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 advances with suppliers. Previously the advance related to Financial Asset was recorded directly in the balance sheet as a financial asset, and therefore not recognized in the statement of income. As from the accounting using the Contractual Asset method, this advance must necessarily pass through the result as implementation of infrastructure cost.

In addition, the Brazilian Securities and Exchange Commission (CVM) published Circular Letter No. 04/2020 of December 1, 2020, with guidance on relevant aspects of CPC 47 and CPC 48 (equivalent to IFRS 15 and IFRS 9, respectively) for the publicly traded electric power transmission companies. Thus, the Company adapted its accounting practices in relation to its contractual assets, reviewing its estimates and identified the following impacts, net of taxes: (i) R$ 124.9 million for the year 2020, recorded in the income for the year; and (ii) R$ 63.5 million for previous years, recorded in Shareholders’ Equity.

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

The adjustments generated by the adoption of CPC 47 as of January 1, 2018 were:

(i) For the initial (starting) balance of the Contractual Asset on January 1, 2018, the adjustment was entered into the special reserve account for the 2018 financial year (Shareholders’ Equity), in the amount of R$ 113,399,544.45, referring to previous years.

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

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

(iv) For the Fiscal Year 2020, the adjustment was entered in the Income Statements in the amount of R$ 631,469,547.58 (including the amount of R$ 124,947,792.20 related to the CIRCULAR LETTER / CVM / SNC / SEP / nº04 / 2020) that was allocated to the special reserve account at the end of the year. In addition, the amount of R$ 63,583,002.83 also related to the CIRCULAR LETTER / CVM / SNC / SEP / nº 04/2020 for previous years was recorded in the special reserve account, in the 2020 shareholders’ equity. It is important to note that for the year 2020, the legal reserve (5%) was not constituted based on art. 193 paragraph 1 of the Brazilian Corporation Law, which says that the Company may stop constituting the legal reserve for the year when the balance of that reserve, plus the amount of capital reserves referred to in paragraph 1 of article 182, exceeds 30% of the share capital.

The aforementioned adjustments totalled R$ 1,216,699,698.28, of which R$ 1,196,287,318.11 recorded as Special Reserve and R$ 20,412,380.17 as Legal Reserve (5%). 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 Incomes account, being allocated to the Special Reserve and Legal Reserve accounts at the end of the fiscal year.