SUMMARY: Procedures to be observed by Publicly Held Companies in the preparation and disclosure of financial statements in constant purchasing power currency.

INTRODUCTION:

Doubts have been raised regarding the application of certain procedures provided for in INSTRUCTION CVM NO. 191, of July 15, 1992. This Opinion aims to disseminate the understanding of this Commission on this matter, updating and consolidating the orientations included in ORIENTING OPINIONS NO. 14, of December 14, 1987; 17, of February 15, 1989; 18, of January 18, 1990; 21, of December 27, 1990; and 24, of January 15, 1992.

INTRODUCTION;
MAIN CHANGES;
PRESENT VALUE ADJUSTMENT.
MONETARY ITEMS;
INITIAL CALCULATION OF PRESENT VALUE ADJUSTMENT; DETERMINATION OF PRESENT VALUE AT THE END OF THE PERIOD.
NON-MONETARY ITEMS.
MONETARY UPDATE.
PEPS CRITERION;
NON-MATERIAL NON-MONETARY ITEMS.
ACCRUAL BASIS.
AFFILIATES AND CONTROLLED COMPANIES.

FINANCIAL INCOME AND EXPENSES.
INTEREST AND PENALTY INCOME AND EXPENSES.
ITEMS VALUED AT MARKET PRICE.
DEFERRED TAXES AND CONTRIBUTIONS.
MANAGEMENT REPORT AND EXPLANATORY NOTES.
RESULT DIFFERENCE.

MAIN CHANGES:

INSTRUCTION CVM NO. 191/92 is inserted in a context of evolution of accounting standards, and its main objective was the introduction of improvements, in accordance with the goals previously established for improving the quality of accounting information, in line with market demand and the maturation of the process of preparing financial statements in constant purchasing power currency. The main changes introduced refer to the refinement of procedures applied to monetary and non-monetary items, as follows:

every non-monetary item must be maintained in Accounting Monetary Unit (UMC), from the date of its formation, regardless of its renewal period, respecting the concept of materiality;
every provision must also be maintained in UMC, from the date of its formation;
every non-monetary item must be recorded, upon its formation, at present value;
every monetary item subject to discount must be maintained at present value;
present value adjustment must be applied to all transactions forming monetary assets and liabilities fixed in advance and subject to discount, regardless of the financial realization period, respecting the concept of materiality;
every discounted value of a monetary asset or liability must be deducted from the revenue or asset/expense identified with it;
every reversal regarding present value adjustment of a monetary item must be treated as nominal commercial financial income or expense, to be compared with the inflationary loss or gain on the corresponding monetary asset or liability, and its disclosure must be made distinctly from traditional financial income and expenses.

PRESENT VALUE ADJUSTMENT:

INSTRUCTION CVM NO. 191/92 dealt with the present value adjustment as follows:
"Art. 5º - Monetary assets and liabilities, arising from fixed-rate operations, shall be translated to present value, based on the average nominal interest rate published by the National Association of Investment Banks - ANBID.
Paragraph 1º In the event of a fixed-rate financial operation involving a financial institution, the present value adjustment may be based on the interest rate effectively contracted, when the effect on the result does not represent a relevant difference compared to that produced by the interest rate provided in the "caput" of this article, observing the concept of conservatism. Paragraph 2º The quantification of the present value adjustment shall be performed on an exponential "pro rata die" basis, from the origin of each transaction. Paragraph 3º The calculation may be performed on a basis different from that provided in the previous paragraph, when the difference verified is not relevant. Paragraph 4º The provisions of this article apply to all operations, including those that do not have an asset or liability balance at the end of each month. Art. 7º Non-monetary items shall be recorded at their present value on the date of their acquisition or formation, in the manner provided in the "caput" and paragraphs of Art. 5º." INSTRUCTION CVM NO. 64/87, which dealt with the preparation of financial statements in constant purchasing power currency, explicitly defined the concept of present value adjustment. According to that Instruction, monetary assets and liabilities that embedded an inflationary expectation should be brought to present value, to the balance sheet date, based on the rate practiced by the company in its credit sales/purchases or based on the variation of the BTNF. Subsequently, INSTRUCTION CVM NO. 191/92 expanded this concept, reaching all fixed-rate credit transactions, so that financial statements would reflect values representative of the balance sheet date, and not the maturity date, with the application of the ANBID nominal interest rate.

In fact, the concept of present value adjustment does not aim to purge inflationary expectations embedded in assets/liabilities said to be "not formally indexed". Strictly speaking, it is applicable to interest, but it was extended, given our reality, to include monetary variation. By this concept, the current or present value of a receivable asset is lower than the value expected to be received at its maturity. Obviously, in an inflationary environment, the higher the inflation (or inflation expectation) and the longer the maturity period, the greater tends to be the distortion caused by the lack of present value adjustment. This procedure is the only one that allows the homogenization of spot operations with credit operations, enabling the comparability of financial statements of various types of companies, regardless of whether they operate predominantly in spot or credit transactions. Regarding fixed-rate credit transactions, without explicit incidence of interest, although INSTRUCTION CVM NO. 191/92 did not address the subject, it is recommended to adopt the present value adjustment on values to be received and paid under these conditions, whenever the effects are relevant, considering the real interest rate being practiced in the market, for risks and similar terms, in post-fixed operations. Therefore, since it constitutes a technically adequate procedure, the adoption of present value adjustment should not be limited only to financial statements in constant purchasing power currency. Strictly, if we perform a careful reading and interpretation of articles 183 and 184 of LAW NO. 6.404/76, we can verify that its application also extends to commercial bookkeeping, as follows:
"Art. 183. In the balance sheet, the elements of the asset shall be evaluated according to the criteria:
rights and credit titles, and any securities not classified as investments, at acquisition cost or market value, if lower, already prescribed ones shall be excluded and adequate provisions made to adjust them to the probable realization value, and an increase in market value shall be admitted for registration of monetary correction, exchange variation, and accrued interest. Art. 184. In the balance sheet, the elements of the liability shall be evaluated according to the following criteria:
obligations, charges, and risks, known or calculable, including income taxes payable based on the result of the fiscal year, shall be computed at their updated value up to the balance sheet date; (emphasis added) obligations in foreign currency, with exchange parity clauses, shall be converted into national currency at the exchange rate in force on the balance sheet date; (emphasis added) obligations subject to monetary correction shall be updated up to the balance sheet date. " (emphasis added)

It is evident the legislator's concern in establishing that all assets and liabilities must reflect, according to the criteria fixed in the Law, their value on the balance sheet date and not on the date of their receipt/payment (future value). The references to the balance sheet date and up to the balance sheet date demonstrate this very clearly. Considering the legal mandate, provided in Art. 177 of the corporate law, of application of the accrual basis, it is not feasible to imagine that the legislator would be incoherent in producing the legal text, allowing a property evaluation to be out of sync with the cited accounting principle. Thus, the CVM again manifests its understanding that the concept of present value adjustment should also be adopted in commercial bookkeeping, since it is a technically adequate procedure, in addition to finding support in corporate law. Therefore, even if not required, it is a correct procedure to be adopted by publicly held companies in their commercial bookkeeping. We emphasize, however, that it is up to each publicly held company to evaluate the fiscal effects resulting from it. The present value adjustment provided for in INSTRUCTION CVM NO. 191, of July 15, 1992, aims to translate the balance sheet values into the currency of the closing date of the period and the recognition of revenues and expenses in respect of the accrual basis. It means eliminating from equity and results values not yet realized. However, the adjustment should not be interpreted as a way to anticipate results to occur in a subsequent period, as there are monetary assets and liabilities that are in the currency of the balance sheet date and will suffer inflationary effects, generating losses and gains, which effectively belong to subsequent periods. Classic examples of values not subject to discount are advances to employees, salaries payable, and dividends payable not monetarily updated. Classic examples of values subject to discount are receivables from credit sales and accounts payable to suppliers, when fixed in advance. The discounted values of assets and liabilities are future nominal financial income and charges from credit operations carried out, which must be appropriated at their proper time and will be subject to comparison with inflationary losses and gains incident on the respective monetary assets and liabilities, during the same period. These net values may cease to be appropriated as expense and be classified in the asset, in the event that the liability values are financing fixed assets under construction, during the period preceding their entry into service.

MONETARY ITEMS:

The present value adjustment brings as a reflection a reduction in the value of a monetary asset, in counterpart to a debit in an income account, or reduction of a monetary liability, in counterpart to a credit in an asset or expense account.
The adjustment incident on a property monetary item will be reversed, over time, to a nominal commercial financial income account, in the case of a monetary asset, or nominal commercial financial expense, for monetary liabilities.
Values thus registered in commercial financial income and expenses will be compared with inflationary losses and gains on monetary assets and liabilities, respectively, to determine the real results of these credit operations.
It is important to remember that the identification of commercial financial income and expenses, presented distinctly from sales revenue and the cost of the asset or expense, will only be done in an adequate manner if all transactions are submitted to the present value adjustment.
A large part of publicly held companies had been carrying out the present value adjustment only on the end-of-month or end-of-quarter balances of the accounts subject to this adjustment. With the maintenance of this procedure, there will be a bias in the information, as the revenues and expenses that identify with the end-of-period balances will have their values adjusted and the others will not. Thus, no transaction can remain without its due adjustment.

INITIAL CALCULATION OF PRESENT VALUE ADJUSTMENT:

The main problems that publicly held companies are encountering to apply the standards on present value adjustment are related to a not very clear disclosure of the criteria that can be used at the level of general accounting, considering that there is a lack of information from billing, purchasing, and other systems that would allow the adoption of this calculation at the origin of each transaction. To replace the analytical process, several alternatives can be adopted, based on aggregated data, as follows:
Presenting it in another way, we have:
MONTHLY - discount the monthly movement (of sales or purchases) by the average monthly ANBID rate (arithmetic), for the average receipt/payment period of transactions carried out in the month; BIWEEKLY - discount each biweekly movement (of sales or purchases) by the average biweekly ANBID rate (arithmetic), for the average receipt/payment period of transactions carried out in the fortnight; WEEKLY - discount each weekly movement (of sales or purchases) by the average weekly ANBID rate (arithmetic), for the average receipt/payment period of transactions carried out in the week; DAILY - discount the daily movement (of sales or purchases) by the daily ANBID rate, for the average receipt/payment period; DAILY BATCHES - discount the daily movements (of sales or purchases), subdivided into groups according to each maturity, by the daily ANBID rate, for each maturity. All these criteria can be adopted, provided that the distortions are not relevant. The first alternative is the least refined and, therefore, subject to more distortions. A company that has a billing formed homogeneously throughout the month and whose invoices have a single maturity period will have better conditions to adopt this criterion, but it is still important to check if the ANBID rate has not suffered abrupt variations throughout the month. Based on a simple numerical example, related to the billing of a publicly held company, which issues only three invoices daily, with different maturities, determined by terms granted from the date of each billing (15, 30, 45 days, etc.), the following table was prepared, which will serve as a basis for the presentation of the calculation hypotheses previously commented. The alternative "a" presented before could be calculated as follows:
Monthly Billing $ 1,869,000
Average Monthly ANBID Rate 37.62% p.m.
Average Receipt Period 33 Days
Average Monthly ANBID Rate Referent to 33 Days 42.09% Present Value of Billing (1,869,000/1.4209) $ 1,315,364 Adjustment Value (Commercial Fin. Inc. of the Period 33d) $ 553,636 In this way, the billing of the month will reflect a gross sales revenue, at present value, of $ 1,315,364. On the other hand, there will be the registration of a nominal commercial financial income of $ 553,636, to be appropriated to the result over 33 (thirty-three) days, considering a portion, therefore, within the billing month itself. If sales occurred, on average, in the middle of the month, assuming a normalized distribution within the period, that portion would be calculated for a period equivalent to 15 days, as commented in item 3.1.2.

Alternative "b" refers to the discount of transactions occurring over a fortnight.
Taking the values from the table previously presented, the calculations would be as follows for each fortnight:
Billing of the First Fortnight $ 1,086,000
Average Monthly ANBID Rate in the Fortnight 36.66% p.m.
Average Receipt Period 33 Days
Average Monthly ANBID Rate for 33 Days 40.996% Present Value of Billing (1,086,000/1.40996) $ 770,235 Adjustment Value (1,086,000 - 770,235) $ 315,765 In the following fortnight, at an average monthly ANBID rate of 38.9% p.m., adjusted for an average receipt period of 33 days, the present value of the billing would be: $ 545,474. Alternative "c" - present value discount of transactions of each week - would be calculated as follows, considering the data from the table presented above (exemplary calculation of the first week):
Billing of the First Week $ 265,000
Average Monthly ANBID Rate in the Week 34.44% p.m.
Average Receipt Period 37 days
Average Monthly ANBID Rate for 37 days 44.05%
Present Value of Billing (265,000/1.4405) $ 183,964 Adjustment Value (265,000 - 183,964) $ 81,036 The calculation of alternative "d" - present value discount of the total of daily transactions, according to their average receipt period - would be done as follows, for each day, taking the same data, in the following manner:
Billing of Day 1 $ 70,000

Daily ANBID Monthly Rate of Day 1 36.39% p.m.
Average Receipt Period 51 days
Daily ANBID Rate of Day 1 Equivalent to 51 days 69.48% Present Value of Billing (70,000/1.6948) $ 41,302 Adjustment Value (70,000 - 41,302) $ 28,698 The calculation of alternative "e" - present value discount of transactions of each day, grouped by common maturity - would be done as follows, using the numbers referring to the second day of September from the table previously presented:
Billing of Day 02 Due in 45 days $ 45,000
Monthly ANBID Rate for day 2 33.9% p.m.
Receipt Period 45 days
ANBID Rate of Day 02 Equivalent to 45 days 54.94% Present Value of Invoices (45,000/1.5494) $ 29,043 Adjustment Value (45,000 - 29,043) $ 15,957 By adopting this alternative, it would be necessary to promote the adjustment for the third invoice of the example, with a receipt period of thirty days. If a company works, for example, with three receipt periods and operates for 20 days in a month, it will have, at most, sixty batches of billings to be submitted to this present value adjustment process. The table below shows the present values of the monthly billing of the example presented, calculated according to each alternative and the respective differences compared to the most refined criterion (e), of daily batch adjustment with the same maturity. From the variations presented in the table above, it can be observed that all criteria applied to the numbers of this example produce values with irrelevant differences. Tests such as these can be carried out to help in the choice of the alternative to be adopted, it being necessary, however, the evaluation of its adequacy from time to time.

It is important to highlight, however, that each company may present a different situation, which deserves a specific analysis, and it is also possible to create new alternatives, such as the decennial method and others, perfectly accepted, provided that the property evaluation is adequate.
In this specific analysis, the company must consider other monetary items subject to discount and not included in the example, as well as treatment for sales returns, as the concept of present value also applies to them.

DETERMINATION OF PRESENT VALUE AT THE END OF THE PERIOD:

At the end of the month, there are two alternatives for calculating the present value:

The discount is performed adopting the rate of the time (of the closing of the period); or
The same rate used at the origin of the transaction is maintained.
Adopting the end-of-month ANBID rate to perform the present value discount, taking the example of alternative "a" of item 3.1.1, we would have:
if the ANBID rate is rising and it is a monetary asset at present value, the application of conservatism could be alleged, requiring the calculation at the current rate. This allegation should be a matter of attention in the event of high receipt periods (above two months, with the current level of inflation) and/or sharp growth in the ANBID rate, with a relevant effect on the result of the period and equity.
if the ANBID rate is falling and it is a monetary liability, the same reasoning applies.
from an operational point of view, the adoption of the end-of-month ANBID rate for the determination of present values that will appear in trial balances and balance sheets makes the process simpler, as all values, with their various maturities, will be adjusted based on a single rate, dispensing with the memories of previously used rates, especially when more refined hypotheses are being used (several batches of billing or purchases, etc.).
from a technical point of view, the adoption of the annual rate is in line with the most recent accounting advances of adopting market value for various financial instruments.
In all cases, it is important that, once a criterion is adopted, it is maintained over time, consistently, and its alteration is carried out through advantages in terms of information quality.

NON-MONETARY ITEMS

Non-monetary items must be recorded at their present value at the origin of each transaction.
The recording can be made directly by the net value or by using a contra account.
Adopting this latter alternative, the realization of the asset implies the appropriation of a portion of that account to rectify the corresponding expense.
In the case of stocks and other non-monetary assets with the same characteristics, the rectification of their value requires only one account for each subheading that one wishes to control. In fixed assets, the contra account is applicable to the value of goods and rights and to accumulated depreciations, there being, therefore, credit contra accounts for gross fixed asset values and debit contra accounts for accumulated depreciations. For control purposes, the use of the contra account proves to be a practical alternative. Let us see an example:
In the purchase of a stock item for a fixed value of $ 1,000, payable in 30 days, whose present value was $ 750, the main stock account would register a debit of $ 1,000 and there would be a credit entry to a contra account of that, with a title, which could be "PRESENT VALUE ADJUSTMENT", or another, in the value of $ 250. The main problem of operationalizing this process is that it requires the adoption of a criterion for appropriating the result of the balance of the said contra account. This criterion must aim to transfer the present value adjustment values to rectify the cost of goods or products sold at the same time that the stocks identified with them are written off. Each company must find a criterion that is most suitable for it. Something simplistic would be to write off the contra account in the same proportion as the stocks are written off as expense, always maintaining a balance in that account compatible with total stocks and according to the average payment period of these and discount rates, which would be valid for a company whose stock items had a similar renewal period or, in the event of differentiated turnover, that all were acquired with fixed values and similar terms. When only some items are acquired under the conditions requiring the present value adjustment, this value can be appropriated to the result within the average renewal period of these stocks. In fixed assets, the present value discount value, maintained in a contra account, must be appropriated to the result, adjusting the depreciation/amortization expense, or to the cost of other assets (industrial products, fixed assets under construction) in the same proportion that the acquired asset is depreciated or amortized.

MONETARY UPDATE

CVM ORIENTING OPINION 27

CVM INSTRUCTION NO. 191/92 establishes that all non-monetary items, including those not classified in permanent assets and shareholders' equity, must be controlled in UMC (Constant Purchasing Power Monetary Unit), at their present value, from the date of their formation or acquisition, regardless of the renewal period. CVM INSTRUCTION NO. 64/87 allowed the non-monetary update of stocks and other non-monetary items that renewed within a period of less than 3 (three) months, as a way to facilitate the introduction of full correction. Therefore, an evolution of the process is being verified, with the greater coverage of monetary update and the concept of present value, compatible with the development of the securities market and the agents participating in it.

In the update of non-monetary items, the main problem should be related to the stock control system, so that all acquisitions, manufacturing expenses, transfers, returns, and unit value can be expressed in UMC, from present value costs. This is an important measure from the point of view of presenting financial statements more representative of the company's economic-financial situation, as well as at the managerial level, by presenting contribution margins and results closer to reality.

However, if the company does not have a system to meet the need to adopt a constant monetary unit for the evaluation of stocks and the cost of goods or products sold, an alternative mechanism may be adopted, provided that it does not cause relevant differences in asset evaluation and result determination.

The possibilities of simplifying mechanisms are various and below we present one of them:

PEPS CRITERION

The basis of everything is the assumption that stocks move by the PEPS method - first in, first out - even if another is the criterion for stock evaluation.

From the premise cited above, the value of the accounting balance, without correction, must be composed of purchases made in the last months, added, in the case of industry, to other production costs.

Once the monthly portions forming the balance are determined, conversion to daily or average monthly UMC is performed.

By applying this criterion, corrected monthly stock balances at present value are obtained.

Additionally, taking the purchases and other production inputs for the period, it is possible to determine the cost of goods or products sold (COGS or CPS) in currency of constant purchasing power, through the formula:

COGS or CPS = IB + P + IP - EB;

where: IB = initial stock;

P = purchases;

IP = other production inputs; and

EB = final stock.

Therefore, we will be abandoning the numbers from commercial bookkeeping and using those obtained by an auxiliary process. Thus, other criteria may be used, with a greater or lesser degree of refinement, provided that the distortions are not relevant.

As an example, let us look at the case of a company that renews its merchandise stocks in a period of less than sixty days and wants to know the value of its stock in December at the corrected cost. We will assume a stock in December/x1 at the original cost of $ 200, purchases in November/x1 of $ 90 and in December/x1 of $ 120. Assuming that the existing balance corresponds to the most recent purchases, it can be observed that the November and December purchases are the ones forming this stock. Therefore, it would be the case of correcting the $ 120 (December purchases), from each day or from the middle of the month to the end of the month, and doing the same with the last November purchases, in order to complete the stored value, that is, $ 80 updated to the end of the period.

With final and initial stocks evaluated on the same bases and placed in the same currency, it would only remain to know the purchases of the period between the two dates, also in the same currency, to apply the aforementioned formula and determine the value of the cost of goods sold updated to the end of the period.

It is relevant to highlight that the monetary update of stocks should not be done without the prior adoption of present value adjustment procedures, to avoid the overvaluation of merchandise, raw materials, and other production inputs, with undesirable effects on asset evaluation and the determination of periodic results.

IRRELEVANT NON-MONETARY ITEMS

In the case of non-monetary items, the standard provides for control for their maintenance in constant currency, but accepts the non-adoption of this procedure in the case of irrelevant values, dispensing with the treatment of monetary items. As a consequence, these values, in constant purchasing power currency accounting, suffer reduction, due to the wear of the purchasing power of the current currency.

This reduction in value must be appropriated as other operating expenses or revenues, depending on whether it refers to non-monetary assets or liabilities, respectively.

ACCRUAL BASIS

The basic standard to be used for the preparation of financial statements in constant purchasing power currency, in addition to other fundamental accounting principles, is that of full compliance with the accrual basis of the period, which, in this case, can be a month or a day.

Rigor in respecting the accrual basis within a certain periodicity is fundamental, because commercial bookkeeping is the basis for the conversion of the national current currency, used in the formation of data, into the unit of monetary capacity of constant purchasing power, the UMC.

This rigor, however, needs to be viewed with care, so as not to lead to extreme positions, which are also undesirable.

It is expected that, in the case of adopting the daily variation of the UMC, the acquisition dates of the main items forming cost, such as stocks, fixed assets, other material expenses, and some third-party services, as well as the main sales revenues, will be respected, and their records will be made at their present values for the days referring to each transaction.

On the other hand, there are revenues and expenses that are formed over time, such as capital yield revenues and some service revenues, as well as personnel expenses and some third-party services. In these cases, records can be made at the end of each month, respecting the present value of that date.

The same reasoning applies to other cases. The main concern with the adoption of the accrual basis is to allow the UMC generated in the system to correspond to the real values of the transactions carried out.

As an example, in a monthly result determination system, but in daily-based constant purchasing power currency, expense values will be correctly accounted for, without the recording of gain or loss with inflation, if salaries and rent expenses for the competence of the month itself are accounted for at the end of the month, in the case of payment on that date.

In the event of the application of the monthly average method, a personnel expense value, for example, thus accounted for, will be converted by the monthly average UMC and there will be an inflationary gain on the monetary liability without charges originated by this operation, which, at the end, will adjust the increase in UMC produced by the calculation on the monthly average basis. Let us look at the case:

salary expense of $ 10,000 in January, with the following values for the UMC: 31.12.x0 = 10.00, average of 01.x1 = 11.00 and 31.01.x1 = 12.10;
the expense in constant purchasing power currency would be (10,000 : 11.00 =) 909.0909 UMC; there would be an inflationary gain of [10,000 x (12.10 / 11.00 - 1) / 12.10 =] 82.6446 UMC which, deducted from the expense of 909.0909 UMC, would result in a net expense of 826.4463 UMC;
equal to the net expense (10,000 / 12.10 = 826.4463) that would be obtained by applying the daily method, with the record at the end of the month.

Therefore, for a payroll, whose payment occurs only at the end of the month, the information is considered adequately prepared with only one record on the disbursement date. It is important to observe the conversion to UMC taking the payment date as reference. Thus, if there is a biweekly, weekly, etc. advance, this fact will be determinative for the definition of the expense value in constant purchasing power currency.

In the same line, if the payroll payment remains for the following month, the UMC record would be made at the end of the competence month and there would be an inflationary gain on this monetary liability, calculated for the corresponding days, which would be credited against personnel expenses.

Respecting the accrual basis means making all due appropriations on a monthly basis, even for values formed over the year, such as income tax provisions, contingency provisions and vacations, profit participations, etc.

When it comes to values formed over the year, special care must be taken in the constant purchasing power currency accounting system, especially because commercial bookkeeping normally includes in the same result account values representing real asset variation and values of simple monetary variations of assets and liabilities, which cannot be considered in the conversion to UMC or, if considered, must be subsequently purged, analogously to the following examples:

A company accounts for a contingency or vacation provision of $ 1,000 in January and in February updates it to $ 1,300, debiting the $ 300 in the provision expense account itself. In the conversion to strong currency, assuming UMC values of $ 100 in January and $ 130 in February, the constant purchasing power currency accounting will record 10 UMC in January and 2.307692 UMC in February, while the total expense should remain as 10 UMC, but in the full correction process there will be an inflationary adjustment value of 2.307692 (1,000 : 100 - 1,000 : 130 = 2.307692) UMC on the liability related to the provision, which must, in this case, be deducted from the value of the corresponding expense, in order to adjust its balance. If the monetary variation had been appropriated in an adequate monetary update account, this would have its balance canceled.

Attention must be given to the calculation of inflationary losses and gains on monetary assets, so that their effects are adequately reflected in the result accounts identified with them.

AFFILIATES AND CONTROLLED COMPANIES

In no case is there an obligation for closed affiliates and controlled companies to make full correction of all their financial statements. However, since the investor needs to adapt the statements of the investees to the principles and methods that she, the investor, uses, it is important to verify the need for eventual adjustments to the balance sheet of each affiliate and controlled company, before applying the equity method.

For example, when the investor corrects her stocks and adjusts her monetary items to present value, she cannot have the equivalence applied to balance sheets of investees without these adjustments, except in the case of irrelevant reflections.

Thus, it is not necessary for these adjustments to be applied to the balance sheet to have the new values of shareholders' equity of the investees (not forgetting to make them net of income tax and social contribution).

For the other statements, there is no obligation to apply full correction except in cases where it becomes mandatory to prepare consolidated statements in constant purchasing power currency or specific reports, to be sent to the Securities and Exchange Commission and the market, together with the parent company's information.

FINANCIAL REVENUES AND EXPENSES

As previously commented, the present value adjustment is now widely applied after CVM INSTRUCTION NO. 191/92, reaching all sales, purchases, etc. transactions, and consequently, allowing the recording of non-monetary assets, revenues, and expenses at their equivalent cash values. In addition, this standard promoted another advance by segregating from the value of sales and expenses/assets the portions embedded therein referring to yields and financial charges. Thus, the values discounted from monetary assets and liabilities, when added to the same assets and liabilities, are recorded as nominal commercial financial revenue and nominal commercial financial expense, respectively.

These new species of financial revenues and expenses receive the same treatment as those originating from financial operations, that is, they must be purified by the deduction of inflationary losses and gains on the assets and liabilities identified with them.

Constant purchasing power currency accounting must present, in the result statement, distinctly, financial revenues and expenses of two species, those originating from traditional financial transactions and those resulting from commercial activities, which will now receive the denomination of real commercial financial expenses and revenues.

It may happen that a negative real financial revenue arises, when nominal rates do not produce enough to cover the effects of inflation. In this case, we continue to maintain the name of financial revenue, even if we may call it "negative". We must not, under any circumstances, call it financial expense because the sign has changed. The expression financial expense is linked to the raising of resources. The same applies to real financial expense.

In the result statement in constant purchasing power currency, traditional real financial revenues must be present, immediately followed by real financial expenses - or their net balance - discriminating in a table or explanatory note their components.

Following the same line, there must be a clear and distinct disclosure for real commercial financial revenues and expenses, with the disclosure of their main origins in explanatory notes.

Regarding financial expenses, it would be most appropriate to classify them after operating profit, so that this represents only the result produced by the assets, regardless of how these assets were financed. Thus, we would have a much more evolved concept of operating profit.

For better disclosure, real financial revenue and real financial expense are what should appear in the result statement in constant purchasing power currency. There is no need to disclose the value of corrected financial revenues and show the value of losses on the assets that generated these revenues. Consequently, in the result statement, or even in an explanatory note, there is no need, and perhaps it is not even convenient, to disclose the two elements. It is most appropriate that only the values of real financial revenues and real financial expenses be disclosed.

For the operationalization of the full correction process, it is important that daily control of the real result be maintained, especially for financial applications and other volatile monetary items, when the values are relevant and the company is using the mixed method (daily for non-monetary items and monthly average for monetary items). This parallel control is important for providing information necessary for the adjustments to be applied to the numbers of previous full correction reports, since the mixed criterion is an operational simplification to obtain a result as if all accounting were maintained by the daily method.

Therefore, whenever a certain monetary element does not present a normalized behavior throughout the period or presents abnormal balances at the end of the month, an adjustment in the result accounts will be required, for the adequate recognition of inflationary effects.

It is emphasized that real financial expenses, commercial or from loans/financing, with financial institutions or other entities, must be allocated to permanent assets whenever they result from supplies/financing for construction or expansion of the installed plant, during the period preceding its entry into operation.

INTEREST AND PENALTIES REVENUES AND EXPENSES

When a company has, for example, receipt of bills of exchange producing revenues resulting from delay due to non-settlement within the agreed period, it is common to treat such receipts as financial revenues.

The same occurs with respect to delay in the case of supplier payments.

For the purposes of full correction, it is important that expenses and revenues for delay originating from monetary accounts that generate financial revenues and expenses, or subject to present value adjustment, be added to the society's commercial financial expenses and revenues, since they will be offset against the gains and losses of the active and passive monetary accounts that generated them.

This orientation is based on the practical aspect, because, at a technical level, if relevant values are involved, it would be convenient to separate these revenues and expenses for delay and associated monetary assets and liabilities, in order to determine and disclose values of real financial revenues and expenses for delay.

ITEMS EVALUATED AT MARKET PRICES

Art. 10 of CVM INSTRUCTION NO. 191, of July 15, 1992, determines that revenues and expenses generated by non-monetary items evaluated at market prices must be adjusted, so that they represent the real variations of the quotations of those asset items.

Therefore, the values representing the loss of the purchasing power of the currency affecting the assets and eventual liabilities thus evaluated must be discounted from those nominal revenues and expenses, so that a nominal revenue, thus adjusted, can correspond to a real asset variation.

In the event that an asset produces a nominal loss, it will be increased by the inflationary effects on the capital applied and its loss value will be increased.

Real revenues and expenses, resulting from the real variations of market prices, shall be classified as revenues or expenses, insofar as they represent positive or negative asset variations, respectively. In this case, an asset could generate an expense, as it is not fixed income, but an operation in a risk market subject, therefore, to fluctuation.

DEFERRED TAXES AND CONTRIBUTIONS

The non-adoption, in the statements of commercial bookkeeping, of procedures established by CVM INSTRUCTION NO. 191/92, such as monetary correction of stocks and present value adjustments, implies the recognition of a deferred income tax in the financial statements in constant purchasing power currency.

In each balance sheet, the value of deferred income tax, in assets or liabilities, must be recalculated and adjusted to the net balance of the difference existing in shareholders' equity at the end of the new social year. The difference in taxes and contributions on the result, in quantity of UMC, will be computed in the result statement of the social year ending.

This calculation must always take into account the effective rate of the company, that is, the value in UMC must be calculated from the following reasoning: how much more or less income tax would the company be paying, if its commercial bookkeeping had appropriated all values obtained from constant purchasing power currency accounting. For each company, this value, more or less, must consider the additional income tax, social contribution, incentives, and situations peculiar to it.

If, in constant purchasing power currency accounting, there is, for example, a reduction in profit, income tax expenses and other tax charges on the result must be reduced and the higher amount to be paid must be considered as an advance of tax to be registered in assets, according to the realization period.

This asset should only be registered in the event that the society has the condition of predicting the recovery of the value with future positive results.

In the event that constant purchasing power currency accounting reveals, for example, a profit greater than that of commercial bookkeeping, the increase in income tax expense and other taxes must be recognized as a future or deferred payable value.

MANAGEMENT REPORT AND EXPLANATORY NOTES

A prerequisite for information to be clear, understandable, and not misleading is that it be expressed in the monetary standard that allows easy comparisons and is identified with the monetary standard used in the presentation of asset values and other statements. To meet this objective, the CVM standard establishes that explanatory notes and the management report must disclose their values in constant purchasing power currency, in accordance with the financial statements.

Among the disclosures in explanatory notes required by CVM INSTRUCTION NO. 191/92, we have the index applied, daily, monthly average, or mixed, the alternative adopted for present value adjustment, transaction by transaction, or other simplified method, and relevant gains and losses not identified with result accounts.

An explanatory note reconciling the result determined in commercial bookkeeping and the result determined in constant purchasing power currency statements must be presented, as well as reconciling the respective Shareholders' Equity.

This Explanatory Note must disclose all items and values of reconciliation, specifying those that are net of opening balance sheet adjustments (correction of non-monetary elements and discounts of values adjusted to present value).

As an example, we present a model of a table demonstrating the reconciliation of net profit and shareholders' equity between commercial bookkeeping and constant purchasing power currency statements, on 31.12.x1, with all its values expressed in currency of that date, to be prepared with more columns, in the event of consolidated statements:

Description NET PROFIT SHAREHOLDERS' EQUITY
Commercial Bookkeeping 1,000 10,000

Stock Update to Present Value - 12/31/X1 100 100 Stock Update to Present Value - 12/31/X0 (-)130 Adjustment to Present Value of Accounts Receivable - 12/31/X1 (-)120 (-)120 Adjustment to Present Value of Accounts Receivable - 12/31/X0 140 Adjustment to Present Value of Suppliers - 12/31/X1 60 60 Adjustment to Present Value of Suppliers - 12/31/X0 (-) 40 Equity Method 30 180 Others - Net Value 1 2 Diff. Provision for Income Tax and Social Contribution (-)4 (-)14 Accounting in Constant Purchasing Power Currency - Constant Acquisition 1,037 10,208

From INSTRUÇÃO CVM Nº 201, of December 1, 1993, publicly held companies may disclose only financial statements in constant purchasing power currency, even with a difference in results compared to commercial bookkeeping, in which case, in addition to the differences in results and shareholders' equity, the other titles and balances of equity accounts that appear different from the balance sheet in constant purchasing power currency must be disclosed.

DIFFERENCE IN RESULTS

It is common to imagine that the effect on the result of an additional procedure adopted in constant purchasing power currency accounting, compared to commercial bookkeeping, is only that related to the variation occurring at the end of the fiscal year. For example: the first idea that arises when a company corrects its inventory is that there will be an increase in the result. This idea is false, as the correction of inventory at the end of the fiscal year is not admitted without adopting the same criterion in the opening balance sheet of the fiscal year, against accumulated profits or losses, as an adjustment for prior periods, as provided for in article 20 of INSTRUÇÃO CVM Nº 191/92.

Since the profit or loss of the fiscal year is the result of a difference in equity between the beginning and the end of the period, the effect of inventory correction will be positive or negative depending on the initial and final balances, the turnover of these inventories, and the inflation level at the end of each period. If inventories are growing and the other variables remain constant, the effect on the result should be positive; if inventories are declining, the effect should be negative. Obviously, the same occurs when inflation is rising or falling and when inventory turnover is becoming slower or faster. According to the level of lag in the asset value at each date, initial and final, there will be an effect on the result. Whenever the lag is greater at the end of the period compared to the beginning, the result, in constant purchasing power currency, will undergo a positive variation, and the inverse is also true. Consequently, whenever there is a significant change in inventory levels, this fact must be disclosed in an explanatory note.

Regarding the present value adjustment, the same applies; the reflection in terms of result for a period is established by the difference in balances, in the same currency, in equity accounts between the two balance sheets, since in the fiscal year in which this procedure begins, adjustments must also be made in the opening balance sheet.

The difference in shareholders' equity, on the other hand, will be determined by the sum of the differences in equity balances of all other accounts in the balance sheet in constant purchasing power currency, including deferred taxes and contributions, compared to commercial bookkeeping. The illustrative explanatory note on these differences presented in the previous item gives an idea of these facts.

Signed Original by
SALVADOR AUGUSTO BENTO
Head of the Special Projects Advisory Office

Signed Original by
ANTÔNIO CARLOS SANTANA
Superintendent of Accounting Standards and Auditing

Approved by the Board, on January 27, 1994.
Publish.

Signed Original by
THOMAS TOSTA DE SÁ
President

CVM Orienting Opinion 27