Accounting in the Transmission Sector

Project Cash Flow

Under the accounting method adopted (CPC 47 – Contractual Assets), the efficiencies generated in the project under construction are accounted for as construction margin in the revenues. That is, the construction revenues now constitute the construction margin, calculated by the difference between the Present Value of the RAP and the Future Value of the Construction Cost upon operating start (see chart). Therefore, if formerly in the Financial Assets the impact of the construction on the result was almost nil during the preoperating phase (construction revenues was equal to construction cost plus PIS/COFINS), now in the Contractual Assets the construction margin will affect the Project Income Statement. In other words, construction revenues are now calculated at construction cost plus construction margin during the preoperating period.

Another important change occurred in the line of Remuneration of the Financial Asset. Under the Financial Asset method, remuneration revenues was calculated based on the TRAF levied on the balance of Financial Assets since the beginning of the concession. Under the Contractual Asset method, the remuneration revenues is calculated based on the Project Rate levied on the balance of Contractual Assets and is recorded solely after the start-up of operations of the project

The other lines of the Revenues under IFRS (O&M and Monetary Restatement) maintain exactly the same recording criterion of the method that was formerly adopted.

Another change in the adoption of CPC 47 occurs in the treatment of advance to suppliers. Formerly, under the Financial Asset method, the advance was directly recorded in the balance sheet as Financial Assets, and therefore it was not recorded in the result. Under the Contractual Asset method, this advance must be recorded in the result as construction cost.

Impacts of the CPC-47 accounting change registered so far:

The adjustment generated by the adoption of CPC 47 as of January 1, 2018:
(i) For the beginning (initial) balance of Contractual Asset as of January 01, 2018, the adjustment was recorded in special reserve account for the year 2018 (Shareholders’ Equity) in the amount of R$ 113,399,544.45, referring to previous years;

(ii) For the Fiscal Year 2018, the adjustment was recorded in the Income Statements, in the amount of R$ 116,924,085.17 and allocated for the special reserve account at the end of the year, net of the 5% that were retained as legal reserve;

(iii) For the Fiscal Year 2019, the adjustment was recorded in the Income Statements, in the amount of R$ 291,323,518.24 and allocated for the special reserve account at the end of the year, net of the 5% that were retained as legal reserve.

The aforementioned adjustments totalled R$ 521,647,147.86, of which R$ 501,234,767.69 recorded as Special Reserve and R$ 20,412,380.17 as Legal Reserve (5%).

On June 30, 2020, the adjustments generated by the adoption of CPC 47 in the net income amounted to R$ 226,736,802.32.

It is important to note that the effects related to the adoption of CPC 47 are excluded from the distributable net income and, during the year, are recorded in the Accumulated Profits account, being allocated to the Special Reserve and Legal Reserve accounts at the end of the fiscal year.

In order not to compromise the Company’s cash position and leverage, the Special Reserve account will be used for future dividend distribution, taking into consideration that the adoption of CPC 47 has no cash effects (the efficiency/inefficiency of the project is recorded as construction margin during the construction phase of the projects, with a pure accounting effect in the results under IFRS).