Circular No. 1101 — Economic Stabilization Program: Financial Statements as of 12/31/86, Decree-Law 2284 of 03/10/86, Accounting Procedures

CIRCULAR NO. 001101

To
Financial Institutions and other Entities Authorized to Operate by the Central Bank of Brazil

We inform you that the Board of Directors of the Central Bank of Brazil, in a session held on 12/30/86, having regard to the provisions of Decree-Law No. 2,284, of 03/10/86, as well as Circulars No. 1,009, of 03/20/86 and No. 1,044, of 06/30/86, and based on Article 4, item XII, of Law No. 4,595, of 12/31/64, by competence delegated by the National Monetary Council, decided to establish the following guidelines:

a) The amortization of the outstanding balance of the Economic Stabilization Program adjustments, as provided in item 1, "i"-I, of Circular No. 1,044/86, combined with letter "e" of Circular Letter No. 1,435, must be made, starting from the 2nd semester of 1986, to the debit of the appropriate income account;

b) Institutions that, as of 06/30/86, opted to account for portions of these adjustments directly to the Accumulated Profits or Losses account must, as of 12/31/86, reverse the value of such amortization to the result of the 2nd semester/86;

c) Regarding the publication of financial statements, with a base date of 12/31/86, it is observed that:

I - Balance Sheet - the values as of 12/31/86 must be compared with those as of 06/30/86;

II - Income Statement - the statement for the 2nd semester of 1986, covering the period from 07/01/86 to 12/31/86, must be published together with that of the 1986 fiscal year, covering the period from 01/01 to 12/31/86, including the appropriate portion, to the debit of the Economic Stabilization Program Adjustments account - DL 2.284/86;

III - Statement of Changes in Equity - converting the balances in cruzeiros of 12/31/85 to cruzados, respecting the parity Cr$1,000/Cz$1.00, a single document covering the period from 01/01/86 to 12/31/86 will be prepared and published, segregating events in the periods 01/01 to 02/28 and 03/01 to 12/31/86;

IV - Statement of Sources and Applications of Funds - converting the balances in cruzeiros of 12/31/85 to cruzados, respecting the parity Cr$1,000/Cz$1.00, a single statement covering the period from 01/01/86 to 12/31/86 will be prepared and published;

V - Explanatory Notes - the published financial statements must be supplemented by Explanatory Notes that contribute to the adequate understanding of their content, and, in addition to normal and regular clarifications, must contain information on:

1. The amount of the adjustments, highlighting the main items, of the Economic Stabilization Program - DL 2.284/86, as well as the criteria for appropriation made in the period and any deferral, based on Circular No. 1,044;

2. The amount of deferred administrative expenses, indicating the deferred values, the amortization period, and their effects on the result (Circular No. 1,043);

3. The effects of equity method investment in the investor resulting from adjustment procedures in affiliated and controlled companies, with emphasis on the provisions of Circular No. 1,044;

VI - Audit Report - the published financial statements must be certified by an Independent Audit Report, which will make specific reference to the procedures and criteria adopted regarding the Program adjustments;

VII - Publication Deadline - the deadlines contained in the respective Accounting Plans established by this Agency will be observed;

d) Commercial banks and other institutions that, by virtue of specific legislation, were required to prepare and publish extraordinary financial statements on 02/28/86, must also observe that:

I - On the base date of 03/01/86, an off-balance sheet Balance Sheet in cruzados, and respective Income Statement, must be prepared, including:

1. The monetary conversion adjustments by applying the conversion factor to all active and passive operations without a monetary correction clause or with a pre-fixed monetary correction clause, with contracting dates up to 02/27/86;

2. The effects of "pro rata" adjustments of active and passive operations with contracting dates up to 02/27/86, and expressed in cruzeiros, with a monetary correction clause, calculated up to 02/28/86;

3. The special monetary correction of the elements of Permanent Assets and Equity, including contra-accounts, based on the "pro rata" value of the National Treasury Obligation of Cz$99.50;

4. The adjustments resulting from the evaluation of relevant investments in affiliated and controlled companies, evaluated by the equity method, taking as a basis the off-balance sheet balance sheet, with a base date of 03/01/86, which contains the same adjustments referred to above;

II - In addition to the mandatory disclosure financial statements as provided in the previous letter "c", the following must also be published:

1. The off-balance sheet Balance Sheet, base date 03/01/86, in cruzados;

2. The Income Statement covering the period from 01/01/86 to 02/28/86, in cruzeiros, excluding the adjustments provided for in item 1.d.I above;

3. The Income Statement for the 1st semester of 1986, period from 01/01/86 to 06/30/86;

4. Explanatory notes providing clarifications that the balance sheet positions of the off-balance sheet Balance Sheet, base date of 03/01/86, and respective Income Statement, include the effects of monetary conversion, the "pro rata" adjustments of operations with a monetary correction clause, as well as the monetary correction of the Balance Sheet based on Cz$99.50. Information will also be included that equity method adjustments in affiliated and controlled companies, if applicable, income tax provision, and participations, duly accounted for in the financial statements of 06/30/86, were not computed.

2. In addition to the documents provided for mandatory publication according to letters "c" and "d" above, the following must be sent to this Central Bank, exceptionally, by 02/13/87:

a) Balance Sheet and Analytical Balance Sheet, position as of 12/31/86, Document No. 1 of the Banking Area and 1 and 2 of the Capital Markets Area;

b) Statement of the Economic Stabilization Program Adjustments in the form of Annex 1 - Banking Area and Annex 2 - Capital Markets Area.

3. Real estate credit societies and savings banks must proceed, by 12/31/86, to account for the effects of monetary conversion adjustments and "pro rata" adjustments of their active and passive operations, contracted up to 02/27/86, with and without a monetary correction clause, observing that:

a) In the case of a creditor balance calculation, the same must be recognized in full in the result of the fiscal year, at the time of the balance sheet of 12/31/86, in the form of letter "e" of item 1 of Circular No. 1,044, of 06/30/86; and

b) In the event of a debtor balance, the institution may recognize it over up to 6 (six) consecutive semesters, to the debit of the Economic Stabilization Program Adjustments account - DL 2.284/86, in the form of letter "e" of item 1 of Circular No. 1,044, combined with letter "c" of Circular Letter No. 1,435, amortizing its value up to the balance sheet of 12/31/88, observing the linear method. In this case, the portion related to 2/6 of the debtor balance calculated in the form of Circular Letter No. 1,367, of 03/05/86, Circular No. 1,009, of 03/20/86, Circular No. 1,044, of 06/30/86, and Circular Letter No. 1,435, of 07/11/86, will be recognized in the balance sheet of 12/31/86.

4. Leasing companies must adopt the following procedures in their accounting records, with a view to adjusting losses resulting from leasing contracts, in full, at the time of the balance sheet of 12/31/86:

a) The present value of the contract installments will be calculated, using the internal rate of return of each contract. Leasing Receivables and Values Residual to Realize will be considered for this purpose, including those registered in Credits in Liquidation;

b) The book value of the contracts will be calculated according to the following procedure:

(+) LEASING RECEIVABLES

(-) LEASE INCOME TO BE APPROPRIATED

(+) VALUES RESIDUAL TO REALIZE

(-) VALUES RESIDUAL TO BALANCE

(+) CREDITS IN LIQUIDATION

(-) INCOME FROM CREDITS IN LIQUIDATION TO BE APPROPRIATED

(+) LEASED ASSETS

(-) VALUE TO BE RECOVERED

(-) ACCUMULATED DEPRECIATION OF LEASED FIXED ASSETS

(+) ASSETS NOT DESTINED FOR USE;

(+) LOSSES IN LEASING TO BE AMORTIZED

(-) ACCUMULATED AMORTIZATION OF LOSSES IN LEASING

c) The resulting value of the difference between "a" and "b" above will be registered, namely:

I - if negative: to the debit of Accumulated Profits or Losses, by the portion corresponding to losses recorded up to 06/30/86, as adjustments of prior fiscal years, and to the debit of Leasing Expenses, by the portion concerning the 2nd semester/86, in credit to Losses in Leasing to be Amortized. The portion exceeding the net balance of losses recorded in the Deferred will be credited to the Insufficiency of Depreciations account;

II - if positive: to the debit of Depreciation Surveniences, in credit to Losses in Leasing to be Amortized, by the net balance of the leasing deferral, if any, and Accumulated Profits or Losses, as adjustments of prior fiscal years, by the portion corresponding up to the period of 06/30/86. The difference, if any, will be registered to the credit of the Leasing Income account;

d) The said value must be considered net of Income Tax for accounting purposes;

e) The fiscal effects resulting must be considered in the Real Profit Calculation Book - LALUR;

f) The institution is obliged to provide full clarification of the procedure adopted, through an explanatory note, evidencing the reflection of the adjustments made in its assets and results;

g) After adopting the procedure, the institution is obliged to provision the loss, according to the accrual basis, monthly, for new contracts entered into, in such a way that the value of the provision, at the end of the operation, is exactly equal to the value of the loss, to cover the write-off of the leased asset.

5. Institutions required to prepare and publish consolidated statements will publish only those relating to the 1986 fiscal year, without comparability with previous periods.

Brasília-DF, December 30, 1986

Persio Arida Luiz Carlos Mendonça de Barros Director Director

José Tupy Caldas de Moura
Director

Obs: The annex of this regulation is available to interested parties at the Headquarters of the Central Bank of Brazil.