CVM Orienting Opinion 17

SUMMARY: Procedures to be observed by publicly held companies and independent auditors in the preparation and publication of financial statements, management reports, and audit opinions relating to fiscal years ending from December 1988.

1. INTRODUCTION
   This opinion aims to guide all publicly held companies and their respective independent auditors regarding the preparation and publication of financial statements, explanatory notes, management reports, and audit opinions.
   The monitoring work of the 1987 financial statements revealed an improvement in the quality and quantity of information provided. However, some deviations that had already been the subject of previous guidance (CVM Letters nºs 578/85 and 309/86 and Orienting Opinion nº 15/87) persist, as well as some new deviations were observed. With the objective of further improving the quality of information brought to the market and continuing to reduce republications, this guidance is issued.

2. MANAGEMENT REPORT
   The information whose disclosure is indispensable and which has already been exhaustively exemplified in Orienting Opinion nº 15/87 continues to prevail.

3. EXPLANATORY NOTES
   In Orienting Opinion nº 15/87, the various situations that should be the subject of explanatory notes were mentioned.
   Some items, however, must receive more careful treatment in the current fiscal year, namely:
   a) Transactions between related parties (CVM Deliberation nº 26/86)

• the explanatory note on transactions between related parties must characterize the transaction that occurred, the conditions under which these transactions took place (especially prices, terms, charges, quality, etc. and whether the transaction was carried out under conditions similar to those that would apply between unrelated parties) and the present and future effects on the financial situation and/or results of the company;

b) Allocation of the year's result

• an explanatory note must be presented regarding the proposal of the management bodies for the allocation of the year's result. In this regard, four facts stand out:
  I - profit retention - the justification and the main lines of the respective capital budget must be explicit; II - reserves of profits to be realized - the calculation of the constituted reserve must be demonstrated, it being worth remembering that the Reserve of Profits to be Realized that may be constituted is the excess of profits to be realized over the reserves (Legal, Statutory, for Contingencies and for Profit Retention) constituted; III - dividend - the demonstration of the calculation of the proposed dividend must be presented; IV - full allocation - it is the understanding of CVM that corporate law determines the full allocation of the year's result, and that undistributed profits, even if kept in accumulated profits, are characterized as Profit Retention (Art. 196 of LAW Nº 6.404/76).

4. SOCIAL CONTRIBUTION
   The new social contribution instituted through LAW Nº 7.689/88, and regulated by SRF Normative Instruction nº 198/88, shall be considered an operating expense and appear in a highlighted manner among the expenses listed in item III of article 187 of LAW Nº 6.404/76.

5. GOLD INVESTMENTS
   Classifiable, among companies that do not have the commercialization of gold as their corporate object, as Current Assets. This type of investment shall be evaluated by the acquisition cost updated monetarily by OTN, or by market value, whichever is lower; and, when applicable, a provision for adjustment to market value must be constituted. Understood as:

• acquisition cost: the price paid for the purchase of gold and stated in the document representing the transaction on the stock exchange or issued by a company authorized to trade the metal, plus brokerage, fees, and taxes, within the limits fixed by the Exchange and actually due by the buyer;

• market value: the weighted arithmetic average of the daily quotes, occurring during the trading session of the Country's Exchange where the highest volume of transactions occurs, on the day of the closing of the fiscal year or, if there is no trading session on that day, on the day of the last previous trading session.

• classification: by virtue of this criterion, companies classified in the above category and that present gold investments must classify them in Current Assets.

6. PROJECTS IN THE IMPLEMENTATION PHASE
   Publicly held companies that have projects in the pre-operational phase, due to expansion, reorganization, or modernization projects, to comply with article 177 of LAW Nº 6.404/76 and, particularly, the principle of matching revenue with expense, must observe the following recommendations:
   a) such projects, while not in operation, must not produce any effect on the results accounted for by the companies; b) expenses incurred in the period preceding the start of operations of a project under implementation must be aggregated to deferred assets and subject to monetary correction, from the month following when they were incurred; c) all effects of financial revenues and expenses, of monetary updates of assets and liabilities, and monetary correction of fixed assets and shareholders' equity attributable to projects in the implementation phase must be aggregated to deferred assets; d) if the resulting net effect proves to be a credit balance and an amount higher than the accumulated deferred assets, characterizing a gain, this effect must be presented as results of future exercises, for future matching with future pre-operational expenses and with future net debit effects. This effect should only be recognized as a result, exceptionally, in cases where it is proven that there is certainty that the gains are of a recurring nature throughout the entire implementation period of the project. In an explanatory note, the adopted decision must be justified and the cause of said gains clarified.

7. PRESENTATION OF NUMBERS IN FS
   Consistent with the recent implementation of the government's Economic Stabilization Program measures, the financial statements of the fiscal year ending on 12/31/88 may be published in thousands or millions of cruzados according to the magnitude of the numbers presented.

8. FULLY CORRECTED FINANCIAL STATEMENTS
   Publicly held companies, whether listed on the stock exchange or over-the-counter, must present, in addition to the financial statements prepared according to corporate law, fully corrected financial statements, in accordance with CVM INSTRUCTION Nº 64/87. In the preparation and publication of these fully corrected financial statements, some special considerations must be taken by publicly held companies, as follows:
   a) comparative statements

• the financial statements relating to fiscal years ending from December 1988 shall, when applicable, be published with indication of the values of the previous fiscal year, in currency with updated purchasing power, for comparison purposes. Thus, for example, the statements of 12/31/88 must be presented compared with the values, in currency with purchasing power of December 1988, relating to the fiscal year ended on 12/31/87;
  b) reconciliation of the result and shareholders' equity
• an Explanatory Note must be presented reconciling the result determined by corporate law and the result determined by full correction, as well as reconciling Shareholders' Equity by corporate law and Shareholders' Equity by full correction.
  This Explanatory Note must highlight all reconciliation items and values, specifying those that are net of opening balance sheet adjustments (correction of non-monetary elements and discounts of values adjusted to present value)

9. PROVISION FOR ADJUSTMENT TO MARKET VALUE
   For the purpose of constituting the provisions provided for in items I and III of article 183, of LAW Nº 6.404/76, the market value, which will serve as a parameter for the valuation of securities, must consider the weighted arithmetic average of the last daily quote occurring in the fiscal year, on the Exchange with the highest trading volume, disregarding, if they exist, quotes derived from atypical transactions.

10. EQUITY PARTICIPATIONS
    From the point of view of LAW Nº 6.404, rights (including equity participation) realizable after the end of the following fiscal year must be classified in Long-Term Receivables and in Current if realized during the following fiscal year.
    Permanent participations in other companies and rights of any nature, not classifiable in current assets (and in Long-Term Receivables) and which are not intended for the maintenance of the company's activity, must be classified in Investments (in Fixed Assets). Thus, equity participations can be classified both in Current/Long-Term Receivables and in Investments-Fixed Assets. The difference is that the first is of a temporary nature and the second is permanent (which does not mean that the company cannot come to sell them one day).

With this in mind, it is necessary to distinguish between permanent and temporary participations. Permanent participations are applications of exclusively operational interest, intended for the maintenance, complementation, or diversification of the company's own activities, or exercised with this purpose. These are the participations provided for in § 3 of article 2 of LAW Nº 6.404/76: "The company may have as its object participating in other companies: even if not provided for in the bylaws, participation is allowed as a means to achieve the corporate object, or to benefit from tax incentives". In this case, the interest of the investing company in participating in the enterprise stands out, including benefiting from tax incentives in projects of its initiative. In the case of investments in shares or quotas of other companies, although they may be made to meet the most diverse objectives, they can be grouped as follows:
a) voluntary participations of a merely speculative nature or with the objective of obtaining, regardless of term, returns produced by their appreciation and negotiation. These are normally applications made on the Stock Exchange, although the company may maintain a "permanent" portfolio of shares by buying and selling shares according to its expectation of appreciation, this is typically a temporary investment (classification: Current Assets or Long-Term Receivables, according to the expectation of alienation); b) voluntary participations exercised for the extension or complementation of the activities of the investor, or even for diversification (horizontalization) of these activities, or even as an operational strategy (security in the supply of inputs, elimination of competition, etc.). In this case, the return from the appreciation of these shares in the market is not expected, but rather the return produced by the operations of the invested company or by the operational improvement of the investing company. Thus, even if an investment of this nature can be alienated at any time, it should not be considered as temporary; they are permanent investments (classification: Fixed Assets/Investments); c) compulsory participations: normally result from the application of tax incentives, but can arise due to other reasons and economic interests, such as the case of participations in shares of telephone companies (expansion plans) and other participations even as a result of legal imposition. Compulsory participations rarely present characteristics of "permanent", as seen above. An exception must be made for cases of applications in own projects in incentivized areas.

Signed originally by
HUGO ROCHA BRAGA
Superintendent of Accounting Standards

Signed originally by
MILTON FERREIRA DARAÚJO
Superintendent of Corporate Relations
Approved by the Collegiate Body on 02/14/89. Publish.
Signed originally by
ARNOLD WALD
President