CVM Orientation Opinion 21: Procedures for Financial Statements and Independent Auditors

SUMMARY: Procedures to be observed by publicly held companies and independent auditors applicable to financial statements for fiscal years ending from December 1990.

1. INTRODUCTION
   This opinion aims to continue the guidance process conducted by the CVM with publicly held companies and their respective auditors regarding the preparation and publication of financial statements, management reports, and audit opinions.

Although the monitoring of financial statements has demonstrated improvements over time in the quality of information provided, it is necessary to present the guidance contained in this opinion, given the existence of new facts evidenced during this fiscal year, as well as the persistence of deviations subject to previous guidance.

2. QUALIFICATIONS IN AUDIT OPINIONS
   According to CVM Instruction No. 38/84, the Independent Auditor must issue a qualified (or adverse) opinion whenever the audited financial statements are not in accordance with accounting principles or fail to reveal facts that may have significant effects on them. In these cases, it is also required that the effects on the result and on shareholders' equity be evidenced, or that the reasons preventing their quantification be indicated.

CVM Instruction No. 38, as well as Resolution No. 321/72 of the Federal Council of Accounting, which approves auditing standards and procedures, further establish that, when issuing a qualified opinion, the auditor must clearly express their opinion, providing a clear explanation of the nature, reasons, and effects of the qualifications.

The CVM has observed that qualified opinions published, with rare exceptions, have been limited to quantifying the effects only on net profit and shareholders' equity, in some cases extending to the involved asset or liability accounts. Considering the importance of the audit opinion for external users of financial statements, particularly minority shareholders, and given the need to expand its informational content so that it can achieve its purpose, it is necessary for the independent auditor, when issuing a qualified or adverse opinion, to clearly indicate which specific accounts or subgroups of assets, liabilities, results, and shareholders' equity are affected and by how much, the reflection in each published financial statement (including the Statement of Sources and Applications of Funds, which is not being explicitly stated), highlighting, furthermore, the effects of dividends and earnings/loss per share.

Alternatively, and in the case of qualified opinions, it is acceptable for the Auditor to refer to the explanatory note that contains this information, provided that, at a minimum, the opinion clearly specifies the nature of the problem, with generic references such as "... except for the effect of the matters mentioned in note X ...", or similar, being prohibited.

Two aspects must also be emphasized, already included in CVM Instruction No. 38/84 and CFC Resolution No. 321/172; and although they are known to independent auditors, they are not fully observed. The first concerns the issuance of qualified opinions when these, by their relevance, considered individually or in aggregate, should warrant the issuance of adverse or disclaimer of opinion reports. The second concerns the issuance of unqualified opinions when the audited company, due to compliance with tax or specific legislation, fails to meet fundamental accounting principles.

The CVM recognizes the importance of the auditor's participation in the securities market. On this matter, EXPLANATORY NOTE No. 09, of 1978, had already stated:

"By its relevance, an effectively independent audit constitutes an indispensable support for the good performance of the duties entrusted to the Securities and Exchange Commission.
The accuracy and clarity of these financial statements, the disclosure in explanatory notes of information essential for viewing the financial and asset position and the results of the companies, depend on an effective audit system and, primarily, on the auditor's awareness of their role.
The figure of the independent auditor is essential to market credibility, representing an instrument of inestimable value in investor protection, in that their function is to ensure the reliability and trustworthiness of the financial statements of publicly held companies.
The accuracy and clarity of these financial statements, the disclosure of the financial and asset position and the results of the companies, depend on an effective audit system and, primarily, on the independent auditor's awareness of their role.
Thus, it is evident the need for the market to have highly qualified auditors and, at the same time, to enjoy a high degree of independence in the exercise of their activities."

It is therefore essential that independent auditors assume an essentially technical posture when providing their professional services and issuing their reports and opinions, and that they divide the responsibility that falls to them, not only with administrators or controlling shareholders, but fundamentally before the external users of the audited financial statements, primarily minority shareholders.

Additionally, it is appropriate to recall that CVM Instruction No. 118/90, and its respective Explanatory Note, when introducing the requirement for special review of quarterly information (ITR) by independent auditors, specified that qualifications in audit opinions on the annual financial statements of publicly held companies would only be justified under special circumstances, such as when resulting from transactions or accounting practices occurring or adopted in the last quarter of the fiscal year subject to audit or when resulting from audit procedures that were not and should not, for technical reasons, have been applied in the special reviews of the quarterly information of said fiscal year. Qualifications omitted in the quarterly review reports and that, being applicable to the quarters submitted to such reviews, only come to be revealed in the opinion on the annual financial statements and that do not result from situations requiring justification, such as those exemplified above, may suggest improper concealment of information by the administrators of the publicly held company to its auditors, during the quarterly reviews or, eventually, incompetence in conducting the review work, situations subject to sanctions under the law and respective normative acts.

3. PENSION FUNDS
   As a result of the examination of financial statements as of December 31, 1989, we could ascertain that, in most cases, companies limit themselves to informing that they are sponsors of retirement, pension, and health plans, maintaining a closed pension entity for this purpose, in addition to other descriptive information, without, however, revealing the amounts of charges and responsibilities involved. The accounting practice of recognizing such responsibilities and the disclosure procedures verified so far are, in their vast majority, imperfect and uninformative, inconsistent with the desired quality of information.

We alert that, according to what is established in CVM Orientation Opinion No. 18/90, the company that maintains a retirement and pension plan for its employees and/or dependents must present an explanatory note informing about the existence of the plan, the actuarial regime for determining the cost and contributions of the plan, the annual cost, and the amount of defined obligations accounted for and potential obligations, whether accounted for or not, with justifications to be disclosed when not accounted for.

4. MONETARY UPDATE OF TEMPORARY INVESTMENTS IN SHARES
   Investments in shares, even classified outside of permanent assets, must be monetarily updated because they constitute, similar to temporary applications in gold, non-monetary items that are not directly subject to the effects of inflation, as evidenced in the process of applying full correction (see Orientation Opinion No. 14/87, item 5).

In addition to being a technically correct procedure, it is the understanding of this CVM that LAW No. 6.404/76, in its article 183, Item I, admits that the acquisition cost of investments in shares may be monetarily updated by the official monetary correction index, provided it is up to the limit of its market value, based on the following:

"Article 183 - In the balance sheet, asset elements will be evaluated according to the following criteria:

I - Rights and credit titles and any securities not classified as investments, by acquisition cost or by market value, if this is lower; and an increase in acquisition cost will be admitted, up to the limit of market value, for the recording of monetary correction, exchange variation, or accrued interest." (our emphasis).

Law 6.404/76 makes no distinction between rights, titles, or securities indexed or not, and is therefore of general application. Values and rights that have formal guarantee of monetary or exchange correction must be updated according to this guarantee. However, the monetary update of other values or rights that do not have this formal guarantee is only justified when this procedure is technically correct. This is what already happens with temporary applications in gold, which, although classified outside of permanent assets, have been subject to monetary update.

Failing to proceed with the monetary update of a portfolio of shares classified in current assets is, in fact, indirectly reflecting in the company's results a loss due to inflation. The loss in the share portfolio is only justified when the market value is lower than the acquisition cost of this portfolio (cost kept in currency of constant purchasing power), just as one can only consider that a company made a profit (or loss) from the alienation of its shares when the sale value exceeds (or is lower than) the value of cost updated monetarily. As an example, if a company acquired a certain number of shares for Cr$1,000 and after two months sold these same shares for Cr$ 1,200 and there had been inflation in this period of 30%, if the company did not adopt the above required procedure, it would report a profit of Cr$ 200, when it should have reported a loss of Cr$ 100 (by not having performed the monetary update of these shares, the company, in reality, would be recognizing a "loss" month by month, which, accumulated, amounted to Cr$ 300).

Thus, temporary investments in shares must be monetarily updated, and this updated value compared with the market value, and a provision for adjustment to market value constituted when the latter is lower.

5. FULL CORRECTION - CALCULATION MEMORANDUM
   As a result of the examinations carried out by the CVM's external supervision on supplementary accounting statements and quarterly information, it was observed that a reasonable number of publicly held companies had not been adequately maintaining calculation memoranda related to the preparation of these statements/information.

We alert that, according to the provisions of article 18 of CVM Instruction No. 64/87, companies must keep in good order, for a minimum period of three years, and by any adequate means, the custody of working papers and calculation memoranda related to the preparation of their statements by full correction.

This information and documents must be available for presentation whenever the CVM requests and must be prepared in a manner that allows the adequate accuracy of the values presented in the supplementary statements and ITRs.

6. CONTINUITY POSTULATE AND AUDITORS' OPINIONS
   In the application of fundamental accounting principles, the "CONTINUITY" postulate must be taken into account. This subject was treated in greater depth in the IBRACON pronouncement approved by CVM DELIBERATION No. 29/86, which addresses, among other things, aspects regarding the discontinuity of the company's activities and the consequent effects on the evaluation of its assets, as well as highlights the concern that independent auditors must have in the face of risks that may affect the normal continuity of an entity's activities.

On this matter, the CVM had already issued CVM INSTRUCTION No. 38/84, establishing that the independent auditor, when issuing an audit opinion, must present, in a highlighted paragraph, an opinion regarding the normal continuity of the audited company's business, whenever there is an imminent risk of total or partial paralysis of its operational activities.

Consequently, IBRACON (Brazilian Institute of Accountants) issued, in April 1985, a technical pronouncement recommending that independent auditors adopt specific procedures before concluding whether there is a risk of discontinuity. The items addressed in the IBRACON pronouncement and that, for the purpose of article 5, item VII, of CVM INSTRUCTION No. 38/84, must be observed by independent auditors when examining the financial statements of publicly held companies, are as follows:

a) verify the administration's plans to react to adverse conditions. Emphasis should be given to plans that may have a significant effect on future operations; b) discuss with the company's senior management the projections, particularly cash flow projections, relevant to their plans. The most significant assumptions must be analyzed and verified for their reasonableness; c) verify liquidity problems with negative trends, such as continuous operating losses, working capital deficiencies, negative cash flow projections in operations, and adverse financial indicators (indices); d) verify if there is default on loan, debenture, or similar contracts, delays in dividend payments, restrictions or credit cuts by suppliers, delayed capitalization plan, and the need to search for new sources or methods of financing; e) research and analyze internal information that may raise doubts about operational continuity, such as loss of key management or operational personnel, work stoppages or employee difficulties, substantial dependence on the success of a specific project, and long-term commitments apparently anti-economic; f) analyze external information that may raise doubts about operational continuity, such as national, regional, or sectoral economic recession or significant reduction in business affecting installed capacity, lawsuits, legislation, or similar matters that may prejudice the company's ability to operate, loss of a license or patent, loss of a major customer or supplier, uninsured catastrophes, such as drought, fire, and floods; g) verify if there are mitigating factors related to insolvency problems, such as, for example:
* existence of non-operational assets with a good probability of sale;
* ability to delay asset replacement or contract "leasing";
* possibility of using assets to obtain discounts, pledges, liens, "sale lease back" or similar negotiations;
* existence of unused credit lines or ability to obtain new loans;
* ability to renew or delay the maturity of existing loans;
* possibility to negotiate debt restructuring and other commitments.
* ability to delay maintenance or research and development expenses or to negotiate new partnerships;
* possibility to reduce indirect manufacturing costs and general and administrative expenses;
* flexibility in dividend distribution;
* ability to obtain additional capital resources;
* possibility to increase the distribution of dividends from subsidiaries or other investments.

Independent auditors must also consider whether there is adequate disclosure of the facts related to the items above, even when there are mitigating factors, making the appropriate mention in their opinion, when concluding that there is no adequate disclosure or that the risks of discontinuity are judged significant.

7. PROVISION FOR DOUBTFUL COLLECTION CREDITS
   Most companies, which are financial institutions, have the habit of constituting a provision for doubtful collection credits adopting the maximum percentage of 3% (three percent) allowed by tax legislation. This method, however, does not represent a technically adequate criterion that reflects, in fact, the company's loss expectations, potentially generating, to a greater or lesser extent, incorrect results, depending on the situation of each company's credits in particular.

The calculation of the value of this provision must be based on the experience each company has regarding the level of losses in the past, the knowledge of the individual situation of its clients, the knowledge of the market in which they operate, and the current economic situation. Special attention must be given to cases of clients with overdue invoices or titles, return of goods, as well as cases of clients in bankruptcy, receivership, or financial difficulties, or clients who are part of a group of companies presenting this type of situation.

Article 183 of LAW No. 6.404/76 establishes that rights and credit titles must be evaluated by their net realizable value, excluding those already prescribed and constituting a provision for expected losses in the realization of these rights and titles. Thus, the determination of the amount of the provision for doubtful collection credits must be based on a careful technical evaluation, which encompasses the company's real loss expectations, and this should not be limited to adopting the simplistic practice provided for in tax legislation or special legislation.

It is also worth remembering that the permission for tax deductibility of the provision for doubtful debtors, expressed in terms of a maximum percentage limit, fixed by tax authorities in the full exercise of their right to regulate the matter, has been erroneously interpreted by some publicly held companies as being an extended command to accounting principles. This interpretation can lead to the extreme of failing to reflect losses exceeding the maximum tax limit and eventually to the equally inadequate opposite extreme of overestimating the provision necessary below the maximum tax limit. When any of these extreme situations occurs, involving relevant figures relative to current assets, net working capital, shareholders' equity, operating profit, net profit, sources of operational resources, or variation in net working capital, the administrators of publicly held companies must determine that the financial statements reflect only the provision actually estimated as necessary. If this does not occur, independent auditors must issue a qualified opinion, disclosing the fact and its effects, as required in item No. 2 of this Orientation Opinion.

In any case, the company must disclose in an explanatory note the criteria adopted for its constitution, also informing any change in criterion, or in the manner of its application, occurring in the fiscal year.

8. DEBENTURES - ACCOUNTING CLASSIFICATION
   Some doubts have resurfaced regarding the adequate accounting classification of debentures, given that, although they are normally long-term titles, they present, in most cases, short-term renegotiation clauses.

Considering that the practice of stipulating a prepayment clause aims to enable the update of the remuneration conditions of the debentures, it is the CVM's understanding that, except for special situations regarding the company's intent or capacity to reinvest this title, the debentures must be classified by the issuing company in long-term liabilities.

On this matter, the CVM also considers the endorsement of items 1 to 10 of the IBRACON - Brazilian Institute of Accountants pronouncement of 10/19/83, whose text we transcribe below:

"DEBENTURES
DISCUSSION
I - In recent years, there has been a significant increase in the issuance of debentures, some of which have innovations to meet characteristics of the financial market. As a result, doubts have arisen regarding the interpretation of the substantive aspects of debentures and that, in the absence of specific guidance in previous IBRACON technical pronouncements, may result in alternative and conflicting accounting criteria. II - Debentures are normally long-term titles, classifiable in long-term liabilities until they become short-term, when they are then classified in current liabilities according to generally accepted accounting principles. III - However, long-term debenture issuances with renegotiation clauses have occurred, by which the debenture holder has the option, to be exercised at established intervals, with intervals that generally vary from 6 to 12 months, to request early amortization at short term. Given this option, doubts have arisen regarding the corresponding classification of debentures in the issuer's balance sheet, as well as regarding the accounting of their placement and remuneration costs. IBRACON OPINION IV - IBRACON understands that the option for early amortization primarily aims to provide opportunities for periodic renegotiation of the debenture's remuneration rate, in order to adapt it to certain intervals to financial market conditions. Thus, IBRACON is of the opinion that, in the absence of persuasive evidence to the contrary, they were substantively issued and taken with long-term maturity and that, except as reserved in paragraph 6, as such they must be classified in the balance sheet of the company that issued them. V - In expressing the opinion contained in the previous paragraph, IBRACON recognizes that the renegotiation clause entails re-evaluation of the previous decision by the debenture holder, who may opt for the early amortization of the title, regardless of the remuneration rate offered by the issuer (continuity premium). In common situations, the consequence of this possibility, however, does not affect the issuer's financial situation if market and company conditions allow the reinvestment of the"

debentures or obtaining long-term financing to replace the resources spent with the early amortization of the debentures.

VI - Numerous factors, both in the financial market and in the situation of the issuing company, influence the renegotiation of debentures. However, the factors that could lead to the large-scale option for early amortization of debentures, modifying the original intention of the parties, depend largely on the EVOLUTION of economic events and their consequences on the company. Generally, these events and their consequences are not predictable at the date of preparation of the balance sheet. The natural uncertainties regarding the future evolution of economic events are not sufficiently valid reasons to justify the classification of debentures as a renegotiation clause in current liabilities. If, however, at the balance sheet date there is sufficiently persuasive evidence that there will be early amortization of a substantial part of the debentures, without the possibility of replacement or coverage through long-term financing, said debentures must be classified as short-term.

VII - The reliability of the evidence referred to in the previous paragraph is a matter of judgment on the part of the auditor, to be exercised with the same precautions that are presumed to be taken by a prudent investor in the decision to retain or amortize the debenture. Substantial deterioration of the financial situation of the issuing company of the debentures, associated with the impossibility of raising long-term financing, are evidence that justify and require the classification of current liabilities in debentures without a renegotiation clause.

VIII - Debentures must be classified in current liabilities if the company intends to amortize them at the renegotiation date, based on information from the company's management and confirmed in writing, usually the management representation letter.

IX - The explanatory notes must disclose the terms of the debentures, including indicating the existence of a renegotiation option clause, contractual or informal, and the periods in which it must be exercised by the debenture holder.

X - Debentures reacquired by the issuer must be classified in the balance sheet as a reduction of enforceability, while not replaced in the market. If the debentures are consigned at the net value of enforceability, the explanatory note must indicate the treasury share for eventual replacement."

9. TAX INCENTIVES

With the advent of Law No. 7,450/85, most companies benefiting from tax incentives arising from investments in the SUDENE and SUDAM areas lost the right to exemption or reduction of the income tax rate that had been extended over the years. The accounting procedure used due to the tax benefit was to consider the Income Tax charge at its gross value, debited to the result of the fiscal year, with the counterpart in a capital reserve (Investment Subsidy Reserve) being the portion of the reduction or the value of the exemption.

However, some companies, claiming acquired rights, filed lawsuits seeking the extension of this tax benefit for a period of five more years and, based on this fact, have understood that the maintenance of the aforementioned accounting procedure is correct. We alert that this understanding finds no support in LAW No. 6,404/76, which establishes in its article 184, item I, that obligations, charges, and risks, known or calculable, including income tax payable based on the result of the fiscal year, shall be computed at their updated value up to the balance sheet date. Therefore, the accounting in a capital reserve of this portion of income tax, even based on a pending judicial action, constitutes an omission of liability.

Furthermore, this procedure also does not meet the "Conservatism" convention referred to in the pronouncement approved by CVM RESOLUTION No. 29/86. This convention provides that, among alternative sets of valuation for equity equally valid, Accounting must choose the one that presents the lowest current value for assets and the highest for obligations. Thus, even if the company understands that there is no income tax to pay and is questioning this judicially, it must recognize that this fact characterizes, at minimum, a contingent liability, making it necessary to constitute the appropriate provision.

10. CONSISTENCY

LAW No. 6,404/76 determines that the company's books must be maintained in obedience to accounting principles and must observe uniform accounting methods and criteria over time. This means, for example, that if the company adopts an evaluation criterion that is in consonance with accounting principles, it must maintain it in subsequent fiscal years, in order to enable the comparison of values presented in the various financial statements.

LAW No. 6,404/76, however, did not prohibit the company from changing the accounting criterion or method adopted, requiring, in this case, the disclosure of its effects when relevant.

Obviously, the change of accounting criteria/method is only justified, both for compliance with the command of LAW No. 6,404, and for observance of the fundamental principles of accounting, when this change evidences an improvement in the quality of the information produced or when it constitutes an improvement in the type and degree of evaluation of the company's situation.

Thus, by way of example, if a company decides, because it is a technically more adequate procedure, to start correcting its inventories (whether for the purpose of full correction or for the purpose of corporate legislation), it must maintain this procedure over time, not admitting, unless there are well-founded technical reasons, that the procedure is changed for the worse.

It is important to clarify that this understanding is already contained in the pronouncement on the Basic Conceptual Structure of Accounting, approved by CVM RESOLUTION No. 29/86, which mentioned:
"Consistency Convention

The Accounting of an entity should be maintained in such a way that users of the financial statements have the possibility of outlining its trend, with the least degree of difficulty possible...
On the one hand, it should be understood that accountants should reflect quite a bit before adopting a certain evaluation procedure, in order to have the greatest possible sequence of fiscal years with the use of the same evaluation procedures. This does not mean, however, that, even with changes in scenarios or reflection on the best use of another criterion, accounting must, just to not alter the sequence, refrain from introducing this improvement." (our emphasis)

11. INDEXER

The recognition, in the financial statements of open companies, of the effects of the loss of purchasing power of the national currency is made, basically:
a) in the financial statements for tax and corporate purposes, by the use of the monetary correction methodology determined by LAW No. 7,799, of July 10, 1989; b) in the financial statements designated as complementary by the use of the methodology known as "full correction" introduced by CVM Institution No. 64, of May 19, 1987, with the additional determinations contained in CVM INSTRUCTION No. 118, of May 07, 1990.

Both of the aforementioned methodologies use the National Treasury Bonus-Fiscal (BTNF) as an indexer. The variation of the BTNF during the calendar year of 1990 was not comparable to the variations of other indicators of the aforementioned loss of purchasing power of the currency, nor were its predecessors ORTN, OTN, and OTNF, at different moments in the past. It is worth noting that it is widely recognized, in the business community by experts, that there is no supposed "optimal" or "ideal" indexer, and it is possible to list both favorable and unfavorable arguments for any of the commonly available inflation indicators, without any resulting absolutely immune to criticism.

The discussion on indexer to reflect inflationary effects must also take into account that such effects do not influence all open companies equally, as differentiated equity structures may generate equally differentiated effects both regarding diverse sectors and among companies in the same sector.

In this context, when, in the understanding of the administrators and/or independent auditors of open companies, considering their specific equity structure and sector, the use of BTN/BTNF implies effects that are important to be brought to public attention, this fact must be, to comply with the provision of article 176, paragraph 4 of LAW No. 6,404/76, presented fundamentally in an explanatory note that has the following minimum characteristics:
a) brief justification of the importance of the effect to be disclosed;

b) quantification of this effect at least on the result (net profit or loss), on earnings per share, and on equity, whether presented by corporate legislation or by full correction; c) such explanatory note must be subject to examination and be covered by the opinion of independent auditors, both regarding the financial statements by corporate legislation and those by full correction.

When choosing to highlight for disclosure any important effects resulting from the use of BTN/BTNF on their specific equity structure, the administrators of open companies and/or their independent auditors must keep in mind that:
a) there may be other effects as or more important to disclose, such as the non-monetary correction of inventories, for example; b) disclosure in the management report does not supplement the provision of this Orienting Opinion, and any conflict of disclosure between this and the explanatory notes to the financial statements is inadmissible.

12. ADJUSTMENT AND PRESENT VALUE

CVM INSTRUCTION No. 64/87, which provides for the preparation of accounting statements by full correction, explicitly defined the concept of present value adjustment. According to this Instruction, monetary asset and liability items that embed a future inflationary expectation must be brought to present value, for the balance sheet date, based on the rate practiced by the company in its credit sales/purchases or based on the variation of the BTNF.

The concept of present value adjustment is not limited to expunging inflationary expectations embedded in assets/liabilities said to be "not formally indexed". It is broader, extending also to the real interest embedded in forward operations. By this concept, the current value or present value of a receivable asset is lower than the value expected to be received at its maturity. Thus, the greater the inflation (or expectation of inflation) and the maturity term, the greater tends to be the distortion caused by the lack of present value adjustment. This procedure is the only one that allows the homogenization of spot operations with forward operations, enabling the comparability of the financial statements of the various types of companies, regardless of whether they operate predominantly spot or forward.

Therefore, since it constitutes a technically adequate procedure, the adoption of present value adjustment should not be limited to complementary accounting statements. Strictly speaking, if we perform a careful reading and interpretation of articles 183 and 184 of LAW No. 6,404/76, we can verify that its application also extends to statements prepared in the form of corporate legislation, as follows:

Article 183 establishes that:

"Art. 183 - In the balance sheet, the elements of the asset shall be evaluated according to the following criteria: (our emphasis)
I. rights and credit titles, and any securities not classified as investments, by acquisition cost or by market value, if this is lower; those already prescribed shall be excluded and appropriate provisions made to adjust them to the probable realization value, and an increase in market value shall be admitted for the registration of monetary correction, exchange variation, or accrued interest."

Article 184 further establishes that:
"Art. 184 - In the balance sheet, the elements of the liability shall be evaluated according to the following criteria:
II. obligations, charges, and risks, known or calculable, including income taxes payable based on the result of the fiscal year, shall be computed at their updated value up to the balance sheet date; (our emphasis)
III. obligations in foreign currency, with an exchange parity clause, shall be converted into national currency at the exchange rate in force on the balance sheet date (our emphasis)
IV. obligations subject to monetary correction shall be updated up to the balance sheet date (our emphasis)."

It seems evident that the legislator's concern was to establish that all assets and liabilities must reflect, according to the criteria fixed by the Law, their value on the balance sheet date and not on the date of their receipt/payment (future value). The references "in the balance sheet", "on the balance sheet date", and "up to the balance sheet date", that is, neither before nor after, demonstrate this understanding very clearly.

Thus, CVM understands that the adoption of the concept of present value adjustment, being a technically adequate procedure and finding support in corporate law, must also be applicable to financial statements prepared in obedience to LAW No. 6,404/76, with appropriate reservation by independent auditors when non-compliance involves material values.

13. ACCOUNTS RECEIVABLE X RESULT OF FUTURE FISCAL YEARS

The accounting of accounts or promissory notes receivable is closely related to the principle of revenue recognition. In general, this principle establishes that "revenue is considered realized and, therefore, capable of registration by Accounting, when products or services produced or rendered by the Entity are transferred to another Entity or natural person with their consent and through payment or commitment of payment specified before the producing Entity..." (Basic Conceptual Structure of Accounting, item 3.5.3).

By this principle, some revenues are considered realized proportionally to the time elapsed, as in the case of rents, where it is considered that the service is continuously rendered throughout the validity period of the rental contract. Advance billing, or even contracts with guaranteed receipt, that do not correspond to resources actually received for future sales or service provision, should not be registered as accounts receivable. The registration of an account receivable presupposes that the revenue recognition principle is met. Thus, the registration of accounts receivable having as a counterpart an account of Result of Future Fiscal Years is inadmissible. If the company has formal guarantee of future receipt of resources from services or sales to be realized, it should, if relevant, leave this information and the amount involved in an explanatory note.

14. MANDATORY DIVIDENDS

The demonstration of the calculation of the proposed minimum dividend was introduced by Orienting Opinion No. 15/87 and reiterated by Orienting Opinion No. 18/90. In order to enable adequate evaluation by shareholders and investors, it becomes indispensable that the dividend payment policy is also disclosed, informing whether they contemplate or not their monetary correction, in accordance with CVM INSTRUCTION No. 72/87, as well as regarding the prospects for maintaining this policy for the coming fiscal years.

Signed Original
HUGO ROCHA BRAGA
Superintendent of Accounting Standards

Signed Original
SULI DA GAMA FONTAINE
Superintendent of Corporate Relations

Approved By The Collegiate Body On 12/27/90.
Publish.

Signed Original
LUIZ LEONARDO CANTIDIANO
President