Circular Letter CVM/SNC/SEP No. 01/2007

CIRCULAR LETTER CVM/SNC/SEP No. 01/2007
Rio de Janeiro, February 14, 2007

To the
Investor Relations Directors and
Independent Auditors

SUBJECT: Guidance on Accounting Standards by Publicly Held Companies

Dear Sirs,

The Circular Letters issued by the CVM technical area have as their main objective to disseminate central issues and 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 international standards issued by the IASB.

The CVM has, over the years of its operation, sought to improve and keep its normative accounting framework up to date, always with the participation of interested segments of the market or the accounting profession. It is important to highlight the important collaboration received from the CVM Advisory Committee on Accounting Standards, which includes representatives from ABRASCA, APIMEC, CFC, IBRACON, FIPECAFI/USP and collaborators especially appointed by the CVM, as well as professors Ariovaldo dos Santos (USP), José Augusto Marques (UFRJ) and Natan Szuster (UFRJ) and, now, the Accounting Pronouncements Committee CPC, recently installed.

It has been a practice to update this Circular Letter annually. However, starting from the current year, it is the intention of the Superintendence of Accounting Standards and Auditing – SNC and the Superintendence of Corporate Relations – SEP, to update this document in shorter periods, whenever necessary.

In this sense and with a view to allowing the participation of all interested parties in the evolution of the quality of accounting information, the SNC and the SEP are making available the electronic address "sugestoesoficiocontabil@cvm.gov.br" so that any interested party can collaborate, at any time, offering suggestions for improvement of this circular.

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

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

This Circular Letter replaces CIRCULAR LETTER/CVM/SNC/SEP No. 01/2006 and its main changes include (in the order in which they are presented and were modified) the following items:

a) item 1.1 Accounting policies and corporate governance of publicly held companies, which brings considerations and guidance on the relationship between the standards for presentation of financial statements and the aspects of corporate governance involved;

b) item 1.9.7 EBITDA measurement – earnings before interest, income tax, depreciation and amortization, with modifications brought by Apimec especially in the clarification of concepts and in guidance on the reconciliation of profit with EBITDA;

c) item 1.13 Presentation of the Balance Sheet, with the improvements resulting from NPC No. 27, approved by CVM Resolution No. 488/05, which brought Brazilian accounting practices closer to international practices in the aspects of presentation of financial statements;

d) item 1.14 Present value adjustment of rights and obligations with general guidance on the adoption of the procedure for discounting balance sheet items;

e) item 5 Accounting Practices, Changes in Accounting Estimates and Correction of Errors, with reference to Pronouncement NPC 12 CVM Del. No. 506, and exclusion of previous comments and 5.3 Retrospective adjustment due to CVM Resolution 506, with the model for the demonstration of the movement of the retained earnings or accumulated losses account, within the changes in equity;

f) item 8.3 Tax Credits, regarding disclosure in the explanatory note of the estimate of realization of the portions of the deferred tax asset and regarding the realization of the values of the asset that were not verified when compared in the profit projection that based the registration in the asset;

g) item 9.2 Convergence between IASB and FASB standards, which emphasizes the need to present information by segments and brings comments on the incorporation of FASB concepts by the IASB;

h) item 13.1 Moment of revenue recognition, with general guidance on revenue recognition according to NPC 14 and IAS 18

i) item 13.2 Classification of gains in tax proceedings, which deals in particular with the outcome of cases such as those related to the widening of the PIS/COFINS base;

j) item 20.1.7 "Goodwill" generated in internal operations, which characterizes the economic essence of operations with artificial generation of goodwill;

k) item 20.3 Reverse Merger – CVM Instruction No. 349/01, with guidance for situations where a provision must be constituted in the amount of the difference between the value of the goodwill and the tax benefit even if a "vehicle" company has not been created;

l) item 20.4.5 Corporate Investments Abroad, which brings considerations on the current standard on accounting for the effects of exchange rate variation of these investments;

m) 23.2.2 The Estimate of Taxes, which deals with the basic situations in the recognition and reversal of legal obligations;

n) item 26.3 Reserve for Profits to be Realized – Law No. 10.303/01 and 26.4 Retention of Profits, which give new wording on the accounting in the constitution and reversal of reserves for profits to be realized and indicate the procedures in the retention of profits;

o) items 29.2 Turnover of Independent Auditors, 29.4 Disclosure of non-audit services, 29.7 Annual information, 29.9 External quality control – peer review, and 29.15 Monitoring the performance of Independent Auditors regarding the information disclosed in the Explanatory Notes of Publicly Held Companies, which deal with aspects related to the disclosure of information, and responsibilities as well as other administrative themes.

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 main changes (additions and exclusions) made is also being disseminated. 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 the disclosure of accounting information and replaces CIRCULAR LETTER/CVM/SNC/SEP No. 01/2006.

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

Presentation of Financial Statements
1.1 Accounting policies and corporate governance of publicly held companies
1.2 Evidence and the Objectives of the CVM
1.3 The Evolution of Corporate Reports
1.4 The Information Disclosure Policy
1.5 Disclosure of accounting information in multiple markets
1.6 Clear and Objective Language
1.7 Disclosure in Explanatory Notes
1.7.1 Objectives and aspects of Explanatory Notes
1.7.2 Differences between national and international accounting procedures
1.8 The Quality of Accounting Information
1.9 The Statement of Results of the Period and Accounting and Non-Accounting Measurements
1.9.1 The objectives of the Statement of Results
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 Results
1.9.6 The economic measurements of the Statement of Results
1.9.7 EBITDA measurement – earnings before interest, income tax, depreciation and amortization (Earnings Before Interest, Taxes, Depreciation and Amortization)
1.9.8 The American standard on the disclosure of "non-GAAP financial measures"
1.9.9 Situation of Brazilian publicly held companies
1.9.10 The policy for disclosure of 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
1.13 Presentation of the Balance Sheet
1.14 Present value adjustment of rights and obligations
Accounts Receivable
2.1 Estimate of Provision for Doubtful Accounts
2.2 Disclosure in explanatory note of Provision for Doubtful Accounts
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 international standard IAS 7
4.3 Disclosure according to Brazilian standards and foreign standards
Accounting Practices, Changes in Accounting Estimates and Correction of Errors
5.1 Concepts
5.2 Summary of the pronouncement: "Accounting Practices, Changes in Accounting Estimates and Correction of Errors"
5.3 Retrospective adjustment due to CVM Resolution 506: demonstration of the movement of the retained earnings or accumulated losses account, within the changes in equity
5.4 Disclosure in explanatory note of accounting practices, changes in accounting estimates and correction of errors of prior periods, according to NPC 12/CVM Del. No. 506/06
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 Evidence of the Income Tax Provision
8.2 Tax Incentives
8.3 Tax Credits
8.4 Disclosure in explanatory note of Income Tax
Segment Reports
9.1 Disclosure in explanatory note of business segment information
9.2 Convergence between IASB and FASB standards
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 Constant Purchasing Power Currency
Fixed Assets
11.1 Recoverability of Assets 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 Moment of revenue recognition
13.2 Classification of gains in tax proceedings
13.3 Results of future periods
Employee Benefits
14.1 Debt Confession Instruments
14.2 Scope and Coverage
14.3 Nominal Rates X Real Rates
14.4 Discount Rate of Actuarial Liability
14.5 Return Rate of Plan Assets
14.6 Benefit Growth Rate
14.7 Other Relevant Assumptions
14.8 Exclusions in the Determination of the Fair Value of Plan Assets
14.9 Actuarial Valuation Method
14.10 Accounting of the initial adjustment of 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 Exchange Rate Changes
17.1 Exchange 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
17.6 Reserve for Profits to be Realized and Hedge Instruments
17.7 Effect on Equity Method Due to Exchange Variation
17.8 Temporary Differences
17.9 Audit Reports/Opinions
17.10 Disclosure in explanatory note of the Effects of Exchange Rate Changes
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 Liens, Guarantees and Contingent Liabilities
18.4.4 REFIS
18.4.5 Capitalization of Interest
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 Valuation
20.1.1 Companies Equivalent to an Associate
20.1.2 Loss of Continuity of Controlled/Associate Operations
20.1.3 Future Sale of the Investment
20.1.4 Permanent Losses in Investments Evaluated by the Equity Method
20.1.5 Goodwill/Discount in Subscription of Capital Increase
20.1.6 Goodwill/Discount originating from Investments evaluated by equity method
20.1.7 "Goodwill" generated in internal operations
20.1.8 Elimination of Unrealized Profits
20.1.9 Calculation of Equity Method
20.1.10 Investment acquired from investee with Negative Equity
20.1.11 Equity Method when there are differentiated rights
20.2 Consolidated Financial Statements
20.2.1 Consolidation of Financial Statements of Jointly Controlled Companies
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 Area
20.3 Reverse Merger – 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 Corporate 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 No. 3,068/01 and 3,082/02 and Susep Circular No. 192/02
21.4 Accounting of Hedge operations according to 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 Value 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 Scheduled Shutdowns
23.2 Taxes
23.2.1 Fundamentals in the Estimate for Accounting of Taxes
23.2.2 The Estimate of Taxes
23.3 PIS/COFINS
23.4 Disclosure in explanatory note of Provisions, Contingent Liabilities and Contingent Assets
23.4.1 Disclosure in explanatory note of Scheduled Shutdowns
23.4.2 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
24.2 Why Corporate Brands should not be accounted for
24.3 Costs with stock placement – subscription operation (underwriting)
24.4 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 Situation of accounting in American standards
25.5 Accounting by international standards IFRS 2
25.6 The controversy over the estimate and pricing methods of options
25.7 Corporate aspects of the approval of the option plan
25.8 Glossary of some of the main terms used in option plans
25.9 Accounting of share-based payment plans
25.10 Disclosure in explanatory note of option plans
Corporate Matters
26.1 Law No. 10.303/2001 – Changes in the Corporation Law
26.2 Participations in Results Not Referenced in Profit
26.3 Reserve for Profits to be Realized – 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 Constant in Shareholders' Agreement
26.6.5 Dividend per Share
26.6.6 Proposed Dividends
26.6.7 Interest on Equity Capital
26.6.8 Remuneration of Administrators
26.6.9 Reserves – Detailing
26.6.10 Reserves for Profits to be Realized
26.6.11 Retention of Profits
26.6.12 Multiple Voting
Reduction in the recoverable value of assets
Special Topics
28.1 Inquiries on Accounting Matter
28.2 Other disclosures in explanatory note
28.2.1 Eletrobrás Credits
28.2.2 Privatization Program
28.2.3 Real Estate Fund
28.2.4 Merger, Consolidation and Spin-off
28.2.5 Earnings or Loss per Share
28.2.6 Insurance
Auditing
29.1 Importance and role of independent auditors
29.2 Turnover of Independent Auditors
29.3 Conflict of Interest
29.4 Disclosure of non-audit services
29.5 Relationship with the independent auditor and the responsibility of administrators
29.6 Examination of technical qualification
29.7 Annual information
29.8 Internal quality control
29.9 External quality control – peer review
29.10 Continuing Professional Education Program
29.11 Audit of Controlled Companies
29.12 Audit in Merger, Consolidation and Spin-off operations
29.13 Audit of Transactions with Related Parties
29.14 Distribution of Results
29.15 Monitoring the performance of Independent Auditors regarding the information disclosed in the explanatory notes of Publicly Held Companies
Annex – Consolidation of Explanatory Notes
30.1 Disclosure in Explanatory Notes (1.7)
30.1.1 Objectives and aspects of Explanatory Notes (1.7.1)
30.1.2 Differences between national and international accounting procedures (1.7.2)
30.2 Disclosure in explanatory note of Provision for Doubtful Accounts (2.2)
30.3 Disclosure in explanatory note of Inventories (3.2)
30.3.1 Disclosure in explanatory note of inventories (3.2.1)
30.3.2 Idle Capacity (3.2.2)
30.4 Disclosure of notes explanatory to the cash flow statements (4.2)
30.5 Disclosure in explanatory note of accounting practices, changes in accounting estimates and correction of errors of prior periods, according to NPC 12/CVM Del. No. 506/06 (5.4)
30.6 Disclosure in explanatory note of Subsequent Events (6.1)
30.7 Disclosure in explanatory note of Income Tax (8.4)
30.7.1 Income Tax and Social Contribution (8.4)
30.7.2 Deferred Tax Asset (8.4)
30.8 Disclosure in explanatory note of business segment information (9.1)
30.9 Disclosure in explanatory note of Information that Reflects the Effects of Price Changes (10.2)
30.9.1 Statements in Constant Purchasing Power Currency (10.2.1)
30.10 Disclosure in explanatory note of Fixed Assets (11.3)
30.10.1 Revaluation of Fixed Assets (11.3.1)
30.11 Disclosure in explanatory note of Leasing (12.1)
30.12 Disclosure in explanatory note of Sales or Services to be Performed (13.3)
30.13 Disclosure in explanatory note of Retirement and Pension Plans (14.11)
30.14 Disclosure in explanatory note of concessions (15.2)
30.15 Disclosure in explanatory note of government subsidies (16.1)
30.16 Disclosure in explanatory note of the Effects of Exchange Rate Changes (17.10)
30.17 Disclosure in explanatory note of borrowing costs (18.4)
30.17.1 Debentures (18.4.1)
30.17.2 Long-Term Obligations (18.4.2)
30.17.3 Liens, Guarantees and Contingent Liabilities (18.4.3)
30.17.4 REFIS (18.4.4)
30.17.5 Capitalization of Interest (18.4.5)
30.18 Disclosure in explanatory note of Transactions with Related Parties (19.5)
30.19 Disclosure in explanatory note of special purpose entities (SPEs) (20.2.2.3)
30.20 Disclosure in explanatory note of Consolidated Financial Statements and Accounting of Investments (20.4)
30.20.1 Goodwill/Discount (20.4.1)
30.20.2 Condensed Statements (20.4.2)
30.20.3 Equity Method (20.4.3)
30.20.4 Consolidated Financial Statements (20.4.4)
30.20.5 Corporate Investments Abroad (20.4.5)
30.21 Disclosure in explanatory note of financial instruments (21.6)
30.22 Disclosure in explanatory note of discontinued operations (22.4)
30.22.1 Initial Disclosure (22.4.1)
30.22.2 Other Disclosures (22.4.2)
30.22.3 Update of Disclosures (22.4.3)
30.22.4 Separate Disclosure for Each Discontinued Operation (22.4.4)
30.22.5 Presentation of Disclosures (22.4.5)
30.22.6 Disclosure in Interim Financial Reports (22.4.6)
30.23 Disclosure in explanatory note of Provisions, Contingent Liabilities and Contingent Assets (23.4)
30.23.1 Disclosure in explanatory note of Scheduled Shutdowns (23.4.1)
30.23.2 Disclosure in explanatory note of Provisions, Contingent Liabilities and Contingent Assets (23.4.2)
30.24 Disclosure in explanatory note of Deferred Asset (24.4)
30.25 Disclosure in explanatory note of option plans (25.10)
30.26 Disclosure in explanatory note of equity items and corporate matters (26.6)
30.26.1 Treasury Shares (26.6.1)
30.26.2 Share Capital (26.6.2)
30.26.3 Authorized Share Capital (26.6.3)
30.26.4 Profit Allocation Constant in Shareholders' Agreement (26.6.4)
30.26.5 Dividend per Share (26.6.5)
30.26.6 Proposed Dividends (26.6.6)
30.26.7 Interest on Equity Capital (26.6.7)
30.26.8 Remuneration of Administrators (26.6.8)
30.26.9 Reserves – Detailing (26.6.9)
30.26.10 Reserves for Profits to be Realized (26.6.10)
30.26.11 Retention of Profits (26.6.11)
30.26.12 Multiple Voting (26.6.12)
30.27 Disclosure in explanatory note of Reduction in the recoverable value of assets (27)
30.28 Other disclosures in explanatory note (28.2)
30.28.1 Eletrobrás Credits (28.2.1)
30.28.2 Privatization Program (28.2.2)
30.28.3 Real Estate Fund (28.2.3)
30.28.4 Merger, Consolidation and Spin-off (28.2.4)
30.28.5 Earnings or Loss per Share (28.2.5)
30.28.6 Insurance (28.2.6)

Sincerely,

Signed Original by Signed Original by
Elizabeth Lopez Rios Machado
Superintendent of Corporate Relations
Jose Carlos Bezerra
Superintendent of Accounting Standards and
Auditing
In exercise

Presentation of Financial Statements

1.1 Accounting Policies and Corporate Governance of Publicly Held Companies

In the era of convergence of Brazilian standards with international ones, some aspects of the choice of accounting practices and disclosure of information must be highlighted for the administrators and accountants responsible for the corporate reports of publicly held companies. The two aspects to be considered are the set of standards that guide publicly held companies in the preparation and disclosure of their accounting information and the accounting policy built from the choices made in accounting practice when dealing with the accounting of various types of transactions and the disclosure of accounting reports.

The first aspect deals with compliance with accounting standards approved by the CVM, which determine a minimum structure, since they do not exhaust the subject, upon which the company's accounting policies are established. These standards are referred to in the pronouncements issued by Ibracon (which begins to transfer this burden to the CPC - Accounting Pronouncements Committee) and approved by the CVM, taking as reference the set of international pronouncements.

The second aspect deals with the responsibility of the Board of Directors in formulating accounting policies. It is recommended that the Board of Directors consider the adoption of explicitly chosen and fixed accounting policies in the form of a document that guides directors and accountants in the practice and preparation of accounting reports. The determination to comply with certain accounting policies, made through this regulation, establishes a relationship of trust with the investing public and builds a more solid framework in the company's governance acts. At a higher level, the company may avail itself of a specialized committee to analyze certain issues in depth, notably on topics that allow wide margin of choice and subjectivity in their treatment.

Compliance with Accounting Standards

Brazilian standards, which now take international standards as a basis, often require a perception of what is essentially established and not a literal interpretation of the texts. This means, among other things, that the guidance on the treatment of transactions in the Brazilian accounting environment, traditionally based on regulatory obedience, evolves into an evaluation of a more subjective nature, oriented by the usefulness of information for the investor. As an example of this, the Technical Interpretations of Ibracon No. 01 and 02, which deal with aspects of NPC 22 - Provisions, Liabilities, Contingent Liabilities and Contingent Assets, are evidence of the effort to transition Brazilian accounting regulation to a new structure common to the global capital market. From this point of view, the standards dealing with the formats and procedures for communicating accounting information recently approved must be understood.

The first standard already approved on the presentation and disclosures of financial statements (NPC No. 27, approved by CVM Resolution No. 488/06) aims to establish the basis upon which accounting information can be prepared and to allow comparison with both the company's own financial statements of previous periods and the financial statements of other entities. These information, however, together with other items in the explanatory notes to the financial statements, will only have value and be validated if they are able to assist investors in estimating the future results and financial flows of the entity.

This pronouncement provides for general considerations for the presentation of financial statements, guidelines for their structure and minimum requirements for their content. It also provides for the presentation format of the following components of the Financial Statements that must be presented by publicly held companies: balance sheet, income statement, statement of changes in equity, statement of cash flows (or, alternatively, statement of sources and applications of funds, as required by corporate legislation - Law No. 6.404/76), statement of added value (if disclosed by the entity) and explanatory notes, including the description of accounting practices. In providing for the structure and content of the financial statements, this pronouncement also deals with specific standards for the preparation of the Management Report to investors, reaffirms the prevalence of the principle of economic substance over legal form, and brings into the environment of accounting information disclosed to the Brazilian capital market the alignment with international standard IAS 1. This pronouncement also modified the presentation of the balance sheet by determining the separation of assets and liabilities into current and non-current and the separate presentation of intangible fixed assets (see item "1.13 Presentation of the Balance Sheet" of this circular which deals with the new presentation of the balance sheet for non-financial publicly held companies).

From the point of view of the presentation of accounting information, administrators and accountants must also consider the content of Ibracon NPC No. 12, approved by CVM Resolution No. 506, which deals with the criteria for selecting accounting practices and changes in these practices, accounting estimates and correction of errors. This pronouncement provides that a change in accounting practice, as well as the correction of an error from a previous period, requires the restatement, for disclosure purposes, of financial statements on a comparative basis, as if the new practice had always been in use, with its effect reflected in the equity of the period of the change or correction. Changes in accounting estimates, however, do not have retroactive effect. They must be applied prospectively, affecting the results of the current and future periods from the date of the change in estimate. The pronouncement also defines and differentiates an accounting practice from an accounting estimate, emphasizing that the company may only change an adopted accounting practice if such change is required by a standard or if it results in a better presentation or more reliable information in the financial statements.

Internationally, it is worth highlighting the effort of the American regulatory authority (SEC), which included "Critical Accounting Estimates" as a mandatory item in Management's Discussion and Analysis (MD&A). This item encompasses the assumptions adopted in accounting estimates that involve significant levels of subjectivity, relating to items regarding which there is uncertainty in judgment. The disclosure of these aspects should supplement (but not duplicate) the description of policies contained in the explanatory notes to the financial statements and increase understanding of the quality and variability that influence the financial condition and operational performance.

Formulation of Accounting Policies

The attribute of financial statements internationally considered as the most desirable by capital markets and the academic community is that they are capable of allowing analysts and investors to predict the 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' net worth and financial situation, the results of their operations, their fund flows and the changes in their 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 the purpose of financial statements intended for capital markets must prevail the economic substance of the transactions that gave rise to them, even when the substance contradicts the legal form of the same.

The choice of "what" to disclose, "how" to disclose and "when" to disclose is an exercise of business common sense, ethics and subjectivity. There are no objective rules that, once met, fulfill all the 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 deciding the most appropriate level of disclosure to be made.

Therefore, to achieve the objectives to which they are 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 net worth; it must evidence, especially, the commitments and future obligations that may have an impact on the net worth and financial situation of the company, even if they do not yet constitute liabilities and, therefore, are not yet recognized in the financial statements.

The arbitrary choice of accounting procedures at the mercy of circumstances and momentary interests destroys trust and increases risk for the investor who prefers clear and stable rules in the interpretation of accounting reports. As a typical example of the Brazilian accounting environment, we can cite a company that, without taking into account its intrinsic operational aspects, simply adopts, in the calculation of depreciation, a linear rate of 10% per year (the tax rate admitted for deductibility purposes) instead of a rate based on its operational characteristics. In this way, it informs the market of the tax rate, when the rate to be reported should be another, thereby increasing the information asymmetry of the market regarding the company.

In items 1.3 Corporate Reports, 1.4 Information Disclosure Policy, 1.5 Disclosure of Accounting Information in Multiple Markets, 1.6 Clear and Objective Language, 1.7 Disclosure in Explanatory Notes, 1.8 The Quality of Accounting Information and 1.9 The Statement of Results of the Period and Non-Accounting and Accounting Measurements, additional clarifications are presented on aspects of the formulation of accounting policies.

Recommendations

An incomplete list of points that should be established in advance in accounting policies to be considered by the Board of Directors (or by a specialized committee) is presented below, in order to avoid the so-called "earnings management", here defined as the arbitrary judgment in the process of reporting financial statements, with the aim of influencing or manipulating the numbers presented, even within the limits prescribed by accounting and tax legislation. Usually such "management" is obtained by using, in a way that is convenient to obtain a certain result through provisions, inconsistent practices in the recognition of revenues and expenses, etc.

a) Points to be covered in the "Management Discussion and Analysis"; b) internal control systems involved in the validation of accounting information; c) accounting policies for transactions, such as:
i) Relevant transactions that are not necessarily included in financial statements ("off-balance sheet transactions") must be detailed in the explanatory notes; ii) estimates of provisions, such as Tax, Labor and Civil, for Restructuring and for employee benefits (retirement and pension plans) and for warranties; iii) change in accounting criterion; iv) transactions with related parties; v) financial instruments and derivatives; vi) share-based compensation; vii) segment reporting; viii) criteria for accounting for tax credits; ix) non-accounting measurements (ebit and ebitda); x) transactions between related parties.

1.2 Disclosure 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 the investing public in this market.

The improvement of information available to the investor constitutes one of the most important tasks of this regulatory body, which, to achieve this objective, must seek to meet the informational needs of the user. In this way, economic decisions by these investors can be more secure, in addition to providing an additional gain in reducing the cost of collecting information about publicly held companies.

The purpose of the CVM's regulatory activity is, in this context, the maintenance of the efficiency and reliability of 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 the differences between companies in terms of disclosure, measurement and methods used in the preparation of financial statements and promoting the substitution of quantity by the quality of this information is a task that comprises the scope of the exercise of regulatory activity.

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 and 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 meet the speed with which this information must reach those interested. It is necessary for the company to make a permanent effort to improve this information and seek to guarantee 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 of 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 working 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 is in the Brazilian legal environment where the Law is the main source of law (Roman law, or code law) compared to countries of jurisprudential law (customary law or 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 the economic substance over the legal form as a 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 guidance 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 aim 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, the Accounting Pronouncements Committee - CPC, now in operation, encompasses representatives of the various segments affected by the accounting information of publicly held companies and is capable of producing accounting standards for application in the Brazilian capital market with reference to international standards, which would bring greater flexibility to the accounting standardization process.

The second barrier deals with economic-tax issues and the need for a 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 to reconcile these interests.

The cultural barrier is important as a fundamental factor in understanding international rules that can only be understood from a base 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 that, at this moment, only some centers are able to meet the training of the professional apt 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 gained access to the global capital market. The requirements on 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 understanding of the CVM's 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 restructurings (mergers, acquisitions and takeovers) (v) the accounting treatment of government grants, (vi) segment reporting.

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 accounting procedures involved in these issues. It is also observed a large number of companies whose reports do not present adequate information to meet investor needs. Although the same formal structure of reports has been maintained over the years, the evolution of users' decision-making models for accounting information and the increase in the complexity of companies' operations demand a new level in the informational quality of corporate reports of publicly held companies.

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 far it is possible to succeed in communicating with the community of investors 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 analysis by investors of the factors that affect 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; the transparency in the disclosure of information; equality in access to information; temporality 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 the investor's decision, without confusing them with an excess of information; that is, considering relevant that which can alter the investor's perception and be capable of allowing 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 the need to roll over short-term debts, significant variations, through gains or losses, permanent or temporary, in market share and sales volumes, exposure to exchange rates, relevant loan operations with related parties, risk of obsolescence 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 the power to influence demand, horizontal diversification of business, verticalization or not of the "supply chain" or of production processes, regulatory or legal changes of representative impact, positive or negative, on the net worth and financial position or on the results of operations, and significant changes in corporate governance and/or risk management practices.

transparency in the disclosure of information
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 aspects of returns and risks of the company, and is willing to undertake the necessary efforts in the study of the corporate report.

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

temporality and continuity of disclosure
Disclosure must occur in time for the timely decision by investors, avoiding harm from procrastination in providing information; this principle is demonstrated by timeliness, that is, the information is due as long as it has the capacity to influence investment decisions. In this sense, the continuity of information disclosure is fundamental so that the investor can evaluate the situation of the invested position and decide on buying, selling, or holding securities. The aspects of equality and temporality are especially important for companies whose securities are traded in more than one market. These companies must serve the users of their information through the filing of 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 broadcasting 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 with the CVM and disclosed for general public access.

1.4 The Information Disclosure Policy
The information disclosure policy of the publicly-held company, 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 of access, and temporality. 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 the ITR must be, for example, integrated by the most relevant information for understanding the company's operations. When deciding on the matters to be disclosed, administrators establish a structure constituted by the main issues of the operation, that is, a central axis for the information organized in the various statements and forms. The expression – disclosure policy – in this context is 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 evaluating the company. This vision creates additional value for the investor through the increased understanding of the company's situation and prospects and is reflected, therefore, in the appraisal of its securities. Although there is no "standard" model for such a disclosure policy, nor is it reasonable to seek one, the same is guided by the minimum requirements contained in corporate legislation and accounting pronouncements, industry conditions, facts and circumstances specific to the company, business acumen, and the ethical sense of administrators and accountants. The practical objective of this policy is to explain to the users of the financial statements the performance that is the result 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 on 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 of the company issuing securities. In summary, the intended functioning for 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. Informational asymmetry refers to a situation where one agent – investor or market analyst, for example – has superior information about the characteristics of the company that another agent does not have. In the case of companies registered in different markets, different requirements for information disclosure made by different regulatory bodies can lead to access to different sets of information by investors in each market, if each set of information is not disclosed in all markets in which it is registered. This implies that the disclosure of a new format for a certain accounting information in a given 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 between the different accounting environments in which the company operates. If the company, for example, discloses a type of financial 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 of 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 way as in the market where it was disclosed due to specific accounting standards. Legal implications are provided for in Article 157 of Law 6.404/76, which deals extensively with the "duty to inform" and CVM rules, particularly CVM Instructions numbers 248/1996, 331/2000, and 358/2002, which deal with the disclosure of financial 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 rules, 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 rules, that is, the distribution and use of information disclosed in an unequal or privileged manner, 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 configures that, legally, the information was made available for access by all.

1.6 Clear and Objective Language
Financial statements are prepared and disclosed with the objective of bringing to the knowledge of shareholders and other interested parties the net worth and financial position of the company, the results of its operations, its fund flows, and the net worth changes 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 financial statements, and of independent auditors in audit reports, to construct texts whose understanding is simple and direct for a reader audience moderately familiar with accounting, business, and finance.
The information produced and disclosed by publicly-held companies, especially those contained in the Financial 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 reader audience to understand the data contained therein and use it for decision-making. It is not contemplated to make the drafting of documents disclosed by companies simplistic or banal, but rather the use of common and usual language, prioritizing the clarity of the exposition, in order to communicate, simply, 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 must be avoided. The use of foreignisms or jargon (proper to business sectors, finance, or accounting) should only be tolerated when all simplifying alternatives are inappropriate. Administrators of companies must ensure that the set of financial statements constitutes, in this way, a document that allows knowledge of the current situation of the company and the facts and events that occurred leading to the calculation of results and changes occurred during the period. Financial 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 must be considered that the increase in volume and complexity of the text does not contribute to the relevance of these reports.

1.7 Disclosure in Explanatory Notes
1.7.1 Objectives and aspects of Explanatory Notes
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 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 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 are not presented anywhere else in the financial statements; c) provide additional information that is not presented in the financial 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 art. 176 of Law No. 6.404/76, which establishes that "the statements shall be complemented by Explanatory Notes and other analytical tables or financial statements necessary to clarify the net worth situation and the results of the fiscal year". In this law, the explanatory notes must discriminate, clearly and objectively, the clarifications necessary for the correct understanding of the content of the financial statements, starting from the items provided in § 5 of art. 176 of the corporate law. This implies that explanatory notes do not deal with the exception of any accounting procedure in the statements but rather clarify about an integrated set of 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 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 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 make up 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. 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) information must encompass the factors of integrity, authenticity, accuracy, sincerity, and relevance; b) texts must be simple, objective, clear, and concise; c) 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) 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 must be avoided because they render a disservice to competent information and are harmful to analysis, such as, for example, "... rates permitted by legislation..." or, redundantly, "... prepared in accordance with the law...", or still, "... in accordance with corporate, tax legislation, and specific norms of the regulatory bodies of the matter...". Regarding redundancy in the drafting of explanatory notes, note the unnecessary reporting that "...were prepared in accordance with the law..." because it is not admissible the confession that it could be different (which would mean disobeying the law).

1.7.2 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 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, mandatorily, to the market its financial statements, due to obtaining registration for trading of its issued securities. When deciding on the disclosure of the reconciliation, the entity's administration must observe how equivalent these practices are. Financial statements prepared according to a certain accounting practice can be considered equivalent to those prepared according to accounting practices adopted in Brazil when both analyses, of both sets of statements, allow investors a similar decision 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 reclassifications of numbers. 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 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 worth 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 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 divergences. These divergences may include additional disclosures, reconciliations, etc. This judgment must be made by the administration and approved by the independent auditors of the publicly-held company, and must be supported by procedures accepted by regulatory bodies and accounting 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 Deliberation No. 29/86, which helps preparers of financial statements, administrators, accountants, analysts, investors, and auditors in the application and understanding of the criteria for evaluating net worth items 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 Deliberation, 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 accounting information useful to users.
The first four qualitative characteristics are: understandability, relevance, reliability, and comparability.

Understandability
25. An essential quality of the information presented in financial statements is that they be readily understood by users. To this end, it is presumed 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 its relevance to users' decision-making needs, should not be excluded merely on the pretext that it would be difficult for certain users to understand.

Relevance
26. To be useful, information must be relevant to users' decision-making needs. Information is relevant when it influences users' economic decisions, helping them to assess the impact of past, present, or future events, confirming or correcting their previous assessments.
27. The forecasting and confirming 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.
28. 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 of direct interest to users, such as dividend and salary payments, 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
29. 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 may affect the assessment of risks and opportunities facing the entity, regardless of the results achieved by the new segment in the period covered by the financial statements. In other cases, both nature and materiality are important, such as the values of existing inventories in each of the main classes of inventories, according to the appropriate classification of the business.
30. 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
31. To be useful, information must be reliable. Information has the quality of reliability when it is free from material errors, and when users can place confidence in it as faithfully representing what it says it represents or what could reasonably be expected to represent.
32. 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 damage claim 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
33. To be reliable, information must faithfully represent the transactions and other events that it says it represents or what 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.
34. 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 transactions or other events to be measured, or in establishing and applying valuation and presentation techniques that may 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 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
35. For information to faithfully represent the transactions and events 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 ensuring that the entity continues to enjoy the future economic benefits generated by the asset. Under such circumstances, reporting the sale would not faithfully represent the transaction effected (if there was indeed a transaction).

Neutrality
36. To be reliable, the information contained in 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
37. Those who prepare financial statements, however, face 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 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, or 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
38. To be reliable, the information contained in financial statements must be complete, within the limits of relevance and cost. An omission may render the information false or distorted, and thus unreliable and deficient in terms of its relevance.

Comparability
39. 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 evaluate, 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 various periods, and in a consistent manner for different entities.
40. An important implication of the qualitative characteristic of comparability is that users must be informed of the accounting policies followed in the preparation of 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 accounting policies used by the entity, helps to achieve comparability.
41. The need for comparability should not be confused with mere uniformity, and it 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 manner if the adopted policy 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 appropriate alternatives.
42. Since users wish to compare financial position, results, and changes in financial position over time, it is important that financial statements show the corresponding information from previous periods.

Limitations on the Relevance and Reliability of Information Timeliness of Information
43. If there is undue delay in reporting information, it may lose relevance. Management may have to establish a balance between reporting information in a timely manner 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 a 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 users' economic decision-making process.

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

Balance Among Qualitative Characteristics
45. In practice, it is sometimes necessary to make a trade-off or accommodation among qualitative characteristics. Generally, the objective is to achieve an appropriate balance among 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
46. We often say that financial statements reflect true and fair financial position, results, and changes in financial position of an entity. 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 Statement of Income and Accounting and Non-Accounting Measurements
The use of economic measurements not based on accounting standards, such as earnings before interest, income tax, depreciation, and amortization – EBITDA (earnings before interest, taxes, depreciation and amortization), or in comments of the management report and 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, as it intends to influence users' economic decisions by adding elements not foreseen in the structure of usual reports of financial statements based on accounting principles. To broaden 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 disclosure to the capital markets.

1.9.1 The Objectives of the Statement of Income
The objective of the Statement of Income 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 shall 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 Statement of Income intends to present the economic perspective in the accounting view 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 Accounting Periods. As a general rule, the Revenue Recognition Principle considers revenue realized when the realization process is complete or virtually complete, i.e., the effort to obtain revenue has been developed, and there has been a transaction. The Matching Principle, also called the Accrual Principle, determines that all expenses, representing sacrifices of assets in the search for revenues occurring in a given 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, are also recognized when incurred. In the evaluation process based on the concept of profit prescribed 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 containing economic benefits, and equity is the residual right of shareholders over the entity's assets 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 increase in assets or 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 involving "multi-services" or "multi-products" have become increasingly frequent. This phenomenon occurs when the relationships between the publicly-held company selling 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, accept it as part of payment for new equipment, or alienate it at pre-agreed values. The use of judgment and common sense by administrators and auditors of publicly-held companies is required to not succumb to the temptation of precipitous judgment regarding which component of the "package" sold is "revenue," when, and at 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 Pronouncement XIV of Ibracon – 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 not 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; extraordinary and accidental transfer expenses; the cost of written-down assets 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 Statement of Income
To concretize these principles and concepts, the problem must be faced regarding the form 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 statement of income from being presented in the manner that results in the best possible appreciation by the user. The minimum items provided 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:
(item 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 participations of debentures, employees, administrators, and beneficiaries, and contributions to institutions or funds for employee assistance or pension; VII net profit or loss of the fiscal year 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 evidenced in the Statement of Income:
a. revenues resulting from the exploration of core activities; b. taxes levied on operations, discounts, returns, and cancellations;
c. the cost 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. operating result; h. revenues, expenses, gains, and losses not resulting 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 fiscal year.
The types of presentation of the statement of income have been modified over time, both by the administrators and accountants responsible for disclosing the company's information, and by users who adapt the disclosed financial statements to their analysis model.

1.9.6 The economic measurements of the Statement of Income
The view of the construction of the company's profit in the period is presented conventionally 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 evidence Financial Revenues and 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 – EBIT (earnings before interest and tax), was constructed with the idea of generating profits from assets and measuring the ability to service debt (payment of interest), as classical finance theory conceptualizes "return on assets" as that obtained independently of the way in which 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 the efficiency in conducting the company's activities. Operating profit is generally defined in accounting standards through its components when treating the information brought by the Income Statement. In its broadest concept, operating profit arises as the result of Operating Revenues and Operating Expenses, defined as those associated with the company's main activity. An 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 most directly related measurement, "return on operating asset" (operating profit / operating asset). This concept allows highlighting, from the ability to manage assets, the skill in raising resources to finance its activities. The concept of non-operating items in the Income Statement corresponds, therefore, to items not related to regular activities or linked to its social objectives, such as sporadic sale of permanent asset items and financial charges.

1.9.7 The EBITDA measurement – earnings before interest, taxes, depreciation and amortization

Publicly held companies have been disclosing the measurement of earnings before interest, income tax, depreciation and amortization – EBITDA as a parallel measurement to the conventional ones presented in the accounting statements. This measurement is also widely used as a type of company cash flow for various purposes, such as, for example, as a measure of the capacity to service debt, when compared to resources applied in the company (market value plus net debt at present value), or used as a multiple for company valuation, among other applications.

Summary view of measurements based and not based on accounting standards, presented here only for the purpose of understanding the text.

Revenues
Cost of Goods Sold
Gross Profit economic measurement based on accounting standards Selling Expenses Administrative Expenses Profit before taxes, interest, depreciation and amortization (EBIT) non-accounting-based measurement, equivalent to EBIT – earnings before interest and tax Depreciation and Amortization Operating Profit before taxation and interest (I.R. and Financial Expenses) (EBIT) non-accounting-based measurement, equivalent to EBIT – earnings before interest and tax Financial Expenses (interest) Operating Profit (after financial expenses) economic measurement based on accounting standards Non-operating Revenues and Expenses Profit before income taxes Taxes on profit: income and social contribution Net Profit economic measurement based on accounting standards

It continues to be observed by capital market representative entities that the EBITDA information is being prepared and disclosed in a very particular way by publicly held companies and divergently among them. This situation makes it difficult to understand both the formation of the number presented and its integration or reconciliation with the other numbers of the Income Statement, and in many cases, it is not comparable because it is prepared on a case-by-case basis. These measurements, therefore, are not directly extracted from the same structure of the income statement built according to accounting principles and standards, but include and exclude amounts not provided for in these standards. Non-accounting-based measurements are defined as those that include or exclude amounts not provided for in the economic measurements associated with the most directly comparable accounting standards. These adjustments intend to reflect the management's view on the company's resource generation and must establish a relationship with the measurements provided for in accounting standards. As an example, the company, when disclosing a measurement similar to EBITDA, must establish a reconciliation with the economic measurement based on the most directly comparable accounting standards with Operating Profit. In this case, the reconciliation could, for example, have the following format:

Operating Profit
(+) Financial expenses
(-) Financial revenues
(+) Depreciation
(+/-) Amortization of goodwill or bargain purchase (+) Other amortizations (-) Non-recurring expenses (revenues) (=) Profit before taxes, interest, depreciation and amortization – EBITDA

A reconciliation of this nature gives the reader of the financial statements a clear idea of the calculation performed by management and has greater explanatory power regarding the formation of the economic measurement and comparison with other companies.

The cited example does not intend to be presented as a unique solution to the problem of items that should be included or excluded in each disclosed measurement. It may be that, in some cases, adaptations to this basic presentation model are necessary, given the specific operating conditions of each business or sector. These adaptations, however, when necessary, must be clearly identified and explained, and presented in a way that reconciles with this basic structure to facilitate the understanding of the external user and to maintain the comparability of this adjusted calculation basis with those of other companies following the general standard.

Generally, financial revenues should be excluded from the EBITDA calculation. It is frequent that the accumulation of excessive amounts of cash is outside the company's usual business cycle – aiming, for example, a future acquisition. Any inclusion of financial revenues in the construction of EBITDA should be limited to those cases where this better represents the items involved in the business cycle, as is customary, for example, in the retail sector.

Other items may also be considered in the preparation of EBITDA, provided they represent revenues or expenses directly linked to the business and that are recurring, that is, those expected to be earned or incurred in the coming fiscal years. Non-recurring expenses or revenues may occasionally be considered in the calculation, provided the manager explicitly states the reasons and bases that led him to opt for the inclusion of these expenses or revenues, which, in any case, must be clearly identified and individualized.

As mentioned earlier, whenever non-accounting measurements of EBIT and EBITDA are used, they must be accompanied by a complete explanation of their calculation and components.

In any case, it is presumed that the manager intends to present the measurement that best represents the efficiency of his management but, conversely, assumes the responsibility of disclosing the objectives to be achieved and the relationship with the other accounting measurements presented. In another situation, the non-accounting measurements of EBIT and EBITDA could be reconciled with the consolidated statement of a publicly held company as follows:

Net profit (loss) of the period
Income tax and Social Contribution
Non-consolidated Participation Result
Net Financial (expenses) revenues
Net Non-operational (expenses) revenues
Participation of non-controlling shareholders
EBIT
Depreciations and amortizations
EBITDA

Finally, the regulation on this type of disclosure seeks to make the reader perceive the meaning of the measurements not supported by the disclosed accounting statements, and for this, the manager must disclose the bases that led him to prefer the chosen form.

1.9.8 The American standard on the disclosure of "non-GAAP financial measures"

The issues associated with the presentation of non-GAAP accounting measurements have historically been commented on in Accounting Series Release No. 142, Reporting Cash Flow and Other Related Data (1973) and, subsequently, in item C. Disclosure of Non-GAAP Measures Such as "EBITDA" in the document Frequently Requested Accounting and Financial Reporting Interpretations and Guidance 1 of the Division of Corporation Finance on March 31, 2001, which, more recently, were reformulated and expanded by Regulation G established in Release 338176 "Conditions for use of Non-GAAP Financial Measures" 2, on January 22, 2003, by virtue of art. 401 (b) of the Sarbanes-Oxley Act of 2002, and by the document issued by the Division of Corporate Finance: Frequently Asked Questions Regarding the Use of Non-GAAP Financial Measures on June 13, 2003 3.

References:
1 http://www.sec.gov/divisions/corpfin/guidance/cfactfaq.htm#P206_37363) 2 http://www.sec.gov/rules/final/338176.htm 3 http://www.sec.gov/divisions/corpfin/faqs/nongaapfaq.htm

The main provisions established in item C of Disclosure of Non-GAAP Measures Such as "EBITDA" in the document Frequently Requested Accounting and Financial Reporting Interpretations and Guidance, (1) of the Division of Corporation Finance on March 31, 2001 were:

Non-accounting measurements must be presented in such a way that no greater power or prominence is given than the accounting measurements of results or cash flows as presented in the accounting statements. The SEC (staff) recommends that EBITDA and other measurements be presented as "other data".

Where non-accounting measurements are used, a footnote or other reference will give a complete explanation of their calculation and components, given that publicly held companies and analysts do not calculate these non-accounting measurements in the same way. The SEC therefore recommends that readers be alerted to the fact that the measurements presented may not be comparable with measurements disclosed by other companies;

Managers must consider in the disclosure of any non-accounting measurement the significant factors and trends and requirements not captured by these measurements to ensure the balance of information and avoid undue reliance (support) on this type of measurement. Despite disclosure by competitors or requests made by market analysts, the staff believes that non-accounting measurements should be avoided unless managers believe that this measurement provides relevant and useful information;

Non-accounting measurements that measure cash or "funds" generated by operations (liquidity) must be harmonized with the equally highlighted disclosure of cash flow amounts (operating, investing and financing activities) and, in some cases, the relationship between profits and fixed charges;

A frequent disclosure is the use of non-accounting measurements in the comment on operational performance when the measurement is primarily of liquidity, capital resource or debt service interest capacity. For example, calculations that describe an adjusted or normalized measurement of working capital or funds generated by operations and available for capital applications or in debt are presented

inappropriately as if they were to be used as alternative measurements of profits, return on investment or similar performance or efficiency factors. In this case, the staff will request the presentation of the measurement in an appropriate context with the clarification of the expected use;

If management presents non-accounting measurements as an alternative or "pro forma" measurements of performance, the staff discourages adjustments to eliminate or smooth items characterized as non-recurring, non-frequent or non-usual. Unusual items are likely to occur in all periods, and companies and investors can distinguish which types of events justify adjustments. Trends can be distorted if only certain items are adjusted while the effect of other non-frequent items (favorable or unfavorable) are not considered or highlighted. Obviously, all special items must be highlighted in the publicly held company's disclosure to allow analysis by investors. Where management intends to present the liquidity-indicative measurement and communicate it in the context of its presentation, the staff commonly will not object to the adjustment of non-cash charges related to special items if this is intelligible to investors within the circumstances.

The provisions of Regulation G established in Release 338176 "Conditions for use of Non-GAAP Financial Measures", on January 22, 2003, and in the forms for filing (SEC filings: item 10 Regulation SK and SB), were summarized in the following items:

The definition of a Non-GAAP financial measure: a historical or projected numerical measure of economic performance, financial position or cash flow that excludes or adds amounts that are included in the most directly comparable accounting measurements prepared according to accounting principles (GAAP) and presented in the Issuer Company's Income Statement, Balance Sheet or Statement of Cash Flows;

The standards on non-accounting measurements do not include: operational and statistical measures and proportions or measures that are calculated using only the accounting measurements prepared according to accounting principles and operational measures;

The disclosure of a non-accounting measurement made by the publicly held company must: a) include the presentation of the most directly comparable accounting measurement calculated and presented according to accounting principles and standards, b) the quantitative reconciliation for historical and prospective information of the differences between the non-accounting measurement and the accounting measurement and, c) A statement describing the reasons why the company believes that non-accounting measurements provide useful information to investors, which can be disclosed in the most recent annual report, or else, companies must present arguments why investors should value the accounting measurements in the context in which they are presented, given the items excluded in the accounting measurements (this statement can be included in the most recent annual report and must be substantive, that is, it must not be justified only by its usefulness in the work of analysts); d) the preparation of non-accounting measurements must be done consistently with the presentation of previous periods and, if a change is necessary, a complete description of the change in this methodology.

Regulation G also requires for prospective measurements the reconciliation between the projected measurement and the most appropriate measurement according to accounting principles; Companies are prohibited from: a) excluding charges or loans that require cash settlement in measures other than EBIT and EBITDA; b) adjusting the non-accounting measurement to eliminate non-frequent items when the nature of the charge or gain is such that it has been incurred in the last 2 years or is likely to occur in the next 2 years; c) present cash flow per share (§33 FASB 95); d) use titles or descriptions of non-accounting measurements that are equal or similar to the titles and descriptions of accounting measurements; e) present non-accounting measurements in the body of the accounting statements or in their explanatory notes.

The comments that must be disclosed include: a) the way in which management uses non-accounting measurements to manage and evaluate the business, b) the economic substance behind the managerial decision to use this type of measurement, c) the limitations associated with the use of non-accounting measurements compared to accounting measurements prepared according to standards and accounting principles, d) the way in which management compensates for these limitations, when using non-accounting measurements and, e) the substantive reasons why management believes that the measurements provide useful information to investors;

There is a historical practice of requiring the presentation of the three large categories of cash flow (i) operating activities, (ii) investing and (iii) financing – with the same prominence as non-accounting liquidity measurements; The disclosure of non-accounting measurements in the disclosure by business segment (SFAS 131) also entails the application of Regulation G. Regulation G applies to the disclosure of non-accounting measurement made by a foreign company outside the United States or included in written communication subject to some limited exceptions. Regulation G does not apply to a foreign publicly held company if the following conditions are met: a) the securities of the foreign company are registered on stock exchanges outside the United States, b) the non-accounting measurement is not derived from the accounting measurements provided for in US GAAP, c) the disclosure is made outside the United States.

It is permitted to include non-accounting measurement in Form 20F, including in its accounting statements, of a foreign publicly held company if the measurement is: a) required or expressly permitted by the issuer of accounting standards used in the primary accounting statements of the foreign company, b) is included in the annual report or accounting statements used in the country of origin. Finally, the SEC also alerts that federal anti-fraud laws are also applicable to "pro forma" information.

General comments on the SEC's position:

Regulation G intended that companies provide an impartial presentation when non-accounting measurements are presented to investors. Although the SEC admits that non-GAAP measurements can be useful to investors and that there is no prohibition of disclosure by companies, the SEC alerts to the potential disorientation caused by these indicators. In particular, the SEC staff observes that "pro forma" information diverges from conventional accounting information and therefore this information can make it difficult for the investor to compare the accounting results of one period to another and with other companies. Under Regulation G, companies should not disclose non-accounting measurements that, taken together with the other information, contain or omit transactions that lead to investor misinformation. The SEC staff's position has placed emphasis over time on the disclosure of information in a unique way (a single result presented in consolidated accounting information, for example) supported by the standards and accounting principles applied by companies to obtain comparable accounting information. The exclusion of non-accounting (non-GAAP) measurements from the body of the accounting statements is aligned with this position. The staff emphasizes that the disclosure of results in a way other than those presented in the body of the accounting statements prepared according to accounting principles and standards (for example, EBITDA), disorients investors when the company does not clearly disclose the bases or principles that support this type of presentation. If the company presents results in which it excludes or omits a certain type of transaction, such as restructuring expenses and other unusual charges, it must also present the method and bases it uses in the presentation of "pro forma" measurements in comparable periods. The approach to the problem of disclosing non-accounting measurements was made on two fronts: the issuance of Regulation G and the changes to item 10 of Regulation SK, which regulates non-accounting information (non-financial statement disclosure requirements), and Form 20F (annual report used by foreign issuer companies). The same provisions of Regulation G must be observed in result announcements filed in Form 8K (item 12, within five days of any public announcement or release disclosure), which regulates current information (current report) that is used to inform about the occurrence of any relevant event or corporate change that is considered important for investors and has not been previously informed. The reaction of American companies to Regulation G has been either not to report non-accounting measurements, as a way not to suffer criticism for their construction by excluding an item, or to increase information by including the comparison with the same previous period plus including summarized managerial comments (a mini MD&A) on non-accounting measurements (which has the advantage of protection under Regulation FD for
disclosures made to analysts).

1.9.9 Situation of Brazilian publicly held companies

There is a widespread use by Brazilian publicly held companies of non-accounting information in their management report and, in some cases, in explanatory notes. Most of the non-accounting measurements, typically EBITDA, have been presented in the most varied forms, generally in market communications but also, and increasingly, in other reports such as management reports, public offering prospectus (summary of financial information) and appraisal reports.

The EBITDA statement in some research conducted was presented as: a) gross result minus expenses; b) gross profit minus sales expenses, minus general and administrative expenses and plus depreciation and amortization; c) operating profit minus equity method result plus/minus financial result, plus depreciation and amortization.

The following applications were observed in the information on non-accounting measurements, generally presented in market communications regarding results:

inclusion of EBITDA as one of the factors explaining the variation in cash balance;
inclusion of EBITDA as one of the items composing net income (EBITDA + taxes + financial income/expenses + depreciation and amortization + others);
inclusion of EBITDA in the explanatory note on business segment information;
analysis of EBITDA variation: Initial EBITDA +/- operating expenses, +/- cash COGS, +/- sold volume, +/- average price = Final EBITDA;
denomination: EBITDA, Adjusted EBITDA, Managerial EBITDA, EBITDA margin on net revenue; indication of depreciation "based on production" and "based on sales volume";
calculation of adjusted EBITDA: EBITDA plus "non-cash" adjustments equals Adjusted EBITDA;
cash earnings per share;
ratios: net debt to EBITDA, company value (net debt + market value) to EBITDA, margin on EBIT, margin on EBITDA, share price to free cash flow;
disclosure of a value for EBITDA without mention of aspects related to preparation, content, reconciliation, and purpose in communications and management reports.

The limitations generally pointed out for the EBITDA measure are not pointed out by Brazilian companies and, compared to American companies, Brazilian disclosures are more liberal and, in general, do not present the justification and purpose for the use of these measurements by management.

1.9.10 Policy for disclosure of economic performance measurements based and not based on accounting standards

When seeking to present a new economic performance measurement, company management 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 be communicated, reduces 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 management intends to demonstrate the operation's resource generation capacity compared to indebtedness. In this case, it must also present and reference its comments on the amount of financial expenses, which includes leasing contracts treated as loans. This treatment considers the principle of economic substance (leasing treated as a loan) over legal form (leasing treated as a rental). These considerations refer to the origin of the need for information provision by open companies, its more or less standardized form within a distribution system to guarantee equal access to users of the disclosed information. It is understood that, as a fundamental characteristic, the information presented to interested users of the capital market must have certain 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, i.e., the application of the same accounting principles, valuation criteria, and norms 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 equity, and 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, 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 company information only through the required and comparable information in 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 the 20F for the American capital market, must also maintain internal coherence and coherence with accounting information provided in Brazil.

Guidance for Brazilian Open Companies

The guidance for this disclosure should consider the following items, aiming for alignment with the international environment and the objective of improving the use and disclosure of non-accounting measurements:

disclosure of non-accounting measurements should be done highlighting the same importance as accounting measurements, so that the investor is not confused;
the information must have explanation and comments on all items added or excluded such as depreciation, financial income and expenses, restructuring expenses, etc.;
this explanation must include the reconciliation of the non-accounting measurement disclosed by the company with the economic measurement closest to accounting standards;
reference to which set of accounting norms and principles the accounting measurement refers to: Brazilian (BR GAAP), American (US GAAP), International (IFRS), mainly for open companies with registration and corresponding disclosure of accounting statements in foreign exchanges;
the information must be presented together with information from the same previous period, so that it is comparable;
non-accounting measurements must be accompanied by a statement describing the reasons and objectives for which the company believes that non-accounting measurements provide useful information to investors and the limitations of this type of measurement;
Guidance to not include non-accounting measurements in accounting statements or in explanatory notes to these statements, as they do not correspond to the information presented in the accounting statements;
The existence of loan contractual clauses or covenants that contain non-accounting measurements such as "Adjusted EBITDA", and which are relevant to the investor, must be disclosed in explanatory notes on these financings;
Mention, at the end of the communication, management report, or document mentioning non-accounting measurements, whether or not review by independent auditors was performed.

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 "miscellaneous accounts" or "current accounts" is prohibited.

1.11 Statement of Changes in Equity

CVM Instruction No. 59/86, in its article 10, allows indicating in an explanatory note or in analytical tables the subdivisions of the 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 user needs, companies must discriminate, account by account, the items comprising their 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 company's production process. The current and potential applications of added value show the economic and social aspect that its concept involves: (i) as an index for evaluating performance in wealth generation, by measuring the company's efficiency in using production factors, comparing the value of outputs with the value of inputs, and (ii) as an index for evaluating social performance as it demonstrates, in the distribution of generated wealth, the participation of employees, the Government, Financing Agents, and Shareholders.

The added value also demonstrates the company's effective contribution, within a global performance view, to the generation of wealth in the economy in which it is inserted, being the result of the concerted effort of all its production factors.

The Statement of Added Value, which can also integrate the Social Balance, thus constitutes an important source of information as it presents this set of elements that allow the analysis of the company's economic performance, evidencing wealth generation, 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 social nature information, having already in 1992 supported and stimulated the disclosure of the DVA, through CVM Advisory Opinion No. 24/92. In Circular Letter CVM/SNC/SEP No. 01/00, the CVM suggested the use of a model elaborated by the Foundation for Research in Accounting, Actuarial and Financial Sciences of USP (FIPECAFI). Additionally, 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 open companies are increasingly adhering to the disclosure of social nature information, mainly the DVA, and within this voluntary disclosure character, aiming to guide and encourage those companies that have not yet adhered, we are presenting a simplified model of the Statement of Added Value (based on a model elaborated by FIPECAFI) with instructions for its completion.

It can be verified in the model below the use of the added value calculation criterion based on sales, which makes the preparation of the DVA simpler and its understanding easier, as thus, the added value is related to the accounting principles used in traditional accounting statements, allowing its reconciliation with the income statement. Thus, it starts from gross revenues and subtracts the value of goods acquired from third parties that was incorporated into the final alienated product or service provided, so that the value effectively generated by the company is known. It should also be highlighted that 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 profit retention of the period.

We must emphasize that this model, even because it is not mandatory information, should not inhibit the presentation of a more detailed demonstration better adapted to the company's business segment. If the company deems it necessary, it may present this information in explanatory notes to the accounting statements, instead of including them in the body of the Management Report.

Statement of Added Value in R$ thousand 20X1 20X2 DESCRIPTION 1 REVENUES 1.1) Sales of merchandise, 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) Consumed raw materials 2.2) Costs of sold merchandise and services 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 exhaustion 5 – NET ADDED VALUE PRODUCED BY THE ENTITY (3-4) 6 – ADDED VALUE RECEIVED IN TRANSFER 6.1) Equity method results 6.2) Financial revenues 7 – TOTAL ADDED VALUE TO DISTRIBUTE (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 and dividends
8.5) Retained profits / deficit of the exercise

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 merchandise, products, and services
Includes values of ICMS and IPI levied on these revenues, i.e., it corresponds to 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 company's main activities, 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 Consumed raw materials (included in the cost of goods sold).
2.2 Costs of sold merchandise and services (does not include expenses with own personnel).
2.3 Materials, energy, third-party services, and others (includes values related to acquisitions and payments to third parties).
In the values of costs of products and merchandise sold, materials, services, energy, etc. consumed, taxes (ICMS and IPI) included at the time of purchases, recoverable or not, must 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 must be added).

3 – GROSS ADDED VALUE (difference between items 1 and 2) 4 – RETENTIONS
4.1 – Depreciation, amortization, and exhaustion
Must 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 results (includes values received as dividends related to investments evaluated at cost)
The equity method result may represent revenue or expense; if expense, it must be reported in parentheses.
6.2 Financial revenues (include all financial revenues regardless of their origin)

7 – TOTAL ADDED VALUE TO DISTRIBUTE (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, transportation, etc., appropriated to the cost of the product or period result must be included (do not include charges with 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 must be included in this item. Values related to ICMS and IPI must be considered as values due or already paid to the public treasury, representing the difference between taxes levied on sales and values considered within item 2 – Inputs acquired from third parties.
8.3 – Interest and rents
Financial expenses and interest related to any type of loans and financings with financial institutions, group companies, or others, and rents (including leasing expenses) paid or credited to third parties must be considered.
8.4 – Interest on equity and dividends
Includes values paid or credited to shareholders. Interest on equity accounted for as a reserve must appear in the "retained profits" item.
8.5 – Retained profits/exercise deficit
Profits of the period destined to profit reserves and any portions still without specific destination must be included.

1.13 Presentation of the Balance Sheet
Law No. 6,404/76 establishes that the Balance Sheet must have its accounts grouped as follows: Assets, subdivided into Current, Long-term Receivables, and Permanent, the latter opened into Investments, Fixed Assets, and Deferred. In turn, Liabilities must be subdivided into Current, Long-term Payables, Results of Future Exercises, and Equity, the latter detailing Share Capital, Capital Reserves, Revaluation Reserves, Profit Reserves, and Accumulated Profits or Losses. This presentation, however, underwent improvements in NPC No. 27, approved by CVM Deliberation No. 488/05, which, ultimately, brought Brazilian accounting practices closer to international practices in aspects of the presentation of accounting statements.

It should be highlighted that such Deliberation maintained all requirements of Law No. 6,404 and presented some innovations that should contribute to the quality of information provided to users of accounting statements. Among these innovations, we can highlight the following: identification and presentation of current and non-current assets and liabilities, as well as separate disclosure of accounts representing intangible assets. Such complementation, required by the aforementioned Deliberation, should assist the user in allowing a better economic-financial evaluation of the company by the investing public.

Below we present a suggestion of a balance sheet model that can be used by non-financial open companies, as well as information regarding the main modifications suffered, when compared with the previous form of publication. Only the accounts that interest as examples are shown, with no concern to highlight a complete balance sheet.
(intentionally left blank)

Balance Sheets (individual) (*) closed in
Assets Liabilities + Equity
Current Assets Current Liabilities
Cash and Equivalents
Cash
Accounts Receivable from Customers
Customers
Inventories
Raw Materials
Financings in national currency
Accounts Payable
Vacation Payable
13th Salary Payable
Charges on Vacation and 13th to be Collected
Taxes Payable

IR and CS Payable
Total Current Assets () Total Current Liabilities () Non-Current Assets Non-Current Liabilities Long-term Receivables Deferred IR and CS Permanent Investments Goodwill/Discount plus or minus value of assets and liabilities and expectation of future losses Fixed Assets Improvements on third-party properties Intangible Trademarks and Patents (Goodwill) – Plus value due to expectation of future profits Research and Development Copyrights Deferred Pre-operational Expenses Reorganization Costs Financings in foreign currency Provisions Fiscal, Labor, and Civil For Restructuring For Employee Benefits (Pension and Retirement Plans) For Guarantees Deferred IR and CS IR and CS Payable Total Non-Current Assets () Total Non-Current Liabilities () Results of Future Exercises Equity Capital Reserves Total Equity () Total Total

(*) in the consolidated statement, the "Non-controlling Interests" group will be presented between "Results of Future Exercises" and "Equity".
() these totals can be eliminated and presented in the first line of the group.

In the assets, besides the separation between current and non-current, the inclusion of "Intangible" is the main novelty. In this item, accounts that were previously classified in other subgroups of permanent assets will be grouped. Examples: trademarks and patents and copyrights previously classified in fixed assets; goodwill for plus value of future profit expectations, previously classified in investments; expenses with research and development, previously classified in deferred.

The other side of the Balance Sheet, previously called simply "liabilities", now has the more technically appropriate denomination of "liabilities plus equity". In the liabilities proper, the main changes refer to new designations that certain accounts have taken. For example, with the definition given by CVM Deliberation No. 489/05, which approved the IBRACON Pronouncement NPC No. 22, that "a provision is a liability of uncertain term or value", several accounts that were previously called "provisions" will no longer be so. Examples are vacation, the 13th salary, the

charges on vacation and 13th salary, income tax and social contribution and other liabilities that are recognized through the normal and routine use of the accrual basis.

Here it must also be highlighted, as per the Balance Sheet model presented above, the creation of a sub-group of liabilities that should encompass all provisions. Such provisions, also in the search for approximation of Brazilian accounting practices to international practices, through Deliberation No. 489/05, had their concepts significantly modified compared to what had been used until the last year.

1.14 Present Value Adjustment of Rights and Obligations

Although discounting to present value is considered an improvement in accounting practice, including with provision in international accounting standards, the lack of its provision in corporate legislation combined with its selective application to certain accounts, and mainly for this last reason, is not an adequate accounting practice. The delay in changing corporate legislation and the speed with which companies seek convergence with international standards bring, however, the need to clarify that this practice is acceptable in the following circumstances:

all elements comprising assets and liabilities, when resulting from long-term operations, must be adjusted to their present value. If there are relevant effects, assets and liabilities resulting from short-term operations must also be adjusted. This procedure is the only one that allows for the homogenization of operations, enabling the presentation of comparable financial statements among the various types of companies, regardless of whether they operate predominantly on a cash or credit basis;
the procedure aims to improve the presentation or make the information more reliable in the accounting statements, of the effects of transactions or other events on the entity's financial position, its performance and its financial movement;
the adoption of this practice is disclosed in an explanatory note, including its effects;
the adoption of this practice must observe NPC 12 – Accounting Practices, Changes in Accounting Estimates and Correction of Errors, approved by CVM Deliberation No. 506, of June 19, 2006, which, among other aspects, requires uniformity in the application of accounting practices, over the fiscal years.

Accounts Receivable
2.1 Estimate of Provision for Doubtful Accounts

Companies must establish a provision for doubtful credit collections in an amount sufficient to cover losses considered likely in the collection of accounts receivable. Such provision aims to adjust Accounts Receivable to their probable realizable value, 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 Accounts

The criteria adopted for the establishment of the provision for doubtful credit collections must be disclosed, as well as any change in the criterion or in the form of its application, occurred during the fiscal year.

(ORIENTATION OPINION CVM No. 21/90)

Inventories
3.1 Inventory Valuation Criteria

The inventory valuation criteria established in art. 183 of Law No. 6.404/76 must be adopted. Alternative procedures that contradict the rules established in the aforementioned article, especially those created by tax legislation or even by special legislation that does not contemplate the Companies Act, will not be accepted.

3.2 Disclosure in explanatory note of Inventories
3.2.1 Disclosure in explanatory note of Inventories

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

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

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

3.2.2 Idle Capacity

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

Regarding this, 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 seasonal periods, 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 are in the statements prepared decades ago by companies that presented the sources and applications of funds obtained essentially from the increases and decreases of the 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 a supplementary and voluntary information to a mandatory statement still under the concept of financial position as the variation in working capital, or net circulating capital.

In the form provided for in article 188 of Law No. 6.404/76, the Statement of Sources and Applications of Resources – DOAR – aims to indicate the modifications in the company's financial position, that is, the variations of items in assets and liabilities 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 fiscal year, increased by depreciation, amortization or exhaustion and adjusted by the variation in results of future fiscal 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 of 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 in relation to applications, representing an increase or reduction in net working capital; IV – the balances, at the beginning and end of the fiscal year, of current assets and liabilities, the amount of net working capital and its increase or reduction during the fiscal 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, which means presenting availability within the so-called financial cycle of the company and the generation of operational resources from the result elaborated 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 on the statement of cash flows 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 assessing the effect of activities on the amount of cash and cash equivalents.

Concepts
Cash and cash equivalents: cash comprises cash on hand and bank deposits available; Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and that 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 determination of the result. 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 equity and borrowings of the entity, which represent demands imposed on future cash flows by the providers of capital to the entity. Examples are cash from the issuance of shares or equity instruments, payments to investors to acquire or redeem shares of the entity, cash from the issuance of debentures, taking out short and long-term loans, amortization of loans, and payment of lease.

Methods for presentation
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 gains 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 items of income and expense relating to cash flows from investing and financing activities, (iii) all other items of income and expense relating 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 transactions in foreign currency must be recorded in the currency in which the financial statements (reporting currency) of the entity are expressed, converting the amount in foreign currency 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 relating to extraordinary items must be classified as resulting from operating, investing or financing activities, as the case may be, and separately disclosed; e) cash flows relating 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 should 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 flows 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 items of the result. IAS 7 requires disclosing, separately, interest paid and received and dividends paid and received, and SFAS 95 allows that interest and dividends received may 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 can be grouped with other distributions to owners; and interest and dividends received can 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 the case may be, 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 unavailable cash and cash equivalents balances, 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 those capitalized 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

Publicly held 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 information is not disclosed in a privileged and asymmetric manner between different markets. Companies must also pay attention to the fact that

Disclosure of the Statement of Cash Flows disclosed in Brazil must be the same as that disclosed abroad, meaning it must have the same format and structure, so as not to prejudice 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 chosen by the company to reference the preparation of this type of statement, as clarified in the explanatory note on the accounting policies followed. For example: the statement of sources and applications under Brazilian corporate law, the statement of cash flows under FAS 95 or IAS 7. This does not prevent the company from improving the model proposed by regulation; it is advisable to provide additional clarification on the basis of the accounting policy followed when establishing these modifications, so as not to prejudice understanding for the user/investor. As examples of these improvements, we can cite the reduction of Net Working Capital (CCL) as a source of resources and the increase of Net Working Capital (CCL) as an application of resources, in the Statement of Sources and Applications of Resources (DOAR), and the creation of special categories or sub-items in the statement of cash flows.

Finally, when making modifications to the structure and concepts indicated in the regulation, administrators, accountants, and auditors must evaluate whether what is intended to be added or modified does not alter the judgment of the analyst/investor and whether, alternatively, it should modify the structure of this statement or appear in a footnote or explanatory note. The final criterion for a change in form in a statement must therefore be its usefulness or relevance to the user, and for this, the company must reference both the regulatory structure, which intends to organize the minimum necessary information to be disclosed, and 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, i.e., 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 non-disclosure in another market constitutes asymmetric information disclosure and represents an infraction with respect to the provisions of Brazilian legislation. Special attention is recommended for this aspect, so as not to prejudice the Brazilian investor nor the international investor.

Accounting Practices, Changes in Accounting Estimates, and Correction of Errors

5.1 Concepts

The preparation of financial statements requires the management of an entity to exercise its judgment regarding estimates and the establishment of premises related to the measurement and disclosure of assets and liabilities and to the values of expenses and revenues on the date of the financial statements.

At the starting point for this exercise, there must be the procedures, bases, conventions, rules, and specific practices adopted by an entity in the preparation and presentation of its financial statements, which translate into the selection and application of accounting practices applicable and appropriate to the entity.

The criteria for the selection of these accounting practices, as well as the accounting treatment and disclosure of changes in accounting practices, changes in accounting estimates, and the correction of errors, are the object of CVM Deliberation No. 506, which approved NPC No. 12 of Ibracon.

This pronouncement deals with the criteria for the selection of accounting practices and changes in these practices, in accounting estimates, and in the correction of errors. It also provides that a change in accounting practice, as well as the correction of an error from a prior period, requires the restatement, for disclosure purposes, of financial statements on a comparative basis, as if the new practice had always been in use, with its effect reflected in the equity of the period of the change or correction. Changes in accounting estimates, however, do not have retroactive effect. They must be applied prospectively, affecting the results of the current and future periods from the date of the change in estimate. This pronouncement also defines and differentiates an accounting practice from an accounting estimate, emphasizing that the company may only change an adopted accounting practice if such change is required by a standard or if it results in better presentation or more reliable information in the financial statements.

(intentionally left blank)

5.2 Summary of the pronouncement: "Accounting Practices, Changes in Accounting Estimates, and Correction of Errors"

Objective of the standard:
Criteria in the absence of the standard:
And more:

Criterion for the selection, alteration, and disclosure of accounting practices and estimates, and correction of errors. a) the standard itself b) the interpretation of the standard c) appendices to the standards d) guidelines for the implementation of the standards e) international standards.

Judge whether the accounting practice results in information:
a) relevant to the user; b) reliable, i.e.:
(i) represents the result and financial position adequately; (ii) reflects the economic substance; (iii) is prudent; (iv) is complete.

Consider:
a) similar standards; b) the basic conceptual framework. c) uniformly with respect to similar transactions.

Changes in accounting practices

General Rule: Does not constitute a change

Registration of accounting changes

Disclosure of accounting changes

a) by requirement of a standard or interpretation of the standard, or b) results in better presentation or more reliable information.

The same practices must be followed in each period, unless by requirement of a standard (a) or by improvement of information (b).

a) the adoption of an accounting practice that differs from previous practices; b) the adoption of a new accounting practice for transactions that did not occur previously.

a) in accordance with the provisions of the accounting standard involved; b) recorded as if the new practice had always been in use, and its effect reflected prominently in the equity of the period of the change or correction.

If relevant:
a) the standard to which it refers, b) that it is being made in accordance with transitional provisions; c) the nature of the change, d) the amount of the adjustment for each affected period

Change in accounting estimates

Practice vs. estimate

Conditions for revision

Recognition

Disclosure of changes in accounting estimates

The use of reasonable estimates is part of the preparation of financial statements and does not affect their reliability; Ex.: doubtful debt collections, obsolete inventory, depreciation, warranties.

When it is difficult to distinguish a change in accounting practices from a change in estimate, the change is treated as a change in accounting estimate.

a) if there are changes in the circumstances on which it was based; b) as a result of new information; c) due to increased experience.

Applicable to transactions from the date of the change in estimate; May affect only the current period and future periods.

The estimate does not relate to prior periods.

a) the nature and amount, if it has a relevant effect in the current period or in subsequent periods, b) disclose, if the effect in subsequent periods is not estimable.

Errors

General Rule

Recognition

Disclosure

Errors identified in subsequent periods must be demonstrated retroactively.

a) by adjustment in the comparative values of the prior periods in which the error was committed, or; b) from the oldest period presented that is practicable.

a) demonstrated retrospectively through the restatement of Financial Statements. b) discriminating in the accumulated profits or losses account, within the statement of changes in equity, the effects of the correction of the error and the net income originally determined.

a) the nature of the error of the prior period; b) the amount of the correction relating to each prior period presented, indicating: (i) the adjustment in each account (ii) the effect on the calculation of earnings per share, c) the amount of the correction of prior periods, d) if impracticable, the circumstances, the form, and the period from which the error was corrected.

5.3 Retrospective adjustment due to CVM Deliberation 506: statement of the movement of the accumulated profits or losses account, within the changes in equity

NPC 12 – Accounting Practices, Changes in Accounting Estimates, and Correction of Errors (CVM Deliberation No. 506/06) may be applied in advance, starting from the 2006 fiscal year. In the case of adjustments provided for in items 20 and 40 of the aforementioned NPC, an example of a statement of changes in equity was prepared to guide publicly-held companies, presented below. These items deal with the adjustments of the opening balances of each account or group of accounts, combined with the need to demonstrate, in a segregated manner: (i) the effects of the adoption of the new accounting practice or the correction of the error and (ii) the net income originally determined, in the accumulated profits or losses account, within the changes in equity (see table below).

(intentionally left blank)

Reserves of Profits
Social Capital Legal Reserves Investments Accumulated Profits Total

As of December 31, 2004 4,000 500 2,000 0 6,500 Adjustment of prior periods (Note 10) 1,000 1,000 Opening balance of 2004 (Adjusted Note 10) 4,000 500 2,000 1,000 7,500 Net income for the year:
Originally presented 3,000 3,000
Adjustments identified in 2006 related to 2005 500 500

Net income for the 2005 fiscal year adjusted 3,500 3,500 Appropriation of the result:
Legal Reserve 150 (150)
Reserve for investment expansion 1,950 (1,950) Distribution of 30% of profits (R$ xx per share) (900) (900)

As of December 31, 2005 (Adjusted Note 10) 4,000 650 3,950 1,500 10,100 Capitalization of reserves 3,950 (3,950) Net income for the year 4,000 4,000 Appropriation of the result:
Legal Reserve 200 (200)
Reserve for investment expansion 3,650 (3,650) Distribution of 30% of profits (R$ xx per share) (1,650) (1,650)

As of December 31, 2006 7,950 850 3,650 0 12,450

In the table above, it was considered that when preparing the financial statements in 2006, an error from prior periods was observed in the amount of R$ 1,500, with R$ 500 belonging to the 2005 fiscal year and R$ 1,000 belonging to prior years.

5.4 Disclosure in explanatory note of accounting practices, changes in accounting estimates, and correction of errors of prior periods, according to NPC 12/CVM Deliberation No. 506/06

Accounting Practices

If the initial application of a standard has a relevant effect on the current period or any prior period presented, except if it is impracticable to quantify the adjustment, or if this initial application results in a relevant effect in future periods, the entity must disclose:
a. the standard to which it refers; b. when applicable, that the change in accounting practice is being made in accordance with the specific transitional provisions of the standard;
c. the nature of the change in accounting practice;
d. when applicable, the description of the transitional provisions; e. if applicable, the transitional provisions that may cause effects in future periods; f. the amount of the adjustment for the current period and for each prior period presented, demonstrating the adjustment in each line of the financial statements and, if applicable, in the calculation of earnings per share; g. the amount of the adjustment relating to periods prior to those included in the comparative information; and h. if retrospective application, according to items 17 (a) and (b), becomes impracticable for any prior period, the reasons that led to this circumstance and a description of how and since when the change in accounting practice was applied.

These disclosures do not need to be repeated in financial statements subsequent to the change in accounting practice.

When a voluntary change in accounting practice has a relevant effect in the current and prior periods, except if the quantification of the adjustment is impracticable, the entity must disclose the following:
a. the nature of the change in accounting practice; b. an explanation of why the application of the new accounting practice provides better presentation or more reliable information;
c. for the current period and each prior period presented, to the extent practicable:
i. the value of the adjustment in each account of the financial statements affected; and
ii. the impact on the calculation of earnings per share;
d. if practicable, the amount of the adjustments relating to periods prior to those presented; and e. if retrospective application for a given prior period or for periods prior to those presented is impracticable, describe the circumstances of this limitation and a description of how and from when the change in accounting practice was applied.

These disclosures do not need to be repeated in financial statements subsequent to the change in accounting practice.

When the entity does not adopt in advance a new accounting standard already issued by a regulatory body, but not yet in force, it must disclose:
a. such fact; and b. if practicable, an estimate of the effects that the change(s) would cause in the financial statements, if it were applied.
When proceeding in accordance with item 28, the entity must consider the following disclosure:
a. the identification of the standard; b. the nature of the imminent change or changes in accounting practices;
c. the effective date of the standard;
d. the date on which the entity plans to adopt the standard; and e. an explanation of the impact that the initial application of the standard may cause in the financial statements or information that the effect of the adoption of the standard is not known nor estimable.

Changes in Accounting Estimates

The nature and amount of the change in an accounting estimate, which has a relevant effect in the current period or is expected to have a relevant effect in subsequent periods, must be disclosed, unless the effect in subsequent periods is not estimable.
If the amount of the effect on subsequent periods of a change in accounting estimate is not estimable, the entity must disclose such fact.

Correction of prior period errors

The entity must disclose the following:
a. the nature of the error of the prior period; b. the amount of the correction relating to each prior period presented, indicating:
i. the adjustment per account of the financial statement; and
ii. the effect on the calculation of earnings per share;
c. the amount of the correction relating to periods prior to those included in the comparative information; and
d. if the retrospective adjustment is impracticable for a given period, the description of the circumstances that led the entity to that conclusion, the form, and the indication of the period from which the error was corrected.

These disclosures do not need to be repeated in financial statements subsequent to the correction of errors.

Subsequent Events

6.1 Disclosure in explanatory note of Subsequent Events

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 financial situation and future results of the company must be disclosed.

(LAW 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 the sales of their developments based on accounting guidance fixed in tax legislation, which presupposes, basically, 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, such companies, when recording the aforementioned sales, do so using as a counterpart to the receivables an account included in the group of Future Period Results, a practice that CVM considers inadmissible, as stated in item 13 of CVM Orientation Opinion No. 21, of 12/27/90.

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 determined 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 effected, regardless of the term for receiving the contracted value. The amount of the installments, when pre-fixed, must be brought to their present value, or, if it is short-term, when there are relevant effects; and 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, i.e., based on physical progress or costs incurred.

Income Tax

8.1 The Disclosure of the Income Tax Provision

In the statement of the result of the fiscal year, the income tax due must be accrued for the gross amount to be paid. In the explanatory notes to the financial statements, the portion related to fiscal incentives embedded in the gross accrued amount must be evidenced, 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 fiscal year and, subsequently, transferred to the respective capital reserve, indicating, in an explanatory note, the start and end dates of the benefit.

8.2 Fiscal 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 evidenced in explanatory notes, when relevant. The CVM Collegiate Body also approved CVM Instruction No. 371/02, which deals with the accounting recording of deferred tax assets and complements CVM Deliberation No. 273/98.

Given that, for many companies, especially those benefiting from fiscal 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, with respect to publicly-held companies and companies...

beneficiaries of tax incentives, their subsidiaries, holding companies, and affiliates, information regarding the existence of tax benefits, of any nature, including, at a minimum, the type of benefit, the term or maturity, and the amount of tax savings realized in the fiscal year and accumulated, where applicable.

For a complete understanding of the aspects related to this topic, the amounts paid/remitted for each tax and/or contribution in the fiscal year must also be disclosed.

8.3 Tax Credits

Starting from Pronunciamento No. 25 of Ibracon, approved by CVM Deliberation No. 273/98, the basis for recognizing a deferred tax asset became the evidence and proof of its realization or recovery, based on an assessment of the probability of generating sufficient taxable profit to compensate for 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 basis for this proof. The fiscal council 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 appropriate evidence or proof to support their opinion on the audited financial statements, especially regarding the premises of realization or 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 an alteration in the recovery premises of the tax credits, in whole or in part, they must be removed from the asset.

Recovery Period

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 earns 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 prevalence of economic substance over legal form; it is not enough to have the right to compensation, but it is necessary for the presence of conditions that indicate that it is likely to achieve a result in the operations whose taxation will enable the recovery of the tax credit on past losses.

Special attention must be given to the fact that long recovery periods for these assets, associated with the distance from the outlook for results compared to those achieved, greatly increases the degree of uncertainty regarding the recoverability of these assets, consequently increasing the risk of the Administration of the public company in keeping them on the Balance Sheet, a risk for which Independent Auditors must have heightened attention and which does not confuse with the eventual imprescriptibility of the tax credit.

Responsibility

Given the relevance that the issue imposes, there is a need to establish a culture of involvement, proactive participation, and interdependent responsibility among the administration bodies, fiscal council, and independent auditors. The standard points in the same direction by requiring the examination by the fiscal council and the approval by the administration bodies (art. 4) 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 mentioned technical study.

Technical Feasibility Study

The technical study must contemplate the generation of future results according to the administration's expectation, considering the existence of profitability history, the continuity of the company, and the conditions defined in accounting policy for the calculation of the estimate of recovery of tax credits. The technical study, however, should not and does not need to be limited to the maximum period of 10 years, a period established for the purposes of evaluating the recovery of the deferred tax asset, i.e., the criteria provided in the standard that deals with discontinuing operations – impairment.

The examination, approval, and re-evaluation of this technical study must be, at a minimum, annual. However, whenever there is a relevant alteration of the elements that make up the study, it must be subject to new examination, approval, and evaluation, even if within a period shorter than the aforementioned one.

It is also recommended that the approval by the administration bodies include the Board of Directors, the Executive Board, and the Fiscal Council, since the assumptions of this type of estimate involve judgments and subjectivities that must be limited by the company's accounting policies. Item 19 of NPC 25 highlights the foundations for this estimate: (i) refer to the operational continuity of the company, (ii) take into account the conditions of vulnerability to external conditions that may compromise the estimate, (iii) the longer the projection period, the greater the risk of compromising the estimated values. The company's administrators must keep in mind that the accounting of deferred tax assets implies a prospective declaration regarding results and that, therefore, involve risks and uncertainties difficult to predict and that are generally outside the control of the administration.

In this sense, the administrators (councilors and directors) can and should establish limits that validate the assets accounted for based on the variability implicit in this type of projection, such as in aspects related to: (i) the maximum estimated period in the recovery of tax credits, which can be lower than the maximum allowed period, (ii) the fundamental premises of the operations: volumes and sales prices, costs and expenses, and (iii) the discount rates used based on the company's cost of capital.

Present Value Adjustment in the Determination of Future Taxable Profits

It should be emphasized 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 evaluating the recovery of the deferred tax asset, these profits must be brought to present value, based on the estimated period for their realization, even if this exceeds the maximum period of 10 years established in item II, article 2 of CVM Instruction No. 371/02.

(intentionally left blank)

Simplified example of a company that estimates the economic viability of tax credits premises:
discount rate 19% p.a.
IR + CS rate 34%
Compensation limit 30% of taxable profit
Recovery limit 10 years

The result of this study concluded that 15 years would be necessary for the total recovery of the tax credits based on economic premises (prices, volumes, costs, expenses, investments, etc.) and the following calculations:

Year	Projected Taxable Profit (Nominal)	Projected Taxable Profit Discounted (B / 1.19^n)	IR + CS on Nominal Taxable Profit (B x 0.34)	IR + CS on Discounted Taxable Profit (C x 0.34)	Recoverable IR + CS on Taxable Profit (D x 0.30)
1	1,000	840	286	340	102
2	1,070	756	257	364	109
3	1,145	679	231	389	117
4	1,225	611	208	417	125
5	1,311	549	187	446	134
6	1,403	494	168	477	143
7	1,501	444	151	510	153
8	1,606	399	136	546	164
9	1,718	359	122	584	175
10	1,839	323	110	625	188
Sub total	13,818	5,454	1,856	4,698	1,410
11	1,967	290	99	669	201
12	2,105	261	89	716	215
13	2,252	235	80	766	230
14	2,410	211	72	819	246
15	2,579	190	65	877	263
Total	25,132	6,641	2,261	8,545	2,563

(1) Tax credit 2,200
(2) IR and CS on projected nominal profit (10 years) x compensation limit 1,410 (3) economic substance test of the tax credit (if D >= tax credit) 2,261

Value to be recorded as deferred tax asset 1,410

It is observed that the lowest value among items A, B, and C of the example table must be chosen. Therefore, the balances of deferred tax assets should not exceed the lowest of the 3 values determined: (A) the value of the tax credit; (B) the nominal value realizable within 10 years, or (C) the value pointed out in the projection of future taxable profits discounted to present value, regardless of the expected period of its recovery.

In this recovery analysis, existing balances prior to the publication of CVM Instruction No. 371/02 are included, as well as new constitutions of deferred tax credits.

It is added that, in this example, the probabilities associated with the realization of the projected annual values were not considered, which limits the quality of the numbers presented. For this reason, these criteria must also be subject to accounting policy due to the increasing imprecision in the estimate of those probabilities for more remote time periods.

Periodic Review

It is also worth remembering that CVM Deliberation No. 273/98 establishes that the carrying amount of a deferred tax asset must be reviewed periodically and the entity must reduce or extinguish it as it is no longer probable to obtain sufficient taxable profit for its realization. We understand that this review must be, at a 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, i.e., that assets must represent a future promise of cash.

Companies must disclose, in explanatory notes, the estimate of realization of the portions of the deferred tax asset, by year of realization. This estimate arises from the Technical Feasibility Study. If frustration is observed in the expectation of realization of the deferred tax asset arising from tax losses and negative base for social contribution, declared in the financial statements of the previous fiscal year, the maintenance of the full balance of the asset is equivalent to the recognition of additional deferred tax asset. In this case, companies must recognize in the result the proportion of the unrealized asset, as commented below.

Example: In the financial statements related to the fiscal year ended on December 31, 20X0, the company disclosed in its explanatory notes the estimate of the realization portions of the deferred tax asset, as follows:

"The values of deferred tax assets, composed of tax losses and negative bases for social contribution, must be realized, according to the Technical Feasibility Study, within the following schedule:

Year	IR and CS Recoverable on Nominal Taxable Profit
1	102
2	109
3	117
4	125
5	134
6 to 10	823
Total	1,410

Upon the preparation of the financial statements for the fiscal year ended on December 31 of year 1, it is observed that the forecast for the realization of the value $102 did not materialize. Due to this situation, and due to the need for periodic review, the company re-does its technical feasibility studies and concludes that the same recovery forecast remains valid, or else, concludes with a different value, this time in new periods starting from year 2.

In this circumstance, the company must write down the value of $102 and constitute a new tax asset, provided that the economic conditions for the realization of this type of asset are met, according to the provisions of article 3 of CVM Instruction No. 371/02. In the case where part of the predicted value has been realized, the proportion of the original estimate of recovery of tax credits that was not realized must be accounted for in the result.

Even observing these determinations, the company's administration must be diligent in the sense of equipping its new Technical Feasibility Study with the necessary prudence, in order to avoid new frustrations. The independent auditor, in turn, in connection with their examination of the financial statements, must consider this new study, analyzing it in the specific circumstances of each company, and evaluate any impact on their opinion.

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 No. 371/02, are subject to the provisions of that normative. Therefore, in these cases, the recognition of a new deferred tax asset has the consequence of the application of CVM Instruction No. 371/02 to the entire amount recognized in the financial statements.

Attention must be given to certain newly constituted companies. By adding a sole paragraph to Art. 2 of CVM Instruction 371/02, providing that a history of profitability is not necessary for them, situations of companies that did not require a long maturation period in the market were anticipated. Companies in their third year of operation, with recurrent losses, will not have profit in 3 of the last 5 fiscal years, a condition contained in art. 3 to presume profitability. In this situation, the registration of the asset is not appropriate, even if there is a technical study with projection of future taxable profit.

8.4 Disclosure in explanatory note of Income Tax

Income Tax and Social Contribution

The financial statements and/or explanatory notes must highlight the following information, when relevant:
a) amount of current and deferred taxes, recorded in the result, equity, assets, and liabilities; b) nature, basis, and expected term for realization of each deferred tax asset and liability; c) effects on assets, liabilities, result, and equity resulting from adjustments due to changes in rates or changes 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 amount debited or credited to the result of income tax and social contribution and the product of the accounting profit before income tax multiplied by the applicable rates, also disclosing such rates and their calculation bases;

f) nature and amount of assets whose tax base is lower than its carrying amount.

(CVM DELIBERATION No. 273/98)

Deferred Tax Asset

It is necessary to clarify, in any situation, including for cases of companies that have recognized deferred tax assets before the effectiveness of CVM Instruction No. 371/02 and that do not recognize additional value to that balance, that disclosure in explanatory notes of the following information is mandatory (items I, II, and III of article 7):

"I estimate of the realization portions of the deferred tax asset, disaggregated 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 period of 10 (ten) years referred to in item II of art. 2; II effects resulting from eventual alteration in the expectation of realization of the deferred tax asset and respective foundations, according to the provision of art. 4, and 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 explanatory notes, of the justified basis of the actions implemented by the company, aiming to generate taxable profit in the future. These actions represent fundamental requirements for the company to be able to keep tax credits in the asset in the absence of profitability history (art. 3, sole paragraph).

(CVM INSTRUCTION No. 371/02)

Segment Reports

9.1 Disclosure in explanatory note of segment information

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. Remembering 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 main area or 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. In this regard, CVM encourages the disclosure of this information by public companies, especially those that publish consolidated statements.

For the presentation of segment information, 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 the international standard IAS 14 (valid until December 2008), 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 format 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 this will have a direct impact on the content of the information made available.
The segmented information that must be included, considering the primary disclosure format (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 the segmented information and the accumulated information, as well as any other relevant segmented information used by management 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 inter-segments) and (iii) segment capital expenditures. If the company adopts and exercises its operational activities in a single segment, of business or geographic area, the information should be disclosed. With the aim of exemplifying 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 management. Only with the objective 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
The segment information is based on two formats: the primary reflects the management structure adopted by the group, while the secondary refers to the division by products. The primary segmentation format, by management responsibility and geographic areas, represents the company's management structure. The group's main activity is food trade. The other activities, poultry product 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 "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. Unallocated items represent research and development assets, including any goodwill. Liabilities comprise debts to suppliers and other obligations, provisions and deferred revenues. 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 management believes is a better indication of the level of capital investment for decision purposes". By geographic area In millions of Reais Current Year Previous Year Current Year Previous Year 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 done by customer destination. Inter-segment sales are not significant.
In millions of Reais Current Year Previous Year Current Year Previous Year 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 Current Year Previous Year Current Year Previous Year 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 Current Year Previous Year Current Year Previous Year 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 Current Year Previous Year 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 Current Year Previous Year 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 that of 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, in respect of the IASB standard, which represent the secondary disclosure format.
9.2 Convergence between IASB and FASB standards
On November 30, 2006, the IASB published IFRS 8 Operating Segments, which will replace the pronouncement IAS 14, becoming mandatory for fiscal years beginning on January 01, 2009, or after. The aforementioned pronouncement adopts the concept of the management view required by FASB standards (SFAS 131) which determines the preparation of segment information according to the same internal bases used by decision-makers (administrators) in the evaluation of performance and allocation of resources. Still from this perspective, the IASB believes that the use of this management view will improve the quality of segment information made available by companies. The evolution proposed by IFRS 8 and the extreme importance of this information in the economic evaluation of the company should encourage companies to present such information by publishing their financial statements, even if they are not mandatory in our regulatory environment. Considering that the framework of IFRS 8 is very close to the determinations already adopted by FASB, the use of the new standard becomes much easier, encouraging its adoption, especially by those companies that already present information to the North American market. By using the model adopted by North American standards (FASB) or by the standard established by IFRS 8, the company must make it clear to the reader that the information presented there follows the management model, not being segmented information resulting from the adoption of accounting principles, still required in IAS 14.
10. Information that Reflects the Effects of Price Changes

10.1 Concepts
As highlighted in item 1 of this Circular Letter, the set of financial statements made available to the market must evidence all information that is relevant for the evaluation of the company's net worth.
To be useful to the decision-making processes of their users, accounting information must gather four main characteristics or qualitative attributes: Relevance, Understandability, Reliability and Comparability.
Notwithstanding the others, we highlight, at this point, the attribute of Comparability. To be comparable, accounting information must be expressed in the same monetary standard, that is, they 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 that aims to eliminate relevant distortions arising from inflationary effects, thereby achieving the objectives of the law to confer the necessary transparency for the situation of the net worth and financial situation of companies to be known. 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 way, thus being 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 financial statements. In this sense, it is necessary to alert open companies and their independent auditors about the provisions of CVM Orientation Opinion No. 29/96 where, among other orientations, it can be extracted:
"(...) it is relevant to highlight that open companies must evaluate the importance of this information, including for comparative analysis purposes, and its disclosure, in order to meet, in a more complete way, the demands of the market".
"(...) Law No. 6.404/76 establishes that financial statements shall be completed by explanatory notes and other analytical tables or accounting statements necessary for the clarification of the entity's net worth situation 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 a 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 financial statements ceased to be mandatory):
Accumulated Inflation in the period 1996 – 2004 (percentage variation) 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 IPCA Annual Variation december
5.69 7.60 9.30 12.53 7.67 5.97 8.94 1.65 5.22 9.56
IPCA
Accumulated Variation
103.73 92.76 79.14 63.90 45.65 35.27 27.65 17.18 15.27
IGPM
Annual Variation december
1.21 12.41 8.71 25.31 10.38 9.95 20.10 1.78 7.74 9.20
IGPM
Accumulated Variation
170.50 167.27 137.76 118.71 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 the effects of inflation in a group of 107 open companies with shares traded on the stock exchange in the year 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 the effects of inflation, and those of the period from 1996 to 2001, all in nominal values. For the year 2002, it was assumed that the variation nominal of increases and decreases in fixed assets was equal to that which occurred in 2001. These gross increases, compared to the net equity 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 Equity Correction of fixed assets up to 2002 Net Equity 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: stocks and advances, fixed assets, total assets and net equity; and c) the reconciliation with the result and with the net equity determined in the commercial bookkeeping.
Still within the assumptions that guide the Information Disclosure Policy, it is recommended that companies, along 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 financial statements published and to the quarterly information sent to CVM or even the presentation of these statements and quarterly information complete, in currency of constant purchasing power. (CVM ORIENTATION OPINION No. 29/96)
11. Fixed Assets
11.1 Recoverability of Assets and Spontaneous Revaluations
The Fundamental Accounting Principle of evaluation of fixed assets is based on the concept of acquisition cost as the basis of value, not being accepted, in many countries, the adoption of market value evaluation criteria. 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 open companies, the adoption of the procedures described therein. The first of these restrictions is that related to the very meaning of revaluing. Revaluation means the abandonment of the original cost principle as the basis of value and the adoption of market value or replacement value for the revalued assets. The second restriction is related to which assets can be subject to revaluation. Only tangible fixed permanent assets can be subject to revaluation, being expressly prohibited the revaluation of intangible assets, or of assets for which an operational discontinuity is expected. Furthermore, once the procedure of evaluating a certain set of assets at market value (revaluation) is adopted, such procedure must be periodically redone, meaning that, at most every 4 (four) years (ideally, every year), the open company that has adopted this procedure must re-evaluate 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 open company, the existence of assets of the same nature or of the same account, part evaluated at cost and another part evaluated at market value (revaluation). Such restriction also applies to consolidated financial statements, it not being acceptable that the controlling company and a controlled company maintain assets of the same nature or of the same account evaluated by two different criteria (cost and market value), both for equity method purposes and for consolidation purposes. Another aspect to be observed in revaluation is that which concerns the remaining useful life of revalued assets and are subject to physical wear. It is absolutely indispensable that the Appraisal Report indicates the remaining useful life aiming to allow the definition of future depreciation rates. The management of the open 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 shall 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 loss provision must be constituted. Attention must also be given to the content of the explanatory notes on revaluation, which must contain, at
minimum, 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 carried out, as well as the expected dates of subsequent and/or complementary revaluations.
11.2 Periodicity of Asset Revaluation
When a company chooses to carry out and account for an asset revaluation, the criterion or basis for evaluation 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, management is sending a message to the market that it will impact future profits seeking, in operations, to recover the market value or the replacement value of its assets, and no longer just the cost, 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 consequent destinations in the calculations of dividends and profit retention. Therefore, revaluations must be carried out periodically, with such regularity that the net book value does not present significant differences relative 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 costs of new assets to the revaluation values accounted for in the past, as thus the fixed asset balance ceases to have any representativeness as information. In view 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 you that the aforementioned deliberation establishes the following maximum deadlines for carrying out new revaluations:
a) annually, for accounts or groups of accounts whose market values vary significantly relative to the previously recorded values; b) every four years, for assets whose market price oscillation is not relevant, including still the assets acquired after the last revaluation; c) observed the concept and deadlines above, the company may opt for a "rotational system", carrying out, periodically, partial revaluations, by rotation, with defined schedules, which cover the totality of the assets to be revalued in each period; and d) The open 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 the revaluation and the appraisers (in the 1st year of revaluation); b) the history and date of the revaluation; c) the summary of the accounts subject to revaluation and their respective values; d) the effect on the period's result, arising from depreciation, amortization, or depletion on the revaluation and subsequent write-offs; e) the treatment regarding dividends and participations; f) the treatment and values involved related to 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, the new evaluation, and the revaluation recorded 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) 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 open companies the right to opt, until 03/31/99, 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 event and its impact, if any, on the accounting statements of the current and previous fiscal year must be disclosed in an explanatory note.

(CVM INSTRUCTION No. 197/93 AND CVM DELIBERATIONS No. 183/95 and 288/98)

Financial Leasing
12.1 Disclosure in explanatory note of Financial Leasing
Lessee companies must disclose, at a minimum, the following:
a) the value of the asset and liability, if the lease is configured as a financed purchase; b) the 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 necessitate present value adjustments because they do not meet the Fundamental Accounting Principles; and b) the present value adjustments of future cash flows of the financial leasing portfolios, highlighting the effect of Income Tax.

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

Revenue
13.1 Moment of revenue recognition
In addition to the concept of revenue, it is important to verify the appropriate moment for its recognition.
Depending on the activity developed by the company (sales of products or merchandise, revenue from service provision, revenue resulting from the right to use the entity's assets or services by others, which will result in interest, rents, and income from assets or rights, these being the most common examples), certain factors must be observed. In this sense, international accounting standards (IAS 18) and NPC 14, issued by IBRACON, are quite aligned, and provide conditions for revenues to be recognized, as summarized below.

Revenue from the sale of products or merchandise must be recognized when all of the following conditions have been met: (a) the company has transferred to the buyer the significant risks and benefits arising from the ownership of the products; (b) the company no longer retains continuing managerial involvement usually associated with ownership, nor effective control over the sold products; (c) the value of the revenue can be measured reliably; (d) it is assured that the economic benefits derived from the transaction will be received by the company; and (e) the costs incurred or to be incurred regarding the transaction can be measured reliably.

For the condition described in (a), it is not enough for the company to have shipped its products or merchandise through a third party, for example, by hiring a carrier with insurance coverage until delivery.
This is because the complete transfer of risks and benefits, the moment when the company's management ceases to have involvement with the transaction, will only occur with the actual delivery to the buyer or legal representative. The hiring of insurance guarantees the company that the value will be received in the event of an eventual loss, but it does not solve the conceptual issue of the moment of revenue recognition.

Revenue from the provision of services must be recognized based on the stage of execution of the transaction in the period, when the outcome of a transaction can be estimated reliably. The outcome of a transaction can be estimated reliably when all of the following conditions have been met: (a) the amount of revenue can be measured reliably; (b) it is probable that the economic benefits arising from the transaction will be received by the company; (c) the stage of execution of the transaction in the period can be measured reliably; and (d) the costs incurred with the transaction and the costs to complete it can be measured reliably.

13.2 Classification of gains in tax proceedings
Gains from tax proceedings have been particularly relevant in 2006 for some open companies, due to the outcome of the discussion related to the widening of the PIS/COFINS base, with a final judgment that directly benefits the company. There are no specific rules that establish how these values should be treated in the companies' results. Generally, the gains are composed of the principal value of the tax plus financial charges, related to the monetary update of the various fiscal years in which the company disputed the cause. In some circumstances, certain companies may have included, along with the liability related to the tax, fines for late payment, according to relevant legislation.

The recording of gains in tax proceedings will depend on the circumstances. Often, the accounting of the obligation, with segregation in the result accounts, of the values of fines, interest, and the principal may be impracticable. Thus, it is possible that companies record the entire value as tax expense, or only the value of the tax in this line, posting interest as financial expenses and fines as other operating expenses.

If the company has the accounting practice of posting each of the values in specific accounts, even if adopting the best estimates, the reversal or gain treated here should occur consistently in the same lines. This is a decision related to the choice of accounting practice, which must be consistent from year to year. If the value of the gain in the period is relevant for an adequate understanding of the set of financial statements, the company must disclose the total amount of the gain in an explanatory note, with mention of the result account(s) in which it was recorded.

13.3 Results of future fiscal years
Concepts
The group of accounts "results of future fiscal years" is represented by net revenue "not yet earned or realized", due to the accrual basis of fiscal years. 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 a contractual provision, without possibility of return (warehouses, silos rental), net of commissions, taxes, and other charges applicable; credit opening commissions in financial institutions. In consolidation, this group must include the discount that is not absorbed in the elimination of the investment.

This group, therefore, does not include portions of customer advances, for products to be delivered, services to be performed, or obligations of another nature, which must be classified in current liabilities or long-term liabilities. Cases classifiable in this classification are very rare. A special case of technically adequate use of this group is the recording of profit not yet realized in transactions between the Parent Company and its Subsidiaries.

Disclosure in explanatory note of Sales or Services to be Realized

The recording of an accounts receivable account presupposes that the revenue realization principle is met. Thus, it is inadmissible to record accounts receivable with a corresponding entry in a future fiscal year result account.
In the case of advance billings or contracts with guaranteed receipt for sales or services to be realized, the company must, when relevant, disclose the fact and respective amounts.

(CVM GUIDANCE OPINION No. 21/90)

Developments in the Implementation Phase
The gain, if any, resulting from the comparison of expenses and revenues attributable to developments in the implementation phase, must be presented as results of future fiscal years. Only if there is, demonstrably, certainty that this gain is of a recurring nature throughout the entire implementation period, may it, exceptionally, 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 GUIDANCE OPINION No. 17/89)

Employee Benefits
CVM Deliberation No. 371/2000 approves and makes mandatory, for open companies, the Pronouncement on Accounting for Employee Benefits, issued by IBRACON and prepared jointly with CVM.
We also consider applicable to open companies the clarifications contained in IBRACON Technical Interpretation No. 01/01 of NPC 26, attached at the end of the clarifications of this item. There are, furthermore, some aspects that were not explicitly stated in this technical interpretation and deserve clarification:

14.1 Debt Acknowledgment Instruments
As a general rule (in compliance with the accrual basis), obligations arising from employee benefits, both in the existence of a formal debt acknowledgment instrument and in its absence, should already have been recognized in the equity of the sponsoring companies. However, given that this is a specific norm that provides a transition rule, we understand that the situation mentioned is included in the effects of CVM Deliberation No. 371/2000.

14.2 Scope and Coverage
Although evident, it is worth clarifying that CVM Deliberation No. 371/00 is applicable to shareholding companies that are open, or that will become, sponsors of benefits to their employees. In this sense, the norm establishes as follows:
"The objective of this pronouncement is to establish when and in what form the cost to provide employee benefits must be recognized by the Employer/Sponsoring Entity, as well as the information that must be disclosed in the accounting statements of this Entity".

Therefore, the charges assumed by the sponsor regarding the benefits due are in no way modified as a result of the application of this Deliberation. What the norm disciplines is the moment and form of accounting for these charges by the sponsor (open company). Moreover, the obligations assumed by the sponsor do not arise from the accounting registration of the obligation, but rather from contractual clauses or legal and normative 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 dismissal plans, indemnities or bonuses for retirement, etc.

14.3 Nominal Rates X Real Rates
It was observed that, for the calculation of the actuarial obligation, 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 emphasized 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 of the Actuarial Obligation

The discount rate must be compatible with the conditions of the company's obligation. The term and risk compatible with this obligation must therefore 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, term and risk compatible with the obligation assumed.

Although evident, we reiterate that the discount rate is not linked to the return rates of the assets of the benefit plan.

14.5 Return Rate of Plan Assets
This rate must be compatible with the expected remuneration and, consequently, must be a reflection of the investments of the equity constituted for the payment of benefits. Therefore, and as noted 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 companies reporting employee benefits did not disclose this rate. It is important to emphasize 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 adjustments by indices different from inflation indices, benefits corrected by parity with salaries, and adjustments that produce a lag between the inflation rate adopted by the plan and the rate used for benefit adjustments.

14.7 Other Relevant Premises
Although not expressly mentioned in the pronouncement, biometric 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 fair value of assets.

In line with IBRACON 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 open sponsoring company, 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 recorded as a liability of the latter. The eventual liability recorded in the open sponsoring company, excluded from the net assets of the plan, must be classified as part of the total actuarial obligation.

14.9 Actuarial Valuation Method
As provided in the pronouncement, the method for determining the actuarial obligation is the Projected Credit Unit Method. The Company must declare in an explanatory note 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 determination of the actuarial obligation and the eventual actuarial liability/asset of the sponsor.

14.10 Accounting of the initial adjustment of the actuarial liability
CVM Deliberation No. 371/2000 approved and made mandatory, for open 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 starting on or after January 1, 2002. In the transitional provisions (paragraphs 84 and 85), the recognition of this actuarial liability was allowed in two ways; either in the result over a five-year period or by the time of service or remaining life of the employees if these are smaller, or directly in equity with the title "adjustment of previous fiscal years".

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 was silent regarding subsequent years.

In the interpretation of this aspect, companies must consider it equally permitted for subsequent 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 note of Retirement and Pension Plans
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 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 at the balance sheet date; 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) in the period; e. The total expense recognized in the statement of result 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 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 rates; 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 net assets of the plan. How should the resulting effects, if any, be treated within the scope of NPC 26 application?

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 assets and, as such, must be considered as actuarial gain or loss 1 . 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).

1 Note: The original text contains a typo "atuverdana" which appears to be a scanning error for "atuária" (actuarial). The translation reflects the intended meaning based on context.

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

Answer
The calculation may be performed for a date prior to the closing of the fiscal year provided that the period does not exceed 60 days and that any relevant changes in the assumptions or other components of its calculation, occurring between the calculation date and the date of closing of 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 assumptions used in the calculation with the actual effects occurred during 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 record it over 5 years (or by the service time or remaining life of the employees, if these are shorter). In this situation, could the company reverse the $1,000 liability by crediting Equity (PL) and subsequently record the $1,500 over time in the result? This would create an increase in Equity on 12/31/2001, as a consequence of the decrease in the 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 recorded against Equity or the result of the next 5 years refers to the difference between the actuarial liability previously recognized by the company and that determined in accordance with NPC 26.

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

Answer
Adjustments to 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 service time or remaining life of the employees if these are shorter, or alternatively until December 31, 2001, directly in equity with the title of "adjustment of prior periods". If the sponsor adopts a period shorter than 5 years, such decision must be disclosed in the explanatory notes and will be irreversible. Thus, if the decision is to amortize, for example, over four years, each fiscal year, from 2002 onwards, will receive a burden of 25% of the adjustment calculated with a base date of December 31, 2001. In any case, the appropriation must comply with the linear criterion.

Question 5
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 method?

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 lifelong monthly value, characterized as a defined benefit plan? 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 lifelong monthly income with a parameter, for example, 40% of the official social security ceiling. Thus, the plan or part of it, for the option holder, has become a defined benefit, which will require that the accounting provisions 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 pension entity that represent rights against the sponsor?

Answer
If the right registered in the private pension entity is transferable (i.e., 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 net assets of the plan. If the right registered in the private pension entity is non-transferable (i.e., not subject to negotiation with third parties) or relates to unpaid contributions or loans to the sponsor, even if registered as an obligation in the sponsor, this right cannot be considered as a net asset of the plan. Additionally, any liability registered in the sponsor, excluded from the net assets of the plan, shall be reclassified as an 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 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 is 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 terms 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 less 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 to 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 service time or remaining life of the employees. Is it possible to recognize the full liability 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 service time or remaining life 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 recording of a deferred asset for future amortization is not allowed. 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 are still 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$100. Subsequently, depending on the option chosen by the sponsor, register R$ 1,400 as a complement of the liability, in counterpart to equity, or register this value over 5 years or by the service time or remaining life of the employees, if these are shorter.

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

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

Accounting for Concessions
15.1 Concepts
On 14.12.2001, CVM placed a draft of a Resolution in public hearing with the objective of collecting the market's opinion on the pronouncement to be issued by IBRACON. This public hearing notice highlighted the little accounting literature on this matter, even at the international level, highlighting the existence of two currents of opinions (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 to account 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 (rental), 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 recording 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 draft presented given the various positions presented and the lack of an international pronouncement that would 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 evaluation of additional information needs to the public, given their access and knowledge about the facts and the company's environment and their greater capacity to evaluate its 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 should consider whether inflationary effects cause relevant distortions on their equity, assets, and results. CVM has already manifested itself on the disclosure of inflationary effects through CVM Orientation Opinion No. 29/96 which dealt with: (i) periodicity, (ii) minimum content, (iii) criteria for preparation and (iv) index. In this regard, CVM PO No. 29 advises: "(...) it is recommended that companies, together with their auditors, evaluate the convenience not only of the voluntary presentation of this type of information. They should also consider the convenience of its insertion as explanatory notes to the published financial statements and 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 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. During this time, IBRACON learned that the IASB (International Accounting Standards Board) is starting a study of the matter as this is of international interest. Since the objective of IBRACON is to edit 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 result of studies and discussions already held to the IASB. Therefore, it would not be opportune to require at this time any alteration 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, it is required from companies that operate with concessions the disclosure of the following information:
Concession Assets

The following information must be disclosed, on the date of each closing of the fiscal year or period, when applicable:
a. assets subject to the concession and their total values, term of the concession, fixed payment commitments, with description also of variable commitments both regarding their calculation and their 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 on the date of the financial statements that shall be transferred to the granting authority at the end of the contract (corresponding to assets with residual life greater than the concession and with clause of transfer to the granting authority);
d. amount paid to the granting authority during the fiscal year or period of the financial statements; e. bases for appropriation to the result of the costs with the 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 financial 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 accounted for in the financial statements of the concessionaires regarding expenses with services such as, for example, maintenance of highways/railways;
ii. amounts accounted for regarding the 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 assets of any nature;
v. amounts of real estate or movable assets 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 accounted for in the entity's financial 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 registered 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.
Accounting for Government Assistance
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 accounting practices. b. Non-compliance with contractual conditions regarding subsidies or the existence of other contingencies.
c. Main commitments assumed by the entity on account of the subsidies.
d. Potential subsidies to be recognized, after fulfilling the contractual conditions.
Effects of Changes in Exchange Rates
17.1 Exchange Rate Variation
The accounting treatment to be dispensed to variations in the exchange rate, occurred during the year 2001, was regulated through Provisional Measure No. 3/01, of 26.09.2001, and CVM Resolution No. 404/01, of 27.09.2001, with new wording given by CVM Resolution No. 409/01, of 01.11.2001. The reading of the provisions contained in the referred acts has generated some doubts and conflicting interpretations by some open companies.

17.2 Amortization
MP 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.
With regard to the method of amortization of the deferred exchange asset, CVM Resolution No. 404/01, in its item IX, determines that the deferred exchange asset shall be amortized linearly, over 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 Resolution No.

404/01. The amortization quotas of the deferred foreign exchange asset must be equal. In this case, the public company must use, over the three-year period, an amortization quota equivalent to 33.33% of the deferred foreign exchange asset.

In setting the amortization period, the company must consider the maturity dates and installments of the foreign exchange liabilities that originated the deferral. For illustration purposes, a public company that has only long-term foreign exchange liabilities maturing in two years cannot amortize the resulting deferred foreign exchange asset over a period longer than that term.

17.3 Change in the Amortization Period

CVM Deliberation No. 404/01, in its item X, provides for the possibility of changing the amortization period of the deferred foreign exchange asset, and the effects of this change must always pass through the current year's income statement, therefore not being accepted as "adjustment of prior periods."

Since the change in the amortization period may impact a previously made investment decision, such a 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 alteration in the manner provided for in CVM Instruction No. 358/02.

17.4 Adjustment Resulting from Recovery of Foreign Exchange Losses

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

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

The same principle must be applied to the deferred foreign 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 foreign exchange losses, that is, the occurrence of gains subsequent to the deferral, shall be accounted for as an adjustment of the deferred foreign exchange asset, without prejudice to the recognition of the amortization quota for the year.

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

17.5 Partial/Total Settlement of Foreign 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 settlement of the foreign exchange liability, whether by payment or conversion into capital, the deferred foreign exchange asset must be amortized totally or partially, in the same proportion in which the settlement of the foreign exchange liability occurred.

17.6 Profit Reserve for Unrealized Gains and Hedge Instruments

CVM Deliberation No. 404/01, in its item V, allows public companies to allocate the positive net result, with the exchange variations occurring in the year 2001, to the constitution of a profit reserve for unrealized gains.

However, with the advent of Law No. 10.303/2001, as mentioned in item 4 of this Circular Letter, the Profit Reserve for Unrealized Gains can only be constituted by the portion of the mandatory minimum dividend that cannot be paid from 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 risk, to the extent and in the proportion in which they are not protected by any type of financial instrument.

Therefore, for the purpose of constituting the Profit Reserve for Unrealized Gains, only the existence of a positive net result with the exchange variations occurring in the year 2001 should be considered, after the computation of any losses and gains arising from financial instruments, used as Hedge for assets and liabilities subject to exchange 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 the exchange variations occurring in the year 2001, eligible for deferral, does not apply to those assets and liabilities, subject to exchange risk, to the extent and in the proportion in which they are protected by any type of financial instrument.

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

Furthermore, regarding the negative net result with the exchange 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 for purposes other than the protection of an active or passive position, subject to exchange risk, assumed by the company.

17.7 Effect on Equity Method Accounting due to Exchange Variation

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

17.8 Temporary Differences

Provisional Measure No. 03/01, in its article 2nd, determines that legal entities that have opted for the deferral of the negative net result with the exchange variations occurring in the year 2001 must exclude from the net income of the 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, Provisional Measure No. 03/01 determines that subsequent amortizations shall be offered for taxation.

The effect of the above-mentioned provisions, together with CVM Deliberation No. 404/01, implies the emergence of a temporary difference. In addition, depending on the taxation regime elected by the company for exchange 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

Regarding independent auditors, CVM Deliberation No. 404/01, in its item XVI, determines that they must express an opinion regarding the adoption of the procedures provided for in said Deliberation. Thus, to comply with professional standards and CVM regulations, 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 public 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 public 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 offense of an objective nature, subjecting auditors to a fine and administrative process in the form of a summary procedure. It should also be noted that the issuance of a qualified opinion does not relieve the auditor of responsibility regarding this communication.

17.10 Disclosure in Explanatory Note of the Effects of Changes in Exchange Rates

In explanatory notes to the financial statements and quarterly information, when relevant, 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 the deferred asset, 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 variation, as well as the destination contemplated, the amortization bases, and the values amortized in each period, must be disclosed.

(CVM DELIBERATION No. 294/99)

Borrowing 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, coverage of interest expenses, etc.). It is possible, and in some cases quite probable, that the respective clauses will be breached.

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

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

a) the creditor has formally agreed, before the approval of the corresponding financial 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 financial 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 Fiscal Recovery Program – REFIS. The aforementioned instruction does not determine the mandatory accounting of the debt at its present value, however, it fixes the conditions for such recognition to be made.

However, CVM Instruction No. 346/00 determines, when relevant, the disclosure, in explanatory notes to the financial statements, of the present value of debts subject to settlement 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 or not.

We must also alert public 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 for refinancing 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 debts in that program included. It should be remembered, furthermore, that this information must be provided, in an updated manner, for the entire time the company remains adherent to the REFIS Program.

18.3 Capitalization of Interest

CVM Deliberation No. 193/96 determines that financial charges resulting from financing obtained from third parties shall be capitalized to the cost of construction of fixed assets or production of long-maturity inventory. The basis for this issue is the Principle of Cost as a Value Basis, which prescribes the inclusion of all incurred expenses necessary to bring the asset to the conditions of intended use. If an asset requires a period of time to exercise these conditions of use, all expenses incurred, including third-party financing charges, during this period of effort to put this asset into activity are part of its acquisition cost. The capitalization of interest meets the objective of obtaining an acquisition cost that reflects the total of resources applied to the asset, which will provide economic benefits in future periods, its consumption being confronted against the revenues earned in these periods. On this topic, the aforementioned CVM Deliberation mentions in its item I:

"Interest incurred and other financial charges, relative to financing obtained from third parties, for the construction of assets included in fixed assets or for the production of long-maturity inventory, must be recorded in a separate account, which evidences their nature, and classified in the same group of the asset that gave rise to it (we underline)".

The reading of item I above induces the understanding that only interest resulting from financing that was obtained exclusively for the construction or production of an asset should be capitalized. IAS 23 "Borrowing Costs" defines a qualifying asset 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, production, or construction of a qualifying asset are those charges that would have been avoided, had the expenditure on this 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 the examples of (i) complexities caused by the centralized financial coordination of an entity, (ii) by the use of several debt instruments to borrow at different interest rates, in turn lent on different bases to other entities in the group and (iii) by the use of foreign currency loans in highly inflationary economies or due to exchange rate fluctuations. As support for the evaluation 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 funds 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 the expenditures on the asset. The capitalization rate must be the weighted average of the financial charges applicable to the borrowings that are outstanding during the period, excluding those borrowings made for the specific purpose of obtaining a qualifying asset. The amount of financial charges of borrowings capitalized during a period, must not exceed the amount of financial charges incurred during that period". In item 29 the IASB establishes that the financial statements must disclose (a) the accounting policy adopted for the financial charges of borrowings; (b) the amount of financial charges capitalized during the period; and (c) the capitalization rate used to determine the amount of financial charges eligible for capitalization. Finally, it is important to highlight the indicative premises for the start of capitalization of borrowing costs, as provided for in item 20 of the IASB, namely:

a. Expenditures on qualifying assets are being incurred; b. Costs with borrowings are being incurred; and
c. Activities necessary to prepare the qualifying asset for its intended use or for sale are in progress.

The flexibility in the application of 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 and other obligations, (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 to be 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 a loan with the specific purpose of financing a certain asset, the interest rate of this loan must be applied, (vi) a weighted average of rates of other loans taken must be applied to expenditures on assets not covered by loans taken with the specific purpose of financing them, (vii) it is necessary to exercise judgment to identify the loans on which this weighted average is calculated. Although the interpretation of Deliberation No. 193/96 suggests a limitation of the interest capitalization procedure, that is, the requirement of direct linkage of financing with the qualifying asset, our guidance is in the sense that Public Companies expand the concept of linkage.

It is known that this linkage can be extremely subjective, requiring the exercise of judgment in determining those loans whose financial charges will be used for capitalization purposes. The minimization of this subjectivity is obtained when we hierarchize our action, that is, for third-party resources earmarked, from their origin, to the financing of a qualifying asset, no judgment is necessary, as these are directly linked to the same. However, others that do not present this characteristic must be supported by some identifier element, such as, for example, a capital budget duly approved by a competent instance indicating the sources of financing, declaration by the administration, at the time of contracting, indicating the linkage of the financing decision with the qualifying asset, among others. In order to improve the understanding of this topic, a numerical example was developed, obviously not exhaustive, detailing the proposed procedure for the purpose of capitalizing financial charges, resulting from third-party financing, incurred in the construction/production of qualifying assets.

Example Data:
a) On 01/01/20X1, Company Alfa contracted with Company Sigma the construction of an equipment for use in its production process, in the amount of R$ 1,100,000.00. b) Company Alfa made 5 payments, provided for in the contract with Sigma, during 20X1, the last one upon the availability of the equipment in the factory, ready for use, as indicated below:

Date R$
01/01/20X1 300,000.00
31/03/20X1 170,000.00
30/06/20X1 230,000.00
30/09/20X1 210,000.00
31/12/20X1 190,000.00
Total 1,100,000.00

c) Company Alfa presented the following third-party financings on 31/12/20X1:

Code Maturity Date Amount R$ Interest in Period R$ E1 01/01/20X1 500,000.00 97,809.09 20X4 E2 31/03/20X1 350,000.00 43,145.27 20X3 E3 30/09/20X1 250,000.00 10,647.69 20X5 E4 01/01/20X1 100,000.00 20,983.04 20X6 Total 1,200,000.00 172,585.08

Code Comments
E1 Linked since origin to the project
E2 Specified in capital budget
E3 Linkage declared by administration
E4 Not linked to the project

CASE DEVELOPMENT:

Loans Principal Interest
Qualifiable financial charges (E1, E2 and E3) 1,100,000.00 151,602.04 Financial charges not linked to the project (E4) 100,000.00 20,983.04 Total financial charges of the period 1,200,000.00 172,585.08

Summary of asset formation cost
Fixed assets in progress (in progress) a) Third-party services 01/01/20X1 300,000.00 31/03/20X1 170,000.00 30/06/20X1 230,000.00 30/09/20X1 210,000.00 31/12/20X1 190,000.00 sum 1,100,000.00 b) Capitalized financial charges 31/12/20X1 151,602.04 *Total Cost 1,251,602.04

Disclosure of financial charges of the period:
Gross financial charges 172,585.08 less:
Capitalized financial charges (151,602.04)
Net financial charges 20,983.04

It is important to emphasize that the financial charges to be capitalized are limited to the amount incurred in the period.

18.4 Disclosure in explanatory note of the cost of borrowings

18.4.1 Debentures
The terms of debentures shall be disclosed, including indicating the existence of a renegotiation option clause and the periods in which renegotiations must occur. When the company acquires debentures of its own issuance, it must disclose this fact and its value in an explanatory note.
(CVM ADVISORY OPINION No. 21/90)

18.4.2 Long-Term Obligations
The interest rates, maturity dates, guarantees, currency, and method of adjustment of long-term obligations shall be disclosed.
(LAW No. 6,404/76, ARTICLE 176)

18.4.3 Encumbrances, Guarantees, and Contingent and Contingent Liabilities
Real encumbrances on asset items, 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, with the reasons for the impossibility of such measurement mentioned in the latter case. (LAW No. 6,404/76, ARTICLE 176 AND EXPLANATORY NOTE TO CVM INSTRUCTION No. 59/86)

18.4.4 REFIS
Publicly held companies must disclose, with respect to 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 for 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 regularly pay taxes, contributions, and other obligations as an essential condition for maintaining the payment conditions provided for in REFIS; and h) any and all imminent risks associated with the loss of the special payment regime. (CVM INSTRUCTION No. 346/00)

18.4.5 Capitalization of Interest
In line with IAS 23, Brazilian publicly held companies are required to make the following disclosure in an explanatory note:
(a) the accounting policy adopted for financial charges on loans; (b) the amount of financial charges capitalized during the period; (c) the capitalization rate used to determine the amount of financial charges eligible for capitalization; (d) the information on the amount of expenses borne by linked financings and the nature of this linkage (contractual, capital budget, management declaration, etc.); and (e) indication of the total financial charges of the period, the portion capitalized in the period, and the net charges that affected the result of the period.

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 has led CVM to not recommend the contracting of this type of business, and this prohibition must appear 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, as 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. Furthermore, 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 such types of transactions are still carried out, detailed disclosure of the conditions under which the businesses were contracted is necessary so that other interested parties in the company can have full knowledge of the operation. In the "Problem Discussion," the pronouncement of Ibracon, approved by CVM Deliberation No. 26/86, highlights this point:
"To allow 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, characteristics, and effects of this type of transaction 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 celebrated 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 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. Several methods are used for their definition, based, for example, on market price, effective or similar, on the cost of the product plus an arbitrated 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
Publicly held 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: "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 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 call options or any other type of benefit and its respective exercise.
Any non-remunerated transfers.
Preemptive rights to subscribe to 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 property of any nature.
Maintenance of any benefits for employees of related parties, such as: supplementary social security 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 price in each operation, it is necessary that the method used, the form of calculation, and the average prices, for example, be clarified.

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 publicly held 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 income statement, functioning as a calculation memory that will assist the user in understanding the constitution of the balance of the accounts involved and how this occurred.

20.1.1 Societies 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 societies considered equivalent to affiliates also be evaluated by the MEP. The Instruction defined as equivalent to an affiliate a society 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 publicly held company must adjust the balance sheet of the controlled/affiliate 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 necessary percentage to characterize the affiliation, but the sum of the participations characterizes the company as equivalent to an affiliate. It is important to emphasize that, in the application of the MEP in equivalent societies, 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 publicly held companies must have, when applying the MEP in equivalent societies, is regarding the percentage of participation to be used. We remind you that the percentage previously mentioned, 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/Affiliate's Operations
The question presented is whether the change in the line of business of the controlled/affiliate would characterize 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 the aforementioned instruction, in its item 4c, transcribed below, clarifies this issue well:
"Investments in affiliates and controlled companies that have clear and effective evidence of discontinuity should not be evaluated by the MEP. These are companies that are in the process of liquidation, extinction, or that are operating under severe long-term restrictions, which prejudice their ability to transfer funds (art. 6)."
Thus, it is clear that the simple change in the line of business of the controlled/affiliate does not characterize loss of continuity, and the investment must continue to be evaluated by the MEP.

20.1.3 Future Sale of the Investment
The Instruction establishes that in the case of investment in controlled/affiliates that are operating normally, where there is evidence of sale in the near future, the criterion of evaluation by the MEP 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 date of sale. 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 must continue to be evaluated by the MEP until the moment the sale is finalized. Regarding the base balance for this evaluation, it is ideal to use that which was adopted for determining the sale price, considering the date lags admitted in the sole paragraph of article 10 of the aforementioned instruction. It should also be remembered that fiscal legislation admits a lag of up to 30 (thirty) days for the application of the MEP, in the case of the reduction of the investment, which 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 asset by deduction of the book value of the investment (including therein the goodwill and unamortized discount), with the excess presented in a specific account in the liability (§ 2 of Art. 12). It is important to emphasize that the investor must 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 is regarding 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 affiliates and controlled companies in their financial statements." It has been questioned whether the investor should not first adjust the equity of the controlled/affiliate, as advocated in item I of article 11, in order to eliminate the effects resulting from the diversity of accounting criteria. 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 contemplate the provisioning of potential losses. An example to be considered is the case of loss expectations, resulting from tax contingencies due to judicial demands promoted exclusively by the controlled/affiliate, which the management of the controlling/investor company deems prudent to constitute a provision for probable losses. Within this theme, due attention is also being required to the constitution of provisions aimed at covering losses, effective or potential, founded 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 management, of the adequate value of these investments, as well as of their own economic substance. The accounting recording of provisions for losses 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 societies, in the current asset or long-term realizable account; c) in other cases, in an investment correcting account.

20.1.5 Goodwill/Discount in Subscription of Capital Increase

The Explanatory Note to CVM Instruction No. 247/96, in item 7, provided important clarifications regarding the treatment to be given to goodwill/discount calculated in cases of subscription where there is a variation in the percentage of participation, presenting a numerical example. In that example, we arrived at the existence of 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 $360 ($1200 X 30% or 120 shares at $3 each), and on this portion there is no figure of goodwill/discount or gain/loss. b) The portion effectively "acquired" by Company B (that is, subscribed above its right) was $840 (70% x $1200 or 280 shares at $3 each) of the capital increase. The calculation of 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/discount arises in the investor when it "acquires" an additional portion of participation and only on this portion. Therefore, subscription, even at a value above/below the book value of the share, does not generate goodwill/discount if it is carried out in the exact previous proportion to the capital increase. By the same reasoning, it is also concluded that, in cases where the subscription right is exercised for a percentage lower than the previous participation (or even if this right is not exercised), the investor reduces its share in the capital and, in the existence of previously constituted reserves, calculates, in this way, a loss due to variation in percentage of participation on these reserves.

20.1.6 Goodwill/Discount originating from Investments evaluated by equity method

The explanatory notes accompanying the financial statements must contain precise information about affiliates and controlled companies.

One of the items of extreme importance for inferring future results, provided for in item VIII of article 20 of CVM Instruction No. 247/96, determines that "the basis and rationale adopted for the constitution and amortization of goodwill or discount and the unamortized amounts, as well as criteria, discount rate and deadlines used in the projection of results" must be disclosed. Thus, the economic reasons that determined the bases and rationale for accounting for goodwill and/or discount and the amounts accounted for as amortization in the period and the amortization bases for subsequent periods must be clearly identified and disclosed.

It must be emphasized that the accounting recognition of goodwill (and its maintenance) is intimately associated with its economic rationale, and disclosures that include evasive or generic definitions are not accepted.

It is worth remembering the provision of article 14, § 2nd, 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. The same procedure must be adopted for goodwill whose economic rationale is not justified (§ 5th).

20.1.7 "Goodwill" generated in internal operations

The CVM has observed that certain corporate restructuring operations of economic groups (incorporation of companies or incorporation of shares) result in the artificial generation of "goodwill".

One of the ways these operations have been carried out begins with the economic evaluation of investments in controlled or affiliated companies, and immediately thereafter, using the result contained in the report originating from this process as a reference to subscribe the capital in a new company. These operations can also be followed by an incorporation.

Another observed way to carry out such an operation is the incorporation of shares at market value of a company belonging to the same economic group.

In our understanding, even if these operations fully meet corporate requirements, from an economic-accounting point of view, it is necessary to clarify that goodwill arises, solely and exclusively, when the price (cost) paid for the acquisition or subscription of an investment to be evaluated by the equity method exceeds the book value of this investment. Moreover, price or acquisition cost only arises when there is expenditure to obtain something from third parties. Thus, from an economic point of view, there is no generation of wealth resulting from a transaction with oneself. Any argument that does not rest on these economic assertions constitutes a formal sophism and, therefore, is inadmissible.

It is not conceivable, economically and accountingly, to recognize an increase in wealth resulting from a transaction of shareholders with themselves. Even if, from a formal point of view, the corporate acts have complied with the applicable legislation (this aspect is not questioned here), from an economic point of view, the recording of goodwill in transactions such as these would only be conceivable if carried out between independent parties, knowledgeable about the business, free from pressures or other interests other than the essence of the transaction, conditions which are referred to in international literature as "arm's length".

Therefore, it is our understanding that these transactions do not possess economic substance and the indispensable independence between the parties, to be eligible for recording, measurement, and disclosure by accounting.

20.1.8 Elimination of Unrealized Profits

The Explanatory Note of CVM Instruction No. 247/96, in its item 5, brings clarifications on the concept involving this new form of elimination of unrealized profits, in addition to presenting the following summarized numerical example:

Example 1

Net Equity of the Controlled Company R$ 1,200
% Participation 60%
Realized Profits R$ 167
Unrealized Profits R$ 200
Book Value of the Investment R$ 500

Calculation of Equity Method

Calculation by previous standard (revoked) | Calculation by current standard (in force) --- | --- Net Equity R$ 1,200 | Net Equity R$ 1,200 less: unrealized profits (200) | percentage of participation 60% Adjusted Net Equity 1,000 | Net Equity R$ 720 percentage of participation 60% | less: unrealized profits (200) total of the Investment R$ 600 | total of the Investment 520 book value of the investment 500 | book value of the investment 500 result of equity method 100 | result of equity method 20

20.1.9 Calculation of Equity Method

As mentioned in the Explanatory Note to CVM Instruction No. 247/96, the figure of unrealized profit only exists in transactions between the controlling company and the controlled company; 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, since there are third parties (minority shareholders) with rights to participate in this profit, this fact must be recognized by the controlling company, both in its individual statements and 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 controlled company, which could lead to a multiple and undue elimination of unrealized profits.

Considering the data above, let us look at an example where the participation in the controlled "C" is presented as follows:

Controlling "A" owns 100% of controlled "B" and 15% of indirect controlled "C"; Controlled "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.

To obtain the adequate reflection of the elimination of unrealized profit, in the case of controls shared by companies of the same economic conglomerate, such unrealized profit must be attributed to the controlling shareholders in the proportion held by each one over the total participation in the controlled company. Thus, for the purpose of the Equity Method (MEP) 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 percentage of participation 15% | percentage of participation 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 book value of the investment 125 | book value of the investment 375 result of equity method 5 | result of equity method 15

calculation of the elimination of 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 result of the equity method 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 controlling 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 controlling 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.

20.1.10 Investment acquired from investee with Negative Net Equity

In the situation where the investee presents a deficit in liabilities, also called negative net equity,

CVM Instruction 247, in § 2nd of article 12, guides towards the constitution of a provision for losses up to the limit of the book 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 liability (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 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 recorded and amortized according to its economic rationale (higher value of assets, expectation of future profitability or recovery of losses and rights of exploration/concession). This practice allows for a better recognition of the future results of the investee, through the combination of the result of the equity method counterposed to the amortization of goodwill based on its economic rationale, as well as allows for 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 result of the equity method progressively decreases the investment until zeroing it out, that is, not recording a negative investment value. The accounting treatment of goodwill in subsequent incorporation operations, for example, investee incorporating the investor, must also be done taking into account the same principle.

20.1.11 Equity Method when the existence of differentiated rights

The corporate structure of Brazilian companies presents a series of specific characteristics and the application of the equity method must adapt to these specifics. 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 profit participation.

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

The example above mentions the hypothesis of 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 financial statements.

20.2 Consolidated Financial Statements

CVM Instruction No. 247/96, determines that the publicly held company that has investment in controlled companies, including jointly controlled companies, and the command society of a group of companies that includes a publicly held company must, at the end of each fiscal year, prepare consolidated financial statements (art. 21).

The aforementioned Instruction also provides that the CVM may, in special cases and upon prior request, authorize the exclusion of one or more controlled companies from the consolidated financial statements (§ 1st of art. 23).

Therefore, the publicly held company that wishes to exclude a controlled company 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 companies and the controlling company, relating to the 3rd quarter of the fiscal year in which the exclusion is being requested, compared with the previous year; b. amount of gross revenue of the controlling company and the controlled companies, arising from operations with third parties;
c. amount of non-operational credits of the controlling company with the controlled companies, and
d. other information on transactions between the controlling company and the controlled companies or between the latter.

The requests for exclusion must be addressed to the Superintendence of Accounting Standards and Auditing of this CVM. It is worth noting that, once granted, the authorization will be valid only for the fiscal year in which the exclusion is being requested.

20.2.1 Consolidation of Financial Statements of Jointly Controlled Companies

This topic provides for the procedures that must be adopted for the preparation of consolidated statements, which include jointly controlled companies (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 shares of participation, two or more entities carry out an economic activity subject to joint control.

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

However, it was verified that there may be situations where the participation in results does not correspond to participation in capital but rather to the production and distribution of results. In these cases, each investor must reflect in the consolidated result statement the effective portion of participation it has in the result of the investee.

Thus, the CVM understands that the jointly controlled company must prepare and provide the financial statements intended for the consolidation of each investor, observing such peculiarities, and it is also incumbent upon it to disclose, in an explanatory note, this procedure and the amounts involved.

Similarly, 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 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 specific 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, they 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 funds (since the operations carried out by the fund are not subject to Income Tax Withholding, as well as CPMF does not apply to the financial movement of the fund). Thus, in essence, the assets of the fund are actually the assets of the company, and must be considered as such, for the purpose of disclosure in the consolidated financial statements, evidencing, separately, their nature.

20.2.2.2 Credit Rights Investment Funds (FIDCs)

Credit Rights Investment Funds (FIDC), whose constitution and operation are authorized by Resolution No. 2,907/91 of the National Monetary Council, were regulated by CVM Instruction No. 356/2001, amended by CVM Resolution No. 393/2003. FIDCs have characteristics of both structured finance operations and investment funds. FIDCs can be open or closed, and composed of senior quotas (subscribed by the investor and which do not subordinate to others for amortization and redemption purposes) and subordinated quotas (usually subscribed by the company that originally held the receivables, as additional guarantee of the operation), or only senior quota. At least 50% of the net equity of an FIDC must be represented by credit rights, which must respect certain eligibility criteria determined by its regulation, which contemplates the operation rules of the FIDC. The portion of the FIDC's net equity not invested in credit rights can be maintained in financial assets.

From the point of view of publicly held companies that originally held the receivables, they must observe the terms of CVM Instruction No. 408, of August 18, 2004, and, as applicable, disclose what article 5th of this Instruction provides.

Publicly held companies that originally held the receivables, as indicated in the Explanatory Note to CVM Instruction No. 408, must observe that the Basic Conceptual Framework of Accounting, approved by CVM Deliberation No. 29/86, as well as the Fundamental Accounting Principles approved by CFC Resolution No. 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, since the decision on the derecognition of accounts receivable, or when preparing the aforementioned disclosures, the publicly held company must also consider:

a) if control over the ceded receivables remains with the company, as evidence of this control may

to be cited, among others: the physical custody of the title, the management of collections with autonomy to establish payment deadlines or conditions, and the receipt/transit of resources from these receivables in the company's current account or collection account; b) whether it still retains any rights 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, repurchase of overdue and unpaid credits due to contractual obligation or even spontaneous repurchase of credits with such frequency as to characterize habituality; or d) whether, in essence or habitually, the company provides guarantees to FIDC investors regarding expected receipts and yields, even if informally.

Regarding liability for losses, a first reading of the circumstance can often lead to a mistaken conclusion. For example, in cases where the company is liable only for 5% of the portfolio, this percentage may be considered irrelevant compared to the total receivables. However, if the credits involved are exclusively from selected customers (consistently solvent) and the historical loss of the company's portfolio as a whole is 3% of its sales, it is clear that the risks are not transferred to the fund. Other ways in which the company assumes risks can be observed through mechanisms such as fines in amounts that could represent the probable loss of the portfolio, possibility of replacing certain receivables due to negotiations with customers, eventual extensions of title maturities, among others.

Given these characteristics, cases where consolidation will not be required should be rare, since the operation will, in essence, be a financing. In any circumstance, the procedure adopted by the company must be the subject of disclosure in an explanatory note, which will describe the firm evidence on which the company's management relied to support the decision to consolidate or not the FIDC.

If the company prepares its financial statements also under other accounting principles, notably American or international principles, consolidating the FIDC in these situations, it is not appropriate, even by the very objective and origin of CVM Instruction No. 408 (harmonization with IASB (SIC 12) and FASB (FIN 46) standards, as described in the Explanatory Note to Instruction No. 408), that for local purposes the FIDC ceases to be consolidated in the financial statements prepared in accordance with accounting practices adopted in Brazil.

When consolidating the FIDC in its financial statements, it is expected that the value received by the company be classified uniformly among companies, in light of the essence of the operation. In this sense, when the operation is analyzed and concluded that the resources received via FIDC in the consolidated balance sheet have the characteristic of financing, they must be classified as debt in the liabilities. Thus, in the FIDC consolidation process, the balance of receivables would return to be presented in the group of accounts receivable from customers, and the amount of the FIDC's equity would be reflected as consolidated financing, with the eventual balance of subordinated quotas held by the company being eliminated in this consolidation process.

On the other hand, if the public company has assigned to a credit rights fund its future cash flow, resulting from contracts maintained with customers for the future delivery of products or services, the value received by the company must continue to be recorded in a liability account, which demonstrates the corresponding financial obligation. In this case, the financial costs of the operation must be appropriated on a pro-rata basis 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 the majority 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, often affecting, significantly, the information on the financial and asset 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 companies, 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.

In its art. 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, resulting 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 SPE's activities, in the case referred to in art. 4.

20.2.3 Consolidated in Reduction or Exemption of Taxes in Incentivized Area

By adopting the accounting form prescribed in item 8.1 (The Disclosure of the Income Tax Provision), of this Circular Letter, for controlled companies, the equity method result recorded by the parent company is composed of a proportional portion resulting from the accounting of that tax incentive, registered in the subsidiaries as a 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 results of the parent company and consolidated, which must be indicated in an explanatory note to the consolidated financial statements, as provided in art. 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 this option is chosen, such adjustment must be presented in the line item of income tax and additional expenses of the said statement.

Additionally, in an explanatory note, the following information must be evidenced: which controlled companies are beneficiaries of tax incentives; the amount, percentage and conditions for enjoying the incentives and the information that the aforementioned 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
(8.1)
PARENT COMPANY
CONSOLIDATED
P&L 31/12/X0 31/12X1 31/12/X0 31/12X1 31/12/X1 Revenue 1,000 1,000 Expense (600) (600) Equity method

Profit
264
(400)
Cap. Res.
136
Ret. Earn. 400
IT/CS (34%) (136) (136)
(a)

Net profit
264 400 400

BALANCE SHEET M1
(b)
Adjustment M2
(b)
Adjustment
Assets:
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
Liabilities:
Current:
Provision
IT/CS
136 (136)
136
Eq.
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 IT/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 of the reverse merger operations that CVM has observed and analyzed so far begin with the constitution by the parent company of a "vehicle" company, to which the value of the investment evaluated by the equity method plus the value of the corresponding goodwill is transferred as a capital contribution. Subsequently, this "vehicle" company is merged into the investee that gave rise to that goodwill. This merger model allowed for the possibility of fiscal utilization of the goodwill, creating, accountingly, a kind of tax credit based on the 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. Were it not for 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 based on economic foundation based on intangibles or in perspective of future profitability, the recognition of an equity increase without effective economic substance. The creation of a society 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 the equity method and the remaining goodwill be restored."

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

However, in cases where there is no interposition of a "vehicle" company, with the original investor being merged, 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 deadlines originally established. In this case, the constitution of the provision mentioned in CVM Instruction No. 349 may be unnecessary or even undue.

It is worth noting that the above-mentioned exception should not be understood in a generalized way. There may be situations where, even if a "vehicle" company has not been created, there may be the recognition of an asset and an equity increase without economic substance, a fact that imposes the need to constitute the provision determined by CVM Instruction No. 349/01.

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 deadlines 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 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 calculated by full correction with that calculated by corporate legislation; and amount of fiscal loss eligible for use in subsequent periods; and b) any information not contained in the above information and which 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 associates and subsidiaries, indicating, at minimum:
I – name of the associate 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 dividends proposed or paid, relating to the same period; III – credits and obligations between the investor and the associates and subsidiaries specifying deadlines, financial charges and guarantees; IV – guarantees, sureties, mortgages or pledges granted in favor of associates or subsidiaries; V – revenues and expenses in operations between the investor and the associates and 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 deadlines used in the projection of results; IX – conditions established in 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 the 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 associates/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 associate 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, 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 a certain subsidiary was excluded; II – subsequent events to the end of the social year that have, or may 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 comparability of financial statements; and IV – events that caused a difference between the amounts of the equity and net profit or loss of the investor, in comparison with the corresponding amounts of the equity and net profit or loss consolidated.

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

The public company affiliated with a group of companies must indicate, in a note to its published financial statements, the body and date on which the last consolidated financial statements of the group controlling 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 Foreign Corporate Investments

The company must evidence the same information required for investments in subsidiaries/associates 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)

Although the accounting regulation for the Brazilian capital market is in the process of convergence with international pronouncements, the impossibility of public companies accounting for the effects of the exchange rate variation of their foreign investments directly in an equity account must be considered at this moment. To apply this accounting method, an alteration in CVM Instruction No. 247 is necessary, an aspect that has been studied with a view to future modifications.

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 publicly-held companies. It is the CVM's expectation that publicly-held companies remain attentive to the subject, so that the quality of information produced by Brazilian companies can be equated with international best practices and meet the expectations of the investor community.

When speaking of financial instruments, it is impossible to dissociate them from the issue of risk. Financial instruments (derivatives in particular) serve, primarily, as risk management strategies for a given publicly-held company; they either leverage (aiming for profits) the exposure of a given publicly-held company to risk factors inherent to it, or reduce it (aiming to mitigate losses).

Sometimes, financial instruments subject the publicly-held company to other risk factors for which it was not originally exposed, as a 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 exchange-traded instrument operations) or the nature of the instrument itself (leverage clauses in certain contracts entered into, which amplify gains or losses, or "covenant" clauses that anticipate the liquidation of a debt instrument, for example).

These information items must, as a matter of obligation, be present in the explanatory notes prepared by publicly-held companies. The explanatory note for financial instruments must, to be fair, contain, in an integrated manner, a qualitative description of the market risk factors affecting the business of a given publicly-held 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.

The CVM encourages those publicly-held companies that may wish to provide additional quantitative information regarding market risk factors to which they are subject, in an explanatory note. The CVM has observed that some publicly-held 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 applied to the financial instrument (measurement criterion, accounting classification received, recording of patrimonial 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
By way of illustration, a possible model of explanatory note is proposed, considering credit, exchange rate and merchandise price risk factors:

"The company's business comprises the extraction and sale of iron ore, for the domestic and foreign markets. The main market risk factors affecting the company's business can be enumerated as follows:

Credit Risk: the possibility that the company may incur losses due to financial problems with its customers, which oblige them not to honor their commitments to the company. To reduce this type of risk, the company enters into ancillary contracts with its customers that oblige them to maintain a certain level of indebtedness and liquidity. Once these levels are exceeded, early liquidation of the debt occurs by the company and, if the case, the execution of any guarantees offered.

Exchange Rate Risk: the 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: the possibility that the company may incur losses due to fluctuations in iron ore prices, in the domestic and foreign 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 to which it is willing to subject itself in the course of its business. The selectivity of its customers, as well as the diversification of its accounts receivable portfolio, monitoring of sales financing terms by business segment and position limits, are procedures that the company adopts in order to minimize any 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 evaluation of accounts receivable balances classified by 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 accounts receivable portfolio

Observation: The example presented informs about the risk involved in sales financing in terms of credit quality, concentration by main customers and sales financing term. 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 elected.

Exchange Rate Risk
The company's indebtedness and the results of its operations are significantly affected by the market risk factor 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 US 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, there was an expectation 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, at the moment, to the market risk factor exchange rate 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 for the computation of the fair value of all elements, with the exception of hedge instruments, was the discounted cash flow method, considering expectations of settlement or realization of liabilities and assets and market rates in effect on the information cutoff date. For hedge instruments, the market quotation of the contracts on the information cutoff date was used.

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

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) Nominal Value
US$ XXXX thousand
US$ XXXX thousand
US$ XX thousand US$ XX thousand US$ XX thousand b) Contracted forward 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 nominal 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 entry into 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:
Merchandise 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
Sold Forward Contract April/X4 July/X4 October/X4 in 31.12.20X3 a) Nominal 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
Sold Future Contract April/X4 July/X4 October/X4 in 31.12.20X3 a) Nominal 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 for the computation of the fair value of stocks and exchange instruments was the market value of these on the information cutoff date. For over-the-counter instruments, the method used for the computation of fair value was the discounted cash flow method, considering expectations of settlement or realization and market rates in effect on the information cutoff date.

Derivative contracts had their nominal 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 No. 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 Private Insurance Superintendence – 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 pronounced itself in the sense 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 give consistent treatment to the move, publicly-held companies that are investors or controlling entities of entities subject to those normative instruments, with respect to the effects on equity method and consolidated accounting statements must, exclusively, apply reflective treatment, that is, the adjustments resulting from the initial adoption of those normative instruments must be equally recorded in the investor directly to equity.

Similarly, reflective recording 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 a free translation and summary of 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 projected 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 as 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 the conception of the hedge that identifies: (i) the hedging instrument, the hedged item and the risk to be hedged; (ii) the objective of risk management 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 projected 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 during the entire period for which it was proposed."

Regarding 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 in the foreign country 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 projected 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 projected and highly probable hedge transaction.

21.5 The issue of the Principle of Substance Over Form 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 reflect their true economic aspect and, consequently, their real reflections on the equity of companies.

In this sense, the Basic Conceptual Structure of Accounting, approved and endorsed by CVM Deliberation No. 29/1986, preaches: "Accounting has a great relationship with the legal aspects surrounding equity, but, not rarely, the legal form may fail to reflect 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 in which one takes as a basis only its contractual aspects, not considering its economic aspects, can be accounted for as generating immediate or deferred gains, when, in truth, 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 related-party transactions, 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 the sense of reporting in their accounting reports the true economic reflections 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 had been met.

21.6 Disclosure in explanatory note of financial instruments
The publicly-held company must disclose, 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 for 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 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 a period of up to 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 based on the cost of its financing, according to the term provided for its receipt, must be indicated.

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 management 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 are different from the book values):

(a) The estimated market values of the company's financial instruments, assets and liabilities, on December 31, 19X1, registered in equity accounts and that present market values different from those recognized in the accounting statements, can be demonstrated as follows:

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 relating to other assets and liabilities is approximately equivalent to their 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 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 clearing 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 and locked options contracts 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 181 to 360 days
Above 360 days

(d) The risks involved in entering into these operations can be summarized as follows: (describe market, credit, operational, currency, and legal risks)

(CVM INSTRUCTION No. 235/95 and CIRCULAR LETTER/CVM/SNC/SEP No. 01/96)

Discontinued Operations

In situations where a company, based on its strategic planning and formal business plan, decides to jointly discontinue a group of assets, possibly associated with liabilities, in a single transaction, a special type of disclosure is required. This disclosure aims generally to highlight 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 cash-generating units, (ii) as a single cash-generating unit, or (iii) as part of a cash-generating unit. 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, listed companies must, whenever relevant, disclose in explanatory notes the information relating 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 noted that the IASB placed a draft pronouncement under the title ED 4 Disposal of Noncurrent Assets and Presentation of Discontinued Operations for public discussion in 2003, dealing with matters associated with reducing the differences between international and American standards (SFAS 144 Accounting for the Impairment or Disposal of Long-Lived Assets), regarding the identification of operations to be discontinued, valuation, and disclosure.

With the objective of advancing the disclosure of this type of information, the information required for discontinued operations can be presented in explanatory notes, without modifying the form of the currently used accounting statements. For general guidance purposes, 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 of in parts, such as selling the assets and settling the liabilities of the component individually; or (iii) closing by abandonment. b. that, on its own, represents an important business segment or geographical area of operations; and
c. that can be distinguished operationally 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 board of directors or management has (i) both approved a detailed formal plan for discontinuation and (ii) made an announcement of the plan.

22.3 Impairment Losses on Assets

The approval and announcement of a plan for discontinuation are an indication that the assets attributable to the discontinued operation may have suffered a reduction in their recoverable amount or that a loss, previously recognized for these assets, must be increased or reversed. Therefore, the disclosure in explanatory notes of discontinued operations must also consider the policies for recognizing and measuring these events.

22.4 Disclosure in Explanatory Notes of Discontinued Operations

22.4.1 Initial Disclosure

An entity must include the following information in explanatory notes 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 geographical 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 the total assets and liabilities to be disposed of 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 financial 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 period of the disclosed financial year.

22.4.2 Other Disclosures

When an entity disposes of 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 explanatory notes, in the period in which the event occurs, the following information:
a. for any gain or loss that is recognized in the disposal 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 decommissioning 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 carrying amount of these net assets.

22.4.3 Update of Disclosures

In the periods subsequent to that in which the initial disclosure event occurred, in the explanatory note on discontinued operations, a description of any significant change in the value or periods of cash flows relating to the assets and liabilities to be disposed of 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. Discontinuation is completed when the plan is substantially fulfilled or abandoned, even if the payments by 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 explanatory notes to the financial statements, except for the disclosure of the value of profit or loss before taxes, recognized in the disposal 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 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 timing of cash flows related to the assets and liabilities to be disposed of or settled.

Provisions, Liabilities, and Contingent Assets

Financial statements relating to financial years starting from January 1, 2006, notwithstanding the incentive for their immediate application, shall consider the provisions contained in Pronouncement NPC 22 of Ibracon on Provisions, Contingent Liabilities, and Contingent Assets, approved by CVM Deliberation No. 489, of October 3, 2005. The objective of this Standard is to ensure that appropriate recognition criteria and measurement bases are applied to provisions, contingent liabilities, and contingent assets, and that sufficient information is disclosed in the explanatory notes to the financial statements so as to allow users to understand their nature, timing, and value.

The Standard must be applied by all entities in the accounting and disclosure of liabilities, provisions, contingent liabilities, and contingent assets, except:
(a) those resulting from financial instruments recorded at market value; (b) those resulting from executory contracts, except when the contract is onerous. Executory contracts are contracts by which neither party has fulfilled any of its obligations or both parties have only partially fulfilled their obligations to an equal extent; (c) those arising from insurance policies in insurance entities; and (d) those covered by another standard issued by Ibracon or a regulatory body, such as those related to construction contracts, income tax, social contribution, and employee benefits.

As previously mentioned, the Circular Letters issued by the CVM technical area have, among other objectives, the purpose of clarifying doubts regarding the application of Accounting Standards by Listed Companies. In this sense, comments follow regarding the application of some items of CVM Deliberation No. 489/05.

23.1 Scheduled Shutdowns

One of the issues arising from the effectiveness of CVM Deliberation No. 489/05 concerns the application of item 13 of NPC 22 in the accounting treatment of the provision for scheduled shutdowns, which aims to restore the service capacity of fixed assets. The hypothesis raised is to reverse (and no longer constitute) the balance of the provision for scheduled shutdowns existing at the end of the 2005 fiscal year. Regarding this, we transcribe Ibracon Technical Interpretation No. 01/2006, which summarizes Brazilian and international standards and clarifies the procedures that listed companies must adopt.

Ibracon Technical Interpretation (IT) No. 01 /2006 Accounting treatment of costs with significant maintenance of fixed assets Introduction

Certain segments of the industry, such as naval, aviation, steelmaking, agroindustry, and petrochemical, perform significant maintenance on fixed assets at regular intervals during their economic useful life. These maintenance activities are carried out to restore or maintain the original performance standards predicted by suppliers and represent the only alternative for the use of the asset until the end of its useful life.

For these maintenance activities, entities halt the operations of the asset or group of assets for a certain period of time and generally incur the following main expenses:
a. Main components and parts. b. Own or contracted third-party services for the replacement of components and parts.
c. Own or contracted services for significant maintenance and cleaning.
d. Fixed plant costs during the maintenance period, inventory losses, etc.

The prevailing accounting practice in Brazil has been the constitution of a provision on a monthly basis, to reflect the total of expenses and costs to be incurred in the planned maintenance period.

A less used alternative is to account for the expenses and costs of the maintenance period in a deferred asset account for amortization over the period between the current maintenance and the next.

This IT does not discuss, therefore, provisions for costs with cleaning and repairs referred to in paragraph 14 of NPC 22, which are obligations regardless of future acts of an entity.

Convergence with international standards

On October 3, 2005, through Deliberation No. 489, the Securities and Exchange Commission (CVM) endorsed the Accounting Standard and Procedure 22 (NPC 22) Provisions, Contingent Liabilities, and Contingent Assets, recently issued by IBRACON. This standard enters into force for financial statements of periods beginning on January 1, 2006, or after this date, with its immediate application encouraged, and revokes previous provisions, including the IBRACON Pronouncement XXII Contingencies.

The issuance of NPC 22 aims at the convergence of Brazilian accounting practices with International Accounting Standards. In this process, maintenance with the objective of restoring the original conditions of the asset comes to merit a new evaluation, replacing the current practice of constituting provisions for future expenses.

Aspects of NPC 22 and other related standards

Items 13 to 16 of NPC 22 bring concepts different from those previously applied regarding the constitution of provisions for maintenance that restore the original service capacity of fixed assets. Let us see:

Financial statements present the financial position of an entity at the end of the period (balance sheet date) and not its possible position in the future. Therefore, no provision is recognized for costs that need to be incurred to operate in the future. The only liabilities recognized in an entity's balance sheet are those that exist on the balance sheet date.
Only obligations arising from past events and existing independently of future acts of an entity (such as the future conduct of its business) are recognized as provisions. Examples of these obligations are fines or costs with cleaning and repairs due to environmental damage, which would result in the outflow of resources for their settlement, regardless of future acts of the entity. Similarly, an entity recognizes a provision for the costs of discontinuation of an industrial installation to the extent that it is obliged to rectify any damage already caused.
An obligation always involves another interested party to whom the obligation is owed. However, it is not necessary to know the identity of the interested party to whom this obligation is owed. Due to an obligation always involving a commitment with another party, a decision by the board of directors or management will not originate an unformalized obligation on the balance sheet date, unless the decision has been communicated before this date, to third parties affected by it, in a sufficiently specific manner to create in them a valid expectation that the entity will fulfill its responsibilities.
An event that does not immediately generate an obligation may generate it at a later date, due to changes in law or because an act (for example, a public declaration in which the entity commits to do something) of the entity gives rise to an unformalized obligation.

From the paragraphs transcribed above, it is concluded that the current accounting practice adopted in Brazil to constitute a provision for costs with the maintenance of fixed assets must be altered by virtue of the recognition only of past transactions existing on the balance sheet date as a liability. In this sense, the standard identifies the formation of the provision for scheduled shutdowns as a future transaction at the discretion of the administrators. The cost of replacement caused by the shutdown for scheduled maintenance is not recognized because, on the balance sheet date, no obligation to replace parts, pieces, and to contract services exists, regardless of the future actions of the entity, and even the intention to incur this type of expense depends on the decision to continue operating the equipment. The change in this practice must, however, take into account the content of the balances of fixed assets, accumulated depreciation, and provision for scheduled shutdowns, applying the concepts determined in other standards, notably NPC 7 Fixed Assets, issued by IBRACON on January 18, 2001.

For better understanding of the subject, we transcribe below some items of NPC 7:

The expenditure on repairs or maintenance of fixed assets is incurred to restore or maintain the future economic benefits that the entity can expect from the originally assessed performance of the asset. As such, it is usually recognized as an expense when incurred. For example, the cost of services or review of the factory and equipment is usually an expense, as it restores, rather than increases, the originally assessed performance standard.
The appropriate accounting treatment for expenditures incurred after the acquisition of a fixed asset depends on the circumstances that were taken into account in the original measurement and recognition of the respective fixed asset and on whether the subsequent expenditure is recoverable. For example, when the carrying amount already takes into account a loss in economic benefits, the subsequent expense to restore the expected future economic benefits of the asset is capitalized, provided that the carrying amount after capitalizing the expenses is recoverable through the normal operations of the company. This is also the case when the purchase cost of an asset already reflects the obligation or commitment of the entity to incur expense in the future, necessary to put the asset in operating conditions. An example of this could be the acquisition of a building needing renovation. In such circumstances, the subsequent expenditure is added to the carrying amount of the asset, to the extent that it can be recovered by the future use of this asset.
The main components of some fixed assets may need replacement at regular intervals. For example, a furnace may need refractory lining after a certain number of hours of use, or the interior of an aircraft may need replacement several times during the life of the fuselage. The components are accounted for as individual and separate assets because they have different useful lives from those of the fixed assets to which they relate. Therefore, provided that the recognition criteria in paragraph 17 are met and that the entity has established the depreciation period, based on the useful life of these separate assets (and not the item to which they belong), the expenditure incurred in the replacement or renewal of the component is capitalized as the acquisition of a separate asset and the replaced asset is written off the books.

According to NPC 7, fixed asset items may contain a component that will require major maintenance or revision, including its replacement, in order to avoid loss in economic benefits. This component is generally not billed separately nor specifically identified, however, conditioned on the ability to be estimated, based on the expected current cost of a major maintenance or revision, it must be controlled separately. Thus, in order to satisfy NPC 7, the entity that purchases or constructs an asset must measure, at the time of purchase, the value of the component to be replaced based on supplier data, the history of costs with major maintenance or revision, etc., segregating these components in accounting. This implies that, from the total purchase value of the fixed asset, a part, at current prices, must be separated to correspond to the estimated value to be consumed until the scheduled time of the next shutdown, to occur in a period greater than one year. For better clarification, an example has been developed which is contained in the annex of this IT.

In 2003, during the revision of IAS 16, the IASB made two changes in the pronouncement directly associated with the theme of this IT. The first of them was to make it even clearer that the determination of charges of

depreciation must be made separately for each significant part of the fixed asset that the entity expects to use for at least one more fiscal year, and the second relates to the treatment of subsequent expenditures after the initial recognition of the asset. Regarding subsequent expenditures, IAS 16 states:

According to the recognition principle in paragraph 7, an entity does not add to the carrying amount of an item of property, plant and equipment the day-to-day servicing costs of that item. Instead, these costs are recognized in profit or loss when incurred. Day-to-day servicing costs are primarily the costs of labor and consumables, including small parts. The purpose of these expenditures is often described as being for "repairs and maintenance" of an item of property, plant and equipment.
Parts of some items of property, plant and equipment may require replacement at regular intervals. For example, a furnace may need to be relined (with refractory bricks) after a certain number of hours of use, or the interiors of aircraft such as seats and galleys may require replacement several times during the economic life of the aircraft. Items of property, plant and equipment may also be acquired for less frequent recurring replacement, such as the replacement of interior walls of a building, or for non-recurring replacement. According to the recognition principle in paragraph 7, an entity adds to the carrying amount of an item of property, plant and equipment the cost of replaced parts in that item when the cost is incurred, if the recognition criteria are met. The carrying amount of the replaced parts is derecognized in accordance with the provisions of this Standard (see paragraph 6772 of the original standard).
The condition for the continuous operation of an item of property, plant and equipment (for example, an aircraft) may be the regular performance of major inspections for faults, regardless of whether parts of that item are replaced or not. When each major inspection is carried out, its cost is capitalized in property, plant and equipment as a replacement, if the recognition criteria are satisfied. Any remaining carrying amount of the cost of the previous inspection (distinct from physical parts) is then derecognized. This occurs regardless of whether the cost of the previous inspection was identified in the transaction in which the item was acquired or constructed. If necessary, the estimated cost of a future similar inspection may be used as an indicator of the cost of the component of the existing inspection when the item was acquired or constructed.

Paragraph 7, cited in the body of paragraphs 12 and 13, reads as follows:

The cost of an item of property, plant and equipment shall be recognized as an asset if, and only if:\ (a) it is probable that future economic benefits associated with the item will flow to the entity; and (b) the cost of the item can be measured reliably.

Appendix C of International Accounting Standards (IAS) 37, the basis for the preparation of NPC 22, in the process of accounting standards convergence, indicates that a provision for maintenance of fixed assets is not recognized, because, at the balance sheet date, no obligation to perform such maintenance exists, regardless of the future actions of the entity, even if the intention to incur expenditures depends on the entity's decision to continue operating these assets or to maintain them. This conclusion is conveyed with the following examples:

Example 11 A: Restoration Costs - No Legal Requirement A furnace has a lining that needs to be replaced, for technical reasons, every five years. At the balance sheet date, the lining has been in use for three years.
Current obligation as a result of a past obligating event – There is no current obligation.
Conclusion – No provision is recognized (see paragraphs 14 and 1719 of the original standard).
The cost of replacing the lining is not recognized because, at the balance sheet date, no obligation to replace the lining exists, regardless of the future actions of the entity – even the intention to incur expenditures depends on its decision to continue operating the furnace or to replace the lining. Instead of recognizing a provision, the depreciation of the lining takes into account its consumption, i.e., it is depreciated over five years. The costs of the new lining then incurred are capitalized with the consumption of each new lining by depreciation over the subsequent five years.

Example 11 B: Restoration Costs - Legal Requirement

The law requires an aviation entity to overhaul its aircraft once every three years.
Current obligation as a result of a past obligating event – There is no current obligation.
Conclusion – No provision is recognized (see paragraphs 14 and 1719 of the original standard).
The costs of overhauling an aircraft are not recognized as a provision for the same reasons that the cost of replacing the lining is not recognized as a provision in Example 11 A. Even a legal requirement to perform the overhaul does not make the overhaul costs a liability, because there is no obligation to overhaul the aircraft. Regardless of the future actions of the entity, it could avoid future expenditures through its future actions, for example, by selling the aircraft. Instead of recognizing a provision, the depreciation of the aircraft takes into account the future incidence of maintenance costs, i.e., an amount equivalent to the expected maintenance costs is depreciated over three years.

IBRACON Guidance
As mentioned at the beginning of this IT, the prevailing accounting practice in Brazil was to establish a provision for significant maintenance expenses of fixed assets. With the issuance of NPC 22, for the reasons mentioned above, entities must cease to establish such a provision, and the adjustment must be treated as a change in accounting practice.

The effects of changes in accounting practice are recorded in Accumulated Profits or Losses. However, before making this adjustment, it is necessary to analyze the provision established so far, including its nature, which part of the fixed asset it is linked to, how the fixed asset is recorded and depreciated, and the expected date for the shutdown and execution of services. A study on this could lead to the conclusion, for example, that the total reversal of the balance of the provision account to Accumulated Profits or Losses is not appropriate.

In some cases, it may be observed that the entity is establishing a provision that includes, mainly, the cost of replacing significant parts of the asset or certain parts with a shorter useful life (for example, three years) than the asset as a whole (for example, ten years). From this observation, two conclusions may be drawn:
a. if the entity is applying the concepts of NPC 7, with depreciation separately of parts, pieces, and services necessary to restore the original service conditions of the fixed asset in time periods shorter than that of the main equipment, it is producing a superposition of costs. First, by depreciating the relevant parts, and second, by establishing the provision. In this situation, the provision related to the portion of fixed assets must be derecognized to profit or loss (portion of the current fiscal year) and equity (portion of previous fiscal years). b. if the entity is not depreciating separately the parts, pieces, and services necessary to restore the original service conditions of the fixed asset according to their economic useful life, the costs related to the establishment of the provision will be partially superimposed(1). In this situation, the provision related to the superposition must be derecognized to profit or loss (portion of the current fiscal year) and equity (portion of previous fiscal years), and the non-superimposed portion of the provision to the accumulated depreciation account. Subsequently, the depreciation criterion must be reviewed, as described below. ((1) The partial superposition consists of the implicit portion of the parts, pieces, and services to be replaced that were being depreciated as part of the main fixed asset).

The eventual balance of the provision recorded so far, which contemplated expenses related to services, loss of inventory during the shutdown, and expenses with fixed costs to be incurred during the shutdown, must be reversed, credited to the profit or loss of the fiscal year (portion of the current fiscal year) and equity (portion of previous fiscal years). The aforementioned expenses must be recorded when incurred.

As commented in this IT, the correct application of NPC 22 presupposes the adequate application of the guidelines and concepts of other accounting standards. That is, the need to segregate in fixed assets certain costs related to implicit values that make up the total cost, such as those of major maintenance that include disassembly, reassembly, and cleaning. These implicit costs should have been segregated from the whole at the time of purchase or construction of the asset, provided they could be measured reliably, and depreciated during the period between the date of installation and the scheduled shutdown. Thus, expenditures incurred related to major maintenance are included as a component of fixed assets and depreciated until the next scheduled shutdown, with the simultaneous accounting derecognition of the cost and accumulated depreciation of these initially identified and now replaced components.

In addition to the concept discussed in the previous paragraph, others must also be observed and include: (i) the provision for reduction of the asset to its recoverable amount (impairment); (ii) the general criterion for recognizing fixed assets, whereby an asset is only recognized if it is probable that future economic benefits associated with the item will flow to the entity, and if the cost of the item can be measured reliably; and (iii) the type of subsequent expenditures and/or costs.

Regarding the type of subsequent expenditures and/or costs, it is important to note that it is not sufficient to consider that these will contribute to the search for future benefits. It is fundamental the concept of day-to-day servicing costs, contained in the international standard on fixed assets. It is the understanding of IBRACON that only the capitalization of major maintenance costs, discussed in this IT, executed in certain industries in a programmed manner during the economic life of the asset, is acceptable.

Therefore, it is not acceptable to capitalize, establish, or maintain a provision for expenses unlinked to fixed assets, such as fixed costs to be incurred as a result of the scheduled shutdown, involving personnel expenses, depreciation of items of fixed assets that make up the plant, contracted electrical energy demand, eventual losses of material in process or raw materials, etc. Consequently, for the application of NPC 22, if the provision for scheduled shutdown includes any of these items, they must be derecognized to profit or loss (portion established in the fiscal year) or Accumulated Profits or Losses (portion formed in previous fiscal years). These expenditures and/or costs, when incurred, must be recorded directly in operating profit or loss, for example in the line of cost of sales, as appropriate, with the necessary highlights and disclosures for an adequate understanding of the circumstance, in accordance with NPC 27 on Disclosure of Financial Statements.

Also, for the reasons stated, the second alternative, considered less used in Brazil (see introduction), of accounting for the expenses and costs of the maintenance period in a deferred expense account for amortization in the period between the current and the next maintenance, is not appropriate and should be discontinued, adopting the guidance of this IT.

23.2 Taxes
23.2.1 Fundamentals in the Estimate for Accounting for Taxes
Another issue arising from the understanding of NPC 22 refers to the interpretation of example 4(a) of Annex II of the aforementioned Resolution vis-à-vis the text of the Standard. The example mentions that the introduction of a new tax or the alteration of a tax rate, inserted by legal device, even if considered unconstitutional by the administration of an entity, must be subject to recording because it is a legal obligation and not a provision or a contingent liability, considering the concepts provided in the NPC.

The judgment necessary for the accounting of this type of transaction must consider the following concepts:
A legal obligation is one that derives from a contract (through explicit or implicit terms), a law, or another instrument based on law.
The triggering event, in the context of this standard, is a past event that creates a present obligation, legal or not formalized, for an entity.
A provision shall be recognized when:
a. an entity has a present legal or not formalized obligation as a result of a past event; b. it is probable that resources will be required to settle the obligation; and
c. the amount of the obligation can be estimated reliably.
In rare cases, it is not clear whether there is a present legal or not formalized obligation. In these cases, it is presumed that a past event gives rise to a present obligation when, taking into account all available evidence, it is probable that a present obligation exists at the balance sheet date.
The evidence considered includes any additional evidence, provided by events subsequent to the balance sheet date. Based on this evidence:
a. when it is probable that a present obligation exists at the balance sheet date, the entity recognizes a provision (if the recognition criteria described in item 10 are met); and b. when it is not probable that a present obligation exists at the balance sheet date, the entity discloses a contingent liability, unless the possibility of outflow of resources is remote (item 70). (CVM Resolution No. 489/05).

The act of evaluating and measuring is inherent to Accounting itself. It is the exercise of analysis and judgment on any situation that requires an appreciation of facts, information, and a decision-making process to achieve an objective. This objective, in Accounting, must be to ensure that financial statements are endowed with qualitative characteristics that are the attributes that make them useful to users. One of these characteristics is reliability. The reliability of a measurement is ensured by the fidelity or accuracy with which it represents what it proposes to represent, ensuring the user the absence of relevant errors or biases; therefore, to be reliable, the information must have representational fidelity and be verifiable and neutral. In this context, management will always have the prerogative to exercise its judgment regarding an accounting treatment. However, this judgment will always have limits, which will be greater or smaller and, in some cases practically non-existent, depending on the event under examination. Present in human behavior, an evaluation implies consequences, which can be positive or negative regarding its objectives, depending on a series of factors, among which, information bases used, variables considered, criteria, concepts and principles adopted, and even beliefs, values, and skills of the evaluator. For Accounting, as already mentioned, the reliability of a measurement is ensured by the fidelity or accuracy with which it represents what it proposes to represent. “Accounting tends, within the broad degrees of judgment that the use of Principles allows us to employ, to choose the smallest of the equally relevant evaluations for the asset and the largest for the obligations. This understanding should not be confused or distorted with the effects of accounting earnings manipulation, but viewed in light of the vocation of safeguard, care, and neutrality that Accounting must have, especially regarding the excesses of enthusiasm and valuations by the management and owners of the entity. Let us not forget that, especially in the case of publicly held companies, their main obligation is to the market and investors.” (CVM Resolution No. 29/86). The evaluation regarding tax obligations is an example of the exercise of judgment where the limits are very small or practically non-existent. On the one hand, management is limited by the legal system that imposes compliance with legislation and consequently the accounting recognition of the tax obligation; on the other hand, Accounting Principles guarantee the prerogative of management to make judgment on the accounting treatment to be followed. At this point, one must resort to the Accounting Principles themselves, or more specifically to the Convention of Conservatism together with the Convention of Objectivity. “For equally relevant procedures, resulting from the application of Principles, preference shall be given, in decreasing order: a) those that can be proven by
documents and objective criteria; b) those that can be corroborated by consensus of qualified persons of the profession, gathered in research committees or in entities that have authority over accounting principles... As we saw in another topic, Accounting is a arduous exercise to maximize relevance, practicability, and objectivity. Regarding the restriction of objectivity, in order for financial statements to be as reliable as possible, accountants need to decide on the attribute or event that will be measured and select appropriate measurement procedures. According to Hendriksen, objectivity has been conceptualized in different ways by people and different accountants, namely:

measurements and assessments of an impersonal nature or that occur outside the thinking of the person or persons performing them;
measurements based on professional consensus of qualified experts;
measurements and assessments based on evidence and verifiable documentation;
the value of the statistical dispersion of measurements of an attribute, when carried out by several researchers.” (CVM Resolution No. 29/86).
23.2.2 The Estimate of Taxes
Based on these fundamentals, the example in question should not be viewed as a literal position. At the moment when management faces the examination regarding the treatment to be given to a tax, it must keep in mind that the Standard provides for its recording, and only in some rare cases does it have at its disposal, provided it is substantiated in the Fundamental Accounting Principles, the prerogative to exercise its judgment regarding its recording as an obligation. If it evaluates the need for recording, this should be maintained until

the moment of its extinction by one of the forms provided for in art. 156 of the National Tax Code.

Still regarding the same example, this also mentions:
"In a subsequent stage, the lawyer communicates that the action was judged procedente in a certain instance.
Even if there is a trend of gain, and even if the lawyer considers the gain of the case in definitive as probable, because the creditor (the Union) can still appeal, the situation is not yet considered practically certain, and therefore, the gain should not be registered. It should be noted that the situation evaluated is that of an active contingency, and not of a passive contingency to be reversed, since the liability, as said in the previous item, is a legal obligation and not a provision or a passive contingency."

This situation must be understood in the context in which the entity, in the face of a change in tax rate or introduction of a new tax, opts (evaluates) for its collection (payment), but, considering the possibility that this tax may be declared unconstitutional, files a lawsuit alleging unconstitutionality of the law.

In this context, the recognition of a gain/asset must be conditioned to a final decision in the process (res judicata or equivalent decision) that directly benefits the company, that is, when it is "practically certain" a future cash inflow.

Two other situations may also occur: in the first, the entity opted for non-collection and for the recognition of the liability. In this circumstance, the reversal of the liability is conditioned to a change in scenario such that it allows concluding as unlikely that there will be a future cash outflow. This change in scenario must consider the "Basis for Estimation for Tax Accounting" exposed in the previous item.

In the second situation, the entity opted for non-collection and for non-recognition of the liability. In this circumstance, first of all, the entity's management, together with its independent auditors, must revisit the reasons that led them to such a decision; reasons that allowed them to conclude that a future cash outflow was unlikely, also considering the "Basis for Estimation for Tax Accounting" exposed in the previous item. It must be kept in mind that accounting statements must be prepared based on judgments free of biases and in light of what is best available.

Concluding, a legal obligation must always be recognized by accounting but Exceptions to this rule are admitted in the very rare circumstances in which management can exercise its judgment (as already exposed). In this case, the bases that led to such a decision must be thoroughly justified and detailedly evidenced, so that the user of the accounting information has conditions to infer about the risks and effects of this decision, as well as the eventual need to adjust the information provided to their evaluation model.

23.3 PIS/COFINS

In a recent decision, the Supreme Federal Court – STF issued a sentence on the so-called "broadening of the calculation base" of PIS and COFINS. This subject is linked to the treatment of the issue commented above.

In this topic, in addition to everything already commented, it is necessary to consider the behavior of the judiciary regarding lawsuits related to the questioning of taxes. As an example, one can cite the decisions related to the IPI credit-prêmio, in which, at first, the sentences issued were considered definitive, to then find out that there was still a judicial path to be traveled, leaving the issue unresolved in this sphere.

Therefore, as already addressed, the accounting registration of the effects of this item is conditioned to the res judicata of a decision that directly benefits the company. Thus, if the accounting statements are disclosed after the date of res judicata, the effects of the decision must be recognized in these statements.

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

23.4.1 Disclosure in explanatory note of Scheduled Shutdowns

By complying with IT Ibracon nº 01/2006, the company must clarify about the accounting policies and practices adopted, highlighting the estimated values and periods for the scheduled shutdowns in the note regarding fixed assets; The company may also observe the guidance of item 5 of this Circular Letter, when treating the aspects of changes in accounting practices related to the accounting of the effect of scheduled shutdowns.

23.4.2 Disclosure in explanatory note of Provisions, Contingent Liabilities and Contingent Assets

Normally, active contingencies or contingent gains should not be registered; 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 litigation (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 as long as it evidences in an explanatory note to the accounting statements the existence of the challenge.

(ORIENTATION OPINION CVM 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) chance of occurrence of the contingency (probable, possible or remote), (iv) instances in which the contingent liabilities are under discussion (administrative or judicial, lower or higher courts), (v) case law on contingent liabilities, (vi) evaluation of the consequences of contingent liabilities on the company's business.

23.5 Annex: Technical Interpretation of Ibracon 03/2002

Accounting treatment of contingent gains

Due to the difficulties that are being found by professionals in the treatment of judicial, fiscal and other claims made by companies in judicial actions, Ibracon understood it appropriate to reaffirm its understanding regarding the accounting treatment related to the 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 at judicial processes in the recovery of taxes or in the extinction of registered tax obligations.

Question 1
What characterizes a contingent gain?
Answer
Based on Pronouncement XXII – Contingencies, from Ibracon, they are potential gains that have conditions or situations of undefined solution at the date of closing of the social year or period to which the accounting 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 tax paid or to the potential extinction of a registered tax obligation.

Question 2
Under what circumstances can a company register a contingent gain according to 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, the CVM issued Orientation Opinion nº. 15/87 which treats 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 assets 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 management and owners of the entity (see item 6.3 of the pronouncement attached to CVM Deliberation n°. 29/86)

By this convention, active contingencies or contingent gains should not be registered; 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 litigation (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 more 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 usually 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 recoverability capacity of 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 the final favorable decision for the recovery of a tax or the extinction of the registered tax obligation, however there is favorable jurisprudence for other Companies in identical cases and the evaluation of the 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 the lawyers? Answer Even in situations where there is favorable jurisprudence, this is not sufficient to give basis to the recognition of the contingent gain, since 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 applies equally (non-recognition of the gain). The Company must make disclosure in an explanatory 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 to compensate those values 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 still not 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 liquidation is also provisional, and if the outcome is unfavorable to the Company, it must collect the tax previously compensated with the legal additions.

Question 6
Is the practice adopted in Brazil harmonized with the best international 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, 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 that, in item V of article 179 of the corporate law, are defined as "applications of resources that will contribute to the formation of results of more than one social year, (...)". Pronouncement NPC nº VII of Ibracon establishes the condition for the activation of these expenses, generally rights linked to the destiny of the entity, 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 activated amounts must be immediately amortized in their entirety".

The international pronouncement 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 a company as a result of past events and, (b) from which future economic benefits are expected to be generated for the entity. For the recognition and accounting of an intangible asset, IAS 38 conditions it to the requirement of filling 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 by 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, as long as it is probable the generation of future incremental revenues resulting from the existence of these assets. This, however, is not the position of American pronouncements, which in SFAS nº 2 – Accounting for Research and Development Costs, determine that expenses with research and development – R&D – be appropriated to the result as an expense, which obliges Brazilian companies listed on American exchanges to evidence 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 indication of loss of economic substance of the respective project and maintaining the premises of the business plan that led the open company to start it, such expenses could, or rather, should be activated. 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 effort (sacrifice) initial materialized by the expenditures occurred. 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 the "startup" and pre-operational, which must be capitalized, unless they are necessary to bring the asset to the conditions of work.

The same foundations apply to the company in motion, that is, for an expense to meet the necessary conditions to be deferred, it must be unequivocally linked with 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 alteration, for 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 linkage of the expense to be deferred must fall. The opposite of this situation would be the incorrect activation of regular expenses to maintain the research and development department, for example, which does not constitute the formation of assets capable of non-ordinary services and generators of 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 (activated) because they are not costs specifically related to a qualifying asset.

It is not sufficient to state narratively and generically that the expense was incurred with the object of contributing to the formation of future results, as this is the essence or the reason for the existence of an expense. The expense represents the use or consumption of goods and services in the process of producing revenues or, in other words, it must be clear that every and any 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 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 open company in the project, and (ii) the linkage 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 expenses incurred.

24.2 Why Corporate Brands Should Not Be Accounted For

The subject of accounting for intangibles carries the difficulty of understanding how intangible assets should be evaluated, which are characterized by the non-existence of physical substance and a high degree of uncertainty in the estimate of future benefits. Many intangibles are characterized by having value only for a particular company, have an indefinite useful life, and are subject to wide fluctuations in value because their benefits are based on some type of competitive advantage.

In any case, only acquired intangibles are accounted for, which is provided for and accepted by international, American and Brazilian standards. This, indeed, is a foundation of accounting reports that are based on the recognition of transactions between entities and, therefore, do not provide for the accounting of assets created internally and not yet recognized in market transactions. The fact that one can evaluate the brand

corporate or even products through valuations, does not mean it should be accounted for. Remember that the explicit purpose of the accounting report is to present a measurement of the result and cash flows of an entity in a certain period and not to produce an estimate of the value of that same entity.
The problem addressed here arises when the administrator intends to include the value of corporate brand in assets and encounters opposition from accountants, independent auditors, that is, the conflict arises between the existence of an economic object capable of producing future profits and the set of opinions and pronouncements that prevent the accounting of corporate brand as it is a subjective goodwill. The subjectivity of the methods of measuring the economic fact before the moment of sale led to international accounting pronouncements to only consider acquired goodwill, as can be observed in paragraphs 48, 49 and 50 of IAS 38, transcribed below, which explicitly prohibit the recognition of internally generated goodwill, which we could classify as the "most sensitive" intangible asset:

Internally generated goodwill should not be recognized as an asset.
(...) internally generated goodwill is not recognized as an asset because it is not an identifiable resource (i.e., it is not separable nor does it arise from a contract or legal right) controlled by the entity that can be measured by its cost.
The differences between the market value of an entity and the amount of its net assets at any time may capture factors that affect the value of the entity. However, these differences do not represent the cost of intangible assets controlled by the entity. (free translation)

24.3 Expenses with share placement – subscription operation (underwriting)
This topic was the subject of great discussion in 2005, due to divergences regarding the understanding of the accounting treatment to be given to the expenses in question.
It is convenient to highlight that this subject has already been the object of disclosure in Ofício-Circular/CVM/SNC/SEP nº 01/2005, where in item 24.1 CVM, as an example of the accounting treatment of intangible assets in Brazil, expressed its technical position on the subject, namely:

“...subscription operation (underwriting), for the launch of new shares to the public.
These expenses, typically composed of the preparation of prospectuses, reports, professional fees, legal publications, advertising, commission of financial intermediaries, should be recognized as expense in the result of the exercise in which they are incurred, since there is no clear link with a qualifying asset and future results”. (Emphasis added)

This position of CVM has as technical support, basically, the Accounting Principle of Confrontation of Expenses with Revenues and Accounting Periods. The main motivation for the discussion arises from the fact that the accounting treatment to be given to expenses related to the opening of capital and placement of shares is not provided for in Brazilian corporate legislation, nor in national accounting standards, consequently generating, judgment of value on the most appropriate accounting treatment for recording this transaction. It should be noted that the exercise of value judgment often provides distinct understandings and positions on the same theme. However, all analyses and interpretations must be carried out in light of the basic conceptual structure of accounting and guided in the direction of convergence with international accounting standards. The issue refers, in a general way, to the capitalization or not of expenses with the placement of shares. It was suggested, more specifically, that such expenses be treated in the group of “Deferred Expenses”, being appropriated to the result in proportion to the expectation of future revenue generation. CVM understands that the referred expenses configure themselves as expenses due to their triggering events having already been incurred (often even paid). This statement leads us to the initial understanding that the entity's equity must be reduced by an amount identical to the expenses incurred with the opening of capital and the placement of shares. However, analyzing this operation oriented towards convergence with international accounting standards that deal with the subject, we have that they refer to expenses with the opening of capital and placement of shares to the accounting standards issued by both IASB and FASB, namely, IAS 32 (revised in 2003 – incorporated SIC 17) and FAS 141/01 (replaced APB 16), respectively. In both standards, it is stated that the value of expenses incurred in the opening of capital and placement of shares must be recognized in a contra account of Equity. The reasoning underlying this position is that the costs incurred in the equity transaction are necessary to complete the transaction, therefore being part of it. From the perspective of the entity issuing the resources, what matters is the net amount raised, whose amount will be used to finance its activities. The expenses incurred in this process are exclusively linked to it, being regarded as a necessary sacrifice for the raising of the intended resources and, therefore, as rectifiers of the amount entered into the Equity of the entity. As cited at the beginning of this item, our corporate and accounting legislation is silent on this subject. Regarding the reduction of Equity, we have specific accounting procedures provided for equity transactions, such as reimbursement, redemption and amortization of shares, as well as cases of loss of the exercise and treasury shares. In general, the acquisition of shares
issued by the company itself should be evidenced as a rectifier of the item that served as the basis for its acquisition, or the capital account itself, in cases of reduction of share capital. From all that has been exposed, from a purely technical point of view, our position is that the most appropriate accounting treatment, exempting legal aspects, would be the recording of expenses with the opening of capital and placement of shares in specific item(s) of Equity, rectifying the one(s) where the amount contributed by shareholders was recorded (capital and/or share premium – if any). This position is based on convergence with international accounting standards and, mainly, because we believe that the net effect of the transaction represents the resources that will effectively finance the company's activities and, since both are recorded in Equity, they ratify the financing decision made by the company. However, until there is a Brazilian accounting standard in this sense, we understand that such expenses should be recorded in the result of the period in which they are incurred, in a specific item that characterizes their non-recurrence.

24.4 Disclosure in explanatory note of Deferred Asset
Their 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.
(CVM GUIDANCE OPINION nº 18/90)

Share-based remuneration
25.1 Introduction
The growing 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.
On February 19, 2004, IASB issued IFRS 2 Share – Based Payment, 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 IASB and only with some small 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 transactions based on the fair value-based method. The general rule of these pronouncements, applicable to the accounting of share-based remuneration plans, is the recognition of cost over the required service period (vesting period) measured through option pricing models.

25.2 Overview
The listed employer company may adopt several types of plans to remunerate executives and employees by granting stock purchase options 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 usual in the American market and, to a lesser extent, in the European community markets, as a way to align the objectives of investors with the objective 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 result 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 price of the shares will rise and employees can buy it through exercise (purchase) 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 aims to attract and motivate employees by granting a part of the future growth of the company. This form also makes sense for listed 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 retention of talent 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 only 20% of the options can be exercised, or still, an employee can, typically, exercise options to which he has the right at any time, proportionally to the eligibility period. Some companies may offer an alternative exercise of options without disbursement 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 disburse the value necessary for payment for the shares at the exercise price agreed in the share-based remuneration plan.

25.4 Accounting situation in 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 the result and earnings per share. In summary, in the general current practice of American companies, the APB nº 25 standard, 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 recognition of a zero value in remuneration expenses (income statement account).

25.5 Accounting by international standards IFRS 2
IFRS 2 requires an entity to reflect in the 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) share-based rights, 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 with reference to 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 amount of the transaction 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 reliably estimate the fair value of employee services received. The application of fair value by IFRS 2 results in an expense in the result, 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 disclosure: (i) of 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 the result and financial position in the period.

25.6 The controversy over the estimation and pricing methods of options
In the estimation of expenses corresponding to the granting 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 in the inputs of 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 result and in the general shareholding position. Although share-based compensation intends to incentivize employees and administrators to behave in the way 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; approval date of Option Plans: 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, under 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 usually exercised between two dates: the date from which the conditions of the plan make exercise possible (vesting date), fixed after the grant date, and the expiration date, which is usually 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 their value; vested right – vested or meeting contractual conditions exercise: decision to buy the share through the option; equity instrument: contract identified to the residual result of the company's assets minus all liabilities;

share option as remuneration: a right issued by a public company to an individual to purchase a certain amount of the company's shares at a set price, within a specified time period; 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 within a certain time period. (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 time period 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; quantification can be done with various methodologies, the most common being the Black-Scholes and Binomial models. fair value: the amount for which an asset can be traded in an active market, where the buyer and seller possess knowledge of the subject and are independent of 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 trading 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 prevailing interest rate in the market, for instruments of similar nature, term, and risk.

25.9 Accounting for Share-Based Compensation Plans
The management and information problems arising in international companies have led an increasing number of companies to voluntarily recognize the costs associated with the grant of share options as expenses recognized in the income statement. This trend supports and reinforces the understanding of international bodies regarding the recognition of the effect on the result of this type of remuneration plans estimated at fair value, that is, through appropriate pricing methods.

It is the understanding of the technical area of this CVM that companies must account for the expenses related to the grant of shares as a form of remunerating employees using an appropriate pricing method. However, while there is no express determination in this regard, public companies must disclose in an explanatory note what the amount of the period's result and Equity would be, had this accounting been done.

25.10 Disclosure in Explanatory Notes of Option Plans
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 by which the shares were issued.

To meet 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 Notes to the financial statements and in the Quarterly Information Form – ITR the following information relating to 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 the option grant relative to the total time until the beneficiary can exercise the option); III the percentage of dilution of participation to which current shareholders may be subject in the event of the exercise of all options to be granted; IV regarding exercised options, description of the shares delivered, in quantity, class, and type, and the total and unit exercise price relative to each of the classes and types 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 redeem the options, indicating the quantity of shares, by class and type, as well as the value received by the company; and VII the effect on the Income Statement and Equity, had this accounting been done.

Corporate Matters
26.1 Law No. 10,303/2001 – Amendments to the Corporate Law
Law No. 10,303, of October 31, 2001, brought some changes to provisions of Law No. 6,404/76. The first change 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 a public company, becomes 15 (fifteen) days, and for the second call, 8 (eight) days.

The second change refers to the documents that must be made available to shareholders up to one month before the date set for 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 change is that made in articles 197 and 202, which deal with the constitution of the Reserve for Realized Profits. The change brought by the new Law is that the Reserve for Realized Profits 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 review 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.

Notwithstanding that 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 public 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 corporate law and that have profit as a 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 corporate law, must be classified as operating cost or expense, regardless of its denomination or calculation base.

26.3 Reserve for Realized Profits – Law No. 10,303/01
From the effective date of Law No. 10,303/01, in the fiscal year in which the amount of the mandatory dividend, calculated in accordance with the bylaws, exceeds the realized portion of the net profit of the fiscal year, the general meeting may, upon proposal of the administrative bodies, designate the excess portion (difference between the two referred values) for the constitution of the Reserve for Realized Profits.

For the purpose of the above described, in accordance with paragraph 1 of art. 197 of Law 6,404/76, with the new wording given by Law No. 10,303/01, the portion of the net profit of the fiscal year that exceeds/overpasses the sum of the following values is considered realized in the fiscal year itself:
The positive net result of equity method accounting; and the profit, gain, or income from operations whose financial realization occurs after the end of the following fiscal year.

Thus, the amounts destined for the constitution of the Reserve for Realized Profits, from the effective date of Law No. 10,303/01, come to represent the deferred dividend itself and no longer its base for realization.

However, the previous balance constituted under the previous rule still has that characteristic, and thus, upon its realization, it will constitute the calculation base for dividends, that is, upon its realization, the realized value will represent the dividend itself provided for in the bylaws, or, in other words and by way of example, in the case of a dividend represented by 25% of the adjusted net profit, the realized value will correspond to 25% of the calculation base for dividends; and, consequently and in this case, the value to be considered realized must correspond to 100%, that is, it must correspond to 4 (four) times the amount received.

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

Alternatively, the public company inserted in this situation may uniformize and group 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 Realized Profits account, with the remaining balance reversed and designated in the form of article 19 of CVM Instruction No. 247/96 (capital increase, dividend distribution and/or constitution of other profit reserves or absorption of fiscal year loss, meeting legal requirements).

In addition to what has been stated above, it is important to guide/clarify public companies regarding procedures that they should adopt in specific situations.

According to the current wording of paragraph 2 of art. 197 of Law No. 6,404/76, the portions of profits to be realized that are the first to be realized in cash in each subsequent fiscal year to that in which the Reserve was constituted will be considered as part of the Reserve for Realized Profits constituted in each previous fiscal year. However, this is not the only hypothesis of realization of the Reserve. In addition to financial realization via receipt of dividends and/or interest on equity capital and receipt of profit, gain, or income from long-term operations, realization hypotheses also include the alienation of the respective corporate participation and the values of capital increases promoted by invested companies, through the use of profit reserves or accumulated profits.

Thus, if such values are realized:
a) in companies that have constituted the Reserve for Realized Profits, before and after the effective date of Law No. 10,303/01, the respective amounts received must, first, be considered as corresponding, proportionally, to the portion of the dividend provided for in the bylaws (for example, 25%) and, in this case, the value corresponding, proportionally, to 100% of the respective amount previously destined for the Reserve for Realized Profits must be considered as realized profit, that is, by way of example, in the case of a dividend represented by: (i) 25%, the value corresponding to 4 (four) times the amount received; (ii) in the case of a dividend represented by 30%, the value corresponding to 3.33 (three and thirty-three hundredths) times the amount received, and so on. In this case, and considering only the first example (dividend represented by 25%), the amount received (which is equal to 25%) must be transferred from the Reserve for Realized Profits to the Dividends Payable account, within the fiscal year in which the respective amount was realized; and the remaining 75% must be designated in the form of art. 19 of CVM Instruction No. 247/96 or, alternatively and if the society does not have financial resources, be designated for the constitution of a Special Reserve for subsequent payment of dividends, in accordance with paragraph 5 of art. 202 of Law No. 6,404/76. This procedure must be adopted until the balance of the Reserve for Realized Profits constituted before the effective date of Law No. 10,303/01 is exhausted. And more, it is important to emphasize, only from then on, the amounts received must be transferred from the Reserve for Realized Profits, constituted after the effective date of Law No. 10,303/01, to the Dividends Payable account and, subsequently, paid to shareholders within the fiscal year in which the respective amount was realized; and b) in companies that have constituted the Reserve for Realized Profits only after the effective date of Law No. 10,303/01 and/or have uniformized it, for the provisions of this same Law, and grouped, with the Reserve constituted after the effective date of Law No. 10,303/01, the balance of the Reserve for Realized Profits, constituted before the effective date of this same Law, the respective amounts received must be transferred from the Reserve for Realized Profits (already uniformized and grouped in legal terms) to the Dividends Payable account and, subsequently, paid to shareholders within the fiscal year in which the respective amount was realized.

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 mandatory designated, in the form of corporate law, with no indiscriminate retentions either as a reserve or in the accumulated profits account. The designations made under the title of retention of profits must be justified by a capital budget approved by the general meeting and their classification must be made, preferably, in a specific reserve account. However, their classification in an accumulated profits account is admitted, provided that their nature is evidenced and the provisions of art. 196 of the corporate law are observed.

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

On this subject, we extract from the text of Circular-Office/CVM/SEP No. 01/2005, the aspects that must be considered for the preparation of the capital budget.

"Article 196 of Law 6,404/76 provides for the possibility of retaining a portion of the net profit of the fiscal year for reinvestment in the company, upon proposal by the administration justified by a capital budget, previously approved or in the same OGM that deliberates on the destination of the result, as can be seen in verbis:
'Art. 196. The general meeting may, upon proposal of the administrative bodies, deliberate to retain a portion of the net profit of the fiscal year provided for in a capital budget previously approved by it.
§ 1 The budget, submitted by the administrative bodies with the justification of the proposed retention of profits, must comprise all sources of resources and applications of capital, fixed or current, and may have a duration of up to five fiscal years, except in the case of execution, for a longer period, of an investment project.
§ 2 The budget may be approved in the ordinary general meeting that deliberates on the balance sheet of the fiscal year.'

From an economic point of view, the retention of profits in the company is justified whenever the return rate on reinvestment in the society exceeds the opportunity cost of capital. By imposing on companies the presentation of a capital budget to demonstrate the economic advantages to investors denied the receipt of dividends in the present, the law sought to protect the rights of these against the discretion of the controller in deliberations on the destination of the result.

Capital investment must be understood as all applications of resources aimed at obtaining compensatory returns over several future periods, distinguishing itself from other modalities whose returns only occur in the current fiscal year. Due to the commitment of a large sum of resources over a long period of time, such decisions are difficult to reverse, and may even put the continuity of the company at risk.

Given the relevance of the reinvestment of profits as a source of financing for companies, the law established as mandatory the provision, to investors, of adequate information regarding the use of resources by the company, to the detriment of the realization of the investment via the distribution of dividends in the present. Hence the need for the administration to present, in a meeting, a financial report called a capital budget, which evidences all applications and sources of resources for a maximum period of 5 years.

Recognizing the existence of numerous opportunities with maturities longer than this, this five-year limit was excepted, provided that, through the preparation of an investment project proving the use of resources in applications for longer periods, whose high degree of exposure to risk will imply better disclosure of information to investors.

It is important to record the need to monitor budget data, in order to prove the accuracy, or not, of capital needs at the time of investments, as well as the performance achieved. In accordance with article 8 of CVM Instruction No. 202/93, the option to present projections must observe the procedures described therein, and, in addition, it will be necessary, after the approval of the budget in question, whether in an extraordinary meeting prior to the OGM, or in the same ordinary meeting that deliberates on the destination of the result and re-presentation of the electronic IAN form, with the completion of table 14.01 – Business and/or Results Projections. This is because, ultimately, retention of profits is also an option of the administration of companies.

26.5 Effect on the Calculation of Mandatory Dividends Resulting from the Accounting Treatment of Exchange Gains
Given the doubts raised by some public 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 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 public 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 calculation 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 the 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 as "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 constituting a reserve for realized profit, within the limitations established in the caput of said article.
This understanding is supported by the statement of reasons that forwarded the Project of Law on Corporations, when dealing with reserves and retention of profits:
"The reserve for realized profits is regulated in the Project so that the mandatory dividend can be fixed as a percentage of the profit of the fiscal year 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 Notes of 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 types and classes; c) the weighted average acquisition cost, as well as 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.
(INSTRUCTIONS CVM Nos. 10/80 and 69/87 and CVM EXPLANATORY NOTE No. 59/86)

26.6.2 Share Capital
The number, species, and classes of shares that make up the share capital shall be disclosed, and, for each species and class, the respective quantity and, if applicable, the par value. The advantages and preferences conferred to the various classes of shares, in accordance with the bylaws, shall also be disclosed.
(LAW No. 6.404/76, ARTICLE 176)

26.6.3 Authorized Share Capital
A company that has authorized capital shall 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 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 preemptive rights for subscription, or the absence of such rights; and e) stock purchase options, if any, for administrators, employees, or natural persons who provide services to the company or society under its control. (LAW No. 6.404/76, ARTICLE 168, §1st)

26.6.4 Profit Allocation Stipulated in Shareholder Agreements
The annual management report shall contain information on the profit reinvestment and dividend distribution policy stipulated 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 share capital, divided by species and class of shares, shall be indicated in the Statement of Changes in 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 with monetary correction or not shall be disclosed.
(CVM GUIDANCE OPINIONS Nos. 15/87 and 21/90)

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

26.6.8 Administrator Remuneration
The amount of remuneration shall be disclosed in the statement of results itself or in an explanatory note.
(CVM GUIDANCE 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 reserves, when their evidence in the Statement of Changes in 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 shall 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 GUIDANCE 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 shall 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 allocated, 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)

26.6.12 Multiple Voting
The open company shall disclose the minimum percentage of participation in the voting share capital required 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 notice of convocation of the meeting and, optionally, together with the closing financial statements of the fiscal year. (CVM GUIDANCE OPINION No. 24/92)

Reduction in the recoverable amount of assets
The preparation of the standard on the reduction in the recoverable amount of assets is in the final phase of public hearing at Ibracon and under analysis by the Advisory Committee for Accounting Standards. This draft was included in the circular letter with the objective of anticipating its main points and is part of the convergence effort with international standards undertaken by Ibracon and CVM.

Objective and scope
1 The objective of Accounting Standard and Procedure NPC No. 16 – Reduction in Recoverable Amount of Assets is to define procedures aiming to ensure that assets are not recorded in accounting by a value higher than that which is recoverable over time through use in the entity's operations or in its eventual sale. If there is clear evidence that assets are recorded at a value not recoverable in the future, the entity shall immediately recognize the impairment, through the establishment of a loss provision. 2 NPC 16 applies to all assets or groups of assets relevant to industrial, commercial, and service activities, updating and complementing the mentions on this theme contained in previously issued standards related to investments not evaluated by the equity method, fixed assets, deferred assets, and asset revaluation. NPC 16 does not apply to assets resulting from construction contracts in construction companies, deferred tax assets, and assets related to financial instruments.

Process for identifying the existence of impaired assets 3 The entity must evaluate, upon the preparation of annual financial statements, if there is any indication that its assets or groups of assets may have lost economic representativeness, considered relevant. If there is an indication, the entity must perform an evaluation and account for the eventual impairment of the assets. 4 The following indications, among others, shall be considered:
External sources, observed during the fiscal year or upon the preparation of financial statements

The market value of the asset has decreased significantly more than would be expected as a result of the passage of time or normal use;
Significant changes have occurred, or will occur in the near future, in the technological, market, economic, or legal environment in which the entity operates or in the market to which the asset is destined;
Market interest rates or other market rates of return on investments have increased, and these increases will likely affect the discount rate used in the calculation of the value of an asset in use and significantly reduce the recoverable amount of the asset; and
The book value of the entity's equity has become greater than the market value of its shares.
Internal sources
Available evidence of obsolescence or physical damage;
Significant changes with adverse effects on the entity have occurred, or will occur in the near future, in the extent or manner in which an asset is used or will be used. These changes, among others, include: the asset becoming inactive, the asset that management plans to discontinue, restructure, or write down prematurely; or, furthermore, the asset that becomes classified as having a defined useful life instead of an indefinite one; and
Internal surveys or reports that evidence, for example, the existence of extraordinary construction expenditures, excessive capitalization of financial charges, etc., and indicate that the economic performance of an asset is, or will be, worse than expected.

Determination of recoverable amount
5 NPC 16 defines recoverable amount as the higher value between the net selling price of the asset and its value in use. If either of these values exceeds the book value of the asset, there will be no impairment nor need to estimate the other value.
6 The best evidence of the net selling price of assets is obtained from a formalized sales contract. If no formal contract exists, the price may be obtained from the trading value in an active market, less the necessary selling expenses. If these sources are also unavailable, the price must be based on the best available information to reflect the value that an entity could obtain, on the balance sheet date, for the alienation of the asset in negotiation with a knowledgeable, interested, and independent party, without corresponding to a compulsory transaction or resulting from a liquidation process, after deducting write-off expenses. In determining this value, the entity may consider the result of recent transactions for similar assets, within the same industry sector in which it operates. 7 The value in use of assets shall be estimated based on future cash flows derived from the continuous use of related assets, using a discount rate to bring these cash flows to present value. 8 Future cash flows must be estimated for the asset in its current condition. Estimates of future cash flows shall not include:
(a) future cash inflows or outflows expected for a future restructuring with which the entity is not yet formally committed, or improvement or enhancement of the asset's performance; and (b) cash inflows or outflows from financial activities or the receipts or payments of income taxes.
9 The estimate of future cash flows must be based on forecasts and/or budgets approved by the entity's administration, adopting a five-year period being recommended. Longer periods should be avoided due to the degree of uncertainty contained in the premises; however, they may be accepted if justified.
10 The discount rate must be a pre-tax rate on income, reflecting current market assessments of the time value of money and the specific risks of the asset. This rate represents the return that investors would require if they had to choose an investment that generated cash flows of values, time, and risk profile equivalent to those the entity expects to extract from the asset. This discount rate must be estimated, from implicit rates, in current market transactions for similar assets or still based on the weighted average cost of capital of a listed entity that has a similar asset, in terms of potential service and risks of the asset under review. However, the discount rate should not reflect the risks for which future cash flow estimates were adjusted nor projected inflation if the flows are in currency of constant purchasing power. Otherwise, the effect of the premises will be taken into consideration in duplicate. 11 When a rate is not directly available in the market, the entity shall estimate the discount rate considering the time value of money for periods up to the end of the asset's useful life and the risks that future cash flows may differ in terms of values and period from the estimates. As a starting point, the entity may consider the following rates: (a) the weighted average cost of capital of the entity determined by the use of techniques such as the Capital Asset Pricing Model; and (b) the borrowing rate obtained by the entity. 12 The recoverable amount of an asset must be estimated for each of the units that generate cash. If it is not possible to estimate the recoverable amount of each of the asset's units, the entity must determine the recoverable amount of the cash-generating unit to which the asset belongs. A cash-generating unit is the smallest group of assets that includes the asset and that generates cash inflows, which are largely independent of cash inflows from other assets or groups of assets. 13 It is considered that the recoverable amount of an asset, individually, cannot be determined if: (a) the value of the asset in use, isolated, generates insignificant cash values, clearly disconnected from what would be the asset's return value in the market; and (b) the asset does not generate cash inflows that can be largely independent of those from other assets. In these cases, the value in use and, therefore, the recoverable amount, shall be determined for the unit considered the cash-generating unit of the group of assets.

Recognition of losses
14 If the recoverable amount of the asset is lower than the book value, the difference between these values must be adjusted by the establishment of a loss provision, reducing the assets, in counterpart to the result of the fiscal year. In the case of revalued assets, the amount of the reduction must reverse a previous revaluation, being debited to a reserve in equity. If this reserve is insufficient, the excess shall be accounted for in the result of the fiscal year. 15 After the recognition of the loss provision, the depreciation, amortization, and depletion expense of the impaired assets must be calculated in future fiscal years by the new book value ascertained, adjusted to the period of its remaining useful life.

Reversal of loss provision for impairment
16 The entity must evaluate at the closing date of the fiscal year if there is any indication, based on external and internal sources of information, that a loss recognized in previous years should be reduced or eliminated. If positive, the established provision must be reversed in full or partially to the credit of the result of the fiscal year.

Disclosures
17 The entity must disclose the information provided in NPC 16, thus summarized:
a. The amount of the loss (reversal of loss) with impairments recognized in the fiscal year, and eventual reflections in revaluation reserves; b. The events and circumstances that led to the recognition or reversal of the impairment;
c. List of items that make up the cash-generating unit and a description of the reasons that justify the manner in which the cash-generating unit was identified; and
d. If the recoverable amount is the net selling value, disclose the basis used to determine this value and, if the recoverable amount is the value of the asset in use, the discount rate used in this estimate.

Special Topics
28.1 Consultations on Accounting Matters
As part of its duties, CVM maintains a service to exercise elucidative or orientation activity towards securities market agents 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 standards and patterns, guides companies to disclose the minimum information, considered essential for the market, establishing qualitative and quantitative indicators.
To the administrators of the companies, as responsible for their disclosure, it falls 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 assess their relevance.
To the independent auditor, it falls to apply a set of technical procedures aimed at issuing an opinion on the adequacy with which the financial statements represent the net worth and financial position, the result of operations, the changes in 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 CVM's knowledge the aspirations and demands of the market.
This communication channel is reputed to be of great importance in the process for the establishment of accounting standards and patterns. 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, shall be accompanied by the prior manifestation of the independent auditor regarding its position on the matter consulted.

28.2 Other disclosures in explanatory notes
28.2.1 Eletrobrás Credits
The criterion used for the establishment of the loss provision and the amounts involved, including the balances of loans not yet converted into shares, shall be disclosed in an explanatory note.
(CVM RESOLUTION No. 70/89)

28.2.2 Privatization Program
Open companies involved in privatization processes shall 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 facilities, 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 remittance of ITRs) and the value of the evaluation; d) amount of the provision for impairment 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 the disclosure of quarterly information or financial statements; and g) judicial and labor disputes, including with the employees' pension fund, and the amounts involved. (CVM GUIDANCE OPINION No. 24/92)

28.2.3 Real Estate Fund
The following information shall 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 undertaking, with address, total/built area square footage, stage in which it is, its characteristics, net applied value, 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 Investment Consultant, their percentages relative to the average semi-annual net equity, and accounting appropriation made, identifying any portion incorporated into the asset; and d) explicit calculation of the distribution of results to unitholders.

The values referring to 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 its registration in revenue is not admitted. In an explanatory note to the financial statements, the administering institution of the Real Estate Investment Fund shall inform the average period of appropriation of this revenue.

28.2.4 Incorporation, Merger, and Spin-off
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 to explore, concession, or permission delegated by the Public Power or the expectation of future results, in order to:
a) register the value losses of the applied capital when it is evidenced 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.

(INSTRUÇÃO CVM nº 319/99)
28.2.5 Earnings or Loss per Share
The company must disclose in the statement of results of the fiscal year the net earnings/loss per share of the social capital.

(LAW nº 6.404/76, ARTICLE 187)
28.2.6 Insurance
It must be informed whether there are responsibilities or interests covered and on which assets.

(CVM ORIENTING OPINION nº 15/87)
29. Audit
29.1 Importance and role of Independent Auditors
Within the scope of the securities market – MVM, within the measures adopted to strengthen it 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 the participants of the aforementioned market.

In this context, the development of the MVM requires an adequate system for the disclosure of economic-financial information of open companies, with the aim of providing liquidity and efficiency to that market, considering the principles of transparency and 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, insofar as the final product of their work has repercussions not only before the audited entity, but mainly before the external public (minority shareholders, potential investors, creditors, regulatory bodies, self-regulatory entities – stock exchanges, investment analysts, risk 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, insofar as 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 the credibility of the market, the CVM embodied in Instruction nº 308/99 all the 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 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 on the technical staff of the audit firm and for the independent auditor as an individual. For professionals who intend 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 the CVM's norms prompted the preparation of a set of professional standards issued 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, aiming to harmonize the interests of 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, to 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 is demonstrated to be inadequate. In this line, the CFC/CRCs system, with the support of this CVM, implemented the creation of the National Register of Independent Auditors (CNAI), through CFC Resolution nº 1.019/05, having been a first step towards the achievement of 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 were prohibited, concomitantly, with audit services for the same client, according to the list established in article 23 of CVM Instruction nº 308/99 (currently suspended application of this provision due to a court 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, insofar as 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 aim, primarily, to contribute so that audit professionals of a high technical standard operate in the market and, at the same time, the requirements of competence and ethics required of these professionals are preserved.

29.2 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 for the same client for a period exceeding five consecutive years, counted from the date of publication 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 the CVM must observe the counting of the maximum period of 5 (five) years 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 such a 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 at 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.

Additionally, it should be emphasized that the replacement of independent auditors due to compliance with the rotation rule does not eliminate the duty of the administrators of the audited entities and of the independent auditors themselves replaced, to formally communicate the change of auditors to the CVM, as required in the "caput" and § 1 of article 28 of CVM Instruction nº 308/99 (see item 29.5).

29.3 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 3 (three) are the 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. Insofar as 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 – Individual, partners, and other members of the technical staff of Independent Audit – Legal Entity shall not perform independent audit 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 norm of the CVM, regarding professional conduct, the exercise of the activity, and the issuance of opinions and audit reports.

Within the scope of the self-regulation system, CFC Resolution nº 1.034/05 (which revoked CFC Resolution nº 961/03) is the current professional standard that deals with the independence of the independent auditor regarding the relationship with the audited entity. The aforementioned norm defined the concepts regarding the attribute of independence of independent auditors and the circumstances that represent a threat to the loss of independence of these professionals, as follows:

Concepts:
a) independence – capacity that the audit entity has to judge and act with integrity and objectivity, allowing the issuance of impartial reports or opinions regarding the audited entity, shareholders, partners, quota holders, cooperative members, and all other parties that may be related to their work. Thus, the professional must have independence of thought and appear independent from the perspective of the external public. b) independence of thought – posture that allows expressing an opinion without being affected by influences that compromise professional judgment, allowing the person to act with integrity, objectivity, and professional skepticism; c) appearance of independence – avoid facts and significant circumstances such that a well-informed third party, having knowledge of all pertinent information, including safeguards applied, reasonably concludes that the integrity, objectivity, or professional skepticism of an audit entity or a member of the audit team have been compromised.

Circumstances that represent a threat to the loss of independence:
a) self-interest threat – occurs when an audit entity or a member of the audit team could benefit from a financial interest in the audited entity, or another self-interest conflict with it. b) self-review threat – occurs when the result of previous work needs to be re-analyzed when drawing conclusions about audit work or when a member of the audit team was previously an administrator or director of the audited entity, or was an employee whose position allowed them to exercise direct and important influence over the object of the audit work. c) advocacy threat – occurs when the audit entity or a member of the audit team defend or appear to defend the position or opinion of the audited entity, to the point of potentially compromising or giving the impression of compromising objectivity. This may be the case of the audit entity or member of the audit team that subordinates their judgment to that of the audited entity. d) familiarity threat – occurs when, due to a close relationship with an audited entity, its administrators, directors, or employees, an audit entity or member of the audit team become overly identified with the interests of the audited entity. e) intimidation threat – occurs when a member of the audit team encounters obstacles to act objectively and with professional skepticism due to threats, real or perceived, from administrators, directors, or employees of an audited entity.

CFC Resolution nº 1.034/05 establishes the list of situations and types of services provided by independent auditors that, in addition to those described in the aforementioned article 23 of CVM Instruction nº 308/99, may cause conflict of interest, namely:
a. employment or similar links by administrators, executives, or employees of the audited entity previously maintained with the audit entity; b. members of the audit entity who were previously administrators, executives, or employees of the audited entity;
c. bookkeeping services;
d. internal audit services to the audited entity; e. consulting services for computerized information systems; f. litigation support, judicial or extrajudicial expertise services; g. corporate finance and similar services; and

h. senior executive selection services.

However, said CFC Resolution nº 1.034/05 preaches 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 prepares it on strictly scientific bases, that the planning is legally supported, supported by adequate 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 nº 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 conflict of interest, and administrators of audited entities must observe, primarily, the norms emanating from the CVM, complemented by the norms of the CFC in points where these are more comprehensive.

Notwithstanding, it must be clarified to the market that: (i) item II and the sole paragraph of article 23 and article 24 of CVM Instruction nº 308/99 had their efficacy suspended regarding audit firms affiliated with the Union of Accounting Service Companies of the State of São Paulo (SESCONSP), due to a court 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 Ernst & Young Independent Auditors S/S in a 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 nºs 381/03 and 409/04 determine to open companies and administrators of investment funds the disclosure of information regarding the provision of any service by the Auditor that is not external audit, as addressed in item 29.4 below.

29.4 Disclosure of Non-Audit Services
Open companies and other issuers of securities must disclose, in their financial statements closed from 12/31/2003, 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, during the fiscal year, due to new hiring, cancellation, or modification of contracts, this information must be updated in the Quarterly Information – QIFs).

The audited entity may cease disclosing the total value of contracted fees and their percentage relative to external audit service fees, provided that the remuneration paid for other services is not relevant (less than 5% of the remuneration for external audit services); however, in all cases, it must be disclosed whether independent auditors provided or did not provide other services, in addition to external audit services, to the audited entity.

It is further emphasized that the independent auditor must declare to the audited entity the reasons why, in their understanding, the provision of another service, other than external audit, does not affect their independence and objectivity. A summary of this declaration must also be disclosed by the audited entity in its annual reports.

Based on the analyses carried out on the administrators' reports that accompany the accounting information disclosed in 2006, we can conclude that there was a significant improvement in the quality of the disclosure of information required by CVM Instruction No. 381/03, the results of which were disclosed in CIRCULAR LETTER/CVM/SNC/SEP No. 02/2006. However, 18 publicly held companies were identified that had already been guided in previous years, for having failed to reveal non-audit services for the 2nd or 3rd consecutive year, which is why they were summoned to provide clarifications regarding the non-disclosure of the existence of other services provided by their respective independent auditors. Other companies identified as non-contumacious were guided by letter to disclose the information in the IPE system, option "Market Communication". Once again, it is worth alerting that, henceforth, companies that do not fully comply with the requirements contained in CVM Instruction No. 381/03, in the accounting statements to be disclosed starting from this year of 2007, will be subject to the application of sanctions provided for in article 11 of Law No. 6.385/76, as it constitutes a serious nature offense; also subject to having to resubmit the DFP form to the CVM and republish their accounting statements in the newspaper in which they were originally published, containing the correction of identified flaws and omissions.

Finally, according to CVM Instruction No. 409/04 (which revoked CVM Instruction No. 386/03), we alert that investment fund administrators must disclose in the explanatory notes to the accounting statements of the aforementioned funds, the information required by CVM Instruction No. 381/03.

29.5 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 care for independence is not the exclusive task of the auditor. In this regard, 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 for 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, which must, obligatorily, include the consent of the replaced auditor. 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 regarding the justifications presented by the audited entity.

It is worth noting that the automatic update of registration data by the publicly held 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, giving rise, in case of non-compliance, to the application of a daily coercive fine, without prejudice to other applicable sanctions.

29.6 Technical Qualification Examination

Starting from 11/26/2004, when the 1st Technical Qualification Examination was held, requests for registration as Independent Auditor – Individual, Independent Auditor – Legal Entity, and for registration as Technical Responsible for Independent Auditor – Legal Entity, must, obligatorily, together with the other documents necessary for their validation, be accompanied by the certificate of approval in the technical qualification examination.

According to CFC Resolution No. 1031/05, the Examination will be applied 2 (two) times each year, in the months of May and November, on a date and time fixed by the Federal Council of Accounting (CFC), in the Notice.

29.7 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 to the CVM the annual information (Annex VI), base year 2006, competence 2007, until the last business day of April (deadline of 04/28/2007), noting 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 must 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 standard XML file (for auditors with a large volume of information).
For the electronic submission of annual information, independent auditors, on the CVM page (www.cvm.gov.br), must proceed as follows: "Document Submission", type CPF and password, "Document Submission via Form" or "Document Upload (XML file)" and follow the instructions on the screen. It is important that, after sending the Annual Information, it is verified if the submission was successful, accessing the delivery protocol which must be printed for eventual proof of delivery.

To speed up the document submission process, independent auditors who so wish, will be granted access to the document sent in the previous year (2006) and the recovery of the information sent, to, from it, make the necessary changes, prepare and send the document of the Annual Information of this exercise.

Starting from this 2007 exercise, the CVM begins to use the electronic means (via internet) as the best way to deliver the Annual Information. Notwithstanding, independent auditors who still do not have conditions to send their annual information via the internet, may send them in printed form by mail, provided they are accompanied by an explanatory statement of the reasons for not sending via electronic means. In the near future, the CVM will begin to require that the delivery of the Annual Information be made exclusively by electronic means (via internet) and from then on, delivery by other means, whether in printed form, by fax or electronic mail, will no longer be accepted.

29.8 Internal quality control

CVM Instruction No. 308/99 determines, in its article 32, that independent auditors must implement an internal quality control program, according to the guidelines emanating from the Federal Council of Accounting – CFC and the Institute of Independent Auditors of Brazil – IBRACON, which aims to guarantee full compliance with the norms governing the activity of auditing accounting statements and the norms emanating from this commission.

On August 26, 2005, the Federal Council of Accounting issued CFC Resolution No. 1036/05 approving NBC T 11.8 – Supervision and Quality Control, which entered into force on January 1, 2006, revoking the provisions of item 11.2.4 of NBC T 11, approved by CFC Resolution No. 820/97; as well as all provisions in NBC T 11 – IT 06, approved by CFC Resolution No. 914/01.

In defining the rules and procedures for internal quality control, several factors must be considered, mainly regarding the structure of the auditor's technical team, size, culture, organization, and complexity of the services to be performed. Such rules and procedures must be formally documented and known to all persons linked to independent auditors, and must also be made available to the Federal Council of Accounting, for monitoring and inspection; to other regulators of market activities; as well as to the clients of audit services themselves.

Internal quality control must cover all activities of auditors, such as administrative and technical procedures of independent audit. In the case of the auditor acting without the collaboration of assistants, quality control will be inherent to their professional qualification. The program must also include an action plan to remedy flaws detected in the quality verification process and the monitoring of its implementation.

29.9 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 emanating from the Federal Council of Accounting – CFC and the Brazilian Institute of Independent Auditors – IBRACON.

Thus, CFC Resolution No. 1008/04, of 10/08/2004, consolidated the rules on external review of quality control.

In 2006, the first four-year cycle was completed since the implementation of the program in 2002. During this period, given the educational/preventive nature of the program, no coercive/punitive measures were adopted against independent auditors whose reviewers issued review reports with reservations, disclaimer of opinion, or even adverse. However, independent auditors who did not adequately comply with or did not submit to the external quality control review program, were summoned and/or notified to provide clarifications, giving rise, even, to the application of a coercive fine.

It is important to note that in this 2007 exercise, a new four-year cycle of the external quality control review program begins, which ceases to have the educational character of the previous cycle, taking on a regulatory character, with the objective of evaluating compliance by the auditors to be reviewed, regarding the strict observance of applicable audit procedures in the execution of work and compliance with professional audit norms, emanating from the Federal Council of Accounting – CFC and the Institute of Independent Auditors of Brazil – IBRACON. Non-observance of the provisions contained in CFC Resolution 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 giving rise to non-compliance with article 20 of CVM Instruction No. 308/99, being subject to the application of penalties provided for in article 35 of said Instruction.

It is worth saying that independent auditors who receive review reports issued with reservations, disclaimer of opinion, or even adverse, may be submitted to administrative sanctioning processes, subjecting themselves to the penalties provided for in Law No. 6.385/76 and its subsequent amendments.

Within the spirit that External Quality Review is considered an essential element in the search for improvement of independent audit services, the Federal Council of Accounting – CFC, through Resolution No. 1008/04, improving and perfecting the mechanisms of the review process, in its 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 'Adverse Opinion' or 'Disclaimer of Opinion' or was not approved by the CRE; c) when they have not complied with the deadlines determined 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 reservation contained in the last Review Report is of a serious nature, and the reviewed auditor must be informed, in advance, 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 informed, in advance, of this condition".

29.10 Continuing professional education program

Accountants who work in the activity of independent audit have the need and ethical-professional duty to keep themselves updated regarding the legal and professional norms of their activity, in addition to seeking constant updates regarding the norms that the entities they audit must observe (corporate legislation, tax legislation, and specific norms 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 their entire workforce, 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 quality and full compliance with the norms governing the exercise of the activity of auditing accounting statements.

CFC Resolution No. 1060/05 (which revoked CFC Resolutions No. 995/04 and 1014/04) deals with the implementation and implementation of the continuing professional education program, which must be observed by Independent Auditors – Individuals and by all accountants comprising the technical staff of Independent Auditors – Legal Entities, duly registered with this CVM and enrolled in the newly created National Registry of Independent Auditors (CNAI). The activities valid for the purposes of compliance with the continuing professional education program are described in Annex I of the cited Resolution. Annex II refers to the guidelines for registration of capable 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 calendar base year of the program, must be sent to the Regional Council of Accounting of the jurisdiction of the respective independent auditor. It is important to emphasize that there is no need to send the "activity report" to the CVM, since, after analysis of the data, the CFC will inform which auditors complied, or not, with the aforementioned norm.

The norm provides that independent auditors must, starting from 2005, comply with a minimum of 32 points/hours, according to the criteria and procedures defined in the resolutions mentioned in the previous paragraph. Non-compliance constitutes an offense to art. 2, Item I, and art. 11, Item IV of the Professional Ethics Code for Accountants.

29.11 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 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, either by decision of the administration, or by compliance with the rotation rule, it is imperative 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 abroad.

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

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

Article 12 of CVM Instruction No. 319 establishes the obligation of independent audit of the accounting statements that serve as the basis for merger, consolidation, or spin-off operations, involving a publicly held company.

This instruction does not obligate the audit of the set of statements normally required by corporate law and CVM norms. Given some doubts that arose 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.

29.13 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, mainly for non-controlling shareholders, insofar as the effects of these transactions can significantly impact current and future results, coming to influence decision-making by those shareholders and investors in general.

The Federal Council of Accounting, which approved NBC T11.14 through CFC Resolution No. 1039/05, determines that the auditor must examine relevant transactions with related parties, applying the necessary procedures to obtain information on 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 the event that the administration does not disclose or proceeds with incomplete or incorrect disclosure, it will be up to the auditor to report such fact in their opinion.

The CFC also determines that the auditor must execute sufficient audit procedures to obtain evidence that the transactions, balances, and information related to related parties were adequately identified and disclosed by the entity's administration in the accounting statements subject to examination. It is worth remembering that non-observance of the aforementioned norm constitutes a disciplinary offense subject to the penalties provided for in letters "c", "d", and "e" of article 27 of Decree-Law No. 9.295/46 and, when applicable, the Professional Ethics Code for Accountants (CEPC).

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 No. 323/2000, the independent auditor must observe if the formalization, implementation, 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, in accordance with the provisions of 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.

29.14 Distribution of Results

Art. 25, of CVM Instruction No. 308/99, determines that the independent auditor must verify if the destination of the audited company's result is in accordance with the provisions of corporate law, the norms emanating from the CVM, and with the company's bylaws. Any irregularity found, 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 for in art. 38 of the same Instruction.

29.15 Monitoring of the performance of Independent Auditors regarding the information disclosed in the explanatory notes of Publicly Held Companies

As provided for in the Circular Letter of the previous year, in continuation of the monitoring of the performance of the

independent auditors at MVM, the technical area of this Commission selected, by sampling, the audit reports issued on the financial statements of various publicly-held companies. In the financial statements whose audit reports were selected, it is being verified whether the information required by some normative acts of this CVM, such as: CVM Resolution No. 273; CVM Resolution No. 371; CVM Instruction No. 235/95; CVM Instruction No. 371/02 and CVM Instruction No. 408/04, has been evidenced/disclosed in explanatory notes, and, in the absence of adequate disclosure of this information, whether the selected reports present the necessary mention, in accordance with NBC T 11 IT 05 Independent Auditors' Report on Financial Statements, approved by CFC Resolution No. 830/98.

Annex - Consolidation of Explanatory Notes

The text below was extracted from the body of the circular letter, as referenced in the sub-item in parentheses, and lists all guidelines for disclosures in explanatory notes to financial statements.

30.1 Disclosure in Explanatory Notes (1.7)

30.1.1 Objectives and Aspects of Explanatory Notes (1.7.1)

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 company's financial situation and results. The explanatory notes that make up the financial 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 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 financial 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 art. 176 of Law No. 6.404/76, which establishes that "the statements shall be supplemented by Explanatory Notes and other analytical tables or financial statements necessary to clarify the financial situation and the results of the fiscal year". In this law, the explanatory notes must clearly and objectively discriminate the clarifications necessary for the correct understanding of the content of the financial statements, based on the items provided in § 5 of art. 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, i.e., the disclosure of the accounting practices used. They should not be used to rectify, as they indeed do not rectify, the application of inappropriate 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 income statement, the statement of sources and applications of resources and the changes in equity.

Explanatory notes should avoid obviousness as well as elaborate writing; their main objective is to evidence 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 appropriate 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 evidenced 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 be observed 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 observing the order observed in the financial statements, both for the groupings and for the accounts that make them up; 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 provide a disservice to competent information and are harmful to analysis, such as, for example, "... rates allowed by legislation..." or, redundantly, "... prepared in accordance with the law...", or even, "... in accordance with corporate, tax and specific regulations of the regulatory bodies of the matter...".

Regarding redundancy, note that the unnecessary need to report 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).

30.1.2 Differences between national and international accounting procedures (1.7.2)

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, mandatorily, to the market its financial statements, due to obtaining registration for trading its issued securities.

When deciding to disclose the reconciliation, the entity's management must observe how equivalent these practices are. Financial statements prepared according to a certain accounting practice can 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 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 reclassifications of numbers. 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 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 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 divergences. These divergences may include additional disclosures, reconciliations, etc. This judgment must be made by the management and approved by the independent auditors of the publicly-held company, and must be supported by procedures accepted by regulatory bodies and standard setters.

30.2 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 change in the criterion or in the manner of its application, occurring during the fiscal year.

(CVM ORIENTING OPINION No. 21/90)

30.3 Disclosure in explanatory note of Inventories (3.2)

30.3.1 Disclosure in explanatory note of inventories (3.2.1)

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

Publicly-held companies that, with CVM authorization, are in the implementation phase of a cost accounting system, must clarify the fact in an explanatory note, subjecting themselves, regarding the effects, to the applicable restrictions that may be pointed out by the independent audit.

(CIRCULAR LETTER/CVM/PTE No. 309/86 and CVM ORIENTING OPINION No. 27/94)

30.3.2 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 ORIENTING 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 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 overheads are treated as expenses in the period in which they are incurred. (...)".

30.4 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 equivalents cash
Requires disclosure of the criteria the company uses in considering investments classified as cash equivalents.
Requires disclosure of the components that 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 on 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 evidenced in highlight only if the indirect method is used; dividends paid can be grouped with other distributions to owners; and, interest and dividends received can 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 evidence cash flows from extraordinary items.
Must be classified as resulting from operating, investment or financing activities, as the case may be, separately disclosed, by which they originated, and evidenced in accordance with 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 the balances of unavailable cash and cash equivalents, together with the comments of the management.
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 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 change 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 investment and financing activities that is greater than 5% of the total value of the activity involved is 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.

30.5 Disclosure in explanatory note of accounting practices, changes in accounting estimates and correction of errors of previous periods, according to NPC 12/CVM Resolution No. 506/06 (5.4)

Accounting Practices

If the initial application of a standard has a material effect on the current period or any prior period presented, except if it is impracticable to quantify the adjustment, or if this initial application results in a material effect in future periods, the entity must disclose:
a. the standard to which it refers; b. when applicable, that the change in accounting practice is being made in accordance with the specific transitional provisions of the standard;
c. the nature of the change in accounting practice;
d. when applicable, the description of the transitional provisions; e. if applicable, the transitional provisions that may cause effects in future periods; f. the amount of the adjustment for the current period and for each prior period presented, demonstrating the adjustment in each line of the financial statements and, if applicable, in the calculation of earnings per share; g. the amount of the adjustment relating to periods prior to those included in the comparative information; and h. if retrospective application, in accordance with items 17 (a) and (b), becomes impracticable for any prior period, the reasons that led to this circumstance and a description of how and since when the change in accounting practice was applied.

These disclosures do not need to be repeated in financial statements subsequent to the change in accounting practice.

When a voluntary change in accounting practice has a material effect in the current and prior periods, except if the quantification of the adjustment is impracticable, the entity must disclose the following:
a. the nature of the change in accounting practice; b. an explanation of why the application of the new accounting practice provides better presentation or more reliable information;
c. for the current period and each prior period presented, to the extent practicable:
i. the value of the adjustment in each account of the financial statements affected; and
ii. the impact on the calculation of earnings per share;
d. if practicable, the amount of adjustments relating to periods prior to those presented; and e. if retrospective application for a given prior period or for periods prior to those presented is impracticable, describe the circumstances of this limitation and a description of how and from when the change in accounting practice was applied.

These disclosures do not need to be repeated in financial statements subsequent to the change in accounting practice.

When the entity does not early adopt a new accounting standard already issued by a regulatory body, but not yet in force, it must disclose:
a. such fact; and b. if practicable, an estimate of the effects that the change(s) would cause in the financial statements, if it were applied.
When proceeding in accordance with item 28, the entity must consider the following disclosure:
a. the identification of the standard; b. the nature of the imminent change or changes in accounting practices;
c. the effective date of the standard;
d. the date on which the entity plans to adopt the standard; and e. an explanation of the impact that the initial application of the standard may cause in the financial statements or information that the effect of the adoption of the standard is not known nor capable of being estimated.

Changes in Accounting Estimates

The nature and amount of the change in an accounting estimate, which has a material effect in the current period or is expected to have a material effect in subsequent periods, must be disclosed, unless the effect in subsequent periods is not capable of being estimated.
If the amount of the effect on subsequent periods of a change in accounting estimate is not capable of being estimated, the entity must disclose such fact.

Correction of errors of previous periods

The entity must disclose the following:
a. the nature of the prior period error; b. the amount of the correction relating to each prior period presented, indicating:
i. the adjustment by account of the financial statement; and
ii. the effect on the calculation of earnings per share;
c. the amount of the correction relating to periods prior to those included in the comparative information; and
d. if the retrospective adjustment is impracticable for a given period, the description of the circumstances that led the entity to that conclusion, the form and indication of the period from which the error was corrected.

These disclosures do not need to be repeated in financial statements subsequent to the correction of errors.

30.6 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 come to have, a material effect on the company's financial situation and future results must be disclosed.

(LAW No. 6.404/76, ARTICLE 176)

30.7 Disclosure in explanatory note of Income Tax (8.3.7)

30.7.1 Income Tax and Social Contribution (8.3.7.1)

The financial statements and/or the explanatory notes must evidence the following information, when relevant:
a) amount of current and deferred taxes recorded in profit, equity, assets and liabilities; b) nature, basis and expectation of term for realization of each deferred tax asset and liability; c) effects on assets, liabilities, profit and equity resulting from adjustments due to changes in rates or due to changes 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 has not been recognized, with indication of the value of the taxes that did not qualify for this recognition; e) reconciliation between the amount debited or credited to profit for income tax and social contribution and the product of accounting profit before income tax multiplied by the applicable rates, also disclosing such rates and their calculation bases; f) the nature and amount of assets whose tax base is lower than its carrying amount.

(CVM RESOLUTION No. 273/98)

30.7.2 Deferred Tax Asset (8.3.7.2)

It is necessary to clarify that, in any situation, including for cases of 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, it is mandatory to disclose in an explanatory note the following information (items I, II and III of article 7):

"I estimate of the portions of realization 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 deferred tax asset not recorded that exceeds the realization period of 10 (ten) years referred to in item II of art. 2º; II effects resulting from eventual alteration 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 an explanatory note, of the justified basis of the actions implemented by the company, aiming to generate taxable profit in the future. These actions represent fundamental requirements for the company to be able to maintain tax credits in the asset in the absence of profitability history (art.3, sole paragraph).

(CVM INSTRUCTION No. 371/02)

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

Segment information aims to provide users of financial statements with information about the size, contributions to profit 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 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. 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 given sector, the investor may encounter companies that present a global performance that was not fostered in the basic sector of

activity, but rather by other non-repetitive activities or businesses. The statements presented in segmented form also serve to elucidate this circumstance, as they will allow users to assess the performance of each activity. From this perspective, the CVM encourages the disclosure of this information by publicly-held companies, especially for those that publish consolidated statements.

To present information by segments, it is necessary, preliminarily, to define the segments to be highlighted. A segment comprises a component of a company involved in the production of goods and services, or a 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 management reports by its administrators in the structure of the information of the business segments.

The company, to highlight its segments, must adopt the form of "business" or "geographic area", or both. If the form used by the 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 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 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 certain country, group of countries, or, as in the Brazilian case, due to its 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, as it will have a direct effect on the content of the information made available.

The segmented information that must be included, considering the primary disclosure format (business or geographic area) based on 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 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 least, the following information: (i) the value of the assets of each segment; (ii) sales revenues to external customers (excluding sales between departments/areas of the same company inter-segments); and (iii) segment capital expenditures. 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 present 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 management.

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

"NOTE XXX SEGMENT INFORMATION

The segment information is based on two formats: the primary reflects the management structure adopted by the group, while the secondary refers to the division by products. The primary segmentation format, by management responsibility and geographic areas, represents the company's management structure. The group's main activity is food trade. The other activities, poultry product 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. The unallocated items comprise corporate expenses, research and development costs, amortization of any 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, receivables, inventories, and prepaid expenses. The unallocated items represent research and development assets, including any goodwill. The liabilities comprise debts to 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 management believes is 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)
Operating Profit 2,305 2,297

The breakdown of sales by geographic area is done 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 disclosure format is that of 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, in respect to the IASB standard, which represent the secondary disclosure format.

30.9 Disclosure in explanatory note of Information that Reflect the Effects of Price Changes (10.2)

30.9.1 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) income statement: 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) 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 statements and complete quarterly information, in constant purchasing power currency.

(ORIENTING OPINION CVM No. 29/96)

30.10 Disclosure in explanatory note of Fixed Assets (11.3)

30.10.1 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 depreciation, amortizations, or exhaustion on the revaluation and subsequent write-offs; 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 recorded 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 publicly-held companies the right to opt, until 03/31/99, 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, reverting 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 year must be disclosed in an explanatory note.

(CVM INSTRUCTION No. 197/93 AND CVM DELIBERATIONS No. 183/95 and 288/98)

30.11 Disclosure in explanatory note of Financial Leasing (12.1)

Lessee companies must disclose, at minimum, 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 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 cause the need for present value adjustments because they do not meet the Fundamental Accounting Principles; and b) the present value adjustments of the future flows of the financial leasing portfolios, evidencing the effect of Income Tax.

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

30.12 Disclosure in explanatory note of Sales or Services to be Performed (13.3)

The recording of an account receivable presupposes that the revenue recognition principle is met. Thus, it is inadmissible to record accounts receivable having as a counterpart an account of future period result.

In the case of advance billing or contracts with guarantee of receipt for sales or services to be performed, the company must, when relevant, disclose the fact and respective amounts.

(CVM ORIENTING OPINION No. 21/90)

30.13 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 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 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) in 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, 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 to discount the actuarial obligation to present value;
ii. The expected rates of return on plan assets;
iii. Estimated salary increase indices; and
iv Any other relevant assumption used.

(item 81 of CVM DELIBERATION No. 371, OF DECEMBER 13, 2000)

30.14 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 of 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 of the matter as it is of international interest. Since the objective of IBRACON is to edit NPC harmonized with international accounting standards (IFRS/IAS), it was concluded 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 result 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 time.

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 from companies that operate 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 both regarding 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 to calculate the present value;
c. residual value of the concession fixed assets at the date of the accounting statements that will 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 the concessionaires regarding expenses with services such as, for example, maintenance of highways/railways;
ii. amounts recorded regarding the purchase and sale, as well as payables or receivables balances resulting from the 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 assets of any nature;
v. amounts of real estate or movable assets 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.
(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 debt cancellation.

30.15 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 on account of the subsidies.
(d) Possible subsidies to be recognized, after contractual conditions are met.

30.16 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 the 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 intended destination, the amortization bases, and the values amortized in each period, must be disclosed, when relevant.

(CVM DELIBERATION No. 294/99)

30.17 Disclosure in explanatory note of the cost of loans (18.4)

30.17.1 Debentures (18.4.1)

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

(CVM ORIENTING OPINION No. 21/90)

30.17.2 Long-Term Obligations (18.4.2)

The interest rates, maturity dates, guarantees, currency, and method of update must be disclosed.

of long-term obligations.
(LAW No. 6,404/76, ARTICLE 176)
30.17.3 Encumbrances, Guarantees and Contingent and Contingent Liabilities (18.4.3)
The real encumbrances on asset elements, guarantees provided to third parties, and other contingent/contingent liabilities must be disclosed. Contingent events that, due to their peculiarities, generate 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, with the reasons for the impossibility of such measurement also mentioned in the latter case. (LAW No. 6,404/76, ARTICLE 176 AND EXPLANATORY NOTE TO CVM INSTRUCTION No. 59/86)
30.17.4 REFIS (18.4.4)
Public companies must disclose, with respect to 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 for 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 make regular payments of taxes, contributions, and other obligations as an essential condition for maintaining the payment conditions provided for in REFIS; and h) any and all imminent risks associated with the loss of the special payment regime. (CVM INSTRUCTION No. 346/00)
30.17.5 Disclosure in Explanatory Note of Capitalization of Interest (18.4.5)
In line with IAS 23, Brazilian public companies are required to make the following disclosure in an explanatory note:
(a) the accounting policy adopted for financial charges on loans; (b) the amount of financial charges capitalized during the period; (c) the capitalization rate used to determine the amount of financial charges eligible for capitalization; (d) the information on the amount of expenses borne by linked financing and the nature of this linkage (contractual, capital budget, management statement, etc.); and (e) indication of the total financial charges of the period, the portion capitalized in the period, and the net charges that affected the period's result.
30.18 Disclosure in Explanatory Note of Transactions with Related Parties (19.5)
Public 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 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 Deliberation 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 shall be given considering the following facts: (i) whether 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 best interest; and (ii) whether 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.
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 or movable assets of any nature.
Maintenance of any benefits for employees of related parties, such as: supplementary social security 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 each price in each operation, it is necessary to clarify the method used, the calculation form, and average prices, for example.
30.19 Disclosure in Explanatory Note 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 face various situations where, even without the existence of corporate links, an entity holds, in fact, 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, often affecting, significantly, the information on the financial and asset 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 companies, 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. In its art. 5, Instruction No. 408/04 cites the following minimum information that must be disclosed in an explanatory note 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, resulting 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 SPE's activities, in the case referred to in art. 4.
30.20 Disclosure in Explanatory Note of Consolidated Financial Statements and Accounting of Investments (20.4)
30.20.1 Goodwill/Bargain Purchase (20.4.1)
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 rates, and terms used in the projection of results. Unjustified goodwill, that is, that does not have an economic foundation, must be recognized immediately as a loss, in the result of the fiscal year, clarifying in an explanatory note the reasons for its existence. (CVM INSTRUCTION No. 247/96)
30.20.2 Condensed Statements (20.4.2)
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 fiscal year; investments in other companies, when relevant, explicitly stating the final amount and the result of the equity method for each investment and the values related to goodwill, bargain purchases, and loss provisions; interest rates, maturities, and encumbrances on long-term debts; number of shares that make up the social capital, discriminating species and classes; reconciliation of the result calculated by full correction with that calculated by corporate legislation; and amount of tax loss eligible for use in subsequent fiscal 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)
30.20.3 Equity Method (20.4.3)
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 social capital and voting capital, and the trading price on the stock exchange, if any; II – net equity, net profit or loss of the fiscal year, as well as the amount of dividends proposed or paid, 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 subsidiaries; VI – individualized 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 individualized amount of the adjustment, when this does not result solely from the application of the percentage of participation in the social 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 rates, and terms 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 the voting social 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. 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 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, separately, in an explanatory note. (LAW No. 6,404/76, ARTICLE 247; CVM INSTRUCTION No. 247/96)
30.20.4 Consolidated Financial Statements (20.4.4)
The explanatory notes accompanying the consolidated financial statements must contain precise information about subsidiaries, indicating:
I – criteria adopted in consolidation and the reasons why a certain subsidiary was excluded; II – subsequent events to the closing date of the fiscal year that have, or may come to have, a relevant effect on the consolidated financial situation and future results; III – effects, on the elements of consolidated equity and result, of the acquisition or sale of a controlled company, during the fiscal 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 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 an explanatory note to the consolidated financial statements, the amount of the main groups of assets, liabilities, and results of jointly controlled companies must also be disclosed, as well as the percentage of participation in each of them. The public company affiliated with a group of companies must indicate, in a note 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)
30.20.5 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 preparation of the financial statements of 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)
30.21 Disclosure in Explanatory Note of Financial Instruments (21.6)
The public 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 determining 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 the market values of accounts receivable and payable. 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 dispensation 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 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 based on the cost of its financing, according to the term provided for its receipt, must be indicated. The proposed model does not exhaust all disclosure needs, or even its own identification, and therefore, it must be adapted and carefully analyzed by the company's management 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 policies of action and control of operations must be disclosed). The following criteria and premises were used in determining 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 company's financial instruments, assets and liabilities, as of December 31, 19X1, recorded in equity accounts and that present market values different from those recognized in the financial statements, can be demonstrated as follows:
Thousands of reais
Book Value Market Value
Financial Applications
Accounts Receivable from Governmental 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 relating to other assets and liabilities is approximately equivalent to their market value. (b) The nominal values of financial instruments, not accounted for on December 31, 19X1, are summarized below (market values must be disclosed, when applicable):

Thousands of reais
Compensation Account Equity Account
Global Value Receivable/Received
(Payable/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 Receivable/Received
(Payable/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 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 summarized as follows: (describe market, credit, operational, currency, and legal risks) (CVM INSTRUCTION No. 235/95 AND CVM OFFICIAL CIRCULAR/SNC/SEP No. 01/96)
30.22 Disclosure in Explanatory Note of Discontinued Operations (22.4)
30.22.1 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 the discontinuation is expected to 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, attributable to discontinued operations 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 operational, investment, and financing activities of the discontinued operation during the period of the disclosed fiscal year.

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

30.22.3 Update of Disclosures (22.4.3)
In 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 related to the assets and liabilities to be disposed of or settled must be disclosed, as well as the events that caused these changes.
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 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.

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

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

30.22.6 Disclosure in Interim Financial Reports (22.4.6)
The 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 timing of cash flows related to the assets and liabilities to be disposed of or settled.

30.23 Disclosure in note on Provisions, Contingent Liabilities and Contingent Assets (23.4)

30.23.1 Disclosure in note on Scheduled Shutdowns (23.4.1)
When complying with Ibracon IT No. 01/2006, the company must clarify the accounting policies and practices adopted, highlighting the estimated values and periods for scheduled shutdowns in the note regarding fixed assets; The company may also observe the guidance of item 5 of this Circular Letter, when dealing with aspects of changes in accounting practices related to the accounting of the effect of scheduled shutdowns.

30.23.2 Disclosure in note on Provisions, Contingent Liabilities and Contingent Assets (23.4.2)
Normally, contingent assets or contingent gains should not be recorded; only when their obtaining or recovery is effectively assured should they be recognized accounting-wise. A possible gain in administrative or judicial actions should only be recognized when, after going 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 create 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 demonstrate its right, with no remaining doubt regarding this right and the chance of receipt, it may not make the provision as long as it evidences in the notes to the financial statements the existence of the challenge. (CVM GUIDANCE 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 being discussed (administrative or judicial, lower or higher courts), (v) case law on contingent liabilities, (vi) assessment of the consequences of contingent liabilities on the company's business.

30.24 Disclosure in note on Deferred Assets (24.4)
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 GUIDANCE OPINION No. 18/90)

30.25 Disclosure in note on Option Plans (25.10)
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 Deliberation No. 371, which determines the disclosure, at a minimum, of the following information: (i) the nature and conditions of the stock 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 options granted and exercised in the fiscal year, the company must disclose in the Notes to the Financial Statements and in the Quarterly Information Form – ITR the following information relating to 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 the beneficiaries' eligibility to exercise the right must be indicated (for example, the time elapsed since the date of grant of the option in relation to the total time until the beneficiary can exercise the option); III the percentage of dilution of participation to which current shareholders may 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 type, and the total and unit exercise price relative to each of the classes and types 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 negotiations involving treasury shares to effect the redemption of options, indicating the quantity of shares, by class and type, as well as the value received by the company; and VII – the effect on the Statement of Income and on Equity, if this accounting had been done.

30.26 Disclosure in note on Equity Items and Corporate Matters (26.6)

30.26.1 Treasury Stock (26.6.1)
The acquisition of shares of its own issuance represents a return of invested capital and shall be demonstrated as a deduction from a specific reserve account. The note must indicate:
a) the objective in acquiring its own shares; b) the quantity of shares acquired or disposed of during the fiscal year, highlighting types and classes; c) the weighted average acquisition cost, as well as the minimum and maximum costs; d) the net result of disposals occurring during the fiscal year; and e) the market value of the types and classes of treasury shares, calculated based on the last quote, 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)

30.26.2 Share Capital (26.6.2)
The number, types, and classes of shares that make up the share capital shall be disclosed, and, for each type 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, shall also be disclosed.
(LAW No. 6.404/76, ARTICLE 176)

30.26.3 Authorized Share Capital (26.6.3)
The company that has authorized capital must disclose this fact, in a note, specifying:
a) the limit of authorized increase, in capital value and number of shares, and the types and classes that may be issued; b) the competent body to deliberate on the issuances (General Assembly 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) stock 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, §1)

30.26.4 Profit Allocation Constant in Shareholder Agreement (26.6.4)
The annual report of administrators 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)

30.26.5 Dividend per Share (26.6.5)
The amount of dividend per share of the share capital, divided by type and class of shares, shall be indicated in the Statement of Changes in Equity, observing the different advantages and the existence of treasury shares.
(LAW No. 6.404/76, ARTICLE 186 AND CVM INSTRUCTION No. 59/86)

30.26.6 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 GUIDANCE OPINIONS Nos. 15/87 and 21/90)

30.26.7 Interest on Equity (26.6.7)
In the notes to the financial statements and to the 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 shall be informed.
(CVM DELIBERATION No. 207/96)

30.26.8 Remuneration of Administrators (26.6.8)
The amount of remuneration shall be disclosed in the statement of income itself or in a note.
(CVM GUIDANCE OPINION No. 04/79)

30.26.9 Reserves – Detailing (26.6.9)
The company may evidence, in a note or in an analytical table, the subdivisions of reserves, when their evidence in the Statement of Changes in Equity becomes too extensive for publication purposes.
(CVM INSTRUCTION No. 59/86)

30.26.10 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 GUIDANCE OPINION No. 24/92)

30.26.11 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 a 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 improper retention of profits. (LAW No. 6.404/76, ARTICLE 196 and EXPLANATORY NOTE TO CVM INSTRUCTION No. 59/86)

30.26.12 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 the members of the Board of Directors. This disclosure must be made mandatorily in the notice of convocation of the assembly and, optionally, together with the financial statements closing the fiscal year. (CVM GUIDANCE OPINION No. 24/92)

30.27 Disclosure in note on Impairment of Assets (27)
The open company must disclose the following information provided in NPC 16:
a. The value of the loss (reversal of loss) with impairments recognized in the fiscal year, and any reflections in revaluation reserves; b. The events and circumstances that led to the recognition or reversal of the impairment;
c. List of items that make up the cash-generating unit and a description of the reasons that justify the way the cash-generating unit was identified; and
d. If the recoverable amount is the net selling value, disclose the basis used to determine this value and, if the recoverable amount is the value in use of the asset, the discount rate used in this estimate.

30.28 Other disclosures in note (28.2)

30.28.1 Electrobrás Credits (28.2.1)
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 a note.
(CVM DELIBERATION No. 70/89)

30.28.2 Privatization Program (28.2.2)
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 with regard to their effects for valuation and decision-making purposes by the user of the company's accounting information. The note must discriminate, when relevant, at a minimum, 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 goods and facilities, 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, if applicable (last three average quotes up to the date of publication or submission of the ITRs) and the value of the evaluation; d) amount of the provision for impairment 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 DELIBERATION No. 26/86, highlighting the 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 GUIDANCE OPINION No. 24/92)

30.28.3 Real Estate Fund (28.2.3)
The following information must be subject to disclosure in a 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 equity and accounting appropriation made, identifying any portion incorporated into the asset; and d) explicit 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 the 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)

30.28.4 Incorporation, Merger and Spin-off (28.2.4)
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) register the losses of value of the capital applied when it is evidenced 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.
(CVM INSTRUCTION No. 319/99)

30.28.5 Earnings or Loss per Share (28.2.5)
The company must disclose in the statement of income of the fiscal year the net earnings/loss per share of the share capital.
(LAW No. 6.404/76, ARTICLE 187)

30.28.6 Insurance (28.2.6)
It must be informed if there are and on which assets, the responsibilities or interests covered.
(CVM GUIDANCE OPINION No. 15/87)

1Actuarial
2Actuarial Liability

Lineage: In force