CVM ORIENTATION OPINION NO. 10, OF MAY 23, 1986.

SUMMARY: Procedures to be observed by public companies in the preparation of Extraordinary Financial Statements of 28.02.86. Interpretation of provisions of CVM Instructions No. 48 and 50, of 20.03 and 20.04.86, respectively.

1. INTRODUCTION

This opinion addresses doubts raised by public companies and independent auditors regarding the application of provisions of CVM INSTRUCTIONS NOS. 48/86 and 50/86.
The issues addressed below were studied by this Securities and Exchange Commission - CVM, in conjunction with the Brazilian Institute of Accountants - IBRACON, aiming to guide the interpretation of certain provisions of the aforementioned Instructions.

2. STATUTORY PARTICIPATIONS AND ALLOCATION OF RESULTS DETERMINED IN THE PERIOD

CVM INSTRUCTION NO. 48 determines that net results determined in accordance with item I of article 2 and in the account for "Adjustments of the Economic Stabilization Program - DL 2284/86" shall be transferred to special and transitional accounts in shareholders' equity for allocation at the end of the fiscal year, without attributing the participations provided for in item VI of article 187 of LAW NO. 6.404/76. The general rule for attributing the participations provided for in item VI of art. 187, of LAW NO. 6.404/76, as well as the allocation of dividends to shareholders (art. 204), is to record them only at the end of the fiscal year. Nevertheless, a company that, in accordance with current legislation, prepares an interim balance sheet, in accordance with fundamental accounting principles, may distribute dividends from the net profit then determined. This provision applies to the algebraic sum of the result determined in cruzeiros, for the period ending on 28.02.86, converted to cruzados, with the balance of the account for "Adjustments of the Economic Stabilization Program - DL 2284/86". Regarding statutory participations, normally attributed at the end of the fiscal year, they shall be accrued upon the preparation of the extraordinary financial statements, to meet any distribution, if due at the end of the fiscal year.

3. PROVISION FOR INCOME TAX

Normative Instruction of the Federal Revenue Secretariat (SRF) No. 057, of March 17, 1986, determines that the value in ORTN of the balance of income tax payable or refundable shall be converted into cruzeiros, taking as a basis the "pro rata" value of the ORTN on 28.02.86 (Cr$ 105.450). The main issues are:
a) whether the update of income tax payable or refundable, from Cr$ 93,039.40 to Cr$ 105,450, will be made in the result in cruzeiros, on 28.02.86, or in the account for "Adjustments of the Economic Stabilization Program - DL 2284/86"; b) how to calculate the income tax payable on the result for the period ending on 28.02.86; c) what treatment should be given to income tax on possible losses, compensable with profits expected until the end of the fiscal year. In the case of the balance payable or refundable of tax on the result of the fiscal year until 31.12.85, the variation of the ORTN - from Cr$ 93,039.40 to Cr$ 105,450 - must be treated as "Adjustments of the Economic Stabilization Program - DL 2284/86". To calculate the value of the provision for income tax on the result for the period ending on 28.02.86, the rate applicable to real profit shall be applied. In the event that this rate is significantly different from that normally applicable at the end of the fiscal year, the company may use the latter, provided it discloses the fact, reasons, and calculation bases in an explanatory note. No adjustment for variation in the nominal "pro rata" value of the ORTN is applicable to the tax determined on real profit on 28.02.86, except for companies that close their fiscal year on that date. It is not prudent, and in fact should not be done, to account for a tax credit on future profits; however, it is recommended that its amount be mentioned in an explanatory note.

4. FINANCIAL APPLICATIONS

By art. 2, item V, letter "a" of CVM INSTRUCTION NO. 48/86, increases to the balances of financial applications shall be recorded in a contra account and appropriated "pro rata temporis" as financial revenue.
There is no definition regarding the criterion for recognizing revenue until 28.02.86, whether by the linear method or the exponential method. Both the linear method and the exponential method have been accepted. The company must, therefore, continue using the adopted method consistently. Regarding the comparison of the book value of financial applications with respect to market value, the principle of cost or market, whichever is lower, prevails.

5. CONVERSION GAINS ATTRIBUTED TO INVENTORIES

Art. 2, item V, letter "f" of CVM INSTRUCTION NO. 48/86 determines that, in the case of obligations related to the supply of inventories, and if direct reduction of each item is not feasible, the conversion gain may be recognized in a contra account of global inventory, for appropriation proportional to the reduction of inventories. The main problems refer to:
a) the criterion to be adopted to identify the value of the conversion gain in the suppliers account that should be credited to inventories or taken directly to the conversion adjustment account, since the inventory has already been reduced; and b) the criterion for future appropriation of the value of the inventory contra account. The appropriate way to determine the portion of conversion gains from supplier debts to be deducted from inventories must take into consideration that:
c) accounts payable to suppliers involve recoverable indirect taxes, the proportional conversion gain of which should not be deducted from inventories; d) only conversion gains with suppliers related to items still in inventory on 28.02.86 should be deducted from inventories, whether in the original raw materials account or included in the balances of work-in-process or finished goods inventories. In the practical application of the above procedures, the adoption of global calculations, using the ABC inventory criterion, average rotation, and others, is adequate as a substitute for item-by-item calculation. Regarding the appropriation of the contra account, it may be made proportionally to the relationship existing between the monthly cost of items written off from assets and the global inventory on 28.02.86.

6. EQUITY EQUIVALENCE

By CVM INSTRUCTION NO. 50, of April 24, 1986, the special monetary correction of permanent assets and shareholders' equity shall be determined based on the "pro rata" value of Cz$ 99.50, with the difference relative to the ORTN value of Cr$ 93,039.40, recorded in the account "Adjustments of the Economic Stabilization Program - DL 2284/86". The existing doubt concerns the treatment to be adopted in the case of investments in affiliates and controlled companies that have not performed the special monetary accounting based on the ORTN variation of Cz$ 99.50 and regarding the use of balance sheets from lagged dates. By CVM INSTRUCTION NO. 48, it is clear that the investor must initially determine the value of investments on 28.02.86, still in cruzeiros, based on the net worth of affiliates and controlled companies, also still in cruzeiros and monetarily corrected based on the ORTN of Cr$ 93,039.40. After conversion to cruzados, at the rate of Cr$ 1,000 per Cz$ 1.00, the investor must determine a new value of equity equivalence based, now, on the balance sheet in cruzados of the affiliates and controlled companies, already reflecting the adjustments provided for in CVM INSTRUCTION NO. 048, i.e., the "Adjustments of the Economic Stabilization Program - DL 2284/86". Regarding the update of the net worth of affiliates and controlled companies by special monetary correction up to the "pro rata" value of Cz$ 99.50, the understanding is that, both in the investor and the investee, uniform accounting principles should be adopted, and the adjustment of special monetary correction may be reflected in the net worth of the investee only for the purpose of applying the equity method. The balance of the account "Adjustments of the Economic Stabilization Program - DL 2284/86" is considered a significant event (item XVI of CVM INSTRUCTION NO. 01) for the calculation of equity equivalence when using financial statements of affiliates and controlled companies prepared with a lag relative to those of the investing company.

7. REDUCTION OF OBLIGATIONS LINKED TO THE ACQUISITION OF PERMANENT ASSETS

By art. 2, item V, letter "f", of CVM INSTRUCTION NO. 048/86, the conversion gain resulting from the reduction of obligations linked to the acquisition of permanent assets shall be recorded as a reduction of the cost of that asset. The aspect under discussion relates to which value of the permanent asset to be corrected, i.e., whether it would be the cost according to the supplier's invoice or the net value after recognizing the conversion gain from the suppliers account. The monetary correction method based on the invoiced cost value by the supplier has been accepted. In this sense, the conversion gain shall be deducted from the corrected cost of the corresponding asset.

8. PROVISIONS FOR VACATION, 13TH SALARY, AND OTHERS

With the introduction of DECREE-LAW NO. 2284/86, of March 10, 1986, salaries shall be adjusted to cruzados, and consequently, there will be an increase or decrease in the labor obligation regarding vacation and the 13th salary. The issue here refers to the accounting treatment of this effect in the preparation of extraordinary financial statements on February 28, 1986. The value of the provision in cruzeiros must be based on the salary of February 28, 1986. This provision must then be supplemented or reduced based on the salaries defined in cruzados, to reflect the actual labor liability. Such supplementation or reduction of the provision must be recorded in the special account that reflects other adjustments for adaptation to the economic stabilization program. Similarly, other provisions may require accounting adjustments in their values in cruzados, resulting from effects arising from the economic stabilization program, such as provisions for doubtful debtors, maintenance, warranty, and others.

9. ADJUSTMENTS THAT DID NOT AFFECT RESULTS

Based on article 4, letter "e", of CVM INSTRUCTION NO. 048, the explanatory notes must also include comments on the conversion adjustments of asset and liability accounts that have not yet affected results.
Adjustments in asset and liability accounts that affected results will be properly disclosed in the Statement of the Account "Adjustments of the Economic Stabilization Program - DL 2284/86", according to the model suggested in the annex to this Orientation Opinion.
The disclosure of asset and liability adjustments that have not yet affected results may be made:
a) in an explanatory note relating the nature of conversion gains and losses and the asset and liability accounts that were affected, such as conversion gains from suppliers deducted from inventories or fixed assets, etc.; b) alternatively, in the extraordinary financial statements themselves.

10. MODELS OF EXTRAORDINARY STATEMENTS ON 28.02.86

Article 4 of CVM INSTRUCTION NO. 048 requires the publication of Extraordinary Financial Statements, including the Statement of the Account "Adjustments of the Economic Stabilization Program - DL 2284/86". Considering that such financial statements represent an innovation, doubts arise regarding their format for the purpose of publication and transcription in the General Diary.
The presentation of Extraordinary Financial Statements may be made according to the suggestions contained in annexes I to IV of this Orientation Opinion, supplemented by the Explanatory Notes.
Such Extraordinary Financial Statements must be transcribed in the General Diary.
Finally, it is worth clarifying that the observations contained in this Opinion do not exhaust the possibilities of adding other information that contributes to improving the understanding of the Extraordinary Financial Statements of each company by its shareholders and other market participants.

Signed originally by
HUGO ROCHA BRAGA
Superintendent of Accounting Standards and Auditing