CIRCULAR LETTER CVM/SNC/SEP No. 01/2005

Rio de Janeiro, February 25, 2005

To the

Directors of Investor Relations and
Independent Auditors

SUBJECT: Guidance on the Preparation of Accounting Information by Publicly Held Companies

Dear Sirs,

The Circular Letters issued by the CVM technical area have as their main objective to disclose the central problems observed in the application of the standards issued by the CVM and to provide more detailed guidance on the application of these same standards. In this sense, this circular letter also proposes to alert the market to deviations verified by the CVM, and to clarify doubts regarding the application of Accounting Standards by Publicly Held Companies and the standards relating to Independent Auditors. This circular letter also seeks to encourage the adoption of new procedures and disclosures, as well as to anticipate future regulation by the CVM and, in some cases, to clarify issues related to the international standards issued by the IASB. These comments have the broader objective of improving accounting information for the market and the consequent convergence with international accounting standards.

The CVM has, over the years of its operation, sought to perfect and keep its accounting regulatory framework up to date, always with the participation of interested segments of the market or the accounting profession. It is worth highlighting, in the preparation of this circular letter, the important collaboration received from the CVM Accounting Standards Advisory Committee, which includes representatives from ABRASCA, APIMEC, CFC, IBRACON and FIPECAFI/USP and professors Ariovaldo dos Santos (USP), José Augusto Marques (UFRJ) and Natan Szuster (UFRJ).

Points for the evolution of accounting information in the Brazilian capital market

The objective of accounting regulation for the capital market is linked to the functioning of companies in corporate form, that is, in the set of relationships with those interested in the functioning of the company (stakeholders) capable of producing economic and social effects. This objective is also related to the role of administrators, who have primary responsibility for the company's accounts, and to the role of auditors who express their opinion on the financial statements and assume public co-responsibility for this information.

Regulation constitutes the formal framework upon which the production of accounting information takes place and establishes the minimum conditions for knowing the company's economic-financial situation. However, this does not exhaust the possibilities of meeting the informational needs of market agents external to the publicly held company, nor does it cover the speed with which this information must reach interested parties. It is necessary for the company to make a permanent effort to improve this information and to seek to ensure the adequacy and reasonableness of its procedures in this effort, particularly if the problem of the globalization of accounting information associated with the free flow of capital is considered.

The different possible solutions for the problem of recording and disclosing accounting information on a global scale can be summarized in the alternatives of (i) reciprocity, or mutual recognition of foreign standards and practices, which brings problems of understanding and comprehension of the accounting environment of other countries; (ii) reconciliation, which predominates today as can be observed in the explanatory notes on reconciliation of results and equity; and finally, (iii) the use of international standards, which is sought in a consensual manner by countries and markets.

The main sense of regulatory evolution in Brazil is the convergence with international pronouncements, and for this, Ibracon and the CVM have been striving to adapt the rules issued by the IASB, the International Financial Reporting Standards (IFRS), to the Brazilian accounting environment. These actions, however, imply overcoming some barriers to the integration of capital markets and the consequent need for accounting harmonization.

The first barrier lies in the Brazilian legal environment, where the Law is the main source of law (Roman law, or code law) compared to countries of case law (common law) based, therefore, on judicial decisions (precedents with binding force). In the latter, the conceptual structure with generally accepted accounting principles sought the reference of the investor as the main user and economic substance over legal form as the conceptual reference. In opposition, in countries based on Roman Law, where the main users were creditors and the tax authority, the main reference was based on compliance with the Law, or orientation by the rule (rules oriented). We therefore have, in the Brazilian accounting environment, the change made by law under the aegis of Roman law, which is slow-moving and cannot keep up with the evolution of business.

Within the principle of self-regulation, which allows the CVM to share roles and activities with private institutions with the objective of increasing the efficiency of regulatory activity, Bill No. 3,741 creates the possibility of exercising the functions of research and issuance of accounting pronouncements by a multi-representative entity. This entity must include representatives of the various segments affected by the accounting information of publicly held companies and be capable of producing accounting standards for application in the Brazilian capital market with reference to international standards, which would bring greater flexibility to the standardization process.

The second barrier concerns economic-tax issues and the need for de facto separation of writings to reconcile the interests of the Tax Authority and the information provided to investors. Bill No. 3,741, without prejudice to the segregation contained in the current law, presents another form of separation for the reconciliation of these interests.

The cultural barrier is important as a fundamental factor in understanding international rules that can only be understood from a basis of sophisticated education and training. In this sense, the pronouncements written in English and the complexity of the standards establish a high level of requirement, which at this moment, only some centers are able to meet the training of the professional qualified to understand and apply these standards. This barrier contributes to the lack of interest in the subject, despite the inevitable need to face the convergence with international standards in the immediate future.

The applicability of international standards in the Brazilian capital market must also be phased, given the existence of companies with access only to the Brazilian capital market and other companies that have already obtained access to the global capital market. The requirements for information must be different given the size and nature of these companies.

In the current situation, there are several points of divergence between Brazilian and international standards, of which, in the opinion of the CVM technical area, the following can be highlighted: (i) the introduction and application of the fair value method, particularly in non-financial companies; (ii) the accounting treatment of financial instruments, also related to the fair value method; (iii) the accounting and disclosure in financial statements of leasing operations; and (iv) the accounting treatment of corporate restructuring (mergers, acquisitions, and takeovers); (v) the accounting treatment of government subsidies; (vi) segment disclosure.

In this circular letter, some topics have been included and others have been subject to review and alteration compared to the previous one. Among these topics, we highlight the following:

a. Adequate presentation of financial statements in item 1.1; b. Disclosure of accounting information in multiple markets in item 1.5;
c. Objectives and aspects of the explanatory notes in item 1.7, which contains comments on disclosure structure (1.7.1.1), operations (1.7.1.2), valuation criteria (1.7.1.3), normal business continuity (1.7.1.4) and differences between national and international procedures (1.7.1.5);
d. Statement of Cash Flows, in item 4; e. Capitalization of interest in item 18.3; f. Equity method when there are differentiated rights, in item 20.1.10; g. Exclusive investment funds, in item 20.2.2.1; h. Credit Rights Investment Funds, in item 20.2.2.2;
i. Consolidation in the reduction or exemption of taxes in incentivized areas, in item 20.2.3;
j. Accounting for hedge operations according to the international standard, in item 21.4; k. Accounting treatment of intangible assets in Brazil, in item 24.1;
l. Importance and role of independent auditors, in item 28.1;
m. Continuing professional education program, in item 28.9.

In addition to these topics, the following topics have been reformulated or received improvements:

The list of guidelines contained in the CVM opinions was introduced and distributed in the topics corresponding to them; the following items were added to this list: explanatory note on government subsidies, in item 16.1; Disclosure of explanatory notes to cash flow statements, in items 4.2 and 4.3; disclosure of hedge operations according to the international standard, in item 21.4
Provision for doubtful debtors, in item 2.1 Accounts Receivable;
Idle capacity, in item 3.2.2;
Information that reflects the effects of price changes, in item 10.1 Concepts;
The issue of the Substance over Form principle in the disclosure of financial instruments;
Contingent assets, in item 23.2;
Share-based payment, in items 25.1 and 25.5;
Rotation of Independent Auditors, in item 28.2;
Technical qualification examination and national register of auditors, in item 28.6;
External quality control – peer review, in item 28.8;

To facilitate understanding of the evolution that occurred in relation to the previous circular letter, in addition to the final version, the version containing the changes (additions and exclusions) made is also being disclosed. The complete reading of each topic is essential given the need for a broad understanding of the subject.

This Circular Letter guides and comments on the standards and disclosure of accounting information and replaces the CIRCULAR LETTER CVM/SNC/SEP No. 01/2004.

The content of this Circular Letter was distributed in the following items:

Presentation of Financial Statements
1.1 Adequate presentation of financial statements
1.2 Disclosure and CVM Objectives
1.3 The Evolution of Corporate Reports
1.4 Information Disclosure Policy
1.5 Disclosure of accounting information in multiple markets
1.6 Clear and Objective Language
1.7 Objectives and aspects of the Explanatory Notes
1.7.1 Disclosure in explanatory note of the Presentation of Financial Statements
1.7.1.1 Structure of disclosure in explanatory note
1.7.1.2 Note on operations
1.7.1.3 Valuation Criteria
1.7.1.4 Normal Business Continuity
1.7.1.5 Differences between national and international accounting procedures
1.8 The Quality of Accounting Information
1.9 The Statement of Result of the Period and Economic Measurements Based and Not Based on Accounting Standards
1.9.1 The objectives of the Statement of Result
1.9.2 The accounting principles involved
1.9.3 The concept of Revenues and Expenses
1.9.4 The types of revenues and expenses
1.9.5 The presentation of the Statement of Result
1.9.6 The economic measurements of the Statement of Result
1.9.7 The economic measurement EBITDA (earnings before interest, income tax, depreciation and amortization)
1.9.8 The policy for disclosure of economic performance measurements based and not based on accounting standards
1.10 Small balances and generic designations
1.11 Statement of Changes in Equity
1.12 Statement of Added Value - DVA
Accounts Receivable
2.1 Provision for doubtful debtors
2.2 Disclosure in explanatory note of Provision for Doubtful Debtors
Inventories
3.1 Inventory valuation criteria
3.2 Disclosure in explanatory note of Inventories
3.2.1 Disclosure in explanatory note of inventories
3.2.2 Idle Capacity
Statement of Cash Flows
4.1 Evolution of the Cash Flow Statement
4.2 The Statement of Cash Flows according to the international standard IAS 7
4.3 Disclosure according to Brazilian and foreign standards
Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies
5.1 Concepts
5.2 Disclosure in explanatory note of Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies
5.2.1 Prior Period Adjustments
Subsequent Events
6.1 Disclosure in explanatory note of Subsequent Events
Construction Contracts
7.1 Financial Statements of Publicly Held Companies in the Real Estate Sector
Income Tax
8.1 Disclosure of Income Tax Provision
8.2 Tax Incentives
8.3 Tax Credits
8.3.1 Periodic Review
8.3.2 Recovery Period
8.3.3 Responsibility
8.3.4 Technical Feasibility Study
8.3.5 Present Value Adjustment in the Determination of Future Taxable Profits
8.3.6 Initial and Additional Recognition of Deferred Tax Asset
8.3.7 Disclosure in explanatory note of Income Tax
8.3.7.1 Income Tax and Social Contribution
8.3.7.2 Deferred Tax Asset
Segment Reports
9.1 Disclosure in explanatory note of information by business segment
Information that Reflects the Effects of Price Changes
10.1 Concepts
10.2 Disclosure in explanatory note of Information that Reflects the Effects of Price Changes
10.2.1 Statements in Currency of Constant Purchasing Power
Fixed Assets
11.1 Asset Recoverability and Spontaneous Revaluations
11.2 Periodicity of Asset Revaluation
11.3 Disclosure in explanatory note of Fixed Assets
11.3.1 Revaluation of Fixed Assets
Leasing
12.1 Disclosure in explanatory note of Leasing
Revenue
13.1 Results of future periods
13.1.1 Concepts
13.1.2 Disclosure in explanatory note of Sales or Services to be Realized
13.1.3 Developments in the Implementation Phase
Employee Benefits
14.1 Debt Confession Instruments
14.2 Scope and Coverage
14.3 Nominal Rates vs. Real Rates
14.4 Actuarial Liability Discount Rate
14.5 Return Rate on Plan Assets
14.6 Benefit Growth Rate
14.7 Other Relevant Assumptions
14.8 Exclusions in the Determination of Fair Value of Plan Assets
14.9 Actuarial Valuation Method
14.10 Accounting for the initial adjustment of the actuarial liability
14.11 Disclosure in explanatory note of Retirement and Pension Plans
14.12 Annex: Ibracon Technical Interpretation No. 01/01 NPC 26
Concession Accounting
15.1 Concepts
15.2 Disclosure in explanatory note of concessions
Government Assistance Accounting
16.1 Disclosure in explanatory note of government subsidies
Effects of Changes in Exchange Rates
17.1 Exchange Rate Variation
17.2 Amortization
17.3 Change in Amortization Period
17.4 Adjustment Resulting from Recovery of Exchange Losses
17.5 Partial/Total Settlement of Exchange Liability
17.7 Effect on Equity Method due to Exchange Rate Variation
17.8 Temporary Differences
17.9 Audit Reports/Opinions
17.10 Disclosure in explanatory note of the Effects of Changes in Exchange Rates
Borrowing Costs
18.1 Restrictive Clauses of Financing Contracts
18.2 Refis
18.3 Capitalization of Interest
18.4 Disclosure in explanatory note of borrowing costs
18.4.1 Debentures
18.4.2 Long-Term Obligations
18.4.3 Encumbrances, Guarantees and Contingent Liabilities
18.4.4 REFIS
Related Party Disclosures
19.1 The motivation for the existence of explanatory notes on "related parties"
19.2 Supervision of transactions between related parties
19.3 Formalization of business between related parties
19.4 Pricing of transactions between related parties
19.5 Disclosure in explanatory note of Transactions with Related Parties
Consolidated Financial Statements and Accounting of Investments
20.1 Equity Method Evaluation
20.1.1 Societies Equivalent to Affiliated Companies
20.1.2 Loss of Continuity of Controlled/Affiliated Company Operations
20.1.3 Future Sale of Investment
20.1.4 Permanent Losses on Investments Evaluated by the Equity Method
20.1.5 Goodwill/Discount on Subscription of Capital Increase
20.1.6 Goodwill/Discount originating from Investments evaluated by equity method
20.1.7 Elimination of Unrealized Profits
20.1.8 Calculation of Equity Method
20.1.9 Investment acquired from investee with Negative Equity
20.1.10 Equity Method when there are differentiated rights
20.2 Consolidated Financial Statements
20.2.1 Consolidation of Financial Statements of Jointly Controlled Societies
20.2.2 Consolidation of special purpose entities (SPEs)
20.2.2.1 Exclusive Investment Funds
20.2.2.2 Credit Rights Investment Funds (FIDCs)
20.2.2.3 Disclosure in explanatory note of special purpose entities (SPEs)
20.2.3 Consolidated in the Reduction or Exemption of Taxes in Incentivized Areas
20.3 Reverse Incorporation - CVM Instruction No. 349/01
20.4 Disclosure in explanatory note of Consolidated Financial Statements and Accounting of Investments
20.4.1 Goodwill/Discount
20.4.2 Condensed Statements
20.4.3 Equity Method
20.4.4 Consolidated Financial Statements
20.4.5 Societal Investments Abroad
Financial Instruments: Disclosure, Presentation, Recognition and Measurement
21.1 Current situation
21.2 Presentation, recognition and measurement of financial instruments
21.3 Effects resulting from the application of Bacen circulars nos. 3,068/01 and 3,082/02 and Susep circular no. 192/02
21.4 Accounting for hedge operations according to the international standard
21.5 The issue of the Substance over Form principle in the disclosure of Financial Instruments
21.6 Disclosure in explanatory note of financial instruments
Discontinued Operations
22.1 Definition
22.2 Initial Disclosure Event
22.3 Losses from Reduction in Recoverable Amount of Assets
22.4 Disclosure in explanatory note of discontinued operations
22.4.1 Initial Disclosure
22.4.2 Other Disclosures
22.4.3 Update of Disclosures
22.4.4 Separate Disclosure for Each Discontinued Operation
22.4.5 Presentation of Disclosures
22.4.6 Disclosure in Interim Financial Reports
Provisions, Contingent Liabilities and Contingent Assets
23.1 Contingencies
23.2 Contingent assets
23.3 Contingent Liabilities
23.4 Disclosure in explanatory note of Provisions, Contingent Liabilities and Contingent Assets
23.5 Annex: Ibracon Technical Interpretation 03/2002
Intangible Assets
24.1 Accounting treatment of intangible assets in Brazil compared to the international pronouncement
24.2 Disclosure in explanatory note of Deferred Asset
Share-based Payment
25.1 Introduction
25.2 Overview
25.3 The concept of stock options as employee remuneration
25.4 Accounting situation in American standards
25.5 Accounting by international standards IFRS 2
25.6 The controversy over the estimation and pricing methods of options
25.7 Corporate aspects of the approval of the options plan
25.8 Glossary of some of the main terms used in options plans
25.9 Accounting of share-based payment plans
25.10 Disclosure in explanatory note of options plans
Corporate Matters
26.1 Law No. 10,303/2001 - Changes in the Companies Law
26.2 Participation in Results Not Referenced in Profit
26.3 Retained Profits Reserve - Law No. 10,303/01
26.4 Retention of Profits
26.5 Effect on the Calculation of Mandatory Dividends Resulting from the Accounting Treatment of Exchange Gains
26.6 Disclosure in explanatory note of equity items and corporate matters
26.6.1 Treasury Shares
26.6.2 Share Capital
26.6.3 Authorized Share Capital
26.6.4 Profit Allocation Stated in Shareholder Agreement
26.6.5 Dividend per Share
26.6.6 Proposed Dividends
26.6.7 Interest on Equity
26.6.8 Remuneration of Administrators
26.6.9 Reserves - Detailing
26.6.10 Retained Profits Reserve
26.6.11 Retention of Profits
26.6.12 Multiple Voting
Special Topics
27.1 Inquiries on Accounting Matters
27.2 Other disclosures in explanatory note
27.2.1 Electrobrás Credits
27.2.2 Privatization Program
27.2.3 Real Estate Fund
27.2.4 Incorporation, Merger and Spin-off
27.2.5 Profit or Loss per Share
27.2.6 Insurance
Audit

28.1 Importance and Role of Independent Auditors
28.2 Rotation of Independent Auditors
28.3 Conflicts of Interest
28.4 Disclosure of Non-Audit Services
28.5 Relationship with the Independent Auditor Responsibilities of Administrators
28.6 Examination of Technical Qualification and National Register of Auditors
28.7 Annual Information
28.8 External Quality Control Peer Review
28.9 Continuing Professional Education Program
28.10 Audit of Subsidiaries
28.11 Audit in Mergers, Consolidations, and Spin-offs Operations
28.12 Audit of Transactions with Related Parties
28.13 Distribution of Results
29 Appendix - Consolidation of Explanatory Notes
29.1 Objectives and Aspects of Explanatory Notes (1.7)
29.1.1 Disclosure in explanatory note on Presentation of Financial Statements (1.7.1)
29.1.1.1 Structure of disclosure in explanatory note (1.7.1.1)
29.1.1.2 Note on operations (1.7.1.2)
29.1.1.3 Valuation Criteria (1.7.1.3)
29.1.1.4 Going Concern (1.7.1.4)
29.1.1.5 Differences between national and international accounting procedures (1.7.1.5)
29.2 Disclosure in explanatory note on Provision for Doubtful Accounts (2.2)
29.3 Disclosure in explanatory note on Inventories (3.2)
29.3.1 Disclosure in explanatory note on inventories (3.2.1)
29.3.2 Idle Capacity (3.2.2)
29.4 Disclosure of explanatory notes to cash flow statements
29.5 Disclosure in explanatory note on Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies (5.2)
29.5.1 Prior Period Adjustments (5.2.1)
29.6 Disclosure in explanatory note on Subsequent Events (6.1)
29.7 Disclosure in explanatory note on Income Tax (8.3.7)
29.7.1 Income Tax and Social Contribution (8.3.7.1)
29.7.2 Deferred Tax Asset (8.3.7.2)
29.8 Disclosure in explanatory note on business segment information (9.1)
29.9 Disclosure in explanatory note on Information Reflecting the Effects of Price Changes (10.2)
29.9.1 Statements in Constant Purchasing Power Currency (10.2.1)
29.10 Disclosure in explanatory note on Fixed Assets (11.3)
29.10.1 Revaluation of Fixed Assets (11.3.1)
29.11 Disclosure in explanatory note on Leases (12.1)
29.12 Disclosure in explanatory note on Sales or Services to be Performed (13.1.2)
29.13 Disclosure in explanatory note on Retirement and Pension Plans (14.11)
29.14 Disclosure in explanatory note on concessions (15.2)
29.15 Disclosure in explanatory note on government grants (16.1)
29.16 Disclosure in explanatory note on the Effects of Changes in Exchange Rates (17.10)
29.17 Disclosure in explanatory note on the cost of borrowings (18.4)
29.17.1 Debentures (18.4.1)
29.17.2 Long-Term Obligations (18.4.2)
29.17.3 Liens, Guarantees and Contingent Liabilities (18.4.3)
29.17.4 REFIS (18.4.4)
29.18 Disclosure in explanatory note on Transactions with Related Parties (19.5)
29.19 Disclosure in explanatory note on Special Purpose Entities (SPEs) (20.2.2.3)
29.20 Disclosure in explanatory note on Consolidated Financial Statements and Accounting of Investments (20.4)
29.20.1 Goodwill/Bargain Purchase (20.4.1)
29.20.2 Condensed Statements (20.4.2)
29.20.3 Equity Method (20.4.3)
29.20.4 Consolidated Financial Statements (20.4.4)
29.20.5 Societal Investments Abroad (20.4.5)
29.21 Disclosure in explanatory note on financial instruments (21.6)
29.22 Disclosure in explanatory note on discontinued operations (22.4)
29.22.1 Initial Disclosure (22.4.1)
29.22.2 Other Disclosures (22.4.2)
29.22.3 Update of Disclosures (22.4.3)
29.22.4 Separate Disclosure for Each Discontinued Operation (22.4.4)

29.22.5 Presentation of Disclosures (22.4.5)
29.22.6 Disclosure in Interim Financial Reports (22.4.6)
29.23 Disclosure in explanatory note on Provisions, Contingent Liabilities and Contingent Assets (23.4)
29.24 Disclosure in explanatory note on Deferred Asset (24.2)
29.25 Disclosure in explanatory note on option plans (25.10)
29.26 Disclosure in explanatory note on equity items and corporate matters (26.6)
29.26.1 Treasury Shares (26.6.1)
29.26.2 Share Capital (26.6.2)
29.26.3 Authorized Share Capital (26.6.3)
29.26.4 Allocation of Professions According to Shareholders' Agreement (26.6.4)
29.26.5 Dividend per Share (26.6.5)
29.26.6 Proposed Dividends (26.6.6)
29.26.7 Interest on Equity Capital (26.6.7)
29.26.8 Remuneration of Administrators (26.6.8)
29.26.9 Reserves Detail (26.6.9)
29.26.10 Realized Profit Reserves (26.6.10)
29.26.11 Retention of Profits (26.6.11)
29.26.12 Multiple Voting Rights (26.6.12)
29.27 Other disclosures in explanatory note (27.2)
29.27.1 Electrobrás Credits (27.2.1)
29.27.2 Privatization Program (27.2.2)
29.27.3 Real Estate Fund (27.2.3)
29.27.4 Mergers, Consolidations and Spin-offs (27.2.4)
29.27.5 Earnings or Loss per Share (27.2.5)
29.27.6 Insurance (27.2.6)

Sincerely,

Original signed by Original signed by
Elizabeth Lopez Rios Machado
Superintendent of Corporate Relations
Antonio Carlos de Santana
Superintendent of Accounting Standards and Auditing

Presentation of Financial Statements
1.1 Proper Presentation of Financial Statements
Generally, a proper presentation is achieved by complying, in all significant aspects, with the accounting practices adopted in Brazil. A proper presentation requires:
a) selection and application of accounting practices adopted in Brazil; b) presentation of relevant, reliable, comparable and understandable information; and c) sufficient additional disclosures to allow users to understand the impact of specific transactions or events on the entity's financial position, results of operations and cash flows (or sources and applications of resources). The bases of presentation and classification of items in the financial statements must be maintained from one period to another, unless:
a) due to a significant change in the nature of the entity's operations, a review of these presentation bases will result in a more appropriate presentation of transactions or other events; or b) a change in presentation is required by another standard or interpretation.
A significant acquisition or disposal, or a review of the presentation of financial statements, may indicate that they should be presented differently. An entity should only change the presentation of its financial statements if the revised structure is likely to continue, if the benefit of changing the presentation is clear, and if the change in presentation provides information that is more reliable. When such changes are made to the presentation, it must reclassify its comparative information. Unless another standard permits or requires otherwise, comparative information must be disclosed for the previous fiscal year, for all values included in the financial statements. Comparative information must also be included in the explanatory notes when relevant for a better understanding of the current year's financial statements. In some cases, narrative information included in the financial statements of previous year(s) remains relevant in the current year. For example, details of a legal dispute, whose outcome was uncertain at the date of the last balance sheet and is still pending, are disclosed in the current year; in this case, users benefit from the information that the uncertainty already existed at the date of the last balance sheet and from information about possible actions taken during the year to resolve the uncertainty. When the presentation or classification of items in the financial statements is changed, comparative values must be reclassified, unless reclassification is impracticable. When comparative values are reclassified, the entity must disclose:
a) the nature of the reclassification; b) the amount of items or groups of items reclassified; and c) the reason for the reclassification.
If reclassification of comparative items is impracticable, the entity must disclose:
a) the reason for not reclassifying; and b) the nature of the adjustments that would have been made if the values were reclassified.
Improving the information presented for comparative purposes assists users in decision-making, mainly by allowing the assessment of trends and projections. In some situations, it may be impracticable to reclassify information from previous year(s) presented for comparative purposes. For example, data necessary to reclassify information for a given previous year is not available and the process to obtain such data is impracticable.

1.2 Evidence and the Objectives of the CVM
One of the objectives of the CVM is to create conditions for the promotion of efficient resource allocation through the capital market, with a view to attracting and retaining public investors in this market.
Improving the information available to investors constitutes one of the most important tasks of this regulatory body, and to achieve this objective, it must seek to meet the informational needs of the user. Thus, economic decisions by these investors can be more secure, in addition to providing an additional gain in reducing information collection costs about publicly held companies. The purpose of the CVM's regulatory activity is, in this context, the maintenance of efficiency and reliability in the capital market, in view of the public interest, considering these attributes as fundamental conditions to ensure the development of this market. Acting to reduce differences between companies in terms of disclosure, measurement and methods used in preparing financial statements and promoting the change from quantity to quality of this information is a task that comprises the scope of the exercise of regulatory activity. The attribute of financial statements, internationally considered the noblest by capital markets and the academic community, is their ability to allow analysts and investors to forecast future cash flows of the businesses of publicly held companies. In this sense, the CVM's concern is to emphasize to publicly held companies that the accounting practices to be adopted, among the possible alternatives, must be those that most appropriately reflect the respective companies' financial and asset situation, the results of their operations, their fund flows and the mutations of their net equity. Accounting practices defined for tax and/or sectoral regulatory purposes are limited to such purposes, and do not necessarily lead to adequate and transparent financial statements for capital market purposes. Whenever not explicitly prohibited by legislation or regulation, accounting practices for financial statements intended for capital markets must prevail over the economic substance of the transactions that give rise to them, even when the substance contradicts their legal form. The choice of "what" to disclose, "how" to disclose and "how much" to disclose is an exercise of business common sense, ethics and subjectivity. There are no objective rules that, once met, fulfill all requirements of good disclosure; such requirements are built, primarily, by administrators, accountants and auditors capable of exercising responsible subjectivity in the formulation of accounting policies and in the decision of the disclosure to be made. Therefore, to achieve the objectives to which it is destined, the set of financial statements made available to the market must evidence all information that is relevant for the assessment of the present and future asset situation; it must evidence, especially, future commitments and obligations that may have an impact on the company's financial and asset situation, even if they do not yet characterize as liabilities and, therefore, are not yet recognized in the financial statements.

1.3 The Evolution of Corporate Reports
The need to support investor decisions, increasingly complex due to innovations in financial and capital markets, has pressured companies to change disclosure practices and the accounting procedures involved in these issues. It is also observed that a large number of companies' reports do not present adequate information to meet investor needs. Although the same formal report structure has been maintained over the years, the evolution of users' accounting information decision models and the increase in the complexity of companies' operations demand a new level in the informational quality of companies' corporate reports. The quality of corporate information disclosure is determined by the content and integration of the entire set of qualitative and quantitative information expressed in the Financial Statements, IAN, ITR and DFP forms, Management Reports and Independent Auditors' Reports. This quality determines how successful it is possible to communicate with the investor community and, more broadly, with all agents of the capital market. The general principle for the disclosure of this information establishes the duty of the publicly held company to make timely and adequate disclosure of relevant information about its business, in exchange for the capital received from investors. This principle is regulated in the obligation to prepare and distribute this information, to allow investors to analyze the factors affecting the risk and return of the business, considered necessary for decision-making. In this context, some of the fundamental aspects to be observed by companies are:
the relevance of the information provided; transparency in information disclosure; equality in access to information; timeliness and continuity of disclosure.

the relevance of the information provided
Not just any type of information benefits the functioning of the market. Disclosure must be necessary and sufficient to facilitate investor decision, without confusing it with an excess of information, i.e., understood as relevant that which can alter the investor's perception and be able to allow the comparison of the performance of the same company over time and of it with other companies. As an example, we can cite the following situations that must be reflected in the set of accounting information (the set of annual and quarterly financial statements) and non-accounting information (the IAN form – annual information):
high indebtedness and need to roll over short-term debts, significant variations, by gains or losses, permanent or transient, in market share and sales volumes, exposure to exchange rate, relevant loan operations with related parties, obsolescence risk in product technology, patents or assets, effects of declining or fierce competition (exit or entry of new protagonists, launches of products widely accepted by customers), volatile operating margins, patents developed or acquired, by the company or by competitors, with power to influence demand, horizontal diversification of businesses, verticalization or not of the "supply chain" or production processes, regulatory or legal changes of representative impact, positive or negative, on the financial and asset position or on the results of operations, and significant changes in corporate governance and/or risk management practices.

transparency in information disclosure
Information must also be disclosed clearly and concisely, and must not vary according to the type of investor. It is assumed that the investor to whom the information is directed is capable of understanding the company's return and risk aspects, and is willing to undertake the necessary efforts in studying the corporate report.

equality in access to information
Report disclosure must adhere to the principles that information must be disseminated broadly, transparently and equally, and that all market participants must have simultaneous access to it.

timeliness and continuity of disclosure
Disclosure must occur in time for timely decision-making by investors, avoiding harm from procrastination in providing information; this principle is demonstrated by timeliness, i.e., the information is due until it has the capacity to influence investment decisions. In this sense, the continuity of information disclosure is fundamental so that the investor can assess the situation of the invested position and decide whether to buy, sell or hold securities. The aspects of equality and timeliness are especially important for companies that have their securities traded in more than one market. These companies must serve the users of their information through filing various forms with regulatory authorities – CVM and Stock Exchanges – as well as, through voluntary efforts, make this information available through websites, press releases to news agencies and interviews, after the broadcast made public by filing. The content of press releases, often, is formatted differently from the information contained in the forms filed and disclosed through the public distribution systems at the CVM and Stock Exchange. A new format is, strictly speaking, new information, and therefore, must be equally registered at the CVM and disclosed for general public access.

1.4 The Company's Information Disclosure Policy
The publicly held company's information disclosure policy, here understood as the organization of information regularly distributed to the market, is constituted by the choice of various forms that observe the principles of relevance, transparency, equality in access and timeliness. It must be established with the objective of integrating information and avoiding deviations in the perception of this information. These deviations are characterized as those that may arise from omissions and irrelevant content. Qualitative information expressed in the Management Report, Explanatory Notes, IAN tables and Performance Comments in ITR must be, for example, integrated by the most relevant information for understanding the company's operations. When deciding on the subjects to be disclosed, administrators establish a structure constituted by the main issues of the operation, i.e., a central axis for information organized in the various statements and forms. The expression – disclosure policy – is, in this context, the set of choices made in seeking the best way to communicate the company's activities and performance, or still, the choice of the most important information so that investors obtain the type of knowledge that supports them in assessing the company. This vision creates additional value to the investor through increased understanding of the company's situation and prospects and reflects, therefore, in the appreciation of its securities. Although there is no nor is it reasonable to seek a "standard" model for such a disclosure policy, it is guided by the minimum requirements contained in corporate legislation and accounting pronouncements, industry conditions, facts and circumstances peculiar to the company, business acumen and ethical sense of administrators and accountants. The practical objective of this policy is to explain to users of financial statements the performance that is

fruit of the daily exercise of administering and making business decisions.

1.5 Disclosure of Accounting Information in Multiple Markets

The ideal functioning of the capital market as an instrument for financing companies presupposes equitable access to the information necessary for the decision-making process regarding buying, selling, or holding securities in circulation. Equitable access is a foundation for the efficiency of the capital market and is related to factors that reduce uncertainty and, consequently, the cost of capital for the issuing company of securities.

In summary, the intended functioning of the capital market assumes that all market participants have access to complete information distributed equally, which includes accounting, corporate, and material fact information, capable of forming the opinion of interested parties regarding the flow of investment returns. The opposite of this situation constitutes information distributed selectively and asymmetrically.

Information asymmetry refers to a situation where one agent – an investor or market analyst, for example – has superior information about the characteristics of a company that another agent does not have. In the case of companies registered in different markets, different disclosure requirements imposed by different regulatory bodies can lead to investors in each market accessing different sets of information, if each set of information is not disclosed in all markets in which the company is registered. This implies that the disclosure of a new format for certain accounting information in a specific market alters the content of the information and, in the specific case of accounting information, this is generally caused by eventual divergence or extension in the treatment of transactions and/or their disclosure among the different accounting environments in which the company operates.

If the company, for example, discloses a type of accounting statement due to regulation in a market where it is registered, it is necessary that it also discloses it in other markets, with the same structure and accounting framework, and must demonstrate, by reconciling, the differences due to the use of another set of standards. The requirement for the Statement of Cash Flows in foreign markets and the Statement of Sources and Applications of Resources – DOAR – by Brazilian corporate legislation, for example, makes it necessary that these statements, which organize resource and cash information differently, be disclosed in other markets in the same manner as in the market where they were disclosed due to specific accounting standards.

The legal implications are provided for in Article 157 of Law 6.404/76, which deals extensively with the "duty to inform" and CVM standards, particularly CVM Instructions No. 248/1996, 331/2000, and 358/2002, which deal with the disclosure of accounting statements required in situations of registration in multiple markets and the disclosure of material facts, including those related to changes in accounting criteria. By virtue of these standards, publicly held companies that disclose, abroad, statements or information additional to those required by corporate legislation must simultaneously disclose them also in the Country. Violation of these standards, that is, the distribution and use of information disclosed unequally or preferentially, constitutes legal responsibility of the administrators and must be subject to an administrative process at this CVM. Note, furthermore, that registration with the regulatory bodies of securities markets constitutes that, legally, the information was made available for access by all.

1.6 Clear and Objective Language

Accounting statements are prepared and disclosed with the objective of bringing to the knowledge of shareholders and other interested parties the company's net worth and financial position, the results of its operations, its fund flows, and the net worth changes that occurred during the period.

The investing public needs to understand the information prepared and disclosed by companies, so that it can make rational economic decisions within the analysis of trends and risk propensity, in addition to fully enjoying the protection assured by corporate legislation.

In this line, it is the responsibility of administrators in the preparation of accounting statements, and of independent auditors in audit reports, to construct texts whose understanding is simple and direct for a readership moderately familiar with accounting, business, and finance.

The information produced and disclosed by publicly held companies, especially those contained in the Accounting Statements, the Management Report, and the Reports and Opinions of Independent Auditors, electronic forms IAN and ITR, must be drafted in a simple and direct manner, allowing an average readership to understand the data contained therein and to use them for decision-making.

It is not intended to make the drafting of documents disclosed by companies simplistic or banal, but rather to use common and usual language, prioritizing the clarity of the exposition, in order to communicate, in a simple way, information that is often of a complex nature. The complexities of the transactions and businesses of companies do not necessarily mean complexity of communication.

Expressions and language whose understanding presupposes very specific knowledge belonging only to those people who deal exclusively with accounting and/or financial matters should be avoided. The use of foreignisms or jargon (specific to business, finance, or accounting sectors) should only be tolerated when all simplifying alternatives are inappropriate.

The Administrators of companies must ensure that the set of accounting statements constitutes, in this way, a piece that allows knowledge of the current situation of the company and the facts and events that occurred leading to the determination of results and changes that occurred during the period.

Accounting Statements are communication mechanisms, as effective (or ineffective) as their ability to reach the perception of those to whom such communication is directed. For this purpose, it should be considered that the increase in volume and complexity of the text does not contribute to the relevance of these reports.

1.7 Objectives and Aspects of Explanatory Notes

Disclosure is one of the basic objectives of Accounting in the Capital Market, so as to guarantee to all types of users complete and reliable information about the financial situation and results of the company. The explanatory notes that integrate the accounting statements must present quantitative and qualitative information in an ordered and clear manner so as to exhaust the capacity to communicate relevant aspects of the content presented in the statements.

The international standard (paragraph 91 of IAS 1, revised in 1997) established the following objectives for the explanatory notes:
a) present information about the criteria that support the preparation of accounting statements and specific accounting policies, selected and applied for significant transactions and events; b) disclose information required by International Accounting Standards that are not presented anywhere else in the accounting statements; c) provide additional information that is not presented in the accounting statements themselves, but that is considered necessary for a fair presentation.

The publication of Explanatory Notes to the Accounting Statements is provided for in § 4 of Article 176 of Law No. 6.404/76, which establishes that "the statements shall be complemented by Explanatory Notes and other analytical tables or accounting statements necessary to clarify the net worth situation and the results of the fiscal year". In this law, the explanatory notes must discriminate, with clarity and objectivity, the clarifications necessary for the correct understanding of the content of the accounting statements, based on the items provided in § 5 of Article 176 of the corporate law. This implies that the explanatory notes do not deal with the exception of any accounting procedure in the statements but rather clarify a set of integrated information, that is, the disclosure of the accounting practices used. They should not be used to rectify, as they indeed do not rectify, the application of inadequate accounting practices. Explanatory notes are also descriptions or details of amounts related to the items that make up the accounting statements: the balance sheet, the income statement, the statement of sources and applications of resources, and the statement of changes in equity.

Explanatory notes must avoid obviousness as well as elaborate writing; their main objective is to highlight to the reader of accounting statements: a) which alternative was chosen for an accounting treatment when there is more than one accepted, or b) expand information that is not

suitable for the body of the pieces that constitute the set of accounting statements.

Mainly (but not only) all potential or contingent liabilities, possible or probable, reflected or not in the accounting statements will be highlighted in notes or in demonstrative tables. The demonstrative tables should be used to discriminate relevant investments, leasing, guarantees, loans and financing, and other information where the quantitative aspect predominates.

In this direction, NBC T 6.2, approved by CFC Resolution No. 737/92, cites in item 6.2.3 the following "aspects to observe in the preparation of explanatory notes":
a) the information must encompass the factors of integrity, authenticity, accuracy, sincerity, and relevance; b) the texts must be simple, objective, clear, and concise; c) the subjects must be ordered obeying the order observed in the accounting statements, both for the groupings and for the accounts that compose them; d) related subjects must be grouped according to their common attributes; e) the data must allow comparisons with those of previous period dates; f) references to laws, decrees, regulations, Brazilian accounting standards, and other normative acts must be grounded and restricted to cases where such citations contribute to the understanding of the subject treated in the explanatory note.

Generic notes should be avoided because they render a disservice to competent information and are harmful to analysis, such as, for example, "... rates permitted by legislation..." or, in a redundant manner, "... prepared in accordance with the law...", or even, "... in accordance with corporate, tax legislation, and specific standards of the regulatory bodies of the matter...".

Regarding redundancy, note that the unnecessary reporting that "...were prepared in accordance with the law..." stems from the fact that it is not admissible to confess that it could be different (which would mean disobeying the law).

1.7.1 Disclosure in Explanatory Note of the Presentation of Accounting Statements

1.7.1.1 Structure of Disclosure in Explanatory Note

Explanatory notes are normally presented in the following order, which helps users in understanding the accounting statements and in comparing them with those of other entities:
a. operational context; b. declaration regarding the basis of preparation of the accounting statements;
c. mention of the bases for valuation of assets and liabilities and accounting practices applied;
d. additional information for items presented in the accounting statements, disclosed in the same order. e. other disclosures, including:
i. contingencies and other disclosures of a financial nature; and
ii. non-financial disclosures, such as the entity's financial risks, the corresponding policies and objectives of management, which do not confuse with the information to be disclosed in the management report, including, but not limited to, exchange or market protection policies, hedge, etc.

In some circumstances, it may be necessary or desirable to modify the sequence of specific items within the explanatory notes. For example, information about interest rates and fair value adjustments may be combined with information about the maturity of financial instruments, although the former are disclosures of the income statement and the latter refer to the balance sheet. Nevertheless, a systematic structure for the explanatory notes must be maintained whenever practicable.

1.7.1.2 Note on Operations

The initial explanatory note that usually starts the list of notes deals with operations or the operational context and declares the corporate purpose of the company. The objective declared in the notes must maintain coherence with the objectives declared in the company's bylaws, which establishes the contractual relationship between shareholders and is the main document on the governance rules of the society. The note on the operational context must include aspects that are relevant regarding the normal continuity of business and the use of production capacity and/or service provision.

1.7.1.3 Evaluation Criteria

The main evaluation criteria for net worth elements, especially for inventories, calculations of depreciation, amortization, and depletion, constitution of provisions for charges or risks, and adjustments to meet probable losses in the realization of asset elements, shall be disclosed.

(LAW NO. 6.404/76, ARTICLE 176)

The explanatory note on the main accounting practices has evolved over time and its objective is to inform about the choice of accounting policies and practices made by the company. This disclosure allows one to deduce the influence of these practices on the numbers presented by the company and has great importance in inferring its net worth situation, that is, the situation of the balance sheet, the financial position, and the results of the operations. This note must also disclose the accounting criteria for transactions typical of the industry, insofar as these criteria are specific and may vary from one type of industry to another.

In this regard, international standards provide (paragraph 99 of IAS 1, revised in 1997):
"When deciding whether an accounting policy should be disclosed, management should consider whether the disclosure would help users understand the manner in which transactions and events are demonstrated in the performance and financial position disclosed. Accounting policies that a company might consider include, but are not limited to:
a) revenue recognition; b) consolidation principles, including wholly-owned and associated subsidiaries; c) business combinations; d) joint control; e) recognition, depreciation, or amortization of tangible and intangible assets; f) capitalization of borrowing costs and other expenses; g) construction contracts; h) investment properties; i) financial instruments and investments; j) operating leases; k) research and development costs; l) inventories; m) taxes, including deferred taxes; n) provisions; o) employee benefit costs; p) foreign currency translation and hedging; q) definition of business and geographic segments and the criterion for cost allocation between segments; r) definition of cash and cash equivalents; s) recognition of the effects of inflation; and t) government grants.

1.7.1.4 Normal Continuity of Business

When a situation of imminent risk of total or partial suspension of the company's business is identified, the explanatory note must provide further details on the plans and possibilities of its recovery or not.

(CVM ORIENTATION OPINION NO. 21/90)

In this regard, the international pronouncement IAS-1 provides in paragraphs 23 and 24:
"23. When preparing accounting statements, management must assess the ability of the entity to continue as a going concern and that it will continue to operate in the foreseeable future. Accounting statements must be prepared on the assumption of continuity of operations, unless management intends to liquidate the entity, or cease its operations or has no other realistic alternative but these. When management, in making its assessment, becomes aware of significant uncertainties related to events or conditions that may cast significant doubt on the ability of the entity to continue as a going concern, these uncertainties must be disclosed. When accounting statements are not prepared on the assumption of the going concern entity, this fact must be disclosed along with the criteria by which the accounting statements are prepared and the reason why the entity is not considered a going concern entity.

When assessing whether the going concern premise is adequate, management takes into consideration all available information for the foreseeable future, which must be at least, but not limited to, twelve months from the date of the balance sheet. The degree of consideration depends on the facts, case by case. When an entity has a history of profitable operations and ready access to financial resources, one can reach the conclusion, without detailed analysis, that the accounting criterion of the going concern entity is appropriate. In other cases, management may need to consider a wide variety of factors surrounding annual profitability and expected, debt payment schedules, and potential sources of replacement financing before being able to satisfy itself that the going concern criterion is appropriate."

1.7.1.5 Differences between National and International Accounting Procedures

Considering the international reach achieved by the IASB (IFRS/IAS) and the commitment and effort of regulatory bodies and standard setters to seek convergence with them, it is recommended that publicly held companies disclose in an explanatory note the reconciliation of differences between the accounting practices adopted in Brazil and international accounting practices. However, there is no impediment for it to be prepared in relation to the accounting standards of other countries in which the publicly held company discloses, to the market, its accounting statements, due to obtaining registration for trading of its issued securities.

When deciding on the disclosure of the reconciliation, the entity's management must observe how equivalent these practices are. Accounting statements prepared according to a certain accounting practice may be considered equivalent to those prepared in accordance with the accounting practices adopted in Brazil when both analyses, of both sets of statements, enable investors to make similar decisions in terms of investment or alienation of previously held investment. If the accounting practices of both sets are equivalent and, therefore, do not indicate a lack of similarity in investor decisions, there will be no need to include an explanatory note, reconciliation, or reclassification of numbers. The question then arises if the principles and/or practices are not equivalent and, therefore, indicate a lack of similarity in investor decisions.

In the latter case, the presentation of the reconciliation of differences between the accounting practices adopted in Brazil and other accounting practices must be quantitative and qualitative. Thus, the disclosure of the reconciliation requires the preparation and disclosure, at a minimum, of the following information:
a) reconciliation between the net profits (losses) of the period and/or fiscal year; b) reconciliation between the net equities at the balance sheet date; c) explanation of the nature of the main reconciliation items.

In certain cases, it is possible that the discrepancies may be of such magnitude that only the preparation of new financial statements according to another set of accounting principles other than those prevalent in Brazil is the solution. In other cases, there may be some instances of partial equivalence that can be resolved or remedied, depending on the nature of the discrepancies. These discrepancies may include additional disclosures, reconciliations, etc. This judgment should be made by management and agreed upon by the company's independent auditors, and should be supported by procedures accepted by regulatory bodies and standard-setters.

1.8 The Quality of Accounting Information

The production of accounting information is broadly supported by the Basic Conceptual Framework approved by CVM Resolution No. 29/86, which helps preparers of financial statements, administrators, accountants, analysts, investors, and auditors in applying and understanding the criteria for valuing assets and liabilities and accounting standards and practices. This basic conceptual framework also helps users in interpreting the set of financial statements when evaluating and inferring about the numbers and information contained in these statements.

With the objective of clarifying and expanding the concepts expressed in that Resolution, we transcribe below the content of the "Qualitative Characteristics of Accounting Information" as presented in the IASB pronouncement on the "Conceptual Framework for the Preparation and Presentation of Financial Statements" (International Accounting Standards, 2001, p.49-53).

"Qualitative Characteristics of Financial Statements

The qualitative characteristics are the attributes that make financial statements useful to users. The first four qualitative characteristics are: understandability, relevance, reliability, and comparability.

Understandability

An essential quality of the information presented in financial statements is that they be readily understood by users. For this purpose, it is assumed that users have a reasonable knowledge of business, economic activities, and accounting and the willingness to study the information with reasonable diligence. However, information on complex matters that should be included in financial statements, because of their relevance to the decision-making needs of users, should not be excluded merely on the pretext that they would be difficult for certain users to understand.

Relevance

To be useful, information must be relevant to the needs of users in their decision-making. Information is relevant when it influences the economic decisions of users, helping them to assess the impact of past, present, or future events, confirming or correcting their previous assessments.
The predictive and confirmatory functions of information are interrelated. For example, information about the current level and structure of assets has value for users in their efforts to predict the entity's ability to seize opportunities and its ability to react to adverse situations. The same information serves to confirm past predictions about, for example, how the entity might be structured or the outcome of planned operations.
Information about financial position and past performance is frequently used as a basis for projecting future financial position and performance, as well as other matters in which users are directly interested, such as the payment of dividends and salaries, changes in bond prices, and the entity's ability to meet its obligations as they become due. To have predictive value, information does not need to be explicitly projected. The ability to make predictions based on financial statements is enhanced, however, depending on how information about previous transactions and events is presented. For example, the value of the income statement as a predictive element stands out when unusual, abnormal, and sporadic items of revenue or expense are presented separately.

Materiality

The relevance of information is affected by its nature and materiality. In some cases, the nature of the information alone is sufficient to determine its relevance. For example, reporting a new segment of the entity could affect the assessment of risks and opportunities with which the entity is faced, regardless of the value of the results achieved by the new segment in the period covered by the financial statements. In other cases, both the nature and the materiality are important, such as the values of existing inventories in each of the main classes of inventories, according to the appropriate classification for the business.
Information is relevant if its omission or misstatement could influence the economic decisions of users made based on the financial statements. Materiality depends on the size of the item or error, judged in the specific circumstances of its omission or misstatement. Thus, materiality provides a threshold or "cut-off point," rather than being a primary qualitative characteristic that information needs to have to be useful.

Reliability

To be useful, information must be reliable. Information has the quality of reliability when it is free from material error, and when users can place confidence in it as faithfully representing that which it says it represents or could reasonably be expected to represent.
Information may be relevant, yet so uncertain in its nature or representation that its recognition may be potentially distorted. For example, if the validity and value of a claim for damages in a legal action are questioned, it may be inappropriate for the entity to recognize the total value of the claim in the balance sheet, although it would be appropriate to disclose the value and circumstances of the claim.

Faithful Representation

To be reliable, information must faithfully represent the transactions and other events that it says it represents or could reasonably be expected to represent. Thus, for example, a balance sheet should faithfully represent the transactions and other events that result in assets, liabilities, and equity of the entity at the balance sheet date, which meet the recognition criteria.
Most accounting information is subject to some risk of not fully achieving the faithful representation of what it intends to portray. This does not occur due to preconceived ideas; however, it occurs due to inherent difficulties, either in identifying the transactions or other events to be measured or in establishing and applying valuation and presentation techniques that can convey information corresponding to such transactions and events. In certain cases, the measurement of the financial effects of items could be so uncertain that entities generally would not recognize them in the financial statements; for example, although many entities generate internally generated goodwill over time, it is usually difficult to identify or measure this goodwill with certainty. In other cases, however, it may be important to recognize items and disclose the risk of error involving their recognition and measurement.

Substance over Form

For information to faithfully represent the transactions and other events that it purports to represent, it is necessary that these transactions and events be accounted for and presented according to their substance or economic reality, and not merely their legal form. The substance of transactions or other events is not always consistent with what appears based on their legal form or formal documents. For example, an entity could sell an asset to a third party in such a way that the documentation indicated the legal transfer of ownership to that third party; however, there may be agreements that ensure that the entity will continue to enjoy the future economic benefits generated by the asset. In such circumstances, reporting the sale would not faithfully represent the transaction effected (if there was indeed a transaction).

Neutrality

To be reliable, the information contained in the financial statements must be neutral, i.e., impartial. Financial statements will not be neutral if, by the choice or presentation of information, they influence decision-making or judgment in order to achieve a predetermined result or outcome.

Prudence

Those who prepare the financial statements, however, face the uncertainties that inevitably involve certain events and circumstances, such as the possibility of collecting doubtful accounts receivable, the probable useful life of the factory and equipment, and the number of claims covered by warranties that may have been given. Such uncertainties are recognized by disclosing their nature and extent and by exercising prudence in the preparation of the financial statements. Prudence consists of including a certain degree of caution in formulating the judgments necessary in the preparation of estimates under certain conditions of uncertainty, so that assets or revenues are not overstated and liabilities or expenses are not understated. However, the exercise of prudence does not allow, for example, the creation of hidden reserves or excessive provisions, the deliberate undervaluation of assets or revenues, the deliberate overvaluation of liabilities or expenses, as the financial statements would cease to be neutral and, therefore, would not have the quality of reliability.

Completeness

To be reliable, the information contained in the financial statements must be complete, within the limits of relevance and cost. An omission can make the information false or distorted and, thus, unreliable and deficient in terms of its relevance.

Comparability

Users must be able to compare the financial statements of an entity over time, in order to identify trends in its financial position and performance. Users must also be able to compare the financial statements of different entities, in order to assess, in relative terms, their financial position, results, and changes in financial position. Consequently, the assessment and presentation of the financial effects of similar transactions and other events must be done consistently across all entities and across different periods and in a consistent manner for different entities.
An important implication of the qualitative characteristic of comparability is that users must be informed of the accounting policies followed in the preparation of the financial statements, any changes in these policies, and the effect of such changes. Users need to be in a position to identify differences between the accounting policies applied to similar transactions and events, used by the same entity from one period to another and by different entities. Compliance with International Accounting Standards, including the disclosure of the accounting policies used by the entity, helps to achieve comparability.
The need for comparability should not be confused with mere uniformity and should not be allowed to become an obstacle to the introduction of improved accounting standards. It is not appropriate for an entity to continue accounting for a transaction or event in the same way if the policy adopted is not in conformity with the qualitative characteristics of relevance and reliability. It is also inappropriate to keep its accounting policies untouched when there are more reliable and adequate alternatives.
Since users wish to compare the financial position, results, and changes in financial position over time, it is important that the financial statements show the corresponding information for previous periods.

Limitations on the Relevance and Reliability of Information

Timeliness of Information

If there is undue delay in reporting information, it may lose its relevance. Management may have to establish a balance between reporting information at the appropriate time and providing reliable information. To provide information at timely dates, it may be necessary to report information before all aspects of a transaction or other event are known, thereby compromising reliability. On the other hand, if, to report information, there is delay until all aspects become known, the information may be highly reliable, but of little use to users who have had the need to make decisions in the meantime. To achieve a balance between relevance and reliability, the prevailing principle is to use the best way to meet the needs of the users' economic decision-making process.

Cost-Benefit Balance

The cost-benefit balance is a pervasive limitation, rather than a qualitative characteristic. The benefits derived from information must exceed the cost of producing it. The assessment of costs and benefits is, however, essentially an exercise of judgment. Moreover, costs do not necessarily have to fall on those users who enjoy the benefit. The benefits must be enjoyed by other users, in addition to those for whom the information was prepared; for example, providing more information to loan creditors may reduce the borrowing costs of an entity. For these reasons, it is difficult to apply the cost-benefit test in a given case. Despite this, standard-setting bodies, in particular, as well as preparers and users of financial statements, must be aware of this limitation.

Balance Between Qualitative Characteristics

In practice, it is sometimes necessary to make a balancing or accommodation between the qualitative characteristics. Generally, the objective is to achieve an appropriate balance between the characteristics, in order to satisfy the objectives of financial statements. The relative value of the characteristics in different cases is a matter of professional judgment.

True and Fair View/Fair Presentation

We often say that financial statements reflect the financial position, results, and changes in financial position of an entity truly and fairly. Although this Conceptual Framework does not deal directly with such concepts, the application of the main qualitative characteristics and appropriate accounting standards usually results in financial statements that portray what is generally understood as a true and fair presentation of this information."

1.9 The Income Statement and Economic Measurements Based and Not Based on Accounting Standards

The use of economic measurements not based on accounting standards, such as earnings before interest, taxes, depreciation, and amortization – EBITDA, or in comments in the management report and in other informative pieces disclosed by publicly-held companies, leads to the need for guidance on the necessary conditions for the understanding of these measurements by users of accounting information. The relevance of disclosing measurements not based on accounting standards is evident, given that it intends to influence the economic decisions of users by adding elements not provided for in the structure of usual reports of financial statements based on accounting principles. To expand the understanding of this subject, a review of the general concepts associated with these types of measurements was made for better understanding by those responsible for disclosing to the capital markets.

1.9.1 The Objectives of the Income Statement

The objective of the Income Statement expresses the understanding of the economic perspective, according to the pronouncement on the Basic Conceptual Framework. In reading the corporate law, we find the reference to this statement: "In determining the result of the fiscal year, the following will be computed, according to § 1 of article 187 of Law 6.404/76:
a) revenues and earnings earned in the period, regardless of their realization in currency, and b) costs, expenses, charges, and losses, paid or incurred, corresponding to these revenues and earnings."

1.9.2 The Accounting Principles Involved

The Income Statement intends to present the economic perspective from the accounting viewpoint in a way that is useful to the user, who generally uses this statement as a data base for performance measurements and for assessments of the company and its securities. The principles directly involved in the organization of this statement are the Revenue Recognition Principle and the Matching Principle of Expenses with Revenues and with Accounting Periods.

As a general rule, the Revenue Recognition Principle considers revenue realized when the realization process is complete or virtually complete, that is, the effort to obtain the revenue has already been developed, and there has been a transaction. The Matching Principle, also called Accrual, determines that all expenses, representing sacrifices of assets in the search for revenues occurring in a certain period, must be matched with the respective revenues recognized in that same period, and that gains and losses, comparable or not with Revenues and Expenses, be equally recognized when incurred.

In the evaluation process based on the concept of profit advocated by accounting principles, usefulness (relevance) and practicability (objectivity) are also important.

1.9.3 The Concept of Revenues and Expenses

The concept of Revenues and Expenses is related to the movement of economic benefits present in the financial position, here understood as that which contains assets, liabilities, and equity. The concept of asset is related to resources from which future economic benefits are expected to result for the entity; conceptually, in turn, liabilities are obligations payable with resources that contain economic benefits, and equity is the residual right of shareholders over the assets of the entity after deducting all liabilities.

As a consequence of these concepts, Revenue can be defined as an increase in economic benefits during the accounting period, by an increase in assets or a decrease in liabilities, which result in increases in equity. Expenses are decreases in economic benefits during the accounting period, by reduction or consumption of assets or incurrence of liabilities, which result in a decrease in Equity.

Revenues present an additional difficulty, in that activities with clients that imply "multi-services" or "multi-products" are becoming increasingly frequent. This phenomenon occurs when the relationships between the publicly-held company that sells products and services and its clients include the seller's commitment to make the product available, update it technologically (upgrades), provide maintenance services, replace components that wear out in regular or normal use of the same, accept it as part payment for new equipment, or alienate it at pre-agreed values. The use of judgment and good sense by administrators and auditors of publicly-held companies is required to not succumb to the temptation of premature judgment regarding which component of the "package" sold is "revenue," when, and for what value. Mere billing, even if it implies the incidence of taxes, does not mean, by itself, that revenue has been earned from the point of view of increasing patrimonial wealth.

1.9.4 The Types of Revenues and Expenses

The types of revenues and expenses were characterized in Ibracon Pronouncement XIV – Revenues, Expenses, and Results, which can be summarized as follows: revenues from the sale of products, from the provision of services, including those resulting from the use of the entity's assets or resources by third parties, and the sale of other items besides those mentioned.

Expenses, in the same pronouncement, were divided into five classes: the cost of assets used and other costs incurred to generate revenue, such as, for example, the cost of goods sold and administrative and sales expenses; expenses for extraordinary and accidental transfers; the cost of assets written off that are not products; costs incurred in unsuccessful activities; and the decline in prices of inventories available for sale.

1.9.5 The Presentation of the Income Statement

To concretize these principles and concepts, the problem must be faced regarding the way in which the elements of the Result should be presented to users of financial statements.

The minimum content indications contained in article 187 of Law 6.404/76 do not prevent the income statement from being presented in the way that results in the best possible appreciation by the user. The minimum items provided for by the cited article 187 are:
I gross revenue from sales and services, deductions from sales, discounts, and taxes; II net revenue from sales and services, the cost of goods and services sold, and gross profit; III expenses with sales, financial expenses, deducted from revenues, general and administrative expenses, and other operating expenses; IV operating profit or loss, non-operating revenues and expenses:
(Section IV with wording given by Law No. 9.249/95).
V the result of the fiscal year before Income Tax and the provision for tax;

VI as participations in debentures, employees, administrators, and beneficiaries, and VII the net profit or loss of the period and its amount per share of social capital.
Resolution CFC No. 686/90, which approves NBC T3, provides for the following elements that must be disclosed in the Income Statement:
a. revenues arising from the exploitation of core activities; b. taxes levied on operations, discounts, returns, and cancellations;
c. costs of products or goods sold and services rendered;
d. the gross result of the period; e. operating gains and losses; f. administrative, sales, financial, and other expenses, and financial revenues; g. the operating result; h. revenues and expenses, and gains and losses not arising from core activities;
i. the result before participations and taxes;
j. provisions for taxes and contributions on the result; k. participations in the result, and
l. the net result of the period.
The types of presentation of the income statement have been modified over time, both by the administrators and accountants responsible for disclosing the company's information, as well as by users who adapt the disclosed financial statements to their analysis model.

1.9.6 Economic Measurements of the Income Statement
The view of the construction of the company's profit in the period is conventionally presented in the items: (i) gross profit, (ii) operating profit, and (iii) profit before taxes. The first evolution in this framework was the guidance of Circular CVM/PTE No. 578/85 to separately disclose Revenues and Financial Expenses, highlighting the interest from monetary updates, both in revenues and expenses. Still from a historical perspective, the indicator of Profit before interest and income tax – Lajir (EBIT – earnings before interest and tax), was built with the idea of profit generation by assets and to measure the capacity to service debt (interest payment), given that classical finance theory defines "return on assets" as that obtained independently of how the assets have been financed. Among these measurements, operating profit is generally an important object in the considerations of administrators and especially analysts and investors regarding efficiency in the conduct of the company's activities. Operating profit is generally defined in accounting standards through its components when addressing the information brought by the Income Statement. In its broadest concept, operating profit arises as the result of Operating Revenues and Expenses operational, defined as those associated with the company's main activity. A Income Statement based on this approach could be presented as follows:
Operating Revenues
(-) Operating Expenses, including Financial Revenues associated with asset protection (in non-financial institutions) (=) Operating Result (operating profit or loss) In this approach, operating profit is that produced by the management of its assets and its measurement most directly related to "return on operating assets" (operating profit / operating assets). This concept allows highlighting, from the ability to manage assets, the

ability to raise resources to finance its activities. The concept of non-operational items of the Income Statement corresponds, therefore, to items not related to regular activities or linked to its social objectives, such as sporadic sale of items from fixed assets and financial charges.

1.9.7 The Lajida measurement (profit before interest, income tax, depreciation, and
amortization)
More recently, publicly held companies have been disclosing the measurement of profit before interest, income tax, depreciation, and amortization – LAJIDA (EBITDA – earnings before interest, taxes, depreciation and amortization) as a parallel measurement to the conventional ones presented in financial statements. This measurement was also widely used as a type of cash flow of the company for purposes of debt-servicing capacity and also as related to a multiple for company valuation, among other applications. Summary view of economic measurements based and not based on accounting standards, here presented only for the purpose of understanding the text. Revenues Cost of Goods Sold Gross Profit economic measurement based on accounting standards Sales Expenses Administrative Expenses Profit before taxes, interest, depreciation, and amortization (LAJIDA) economic measurement not based on accounting standards, equivalent to EBITDA – earnings before interest, tax, depreciation, and amortization Depreciation and Amortization Operating profit before taxation and interest (Income Tax and Financial Expenses) (LAJIR) economic measurement not based on accounting standards, equivalent to EBIT – earnings before interest and tax Financial Expenses (interest) Operating Profit (after financial expenses) economic measurement based on accounting standards Non-operational Revenues and Expenses Profit before income taxes Taxes (profit: income tax and social contribution) Net Profit economic measurement based on accounting standards It has been observed by capital market representative entities that the information on Lajida (EBITDA) is being prepared and disclosed in a very particular manner by publicly held companies and in a divergent manner among them. This situation makes it difficult to understand both the formation of the number presented as well as its integration or reconciliation with the other numbers of the Income Statement, in addition to not being comparable. These measurements, therefore, are not directly extracted from the same structure of the income statement built according to the principles and accounting standards, but include and exclude amounts not provided for in these standards. Measurements not based on accounting standards are defined as those that include or exclude amounts not provided for in the economic measurements associated with the accounting standards most directly comparable. These adjustments intend to reflect the administration's view on the generation of resources by the company, but must also establish a relationship with the measurements provided for in accounting standards.

As an example, when a company discloses a measurement similar to Lajida (EBITDA), it must establish a reconciliation with the economic measurement based on accounting standards most directly comparable to Operating Profit. In this generic structure, the reconciliation could, for example, have the following format:
Operating Profit
(+) financial expenses
(+) depreciation
(+/-) amortization of goodwill or bargain purchase (+) other amortizations (=) Profit before taxes, interest, depreciation, and amortization – Lajida (EBITDA) A reconciliation of this nature gives the reader of the financial statements a clear idea of the calculation performed by the administration and explanatory power regarding the formation of the economic measurement and comparison with other companies.

1.9.8 Policy for disclosure of economic performance measurements based and not
based on accounting standards
When seeking to present a new economic performance measurement, the company's administrators must reflect on the relevance of the information for the user, as well as the meaning and concepts involved. The mere inclusion of a new measurement, without clarifying what is intended to communicate, diminishes the relevance of this disclosure and may have the opposite effect of what is recommended, confusing instead of informing. Assuming that the company has high indebtedness, which includes financial leasing contracts, it is reasonable to assume that the administrator intends to demonstrate the resource generation capacity of the operation compared to indebtedness. In this case, it must also present and reference its comments on the amount of financial expenses, which includes financial leasing contracts (leasing) treated as if they were loans. This treatment considers the principle of economic substance (leasing treated as a loan) over legal form (leasing treated as rent). These considerations refer to the origin of the need for information provision by publicly held companies, its more or less standardized form within a system of information distribution to guarantee equal access to users of the information disclosed. It is understood that, as a fundamental characteristic, the information presented to interested users of the capital market must have some qualities, among which is the need for them to be comparable over time, within the industry, and between distinct industries, which is why companies observe all elements of the accounting process that guarantee final quality, that is, the application of the same accounting principles, evaluation criteria, and standards and practices on the set of data. Furthermore, this set of information has its own logic that allows integration and correlation between its various parts: the balance sheet, the income statement, the statement of sources and applications of resources and/or cash flows, changes in shareholders' equity, and the explanatory notes. Review by independent auditors is another element that seeks to guarantee the credibility and consistency of the information presented to the set of elements of the accounting process already cited. Compliance with principles, the formalization, and integration of this information is critical for the purposes of equal access, given that they are intended for general use. This information is primarily intended to meet the needs of users who have access to the company's information only through the required and comparable information of the distribution system, currently administered by the CVM on its website. Qualitative information provided in other forms such as IAN, ITRs, and foreign forms, such as Form 20F for the American capital market, must also maintain internal coherence and with the accounting information provided in Brazil. All these considerations lead to the need for the adoption of the following desirable set of practices by publicly held
companies, when disclosing measurements not based on accounting standards, such as Lajida (EBITDA):

a. the information must have an explanation of its formation, similar to other conventional measurements such as gross profit, operating profit, and profit before income tax; b. this explanation must include the reconciliation of the economic measurement not based on accounting standards disclosed by the company with the economic measurement based on accounting standards closest, as in the example already cited: operating profit and Lajida (EBITDA);
c. the information must be comparable with the same previous period;
d. the information must be audited, or its consistency verified with respect to the information disclosed in the financial statements.

1.10 Small Balances and Generic Designations
The provision of § 2 of article 176 of Law No. 6.404/76 determines that small balances may be aggregated, provided their nature is indicated and they do not exceed 0.1 (one tenth) of the value of the respective group of accounts; but the use of generic designations, such as "various accounts" or "current accounts," is prohibited.

1.11 Statement of Changes in Shareholders' Equity
CVM Instruction No. 59/86, in its article 10, allows indicating in explanatory notes or in analytical tables the subdivisions of the shareholders' equity groupings provided for in articles 5, 6, and 7, of the same Instruction, for cases where the statement becomes too extensive for publication purposes.
To fully meet the needs of users, companies must discriminate, account by account, the items comprising their shareholders' equity.

1.12 Statement of Added Value – DVA
The wealth generated by the company, measured in the concept of added value, is calculated from the difference between the value of its production and that of goods produced by third parties used in the production process of the company. The current and potential applications of added value show the economic and social aspect that its concept involves: (i) as an index of evaluation of performance in wealth generation, by measuring the company's efficiency in the use of factors of production, comparing the value of outputs with the value of inputs, and (ii) as an index of evaluation of social performance as it demonstrates, in the distribution of generated wealth, the participation of employees, the Government, Financing Agents, and Shareholders. Added value also demonstrates the company's effective contribution, within a global view of performance, to the generation of wealth of the economy in which it is inserted, being the result of the combined effort of all its factors of production. The Statement of Added Value, which can also integrate the Social Balance, constitutes, in this way, an important source of information as it presents this set of elements that allow the analysis of the company's economic performance, evidencing the generation of wealth, as well as the social effects produced by the distribution of this wealth. Within this view, the CVM has been encouraging and supporting the voluntary disclosure of information of a social nature, having already in 1992 supported and stimulated the disclosure of DVA, through Opinion CVM No. 24/92. In Circular CVM/SNC/SEP No. 01/00, the CVM suggested the use of a model prepared by the Institute of Research in Accounting, Actuarial, and Finance of USP (FIPECAFI). In addition, it had included in the draft reformulation of Law No. 6.404/76 the mandatory disclosure of the Statement of Added Value and information of a social and productivity nature. Considering that publicly held companies have increasingly adhered to the disclosure of information of a social nature, mainly DVA, and within this voluntary nature of disclosure, aiming to guide and encourage those companies that have not yet adhered, we are presenting a simplified model of Statement of Added Value (based on a model prepared by FIPECAFI) with instructions for its completion. It can be verified in the model below, the use of the calculation criterion of added value based on sales, which makes the preparation of DVA simpler and easier to understand, since, thus, the added value is related to the accounting principles used in the traditional financial statements, allowing its reconciliation with the income statement. It starts, thus, from gross revenues and subtracts the value of goods acquired from third parties that was incorporated into the final product alienated or service rendered, so as to know the value effectively generated by the company. It should be highlighted, furthermore, that the depreciation of assets evaluated at acquisition
cost must be subtracted from gross added value to calculate net added value, and such values should not be classified as retention of the period's profit. We must emphasize that this model, even because it is not mandatory information, should not inhibit the presentation of a more detailed and better adapted demonstration to the business segment of the company. If the company deems it necessary, it may present this information in explanatory notes to the financial statements, instead of including it in the body of the Management Report.

Statement of Added Value in R$ thousand 20X1 20X2 DESCRIPTION 1 REVENUES 1.1) Sales of goods, products, and services 1.2) Provision for doubtful debts – Reversal/(Establishment) 1.3) Non-operational 2 INPUTS ACQUIRED FROM THIRD PARTIES (includes ICMS and IPI) 2.1) Raw materials consumed 2.2) Costs of goods and services sold 2.3) Materials, energy, third-party services, and others 2.4) Loss/Recovery of asset values 3 – GROSS ADDED VALUE (1-2) 4 – RETENTIONS 4.1) Depreciation, amortization, and depletion 5 – NET ADDED VALUE PRODUCED BY THE ENTITY (3-4) 6 – ADDED VALUE RECEIVED IN TRANSFER 6.1) Equity method result 6.2) Financial revenues 7 – TOTAL ADDED VALUE TO BE DISTRIBUTED (5+6) 8 – DISTRIBUTION OF ADDED VALUE 8.1) Personnel and charges 8.2) Taxes, fees, and contributions 8.3) Interest and rents 8.4) Interest on equity capital and dividends 8.5) Retained profits / loss of the period

The total of item 8 must be exactly equal to item 7.

Instructions for completion:
The information is extracted from accounting and, therefore, must be based on the accounting principle of the accrual basis of accounting.
1 – REVENUES (sum of items 1.1 to 1.3)
1.1 – Sales of goods, products, and services
Includes the values of ICMS and IPI levied on these revenues, that is, it corresponds to the gross revenue or gross billing.
1.2 – Provision for doubtful debts – Reversal/Establishment
Includes values related to the establishment/write-off of provision for doubtful debts.
1.3 – Non-operational
Includes values considered outside the main activities of the company, such as: gains or losses on the disposal of fixed assets, gains or losses on the disposal of investments, etc.
2 – INPUTS ACQUIRED FROM THIRD PARTIES (sum of items 2.1 to 2.4)
2.1 Raw materials consumed (included in the cost of goods sold).
2.2 Costs of goods and services sold (does not include expenses with own personnel).
2.3 Materials, energy, third-party services, and others (includes values related to purchases
and payments to third parties).
In the values of the costs of products and goods sold, materials, services, energy, etc. consumed, taxes (ICMS and IPI) included at the time of purchases, recoverable or not, shall be considered.
2.4 Loss/Recovery of asset values
Includes values related to market value of inventories and investments, etc. (if in the period the net value is positive, it shall be added).
3 – GROSS ADDED VALUE (difference between items 1 and 2).
4 – RETENTIONS
4.1 – Depreciation, amortization, and depletion
Should include the expense accounted for in the period.
5 – NET ADDED VALUE PRODUCED BY THE ENTITY (item 3 minus item 4).
6 – ADDED VALUE RECEIVED IN TRANSFER (sum of items 6.1 and 6.2)
6.1 Equity method result (includes values received as dividends
relating to investments evaluated at cost). The equity method result may represent revenue or expense; if expense, it shall be reported in parentheses.
6.2 Financial revenues (include all financial revenues regardless of their
origin).
7 – TOTAL ADDED VALUE TO BE DISTRIBUTED (sum of items 5 and 6) 8 – DISTRIBUTION OF ADDED VALUE (sum of items 8.1 to 8.5)
8.1 – Personnel and charges
In this item, charges for vacation, 13th salary, FGTS, food, transport, etc., appropriated to the cost of the product or result of the period shall be included (do not include charges for INSS – see treatment to be given in the following item).
8.2 – Taxes, fees, and contributions
In addition to contributions due to INSS, income tax, social contribution, all other taxes, fees, and contributions shall be included in this item. The values relating to ICMS and IPI shall be considered as the values due or already collected to the public treasury, representing the difference between the taxes levied on sales and the values considered within item 2 – Inputs acquired from third parties.
8.3 – Interest and rents
Financial expenses and interest expenses related to any type of loans and financing from financial institutions, group companies, or others and rents (including leasing expenses) paid or credited to third parties shall be considered.
8.4 – Interest on equity capital and dividends
Includes values paid or credited to shareholders. Interest on equity capital accounted as reserves shall be included in the "retained profits" item.
8.5 – Retained profits/loss of the period
Profits of the period destined to profit reserves and any portions still without specific destination shall be included.

Accounts Receivable
2.1 – Estimate of Provision for Doubtful Debts

Companies must establish a provision for doubtful debt collection in an amount sufficient to cover losses considered probable in the collection of accounts receivable. Such provision aims to adjust Accounts Receivable to their probable realization value, the criterion by which rights and credit titles must appear in the balance sheet. This must also be established based on estimates that allow for a provision as close to reality as possible, regardless of criteria and limits established by special or tax legislation.

The calculation of the value of this provision must undergo careful technical evaluation and consider, among other factors: (i) experience each company has regarding the level of losses in the past; (ii) current value of Accounts Receivable that have already matured; (iii) current economic situation and analysis of trends; (iv) current situation of credit in general; (v) analysis of the individual situation of its clients, mainly regarding degree of indebtedness, market where they operate, ability to generate results, contingencies, bankruptcy or insolvency status, etc.; (vi) conditions of guarantees under which the sale occurred, such as collateral and real guarantees; and, (vii) cost of sales financing.

2.2 Disclosure in explanatory note of Provision for Doubtful Debtors

The criteria adopted for the establishment of the provision for doubtful debt collection must be disclosed, as well as any change in the criterion or in the manner of its application, occurring during the fiscal year.

(CVM ORIENTATION OPINION NO. 21/90)

Inventories

3.1 – Inventory valuation criteria

The inventory valuation criteria established in Article 183 of Law No. 6,404/76 must be adopted. Alternative procedures that contradict the rules established in the aforementioned article will not be accepted, especially those created by tax legislation or even special legislation that does not contemplate the Corporations Law.

3.2 Disclosure in explanatory note of Inventories

3.2.1 Disclosure in explanatory note of inventories

Whenever there is a significant change in inventory levels, this fact must be the subject of clarification in an explanatory note.

Open companies that, with CVM authorization, are in the phase of implementing a cost accounting system, must clarify the fact in an explanatory note, subjecting themselves, regarding the effects, to the appropriate restrictions that may be pointed out by the independent auditor.

(CVM CIRCULAR LETTER/PTE NO. 309/86 and CVM ORIENTATION OPINION NO. 27/94)

3.2.2 Idle Capacity

Information must be provided to inform about the dimension of the fact, such as: the existence, expectation of change, and accounting treatment related to idle capacity (CVM ORIENTATION OPINION NO. 24/92).

Regarding this matter, paragraph 11 of the international pronouncement IAS – 2 states: "The allocation of fixed production overheads to costs of conversion is based on the normal capacity of production. Normal capacity is the production expected to be achieved, on average, over a number of periods or seasons under normal conditions, taking into account the reduction in capacity resulting from planned maintenance. The actual level of production may be used if it is close to normal capacity. The amount of fixed overheads allocated to each unit of production does not increase as a consequence of low production or factory idleness. Unallocated fixed overheads are treated as expenses in the period in which they are incurred. (...)"

Statement of Cash Flows

4.1 Evolution of the Statement of Cash Flows

The origins of the current statement of cash flows lie in the statements prepared decades ago by companies that presented the sources and applications of funds obtained in essence the increases and decreases of items in the balance sheet. The difference between these items was called financial position, a denomination that remains today in several countries.

This format evolved from supplementary and voluntary information to a mandatory statement still under the concept of financial position as the variation in working capital, or net working capital.

In the form provided by Article 188 of Law No. 6,404/76, the Statement of Sources and Applications of Resources – DOAR – aims to indicate modifications in the company's financial position, that is, the variations in asset and liability items organized in such a way as to demonstrate the variation in net working capital of the period. In the text of this article, this statement must discriminate:

I – the sources of resources, grouped into:

a) profit of the year, increased by depreciation, amortization or exhaustion and adjusted by the variation in results of future years;

b) realization of share capital and contributions to capital reserves;

c) third-party resources, originating from the increase in long-term payable liabilities, the reduction in long-term realizable assets, and the alienation of investments and rights of fixed assets;

II – the applications of resources, grouped into:

a) distributed dividends;

b) acquisition of rights of fixed assets;

c) increase in long-term realizable assets, investments, and deferred assets;

d) reduction of long-term payable liabilities;

III – the excess or insufficiency of sources of resources relative to applications, representing an increase or reduction in net working capital;

IV – the balances, at the beginning and end of the year, of current assets and liabilities, the amount of net working capital, and its increase or reduction during the year.

The preparation of the statement of sources and applications of resources evolved over time, and the following points were adopted in accounting practice: (i) when the resources from the company's operations are negative, they must be shown as an application of resources and not as a reduction in the source of resources, (ii) loans dedicated to financing fixed assets can be presented as sources and applications, respectively, (iii) revaluation must be excluded from the statements of sources and applications as it does not represent a flow of resources.

The concept of "funds" and "financial position" originating from the first statements was then narrowed to a definition of cash or cash equivalents, as established in the American pronouncement SFAS 95 and the international pronouncement IAS 7, both titled Statement of Cash Flow. The DOAR is therefore based on the concepts of net working capital and the accrual basis, meaning presenting availability within the so-called financial cycle of the company and the generation of operational resources from the result prepared according to the accrual basis. The statement of cash flows, on the other hand, is based on the concept of immediate availability, demonstrated according to the cash basis.

4.2 The Statement of Cash Flows according to international standard IAS 7

The following are summarized and commented on the main points of the standard regarding the statement of cash flow in IAS 7:

Objectives

Cash flow information provides a basis for assessing the ability to generate and use these flows in a structured manner by nature of activities. Users of the company are interested in knowing how the company generates cash and cash equivalents, and this interest is independent of the nature of the company.

Structure

The following main topics must be used in all cash flows: (i) operating activities, (ii) investing, and (iii) financing. This classification allows evaluating the effect of activities on the amount of cash and cash equivalents.

Concepts

Cash and cash equivalents: cash comprises cash on hand and available bank deposits; Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value.

Operating activities: are the main revenue-generating activities of the entity, in addition to other activities different from investing and financing; These flows are basically derived from revenue-generating transactions of the entity and, therefore, generally result from transactions and other events that enter into the calculation of results. Examples are cash receipts from the sale of goods and services and cash payments to suppliers, employees, insurers for premiums, and taxes.

Investing activities: are the acquisition and sale of long-term assets and other investments that represent expenditures intended to generate future revenues and cash flows and that are not included in cash equivalents. Examples are outlays for the acquisition of fixed assets, intangible assets, and other long-term assets, receipts from the sale of fixed assets, acquisition or sale of shares or debt instruments of other entities.

Financing activities: are activities that result in changes in the size and composition of the entity's equity and loans payable, which represent demands imposed on future cash flows by the entity's capital providers. Examples are cash from the issuance of shares or capital instruments, payments to investors to acquire or redeem the entity's shares, cash from the issuance of debentures, taking out short- and long-term loans, amortization of loans, and lease payments.

Presentation methods

The entity may use the direct or indirect method to report the cash flow from operating activities, with the direct method being encouraged. In the direct method, the main classes of receipts and payments are disclosed, and in the indirect method, the net cash flow from operating activities is determined by adjusting the result (profit or loss): (i) by the effects of transactions that do not affect cash, such as depreciation, deferrals, and provisions, unrealized exchange profits or losses, undistributed profits of investees and minority interests, (ii) variations occurring in the period in inventories and in accounts receivable and payable, and, (iii) all other income and expense items related to cash flows from investing and financing activities, (iii) all other income and expense items related to cash flows from investing and financing activities.

Classification and disclosure aspects

a) The entity must highlight the main classes of receipts and payments arising from investing and financing activities at gross value;

b) Cash flows from foreign currency transactions must be recorded in the currency in which the entity's financial statements (reporting currency) are expressed, converting the foreign currency amount at the exchange rate on the date of the cash flow;

c) When a contract is accounted for as a hedge of an identifiable position, the cash flows of the contract are classified in the same way as the cash flows of the position being hedged.

d) cash flows related to extraordinary items must be classified as resulting from operating, investing, or financing activities, as appropriate, and separately disclosed;

e) cash flows related to interest, dividends, and income tax must be disclosed separately and uniformly in the group that best represents the essence of the transaction; the IAS 7 pronouncement does not specify how these cash flows must be classified, and requires the company to establish its accounting policy for these items in the most appropriate way;

The difference in treatment of interest and dividends between the American pronouncement FASB Statement 95 and the international pronouncement IAS 7

The classification of interest and dividends, which in the international pronouncement IAS 7 allows for alternative treatments, receives a specific guideline in the case of the American pronouncement. The IAS 7 pronouncement allows a non-financial company to classify consistently between periods: (a) interest (financial expenses) and dividends paid or received in the "operating" topic or (b) interest and dividends paid as "financing", that is, the cost of obtaining financial resources, and interest (financial revenues) and dividends received as "investment", that is, returns on investment. The SFAS 95 pronouncement, on the other hand:

(i) requires that interest paid and interest and dividends received must be classified as operating cash flow,

(ii) classifies dividends paid as a "financing" cash flow, because they are considered a cost to obtain resources. It is added that SFAS 95 determines that the transaction must be classified in the activity that represents the predominant source of cash flow for the item, and this difference may cause the company to potentially vary the classification for the same type of transaction.

The underlying premise in the case of the American pronouncement is the convergence between operating cash flow and result items. IAS 7 requires disclosing, separately, interest paid and received and dividends paid and received, and SFAS 95 allows interest and dividends received to be disclosed together.

It is recommended that the Brazilian company, particularly those registered on American stock exchanges, establish and disclose in an explanatory note to the cash flow statements an accounting policy for these items. A way to reconcile these pronouncements could be the demonstration of interest paid and interest and dividends received, as an item of operating cash flow, and dividends paid as an item of financing cash flow, keeping each of these items demonstrated separately.

Disclosure of explanatory notes to cash flow statements

IAS 7 and SFAS 95 require disclosures in explanatory notes on certain topics of the cash flow statement:

topic SFAS 95 IAS 7

Cash and cash equivalents components

Requires disclosure of the criteria the company uses in considering investments classified as cash equivalents.

Requires disclosure of the components the company is considering as cash and cash equivalents and must present a reconciliation between the values in its statement of cash flows with the items in the balance sheet. The effect of any change in policy to determine the components of cash and cash equivalents must be disclosed (IAS 8).

Interest, dividends, and income tax

Interest (net of capitalized amounts) and income tax paid must be highlighted only if the indirect method is used; dividends paid may be grouped with other distributions to owners; and, interest and dividends received may also constitute a single sub-item.

Interest and dividends, paid and received, and income tax paid must be shown individually in the cash flow statement, regardless of whether the direct or indirect method is used.

Extraordinary items

No special procedure is necessary to highlight cash flows arising from extraordinary items.

Must be classified as resulting from operating, investing, or financing activities, as appropriate, separately disclosed, what originated them, and evidenced according to IAS 8.

Cash flow per share

Prohibits the disclosure of any index related to cash flow per share.

Does not make reference.

Hedging activities

Requires disclosure of the criteria used to classify hedges of identifiable transactions in the same category as the items that originated them.

Does not require disclosure of the criteria used.

Unavailable cash balances

Does not make reference.

Must disclose the balances of unavailable cash and cash equivalents, together with management comments.

Other disclosures

Does not make reference.

Encourages disclosure of:

. Value of loans obtained but not used,

. Value of cash flows by activity in joint ventures;

. Value of cash flows derived from increases in operational capacity separately from those necessary to maintain operational capacity;

. Value of flows by economic activity and geographic region.

The company must also consider other clarification items for users in additional explanatory notes, such as: (a) the disclosure of interest and charges paid in the year, including capitalized ones arising from activations in assets under construction; (b) the total income tax and CSSL paid in the year, and (c) any transactions or events that did not change cash but are relevant to inform about the company's resource flow (and that are expressly excluded from the cash flow statement by IAS 7). As an accounting policy, the company may also determine that any cash flow from investing and financing activities that is greater than 5% of the total value of the activity involved be discriminated separately. In this case, the company judged that, by opening up the composition of these cash flows, it would facilitate the evaluation of the activity's behavior for the investor/market analyst.

4.3 Disclosure according to Brazilian and foreign standards.

Open companies have been disclosing the CFS as supplementary to their financial statements, giving it a connotation of voluntary nature information. However, companies that disclose this information abroad are obliged to disclose it in Brazil so that privileged and asymmetric information disclosure does not occur between different markets. Companies must also pay attention so that the disclosure of the Statement of Cash Flows disclosed in Brazil is the same as disclosed abroad, that is, has the same format and structure, so that there is no prejudice to the investor's understanding.

It is recommended that, in the current transition situation, the statements of cash flows and of sources and applications of resources be prepared in accordance with the standards and practices set forth in which the company chose to reference the preparation of this type of statement and that are clarified in the explanatory note on the accounting policies followed. For example: the statement of sources and applications in Brazilian corporate legislation, the statement of cash flows by FAS 95 or by IAS 7. This does not prevent the company from improving the model proposed by regulation, and it is advisable to provide additional clarification on the basis of the accounting policy followed when establishing these modifications, so that there is no prejudice of understanding for the user/investor. As an example of these improvements, we can cite the reduction of NWC as sources of resources and the increase in NWC as an application of resources, in the DOAR, and the creation of categories or special sub-items in the statement of cash flows.

Finally, when making modifications on the structure and concepts indicated in the regulation, administrators, accountants, and auditors must evaluate if what is intended to be added or modified does not alter the judgment of the analyst/investor and if, alternatively, it should modify the structure of this statement or appear in a footnote or explanatory note. The final criterion of a form change in a statement must therefore be its usefulness or relevance to the user, and for this, the company must refer itself to both the regulatory structure, which intends to organize the minimum necessary information to be disclosed, and to the objectives of the users of the disclosed accounting information.

The disclosure of the statement of cash flows in Portuguese using the means for disclosure in Brazil, that is, disclosed through the company's website, CVM website, newspapers, for example, must maintain perfect identity with the cash flow disclosed in a foreign language according to foreign standards. The disclosure of the statement of cash flows in different formats and in two distinct markets, with additions or exclusions of the respective explanatory notes, for example, does not contribute to communicating the company's performance and potentially brings the risk of confusing the reader.

In another situation, the disclosure of the same type of accounting information in one market and the non-disclosure in another market constitutes asymmetric information disclosure and represents an infraction regarding the provisions of Brazilian legislation. Special attention is recommended for this aspect, so that there is no prejudice to the Brazilian investor nor to the international investor.

Net Profit or Loss of the Period, Fundamental Errors, and Changes in Accounting Policies

5.1 – Concepts

As "prior period adjustments" will be considered, only those resulting from a change from one accounting criterion to another accepted by accounting standards, or from the correction of an error attributable to a prior year, provided that they cannot be attributed to subsequent events (§ 1 of Article 186 of Law No. 6,404/76) – and are not revisions of estimates or definition of values that are different from those provided. Changes decided by the administration must aim to improve information or rationalize accounting procedures. The law limits the possibility of the administration influencing results through changes in accounting practices, so it is treated as an adjustment to the portion that should have been considered included or excluded from equity in the previous year if the criterion now adopted were already in force. Therefore, modifications in operational conditions that determine the adoption of new criteria, whose consequences cannot be assessed in comparison with criteria adopted previously, cannot be considered.

Regarding errors attributable to a prior year, they can only be characterized when it is an involuntary accounting entry different from what would be appropriate, given the documents, information, and circumstances existing at the time. They result from arithmetic errors in the treatment of correct basic data, for any reason, including misinterpretation. Adjustments of provisions constituted, due to inadequate assessment of estimated risks or insufficient information existing at the time of their constitution, do not fit, therefore. Nor are they included as prior period adjustments the write-offs of non-recoverable assets and the adjustments related to the provision for doubtful debt collection, provision for income tax, and others that, when constituted, must be so within the broadest criteria and exhaustive analysis of possible and available information. Prior period adjustments will be subject to broad and clear disclosure in an explanatory note, in which their nature and foundations are specified.

5.2 Disclosure in explanatory note of Net Profit or Loss of the Period, Fundamental Errors, and Changes in Accounting Policies

5.2.1 Prior Period Adjustments

The nature of prior period adjustments and their grounds must be highlighted in explanatory notes to the financial statements.
(LEI Nº 6.404/76, ARTICLES 176 AND 186 AND EXPLANATORY NOTE OF CVM INSTRUCTION Nº 59/86)

5.2.2 Change in Accounting Method or Criteria
Whenever there is a relevant change in accounting methods or criteria, the company must disclose the change, emphasizing the resulting effects.
(LEI Nº 6.404/76, ARTICLE 177)

Subsequent Events
6.1 Disclosure in Explanatory Note of Subsequent Events
Events occurring between the end of the fiscal year and the date of publication of the financial statements that have, or may have, a relevant effect on the financial situation and future results of the company must be disclosed.
(LEI Nº 6.404/76, ARTICLE 176)
Construction Contracts
7.1 Financial Statements of Publicly Held Companies in the Real Estate Sector
Companies operating in the real estate sector have the option to record sales of their developments based on accounting guidance fixed in tax legislation, which basically presupposes the recognition of revenues as they are received, characterizing the use of the cash regime to the detriment of the accrual regime of exercises prescribed in article 177 of the corporate law. Furthermore, when these companies record the aforementioned sales, they do so using as the counterpart to receivables an account included in the group of Future Exercise Results, a practice that the CVM considers inadmissible, as explained in item 13 of CVM Orientation Opinion nº 21, of 27.12.90. Therefore, in installment or deferred sales of real estate units, for the purpose of complying with the provisions of articles 177 and 187 § 1° of Law 6.404/76, the accounting recording of the results obtained in these sales must follow the fundamental principles of accounting. Alternative procedures emanating from tax legislation or specific legislation must be observed in auxiliary records, as provided for in § 2° of the aforementioned art. 177. Thus, in installment or deferred sales of real estate units, the accounting treatment to be adopted comprises the following:
a. Deferred Sale of Completed Unit
The result on the sale must be appropriated at the moment it was finalized, regardless of the term for receiving the contracted value. The amount of installments, when pre-fixed, must be brought to their present value, or, if of short term, when there are relevant effects; b. Deferred Sale of Unit Not Completed In this case, the result on the sale must be appropriated over the course of the work, in the same way that contracts for the supply of goods, works, and long-term services are appropriated, that is, based on physical progress or costs incurred.
Income Tax
8.1 The Disclosure of the Income Tax Provision
In the statement of the exercise result, the income tax due must be provisioned for the gross amount to be paid. In explanatory notes to the financial statements, the portion related to tax incentives embedded in the gross amount provisioned must be highlighted, and reference must be made to the legal provision permitting the use of incentives. In cases of temporary exemption, the tax that would be due will be computed for the determination of the net result of the exercise and, subsequently, transferred to the respective capital reserve, indicating, in an explanatory note, the start and end dates of the benefit.

8.2 Tax Incentives
CVM Deliberation nº 273/98 established the accounting procedures applicable to the recording of Income Tax and Social Contribution, listing, furthermore, the information that must be highlighted in explanatory notes, when relevant. The CVM Collegiate also approved CVM Instruction nº 371/02, which provides for the accounting recording of deferred tax assets and complements CVM Deliberation nº 273/98. Given that, for many companies, especially those benefiting from tax incentives, one of the most relevant pieces of information concerns this condition, we are requesting that, in addition to the information provided in the aforementioned Deliberation, the following be also disclosed, regarding publicly held companies and companies benefiting from tax incentives, their subsidiaries, holding companies, and affiliates: information on the existence of tax benefits, of any nature, comprising, at minimum, the type of benefit, the term or maturity, and the amount of tax savings realized in the exercise and accumulated, when applicable. For the complete understanding of the aspects related to this topic, the amounts paid/paid for each tax and/or contribution in the social exercise must also be disclosed.

8.3 Tax Credits
From CVM Deliberation nº 273/98, the basis for the recognition of a deferred tax asset became the evidence/proof of its realization/recovery, based on an evaluation of the probability of generating sufficient taxable profit to offset the tax loss that gave rise to it.
It is, therefore, the duty of the administrator, through the information provided to the market, to prove that the credit being accounted for has the intrinsic economic condition necessary for its recording as an asset, as well as to disclose the bases of this proof. The supervisory board and the statutory administration bodies must evaluate and approve such proof. The independent auditor is responsible for, during the course of their work, obtaining sufficient and adequate evidence or proofs to support their opinion on the audited financial statements, especially regarding the premises of realization/recovery of the deferred tax asset accounted for by the company and its correct disclosure, including the evidence that supports its recording. Immediately when changes are identified that imply the alteration of the recovery premises of tax credits, in whole or in part, the same must be removed from the asset.

8.3.1 Periodic Review
It is also worth remembering that CVM Deliberation nº 273/98 establishes that the book value of a deferred tax asset must be reviewed periodically and the entity must reduce it or extinguish it as it is not probable to obtain sufficient taxable profit for its realization. We understand that this review must be, at minimum, annual and ideally at a shorter interval, if any relevant event has occurred that could alter the estimates. The concept that guides this review is the economic substance of the asset, or the capacity of the asset to transform, directly or indirectly, into net cash inflows, that is, they must represent a future promise of cash.

8.3.2 Recovery Term
It is imperative that this credit can, in fact, be used by the company through future tax savings, and this will only occur if and when the company comes to earn taxable profits in sufficient volume. Future profitability must consider the probable capacity to generate taxable profits by the company in the context of the main business variables, such as prices, volumes, market, and competition. This is an example of the cited prevalence of substance over form, not being sufficient to exist the right to offset but being necessary the presence of conditions to be achieved, in future operations, business and commercially, the profit whose taxation will entail the recovery of the tax credit on past losses. Special attention must be given to the fact that long recovery terms for these assets, associated with the distancing of result perspectives in confrontation with those achieved, greatly increases the degree of uncertainty regarding the recoverability of these assets, consequently increasing the risk of the Administration of the publicly held company in keeping them on the Balance Sheet, a risk for which Independent Auditors must have heightened attention and which finds no support in the imprescriptibility of the tax credit.

8.3.3 Responsibility
Given the relevance that the issue imposes, the objective is to establish a culture of involvement, proactive participation, and interdependent responsibility among the administration bodies, supervisory board, and independent auditors. Thus it does when it requires the examination by the supervisory board and the approval by the administration bodies (art.4º) of the technical feasibility study. Independent auditors are required to evaluate the adequacy of the procedures for the constitution and maintenance of the deferred tax asset and liability, including with respect to the premises used for the preparation and updating of the aforementioned technical study.

8.3.4 Technical Feasibility Study
It must be emphasized that this study does not constitute an additional requirement to those required by CVM Deliberation nº 273/98:
"004 The deferred tax asset resulting from tax losses of income tax and negative bases of social contribution must be recognized, totally or partially, provided that the entity has a history of profitability, accompanied by the expected fundament of this profitability for a term that considers the maximum limit of compensation allowed by legislation" The technical study must not be limited to the maximum term of 10 years (this term is established for the purposes of evaluating the recovery of the deferred tax asset, that is, of the criteria provided in the standard that deals with discontinuing operations – impairment). Therefore, it must contemplate the generation of results according to the administration's expectation, considering the continuity of the company and the maintenance of the result for an indefinite time, including its perpetuity. The examination, approval, and evaluation of this technical study must be, at minimum, annual. However, whenever there is a relevant change in the elements that compose the study, it must be subject to new examination, approval, and evaluation, even if at a term shorter than the aforementioned one. It is also worth clarifying that the approval by the administration bodies includes the Board of Directors and the Executive Management.

8.3.5 Present Value Adjustment in the Determination of Future Taxable Profits
It must be highlighted that it is the future taxable profits, contemplated in the technical feasibility study, that must be brought to present value. The standard does not determine that the deferred tax asset must necessarily be accounted for at its present value; it establishes, however, the discounting of future taxable profits (which cannot be considered at their nominal value) in order to verify if the asset is recoverable and, therefore, if it should be recorded and for how much. In this case, for purposes of evaluation regarding the recovery of the deferred tax asset, these profits must be brought to present value, based on the estimated term for their realization, even if this exceeds the maximum term of 10 years established in item II, article 2º of CVM Instruction nº 371/02. Simplified Example:
Deferred Tax Asset (total) .................................. 150.00 Deferred Tax Asset (recoverable portion in 10 years) .................................. 100.00 Fiscal Effect Considering the Present Value of Future Taxable Profits ("n" years (*) ):
1st hypothesis (260.00 x IR of 0.35) .................................. 91.00 2nd hypothesis (400.00 x IR of 0.35) .................................. 140.00 Fiscal Asset accounted for in the 1st hypothesis .................................. 91.00 (amount expected to be recovered)

Fiscal Asset accounted for in the 2nd hypothesis .................................. 100.00 (nominal recoverable value in 10 years) (*) for example 15 years + perpetuity.
Therefore, the balances of deferred tax assets must not exceed the values pointed out in the projection of future taxable profits discounted to present value, regardless of the expected term of their recovery.
In this recovery analysis, existing balances prior to the publication of CVM Instruction 371/02 are included, as well as new constitutions of deferred tax credits.

8.3.6 Initial and Additional Recognition of Deferred Tax Asset
It must be clarified that both the company that recognizes a deferred tax asset for the first time, and that which accounts for an additional value to the balance existing prior to the effectiveness of CVM Instruction 371/02, are subject to the determinations of that normative. Therefore, in these cases, the recognition of a new deferred tax asset has as a consequence the application of CVM Instruction nº 371/02 to the entire amount recognized in the financial statements.

8.3.7 Disclosure in Explanatory Note of Income Tax
8.3.7.1 Income Tax and Social Contribution
The financial statements and/or the explanatory notes must highlight the following information, when relevant:
a) amount of current and deferred taxes registered in the result, equity, asset, and liability; b) nature, ground, and expected term for the realization of each deferred tax asset and obligation; c) effects on the asset, liability, result, and equity resulting from adjustments due to change in rates or change in the expectation of realization or settlement of deferred assets or liabilities; d) amount of temporary differences and unused tax losses for which a deferred tax asset was not recognized, with the indication of the value of the taxes that did not qualify for this recognition; e) reconciliation between the value debited or credited to the income tax and social contribution result and the product of the accounting result before income tax multiplied by the applicable rates, also disclosing such rates and their calculation bases; a. nature and amount of assets whose tax base is lower than its book value. (CVM DELIBERATION Nº 273/98)

8.3.7.2 Deferred Tax Asset
It is worth clarifying that, in any situation, including for cases of companies that have recognized a deferred tax asset before the effectiveness of CVM Instruction nº 371/02 and that do not recognize additional value to that balance, it is mandatory to disclose in the explanatory note the following information (items I, II, and III of article 7º):
"I estimate of the realization portions of the deferred tax asset, discriminated year by year for the first 5 (five) years and, from then on, grouped in maximum periods of 3 (three) years, including for the portion of the deferred tax asset not registered that exceeds the realization term of 10 (ten) years referred to in item II of art. 2º; II effects resulting from eventual change in the expectation of realization of the deferred tax asset and respective grounds, as provided in art.4º, and III in the case of newly constituted companies, or in the process of operational restructuring or corporate reorganization, description of the administrative actions that will contribute to the future realization of the deferred tax asset."

This also applies to the disclosure, in the explanatory note, of the fundamented justification of the actions implemented by the company, aiming at the generation of taxable profit in the future. These actions represent fundamental requirements for the company to keep tax credits in the asset in the absence of a profitability history (art.3º, § único). (CVM INSTRUCTION Nº 371/02)

Segment Reports
9.1 – Disclosure in Explanatory Note of Information by Business Segment
Segment information aims to provide users of financial statements with information on the size, contributions to the result, and growth trends of the different operational or geographic areas in which the company operates, allowing for prospective analysis regarding risks and perspectives of a diversified company. Recalling that financial statements aim to allow the projection of expected future cash flows, it is particularly relevant that the generation of such cash flows can be evaluated by analysts and investors by business area or by geographic area of operation of the publicly held company or the business conglomerate that includes it. Segmented information provides the user with the opportunity to know the performance of each area or main business managed by the company. The knowledge of this mix is important information insofar as the user can effectively compare these performances, not only within a company, but eventually also in relation to other companies. When analyzing a certain sector, the investor may encounter companies that present a global performance that was not fostered in the basic sector of operation, but rather by other activities or non-repetitive businesses. The statements presented in segmented form also serve to elucidate this circumstance, as they will allow users to evaluate the performance of each activity. From this aspect, the CVM encourages the disclosure of this information by publicly held companies, especially for those that publish consolidated statements. For the presentation of information by segments, it is necessary, preliminarily, to define the segments to be highlighted. A segment comprises a component of a company that is involved in the production of goods and services, or group of these, subject to risks and returns different from other segments. It is important to remember that, as a general principle, the company must use the same logic of analysis for decision-making used in the managerial reports by its administrators in the structure of the information of activities by business segment. The company, to highlight its segments, must adopt the form of "businesses" or "geographic area", or both. If the form used by administrators does not allow for rapid segmentation, the company may use some rules for its grouping into segments. For example, as defined in international standard IAS 14, the segmentation used for a business segment must observe: (i) the nature of the products or services; (ii) nature and technology of the production processes; (iii) types of markets in which the products and services are sold; (iv) main classes of clients; (v) channels and methods of distribution of the products and (vi) when applicable, the existence of a specific regulatory environment. In turn, the use of the form of segment by geographic area comprises an identifiable part of a company focused on operations in a certain country, group of countries or, as in the Brazilian case, due to possessing continental
dimensions, the various regions of the country. Once the segments are established, whether by "business" and/or "geographic area", the company must also establish which form of disclosure should be considered as primary or secondary, since it will have a direct effect on the content of the information made available. The segmented information that must be included, considering the primary format of disclosure (business or geographic area) based on international standard 14 (IAS 14), are: (i) revenues, expenses, and result obtained by the segment; (ii) assets and liabilities involved in the segment; (iii) capital expenditures in the segment; (iv) depreciation, amortization, and other significant expenses; (v) effects on the segment of results with equity method; (vi) nature and value of extraordinary items, provided they are directly attributable to a segment or capable of allocation, on rational bases; (vii) significant contingencies directly attributable to the segment, and (viii) reconciliations between the segmented information and the accumulated information, as well as any other relevant segmented information used by administrators in the decision-making process. For the secondary format, the company must disclose, at minimum, the following information: (i) the value of the assets of each segment; (ii) the revenues from sales to external clients (excluding sales between departments/areas of the same company inter-segments) and (iii) capital expenditures of the segment. If the company adopts and exercises its operational activities in a single segment, of business or geographic area, the information must be disclosed. With the aim of exemplifying the disclosure by segments, we demonstrate below information by segments in compliance with the standards issued by the IASB. In this sense, it is convenient to remember that such information is only an example of the minimum information required and that, as a determination of those standards, the model to be used must be consistent with the information used internally during the decision-making process by the manager. Only for the purpose of illustrating the type of note required, the example of a manufacturing company, with operation in various regions, is presented below:
" NOTE XXX INFORMATION BY SEGMENTS
The segment information is based on two formats: the primary reflects the managerial structure adopted by the group, while the secondary refers to the division by products. The primary format of segmentation, by managerial responsibility and geographic areas, represents the managerial structure of the company. The main activity of the group is the trade of food. The other activities, poultry line and feeds, are managed on a regional basis. The secondary format of disclosure, represented by product line, is divided into five categories, or segments. The results by segment represent the contribution of the different segments to the formation of the result, encompassing administrative expenses, research and development costs, and the Group's profit. The unallocated items comprise corporate expenses, research and development costs, amortization of potential "goodwills" and, for the product segments, restructuring and other small costs. Specific expenses with product research and development are allocated directly to the segments. The assets of each segment comprise properties, equipment, rights to receive, inventories, and prepaid expenses. The unallocated items represent research and development assets, including eventual goodwill. The liabilities comprise debts with suppliers and other obligations, provisions, and deferred revenues. The eliminations represent movements between the various companies of the Group, between different segments. The assets and liabilities segmented by geographic area are represented at year-end value. The assets by product line represent the annual average, which the administration understands to be a better indication of the level of capital investment for decision purposes."

By Geographic Area
In millions of Reais 2002 2001 2002 2001
Sales Results
Region 1 6,685 6,571 696 688
Region 2 6,649 6,381 882 876
Region 3 3,864 3,927 650 668
Other Activities 3,976 3,476 537 504
21,174 20,355 2,765 2,736
Unallocated Items (460) (439)
Profit from Operations 2,305 2,297
The opening of sales by geographic area is performed by customer destination. Inter-segment sales are not significant.

In millions of Reais 2002 2001 2002 2001
Assets Liabilities

Region 1 3,127 3,228 1,346 1,320
Region 2 2,748 2,625 919 865
Region 3 1,724 1,724 613 648
Other activities 2,187 1,965 804 724
9,786 9,542 3,682 3,557
Unallocated items 7,605 2,659 290 97
Eliminations (280) (212) (280) (212)
17,111 11,989 3,692 3,442
In millions of Reais
2002 2001 2002 2001
Capital Expenditures
Depreciation of properties and equipment
Region 1 238 236 201 222
Region 2 187 191 174 192
Region 3 156 138 110 120
Other activities 293 237 139 130
874 802 624 664
Unallocated items
(a) 29 23 21 20
903 825 645 684 a) Corporate, research and development fixed assets.
By product line
In millions of Reais 2002 2001 2002 2001
Sales Results
Product line 1 6,005 5,761 1,065 1,080
Product line 2 5,739 5,493 643 655
Product line 3 5,331 5,158 506 487
Product line 4 2,811 2,744 309 291
Product line 5 1,288 1,199 313 303
21,174 20,355 2,836 2,816
Unallocated items (a) (531) (519)
Operating profit 2,305 2,297

a) Corporate, research and development expenses and restructuring costs.
In millions of Reais 2002 2001
Assets
Product line 1 2,772 2,663
Product line 2 2,782 2,804
Product line 3 2,155 2,245
Product line 4 1,587 1,671
Product line 5 715 647
10,011 10,030
In millions of Reais 2002 2001
Capital Expenditures
Product line 1 266 234
Product line 2 143 132
Product line 3 115 98
Product line 4 62 62
Product line 5 25 28
611 554
Administration, distribution, research and development 292 271 903 825

In the example transcribed above, we can verify that the primary format of disclosure is the geographic area, dividing activities into three large groups: Region 1, Region 2, and Region 3.
With the division used, sales, results, assets, and liabilities were presented, as well as information regarding capital expenditures and depreciation. In the example, information by product group was also demonstrated, representing the secondary format of disclosure, in respect to IASB standards.

Information that Reflects the Effects of Price Changes
10.1 Concepts
As highlighted in item 1 of this Circular Letter, the set of accounting statements made available to the market must disclose all information that is relevant for the assessment of the net worth of the public company.
To be useful to the decision-making processes of their users, accounting information must gather four main qualitative characteristics or attributes: Relevance, Understandability, Reliability, and Comparability.
Notwithstanding the others, we highlight, at this point, the attribute of Comparability. For accounting information to be comparable, it must be expressed in the same monetary standard, that is, it must be expressed in currency of the same purchasing power on the date of the last accounting information presented. The voluntary disclosure of accounting information prepared in currency of constant purchasing power constitutes an accounting procedure aimed at eliminating relevant distortions arising from inflationary effects, thereby achieving the objectives of the law to confer the necessary transparency to know the net worth and financial situation of companies. These distortions, evidently, become larger or smaller due to the level of inflation, the company's net worth structure, the return rate of its assets, and its cost of capital (own or third-party). Therefore, for comparative analysis purposes, its disclosure meets the market's demands in a more complete manner, thus constituting a more appropriate system for proceeding with the analysis of the company's financial position in economic environments where inflation is present, conferring a higher degree of comparability to the information provided to users of the accounting statements. In this sense, it is necessary to alert public companies and their independent auditors about the provisions in CVM Advisory Opinion No. 29/96, from which, among other guidelines, it can be extracted:
"(...) it is relevant to highlight that public companies must evaluate the importance of this information, including for comparative analysis purposes, and its disclosure, in order to meet, in a more complete manner, the demands of the market.
"(...) Law No. 6,404/76 establishes that financial statements must be completed by explanatory notes and other analytical tables or accounting statements necessary for the clarification of the entity's net worth and its results."
It should be highlighted that the lower annual inflation rates of the Brazilian economy in recent years, compared to our historical experience, do not ensure the non-existence of relevant inflationary effects. These depend on the combination of the company's net worth structure and the magnitude of inflation, which is not negligible data, considering the evolution of accumulated inflation measured by IPCA (IBGE) and IGPM (FGV), as can be observed in the table below (in the same period in which the disclosure of inflationary effects in accounting statements ceased to be mandatory):
Accumulated Inflation in the period 1996 – 2004 (percentage variation) 2004 2003 2002 2001 2000 1999 1998 1997 1996 IPCA Annual Variation december
7.60 9.30 12.53 7.67 5.97 8.94 1.65 5.22 9.56
IPCA
Accumulated Variation
92.76 79.14 63.90 45.65 35.27 27.65 17.18 15.27
IGPM
Annual Variation december
12.41 8.71 25.31 10.38 9.95 20.10 1.78 7.74 9.20
IGPM
Accumulated Variation
167.27 137.76 118.71 74.53 58.12 43.81 19.74 17.65
Source: Database – Economic Advisory – ASE – CVM, Feb 2005 Research conducted by Fipecafi, estimating the recognition of inflation effects in a group of 107 public companies with shares traded on the stock exchange in 2002, indicated the following effects:
Effects of Inflation on Fixed Assets

fixed assets in 2002 historical up to 2001 year of 2002 total () R$ millions R$ millions % R$ millions % R$ millions % with IPCA 100,793.9 28,128.8 27.9 13,960.2 13.9 42,089.1 41.8 with IGPM 100,793.9 45,816.3 45.5 33,841.5 33.6 79,657.8 79.0 () The information was obtained from the balance sheet of 1995, the last one that included the recognition of inflation effects, and those from the period of 1996 to 2001, all in nominal values. For the year 2002, it was assumed that the nominal variation of increases and decreases in fixed assets was equal to that which occurred in 2001. These gross increases, compared to the net worth expressed in historical values for the same group of companies, shows the relevance of the lag between historical and corrected values:
Comparison of Fixed Asset Correction with Net Worth Correction of fixed assets up to 2002 Net Worth in 2002 (historical) percentage variation R$ millions R$ millions (%) with IPCA 42,089.1 62,796.6 67.0 with IGPM 79,657.8 62,796.6 126.9

10.2 Disclosure in explanatory note of Information that Reflects the Effects of Price Changes
10.2.1 Statements in Currency of Constant Purchasing Power
CVM understands that, in the voluntary disclosure of data in currency of constant purchasing power, a minimum content of information must be presented, such as:
a) statement of results: net operating revenue, gross profit, net financial expenses, net profit/loss; b) balance sheet: inventories and advances, fixed assets, total assets, and net worth; and c) the reconciliation with the result and net worth determined in the commercial bookkeeping.
Still within the assumptions that guide the Information Disclosure Policy, it is recommended that companies, together with their auditors, evaluate the convenience not only of the voluntary presentation of this type of information. They must also consider the convenience of its insertion as an explanatory note to the published accounting statements and quarterly information sent to CVM, or even the presentation of these statements and complete quarterly information, in currency of constant purchasing power. (CVM ADVISORY OPINION NO. 29/96)

Fixed Assets
11.1 Recoverability of Assets and Spontaneous Revaluations
The Fundamental Accounting Principle for the valuation of fixed assets is based on the concept of acquisition cost as the value basis, and the adoption of market value evaluation criteria is not accepted in many countries. In Brazil, the corporate legislation in force since 1976, complemented by tax legislation, allows this practice with numerous restrictions and cautions. CVM Deliberation No. 183/95 approved IBRACON's Pronouncement on the subject, making it mandatory, in cases of revaluation, for public companies to adopt the procedures described therein. The first of these restrictions is related to the very meaning of revaluing. Revaluation means the abandonment of the original cost principle as the value basis and the adoption of market value or replacement value for the revalued assets. The second restriction is related to which assets can be the object of revaluation. Only tangible fixed permanent assets can be the object of revaluation, and the revaluation of intangible assets, or assets for which an operational discontinuity is expected, is expressly prohibited. Furthermore, once the procedure of valuing a certain set of assets at market value (revaluation) is adopted, such procedure must be periodically redone, meaning that, at least every 4 (four) years (ideally, every year), the public company that has adopted this procedure must revalue these assets, under the terms and procedures described in the cited IBRACON pronouncement. Another restriction is related to the revaluation of assets individually. It is not acceptable, for the same public company, for assets of the same nature or of the same account to have part valued at cost and part valued at market value (revaluation). This restriction also applies to consolidated accounting statements, and it is not acceptable that the controlling company and a controlled company maintain assets of the same nature or of the same account valued by two different criteria (cost and market value), both for equity equivalence purposes and for consolidation purposes. Another aspect to be observed in revaluation is that concerning the remaining useful life of revalued assets that are subject to physical wear and tear. It is absolutely indispensable that the Valuation Report indicate the remaining useful life aiming to allow the definition of future depreciation rates. The administration of the public company must evaluate, at least each fiscal year, if there is any indication that an asset may have lost value or economic substance. In the existence of external or internal indicators, the company must deepen its analysis in order to verify if the ability to generate future economic benefits, the remaining useful life, the method and term of depreciation or amortization, or the residual value of the assets need to be adjusted, or even if a provision for losses must be constituted. Attention must also be given to the content of explanatory notes on revaluation, which must contain, at least, the
information listed in paragraph 67 of the cited IBRACON Pronouncement, especially regarding the company's policy on the treatment given to the effects of revaluation on dividends, with the mandatory citation of the date of the revaluation performed, as well as the expected dates of subsequent and/or complementary revaluations.

11.2 Periodicity of Asset Revaluation
When a company chooses to perform and account for an asset revaluation, the criterion or basis for the valuation of its fixed assets changes radically: it ceases to be the cost value and becomes market value or replacement value. More than relying on a legal permission, the administration is sending a message to the market that it will impact future profits by seeking, in operations, to recover the market value or replacement value of its assets, and not just the cost value, which has a vital difference in economic interpretation. This means that sales revenues will be compared with a new level of expenses, which affects the result and the subsequent allocations in the calculations of dividends and profit retention. Therefore, revaluations must be performed periodically, with such regularity that the net accounting value does not present significant differences in relation to the market value or replacement value on the date of each balance sheet. It is not appropriate to revalue only once in the history of the company's balance sheets, and add the costs of new assets to the revaluation values accounted for in the past, as thus the fixed asset balance loses any representativeness as information. Given that CVM Deliberation No. 183/95 entered into force on July 1, 1995, regarding revaluations made from that date, and, by virtue of CVM Deliberation No. 206/96, on December 31, 1996, regarding reserves already existing, we remind that the aforementioned deliberation establishes the following maximum deadlines for performing new revaluations:
a) annually, for accounts or groups of accounts whose market values vary significantly in relation to previously recorded values; b) every four years, for assets whose market price fluctuation is not relevant, including still the assets acquired after the last revaluation; c) observing the concept and deadlines above, the company may opt for a "rotational system", performing periodically, partial revaluations, by rotation, with defined schedules, which cover the total of assets to be revalued each period, and d) The public company must disclose in an explanatory note all information related to the option referred to in letter "c" above.

11.3 Disclosure in explanatory note of Fixed Assets
11.3.1 Revaluation of Fixed Assets
The company must disclose:
a) the bases of revaluation and the appraisers (in the 1st year of revaluation); b) the history and date of revaluation; c) the summary of the accounts subject to revaluation and respective values; d) the effect on the result of the exercise, arising from depreciation, amortizations, or exhaustion on the revaluation and subsequent write-downs; e) the treatment regarding dividends and participations; f) the treatment and values involved regarding taxes and contributions; and g) in the case of partial revaluation, which items and accounts were revalued and which were not, with indication of the previous net accounting value of the new evaluation and the revaluation registered by account or nature. In the case of revaluation reserves constituted before 01/01/93, the following must be disclosed:
a) the portion of special monetary correction – Law No. 8,200/91 that is included in the Reserve; b) the amount realized in the period; and c) the tax effect on the reserve balance that exceeds the portion referred to in letter "a" above.
CVM allowed public companies the right to opt, until 03/31/99, for the following procedures:
a) adoption of market value for the valuation of fixed assets; b) adoption of the corrected cost method, being able to maintain assets at revaluation values; c) return to the corrected cost criterion, reversing existing revaluations.
The effects of the decision taken must retroact to the beginning of the fiscal year in which the procedure was adopted, and the fact occurring and its impact, if any, on the accounting statements of the current exercise and the previous exercise must be disclosed in an explanatory note.
(CVM INSTRUCTION NO. 197/93 AND CVM DELIBERATIONS NOS 183/95 AND 288/98)

Financial Leasing
12.1 Disclosure in explanatory note of Financial Leasing
Lessee companies must disclose, at least, the following:
a) value of the asset and liability, if the lease is configured as financed purchase; b) balance, value, and number of installments, embedded interest, monetary variation; and c) other information related to long-term contracts.
Lessor companies must disclose in an explanatory note:
a) the criteria currently used for accounting for their operations, including those that provoke the need for present value adjustments for not meeting the Fundamental Principles of Accounting; and b) the present value adjustments of the future flows of financial leasing portfolios, evidencing the effect of Income Tax. (CIRCULAR LETTER/CVM/PTE NO. 578/85, CVM INSTRUCTION NO. 58/86, CVM ADVISORY OPINION NO. 15/87 AND LAW NO. 6,404/76, ARTICLE 176, § 5, "e")
Revenue
13.1 Results of Future Exercises
13.1.1 Concepts
The group of accounts "results of future exercises" is represented by net revenue "not earned or not finalized", due to the accrual basis of exercises. It is characterized by the fact that there is no obligation to return money, deliver a good, or provide a service that implies any additional effort, or any burden or significant sacrifice for the assets of the beneficiary company of the revenue. The object of the operation – good or service produced – is made available to the buyer or user, without any additional effort on the part of the company. The most common examples are: rents received in advance, by virtue of contractual provision, without possibility of return (warehouse, silo rental), deducted from commissions, taxes, and other charges incident; credit opening commissions in financial institutions. In consolidation, this group must include the discount that is not absorbed in the elimination of the investment. Therefore, this group does not contemplate portions of customer advances, for products to be delivered, service to be performed, or obligations of another nature, which must be classified in current liabilities or long-term payable liabilities. Cases classifiable in this classification are very rare. A special case of technically adequate use of this group is the recording of unrealized profit in transactions between the Controlling Company and its Controlled Companies.

13.1.2 Disclosure in explanatory note of Sales or Services to be Realized
The recording of an account receivable presupposes that the principle of revenue realization is met. Thus, it is inadmissible to record accounts receivable having as a counterpart an account of future exercise results. In the case of advance billings or contracts with guaranteed receipt for accounts of sales or services to be realized, the company must, when relevant, disclose the fact and respective amounts. (CVM ADVISORY OPINION NO. 21/90)

13.1.3 Projects in the Implementation Phase
The gain, if any, resulting from the confrontation of expenses and revenues attributable to projects in the implementation phase, must be presented as results of future exercises. Only if there is, demonstrably, certainty that this gain is of a recurring nature throughout the implementation period is it, exceptionally, that it may be recognized in the company's results. In an explanatory note, the procedure adopted must be justified, as well as the cause of said gain clarified. (CVM ADVISORY OPINION NO. 17/89)

Employee Benefits
CVM Deliberation No. 371/2000 approves and makes mandatory, for public companies, the Pronouncement on Accounting for Employee Benefits, issued by IBRACON and elaborated jointly with CVM. We also consider applicable to public companies the clarifications contained in IBRACON's Technical Interpretation No. 01/01 of NPC 26, attached at the end of the clarifications of this item. There are still some aspects that were not explicit in this technical interpretation and that deserve clarification:
14.1 Debt Confession Instruments
As a general rule (in compliance with the accrual basis), obligations arising from employee benefits, both in the existence of a formal debt confession instrument, and in the absence thereof, should already have been recognized in the equity of the sponsoring companies.
However, given that this is a specific norm that provides for a transition rule, we understand that the situation mentioned is inserted in the effects of CVM Deliberation No.

371/2000.
14.2 Scope and Coverage
Even if it is evident, it is worth clarifying that CVM Deliberation No. 371/00 is applicable to publicly-held share companies that are, or will become, sponsors of benefits for their employees. In this sense, the regulation establishes as follows:
"The objective of this pronouncement is to establish when and in what manner the cost of providing benefits to employees should be recognized by the employer/sponsor entity, as well as the information that must be disclosed in the financial statements of this Entity."
Therefore, the obligations assumed by the sponsor regarding the benefits due are in no way modified as a result of the application of this Deliberation. What the regulation disciplines is the timing and manner of accounting for these obligations by the sponsor (publicly-held company). Furthermore, the obligations assumed by the sponsor do not arise from the accounting registration of the obligation, but rather from contractual clauses or legal and regulatory impositions assumed by this sponsor. Although mentioned in the Circular Letter closing the 2001 fiscal year, it is worth emphasizing once again that the pronouncement does not cover only pension and retirement benefits, but rather these and several other categories of benefits, such as life insurance, medical and/or dental assistance, voluntary resignation plans, indemnities or bonuses for retirement, etc.

14.3 Nominal Rates vs. Real Rates
It was observed that, for the calculation of the actuarial liability, most companies used nominal interest rates (which include an expected inflation rate). Others, in smaller numbers, used real interest rates. The pronouncement does not determine the rate to be used, whether nominal or real.
For those companies that opt for a real interest rate, it is necessary to disclose, with justification, the inflation expectation.
Nevertheless, it must be stressed that, regardless of the option, the model must be consistent, that is, the same model (nominal or real) must be used for all economic rates to be employed (discount, return on investments, salary growth, benefit growth, medical service growth, etc.).

14.4 Discount Rate for Actuarial Liability
The discount rate must be compatible with the company's liability conditions. Therefore, the term and risk compatible with this obligation must be considered.
The pronouncement establishes that the discount rate must be based on first-line papers or government bonds, traded in the market, and in the absence of these, the company must determine and justify the rate used, considering, as mentioned above, the term and risk compatible with the assumed obligation.
Even if evident, we stress that the discount rate is not linked to the return rates of the benefit plan's assets.

14.5 Return Rate on Plan Assets
This rate must be compatible with the expected remuneration and, consequently, must be a reflection of the investments of the patrimony constituted for the payment of benefits. Therefore, and as stressed above, it should not be tied, without justification, to the discount rate.

14.6 Benefit Growth Rate
It was observed that a significant portion of the companies that reported employee benefits did not disclose this rate. It is important to stress that any relevant premise used must be subject to disclosure, as provided for in item 81.f.iv of the Pronouncement attached to CVM Deliberation No. 371/00.
This rate must be determined based on the plan regulations, and its disclosure is relevant given that it can significantly impact results, mainly in cases of readjustments by indices different from inflation indices, benefits corrected by parity with salaries, and readjustments that produce a lag between the inflation rate adopted by the plan and the rate used for benefit readjustment.

14.7 Other Relevant Premises
Although not expressly mentioned in the pronouncement, actuarial premises constitute relevant information to be made available to the user of the accounting information of a company sponsoring employee benefits. Information related to mortality tables, turnover tables, and others, in the same way as the item previously addressed, are relevant, given that they can significantly impact results.

14.8 Exclusions in the Determination of the Fair Value of Plan Assets
Items 17 and 60 of the Pronouncement approved by CVM Deliberation No. 371/00 determine that non-transferable financial instruments issued by the sponsor and held by the pension fund are not considered plan assets and should not be included in the determination of the fair value of assets.
In line with IBRACON's Technical Interpretation No. 01/01 attached at the end of this item of the circular letter, the financial instruments referred to above are those, issued by the publicly-held sponsor, that cannot be transferred, that is, not subject to negotiation with third parties or related to unpaid contributions or loans to the sponsor, even if registered as an obligation of this company. The eventual liability registered in the publicly-held sponsor, excluded from the net assets of the plan, shall be classified as part of the total actuarial liability.

14.9 Actuarial Valuation Method
As provided in the pronouncement, the method for determining the actuarial liability is the Projected Credit Unit Method. The Company must declare in the explanatory notes that this was the method adopted. We know that the pension fund sponsored by the Company may have adopted a different method, however, the purpose of the pronouncement is to allow uniformity in the calculation of the actuarial liability and the eventual actuarial liability/asset of the sponsor.

14.10 Accounting for the Initial Adjustment of Actuarial Liability
CVM Deliberation No. 371/2000 approved and made mandatory, for publicly-held companies, the Pronouncement on Accounting for Employee Benefits, issued by IBRACON and prepared jointly with CVM. This pronouncement determined its mandatory application for the period beginning on or after January 1, 2002. In the transitional provisions (paragraphs 84 and 85), the recognition of this actuarial liability was permitted in two ways; either in the result over a period of five years or by the remaining service or life time of the employees if these are smaller, or directly in equity with the title "adjustment of prior periods". In the first alternative, companies that opted for the debit in the result account, the pronouncement explicitly stated that the adjustment would be as an extraordinary item in the result of the first fiscal year and amortized for the following years. In the interpretation of this aspect, companies must consider it equally permitted for the following years, from the second to the fifth year, that the adjustment of this actuarial liability be equally recognized and disclosed prominently as an extraordinary item, that is, outside the operating result.

14.11 Disclosure in Explanatory Notes of Retirement and Pension Plans
The following information must be disclosed in the financial statements of the sponsoring Entity:
a. The accounting policy adopted by the Entity in recognizing actuarial gains and losses; b. A general description of the characteristics of the plan;
c. A reconciliation of the assets and liabilities recognized in the balance sheet, demonstrating at least the following:

i. The present value, at the balance sheet date, of actuarial obligations that are fully uncovered;
ii. The present value, at the balance sheet date, of actuarial obligations (before deducting the fair value of plan assets) that are fully or partially covered;
iii. The fair value of plan assets at the balance sheet date;
iv. The net value of unrecognized actuarial gains or losses;
v. The value of unrecognized past service cost; and
vi. Any value not recognized as an asset due to the rule established in paragraph 49.g of this pronouncement.
d. A statement of the movement of the net actuarial liability (asset) during the period; e. The total expense recognized in the income statement for each of the following items:
i. Current service cost;
ii. Interest cost;
iii. Effective and expected return on plan assets;
iv. Actuarial losses and gains;
v. Amortized past service cost; and
vi. The effect of any increase, reduction, or early settlement of the plan.
f. The main actuarial premises used at the balance sheet date, including, when applicable:
i. The rates used to discount the actuarial obligation to present value;
ii. The expected return rates on plan assets;
iii. Estimated salary increase indices; and
iv. Any other relevant premise used.
(item 81 of CVM DELIBERATION NO. 371, OF DECEMBER 13, 2000)

14.12 Annex: IBRACON Technical Interpretation No. 01/01 NPC 26

Question 1
Recently, the federal government issued Provisional Measure No. 2.222, of December 4, 2001, which deals with the taxation, by income tax, of benefit plans of a previdenciary nature. The application of this PM may result in modification of the plan's net assets. How should the resulting effects, if any, be treated within the scope of the application of NPC 26?

Answer
As defined in paragraph 52 of NPC 26, "actuarial gains and losses comprise the differences between actuarial premises and what actually occurred, based on experience."
Thus, the effects of PM No. 2.222 relate to the profitability of the plan's assets and, as such, must be considered as an actuarial gain or loss.
Consequently, this effect will enter the calculation of the portion of actuarial gains or losses to be recognized in accordance with paragraph 53 of NPC 26 (Actuarial Gains and Losses).

Question 2
Can the actuarial calculation be done for dates prior to the end of the fiscal year? What is the maximum acceptable period for this calculation and what are the minimum subsequent mandatory procedures, to ensure that between the calculation date and the end of the fiscal year no significant changes occurred that should be reflected in the actuarial liability to be recorded?

Answer
The calculation can be done for a date prior to the end of the fiscal year provided that the period does not exceed 60 days and that any relevant changes in premises or other components of its calculation, occurring between the base date and the date of closing the fiscal year, are analyzed, for the purpose of compliance with paragraphs 49(d) and 49(e), and their effects reflected in the original calculation. The minimum procedure to be performed is the comparison of the premises used in the calculation with the actual effects occurred in the period.

Question 3
Assuming that, on December 31, 2001, the company already has an actuarial liability registered, say $1,000, and that, as a result of the application of NPC 26, the new actuarial liability is $1,500, and the company decides to register it over 5 years (or by the remaining service or life time of the employees, if these are smaller). In this situation, could the company reverse the $1,000 liability by crediting Equity (PL) and, subsequently, register the $1,500 over time in the result? This would create an increase in PL on 12/31/2001, as a result of the decrease in liability and its constitution over the next 5 years (or less, depending on the other criteria mentioned above).

Answer
This reversal cannot be made. The adjustment that should be registered against PL or the result of the next 5 years refers to the difference between the actuarial liability previously recognized by the company and that determined according to NPC 26.

Question 4
In the event that the company does not register the effect of the initial adjustment directly against equity, but decides to register the initial adjustment in the result in a period shorter than that allowed by NPC 26, is such a position acceptable?

Answer
The adjustments in the actuarial liability, as a result of the adoption of NPC 26, shall be recognized in the result over a period of up to five years or by the remaining service or life time of the employees if these are smaller, or alternatively until December 31, 2001, directly in equity with the title "adjustment of prior periods". If the sponsor adopts a period shorter than 5 years, such decision must be disclosed in the explanatory note and will be irreversible. Thus, if the decision is to amortize, for example, in four years, each fiscal year, from 2002, will receive a burden of 25% of the adjustment calculated with a base date of December 31, 2001. In any case, the appropriation must obey the linear criterion.

Question 5
The adjustments made by subsidiaries and affiliates directly in Equity, as a result of the application of the alternative offered by the Standard, should be reflected directly in the equity of the controlling or investing company, or should be recorded in the result of the fiscal year, as equity equivalence?

Answer
Exceptionally, the adjustment made by subsidiaries and affiliates, directly in equity, shall be reflected in the same way in the investor, that is, in its equity.

Question 6
In view of NPC 26, is a defined contribution plan, but which at the date of retirement gives the participant the option to receive a lifetime monthly value, characterized as a defined benefit? For this plan, must the actuarial calculation be done only for retired beneficiaries?

Answer
This is a very important issue, as some plans have the original characteristic of defined contribution, but give the participant the option to receive a lifetime monthly income with a parameter, for example, 40% of the official previdenciary ceiling. Thus, the plan or part of it, for the optant, has become a defined benefit, which will require that the provisions for accounting for defined benefit plans be applied. The mass of beneficiaries to be included in the calculation must be actuarially estimated.

Question 7
What consideration should be given to assets accounted for in the private previdenciary entity that represent rights against the sponsor?

Answer
If the right registered in the private previdenciary entity is transferable (that is, negotiable with third parties) and has a counterpart already registered as an obligation in the sponsor, this right should be included in the amount of the plan's net assets. If the right registered in the private previdenciary entity is non-transferable (that is, not subject to negotiation with third parties) or related to unpaid contributions or loans to the sponsor, even if registered as an obligation in the sponsor, this right cannot be considered as net assets of the plan. Additionally, the eventual liability registered in the sponsor, excluded from the net assets of the plan, shall be reclassified as actuarial obligation.

Question 8
In defined benefit plans that aggregate contributions from several sponsoring entities belonging to the same economic group or not (in the latter case, it is a matter of multi-sponsor plans), how should the segregation of plan assets/liabilities be made? Can parameters such as the number of employees be used?

Answer
The use of the number of beneficiaries to segregate plan assets is not adequate. It is necessary that the accumulated actuarial liability of each sponsor be clearly identified and the total assets of the plan must be allocated proportionally to the amounts of the accumulated obligations of each sponsor, except when another form is determined in the plan regulation(s). When sponsors assume joint and several liability in a multi-sponsor plan, each sponsor must evaluate the financial capacity of the other sponsors and consider the need to recognize additional liability (contingencies) if it is probable that one or more of them will not be able to fulfill the joint and several obligation.

Question 9
Is the segregation of the actuarial liability between short and long term appropriate? Under what circumstances would this be appropriate?

Answer
Yes, it is appropriate when there is a provision for the payment of contributions in the 12 months following the closing of the financial statements. If the sponsor opts to recognize the liability over up to 5 years and the amount of the recognized liability is lower than the amount of contributions expected to be paid in the 12 months following the closing date, the entire balance of the actuarial liability shall be presented in current liabilities. If the sponsor opts to account for the liability in full at once, it shall segregate as current liability the portion to be paid in the 12 months following the closing.

Question 10
Paragraph 84 establishes that adjustments in the actuarial liability, as a result of the adoption of NPC 26, shall be recognized in the result over a period of five years or by the remaining service or life time of the employees. Is it possible to recognize the liability in full on December 31, 2001 with a counterpart to a deferred asset account, which would subsequently be amortized over a period of 5 years or by the remaining service or life time of the employees?

Answer
If the option is not for full recognition against equity on December 31, 2001, the actuarial liability shall be constituted gradually, over the period established in paragraph 84, and the registration of a deferred asset for future amortization is not appropriate.
However, the disclosures provided for in paragraph 81 must be made.

Question 11
A company accounted for, before the effectiveness of NPC 26, an actuarial liability of R$ 1,000 with a counterpart to deferred asset, which was amortized by the remaining service time of the employees. Upon adoption of NPC 26, the calculated actuarial liability is R$ 1,500 and there still remain R$ 1,000 and R$ 900 accounted for as liability and deferred asset to be amortized, respectively. How should one proceed?

Answer
The first step is to eliminate the deferred asset against the liability, which will result, in the example, in a net liability of R$100. Subsequently, depending on the option chosen by the sponsor, register R$ 1400 as a complement of the liability, in counterpart to equity, or register this value over 5 years or by the remaining service or life time of the employees, if these are smaller.

Question 12
Are the premises for actuarial calculations required by NPC 26 the same as those used in the plans, according to the rules of the Secretariat of Complementary Previdenciary?

Answer
The actuarial calculations required by NPC 26 can be significantly different from those required for previdenciary entities. In addition to the actuarial method in the case of NPC 26 being the projected credit unit method, there may be other components of actuarial premises different from those detailed in item 49 regarding measurement.

Accounting for Concessions
15.1 Concepts
On 14.12.2001, CVM placed in public hearing a draft Deliberation with the objective of collecting the market's opinion on the pronouncement to be issued by IBRACON. This hearing notice highlighted the little accounting literature on this matter, even at the international level, highlighting the existence of two currents of opinion (to capitalize or not the concession right) and especially requesting from interested parties their reasoned understanding regarding the best alternative to be adopted. In summary, the alternatives considered in the draft for accounting for government concessions are:
a. capitalize the concession right and the assets received in the concession, and, as a consequence, recognize future obligations (payables); b. do not capitalize and treat the concession as a kind of operating lease (rent), not recognizing future obligations;
c. reconciliatory alternative – due to the lack of recognition of inflationary effects through monetary correction of the balance sheet, capitalize the concession right and defer the effects of monetary variations of future obligations.
The reconciliatory alternative sought to overcome the limitation of capitalizing the concession right and the assets received, which hits the problem of the lack of registration of inflationary effects in the financial statements, which is not generally disclosed by companies.
Due to not having been able to reach a consensus on the presented draft given the various positions presented and the lack of an international pronouncement that could contribute to elucidate this problem, Ibracon issued Technical Communication No. 03/03, transcribed below and approved by this Circular Letter, which lists the minimum disclosure requirements of companies that operate with concessions. In addition to these minimum requirements, administrators must keep in mind that they are legally responsible for the disclosure of the minimum information considered essential for the market.

Company administrators must promote the continuous assessment of the additional need for information to the public, given their access and knowledge of the facts and the company's environment, as well as their greater capacity to assess relevance, using the criterion of the possible reflection of events on the quotation of the securities issued by them.

Based on this, companies that operate with government concessions must consider whether inflationary effects cause relevant distortions in their equity, assets, and results. The CVM has already expressed itself on the disclosure of inflationary effects through Orientation Opinion CVM No. 29/96, which dealt with: (i) periodicity, (ii) minimum content, (iii) criteria for preparation, and (iv) index.

In this regard, CVM Orientation Opinion No. 29 states: "(...) it is recommended that companies, together with their auditors, evaluate the convenience not only of the voluntary presentation of this type of information. They must also consider the convenience of its insertion as an explanatory note to the published accounting statements and the quarterly information sent to this Commission, or even the presentation of these statements and quarterly information complete, in currency of constant purchasing power."

15.2 Disclosure in explanatory note
Technical Communication 03/03 Ibracon
Concessions

After the approval of the draft for public hearing of NPC Accounting for Government Concessions, IBRACON had the opportunity to analyze the responses received in the public hearing process conducted by the Securities and Exchange Commission (CVM). During this time, IBRACON learned that the IASB (International Accounting Standards Board) is starting a study of the matter as it is of international interest. Since IBRACON's objective is to issue NPC harmonized with international accounting standards (IFRS/IAS), it concludes that it is necessary and prudent to wait for the position that will be adopted internationally before issuing a pronouncement by IBRACON.

On the other hand, IBRACON is already contributing to the international debate by passing on the results of studies and discussions already held to the IASB. Therefore, it would not be appropriate to request any change at this moment in the treatment currently adopted by Brazilian companies.

However, IBRACON considers it indispensable that companies provide a minimum of information so that users are provided with minimum elements for decision-making. In this context, companies operating with concessions are required to disclose the following information:

Concession Assets

The following information must be disclosed, at the date of each closing of the fiscal year or period, when applicable:

a. assets subject to the concession and their total values, concession term, fixed payment commitments, with description also of variable commitments regarding their calculation and incidence;

b. residual amount of the concession, with indication of the nominal value and the present value of the installments to be paid in the 12 months following the closing of the fiscal year or period and of the installments to be paid after this 12-month period, indicating the interest rate used to calculate the present value;

c. residual value of the concession fixed assets at the date of the accounting statements, which must be transferred to the granting authority at the end of the contract (corresponding to assets with residual life greater than the concession and with a clause of transfer to the granting authority);

d. amount paid to the granting authority during the fiscal year or period of the accounting statements;

e. bases for appropriation to the result of costs with remuneration of the granting authority; and

f. terms of other financial commitments (maintenance and investments), including variable ones, such as those based on collected tariffs.

Related Parties

Considering the peculiar characteristics of a concession, disclosures regarding balances and transactions with related parties must be made, when relevant and applicable, in explanatory notes to the accounting statements of the public service concessionaire and/or use of public property referred to, which are divided into three categories:

(a) Operating transactions:

i. amounts recorded in the accounting statements of the concessionaires regarding expenses with services such as, for example, maintenance of highways/railways;

ii. amounts recorded regarding purchase and sale, as well as payables or receivables balances resulting from operations;

iii. provision of administrative services and/or any form of use of the physical structure or personnel of one company by the other, with or without consideration;

iv. receipts or payments for the lease of real estate or movable property of any nature;

v. amounts of real estate or movable property of any nature received or delivered in loan for use; and

vi. other transactions deemed relevant.

(b) Investment transactions:

i. amount of contracts already celebrated in execution and recorded in the entity's accounting statements;

ii. amounts of contracts to be executed and indication of the fiscal years in which they will be completed;

iii. alienation or transfer of assets from the asset; and

iv. acquisition of rights or purchase options or any other type of benefit and its respective exercise.

i. loans and advances, with or without financial charges, and the rates practiced;

ii. revenues or expenses recorded in the fiscal year/period regarding the loans or advances referred to in i;

iii. guarantees, sureties, mortgages, deposits, pledges or any other forms of guarantees; and

iv. novation, forgiveness or other forms of cancellation of debts.

Government Assistance Accounting

16.1 Disclosure in explanatory note of government subsidies

The company must disclose the following information:

(a) The existence, nature, and measurable amounts of government subsidies or government assistance from which the entity benefits, as well as the accounting practices.

(b) Non-compliance with contracted conditions regarding subsidies or the existence of other contingencies.

(d) Possible subsidies to be recognized, after contractual conditions are met.

Effects of Changes in Exchange Rates

17.1 Exchange Rate Variation

The accounting treatment to be given to variations in the exchange rate, occurring during the year 2001, was regulated through Provisional Measure No. 3/01, of 26.09.2001, and CVM Deliberation No. 404/01, of 27.09.2001, with new wording given by CVM Deliberation No. 409/01, of 01.11.2001. The reading of the provisions contained in the aforementioned acts has generated some doubts and conflicting interpretations by some open companies.

17.2 Amortization

PM No. 03/01, in its article 1st, sole paragraph, determines that the amortization of the negative net result with exchange rate variations, subject to deferral, shall begin from the calendar year of 2001.

Regarding the method of amortization of the deferred exchange asset, CVM Deliberation No. 404/01, in its item IX, determines that the deferred exchange asset shall be amortized linearly, for a period not exceeding 4 years. Thus, the period for amortization of the deferred exchange asset may be done in 2, 3, or 4 years (equivalent in quarters).

By way of illustration, an open company that decides to amortize the deferred exchange asset at a rate of 25% for the first year, 25% for the second year, and 50% for the third year will not be complying with CVM Deliberation No. 404/01. The amortization quotas of the deferred exchange asset must be equal. In the case in question, the open company should use, over the three years, an amortization quota equivalent to 33.33% of the deferred exchange asset.

In fixing the amortization period, the company must consider the due dates and installments of the exchange liabilities that originated the deferral. By way of illustration, an open company that possesses solely long-term exchange liability maturing in two years cannot amortize the resulting deferred exchange asset in a period longer than this period.

17.3 Change in the Amortization Period

CVM Deliberation No. 404/01, in its item X, provides for the possibility of change in the period of amortization of the deferred exchange asset, the effects of this change must always pass through the result of the current fiscal year, therefore, its accounting as "adjustment of previous fiscal years" is not accepted.

Since the change in the amortization period can impact an investment decision previously taken, this change is only admitted in the case of a decrease in the amortization period. In this case, the company must also disclose the relevant effects resulting from this change in the manner provided in CVM Instruction No. 358/02.

17.4 Adjustment Resulting from Recovery of Exchange Losses

CVM Deliberation No. 404/01 determines, in its item III, that the reflections of reductions in the exchange rate on exchange liabilities, which are financing fixed assets under construction or long-maturity inventory, occurring during the entire year of 2001, shall be registered as a reduction in the cost value of these assets.

If the realization of these assets has been started, CVM Deliberation No. 404/01, in the same item III, determines that the depreciation expense recorded in the period's result shall be adjusted. Similarly, the cost of the long-maturity inventory that has been transferred to the period's result must be adjusted.

The same principle must be applied to the deferred exchange asset. CVM Deliberation No. 404/01, in its item XII, with new wording given by CVM Deliberation No. 409/01, determines that the recovery of deferred exchange losses, that is, the occurrence of gains subsequent to the deferral, shall be accounted for as an adjustment of the deferred exchange asset, without prejudice to the recognition of the amortization quota of the fiscal year.

In addition to normal amortization, the recovery of losses generates an extraordinary amortization. This is the intelligence of CVM Deliberation No. 404/01, namely, to amortize the deferred exchange asset as quickly as possible. However, any negative exchange rate variations occurring from 01.01.2002, even linked to liabilities that gave rise to the deferral, must be registered in the period's result.

17.5 Partial/Total Liquidation of the Exchange Liability

CVM Deliberation No. 404/01 determines in its item XII, with new wording given by CVM Deliberation No. 409/01, that in the event of total or partial liquidation of the exchange liability, whether by payment or conversion into capital, the deferred exchange asset shall be amortized totally or partially, in the same proportion in which the liquidation of the exchange liability occurred.

17.6 Reserve of Profits to be Realized and Hedge Instruments

CVM Deliberation No. 404/01, in its item V, allows open companies to allocate the positive net result, with exchange rate variations occurring in the year 2001, to the constitution of a reserve of profits to be realized. However, with the advent of Law No. 10.303/2001, as mentioned in item 4 of this Circular Letter, the Reserve of Profits to be Realized can only be constituted by the portion of the mandatory minimum dividend that cannot have its payment borne by realized profits.

This positive net result, as emphasized by CVM Deliberation No. 404/01, in its item VI, refers exclusively to those assets and liabilities, subject to exchange rate risk, to the extent and in the proportion in which they are not protected by a financial instrument of any kind.

Therefore, for the purposes of constituting the Reserve of Profits to be Realized, only the existence of positive net result with exchange rate variations occurring in the year 2001 should be considered, after the computation of any losses and gains arising from financial instruments, used as Hedge of assets and liabilities subject to exchange rate risk, occurring in the year 2001.

In the same line, CVM Deliberation No. 404/01 determines, in its item XIII, that the negative net result with exchange rate variations occurring in the year 2001, subject to deferral, does not apply to those assets and liabilities, subject to exchange rate risk, to the extent and in the proportion, in which they are protected by a financial instrument of any kind.

Similarly, for the purposes of deferral, only the existence of negative net result should be considered after considering the exchange rate variations with the inclusion of any losses and gains arising from financial instruments used as Hedge of assets and liabilities subject to exchange rate risk occurring in the year 2001.

With regard, still, to the negative net result with exchange rate variations occurring in the year 2001, CVM Deliberation No. 404/01 does not admit the deferral of speculative losses, operations in markets with future settlement with other purposes than the protection of an active or passive position, subject to exchange rate risk, assumed by the company.

17.7 Effect on Equity Method in consequence of Exchange Rate Variation

In the computation of the positive or negative net result with exchange rate variations occurring in the year 2001, any revenue or expense with equity method should be taken into consideration, specifically the portion attributed to the exchange rate variation, of corporate participation abroad or of any other entity defined by CVM Instruction No. 247/96, articles 2nd and 3rd.

17.8 Temporary Differences

PM No. 03/01, in its article 2nd, determines that legal entities that have opted for the deferral of the negative net result with exchange rate variations occurring in the year 2001 shall exclude from the net profit of the fiscal year, for the determination of real profit and the calculation base of the social contribution, the difference between the deferred amount and the value amortized in the period. In the sole paragraph of this same article, PM No. 03/01 determines that subsequent amortizations shall be offered to taxation.

The effect of the aforementioned provisions, together with CVM Deliberation No. 404/01, implies the emergence of a temporary difference. Moreover, according to the taxation regime elected by the company for exchange rate variations (cash or accrual), other temporary differences may arise. In this sense, the IBRACON Pronouncement approved by CVM Deliberation No. 273/98, of 20.08.98, must be observed.

17.9 Audit Reports/Opinions

With regard to independent auditors, CVM Deliberation No. 404/01, in its item XVI, determines that they must express themselves regarding the adoption of the procedures provided for in the aforementioned Deliberation. Thus, in compliance with professional standards and CVM standards, independent auditors, when issuing a special review report or independent audit opinion, must observe the Fundamental Accounting Principles – FAP.

It should be emphasized that, in accordance with CVM Instruction No. 308/99, of 14.05.99, article 25, sole paragraph, it is incumbent upon independent auditors to promptly communicate to this CVM about acts practiced by the administrators of open companies that are not in accordance with legal or regulatory provisions.

In this sense, the non-observance of provisions of CVM Deliberation No. 404/01 by open companies obliges independent auditors to communicate the fact to the CVM, in writing, within a maximum period of 20 days from its detection. The failure to communicate constitutes an infraction of an objective nature, subjecting auditors to a fine and administrative process in the form of summary procedure. It should be noted, furthermore, that the issuance of a qualified opinion does not elide the auditor's responsibility regarding this communication.

17.10 – Disclosure in explanatory note of the Effects of Changes in Exchange Rates

In explanatory notes to the accounting statements and quarterly information, the amounts of assets and liabilities in foreign currency, the risks involved, the degree of exposure to these risks, the policies and financial instruments adopted to reduce the risk, as well as, in the case of registration, in the deferred asset, of the negative net result derived from the adjustment of the values in reais of obligations and credits, the amount of expenses and revenues resulting from exchange rate variation, as well as the destination contemplated, the amortization bases, and the values amortized in each period, must be disclosed, when relevant.

(CVM DELIBERATION NO. 294/99)

Loan Costs

18.1 Restrictive Clauses of Financing Contracts

Some companies have liabilities linked to other currencies, whose contracts include clauses that impose certain restrictions, normally linked to the maintenance of certain financial indices (debt, interest expense coverage, etc.). It is possible, and in some cases quite likely, the non-compliance with the respective clauses.

To determine the adequate classification of these liabilities, it is necessary to understand in detail at what moment the non-compliance with the restrictive clauses is consummated and the consequences of this non-compliance. In this process, it may be necessary, on the part of the independent auditor, a consultation with the company's legal representatives. Some loan contracts incorporate clauses that have the effect of making the debt due on demand, including installments of long term, if certain financial indices are not met.

Under these circumstances, as required by NPC 27 "Accounting Statements – Presentation and Disclosure" of IBRACON, the corresponding liability shall be fully classified as current, except when:

a) the creditor has formally agreed, before the approval of the corresponding accounting statements/quarterly information, not to demand early payment resulting from the breach of a contractual clause; and

b) it is unlikely that other breaches will occur within twelve months from the date of the accounting statements/quarterly information in question.

18.2 REFIS

CVM Instruction No. 346/00 established the conditions for accounting and disclosure of information on the effects resulting from adherence to the Tax Recovery Program – REFIS.

The aforementioned instruction does not determine the obligation to record the debt at its present value, however, it fixes the conditions for this recognition to be made.

However, CVM Instruction No. 346/00 determines, when relevant, the disclosure, in explanatory notes to the accounting statements, of the present value of debts subject to liquidation based on a percentage of gross revenue, as well as the values, terms, rates, and other premises used to determine this present value. This disclosure must be made regardless of whether the company has accounted for the debt at present value.

We must also alert open companies that the provisions contained in CVM Instruction No. 346/00, due to the concepts contained therein, also apply to other state or municipal programs of refinancing of tax debts, which have similar conditions.

In this line, administrators and independent auditors must pay special attention to the disclosure of the fact that the company has adhered to the REFIS program, as well as to the amounts paid in each period for the amortization of the debts included in that program. It is worth remembering,

furthermore, that this information must be provided, in an updated manner, throughout the time the company remains adherent to the REFIS Program.

18.3 Capitalization of Interest

Companies in general have had different interpretations of CVM Deliberation No. 193/96, which provides for the capitalization of interest and, in particular, the link between taking out loans and the construction of fixed assets. At the heart of this issue is the criterion for including the necessary incurred costs to bring the asset to the conditions for intended use. If an asset requires a period of time to achieve these conditions of use, the interest costs incurred during this period of effort to put this asset into operation are part of the acquisition cost of this asset. The capitalization of interest meets the objectives of obtaining an acquisition cost that reflects the total of resources applied to the asset and activating an expenditure that will provide a benefit in future periods against revenues earned in these periods, which implies establishing the recoverability capacity of these capitalized assets as a maximum limit.

Regarding this topic, the aforementioned CVM Deliberation mentions in item I: "Interest incurred and other financial charges, relative to loans obtained from third parties, for the construction of assets included in fixed assets or for the production of long-maturity inventories, must be recorded in a separate account, which evidences their nature, and classified in the same group as the asset that gave rise to them (we underline)".

Based on item I above, it could lead to the judgment that only interest arising from loans that were obtained exclusively for the construction of an asset must be capitalized, that is, when the loan is taken under the condition of a link to the construction of an asset. However, this understanding can be expanded to include loans taken without an express link in the contract for the financing of qualifying assets, based on the criteria established by IAS 23 "Borrowing Costs". A qualifying asset is defined in this pronouncement as "an asset that necessarily takes a substantial period of time to get ready for its intended use or for sale".

In items 13 and 14 of IAS 23, the IASB establishes the general principle that financial charges directly attributable to the acquisition or construction of a qualifying asset are those charges that would have been avoided, had the expenditure on that qualifying asset not been made. It considers that it may be difficult to identify a direct relationship between certain loans obtained and a qualifying asset. It cites examples of (i) complexities caused by the centralized financial coordination of an entity, (ii) by the use of several debt instruments to take out loans at different interest rates, in turn lent on different bases to other entities in the group and (iii) by the use of loans in foreign currency in highly inflationary economies or due to exchange rate fluctuations.

As support for the assessment of the amount of loan interest to be capitalized, IAS 23 proposes as a rule in its paragraph 17 that "To the extent that borrowing resources are taken for general purposes and used to obtain a qualifying asset, the amount of financial charges qualifying for capitalization must be determined by applying a capitalization rate to expenditures on the asset. The capitalization rate must be the weighted average of the financial charges applicable to loans that are outstanding during the period, excluding those loans made for the specific purpose of obtaining a qualifying asset. The amount of financial charges of loans capitalized during a period must not exceed the amount of financial charges incurred during that period". In item 29 (c) the IASB establishes that the capitalization rate used to determine the amount of financial charges qualifying for capitalization must be disclosed in the financial statements.

The flexibility in applying the accounting standard in this type of transaction is also considered in the SFAS No. 34 pronouncement of US – GAAP which, in summary, establishes the following main points: (i) the interest cost chosen for capitalization must be the interest cost recognized on loans, (ii) the amount to be capitalized corresponds to the interest cost incurred during the period required to complete the asset, (iii) the interest cost for capitalization purposes must be based on the rates of external loans outstanding taken by the company, (iv) the amount of interest expenditures capitalized for qualifying assets should be the portion of interest incurred during the acquisition period that could have been avoided if the expenditures on qualifying assets had not been made, (v) If the company takes out a loan for the specific purpose of financing a certain asset, the interest rate of that loan must be applied, (vi) a weighted average of loan rates taken to finance a qualifying asset can be applied to the portions of assets not covered by loans taken for the specific purpose of financing them, (vii) it is necessary to exercise judgment to identify the loans on which this weighted average is calculated.

18.4 Disclosure in explanatory note of the cost of loans

18.4.1 Debentures

The terms of the debentures must be disclosed, including indicating the existence of a renegotiation option clause and the periods in which the renegotiations must occur. When the company acquires debentures of its own issuance, it must disclose this fact and its value in an explanatory note.

(ORIENTATION OPINION CVM No. 21/90)

18.4.2 Long-Term Obligations

The interest rates, maturity dates, guarantees, currency, and method of updating long-term obligations must be disclosed.

(LAW No. 6.404/76, ARTICLE 176)

18.4.3 Liens, Guarantees and Contingent and Contingent Liabilities

Real liens on asset elements, guarantees provided to third parties, and other contingent/contingent liabilities must be disclosed. Contingent events that generate, due to their peculiarities, reserves or provisions for contingencies and, even those whose probability is difficult to calculate or whose value is not measurable, must be evidenced in an explanatory note, and in the latter case, the reasons for the impossibility of this measurement must also be mentioned.

(LAW No. 6.404/76, ARTICLE 176 AND EXPLANATORY NOTE TO CVM INSTRUCTION No. 59/86)

18.4.4 REFIS

Open companies must disclose, with respect to the fiscal years in which they remain in the REFIS program, in explanatory notes to their financial statements and quarterly information, the following information:
a) the amount of debts included in REFIS, segregated by type of tax and nature (principal, fines and interest); b) the present value of debts subject to settlement based on gross revenue, as well as the values, terms, rates and other premises used to determine this present value; c) the amount of tax credits, including those arising from tax losses and negative bases of social contribution, used to settle interest and fines; d) the amount paid in the period to amortize debts subject to settlement based on gross revenue; e) the detail of adjustments recorded as extraordinary items; f) the guarantees provided or assets listed and respective amounts; g) the mention of the obligation to pay taxes, contributions and other obligations regularly as an essential condition for maintaining the payment conditions provided for in REFIS; and h) any and all imminent risk associated with the loss of the special payment regime.

(CVM INSTRUCTION No. 346/00)

Related Party Disclosures

19.1 The motivation for the existence of explanatory notes on "related parties"

Within the securities market, the disclosure of transactions between related parties is currently regulated by CVM Deliberation No. 26/86 and is also the subject of the international pronouncement IAS No. 24, revised in 1986, and the recommendations of the CVM "Corporate Governance Guide" in item III.4.

The nature of transactions between parties that have common interests led CVM not to recommend the contracting of this type of business, and this prohibition must be included in the company's bylaws. This recommendation of the CVM governance guide is based on the difficulty of establishing fairness in the pricing of these operations, since it is presumed that there is a high probability of an interest that may not coincide with the search for the best result for the company and, consequently, for the interests of non-controlling shareholders: shareholders, debenture holders, creditors, etc. In addition, it can be inferred that any transaction of this type, to some extent, large or small, consumes some type of resource of the company that would be available for other types of business, credit limits, as well as other types that, if applied in some alternative of lower profitability and admitting that the company's resources are by definition limited and scarce, would certainly reduce the wealth of non-controlling shareholders.

These are the reasons why, if, nevertheless, such types of transactions are carried out, it is necessary to disclose in detail the conditions under which the businesses were contracted so that other interested parties in the company can have full knowledge of the operation.

In the "Discussion of the Problem", the Ibracon pronouncement, approved by CVM Deliberation No. 26/86, highlights this point:

"To allow for adequate interpretation of the financial statements by their users and by those who will base economic-financial decisions on them, it is necessary that transactions between related parties be disclosed in a manner that provides the reader, and mainly minority shareholders, with sufficient informative elements to understand the magnitude, the characteristics and the effects of this type of transactions on the financial situation and results of the company."

It is concluded that the existence and disclosure of transactions between related parties is of a sensitive nature and that the disclosure in a summary and non-detailed manner of this type of business leads to distrust and reduces the appreciation of the company's securities.

19.2 Supervision of transactions between related parties

The CVM corporate governance guide in item III.4 recommends the following:

"The board of directors must ensure that transactions between related parties are clearly reflected in the financial statements and were made in writing and under market conditions. The company's bylaws must prohibit service contracts with related parties based on billing/revenue and, in principle, loan contracts with the controlling party or related parties.

Regardless of the precautions ordinarily adopted so that proof of contracts entered into is made in the best possible way, it is imperative that due transparency be given to contracts between related parties, in order to enable shareholders to exercise the essential right of supervision and monitoring of the company's management acts, without prejudice to the duty to promote their wide disclosure to the market, when the contracting constitutes a relevant fact or when disclosing the financial statements."

19.3 Formalization of business between related parties

The CVM corporate governance guide in item III.4 recommends the following, regarding the need for the form that these types of transactions should take:

"Contracts between related parties must be formalized in writing, detailing their main characteristics (rights, responsibilities, quality, prices, charges, terms, indicators of commutativity, etc.). In the assemblies to discuss such contracts, if minority shareholders deem it necessary, they may request an opinion from an independent entity, to be paid by the company."

Among the operations observed over the last few years, it should be emphasized that loan contracts between companies of the same economic group are included in this explanatory note and must be backed by contracts that discriminate rights, responsibilities, conditions of commutativity and other aspects such as prices, terms and charges, which allow for a reasonable understanding of the economic relationship between the parties.

19.4 Pricing of transactions between related parties

Since the law requires that such contracts be celebrated under market conditions (term, rate and guarantees), if the related party seeks credit, for example, it must do so under the same conditions it would with third parties. Service contracts between the company and the controlling party or related parties must be aligned with the interests of all shareholders of the company. In particular, such contracts should not be based on billing/revenue, as part of the remuneration of the controlling party or the related party will not depend on the operational performance of the company.

Special attention must be given to the issue of transfer prices, often used with the objective of maximizing the results of an entity or group of entities. There are several methods used for their definition, based, for example, on market price, effective or similar, on the cost of the product plus an arbitraged profit margin or on standard cost plus profit. Thus, it becomes necessary to disclose the calculation criteria used to determine transfer prices in transactions with related parties.

It is observed that Law No. 9.430/96 established fiscal rules on the transfer prices of goods, services and rights abroad, establishing the methods to be used so that these prices are considered deductible in the calculation of income tax and social contribution. Any relevant consequences of the application of this rule must be considered for disclosure in an explanatory note.

19.5 Disclosure in explanatory note of Transactions with Related Parties

Open companies, when disclosing this type of information, have given greater emphasis to the values resulting from these transactions, which integrate assets, liabilities and results, without, however, giving the same prominence to the conditions under which the transactions were carried out, the nature of the relationship and the transfer pricing policy.

The disclosure of transactions with related parties must cover the conditions under which these transactions took place, especially regarding prices, terms and charges and whether they were carried out under conditions similar to those that would be applicable to unrelated parties, as well as the present and future effects on the financial situation and results of the company.

The Ibracon pronouncement, approved by CVM Deliberation No. 26/86, establishes as a criterion for the preparation of this note the following: "Greater or lesser prominence in the disclosure of transactions should be given considering the following facts: (i) if the transaction was carried out under conditions similar to those that would be applied between unrelated parties (regarding prices, terms, charges, quality, etc.) that contracted based on their free will and their best interest; and (ii) if the transactions by themselves or by their effects affect or may come to affect, significantly, the financial situation and/or the results of the companies involved in the operation."

The aforementioned pronouncement lists, in a merely exemplary manner, the following types of transactions between related parties that must be subject to disclosure in explanatory notes:

Purchase or sale of products and/or services that constitute the company's social object.
Alienation or transfer of asset items.
Alienation or transfer of industrial property rights.
Balances resulting from operations and any other balances receivable or payable.
Novation, forgiveness or other unusual forms of debt cancellation.
Provision of administrative services and/or any form of use of the physical structure or personnel of one company by another or others, with or without consideration.
Guarantees, sureties, mortgages, deposits, pledges or any other forms of guarantees.
Acquisition of rights or purchase options or any other type of benefit and its respective exercise.
Any non-remunerated transfers.
Preferential rights to the subscription of securities.
Loans and advances, with or without financial charges, or at favorable rates.
Receipts or payments for the lease or loan of real or movable assets of any nature.
Maintenance of any benefits for employees of related parties, such as: supplementary social pension plans, health assistance plans, cafeteria, recreation centers, etc.
Market and technological limitations.

The use of the standard expression in explanatory notes: "Transactions with related parties are carried out at normal market prices and conditions, similar to those carried out with third parties", does not fulfill the determination to clarify about prices and/or pricing policies in these types of transactions and is ineffectual. Even if they are made in large numbers and it becomes unfeasible to detail the price of each operation, it is necessary that the method used, the form of calculation and the average prices, for example, be clarified.

20 Consolidated Financial Statements and Accounting of Investments

20.1 Equity Method Evaluation

This was an issue that also led CVM to request clarifications from a reasonable number of open companies due to the discrepancies found between the values described in the balance sheet and the content of the explanatory note on the subject.

What is expected is that the highlights of the note clarify or complement the other financial statements in an objective manner, aiming to provide the reader with a complete understanding of the operation. One way for this to materialize is that the quantitative data of the notes are consistent with the items of the balance sheet and the statement of results of the fiscal year, functioning as a calculation memory that will assist the user in understanding the constitution of the balances of the accounts involved and how this occurred.

20.1.1 Companies Equivalent to an Affiliate

Aiming to preserve the basic premises that underpin the application of the equity method, CVM began to require, from Instruction No. 247/96, that investments in other companies considered equivalent to affiliates also be evaluated by the MEP. The Instruction defined as equivalent to an affiliate the company that participates in another:
a. indirectly, with 10% (ten percent) or more of the voting capital, without controlling it; b. directly, with 10% (ten percent) or more of the voting capital, without controlling it, regardless of the percentage of participation in the total capital, that is, even if this percentage is less than 10% (ten percent) of the total capital.

Doubts have arisen regarding the way to adjust the MEP in cases of indirect participation. In this case, the open company must adjust the balance sheet of the controlled/affiliated company in which it holds direct participation for the purposes of applying the MEP, or request it, when applicable, to already include such effects in its statements.

This same understanding is applicable in cases where individually the investment of affiliates/controlled companies does not reach the percentage necessary to characterize the affiliation, however the sum of the participations characterizes the company as equivalent to an affiliate.

It is important to emphasize, furthermore, that in the application of the MEP in equivalent companies, the same conditions of relevance of the investment and influence on management defined in articles 4 and 5 of CVM Instruction No. 247/96, and applicable to affiliates, must be observed. An additional care that open companies must have, when applying the MEP in equivalent companies, is regarding the percentage of participation to be used. We remind you that the percentage previously referred to, of 10% or more of the voting capital, serves to measure the equivalence, not necessarily representing the percentage to be used for the application of the MEP.

20.1.2 Loss of Continuity of the Controlled/Affiliated Company's Operations

The question presented is whether a change in the business activity of a subsidiary/affiliate would characterize a loss of continuity, for the purposes of Article 6 and the sole paragraph of Article 8 of CVM Instruction No. 247/96. The Explanatory Note to said instruction, in item 4c, transcribed below, clarifies this issue well:

"Investments in affiliates and subsidiaries that have clear and effective evidence of discontinuity should not be evaluated by the Equity Method. These are companies that are in the process of liquidation, extinction, or that are operating under severe long-term restrictions, which impair their ability to transfer funds (Art. 6)."

Thus, it is clear that the mere change in the business activity of the subsidiary/affiliate does not characterize a loss of continuity, and the investment should continue to be evaluated by the Equity Method.

20.1.3 Future Sale of the Investment
The Instruction establishes that in the case of investment in subsidiaries/affiliates that are operating normally, where there is evidence of a sale in the near future, the criterion of evaluation by the Equity Method must be maintained until the base date considered for the sale (Art. 7). The question that has been raised refers to the term "base date," that is, whether the investment should be evaluated based on the balance sheet of the sale date.

It should be mentioned, preliminarily, that Article 7 aimed to clarify that the intention to sell the investment, even if formalized by a protocol of intentions or other document, does not characterize the loss of continuity, and the investment should continue to be evaluated by the Equity Method until the moment the sale is finalized.

Regarding the base balance for this evaluation, the ideal is to use that which was adopted for the determination of the sale price, considering the date lags admitted in the sole paragraph of Article 10 of said instruction.

It should also be remembered that tax legislation admits a lag of up to 30 (thirty) days for the application of the Equity Method, in the case of the write-off of the investment, and this may be the "base date" to be used by the company to comply with CVM standards.

20.1.4 Permanent Losses in Investments Evaluated by the Equity Method
The main change made in this topic concerns the need to constitute a provision for losses, when there is an uncovered liability and there is a clear intention of the investor to maintain its financial support to the investee (§ 1 of Art. 12). The provision for losses must be presented in the permanent assets by deduction of the accounting value of the investment (including therein the goodwill and unamortized goodwill reduction), with the excess presented in a specific account in the liabilities (§ 2 of Art. 12).

It is important to emphasize that the investor should constitute such provision, as already mentioned, only when there is a clear intention to maintain financial support or formal or operational responsibility to cover an uncovered liability, this procedure not applying in cases where, despite the existence of an uncovered liability, the investee does not show signs of paralysis or need for financial support from the investor.

Another aspect to be clarified concerns the determination contained in item "a" of item I of Article 12 for the investor to constitute a provision for "coverage of effective losses due to events that result in losses not provided for by the affiliates and subsidiaries in their financial statements".

It has been questioned whether the investor should not adjust the net equity of the subsidiary/affiliate beforehand, as prescribed in item I of Article 11, in order to eliminate the effects resulting from the diversity of accounting criteria.

The CVM agrees with such argumentation, however, the command of item "a" of item I of Article 12 constitutes an additional mechanism in situations where the standardization of accounting criteria is not sufficient to cover the provisioning of possible losses. An example to be considered is the case of loss expectations, resulting from tax contingencies due to judicial demands promoted exclusively by the subsidiary/affiliate, which the administration of the parent/investor considers prudent to constitute a provision for probable losses.

Within this theme, due attention is also being required for the constitution of provisions aimed at covering losses, effective or potential, based on the reasons listed in item II of Article 12 of CVM Instruction No. 247/96. We understand that this is an extremely relevant subject and, consequently, requires constant monitoring, by the company's administration, of the adequate value of these investments, as well as their own economic substance.

The accounting recording of loss provisions should be promoted:
a) when resulting from debts with third parties, in the current liability or long-term payable account, according to the payment term; b) when resulting from losses of credits against the investee companies, in the current asset or long-term realizable account; c) in other cases, in an investment correcting account.

20.1.5 Goodwill/Goodwill Reduction in the Subscription of Capital Increase
The Explanatory Note to CVM Instruction No. 247/96, in its item 7, brought important clarifications regarding the change in the treatment to be given to the goodwill/goodwill reduction determined in cases of subscription where there is a variation in the percentage of participation, also presenting a numerical example. In that example, we arrived at the existence of a goodwill in the investor Company B in the amount of $200. In view of the doubts that still persist on this subject, we present the same example in another way:
a) The subscription right of Company B was 30% (previous participation) of the capital increase, therefore of $ 360 ($1200 X 30% or 120 shares at $3 each) and on this portion there is no figure of goodwill/goodwill reduction or gain/loss. b) The portion effectively "acquired" by Company B (that is, subscribed above its right) was of $840 (70% x $1200 or 280 shares at $3 each) of the capital increase. The determination of the goodwill can be demonstrated as follows:
Net Equity of XYZ after capital increase $3,200 (:) Number of shares of capital 1,400 (=) Book Value per share $2.2857 (x) Number of shares "acquired" 280 (=) "Acquisition" at Book Value $640 () Acquisition Cost $840 (=) Goodwill $200

What is sought to be emphasized, in this example, is that the figure of goodwill/goodwill reduction arises in the investor when it "acquires" an additional portion of participation and only on this portion. Therefore, the subscription, even if at a value above/below the book value of the share, does not generate goodwill/goodwill reduction if it is carried out in the exact proportion prior to the capital increase. By the same reasoning, it is also concluded that, in the cases where the right to subscription is exercised by a percentage lower than the previous participation (or even if this right is not exercised), the investor reduces its portion in the capital and, in the existence of previously constituted reserves, determines, in this way, a loss due to variation in the percentage of participation on these reserves.

20.1.6 Goodwill/Goodwill Reduction originating from Investments evaluated by Equity Method
The explanatory notes accompanying the financial statements must contain precise information about the affiliates and the subsidiaries.

One of the items of extreme importance for the inference about future results, provided for in item VIII of Article 20 of CVM Instruction No. 247/96, determines that "the basis and the foundation adopted for the constitution and amortization of the goodwill or goodwill reduction and the unamortized amounts, as well as criteria, discount rate and periods used in the projection of results" be disclosed.

Thus, the economic reasons that determined the bases and foundations for the accounting of the goodwill and/or goodwill reduction and the amounts accounted for as amortization in the period and the amortization bases for the subsequent periods must be clearly identified and disclosed.

It must be emphasized that the accounting recognition of the goodwill (and its maintenance) is intimately associated with its economic foundation, and disclosures that encompass evasive or generic definitions are not accepted. It should be remembered the provision of Article 14, § 2, item "a", of CVM Instruction No. 247/96, including the wording given by CVM Instruction No. 285/98, which recommends the immediate recognition of the loss of economic substance, attested by the mandatory periodic review (at least once a year) of future results projections. An equal procedure must be adopted for the goodwill whose economic foundation is not justified (§ 5).

20.1.7 Elimination of Unrealized Profits
The Explanatory Note of CVM Instruction No. 247/96, in its item 5, brings clarifications on the concept that involves this new form of elimination of unrealized profits, besides presenting the numerical example summarized below:

Example 1
Net Equity of the Subsidiary R$ 1,200
% Participation 60%
Realized Profits R$ 167
Unrealized Profits R$ 200
Accounting Value of the Investment R$ 500
Equity Method Calculation calculation by the previous standard (revoked) calculation by the current standard (in force) Net Equity R$ 1,200 Net Equity R$ 1,200 less: unrealized profits (200) participation percentage 60% Adjusted Net Equity 1,000 Adjusted Net Equity R$ 720 participation percentage 60% less: unrealized profits (200) total of the Investment R$ 600 total of the Investment 520 accounting value of the investment 500 accounting value of the investment 500 equity method result 100 equity method result 20

20.1.8 Calculation of Equity Method
As mentioned in the Explanatory Note to CVM Instruction No. 247/96, there is only the figure of unrealized profit in transactions between the parent and the subsidiary; that is, it is as if the transaction had been made between two departments belonging to the same entity, but with distinct legal personalities. In this case, the transaction should not generate profit in the entity.

However, as there are third parties (minority shareholders) with rights of participation on this profit, this fact must be recognized by the parent, both in its individual statements, as well as in the consolidated statements. Another way to highlight the amount of the controlling shareholder's profit, in the example above, would be:
Total Profit R$ 367
Unrealized Profit (200)
Minority Profit (40% of $ 367) (147)
Controlling Shareholder Profit 20

Another aspect, not contemplated in the Explanatory Note, concerns the elimination of unrealized profits in cases where control is exercised indirectly, that is, where there is more than one investor in the subsidiary and which could lead to a multiple and undue elimination of unrealized profits.

Considering the data above, let us see an example where the participation in the subsidiary "C" is presented as follows:
Parent "A" owns 100% of subsidiary "B" and 15% of indirect subsidiary "C"; Subsidiary "B" owns 45% of Company "C".
Assuming the occurrence of unrealized profit, in the amount of R$ 200, in an operation of sale of assets from "C" to "B", we would have:
"B" when evaluating the investment in "C" must eliminate this unrealized profit; and "A" when evaluating the investment in "C" must also eliminate it.

However, if "A" and "B" proceed thus, the unrealized profit will be eliminated in duplicate.

In order to obtain the adequate reflection of the elimination of the unrealized profit, in the case of shared controls by companies of the same economic conglomerate, such unrealized profit must be attributed to the controllers in the proportion held by each one on the total participation in the subsidiary. Thus, for the purpose of the Equity Method, we would have:
Participation of more than one company of the same "economic group" in an investee elimination of unrealized profit of "C" in "A" elimination of unrealized profit of "C" in "B" Net Equity R$ 1,200 Net Equity R$ 1,200 participation percentage 15% participation percentage 45% Equity Method R$ 180 Equity Method R$ 540 less: unrealized profits (1) (50) less: unrealized profits (2) (150) total of the Investment 130 total of the Investment 390 accounting value of the investment 125 accounting value of the investment 375 equity method result 5 equity method result 15 calculation of the elimination of the unrealized profit of R$ 200 :
(1) [(0.15 / 0.60)] x R$ 200 = R$ 50
(2) [(0.45 / 0.60)] x R$ 200 = R$ 150

As observed, the sum of the equity method result is the same found in the 1st example.

It is important to emphasize that, in the situations of this example, the unrealized profit must, necessarily, be attributed proportionally to the parent companies/investors, highlighting the hypothesis of only one of the companies eliminating it, in view of the distortions resulting from the values recorded in the individual balance sheets, which may bring effects to third parties, notably minority shareholders of these parent companies.

In the example above, for simplification, we assumed that A has 100% of the capital of B, however, if there were any minority participation in B, the attribution of the entire unrealized profit to company A or B would lead to a favoring/disadvantaging of these, including with respect to dividends.

20.1.9 Investment acquired from an investee with Negative Net Equity
In the situation where the investee presents an uncovered liability, also called negative net equity, CVM Instruction 247, in § 2 of Article 12, guides towards the constitution of a provision for losses up to the limit of the accounting value of the investment to which it refers, with the excess, when applicable, and in accordance with CVM Instruction No. 247/96, presented in a specific account in the liabilities (see item 17.1.4).

If, at the time of acquisition of the investment, the value of the Net Equity of the investee is already negative, the initial balance of the equity method must be negative, with the goodwill representing the difference between this result and the acquisition cost. The total initial investment, of course, will be positive, representing the effective value paid. This goodwill must be registered and amortized according to its economic foundation (asset appreciation, expectation of future profitability or recovery of losses and rights of exploration/concession). This practice allows a better recognition of the future results of the investee, through the combination of the equity method result opposing the amortization of the goodwill based on its economic foundation, as well as allows a better presentation of the consolidated net equity.

The recording of the equity method must be normal from then on unless any additional losses surpass the investment, in which case, the equity method result progressively decreases the investment until zeroing it, that is, not registering a negative investment value. The accounting treatment of the goodwill in the subsequent incorporation operations, for example, investee incorporating the investor, must also be done taking into account the same principle.

20.1.10 Equity Method when the existence of differentiated rights
The corporate structure of Brazilian companies presents a series of own characteristics and the application of the equity method must adapt to these specificities. In this sense, CVM Instruction No. 247/96, determines in its art. 11, item IV, that for the determination of the value of the equity method, the investor must recognize the effects resulting from classes of shares with right to fixed preferential dividend, cumulative dividend and with differentiation in the participation of profits.

The objective here is to recognize, in the application of the equity method, the existence of a distinction between the participation in the capital and the participation in the distribution of the result. For example, there may be a situation where each shareholder has a 50% participation in the capital, while, by force of a shareholders' agreement, the distribution of the profit is carried out considering the percentages of 60% and 40%. In this case, there must be the recognition of this distinction in the equity method process and in the consolidation of the financial statements to consider this distinction.

The example above mentions the hypothesis of the existence of an agreement between shareholders, however, there may be other instruments for the establishment of differentiated rights that will entail the recognition of their effects in the application of the equity method and in the consolidation of the financial statements.

20.2 Consolidated Financial Statements
CVM Instruction No. 247/96, determines that the open company that has investment in controlled societies, including jointly controlled societies, and the command society of a group of societies that includes an open company must, at the end of each social year, prepare consolidated financial statements (Art. 21).

It also provides that the CVM may, in special cases and upon prior request, authorize the exclusion of one or more controlled societies from the consolidated financial statements (§ 1 of Art. 23).

Therefore, the open company that wishes to exclude a controlled society from its Consolidated Financial Statements must request, previously, authorization for the mentioned exclusion, instructing its request with the following information:
a. financial statements of the controlled societies and the parent, relative to the exercise in which the exclusion is being requested, compared with the previous exercise; b. amount of gross revenue of the parent and the subsidiaries, from operations with third parties;
c. amount of non-operational credits of the parent with the subsidiaries, and
d. other information on transactions between the parent and the subsidiaries or between the latter.

Alternatively, aiming to speed up the analysis of the request and, consequently, the process of preparing the consolidated financial statements, the company may replace the demonstrations mentioned in item a) with intermediate demonstrations raised on September 30.

The requests for exclusion must be addressed to the Superintendence of Accounting Standards and Auditing of this CVM. It should be noted that, once granted, the authorization will have validity only for the social exercise in which the exclusion is being requested.

20.2.1 Consolidation of the Financial Statements of Jointly Controlled Societies
In this topic are provided the procedures that must be adopted for the preparation of consolidated statements, which encompass the jointly controlled societies (art. 32 to 34), here defined as those in which no shareholder exercises, individually, the powers provided for in Article 3 of the Instruction.

These provisions reach, mainly, but not exclusively, the so-called joint ventures in which, through the existence of a contractual agreement and proportional portions of participation, two or more entities undertake an economic activity subordinate to joint control.

Article 32 determines that the components of the assets and liabilities, revenues and expenses of the jointly controlled societies must be aggregated to the consolidated financial statements of each investor, in proportion to the participation of these in their social capital.

However, it was verified that there may be situations where the participation in the results does not correspond to the participation in the capital but rather to the production and distribution of the result. In these cases, each investor must reflect in the consolidated result statement the effective portion of participation that it has in the result of the investee. Thus, the CVM understands that the jointly controlled subsidiary must prepare and provide the financial statements intended for the consolidation of each investor, observing such peculiarities, and it is still incumbent upon it to disclose, in an explanatory note, this procedure and the amounts involved.

In the same way, there may be balances of active/passive operations with the investors. In this case, it is reiterated that such components must be eliminated from the investor's financial statements proportionally to its participation in the capital, with the remaining balances of such operations, above/below this participation, appearing in said statements as operations with third parties (in this case, with the other partners).

20.2.2 Consolidation of special purpose entities (SPEs)
20.2.2.1 Exclusive Investment Funds
Exclusive investment funds have own characteristics that must be considered to treat them as SPEs. Rarely are the conditions for non-consolidation met for these types of funds and, therefore, as a general rule, the same must be consolidated.

Exclusive funds usually represent only a vehicle for the company to diversify its investments in a portfolio convenient in terms of cash flow and profitability, with the neutrality of the tax treatment of the funds (since the operations carried out by the fund are not subject to IRRF, as well as on the financial movement of the fund CPMF does not apply). Thus, in essence, the assets of the fund are actually the assets of the company, and must be considered thus, for the purposes of disclosure in the consolidated financial statements, evidencing, separately, their nature.

20.2.2.2 Credit Rights Investment Funds (FIDCs)
Credit Rights Investment Funds (FIDCs), established by Resolution No. 2,907/91, of the Central Bank of Brazil, have regulation and rules for their operation determined by CVM Instructions No. 356/2001 and 393/2003. FIDCs have characteristics of both structured finance operations and investment funds. They are, by nature, entities immune to bankruptcy and enjoy privileged tax treatment under current tax legislation. FIDCs can be open or closed, with senior quotas (subscribed by the investor and which do not subordinate to others for purposes of amortization and redemption) and quotas

subordinated (usually subscribed by the originator as additional guarantee for the operation), or only senior. At least 50% of the equity of a FIDIC must be represented by credit rights, which must respect certain eligibility criteria determined by its bylaws, which contemplate the operating rules of the FIDIC. The portion of the FIDIC's equity not invested in credit rights may be held in financial assets.

From the perspective of the public companies originating the receivables, they must observe the terms of CVM Instruction No. 408, of August 18, 2004 and, as applicable, disclose what Article 5 of Instruction No. 408/04 provides (presented in the following item 20.2.2.3).

The public companies originating the receivables, as indicated in the Explanatory Note to CVM Instruction No. 408, should observe that the Basic Conceptual Structure of Accounting, approved by CVM Deliberation No. 29/86, as well as the Fundamental Accounting Principles approved by CFC Resolution 750/93, require that transactions and other events be accounted for and disclosed according to their essence and economic reality, and not only by their legal form. In this sense, when deciding, from the moment of derecognition of accounts receivable, or when preparing the aforementioned disclosures, the public company should also consider:
a) whether control over the assigned receivables remains with the company, as evidence of this control may be cited, among others: physical custody of the title, management of collections with autonomy to establish payment deadlines or conditions, and the receipt/flow of funds from these receivables into the company's current account or collection account; b) whether it still retains any right regarding the assigned receivables (interest, default and/or penalties, portion of the cash flow itself); c) whether it still retains the risks and responsibilities regarding the assigned credits, for example, the existence of an obligation to acquire or replace overdue receivables.

On the other hand, if the public company has assigned to a credit rights fund its future cash flow, resulting from contracts maintained with clients for the future delivery of products or services, the value received by the company must be recorded in a liability account that demonstrates the corresponding financial obligation. In this case, the financial costs of the operation must be appropriated pro rata temporis to the appropriate financial expense line item.

20.2.2.3 Disclosure in explanatory notes of special purpose entities (SPEs)

The consolidation of financial statements, as has been required by CVM Instruction No. 247/96, has been based on the existence of a corporate link between controlling companies and their subsidiaries. However, transactions involving SPEs have become increasingly common today, and the consolidation approach, based exclusively on voting capital, has proven insufficient for the full disclosure of economic activities as a whole. Currently, we encounter various situations where, even without the existence of corporate links, an entity effectively holds control over the activities and benefits of another, bearing most of the consequent risks of these activities. The lack of consolidation of these entities allows certain businesses "controlled" by public companies to fail to be fully evidenced, affecting, often significantly, the information on the financial and equity situation of the company as a whole.

Due to the need to evidence the aforementioned situations, CVM issued Instruction No. 408, of August 18, 2004, which establishes that public companies must include, in addition to controlled or jointly controlled societies, SPEs, when the essence of their relationship with the public company indicates that the activities of these entities are controlled directly or indirectly, individually or jointly, by the public company.

IV – amount and nature of credits, obligations, revenues and expenses between the company and the SPE, assets transferred by the company and rights of use over assets or services of the SPE; V – total assets, liabilities and equity of each SPE; VI – guarantees, sureties, mortgages or other guarantees granted in favor of the SPE; and VII – the identification of the main beneficiary or group of main beneficiaries of the SPE's activities, in the case referred to in Article 4.

20.2.3 Consolidated in Reduction or Exemption of Taxes in Incentivized Area

By adopting the accounting form prescribed in item 16.8.3 (Reduction or exemption of taxes in incentivized area) of this Circular Letter, for controlled societies, the equity method income recorded by the parent company is composed of a proportional portion resulting from the accounting of that tax incentive, registered in the subsidiaries as Capital Reserve.

In this circumstance, when preparing the Consolidated Financial Statements, the accumulated results account, presented in Consolidated Equity, is equal to that of the parent company, because the investments are eliminated against the Equity of the subsidiaries, however it is different from the consolidated result. This difference is explained by the non-elimination of the portion related to the tax incentive, thus generating a reconciliation item between the parent company's results and consolidated results that must be indicated in explanatory notes to the consolidated financial statements, as provided in Article 31, item IV, of CVM Instruction No. 247/96.

However, to eliminate this reconciliation item and better reflect in the consolidated statements the economic essence of the enjoyment of the tax incentive, one can adjust, directly in the Consolidated Statement of Results, the effects resulting from the mentioned tax incentive.

If so opted, such adjustment must be presented in the line item of income tax and additional expenses of the said statement.

Additionally, in explanatory notes, the following information must be evidenced: which controlled companies are beneficiaries of tax incentives; the amount, percentage and conditions of enjoyment of the incentives and the information that said incentives were adjusted in the Consolidated Statement of Results in the line item of income tax and additional expenses.

To allow a better understanding of the above, a numerical example is developed below, where the Financial Statements of a wholly-owned subsidiary, its parent company and the respective consolidated statements are presented.

SUBSIDIARY
(Item 16.8.3)
PARENT
CONSOLIDATED
P&L 31/12/X0 31/12/X1 31/12/X0 31/12/X1 31/12/X1 Revenue 1,000 1,000 Expense (600) (600) Equity method Profit 264 (400) Cap. Res.
136
Ret. Earn.
400
IR/CS (34%) (136) (136)
(a)

Net
Profit 264 400 400
BALANCE SHEET M1
(b)
Adjustment M2
(b)
Adjustment

Asset:
Current:
Cash 1,200 1,600 1,600 1,600
Permanent;
Investment 1,200 1,600 (1,600)
1,200 1,600 1,600 1,200 1,600 1,600
Liability:
Current:
Provision
IR/CS 136 (136) 136
Equity:
Capital 1,200 1,000 1,000 (1,200) 1,000
Cap. Res. 136 136 (136)
Ret. Earn. 264 264 200 600 (264) 600
1,200 1,600 1,600 1,200 1,600 (1,600) 1,600
Obs.: (a) It was considered that the subsidy refers to the full exemption of IR/CS; (b) M1 and M2 represent the balances of the respective accounts, before and after the proposed adjustment, respectively.

20.3 Reverse Merger – CVM Instruction No. 349/01

Most reverse merger operations that CVM has observed and analyzed so far begin with the parent company constituting a "vehicle" company, to which the value of the investment evaluated by equity method plus the value of the corresponding goodwill is transferred as capital contribution. Subsequently, this "vehicle" company is merged into the investee that originated that goodwill. This merger model allowed for the possibility of tax benefit from the goodwill, creating, accountingly, a type of tax credit based on future reduction of income tax and social contribution, due to the possibility of amortizing this goodwill. However, this model ended up distorting the figure of the merger in its real economic dimension.

CVM, with the objective of better disciplining this matter and preserving the quality of financial statements, issued CVM Instruction No. 349/01, determining that in cases of reverse merger, the goodwill based on profitability perspective or concession right should be recognized by the amount of the expected tax benefit. This recognition is made by the constitution of a provision, in the merged company, in the amount of the difference between the value of the goodwill and the tax benefit resulting from its amortization. Without this determination, the goodwill would be duplicated without any economic foundation for such.

In this sense, the Explanatory Note to CVM Instruction No. 349/01 clarifies:
"CVM Instruction No. 319/99, by providing that the counterpart of the goodwill could be registered entirely in a special reserve account (Art. 6, § 1), ended up making possible, in cases of goodwill with economic foundation based on intangibles or future profitability perspective, the recognition of an equity increase without effective economic substance. The creation of a company with the sole purpose of serving as a vehicle to transfer, from the original parent to the controlled, the goodwill paid in its acquisition, ended up distorting the figure of the merger in its economic dimension. This distortion occurs because, when the merger process of the vehicle company is concluded, the investment and, consequently, the goodwill remain unchanged in the original parent. (...). Thus, it becomes necessary that, in the evaluation of the investment in the parent company, the amounts of equity method and remaining goodwill be recomposed."

The parent company, in this case, is the original investor, that is, the one that paid the goodwill at the time of the investment acquisition, and which remains after the merger of the "vehicle" company. Thus, the changes introduced by CVM Instruction No. 349 had a predetermined objective: mergers through the creation of a "vehicle" company in which there could be the recognition of an asset and an equity increase without economic substance.

However, in cases where there is no interposition of a "vehicle" company, being merged the original investor, and where the economic foundations that gave rise to the goodwill remain valid, the same should be maintained in its entirety and amortized under the conditions and period originally established. In this case, the constitution of the provision mentioned in CVM Instruction No. 349 may be unnecessary or even undue.

20.4 Disclosure in explanatory notes of Consolidated Financial Statements and Accounting of Investments

20.4.1 Goodwill/Bargain Purchase

The explanatory notes must contain precise information indicating the basis and foundation adopted for the constitution and amortization of goodwill or bargain purchase and unamortized amounts, as well as criteria, discount rate and periods used in the projection of results. Unjustified goodwill, that is, which does not have an economic foundation, must be recognized immediately as a loss, in the result of the period, clarifying in an explanatory note the reasons for its existence.

(CVM INSTRUCTION NO. 247/96)

20.4.2 Condensed Statements

Public companies that have made additional publications of their financial statements, beyond the publications ordered by corporate law, may do so in a condensed form provided that they are accompanied, at minimum, by the following explanatory notes:
a) changes in accounting practices compared to the previous social year; investments in other companies, when relevant, specifying the final amount and the equity method result in each investment and the values related to goodwill, bargain purchases and loss provisions; interest rates, maturities and real burdens on long-term debts; number of shares that make up the share capital discriminating species and classes; reconciliation of the result determined by full correction with that determined by corporate legislation; and amount of fiscal loss capable of being used in subsequent years; and b) any information not contained in the above-mentioned information and that are relevant for knowledge of the company's situation.

(CVM INSTRUCTION NO. 232/95)

20.4.3 Equity Method

The explanatory notes accompanying the financial statements must contain precise information about affiliates and subsidiaries, indicating, at minimum:
I – name of the affiliate and subsidiary, the number, species and class of shares or capital quotas owned by the investor, the percentage of participation in the share capital and voting capital and the trading price on the stock exchange, if any; II – equity, net profit or loss of the period, as well as the amount of proposed or paid dividends, relating to the same period; III – credits and obligations between the investor and the affiliates and subsidiaries specifying deadlines, financial charges and guarantees; IV – guarantees, sureties, mortgages or pledges granted in favor of affiliates or subsidiaries; V – revenues and expenses in operations between the investor and the affiliates and the subsidiaries;

VI – individualized amount of the adjustment, in the result and equity, resulting from the evaluation of the book value of the investment by the equity method, as well as the book balance of each investment at the end of the period; VII – calculation memory of the individualized amount of the adjustment, when this does not result solely from the application of the percentage of participation in the share capital on the results of the investee, if relevant; VIII – basis and foundation adopted for the constitution and amortization of goodwill or bargain purchase and unamortized amounts, as well as criteria, discount rate and periods used in the projection of results; IX – conditions established in shareholders' agreements regarding influence on administration and distribution of profits, evidencing the numbers relating to cases where the proportion of voting power is different from the proportion of participation in voting share capital, directly or indirectly; X – reciprocal participations existing; and XI – effects on assets, liabilities, equity and result resulting from discontinued investments.

The period of coverage of the financial statements of affiliates/subsidiaries must be identical to that of the investor. The use of non-identical periods is admitted, in cases where this fact represents an improvement in the quality of the information produced, with the change evidenced in an explanatory note.

The investment in an affiliate that, due to reduction of the book value of the investment, ceases to be relevant, will continue to be evaluated by equity method, provided that this reduction is not considered of a permanent nature, and all its effects must be evidenced, separately, in an explanatory note.

(LAW NO. 6,404/76, ARTICLE 247; CVM INSTRUCTION NO. 247/96)

20.4.4 Consolidated Financial Statements

The explanatory notes accompanying the consolidated financial statements must contain precise information about subsidiaries, indicating:
I – criteria adopted in consolidation and the reasons why the exclusion of a certain subsidiary was carried out; II – subsequent events to the end of the social year that have, or may come to have, a relevant effect on the financial situation and future consolidated results; III – effects, on the elements of consolidated equity and result, of the acquisition or sale of a controlled company, during the social year, as well as the insertion of a subsidiary into the consolidation process, for the purpose of comparability of financial statements; and IV – events that caused a difference between the amounts of equity and net profit or loss of the investor, in comparison with the corresponding amounts of equity and net profit or loss consolidated.

In explanatory notes to the consolidated financial statements, the amount of the main groups of assets, liabilities and results of the controlled societies together, as well as the percentage of participation in each of them, must also be disclosed.

The public company affiliated with a group of companies must indicate, in notes to its published financial statements, the body and date on which the last consolidated financial statements of the group's holding company to which it is affiliated were published.

In consolidated statements, which include transactions between related parties, the information and values relating to transactions not eliminated in consolidation must be evidenced.

(LAW NO. 6,404/76, ARTICLE 275, CVM INSTRUCTION NO. 247/96 and CVM DELIBERATION NO. 26/86)

20.4.5 Corporate Investments Abroad

The company must evidence the same information required for investments in subsidiaries/affiliates in the Country. The criteria for the preparation of the financial statements of the investees abroad, as well as the criteria for conversion to the national currency, must be mentioned in the summary of accounting practices.

(CVM DELIBERATION NO. 28/86)

Financial Instruments: Disclosure, Presentation, Recognition and Measurement

21.1 Current Situation

Since the matter was disciplined by CVM, a significant lag has continued to be observed between the content of Instruction and Explanatory Note No. 235/95 and the practice of disclosure of financial instruments by Brazilian public companies. It is CVM's expectation that public companies pay attention to the subject, so that the quality of information produced by Brazilian companies can be equated with the best international practices and meet the expectation of the investor community.

When speaking of financial instruments, it is impossible to dissociate the issue of risk. Financial instruments (derivatives in particular) serve, primarily, as risk management strategies of a given public company; or leverage (aiming at profits) the exposure of a given public company to risk factors inherent to it, or reduce it (aiming at mitigating losses).

At times, financial instruments subject the public company to other risk factors to which it was not originally exposed, consequence of the type of market in which they are traded (over-the-counter instruments, for example, offer exposure to credit risk, which in turn is eliminated in operations with exchange instruments) or the nature of the instrument itself (leverage clauses in certain contracts entered into, which potentialize gains or losses, or "covenant" clauses that anticipate the liquidation of a debt instrument, for example).

This information, obligatorily, should be present in the explanatory notes prepared by public companies. The explanatory note for financial instruments must, to tell the truth, contain, in an integrated manner, a qualitative description of the market risk factors that affect the business of a given public company (risk of prices of its merchandise, interest rate risk, exchange rate risk, credit risk, inflationary risk, liquidity risk, etc.), the strategy adopted by the company's management for the management of these risks, and in what context the financial instruments are inserted.

CVM encourages those public companies that may wish to provide additional quantitative information about market risk factors to which they are subject, in an explanatory note. CVM has observed that some public companies have been improving the quality of disclosure by making available information generated by risk measurement systems such as VAR – Value at Risk.

Another point that must be addressed concerns accounting procedures. Information regarding the accounting policy dispensed to the financial instrument (measurement criterion, accounting classification received, recording of equity effects, among others) must be disclosed, so that users of the information are not prejudiced in their analyses.

21.2 Presentation, recognition and measurement of financial instruments

For illustrative purposes, a possible model of explanatory note is proposed, considering credit risk, exchange rate risk and merchandise price risk:
"The company's business comprises the extraction and sale of iron ore, for the domestic and external markets. The main market risk factors affecting the company's business can be thus enumerated:
Credit risk: possibility of the company incurring losses due to financial problems with its clients, which oblige them not to honor their commitments with the company. To reduce this type of risk, the company enters into ancillary contracts with its clients that oblige them to maintain a certain level of indebtedness and liquidity. Once these levels are exceeded, the early liquidation of the debt by the company occurs and, if the case, the execution of any guarantees offered."

Exchange rate risk: possibility that the company may incur losses due to fluctuations in exchange rates, which reduce nominal invoiced values or increase values raised in the market. To reduce this type of risk, the company enters into derivative contracts in exchange markets, as demonstrated in a specific table.

Iron ore price risk: possibility that the company may incur losses due to fluctuations in iron ore prices, in domestic and external markets. To reduce this type of risk, the company enters into derivative contracts in exchange and over-the-counter markets, as demonstrated in a specific table.

Credit Risk
The company's sales policy is closely associated with the level of credit risk it is willing to undertake in the course of its business. The selectivity of its customers, as well as the diversification of its receivables portfolio, monitoring of sales financing terms by business segment and position limits, are procedures adopted by the company to minimize potential default problems with its commercial partners. The same credit risk management policies are observed in the contracting of over-the-counter derivatives. The table below indicates the assessment of accounts receivable balances classified by the credit risk measurement (rating) of customers:

Customer Credit Rating ()
Contract Term
Moody’s Classification
Standard & Poor’s Classification
Between 1 and 4 years
Aa3
AA
More than 4 years
Aaa
AAA
Exposure
Up to R$ XXX million
Aa3
AA
Up to R$ XXXX million
Aaa
AAA
Diversification 31.12.20X0 31.12.20X1
XYZ & Co. 6% 6%
ABC & Co. 8% 7%
Wk & Co. 7% 6%
Other Customers ()
79% 81%
Total Portfolio 100% 100%
(*) other customers with a participation of no more than 5% of the receivables portfolio

Note: The example presented provides information on the risk involved in sales financing in terms of credit quality, concentration by main customers, and sales financing terms. Moody’s and Standard & Poor’s ratings are examples of ratings prepared by independent entities based on qualitative and quantitative criteria. The publicly held company must disclose the criteria chosen for the preparation of the risk measurement (rating) of its customers, detailing the algorithm used in the classification. It is recommended that objective criteria be selected.

Exchange Rate Risk
The company's indebtedness and the results of its operations are significantly affected by the market risk factor of exchange rate (US dollar). Resources were raised in foreign currency (US dollar) on 01.01.20X1 to finance its working capital.
On 01.04.20X1, resources were obtained from the American banking institution (Bank XYZ) to finance the expansion of the company's installed capacity, aiming to meet the company's future objectives of increasing its participation in the international market.
The strategy defined by the company at the beginning of the 2001 fiscal year focused predominantly on the international market. With this, it was expected that the company's dollar revenue would act as a natural hedge for its working capital loan (there would be a balancing of its cash flow), which effectively happened during the fiscal year. The company's net exposure to the market risk factor of exchange rate at this time is demonstrated below:

Book Value Fair Value
31.12.20X2 31.12.20X3 31.12.20X2 31.12.20X3
Loan R$ XXXXX R$ XXXXX R$ XXXXX R$ XXXXX
Financing R$ XXXX R$ XXXX R$ XXXX R$ XXXX
R$ XXXXX R$ XXXXX R$ XXXXX R$ XXXXX
Dollar Assets
R$ XXX R$ XXX R$ XXX R$ XXX
Hedge Instruments
R$ XXX R$ XXX R$ XXX R$ XXX
Net Exposure
R$ XXX R$ XXX R$ XXX R$ XXX

The measurement method used to calculate the fair value of all elements, except for hedge instruments, was the discounted cash flow method, considering expectations of settlement or realization of liabilities and assets and prevailing market rates on the cut-off date of the information. For hedge instruments, the market quotation of the contracts on the cut-off date of the information was used.

Market Risk Factor: Exchange Rate
Amortization Plan/Expectation of Realization
20X4 20X5 20X6 20X7 20X8 Total
US Currency:

Floating Rate Liability
Working Capital Loan
Principal R$
XXX
R$ XXX R$
XXXXX
Interest R$ XX R$ XX R$ XXX
Expected Libor X.X% X.X% X.X%
Fixed Rate Liability
Financing
Principal R$
XXX
R$ XXX R$ XXX R$ XXX R$ XXX R$
XXXXX
Interest R$ XX R$ XX R$ XX R$ XX R$ XX R$ XXX
Contracted Interest Rate
X.X% X.X% X.X% X.X% X.X% X.X%
Asset Accounts Receivable
R$
XXX
R$ XXX R$
XXXXX

Market Risk Factor: Exchange Rate
Hedge Instruments:
Exchange Market
Maturity
Futures Contracts
Purchased
20X2 20X3 20X4 20X5 20X6 a) Notional Value
US$ XXXX thousand
US$ XXXX thousand
US$ XX thousand US$ XX thousand US$ XX thousand b) Contracted future rate R$ X,XX R$ X,XX R$ X,XX R$ X,XX R$ X,XX Total (a x b) R$ XXXXX R$ XXXXX R$ XXXXX R$ XXXXX R$ XXXXX Derivative contracts had their notional values registered in clearing accounts and gains and losses, when financially realized, registered in income accounts.

Iron Ore Price Risk
The strategy adopted by the company to minimize its exposure to the iron ore price risk factor is the execution of future settlement contracts (over-the-counter and exchange), which guarantee the realization of its stocks at a certain level.
Its stocks turn over on average three months, which is why every three months a rollover of future settlement contracts is made.

Market Risk Factor:
Commodity Price
31.12.20X2 31.12.20X3
Book Value Fair Value Book Value Fair Value
Iron ore stocks
$XXX
Hedge Instruments:

Over-the-Counter Market Maturity Fair Value
Forward Contract Sold April/X4 July/X4 October/X4 in 31.12.20X3 a) Notional Value X tons X tons X tons $XXX b) Contracted future price $ X,XX $ X,XX $ X,XX Total (a x b) $ XXXXX $ XXXXX $ XXXXX
Exchange Market Maturity Fair Value
Futures Contract Sold April/X4 July/X4 October/X4 in 31.12.20X3 a) Notional Value X tons X tons X tons $XXX b) Contracted future price $ X,XX $ X,XX $ X,XX Total (a x b) $ XXXXX $ XXXXX $ XXXXX

The measurement method used to calculate the fair value of stocks and exchange instruments was the market value of these on the cut-off date of the information. For over-the-counter instruments, the method used to calculate the fair value was the discounted cash flow method, considering expectations of settlement or realization and prevailing market rates on the cut-off date of the information. Derivative contracts had their notional values registered in clearing accounts and gains and losses, when financially realized, registered in income accounts.

21.3 Effects resulting from the application of Bacen Circulars nos. 3,068/01 and 3,082/02 and Susep Circular no. 192/02
The Central Bank of Brazil issued Circular No. 3,068 at the end of 2001, establishing categories for classification and respective criteria for evaluation and recording of securities acquired by financial institutions and other entities authorized to operate by the Central Bank of Brazil, producing effects from June 30, 2002. The Superintendence of Private Insurance – SUSEP also adopted new criteria for evaluation and accounting classification of securities acquired by insurance companies, capitalization societies, and open complementary pension entities, with effects produced from June 30, 2002. Previously, this CVM had stated that it considers the procedures contained in the normative of the Central Bank harmonized with international best practices. Given this understanding and also aiming to provide consistent treatment with the move, publicly held companies that are investors or controlling entities of entities subject to those norms, with respect to the effects on equity method and consolidated financial statements, must exclusively dispense with reflective treatment, that is, the adjustments resulting from the initial adoption of those norms must be equally registered in the investor directly to equity. In the same way, reflective registration must be adopted for the counterpart resulting from the mark-to-market of the portfolio of securities classified as available for sale, recognizing the effects in income or, while not realized, in a separate account of equity that evidences its nature.

21.4 Accounting for hedge operations according to international standard
It is important to consider that, although the accounting for hedge operations has not yet been the subject of a specific CVM standard, its use, provided it does not conflict with corporate law, should be aligned with international accounting best practices.
The IASB revised the IAS 39 standard in December 2003 for application in January 2005 with significant modifications. Below is translated and summarized freely, the initial paragraphs that define and qualify the hedge operation.

39.85 "Hedge accounting recognizes in income the compensatory effects arising from modification in the fair value of hedge instruments and hedged items.
39.86 Hedge operations can be of three types:
a) fair value hedge: hedge protection against changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, or still, of an identified portion of an asset or liability or of a firm commitment that is attributable to a particular risk and that can affect income; b) cash flow hedge: protection against exposures to variations in cash flows that (i) are attributable to specific risks associated with assets or liabilities (such as variable interest rates on future payments)) or a highly probable planned transaction and (ii) that can affect income;

c) hedge of a net investment in foreign operations as defined in IAS 21.
A hedge against exchange rate risks in a firm commitment can be accounted for either as a fair value hedge or a cash flow hedge.
39.88 Hedge relationships qualify for hedge accounting under paragraphs 89-102 of IAS 39 only if:
a) There is written documentation at the time of hedge conception that identifies: (i) the hedging instrument, the hedged item, and the risk to be hedged; (ii) the risk management objective and the strategy for taking the hedge; and (iii) how its effectiveness will be measured, specifying the approaches to be used for prospective and retrospective effectiveness testing; b) It is expected that the hedge will be highly effective in compensating for modifications in fair value or cash flows attributable to the hedged risk, in line with the risk management strategy originally documented for the specific hedge operation (in paragraph BC 136 attached Basis for Conclusions and in AG105-AG113 Application Guidance, the pronouncement qualifies the range of 80:125 percent of hedge results to be considered as "almost completely compensated"); c) In the cash flow hedge, the planned transaction subject to the hedge must be highly probable and must present an exposure to cash flow variations that can affect income; d) The effectiveness of the hedge must be measured reliably. This requires that the fair value of a hedge instrument and the fair value (or cash flows) of the hedged item be measured reliably; e) The hedge must be evaluated continuously and must have been effective throughout the period for which it was proposed".

In terms of disclosure, the IASB, in paragraphs 58 and 59 of pronouncement IAS 32, establishes that:
The entity must disclose the following items, separately for fair value hedge, cash flow hedge, and hedge of net investment in foreign countries, as defined in IAS 39:
a) description of the hedge (description of the type of hedge if fair value, cash flow, or net investment abroad and of the operation itself); b) description of financial instruments designated as hedge instruments and their fair values on the balance sheet date; c) nature of the risks protected by hedge; d) for cash flow hedges, the periods in which flows are expected to occur, their reflection in income, and the description of any planned transaction for which hedge accounting was previously used but which is not expected to still occur. When gains or losses of a hedge instrument in a cash flow hedge operation have been recognized directly in equity, the entity must disclose:
a) the amount recognized during the period; b) the amount that was written off from equity and recognized in income during the period, and c) the amount that was written off from equity during the period and included in the initial measurement of the acquisition cost or in another book value of a non-financial asset or liability in a planned and protected hedge, highly probable.

21.5 The issue of the Substance Over Form principle in the disclosure of financial instruments
It is not uncommon for situations in which the legal-formal aspects involving an operation related to financial instruments do not portray their true economic aspect and, consequently, their real effects on the equity of companies.
In this sense, the Basic Conceptual Framework of Accounting, approved and endorsed by CVM Deliberation no. 29/1986, preaches: "Accounting has a great relationship with the legal aspects surrounding equity, but, often, the legal form may fail to portray the economic essence. In these situations, Accounting must be guided by its objectives of well informing, following, if necessary for that, the essence instead of the form". For example, an operation based solely on its contractual aspects, not considering its economic aspects, may be accounted for as generating immediate or deferred gains, when, in fact, these gains, when existing, must be recognized over the period of the contract. Item IV of the Explanatory Note to CVM Instruction no. 235/95, although referring to so-called linked operations, alerted to the prevalence of substance over form in the accounting of financial instruments. Therefore, administrators and independent auditors must dedicate special attention to these operations, in order to report in their accounting reports the true economic effects resulting from these operations. Finally, it is possible that a hedge instrument has an underlying item distinct from the item subject to the hedge, or still, a distinct term from the object of the hedge. The nature of this operation must be identified and controlled by the company and can be characterized as hedge accounting, if the conditions provided for in the international pronouncement IAS 39 have been met.

21.6 Disclosure in explanatory note of financial instruments
The publicly held company must evidence, whenever relevant:
a) the market value of all financial instruments, recognized or not as asset/liability in its balance sheet; b) the criteria and premises adopted for the determination of this value; and c) the policies of action and control of operations in derivative markets and the risks involved.
Article 4 of CVM Instruction no. 235/95 dispenses with the disclosure of market values of accounts receivable and payable. The CVM also understands that it is unnecessary to disclose the market values of other accounts receivable and payable with terms compatible with the normal operations of the company. This dispensation was based on the fact that accounts receivable and payable, as well as other monetary items, were adjusted to present value as required by CVM Instruction no. 191/92.
The above dispensation, however, does not apply to accounts receivable from government entities or others resulting from long-term contracts, whose possibility of receipt within three months is not effectively assured. In this case, the market value must be informed in an explanatory note or, in the absence of this information, an estimate of discount must be indicated based on the cost of its financing, according to the term provided for its receipt. The proposed model does not exhaust all disclosure needs or, still, its own identification, and therefore, it must be adapted and carefully analyzed by the company's administration and its independent auditors.

MODEL FOR NON-FINANCIAL COMPANIES
Note X Financial Instruments
The company participates in operations involving the financial instruments described below, with the objective of... (the objectives and policy of action and control of operations must be disclosed).
The following criteria and premises were used in the determination of the market values of each financial instrument, (disclose the financial instruments whose market values are different from the book values):
(a) The estimated market values of the financial instruments, assets and liabilities of the company, on December 31, 19X1, registered in equity accounts and that present market values different from those recognized in the financial statements, can be thus demonstrated:
Thousands of reais
Book value Market value
Financial applications
Accounts receivable from Government entities and long-term contracts Investments Medium-term loans and financing Debentures Others (detail) The market values of investments were estimated... (describe) The estimated market values of medium-term loans and financing (between three months and one year) were obtained... (describe) The book value of financial instruments referring to other assets and liabilities is approximately equivalent to its market value. (b) The nominal values of financial instruments, not registered in accounting on December 31, 19X1, are summarized below (market values must be disclosed, when applicable):
Thousands of reais clearing account equity account Global Value Value to be received/received (to be paid/paid) Futures Contracts Purchase Commitments Foreign Currency Interbank Market Pre-fixed Indices Shares Others Sales Commitments Foreign Currency Interbank Market Pre-fixed Indices Shares Others Options Contracts Purchase Commitments Foreign Currency Interbank Market Pre-fixed Indices Shares Others Sales Commitments Foreign Currency Interbank Market Pre-fixed Indices Shares Others Thousands of reais clearing account equity account Global Value Value to be received/received (to be paid/paid) Contracts and "swaps" Purchase Commitments Foreign Currency Interbank Market Pre-fixed Indices Shares Others Sales Commitments Foreign Currency Interbank Market Pre-fixed Indices Shares Others (c) Futures contracts, locked options have terms of less than 90 days; "swap" contracts have the following maturities:

Thousands of reais
Up to 90 days
From 91 to 180 days
From 81 to 360 days
Above 360 days
(d) The risks involved in contracting these operations can be thus summarized: (describe market, credit, operational, currency, and legal risks) (CVM INSTRUCTION NO. 235/95 AND CIRCULAR OFFICE/CVM/SNC/SEP/NO. 01/96)

Discontinued Operations
In situations where a company, based on its strategic planning and formal business plan, decides to discontinue jointly a group of assets, eventually associated with liabilities, in a single transaction, a special nature disclosure is required. This disclosure has the general objective of highlighting the ability to generate results and cash flows between current operations and operations to be discontinued. This group of assets can be characterized in various ways: (i) as a business segment characterized as a group of units generating income and cash, (ii) as a single unit generating income and cash, or, (iii) as part of a unit generating income and cash. What characterizes these assets as "non-current and held for sale" is the expectation of recovering their value through a sale transaction and not through their consumption on a continuous basis. In this sense and in order to provide higher quality information, publicly held companies must, whenever relevant, disclose in an explanatory note information related to discontinued operations, which are currently considered in the international pronouncement IAS 35 "Discontinued Operations". This pronouncement considers discontinuation based on the magnitude of the operation, such as the abandonment or transfer of a business segment, establishing a basis to segregate this information from operations that will continue. It should be observed that the IASB put to public discussion in 2003 a draft pronouncement under the title ED 4 Disposal of Noncurrent Assets and Presentation of Discontinued Operations, dealing with matters associated with reducing the differences between the international standard and the American standard SFAS 144 Accounting for the Impairment or Disposal of Long-Lived Assets, in terms of identification of operations to be discontinued, evaluation, and disclosure. With the objective of advancing in the disclosure of information of this type, this information required for discontinued operations can be presented in an explanatory note, without modification of the form of the financial statements currently in use. For general guidance, the main points to be observed in the preparation of this explanatory note are summarized and adapted below, based on the free translation and reading of the current wording of pronouncement IAS 35.

22.1 Definition
For the purpose of disclosure in financial statements, a discontinued operation is a relatively large component of an entity:
a. that, in accordance with a determined plan, the entity is: (i) substantially disposing of the component in its entirety, such as selling in a single transaction, by spin-off or capital reduction; (ii) disposing in parts, such as selling the assets and liquidating the liabilities of the component individually; or (iii) closing by abandonment. b. that, alone, represents an important business segment or geographic area of operations; and
c. that can be operationally differentiated and for financial reporting purposes.

22.2 Initial Disclosure Event
The initial disclosure event is the occurrence of one of the following events: (a) the entity has signed

a contract for the sale of all assets attributable to the discontinued operation; or (b) the entity's management or board of directors has (i) approved a detailed formal plan for the discontinuation and (ii) made an announcement of the plan.

22.3 Impairment Losses on Recoverable Amount of Assets
The approval and announcement of a plan for discontinuation are an indication that assets attributable to the discontinued operation may have suffered impairment of their recoverable amount or that a loss previously recognized for these assets must be increased or reversed. Therefore, the note disclosure of discontinued operations must also consider the recognition and measurement policies for these events.

22.4 Note Disclosure of Discontinued Operations

22.4.1 Initial Disclosure
An entity must include the following information in note disclosure regarding a discontinued operation in its financial statements for the period in which the initial disclosure event occurs, as cited above. a. a description of the discontinued operation; b. the business segment or geographic segment to which it belongs;
c. the date and nature of the event, initially disclosed;
d. the date or period in which the discontinuation is expected to be completed, if known or determinable; e. the accumulated values, at the balance sheet date, of total assets and liabilities to be sold or settled; f. the values of revenues, expenses, and profit or loss before taxes, from ordinary activities attributable to the discontinued operation in the current fiscal year disclosed and the related income tax expense; g. the values of cash flows (statement of sources and applications of funds) attributable to the operating, investing, and financing activities of the discontinued operation during the disclosed fiscal year period.

22.4.2 Other Disclosures
When an entity sells assets or settles liabilities attributable to a discontinued operation or enters into agreements for the sale of these assets or the settlement of these liabilities, it must include in note disclosure, in the period in which the event occurs, the following information:
a. for any gain or loss that is recognized in the sale of assets or settlement of liabilities attributable to the discontinued operation (i) the value of the profit or loss and (ii) the income tax expenses related to this profit or loss; b. the net selling price or price range (after reducing expected disposal costs) of those net assets for which the entity has signed one or more firm sale agreements, the expected time of receipt of these cash flows, and the book value of these net assets.

22.4.3 Update of Disclosures
In periods subsequent to that in which the initial disclosure of the event occurred, in the note disclosure on discontinued operations, a description of any significant change in the value or periods of cash flows relative to the assets and liabilities to be sold or settled and the events that caused these changes must be disclosed. These disclosures must continue in the financial statements until the period in which the discontinuation is completed. The discontinuation is completed when the plan is substantially fulfilled or abandoned, even if the payments from the buyer(s) to the seller have not yet been concluded. If an entity abandons or withdraws a plan that was previously reported as a discontinued operation, this fact and its effect must be disclosed.

22.4.4 Separate Disclosure for Each Discontinued Operation
All disclosures must be presented separately for each discontinued operation.

22.4.5 Presentation of Disclosures
Disclosures of discontinued operations shall be presented in notes to the financial statements, except for the disclosure of the value of profit or loss before taxes, recognized in the sale of assets or settlement of liabilities attributable to the discontinued operation, which must be included in the income statement.

22.4.6 Disclosure in Interim Financial Reports
The notes to an interim financial report must describe any significant activities or events occurring since the completion of the most recent annual report, regarding a discontinued operation, and any significant changes in the values or timing of cash flows related to the assets and liabilities to be sold or settled.

Provisions, Contingent Liabilities, and Contingent Assets

23.1 Contingencies
A contingency is a condition or situation whose final result, favorable or unfavorable, depends on uncertain future events. In accounting, this definition is restricted to situations existing at the date of the financial statements and accounting information, whose financial effect will be determined by future events that may occur or not occur. Estimates regarding the outcome and financial effects of contingencies are determined by the judgment of the company's management, supported by studies and technical opinions that reflect an impartial position, and reviewed by the independent auditor. Both estimates and the review must include the examination of events occurring after the balance sheet date, supplemented by experience obtained in similar transactions. In complement to the understanding of this CVM technical area, we are attaching in this item the Ibracon Technical Interpretation 03/2002 regarding the resolution of doubts about contingent gains.

23.2 Contingent Assets
Contingent Assets that, in compliance with accounting principles, should not be recognized in accounting, must be disclosed in a note with a description of their nature, the potential value, and the company's expectation regarding their eventual realization.
We reaffirm the understanding contained in CVM Orientation Opinion No. 15/87 regarding contingent gains. In compliance with the Principle of Conservatism (Prudence), these gains should not be accounted for until their obtaining is effectively assured in a final decision for which no further appeals are possible. Considering that the merit of the issue will still depend on a final decision, the gain should not be accounted for. Even in situations where there is favorable jurisprudence, this is not sufficient to provide a basis for the recognition of the contingent gain, as this does not ensure a final favorable decision for the Company, and disclosure in the notes to the financial statements regarding the subject must be made. The IPI credit bonus (crédito-prêmio do IPI) is an example inserted in this context. The Plenary of the Federal Supreme Court – STF, on December 16, 2004, by nine votes to one, declared unconstitutional Article 1 of Decree-Law 1,724/79, which authorized the Minister of Finance to regulate and even extinguish the granting of IPI credit bonus, finally judging an Extraordinary Appeal filed by the Union against a decision of the 4th Regional Federal Court. Note that the STF did not judge the merit of the issue, but only the delegation to the Minister of State of Finance of the competence to reduce, increase, or extinguish the IPI credit bonus. It is a fact that Minister Gilmar Mendes observed that the provisions of Decree-Law 1,658/79 and Decree-Law 1,722/79 remained fully effective and in force and concluded by stating that the extinction of the IPI credit bonus occurred gradually, until June 30, 1983. However, this issue was not the object of the discussion, nor of the decision. The issue, still the object of discussion in the judicial sphere is: With the declaration of unconstitutionality, until when could companies enjoy the tax benefit instituted by Decree-Law No. 491/69? There are those who understand that the right to the credit bonus would have been extinguished by Article 41 of the Transitional Constitutional Provisions Act (ADCT), from October 5, 1990, to the extent that there are understandings that this provision would have extinguished tax incentives of a sectoral nature (among them the IPI credit bonus) that had not been confirmed by law, within a period of two years after the date of the promulgation of the 1988 Constitution. Others understand that the IPI credit bonus constitutes a subsidy, not applying to it Article 41 of the ADCT. Thus, the legislation that instituted the tax incentive is still fully in force. Furthermore, for these, even if it is admitted that the credit bonus characterizes itself as a tax incentive, the rule in question is also not applicable, since it does not have a sectoral nature. Others, including the Government, understand that with the declaration of unconstitutionality of the delegation of powers of Decree-Laws No. 1,724/79 and 1,894/81, Decree-Laws No. 1,658/79 and 1,722/79 should be
applied, which fixed the final term on June 30, 1983. Thus, there is still a judicial path to be traveled, leaving the issue unresolved in this sphere.

23.3 Contingent Liabilities
CVM has observed that certain information disclosed in issuance prospectuses does not correspond to the financial statements or Quarterly Information made available to the public. This is the case of contingent liabilities.
Over the years, through the process of monitoring information made available to the public by open companies, CVM verified many incongruities. In a specific case, for example, up to 4 pages were dedicated in the issuance prospectus to the description of events associated with contingent liabilities involving the open company, whereas in its Quarterly Information or its financial statements not even a paragraph on the matter was found. The rewriting and republication of the same were inevitable. Using subsidiarily the IBRACON Pronouncement on uncertainties, NPA No. 09, of June 1995, to better elucidate the matter, it is understood that, technically, an uncertainty, from an accounting point of view, can be classified, probabilistically, according to its chance of occurrence, into three groups: (i) probable chance of incurring a liability or not realizing an asset; (ii) possible chance of incurring a liability or not realizing an asset; (iii) remote chance of incurring a liability or not realizing an asset. Contingent loss must be provided for whenever: (i) it is probable that future events and/or past experience will confirm the decrease in the realization or recovery value of an asset or the existence of a liability; and (ii) the loss can be reasonably estimated. However, if the amount involved cannot be reasonably estimated, all relevant information must be disclosed, at least, in a note, so that users of the financial statements can become aware of the contingent risks to which a given company is subject. When the chance of occurrence of contingent liabilities is possible or remote, CVM understands, in light of NPA No. 09, that all relevant information must be disclosed in a note, even if the uncertainties are great. CVM understands that the benefits of providing relevant information about contingent liabilities, even with a possible or remote chance of occurrence, far outweigh the probable costs to be incurred in their production. The costs are incurred only at a first moment; the benefits extend over several fiscal years.

23.4 Note Disclosure of Provisions, Contingent Liabilities, and Contingent Assets
Normally, contingent assets or contingent gains should not be recorded; only when their obtaining or recovery is effectively assured should they be recognized in accounting. A possible gain in administrative or judicial actions should only be recognized when, having gone through all necessary instances, the company obtains a favorable decision. If the company has already recognized revenue involving an asset in dispute (accounts receivable, for example), it must then constitute a provision for losses in proportion to the contingent value. If there is a challenge by the debtor, but the company considers that it has objective conditions to evidence its right, leaving no doubt regarding this right and the chance of receipt, it may not effect the provisioning provided that it evidences in a note to the financial statements the existence of the challenge. (CVM ORIENTATION OPINION NO. 15/87) CVM recommends that in the preparation of notes on contingent liabilities, the following information be provided, at a minimum: (i) nature of the contingency (labor, social security, tax, civil, environmental, etc.), (ii) detailed description of the contingent event involving the company, (iii) chance of occurrence of the contingency (probable, possible, or remote), (iv) instances in which contingent liabilities are under discussion (administrative or judicial, lower or higher courts), (v) jurisprudence on contingent liabilities, (vi) evaluation of the consequences of contingent liabilities on the company's business.

23.5 Annex: Ibracon Technical Interpretation 03/2002
Accounting treatment of contingent gains
Due to the difficulties being encountered by professionals in the treatment of judicial, tax, and other claims made by companies in judicial actions, Ibracon deemed it appropriate to reaffirm its understanding regarding the accounting treatment related to so-called contingent gains. In this context, this Technical Interpretation aims to guide the application of paragraph 7 of Pronouncement XXII – Contingencies, in the accounting treatment of contingent gains, specifically directed towards judicial processes for the recovery of taxes or the extinction of registered tax obligations.

Question 1
What characterizes a contingent gain?
Answer
Based on Pronouncement XXII – Contingencies, from Ibracon, these are potential gains that have conditions or situations of undefined solution at the date of the closing of the fiscal year or period to which the financial statements refer and, as such, depend on events that may or may not occur.
In this context, a contingent gain corresponds to the potential right to recover a paid tax or the potential extinction of a registered tax obligation.

Question 2
Under what circumstances can a company register a contingent gain in accordance with Brazilian accounting practices?
Answer
Paragraph 7 of Pronouncement XXII – Contingencies, from Ibracon, defines when a contingent gain should be recognized, as reproduced below:
"As a general rule, contingent gains should not be accounted for in obedience to the accounting convention of conservatism, by which revenue should only be recognized when realized."
On the same subject, CVM issued Orientation Opinion No. 15/87 which addresses the subject as follows:
"The convention of Conservatism (also called Prudence) stipulates that among alternative sets of evaluation for equity equally valid, according to fundamental principles, Accounting will choose the one that presents the lowest current value for the asset and the highest for obligations. This understanding should not be confused or distorted with the effects of accounting earnings manipulation, but viewed in light of the vocation for protection, care, and neutrality that Accounting must have, especially regarding the excesses of enthusiasm and valuations by the management and owners of the entity (see item 6.3 of the pronouncement attached to CVM Deliberation No. 29/86). By this convention, contingent assets or contingent gains should not be recorded; only when their obtaining or recovery is effectively assured should they be recognized in accounting. Thus, a possible gain in administrative or judicial actions should only be recognized when, having gone through all necessary instances, the company obtains a favorable decision. If the company has already recognized revenue involving an asset in dispute (accounts receivable, for example), it must then constitute a provision for losses in proportion to the contingent value."

Question 3
In situations where the Company has obtained a final favorable decision on a contingent gain, what is the moment of its accounting recognition? Upon the judicial decision or upon its financial realization?
Answer
With no further possibilities of appeal by the opposing party, the risk of non-realization of the contingent gain is considered "remote" and, therefore, the Company must recognize the gain in accounting when the final judicial decision produces its effects, which normally occurs after publication in the Official Gazette. This means that it will no longer be a contingent gain but rather a right of the Company, for which the Company's management, before its registration, must take into account the mentioned in the following paragraph. Before the registration of the contingent gain and periodically after its registration, the Company's management must evaluate the recovery capacity on the asset, since the opposing party may become unable to honor this commitment or its future use is uncertain. In subsequent evaluations after its registration, the need for a provision for asset impairment must be taken into consideration.

Question 4
In situations where the Company has not yet obtained a final favorable decision for the recovery of a tax or the extinction of a registered tax obligation, but there is favorable jurisprudence for other companies in identical cases and the evaluation of lawyers is that the chances of a favorable outcome are probable, can that Company recognize the contingent gain based on jurisprudence and the opinion of lawyers? Answer Even in situations where there is favorable jurisprudence, this is not sufficient to provide a basis for the recognition of the contingent gain, as this does not ensure a final favorable decision for the Company, as many other factors can influence this decision, for example, the branch of activity, the formalization of the process, etc. Even if it is considered that the Company has an injunction and there is favorable jurisprudence, the concept described above (non-recognition of the gain) equally applies. The Company must make disclosure in a note regarding the subject.

Question 5
In cases of processes not yet finally judged in which the Company discusses the recovery of taxes allegedly paid in excess and obtains an injunction allowing those values to be offset with other taxes, should it register the contingent gain supported by this injunction?
Answer
As the injunction is a provisional instrument, the registration of a contingent gain is not yet possible, as the realization of the gain is not definitive.
The Company will proceed with the compensation from a financial point of view; however, the compensated tax must still appear as a liability until the final outcome of the case, since its settlement is also provisional, and if the outcome is unfavorable to the Company, it must pay the previously compensated tax with the legal additions.

Question 6
Is the practice adopted in Brazil harmonized with international best practices?
Answer
Yes, the accounting practices adopted in Brazil are harmonized with the international standards prescribed in IAS No. 37 which deals with the subject, issued by the International Accounting Standards Committee. These standards, in summary, conclude that "A company should not recognize a contingent asset."
In the same line is the North American accounting treatment prescribed in FASB 5, this issued by the

Financial Accounting Standards Board.

Intangible Assets

24.1 – Accounting treatment of intangible assets in Brazil

Intangible assets in Brazil are generally considered as deferred assets, which, in item V of Article 179 of the corporate law, are defined as "applications of resources that will contribute to the formation of results in more than one fiscal year, (...)". Pronouncement NPC No. VII of Ibracon establishes the condition for capitalizing these expenses, generally rights linked to the entity's destiny, and their recoverability, that is, their link with revenues to be obtained in future periods. If this is not possible, the aforementioned pronouncement (in item b of paragraph 2) determines that "the capitalized amounts must be immediately amortized in their entirety".

International standard IAS 38 defines an intangible asset as "an identifiable non-monetary asset without physical substance, held for use in the production or supply of goods or services, for rental to others, or for administrative purposes". This definition is conditioned to the general definition of assets, that is, (a) an asset is controlled by an enterprise as a result of past events and, (b) from which future economic benefits are expected to flow to the entity. For the recognition and accounting of an intangible asset, IAS 38 conditions it to the requirement of meeting the definition of an intangible asset (cited above) and the possibility of estimating the cost of this asset with security. Furthermore, the entity must evaluate the probability of generating future economic benefits from these assets "which represent the best estimate of management regarding the set of economic conditions that will exist during the useful life of the asset".

It is observed that, essentially, both Brazilian and international standards recognize the deferred asset, provided that the generation of future incremental revenues resulting from the existence of these assets is probable. However, this is not the position of American pronouncements, which, in SFAS No. 2 – Accounting for Research and Development Costs, determine that research and development expenses – R&D – should be appropriated to results as an expense, which obliges Brazilian companies listed on American exchanges to disclose this divergence.

In the case of a company in the pre-operational phase, there would be no doubt in stating that, in the absence of indications of loss of economic substance of the respective project and maintaining the premises of the business plan that led the public company to start it, such expenses could, or rather, should be capitalized. This statement is based on the premise that said business plan already contemplated that the revenues to be obtained, during a certain period of time, will be unequivocally linked to that initial effort (sacrifice) materialized by the expenditures incurred. In addition, we can also state that these, when realized, will be incremental, that is, capable of increasing the capacity to generate revenues, in addition to being specific to the condition of the asset, as in the case of expenses with "startup" and pre-operational activities, which cannot be capitalized unless they are necessary to bring the asset to the conditions of work.

The same grounds apply to the company in operation, that is, for an expense to meet the necessary conditions to be deferred, it must be unequivocally linked to the obtaining of incremental revenue in the future, the period of time in which it will be realized must be recognized, there must be no evidence of loss of economic substance of the project or of a change, for the worse, of fundamental premises of the respective business plan that justified the project, and the incremental revenue must be fully demonstrated. Therefore, the focus is on the incremental revenue on which the link of the expense to be deferred must fall. The opposite of this situation would be the incorrect capitalization of regular expenses to maintain the research and development department, for example, which does not constitute the formation of assets capable of providing non-ordinary services and generating incremental revenues. In the same direction, generic and non-specific expenses related to the general functioning of the company should not, for this reason, be capitalized (recorded as assets) because they are not costs specifically related to a qualifying asset. As an example of generic expenses that should not be capitalized, the capitalization of expenses with the "capital call", that is, the subscription (underwriting) operation, for the launch of new shares to the public, can be cited. These expenses, typically composed of the preparation of prospectuses, reports, professional fees, legal publications, advertising, financial intermediary commissions, must be recognized as an expense in the results of the fiscal year in which they are incurred, since there is no clear link with a qualifying asset and with future results.

It is not sufficient to merely narratively and generically state that the expense was incurred with the object of contributing to the formation of future results, because this is the essence or reason for the existence of an expense. The expense represents the utilization or consumption of goods and services in the process of producing revenues or, in other words, it must be clear that every expenditure made by a company aims to obtain future revenue of greater value. Therefore, the points for the judgment of value on the deferred expenses to be emphasized are: (i) the absence of any fact or event that indicates the deterioration of the future profitability prospects of the project, as stated in the business plan that justified the engagement of the public company in the project, and (ii) the link of these expenses with future incremental revenues, specific to the asset to which they are related. These are the crucial points to be considered in the exercise of judgment regarding the deferral of incurred expenses.

24.2 Disclosure in explanatory note of Deferred Asset

Its composition and criteria for amortization must be disclosed. Companies benefiting from tax incentives must provide more detailed information, specifying the status of the incentivized projects.

(ORIENTATION OPINION CVM No. 18/90)

Share-based Compensation

25.1 Introduction

The increasing use by Brazilian companies of remuneration programs through the granting of stock purchase options to employees and the revision of international pronouncements on the subject due to public debates in the form of accounting makes the subject relevant for the considerations of this circular letter.

On February 19, 2004, IFRS 2 Share-Based Payment was issued by the IASB, for application from January 1, 2005. On March 31, 2004, the Financial Accounting Standards Board – FASB issued a draft pronouncement that, in the same direction as the IASB and with only a few minor differences, addresses transactions in which a company exchanges employee services for (a) equity instruments of the company or (b) liabilities based on the fair value of equity instruments. The American draft pronouncement eliminates the possibility of using APB Opinion No. 25, Accounting for Stock Issued to Employees, and requires the recording of this type of transaction based on the fair value-based method. The general rule of these pronouncements, applicable to the accounting of share-based compensation plans, is the recognition of the cost over the required service period (vesting period) measured through option pricing models.

25.2 Overview

The public employer company may adopt various types of plans to remunerate executives and employees by granting options to purchase shares issued by the company. In conventional stock purchase grant plans, for example, the employer company grants options to purchase a fixed number of shares of the company, at a set price, during a specific period, in exchange for current or future services of executives and employees. This type of remuneration is common in the American market and, to a lesser extent, in the European community markets, as a way to align investor objectives with the objectives of administrators and employees. In Brazil, there are few disclosed cases of companies with this type of remuneration plan, possibly motivated by the low delegation of powers of controlling investors to administrators, given the identification of controlling shareholders with administrators, forming a single group of interest. In any case, Brazilian companies with shares traded in foreign markets must follow international recommendations that provide for the accounting of these programs in their income statement, that is, the effect of the option plan on the results statement.

25.3 The concept of stock options as employee remuneration

In the most common configuration, the stock option gives the employee the right to purchase a certain number of shares of the company at a fixed price for a certain number of years. The price at which the option is granted is usually the market price on the date the options are granted. The logic of this benefit is the expectation that the share price will rise and employees will be able to buy it by exercising (purchasing) at a lower price than was referenced at the time of grant and sell it at the current market price, for example.

The granting of shares to employees is considered a flexible form of remuneration that intends to attract and motivate employees by granting a part of the future growth of the company. This form also makes sense for public companies that intend to maintain a continuous form of remuneration and employee participation in the administration of the company. The general idea is the benefit of increased productivity and talent retention added to the relatively small dilution of capital through the granting of stock options. The positive effect of remuneration to employees through the granting of options depends, to a large extent, on the creation of a real and significant commitment to the destiny of the company.

In the design of an option program, it is necessary to consider the number of shares that will be available to be exercised and how many employees will receive the right to receive these options each year so that there is regularity in the granting of this type of remuneration and in the expected beneficial effects. This consideration is important so that there is the possibility of including future employees in this type of remuneration. Another important consideration is the intention to grant the benefit to all employees or only to some key employees. The answer to these and other questions will determine the type of plan, the time provided for its duration, the characteristics of eligibility, allocation, valuation, time of grant, vesting periods, and exercise price of the options.

In the practice of companies in more developed markets, options are typically subject to a period of three to five years of service provision (vesting period), which means that if any employee has 20% of this period, they can only exercise 20% of the options, or still, an employee can, typically, exercise options to which they are entitled at any time, proportionally to the eligibility period.

Some companies may offer an alternative exercise of options without outlay in which the employee exercises the option and the company pays an amount equal to the difference between the market price and the exercise price. In other cases, it is necessary for employees to make the outlay of the value necessary for payment for the shares at the exercise price agreed in the share-based remuneration plan.

25.4 Accounting situation under American standards

SFAS 123, Accounting for Stock-Based Compensation, encourages the recognition of the "fair value" of share-based remuneration plans as an expense on the date of grant of these benefits, but allows companies to continue accounting for these plans according to the rules of APB No. 25, Accounting for Stock Issued to Employees. In APB No. 25, remuneration expenses are estimated according to the "intrinsic value", that is, the difference between the quotation value and the exercise price of the option, on the date when the exercise price and the number of options are known. Most American companies grant a fixed number of options with an exercise price equal to the share price on the date of grant of the benefit, which, under APB 25 rules, is the same date of measurement and, therefore, results in the recognition of a value equal to zero in expense. Firms that apply the estimation method of APB No. 25 must disclose in an explanatory note the estimated value of the grant of this benefit through the concept of fair value, that is, using an adequate pricing method to estimate the expense with the advantage granted, that is, the effect on results and earnings per share.

In summary, in the general current practice of American companies, the standard APB No. 25, Accounting for Stock Issued to Employees of 1972, is adopted, in which the fair value is disclosed in explanatory notes to the financial statements with the recognition of a zero value in remuneration expenses (income statement).

25.5 Accounting by international standards IFRS 2

IFRS 2 requires an entity to reflect in results and financial position the effects of share-based payment transactions, including expenses associated with stock options granted to employees. It includes the following topics: (i) all stock options and stock purchase plans, (ii) rights referenced in shares, when a payment depends on the share price, (iii) transactions with suppliers involving a share-based payment in exchange for goods or services of non-employees.

The key principle for recording transactions in which goods and services are received having as reference the equity instruments of the entity must be measured by the fair value method of the goods and services received. If the value cannot be estimated reliably, then the fair value of the equity instruments granted must be used.

In the case of share-based remuneration to employees, the measurement of the transaction amount is made at the beginning of the grant period and the valuation process is focused on the specific terms and conditions of the grant of shares or stock options to employees because it is not possible to estimate the fair value of employee services received reliably. The application of fair value by IFRS 2 results in an expense in the results, even if the exercise price of the option granted to employees is the same as the share price of the company on the grant date, given the application of option pricing models.

In general lines, the IFRS 2 pronouncement aims that the user of accounting information has access to the disclosure: (i) the nature and extent to which share-based payment contracts existed during the accounting period; (ii) how the fair value was determined; and (iii) the effect of share-based payment transactions on results and financial position in the period.

25.6 The controversy over the estimation and pricing methods of options

In estimating the expenses corresponding to the grant of stock options to employees, companies must choose a pricing method capable of measuring the present effect of this type of instrument. The Black-Scholes model and the binomial model are the most popular for the valuation of stock options. Each of these models is based on subjective premises such as volatility, that is, its historical tendency to increase or decrease over a certain period of time. Although the valuation of these financial instruments is imperfect since, for example, it considers options as freely tradable while options granted to employees suffer a set of restrictions, it is considered that: (i) it is preferable to have some type of estimate rather than no estimate and, (ii) it is possible to make some adjustments to the inputs in option pricing models to consider these differences, such as expected volatility, expected life, and probability of acquiring the right (vesting).

25.7 Corporate aspects of the approval of the option plan

Approval by shareholders is a relevant aspect for the existence of the option plan. This type of remuneration plan implies a modification of the company's share capital structure and, furthermore, that it does not substantially modify the participation relationships, must be approved by the General Assembly of shareholders or by the Board of Directors. This topic must also be considered in the corporate governance rules established so that investors have full understanding of the amounts involved both in the company's results and in the general shareholding position. Although share-based compensation intends to incentivize in employees and administrators the behavior that shareholders desire, there are ethical aspects that must be present in the behavior of these employees when proposing and changing accounting rules in general and, especially, in the disclosure of information that is capable of inflating expectations of future profits.

25.8 Glossary of some of the main terms used in option plans

acquisition of the right (vesting): delivery, by the company, of a benefit corresponding to the right of an employee acquired gradually by the time of service provided;

option plan approval date: the plan must be approved by the Board of Directors or General Assembly;

disclosure date: The Option Plan is disclosed in accordance with CVM Instruction No. 358/02;

grant date: the date on which an option is granted to an individual, or the date on which a company and the employee agree (as provided in a share-based remuneration agreement) on the grant date of the right over equity instruments, within certain conditions (vesting conditions), by which this right will be exercised;

vest date: date from which an option can be exercised and sold;

exercise date: the option is generally exercised between two dates: the date from which the plan conditions make exercise possible (vesting date), fixed after the grant date, and the expiration date, which is generally fixed a few years later;

expiration date: is the last day on which an option can be exercised, or sold; on this date the employee's rights are extinguished, that is, they lose value;

acquired right (vested) – vested or that meets contractual conditions

exercise: decision to buy the share through the option;

equity instrument: contract identified with the residual result of the company's assets minus all liabilities;

stock option as remuneration: a right issued by a public company to an individual to purchase an amount of shares of the company at a set price, within a specified period of time;

vesting period: period between the grant date and the date on which all eligibility conditions (vesting conditions) of an option plan have been met;

Option Plan: contract that gives its holder the right, but not the obligation, to subscribe to shares of a company at a fixed or determinable price in a given period of time. (contract containing a set of rules defined in a document that gives the employee the right to buy a share of the company on a future date).

exercise price: price at which a share can be purchased through the exercise of an option (strike price);

expected life: the period of time between the grant date and the date when, it is estimated, the option will be exercised;

grant value: represents the face value of the option. This value is calculated based on the application of the pricing method used.

expected value: represents the value of the remuneration offered to the participant and not necessarily the gain realized; it is the present value of future gains; the quantification can be done with several methodologies, the most common being the Black-Scholes and Binomial models.

fair value: the amount by which an asset can be traded in an active market, in which the buyer and seller possess knowledge of the subject and independence from each other, without it corresponding to a compulsory transaction or resulting from a liquidation process, or, in the absence of an active market for a given financial instrument: a) the value that can be obtained with the negotiation of another financial instrument of similar nature, term, and risk, in an active market; or b) the net present value of future cash flows to be obtained, adjusted based on the interest rate prevailing in the market, for instruments of similar nature, term, and risk.

25.9 Accounting of share-based remuneration plans

The management and information problems arising in international companies have led an increasing number of companies to voluntarily recognize the costs with the grant of stock options as expenses recognized in the results statement. This trend supports and backs the understanding of international bodies in the sense of recognizing the effect on the results of this type of remuneration plans estimated by fair value, that is, through adequate pricing methods.

It is the understanding of the technical area of this CVM that companies must account for the expenses related to the granting of shares as a way to remunerate employees using an adequate pricing method. However, while there is no express determination in this sense, public companies must disclose in an explanatory note what would be the amount of the period's results and Equity, if this accounting had been done.

25.10 Disclosure in explanatory note of option plans

The objective of initiating the process of knowledge of this issue within the Brazilian capital market led to the provisions of the Ibracon Pronouncement on Accounting for Employee Benefits approved by CVM Resolution No. 371, which determines the disclosure, at a minimum, of the following information: (i) the nature and conditions of the stock purchase option plans; (ii) the accounting policy adopted; and (iii) the quantity and value by which the shares were issued.

To fulfill the disclosure objectives, and to comply with Article 176 of the corporate law which provides for the disclosure of stock purchase options granted and exercised in the fiscal year, the company must disclose in the Explanatory Note to the financial statements and in the form...

Quarterly Information – ITR the following information regarding Stock Option Plans, always comparatively to their respective previous periods:

I the existence of Stock Option Plans, with a description of their nature and conditions (including eligibility conditions for beneficiaries).

II the quantity, description of the nature and conditions (including, where applicable, rights to dividends, voting, conversion, exercise and expiration dates) and amount of options granted, exercised, and expired, if applicable, held by each group of beneficiaries, including their exercise price or, if applicable, the method for calculating it. The measure of beneficiaries' eligibility to exercise the right must be indicated (for example, the time elapsed since the date of option grant relative to the total period until the beneficiary can exercise the option);

III the percentage of participation dilution to which current shareholders will eventually be subjected in the event of the exercise of all options to be granted;

IV regarding exercised options, a description of the shares delivered, in quantity, class, and species, and the total and unit exercise price relative to each of the classes and species and their respective market value on the respective dates;

V the dates or periods in which options may be exercised by beneficiaries and any expiration dates;

VI a description of any transactions involving treasury shares to effect the redemption of options, indicating the quantity of shares, by class and species, as well as the amount received by the company; and

VII the effect on the Statement of Net Income and on Shareholders' Equity, if such accounting had been made.

Corporate Matters

26.1 Law No. 10,303/2001 – Amendments to the Corporations Law

Law No. 10,303, of October 31, 2001, brought some amendments to provisions of Law No. 6,404/76. The first amendment is that contained in item II, of §1, of the new wording of art. 124. By this provision, the notice period for the first call for a general meeting, in an open company, becomes 15 (fifteen) days, and for the second call, 8 (eight) days.

The second amendment refers to the documents that must be made available to shareholders up to one month before the date set for the holding of the Ordinary General Meeting. Law No. 10,303/2001 added the opinion of the fiscal council, including dissenting votes, and other documents pertinent to the matters included in the agenda, to the list of documents available to shareholders.

Another very significant amendment is that made in articles 197 and 202, which deal with the constitution of the Reserve for Profits to be Realized. The amendment brought by the new Law is that the Reserve for Profits to be Realized is no longer constituted by the amount of profits to be realized, as defined by Art. 197, but rather by the portion of the mandatory dividend exceeding the amount of realized profit.

No less important is the modification of art. 196, which determines the annual revision of the capital budget that encompasses a period longer than one fiscal year, this budget being used to support the constitution of the Reserve for Profits – Retention of Profits. This budget must include the main items of investment in working capital and fixed capital with the main sources of financing – own and third-party capital – projected, as well as the premises that support it. The content of the capital budget must receive adequate disclosure in the IAN form, and it is recommended that it be considered in the preparation of the Management Report and in the performance comments in the ITR form.

Reinforcing the understanding that CVM has maintained over time, § 6 of the new article 202 establishes that profits that are not destined for profit reserves, in accordance with articles 193 to 197, must be distributed as dividends.

26.2 Participation in Results Not Referenced in Profit

Employee participation in profits or results is provided for in article 7, item XI, of the Constitution, and regulated by Law No. 10,101/00.

Although it is a complex subject, our objective is merely to issue an understanding regarding the accounting treatment of participations in profits or results, given the different accounting treatments adopted by some open companies.

It is the understanding of this CVM that the classification provided for in item VI, of article 187, of Law No. 6,404/76, applies only to statutory participations provided for in the corporations law and that have profit as the base and are determined in accordance with the provisions of said Law.

Therefore, any gratification to employees, even those designated as participation in profits or results, that does not fully observe the conditions provided for in the corporations law, must be classified as operating cost or expense, regardless of its denomination or calculation base.

26.3 Reserve for Profits to be Realized – Law No. 10,303/01

From the effective date of Law No. 10,303/01, the Reserve for Profits to be Realized came to be constituted by the amount of the mandatory dividend, calculated in accordance with the bylaws or art. 202, that exceeds the realized portion of the net profit of the fiscal year.

Thus, the amounts constituted from the effective date of Law No. 10,303/01 come to represent the deferred dividend itself and no longer its base in realization.

However, the previous balance constituted under the previous rule still has that characteristic, that is, upon its realization, it will constitute the calculation base for dividends.

Given this differentiated characteristic in the constitution of the reserve, it is worth alerting that there must be adequate segregation of the amounts that make up the balances of the Reserve for Profits to be Realized constituted before and after the effective date of Law No. 10,303/01.

Alternatively, the open company in this situation may uniformize those amounts, transforming the previous balance to adapt it to the new form of realization of the reserve.

Only the portion that will be paid as a dividend should be maintained in the Reserve for Profits to be Realized account, with the remaining balance reversed and destined in the form of article 19 of CVM Instruction No. 247/96 (capital increase, distribution of dividend and/or constitution of other profit reserves or absorption of fiscal year loss, meeting legal requirements).

26.4 Retention of Profits

Legally, shareholders have the right to receive, as mandatory dividend, at least the portion of profits established in the bylaws. This dividend, stipulated in the bylaws, must be the minimum remuneration due to the shareholder. Any remaining balance of undistributed profit must be mandatorily destined, in the form of the corporations law, with no indiscriminate retentions allowed, whether as a reserve or in the accumulated profits account.

The destinations made under the title of retention of profits must be justified by a capital budget approved by the general meeting, and their classification should be made, preferably, in a specific reserve account. However, their classification in the accumulated profits account is admitted, provided that their nature is evidenced and the provisions of art. 196 of the corporations law are observed.

We must also emphasize that CVM Instruction No. 323/00 defines as abusive exercise of controlling power the approval by the controlling shareholder of the constitution of a profit reserve that does not meet the prerequisites for such constitution, as well as the retention of profits without a budget, approved in a General Meeting, that justifies this retention.

26.5 Effect on the Calculation of Mandatory Dividends Resulting from the Accounting Treatment of Exchange Gains

Given the doubts raised by some open companies regarding the accounting treatment to be given to exchange gains with liabilities indexed in foreign currency and regarding their computation in the calculation base of the mandatory dividend, we present the clarifications below.

Item 4 of CVM Orientation Opinion No. 13, of July 6, 1987, provides regarding exchange variations:
"4. Guided by the fundamental principles of accounting, the Securities and Exchange Commission clarifies that the open company must observe the following procedures regarding exchange variations resulting from changes in the exchange rate:
a) variations resulting from the adjustment of credits and obligations in foreign currency, due to changes in the exchange rate, constitute revenue or expense and integrate the determination of the result in the fiscal year in which the exchange variations occur; b) when they refer to obligations linked to the financing of assets..."
However, a problem arises regarding the payment of dividends, relative to the portion of such gains included in the result of the fiscal year: in the case of exchange gains originating from the existence of long-term liability, their recognition may imply an immediate impact on cash flow, to meet that payment, generating financial problems for the company.
The understanding of CVM, in such cases, is that, although realized from an accounting point of view, this gain constitutes an unrealized result from a financial perspective. Thus, in the same way that the "profit on sale payable after the end of the following fiscal year" is treated (art. 197, sole paragraph, letter "c", of Law No. 6,404/76), the company may consider this gain as unrealized when eventually constituting a reserve for profit to be realized, within the limitations established in the caput of said article.
This understanding is supported by the very statement of reasons that forwarded the Bill for the Corporations Law, when dealing with reserves and retention of profits:
"The reserve for profits to be realized is regulated in the Bill so that the mandatory dividend can be fixed as a percentage of the fiscal year's profit without risk of creating financial problems for the company."
The reversal of the reserve, and its consequent computation in the calculation base of the mandatory dividend, will occur when there is a reversal of the expectations of exchange gains or at the maturity of each long-term contract, whichever occurs first, which gave rise to the aforementioned exchange gains.

26.6 Disclosure in explanatory note of shareholders' equity items and corporate matters

26.6.1 Treasury Shares

The acquisition of shares of its own issuance represents a return of invested capital and must be demonstrated as a deduction from a specific reserve account. The explanatory note must indicate:
a) the objective in acquiring its own shares; b) the quantity of shares acquired or alienated during the fiscal year, highlighting species and classes; c) the weighted average acquisition cost, as well as the minimum and maximum costs; d) the net result of the alienations occurring during the fiscal year; and e) the market value of the species and classes of treasury shares, calculated based on the last quotation, on the stock exchange or over-the-counter, prior to the date of closing of the fiscal year. (CVM INSTRUCTIONS NOS. 10/80 and 69/87 and CVM EXPLANATORY NOTE NO. 59/86)

26.6.2 Social Capital

The number, species, and classes of shares that make up the social capital must be disclosed, and, for each species and class, the respective quantity and, if any, the nominal value. The advantages and preferences conferred to the various classes of shares must also be disclosed, according to bylaw norms.
(LAW NO. 6,404/76, ARTICLE 176)

26.6.3 Authorized Capital

The company that possesses authorized capital must disclose this fact, in an explanatory note, specifying:
a) the limit of authorized increase, in capital value and in number of shares, and the species and classes that may be issued; b) the competent body to deliberate on the issuances (General Meeting or Board of Directors); c) the conditions to which the issuances are subject; d) the cases or conditions in which shareholders will have the right of preference for subscription, or the non-existence of this right; and e) share purchase option, if any, to administrators, employees, or natural persons who provide services to the company or society under its control. (LAW NO. 6,404/76. ARTICLE 168, §1º)

26.6.4 Destination of Profits Constant in Shareholder Agreements

The annual management report must contain information on the profit reinvestment and dividend distribution policy constant in shareholder agreements filed with the company.
(LAW NO. 6,404/76, ARTICLE 118)

26.6.5 Dividend per Share

The amount of dividend per share of the social capital, divided by species and class of shares, must be indicated in the Statement of Changes in Shareholders' Equity, observing the different advantages and the existence of treasury shares.
(LAW NO. 6,404/76, ARTICLE 186 AND CVM INSTRUCTION NO. 59/86)

26.6.6 Proposed Dividends

The demonstration of the calculation of dividends proposed by the administrators, the payment policy, and whether these will be paid corrected monetarily or not must be disclosed.
(CVM ORIENTATION OPINIONS NOS. 15/87 and 21/90)

26.6.7 Interest on Equity

In explanatory notes to the financial statements and to quarterly information (ITRs), the criteria used to determine these interests, the policies adopted for their distribution, the amount of income tax incident, and, when applicable, their effects on mandatory dividends must be informed.
(CVM RESOLUTION NO. 207/96)

26.6.8 Remuneration of Administrators

The amount of remuneration must be disclosed in the statement of result itself or in an explanatory note.
(CVM ORIENTATION OPINION NO. 04/79)

26.6.9 Reserves – Detailing

The company may evidence, in an explanatory note or in an analytical table, the subdivisions of the reserves, when their evidence in the Statement of Changes in Shareholders' Equity becomes too extensive for publication purposes.
(CVM INSTRUCTION NO. 59/86)

26.6.10 Reserves for Profits to be Realized

The calculation of the reserve must be demonstrated, evidencing the amount and nature of the values constituted, the realized amount, the parameters used, and the future effect on dividends.
(EXPLANATORY NOTE TO CVM INSTRUCTION NO. 59/86 AND CVM ORIENTATION OPINION NO. 24/92)

26.6.11 Retention of Profits

The retention of profits may present itself with various denominations, such as: reserve for expansion, for reinvestment, etc., and may still be included in the Accumulated Profits account. In any circumstance, its constitution, maintenance, and legal basis must be disclosed in an explanatory note, as well as the main lines of the capital budget that supports the retention. The justifications and the main lines of the respective capital budget must be explicit. Profits not destined, even if kept in accumulated profits, characterize as undue retention of profits. (LAW NO. 6,404/76, ARTICLE 196 AND EXPLANATORY NOTE TO CVM INSTRUCTION NO. 59/86)

26.6.12 Multiple Voting

The open company must disclose the minimum percentage of participation in the voting social capital for the shareholder to request the adoption of multiple voting in its general meeting, which will deal with the election of the members of the Board of Directors. This disclosure must be made mandatorily in the call notice for the meeting and, optionally, together with the financial statements closing the fiscal year. (CVM ORIENTATION OPINION NO. 24/92)

Special Topics

27.1 Consultations on Accounting Matter

As part of its duties, CVM maintains a service to exercise elucidative or orienting activity towards agents of the securities market or any investor.
Constituting an important communication channel, this service is widely used by those agents and especially by open companies regarding accounting matters.
CVM, through norms and standards, guides companies to disclose the minimum information, considered essential for the market, establishing qualitative and quantitative indicators.
It is up to the administrators of the companies, as responsible for their disclosure, to promote the continuous evaluation of additional information needs to the public, given their access and knowledge about the facts and their greater capacity to evaluate their relevance.
It is up to the independent auditor to apply a set of technical procedures whose objective is to issue an opinion on the adequacy with which the financial statements represent the patrimonial and financial position, the result of operations, the changes in shareholders' equity, and the sources and applications of resources of the audited entity. It is always important to remember that Accounting is a social science and, as such, is characterized as the language of business and markets and is embodied in concepts, definitions, methodologies, techniques, and practices that arise from the interaction and conflicts between groups. In this sense, there has been an increasing incidence of consultations regarding the change of a certain practice or accounting procedure. These consultations, often, bring to the knowledge of CVM the aspirations and demands of the market. This communication channel is considered of great importance in the process for the establishment of norms and accounting standards. However, it is equally important that all agents involved participate in this process. In this sense, the participation of the independent auditor is an essential condition for the broad debate of the issues under examination. Therefore, the guidance is in the sense that consultations, which deal with the change or adoption of new practices or accounting procedures, should be accompanied by the prior manifestation of the independent auditor regarding their position on the matter consulted.

27.2 – Other disclosures in explanatory note

27.2.1 Electrobrás Credits

The criterion used for the constitution of the provision for losses and the amounts involved, including the balances of loans not yet converted into shares, must be disclosed in an explanatory note.
(CVM RESOLUTION NO. 70/89)

27.2.2 Privatization Program

Open companies involved in privatization processes must disclose, together with their financial statements, all acts and relevant facts that are known to their administrators, whose revelation does not put at risk the legitimate interest of the company, due to the importance of the privatization process, especially regarding its effects for valuation and decision-making purposes by the user of the company's accounting information. The explanatory note must discriminate, when relevant, at least the following information:
a) operational mode of privatization (individual alienation or in block, if it has more than one participation subject to privatization, through auction, public offering, capital increase with waiver of subscription, alienation, lease or rental of assets and installations, transformation, merger, spin-off, dissolution, etc.); b) stage of the privatization process, including a brief history of relevant facts occurring during the period; c) book value of the investment subject to privatization and evaluation method, book value on the date of the financial/accounting information, market value, when applicable (last three average quotations up to the date of publication or submission of ITRs) and the value of the evaluation; d) amount of the provision for depreciation or permanent loss, and respective basis, or clarification of the reasons that determined the non-provisioning; e) precise information regarding transactions with related parties, in the form of CVM RESOLUTION NO. 26/86, with emphasis on active and passive balances, revenues and expenses resulting from transactions carried out with companies subject to privatization; f) amount of resources to be used in the settlement of debts with the public sector, value of the eventual balance to be applied in the acquisition of long-term federal public debt securities and conditions under which the applications will be made, if already known at the time of disclosure of the quarterly information or financial statements; and g) judicial and labor disputes, including with the employees' pension fund, and the amounts involved. (CVM ORIENTATION OPINION NO. 24/92)

27.2.3 Real Estate Fund

The following information must be the object of disclosure in an explanatory note:
a) analytical information on the position of real estate investments, on the date of closing of the period, detailing each undertaking, with address, total/built area square footage, stage in which it is, its characteristics, net value applied and market value, as specified in item "c" of item III of article 17 of CVM INSTRUCTION NO. 205, as well as its movement during the period; b) market value of other assets; c) information on expenses with the Fund's administration fee and with Investment Consultant, their percentages relative to the average semi-annual shareholders' equity and accounting appropriation made, identifying any portion incorporated into the asset; and d) explanation of the calculation of the distribution of results to the unitholders. The values regarding the commercialization of business points in "shopping malls" and similar ("res

sperata") shall be recognized as revenue over the periods of their respective initial lease contracts, and their accounting as an asset of any nature before the period of their recognition in revenue is not permitted. In explanatory notes to the financial statements, the institution administering the Real Estate Investment Fund shall inform the average period of appropriation of this revenue. (INSTRUCTION CVM NO. 206/94)

27.2.4 Incorporation, Merger, and Spin-off
The company shall perform and disclose, at the end of each fiscal year, an analysis on the recovery of the value of goodwill, when the economic basis was the acquisition of the right to explore, concession, or permission delegated by the Public Power or the expectation of future results, in order to:
a) record losses in the value of the applied capital when it is evident that there will not be sufficient results to recover this value; or b) revise and adjust the criteria used to determine its economic useful life and for the calculation and term of its amortization.
(INSTRUCTION CVM NO. 319/99)

27.2.5 Profit or Loss per Share
The company must disclose in the statement of results of the fiscal year the net profit/loss per share of the social capital.
(LAW NO. 6.404/76, ARTICLE 187)

27.2.6 – Insurance
It must be informed whether there are responsibilities or interests covered and on which assets.
(CVM GUIDANCE OPINION NO. 15/87)

Audit

28.1 Importance and Role of Independent Auditors
Within the scope of the securities market – MVM, within the measures adopted for its strengthening as a source of stimulus and financing for the growth and development of the country's economic and productive activity, this Securities and Exchange Commission (CVM), in recent years, has been fulfilling its legal competence through the improvement of the regulatory framework and the effective monitoring of the performance of participants in said market. In this context, the development of the MVM requires an adequate system for the disclosure of economic-financial information by open companies, with the aim of providing liquidity and efficiency to that market, considering the principles of transparency and complete disclosure (full disclosure) of information that has or may have influence on the investment decisions of investors. Thus, such information disclosed by open companies must by law be audited by qualified professionals who, although hired by them, must adopt an independent and impartial stance in the provision of their services, to the extent that the final product of their work has repercussions not only before the audited entity, but mainly with the external public (minority shareholders, potential investors, creditors, regulatory bodies, self-regulatory entities – stock exchanges, investment analysts, rating agencies). Recognizing that such professionals, called independent auditors, play a fundamental role in this entire process, the regulation of the independent audit activity in the MVM is based on the following premises:
the importance of an independent audit system as an indispensable support for the activities developed by the regulatory body; the figure of the independent auditor as an essential element for the credibility of the market and as an instrument of inestimable value in the protection of investors, to the extent that their function is to ensure the fidelity and reliability of the audited entity's financial statements; the accuracy and clarity of the financial statements, including the disclosure in explanatory notes of information indispensable to the visualization of the patrimonial and financial situation and the results of the audited entity, depend on an effective audit system and, fundamentally, on the auditor's awareness of their true role within this context; and the need for the market to have highly qualified independent auditors who, at the same time, enjoy a high degree of independence in the exercise of their activity. Given the importance of independent auditors for market credibility, the CVM embodied in Instruction No. 308/99 all requirements for the registration and operation of these professionals in the securities market. The requirements contained in the aforementioned instruction, complemented by the professional standards emanating from the representative bodies of the accounting class (Federal Council of Accounting – CFC and the Institute of Independent Auditors of Brazil – IBRACON), are based on two attributes that, essentially, reflect the expectations that the investing public and regulatory bodies have regarding independent auditors: technical-professional competence and independence in the relationship with the audited entity. In this sense, the innovations contained in CVM Instruction No. 308/99 aim to promote the level of technical-professional competence of auditors operating in the MVM, through the mandatory implementation of a quality internal control system, periodically reviewed by a peer, within the process of external quality control review (peer review), as well as the maintenance of a continuing education program for all accountants in the technical staff of the audit firm and for the independent auditor as an individual. For professionals wishing to operate in the MVM, a technical qualification exam was also instituted to assess their knowledge of professional standards and corporate legislation, as a sine qua non condition for obtaining registration with this CVM. It should be noted that the requirements contained in CVM standards prompted the elaboration of a set of professional standards by the representative bodies of the accounting class and independent auditors, which, in a spirit of cooperation, helped to promote and implement a new culture, assisting the regulatory body and the entities of the self-regulation system. Thus, the programs are conducted directly by permanent committees integrated by representatives of the Federal Council of Accounting – CFC and the Institute of Independent Auditors of
Brazil – IBRACON, with their activities monitored by the technical area of this CVM. The CVM hopes to continue counting on the support of the aforementioned class entities, aiming, in the near future, for the transition from a model of direct state regulation to a model of professional self-regulation, in which the class bodies would be primarily responsible for the registration and supervision of the independent audit activity, with the CVM responsible for verifying the efficiency of the model and any interventions, while this model is not fully operational or if it proves inadequate. Along these lines, the CFC/CRCs system is implementing the creation of the National Register of Independent Auditors, with the support of this CVM, being a first step towards the greater objective of promoting the self-regulation system. Furthermore, regarding the attribute of independence of auditors in relation to audited entities, the CVM understands that in the view of the external public, the auditor must be independent in fact and in appearance, so that the objectivity and skepticism that the audit professional must have in the execution of their work are not called into question. Therefore, within the MVM, consulting services and any other service that might generate a conflict of interest, concomitantly with audit services for the same client, were prohibited, according to the list established in article 23 of CVM Instruction No. 308/99 (currently suspended application of this provision by virtue of a judicial decision). Moreover, still within the spirit of preserving the independence of auditors in relation to audited entities, the rotation rule instituted in article 31 of CVM Instruction No. 308/99 is pertinent, to the extent that the prolonged relationship between the auditor and the client, in the view of the external public, reduces the perception of independence of such professional, potentially compromising the quality of the service provided and diminishing investor confidence. Therefore, the mechanisms introduced in CVM Instruction No. 308/99 primarily aim to contribute to the operation in the market of audit professionals of high technical standards and who, at the same time, preserve the requirements of competence and ethics required of these professionals.

28.2 Rotation of Independent Auditors
Article 31 of CVM Instruction No. 308 establishes that the independent auditor, whether an individual or a legal entity, cannot provide services to the same client for a period exceeding five consecutive years, counted from the date of this Instruction, requiring a minimum interval of three years for their re-hiring.
In this sense, it should be observed that the five-year period established is counted from the date of publication of the Instruction, which occurred on 05/19/1999, not reaching past time. Thus, open companies and other entities registered with this CVM must observe the counting of the 5 (five) year period for the replacement of their independent auditors, with the date of 05/19/2004 being the deadline for the 1st rotation of auditors. For open companies and other entities registered with this CVM that hired their independent auditors on a date subsequent to 05/19/1999, in light of the understanding of article 31 of CVM Instruction No. 308, the deadline for the application of the rotation rule will be the date of the 5th anniversary of the hiring of said auditors. However, nothing prevents the audited entity from replacing its independent auditor(s) in a period shorter than five years; however, in case of re-hiring, the minimum interval of three years must be observed. For the full compliance with the principle contained in the rule of rotation of independent auditors, under certain circumstances, the simple change of audit firm is not sufficient. Considering that this rule was established to prevent the prolonged relationship between the auditor and the audited entity from diminishing independence and objectivity in the execution of work, when changing independent auditors, at least the professionals who worked in the previous audit firm and participated in the work at the audited entity for 5 (five) or more years, in the event of being hired by the substitute audit firm, must, to preserve the essence of the rule, observe a cooling-off period of 3 (three) years to return to audit work at said audited entity. Finally, it becomes opportune to remind that both the open company and the independent auditor, upon the change of auditor, must observe the provisions that determine the disclosure of these changes and the reasons why they occurred.

28.3 Conflict of Interest
For the perfect exercise of the independent audit activity, the professional must, essentially, be free from interests linked to the audited entity, not allowing such interests to condition their performance in the execution of work and, consequently, in the issuance of audit reports and opinions.
In harmony with this premise, the CVM considers that there are 3 essential prerequisites for the operation of independent auditors in the securities market:
1st) the market must have highly qualified auditors; 2nd) at the same time, these auditors must enjoy a high degree of independence, and 3rd) the need for the auditor to be aware that their primary responsibility is with the external public, users of the audited financial statements.
Independence is a fundamental issue, and the most relevant aspect is not the fact that the auditor is independent or maintains their attitude of independence in relation to their client, but rather, and this is the crucial point, if they, in addition, appear to have independence. To the extent that the auditor's independence is put on trial by society, the information they audit tends to undergo the same process. For this reason, the CVM understands that the provision of other services to the audited entity may constitute a decrease in the degree of independence of the auditor and generate situations of conflict of interest. Articles 22 and 23 of CVM Instruction No. 308/99 define the hypotheses of impediment and incompatibility for the independent auditor to provide other services, in addition to external audit services, to the audited entity.
Article 22 states that "independent audit may not be performed by the Independent Auditor – Individual, the partners, and the other members of the technical staff of Independent Auditor – Legal Entity when it is configured, in their performance at the audited entity, its subsidiaries, holding companies, or members of the same economic group, the infringement of the norms of the Federal Council of Accounting – CFC regarding independence." Article 23 lists the services whose provision jointly with external audit services is prohibited to the independent auditor and to the individuals and legal entities linked to them.
On the other hand, articles 19 and 20 establish that the independent auditor must comply with the specific norms of the CVM and observe, furthermore, the norms emanating from the Federal Council of Accounting – CFC and the technical pronouncements of the Brazilian Institute of Independent Auditors – IBRACON, considering that there is no conflict with a specific CVM norm, with respect to professional conduct, the exercise of the activity, and the issuance of opinions and audit reports. In this sense, CFC Resolution No. 961/03, a professional standard that deals with the independence of the independent auditor regarding the relationship with the audited entity, expanded the list of situations and provision of services listed in the aforementioned article 23 of CVM Instruction No. 308/99 that potentially generate conflicts of interest, namely:
I. employment or similar links by administrators, executives, or employees of the audited entity previously maintained with the audit entity;
II. members of the audit entity who, previously, were administrators, executives, or employees of the audited entity;
III. bookkeeping services;
IV. internal audit services to the audited entity;
V. consulting services for computerized information systems;
VI. support services in litigation, judicial or extrajudicial expertise;
VII. corporate finance and similar services; and
VIII. executive selection services.
However, said CFC Resolution No. 961/03 establishes that in situations regarding the provision of other services to the audited entity, the independent auditor must observe certain parameters that, according to the nature of these services, may or may not be provided in addition to external audit services. For example, the aforementioned professional standard allows the independent auditor to provide tax planning services to the audited entity, provided that the independent auditor elaborates it on strictly scientific bases, that the planning is legally supported, backed by suitable documentation, and that the fees do not include a variable portion proportional to the benefit obtained by the audited entity. However, the sole paragraph of article 23 of CVM Instruction No. 308/99 prohibits the provision of consulting services regarding tax planning to the audited entity. Furthermore, according to item VII of the aforementioned sole paragraph of article 23 of CVM Instruction 308/99, the provision of any other product or service that influences or may influence the decisions taken by the administration of the audited institution is prohibited. In light of the above, within the scope of the securities market, independent auditors, regarding situations related to conflicts of interest, and administrators of audited entities must primarily observe the norms emanating from the CVM, complemented by CFC norms in points where these are more comprehensive. Notwithstanding, it must be clarified to the market that: (i) arts. 23 and 24 of CVM Instruction No. 308/99 had their efficacy suspended regarding audit companies affiliated with the Union of Accounting Service Companies of the State of São Paulo (SESCONSP), due to a judicial decision issued in a writ of mandamus (process No. 1999.61.00.0373056, pending before the 1st Federal Court of São Paulo), as well as regarding the company in the Writ of Mandamus filed by it (process No. 1999.61.00.0299646, pending before the 9th Federal Court of São Paulo); (ii) The CVM filed the appropriate appeals in both processes before the Regional Federal Court of the 3rd Region, which are pending judgment; (iii) In light of this, auditors registered with this autarchy are relieved from observing the provisions of said articles 23 and 24. However, CVM Instructions No. 381/03 and 386/03 determine that open companies and administrators of investment funds disclose information regarding the provision of any service by the Auditor that is not external audit, as addressed in item 28.4 below.

28.4 Disclosure of Non-Audit Services
Open companies and other issuers of securities must disclose in their financial statements closed from 12/31/2003 onwards, information regarding the provision, by their independent auditor or persons linked to them, of any other service that is not external audit, as determined by CVM Instruction No. 381/03.
According to the Instruction, companies must disclose in the Administrators' Report the following information about these other services:
the date of hiring, the duration term, if greater than one year, and the indication of the nature of each service provided; the total value of contracted fees and its percentage in relation to fees related to external audit services; the policy or procedures adopted by the company to avoid the existence of conflict of interest, loss of independence or objectivity of its independent auditors. summary of the reasons why, in their understanding, the provision of other services does not affect the independence and objectivity necessary for the performance of external audit services. In case of alteration, in the fiscal year, due to new hiring, cancellation, or modification of contracts, this information must be updated in the Quarterly Information – ITR's). The audited entity may refrain from disclosing this information, if the remuneration paid for other services is not relevant (less than 5% of the remuneration for external audit services); however, it is recommended that only the information be disclosed if the independent auditors provided or did not provide other services, in addition to external audit services, to the audited entity. It is also emphasized that the independent auditor must declare to the audited entity the reasons why, in their understanding, the provision of another service, which is not external audit, does not affect their independence and objectivity. A summary of this disclosure must also be disclosed by the audited entity in its annual reports. Finally, according to CVM Instruction No. 386/03, administrators of financial investment funds, funds for application in quotas of financial investment funds, and funds for investment abroad must disclose in explanatory notes to the financial statements of said funds, the information required by CVM Instruction No. 381/03.

28.5 Relationship with the Independent Auditor and the Responsibility of Administrators
CVM Instruction No. 308/99, in its articles 26 to 29, establishes duties and responsibilities of administrators and fiscal council members in their relationship with independent auditors.
Consequently, it must be emphasized that the care for independence is not the exclusive task of the auditor. In this aspect, article 27 combined with article 29 of CVM Instruction No. 308/99 establishes that the administrators of the audited entities, as well as the respective members of the Fiscal Council, will be held responsible for hiring independent auditors who do not meet the conditions provided in the cited norm, especially regarding their independence (existence of conflict of interest) and the regularity of their registration with this Securities and Exchange Commission. Among these responsibilities, article 28 determines that the administration of the audited entity must communicate to the CVM, within 20 days of the occurrence, the change of auditor, in which the consent of the replaced auditor must necessarily appear. Said article also disciplines the hypotheses of lack of communication by the audited entity and by the auditor, as well as the disagreement of the latter with the justifications presented by the audited entity.

It should be noted that the automatic update of registration data by the public company or even the change of independent auditors due to compliance with the rotation rule does not eliminate the need to send the communication required in Article 28 of Instruction No. 308/99, resulting, in case of non-compliance, in the application of a daily coercive fine, without prejudice to other applicable sanctions.

28.6 Examination of technical qualification and national register of auditors

Deliberation CVM No. 466, of December 26, 2003, endorsed Resolution CFC No. 989/03, regarding the approval of NBC P 5 – Standard on Examination of Technical Qualification, establishing that from January 1, 2004 and until the first examination, for purposes of registration as an Independent Auditor – Individual and registration as Technical Responsible for Independent Auditor – Legal Entity, interested parties, provided that the other provisions of CVM Instruction No. 308/99 are met, would obtain provisional registration, with the granting of definitive registration remaining conditional upon subsequent presentation of the approval certificate in the Technical Qualification Examination.

We emphasize that registrations of Independent Auditor – Individual and registration as Technical Responsible for Independent Auditor – Legal Entity granted until December 31, 2003 were exempt from presenting the approval certificate in the Technical Qualification Examination.

Resolution CFC No. 1002/05 of July 23, 2004, which revoked Resolution CFC No. 989/03, established the criteria for carrying out the technical qualification examination, as well as its form and content.

Subsequently, CFC/CAE Notice No. 1/2004, of August 20, 2004, specified the procedures for the first technical qualification examination, which took place on November 26, 2004.

Thus, from then on, each new request for registration as an Independent Auditor – Individual, Independent Auditor – Legal Entity, and registration as Technical Responsible for Independent Auditor – Legal Entity, in addition to the other documents necessary for its validation, the interested party must present the approval certificate in the technical qualification examination.

Still in Resolution CFC No. 1002/05, the Federal Council of Accounting instituted the National Register of Independent Auditors (CNAI), establishing that approval in the technical qualification examination is a prior condition for enrollment in said register, with a view to acting in the securities market. This initiative of the Federal Council of Accounting is in line with the objectives of this CVM, commented on earlier in this circular letter, in the sense of promoting the supervision and monitoring of the independent audit activity, primarily by the representative entities of the class, within the self-regulation model.

28.7 Annual information

In compliance with Article 16 of CVM Instruction No. 308/99, independent auditors registered with this CVM (individuals or legal entities) must send the annual information (Annex VI), competence 2004, to the CVM by the last business day of April (deadline of April 29, 2005), emphasizing that late submission will result in the application of a daily coercive fine, according to Article 18 of the aforementioned Instruction.

It is worth remembering that independent auditors have the option to send their annual information via the internet, considering two alternatives: a) presentation by filling out the "web" form (for auditors whose information is reduced) and b) presentation in a standard XML file (for auditors with a large volume of information).

For sending annual information electronically, independent auditors, on the CVM page (www.cvm.gov.br), must proceed as follows: "Document Submission", enter CPF and password, "Document Submission via Form" or "Document Upload (XML file)" and follow the instructions on the screen.

28.8 External quality control – peer review

Article 33 of CVM Instruction No. 308/99 determined that independent auditors must have their internal quality controls reviewed by their peers, according to the guidelines issued by the Federal Council of Accounting – CFC and the Brazilian Institute of Independent Auditors – IBRACON.

Thus, Resolution CFC No. 1008/04, of October 8, 2004, consolidated the rules on external quality control review.

It is emphasized that notwithstanding the educational and preventive nature of the 1st external quality review, aiming at the continuous improvement of audit procedures applicable in the execution of work and compliance with professional audit standards, non-observance of the provisions contained in Resolution CFC No. 1008/04 constitutes a disciplinary offense subject to the penalties provided for in letters "c", "d", and "e" of Article 27 of Decree-Law 9295/46 and, when applicable, the Professional Ethics Code for Accountants (CEPC), in addition to resulting in non-compliance with Article 20 of CVM Instruction No. 308/99, being subject to the application of the penalties provided for in Article 35 of the aforementioned Instruction.

Within the spirit that External Quality Review is considered an essential element in the search for the improvement of independent audit services, the Federal Council of Accounting CFC through Resolution 1008/04, improving and perfecting the mechanisms of the review process, in item 14.2.4.2 resolved that those who fall under the items transcribed below cannot act as reviewing auditors:

"... a) whose registration is suspended or cancelled by the Securities and Exchange Commission (CVM); b) when the last Review Report was issued with an "Adverse Opinion" or "Disclaimer of Opinion" or was not approved by the CRE; c) when they have not complied with the deadlines set by the CRE in the previous review; d) who have not previously been submitted to External Quality Review; e) when, in the opinion of the CRE, the qualification contained in the last Review Report is of a serious nature, and the audited auditor must be previously informed of this condition; and f) when, in the unanimous opinion of the CRE members, the reviewer cannot be accepted, and the reviewing auditor must be previously informed of this condition."

28.9 Continuing professional education program

Accountants who work in the activity of independent audit have the need and the ethical-professional duty to keep themselves updated regarding the legal and professional standards of their activity, in addition to seeking constant updates regarding the standards that the entities they audit must observe (corporate legislation, tax legislation, and specific standards of the respective sector).

Thus, Article 34 of CVM Instruction No. 308/99 determines that independent auditors who operate in the MVM must maintain a continuing professional education program for all their staff, according to the guidelines approved by the Federal Council of Accounting – CFC and the Institute of Independent Auditors of Brazil – IBRACON, with a view to guaranteeing the quality and full compliance with the standards governing the exercise of the activity of auditing financial statements.

Resolutions CFC Nos. 995/04 and 1014/04 deal with the implementation and implementation of the continuing professional education program, which must be observed by Independent Auditors – Individual and by all accountants integrated into the technical staff of Independent Auditors – Legal Entity, duly registered with this CVM and enrolled in the newly created National Register of Independent Auditors (CNAI). The activities valid for purposes of compliance with the continuing professional education program are described in Annex I of Resolution CFC 995/04. Annex II refers to the guidelines for registration of training entities (responsible for events recognized by CFC/CRCs for calculating points/hours of participation of auditors) and Annex III refers to the model of the "activity report" which annually, until January 31 of the year following the base calendar year of the program, must be sent to the Regional Council of Accounting of the jurisdiction of the respective independent auditor.

The standard provides that independent auditors must, from 2005 onwards, comply with a minimum of 32 hours/points, according to the criteria and procedures defined in the resolutions mentioned in the previous paragraph.

28.10 Audit of Subsidiaries

The main aspect to be highlighted is the obligation to be audited, by an independent auditor registered with the CVM, all subsidiaries included in the consolidation. In this sense, it would be ideal for this examination to be carried out by the same auditor of the controlling company; when this is not possible, whether by decision of the administration or by compliance with the rotation rule, it is essential that the auditor of the subsidiary makes their working papers available to the auditor of the controlling company (sole paragraph, Article 35 of CVM Instruction No. 247/96).

The problems pointed out by the market refer to subsidiaries located abroad and the difficulty of meeting the requirement of examination by an auditor registered with the CVM, as well as the issue of difficulty in accessing working papers if it is not the same audit in Brazil as abroad.

In these cases, the auditor of the controlling company, in Brazil, must guide their analysis and verification to the extent necessary and sufficient to be able to certify and issue the opinion on the financial statements of the controlling company and on the consolidated financial statements without any restriction to any group of accounts (in particular, to the "Investments" asset). The public company obliged to prepare and disclose consolidated financial statements must provide its independent auditor with all conditions so that there are no limitations in the scope of their work.

28.11 Audit in Merger, Consolidation, and Spin-off Operations

Article 12 of CVM Instruction No. 319 establishes the obligation of independent audit of the financial statements that serve as the basis for operations of merger, consolidation, or spin-off, involving a public company. This instruction does not obligate the audit of the set of financial statements normally required by corporate law and CVM standards. Given some doubts that have arisen in the market, we must clarify that, as the text itself mentions, only the statements prepared to effectuate this type of operation (basically the balance sheet and the statement of results of the period) must be subject to audit.

28.12 Audit of Transactions with Related Parties

An important item that has been worrying the CVM concerns the disclosure of information regarding transactions carried out with related parties, as required by CVM Deliberation No. 26/86. This is fundamental information, especially for non-controlling shareholders, insofar as the effects of these transactions can significantly impact current and future results, coming to influence the decision-making of those shareholders and investors in general.

The Federal Council of Accounting, which approved NBCT11, determines that the auditor must examine relevant transactions with related parties, applying the necessary procedures to obtain information about the purpose, nature, and extent of the transactions, with special attention to those that seem abnormal. Therefore, the auditor must verify if these transactions are properly disclosed and, in case of negative, mention it in their audit opinion.

NBCT11 – IT 10, approved by the Federal Council of Accounting through Resolution CFC No. 974/03, determines that the auditor must execute sufficient audit procedures to obtain evidence that transactions, balances, and information related to related parties were adequately identified and disclosed by the management of the entity in the financial statements subject to examination, and must also verify the purpose, nature, and extent of these transactions, with special attention to those that seem abnormal. In the event that management does not disclose or proceeds with incomplete disclosure of transactions with related parties, it will be up to the auditor to report such fact in their opinion.

Notwithstanding the aspects related to disclosure, given the provisions of Articles 115, 116, 117, 145, 153 to 165 of Law No. 6.404/76 and CVM Instruction 323/2000, the independent auditor must observe whether the formalization, execution, and adequate description of the circumstances established in those documents meet the concept of equal or market conditions and, if necessary, communicate the fact to the CVM, as provided in Article 25 of CVM Instruction No. 308/1999.

At this point, the action of the independent auditor is important in the sense of verifying the existence, and consequently, taking care of its adequate revelation, of contractual instruments or other document signed that disciplines operations with related parties.

28.13 Distribution of Results

Art. 25, of CVM Instruction No. 308/99, determines that the independent auditor must verify if the destination of the result of the audited company is in accordance with the provisions of corporate law, the standards issued by the CVM, and with the company's bylaws.

Upon finding any irregularity, the auditor must communicate the fact to the CVM, within 20 (twenty) days, from its occurrence. The failure to communicate the fact to the CVM constitutes an offense of an objective nature, subject to the initiation of an administrative process of Summary Procedure, as provided in Art. 38 of the same Instruction.

29 Annex Consolidation of Explanatory Notes

29.1 Objectives and aspects of Explanatory Notes (1.7)

Disclosure is one of the basic objectives of Accounting in the Capital Market, so as to guarantee all types of users complete and reliable information about the financial situation and results of the company. The explanatory notes that integrate the financial statements must present quantitative and qualitative information in an ordered and clear manner so that the capacity to communicate relevant aspects of the content presented in the statements is exhausted.

The international standard (paragraph 91 of IAS 1, revised in 1997) established the following objectives for the explanatory notes:
a) present information about the criteria that support the preparation of financial statements and specific accounting policies, selected and applied for significant transactions and events; b) disclose information required by International Accounting Standards that is not presented anywhere else in the financial statements; c) provide additional information that is not presented in the statements themselves, but that is considered necessary for a fair presentation.

The publication of Explanatory Notes to Financial Statements is provided for in § 4 of Article 176 of Law No. 6.404/76, which establishes that "the statements will be complemented by Explanatory Notes and other analytical tables or financial statements necessary to clarify the financial situation and results of the fiscal year". In this law, the explanatory notes must discriminate, with clarity and objectivity, the clarifications necessary for the correct understanding of the content of the financial statements, based on the items provided in § 5 of Article 176 of the corporate law. This implies that the explanatory notes do not deal with the exception of some accounting procedure in the statements but rather clarify a set of integrated information, that is, the disclosure of accounting practices used. They should not be used to rectify, as they indeed do not rectify, the application of inadequate accounting practices. Explanatory notes are also descriptions or details of amounts related to the items that make up the financial statements: the balance sheet, the statement of results, the statement of sources and applications of resources, and the changes in equity.

Explanatory notes should avoid obviousness as well as elaborate wording; their main objective is to highlight to the reader of financial statements: a) which alternative was chosen for an accounting treatment when there is more than one accepted, or b) expand information that is not feasible in the body of the documents that constitute the set of financial statements. Especially (but not only) all potential or contingent liabilities, possible or probable, reflected or not in the financial statements will be highlighted in notes or in demonstrative tables. The demonstrative tables should be used to discriminate relevant investments, leasing, guarantees, loans and financing, and other information where the quantitative aspect predominates.

In this direction, NBC T 6.2, approved by Resolution CFC No. 737/92, cites in item 6.2.3 the following "aspects to observe in the preparation of explanatory notes":
a) the information must encompass the factors of integrity, authenticity, accuracy, sincerity, and relevance; b) the texts must be simple, objective, clear, and concise; c) the subjects must be ordered obeying the order observed in the financial statements, both for the groupings and for the accounts that compose them; d) related subjects must be grouped according to their common attributes; e) the data must allow comparisons with those of previous period dates; f) references to laws, decrees, regulations, Brazilian accounting standards, and other normative acts must be grounded and restricted to cases where such citations contribute to the understanding of the subject treated in the explanatory note.

Generic notes should be avoided because they render a disservice to competent information and are harmful to analysis, such as, for example, "... rates permitted by legislation..." or, in a redundant way, "... prepared in accordance with the law...", or even, "... in accordance with corporate, tax legislation, and specific standards of the regulatory bodies of the matter...".

29.1.1 Disclosure in explanatory note of the Presentation of Financial Statements (1.7.1)

29.1.1.1 Structure of disclosure in explanatory note (1.7.1.1)

Explanatory notes are normally presented in the following order, which helps users in understanding the financial statements and in comparison with those of other entities:
a. operational context; b. declaration regarding the basis of preparation of the financial statements;
c. mention of the bases for valuation of assets and liabilities and accounting practices applied;
d. additional information for items presented in the financial statements, disclosed in the same order. e. other disclosures, including:
i. contingencies and other disclosures of a financial nature; and
ii. non-financial disclosures, such as the entity's financial risks, the corresponding policies and objectives of the administration, which do not confuse with the information to be disclosed in the management report, including, but not limited to, exchange rate or market protection policies, hedge, etc.

In some circumstances, it may be necessary or desirable to modify the sequence of specific items within the explanatory notes. For example, information about interest rates and fair value adjustments can be combined with information about the maturity of financial instruments, although the former are disclosures of the statement of results and the latter refer to the balance sheet. Nevertheless, a systematic structure for the explanatory notes must be maintained whenever practicable.

29.1.1.2 Note on operations (1.7.1.2)

29.1.1.3 Valuation Criteria (1.7.1.3)

The main valuation criteria of the patrimonial elements, especially inventories, depreciation, amortization, and depletion calculations, establishment of provisions for charges or risks, and adjustments to meet probable losses in the realization of asset elements, must be disclosed.

(LAW NO. 6.404/76, ARTICLE 176)

operations. This note must also disclose the accounting criteria for transactions typical of the industry, insofar as these criteria are specific and may vary from one type of industry to another.

In this regard, international standards provide (paragraph 99 of IAS 1, revised in 1997):
"When deciding whether an accounting policy should be reported, management should consider whether disclosure would help users understand the manner in which transactions and events are presented in the performance and financial position disclosed. Accounting policies that a company might consider include, but are not limited to:
a) revenue recognition; b) consolidation principles, including wholly-owned subsidiaries and associates; c) business combinations; d) joint control; e) recognition, depreciation or amortization of tangible and intangible assets; f) capitalization of borrowing costs and other expenses; g) construction contracts; h) investment property; i) financial instruments and investments; j) finance leases; k) research and development costs; l) inventories; m) taxes, including deferred taxes; n) provisions; o) employee benefits costs; p) foreign currency translation and hedging; q) definition of businesses and geographic segments and the criterion for cost allocation between segments; r) definition of cash and cash equivalents; s) recognition of the effects of inflation, and t) government grants.

29.1.1.4 Normal Business Continuity (1.7.1.4)

When a situation of imminent risk of total or partial suspension of the company's business is identified, the explanatory note must provide further details regarding the plans and possibilities of its recovery or non-recovery.

(CVM GUIDANCE OPINION NO. 21/90)

In this regard, the international pronouncement IAS-1 states in paragraphs 23 and 24:
"23. When preparing financial statements, management must assess the entity's ability to continue as a going concern and that it will continue to operate in the foreseeable future. Financial statements must be prepared on the assumption of continuity of operations, unless management intends to liquidate the entity, or cease its operations, or has no other realistic alternative but to do so. When management, in making its assessment, becomes aware of significant uncertainties related to events or conditions that may cast significant doubt on the entity's ability to continue as a going concern, these uncertainties must be disclosed. When financial statements are not prepared on the going concern assumption, this fact must be disclosed along with the criteria by which the financial statements are prepared and the reason why the entity is not considered a going concern.
24. In assessing whether the going concern assumption is appropriate, management takes into account all available information for the foreseeable future, which must be at least, but not limited to, twelve months from the balance sheet date. The degree of consideration depends on the facts, case by case. When an entity has a history of profitable operations and ready access to financial resources, it may be concluded, without detailed analysis, that the entity's going concern accounting criterion is appropriate. In other cases, management may need to consider a wide variety of factors surrounding annual profitability and expected profitability, debt payment schedules, and potential sources of replacement financing before being satisfied that the going concern criterion is appropriate."

29.1.1.5 Differences between national and international accounting procedures (1.7.1.5)

Considering the international reach achieved by the IASB (IFRS/IAS) and the commitment and effort of regulatory bodies and standard setters to seek convergence with them, it is recommended that public companies disclose in an explanatory note the reconciliation of differences between the accounting practices adopted in Brazil and international accounting practices. However, there is no impediment to preparing it with respect to the accounting standards of other countries in which the public company must disclose to the market its financial statements, due to obtaining registration for the trading of its issued securities.

When deciding on the disclosure of the reconciliation, the entity's management must observe how equivalent these practices are. Financial statements prepared according to a certain accounting practice may be considered equivalent to those prepared according to the accounting practices adopted in Brazil when both analyses, of both sets of statements, allow investors to make similar decisions regarding investment or divestment of previously held investments. If the accounting practices of both sets are equivalent and, therefore, do not indicate a lack of similarity in investor decisions, there will be no need to include an explanatory note, reconciliation, or reclassification of figures. The issue then arises if the principles and/or practices are not equivalent and, therefore, indicate a lack of similarity in investor decisions.

In the latter case, the presentation of the reconciliation of differences between the accounting practices adopted in Brazil and other accounting practices must be quantitative and qualitative. Thus, the disclosure of the reconciliation requires the preparation and disclosure, at a minimum, of the following information:
a) reconciliation between the net profits (losses) of the period and/or fiscal year; b) reconciliation between the net equity at the balance sheet date; c) explanation of the nature of the main reconciliation items.

In certain cases, it is possible that the divergences are of such magnitude that only the preparation of new financial statements according to another set of accounting principles other than those prevailing in Brazil is the solution. In other cases, there may be some instances of partial equivalence that can be resolved or remedied, depending on the nature of the divergences. These divergences may include additional disclosures, reconciliations, etc. This judgment must be made by management and approved by the company's independent auditors, and must be supported by procedures accepted by regulatory bodies and accounting standard setters.

29.2 Disclosure in explanatory note of Provision for Doubtful Debts (2.2)

The criteria adopted for the establishment of the provision for doubtful credit collection must be disclosed, as well as any changes in the criterion or in the manner of its application, occurring during the fiscal year.

(CVM GUIDANCE OPINION NO. 21/90)

29.3 Disclosure in explanatory note of Inventories (3.2)

29.3.1 Disclosure in explanatory note of inventories (3.2.1)

Whenever there is a significant change in inventory levels, this fact must be clarified in an explanatory note.

Public companies that, with CVM authorization, are in the phase of implementing a cost accounting system, must clarify this fact in an explanatory note, subject, regarding the effects, to the applicable restrictions that may be pointed out by the independent audit.

(CVM OFFICIAL CIRCULAR/PTE NO. 309/86 and CVM GUIDANCE OPINION NO. 27/94)

29.3.2 Idle Capacity (3.2.2)

Information must be provided to inform of the dimension of the fact, such as: the existence, expectation of change, and accounting treatment related to idle capacity (CVM GUIDANCE OPINION NO. 24/92).

In this regard, paragraph 11 of the international pronouncement IAS-2 states: "The allocation of fixed production overheads to costs of conversion is based on the normal capacity of production. Normal capacity is the production expected to be achieved, on average, over a number of periods or seasons under normal circumstances, taking into account the reduction in capacity resulting from planned maintenance. The actual level of production may be used if it is close to normal capacity. The amount of fixed overheads allocated to each unit of production does not increase as a consequence of low production or factory idleness. Unallocated overheads are treated as expenses in the period in which they are incurred. (...)"

29.4 Disclosure of explanatory notes to cash flow statements (4.2)

IAS 7 and SFAS 95 require disclosures in explanatory notes on certain topics of the cash flow statement:

topic SFAS 95 IAS 7
Cash and cash equivalents components Requires disclosure of the criteria the company uses in considering investments classified as cash equivalents. Requires disclosure of the components the company is considering as cash and cash equivalents and must present a reconciliation between the values in its cash flow statement with the items in the balance sheet. The effect of any change in policy to determine the components of cash and cash equivalents must be disclosed (IAS 8). Interest, dividends, and income tax Interest (net of capitalized amounts) and income tax paid must be highlighted only if the indirect method is used; dividends paid may be grouped with other distributions to owners; and interest and dividends received may also constitute a single sub-item. Interest and dividends, paid and received, and income tax paid must be shown individually in the cash flow statement, regardless of whether the direct or indirect method is used. Extraordinary items No special procedure is required to highlight cash flows from extraordinary items. They must be classified as resulting from operating, investing, or financing activities, as appropriate, separately disclosed, by what originated them, and highlighted according to IAS 8. Cash flow per share Prohibits disclosure of any index related to cash flow per share. Does not make reference. Hedging activities Requires disclosure of the criteria used to classify hedges of identifiable transactions in the same category as the items that originated them. Does not require disclosure of the criteria used. Unavailable cash balances Does not make reference. Must disclose unavailable cash and cash equivalents balances, along with management's comments. Other disclosures Does not make reference. Encourages disclosure of:
. Value of loans obtained but not used,
. Value of cash flows by activity in joint ventures; . Value of cash flows derived from increases in operational capacity separately from those necessary to maintain operational capacity; . Value of flows by economic activity and geographic region.

The company must also consider other clarification items for users in additional explanatory notes, such as: (a) disclosure of interest and charges paid during the year, including those capitalized from activations in assets under construction; (b) the total income tax and CSSL paid during the year, and (c) any transactions or events that did not alter cash but are relevant to inform about the company's resource flow (and which are expressly excluded from the cash flow statement by IAS 7. As an accounting policy, the company may also determine that any cash flow from investing and financing activities that is greater than 5% of the total value of the activity involved is broken down separately. In this case, the company judged that, by opening up the composition of these cash flows, it would facilitate the evaluation of the activity's behavior for the investor/market analyst.

29.5 Disclosure in explanatory note of Net Profit or Loss for the Period, Fundamental Errors, and Changes in Accounting Policies (5.2)

29.5.1 Prior Period Adjustments (5.2.1)

The nature of prior period adjustments and their basis must be highlighted in explanatory notes to the financial statements.

(LAW NO. 6.404/76, ARTICLES 176 AND 186 AND EXPLANATORY NOTE OF CVM INSTRUCTION NO. 59/86)

5.2.2 Change of Accounting Method or Criterion

Whenever there is a relevant change in accounting methods or criteria, the company must disclose the change, highlighting the resulting effects.

(LAW NO. 6.404/76, ARTICLE 177)

29.6 Disclosure in explanatory note of Subsequent Events (6.1)

Events occurring between the end of the fiscal year and the date of disclosure of the financial statements that have, or may have, a relevant effect on the company's financial situation and future results must be disclosed.

(LAW NO. 6.404/76, ARTICLE 176)

29.7 Disclosure in explanatory note of Income Tax (8.3.7)

29.7.1 Income Tax and Social Contribution (8.3.7.1)

The financial statements and/or explanatory notes must highlight the following information, when relevant:
a) amount of current and deferred taxes recorded in profit or loss, equity, assets, and liabilities; b) nature, basis, and expected timeframe for realization of each deferred tax asset and liability; c) effects on assets, liabilities, profit or loss, and equity resulting from adjustments due to changes in tax rates or changes in the expectation of realization or settlement of deferred tax assets or liabilities; d) amount of temporary differences and unused tax losses for which no deferred tax asset has been recognized, indicating the value of taxes that did not qualify for this recognition; e) reconciliation between the amount debited or credited to profit or loss for income tax and social contribution and the product of accounting profit before income tax multiplied by the applicable tax rates, also disclosing such rates and their calculation bases; a. nature and amount of assets whose tax base is lower than its carrying amount.

(CVM RESOLUTION NO. 273/98)

29.7.2 Deferred Tax Asset (8.3.7.2)

It is worth clarifying that, in any situation, including for companies that have recognized deferred tax assets before the entry into force of CVM Instruction No. 371/02 and that do not recognize additional value to that balance, disclosure in an explanatory note of the following information is mandatory (items I, II, and III of article 7):

"I estimate of the portions of realization of the deferred tax asset, broken down year by year for the first 5 (five) years and, from then on, grouped in maximum periods of 3 (three) years, including for the portion of deferred tax asset not recorded that exceeds the 10 (ten) year realization period referred to in item II of art. 2; II effects resulting from any change in the expectation of realization of the deferred tax asset and respective bases, as provided in art. 4, III in the case of newly constituted companies, or in the process of operational restructuring or corporate reorganization, description of administrative actions that will contribute to the future realization of the deferred tax asset."

This also applies to the disclosure, in an explanatory note, of the justified basis for the actions implemented by the company, aiming to generate taxable profit in the future. These actions represent fundamental requirements for the company to maintain tax credits in the asset in the absence of a profitability history (art. 3, sole paragraph).

(CVM INSTRUCTION NO. 371/02)

29.8 Disclosure in explanatory note of information by business segment (9.1)

Segment information aims to provide users of financial statements with information on the size, contributions to results, and growth trends of the different operational or geographic areas in which the company operates, allowing for prospective analysis regarding risks and perspectives of a diversified company.

Recalling that financial statements aim to allow the projection of expected future cash flows, it is particularly relevant that the generation of such cash flows can be evaluated by analysts and investors by business area or by geographic region of operation of the public company or the business conglomerate that includes it.

Segmented information provides the user with the opportunity to know the performance of each area or main business managed by the company. Knowledge of this mix is important information insofar as the user can effectively compare these performances, not only within a company, but potentially also in relation to other companies. When analyzing a specific sector, the investor may encounter companies that present a global performance that was not fostered in the basic operating sector, but rather by other activities or non-repetitive businesses. The statements presented in segmented form also serve to elucidate this circumstance, as they will allow users to evaluate the performance of each activity. In this regard, the CVM encourages the disclosure of this information by public companies, especially those that publish consolidated statements.

For the presentation of information by segments, it is necessary, preliminarily, to define the segments to be highlighted. A segment comprises a component of a company that is involved in the production of goods and services, or group thereof, subject to risks and returns different from other segments. It is important to remember that, as a general principle, the company must use the same logic of analysis for decision-making used in the managerial reports by its administrators in the structure of information of activities by business segment.

The company, to highlight its segments, must adopt the form of "business" or "geographic area", or both. If the form used by administrators does not allow for rapid segmentation, the company may use some rules for its grouping into segments. For example, as defined in the international standard IAS 14, the segmentation used for a business segment must observe: (i) the nature of products or services; (ii) nature and technology of production processes; (iii) types of markets in which products and services are sold; (iv) main classes of customers; (v) channels and methods of product distribution; and (vi) when applicable, the existence of a specific regulatory environment. In turn, the use of the geographic area segment form comprises an identifiable part of a company focused on operations in a specific country, group of countries, or, as in the Brazilian case, due to possessing continental dimensions, the various regions of the country.

Once the segments are established, whether by "business" and/or "geographic area", the company must also establish which form of disclosure should be considered primary or secondary, as it will have a direct impact on the content of the information provided.

The segmented information that must be included, considering the primary format of disclosure (business or geographic area) based on international standard 14 (IAS 14), are: (i) revenues, expenses, and results obtained by the segment; (ii) assets and liabilities involved in the segment; (iii) capital expenditures in the segment; (iv) depreciation, amortization, and other significant expenses; (v) effects on the segment of results with equity method; (vi) nature and value of extraordinary items, provided they are directly attributable to a segment or capable of allocation, on rational bases; (vii) significant contingencies directly attributable to the segment, and (viii) reconciliations between segmented information and accumulated information, as well as any other relevant segmented information used by administrators in the decision-making process.

For the secondary format, the company must disclose, at least, the following information: (i) the value of assets of each segment; (ii) sales revenues to external customers (excluding sales between departments/areas of the same company - intersegment) and (iii) capital expenditures of the segment. If the company adopts and exercises its operational activities in a single segment, of business or geographic area, the information must be disclosed.

With the aim of exemplifying disclosure by segments, we demonstrate below information by segments in compliance with standards issued by the IASB. In this sense, it is convenient to remember that such information is only an example of the minimum information required and that, as a determination of those standards, the model to be used must be consistent with the information used internally during the decision-making process by management.

Only for the purpose of illustrating the type of note required, the example of a manufacturing company, with operations in various regions, is presented below:

" NOTE XXX SEGMENT INFORMATION
Segment information is based on two formats: the primary reflects the managerial structure adopted by the group, while the secondary refers to the division by products. The format"

primary segmentation, by managerial responsibility and geographic areas, represents the company's management structure. The group's main activity is food trade. The other activities, poultry products line and feeds, are managed on a regional basis. The secondary disclosure format, represented by product line, is divided into five categories, or segments. The results by segment represent the contribution of the different segments to the formation of the result, encompassing administrative expenses, research and development costs, and the Group's profit. Unallocated items comprise corporate expenses, research and development costs, amortization of any potential goodwill, and, for product segments, restructuring and other minor costs. Specific expenses for product research and development are allocated directly to the segments. The assets of each segment comprise properties, equipment, receivables, inventories, and prepaid expenses. Unallocated items represent research and development assets, including any potential goodwill. Liabilities comprise debts to suppliers and other obligations, provisions, and deferred revenues. Eliminations represent transactions between the various companies of the Group, between different segments.

The assets and liabilities segmented by geographic area are represented at year-end values. The assets by product line represent the annual average, which management considers to be a better indication of the level of capital investment for decision-making purposes.

By Geographic Area
In millions of Reais 2002 2001 2002 2001
Sales Results
Region 1 6,685 6,571 696 688
Region 2 6,649 6,381 882 876
Region 3 3,864 3,927 650 668
Other Activities 3,976 3,476 537 504
21,174 20,355 2,765 2,736
Unallocated items (460) (439)
Profit from operations 2,305 2,297

The breakdown of sales by geographic area is performed by customer destination. Intersegment sales are not significant.

In millions of Reais 2002 2001 2002 2001
Assets Liabilities
Region 1 3,127 3,228 1,346 1,320
Region 2 2,748 2,625 919 865
Region 3 1,724 1,724 613 648
Other activities 2,187 1,965 804 724
9,786 9,542 3,682 3,557
Unallocated items 7,605 2,659 290 97
Eliminations (280) (212) (280) (212)
17,111 11,989 3,692 3,442

In millions of Reais
2002 2001 2002 2001
Capital
Expenditures
Depreciation of properties and equipment
Region 1 238 236 201 222
Region 2 187 191 174 192
Region 3 156 138 110 120
Other activities 293 237 139 130
874 802 624 664
Unallocated items
(a) 29 23 21 20
903 825 645 684 a) Corporate, research, and development fixed assets.

By Product Line
In millions of Reais 2002 2001 2002 2001
Sales Results
Product Line 1 6,005 5,761 1,065 1,080
Product Line 2 5,739 5,493 643 655
Product Line 3 5,331 5,158 506 487
Product Line 4 2,811 2,744 309 291
Product Line 5 1,288 1,199 313 303
21,174 20,355 2,836 2,816
Unallocated items (a) (531) (519)
Profit from operations 2,305 2,297 a) Corporate, research, and development expenses and restructuring costs.

In millions of Reais 2002 2001
Assets
Product Line 1 2,772 2,663
Product Line 2 2,782 2,804
Product Line 3 2,155 2,245
Product Line 4 1,587 1,671
Product Line 5 715 647
10,011 10,030

In millions of Reais 2002 2001
Capital Expenditures
Product Line 1 266 234
Product Line 2 143 132
Product Line 3 115 98
Product Line 4 62 62
Product Line 5 25 28
611 554
Administration, distribution, research and development 292 271 903 825

In the example transcribed above, we can verify that the primary disclosure format is by geographic area, dividing activities into three large groups: Region 1, Region 2, and Region 3. With the division used, sales, results, assets, and liabilities were presented, along with information regarding capital expenditures and depreciation. In the example, information by product group was also demonstrated, in respect to IASB standards, which represent the secondary disclosure format.

29.9 Disclosure in explanatory note of Information that Reflects the Effects of Price Changes (10.2)
29.9.1 Statements in Constant Purchasing Power Currency (10.2.1)

The CVM understands that, in the voluntary disclosure of data in constant purchasing power currency, a minimum content of information must be presented, such as:
a) statement of results: net operating revenue, gross profit, net financial expenses, net profit/loss; b) balance sheet: inventories and advances, permanent assets, total assets, and shareholders' equity; and c) the reconciliation with the result and with the shareholders' equity determined in commercial bookkeeping.

Still within the assumptions that guide the Information Disclosure Policy, it is recommended that companies, together with their auditors, evaluate the convenience not only of the voluntary presentation of this type of information. They must also consider the convenience of its insertion as an explanatory note to the published accounting statements and to the quarterly information sent to the CVM, or even the presentation of these complete statements and quarterly information, in constant purchasing power currency.

(ORIENTATION OPINION CVM NO. 29/96)

29.10 Disclosure in explanatory note of Fixed Assets (11.3)
29.10.1 Revaluation of Fixed Assets (11.3.1)

The company must disclose:
a) the bases of revaluation and the appraisers (in the 1st year of revaluation); b) the history and date of revaluation; c) the summary of the accounts subject to revaluation and respective values; d) the effect on the result of the period, arising from depreciations, amortizations, or exhaustion on the revaluation and subsequent write-downs; e) the treatment regarding dividends and participations; f) the treatment and values involved regarding taxes and contributions; and g) in the case of partial revaluation, which items and accounts were revalued and which were not, with indication of the previous net book value, the new evaluation, and the revaluation registered by account or nature.

In the case of revaluation reserves constituted before 01/01/93, the following must be disclosed:
a) the portion of special monetary correction – Law No. 8,200/91 that is included in the Reserve; b) the amount realized in the period; and c) the tax effect on the reserve balance that exceeds the portion referred to in letter "a" above.

The CVM allowed open companies the right to opt, until 31/03/99, for the following procedures:
a) adoption of market value for the evaluation of fixed assets; b) adoption of the corrected cost method, being able to keep assets at revaluation values; c) return to the corrected cost criterion, reversing existing revaluations.

The effects of the decision taken must retroact to the beginning of the fiscal year in which the procedure was adopted, and the fact occurring and its impact, if any, on the accounting statements of the current and previous fiscal years must be disclosed in an explanatory note.

(CVM INSTRUCTION NO. 197/93 AND CVM RESOLUTIONS NOS. 183/95 AND 288/98)

29.11 Disclosure in explanatory note of Financial Leasing (12.1)

Lessee companies must disclose, at a minimum, the following:
a) value of the asset and liability, if the lease is configured as a financed purchase; b) balance, value, and number of installments, embedded interest, monetary variation; and c) other information relating to long-term contracts.

Lessor companies must disclose in an explanatory note:
a) the criteria currently used for accounting for their operations, including those that necessitate present value adjustments because they do not meet the Fundamental Accounting Principles; and b) present value adjustments of the future cash flows of the financial leasing portfolios, evidencing the effect of Income Tax.

(CIRCULAR LETTER/CVM/PTE NO. 578/85, CVM INSTRUCTION NO. 58/86, ORIENTATION OPINION CVM NO. 15/87 AND LAW NO. 6,404/76, ARTICLE 176, § 5, "e")

29.12 Disclosure in explanatory note of Sales or Services to be Performed (13.1.2)

The recording of an account receivable presupposes that the revenue recognition principle is met. Thus, it is inadmissible to record accounts receivable with a counterpart in a future period income statement account. In the case of advance billing or contracts with guaranteed receipt for accounts regarding sales or services to be performed, the company must, when relevant, disclose the fact and respective amounts.

(ORIENTATION OPINION CVM NO. 21/90)

29.13 Disclosure in explanatory note of Retirement and Pension Plans (14.11)

The following information must be disclosed in the accounting statements of the Sponsoring Entity:

a. The accounting policy adopted by the Entity in the recognition of actuarial gains and losses; b. A general description of the plan's characteristics;
c. A reconciliation of the assets and liabilities recognized in the balance sheet, demonstrating at least the following:
i. The present value, at the balance sheet date, of actuarial obligations that are fully uncovered;
ii. The present value, at the balance sheet date, of actuarial obligations (before deducting the fair value of plan assets) that are total or partially covered;
iii. The fair value of plan assets at the balance sheet date;
iv. The net value of unrecognized actuarial gains or losses;
v. The value of unrecognized past service cost in the balance sheet; and
vi. Any value not recognized as an asset due to the rule established in paragraph 49.g of this pronouncement.
d. A statement of the movement of the net actuarial liability (asset) during the period; e. The total expense recognized in the statement of results for each of the following items:
i. Current service cost;
ii. Interest cost;
iii. Effective and expected return on plan assets;
iv. Actuarial losses and gains;
v. Amortized past service cost; and
vi. The effect of any increase, or reduction, or early settlement of the plan.
f. The main actuarial assumptions used at the balance sheet date, including, when applicable:
i. The rates used for discounting the actuarial obligation to present value;
ii. The expected rates of return on plan assets;
iii. The estimated salary increase indices; and
iv. Any other relevant assumption used.

(item 81 of CVM RESOLUTION NO. 371, OF DECEMBER 13, 2000)

29.14 Disclosure in explanatory note of Concessions (15.2)
Technical Communication 03/03 Ibracon
Concessions

After the approval of a draft for public hearing of NPC Accounting for Government Concessions, IBRACON had the opportunity to analyze the responses received in the public hearing process conducted by the Securities and Exchange Commission (CVM). During this time, IBRACON learned that the IASB (International Accounting Standards Board) is initiating a study on the matter as it is of international interest. Since IBRACON's objective is to issue NPC harmonized with international accounting standards (IFRS/IAS), it concludes that it is necessary and prudent to wait for the position that will be adopted internationally before issuing a pronouncement by IBRACON.

On the other hand, IBRACON is already contributing to the international debate by passing on the results of studies and discussions already held to the IASB. Therefore, it would not be opportune to request any alteration in the treatment currently adopted by Brazilian companies at this moment.

However, IBRACON considers it indispensable that companies provide a minimum of information so that users are provided with minimum elements for decision-making. In this context, it is required of companies operating with concessions to disclose the following information:

Concession Assets

The following information must be disclosed, at the date of each closing of the fiscal year or period, when applicable:
a. assets subject to the concession and their total values, concession term, fixed payment commitments, with description also of variable commitments regarding both their calculation and their incidence; b. residual amount of the concession, with indication of the nominal value and the present value of installments to be paid in the 12 months following the closing of the fiscal year or period and of installments to be paid after this 12-month period, indicating the interest rate used for the calculation of the present value;
c. residual value of the concession fixed assets at the date of the accounting statements that must be transferred to the granting authority at the end of the contract (corresponding to assets with residual life greater than the concession and with a clause of transfer to the granting authority);
d. amount paid to the granting authority during the fiscal year or period of the accounting statements; e. bases for appropriation to the result of costs with remuneration of the granting authority; and f. terms of other financial commitments (maintenance and investments), including variable ones, such as those based on collected tariffs.

Related Parties
2. Considering the peculiar characteristics of a concession, disclosures regarding balances and transactions with related parties must be made, when relevant and applicable, in explanatory notes to the accounting statements of the public service concessionaire and/or use of public asset referred to, which are divided into three categories:
(a) Operating transactions:
i. amounts recorded in the accounting statements of concessionaires regarding expenses with services such as, for example, maintenance of highways/railways;
ii. amounts recorded regarding purchase and sale, as well as payables or receivables balances resulting from operations;
iii. provision of administrative services and/or any form of use of the physical structure or personnel of one company by another, with or without consideration;
iv. receipts or payments for the lease of real estate or movable assets of any nature;
v. amounts of real estate or movable assets of any nature received or delivered on loan; and
vi. other transactions deemed relevant.
(b) Investment transactions:
i. amount of contracts already celebrated in execution and recorded in the entity's accounting statements;
ii. amounts of contracts to be executed and indication of the fiscal years in which they will be concluded;
iii. alienation or transfer of assets from the asset; and
iv. acquisition of rights or purchase options or any other type of benefit and its respective exercise.
(c) Transactions with loans/financing:

i. loans and advances, with or without financial charges, and the rates practiced;
ii. revenues or expenses recorded in the fiscal year/period regarding the loans or advances referred to in i;
iii. guarantees, sureties, mortgages, deposits, pledges, or any other forms of guarantees; and
iv. novation, forgiveness, or other forms of cancellation of debts.

29.15 Disclosure in explanatory note of Government Subsidies (16.1)

The company must disclose the following information:
(a) The existence, nature, and measurable amounts of government subsidies or government assistance from which the entity benefits, as well as the accounting practices.
(b) Non-compliance with contractual conditions related to subsidies or the existence of other contingencies.
(c) Main commitments assumed by the entity due to the subsidies.
(d) Potential subsidies to be recognized, after contractual conditions are met.

29.16 Disclosure in explanatory note of the Effects of Changes in Exchange Rates (17.10)

In explanatory notes to the accounting statements and to the quarterly information, the amounts of assets and liabilities in foreign currency, the risks involved, the degree of exposure to these risks, the policies and financial instruments adopted to reduce risk, as well as, in the case of recording, in deferred assets, the net negative result derived from the adjustment of the values in reais of obligations and credits, the amount of expenses and revenues resulting from exchange rate variation, as well as the destination contemplated, the amortization bases, and the values amortized in each period, must be disclosed, when relevant.

(CVM RESOLUTION NO. 294/99)

29.17 Disclosure in explanatory note of the cost of loans (18.4)
29.17.1 Debentures (18.4.1)

(ORIENTATION OPINION CVM NO. 21/90)

29.17.2 Long-Term Obligations (18.4.2)

The interest rates, maturity dates, guarantees, currency, and method of updating long-term obligations must be disclosed.

(LAW NO. 6,404/76, ARTICLE 176)

29.17.3 Liens, Guarantees, and Contingent and Contingent Liabilities (18.4.3)

Real liens on elements of the asset, guarantees provided to third parties, and other contingent/contingent liabilities must be disclosed. Contingent facts that generate, due to their peculiarities, reserves or provisions for contingencies, and even those whose probability is difficult to calculate or whose value is not measurable, must be evidenced in an explanatory note, and in the latter case, the reasons for the impossibility of this measurement must also be mentioned.

(LAW NO. 6,404/76, ARTICLE 176 AND EXPLANATORY NOTE TO CVM INSTRUCTION NO. 59/86)

29.17.4 REFIS (18.4.4)

Open companies must disclose, regarding the fiscal years in which they remain in the REFIS program, in explanatory notes to their accounting statements and quarterly information, the following information:

a) the amount of debts included in REFIS, segregated by type of tax and nature (principal, fines, and interest); b) the present value of debts subject to liquidation based on gross revenue, as well as the values, terms, rates, and other assumptions used to determine this present value; c) the amount of tax credits, including those resulting from tax losses and negative bases of social contribution, used for the liquidation of interest and fines; d) the amount paid in the period for the amortization of debts subject to liquidation based on gross revenue; e) the detail of adjustments recorded as extraordinary items; f) the guarantees provided or assets listed and respective amounts; g) the mention of the obligation to regularly pay taxes, contributions, and other obligations as an essential condition for maintaining the payment conditions provided in REFIS; and h) any and all imminent risks associated with the loss of the special payment regime.

(CVM INSTRUCTION NO. 346/00)

29.18 Disclosure in explanatory note of Transactions with Related Parties (19.5)

Open companies, when disclosing this type of information, have given greater emphasis to the values resulting from these transactions, which integrate the asset, liability, and result, without, however, giving the same prominence to the conditions under which the transactions were carried out, the nature of the relationship, and the transfer pricing policy.

The disclosure of transactions with related parties must cover the conditions under which these transactions occurred, especially regarding prices, terms, and charges, and whether they are carried out under conditions similar to those that would be applicable to unrelated parties, as well as the present and future effects on the company's financial situation and results.

The pronouncement of Ibracon, approved by CVM Resolution No. 26/86, establishes as a criterion for the preparation of this note the following: "The greater or lesser prominence in the disclosure of transactions should be given considering the following facts: (i) if the transaction was carried out under conditions similar to those that would be applied between unrelated parties (regarding prices, terms, charges, quality, etc.) that contracted based on their free will and their best interest; and (ii) if the transactions by themselves or by their effects affect or may come to affect, significantly, the financial situation and/or the results of the companies intervening in the operation."

The aforementioned pronouncement lists, in a merely exemplary manner, the following types of transactions between related parties that must be subject to disclosure in explanatory notes:

Purchase or sale of products and/or services that constitute the company's social object.
Alienation or transfer of assets from the asset.
Alienation or transfer of industrial property rights.
Balances resulting from operations and any other balances to be received or paid.
Novation, forgiveness, or other unusual forms of debt cancellation.
Provision of administrative services and/or any form of use of the physical structure or personnel of one company by another or others, with or without consideration.
Guarantees, sureties, mortgages, deposits, pledges, or any other forms of guarantees.
Acquisition of rights or purchase options or any other type of benefit and its respective exercise.
Any non-remunerated transfers.
Preemptive rights to the subscription of securities.

Loans and advances, with or without financial charges, or at favorable rates.
Receipts or payments for the lease or loan of real estate or movable assets of any nature.
Maintenance of any benefits for employees of related parties, such as:
supplementary social security plans, health assistance plans, cafeterias, recreation centers, etc.
Market and technological limitations.
The use of the standard expression in explanatory notes: "Transactions with related parties are carried out at normal market prices and conditions, similar to those carried out with third parties," does not fulfill the requirement to clarify prices and/or pricing policies in these types of transactions and is ineffectual. Even if they are made in large numbers and it becomes unfeasible to detail the price of each operation, it is necessary to clarify the method used, the calculation method, and average prices, for example.

29.19 Disclosure in explanatory notes of special purpose entities (SPEs)
(20.2.2.3)
The consolidation of financial statements, as has been required by CVM Instruction No. 247/96, has been based on the existence of a corporate link between controlling companies and their subsidiaries. However, transactions involving SPEs have become increasingly common today, and the consolidation approach, based exclusively on voting capital, has proven insufficient for the full disclosure of economic activities as a whole. Currently, we encounter various situations where, even without the existence of corporate links, an entity effectively holds control over the activities and benefits of another, bearing most of the consequent risks of these activities. The lack of consolidation of these entities allows certain businesses "controlled" by publicly-held companies to fail to be fully evidenced, affecting, often significantly, the information regarding the financial and equity situation of the company as a whole.

Due to the need to evidence the situations mentioned above, the CVM issued Instruction No. 408, of August 18, 2004, which establishes that publicly-held companies must include, in addition to controlled or jointly controlled companies, SPEs, when the essence of their relationship with the publicly-held company indicates that the activities of these entities are controlled directly or indirectly, individually or jointly, by the publicly-held company.

In its Article 5, Instruction No. 408/04 cites the following minimum information that must be disclosed in explanatory notes to the respective financial statements:
I – name, nature, purpose, and activities developed by the SPE; II – participation in the equity and results of the SPE; III – nature of its involvement with the SPE and type of exposure to losses, if any, deriving from this involvement; IV – amount and nature of credits, obligations, revenues, and expenses between the company and the SPE, assets transferred by the company and rights of use over assets or services of the SPE; V – total assets, liabilities, and equity of each SPE; VI – guarantees, sureties, mortgages, or other guarantees granted in favor of the SPE; and VII – the identification of the main beneficiary or group of main beneficiaries of the activities of the SPE, in the case referred to in Article 4.

29.20 Disclosure in explanatory notes of Consolidated Financial Statements and
Accounting of Investments (20.4)

29.20.1 Goodwill/Badwill (20.4.1)
Explanatory notes must contain precise information indicating the basis and foundation adopted for the formation and amortization of goodwill or badwill and unamortized amounts, as well as criteria, discount rates, and terms used in the projection of results. Unjustified goodwill, that is, that which has no economic foundation, must be recognized immediately as a loss, in the result of the period, clarifying in an explanatory note the reasons for its existence. (CVM INSTRUCTION NO. 247/96)

29.20.2 Condensed Statements (20.4.2)
Publicly-held companies that have made additional publications of their financial statements, beyond the publications ordered by corporate law, may do so in condensed form provided that accompanied, at a minimum, by the following explanatory notes:
a) changes in accounting practices compared to the previous social year; investments in other companies, when relevant, specifying the final amount and the result of equity method for each investment and the values related to goodwill, badwill, and loss provisions; interest rates, maturities, and real burdens on long-term debts; number of shares that make up the share capital discriminating species and classes; reconciliation of the result determined by full adjustment with that determined by corporate law; and amount of the fiscal loss eligible for use in subsequent years; and b) any information not contained in the above-mentioned information and that is relevant for knowledge of the company's situation. (CVM INSTRUCTION NO. 232/95)

29.20.3 Equity Method (20.4.3)
Explanatory notes accompanying the financial statements must contain precise information about affiliates and subsidiaries, indicating, at a minimum:
I – name of the affiliate and subsidiary, the number, species, and class of shares or capital quotas owned by the investor, the percentage of participation in share capital and voting capital, and the trading price on the stock exchange, if any; II – net equity, net profit or loss of the period, as well as the amount of proposed or paid dividends, relating to the same period; III – credits and obligations between the investor and the affiliates and subsidiaries specifying terms, financial charges, and guarantees; IV – guarantees, sureties, mortgages, or pledges granted in favor of affiliates or subsidiaries; V – revenues and expenses in operations between the investor and the affiliates and the subsidiaries; VI – individually identified amount of the adjustment, in the result and net equity, resulting from the evaluation of the book value of the investment by the equity method, as well as the book balance of each investment at the end of the period; VII – calculation memory of the individually identified amount of the adjustment, when this does not result solely from the application of the percentage of participation in share capital on the results of the investee, if relevant; VIII – basis and foundation adopted for the formation and amortization of goodwill or badwill and unamortized amounts, as well as criteria, discount rate, and terms used in the projection of results; IX – conditions established in a shareholders' agreement regarding influence on administration and distribution of profits, evidencing the numbers relating to cases where the proportion of voting power is different from the proportion of participation in voting share capital, directly or indirectly; X – reciprocal participations existing; and XI – effects on assets, liabilities, net equity, and result resulting from discontinued investments. The period of coverage of the financial statements of affiliates/subsidiaries must be identical to that of the investor. Non-identical periods are admitted, in cases where this fact represents an improvement in the quality of the information produced, with the change evidenced in an explanatory note. The investment in an affiliate that, due to the reduction of the book value of the investment, ceases to be relevant, will continue to be evaluated by the equity method, provided that this reduction is not considered permanent, and all its effects must be evidenced, segregated, in an explanatory note. (LAW NO. 6.404/76, ARTICLE 247; CVM INSTRUCTION NO. 247/96)

29.20.4 Consolidated Financial Statements (20.4.4)
Explanatory notes accompanying the consolidated financial statements must contain precise information about subsidiaries, indicating:
I – criteria adopted in consolidation and the reasons why the exclusion of a certain subsidiary was carried out; II – events subsequent to the end of the social year that have, or may come to have, a relevant effect on the financial situation and future consolidated results; III – effects, on the elements of consolidated equity and result, of the acquisition or sale of a controlled company, during the social year, as well as the insertion of a subsidiary into the consolidation process, for the purposes of comparability of the financial statements; and IV – events that caused a difference between the amounts of net equity and net profit or loss of the investor, in comparison with the corresponding amounts of net equity and net profit or loss consolidated. In explanatory notes to the consolidated financial statements, the amount of the main groups of assets, liabilities, and result of controlled societies jointly, as well as the percentage of participation in each of them, must also be disclosed. The publicly-held company affiliated with a group of companies must indicate, in notes to its published financial statements, the body and date on which the last consolidated financial statements of the group's holding company to which it is affiliated were published. In consolidated statements, which include transactions with related parties, the information and values relating to transactions not eliminated in consolidation must be evidenced. (LAW NO. 6.404/76, ARTICLE 275, CVM INSTRUCTION NO. 247/96 AND CVM DELIBERATION NO. 26/86)

29.20.5 Corporate Investments Abroad (20.4.5)
The company must evidence the same information required for investments in subsidiaries/affiliates in the Country. The criteria for the determination of the financial statements of the investees abroad must be mentioned in the summary of accounting practices, as well as the criteria for conversion to the national currency. (CVM DELIBERATION NO. 28/86)

29.21 Disclosure in explanatory note of financial instruments (21.6)
The publicly-held company must evidence, whenever relevant:
a) the market value of all financial instruments, recognized or not as asset/liability in its balance sheet; b) the criteria and premises adopted for the determination of this value; and c) the policies of action and control of operations in the derivative markets and the risks involved.
Article 4 of CVM Instruction No. 235/95 exempts the disclosure of market values of
accounts receivable and payable. The CVM also understands that it is unnecessary to disclose the market values of other accounts receivable and payable with a term compatible with the normal operations of the company. This exemption was based on the fact that accounts receivable and payable, as well as other monetary items, are adjusted to present value as required by CVM Instruction No. 191/92.

The above exemption, however, does not apply to accounts receivable from government entities or others resulting from long-term contracts, whose possibility of receipt within three months is not effectively assured. In this case, the market value must be informed in an explanatory note or, in the absence of this information, an estimate of discount must be indicated based on the cost of its financing, according to the term provided for its receipt. The proposed model does not exhaust all disclosure needs, or even its own identification, and therefore must be adapted and carefully analyzed by the company's administration and its independent auditors.

MODEL FOR NON-FINANCIAL COMPANIES
Note X Financial Instruments
The company participates in operations involving the financial instruments described below, with the objective of... (the objectives and the policy of action and control of operations must be disclosed).
The following criteria and premises were used in the determination of the market values of each financial instrument, (disclose the financial instruments whose market values differ from the book values):
(a) The estimated market values of the financial instruments, assets and liabilities of the company, as of December 31, 19X1, recorded in equity accounts and that present different market values from those recognized in the financial statements, can be thus demonstrated:
Thousands of reais
Book Value Market Value
Financial Applications
Accounts receivable from entities
Governmental and long-term contracts
Investments
Loans and medium-term financing
Debentures
Others (detail)
The market values of investments were estimated... (describe) The estimated market values of medium-term loans and financing (between three months and one year) were obtained... (describe) The book value of financial instruments relating to other assets and liabilities is approximately equivalent to its market value. (b) The nominal values of financial instruments, not registered in accounting as of December 31, 19X1, are summarized below (market values must be disclosed, when applicable):
Thousands of reais compensation account equity account Global Value Value to be received/received (to be paid/paid) Futures Contracts Purchase Commitments Foreign Currency Interbank Market Fixed Rate Indices Shares Others Sales Commitments Foreign Currency Interbank Market Fixed Rate Indices Shares Others Options Contracts Purchase Commitments Foreign Currency Interbank Market Fixed Rate Indices Shares Others Sales Commitments Foreign Currency Interbank Market Fixed Rate Indices Shares Others Thousands of reais compensation account equity account Global Value Value to be received/received (to be paid/paid) Contracts and "swaps" Purchase Commitments Foreign Currency

Interbank Market
Fixed Rate
Indices
Shares
Others
Sales Commitments
Foreign Currency
Interbank Market
Fixed Rate
Indices
Shares
Others
(c) Futures contracts, locked options have terms less than 90 days; "swap" contracts have the following maturities:
Thousands of reais
Up to 90 days
From 91 to 180 days
From 81 to 360 days
Above 360 days
(d) The risks involved in contracting these operations can be summarized as follows: (describe market, credit, operational, currency, and legal risks) (CVM INSTRUCTION NO. 235/96 AND OFFICIAL CIRCULAR/CVM/SNC/SEP/NO. 01/96)

29.22 Disclosure in explanatory note of discontinued operations (22.4)

29.22.1 Initial Disclosure (22.4.1)
An entity must include the following information in an explanatory note regarding a discontinued operation in its financial statements of the period in which the initial disclosure event occurs, as cited above. a. a description of the discontinued operation; b. the business segment or geographic segment to which it belongs;
c. the date and nature of the event, initially disclosed;
d. the date or period in which it is expected that the discontinuation will be completed, if known or determinable; e. the accumulated values, at the balance sheet date, of the total assets and liabilities to be alienated or liquidated; f. the values of revenues, expenses, and profit or loss before taxes, of the ordinary activities attributable to the discontinued operation in the current social year disclosed and the income tax expense related; g. the values of cash flows (statement of sources and applications of resources) attributable to the operating, investing, and financing activities, of the discontinued operation during the period of the disclosed social year.

29.22.2 Other Disclosures (22.4.2)

When an entity alienates assets or liquidates liabilities attributable to a discontinued operation or closes agreements for the sale of these assets or the liquidation of these liabilities, it must include in an explanatory note, in the period in which the event occurs, the following information:
a. for any gain or loss that is recognized in the alienation of assets or in the liquidation of liabilities attributable to the discontinued operation (i) the value of the profit or loss and (ii) the income tax expenses related to this profit or loss; b. the net selling price or price range (after reducing the expected costs of disposal) of those net assets for which the entity has signed one or more firm sale agreements, the expected time of receipt of these cash flows and the book value of these net assets.

29.22.3 Update of Disclosures (22.4.3)

In the periods subsequent to that in which the initial disclosure of the event occurred, in the note on discontinued operations, a description of any significant change in the value or periods of the cash flows relating to the assets and liabilities to be alienated or liquidated and the events that caused these changes must be disclosed. These disclosures must continue in the financial statements until that period in which the discontinuation is completed. The discontinuation is completed when the plan is substantially fulfilled or abandoned, even if the payment(s) of the buyer(s) to the seller have not yet been completed. If an entity abandons or withdraws a plan that was previously informed as a discontinued operation, this fact and its effect must be disclosed.

29.22.4 Separate Disclosure for Each Discontinued Operation (22.4.4)

All disclosures must be presented separately for each discontinued operation.

29.22.5 Presentation of Disclosures (22.4.5)

The disclosures of discontinued operations must be presented in explanatory notes to the financial statements, except for the disclosure of the value of profit or loss before taxes, recognized in the alienation of assets or liquidation of liabilities attributable to the discontinued operation, which must be included in the statement of result.

29.22.6 Disclosure in Interim Financial Reports (22.4.6)

The explanatory notes of an interim financial report must describe any significant activities or events that have occurred since the completion of the most recent annual report, relating to a discontinued operation, and any significant changes in the values or time of the cash flows related to the assets and liabilities to be alienated or liquidated.

29.23 Disclosure in explanatory note of Provisions, Liabilities, and Contingent Assets (23.4)

Normally, contingent assets or contingent gains should not be recorded; only when their obtaining or recovery is effectively assured should they be recognized in accounting. A possible gain in administrative or judicial actions, only should be recognized when, having gone through all necessary instances, the company obtains a favorable decision. If the company has already recognized revenue involving an asset in dispute (accounts receivable, for example), it must then constitute a provision for losses in proportion to the contingent value. If there is a challenge by the debtor, but the company considers that it has objective conditions to evidence its right, leaving no doubt regarding this right and the chance of receipt, it may not make the provision provided that it evidences in an explanatory note to the financial statements the existence of the challenge. (CVM ORIENTING OPINION NO. 15/87) The CVM recommends that in the preparation of explanatory notes on passive contingencies, the following information be provided, at a minimum: (i) nature of the contingency (labor, social security, tax, civil, environmental, etc.), (ii) detailed description of the contingent event involving the company,

(iii) probability of the contingency occurring (probable, possible, or remote), (iv) forums in which contingent liabilities are being discussed (administrative or judicial, lower or higher courts), (v) case law regarding contingent liabilities, (vi) assessment of the consequences of contingent liabilities on the company's business.

29.24 Disclosure in explanatory notes of Deferred Assets (24.2)
Their composition and amortization criteria must be disclosed. Companies benefiting from tax incentives must provide more detailed information, specifying the status of the incentivized projects.

(CVM ORIENTATION OPINION NO. 18/90)

29.25 Disclosure in explanatory notes of option plans (25.10)
The objective of initiating the process of understanding this issue within the Brazilian capital market led to the provisions of the Ibracon Pronouncement on Accounting for Employee Benefits approved by CVM Resolution No. 371, which determines the disclosure, at a minimum, of the following information: (i) the nature and conditions of the stock purchase option plans; (ii) the accounting policy adopted; and (iii) the quantity and value for which the shares were issued.

To fulfill disclosure objectives and comply with Article 176 of the corporate law, which provides for the disclosure of stock purchase options granted and exercised in the fiscal year, the company must disclose in the Explanatory Notes to the financial statements and in the Quarterly Information Form – ITR the following information regarding Option Plans, always comparatively to the respective previous periods:

I the existence of Option Plans, with a description of their nature and conditions (including eligibility conditions for beneficiaries).

II the quantity, description of the nature and conditions (including, where applicable, rights to dividends, voting, conversion, exercise and expiration dates) and amount of options granted, exercised, and expired, if applicable, held by each group of beneficiaries, including their exercise price or, if applicable, the method of calculation to obtain it. The measure of beneficiaries' eligibility to exercise the right must be indicated (for example, the time elapsed since the date of grant of the option relative to the total time until the beneficiary can exercise the option);

III the percentage of participation dilution to which current shareholders will eventually be subjected in the event of exercise of all options to be granted;

IV regarding exercised options, description of the shares delivered, in quantity, class, and species, and the total and unit exercise price relative to each of the classes and species and their respective market value on the respective dates;

V the dates or periods in which options may be exercised by beneficiaries and any expiration dates;

VI description of any transactions involving treasury shares to effect the redemption of options, indicating the quantity of shares, by class and species, as well as the value received by the company; and

VII – the effect on the Statement of Net Income and on Shareholders' Equity, if this accounting had been made.

29.26 Disclosure in explanatory notes of equity items and corporate matters (26.6)

29.26.1 Treasury Shares (26.6.1)
The acquisition of shares of its own issuance represents a return of invested capital and must be shown as a deduction from a specific reserve account. The explanatory note must indicate:
a) the objective in acquiring its own shares; b) the quantity of shares acquired or alienated during the fiscal year, highlighting species and classes; c) the weighted average acquisition cost, as well as the minimum and maximum costs;

d) the net result of alienations occurring during the fiscal year; and e) the market value of the species and classes of treasury shares, calculated based on the last quotation, on the stock exchange or over-the-counter, prior to the closing date of the fiscal year.

(CVM INSTRUCTIONS NOS. 10/80 and 69/87 and CVM EXPLANATORY NOTE NO. 59/86)

29.26.2 Share Capital (26.6.2)
The number, species, and classes of shares comprising the share capital must be disclosed, and, for each species and class, the respective quantity and, if any, the par value. The advantages and preferences conferred to the various classes of shares, according to the bylaws, must also be disclosed.

(LAW NO. 6.404/76, ARTICLE 176)

29.26.3 Authorized Share Capital (26.6.3)
The company that has authorized capital must disclose this fact in an explanatory note, specifying:
a) the limit of authorized increase, in capital value and number of shares, and the species and classes that may be issued; b) the competent body to deliberate on issuances (General Assembly or Board of Directors); c) the conditions to which issuances are subject; d) the cases or conditions in which shareholders will have preemptive rights for subscription, or the absence of such right; and e) stock purchase options, if any, to administrators, employees, or natural persons who provide services to the company or society under its control.

(LAW NO. 6.404/76. ARTICLE 168, §1)

29.26.4 Destination of Profits Constant in Shareholder Agreements (26.6.4)
The annual management report must contain information on the profit reinvestment and dividend distribution policy contained in shareholder agreements filed with the company.

(LAW NO. 6.404/76, ARTICLE 118)

29.26.5 Dividend per Share (26.6.5)
The amount of dividend per share of the share capital, divided by species and class of shares, must be indicated in the Statement of Changes in Shareholders' Equity, observing the different advantages and the existence of treasury shares.

(LAW NO. 6.404/76, ARTICLE 186 AND CVM INSTRUCTION NO. 59/86)

29.26.6 Proposed Dividends (26.6.6)
The demonstration of the calculation of dividends proposed by administrators, the payment policy, and whether these will be paid corrected monetarily or not must be disclosed.

(CVM ORIENTATION OPINIONS NOS. 15/87 and 21/90)

29.26.7 Interest on Equity Capital (26.6.7)
In explanatory notes to the financial statements and to quarterly information (ITRs), the criteria used to determine these interests, the policies adopted for their distribution, the amount of income tax incident, and, when applicable, their effects on mandatory dividends must be informed.

(CVM RESOLUTION NO. 207/96)

29.26.8 Remuneration of Administrators (26.6.8)

The amount of remuneration must be disclosed in the statement of results itself or in an explanatory note.

(CVM ORIENTATION OPINION NO. 04/79)

29.26.9 Reserves – Detailing (26.6.9)
The company may highlight, in an explanatory note or in an analytical table, the subdivisions of reserves, when their highlighting in the Statement of Changes in Shareholders' Equity becomes too extensive for publication purposes.

(CVM INSTRUCTION NO. 59/86)

29.26.10 Reserves of Profits to be Realized (26.6.10)
The calculation of the reserve must be demonstrated, evidencing the amount and nature of the values constituted, the amount realized, the parameters used, and the future effect on dividends.

(EXPLANATORY NOTE TO CVM INSTRUCTION NO. 59/86 and CVM ORIENTATION OPINION NO. 24/92)

29.26.11 Retention of Profits (26.6.11)
The retention of profits may present itself with various denominations, such as: reserve for expansion, for reinvestment, etc., and may still be included in the Accumulated Profits account. In any circumstance, its constitution, maintenance, and legal basis must be disclosed in an explanatory note, as well as the main lines of the capital budget that supports the retention. The justifications and main lines of the respective capital budget must be explicit. Profits not destined, even if kept in accumulated profits, characterize improper retention of profits.

(LAW NO. 6.404/76, ARTICLE 196 AND EXPLANATORY NOTE TO CVM INSTRUCTION NO. 59/86)

29.26.12 Multiple Voting (26.6.12)
The open company must disclose the minimum percentage of participation in the voting share capital for the shareholder to request the adoption of multiple voting in its general assembly, which will deal with the election of members of the Board of Directors. This disclosure must be made obligatorily in the notice of convocation of the assembly and, optionally, together with the closing financial statements of the fiscal year.

(CVM ORIENTATION OPINION NO. 24/92)

29.27 Other disclosures in explanatory note (27.2)

29.27.1 Electrobrás Credits (27.2.1)
The criterion used for the constitution of the provision for losses and the amounts involved, including the balances of loans not yet converted into shares, must be disclosed in an explanatory note.

(CVM RESOLUTION NO. 70/89)

29.27.2 Privatization Program (27.2.2)
They must be disclosed by open companies involved in privatization processes, together with their financial statements, all acts and relevant facts that are known to their administrators, whose revelation does not put at risk the legitimate interest of the company, due to the importance of the privatization process, especially regarding its effects for valuation and decision-making purposes by the user of the company's accounting information.

The explanatory note must discriminate, when relevant, at least the following information:
a) operational mode of privatization (individual alienation or in block, if it has more than one participation subject to privatization, through auction, initial public offering, capital increase with waiver of subscription, alienation, lease or rental of assets and installations, transformation, merger, spin-off, dissolution, etc.); b) stage of the privatization process, including a brief history of relevant facts that occurred during the period; c) book value of the investment subject to privatization and evaluation method, book value on the date of the financial/accounting information, market value, when applicable (last three average quotations up to the date of publication or submission of the ITRs) and the value of the evaluation; d) amount of the provision for depreciation or permanent loss, and respective basis, or clarification of the reasons that determined the non-provisioning; e) precise information regarding transactions with related parties, in the form of CVM RESOLUTION NO. 26/86, highlighting the asset and liability balances, revenues, and expenses resulting from transactions carried out with companies subject to privatization; f) amount of resources to be used in the settlement of debts with the public sector, value of the eventual balance to be applied in the acquisition of long-term federal public debt securities and conditions under which the applications will be made, if already known at the time of disclosure of the quarterly information or financial statements; and g) judicial and labor disputes, including with the employees' pension fund, and the amounts involved.

(CVM ORIENTATION OPINION NO. 24/92)

29.27.3 Real Estate Fund (27.2.3)
The following information must be subject to disclosure in an explanatory note:
a) analytical information on the position of real estate investments, on the closing date of the period, detailing each development, with address, total/built area square footage, stage in which it is, its characteristics, net value applied and market value, as specified in item "c" of paragraph III of article 17 of CVM INSTRUCTION NO. 205, as well as its movement during the period; b) market value of other assets; c) information on expenses with the Fund's administration fee and with Investment Consultant, their percentages relative to the average semi-annual shareholders' equity and accounting appropriation made, identifying any portion incorporated into the asset; and d) explanation of the calculation of the distribution of results to unitholders.

The values related to the commercialization of business points in "shopping malls" and similar ("res sperata") must be recognized as revenue over the periods of their respective initial lease contracts, and their accounting as an asset of any nature before the period of its registration in revenue is not admitted. In explanatory notes to the financial statements, the administrator institution of the Real Estate Investment Fund must inform the average period of appropriation of this revenue.

(CVM INSTRUCTION NO. 206/94)

29.27.4 Incorporation, Merger, and Spin-off (27.2.4)
The company must perform and disclose, at the end of each fiscal year, an analysis on the recovery of the value of goodwill, when the economic basis was the acquisition of the right of exploration, concession, or permission delegated by the Public Power or the expectation of future results, in order to:
a) record losses in the value of applied capital when it is evident that there will not be sufficient results to recover this value; or b) review and adjust the criteria used to determine its economic useful life and for the calculation and term of its amortization.

(CVM INSTRUCTION NO. 319/99)

29.27.5 Earnings or Loss per Share (27.2.5)
The company must disclose in the statement of results of the fiscal year the net earnings/loss per share of the share capital.

(LAW NO. 6.404/76, ARTICLE 187)

29.27.6 Insurance (27.2.6)
It must be informed if there are liabilities or interests covered and on which assets.

(CVM ORIENTATION OPINION NO. 15/87)

1Actuarial
2Actuarial Liability
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Circular Letter CVM/SNC/SEP No. 01/2005: Guidance on the Preparation of Accounting Information by Publicly Held Companies

CIRCULAR LETTER CVM/SNC/SEP No. 01/2005

Points for the evolution of accounting information in the Brazilian capital market

Lineage: In force