CVM Orienting Opinion 24

SUMMARY: Procedures to be observed by publicly-held companies and their respective independent auditors applicable to accounting statements relating to fiscal years ending from December 1991.

1. INTRODUCTION
   This opinion aims to continue the guidance process carried out by the CVM with publicly-held companies and their respective auditors, regarding the preparation and publication of accounting statements, management report, and audit opinion.
   This opinion is the result of work analyzing the information provided and observing the main problems and doubts of publicly-held companies, aiming to correct deviations and improve the quality of information made available to the public.

2. IDLE CAPACITY
   The cost related to installed capacity must be transferred to the units produced, in full, whenever productive installations are being used under normal conditions. From the point at which idleness ceases to be within normal limits, the cost related to this excess idleness must be taken directly to non-operating expense, as an extraordinary item, its transfer to inventories not being admitted, thereby avoiding the risk of overvaluation of these and the impossibility of their recovery. Abnormal idleness is a non-routine or non-recurrent factor and may occur due to strikes, pronounced economic recession in the sector in which the company operates, or other economic reasons, internal or external, extraneous. Costs of installed capacity are all of a fixed nature, such as depreciation, rents, etc., including supervision costs included in indirect manufacturing expenses. In the event of idle capacity, the publicly-held company will prepare an explanatory note to inform interested parties of the dimension of the fact.

3. PRESENT VALUE DISCOUNT
   The present value discount provided for in CVM INSTRUCTION No. 138, of January 16, 1991, has the main purpose of translating all values in the balance sheet into the currency of the date of closing of the period to which it refers, aiming at the recognition of revenues and expenses in strict respect for the accrual basis.
   It means eliminating from equity and the period's results prefixed values (revenues or expenses) that have not yet been effectively realized. Therefore, the discount should not be interpreted as a way to anticipate results to occur in a subsequent period, as there are monetary assets and liabilities, which are in the currency of the balance sheet date and will generate losses and gains, that effectively belong to subsequent periods. Classic examples of values not subject to discount are advances to employees and dividends payable. Classic examples of items subject to discount are receivables from installment sales and accounts payable to suppliers, when not post-fixed. The reason for present value translation in these cases is that such accounts have embedded in their face value the expectation of a future nominal financial yield or charge, from the original date of the commercial transaction until its financial settlement. Doubts have been raised, however, regarding present value translation in the following hypotheses:
   a) when there are obligations payable on demand that will be financially settled after the date of closing of the fiscal year or period, as is the case, for example, of salaries payable; b) when there are rights, such as accounts receivable from public tariffs, expressed at their cash value, but which are settled in a subsequent period. Present value translation aims, conceptually, at the elimination of markups added to cash prices practiced in the market, which are adopted to protect equity, by using, in most cases, the current rates practiced in the financial market. In light of the Fundamental Accounting Principles "Monetary Common Denominator" and "Confrontation of Expenses with Revenues and with Accounting Periods (Accrual Basis)", such prefixed values and which aim to protect the holder of the asset in the period subsequent to the closing of the balance sheet must be recognized accounting-wise in the period to which they belong, that is, subsequently to the closed period. It is in this context that the two hypotheses "a" and "b" mentioned above must be analyzed. In the first case, obligations expressed at their cash value at the end of a certain period, such as salaries payable, do not contain any markup to their value that seeks to protect them in a subsequent period. Thus, the later such values are paid, the greater the loss the creditors will experience and the greater the monetary gain the debtor will obtain. It remains to be seen, then, when this effect should be recorded. It must be recorded in the period in which the purchasing power of the currency undergoes variation, to be classified as monetary loss or gain and not as a value rectifier in nominal financial revenue or expense arising from present value translation. In case "b" under analysis, that is, of cash rights that are billed for installment receipt, the reasoning is the same. When tariffs for a certain service are calculated, if the expectation of future nominal financial charges in the receipt period of the accounts is considered in the costs, to be covered by the service revenue, the aforementioned markup is characterized and the company must apply present value discount; otherwise, it should not. Therefore, the hypothesis of installment sales at cash value is only admitted, without including markup, in the inflationary regime in which we live, in the case of public utility services, subject to regulation, and provided that evidence proves that the nominal financial charge to be covered by the service user was not considered in the tariff. This assessment must be carried out by the company and its independent auditor. It is understood that when the company sells at cash and installment at the same price, this value is formed taking into account the nominal financial charge on the portion to be kept in accounts receivable in its assets, and therefore includes a nominal yield regarding the credit granted, which needs to be discounted. The values discounted from assets and
   liabilities are future nominal financial yields and charges from credit operations carried out, which must be appropriated at the right time and will be subject to confrontation with inflationary losses and gains incident on the respective monetary assets and liabilities. These financial yields and charges, net of the respective inflationary losses and gains, must be classified in result accounts together with the revenues and expenses with which they are identified. It is important that this procedure be applied throughout all months of the year, and not only at the closing of each quarter of a fiscal year, which would not allow an adequate evaluation of the revenues and expenses of the fiscal year in constant currency. Present value discounts of liabilities that are identified with asset accounts, after the first record of asset and liability adjustment, must also produce a nominal financial expense of the following period, to be confronted with inflationary gains arising from the same liabilities and will be subject to disclosure, whenever relevant. The aforementioned values may cease to be appropriated in expense and be classified in assets, in the event that the liability values are financing fixed assets under construction. As provided in the aforementioned Instruction and in items 12 and 06 of Orienting Opinions No. 21, of December 27, 1990, and No. 22, of January 16, 1991, publicly-held companies must recognize this present value adjustment in their corporate accounting records, starting from the fiscal year ending in December 1991, with the appropriate accounting adjustments of the opening balance sheet of the fiscal year, to produce their effects in the accounting statements with full correction, subject to disclosure.

4. ADVANCES IN INFORMATION QUALITY AND DISCLOSURE OF ACCOUNTING STATEMENTS.
   Some companies have shown interest or developed work in the sense of bringing to their user higher quality information, through the improvement of their reports or more complete information.
   The CVM supports and encourages these initiatives. Examples of ways to enrich the information made available to the public are:
   Complementary Statements, such as:
   a) Cash Flow; and b) Added Value
   Notes on:
   a) market value of inventories, gold, and highly liquid shares; and b) results by product lines or businesses, especially regarding consolidated statements.
   Disclosure:
   a) greater emphasis on consolidated financial statements in such a way that the individualized statements of the controlling company are presented in a separate table, with less emphasis, containing the accounts and their respective values required by law. b) preparation of consolidated accounting statements, even when investments in controlled companies do not reach 30% (thirty percent) of their net equity, as provided for in article 249 of LAW No. 6.404/76. c) greater emphasis on statements with full correction, in such a way that those prepared in corporate form, when published, are also presented separately, containing the accounts and values legally required. It is the understanding of this CVM that publicly-held companies that present equal balance sheets and results, in corporate form and full correction, may disclose only the set of statements with full correction, considering that, essentially, they are the same accounting documents and that the existing differences refer solely to the way they are presented. From an informational point of view, the disclosure of a single information, and in the most adequate form, eliminates doubtful interpretations and prevents its misuse, benefiting the Securities Market with the clarity and quality of numbers with better conceptual quality. According to CVM INSTRUCTION No. 138/91, Orienting Opinions No. 21/90 and 22/91 and the orientations contained in this opinion, regarding present value discount and monetary correction of inventories, to be recognized in the company's corporate accounting, we are moving in the direction of no longer having grounds for differentiated results between statements in corporate form and full monetary correction. However, should such a fact occur, the CVM encourages publicly-held companies to disclose statements with full correction in the main body of the informational set, presenting statements in corporate form separately, with less emphasis, contemplating the accounts and values necessary to meet legal requirements.

5. OPINION OF THE INDEPENDENT AUDITOR
   The opinion of the Independent Auditor, contained in its opinion regarding the accounting statements of the closing of the fiscal year, must refer to the two fiscal years presented comparatively, especially when the statements of the previous period have undergone adjustment and even if the work regarding that period was carried out by another Auditor. This understanding is in accordance with the "Standards of Independent Audit of Accounting Statements (NBC-T-11)", approved by CVM INSTRUCTION No. 145, of May 10, 1991. It is noted that in the fiscal year that includes the month of December 1991, comparative accounting statements must consider the provisions of article 12 and its paragraphs of CVM INSTRUCTION No. 167/91, as well as item 10 of this Orienting Opinion. The adoption of accounting practices inconsistent or in disagreement with the Fundamental Accounting Principles, whenever relevant, obliges their disclosure in an explanatory note or in the body of the Opinion, in order to reveal the amounts involved, when measurable, and the effects on the accounting statements. From an informational point of view, it is fundamental that Independent Auditors ensure that the reflections on dividends and specific accounts of net equity are clearly evidenced.

6. REVALUATION RESERVE
   The only destination for this reserve is the transfer to accumulated profits or losses, according to depreciation, amortization, exhaustion, and other forms of realization of the revalued asset, according to CVM INSTRUCTION No. 170, of January 03, 1992.

7. MONETARY CORRECTION OF INVENTORIES
   Article 185 of LAW No. 6.404/76, which establishes the form and accounts subject to monetary correction, was revoked by article 2 of Law No. 1.730/89. That article established that "the effects of the modification of the purchasing power of the currency on the value of the elements of equity and the results of the fiscal year" should be considered in the accounting statements (and for this to be fully met it would be necessary to correct all non-monetary items, mainly inventories, when their non-correction caused relevant distortions).
   With the revocation of article 185 of LAW No. 6.404/76, a legislative-corporate vacuum was verified on this subject, although article 177 (not revoked) of the same Law determined (and still determines) that the company's bookkeeping must be maintained with "observance of generally accepted accounting principles" (Fundamental Accounting Principles). And it is fully known to professionals in the accounting area that, among these principles, is that of the Monetary Common Denominator (on this subject, the CVM, before the revocation of the aforementioned art. 185, approved, through CVM DELIBERATION No. 29/86, a pronouncement of IBRACON on the Basic Conceptual Structure of Accounting, in which the postulated principles and accounting conventions were listed and explained). Briefly, by the principle of the Monetary Common Denominator, accounting statements must be expressed in terms of the national currency, considering its maintenance in terms of constant purchasing power. Thus, although the aforementioned article 185 was revoked, we could understand that, to meet the objectives of LAW No. 6.404/76, and more specifically article 177, the company could never fail to carry out the monetary correction of its statements. With the advent of LAW No. 7.799/89, this correction was reestablished, although, as referred to in its article 2, only for "the purpose of determining the real profit-base for the calculation of Income Tax for legal entities". However, for simplicity or custom, the procedures established in the aforementioned Law were extended to accounting statements, prepared for corporate purposes. LAW No. 7.799/89 determined the monetary correction of Permanent Asset, Net Equity, and other accounts, without, however, including inventories (except for real estate for sale). More recently, LAW No. 8.200/91 was issued establishing the indexer and determining/allowing companies to carry out past corrections. This Law, although extending its effects to statements for corporate purposes, did not establish which accounts must be corrected, nor did it extend the provisions of LAW No. 7.799/89 to these statements. DECREE No. 332/91, which regulates LAW No. 8.200/91, lists in its article 4 the accounts that must be subject to correction, increasing the list already required by LAW No. 7.799/89, without, however, including inventories. However, this Decree, as referred to in its article 1, also aims to "determine the real profit-base for the calculation of Income Tax for legal entities". Furthermore, it provides, in its article 48, that it is up to the CVM, the BACEN, and the SUSEP to issue complementary norms, within the competence of each body. Therefore, as there is no, from the point of view of corporate legislation, a list of accounts subject or not to monetary correction, the existing list being only for tax purposes, we understand that there is no impediment for the company to correct its inventories and other non-monetary items. On the other hand, from
   a technical point of view, it is unnecessary to make any reference to the importance of this correction and to the distortions that may occur if it is not adopted. It is up to the company, together with its independent auditors, to evaluate, in light of the Fundamental Accounting Principles, mainly that of the Monetary Common Denominator, the need for its adoption. The Securities and Exchange Commission accepts and recommends that the monetary correction of inventories and other non-monetary items be carried out in statements prepared for corporate purposes, when their non-use causes relevant effects on results, asset values, or net equity. The adoption of this procedure, however, obliges its consistent application over time, as well as the correction of inventories at the beginning of the period, to be recorded directly to accumulated profits or losses and, eventually, to market value adjustment, with the consequent disclosure in an explanatory note.

8. PRIVATIZATION PROGRAM
   LAW No. 6.404, of December 15, 1976, established two concepts for securities, when represented by investment in participation in other societies, according to evaluation criteria defined in items I and III of article 183. Item I deals with investments in shares not considered as investment, that is, without permanence character, therefore classified in current assets or long-term realizable. Item III deals with investments in shares that have a permanent character and that, as established in article 179, item III, are classified as investments. The evaluation criterion for permanent investments, established in the S.A. Law and in CVM INSTRUCTION No. 01/78, determines that the equity method be used for investments in controlled companies and relevant ones in affiliated companies, and the corrected monetary acquisition cost method for the evaluation of other permanent investments. In both methods, the evaluation criterion provides for the constitution of a provision for probable losses in the realization of the investment value, provided that this loss is of a permanent character. CVM INSTRUCTION No. 01/78 characterizes the need to constitute the provision for losses in the following cases:

o Effective losses, due to events that resulted in losses not contemplated in the controlled/affiliated companies or due to liabilities, when applicable, for coverage of accumulated losses in excess of the social capital of the controlled/affiliated company, and o Potential losses resulting from a trend of obsolescence of the investment, high risk of paralysis of the operations of the controlled/affiliated company, events that may predict partial or total loss of the book value of the investment or of the amount of credits against the controlled/affiliated companies and for coverage of guarantees or sureties granted regarding due obligations. The evaluation criterion for corporate participations not classified as permanent investment, according to article 183, item I, of the S.A. Law, must be by acquisition cost or market value, if lower, with the necessary provisions made to adjust it to the probable realization value, admitting the monetary correction of the acquisition cost up to the limit of its market value. Thus, publicly-held companies that have corporate participations, subject to privatization and classified in permanent assets, in the effective inclusion of these participations in the Privatization Program (which can be evidenced by the publication of the Decree and deposit of shares in the National Privatization Fund), and provided there is certainty of realization, must proceed to their reclassification to long-term realizable or to current, depending on the expectation regarding the realization period, adopting from this moment the corresponding evaluation method. As a result of this reclassification, the following aspects must be considered:
a) in cases where investments have been evaluated by the equity method, the company must maintain this procedure until the date of its reclassification. Special attention must be given to dividends to be received due to results already computed in the investor, via equity method. In this case, the amount of dividends, when received (or declared), must be deducted from the value of the investment; b) although classified outside of permanent, these participations must continue to be monetarily corrected until the date of their alienation (according to item 4 of CVM Orienting Opinion No. 21, of December 27, 1990); and c) if the existence of probable loss in the realization of the investment is evidenced and its measurement is possible, the respective provision must be constituted. Although LAW No. 8.031, of April 12, 1990, establishes that investments subject to privatization must be kept registered without alteration of criterion until the end of the process, when the gain or loss on the alienation of these investments would be determined, this fact does not discharacterize, nor constitute an impediment element for the adoption of the procedures referred to in this Orienting Opinion. This is because the inclusion of this legal device had the sole purpose of making clear, in law, that the deposit of shares in the National Privatization Fund does not constitute a transfer of ownership of the participation or of the shareholding control, not therefore, the write-off of this investment in the accounting records of the investor/parent company.

Publicly-held companies involved must disclose, together with their financial statements, all relevant acts and facts known to their administrators, the disclosure of which 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 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 privatizable participation, through auction, public offering, capital increase with waiver of subscription, alienation, lease or leasing 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 privatizable investment and valuation method, book value on the date of the accounting statement/information, market value, when applicable (last three average quotes up to the date of publication or submission of the ITR) and the value of the assessment (minimum realization value, according to the procedure provided in DECREE No. 99.463/90); d) amount of the provision for depreciation or permanent loss, and its 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, 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 federal long-term 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 amounts involved.

In the case of a publicly-held company directly subject to privatization, in addition to the information on the operational mode of privatization and the stage in which the process is, as mentioned above, the following aspects must be considered:
a) in the application of the Fundamental Accounting Principles (see Basic Conceptual Structure of Accounting, approved by CVM RESOLUTION No. 29, of February 05, 1986), the basic postulate of Continuity must be considered. This postulate defines the entity as "something capable of producing wealth and generating value continuously, without interruptions" and in consonance with it is the principle of Cost as the Basis of Value; b) however, if there is certainty or even quite solid evidence of discontinuity of the company's activities, the principle of Cost as the Basis of Value must then be abandoned, adopting, in substitution, an exit or realization value for its assets; c) additionally, the company must register indemnities and fines for breach of contract, where applicable, register the exigibility resulting from labor commitments and coverage of resources for the employees' pension fund, as well as pay attention to the eventual need to transfer long-term obligations to current liabilities; and d) these same aspects must be considered by publicly-held companies that have investments and/or credits in companies subject to privatization, whose operational mode implies the discontinuity of the operations of these societies.

The disclosure of the aforementioned information, together with the financial statements, does not negate the need for disclosure, by the administrators of the publicly-held companies, without prejudice to the other parties involved in the privatization process, of relevant information that they are aware of, in the form established in CVM INSTRUCTION No. 31, of February 08, 1984.

In the case of the company that is in the position of buyer of the shares of privatized companies, using for this purpose various assets, among them federal public debt securities and other credits against the Union, it must make the book value of these assets, net of provisions to adjust them to the probable realization value, for transfer to permanent assets.

In the case of investments valued at cost, this will be the valuation value.

When the investment is subject to valuation by the equity method, its net asset value, compared with the acquisition cost, as previously commented, will result in a premium or discount to be registered in its own account.

9. INCOME TAX CREDIT ARISING FROM LOSS

In line with the provisions of art. 1, item II, of CVM Instruction No. 167, of December 17, 1991, the income tax credit arising from fiscal loss should not be recognized accounting-wise, except in the event that there is guarantee of its realization, founded on an obligation with long-term income tax, within the limit of this passive value, and compatibly with the period of its realization.

10. EFFECTS OF MONETARY CORRECTION OF LAW No. 8.200/91.

In the preparation of the calculations of special monetary correction, as provided for in article 6, item I, of CVM INSTRUCTION No. 167, of December 17, 1991, the publicly-held company, which deems it relevant to retrocede to a period prior to the existence of the INPC - National Consumer Price Index, of the IBGE - Brazilian Institute of Geography and Statistics, may do so by adopting a national index representative of the general variation in the price level, such as the IGP - General Price Index of the Getulio Vargas Foundation.

Paragraph 1 of Art. 12 of CVM INSTRUCTION No. 167/91 allowed the publication of comparative information regarding the results and the sources and applications of resources of the fiscal year that includes the month of December 1991, granting a period of six months for companies with securities admitted to trading on a Stock Exchange to disclose them. However, considering its importance for the Securities Market, the CVM recommends that this disclosure occur in the shortest possible time.

When the presentation of the balance sheet and the statement of changes in shareholders' equity of the previous period, adjusted by the effects of articles 2 and 3 of LAW No. 8.200/91, occurs for comparison purposes with the statements of the latter fiscal year, it is perfectly acceptable that there is no compatibility between the values forming the accumulated profits or losses; of the closing date of the previous period, with the net result to be presented in the result statement, also of the previous fiscal year, adjusted by the same effects, since this latter statement has only an informative purpose and adopts the assumption that monetary correction would have been recognized at the right time, which did not actually happen.

Within this same context, the explanatory note intended to inform the net result of the 1990 fiscal year, as provided for in item "c" of Art. 13 of CVM INSTRUCTION No. 167/91, as it can be prepared before the preparation of the adjusted result statement of the previous fiscal year, may be made based on approximate or estimated values.

It is highlighted, according to the following paragraphs, that the result of the 1990 fiscal year can be determined based on INPC and IPC, receiving greater influence from one of the two indexers, according to the time of formation of the assets and eventual revaluation carried out. As a consequence, the determination of this result, by the method of full monetary correction, will require adjustments, to eliminate the effects of the indexer that presents less influence.

In the application of the corrections provided for in Articles 2 and 3 of LAW No. 8.200/91, according to the criteria established by DECREE No. 332/91, and considering the Normative Instruction No. 114, of December 04, 1991, of the Federal Revenue Department, it is possible that the total values found, of the assets corrected according to INPC, may be lower than those produced by the application of IPC in 1990 and variation of BTNF in January 1991.

If this hypothesis occurs, the publicly-held company must accept the values determined with the application of IPC in 1990 and BTNF in January 1991, due to the mandatory condition of the norm that regulates the matter. However, this procedure may lead to an overvaluation of assets, so that the recovery by the company's economic activity is compromised. It is important that the analysis of this fact is carried out and, when appropriate, the adjustment that adapts the company's asset to its potential to generate benefits is accounted for.

According to item IV of article 6 of CVM INSTRUCTION No. 167/91, the special monetary correction will be appropriated in Shareholders' Equity by its net value of the taxes incident, which will be classified in the long-term payable liability. Identical procedure is applicable to the Revaluation Reserve, according to paragraph 2 of Art. 10 of the said Instruction.

It is common to question this accounting criterion, especially regarding the time of recording this obligation as exigibility, alleging that these equity increases do not produce tax effects.

This is true when analyzing the problem from a fiscal point of view. However, corporately, an increase in assets, accepted as an adequate accounting valuation of the equity, even for purposes of measuring depreciation, amortization, etc., resulting from it, and which will not be deductible as an expense for tax purposes, characterizes a differentiated asset increase, that is, subject to restriction. Consequently, the corresponding restriction must be evidenced in the liability, conceptually also called restriction on assets.

From other points of view, it would also be, ACCOUNTING-WISE, improper not to recognize this liability, at the time of the increase in assets, for the following reasons:
a) the shareholders' equity of publicly-held companies would be contemplating a value subject to dilution; and b) future results would be affected by a provision for income tax not associated with the revenues and expenses of the period, contradicting the accrual basis, also referring to the special monetary correction reserve.

In the same line as stated above, the values of social contribution and tax on net profit due based on the correction of article 3 of LAW No. 8.200/91, added to the asset, according to the provisions of art. 39 and paragraph 2 of Art. 41 of DECREE No. 332, of November 04, 1991, must be registered as current liability and payable in the long term, in counterparty of accumulated profits or losses. Regarding the Tax on Net Profit, the period of its incidence, until December 31, 1992, must still be observed, according to Art. 75 of LAW No. 8.383/91.

11. INFLATION INDICES FOR NOVEMBER AND DECEMBER 1991

The CVM understands that the same indices established by the Federal Revenue Department, through Declaratory Act No. 02, of January 03, 1992, can be used for corporate and full monetary correction system purposes.

12. RESERVE OF PROFITS TO BE REALIZED

LAW No. 6.404, of December 1976, contemplated provisions disciplining its constitution and determining its inclusion and exclusion in the calculation of the mandatory minimum dividend. However, after all these years since its creation, doubts and errors still remain regarding the form of realization and reversal of this Reserve, which has prompted companies to adopt the most diverse procedures and interpretations.

The constitution of the Reserve of Profits to be Realized aims to postpone the payment of the mandatory dividend (art. 202, LAW No. 6.404/76) until the fiscal year in which the profits to be realized, which gave rise to the reserve, are "financially" realized, thereby compatible the company's financial availability with the proposal of payment of dividends.

• CONSTITUTION

The Reserve of Profits to be Realized is constituted by the remaining amount of profits to be realized, after such profits have already been destined to the constitution of the reserves provided for in articles 193 to 196, of LAW No. 6.404/76 (Legal Reserve, Statutory Reserve, for Contingencies and for Retention of Profits, including in the Retained Earnings account).

For this purpose, profits to be realized are considered, in accordance with the cited Law No. 6.404:
a) the credit balance of the account for recording the counterparty of monetary correction adjustments; b) the increase in the value of investment in affiliates and controlled companies; c) the profit in sales on credit realizable after the end of the following fiscal year.

In the case of item "a" above, it must be emphasized that its simple existence does not necessarily imply, from an economic and financial point of view, the characterization of profits to be realized. In most cases where there is a credit balance of monetary correction, there are also, in counterparty, other inflationary effects, such as monetary variation expenses, which should be contemplated as a deduction from this credit balance and which technically invalidate the idea that part of the profit formed by this balance is not financially realized. In reality, this hypothesis (item "a") should only be considered in the existence of financing sources that were financing slow-realization assets, such as subsidized loans linked to permanent assets, with charges below inflation, therefore generating monetary gains resulting from inflation. This fact is quite evident when examining the accounting statements prepared by full correction.

In the case of item "b", LAW No. 6.404/76 refers to the increase in the value of investment in affiliates and controlled companies, as provided for in item III, of art. 248 of the same law.

The interpretation that has been given to this legal command, materialized through the procedures that have been used by publicly-held companies, is that of the constitution of the reserve of profits to be realized, using the net result of the equity method, contemplating positive and negative results, operational or not, with profits to be realized existing only when this net result is positive.

It is important, however, to verify that the result resulting from the equity method, capable of being used for the constitution of the reserve of profits to be realized, must be positive, that is, only profits or some other type of increase (increase) produced by the equity of the invested societies are capable of being reserved for future destination. Thus, when the net result of the equity method is destined for the constitution of the reserve, strictly speaking, profits and/or equity increases of certain investees are being offset against losses and/or equity reductions of other investees.

This offset, however, cannot be done automatically, because once done, there is a risk of offsetting losses that could be deducted from reserves existing in the own equity of the investees. In other words, the offsetting of losses and equity reductions between the equities of the investees is only admissible, since the investee generating the losses does not have, in its equity composition, any capital or profit reserves capable of being offset against the losses. In these cases, and only in these, the deduction of losses from a certain investee with the profits and/or reserves of another investee is admitted, within the account of investments of the controlling or investing company.

This procedure makes it possible to meet good accounting technique, a technique based fundamentally on the measurement and economic-financial evaluation of the return of each investment taken individually at first, and secondarily, on the measurement and evaluation of the application of resources in the "investment account", understood here as the sum of all applications in controlled and affiliated societies as if they were a single asset.

In the case of item "c", it is usually understood as "profit" the value of gross profit, similar to the concept used in the equity method and in consolidation, when eliminating unrealized results.

When the sale is for receipt in several installments, the total profit of the operation is considered distributed among the installments, proportionally to the value of each of them.

Any results appropriated by the accrual regime, to be received after the following social fiscal year, are included in this list of long-term receivable profit, such as financial revenues during grace periods.

Obviously, revenues that have specifically been the subject of provisioning due to doubt about their realization are not included.

It should be emphasized again that only the installments of profits to be realized that exceed the amounts already retained in the fiscal year in the Profit Reserves (art. 193 to 195 of LAW No. 6.404/76) and in the profit retentions carried out, whether these latter result from previously approved capital budgets by the General Assembly (art. 196 of LAW No. 6.404), or result from the pure and simple maintenance of profits in the accumulated result account without specific destination (art. 8 of CVM INSTRUCTION No. 59, of 12/22/86), may be classified in the Reserve of Profits to be Realized.

• REALIZATION

SEGREGATION BY ORIGIN

For purposes of controlling the amounts realized in the fiscal year and to be realized in future fiscal years, it is important that the origin of the profits to be realized destined for the formation of the Reserve of Profits to be Realized is identified, and that their respective values are segregated accounting-wise in distinct sub-accounts, according to their origin.

REVERSAL OF THE RESERVE AND ITS MONETARY CORRECTION

The Reserve of Profits to be Realized is constituted by transfer from the Retained Earnings/Profits or Losses account. Thus, as realization occurs, regardless of its form, the corresponding proportion of the reserve must be mandatorily reversed and computed in the calculation of the mandatory dividend.

The recognition of the variation in the purchasing power of the national currency on the elements of the equity and the result of the fiscal year is made in the shareholders' equity, with the monetary update of its components (accounts comprising it). Thus, not only the balance of the Reserve of Profits to be Realized must be corrected, but all its movement, including the realization of the reserve. Thus, the amount reversed from the Reserve of Profits to be Realized must contemplate its respective monetary correction and, consequently, the dividends to be distributed must also be monetarily corrected.

COMPUTATION IN THE CALCULATION OF THE MANDATORY DIVIDEND

In this sense, article 186, of LAW No. 6.404/76 determines that the statement of the Retained Earnings/Profits or Losses account will discriminate the reversals of reserves (item II) and the transfers to reserves (item III). It also determines that item III of article 202 of the same Law, in the calculation of the mandatory dividend, the amount of profits to be realized transferred to the Reserve of Profits to be Realized will be decreased and the amount previously registered in this reserve that has been realized in the fiscal year will be increased.

Thus, after being computed in the calculation of the minimum mandatory dividend, the amount reversed from the Reserve of Profits to be Realized, which remains after the compensation of accumulated losses and after the deduction of the dividend, must be destined to increase the social capital, or for the payment of complementary dividends.

It is inadmissible, therefore, the use of the Reserve of Profits to be Realized directly in capital increase, without first passing through the accumulated results account and without having entered the base for the calculation of the mandatory dividend that was postponed.

CRITERIA FOR REALIZATION

As mentioned above, profits to be realized may result from the credit balance of monetary correction, the increase in the value of investment in controlled and affiliated companies or as a result of profits in sales on credit realizable after the end of the following fiscal year.

Result of Equity Method

Since the origin of profits to be realized results from the increase in the value of investment in controlled and affiliated companies, due to the adoption of the equity method, realization occurs through the receipt of profits and dividends, or through write-off due to alienation or obsolescence of the investment.

Still in this case, according to the provision contained in item XXXII, of CVM INSTRUCTION No. 01/78, the company must reverse the corresponding portion of the Reserve of Profits to be Realized, and compute it in the calculation of the mandatory dividend, whenever there is a capital increase in the affiliate or controlled company, resulting from the incorporation of profits or profit reserves. This provision aims to protect the minority shareholder of the controlling or investing company, avoiding that, due to the capitalization, in the controlled or affiliated company, of the total profits determined, the mandatory dividends to which the shareholder of the controlling or investing company has the right to receive are not distributed.

Result of Monetary Correction

Since the origin of profits to be realized is the credit balance of monetary correction, there is no adequate technical criterion that is easy to use. In practice, the criterion determined in the income tax legislation for the realization of the "inflationary profit" has been adopted, which occurs through depreciation, amortization or exhaustion, or through write-off due to alienation, expropriation, transfer or obsolescence of the assets or rights that gave rise to the "inflationary profit".

Long-Term Sales

In the case of profits in sales on credit realizable after the end of the subsequent fiscal year, realization occurs by the transfer of receivable rights to current assets or by the early receipt of these rights.

• THE IDENTIFICATION OF PROFITS TO BE REALIZED BY ORIGIN

The existence, in the same fiscal year, of more than one mode of profits to be realized, sometimes does not allow an adequate differentiation of the amounts of these profits, in order for the correct application of the forms of realization referred to above to be made.

The lack of a uniform procedure for recognizing realized amounts has as its consequence the use, by public companies, of the most diverse realization criteria, which often leads the company not to consider, in the calculation of the mandatory dividend, profits that have already been financially realized.

Sometimes situations occur where, if there is more than one of the modalities of profits to be realized, the amount allocated to the constitution of the reserve is lower than any of the individual amounts of these profits to be realized. When this occurs, the identification of the origin of the profits to be realized, as well as the determination of the realization criterion, can be done differently in each company, and cause harm to minority shareholders, by withholding mandatory dividends, when the company already has the necessary resources to pay them partially or totally.

One might argue whether in this case the fairest criterion would not be to distribute proportionally the amount to be allocated to the Reserve for Realized Profits among the various modalities of profits to be realized existing in the period, with the Reserve being realized based on this proportion. Besides the operational difficulties of this method, we understand that, since the constitution of the Reserve for Realized Profits has the sole and exclusive purpose of postponing the payment of the mandatory dividend, compatible with the company's financial availability, as soon as there is an inflow of the necessary resources for the payment of dividends, the company must effect it.

Thus, as resources from profits destined to constitute the reserve enter the company or are considered realized, regardless of having originated from any of the three modalities of profits to be realized, the corresponding proportion of the Reserve for Realized Profits should be reversed to the Retained Earnings or Accumulated Losses account and included in the calculation of the mandatory dividend.

In other words, if the company has sufficient resources for the payment of any portion of the mandatory dividend that was postponed, resources that, we emphasize, come from the realization of any of the three modalities of profits to be realized, it must do so, regardless of whether the realization is through receipt of resources related to long-term sales, receipt of dividends from affiliates or controlled companies, or realization of the credit balance of monetary correction (which, as we have seen previously, should not even be postponing the payment of mandatory dividends).

It would be inadmissible, for example, the case of a company that had, in the period, all three modalities of profits to be realized in equal amounts, and that could only allocate to the constitution of the Reserve a value equal to or less than the amount of one of the modalities of profits to be realized and, having received, for example, resources from long-term sales, in an amount sufficient for the payment of postponed dividends, does not do so, alleging that the value allocated to the Reserve for Realized Profits originated from the credit balance of monetary correction or the increase in investment in controlled or affiliated companies, and that they have not yet been realized.

By proceeding in this manner, the company would be not only postponing the payment of the mandatory dividend, which shareholders have the right to receive, but also indiscriminately retaining these dividends, since it would already possess the necessary resources to make the payment. Therefore, the objective with which the constitution of the Reserve for Realized Profits was permitted, by LAW No. 6.404/76, would be completely distorted, which, as previously emphasized, is to compatibilize the payment of the mandatory dividend, fixed as a percentage of profit, with the entry of the necessary resources for this payment.

• PROPORTIONALITY OF THE AMOUNT TO BE REVERSED
  The reversal of the Reserve for Realized Profits, to be computed in the calculation of the minimum mandatory dividend, must be considered by the proportional amount to the value of the dividend that was postponed.
  For example: a company that distributes dividends on the basis of 25% of adjusted net profit, allocated to the constitution of the Reserve for Realized Profits the amount of Cr$ 100.0 million, this amount referring to the gain resulting from the valuation of the investment, in a wholly-owned subsidiary, by the equity method.

In the subsequent period, the wholly-owned subsidiary distributed dividends in the amount of Cr$ 30.0 million (30% of net profit). The amount of the Reserve for Realized Profits to be reversed and computed in the calculation of the mandatory dividend will be Cr$ 100.0 million and not Cr$ 30.0 million. This is because the controlling company received resources in an amount sufficient for the payment of the dividends that were postponed in the previous period (25% of Cr$ 100.0 million), thus being able to pay them in full. The remaining Cr$ 75.0 million of the Reserve for Realized Profits (Cr$ 100.0 million minus Cr$ 25.0 million of dividends) should be allocated to capital increase or payment of complementary dividend (according to the company's will and financial availability). It is worth clarifying, furthermore, that in this example the effects resulting from monetary correction were not considered, which must apply to the balance and movement of the Reserve for Realized Profits and to the dividends already treated above.

In any case, the company must consider, for the purpose of paying dividends on values realized in the period, the portion that should have been paid as dividends, at the time of the formation of the reserve, if it had not been constituted, plus the respective monetary correction.

• EXPLANATORY NOTES
  Given the importance of the constitution and reversal of the Reserve for Realized Profits, for purposes of determining the dividends to be distributed and, consequently, for decision-making by shareholders and investors, it becomes necessary for the company to disclose, in an explanatory note to the accounting statements, complementary information about this reserve, discriminating the origin of the amounts allocated to its constitution and respective values individualized by modality of profits to be realized, the amount realized in the period and the respective basis, and the future effect on dividends.

This text encompasses the Orienting Opinions previously issued on this subject (Nos. 15/87, 17/89 and 18/90).

13. PENSION FUNDS
    Conceptually, charges with employee pension funds should be recognized as expense according to the benefits produced by these employees throughout their working life, so that the confrontation between expenses and revenues occurs, respecting the accrual basis.

Against this reasoning, placed in a broad way, whenever a company constitutes its pension fund, and its plan is of defined benefit, there will be a past service, for which there was no contribution and which requires an amortization plan, calculated actuarially. This plan must be the subject of an explanatory note, to highlight its value and conditions (term, interest rate, etc.) of amortization.

However, the accounting recording of the company's commitments with past service, regarding its employees, referring to retirement and other benefits, when there is no formal existence of a pension fund, is subject to criteria, always when it is a restricted mass.

Regarding the explanatory note on retirements and pensions, introduced through Orienting Opinion No. 18/90, we present below the minimum items to be highlighted by public companies, aiming to transmit a clear idea of their commitments towards these entities:

• sponsoring entities;
• annual cost for the company, including all its contributions;
• actuarial regime for cost determination;
• type of plan (defined benefit, defined contribution, mixed);
• due obligations;
• statutory commitments of the company regarding asset deficiencies;
• value of the deficiency and its reasons;
• current and future contribution rates, approved or forecasted;
• relationship of sponsor/participant contribution; and
• date of the last approved actuarial re-evaluation.

14. CONSOLIDATION OF EXPLANATORY NOTES
    CVM has observed that explanatory notes have been prepared by public companies, each year, in a process almost automatic and repetitive, resulting in little rich evidence, in some cases, when important information is left aside and the standardized model takes its place.

From this social exercise, a warning is made in the sense that public companies improve their review process, so that the most important information takes the place of others that are elaborated because there is a legal requirement, but which are not relevant or do not fit the company.

As an example, we have observed numerous cases of companies that present immaterial values of stocks and financing and prepare explanatory notes about them, bound by the existence of the legal norm that relates these asset items as items subject to evidence through notes.

In summary, the public company must make an explanatory note, even with legal requirement, only when the values or facts are material and apply to its case. The evaluation criteria provided by law must be described to evidence something more than what is already legal norm and is public knowledge, that is, the concern must be in the sense of treating with emphasis, occupying the spaces that deserve, the acts and particular facts in the public company.

The work of Independent Audit is extremely important in this area, to question facts that, even without legal requirement, deserve to be evidenced.

Aiming to facilitate the process of consultation to the various normative documents, to identify the explanatory notes required, intended to complete the accounting statements, research work was carried out for this purpose, which is presented below:

• TREASURY SHARES
  The acquisition of its own issuance shares represents a return of the invested capital and should be demonstrated as a deduction of equity. The explanatory note should indicate:
  a) the objective to acquire its own shares; b) the quantity of shares acquired or alienated during the period, highlighting species and class; c) the weighted average cost of acquisition, as well as the minimum and maximum costs; d) the net result of the alienations occurred in the period;

e) the market value of the species and classes of treasury shares, calculated based on the last quotation, in stock exchange or over-the-counter, prior to the date of closing the social exercise; (CVM INSTRUCTIONS NOS. 10 AND 20 - EXPLANATORY NOTE OF CVM INSTRUCTION NO. 59/86)

• PREMIUM/DISCOUNT
  The economic reason that underpins the premium/discount must be disclosed, in addition to the criteria established for its amortization.
  (ORIENTING OPINION CVM NO. 15/87)

• PRESENT VALUE ADJUSTMENTS
  The company must disclose the alternative used to adjust its assets and liabilities to present value.
  (CVM INSTRUCTION NO. 146/91)

• PRIOR PERIOD ADJUSTMENTS
  Prior period adjustments are considered those resulting from a change in accounting criterion and rectification of error attributable to a certain prior period, and which cannot be attributed to subsequent facts.
  These adjustments should be discriminated in the statement of changes in equity, their nature and foundations being evidenced in the explanatory notes to the accounting statements.
  (LAW NO. 6.404/76, ARTICLES 176 AND 186; EXPLANATORY NOTE OF CVM INSTRUCTION NO. 59/86 and ORIENTING OPINION NO. 18/90)

• RETIREMENT AND PENSIONS (PLAN)
  The explanatory notes must contain information on the existence of the plan, the actuarial regime for cost determination and contributions to the plan, the annual cost, the defined obligations, the potential obligations and the accounting criteria.
  (ORIENTING OPINION CVM NO. 18/90 AND ITEM 13 OF THIS ORIENTING OPINION)

• FINANCIAL LEASING
  The explanatory note must indicate, at minimum, the following:
  a) commitment under financial leasing contract; b) payment form and terms; c) expenses of the period with financial leasing.
  Leasing companies must disclose in an explanatory note:
  a) the criteria currently used for accounting for their operations, including those that necessitate present value adjustments for not meeting fundamental accounting principles; b) present value adjustments of future flows of leasing portfolios, evidencing the effect of Income Tax.
  (CVM CIRCULAR LETTER/PTE NO. 578/85 and 309/86; CVM INSTRUCTION NO. 58/86)

• DEFERRED ASSET
  Its composition and criteria for amortization must be disclosed. Companies benefiting from tax incentives must provide more detailed information, specifying the situation in which the incentivized projects are found.
  (ORIENTING OPINION CVM NO. 18/90, ITEM 3, ALÍNEA "c")

• IDLE CAPACITY
  (ITEM 2 OF THIS ORIENTING OPINION)

• SHARE CAPITAL
  The number, species and classes of shares that make up the share capital, and, for each species and class, the respective quantity and nominal value, if any, should be disclosed. Advantages and preferences conferred to the different classes of shares should also be disclosed.
  (LAW NO. 6.404/76, ARTICLE 176 and ORIENTING OPINION CVM NO. 4/79)

• AUTHORIZED SHARE CAPITAL
  The company that possesses authorized capital must 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 the right of preference for subscription, or the non-existence of this right; e) option to purchase shares, if any, to administrators, employees or natural persons who provide services to the company or society under its control. (EXPLANATORY NOTE THAT INTEGRATES CVM INSTRUCTION NO. 59/86)

• NORMAL CONTINUITY OF BUSINESS
  When the situation of imminent risk of total or partial stoppage of the company's business is identified, the explanatory note should provide more details on the plans, and possibilities of recovery or not.
  (ORIENTING OPINION CVM NO. 21/90)

• ELECTROBRÁS CREDITS
  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 an explanatory note.
  (CVM DELIBERATION NO. 70/89)

• EVALUATION CRITERIA
  The main evaluation criteria of asset elements, especially stocks, of depreciation, amortization and depletion calculations, of constitution of provisions for charges or risks and of adjustments to attend to provisional losses in the realization of asset elements, should be disclosed.
  (LAW NO. 6.404/76, ARTICLE 176, AND ITEM 7 OF THIS ORIENTING OPINION)

• BOND DEBENTURES
  On debentures, the terms of the debentures should 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 in the administration report and in the financial statements.
  (ORIENTING OPINION CVM NO. 21/90, ITEM 8)

• COMPLEMENTARY STATEMENTS (IN CONSTANT CURRENCY)
  The following disclosures are required:
  a) criteria adopted in the preparation of complementary accounting statements, including regarding the indexator used (monthly variation, average, daily or mixed criterion); b) the values contained in the explanatory notes and in the administration report must be disclosed in currency of constant purchasing power; c) the composition of the difference between the net profit/loss determined in the form of corporate legislation and that of full correction; d) gains and losses on monetary items must be distributed by the accounts to which they are linked, this fact, and the criteria used, being evidenced in an explanatory note. The balance that, eventually, cannot be allocated, when relevant, must also be evidenced. (CVM INSTRUCTIONS NOS. 64/87 and 146/91)

• CONSOLIDATED ACCOUNTING STATEMENTS
  The company obliged to prepare consolidated accounting statements must disclose:

a) criteria adopted in consolidation, such as elimination of account balances between the companies included in the consolidation, elimination of reciprocal participations, elimination of unrealized profits and losses, etc.; b) demonstration of the controlled societies included in the consolidation, as well as the percentage of participation of the controller in each controlled society, encompassing direct participation and indirect participation, through other controlled societies; c) societies excluded in the consolidation, as well as exposure of the reasons that determined the exclusion; d) basis and foundation for the amortization of unabsorbed premium or discount in the consolidation; e) subsequent events that have, or may come to have, relevant effect on the financial situation and future consolidated results; f) events that caused any difference between the amounts of equity and net profit/loss of the controller, in comparison with the corresponding amounts of equity and net profit/loss consolidated. The public company affiliated with a group of societies must indicate, in a note to its published accounting statements, the body and date in which the last consolidated accounting statements of the group commanding society to which it is affiliated were published. In consolidated statements, which include transactions between related parties, the information and values regarding transactions not eliminated in the consolidation must be evidenced. (LAW NO. 6.404/76, ARTICLE 275, CVM INSTRUCTION NO. 15/80 and CVM DELIBERATION NO. 26/86)

• PROFIT DESTINATION CONSTANT IN SHAREHOLDER AGREEMENTS
  The annual report of administrators must contain information on the profit reinvestment policy and dividend distribution constant in shareholder agreements filed at the company.
  (LAW NO. 6.404/76, ARTICLE 118)

• DIVIDEND PER SHARE
  The amount of dividend per share of the social capital, divided by species and class of shares, must 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)

• PROPOSED DIVIDENDS
  The demonstration of the calculation of the dividend proposed by the administrators, the payment policy and whether they will or will not be monetarily corrected must be disclosed.
  (ORIENTING OPINIONS CVM NOS. 15/87 and 21/91)

• PROJECTS IN IMPLEMENTATION PHASE
  The gain, if any, resulting from the confrontation of expenses and revenues attributable to projects in the implementation phase must be presented as Future Period Result.
  Only if there is, demonstrably, certainty that this gain is of a recurring nature throughout the entire implementation period is that, exceptionally, it may be recognized in the company's results.
  In an explanatory note, the attitude adopted must be justified, as well as clarified the cause of said gain.
  (ORIENTING OPINION CVM NO. 17/89)

• EQUITY METHOD
  The company with investments in affiliates and controlled companies, evaluated by the equity method, must disclose:
  a) name of the affiliate or controlled company, share capital, equity and net profit/loss; b) number, species and class of shares or quotas of the social capital possessed by the investor/controller, and the market price of the shares, if any; c) credits and obligations between the investor/controller and the affiliates/controlled companies, specifying terms, financial charges and guarantees; d) revenues and expenses in operations between investor/controller and affiliates/controlled companies; e) basis and foundation adopted for amortization of premium or discount;

f) conditions established in shareholder agreement, regarding influence on administration and distribution of profits; g) result of the equity method, divided into operational, non-operational and resulting from revaluation in controlled/affiliated companies.
(LAW NO. 6.404/76, ARTS. 176 AND 247; CVM INSTRUCTION NO. 01/78 and ORIENTING OPINION CVM NO. 04/79)

• SUBSEQUENT EVENTS
  Events occurring between the date of closing the social exercise and the date of disclosure of the accounting statements that have, or may come to have, relevant effect on the financial situation and future results of the company must be disclosed.
  (LAW NO. 6.404/76, ART. 176 and ORIENTING OPINION CVM NO. 04/79)

• WITHHOLDING INCOME TAX ON NET PROFIT (ILL)
  The criteria used for the calculation of said tax must be disclosed.
  (ORIENTING OPINION CVM NO. 18/90)

• TAX ON FINANCIAL OPERATIONS (IOF)
  The adoption of an alternative procedure to that in which IOF integrates the cost of imported goods (stocks or fixed assets), and its effects on the financial position and results, must be disclosed.
  (ORIENTING OPINION CVM NO. 07/81)

• SOCIETAL INVESTMENTS ABROAD
  The company must evidence the same information required for investments in controlled/affiliated companies in the country. The criteria for the determination of the accounting statements of the investees abroad, as well as the criteria for conversion to national currency, must be mentioned in the summary of accounting practices.
  (CVM DELIBERATION NO. 28/86)

• LAW NO. 8.200/91
  The following must be subject to evidence in an explanatory note:
  a) general procedures adopted and amounts accounted for complementary monetary corrections of IPC x BTNF and special in the main asset accounts; b) justification of the chosen option regarding special monetary correction, in light of Fundamental Accounting Principles; c) net operating revenue and net profit/loss, of the 1990 period, that would be determined if INPC were used throughout the retroactive period. (CVM INSTRUCTION NO. 167/91 AND ITEM 10 OF THIS ORIENTING OPINION)

• PROFIT OR LOSS PER SHARE
  The company must disclose in the statement of the result of the period the net profit/loss per share of the social capital.
  (LAW NO. 6.404/76, ART. 187)

• CHANGE OF ACCOUNTING CRITERION
  Whenever there is a modification of methods or accounting criteria, of relevant effects, the company must disclose the modification, highlighting the resulting effects.
  (LAW NO. 6.404/76, ART. 177)

• LONG-TERM OBLIGATIONS
  Interest rates, maturity dates, guarantees, currency and form of update of long-term obligations must be disclosed.
  (LAW NO. 6.404/76, ART. 176 and ORIENTING OPINION CVM NO. 04/78)

• BURDENS, GUARANTEES AND EVENTUAL AND CONTINGENT LIABILITIES
  Real burdens on asset elements, guarantees provided to third parties and other eventual/contingent liabilities must be disclosed. Contingent facts that generate, by their...

peculiarities, reserves or provisions for contingencies, and even those whose probability is difficult to calculate or whose value is not measurable, must be disclosed in an explanatory note, and in the latter case, the reasons for the impossibility must also be mentioned.
(LEI Nº 6.404/76, ART. 176 and EXPLANATORY NOTE ON CVM INSTRUCTION Nº 59/86)

• RELATED PARTIES
  The disclosure of transactions with related parties must cover:
  a) balances and transactions inserted in the usual operational context of companies must be classified together with balances and transactions of the same nature; b) balances and transactions not inserted in the normal operational context must be classified in separate items; c) in any case, the conditions under which these transactions occurred must be indicated, 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 company's financial situation and results. (CVM DELIBERATION Nº 26/86 and CVM ORIENTING OPINION Nº 18/90)

• PRIVATIZATION PROGRAM
  (ITEM 08 OF THIS ORIENTING OPINION)

• PROVISION FOR DOUBTFUL DEBT
  The criteria adopted for its establishment 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)

• STOCK PURCHASE OPTIONS
  Stock purchase options granted and exercised during the fiscal year must be disclosed.
  (LEI Nº 6.404/76, ART. 176)

• REVALUATION
  The company must disclose the following information:
  a) history and date of revaluation - only in the year of revaluation; b) summary, by account, of the valuation values, respective book values, and the value of the reserve established - only in the year of revaluation; c) effect on the year's result, arising from depreciation, amortization, or exhaustion on revaluations, and any subsequent write-downs after their recording; d) treatment regarding dividends and participations, and mention regarding the value of the incident tax; e) use of the reserve for capital increase or compensation of losses. Disclose the remaining balance and the destination it would have been given in the application of the reclassification criterion provided in CVM institution nº 167/91. f) partial revaluations (revalued items) and in controlled companies (those that underwent revaluation and those that did not). (LEI Nº 6.404/76, ART. 176, CVM DELIBERATION Nº 27/86 CVM INSTRUCTION Nº 167/91)

• REMUNERATION OF ADMINISTRATORS
  The amount of remuneration must be disclosed in the income statement itself or in an explanatory note.
  (CVM ORIENTING OPINION Nº 04/78)

• RESERVE OF PROFITS TO BE REALIZED
  The amount and nature of the values established, the amount realized, and the parameters used must be disclosed.
  (EXPLANATORY NOTE INTEGRATING CVM INSTRUCTION Nº 59/86, CVM ORIENTING OPINION Nº 18/90, AND ITEM 12 OF THIS ORIENTING OPINION)

• RESERVES - DETAILING
  The company may disclose, in an explanatory note or in an analytical table, the subdivisions of the reserves, when their disclosure in the Statement of Changes in Equity becomes too extensive for publication purposes.
  (CVM INSTRUCTION 59/86)

• RETENTION OF PROFITS
  The retention of profits may appear under various names, such as: reserve for expansion, for reinvestment, etc., and may still be included in the Accumulated Profits account.
  In any circumstance, its establishment, maintenance, and legal basis must be disclosed in an explanatory note, as well as the main lines of the capital budget that supports the retention.
  (EXPLANATORY NOTE OF CVM INSTRUCTION Nº 69/86 and CVM ORIENTING OPINION Nº 18/90)

• INSURANCE
  It must be informed whether there are and which assets, liabilities, or interests are covered.
  (CVM ORIENTING OPINION Nº 15/87)

• SALES OR SERVICES TO BE PERFORMED
  The existence of advance billings or contracts with guaranteed receipt for sales or services to be performed, when relevant, and their respective amounts, must be disclosed in an explanatory note.
  (CVM ORIENTING OPINION Nº 21/91)

15. MULTIPLE VOTING
    It is important to highlight the need for the public company to 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, in accordance with CVM INSTRUCTION Nº 165, of December 11, 1991. This disclosure must be made mandatorily in the notice of convocation of the assembly and optionally together with the closing financial statements of the fiscal year.

Signed originally by
SALVADOR AUGUSTO BENTO
Superintendent of Accounting Standards
Signed originally by
WLADIMIR CASTELO BRANCO CASTRO
Superintendent of Corporate Relations - In Office Approved by the Collegiate Body on 15.01.92. Publish.
Signed originally by
FLORA VALLADARES COELHO
Acting President