CVM Orienting Opinion No. 14 of December 14, 1987 — CVM — BR

CVM ORIENTING OPINION NO. 14, OF DECEMBER 14, 1987.

SUMMARY: Procedures to be observed by public companies in the preparation and dissemination of supplementary accounting statements in currency of constant purchasing power. Intelligence of provisions of CVM Instruction No. 64, of May 19, 1987. Approval of Technical Communications Nos. 04/87 and 05/87 of IBRACON - Brazilian Institute of Accountants, of November 30 and December 10, 1987, respectively.

Introduction

Several doubts have been raised regarding certain aspects of CVM INSTRUCTION NO. 64, of May 19, 1987. In order to disseminate this Commission's understanding regarding various procedures contained therein, this orienting opinion is issued.

Base Period for Correction

The hypothesis has been raised of performing full monetary correction not based on appropriation values under the accrual basis at a monthly level, but rather based on quarterly income statements. The understanding is that such quarterly-based correction is not possible, nor is it compatible with the explicit determinations contained in the Instruction (see Art. 6 and 7).

In a situation of high inflation rates, the very use of a cross/OTN parity maintained for an entire month is already technically quite questionable. Even more so is the use for an entire quarter of an OTN value, even if it is the effective average of the OTN for the three months.

The use of quarterly statements based on the average OTN could be thought of as viable for the hypothesis that the company opts for full retroactive correction for the 1986 statements. However, despite the low inflation rates, after the cross plan, the technical problem of the 1st quarter remains, when high inflation rates mixed with a deflation rate. At most, quarterly-based correction could be accepted for the 1986 fiscal year, provided that, for the quarter in which there was this mix of such different national currency devaluation rates, an adequate segregation was used; that is, for the January/March quarter of that year, the separation of the January/February bimonth from the month of March would be performed.

If the company opts for this form, it must clearly disclose such fact in an explanatory note.

In any case, for the 1987 fiscal year onwards, under no circumstances will the quarterly base be usable.

CVM ORIENTING OPINION NO. 14, OF DECEMBER 14, 1987.

Adjustments and Present Value

As determined by CVM INSTRUCTION NO. 64/87, values due on a date exceeding 90 (ninety) days from the end of the social year shall be prefixed and not adjusted to the currency of the end of the fiscal year; they shall be brought to present value. This means that not all values contracted at fixed rates shall be brought to present value. Loans given or taken under these conditions must already be in the primary financial statements adjusted by the charges yet to be appropriated. And this situation is not common only to financial institutions but also to other corporations. In this case, the fixed values are already duly adjusted to present value, even if the appropriation of charges or revenues contracted at predetermined rates is being made on a linear basis instead of an exponential one.

In the specific case of the discounted bills account, it must also be remembered that, although its balance may be at future value and, eventually, with values subject to a term exceeding the 90 (ninety) days cited, there is no need to bring those amounts to present value, since, in the financial statements under corporate law, the charges related to such discounts are being appropriated gradually under the accrual basis. This means that, in the balance sheet, the bills account reduced by the charges yet to be appropriated translates to a value adjusted to the currency of the balance sheet date (even if such charges are included in prepaid expenses).

Doubts have also been raised regarding taxes to be collected or paid, when not subject to any form of monetary update (for example, the income tax payable related to a closed social year is subject to update by the variation of the OTN and, therefore, should not be brought to present value). This is the case, for example, of some situations of the ICM, IPI, PIS, etc. accounts. The doubts concern technical adequacy: should these accounts be brought to present value? Theoretically, if the values to be collected from these taxes originated from operations in which there was an addition of overvaluation, as a consequence of expected future inflation, the adjustment to present value should be applied to such taxes. But, even in this situation, it should be noted that an operation may be being made for receipt in 60 (sixty) days, but the tax originating from the transaction is collected in 180 (one hundred and eighty days). The adjustment of the tax to present value would bring an increase to the result in net terms. This technique contradicts the Principle of Prudence (see CVM DELIBERATION NO. 29, of February 5, 1986). Hence, the understanding is that only the adjustment to present value of accounts of this nature is acceptable if, effectively, within them, there is embedded an increase in value compatible with the calculation of the overvaluation of the operations to which they refer.

In hypotheses where there is no such compatibility, these accounts shall be maintained in the balance sheet without adjustment, which will entail the recognition of monetary gains to be appropriated in the subsequent fiscal year, when the effect of the new inflation applies to them.

In commercial transactions originating the balances of bills receivable, suppliers, and similar, it is logical that the present value must always be calculated (obligatorily, at least, for cases where the 90 (ninety) day term is exceeded) because one always starts from the hypothesis that there was effectively an overprice due to expected future inflation.

As a final comment on this item, it is worth emphasizing that the current obligation is to bring to present value the values to be received and paid that, on the balance sheet date, have a maturity date beyond 90 (ninety) days from that date. Only those exceeding this term have, at least for now, the obligation to be brought to present value.

The present value calculation must be made based on a monthly rate equal to the arithmetic mean of the last three variations of the OTN before the end of the social year (for balance sheets closed in December, the variations of the OTN from September to October, October to November, and November to December apply). The calculation shall bring the values above 90 (ninety) days to the currency of the month of the end of the social year. Thus, if, for example, a company has credits from product sales to be received from January to May, only those receivables in the months of April and May are obligated to be adjusted to present value. The present value of credits due in April will take into account a discount of four months, and that of May of five. Clearly, with this, there is still some incompatibility in the balance sheet, as there will be values receivable in more than one currency. However, as already widely clarified, this criterion is being adopted temporarily, for reasons of simplification.

If the values in question were Cz$ 1,000.00, receivable in each of the months from January to May, the present value for December 1987 would be:
a) discount rate = 12.84% + 9.18% + 5.68% = 9.23% b) present value of April credit = Cz$ 1,000 = Cz$ 702 1.09234 c) present value of May credit = Cz$ 1,000 = Cz$ 643 1.09235 d) amount to be received in December/87:
Cz$ 1,000 + Cz$ 1,000 + Cz$ 1,000 + Cz$ 702 + Cz$ 643 = Cz$ 4,345 e) discount to be computed in the result = Cz$ 655.
(The correct would be the full discount, which would give the present value of Cz$ 3,867).

These Cz$ 655 will also reduce the 1987 result and will be considered as revenue for the calculation of the supplementary result of 1988 (V. item no. 20).

Inventories

CVM ORIENTING OPINION NO. 14, OF DECEMBER 14, 1987.

Inventories are the items that normally bring the most difficulty and complexity in the full correction of accounting statements. The simplest and correct way to obtain inventory values and the cost of products or merchandise sold is the use of inventory control in OTN. If the company starts to control all its inventories in this standard, it will automatically have the OTN quantifications for balance sheet and result purposes directly, with the most correctly determined values.

The fact that the company starts to work with its inventories controlled in OTN does not mean that it will be exempt from choosing evaluation criteria if it works with interchangeable products. It will continue to need to choose between average cost, "first-in, first-out," etc. But these calculations will now be made exclusively in OTN and no longer in cruzados. The average cost in OTN, for example, is calculated exactly the same way as it is done in cruzados.

The second best way is the maintenance of inventory control in two currencies: one in cruzados (which normally already exists practiced by the company today) and another in OTN. The control in cruzados providing the inventory and result values for corporate accounting and tax accounting purposes, and the control in OTN producing the more correct numbers of the fully corrected supplementary statements.

CVM INSTRUCTION NO. 64/87 allows, however, the use of approximate calculation criteria for inventories and, consequently, for the cost of products and merchandise sold, without the company being obliged to use inventory controls completely in OTN. One of the cited criteria is the use of the PEPS method in OTN, even if the company is using another criterion in corporate accounting, normally the average cost. In this hypothesis, the company starts its calculations from the value of inventories in cruzados, making an assessment within the following reasoning: if this value in cruzados had been obtained using the PEPS criterion, how would these inventories have been formed month by month? It suffices, therefore, to verify the formation of this inventory in each of the preceding months until the total is reached. In the case of a commercial company, it suffices to verify the volume of purchases of the last month (the month of the end of the social year), then the volume of purchases of the previous month, and so on, until a volume of purchases is reached that is sufficient to equal the value of final inventories (it is logical that the last batch, the furthest to be used normally, will be considered not by the total purchases of that last month but rather by the amount sufficient to total the final inventories). From these values obtained, it is admitted that those inventories in cruzados were formed by these purchases made in the last months, and then the correction of their values is performed.

To perform this correction, it must again be remembered that the mandatory correction covers inventories acquired more than 90 (ninety) days ago. Thus, the company is exempt from correcting the part of the inventories represented by purchases from October, November, and December (for balance sheets closed in December), only being obliged to correct those acquired from September backwards. And in this case, the correction is made for each month until December, that is, until the last month of the social year.

These calculations can be made by items or by homogeneous groups of items.

CVM ORIENTING OPINION NO. 14, OF DECEMBER 14, 1987.

Another simplified form of inventory correction consists of a proportional write-off in quantity of OTN, a proportion based on the write-off in cruzados of the inventories. The initial inventory is added to the purchases of a month in cruzados, the value of the inventories written off in cruzados is compared with this sum, and a certain percentage is obtained. After this, the quantity of OTN corresponding to the month's purchases is added. On this sum in OTN, that percentage already obtained from the cruzados operations is applied. With this, the final inventory value represents the value to be used for full correction purposes, and automatically the amount written off in OTN will go to the supplementary statement of the result.

For industrial companies, the most complete form is the synthesis, in OTN, of the values obtained by their integrated cost system and coordinated with accounting and consequently, the determination of the cost of each product or family of products in this currency. There is no need to "run" the cost system twice, once in cruzados and once in OTN. It suffices to make parallel calculations based on global values in OTN.

Still in the case of industrial companies, great care must be taken with the problem of timeframes. The rotation of finished products may be high, but when considering the rotation of raw materials, and moreover, the manufacturing time, there will be an excess over the 90 (ninety) days permitted. Thus, it is possible that in an industry, the end-of-fiscal-year inventory of finished products may have been formed by production elaborated within the last three months, but there is the situation of the raw material contained in these inventories having been acquired by the company four, five, or more months before the balance sheet closing. With this, there is the obligation not of the full correction of the finished products but at least of the amount of raw material inserted in them acquired more than three months ago.

Here is repeated the simplest and what probably has conditions to provide results - mainly for managerial purposes much more correct and complete - is the use of inventory control criteria and industrial cost determination, already directly in OTN.

It should be noted, furthermore, the following fact: companies that will already perform the monetary correction of their inventories and the present value adjustments for the 1987 fiscal year must retroactively calculate the inventories and values to be received and paid for the previous social year, such that in the supplementary balance sheet, the adjustments related to these inventories and initial monetary assets are considered as prior year adjustments, in order not to influence the result of the current fiscal year, even being the first to receive the application of full correction. This adjustment may, as contained in the instruction itself, be left unprepared if the value of the adjustments related to the previous social year is immaterial (due to the low inflation rate in 1986, for example). In this case, at minimum, the company must mention the fact in an explanatory note.

A variant form of adjustment could be the following: for the first balance sheet in which there was the correction of inventories, the calculation could be based on the PEPS method. From this balance sheet, the company would start making global calculations no longer based on this method but by average cost. In this way, the exceptional use of PEPS will be made only once in the introduction of the new methodology, and from then on, the average cost will be used, with greater compatibility with corporate and tax accounting.

This last criterion could be exemplified as follows:

Let us assume that a certain commercial company has an inventory formed in December 1986, of a certain product, based on the average cost at the value of Cz$ 12,650,000.00, and decides to adopt, then, the hypothesis of evaluating this inventory in December 1986 for full correction purposes, as if it were using the PEPS criterion. For this, it makes an assessment of what are the volumes of purchases of this merchandise in the year 1986, backwards, arriving at the following:

December/86
Cz$
3,100,000.00
November/86
Cz$
2,950,000.00
October/86
Cz$
2,000,000.00
September/86
Cz$
1,850,000.00
August/
Cz$
1,050,000.00
July/8
Cz$
1,500,000.00
Sum Cz$12,650.
000.00

(The purchases of the month of July could have been of Cz$ 2 million in cruzados but only the value of Cz$ 1,500,000.00 is taken because it is necessary and sufficient to have the total inventories of Cz$ 12,650,000.00 obtained from corporate accounting). The company decides to perform the monetary correction of the inventories independently of the 90 (ninety) day term, thus opting for the technically more correct and healthy criterion. With this, the division of the values that make up its inventory by the value of the OTN pro rata of 1986 of each of the mentioned months is performed, arriving at the following:

December/86
Cz$
3,100,000.00
: Cz$
119.49
= 25,943.5936
OTN
November/86
Cz$
2,950,000.00
: Cz$
113.30
= 26,037.0697
OTN
October/86
Cz$
2,000,000.00
: Cz$
109.70
= 20,054.6946
OTN
September/86
Cz$
1,850,000.00
: Cz$
107.65
= 17,185.3228
OTN
August/
Cz$
1,050,000.00
: Cz$
105.85
= 09,921.5723
OTN
July/8
Cz$
1,500,000.00
: Cz$
104.08
= 14,411.9908
OTN
Sum Cz$12,650.
000.00
=113,554.234
8 OTN

In view of this, the following value of the net adjustment to be made in the opening balance sheet of 1987, for full correction purposes, with differential treatment of these inventories in the form of prior year adjustment, is obtained. It should be remembered that the value of the adjustment must be expunged of the effect of deferred income tax on its amount. We consider that, in the example in question, the company is marginally in the 45% bracket of this tax rate.

113,554.2348 OTN x CZ$ 119.49 Cz$
13,568,597.00
(-) accounting inventory: Cz$
12,650,000.00
Inventory Correction: Cz$
918,597.00
45% Income Tax: Cz$
413,369.00
Net Equity Increase of the Balance Sheet of
Dec/96
Cz$
505,228.00

Thus, the 1986 balance sheet will, in cruzados of that time, be increased by Cz$ 918,597.00 in assets, in the inventory account, and this increase will be, on the side of the liability, represented by two portions: a new account in long-term liabilities of Cz$ 413,369.00, under the title of deferred income tax, and more Cz$ 505,228.00, in equity, in the accumulated profits or losses account.

It should be remembered that these values are in cruzados of December 1986 and that if the company presents this balance sheet converted to cruzados of December 1987, for comparison purposes, such values will be duly corrected by the variation of the OTN until the end of 1987.

Let us now assume that the company, for calculating the values related to 1987, decides to use the average cost, calculated globally and simply, definitively abandoning the simplified PEPS hypothesis. Thus, it must, monthly, perform the calculations of additions and write-offs in OTN based on the values obtained in cruzados. Let us assume that, for the month of January 1987, the summarized movement of inventories of this merchandise was:

January/87
Inventory Cz$

CVM ORIENTING OPINION NO. 14, OF DECEMBER 14, 1987.

Initial 12,650,000.00
Purchases 3,900,000.00
Write-offs (2,850,000.0
0)
Final Inventory
Cz$
13,700,000.00

The calculations in OTN would be made first by verifying what is the average OTN of the initial inventories, and for this, the following division is made:
Cz$ 12,650,000.00: 113,554.2438 OTN = 111.4005

Then, it suffices to calculate the purchases based on the OTN of January 1987, and the new average cost, in terms of OTN, of the inventories is found, immediately before the write-offs of this month, and then, the write-offs are performed and the final inventory is calculated based on this average OTN obtained:

Inventory
Initial
Cz$
12,650,000.00
Cz$11
1.4005
113,554.2438
OTN
Purchases 3,900,000.00 129.97
30,006.9247
OTN
Sum 16,550,000.0
115.28
143,561.1685
OTN
Write-offs -
CVM
(2,850,000.0
0)
115.28
(24,722.0075
OTN)
Inventory Cz$ 115.28 118,836.1610

Final 13,700,000.00 19 OTN

In the sum line, the calculation was as follows: Cz$ 16,550,000.00 of initial inventory plus purchases was divided by 143,561.1685 OTN, arriving at the average OTN of 115.2819. In the write-offs line, Cz$ 2,850,000.00 was divided by the average OTN of 115.2819, arriving at the quantity of OTN to be written off and thus, by difference, the value of the final inventory in OTN.

For the month of February, the same would be done with the initial inventory, now of Cz$ 13,700,000.00 equivalent to 118,839.1610 OTN, and so on, until the end of the social year.

For industrial companies, the same reasoning can be followed, remembering the need for due adaptations for the calculation of work-in-process products and finished products.

For the initial inventory assessment still based on PEPS, normally the value of raw materials formed from purchases from December backwards would be obtained. After forming the raw material inventory, the calculation of work-in-process products would be started, and subsequently, the same would be done with finished products. If in the example given, instead of merchandise, we had raw material and if there was work-in-process, at the end of 1986, the raw material contained in this work-in-process should be taken from the unused balance of the July purchases (Cz$ 2,000,000.00 of purchases - Cz$ 1,500,000.00 used for the calculation of raw material inventory = Cz$ 500,000.00 contained in the finished product inventory); and more the purchases of June, May, etc. The same would occur with the finished product inventory, whose raw material inserted in it would be computed by the purchases related to the continuation of the furthest month used for the calculation of work-in-process. (The reasoning is that the oldest raw materials are in the finished products and the most recent are stored, still as raw materials).

Through calculations made with the above demonstrated, these memories directly have the values of final inventories and the cost of products or merchandise sold, in quantity of OTN, for the supplementary statements.

For the company that decides to make the calculations only based on the PEPS hypothesis, there is a need to calculate the cost of products or merchandise sold according to Art. 7, letter b of CVM INSTRUCTION NO. 64/87, and adjust that value by the difference obtained between the quantities of OTN calculated by the PEPS method and the nominal value constant in the balance sheets. Thus, the cost of products or merchandise sold, in quantity of OTN, will be increased by the difference that exists, in the initial balance sheet, between the quantity of OTN of the inventories, calculated separately, and the quantity of OTN that would be obtained by the simple division of the value in cruzados of the inventories of corporate accounting by the value of the OTN of the end of the previous social year. And the cost of the merchandise or product sold would be decreased by the difference, at the end of the social year, between the value in OTN of the inventories, calculated separately, and the value in quantity of OTN obtained by the simple division of the inventories of corporate accounting by the value of the OTN of the month of the end of the current social year.

Consumables, Stock Portfolio, and Others

CVM ORIENTING OPINION NO. 14, OF DECEMBER 14, 1987.

As a general rule, the accessory follows the principal. If in corporate accounting the consumed material inventories written down are allocated partly to administrative expenses and partly to sales expenses, for example, the "losses" calculated on these material inventories must be allocated as increases to those administrative expenses and sales expenses, according to the destination and effective consumption of such inventories.

The same applies to the appropriation of prepaid expenses, as demonstrated in the example included in the explanatory note of CVM INSTRUCTION NO. 64/87.

The same concepts applicable to physical goods inventories apply to securities and other financial instrument inventories. Thus, stock holdings of shares in current assets must also be corrected and, if applicable, adjusted to market value, unless such assets are already evaluated directly and continuously at market prices, due to specific applicable principles.

Thus, shares, for example, in the current assets of commercial companies, brokers, and insurers will be corrected (within the optional rules regarding the 90-day period, in addition to the special rules of 1987), while pension entities and investment funds, even if they were publicly-held companies, would not make such correction.

Additional Provision for Adjustment to Market Value

A company may have an inventory in its accounting at a cost lower than market value. However, upon correcting this inventory, it may reach an amount that is now above its market value. Therefore, in these supplementary statements, it will be necessary to provide for this difference. This provision may exist only in the supplementary balance sheet and income statement.

Special attention must be given by companies and independent auditors to corrected inventories, because the correction increases the likelihood that these provisions will be necessary (or that they will appear at values higher than those in the legislation).

Advances to Suppliers

The publicly-held company that has an account for advances to suppliers of raw materials, services, or goods, or other values not part of fixed assets, must analyze the nature of these advances. If related to the acquisition of goods, the advances must be treated as if they were inventories; consequently, if the option given in art. 7, letter b, of CVM INSTRUCTION NO. 64/87 is used, the "losses" in this account of advances must be aggregated to the cost of goods sold. The same applies to advances to suppliers of raw materials.

If the advances are to service providers, the "losses" must be integrated into the account where such services are appropriated. The general rule, as already stated, is always that the accessory follows the principal.

In the case of advances to suppliers of raw materials, goods, or even third-party services, originating inventories, which at the balance sheet date must undergo monetary correction, the "losses", in quantity of OTN, relative to such advance accounts, must be aggregated to the respective inventories as an integral part of their correction.

When the company has advances to suppliers of fixed assets, normally fixed assets, there is no loss situation, as such accounts must in their own accounting, under the current corporate legislation, be properly classified in fixed assets, generating monetary correction from the creation of their values. It is unacceptable, by fundamental accounting principles, that disbursements made with the objective of immobilization are classified as current assets or long-term receivables, except in absolutely special situations where such advances are named as such but are characterized, in reality, as loans to third parties. In these hypotheses, the loans should, already in corporate accounting, receive the correct title, generating the contracted appropriations related to financial earnings.

Advances for Salaries and Others

It has been asked whether these advances and those for travel expenses and similar items are classifiable as non-monetary assets, as they are normally not received in cash.

In reality, these advances are loans and have a characteristic different from advances to suppliers. In the latter, the risk of variation in the price of raw materials, the cost of goods, inflation in general, are almost always that of the supplier. The advance is part of the acquisition cost of the good to be received.

In advances for salaries and various expenses, the risk of the effects of inflation, changes in ticket prices, and salaries themselves is normally that of the company itself. They are not necessarily equal to the expenses to be incurred, often being superior to them.

Thus, they have much more characteristics of loans (especially in the case of salaries) to be offset with the obligation that will be registered opportunistically. (Moreover, they are rarely relevant).

Therefore, their correct classification is in current assets, along with credits and not in prepaid expenses.

Therefore, they must be treated as monetary items, unless some very special characteristic, different from those commented on, is present and modifies the reasoning.

Deferred Income Tax

The Instruction, by requiring the recording of the income tax that the company would pay more or less, if it were using, in its corporate accounting, the corrected values of inventories and other non-monetary items and the present value adjustments advocated by CVM Instruction No. 64/87, seeks to ensure that the effect on net equity of the corrected statements is not distorted.

Thus, there is an obligation for the company to consider, in the supplementary statements, a deferred income tax (liability), if the net effect of the adjustments produces a net equity, by full correction, greater than that of corporate accounting. On the other hand, a deferred active income tax will arise, in the case where the net effects of the adjustments decrease the fully corrected net equity.

In each balance sheet, the value of deferred income tax, in assets or liabilities, according to the Instruction, must be recalculated and adjusted to the net balance of the difference existing in net equity at the end of the new social year. The difference between the initial and final value of deferred income tax, in quantity of OTN, will be computed in the income tax of the income statement of the social year ending.

This calculation must always take into account the company's marginal tax rate, that is, the value in OTN must be calculated based on the following reasoning: how much more or less in tax would the company be paying, if its corporate accounting had appropriated all the values obtained from full correction. For each company, this value, more or less, must consider the additional tax, incentives, and situations that are peculiar.

Advances from Customers

If the company receives advances from customers for deliveries of goods or services, and the periods between receipt and delivery are different, the procedure must be the aggregation of "gains" (on the account of advances) to the own account of revenues from sales of products or services for the purpose of the supplementary income statement.

In the case of advances received that will generate revenues in periods that may exceed the result of the social year, and, in addition, if at the date of the social year there is more than one quarter between the receipt of the advance and the actual closing of the year, a special treatment must be given. The passive account (current or long-term payable) of customer advances must incorporate the "gains" from its generation until the balance sheet date, which means that it must be monetarily corrected, as it is a non-monetary item (see art. 4 of CVM INSTRUCTION NO. 64/87). When in a following year this customer advance account is transferred, in corporate accounting, to revenues, it must, in the corrected statements (balance sheet and income statement), have the same transfer, but by its corrected value.

With this, the fully corrected supplementary statements will be able to evidence, with much more transparency, the gross and net results of each period, as well as present them with greater adherence to accounting principles.

In the case where the advances (and this also applies to those made to suppliers) are already being monetarily corrected in corporate accounting, the "gains" (or "losses") must be charged to the respective monetary variation accounts.

Deductions from Gross Revenue

In the draft of the Instruction on full correction, it was mentioned that returns and other deductions from gross revenue should be converted to the OTN of the original month and not the month in which the return or adjustment of gross revenue was made. In CVM INSTRUCTION NO. 64/87, however, this obligation did not appear, and all deductions may be converted to OTN by their value in the month of the deduction's registration without returning to the original month.

Of course, this is a simplification that must be made for cases that are relatively common and normal for the company. However, if there are returns or adjustments to gross revenue by quite relevant values, the company must do them, in full correction, by the values of the OTN of their original month and not the month of the deduction's registration. Only that this implies an adjustment in some other equity account.

In the case of a return, for example, if it refers to a sale made two months prior, the conversion by the OTN of the month of the sale will oblige the company to recalculate the monetary losses occurred and registered in the accounts receivable since the month of the sale until the month of the adjustment. In fact, this was one of the reasons that led to the change in positioning by the CVM, since this more correct, though more sophisticated, procedure does not alter the result of the social year and normally the effect is of small amount in companies. However, in the case of unusual and relevant values, the more complex procedure must be used.

Costs of Goods and Products Sold

Doubts have also been raised regarding the evidence of these costs of goods and products sold, with respect to the segregation between the values of corrected nominal historical costs and the value relative to the aggregation, to these costs, of the "losses" suffered by the inventories held monthly.

As already commented in this opinion and defined by CVM INSTRUCTION NO. 64/87, in the case of the absence of parallel inventory controls, the calculation of these costs of goods and products sold is made by aggregating, to the nominal value of each month according to corporate legislation, the "losses" suffered by the inventories at each monthly turn due to not being corrected. Doubts have arisen regarding the need to evidence the two components.

The CVM understands that, both in the Instruction itself and in the example attached to the explanatory note of this same Instruction, it was sufficiently clear that the value to be presented must be the set, the balance relative to the sum of the two amounts.

Thus, the line of cost of goods and products sold should not have that segregation that would probably bring more confusion than help to the user and the analyst.

In the case of societies that obtain the values relative to this component of the result directly from parallel controls, and also in the case of companies that perform monetary correction of their balance sheet inventories, the same reasoning applies. That is, even in these situations, the line of "cost of goods and products sold" must already be demonstrated by its fully corrected values and adjusted to the currency of the month of closing of the social year, without segregation of its components.

The segregation that some companies have proposed stems not from the essence of the item "cost of goods and products sold", but rather from the calculation methodology that the Instruction, in a simplified manner, ended up implementing. Thus, there is no need to make this segregation, more derived from methodology than from the nature and essence of the item represented.

Equity Method

With the elimination of semi-annual taxation, it is unlikely that the equity method result will be different between the two sets of statements (corporate and fully corrected). But this could occur upon write-down of investments evaluated by this method, because in corporate legislation the equity method result will be in the currency of the month in which the last equity method was made; and in full correction, this value must be brought to the currency of the end of the social year. Or there may be, in the hypotheses already previously commented, the need to use net assets of investees adjusted for the purpose of full correction. Or still, when there is receipt of dividends declared by the investee relating to profits of previous years, before the effectiveness of CVM INSTRUCTION NO. 72, of November 30, 1987. This is because the "reversal" that was made of the correction of the investment account caused a reduction in the credit to the monetary correction account and an increase in the equity method revenue inappropriately.

Late Payment Revenues and Expenses

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

For the purpose of full correction of financial statements, the most correct is the segregation of these revenues from financial revenues proper, and the treatment of their values, translated into quantities of OTN, as recovery of the losses suffered by the original account (in this case, the accounts receivable account).

It is incorrect to include these values, when of some relevance, as part of financial revenues, as these would be placed in the income statement in a different line, not compatible with the line in which monetary losses with the active accounts receivable account appear.

The same applies to late payment in the case of payment, for example, to suppliers. Expenses of this nature must be deducted from the account of monetary gain with suppliers.

Of course, in the case of late payment expenses and revenues originating from monetary accounts that generate financial revenues and expenses, there is no need for the commented segregation, and in this case, such expenses and revenues must be added to the normal expenses and revenues of the society, as they will be offset against the gains and losses of the active and passive monetary accounts that generated them.

Allocation of the Gain and Loss Account in Monetary Items

At first glance, it seems totally adequate that the components of the gain and loss account in monetary items that do not generate financial revenues or expenses should be distributed among the various components of the income statement. The loss account on customers, for example, could be deducted from the sales revenue account; the gains with suppliers, deducted from the cost of products sold; the gains with salaries payable, 13th salary provision, vacation provision, deducted from administrative expenses, and so on. The fact is that this is correct when the values appropriated to the result are exactly compatible with such gains and losses.

However, as this compatibility normally does not exist, the Instruction determines that the gain and loss account with these items be considered as operational, but in a special line.

At the beginning of the social year, for example, there are losses on promissory notes receivable, but these promissory notes do not relate to sales of the own exercise; the same occurs with gains from suppliers that may not be related to the products being sold within the social exercise. It is likely that, in the future, there will be an evolution and we will reach the situation of having all purchase and sale operations treated by their cash values and then, there will be the compatibility that will allow the commented treatment. For example, if a sale is registered by its cash value and the difference relative to the contracted value, for a future date, is considered in corporate accounting as financial revenue, the losses with customers will be adjusted against financial revenues, to determine the real financial revenue and then it will have the correct treatment.

Financial Revenues and Expenses

As demonstrated by CVM INSTRUCTION NO. 64/87, the calculation of real financial revenues is made based on the opposition between nominal financial revenues and losses on monetary assets that generate these nominal revenues. This difference is given the name of net real financial revenue or simply real financial revenue.

It may occur that this value is negative, when the nominal application 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 cannot, under any circumstances, call it financial expense because of this sign change. The expression "financial expense" is linked to the raising of resources. The same applies to "real financial expense".

According to Brazilian legislation (Law of Corporations), financial revenues and expenses must appear in the income statement together, which does not mean that only their balance should be demonstrated; on the contrary, the two values must be disclosed in the demonstration itself, or

at least in some table or explanatory note. Similarly, in the supplementary income statement, the real financial revenues must be followed immediately by the real financial expenses; or the net balance of them, discriminating in a table or explanatory note their components. Perhaps in the future there will be a separation of financial expenses, so that operating profit represents only the result produced by the assets, independently of how these assets are financed. At that time we will have a much more evolved concept of operating profit.

According to the Instruction, the real financial revenue and the real financial expense are what must appear in the supplementary income statement. There is no need to disclose the value of corrected nominal financial revenues and show the value of losses on assets that generate these revenues. Thus, in the supplementary income statement, or even in an explanatory note, there is no need, and perhaps it is not even convenient for non-financial institutions, to disclose the two elements. The most adequate is that only the values of real financial revenues and real financial expenses be disclosed and included in the supplementary income statement of the exercise.

In the case of financial institutions, as these revenues and expenses are vital for their activity, it may be important and convenient, at least at the beginning of the use of fully corrected statements, the evidence of the values relative to the amounts of these corrected nominal revenues and expenses to the currency of the end of the exercise and the values corresponding to the losses (or gains) relative to the assets (or liabilities) corresponding to these items.

Thus, in the financial statements of banks, for example, instead of appearing the real financial revenue of the credit operations portfolio, the corrected nominal financial revenues of this portfolio will appear and then, subtracting from this value, within the same group, the losses by inflation on the assets generating these nominal revenues. With the passage of time, with the dissemination of concepts and the development of the methodology of analysis of supplementary statements, perhaps in the future, the elimination of these two components will be had, leaving only the real financial revenues and expenses.

Abnormal Month-End Balances

A series of doubts have also been raised when a company has month-end balances in accounts of monetary assets or liabilities that have a quite atypical behavior, being abnormally very high or very reduced exactly on this date, not representing the monthly average of their values.

In principle, the entire philosophy of full correction is based on the use of a currency of constant purchasing power for the whole month, the OTN. This means that the company, if it had its accounting carried out in OTN, would calculate all gains and all losses solely and exclusively, at the turn of each month, when then, in the monthly change, it would pass to adjust its balances by the reduction in quantity of OTN. CVM INSTRUCTION NO. 64/87 follows exactly this reasoning and, thus, the general rule is that the calculation can only be made based on the variations occurred of the OTN from the last day of a month to the first day of the subsequent month, and the gain or loss are computed for the purpose of the result of the subsequent month.

CVM ORIENTING OPINION NO. 14, OF DECEMBER 14, 1987.

However, situations may occur where these balances, being excessively abnormal on the day of the month change, cause a very large distortion in some line of the supplementary income statement. For example, if a company has its sales received concentrated on the last day of the month, it may end up in a situation where its cash account, at the monthly change, always has a very high balance, and its accounts receivable account, on that same date, has a very reduced balance, when compared to their respective daily average balances. In a situation like this, it becomes quite evident the inaccuracy of stating that all losses at the change of each of the twelve months occur only on the cash account. It would even be acceptable to transfer part of the losses with cash to losses with accounts receivable, based on an objective and clear criterion that takes into account a more representative value of the true behavior of each of the two monetary items. This can be important, because, if the company is investing its cash in the financial market, generating nominal financial revenues, it will end up presenting much more losses than revenues, and thus its real financial revenues, from the application of cash, will always be quite negative; this does not represent reality, since the balance exposed to inflation at the month change has little to do with the balance exposed to inflation during the period in which the account generated financial revenues.

It is repeated that these hypotheses, when some rearrangement of values relative to gains and losses in monetary items is made, must be used exclusively as a last resort. An explanatory note must highlight the treatment and, in any case, this criterion must always be avoided, its use being restricted to exceptionally abnormal situations and, in addition, only if relevant distortion results in some component of the supplementary income statement of the period. Even so, the rearrangement must be preceded by specific authorization from CVM (SNC).

In the case of offsetting an abnormally high balance of a monetary item in a non-monetary account, it is practically impossible to recognize this adjustment in the supplementary statements. For example, if a company receives a large value of capital increase at the end of the month, it carries this exceptional balance to the next month, and, on the first day of the following month, applies the amount in a fixed asset. In this case, one would have to not consider such a large loss on the change of an exceptional cash balance, but, on the other hand, at the end of the following month, there should be a correction, already in the month, by the acquisition of the fixed asset made at the beginning of the month. Thus, the excess of the cash loss, at the month change, should, theoretically, be considered as an increase in the cost of the fixed asset. As the fixed asset, in corporate accounting, is at the same value of the cross-rate/OTN, regardless of the day of its acquisition, it is verified that a procedure like this will bring, no matter how technical and correct it is, an additional difficulty to the company and, possibly, incomparability with other companies that are not following this criterion. For the sake of uniformity, therefore, the possibility of transferring the effects of gains and losses is restricted to cases where they occur, solely and exclusively, between accounts of a monetary nature. (See how these effects already exist today in corporate accounting, only not so visible; the full correction at no time amplifies these deficiencies, it may only not be eliminating them, but rather increasing their transparency.)

Affiliates and Controlled Companies - Full Correction

CVM ORIENTING OPINION NO. 14, OF DECEMBER 14, 1987.

In no case is there an obligation for closed affiliates and controlled companies to make full monetary correction of all their financial statements. However, since the investor needs to adapt the statements of the investees to the principles and methods that it, 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, if the investor is correcting all its inventories and adjusting the present value of all its monetary items, it cannot have the equity method applied to balance sheets of investees without these adjustments, except in the case of irrelevant reflections. Even if the investor is limiting itself to the minimum necessary (only values exceeding 90 days), it also needs to adapt the balance sheets of the affiliates and controlled companies evaluated by the equity method.

But it is not necessary to apply more than these adjustments to the balance sheet to have the new values of the equity of the investees (not forgetting to make them net of deferred income tax).

For the other statements, there is no obligation to apply full correction (income, sources and applications of resources and changes in equity).

Consolidation

Even for the consolidation of financial statements, the parent company may dispense its controlled companies from preparing full correction. It is sufficient for the parent company to perform the consolidation of the corporate statements monthly, because it can then apply full correction directly to these consolidated statements.

Of course, it will need the adjustments and pertinent additional information, but it is viable to follow this path.

However, for managerial purposes, it is believed that the extension of full correction to all controlled companies will be extremely beneficial and, in some cases, may even facilitate the obtaining of adjusted consolidated statements.

Differences in Profits and Corporate and Tax Effects

The Instruction expressly cites that results and supplementary balance sheets different from those obtained from commercial bookkeeping will never generate any corporate effects (for purposes of dividends, profit participations, book value for dissenting shareholders, etc.) or tax effects (income tax, tax on production circulation, etc.).

For this reason, among others, the statements are called supplementary, because their objective is to inform the user of these statements (whether the administration of the company itself, or the investor or any other interested party) better and more completely.

CVM ORIENTING OPINION NO. 14, OF DECEMBER 14, 1987.

Results and balance sheets may be different for several reasons: correction of final inventories produces greater profit, increasing assets and equity, but the correction of initial inventories, when such inventories are written down, decreases profit, assets and equity. Thus, this update, by full correction, will now cause smaller profits, now larger than those of commercial bookkeeping. But those of full correction will always be technically more correct.

When, in a year like 1987, there is low inflation to update initial inventories (from the balance sheets of end of 1986), and high inflation for final inventories, of course the tendency will be to have, as a net effect, larger and more correct profits in full correction. These differences will always depend on the differences between average storage periods (from one year to another), physical sizes of inventories, inflation rates, etc. The effect on the result will always be determined by the conditions of an end of fiscal year different from that of the previous fiscal year.

Present value adjustments have similar effects, and the difference on the result will depend on the volumes of the updateable items in one and the other balance sheet, the periods and inflation rates of one and the other end of the fiscal year, etc. Adjustments that reduce receivables reduce profit, assets and equity, at first, and increase them at a second moment, when they approach maturity (as if financial revenue were recognized on them). However, adjustments that reduce payables work in the opposite way, increasing those items above first and decreasing them later. Unless the liability refers to financing of an activated item, when the effect on the result is initially null, since the value of the adjustment is considered as a reduction of the cost of this asset. There, the effect is on the asset and the liability, only at this moment. At a second moment, there will be, with the approach of the maturity of the obligation, its increase and the consequent reduction of profit. On the other hand, the asset, when written down, will be by a smaller value than in commercial bookkeeping, compensating those effects.

Indeed, it must be evident that monetary items brought to present value need, of course, to be subsequently increased until they reach their predetermined value for the maturity date. These increases are expenses or revenues not registered in commercial bookkeeping, but are so in the fully corrected statements where, at least for now, they will again compose the "present value adjustments", now with a sign opposite to the previous exercise.

Other reasons can produce distinct profits: no monetary correction of advances made to suppliers or received from customers in commercial bookkeeping, no correction of results of future exercises or other non-monetary items, or, also, no correction of accounts retained earnings or reserves, until the moment in which their value relative to dividends paid from profits of previous years is reduced (only until 1987 - for 1986 the same may occur with the non-correction of the advanced interim dividend - which is now adjusted for 1987).

In practice, it is possible that differences still occur due to error in the "official" monetary correction of the exercise, or by adjustments of previous errors considered in the monetary correction account of the year in progress.

It is fundamental that the reasons and values that explain the difference between the two results are highlighted.

CVM ORIENTING OPINION NO. 14, OF DECEMBER 14, 1987.

Quarterly Results

Special orientation should be given to the user of the financial statements for the following fact: even if there are no inventory corrections, present value adjustments or other facts as cited, and the result of commercial bookkeeping is exactly equal to that of full correction for the fiscal year, this equality will only exist for the accumulated result values, and not for those of each month, taken individually.

In the first month of the fiscal year, the two results will be equal (considering the circumstance of the non-existence of the cited factors). But, in the second month, they would only be equal if, in commercial bookkeeping, the monetary correction of the profit of the first month were accounted for. We know that this correction does not alter the accumulated result of the two months, because what is added to the result of one month is decreased from the result of the following month. As, normally, this correction is not made, the results of each month, by full correction, from the second month will be different from those of corporate accounting (and only the fully corrected ones will better represent reality).

With this, the same effect will occur with quarterly or semi-annual reports (from corporate legislation). Within the given conditions, the result of the first quarter by full correction will be equal to that of corporate accounting. That of the second quarter, no, but the accumulated ones of both will be equal.

ITR - Quarterly Information and DFP - Standardized Final Statements

The 1987 DFPs of companies obliged to full correction should already begin to be filled solely with their fully corrected values. The over-the-counter companies, which opt for non-correction in this year, will fill them in 1987 with the values of corporate legislation, passing to the obligation of using the corrected values for the next fiscal year.

From 1988, the ITRs will be, obligatorily and uniquely, filled with values based on CVM Instruction 64/87, except for over-the-counter companies that opt for postponing the application of the cited Instruction.

The information of closed affiliates and controlled companies contained in the ITR may be sent with the values by corporate legislation.

Statement of Sources and Applications of Resources (DOAR)

In the case of this statement, apparently the only doubt raised has been regarding the monetary variations of debts and long-term receivables. In the DOAR, when starting from the supplementary income statement, fully corrected, the net result is not adjusted by monetary variations. But it is necessary to adjust the profit by the real financial expenses and revenues that alter non-current items (without modifying net working capital).

CVM ORIENTING OPINION NO. 14, OF DECEMBER 14, 1987.

With this, if long-term receivables and payables vary in OTN, and if their real financial revenues and expenses affect net working capital, no adjustment will be made to profit for the purposes of the DOAR.

But if there are variations in foreign currency and they are different from the variations of the OTN, this difference should be treated as real financial expense or revenue in the result by full correction.

When incorporated into non-current items, they need to be considered for adjustment of the calculation of net working capital produced by the company's operations.

Thus, the simplest is, when preparing the result statement, to segregate the monetary variations and gains/losses of long-term monetary items from short-term ones, in such a way that their net difference already serves for the cited adjustment in the corrected DOAR, in addition to serving the supplementary income statement.

It is important to emphasize that in the DOAR there may be large differences between the values of corporate legislation and those of full correction. And those of the latter, finally, will be useful and will indeed have informative capacity.

Values in the Administration Reports and in the Explanatory Notes

Attention is called to the fact that the Administration Report may have all its financial values based on the numbers fully corrected to the currency of the closing month of the fiscal year, or both values: corrected and those of corporate accounting.

Already the explanatory notes of the closed exercise will necessarily contain both values: corrected and those of commercial bookkeeping. The values contained in the explanatory notes, relative to the previous exercise, may be only by their amounts corrected to the currency of the end of the exercise being closed.

Statements of End of 1987

Except for over-the-counter market companies, all other public companies are obliged to publish their financial statements accompanied by supplementary accounting statements for the exercises closed from December 1, 1987.

In this first year, companies may not present full correction for the values of the previous fiscal year, but if they do, they will be relieved of presenting the statements of result, of sources and applications of resources and of equity changes of the previous exercise by the original values. In this case, the balance sheet of the previous year will be published corrected to the current currency.

Indeed, it is recommended that the 1986 balance sheet be published also by the corrected values for 1987, even in the case of companies that do not retroactively apply full correction to the other 1986 statements; at least there will be comparison between this corrected previous balance sheet and the current one.

CVM ORIENTING OPINION NO. 14, OF DECEMBER 14, 1987.

Those who decide to publish the 1986 values with full correction may not publish the statement of equity changes by corporate legislation; they may replace it by the statement of accumulated profits or losses (which can be only of 1987), provided they perform the statement of equity changes for the biennium 1986/1987 by full correction.

In this first year of validity of CVM INSTRUCTION NO. 64/87, the correction of inventories and other non-monetary items, nor the present value adjustment of monetary items, even if exceeding 90 (ninety) days, is mandatory. But it is highly recommended that this be done for better quality of information. However, as already said previously, whoever performs these adjustments must consider, for the statements of result, sources and applications of resources and equity changes of 1987, that the same adjustments for the 1986 balance sheet must be calculated and treated as pertinent to it.

These latter are adjustments of previous exercises made in the supplementary balance sheet of opening of 1987.

Inventories of the 1987 balance sheet cannot be adjusted, for example, and consider in the result of this year only the effects of this correction, without taking into account the correction of inventories of 1986, unless the effects of the latter are immaterial.

There is no obligation, for 1987, to publish consolidated statements with full correction, but they can be made both for 1987 and retroactively for 1986.

Statements of End of 1988

Over-the-counter market companies that come to perform full correction for the first time, at the end of 1988, must do so without the option of not correcting inventories and adjusting, to present value, items with a lag greater than 90 (ninety) days. They must also consider in their initial balance sheets of that year the effects of such adjustments relative to their balance sheets of end of 1987. They will not have the obligation to compare their supplementary statements of 1988 with those of 1987. The same applies to consolidated statements.

Such opening adjustments of 1988, of course, are necessary for the case of companies that had opted, in 1987, for non-correction and non-adjustment of items exceeding the cited period.

Presentation of Statements and Opinion of the Independent Auditor

CVM considers and endorses Technical Communication No. 04/87 of IBRACON - Brazilian Institute of Accountants, of 30.11.87, where models of presentation of financial statements accompanied by supplementary statements and explanatory notes are suggested.

CVM also recognizes and endorses the models of supplementary income statement and explanatory notes for financial institutions approved by CNF - National Confederation of Financial Institutions from an original proposal of the Accounting Sector Board of FEBRABAN - Brazilian Federation of Bank Associations (CNF Circulars 107/87 and FB 151/87, of

CVM ORIENTING OPINION NO. 14, OF DECEMBER 14, 1987.

10.12.87), contained in Technical Communication No. 05/87 of IBRACON - Brazilian Institute of Accountants, of 10.12.87.
CVM also recognizes the suggestion of independent auditor opinion contained in these same Technical Communications No. 04 and 05 of IBRACON, as the minimum form for compliance with art. No. 14 of CVM Instruction No. 64/87.

Segregation Cruzeiros/Cruzados - 1986

To companies that opt for non-full correction of the statements of the 1986 exercise, CVM authorizes the non-segregation of values in cruzeiros and cruzados if, and only if, the minimum items of the income statement cited in a specific note of the Technical Communications referred to above are highlighted in an explanatory note or supplementary table. There is no need for cruzeiro/cruzado segregation of the other statements.

Other Doubts

Other questions are normally raised, but this opinion sought to restrict itself to those that have been raised in a greater number of inquiries, possibly returning to the discrimination of some others in the future. Situations, however, very particular should be treated directly with the Superintendence of Accounting Standards of the Securities and Exchange Commission (art. 17 of CVM INSTRUCTION NO. 64/87).

Signed original by
HUGO ROCHA BRAGA
Superintendent of Accounting Standards

Signed original by
MILTON FERREIRA DARAÚJO
Superintendent of Corporate Relations

Approved by the Collegiate in a Meeting of 14.12.1989

Note: The technical communications nos 04/87 and 05/87 of IBRACON are available to interested parties at CVM and at that institute.