products with the aim of gradually reducing its greenhouse gas emissions, so that they do not exceed, by 20X5, 40% of its current level; and (b) from 20X5, compensate for the remaining emissions by paying forest commissions in the countries where it manufactures to plant trees.

Present obligation as a result of a past event

The manufacturer's public announcement indicates to the public that it has accepted responsibility for eliminating or compensating for its greenhouse gas emissions from 20X5 onwards. This announcement creates an unformalized obligation for the manufacturer if it creates a valid expectation among members of the public that it will fulfill this responsibility. Assessing whether the announcement creates such an expectation is a matter of judgment, determined by management taking into account the facts and circumstances.

An announcement that meets the criteria to create an unformalized obligation is not sufficient by itself to create a present unformalized obligation. A present unformalized obligation arises only when the manufacturer has emitted greenhouse gases that it has committed to compensate. It then has the obligation to pay for the amount of tree planting necessary to compensate for past emissions.

The manufacturer's commitment to change aspects of the way it manufactures its products is not an obligation to transfer economic resources.

Conclusion

The manufacturer recognizes a provision as a result of its net-zero commitment:

(a) when it has emitted the greenhouse gases it has committed to compensate; and (b) if, at that time, management judges that its announcement gave rise to an unformalized obligation to fulfill net-zero commitments.

The manufacturer recognizes a provision for the best estimate of the values to be paid to forest commissions regarding past emissions.

Resolution CVM 223

Lineage: In force