CIRCULAR LETTER CVM/SNC/SEP No. 01/2006

Rio de Janeiro, February 22, 2006

To the

Investor Relations Directors and

Independent Auditors

SUBJECT: Guidance on the Preparation of Accounting Information by Publicly Held Companies

Dear Sirs,

Circular Letters issued by the CVM's technical area have as their main objective to disseminate the central problems observed in the application of standards issued by the CVM and to provide more detailed guidance on the application of these same standards. In this sense, this circular letter also proposes to alert the market to deviations verified by the CVM and to clarify doubts regarding the application of Accounting Standards by Publicly Held Companies and standards related to Independent Auditors. This circular letter also seeks to encourage the adoption of new procedures and disclosures, as well as to anticipate future regulation by the CVM and, in some cases, to clarify issues related to international standards issued by the IASB. These comments have the broader objective of improving accounting information for the market and the consequent convergence with international accounting standards.

The CVM has, over the years of its operation, sought to improve and keep its accounting regulatory framework up to date, always with the participation of interested segments of the market or the accounting profession. It is worth highlighting, in the preparation of this circular letter, the important collaboration received from the CVM's Advisory Committee on Accounting Standards, which includes representatives from ABRASCA, APIMEC, CFC, IBRACON and FIPECAFI/USP and professors Ariovaldo dos Santos (USP), José Augusto Marques (UFRJ) and Natan Szuster (UFRJ).

Points for the Evolution of Accounting Information in the Brazilian Capital Market

The objective of accounting regulation for the capital market is linked to the functioning of companies in a corporate form, that is, in the set of relationships with stakeholders interested in the functioning of the company, capable of producing economic and social effects. This objective is also related to the role of administrators, who have primary responsibility for the company's accounts, and to the role of auditors who express their opinion on the financial statements and assume co-responsibility for this information.

Regulation constitutes the formal framework upon which the production of accounting information takes place and establishes the minimum conditions for knowing the company's economic-financial situation. However, this does not exhaust the possibilities of meeting the informational needs of agents external to the publicly held company, nor does it address the speed at which this information must reach interested parties. It is necessary for the company to make a permanent effort to improve this information and to seek to ensure the adequacy and reasonableness of its procedures in this effort, particularly if the problem of the globalization of accounting information associated with the free flow of capital is considered.

The different possible solutions for the problem of recording and disclosing accounting information on a global scale can be summarized in the alternatives of (i) reciprocity, or mutual recognition of foreign standards and practices, which brings problems of understanding and comprehension of the accounting environment of other countries, (ii) reconciliation, which predominates today as can be observed in the explanatory notes on the reconciliation of results and equity, and finally, (iii) the use of international standards, which is sought in a consensual manner by countries and markets.

The main direction of regulatory evolution in Brazil is the convergence with international pronouncements, and for this, Ibracon and the CVM have been working to adapt the rules issued by the IASB, the International Financial Reporting Standards (IFRS), to the Brazilian accounting environment. These actions, however, imply overcoming some barriers to the integration of capital markets and the consequent need for accounting harmonization.

The first barrier lies in the Brazilian legal environment, where the Law is the main source of law (Roman law, or code law) compared to countries of case law (common law), based therefore on judicial decisions (precedents with mandatory force). In the latter, the conceptual structure with generally accepted accounting principles sought the investor as the main user and economic substance over legal form as the conceptual reference. In opposition, in countries based on Roman Law, where the main users were creditors and the tax authority, the main reference was based on compliance with the Law, or rule orientation (rules oriented). We therefore have, in the Brazilian accounting environment, the change made by law under the aegis of Roman law, which is slow-moving and cannot keep up with the evolution of business.

Within the principle of self-regulation, which allows the CVM to share roles and activities with private institutions in order to increase the efficiency of regulatory activity, Bill No. 3,741 creates the possibility of exercising the functions of research and issuance of accounting pronouncements by a multi-representative entity. This entity must include representatives of the various segments affected by the accounting information of publicly held companies and be capable of producing accounting standards for application in the Brazilian capital market with reference to international standards, which would bring greater flexibility to the accounting standardization process.

The second barrier deals with economic-tax issues and the need for a de facto separation of writings to reconcile the interests of the Tax Authority and the information provided to investors. Bill No. 3,741, without prejudice to the segregation contained in the current law, presents another form of separation for the reconciliation of these interests.

The cultural barrier is important as a fundamental factor in understanding international rules that can only be understood from a base of sophisticated education and training. In this sense, pronouncements written in English and the complexity of the standards establish a high level of requirement that, at this moment, only some centers are capable of meeting the training of the professional qualified to understand and apply these standards. This barrier contributes to the lack of interest in the subject, despite the inevitable need to face the convergence with international standards in the immediate future.

The applicability of international standards in the Brazilian capital market must also be phased, given the existence of companies with access only to the Brazilian capital market and other companies that have already obtained access to the global capital market. The requirements on information must be different given the size and nature of these companies.

In the current situation, there are several points of divergence between Brazilian and international standards, of which, in the understanding of the CVM's technical area, the following can be highlighted: (i) the introduction and application of the fair value method, particularly in non-financial companies; (ii) the accounting treatment of financial instruments, also related to the fair value method; (iii) the accounting and disclosure in financial statements of leasing operations, and (iv) the accounting treatment of corporate restructurings (mergers, acquisitions, and takeovers) (v) the accounting treatment of government subsidies, (vi) disclosure by business segment.

In this circular letter, some topics have been included and others have been subject to review and alteration compared to the previous one. Among these topics, we highlight the following (in the order in which they are presented in the circular letter):

a) item 1.1 - presentation of Ibracon pronouncement No. 27 approved by Deliberation No. 488 on "Presentation and Disclosure of Financial Statements" and the reference to CVM Deliberation No. 496/06 which extends its entry into force;

b) item 1.9 - comments on the American standard dealing with the disclosure of non-GAAP financial measures and the proposal for improvement in guidance to Brazilian publicly held companies;

c) item 5 - change in the text dealing with "Net Income or Loss for the Period, Fundamental Errors and Changes in Accounting Policies" to align with the Ibracon standard under approval;

d) item 9 - the inclusion of item 9.2 on the American standard SFAS 131, which deals with the concept of "management view" in segment information;

e) item 18.3 which improves the text on capitalization of interest and includes an example;

f) item 20.2 which improves the text on Credit Rights Investment Funds (FIDCs), especially regarding the elements that must be considered in characterizing the FIDC as a Special Purpose Entity (SPE);

g) 23.1 on Provision for Scheduled Shutdowns, which includes the text of Technical Interpretation No. 01/2006 and guidance on disclosure in explanatory notes;

h) item 23 on Provisions, Contingent Liabilities and Contingent Assets for alignment with NPC No. 22 approved by CVM Deliberation No. 489 and to include considerations on the applicability of example "4a" which deals with the obligation to account for a legal obligation;

i) item 24.2 on "Why Corporate Brands Should Not Be Accounted For";

j) item 24.3 which comments on the CVM's position regarding the accounting of expenses with the placement of shares in subscription (underwriting) operations;

k) item 27 which transcribes the draft standard on the impairment of assets in the hearing phase;

l) item 29 which modifies some orientations on the activity of independent auditors.

To facilitate the understanding of the evolution that occurred compared to the previous circular letter, in addition to the final version, the version containing the main alterations (additions and exclusions) made is also being disseminated. The complete reading of each topic is essential given the need for a broad understanding of the subject.

This Circular Letter guides and comments on standards and the disclosure of accounting information and replaces CIRCULAR LETTER CVM/SNC/SEP No. 01/2005.

The content of this Circular Letter was distributed in the following items:

1. Presentation of Financial Statements
   1.1 Adequate presentation of financial statements
   1.2 Disclosure and CVM's Objectives
   1.3 The Evolution of Corporate Reports
   1.4 Information Disclosure Policy
   1.5 Disclosure of accounting information in multiple markets
   1.6 Clear and Objective Language
   1.7 Disclosure in Explanatory Notes
   1.7.1 Objectives and aspects of Explanatory Notes
   1.7.2 Differences between national and international accounting procedures
   1.8 The Quality of Accounting Information

1.9 The Statement of Results of the Period and Accounting and Non-Accounting Measurements
1.9.1 The objectives of the Statement of Results
1.9.2 The accounting principles involved
1.9.3 The concept of Revenues and Expenses
1.9.4 The types of revenues and expenses
1.9.5 The presentation of the Statement of Results
1.9.6 The economic measurements of the Statement of Results
1.9.7 The economic measurement EBITDA (earnings before interest, income tax, depreciation and amortization)
1.9.8 The American standard on the disclosure of "non-GAAP financial measures"
1.9.9 Situation of Brazilian publicly held companies
1.9.10 The policy for disclosure of performance measurements based and not based on accounting standards
1.10 Small balances and generic designations
1.11 Statement of Changes in Equity
1.12 Statement of Added Value - SVA

2. Accounts Receivable
   2.1 Estimate of Provision for Doubtful Accounts
   2.2 Disclosure in explanatory note of Provision for Doubtful Accounts

3. Inventories
   3.1 Inventory valuation criteria
   3.2 Disclosure in explanatory note of Inventories
   3.2.1 Disclosure in explanatory note of inventories
   3.2.2 Idle Capacity

4. Statement of Cash Flows
   4.1 Evolution of the Statement of Cash Flows
   4.2 The Statement of Cash Flows according to international standard IAS 7
   4.3 Disclosure according to Brazilian standards and foreign standards

5. Accounting Practices, Changes in Accounting Estimates and Correction of Errors
   5.1 Concepts
   5.2 Selection and Application of Accounting Practices
   5.3 Changes in Accounting Practices
   5.4 Changes in Accounting Estimates
   5.5 Prior Period Errors
   5.6 Accounting
   5.7 Disclosure in Explanatory Note of Accounting Practices, Changes in Accounting Estimates and Correction of Errors
   5.7.1 Adoption of a New Accounting Practice
   5.7.2 Changes in Accounting Estimates
   5.7.3 Correction of Prior Period Errors

6. Subsequent Events
   6.1 Disclosure in explanatory note of Subsequent Events

7. Construction Contracts
   7.1 Financial Statements of Publicly Held Companies in the Real Estate Sector

8. Income Tax
   8.1 Disclosure of Income Tax Provision
   8.2 Tax Incentives
   8.3 Tax Credits
   8.3.1 Periodic Review
   8.3.2 Recovery Period
   8.3.3 Responsibility
   8.3.4 Technical Feasibility Study
   8.3.5 Present Value Adjustment in the Determination of Future Taxable Profits
   8.3.6 Initial and Additional Recognition of Deferred Tax Asset
   8.3.7 Disclosure in explanatory note of Income Tax
   8.3.7.1 Income Tax and Social Contribution
   8.3.7.2 Deferred Tax Asset

9. Segment Reports
   9.1 Disclosure in explanatory note of business segment information
   9.2 The North American standards: The SFAS 131 pronouncement

10. Information Reflecting the Effects of Price Changes
    10.1 Concepts
    10.2 Disclosure in explanatory note of Information Reflecting the Effects of Price Changes
    10.2.1 Statements in Constant Purchasing Power Currency

11. Fixed Assets
    11.1 Asset Recoverability and Spontaneous Revaluations
    11.2 Periodicity of Asset Revaluation
    11.3 Disclosure in explanatory note of Fixed Assets
    11.3.1 Revaluation of Fixed Assets

12. Leasing
    12.1 Disclosure in explanatory note of Leasing

13. Revenue
    13.1 Results of future periods
    13.1.1 Concepts
    13.1.2 Disclosure in explanatory note of Sales or Services to be Performed
    13.1.3 Projects in the Implementation Phase

14. Employee Benefits
    14.1 Debt Acknowledgment Instruments
    14.2 Scope and Coverage
    14.3 Nominal Rates X Real Rates
    14.4 Discount Rate of Actuarial Liability
    14.5 Return Rate of Plan Assets
    14.6 Benefit Growth Rate
    14.7 Other Relevant Assumptions
    14.8 Exclusions in the Determination of the Fair Value of Plan Assets
    14.9 Actuarial Valuation Method
    14.10 Accounting of the initial adjustment of the actuarial liability

14.11 Disclosure in explanatory note of Retirement and Pension Plans
14.12 Annex: Ibracon Technical Interpretation No. 01/01 NPC 26

15. Concession Accounting
    15.1 Concepts
    15.2 Disclosure in explanatory note of concessions

16. Government Assistance Accounting
    16.1 Disclosure in explanatory note of government subsidies

17. Effects of Changes in Exchange Rates
    17.1 Exchange Rate Variation
    17.2 Amortization
    17.3 Change in Amortization Period
    17.4 Adjustment Resulting from Recovery of Exchange Losses
    17.5 Partial/Total Settlement of Exchange Liability
    17.6 Reserve of Profits to be Realized and Hedge Instruments
    17.7 Effect on Equity Method due to Exchange Rate Variation
    17.8 Temporary Differences
    17.9 Audit Reports/Opinions
    17.10 Disclosure in explanatory note of the Effects of Changes in Exchange Rates

18. Borrowing Costs
    18.1 Restrictive Clauses of Financing Contracts
    18.2 Refis (Tax Debt Restructuring Program)
    18.3 Capitalization of Interest
    18.4 Disclosure in explanatory note of borrowing costs
    18.4.1 Debentures
    18.4.2 Long-Term Obligations
    18.4.3 Liens, Guarantees and Contingent Liabilities
    18.4.4 REFIS
    18.4.5 Capitalization of Interest

19. Related Party Disclosures
    19.1 The motivation for the existence of explanatory notes on "related parties"
    19.2 Supervision of transactions between related parties
    19.3 Formalization of business between related parties
    19.4 Pricing of transactions between related parties
    19.5 Disclosure in explanatory note of Transactions with Related Parties

20. Consolidated Financial Statements and Accounting of Investments
    20.1 Equity Method Valuation
    20.1.1 Companies Equivalent to an Associate
    20.1.2 Loss of Continuity of Controlled/Associate Operations
    20.1.3 Future Sale of the Investment
    20.1.4 Permanent Losses in Investments Evaluated by the Equity Method
    20.1.5 Goodwill/Bargain Purchase in Subscription of Capital Increase
    20.1.6 Goodwill/Bargain Purchase originating from Investments evaluated by equity method

20.1.7 Elimination of Unrealized Profits
20.1.8 Calculation of Equity Method
20.1.9 Investment acquired from investee with Negative Equity
20.1.10 Equity Method when there are differentiated rights
20.2 Consolidated Financial Statements
20.2.1 Consolidation of Financial Statements of Jointly Controlled Companies
20.2.2 Consolidation of Special Purpose Entities (SPEs)
20.2.2.1 Exclusive Investment Funds
20.2.2.2 Credit Rights Investment Funds (FIDCs)
20.2.2.3 Disclosure in explanatory note of Special Purpose Entities (SPEs)
20.2.3 Consolidated in Reduction or Exemption of Taxes in Incentivized Area
20.3 Reverse Merger - CVM Instruction No. 349/01
20.4 Disclosure in explanatory note of Consolidated Financial Statements and Accounting of Investments
20.4.1 Goodwill/Bargain Purchase
20.4.2 Condensed Statements
20.4.3 Equity Method
20.4.4 Consolidated Financial Statements
20.4.5 Corporate Investments Abroad

21. Financial Instruments: Disclosure, Presentation, Recognition and Measurement
    21.1 Current situation
    21.2 Presentation, recognition and measurement of financial instruments
    21.3 Effects resulting from the application of Central Bank Circulars No. 3,068/01 and 3,082/02 and Susep Circular No. 192/02
    21.4 Accounting of Hedge operations according to international standard
    21.5 The issue of the Substance Over Form principle in the disclosure of Financial Instruments
    21.6 Disclosure in explanatory note of financial instruments

22. Discontinued Operations
    22.1 Definition
    22.2 Initial Disclosure Event
    22.3 Losses from Impairment of Assets
    22.4 Disclosure in explanatory note of discontinued operations
    22.4.1 Initial Disclosure
    22.4.2 Other Disclosures
    22.4.3 Update of Disclosures
    22.4.4 Separate Disclosure for Each Discontinued Operation
    22.4.5 Presentation of Disclosures
    22.4.6 Disclosure in Interim Financial Reports

23. Provisions, Contingent Liabilities and Contingent Assets
    23.1 Scheduled Shutdowns
    23.2 Taxes
    23.2.1 Foundations in the Estimate for Accounting of Taxes
    23.2.2 The Estimate of Taxes
    23.3 PIS/COFINS

23.4 Disclosure in explanatory note of Provisions, Contingent Liabilities and Contingent Assets
23.4.1 Disclosure in explanatory note of Scheduled Shutdowns
23.4.2 Disclosure in explanatory note of Provisions, Contingent Liabilities and Contingent Assets
23.5 Annex: Ibracon Technical Interpretation 03/2002

24. Intangible Assets
    24.1 Accounting treatment of intangible assets in Brazil
    24.2 Why Corporate Brands Should Not Be Accounted For
    24.3 Expenses with share placement – subscription operation (underwriting)
    24.4 Disclosure in explanatory note of Deferred Asset

25. Share-Based Payment
    25.1 Introduction
    25.2 Overview
    25.3 The concept of stock options as employee remuneration
    25.4 Accounting situation in American standards
    25.5 Accounting by international standards IFRS 2
    25.6 The controversy over the estimation and pricing methods of options
    25.7 Corporate aspects of the approval of the options plan
    25.8 Glossary of some of the main terms used in options plans
    25.9 Accounting of share-based payment plans
    25.10 Disclosure in explanatory note of options plans

26. Corporate Matters
    26.1 Law No. 10,303/2001 - Changes in the Corporation Law
    26.2 Participation in Results Not Referenced in Profit
    26.3 Reserve of Profits to be Realized - Law No. 10,303/01
    26.4 Retention of Profits
    26.5 Effect on the Calculation of Mandatory Dividends Resulting from the Accounting Treatment of Exchange Gains
    26.6 Disclosure in explanatory note of equity items and corporate matters
    26.6.1 Treasury Shares
    26.6.2 Share Capital
    26.6.3 Authorized Share Capital
    26.6.4 Profit Allocation Constant in Shareholder Agreement
    26.6.5 Dividend per Share
    26.6.6 Proposed Dividends
    26.6.7 Interest on Equity Capital
    26.6.8 Remuneration of Administrators
    26.6.9 Reserves - Detailing
    26.6.10 Reserves of Profits to be Realized
    26.6.11 Retention of Profits
    26.6.12 Multiple Voting

27. Impairment of Assets

28. Special Topics
    28.1 Inquiries on Accounting Matters
    28.2 Other disclosures in explanatory note
    28.2.1 Electrobrás Credits
    28.2.2 Privatization Program
    28.2.3 Real Estate Fund
    28.2.4 Merger, Spin-off and Split
    28.2.5 Profit or Loss per Share
    28.2.6 Insurance

29. Audit
    29.1 Importance and role of independent auditors
    29.2 Rotation of Independent Auditors
    29.3 Conflict of Interest
    29.4 Disclosure of Non-Audit Services
    29.5 Relationship with the independent auditor and the responsibility of administrators
    29.6 Examination of technical qualification
    29.7 Annual information
    29.8 Internal quality control
    29.9 External quality control – peer review
    29.10 Continuing Professional Education Program
    29.11 Audit of Controlled Companies
    29.12 Audit in Merger, Acquisition and Split operations
    29.13 Audit of Transactions with Related Parties
    29.14 Distribution of Results
    29.15 Monitoring the performance of Independent Auditors regarding the information disclosed in the Explanatory Notes of Publicly Held Companies

30. Annex - Consolidation of Explanatory Notes
    30.1 Disclosure in Explanatory Notes (1.7)
    30.1.1 Objectives and aspects of Explanatory Notes (1.7.1)
    30.1.2 Differences between national and international accounting procedures (1.7.2)
    30.2 Disclosure in explanatory note of Provision for Doubtful Accounts (2.2)
    30.3 Disclosure in explanatory note of Inventories (3.2)
    30.3.1 Disclosure in explanatory note of inventories (3.2.1)
    30.3.2 Idle Capacity (3.2.2)
    30.4 Disclosure of explanatory notes to cash flow statements (4.2)
    30.5 Disclosure in Explanatory Note of Accounting Practices, Changes in Accounting Estimates and Correction of Errors (5.7)
    30.5.1 Adoption of a New Accounting Practice (5.7.1)
    30.5.2 Changes in Accounting Estimates (5.7.2)
    30.5.3 Correction of Prior Period Errors (5.7.3)
    30.6 Disclosure in explanatory note of Subsequent Events (6.1)
    30.7 Disclosure in explanatory note of Income Tax (8.3.7)
    30.7.1 Income Tax and Social Contribution (8.3.7.1)
    30.7.2 Deferred Tax Asset (8.3.7.2)
    30.8 Disclosure in explanatory note of business segment information (9.1)
    30.9 Disclosure in explanatory note of Information Reflecting the Effects of Price Changes (10.2)

30.9.1 Statements in Constant Purchasing Power Currency (10.2.1)
30.10 Disclosure in explanatory note of Fixed Assets (11.3)
30.10.1 Revaluation of Fixed Assets (11.3.1)
30.11 Disclosure in explanatory note of Finance Leases (12.1)
30.12 Disclosure in explanatory note of Sales or Services to be Performed (13.1.2)
30.13 Disclosure in explanatory note of Retirement and Pension Plans (14.11)
30.14 Disclosure in explanatory note of concessions (15.2)
30.15 Disclosure in explanatory note of government grants (16.1)
30.16 Disclosure in explanatory note of the Effects of Changes in Exchange Rates (17.10)
30.17 Disclosure in explanatory note of the cost of borrowings (18.4)
30.17.1 Debentures (18.4.1)
30.17.2 Long-Term Obligations (18.4.2)
30.17.3 Liens, Guarantees and Contingent and Contingent Liabilities (18.4.3)
30.17.4 REFIS (18.4.4)
30.17.5 Disclosure in Explanatory Note of Capitalization of Interest (18.4.5)
30.18 Disclosure in explanatory note of Transactions with Related Parties (19.5)
30.19 Disclosure in explanatory note of special purpose entities (SPEs) (20.2.2.3)
30.20 Disclosure in explanatory note of Consolidated Financial Statements and Accounting of Investments (20.4)
30.20.1 Goodwill/Bargain Purchase (20.4.1)
30.20.2 Condensed Statements (20.4.2)
30.20.3 Equity Method (20.4.3)
30.20.4 Consolidated Financial Statements (20.4.4)
30.20.5 Corporate Investments Abroad (20.4.5)
30.21 Disclosure in explanatory note of financial instruments (21.6)
30.22 Disclosure in explanatory note of discontinued operations (22.4)
30.22.1 Initial Disclosure (22.4.1)
30.22.2 Other Disclosures (22.4.2)
30.22.3 Update of Disclosures (22.4.3)
30.22.4 Separate Disclosure for Each Discontinued Operation (22.4.4)
30.22.5 Presentation of Disclosures (22.4.5)
30.22.6 Disclosure in Interim Financial Reports (22.4.6)
30.23 Disclosure in explanatory note of Provisions, Contingent Liabilities and Contingent Assets (23.4)
30.23.1 Disclosure in explanatory note of Scheduled Shutdowns (23.4.1)
30.23.2 Disclosure in explanatory note of Provisions, Contingent Liabilities and Contingent Assets (23.4.2)
30.24 Disclosure in explanatory note of Deferred Assets (24.4)
30.25 Disclosure in explanatory note of option plans (25.10)
30.26 Disclosure in explanatory note of equity items and corporate matters (26.6)
30.26.1 Treasury Shares (26.6.1)
30.26.2 Share Capital (26.6.2)
30.26.3 Authorized Share Capital (26.6.3)
30.26.4 Profit Allocation Constant in Shareholder Agreement (26.6.4)
30.26.5 Dividend per Share (26.6.5)

30.26.6 Proposed Dividends (26.6.6)
30.26.7 Interest on Equity Capital (26.6.7)
30.26.8 Remuneration of Administrators (26.6.8)
30.26.9 Reserves - Detail (26.6.9)
30.26.10 Reserves of Profits to be Realized (26.6.10)
30.26.11 Retention of Profits (26.6.11)
30.26.12 Multiple Voting (26.6.12)
30.27 Disclosure in explanatory note of Reduction in the recoverable amount of assets (27)
30.28 Other disclosures in explanatory note (28.2)
30.28.1 Electrobrás Credits (28.2.1)
30.28.2 Privatization Program (28.2.2)
30.28.3 Real Estate Fund (28.2.3)
30.28.4 Incorporation, Merger and Spin-off (28.2.4)
30.28.5 Earnings or Loss per Share (28.2.5)
30.28.6 Insurance (28.2.6)
Sincerely,
Original signed by Original signed by
Elizabeth Lopez Rios Machado
Superintendent of Corporate Relations
Antonio Carlos de Santana
Superintendent of Accounting Standards and Auditing

1. Presentation of Financial Statements
   1.1 Proper Presentation of Financial Statements
   CVM published on 10/04/05 Resolution No. 488 which recognizes and approves Pronouncement 27 issued by the Brazilian Institute of Independent Auditors (Ibracon) on Presentation and Disclosure of Financial Statements. The technical area of this CVM understands that such pronouncement reflects the growing importance that the agency and Ibracon confer to the convergence of Brazilian accounting practices with international accounting practices, aiming at increasing transparency and security in our accounting information disclosed to investor public, and enabling, at a lower cost, access of national companies to external financing sources. The objective of the Standard on presentation and disclosures of Financial Statements is to establish the basis upon which accounting information can be prepared and for which it is possible to compare both with the own financial statements of previous periods as with the financial statements of other entities. This information, together with other items in the explanatory notes to the financial statements, helps investors estimate the future results and financial flows of the entity. This pronouncement provides for general considerations for the presentation of financial statements, guidelines for their structure and minimum requirements of their content. It also provides for the following components of the Financial Statements that must be presented by publicly-held companies: balance sheet, statement of income, statement of changes in equity, statement of cash flows (or, alternatively, statement of sources and applications of funds, as required by corporate law - Law No. 6.404/76), statement of added value, if disclosed by the entity, and explanatory notes, including the description of accounting practices. In providing for the structure and content of the financial statements, this pronouncement also deals with specific standards for the preparation of the Management Report to investors, reaffirms the prevalence of the principle of economic substance over form and brings to the environment of accounting information disclosed to the Brazilian capital markets the alignment to international standard IAS 1. This pronouncement also modifies the presentation of the balance sheet by determining the separation of assets and liabilities into current and non-current and the separate presentation of intangible fixed assets. The effective date of this standard was extended by virtue of the decision of Ibracon, approved in CVM Resolution No. 496/06 and, therefore, financial statements relating to the fiscal year of 2006 published in comparison with the 2005 statements will be applicable. Although the accounting effects of Resolution 488 affect only the Financial Statements disclosed after the closing of the social years started from 01/01/2006, excluding, therefore, the quarterly information - ITRs - of the 2006 fiscal year, CVM encourages its voluntary early adoption, as a contribution to the improvement of accounting
   information.

1.2 Evidence and the Objectives of CVM
One of the objectives of CVM is to create conditions for the promotion of an efficient allocation of resources through the capital market, with a view to attracting and retaining the investor public in this market.
The improvement of the information available to the investor constitutes one of the most important tasks of this regulatory body and, to achieve this objective, it must seek to meet the informational needs of the user. In this way, economic decisions by these investors can be more secure, in addition to providing an additional gain in reducing information collection costs about publicly-held companies. The purpose of CVM's regulatory activity is, in this context, the maintenance of efficiency and reliability in the capital market, in view of the public interest, considering these attributes as fundamental conditions to ensure the development of this market. Acting to reduce the differences between companies in terms of disclosure, measurement and methods used in the preparation of financial statements and to promote the change from quantity to quality of this information is a task that comprises the scope of the exercise of regulatory activity. The attribute of financial statements, internationally considered as the noblest by capital markets and the academic community, is that they are able to allow analysts and investors to predict the cash flows of the future businesses of publicly-held companies. In this sense, CVM's concern is to emphasize to publicly-held companies that the accounting practices to be adopted, among the possible alternatives, must be those that most appropriately reflect the respective companies' net worth and financial situation, the results of their operations, their fund flows and the changes in their equity. Accounting practices defined for tax and/or sectoral regulatory purposes are limited to such purposes, and do not necessarily lead to adequate and transparent financial statements for capital market purposes. Whenever not explicitly prohibited by legislation or regulation, accounting practices for the purposes of financial statements intended for capital markets must prevail the economic substance of the transactions that give rise to them, even when the substance contradicts the legal form of the same. The choice of "what" to disclose, "how" to disclose and "how much" to disclose is an exercise of business common sense, ethics and subjectivity. There are no objective rules that, once met, fill all the requirements of good disclosure; such requirements are built, primarily, by administrators, accountants and auditors capable of exercising responsible subjectivity in the formulation of accounting policies and in the decision of the disclosure to be made. Therefore, to achieve the objectives to which it is destined, the set of financial statements made available to the market must and should evidence all information that is relevant for the assessment of the present and future net worth situation; it must evidence, especially, the commitments and future obligations that may come to have an impact on the net worth and financial situation of the company, even if they do not yet characterize as exigibilities and,
therefore, are not yet recognized in the financial statements.

1.3 The Evolution of Corporate Reports
The need to support investor decisions, increasingly complex due to innovations in financial and capital markets, has pressured companies to change disclosure practices and accounting procedures involved in these issues. It is also observed a large number of companies whose reports do not present adequate information to meet investor needs. Although the same formal structure of reports has been maintained over the years, the evolution of users' decision models of accounting information and the increase in the complexity of companies' operations demand a new level in the informational quality of corporate reports of companies. The quality of corporate information disclosure is determined by the content and integration of the entire set of qualitative and quantitative information expressed in the Financial Statements, IAN, ITR and DFP forms, Management Reports and Independent Auditors' Reports. This quality determines how far it is possible to succeed in communication with the investor community and, more broadly, with all agents of the capital market. The general principle for the disclosure of this information establishes the duty of the publicly-held company to make timely and adequate disclosure of relevant information about its business, in exchange for the capital received from investors. This principle is regulated in the obligation to prepare and distribute this information, to allow analysis by investors of the factors that affect the risk and return of the business, considered necessary for decision making. In this context, some of the fundamental aspects to be observed by companies are:
the relevance of the information provided; transparency in the disclosure of information; equality in access to information; timeliness and continuity of disclosure. the relevance of the information provided Not any type of information benefits the functioning of the market. Disclosure must be necessary and sufficient to facilitate the investor's decision, without confusing it with an excess of information, that is, understanding as relevant that which can alter the investor's perception and be able to allow the comparison of the performance of the same company over time and of it with other companies. As an example, we can cite the following situations that must be reflected in the set of accounting information (the set of annual and quarterly financial statements) and non-accounting information (the IAN form - annual information): high indebtedness and need to roll over short-term debts, significant variations, by gains or losses, permanent or transitory, in market share and sales volumes, exposure to exchange rate, relevant loan operations with related parties, risk of obsolescence in product technology, patents or assets, effects of declining or fierce competition (exit or entry of new protagonists, launches of products with great acceptance by customers), volatile operating margins, patents developed or acquired, by the company or by competitors, with the power to influence demand, horizontal diversification of businesses, verticalization or not of the "supply chain" or of production processes, regulatory or legal changes of representative impact, positive or negative, for the net worth and financial position or for the results of operations, and significant changes in corporate governance and/or risk management practices. transparency in the disclosure of information The information must also be disclosed in a clear and concise manner, and must not vary according to the type of investor. It is assumed that the investor to whom the information is directed is capable of understanding the aspects of returns and risks of the company, and is willing to undertake the necessary efforts in the study of the corporate report. equality in access to information The disclosure of reports must obey the principles that information must be disseminated in a broad, transparent and equal manner, and that all market participants must have simultaneous access to them. timeliness and continuity of disclosure Disclosure must occur in time for the investor's timely decision, avoiding prejudice by procrastination in providing the information; this principle is demonstrated by timeliness, that is, the information is due until it has the capacity to influence investment decisions. In this sense, the continuity of information disclosure is fundamental for the investor to be able to evaluate the situation of the invested position and decide whether to buy, sell or hold securities. The aspects of equality and timeliness are especially important for companies that have
their securities traded in more than one market. These companies must meet the users of their information through the filing of the various forms with the regulatory authorities - CVM and Exchanges - as well as, through voluntary efforts, make this information available through websites, press releases for news agencies and interviews, after the broadcast made public by filing. The content of press releases, not infrequently, is formatted in a manner different from the information contained in the forms filed and disclosed through the public distribution systems at CVM and Stock Exchange. A new format is, strictly speaking, new information and, therefore, must be equally registered at CVM and disclosed for general public access.

1.4 The Company's Information Disclosure Policy
The publicly-held company's information disclosure policy, here understood as the organization of information regularly distributed to the market, is constituted by the choice of various forms that observe the principles of relevance, transparency, equality in access and timeliness. It must be established with the objective of integrating information and avoiding deviations in the perception of this information. These deviations are characterized as those that may arise from omissions and irrelevant content. The qualitative information expressed in the Management Report, Explanatory Notes, IAN tables and Performance Comments in ITR must be, for example, integrated by the most relevant information for the understanding of the company's operations. When deciding on the issues to be disclosed, administrators establish a structure constituted by the main issues of the operation, that is, a central axis for the information organized in the various statements and forms. The expression - disclosure policy - is, in this context, the set of choices made in the search for the best way to communicate the company's activities and performance, or still, the choice of the most important information so that investors obtain the type of knowledge that supports them to evaluate the company. This vision creates additional value to the investor through the increase in understanding of the company's situation and perspectives and is reflected, therefore, in the appreciation of its securities. Although there is no nor is it reasonable to seek a "standard" model for such disclosure policy, the same is guided by the minimum requirements contained in corporate legislation and accounting pronouncements, industry conditions, facts and circumstances that are specific to the company, business acumen and ethical sense of administrators and accountants. The practical objective of this policy is to explain to the users of the financial statements the performance that is the result of the daily exercise of administering and making business decisions.

1.5 Disclosure of Accounting Information in Multiple Markets
The ideal functioning of the capital market as a financing instrument for companies presupposes equitable access to the information necessary for the decision-making process on whether to buy, sell or hold the securities in circulation. Equitable access is a foundation for the efficiency of the capital market and is related to the factors that reduce uncertainty and, consequently, the cost of capital of the company issuing securities. In summary, the intended functioning for the capital market assumes that all market participants have access to complete information distributed in an equal manner, which includes accounting, corporate and material fact information, capable of forming the opinion of interested parties regarding the flow of investment returns. The opposite of this situation constitutes information distributed in a selective and asymmetric manner. Information asymmetry refers to a situation in which an agent - investor or market analyst, for example - has superior information about the characteristics of the company that another agent does not have. In the case of companies registered in different markets, different requirements in the disclosure of information made by different regulatory bodies may lead to access to different sets of information by investors of each market, if each set of information is not disclosed in all markets in which it is registered. This implies that the disclosure of a new format for a certain accounting information in a given market alters the content of the information and, in the specific case of accounting information, this is generally caused by the eventual divergence or extension in the treatment of transactions and/or their disclosure between the different accounting environments in which the company operates. If the company, for example, discloses a type of financial statement by virtue of regulation in a market where it is registered, it is necessary that it also discloses in other markets, with the same structure and accounting framework, and must demonstrate, reconciling, the differences by the use of another set of standards. The requirement of the Statement of Cash Flows

Cash in Foreign Markets and Disclosure of Sources and Applications of Resources – DOAR – Under Brazilian Corporate Law, for example, makes it necessary that these statements, which organize resource and cash information differently, be disclosed in other markets in the same way as in the market where they were disclosed by virtue of specific accounting standards.

The legal implications are provided for in Article 157 of Law 6.404/76, which deals extensively with the "duty to inform," and in CVM standards, particularly in CVM Instructions No. 248/1996, 331/2000, and 358/2002, which deal with the disclosure of accounting statements required in situations of registration in multiple markets and the disclosure of material facts, including those related to changes in accounting criteria. By virtue of these standards, open companies that disclose, abroad, statements or additional information beyond those required by corporate law must, simultaneously, also disclose them in the Country. Violation of these standards, that is, the distribution and use of information disclosed in an unequal or privileged manner, constitutes legal liability of the administrators and must be subject to an administrative process at this CVM.

Note, furthermore, that registration with the regulatory bodies of securities markets configures that, legally, the information was made available for access by all.

1.6 Clear and Objective Language

Accounting statements are prepared and disclosed with the objective of bringing to the knowledge of shareholders and other interested parties the company's net worth and financial position, the results of its operations, its fund flows, and the net worth changes that occurred during the period.

The investing public needs to understand the information prepared and disclosed by companies, so that it can make rational economic decisions within the analysis of trends and risk propensity, in addition to fully enjoying the protection assured by corporate legislation.

In this line, it is the responsibility of the administrators in the preparation of accounting statements, and of independent auditors in the audit reports, to construct texts whose understanding is simple and direct for a reading audience moderately familiar with accounting, business, and finance.

The information produced and disclosed by open companies, especially those contained in the Accounting Statements, the Management Report, and the Reports and Opinions of Independent Auditors, electronic forms IAN and ITR, must be drafted in a simple and direct manner, allowing an average reading audience to understand the data contained therein and to use it for decision-making.

It is not contemplated to make the drafting of documents disclosed by companies simplistic or banal, but rather to use current and usual language, prioritizing the clarity of the exposition, in order to communicate, simply, information that is often of a complex nature. The complexities of the transactions and businesses of companies do not necessarily mean complexity of communication.

Expressions and language whose understanding presupposes very specific knowledge belonging only to those people who deal exclusively with accounting and/or financial matters should be avoided. The use of foreignisms or jargon (specific to business sectors, finance, or accounting) should only be tolerated when all simplifying alternatives are inappropriate.

The Administrators of companies must ensure that the set of accounting statements constitutes, in this way, a piece that allows knowledge of the current situation of the company and the facts and events that occurred that led to the determination of results and the changes that occurred during the period.

Accounting Statements are communication mechanisms, as effective (or ineffective) as their ability to reach the perception of those to whom such communication is directed. For this purpose, it should be considered that the increase in volume and complexity of the text does not contribute to the relevance of these reports.

1.7 Disclosure in Explanatory Notes

1.7.1 Objectives and Aspects of Explanatory Notes

Disclosure is one of the basic objectives of Accounting in the Capital Market, so as to guarantee all types of users complete and reliable information about the financial situation and results of the company. The explanatory notes that integrate the accounting statements must present quantitative and qualitative information in an ordered and clear manner so as to exhaust the capacity to communicate relevant aspects of the content presented in the statements.

The international standard (paragraph 91 of IAS 1, revised in 1997) established the following objectives for the explanatory notes:
a) present information about the criteria that support the preparation of accounting statements and specific accounting policies selected and applied for significant transactions and events; b) disclose information required by International Accounting Standards that is not presented anywhere else in the accounting statements; c) provide additional information that is not presented in the accounting statements themselves, but that is considered necessary for a fair presentation.

The publication of Explanatory Notes to the Accounting Statements is provided for in § 4 of art. 176 of Law No. 6.404/76, which establishes that "the statements will be complemented by Explanatory Notes and other analytical tables or accounting statements necessary to clarify the net worth situation and the results of the fiscal year." In this law, the explanatory notes must discriminate, with clarity and objectivity, the clarifications necessary for the correct understanding of the content of the accounting statements, based on the items provided in § 5 of art. 176 of the corporate law. This implies that the explanatory notes do not deal with the exception of any accounting procedure in the statements but rather clarify a set of integrated information, that is, the disclosure of the accounting practices used. They should not be used to rectify, as they in fact do not, the application of inadequate accounting practices. The explanatory notes are also descriptions or details of amounts related to the items that make up the accounting statements: the balance sheet, the income statement, the statement of sources and applications of resources, and the statement of changes in shareholders' equity.

Explanatory notes should avoid obviousness as well as elaborate writing; their main objective is to highlight to the reader of accounting statements: a) which alternative was chosen for an accounting treatment when there is more than one accepted, or b) expand information that is not appropriate in the body of the pieces that make up the set of accounting statements. Especially (but not only) all potential or contingent liabilities, possible or probable, reflected or not in the accounting statements will be highlighted in notes or in demonstrative tables. The demonstrative tables should be used to discriminate relevant investments, leasing, guarantees, loans and financing, and other information where there is a predominance of the quantitative aspect.

In this direction, NBC T 6.2, approved by CFC Resolution No. 737/92, cites in item 6.2.3 the following "aspects to observe in the preparation of explanatory notes":
a) the information must encompass the factors of integrity, authenticity, accuracy, sincerity, and relevance; b) the texts must be simple, objective, clear, and concise; c) the subjects must be ordered obeying the order observed in the accounting statements, both for the groupings and for the accounts that compose them; d) related subjects must be grouped according to their common attributes; e) the data must allow comparisons with those of previous period dates; f) references to laws, decrees, regulations, Brazilian accounting standards, and other normative acts must be grounded and restricted to cases where such citations contribute to the understanding of the subject treated in the explanatory note.

Generic notes should be avoided because they render a disservice to competent information and are harmful to analysis, such as, for example, "... rates permitted by legislation..." or, in a redundant manner, "... prepared in accordance with the law...", or still, "... in accordance with corporate, tax legislation, and specific standards of the regulatory bodies of the matter...".

Regarding redundancy, note that the unnecessary reporting that "... were prepared in accordance with the law..." stems from the fact that it is not admissible to confess that it could be different (which would mean disobeying the law).

1.7.2 Differences between National and International Accounting Procedures

Considering the international reference reached by the IASB (IFRS/IAS) and the commitment and effort of regulatory bodies and standard setters to seek convergence with them, it is recommended that open companies disclose in an explanatory note the reconciliation of the differences between the accounting practices adopted in Brazil and international accounting practices.

However, there is no impediment for it to be prepared in relation to the accounting standards of other countries in which the open company must, to the market, disclose its accounting statements, due to obtaining registration for trading the securities it issues.

When deciding on the disclosure of the reconciliation, the entity's administration must observe how equivalent these practices are. Accounting statements prepared according to a certain accounting practice can be considered equivalent to those prepared according to the accounting practices adopted in Brazil when both analyses, of both sets of statements, allow investors a similar decision in terms of investment or alienation of an investment previously held. If the accounting practices of both sets are equivalent and, therefore, do not indicate a lack of similarity in the investor's decisions, there will be no need to include an explanatory note, reconciliation, or reclassification of numbers. The issue then arises if the principles and/or practices are not equivalent and, therefore, indicate a lack of similarity in the investor's decisions.

In the latter case, the presentation of the reconciliation of the differences between the accounting practices adopted in Brazil and other accounting practices must be quantitative and qualitative. Thus, the disclosure of the reconciliation requires the preparation and disclosure, at a minimum, of the following information:
a) reconciliation between the net profits (losses) of the period and/or fiscal year; b) reconciliation between the shareholders' equity at the balance sheet date; c) explanation of the nature of the main reconciliation items.

In certain cases, it is possible that the divergences are of such magnitude that only the preparation of new accounting statements according to another set of accounting principles other than those prevalent in Brazil is the solution. In other cases, there may be some instances of partial equivalence that can be resolved or remedied, depending on the nature of the divergences. These divergences may include additional disclosures, reconciliations, etc. This judgment must be made by the administration and agreed to by the independent auditors of the open company, and must be supported by procedures accepted by regulatory bodies and standard setters for accounting.

1.8 The Quality of Accounting Information

The production of accounting information is broadly supported by the Basic Conceptual Structure approved by CVM Deliberation No. 29/86, which helps the preparers of accounting statements, administrators, accountants, analysts, investors, and auditors in the application and understanding of the criteria for evaluating net worth items and accounting standards and practices. This basic conceptual structure also helps users in interpreting the set of accounting statements when evaluating and inferring about the numbers and information contained in these statements.

With the objective of clarifying and expanding the concepts expressed in that Deliberation, we transcribe below the content of the "Qualitative Characteristics of Accounting Information" as presented in the IASB pronouncement on the "Conceptual Framework for the Preparation and Presentation of Accounting Statements" (International Accounting Standards, 2001, p.49-53.)

"Qualitative Characteristics of Accounting Statements

24. The qualitative characteristics are the attributes that make accounting statements useful to users. The first four qualitative characteristics are: understandability, relevance, reliability, and comparability.

Understandability

25. An essential quality of the information presented in accounting statements is that they be readily understood by users. For this purpose, it is presumed that users have a reasonable knowledge of business, economic activities, and accounting and the willingness to study the information with reasonable diligence. However, information about complex subjects that must be included in accounting statements, because of their relevance to the needs of decision-making by users, should not be excluded merely on the pretext that they would be difficult for certain users to understand.

Relevance

26. To be useful, information must be relevant to the needs of users in their decision-making. Information is relevant when it influences the economic decisions of users, helping them to assess the impact of past, present, or future events, confirming or correcting their previous assessments.

27. The predictive and confirmatory functions of information are interrelated. For example, information about the current level and structure of assets has value for users in their efforts to predict the entity's ability to take advantage of opportunities and its ability to react to adverse situations. The same information serves to confirm past predictions about, for example, the way in which the entity might be structured or the result of planned operations.

28. Information about financial position and past performance is frequently used as a basis for projecting future financial position and performance, as well as other subjects in which users are directly interested, such as payment of dividends and salaries, changes in bond prices, and the entity's ability to meet its commitments as they become due. To have predictive value, information does not need to be explicitly projected. The ability to make predictions based on accounting statements increases, however, depending on how information about previous transactions and events is presented. For example, the value of the income statement as an element of prediction stands out when unusual, abnormal, and sporadic items of revenue or expense are presented separately.

Materiality

29. The relevance of information is affected by its nature and materiality. In some cases, the nature of the information, by itself, is sufficient to determine its relevance. For example, reporting a new segment of the entity could affect the assessment of risks and opportunities with which the entity is faced, regardless of the value of the results achieved by the new segment during the period covered by the accounting statements. In other cases, both the nature and the materiality are important, such as the values of existing inventories in each of the main classes of inventories, according to the classification appropriate to the business.

30. Information is relevant if its omission or misstatement could influence the economic decisions of users made based on the accounting statements. Materiality depends on the size of the item or error, judged in the specific circumstances of its omission or misstatement. Thus, materiality provides a threshold or "cut-off point," rather than being a primary qualitative characteristic that information needs to have to be useful.

Reliability

31. To be useful, information must be reliable. Information has the quality of reliability when it is free from material error, and when users can place confidence in it as faithfully representing what it says it represents or could reasonably be expected to represent.

32. Information may be relevant, yet so uncertain in its nature or representation that its recognition could potentially be distorted. For example, if the validity and value of a claim for damages in a legal action are questioned, it may be inappropriate for the entity to recognize the total value of the claim in the balance sheet, although it would be appropriate to disclose the value and circumstances of the claim.

Faithful Representation

33. To be reliable, information must faithfully represent the transactions and other events that it says it represents or could reasonably be expected to represent. Thus, for example, a balance sheet should faithfully represent the transactions and other events that result in assets, liabilities, and shareholders' equity of the entity at the balance sheet date, that meet the recognition criteria.

34. Most accounting information is subject to some risk of not fully achieving the faithful representation of what it intends to portray. This does not occur due to preconceived idea; however, it occurs due to inherent difficulties, or in the identification of transactions, or other events to be measured, or in establishing and applying valuation and presentation techniques that can transmit information corresponding to such transactions and events. In certain cases, the measurement of the financial effects of items could be so uncertain that entities generally would not recognize them in the accounting statements; for example, although many entities generate internally goodwill over time, it is usually difficult to identify or measure this goodwill with certainty. In other cases, however, it may be important to recognize items and disclose the risk of error involving their recognition and measurement.

Primacy of Substance over Form

35. For information to faithfully represent the transactions and other events it purports to represent, it is necessary that these transactions and events be accounted for and presented in accordance with their substance or economic reality, and not merely their legal form. The substance of transactions or other events is not always consistent with what appears based on their legal form or formal documents. For example, an entity could sell an asset to a third party in such a way that the documentation indicated the legal transfer of ownership to that third party; however, there may be agreements ensuring that the entity will continue to enjoy the future economic benefits generated by the asset. Under such circumstances, reporting the sale would not faithfully represent the transaction carried out (if there was indeed a transaction).

Neutrality

36. To be reliable, the information contained in financial statements must be neutral, i.e., impartial. Financial statements will not be neutral if, through the choice or presentation of information, they influence decision-making or judgment in order to achieve a predetermined outcome or result.

Prudence

37. Those who prepare financial statements, however, face uncertainties that inevitably involve certain events and circumstances, such as the possibility of collecting doubtful accounts receivable, the probable useful life of the factory and equipment, and the number of complaints covered by warranties that may have been given. Such uncertainties are recognized by disclosing their nature and extent and by exercising prudence in the preparation of financial statements. Prudence consists of including a certain degree of caution in formulating the judgments necessary in the preparation of estimates under certain conditions of uncertainty, so that assets or revenues are not overstated and liabilities or expenses are not understated. However, the exercise of prudence does not allow, for example, the creation of hidden reserves or excessive provisions, the deliberate undervaluation of assets or revenues, or the deliberate overvaluation of liabilities or expenses, as the financial statements would cease to be neutral and, therefore, would not have the quality of reliability.

Completeness

38. To be reliable, the information in financial statements must be complete, within the limits of relevance and cost. An omission can render information false or distorted, and thus unreliable and deficient in terms of its relevance.

Comparability

39. Users must be able to compare the financial statements of an entity over time in order to identify trends in its financial position and performance. Users must also be able to compare the financial statements of different entities in order to evaluate, in relative terms, their financial position, results, and changes in financial position. Consequently, the assessment and presentation of the financial effects of similar transactions and other events must be done consistently across all entities and over various periods, and in a consistent manner for different entities.

40. An important implication of the qualitative characteristic of comparability is that users must be informed of the accounting policies followed in the preparation of financial statements, any changes in these policies, and the effect of such changes. Users need to be in a position to identify differences between the accounting policies applied to similar transactions and events, used by the same entity from one period to another and by different entities. Compliance with International Accounting Standards, including the disclosure of accounting policies used by the entity, helps achieve comparability.

41. The need for comparability should not be confused with mere uniformity, nor should it be allowed to become an obstacle to the introduction of improved accounting standards. It is not appropriate for an entity to continue accounting for a transaction or event in the same way if the adopted policy is not in conformity with the qualitative characteristics of relevance and reliability. It is also inappropriate to keep its accounting policies untouched when there are more reliable and adequate alternatives.

42. Since users wish to compare the financial position, results, and changes in financial position over time, it is important that financial statements show the corresponding information from previous periods.

Limitations on the Relevance and Reliability of Information

Timeliness of Information

43. If there is undue delay in reporting information, it may lose its relevance. Management may have to establish a balance between reporting information at the appropriate time and providing reliable information. To provide information at timely dates, it may be necessary to report information before all aspects of a transaction or other event are known, thereby compromising reliability. On the other hand, if, to report information, there is a delay until all aspects become known, the information may be highly reliable but of little use to users who needed to make decisions in the meantime. To achieve a balance between relevance and reliability, the prevailing principle is to use the best way to meet the needs of users' economic decision-making process.

Balance between Cost and Benefit

44. The balance between cost and benefit is a pervasive limitation, rather than a qualitative characteristic. The benefits arising from information must exceed the cost of producing it. The assessment of costs and benefits, however, is essentially an exercise of judgment. Furthermore, costs do not necessarily fall on those users who enjoy the benefit. Benefits must be exploited by other users, in addition to those for whom the information was prepared; for example, providing more information to lenders may reduce the borrowing costs of an entity. For these reasons, it is difficult to apply the cost-benefit test in a given case. Despite this, regulatory bodies, in particular, as well as preparers and users of financial statements, must be aware of this limitation.

Balance between Qualitative Characteristics

45. In practice, it is sometimes necessary to make a trade-off or accommodation between qualitative characteristics. Generally, the objective is to achieve an appropriate balance between the characteristics in order to satisfy the objectives of financial statements. The relative value of the characteristics in different cases is a matter of professional judgment.

True and Fair View / Fair Presentation

46. We often say that financial statements reflect the financial position, results, and changes in financial position of an entity truly and fairly. Although this Conceptual Framework does not deal directly with such concepts, the application of the main qualitative characteristics and appropriate accounting standards normally results in financial statements that portray what is generally understood as a true and fair presentation of this information.

1.9 The Income Statement and Accounting and Non-Accounting Measurements

The use of economic measurements not based on accounting standards, such as earnings before interest, income taxes, depreciation, and amortization – EBITDA (earnings before interest, taxes, depreciation and amortization), or in comments in the management report and other informational pieces disclosed by publicly held companies, leads to the need for guidance on the necessary conditions for the understanding of these measurements by users of accounting information. The relevance of disclosing measurements not based on accounting standards is evident, given that it intends to influence users' economic decisions by adding elements not foreseen in the structure of usual reports of financial statements based on accounting principles. To broaden the understanding of this subject, a review of the general concepts associated with these types of measurements was made for better comprehension by those responsible for disclosing to the capital markets.

1.9.1 The Objectives of the Income Statement

The objective of the Income Statement expresses the understanding of the economic perspective, according to the pronouncement on the Basic Conceptual Framework. In reading the corporate law, we find the reference to this statement: "In determining the result of the fiscal year, the following shall be computed, according to § 1 of article 187 of Law 6.404/76:
a) revenues and earnings earned in the period, regardless of their realization in currency, and b) costs, expenses, charges, and losses, paid or incurred, corresponding to these revenues and earnings."

1.9.2 The Accounting Principles Involved

The Income Statement intends to present the economic perspective in the accounting view in a way that is useful to the user, who generally uses this statement as a data base for performance measurements and for evaluations of the company and its securities. The principles directly involved in the organization of this statement are the Revenue Recognition Principle and the Matching Principle of Expenses with Revenues and with Accounting Periods.

As a general rule, the Revenue Recognition Principle considers revenue realized when the realization process is complete or virtually complete, that is, the effort to obtain the revenue has already been developed, and a transaction has occurred. The Matching Principle, also called Accrual, determines that all expenses, representing sacrifices of assets in the search for revenues occurring in a certain period, must be matched with the respective revenues recognized in that same period, and that gains and losses, comparable or not with Revenues and Expenses, are equally recognized when incurred.

In the evaluation process based on the concept of profit advocated by accounting principles, utility (relevance) and practicability (objectivity) are also important.

1.9.3 The Concept of Revenues and Expenses

The concept of Revenues and Expenses is related to the movement of economic benefits present in the financial position, here understood as that which contains assets, liabilities, and shareholders' equity. The concept of asset is related to resources from which future economic benefits are expected to result for the entity; conceptually, in turn, liabilities are obligations payable with resources containing economic benefits, and shareholders' equity is the residual right of shareholders over the assets of the entity after deducting all liabilities.

As a consequence of these concepts, Revenue can be defined as an increase in economic benefits during the accounting period, by an increase in assets or decrease in liabilities, which results in increases in shareholders' equity. Expenses are decreases in economic benefits during the accounting period, by reduction or consumption of assets or incurrence of liabilities, which result in a decrease in Shareholders' Equity.

Revenues present an additional difficulty, insofar as activities with clients involving "multi-services" or "multi-products" are becoming increasingly frequent. This phenomenon occurs when the relationships between the publicly held company selling products and services and its clients include the seller's commitment to make the product available, update it technologically (upgrades), provide maintenance services, replace components that wear out in regular or normal use, accept it as part payment for new equipment, or alienate it at pre-agreed values. The judgment and common sense of administrators and auditors of publicly held companies are required to avoid succumbing to the temptation of hasty judgment regarding which component of the sold "package" is "revenue," when, and at what value. Mere billing, even if it implies the incidence of taxes, does not mean, by itself, that revenue has been earned from the point of view of increasing patrimonial wealth.

1.9.4 The Types of Revenues and Expenses

The types of revenues and expenses were characterized in Pronouncement XIV of Ibracon – Revenues, Expenses, and Results, which can be summarized as follows: revenues from the sale of products, from the provision of services, including those resulting from the use of the entity's assets or resources by third parties, and the sale of other items besides those mentioned.

Expenses, in the same pronouncement, were divided into five classes: the cost of assets used and other costs incurred to generate revenue, such as, for example, the cost of goods sold and administrative and sales expenses; extraordinary and accidental transfer expenses; the cost of written-off assets that are not products; costs incurred in unsuccessful activities; and the decline in prices of inventories available for sale.

1.9.5 The Presentation of the Income Statement

To concretize these principles and concepts, the problem must be faced regarding the form in which the elements of Result should be presented to users of financial statements.

The minimum content indications contained in article 187 of Law 6.404/76 do not prevent the income statement from being presented in the manner that results in the best possible appreciation by the user. The minimum items provided by the cited article 187 are:
I the gross revenue from sales and services, the deductions from sales, discounts, and taxes; II the net revenue from sales and services, the cost of goods and services sold, and gross profit; III expenses with sales, financial expenses, deducted from revenues, general and administrative expenses, and other operating expenses; IV operating profit or loss, non-operating revenues and expenses:
(Section IV with wording given by Law no. 9.249/95).
V the result of the fiscal year before Income Tax and the provision for tax; VI participations of debentures, employees, administrators, and beneficiary parties, and contributions to institutions or funds for employee assistance or pension; VII the net profit or loss of the fiscal year and its amount per share of social capital.

Resolution CFC no. 686/90, which approves NBC T3, provides for the following elements that must be evidenced in the Income Statement:
a. revenues arising from the exploration of core activities; b. taxes incident on operations, discounts, returns, and cancellations;
c. the cost of products or goods sold and services rendered;
d. the gross result of the period; e. operating gains and losses; f. administrative, sales, financial, and other expenses, and financial revenues; g. operating result; h. non-core activity revenues and expenses, and gains and losses;
i. result before participations and taxes;
j. provisions for taxes and contributions on the result; k. participations in the result; and
l. the net result of the fiscal year.

The types of presentation of the income statement have been modified over time, both by the administrators and accountants responsible for disclosing the company's information, and by users who adapt the disclosed financial statements to their analysis model.

1.9.6 The Economic Measurements of the Income Statement

The view of the construction of the company's profit in the period is conventionally presented in the items: (i) gross profit, (ii) operating profit, and (iii) profit before taxes. The first evolution in this framework was the guidance of CVM/PTE Circular no. 578/85 to separately evidence Financial Revenues and Expenses, highlighting the interest from monetary updates, both in revenues and in expenses. Still from a historical perspective, the indicator of Earnings Before Interest and Income Tax – EBIT (EBIT – earnings before interest and tax), was built with the idea of profit generation by assets and to measure the capacity to service debt (interest payment), since classical finance theory conceptualizes "return on assets" as that obtained independently of the way assets have been financed.

Among these measurements, operating profit is generally an important object in the considerations of administrators and especially analysts and investors regarding the efficiency in conducting the company's activities. Operating profit is generally defined in accounting standards through its components when dealing with the information brought by the Income Statement. In its broadest concept, operating profit arises as the result of Operating Revenues and Expenses, defined as those associated with the company's main activity. An Income Statement based on this approach could be presented as follows:

Operating Revenues
(-) Operating Expenses, including Financial Revenues associated with asset protection (in non-financial institutions) (=) Operating Result (operating profit or loss)

In this approach, operating profit is that produced by the administration of its assets, and its most directly related measurement, "return on operating asset" (operating profit / operating asset). This concept allows highlighting, from the capacity to manage assets, the ability to raise resources to finance its activities. The concept of non-operating items in the Income Statement corresponds, therefore, to items not related to regular activities or linked to its social objectives, such as sporadic sale of fixed asset items and financial charges.

1.9.7 The Economic Measurement EBITDA (Earnings Before Interest, Income Taxes, Depreciation, and Amortization)

Publicly held companies have been disclosing the measurement of earnings before interest, income taxes, depreciation, and amortization – EBITDA (EBITDA – earnings before interest, taxes, depreciation and amortization) as a parallel measurement to the conventional ones presented in financial statements. This measurement is also widely used as a type of cash flow of the company for various purposes such as the capacity to service debt, compared to resources applied in the company (market value plus net debt at present value), or used as a multiple for company valuation, among other applications.

Summary view of measurements based and not based on accounting standards, here presented only for the purpose of understanding the text.

Revenues
Cost of Goods Sold
Gross Profit accounting-based economic measurement Sales Expenses Administrative Expenses Profit Before Taxes, Interest, Depreciations and Amortizations (EBITDA) non-accounting-based economic measurement, equivalent to EBITDA – earnings before interest, tax, depreciation and amortization Depreciation and Amortization Profit Before Taxation and Interest (I.R. and Financial Expenses) (EBIT) non-accounting-based economic measurement, equivalent to EBIT – earnings before interest and tax Financial Expenses (of interest) Operating Profit (after financial expenses) accounting-based economic measurement Non-Operating Revenues and Expenses Profit Before Income Taxes Taxes on profit: income and social contribution Net Profit accounting-based economic measurement

It has been observed by entities representing the capital market that EBITDA (EBITDA) information is being prepared and disclosed in a very particular way by publicly held companies and divergently among them. This situation makes it difficult to understand both the formation of the presented number and its integration or reconciliation with the other numbers of the Income Statement, in addition to not being comparable. These measurements, therefore, are not directly extracted from the same structure of the income statement built according to accounting principles and standards, but include and exclude amounts not foreseen in these standards. Measurements not based on accounting standards are defined as those that include or exclude amounts not foreseen in the economic measurements associated with the accounting standards most directly comparable. These adjustments intend to reflect the administration's view on the generation of resources by the company, but must also establish a relationship with the measurements provided in accounting standards. As an example, when a company discloses a measurement similar to EBITDA (EBITDA), it must establish a reconciliation with the accounting-based economic measurement most directly comparable to Operating Profit. In this case, the reconciliation could, for example, have the following format:

Operating Profit
(+) Financial Expenses

(+) depreciation
(+/-) amortization of goodwill or bargain purchase (+) other amortizations () non-recurring expenses (=) Profit before taxes, interest, depreciation, and amortization – EBITDA

A reconciliation of this nature gives the reader of the financial statements a clear idea of the calculation performed by management and an explanatory power regarding the formation of the economic measurement and comparison with other companies.
The cited example serves solely as a possible exercise in management judgment and does not claim to be presented as a unique solution to the problem of which items should be included or excluded in each disclosed measurement. It is presumed that, in each entity, there is a need for additional and specific clarification regarding the concepts and objectives underlying the preparation and disclosure, considering this set as a basis for the user's understanding of the construction of the measurement not based on the accounting structure prepared according to accounting standards and practices.

The highlighting of financial revenues, for example, is presumed to be useful because it stems from the management of assets that, in this case, were associated with an operating result concept, preferred by the manager in this example. From this same viewpoint, the measurement with financial revenues was judged as the one that best represents the items involved in the business cycle, as is customary, for example, in the retail sector. The exclusion could consider an excessive amount of cash, which would have the objective of preparing a future acquisition, i.e., that is outside the usual business cycle of the company. The total exclusion of financial revenues, from the external user's perspective, can also be considered a simplification in cases where there is no detail regarding their nature. Other items for the construction of EBITDA may also be considered at the discretion of management, such as the inclusion of non-recurring expenses, i.e., those not expected to be incurred in the coming fiscal years.

In any case, it is presumed that the manager intends to present the measurement that best represents the efficiency of their management, but, conversely, assumes the responsibility of disclosing the objectives to be achieved and the relationship with other accounting measurements presented. In another case, the non-accounting measurements of EBIT and EBITDA could be reconciled with the consolidated statement of an open company as follows:

Net profit (loss) for the year
Income tax and Social Contribution
Participations in controlled and affiliated companies Net financial expenses (revenues) Net non-operating expenses (revenues) Minority shareholders' interests EBIT Depreciation and amortization EBITDA

Finally, regulation on this type of disclosure seeks to make the reader perceive the meaning of measurements not supported by the disclosed financial statements, and for this, the manager must disclose the bases that led them to prefer the chosen form.

1.9.8 The American standard on the disclosure of "non-GAAP financial measures"
The issues associated with the presentation of non-GAAP accounting measurements have historically been commented on in Accounting Series Release No. 142, Reporting Cash Flow and Other Related Data (1973), and subsequently in item C. Disclosure of Non-GAAP Measures Such as "EBITDA" in the document Frequently Requested Accounting and Financial Reporting Interpretations and Guidance 1 of the Division of Corporation Finance on March 31, 2001, which, more recently, were reformulated and expanded by Regulation G established in Release 338176 "Conditions for use of Non-GAAP Financial Measures" 2, on January 22, 2003, pursuant to art. 401(b) of the Sarbanes-Oxley Act of 2002, and by the document issued by the Division of Corporate Finance: Frequently Asked Questions Regarding the Use of Non-GAAP Financial Measures on June 13, 2003 3.

References:
1 http://www.sec.gov/divisions/corpfin/guidance/cfactfaq.htm#P206_37363) 2 http://www.sec.gov/rules/final/338176.htm 3 http://www.sec.gov/divisions/corpfin/faqs/nongaapfaq.htm

The main provisions established in item C of Disclosure of Non-GAAP Measures Such as "EBITDA" in the document Frequently Requested Accounting and Financial Reporting Interpretations and Guidance, (1) of the Division of Corporation Finance on March 31, 2001 were:

Non-accounting measurements must be presented in such a way that they are not given greater power or prominence than the accounting measurements of results or cash flows as presented in the financial statements. The SEC (staff) recommends that EBITDA and other measurements be presented as "other data."

Where non-accounting measurements are used, a footnote or other reference will give a complete explanation of their calculation and components, given that open companies and analysts do not calculate these non-accounting measurements in the same way. The SEC therefore recommends that readers be alerted to the fact that the measurements presented may not be comparable with measurements disclosed by other companies;

Managers must consider in the disclosure of any non-accounting measurement the significant factors and trends and requirements not captured by these measurements to ensure the balance of information and avoid undue reliance (support) on this type of measurement. Despite disclosure by competitors or requests made by market analysts, the staff believes that non-accounting measurements should be avoided unless managers believe that this measurement provides relevant and useful information;

Non-accounting measurements that measure cash or "funds" generated by operations (liquidity) must be harmonized with the equally highlighted disclosure of cash flow amounts (operating, investing, and financing activities) and, in some cases, the relationship between profits and fixed charges;

A frequent disclosure is the use of non-accounting measurements in the commentary on operational performance when the measurement is primarily of liquidity, capital resources, or debt service interest capacity. For example, calculations that describe an adjusted or normalized measurement of working capital or funds generated by operations and available for capital applications or in debt are presented inappropriately as if they should be used as alternative measurements of profits, return on investment, or similar performance or efficiency factors. In this case, the staff will request the presentation of the measurement in an appropriate context with the clarification of the expected use;

If management presents non-accounting measurements as an alternative or "pro forma" measurements of performance, the staff discourages adjustments to eliminate or smooth items characterized as non-recurring, infrequent, or unusual. Unusual items are likely to occur in all periods, and companies and investors can distinguish which types of events justify adjustments. Trends can be distorted if only certain items are adjusted while the effect of other infrequent items (favorable or unfavorable) is not considered or highlighted. Obviously, all special items must be highlighted in the open company's disclosure to allow analysis by investors. Where management intends to present the liquidity-indicative measurement and communicate it in the context of its presentation, the staff commonly will not object to the adjustment of non-cash charges related to special items if this is intelligible to investors within the circumstances.

The provisions of Regulation G established in Release 338176 "Conditions for use of Non-GAAP Financial Measures", on January 22, 2003, and in the forms for filing (SEC filings: item 10 Regulation SK and SB), were summarized in the following items:

The definition of a Non-GAAP financial measure: a historical or projected numerical measure of economic performance, financial position, or cash flow that excludes or adds amounts that are included in the most directly comparable accounting measurements prepared according to accounting principles (GAAP) and presented in the Income Statement, Balance Sheet, or Statement of Cash Flows of the issuing company;

The standards on non-accounting measurements do not include: operational and statistical measures and ratios or measures that are calculated using only the accounting measurements prepared according to accounting principles and operational measures;

The disclosure of a non-accounting measurement made by the open company must: a) include the presentation of the most directly comparable accounting measurement calculated and presented according to accounting principles and standards, b) the quantitative reconciliation for historical and prospective information of the differences between the non-accounting measurement and the accounting measurement, and c) A statement describing the reasons why the company believes that non-accounting measurements provide useful information to investors, which can be disclosed in the most recent annual report, or else, companies must present arguments why investors should value the accounting measurements in the context in which they are presented, given the items excluded in the accounting measurements (this statement can be included in the most recent annual report and must be substantive, i.e., it should not be justified solely by its utility in the work of analysts); d) the preparation of non-accounting measurements must be done consistently with the presentation of previous periods and, if a change is necessary, a complete description of the change in this methodology.

Regulation G also requires for prospective measurements the reconciliation between the projected measurement and the most appropriate measurement according to accounting principles; Companies are prohibited from: a) excluding charges or loans that require cash settlement in measures other than EBIT and EBITDA; b) adjusting the non-accounting measurement to eliminate infrequent items when the nature of the charge or gain is such that it has been incurred in the last 2 years or is likely to occur in the next 2 years; c) presenting cash flow per share (§33 FASB 95); d) using titles or descriptions of non-accounting measurements that are equal or similar to the titles and descriptions of accounting measurements; e) presenting non-accounting measurements in the body of the financial statements or in their explanatory notes.

The comments that must be disclosed include: a) the way in which management uses non-accounting measurements to manage and evaluate the business, b) the economic substance behind the managerial decision to use this type of measurement, c) the limitations associated with the use of non-accounting measurements compared to accounting measurements prepared according to standards and accounting principles, d) the way in which management compensates for these limitations when using non-accounting measurements, and e) the substantive reasons why management believes that the measurements provide useful information to investors;

There is a historical practice of requiring the presentation of the three major categories of cash flow (i) operating activities, (ii) investing, and (iii) financing – with the same prominence as non-accounting liquidity measurements; The disclosure of non-accounting measurements in business segment disclosure (SFAS 131) also entails the application of Regulation G. Regulation G applies to the disclosure of non-accounting measurement made by a foreign company outside the United States or included in written communication subject to some limited exceptions. Regulation G does not apply to a foreign open company if the following conditions are met: a) the securities of the foreign company are registered on stock exchanges outside the United States, b) the non-accounting measurement is not derived from the accounting measurements provided by US GAAP, c) the disclosure is made outside the United States.

The inclusion of non-accounting measurement in Form 20F, including in its financial statements, of a foreign open company is permitted if the measurement is: a) required or expressly permitted by the issuer of accounting standards used in the primary financial statements of the foreign company, b) is included in the annual report or financial statements used in the country of origin. Finally, the SEC also alerts that federal anti-fraud laws are also applicable to "pro forma" information.

General comments on the SEC's position:
Regulation G intended that companies provide an impartial presentation when non-accounting measurements are presented to investors. Although the SEC admits that non-GAAP measurements may be useful to investors and that there is no prohibition of disclosure by companies, the SEC alerts to the potential disorientation caused by these indicators. In particular, the SEC staff observes that "pro forma" information diverges from conventional accounting information and therefore this information can make it difficult for the investor to compare the accounting results of one period to another and with other companies. Under Regulation G, companies should not disclose non-accounting measurements that, taken together with the other information, contain or omit transactions that lead to investor misinformation. The SEC staff's position has placed emphasis over time on the disclosure of information in a unique way (a single result presented in consolidated accounting information, for example) supported by the standards and accounting principles applied by companies to obtain comparable accounting information. The exclusion of non-accounting measurements (non-GAAP) from the body of the financial statements is aligned with this position. The staff emphasizes that the disclosure of results in a way other than those presented in the body of the financial statements prepared according to accounting principles and standards (for example, EBITDA) disorients investors when the company does not clearly disclose the bases or principles supporting this type of presentation. If the company presents results in which it excludes or omits certain types of transactions, such as restructuring expenses and other unusual charges, it must also present the method and bases it uses in the presentation of "pro forma" measurements in comparable periods. The approach to the problem of the disclosure of non-accounting measurements was made on two fronts: the issuance of Regulation G and the changes to item 10 of Regulation S-K, which regulates non-accounting information (non-financial statement disclosure requirements), and Form 20F (annual report used by foreign issuing companies). The same provisions of Regulation G must be observed in result announcements filed in Form 8K (item 12, within five days of any public announcement or release disclosure), which regulates current reports used to inform about the occurrence of any relevant event or corporate change that is considered important for investors and has not been previously informed. The reaction of American companies to Regulation G has been either not to report non-accounting measurements, as a way to not suffer criticism for their construction by excluding some item, or to increase information by including the comparison with the same previous period plus including summarized managerial comments (a mini MD&A) on non-accounting measurements (which has the advantage of protection under Regulation FD for disclosures made to
analysts).

1.9.9 Situation of Brazilian open companies
There is a widespread use by Brazilian open companies of non-accounting information in their management report and, in some cases, in explanatory notes. Most of the time, non-accounting measurements, typically EBITDA, have been presented in the most varied forms, generally in market communications but also, and increasingly, in other reports such as management reports, public distribution offering prospectuses (summary of financial information), and valuation reports.

The demonstration of EBITDA in some research was presented as: a) gross result minus expenses; b) gross profit minus sales expenses, minus general and administrative expenses, plus depreciation and amortization; c) operating profit minus equity method income plus/minus financial result, plus depreciation and amortization.

The following applications were observed in the information on non-accounting measurements, generally presented in market communications about results:

the inclusion of EBITDA as one of the factors explaining the variation in cash balance; the inclusion of EBITDA as one of the items composing net profit (ebitda + taxes + financial revenues/expenses + depreciation and amortization + others); the inclusion of EBITDA in the explanatory note on business segment information; the analysis of the variation of EBITDA: Initial EBITDA +/- operating expenses, +/- cash COGS, +/- volume sold, +/- average price = Final EBITDA; the denomination: EBITDA, Adjusted EBITDA, Managerial EBITDA, EBITDA margin on net revenue; the indication of depreciation "based on production" and "based on sales volume"; the calculation of adjusted EBTIDA: EBITDA plus "non-cash" adjustments equal to Adjusted EBTIDA; cash profit per share; the ratios: net debt to EBITDA, company value (net debt + market value) to EBITDA, margin on EBIT, margin on EBITDA, share price on free cash flow; the disclosure of a value for EBITDA without mention of the aspects related to preparation, content, reconciliation, and purpose in communications and management reports.

The limitations generally pointed out for the EBITDA measure are not pointed out by Brazilian companies and, compared to American companies, Brazilian disclosures are more liberal and, in general, do not present the justification and purpose for the use of these measurements by management.

1.9.10 Policy for the disclosure of economic performance measurements based and not based on accounting standards

When seeking to present a new economic performance measurement, company administrators must reflect on the relevance of the information for the user, as well as the meaning and concepts involved. The mere inclusion of a new measurement, without clarifying what is intended to be communicated, diminishes the relevance of this disclosure and may have the opposite effect of what is recommended, confusing instead of informing. Assuming that the company has high indebtedness, which includes financial leasing contracts, it is reasonable to assume that the administrator intends to demonstrate the company's operational resource generation capacity compared to its indebtedness. In this case, it must also present and reference its comments on the amount of financial expenses, which includes leasing contracts treated as loans. This treatment considers the principle of economic substance (leasing treated as a loan) over legal form (leasing treated as a lease). These considerations refer to the origin of the need for information disclosure by open companies, its more or less standardized form within an information distribution system to guarantee equal access to information users. It is understood that, as a fundamental characteristic, the information presented to interested users of the capital market must have certain qualities, among which is the need for them to be comparable over time, within the industry, and across distinct industries, which is why companies observe all elements of the accounting process that guarantee final quality, that is, the application of the same accounting principles, valuation criteria, and norms and practices on the set of data. In addition, this set of information has its own logic that allows for integration and correlation between its various parts: the balance sheet, the income statement, the statement of sources and applications of resources and/or cash flows, changes in equity, and the notes to the financial statements. The review by independent auditors is another element that seeks to guarantee the credibility and coherence of the information presented to the set of elements of the accounting process already cited. Compliance with the principles, formalization, and integration of this information is critical for the purposes of equal access, given that they are intended for general use. This information is primarily intended to meet the needs of users who have access to the company's information only through the required and comparable information in the distribution system, currently administered by the CVM on its website. Qualitative information provided in other forms such as IAN, ITRs, and foreign forms, such as the 20F for the American capital market, must also maintain internal coherence and coherence with the accounting information provided in Brazil.

Guidance for Brazilian open companies

The guidance for this disclosure should consider the following items, with a view to alignment with the international environment and the objective of improving the use and disclosure of non-accounting measurements:

1) the disclosure of non-accounting measurements should be done highlighting the same importance as accounting measurements, so that the investor is not confused;
2) the information must have an explanation and comment on all items added or excluded such as depreciation, financial revenues and expenses, restructuring expenses, etc.;
3) this explanation must include the reconciliation of the non-accounting measurement disclosed by the company with the closest accounting measurement based on accounting standards;
4) the reference to which set of accounting norms and principles the accounting measurement refers to: Brazilian (BR GAAP), American (US GAAP), international (IFRS), mainly for open companies with registration and corresponding disclosure of financial statements on foreign exchanges;
5) the information must be presented together with the information from the same previous period, so that it is comparable;
6) non-accounting measurements must be accompanied by a statement describing the reasons and objectives for which the company believes that non-accounting measurements provide useful information to investors and the limitations of this type of measurement;
7) Guidance to not include non-accounting measurements in the financial statements or in notes to these statements, as they do not correspond to the information presented in the financial statements;
8) The existence of loan contractual clauses or covenants that contain non-accounting measurements such as "Adjusted EBITDA", which are relevant to the investor, must be disclosed in notes to these financings;
9) The mention, at the end of the communication, management report, or document that mentions non-accounting measurements, whether or not a review by independent auditors was performed.

1.10 Small balances and generic designations

The provision of § 2 of article 176 of Law No. 6,404/76 determines that small balances may be aggregated, provided that their nature is indicated and they do not exceed 0.1 (one tenth) of the value of the respective group of accounts; but the use of generic designations, such as "various accounts" or "current accounts", is prohibited.

1.11 Statement of Changes in Equity

CVM Instruction No. 59/86, in its article 10, allows indicating in a note or in analytical tables the subdivisions of the equity groupings provided for in articles 5, 6, and 7, of the same Instruction, for cases where the statement becomes too extensive for publication purposes.

To fully meet the needs of users, companies must discriminate, account by account, the items comprising their equity.

1.12 Statement of Added Value – DVA

The wealth generated by the company, measured in the concept of added value, is calculated from the difference between the value of its production and that of goods produced by third parties used in the company's production process. The current and potential applications of added value show the economic and social aspect that its concept involves: (i) as an index for evaluating performance in wealth generation, by measuring the company's efficiency in using production factors, comparing the value of outputs with the value of inputs, and (ii) as an index for evaluating social performance insofar as it demonstrates, in the distribution of generated wealth, the participation of employees, the Government, Financing Agents, and Shareholders.

The added value also demonstrates the company's effective contribution, within a global performance view, to the generation of wealth in the economy in which it is inserted, being the result of the combined effort of all its production factors.

The Statement of Added Value, which can also integrate the Social Balance, thus constitutes an important source of information insofar as it presents this set of elements that allow for the analysis of the company's economic performance, highlighting wealth generation, as well as the social effects produced by the distribution of this wealth.

Within this vision, the CVM has been encouraging and supporting the voluntary disclosure of information of a social nature, having, in 1992 already, supported and stimulated the disclosure of the DVA, through CVM Advisory Opinion No. 24/92. In Circular Letter CVM/SNC/SEP No. 01/00, the CVM suggested the use of a model prepared by the Foundation for Research in Accounting, Actuarial and Financial Sciences of USP (FIPECAFI). In addition, it included in the draft reformulation of Law No. 6,404/76 the mandatory disclosure of the Statement of Added Value and information of a social and productivity nature.

Considering that open companies are increasingly adhering to the disclosure of information of a social nature, mainly the DVA, and, within this voluntary nature of disclosure, aiming to guide and encourage those companies that have not yet adhered, we are presenting a simplified model of the Statement of Added Value (based on a model prepared by FIPECAFI) with instructions for its completion.

It can be verified in the model below, the use of the added value calculation criterion based on sales, which makes the preparation of the DVA simpler and easier to understand, since, thus, the added value is related to the accounting principles used in traditional financial statements, allowing its reconciliation with the income statement. Thus, we start with gross revenues and subtract the value of goods acquired from third parties that was incorporated into the final product sold or service provided, so that the value effectively generated by the company is known. It should also be highlighted that the depreciation of assets evaluated at acquisition cost must be subtracted from the gross added value to calculate the net added value, and such values should not be classified as retention of the period's profit.

We must emphasize that this model, even because it is not mandatory information, should not inhibit the presentation of a more detailed demonstration better adapted to the company's business segment. If the company deems it necessary, it may present this information in the notes to the financial statements, instead of including it in the body of the Management Report.

Statement of Added Value in R$ thousand 20X1 20X2 DESCRIPTION 1 REVENUES 1.1) Sales of merchandise, products, and services 1.2) Provision for doubtful debts – Reversal/(Establishment) 1.3) Non-operational 2 INPUTS ACQUIRED FROM THIRD PARTIES (includes ICMS and IPI) 2.1) Raw materials consumed 2.2) Costs of goods and services sold 2.3) Materials, energy, third-party services, and others 2.4) Loss/Recovery of asset values 3 – GROSS ADDED VALUE (1-2) 4 – RETENTIONS 4.1) Depreciation, amortization, and depletion 5 – NET ADDED VALUE PRODUCED BY THE ENTITY (3-4) 6 – ADDED VALUE RECEIVED IN TRANSFER 6.1) Equity method results 6.2) Financial revenues 7 – TOTAL ADDED VALUE TO BE DISTRIBUTED (5+6) 8 – DISTRIBUTION OF ADDED VALUE 8.1) Personnel and charges 8.2) Taxes, fees, and contributions 8.3) Interest and rents 8.4) Interest on equity capital and dividends 8.5) Retained earnings / deficit of the exercise

• The total of item 8 must be exactly equal to item 7.

Instructions for completion:
The information is extracted from accounting and, therefore, must be based on the accounting principle of the accrual basis of accounting.

1 – REVENUES (sum of items 1.1 to 1.3)
1.1 – Sales of merchandise, products, and services
Includes the values of ICMS and IPI levied on these revenues, that is, it corresponds to gross revenue or gross billing.
1.2 – Provision for doubtful debts – Reversal/Establishment
Includes values related to the establishment/write-off of provision for doubtful debts.
1.3 – Non-operational
Includes values considered outside the company's main activities, such as: gains or losses on the disposal of fixed assets, gains or losses on the disposal of investments, etc.

2 – INPUTS ACQUIRED FROM THIRD PARTIES (sum of items 2.1 to 2.4)
2.1 Raw materials consumed (included in the cost of goods sold).
2.2 Costs of goods and services sold (does not include expenses with own personnel).
2.3 Materials, energy, third-party services, and others (includes values related to acquisitions and payments to third parties).
In the values of the costs of products and goods sold, materials, services, energy, etc. consumed, taxes (ICMS and IPI) included at the time of purchases, recoverable or not, shall be considered.
2.4 Loss/Recovery of asset values
Includes values related to the market value of inventories and investments, etc. (if in the period the net value is positive, it should be added).

3 – GROSS ADDED VALUE (difference between items 1 and 2) 4 – RETENTIONS
4.1 – Depreciation, amortization, and depletion
Should include the expense accounted for in the period.
5 – NET ADDED VALUE PRODUCED BY THE ENTITY (item 3 minus item 4) 6 – ADDED VALUE RECEIVED IN TRANSFER (sum of items 6.1 and 6.2)
6.1 Equity method results (includes values received as dividends related to investments evaluated at cost)
The equity method result may represent revenue or expense; if expense, it should be reported in parentheses.
6.2 Financial revenues (include all financial revenues regardless of their origin)

7 – TOTAL ADDED VALUE TO BE DISTRIBUTED (sum of items 5 and 6) 8 – DISTRIBUTION OF ADDED VALUE (sum of items 8.1 to 8.5)
8.1 – Personnel and charges
In this item, charges for vacation, 13th salary, FGTS, food, transportation, etc., appropriated to the cost of the product or period result should be included (do not include charges with INSS – see treatment to be given in the following item).
8.2 – Taxes, fees, and contributions
In addition to contributions due to INSS, income tax, social contribution, all other taxes, fees, and contributions shall be included in this item. The values related to ICMS and IPI shall be considered as the values due or already paid to the public treasury, representing the difference between the taxes levied on sales and the values considered within item 2 – Inputs acquired from third parties.
8.3 – Interest and rents
Financial expenses and interest related to any type of loans and financing from financial institutions, group companies, or others, and rents (including leasing expenses) paid or credited to third parties should be considered.
8.4 – Interest on equity capital and dividends
Includes values paid or credited to shareholders. Interest on equity capital accounted for as reserves should appear in the "retained earnings" item.
8.5 – Retained earnings/deficit of the exercise
Period profits destined for profit reserves and any portions still without specific destination should be included.

2. Accounts Receivable
   2.1 Estimation of the Provision for Doubtful Accounts
   Companies must establish the provision for doubtful credit collection in an amount sufficient to cover losses considered likely in the collection of accounts receivable. Such provision aims to adjust Accounts Receivable to their probable realization value, the criterion by which rights and credit titles must appear in the balance sheet. This must also be established based on estimates that allow for a provision as close to reality as possible, regardless of criteria and limits established by special or tax legislation.

The calculation of the value of this provision must undergo careful technical evaluation and consider, among other factors: (i) experience that each company has regarding the level of losses in the past; (ii) current value of Accounts Receivable that have already matured; (iii) current economic situation and analysis of trends; (iv) current situation of credit in general; (v) analysis of the individual situation of its clients, mainly regarding degree of indebtedness, market in which they operate, ability to generate results, contingencies, bankruptcy or insolvency status, etc.; (vi) conditions of guarantees under which the sale occurred, such as, for example, collateral and real guarantees; and, (vii) cost of sales financing.

2.2 Disclosure in note of the Provision for Doubtful Accounts
The criteria adopted for the establishment of the provision for doubtful credit collection, as well as any change in the criterion or in the way of its application, occurred during the fiscal year, must be disclosed.
(ADVISORY OPINION CVM NO. 21/90)

3. Inventories
   3.1 Inventory valuation criteria
   The inventory valuation criteria established in art. 183 of Law No. 6,404/76 must be adopted. Alternative procedures that contradict the rules established in the aforementioned article, especially those created by tax legislation or even special legislation that does not contemplate the Companies Act, will not be accepted.

3.2 Disclosure in note of Inventories
3.2.1 Disclosure in note of inventories
Whenever there is a significant change in stocking levels, this fact must be the subject of clarification in a note.
Open companies that, with CVM authorization, are in the implementation phase of a cost accounting system, must clarify the fact in a note, subjecting themselves, regarding the effects, to the applicable restrictions that may be pointed out by the independent audit.
(CIRCULAR LETTER/CVM/PTE NO. 309/86 and ADVISORY OPINION CVM NO. 27/94)

3.2.2 Idle Capacity
Information must be provided to give notice of the dimension of the fact, such as: the existence, expectation of change, and accounting treatment related to idle capacity (ADVISORY OPINION CVM NO. 24/92).

With regard to this, paragraph 11 of the international pronouncement IAS – 2 states: "The allocation of fixed production overheads to costs of conversion is based on the normal capacity of production. Normal capacity is the production expected to be achieved, on average, over a number of periods or seasons under normal conditions, taking into account the reduction in capacity resulting from planned maintenance. The actual level of production may be used if it is close to normal capacity. The amount of fixed overheads allocated to each unit of production does not increase as a consequence of low production or factory idleness. Unallocated overheads are treated as expenses in the period in which they are incurred. (...)".

4. Statement of Cash Flows
   4.1 Evolution of the Statement of Cash Flows
   The origins of the current statement of cash flows are in the statements prepared decades ago by companies that presented the sources and applications of funds obtained essentially from the increases and decreases in items of the balance sheet. The difference between these items was called financial position, a denomination that remains today in several countries. This format evolved from supplementary and voluntary information to a mandatory statement still under the concept of financial position as the variation in working capital, or net working capital.

In the form provided for in article 188 of Law No. 6,404/76, the Statement of Sources and Applications of Resources – DOAR – aims to indicate modifications in the company's financial position, that is, the variations in items of assets and liabilities organized in such a way as to demonstrate the variation in net working capital of the period. In the text of this article, this statement must discriminate:

I – the sources of resources, grouped into:
a) profit of the exercise, increased by depreciation, amortization, or depletion and adjusted by the variation in results of future exercises; b) realization of share capital and contributions to capital reserves; c) resources from third parties, originating from the increase in long-term payable liabilities, the reduction of long-term realizable assets, and the alienation of investments and rights of fixed assets; II – the applications of resources, grouped into:
a) distributed dividends; b) acquisition of rights of fixed assets; c) increase in long-term realizable assets, investments, and deferred assets; d) reduction of long-term payable liabilities; III – the excess or insufficiency of sources of resources relative to applications, representing an increase or reduction in net working capital; IV – the balances, at the beginning and end of the exercise, of current assets and liabilities, the amount of net working capital, and its increase or reduction during the exercise.

The preparation of the statement of sources and applications of resources evolved over time, and the following points were adopted in accounting practice: (i) when the resources from the company's operations are negative, they must be demonstrated as an application of resources and not as a reduction in the source of resources, (ii) loans dedicated to financing fixed assets can be presented as sources and applications, respectively, (iii) revaluation must be excluded from the statements of sources and applications as it does not represent a flow of resources.

The concept of "funds" and "financial position" originating from the first statements was then narrowed to a definition of cash or cash equivalents, as established in the American pronouncement SFAS 95 and the international pronouncement IAS 7, both titled Statement of Cash Flow. The DOAR is therefore based on the concepts of net working capital and the accrual basis, which means presenting availability within the so-called financial cycle of the company and the generation of operational resources from the result prepared according to the accrual basis. The statement of cash flows, on the other hand, is based on the concept of immediate availability, demonstrated according to the cash basis.

4.2 The Statement of Cash Flows according to international standard IAS 7

The following are summarized and commented on the main points of the standard on the statement of cash flows in IAS 7:

Objectives
Cash flow information provides a basis for evaluating the ability to generate and use these flows in a structured manner by nature of activities. Company users are interested in knowing how the company generates cash and cash equivalents, and this interest is independent of the nature of the company.

Structure
The following main topics must be used in all cash flows: (i) operating activities, (ii) investing, and (iii) financing. This classification allows for the evaluation of the effect of activities on the amount of cash and cash equivalents.

Concepts
Cash and cash equivalents: cash comprises cash on hand and available bank deposits; Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value.

Operating activities: are the main revenue-generating activities of the entity, in addition to other activities different from investing and financing; These flows are basically derived from revenue-generating transactions of the entity and, therefore, generally result from transactions and other events that enter into the determination of the result. Examples are cash receipts from the sale of goods and services and cash payments to suppliers, employees, insurers for premiums, and taxes.

Investment activities: are the acquisition and sale of long-term assets and other investments that represent expenditures intended to generate future revenues and cash flows and that are not included in cash equivalents. Examples are disbursements for the acquisition of fixed assets, intangible assets, and other long-term assets, receipts from the sale of fixed assets, acquisition or sale of shares or debt instruments of other entities.

Financing activities: are activities that result in changes in the size and composition of the entity's equity and loans payable, which represent demands imposed on future cash flows by the entity's capital providers. Examples are cash from the issuance of shares or equity instruments, payments to investors to acquire or redeem the entity's shares, cash from the issuance of debentures, borrowing short and long-term, amortization of loans, and lease payments.

Presentation Methods
The entity may use the direct or indirect method to report the cash flow from operating activities, with the direct method being encouraged. In the direct method, the main classes of receipts and payments are disclosed, and in the indirect method, the net cash flow from operating activities is determined by adjusting the result (profit or loss): (i) by the effects of transactions that do not affect cash, such as depreciation, deferrals and provisions, unrealized exchange gains or losses, undistributed profits of investees and minority interests, (ii) variations occurring in the period in inventories and in accounts receivable and payable, and (iii) all other income and expense items related to cash flows from investing and financing activities, (iii) all other income and expense items related to cash flows from investing and financing activities.

Classification and Disclosure Aspects a) The entity must highlight the main classes of receipts and payments arising from investing and financing activities at gross value; b) Cash flows from foreign currency transactions must be recorded in the currency in which the entity's accounting statements (reporting currency) are expressed, converting the foreign currency amount at the exchange rate on the date of the cash flow; c) When a contract is accounted for as a hedge of an identifiable position, the cash flows of the contract are classified in the same way as the cash flows of the position being hedged. d) Cash flows related to extraordinary items must be classified as resulting from operating, investing, or financing activities, as appropriate, and separately disclosed; e) Cash flows related to interest, dividends, and income tax must be disclosed separately and uniformly in the group that best represents the essence of the transaction; Pronouncement IAS 7 does not specify how these cash flows should be classified, and requires the company to establish its accounting policy for these items in the most appropriate way; The difference in treatment of interest and dividends between the American pronouncement FASB Statement 95 and the international pronouncement IAS 7 The classification of interest and dividends, which in the international pronouncement IAS 7 allows for alternative treatments, receives a specific guideline in the case of the American pronouncement. Pronouncement IAS 7 allows a non-financial company to classify consistently between periods: (a) interest (financial expenses) and dividends paid or received in the "operating" topic or (b) interest and dividends paid as "financing", that is, the cost of obtaining financial resources, and interest (financial revenues) and dividends received as "investment", that is, returns on investment. Pronouncement SFAS 95, on the other hand: (i) requires that interest paid and interest and dividends received must be classified as operating cash flow, (ii) classifies dividends paid as a "financing" cash flow, because they are considered a cost to obtain resources. It is also added that SFAS 95 determines that the transaction must be classified in the activity that represents the predominant source of cash flows for the item, and this difference may cause the company to potentially vary the classification for the same type of transaction. The underlying premise in the case of the American pronouncement is the convergence between operating cash flow and items of the result. IAS 7 requires disclosing, separately, interest paid and received and dividends paid and received, and SFAS 95 allows interest and dividends received to be disclosed together. It is recommended that the Brazilian company, particularly those registered on American stock exchanges, establish and disclose in the explanatory notes to the cash flow statements an accounting policy for these items. A way to reconcile these pronouncements
could be the demonstration of interest paid and interest and dividends received, as an item of operating cash flow, and dividends paid as an item of financing cash flow, keeping each of these items demonstrated separately.

Disclosure of Explanatory Notes to Cash Flow Statements IAS 7 and SFAS 95 require disclosures in explanatory notes on certain topics of the cash flow statement:

Topic SFAS 95 IAS 7
Cash and cash equivalents components
Cash
Requires disclosure of the criteria the company uses in considering investments classified as cash equivalents.
Requires disclosure of the components the company is considering as cash and cash equivalents and must present a reconciliation between the values in its cash flow statement with the items in the balance sheet. The effect of any change in policy to determine the components of cash and cash equivalents must be disclosed (IAS 8).
Interest, dividends, and income tax
Interest (net of capitalized amounts) and income tax paid must be highlighted only if the indirect method is used; dividends paid may be grouped with other distributions to owners; and interest and dividends received may also constitute a single sub-item.
Interest and dividends, paid and received, and income tax paid must be shown individually in the cash flow statement, regardless of whether the direct or indirect method is used.
Extraordinary items
No special procedure is required to highlight cash flows arising from extraordinary items.
Must be classified as resulting from operating, investing, or financing activities, as appropriate, separately disclosed, by whom they originated, and evidenced according to IAS 8.
Cash flow per share
Prohibits the disclosure of any index related to cash flow per share.
Does not make reference.
Hedging activities
Requires disclosure of the criteria used to classify hedges of identifiable transactions in the same category as the items that originated them.
Does not require disclosure of the criteria used.
Unavailable cash balances
Does not make reference.
Must disclose unavailable cash and cash equivalents balances, together with management comments.
Other disclosures
Does not make reference.
Encourages disclosure of:
. Value of loans obtained but not used,
. Value of cash flows by activity in joint ventures; . Value of cash flows derived from increases in operational capacity separately from those necessary to maintain operational capacity; . Value of flows by economic activity and geographic region.
The company must also consider other clarification items for users in additional explanatory notes, such as: (a) the disclosure of interest and charges paid in the year, including those capitalized from activations in assets under construction; (b) the total income tax and CSSL paid in the year, and (c) any transactions or events that did not alter cash but are relevant to inform about the company's resource flow (which are expressly excluded from the cash flow statement by IAS 7). As an accounting policy, the company may also determine that any cash flow from investing and financing activities that is greater than 5% of the total value of the activity involved be discriminated separately. In this case, the company judged that, by opening up the composition of these cash flows, it would facilitate the evaluation of the activity's behavior for the investor/market analyst.

4.3 Disclosure according to Brazilian and foreign standards
Open capital companies have been disclosing the Cash Flow Statement (DFC) supplementarily to their accounting statements, giving it a connotation of voluntary nature information. However, companies that disclose this information abroad are required to disclose it in Brazil so that information is not disclosed in a privileged and asymmetric manner between different markets. Companies must also pay attention to ensure that the Cash Flow Statement disclosed in Brazil is the same as that disclosed abroad, that is, has the same format and structure, so that there is no prejudice to the investor's understanding. It is recommended that, in the current transition situation, the cash flow statements and statements of sources and applications of resources be prepared in accordance with the standards and practices set forth in which the company chose to reference the preparation of this type of statement and which are clarified in the explanatory note on the accounting policies followed. For example: the statement of sources and applications in Brazilian corporate legislation, the cash flow statement by FAS 95 or by IAS 7. This does not prevent the company from improving the model proposed by regulation, and it is advisable to provide additional clarification on the basis of the accounting policy followed when establishing these modifications, so that there is no prejudice of understanding for the user/investor. As an example of these improvements, we can cite the reduction of CCL as sources of resources and the increase of CCL as an application of resources, in the DOAR and the creation of categories or special sub-items in the cash flow statement. Finally, when making modifications on the structure and concepts indicated in the regulation, administrators, accountants, and auditors must evaluate whether what is intended to be added or modified does not alter the judgment of the analyst/investor and if, alternatively, it should modify the structure of this statement or appear in a footnote or explanatory note. The final criterion of a form change in a statement must therefore be its usefulness or relevance to the user, and for this, the company must refer itself both to the regulatory structure, which intends to organize the minimum necessary information to be disclosed, and to the objectives of the users of the disclosed accounting information. The disclosure of the cash flow statement in Portuguese using the means for disclosure in Brazil, that is, disclosed through the company's website, CVM website, newspapers, for example, must maintain perfect identity with the cash flow disclosed in a foreign language according to foreign standards. The disclosure of the cash flow statement in different formats and in two distinct markets, with additions or exclusions of the respective explanatory notes, for example, does not contribute to communicating the company's performance and potentially brings the risk of confusing the reader. In another situation, the
disclosure of the same type of accounting information in one market and non-disclosure in another market constitutes asymmetric disclosure of information and represents an infraction with respect to the provisions of Brazilian legislation. Special attention is recommended for this aspect, so that there is no prejudice to the Brazilian investor nor to the international investor.

5. Accounting Practices, Changes in Accounting Estimates, and Correction of Errors
   5.1 Concepts
   The preparation of accounting statements requires the management of an entity to exercise its judgment regarding estimates and the establishment of premises related to the measurement and disclosure of assets and liabilities and to the values of expenses and revenues on the date of the accounting statements.
   At the starting point for this exercise, there must be the procedures, bases, conventions, rules, and specific practices adopted by an entity in the preparation and presentation of its accounting statements, which translate into the selection and application of applicable and adequate accounting practices for the entity.
   The criteria for the selection of these accounting practices, as well as the accounting treatment and disclosure of changes in accounting practices, changes in accounting estimates, and the correction of errors, were recently considered in a draft of accounting standards submitted to public hearing by IBRACON and CVM, and will be commented on below.

5.2 Selection and Application of Accounting Practices
Accounting practices define the process by which transactions and other events are reflected in accounting statements. Thus, decisions regarding accounting practice have economic consequences, and therefore their selection must result in reliable, adequate, and relevant information.
When a standard is applicable to a transaction, event, or condition, the accounting practice must be determined taking into account the standard itself and, additionally, the corresponding interpretation, the appendices to the standards that are not part of them, the implementation guidelines for the standards, and the International Accounting Standards issued by the IASB. In the absence of a specific standard or interpretation for an item in the accounting statements, the entity's management must use its judgment in the development and application of an accounting practice that results in relevant information for the decision-making needs of users of those statements. The information must, furthermore, be reliable so that the accounting statements adequately represent the results of its operations and the entity's net worth and financial position, reflect the economic substance of transactions and other events, and not simply their legal form, be free of distortions, be prudent, and finally, be complete in all relevant aspects. In its judgment process, the entity's management must consider the practices and guidelines contained in standards and interpretations dealing with similar or related matters, as well as the definitions, criteria for recognition, evaluation, and presentation of assets, obligations, revenues, and expenses established in the Basic Conceptual Framework of Accounting (CVM Resolution No. 29/86). Additionally, it must also consider pronouncements from other bodies that elaborate standards and practices of specific segments, which adopt similar concepts in the development of accounting standards, as well as other literatures and specific accounting practices for certain business segments, provided that such standards constitute an improvement of accounting practice and are in conformity with what is stated in item 5.1 of this Circular Office.

5.3 Changes in Accounting Practices
A change in accounting practice by the entity should only be made if: (i) it is required by a standard or interpretation; or (ii) it results in better presentation or more reliable information, in the accounting statements, of the effects of transactions or other events on the entity's net worth and financial position, its performance, and financial movement. Changes in accounting practices do not include, besides cases of change in estimates, treated below, the adoption of an accounting practice for transactions or other events that differ in essence from transactions and events that occurred previously and from transactions or other events that did not occur previously or that were immaterial. Change indicates alteration of a procedure previously practiced for the same object. If the object did not exist in the past, there is no talk of change in accounting practice.

5.4 Changes in Accounting Estimates
It is important to know the difference between the change in estimate and the change in accounting practice. The change in estimate, unlike change in accounting practice, results from: new events not existing at the time of the original estimate, changes in conditions and circumstances since the previous estimate, acquisition of greater experience in dealing with certain facts or events, greater or more accurate information than previously existing, new discoveries due to recent research, among others. If we understand that, at the time of preparing the accounting statements, the entity exercised its best judgment regarding the fact, it might appear not a change in accounting practice or a correction of error, but rather a change in estimate. Accounting always works with estimates regarding events and their future economic effects on an entity's net worth. This occurs every time possible useful lives, probabilities of losses, possibilities of gains, passive and active contingencies, etc., are estimated. Examples of items that require the estimation process are: doubtful credit collections; obsolete inventories, fair value of financial assets or liabilities; useful life or expected pattern of consumption of economic benefits of depreciable assets; and obligations arising from warranties. As a consequence, an estimate may require revision if there are changes in the circumstances on which it was based or as a result of new information, or greater experience. Thus, by its nature, the revision of the estimate does not relate to previous periods, nor does it represent a correction of error.

5.5 Prior Period Errors
Errors may occur in the recording, measurement, presentation, or disclosure of elements that make up the accounting statements. These statements are not in accordance with the accounting practices adopted in Brazil if they contain relevant errors or even irrelevant inaccuracies committed intentionally to achieve a predetermined presentation of the entity's net worth and financial position, its performance, or financial flow. Error correction can only be characterized when it is an involuntary accounting different from what would be adequate, given the documents, information, and circumstances existing at the time. They result from arithmetic errors in the treatment of correct basic data, for any reason, including misinterpretation. Adjustments of provisions constituted due to inadequate assessment of estimated risks or insufficient information existing at the time of their constitution do not fit, for example.

5.6 Accounting
Brazilian corporate legislation determines that adjustments of prior periods will be considered only those resulting from the change of accounting criteria (accounting practice), or the rectification of error attributable to a specific prior period, and that cannot be attributed to subsequent facts. (§ 1º, art. 186).
This provision "states the basic principle in the determination of results of correspondence between revenues and expenses computed in each period, in order to eliminate arbitrary transfers of results from one period to another." (Exposition of Motives – Law No. 6.404/76).
Therefore, the legislator's decision, in including in the Law the figure of adjustment of prior periods, was precisely to "limit the possibility of management influencing results through changes in accounting practices." (see Explanatory Note of CVM Instruction No. 59/86).
Based on this context, our position has been to determine that records resulting from changes in accounting estimates and deliberate errors practiced in the past should be reflected in the result and records resulting from changes in accounting practices and non-deliberate (or involuntary) errors should be reflected in the account of accumulated profits or losses. Notwithstanding, in October 2005, CVM submitted to public hearing a draft Resolution that approves IBRACON Pronouncement on Accounting Practices, Changes in Accounting Estimates, and Correction of Errors. This draft Resolution is part of a larger set of standards that CVM, together with IBRACON and the CVM Advisory Committee on Accounting Standards (CCNCCVM), has been elaborating and putting to public hearing and which aims to gradually reduce the asymmetries existing between Brazilian accounting practices and international practices. The draft contemplates the retrospective application of adjustments resulting from changes in accounting practice and correction of past errors, with the consequent restatement of the financial statements of the prior period(s) presented for comparative purposes. For compatibility with corporate legislation, it is provided, in its items 19 and 39, the discrimination of these adjustments also in the accumulated profits account. CVM understands that this restatement enables greater comparability between the statements of the period and the previous period.

5.7 Disclosure in Explanatory Note of Accounting Practices, Changes in Accounting Estimates, and Correction of Errors
5.7.1 Adoption of a New Accounting Practice
If the initial application of a Standard has a relevant effect on the current period or any prior period presented,

except if it is impracticable to quantify the adjustment, or if this initial application results in a relevant effect in future periods, the entity must disclose the following:
(a) the standard to which it refers;
(b) when applicable, that the change in accounting practice is being made in accordance with the specific transitional provisions of the Standard; (c) the nature of the change in accounting practice; (d) when applicable, the description of the transitional provisions; (e) if applicable, the transitional provisions that may cause effects in future periods; (f) the amount of the adjustment for the current period and for each prior period presented, showing the adjustment in each line of the financial statements and, if applicable, in the calculation of earnings per share; (g) the amount of the adjustment relating to periods prior to those included in the comparative information; and (h) if retrospective application becomes impracticable for any prior period, the reasons that led to this circumstance and a description of how and from when the change in accounting practice was applied. These disclosures do not need to be repeated in financial statements subsequent to the change in accounting practice.

When a voluntary change in accounting practice has a relevant effect in the current and prior periods, except if the quantification of the adjustment is impracticable, the entity must disclose the following: (a) the nature of the change in accounting practice; (b) an explanation of why the application of the new accounting practice provides better presentation or more reliable information; (c) for the current period and each prior period presented, to the extent practicable: (d) the value of the adjustment in each account of the financial statements affected; and (e) the impact on the calculation of earnings per share; (f) if practicable, the amount of the adjustments relating to periods prior to those presented; and (g) if retrospective application for a given prior period or for periods prior to those presented is impracticable, describe the circumstances of that limitation and a description of how and from when the change in accounting practice was applied. These disclosures do not need to be repeated in financial statements subsequent to the change in accounting practice.

When the entity does not early adopt a new accounting standard already issued by a regulatory body, but not yet in force, it must disclose:
(a) such fact; and
(b) if practicable, an estimate of the effects that the change(s) would cause in the financial statements, if it were applied.

In proceeding in accordance with the above, the entity must consider the following disclosure:
(a) the identification of the standard;
(b) the nature of the imminent change or changes in accounting practices; (c) the effective date of the standard; (d) the date on which the entity plans to adopt the standard; and (e) either an explanation of the impact that the initial application of the standard may cause in the financial statements or information that the effect of the adoption of the standard is unknown, nor capable of being estimated.

5.7.2 Changes in Accounting Estimates
The nature and amount of the change in an accounting estimate, which has a relevant effect in the current period or is expected to have a relevant effect in subsequent periods, must be disclosed, unless the effect in subsequent periods is not capable of being estimated.
If the amount of the effect on subsequent periods of a change in accounting estimate is not capable of being estimated, the entity must disclose such fact.

5.7.3 Correction of Prior Period Errors
The entity must disclose the following: a) the nature of the prior period error; b) the amount of the correction relating to each prior period presented, indicating: i) the adjustment by account of the financial statement; and ii) the effect on the calculation of earnings per share; (c) the amount of the correction relating to periods prior to those included in the comparative information; and (d) if the retrospective adjustment is impracticable for a given period, the description of the circumstances that led the entity to that conclusion, the manner and indication of the period from which the error was corrected. These disclosures do not need to be repeated in financial statements subsequent to the correction of errors.

6. Subsequent Events
   6.1 Disclosure in explanatory notes of Subsequent Events
   Events occurring between the end of the fiscal year and the date of publication of the financial statements that have, or may come to have, a relevant effect on the financial situation and future results of the company must be disclosed.

(LAW NO. 6,404/76, ARTICLE 176)

7. Construction Contracts
   7.1 Financial Statements of Open Companies in the Real Estate Sector
   Companies operating in the real estate sector have the option to record the sales of their developments based on accounting guidance fixed in tax legislation, which basically presupposes the recognition of revenues as they are received, characterizing the use of the cash regime to the detriment of the accrual regime of exercises prescribed in article 177 of the corporate law. Furthermore, such companies, when recording the aforementioned sales, do so using as a counterpart to the receivables an account included in the group of Future Exercise Results, a practice that the CVM considers inadmissible, as explained in item 13 of CVM Orientation Opinion No. 21, of 12/27/90. Therefore, in installment or deferred sales of real estate units, for the purpose of complying with the provisions of articles 177 and 187 § 1° of Law 6,404/76, the accounting recording of the results ascertained in these sales must follow the fundamental principles of accounting. Alternative procedures emanating from tax legislation or specific legislation must be observed in auxiliary records, as provided for in § 2° of the aforementioned art. 177. Thus, in installment or deferred sales of real estate units, the accounting treatment to be adopted comprises the following:
   a) Deferred Sale of Completed Unit
   The result on the sale must be appropriated at the moment it was effected, regardless of the term for receiving the contracted value. The amount of the installments, when pre-fixed, must be brought to its present value, or, if it is of short term, when there are relevant effects; and b) Deferred Sale of Unit Not Completed In this case, the result on the sale must be appropriated over the course of the work, in the same way that contracts for the supply of goods, works, and long-term services are appropriated, that is, based on physical progress or costs incurred.

8. Income Tax
   8.1 The Evidence of the Income Tax Provision
   In the statement of results of the exercise, the income tax due must be accrued for the gross value to be paid. In the explanatory notes to the financial statements, the portion related to tax incentives embedded in the gross accrued value must be evidenced and reference made to the legal provision permitting the use of incentives. In cases of temporary exemption, the tax that would be due will be computed for the determination of the net result of the exercise and, subsequently, transferred to the respective capital reserve, indicating, in the explanatory note, the start and end dates of the benefit.

8.2 Tax Incentives
CVM Deliberation No. 273/98 established the accounting procedures applicable to the recording of Income Tax and Social Contribution, listing, furthermore, the information that must be evidenced in explanatory notes, when relevant. The CVM Collegiate also approved CVM Instruction No. 371/02, which provides for the accounting recording of deferred tax assets and complements CVM Deliberation No. 273/98. Given that, for many companies, especially those benefiting from tax incentives, one of the most relevant pieces of information concerns this condition, we are requesting that, in addition to the information provided for in the aforementioned Deliberation, information regarding open companies and companies benefiting from tax incentives, their controlled, controlling, and affiliated companies, be disclosed, regarding the existence of tax benefits, of any nature, encompassing, at minimum, the type of benefit, the term or maturity, and the amount of tax savings realized in the exercise and accumulated, when applicable. For the complete understanding of the aspects related to this topic, the amounts paid/paid for each tax and/or contribution in the social exercise must also be disclosed.

8.3 Tax Credits
From CVM Deliberation No. 273/98, the basis for the recognition of a deferred tax asset became the evidence/proof of its realization/recovery, based on an assessment of the probability of generating sufficient taxable profit to compensate for the tax loss that gave rise to it.
It is, therefore, the duty of the administrator, through the information provided to the market, to prove that the credit being accounted for has the intrinsic economic condition necessary for its recording as an asset, as well as to disclose the bases of this proof. The supervisory board and the statutory administrative bodies must evaluate and approve such proof. The independent auditor is responsible for, in the course of their work, obtaining sufficient and adequate evidence or proofs to support their opinion on the audited financial statements, especially regarding the premises of realization/recovery of the deferred tax asset accounted for by the company and its correct disclosure, including the evidence that supports its recording. Immediately when changes are identified that imply the alteration of the recovery premises of the tax credits, in whole or in part, they must be removed from the asset.

8.3.1 Periodic Review
It is also worth remembering that CVM Deliberation No. 273/98 establishes that the book value of a deferred tax asset must be reviewed periodically and the entity must reduce it or extinguish it as it is not probable to obtain sufficient taxable profit for its realization. We understand that this review must be, at minimum, annual and ideally at a shorter interval, if any relevant event has occurred that could alter the estimates. The concept that guides this review is the economic substance of the asset, or the capacity of the asset to transform, directly or indirectly, into net inflows of cash, that is, they must represent a future promise of cash.

8.3.2 Recovery Term
It is imperative that this credit can, in fact, be used by the company through future tax savings, and this will only occur if and when the company comes to earn taxable profits in sufficient volume. Future profitability must consider the probable capacity to generate taxable profits by the company in the context of the main variables of the business, such as prices, volumes, market, and competition. This is an example of the cited prevalence of substance over form, not being sufficient to exist the right to compensation but being necessary the presence of conditions to be achieved, in future operations, business and commercially, the profit whose taxation will entail the recovery of the tax credit on past losses. Special attention must be given to the fact that long recovery terms for these assets, associated with the distancing of result perspectives in comparison with those achieved, greatly increases the degree of uncertainty regarding the recoverability of these assets, increasing, consequently, the risk of the Administration of the open company in keeping them on the Balance Sheet, a risk for which Independent Auditors must have redoubled attention and which finds no support in the imprescriptibility of the tax credit.

8.3.3 Responsibility
Given the relevance that the issue imposes, the objective is the establishment of a culture of involvement, proactive participation, and interdependent responsibility among the bodies of administration, supervisory board, and independent auditors. Thus it does when requiring the examination by the supervisory board and the approval by the bodies of administration (art.4) of the technical feasibility study. Independent auditors are required to evaluate the adequacy of the procedures for the constitution and maintenance of the deferred tax asset and liability, including with regard to the premises used for the elaboration and updating of the aforementioned technical study.

8.3.4 Technical Feasibility Study
It must be emphasized that this study does not constitute an additional requirement to those required by CVM Deliberation No. 273/98:
"004 The deferred tax asset resulting from income tax losses and negative bases of social contribution must be recognized, in whole or in part, provided that the entity has a history of profitability, accompanied by the justified expectation of this profitability for a term that considers the maximum limit of compensation allowed by legislation".
The technical study must not be limited to the maximum term of 10 years (this term is established for the purposes of assessing the recovery of the asset, that is, of the criteria provided for in the standard that deals with discontinuing operations – impairment).
Therefore, it must encompass the generation of results according to the expectation of the administration, considering the continuity of the company and the maintenance of the result for an indefinite time, including its perpetuity.
The examination, approval, and evaluation of this technical study must be, at minimum, annual. However, whenever there is a relevant alteration of the elements that compose the study, it must be subject to new examination, approval, and evaluation, even at a term shorter than the aforementioned one.
It is also worth clarifying that the approval by the bodies of administration includes the Board of Directors and the Executive Management.

8.3.5 Present Value Adjustment in the Determination of Future Taxable Profits
It must be emphasized that it is the future taxable profits, contemplated in the technical feasibility study, that must be brought to present value. The standard does not determine that the deferred tax asset must necessarily be accounted for at its present value; it establishes, however, the discounting of future taxable profits (which cannot be considered at their nominal value) in order to verify if the asset is recoverable and, therefore, if it should be recorded and for how much. In this case, for the purposes of assessment regarding the recovery of the deferred tax asset, these profits must be brought to present value, based on the estimated term for their realization, even if this exceeds the maximum term of 10 years established in item II, article 2° of CVM Instruction No. 371/02. Simplified Example:
Deferred Tax Asset (total) ................... 150.00 Deferred Tax Asset (portion recoverable in 10 years) ................... 100.00 Tax Effect Considering the Present Value of Future Taxable Profits ("n" years()):
1st. hypothesis (260.00 x IR of 0.35) ................... 91.00 2nd. hypothesis (400.00 x IR of 0.35) ................... 140.00 Deferred Tax Asset accounted for in the 1st hypothesis ................... 91.00 (amount expected to be recovered) Deferred Tax Asset accounted for in the 2nd hypothesis ................... 100.00 (nominal value recoverable in 10 years) () for example 15 years + perpetuity. Therefore, the balances of deferred tax assets must not exceed the values pointed out in the projection of future taxable profits discounted to present value, regardless of the expected term of their recovery.

In this recovery analysis, existing balances prior to the publication of CVM Instruction 371/02 are included, as well as new constitutions of deferred tax credits.

8.3.6 Initial and Additional Recognition of Deferred Tax Asset
It must be clarified that both the company that recognizes a deferred tax asset for the first time, and that which accounts for an additional value to the balance existing prior to the effectiveness of CVM Instruction No. 371/02, are subject to the determinations of that normative. Therefore, in these cases, the recognition of a new deferred tax asset has as a consequence the application of CVM Instruction No. 371/02 to the entire amount recognized in the financial statements.

8.3.7 Disclosure in explanatory note of Income Tax
8.3.7.1 Income Tax and Social Contribution
The financial statements and/or the explanatory notes must evidence the following information, when relevant:
a) amount of current and deferred taxes, registered in the result, equity, asset, and liability; b) nature, basis, and expected term for realization of each deferred tax asset and obligation; c) effects on the asset, liability, result, and equity resulting from adjustments due to alteration of rates or by change in the expectation of realization or settlement of deferred assets or liabilities; d) amount of temporary differences and unused tax losses for which a deferred tax asset was not recognized, with the indication of the value of the taxes that did not qualify for this recognition; e) reconciliation between the value debited or credited to the result of income tax and social contribution and the product of the accounting result before income tax multiplied by the applicable rates, also disclosing such rates and their calculation bases; f) nature and amount of assets whose tax basis is lower than its book value. (CVM DELIBERATION NO. 273/98)

8.3.7.2 Deferred Tax Asset
It is worth clarifying that, in any situation, including for cases of companies that have recognized deferred tax assets prior to the effectiveness of CVM Instruction No. 371/02 and that do not recognize additional value to that balance, it is mandatory to disclose in the explanatory note the following information (items I, II, and III of article 7°):
"I estimate of the portions of realization of the deferred tax asset, discriminated year by year for the first 5 (five) years and, from then on, grouped in maximum periods of 3 (three) years, including for the portion of the deferred tax asset not registered that exceeds the realization term of 10 (ten) years referred to in item II of art. 2°; II effects resulting from eventual alteration in the expectation of realization of the deferred tax asset and respective foundations, as provided in art.4°; III in the case of newly constituted companies, or in the process of operational restructuring or corporate reorganization, description of the administrative actions that will contribute to the future realization of the deferred tax asset". This also applies to the disclosure, in the explanatory note, of the justified justification of the actions implemented by the company, aiming to generate taxable profit in the future. These actions represent fundamental requirements for the company to be able to keep tax credits in the asset in the absence of a history of profitability (art.3°, § sole). (CVM INSTRUCTION NO. 371/02)

9. Segment Reports
   9.1 Disclosure in explanatory note of segment information
   Segment information aims to provide users of the financial statements with information on the size, contributions to the result, and growth trends of the different operational or geographic areas in which the company operates, allowing for prospective analysis regarding risks and perspectives of a diversified company. Reminding that the financial statements aim to allow the projection of expected future cash flows, it is particularly relevant that the generation of such cash flows can be evaluated by analysts and investors by business area or by geographic region of operation of the open company or the business conglomerate that includes it. Segmented information provides the user with the opportunity to know the performance of each area or main business managed by the company. The knowledge of this mix is important information insofar as the user can effectively compare these performances, not only within a company, but eventually also in relation to other companies. When analyzing a given sector, the investor may encounter companies that present a global performance that was not fostered in the basic sector of operation, but rather by other activities or non-repetitive businesses. The statements presented in segmented form also serve to elucidate this circumstance, as they will allow users to evaluate the performance of each activity. From this aspect, the CVM encourages the disclosure of this information by open companies, especially for those that publish consolidated statements. For the presentation of segment information, it is necessary, preliminarily, to define the segments to be evidenced. A segment comprises a component of a company that is involved in the production of goods and services, or group

of these, subject to risks and returns different from other segments. It is important to remember that, as a general principle, the company must use the same logic of analysis for decision-making used by its administrators in the managerial reports in the structure of the information of activities by business segment.

The company, to highlight its segments, must adopt the form of "business" or "geographic area", or both. If the form used by administrators does not allow for rapid segmentation, the company may use some rules for its grouping into segments. For example, as defined in international standard IAS 14, the segmentation used for a business segment must observe: (i) the nature of products or services; (ii) nature and technology of production processes; (iii) types of markets in which products and services are sold; (iv) main classes of customers; (v) channels and methods of product distribution and (vi) when applicable, the existence of a specific regulatory environment. In turn, the use of the geographic area segment form comprises an identifiable part of a company focused on operations in a specific country, group of countries or, as in the Brazilian case, due to possessing continental dimensions, the various regions of the country.

Once the segments are established, whether by "business" and/or "geographic area", the company must also establish which form of disclosure should be considered as primary or secondary, as it will have a direct effect on the content of the information made available.

The segmented information that must be included, considering the primary disclosure format (business or geographic area) based on international standard 14 (IAS 14), are: (i) revenues, expenses and results obtained by the segment; (ii) assets and liabilities involved in the segment; (iii) capital expenditures in the segment; (iv) depreciation, amortization and other significant expenses; (v) effects on the segment of results with equity method; (vi) nature and value of extraordinary items, provided they are directly attributable to a segment or capable of allocation, on rational bases; (vii) significant contingencies directly attributable to the segment, and (viii) reconciliations between the segmented information and the accumulated information, as well as any other relevant segmented information used by administrators in the decision-making process.

For the secondary format, the company must disclose, at least, the following information: (i) the value of assets of each segment; (ii) sales revenues to external customers (excluding sales between departments/areas of the same company inter-segments) and (iii) capital expenditures of the segment. If the company adopts and exercises its operational activities in a single segment, of business or geographic area, the information must be disclosed.

With the aim of exemplifying disclosure by segments, we demonstrate below information by segments in compliance with the standards issued by the IASB. In this sense, it is convenient to remember that such information is only an example of the minimum information required and that, as a determination of those standards, the model to be used must be consistent with the information used internally during the decision-making process by the manager.

Only for the purpose of illustrating the type of note required, an example of a manufacturing company, with operations in various regions, is presented below:

"NOTE XXX SEGMENT INFORMATION

The segment information is based on two formats: the primary reflects the management structure adopted by the group, while the secondary refers to the division by products. The primary format of segmentation, by management responsibility and geographic areas, represents the company's management structure. The group's main activity is food trade. The other activities, poultry line and feeds, are managed on a regional basis. The secondary disclosure format, represented by product line, is divided into five categories, or segments. The results by segment represent the contribution of the different segments to the formation of the result, encompassing administrative expenses, research and development costs and the Group's profit. The unallocated items comprise corporate expenses, research and development costs, amortization of any "goodwills" and, for the product segments, restructuring and other small costs. Specific expenses with product research and development are allocated directly to the segments. The assets of each segment comprise properties, equipment, receivables, inventories and prepaid expenses. The unallocated items represent research and development assets, including any goodwill. Liabilities comprise debts with suppliers and other obligations, provisions and deferred revenues. The eliminations represent movements between the various companies of the Group, between different segments.

The assets and liabilities segmented by geographic area are represented at year-end value. The assets by product line represent the annual average, which management believes is a better indication of the level of capital investment for decision purposes."

By Geographic Area

In millions of Reais Current Year Previous Year Current Year Previous Year Sales Results Region 1 6,685 6,571 696 688 Region 2 6,649 6,381 882 876 Region 3 3,864 3,927 650 668 Other Activities 3,976 3,476 537 504 21,174 20,355 2,765 2,736 Unallocated Items (460) (439)

Profit from Operations 2,305 2,297

The opening of sales by geographic area is done by customer destination. Inter-segment sales are not significant.

In millions of Reais Current Year Previous Year Current Year Previous Year Assets Liabilities Region 1 3,127 3,228 1,346 1,320 Region 2 2,748 2,625 919 865 Region 3 1,724 1,724 613 648 Other activities 2,187 1,965 804 724 9,786 9,542 3,682 3,557 Unallocated Items 7,605 2,659 290 97 Eliminations (280) (212) (280) (212) 17,111 11,989 3,692 3,442

In millions of Reais Current Year Previous Year Current Year Previous Year Capital Expenditures Depreciation of properties and equipment Region 1 238 236 201 222 Region 2 187 191 174 192 Region 3 156 138 110 120 Other activities 293 237 139 130 874 802 624 664 Unallocated Items (a) 29 23 21 20 903 825 645 684 (a) Corporate, research and development fixed assets.

By Product Line

In millions of Reais Current Year Previous Year Current Year Previous Year Sales Results Product Line 1 6,005 5,761 1,065 1,080 Product Line 2 5,739 5,493 643 655 Product Line 3 5,331 5,158 506 487 Product Line 4 2,811 2,744 309 291 Product Line 5 1,288 1,199 313 303 21,174 20,355 2,836 2,816 Unallocated Items (a) (531) (519) Profit from Operations 2,305 2,297 (a) Corporate, research and development expenses and restructuring costs.

In millions of Reais Current Year Previous Year Assets Product Line 1 2,772 2,663 Product Line 2 2,782 2,804 Product Line 3 2,155 2,245 Product Line 4 1,587 1,671 Product Line 5 715 647 10,011 10,030

In millions of Reais Current Year Previous Year Capital Expenditures Product Line 1 266 234 Product Line 2 143 132 Product Line 3 115 98 Product Line 4 62 62 Product Line 5 25 28 611 554 Administration, distribution, research and development 292 271 903 825

In the example transcribed above, we can verify that the primary disclosure format is that of geographic area, dividing activities into three large groups: Region 1, Region 2 and Region 3. With the division used, sales, results, assets and liabilities were presented, as well as information regarding capital expenditures and depreciation. In the example, information by product group was also demonstrated, in respect of the IASB standard, which represent the secondary disclosure format.

9.2 The North American standards: Pronouncement SFAS 131

Notwithstanding the framework to be followed corresponds to the international pronouncement IAS 14, CVM reminds that FASB, through pronouncement SFAS 131, also regulated the disclosure of information by business segments. SFAS 131 introduced a concept of "management view" in segment information, in which information must be presented on the internal bases used by decision-makers to evaluate segment performance and to decide how to allocate resources to segments. Some Brazilian companies already adopt such disclosure form, mainly those that have shares traded in the North American market, where such rules are mandatory.

Important point, and which can be considered as the main difference between the two sets of standards (international and North American), consists in the fact that SFAS 131 does not require that the segmentation of information strictly obey accounting principles (in that country's case, US GAAP), used in the preparation of consolidated financial statements. FASB's concern is that segmented information be presented in the form used by the administrator for decision-making. However, in these cases where there are differences between segmented information and accounting reports, it is necessary to present a reconciliation that compares the numbers made available. When using the model adopted by North American standards (FASB), the company must make it clear to the reader that the information presented there follows the managerial model, not being segmented information resulting from the adoption of accounting principles.

Currently, IASB is promoting studies to promote convergence of IAS 14 to the model adopted by FASB (SFAS 131). In this way, we consider it relevant for those companies that adopt segment disclosure in the model proposed by IASB, to already do so, if possible, given the change that will occur soon.

10. Information that Reflects the Effects of Price Changes

10.1 Concepts

As highlighted in item 1 of this Circular Letter, the set of financial statements made available to the market must highlight all information that is relevant for the evaluation of the open company's equity situation.

To be useful to the decision-making processes of its users, accounting information must gather four main qualitative characteristics or attributes: Relevance, Understandability, Reliability and Comparability.

Notwithstanding the others, we highlight, in this point, the attribute of Comparability. To be comparable, accounting information must be expressed in the same monetary standard, that is, they must be expressed in currency of the same purchasing power on the date of the last accounting information presented.

The voluntary disclosure of accounting information prepared in currency of constant purchasing power constitutes an accounting procedure that aims to eliminate relevant distortions arising from inflationary effects, thereby achieving the objectives of the law to confer the necessary transparency to know the equity and financial situation of companies. These distortions, evidently, become larger or smaller due to the level of inflation, the company's equity structure, the return rate of its assets and its cost of capital (own or third-party).

Therefore, for comparative analysis purposes, its disclosure meets the market's demands in a more complete way, thus consisting of a more appropriate system for proceeding with the analysis of the company's financial position in economic environments where inflation is present, conferring a higher degree of comparability to the information provided to users of the financial statements.

In this sense, it is necessary to alert open companies and their independent auditors about the provisions of CVM Orientation Opinion No. 29/96 where, among other orientations, it can be extracted:

"(...) it is relevant to highlight that open companies must evaluate the importance of this information, including for comparative analysis purposes, and its disclosure, in order to meet, in a more complete way, the demands of the market".

"(...) Law No. 6.40/76 establishes that financial statements must be completed by explanatory notes and other analytical tables or accounting statements necessary for the clarification of the entity's equity situation and its results".

It should be highlighted that the lower annual inflation indices of the Brazilian economy in recent years, compared to our historical experience, do not ensure the non-existence of relevant inflationary effects. These depend on the combination of the company's equity structure and the magnitude of inflation, which is not negligible data, considering the evolution of accumulated inflation measured by IPCA (IBGE) and IGPM (FGV), as can be observed in the table below (in the same period in which the disclosure of inflationary effects in financial statements ceased to be mandatory):

Accumulated Inflation in the period 1996 – 2004 (percentage variation)

2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 IPCA Annual Variation december
5.69 7.60 9.30 12.53 7.67 5.97 8.94 1.65 5.22 9.56
IPCA
Accumulated Variation
103.73 92.76 79.14 63.90 45.65 35.27 27.65 17.18 15.27
IGPM
Annual Variation december
1.21 12.41 8.71 25.31 10.38 9.95 20.10 1.78 7.74 9.20
IGPM
Accumulated Variation
170.50 167.27 137.76 118.71 74.53 58.12 43.81 19.74 17.65

Source: Database – Economic Advisory – ASE – CVM, Feb 2005

Research conducted by Fipecafi, estimating the recognition of inflation effects in a group of 107 open companies with shares traded on the stock exchange in the year 2002, indicated the following effects:

Effects of Inflation on Permanent Asset

permanent asset in 2002 historical until 2001 year of 2002 total (*) R$ millions R$ millions % R$ millions % R$ millions % with IPCA 100,793.9 28,128.8 27.9 13,960.2 13.9 42,089.1 41.8 with IGPM 100,793.9 45,816.3 45.5 33,841.5 33.6 79,657.8 79.0

(*) The information was obtained from the balance sheet of 1995, the last one that included the recognition of inflation effects, and those of the period from 1996 to 2001, all in nominal values. For the year 2002, nominal variation of increases and decreases in permanent assets equal to that which occurred in 2001 was admitted.

These gross increases, compared to the equity expressed in historical values for the same group of companies, shows the relevance of the lag between historical and corrected values:

Comparison of Permanent Asset Correction with Equity

Correction of permanent asset until 2002
Equity in
2002 (historical) percentage variation
R$ millions R$ millions (%) with IPCA 42,089.1 62,796.6 67.0 with IGPM 79,657.8 62,796.6 126.9

10.2 Disclosure in explanatory note of Information that Reflects the Effects of Price Changes

10.2.1 Statements in Currency of Constant Purchasing Power

CVM understands that, in the voluntary disclosure of data in currency of constant purchasing power, a minimum content of information must be presented, such as:

a) statement of results: net operating revenue, gross profit, net financial expenses, net profit/loss; b) balance sheet: inventories and advances, permanent asset, total asset and equity; and c) reconciliation with the result and with the equity determined in the commercial bookkeeping.

Still within the assumptions that guide the Information Disclosure Policy, it is recommended that companies, together with their auditors, evaluate the convenience not only of the voluntary presentation of this type of information. They must also consider the convenience of its insertion as an explanatory note to the published financial statements and quarterly information sent to CVM or even the presentation of these statements and complete quarterly information, in currency of constant purchasing power.

(CVM ORIENTATION OPINION NO. 29/96)

11. Fixed Assets

11.1 Recoverability of Assets and Spontaneous Revaluations

The Fundamental Accounting Principle of evaluation of fixed assets is based on the concept of acquisition cost as the value basis, not being accepted, in many countries, the adoption of market value evaluation criteria. In Brazil, the corporate legislation in force since 1976, complemented by tax legislation, allows this practice with numerous restrictions and cautions.

CVM Deliberation No. 183/95 approved IBRACON Pronouncement on the subject, making it mandatory in cases of revaluation, for open companies, the adoption of the procedures described therein.

The first of these restrictions is that related to the very meaning of revaluing. Revaluation means the abandonment of the original cost principle as the value basis and the adoption of market value or replacement value for the revalued assets.

The second restriction is related to which assets can be subject to revaluation. Only tangible permanent fixed assets can be subject to revaluation, with the revaluation of intangible assets, or assets for which an operational discontinuity is expected, being expressly prohibited.

In addition, once the procedure of evaluating a certain set of assets at market value (revaluation) is adopted, such procedure must be periodically redone, meaning that, at most every 4 (four) years (ideally, every year), the open company that has adopted this procedure must re-evaluate these assets, under the terms and procedures described in the cited IBRACON pronouncement.

Another restriction is related to the revaluation of assets individually. It is not acceptable, for the same open company, the existence of assets of the same nature or of the same account, part evaluated at cost and another part evaluated at market value (revaluation). Such restriction also applies to consolidated financial statements, it not being acceptable that the controlling company and a certain controlled company maintain assets of the same nature or of the same account evaluated by two different criteria (cost and market value), both for equity method purposes and for consolidation purposes.

Another aspect to be observed in revaluation is that which concerns the remaining useful life of revalued assets and are subject to physical wear. It is absolutely indispensable that the Valuation Report indicate the remaining useful life aiming to allow the definition of future depreciation rates.

The administration of the open company must evaluate, at least, each social year if there is any indication that an asset may have lost value or economic substance. In the existence of external or internal indicators, the company must deepen its analysis in order to verify if the ability to generate future economic benefits, the remaining useful life, the method and term of depreciation or amortization, or the residual value of the assets need to be adjusted, or even if a provision for losses must be constituted.

Attention must also be given to the content of the explanatory notes on revaluation, which must contain, at least, the

information listed in paragraph 67 of the cited IBRACON Pronouncement, especially regarding the company's policy on the treatment given to the effects of revaluation on dividends, with the mandatory citation of the date of the revaluation performed, as well as the expected dates of subsequent and/or complementary revaluations.

11.2 Periodicity of Asset Revaluation
When a company chooses to perform and account for an asset revaluation, the criterion or basis for evaluating its fixed assets changes radically: it ceases to be the cost value and becomes the market value or replacement value. More than just relying on a legal permission, the administration is sending a message to the market that it will impact future profits by seeking, in operations, to recover the market value or replacement value of its assets, and no longer just the cost value, which has a vital difference in economic interpretation. This means that sales revenues will be compared with a new level of expenses, which affects the result and the consequent allocations in the calculations of dividends and profit retention. Therefore, revaluations must be performed periodically, with such regularity that the net book value does not present significant differences relative to the market or replacement value on the date of each balance sheet. It is not appropriate to revalue only once in the history of the company's balance sheets, and to add the costs of new assets to the revaluation values accounted for in the past, as thus the fixed asset balance ceases to have any representativeness as information.

In view that CVM Deliberation No. 183/95 entered into force on July 1, 1995, regarding revaluations made from that date, and, by force of CVM Deliberation No. 206/96, on December 31, 1996, regarding reserves already existing, we remind you that the aforementioned deliberation establishes the following maximum deadlines for performing new revaluations:
a) annually, for accounts or groups of accounts whose market values vary significantly relative to previously recorded values; b) every four years, for assets whose market price fluctuation is not relevant, including still the goods acquired after the last revaluation; c) observed the concept and deadlines above, the company may opt for a "rotating system", performing periodically, partial revaluations, by rotation, with defined schedules, which cover the total of assets to be revalued in each period; and d) The publicly-held company must disclose in an explanatory note all information related to the option referred to in letter "c" above.

11.3 Disclosure in Explanatory Note of Fixed Assets
11.3.1 Revaluation of Fixed Assets
The company must disclose:
a) the bases of the revaluation and the appraisers (in the 1st year of revaluation); b) the history and date of the revaluation; c) the summary of the accounts subject to revaluation and respective values; d) the effect on the result of the period, arising from depreciations, amortizations or exhaustion on the revaluation and subsequent write-downs; e) the treatment regarding dividends and participations; f) the treatment and values involved relative to taxes and contributions; and g) in the case of partial revaluation, which items and accounts were revalued and which were not, with indication of the previous net book value of the new evaluation and of the revaluation registered by account or nature.

In the case of revaluation reserves constituted before 01/01/93, the following must be disclosed:
a) the portion of the special monetary correction - Law No. 8.200/91 that is included in the Reserve; b) the amount realized in the period; and c) the tax effect on the reserve balance that exceeds the portion referred to in letter "a" above.

CVM allowed publicly-held companies the right to opt, until 03/31/99, for the following procedures:
a) adoption of the market value for the evaluation of fixed assets; b) adoption of the corrected cost method, being able to keep the assets at revaluation values; c) return to the corrected cost criterion, reversing existing revaluations.

The effects of the decision taken must retroact to the beginning of the fiscal year in which the procedure was adopted, the fact occurring and its impact, if any, on the accounting statements of the current and previous fiscal year being subject to disclosure in an explanatory note.

(CVM INSTRUCTION NO. 197/93 AND CVM DELIBERATIONS NOS 183/95 AND 288/98)

12. Leasing
    12.1 Disclosure in Explanatory Note of Leasing
    Lessee companies must disclose, at minimum, the following:

a) value of the asset and liability, if the lease is configured as financed purchase; b) balance, value and number of installments, embedded interest, monetary variation; and c) other information related to long-term contracts.

Lessor companies must disclose in an explanatory note:
a) the criteria currently used for accounting for their operations, including those that cause the need for present value adjustments because they do not meet the Fundamental Principles of Accounting; and b) the present value adjustments of the future flows of the leasing portfolios, evidencing the effect of Income Tax.

(CIRCULAR LETTER/CVM/PTE NO. 578/85, CVM INSTRUCTION NO. 58/86, CVM GUIDANCE OPINION NO. 15/87 AND LAW NO. 6.404/76, ARTICLE 176, § 5, "e")

13. Revenue
    13.1 Results of Future Periods
    13.1.1 Concepts
    The group of accounts "results of future periods" is represented by net revenue "not earned or not realized", due to the accrual basis of periods. It is characterized by the fact that there is no obligation to return money, deliver a good or provide a service that implies any additional effort, or any burden or significant sacrifice for the assets of the beneficiary company of the revenue. The object of the operation – good or service produced – is made available to the buyer or user, without any additional effort on the part of the company. The most common examples are: rents received in advance, by virtue of contractual provision, without possibility of return (warehouse, silo rental), net of commissions, taxes and other charges levied; credit opening commissions in financial institutions. In consolidation, this group must include the discount that is not absorbed in the elimination of the investment.

This group, therefore, does not contemplate portions of customer advances, for products to be delivered, service to be executed or obligations of another nature, which shall be classified in current liabilities or long-term liabilities. Cases classifiable in this classification are very rare. A special case of technically adequate use of this group is the recording of unrealized profit in transactions between the Parent Company and its Subsidiaries.

13.1.2 Disclosure in Explanatory Note of Sales or Services to Be Performed
The recording of an accounts receivable account presupposes that the revenue recognition principle is met. Thus, it is inadmissible to record accounts receivable having as a counterpart an account of future period results. In the case of advance billing or contracts with guarantee of receipt for sales or services to be performed, the company must, when relevant, disclose the fact and respective amounts.

(CVM GUIDANCE OPINION NO. 21/90)

13.1.3 Projects in the Implementation Phase
The gain, if any, resulting from the comparison of expenses and revenues attributable to projects in the implementation phase, must be presented as results of future periods. Only if there is, demonstrably, certainty that this gain is of a recurring nature throughout the implementation period is it, exceptionally, that it may be recognized in the company's results. In an explanatory note, the procedure adopted must be justified, as well as the cause of said gain clarified.

(CVM GUIDANCE OPINION NO. 17/89)

14. Employee Benefits
    CVM Deliberation No. 371/2000 approves and makes mandatory, for publicly-held companies, the Pronouncement on Accounting for Employee Benefits, issued by IBRACON and prepared jointly with CVM. We also consider applicable to publicly-held companies the clarifications contained in IBRACON Technical Interpretation No. 01/01 of NPC 26, attached at the end of the clarifications of this item. There are, furthermore, some aspects that were not explicit in this technical interpretation and that deserve clarification:

14.1 Debt Confession Instruments
As a general rule (in compliance with the accrual basis), obligations arising from employee benefits, both in the existence of a formal debt confession instrument and in its absence, should already have been recognized in the equity of the sponsoring companies. However, in view that this is a specific norm that provides for a transition rule, we understand that the situation mentioned is included in the effects of CVM Deliberation No. 371/2000.

14.2 Scope and Coverage
Although it is evident, it is worth clarifying that CVM Deliberation No. 371/00 is applicable to joint-stock companies of public capital that are, or will become, sponsors of benefits to their employees. In this sense, the norm establishes as follows:
"The objective of this pronouncement is to establish when and in what form the cost to provide employee benefits must be recognized by the Employer/Sponsoring Entity, as well as the information that must be disclosed in the accounting statements of this Entity".

Therefore, the charges assumed by the sponsor regarding the benefits due are in no way modified as a result of the application of this Deliberation. What the norm disciplines is the moment and the form of accounting for these charges by the sponsor (publicly-held company). Moreover, the obligations assumed by the sponsor do not arise from the accounting registration of the obligation, but rather from contractual clauses or legal and normative impositions assumed by this sponsor.

Although mentioned in the Circular Letter closing the 2001 fiscal year, it is worth emphasizing once again that the pronouncement does not cover only pension and retirement benefits, but rather these and several other categories of benefits, such as life insurance, medical and/or dental assistance, voluntary dismissal plans, indemnities or bonuses for retirement, etc.

14.3 Nominal Rates X Real Rates
It was observed that, for the calculation of the actuarial obligation, most companies used nominal interest rates (which include an expected inflation rate). Others, in smaller numbers, used real interest rates. The pronouncement does not determine the rate to be used, whether nominal or real.

For those companies that opt for a real interest rate, it is necessary to disclose, with justification, the inflationary expectation.

Notwithstanding, it must be stressed that, regardless of the option, the model must be consistent, that is, the same model (nominal or real) must be used for all economic rates to be employed (discount, return on investments, salary growth, benefit growth, medical service growth, etc.).

14.4 Discount Rate of the Actuarial Obligation
The discount rate must be compatible with the conditions of the company's obligation. Therefore, the term and risk compatible with this obligation must be considered.

The pronouncement establishes that the discount rate must be based on first-line papers or government bonds, traded in the market, and in the absence of these, the company must determine and justify the rate used, considering, as mentioned above, term and risk compatible with the obligation assumed.

Although evident, we stress that the discount rate is not linked to the return rates of the assets of the benefit plan.

14.5 Return Rate of Plan Assets
This rate must be compatible with the expected remuneration and, consequently, must be a reflection of the investments of the patrimony constituted for the payment of benefits. Therefore, and as stressed above, it should not be tied, without justification, to the discount rate.

14.6 Benefit Growth Rate
It was observed that a significant portion of the companies that reported employee benefits did not disclose this rate. It is important to stress that any relevant premise used must be subject to disclosure, as provided for in item 81.f.iv of the Pronouncement attached to CVM Deliberation No. 371/00.

This rate must be determined based on the plan regulations and its disclosure is relevant in view that it can significantly impact results, mainly in cases of readjustments by indices different from inflation indices, benefits corrected by parity with salaries and readjustments that produce a lag between the inflation rate adopted by the plan and the rate used for benefit readjustment.

14.7 Other Relevant Premises
Although not expressly mentioned in the pronouncement, the biometric premises constitute relevant information to be made available to the user of the accounting information of a company sponsoring employee benefits. Information related to mortality tables, turnover tables and others, in the same way as the item previously addressed, are relevant, in view that they can significantly impact results.

14.8 Exclusions in the Determination of the Fair Value of Plan Assets
Items 17 and 60 of the Pronouncement approved by CVM Deliberation No. 371/00 determine that non-transferable financial instruments issued by the sponsor and held by the pension fund are not considered plan assets, and should not be included in the determination of the fair value of assets.

In line with IBRACON Technical Interpretation No. 01/01 attached at the end of this item of the circular letter, the financial instruments referred to above are those, issued by the publicly-held sponsoring company, that cannot be transferred, that is, not subject to being negotiated with third parties or related to unpaid contributions or loans to the sponsor, even if registered as an obligation of the latter. The eventual liability registered in the publicly-held sponsoring company, excluded from the net assets of the plan, shall be classified as part of the total actuarial obligation.

14.9 Actuarial Valuation Method
As provided in the pronouncement, the method for determining the actuarial obligation is the Projected Credit Unit Method. The Company must declare in an explanatory note that this was the method adopted. We know that the pension fund sponsored by the Company may have adopted a different method, however, the purpose of the pronouncement is to allow uniformity in the determination of the actuarial obligation and the eventual actuarial liability/asset of the sponsor.

14.10 Accounting for the Initial Adjustment of the Actuarial Liability
CVM Deliberation No. 371/2000 approved and made mandatory, for publicly-held companies, the Pronouncement on Accounting for Employee Benefits, issued by IBRACON and prepared jointly with CVM. This pronouncement determined its mandatory application for the period starting on or after January 1, 2002. In the transitional provisions (paragraphs 84 and 85), the recognition of this actuarial liability was allowed in two ways; either in the result over a five-year period or by the time of service or remaining life of the employees if these are smaller, or directly in equity with the title "adjustment of previous periods".

In the first alternative, companies that opted for the debit in the result account, the pronouncement specified that the adjustment would be as an extraordinary item in the result of the first exercise and was frozen for the following years.

In the interpretation of this aspect, companies must consider it equally permitted for the following years, from the second to the fifth years, that the adjustment of this actuarial liability be equally recognized and disclosed prominently as an extraordinary item, that is, outside the operating result.

14.11 Disclosure in Explanatory Note of Retirement and Pension Plans
The following information must be disclosed in the accounting statements of the Sponsoring Entity:
a. The accounting policy adopted by the Entity in the recognition of actuarial gains and losses; b. A general description of the characteristics of the plan;
c. A reconciliation of the recognized assets and liabilities in the balance sheet, demonstrating at least the following:
i. The present value, on the balance sheet date, of the actuarial obligations that are fully uncovered;
ii. The present value, on the balance sheet date, of the actuarial obligations (before deducting the fair value of the plan assets) that are fully or partially covered;
iii. The fair value of the plan assets on the balance sheet date;
iv. The net value of unrecognized actuarial gains or losses;
v. The value of the past service cost not yet recognized in the balance sheet; and
vi Any value not recognized as an asset due to the rule established in paragraph 49.g of this pronouncement. d. A statement of the movement of the net actuarial liability (asset) in the period; e. The total expense recognized in the statement of result for each of the following items:
i. The current service cost;
ii. The interest cost;
iii. The effective and expected return on the plan assets;
iv. Actuarial losses and gains;
v. The amortized past service cost; and
vi The effect of any increase, or reduction or early settlement of the plan. f. The main actuarial premises used on the balance sheet date, including, when applicable:
i. The rates used for the present value discount of the actuarial obligation;
ii. The expected return rates on the plan assets;
iii The estimated salary increase indices; and iv Any other relevant premise used.

(item 81 of CVM DELIBERATION NO. 371, OF DECEMBER 13, 2000)

14.12 Annex: IBRACON Technical Interpretation No. 01/01 NPC 26
Question 1
Recently, the federal government issued Provisional Measure No. 2.222, of December 4, 2001, which deals with the taxation, by income tax, of benefit plans of a previdenciary nature. The application of this PM may result in modification of the net assets of the plan. How should the resulting effects, if any, be treated within the scope of the application of NPC 26? Answer As defined in paragraph 52 of NPC 26, "actuarial gains and losses comprise the differences between the actuarial premises and what actually occurred, based on experience". Thus, the effects of PM No. 2.222 relate to the profitability of the plan assets and, as such, must be considered as an actuarial gain or loss. Consequently, this effect will enter the calculation of the portion of actuarial gains or losses to be recognized in accordance with paragraph 53 of NPC 26 (Actuarial gains and losses).

Question 2

Can the actuarial calculation be performed for dates prior to the closing of the fiscal year? What is the maximum acceptable period for this calculation and what are the subsequent mandatory minimum procedures to ensure that between the calculation date and the end of the fiscal year no significant changes occurred that should be reflected in the actuarial liability to be recorded?

Answer
The calculation can be performed for a date prior to the closing of the fiscal year provided that the period does not exceed 60 days and that any relevant changes in the assumptions or other components of its calculation, occurring between the date and the date of closing of the fiscal year, are analyzed, for the purpose of compliance with paragraphs 49(d) and 49(e), and their effects reflected in the original calculation. The minimum procedure to be performed is the comparison of the assumptions used in the calculation with the actual effects that occurred during the period.

Question 3
Assuming that, on December 31, 2001, the company already has a recorded actuarial liability of $1,000, and that, as a result of the application of NPC 26, the new actuarial liability is $1,500, and the company decides to record it over 5 years (or by the service time or remaining life of the employees, if these are shorter). In this situation, could the company reverse the $1,000 liability by crediting Equity (PL) and subsequently record the $1,500 over time in the result? This would create an increase in Equity on 12/31/2001, as a consequence of the decrease in the liability and its constitution over the next 5 years (or less, depending on the other criteria mentioned above).

Answer
This reversal cannot be made. The adjustment that should be recorded against Equity or the result of the next 5 years refers to the difference between the actuarial liability previously recognized by the company and that determined in accordance with NPC 26.

Question 4
In the event that the company does not record the effect of the initial adjustment directly against equity, but decides to record the initial adjustment in the result in a period shorter than that allowed by NPC 26, is such a position acceptable?

Answer
Adjustments to the actuarial liability, as a result of the adoption of NPC 26, shall be recognized in the result over a period of up to five years or by the service time or remaining life of the employees if these are shorter, or alternatively until December 31, 2001, directly in equity under the title "adjustment of prior periods". If the sponsor adopts a period shorter than 5 years, such decision must be disclosed in the explanatory notes and will be irreversible. Thus, if the decision is to amortize, for example, over four years, each fiscal year, from 2002 onwards, will bear a charge of 25% of the adjustment calculated with a base date of December 31, 2001. In any case, the appropriation must follow the linear criterion.

Question 5
Adjustments made by controlled and affiliated companies directly in Equity, as a result of the application of the alternative offered by the Standard, should be reflected directly in the Equity of the controlling or investing company, or recorded in the result of the fiscal year, as equity method accounting?

Answer
Exceptionally, the adjustment made by controlled and affiliated companies, directly in equity, shall be reflected in the same way in the investor, that is, in its equity.

Question 6
In light of NPC 26, is a defined contribution plan, but which at retirement gives the participant the option to receive a lifelong monthly value, characterized as a defined benefit plan? For this plan, must the actuarial calculation be performed only for retired beneficiaries?

Answer
This is a very important issue, as some plans have the original characteristic of defined contribution, but give the participant the option to receive a lifelong monthly income with a parameter, for example, 40% of the official social security ceiling. Thus, the plan or part of it, for the option holder, has become a defined benefit, which will require that the accounting provisions for defined benefit plans be applied. The mass of beneficiaries to be included in the calculation must be actuarially estimated.

Question 7
What consideration should be given to assets recorded in the private pension entity that represent rights against the sponsor?

Answer
If the right registered in the private pension entity is transferable (i.e., negotiable with third parties) and has a counterpart already recorded as an obligation in the sponsor, this right should be included in the amount of the plan's net assets. If the right registered in the private pension entity is non-transferable (i.e., not subject to negotiation with third parties) or relates to unpaid contributions or loans to the sponsor, even if recorded as an obligation in the sponsor, this right cannot be considered as a net asset of the plan. Additionally, any liability recorded in the sponsor, excluded from the plan's net assets, shall be reclassified as an actuarial obligation.

Question 8
In defined benefit plans that aggregate contributions from several sponsoring entities belonging to the same economic group or not (in the latter case, these are multi-sponsor plans), how should the segregation of plan assets/liabilities be made? Can parameters such as the number of employees be used?

Answer
The use of the number of beneficiaries to segregate plan assets is not adequate. It is necessary that the accumulated actuarial liability of each sponsor be clearly identified and the total assets of the plan must be allocated proportionally to the amounts of the accumulated obligations of each sponsor, except when another form is determined in the plan regulation(s). When sponsors assume joint and several liability in a multi-sponsor plan, each sponsor must evaluate the financial capacity of the other sponsors and consider the need to recognize additional liability (contingencies) if it is probable that one or more of them will not be able to fulfill the joint and several obligation.

Question 9
Is the segregation of the actuarial liability between short and long terms appropriate? Under what circumstances would this be appropriate?

Answer
Yes, it is appropriate when there is a provision for the payment of contributions in the 12 months following the closing of the financial statements. If the sponsor chooses to recognize the liability over up to 5 years and the amount of the recognized liability is less than the amount of contributions expected to be paid in the 12 months following the closing date, the entire balance of the actuarial liability shall be presented in current liabilities. If the sponsor chooses to account for the liability in full at once, it shall segregate as current liability the portion to be paid in the 12 months following the closing.

Question 10
Paragraph 84 establishes that adjustments to the actuarial liability, as a result of the adoption of NPC 26, shall be recognized in the result over a period of five years or by the service time or remaining life of the employees. Is it possible to recognize the full liability on December 31, 2001 with a corresponding deferred asset account, which would subsequently be amortized over a period of 5 years or by the service time or remaining life of the employees?

Answer
If the option is not for full recognition against equity on December 31, 2001, the actuarial liability shall be constituted gradually, over the period established in paragraph 84, and the recording of a deferred asset for future amortization is not appropriate. However, the disclosures provided for in paragraph 81 must be made.

Question 11
A company accounted for, before the effectiveness of NPC 26, an actuarial liability of R$ 1,000 with a corresponding deferred asset, which was amortized over the remaining service time of the employees. Upon adoption of NPC 26, the calculated actuarial liability is R$ 1,500 and there still remain R$ 1,000 and R$ 900 accounted for as liability and deferred asset to be amortized, respectively. How should one proceed?

Answer
The first step is to eliminate the deferred asset against the liability, which will result, in the example, in a net liability of R$ 100. Subsequently, depending on the option chosen by the sponsor, record R$ 1,400 as a complement of the liability, in counterpart to equity, or record this value over 5 years or by the service time or remaining life of the employees, if these are shorter.

Question 12
Are the assumptions for actuarial calculations required by NPC 26 the same as those used in the plans, according to the rules of the Secretariat of Complementary Social Security?

Answer
The actuarial calculations required by NPC 26 can be significantly different from those required for pension entities. In addition to the actuarial method in the case of NPC 26 being the projected credit unit method, there may be other components of the actuarial assumptions different from those detailed in item 49 regarding measurement.

15. Accounting for Concessions
    15.1 Concepts
    On 12/14/2001, CVM placed a draft Resolution in public hearing with the objective of collecting the market's opinion on the pronouncement to be issued by IBRACON. This hearing notice highlighted the little accounting literature on this matter, even at the international level, highlighting the existence of two currents of opinion (activating or not the concession right) and especially requesting the informed understanding of interested parties regarding the best alternative to be adopted. In summary, the alternatives considered in the draft for accounting for government concessions are:

a. activate the concession right and the assets received in the concession, and as a consequence, recognize future obligations (payables); b. do not activate and treat the concession as a kind of operating lease (rental), not recognizing future obligations;
c. reconciliatory alternative – due to the lack of recognition of inflationary effects through monetary correction of the balance sheet, activate the concession right and defer the effects of monetary variations of future obligations.
The reconciliatory alternative sought to overcome the limitation of activating the concession right and the assets received, which runs into the problem of the lack of registration of inflationary effects in the financial statements, which is not generally disclosed by companies.
Due to not having been able to reach a consensus on the presented draft given the various positions presented and the lack of an international pronouncement that could help elucidate this problem, Ibracon issued Technical Communication No. 03/03, transcribed below and approved by this Circular Letter, which lists the minimum disclosure requirements for companies operating with concessions. In addition to these minimum requirements, administrators must bear in mind that they are legally responsible for the disclosure of the minimum information considered essential for the market. Company administrators must promote the continuous evaluation of additional information needs to the public, given their access and knowledge about the facts and the company's environment and their greater capacity to assess its relevance, using the criterion of the possible reflection of events on the quotation of the securities issued by them. Based on this, companies operating with government concessions must consider whether inflationary effects cause relevant distortions on their equity, assets, and results. CVM has already manifested itself on the disclosure of inflationary effects through CVM Orientation Opinion No. 29/96 which dealt with: (i) periodicity, (ii) minimum content, (iii) criteria for preparation and (iv) index. In this regard, CVM PO No. 29 states: "(...) it is recommended that companies, together with their auditors, evaluate the convenience not only of the voluntary presentation of this type of information. They must also consider the convenience of its insertion as explanatory notes to the published financial statements and quarterly information sent to this Commission or even the presentation of these statements and quarterly information complete, in currency of constant purchasing power".

15.2 Disclosure in explanatory note
Technical Communication 03/03 - Ibracon
Concessions
After the approval of a draft for public hearing of NPC Accounting for Government Concessions, IBRACON had the opportunity to analyze the responses received in the public hearing process conducted by the Securities and Exchange Commission (CVM). During this time, IBRACON learned that the IASB (International Accounting Standards Board) is starting a study of the matter as this is of international interest. Since the objective of IBRACON is to issue NPC harmonized with international accounting standards (IFRS/IAS), it was concluded necessary and prudent to wait for the position that will be adopted internationally before issuing a pronouncement by IBRACON. On the other hand, IBRACON is already contributing to the international debate by passing on the result of studies and discussions already held to the IASB. Therefore, it would not be appropriate to require at this time any alteration in the treatment currently adopted by Brazilian companies. However, IBRACON considers it indispensable that companies provide a minimum of information so that users are provided with minimum elements for decision making. In this context, it is required from companies that operate with concessions the disclosure of the following information:
Concession Assets
1. The following information must be disclosed, on the date of each closing of the fiscal year or period, when applicable:
a. assets subject to the concession and their total values, concession term, fixed payment commitments, with description also of variable commitments both regarding their calculation and their incidence; b. residual amount of the concession, with indication of the nominal value and the present value of the installments to be paid in the 12 months following the closing of the fiscal year or period and of the installments to be paid after this 12-month period, indicating the interest rate used to calculate the present value;
c. residual value of the concession fixed assets on the date of the financial statements that shall be transferred to the granting authority at the end of the contract (corresponding to assets with residual life greater than the concession and with a clause of transfer to the granting authority);
d. amount paid to the granting authority during the fiscal year or period of the financial statements; e. bases for appropriation to the result of the costs with the remuneration of the granting authority; and f. terms of other financial commitments (maintenance and investments), including variable ones, such as those based on collected tariffs.
Related Parties
2. Considering the peculiar characteristics of a concession, disclosures regarding balances and transactions with related parties must be made, when relevant and applicable, in explanatory notes to the financial statements of the public service concessionaire and/or use of public asset referred to, which are divided into three categories:
(a) Operating transactions:
i. amounts accounted for in the financial statements of the concessionaires regarding expenses with services such as, for example, maintenance of highways/railways;
ii. amounts accounted for regarding the purchase and sale, as well as payables or receivables balances resulting from operations;
iii. provision of administrative services and/or any form of use of the physical structure or personnel of one company by the other, with or without consideration;
iv. receipts or payments for the lease of real estate or movable assets of any nature; and
v. amounts of real estate or movable assets of any nature received or delivered on loan; and
vi. other transactions deemed relevant.
(b) Investment transactions:
i. amount of contracts already celebrated in execution and accounted for in the financial statements of the entity;
ii. amounts of contracts to be executed and indication of the fiscal years in which they will be concluded;
iii. alienation or transfer of assets from the asset; and
iv. acquisition of rights or purchase options or any other type of benefit and its respective exercise.
(c) Transactions with loans/financing:
i. loans and advances, with or without financial charges, and the rates practiced;
ii. revenues or expenses recorded in the fiscal year/period regarding the loans or advances referred to in i;
iii. guarantees, sureties, mortgages, deposits, pledges or any other forms of guarantees; and
iv. novation, forgiveness or other forms of cancellation of debts.

16. Accounting for Government Assistance
16.1 Disclosure in explanatory note of government subsidies
The company must disclose the following information:
a. The existence, nature and measurable amounts of government subsidies or government assistance from which the entity benefits, as well as accounting practices. b. Non-compliance with contracted conditions regarding subsidies or the existence of other contingencies.
c. Main commitments assumed by the entity on account of the subsidies.
d. Possible subsidies to be recognized, after fulfilling the contractual conditions.

17. Effects of Changes in Exchange Rates
17.1 Exchange Rate Variation
The accounting treatment to be given to variations in the exchange rate, occurring during the year 2001, was regulated through Provisional Measure No. 3/01, of 09/26/2001, and CVM Resolution No. 404/01, of 09/27/2001, with new wording given by CVM Resolution No. 409/01, of 11/01/2001. The reading of the provisions contained in the aforementioned acts has generated some doubts and conflicting interpretations by some open companies.

17.2 Amortization
MP No. 03/01, in its article 1st, sole paragraph, determines that the amortization of the negative net result with exchange rate variations, subject to deferral, shall begin from the calendar year of 2001.
With regard to the method of amortization of the deferred exchange rate asset, CVM Resolution No. 404/01, in its item IX, determines that the deferred exchange rate asset shall be amortized linearly, for a period not exceeding 4 years. Thus, the period for amortization of the deferred exchange rate asset may be done in 2, 3 or 4 years (equivalent in quarters). By way of illustration, an open company that decides to amortize the deferred exchange rate asset at a rate of 25% for the first year, 25% for the second year and 50% for the third year will not be complying with CVM Resolution No. 404/01. The amortization quotas of the deferred exchange rate asset must be equal. In the case at hand, the open company shall use, over the three years, an amortization quota equivalent to 33.33% of the deferred exchange rate asset. In setting the amortization period, the company must consider the due dates and installments of the exchange rate liabilities that originated the deferral. By way of illustration, an open company that possesses only long-term exchange rate liability maturing in two years shall not amortize the resulting deferred exchange rate asset in a period longer than this period.

17.3 Change of the Amortization Period

17.4 Adjustment Resulting from Recovery of Exchange Losses
CVM Resolution No. 404/01 determines, in its item III, that the effects of reductions in the exchange rate on foreign exchange liabilities, which are financing fixed assets under construction or long-maturity inventory, occurring during the entire year of 2001, shall be recorded as a reduction in the cost value of these assets.
If the realization of these assets has begun, CVM Resolution No. 404/01, in the same item III, determines that the depreciation expense recorded in the period's result shall be adjusted. Similarly, the cost of long-maturity inventory that has been transferred to the period's result must be adjusted.
The same principle must be applied to the deferred foreign exchange asset. CVM Resolution No. 404/01, in its item XII, with new wording given by CVM Resolution No. 409/01, determines that the recovery of deferred exchange losses, that is, the occurrence of gains subsequent to the deferral, shall be accounted for as an adjustment of the deferred foreign exchange asset, without prejudice to the recognition of the amortization quota of the exercise. In addition to normal amortization, the recovery of losses generates an extraordinary amortization. This is the intent of CVM Resolution No. 404/01, namely, to amortize the deferred foreign exchange asset as quickly as possible. However, any negative exchange variations occurring from 01.01.2002, even if linked to liabilities that gave rise to the deferral, must be recorded in the period's result.

17.5 Partial/Total Settlement of Foreign Exchange Liability
CVM Resolution No. 404/01 determines in its item XII, with new wording given by CVM Resolution No. 409/01, that in the event of total or partial settlement of the foreign exchange liability, whether by payment or conversion into capital, the deferred foreign exchange asset shall be amortized totally or partially, in the same proportion in which the settlement of the foreign exchange liability occurred.

17.6 Reserve for Profits to be Realized and Hedge Instruments
CVM Resolution No. 404/01, in its item V, allows open companies to allocate the positive net result, with the exchange variations occurring in the year 2001, to the constitution of a reserve for profits to be realized. However, with the advent of Law No. 10.303/2001, as mentioned in item 4 of this Circular Letter, the Reserve for Profits to be Realized can only be constituted by the portion of the mandatory minimum dividend that cannot be paid from realized profits. This positive net result, as emphasized by CVM Resolution No. 404/01, in its item VI, refers exclusively to those assets and liabilities, subject to exchange risk, to the extent and in the proportion in which they are not protected by a financial instrument of any kind. Therefore, for the purposes of constituting the Reserve for Profits to be Realized, only the existence of a positive net result with the exchange variations occurring in the year 2001 should be considered, after the computation of any losses and gains arising from financial instruments, used as Hedge for assets and liabilities subject to exchange risk, occurring in the year 2001. In the same line, CVM Resolution No. 404/01 determines, in its item XIII, that the negative net result with the exchange variations occurring in the year 2001, subject to deferral, does not apply to those assets and liabilities, subject to exchange risk, to the extent and in the proportion in which they are protected by a financial instrument of any kind. Similarly, for deferral purposes, only the existence of a negative net result should be considered after considering the exchange variations with the inclusion of any losses and gains arising from financial instruments used as Hedge for assets and liabilities subject to exchange risk occurring in the year 2001. Regarding, furthermore, the negative net result with the exchange variations occurring in the year 2001, CVM Resolution No. 404/01 does not admit the deferral of speculative losses, operations in markets with future settlement for purposes other than the protection of an active or passive position, subject to exchange risk, assumed by the company.

17.7 Effect on Equity Method in consequence of Exchange Variation
In the computation of the positive or negative net result with the exchange variations occurring in the year 2001, any revenue or expense with equity method participation must be taken into consideration, specifically the portion attributed to the exchange variation, of corporate participation abroad or of any other entity defined by CVM Instruction No. 247/96, articles 2 and 3.

17.8 Temporary Differences
Provisional Measure No. 03/01, in its article 2, determines that legal entities that have opted for the deferral of the negative net result with the exchange variations occurring in the year 2001 shall exclude from the net profit of the exercise, for the determination of real profit and the calculation base of the social contribution, the difference between the deferred amount and the value amortized in the period. In the sole paragraph of this same article, Provisional Measure No. 03/01 determines that subsequent amortizations shall be offered to taxation. The effect of the above-mentioned provisions, together with CVM Resolution No. 404/01, implies the emergence of a temporary difference. In addition, depending on the taxation regime elected by the company for exchange variations (cash or accrual), other temporary differences may arise. In this sense, the IBRACON Pronouncement approved by CVM Resolution No. 273/98, of 20.08.98, must be observed.

17.9 Audit Reports/Opinions
Regarding independent auditors, CVM Resolution No. 404/01, in its item XVI, determines that they must express themselves regarding the adoption of the procedures provided for in said Resolution. Thus, in compliance with professional standards and CVM standards, independent auditors, when issuing a special review report or independent audit opinion, must observe the Fundamental Accounting Principles – FAP. It should be emphasized that, in accordance with CVM Instruction No. 308/99, of 14.05.99, article 25, sole paragraph, it is incumbent upon independent auditors to promptly communicate to this CVM about acts practiced by the administrators of open companies that are not in accordance with legal or regulatory provisions. In this sense, the non-observance of provisions of CVM Resolution No. 404/01 by open companies obliges independent auditors to communicate the fact to the CVM, in writing, within a maximum period of 20 days from its detection. The failure to communicate constitutes an infraction of an objective nature, subjecting auditors to a fine and an administrative process in the form of a summary procedure. It should be noted, furthermore, that the issuance of an opinion with reservations does not relieve the auditor of responsibility regarding this communication.

17.10 Disclosure in explanatory note of the Effects of Changes in Exchange Rates
In explanatory notes to the financial statements and quarterly information, the amounts of assets and liabilities in foreign currency, the risks involved, the degree of exposure to these risks, the policies and financial instruments adopted to reduce risk, as well as, in the case of registration, in the deferred asset, of the negative net result derived from the adjustment of the values in reais of obligations and credits, the amount of expenses and revenues resulting from exchange variation, as well as the destination contemplated, the amortization bases and the values amortized in each period, must be disclosed. (CVM RESOLUTION NO. 294/99)

18. Borrowing Costs

18.1 Restrictive Clauses of Financing Contracts
Some companies have liabilities linked to other currencies, whose contracts include clauses that impose certain restrictions, normally linked to the maintenance of certain financial indices (debt, coverage of interest expenses, etc.). It is possible, and in some cases quite likely, the non-compliance with the respective clauses.
To determine the appropriate classification of these liabilities, it is necessary to understand in detail at what moment the non-compliance with the restrictive clauses is consummated and the consequences of this non-compliance. In this process, it may be necessary, by the independent auditor, a consultation with the legal representatives of the company. Some loan contracts incorporate clauses that have the effect of making the debt due on demand, including installments of long term, if certain financial indices are not met. Under these circumstances, as required by NPC 27 "Financial Statements – Presentation and Disclosure" of IBRACON, the corresponding liability shall be fully classified as current, except when:
a) the creditor has formally agreed, before the approval of the corresponding financial statements/quarterly information, not to demand early payment resulting from the breach of a contractual clause; and b) it is unlikely that other breaches will occur within twelve months from the date of the financial statements/quarterly information in question.

18.2 REFIS
CVM Instruction No. 346/00 established the conditions for accounting and disclosure of information on the effects resulting from adherence to the Tax Recovery Program – REFIS. The aforementioned instruction does not determine the obligation to record the debt at its present value, however, fixing the conditions for such recognition to be made.
However, CVM Instruction No. 346/00 determines, when relevant, the disclosure, in an explanatory note to the financial statements, of the present value of debts subject to settlement based on a percentage of gross revenue, as well as the values, terms, rates and other premises used to determine this present value. This disclosure must be made regardless of whether the company has accounted for the debt at present value. We must also alert open companies that the provisions contained in CVM Instruction No. 346/00, due to the concepts contained therein, also apply to other state or municipal programs for refinancing tax debts, which have similar conditions. In this line, administrators and independent auditors must give special attention to the disclosure of the fact that the company has adhered to the REFIS program, as well as to the amounts paid in each period for the amortization of debts included in that program. It should be remembered, furthermore, that this information must be provided, in an updated manner, for the entire time that the company remains adherent to the REFIS Program.

18.3 Capitalization of Interest
CVM Resolution No. 193/96 determines that financial charges resulting from financing obtained from third parties shall be capitalized to the cost of construction of fixed assets or production of long-maturity inventory. The basis of this issue is the Principle of Cost as Value Basis, which prescribes the inclusion of all incurred expenses necessary to bring the asset to the conditions of intended use. If an asset requires a period of time to exercise these conditions of use, all expenses incurred, including third-party financing financial charges, during this period of effort to put this asset into activity are part of its acquisition cost. The capitalization of interest meets the objective of obtaining an acquisition cost that reflects the total of resources applied in the asset, which will provide economic benefits in future periods, its consumption being confronted against the revenues earned in these periods. On this topic, the aforementioned CVM Resolution mentions in its item I:
"Interest incurred and other financial charges, relative to financing obtained from third parties, for the construction of assets included in the fixed asset or for the production of long-maturity inventory, must be recorded in a separate account, which evidences their nature, and classified in the same group of the asset that gave rise to it (we emphasize)". The reading of item I above induces the understanding that only interest resulting from financing that was obtained exclusively for the construction or production of an asset should be capitalized. IAS 23 "Borrowing Costs", defines a qualifying asset as "an asset that necessarily takes a substantial period of time to get ready for its intended use or for sale". In items 13 and 14 of IAS 23, the IASB establishes the general principle that financial charges directly attributable to the acquisition, production or construction of a qualifying asset are those charges that would have been avoided, had the expenditure on this qualifying asset not been made. It considers that it may be difficult to identify a direct relationship between certain loans obtained and a qualifying asset. It cites the examples of (i) complexities caused by centralized financial coordination of an entity, (ii) by the use of several debt instruments to borrow at different interest rates, in turn lent on different bases to other entities in the group and (iii) by the use of foreign currency loans in highly inflationary economies or due to exchange rate fluctuations. As support for the evaluation of the amount of loan interest to be capitalized, IAS 23 proposes as a rule in its paragraph 17 that "To the extent that borrowing resources are taken for general purposes and used to obtain a qualifying asset, the amount of financial charges qualifying for capitalization must be determined by applying a capitalization rate to the expenditures on the asset. The capitalization rate must be the weighted average of the financial charges applicable to the loans that are pending during the period, excluding those loans made for the specific purpose of obtaining a qualifying asset. The amount of financial charges of loans capitalized during a period, must not exceed the amount of financial charges incurred during this period". In item 29 the IASB establishes that the financial statements must disclose (a) the accounting policy adopted for the financial charges of loans; (b) the amount of financial charges capitalized during the period; and (c) the capitalization rate used to determine the amount of financial charges eligible for capitalization. Finally, it is important to highlight the indicative premises for the start of capitalization of borrowing costs, as provided for in item 20 of the IASB, namely:
a. Expenditures on qualifying assets are being incurred; b. Borrowing costs are being incurred; and
c. Activities necessary to prepare the qualifying asset for its intended use or for sale are in progress.
The flexibility in the application of the accounting standard in this type of transaction is also considered in the SFAS No. 34 pronouncement of the US – GAAP, which, in summary, establishes the following main points: (i) the interest cost chosen for capitalization must be the interest cost recognized on loans and other obligations, (ii) the amount to be capitalized corresponds to the interest cost incurred during the period required to complete the asset, (iii) the interest cost for capitalization purposes must be based on the rates of external loans outstanding taken by the company, (iv) the amount of interest to be capitalized for qualifying assets should be the portion of interest incurred during the acquisition period that could have been avoided if the expenditures on qualifying assets had not been made, (v) If the company takes a loan with the specific purpose of financing a certain asset, the interest rate of this loan must be applied, (vi) a weighted average of rates of other loans taken must be applied for expenditures on assets not covered by loans taken with the specific purpose of financing them, (vii) it is necessary to exercise judgment to identify the loans on which this weighted average is calculated. Although the interpretation of Resolution No. 193/96 suggests a limitation of the interest capitalization procedure, that is, the requirement of direct linkage of financing with the qualifying asset, our guidance is in the sense that Open Companies expand the concept of linkage. It is known that this linkage can be extremely subjective, requiring the exercise of judgment in determining those loans whose financial charges will be used for capitalization purposes. The minimization of this subjectivity is obtained when we hierarchize our action, that is, for third-party resources charged, since their origin, to the financing of a qualifying asset, no judgment is necessary, as these are directly linked to the same. However, others that do not present this characteristic must be supported by some identifier element, such as, for example, a capital budget duly approved by a competent instance indicating the sources of financing, declaration of the administration, at the time of contracting, indicating the linkage of the financing decision with the qualifying asset, among others. In order to improve the understanding of this topic, a numerical example was developed, obviously not exhaustive, detailing the proposed procedure for the purposes of capitalization of financial charges, resulting from third-party financing, incurred in the construction/production of qualifying assets. Example Data:
a) On 01/01/20X1, Company Alfa contracted with Company Sigma the construction of an equipment for use in its production process, in the amount of R$ 1,100,000.00. b) Company Alfa made 5 payments, provided for in the contract with Sigma, during 20X1, the last one being upon the availability of the equipment in the factory, ready for use, as indicated below:
Date R$
01/01/20X1 300,000.00
31/03/20X1 170,000.00
30/06/20X1 230,000.00
30/09/20X1 210,000.00
31/12/20X1 190,000.00
Total 1,100,000.00 c) Company Alfa presented the following third-party financings on 31/12/20X1:
Capture Interest in the period
Code Maturity Date R$ R$
E1 01/01/20X1 500,000.00 97,809.09 20X4
E2 31/03/20X1 350,000.00 43,145.27 20X3
E3 30/09/20X1 250,000.00 10,647.69 20X5
E4 01/01/20X1 100,000.00 20,983.04 20X6
Total 1,200,000.00 172,585.08
Code Comments
E1 Linked since origin to the project
E2 Specified in capital budget
E3 Link declared by administration
E4 Not linked to the project
CASE DEVELOPMENT:
Loans Principal Interest
Qualifiable financial charges (E1, E2 and E3) 1,100,000.00 151,602.04 Financial charges not linked to the project (E4) 100,000.00 20,983.04 Total financial charges of the period 1,200,000.00 172,585.08 Summary of asset formation cost Fixed assets in progress (in progress) a) Third-party services 01/01/20X1 300,000.00 31/03/20X1 170,000.00 30/06/20X1 230,000.00 30/09/20X1 210,000.00 31/12/20X1 190,000.00 sum 1,100,000.00 b) Capitalized financial charges 31/12/20X1 151,602.04 *Total Cost 1,251,602.04 Disclosure of financial charges of the period:
Gross financial charges 172,585.08 less:
Capitalized financial charges (151,602.04)
Net financial charges 20,983.04
It is important to emphasize that the financial charges to be capitalized are limited to the amount incurred in the period.

18.4 Disclosure in explanatory note of the cost of loans

18.4.1 Debentures
The terms of the debentures shall be disclosed, including indicating the existence of a renegotiation option clause and the periods in which the renegotiations must occur. When the company acquires debentures of its own issuance, it shall disclose this fact and its value in an explanatory note.
(CVM ORIENTATION OPINION NO. 21/90)

18.4.2 Long-Term Obligations
The interest rates, maturity dates, guarantees, currency and method of updating of long-term obligations shall be disclosed.
(LAW NO. 6.404/76, ARTICLE 176)

18.4.3 Liens, Guarantees and Contingent and Contingent Liabilities
Real liens on asset elements, guarantees provided to third parties and other contingent/contingent liabilities must be disclosed. Contingent facts that generate, due to their peculiarities, reserves or provisions for contingencies and, even those whose probability is difficult to calculate or whose value is not measurable, must be evidenced in an explanatory note, and in the latter case, the reasons for the impossibility of this measurement must also be mentioned. (LAW NO. 6.404/76, ARTICLE 176 AND EXPLANATORY NOTE TO CVM INSTRUCTION NO. 59/86)

18.4.4 REFIS
Open companies shall disclose, with respect to the social exercises in which they remain in the REFIS program, in an explanatory note

explanatory notes to their accounting statements and quarterly information, the following information:
a) the amount of debts included in the REFIS, segregated by type of tax and nature (principal, fines, and interest); b) the present value of debts subject to settlement based on gross revenue, as well as the values, terms, rates, and other premises used to determine this present value; c) the amount of tax credits, including those arising from tax losses and negative bases for social contribution, used to settle interest and fines; d) the amount paid in the period to amortize debts subject to settlement based on gross revenue; e) the detail of adjustments recorded as extraordinary items; f) the guarantees provided or assets listed and respective amounts; g) the mention of the obligation to regularly pay taxes, contributions, and other obligations as an essential condition for maintaining the payment conditions provided for in the REFIS; and h) any and all imminent risks associated with the loss of the special payment regime. (INSTRUCTION CVM NO. 346/00)
18.4.5 Capitalization of Interest
In line with IAS 23, Brazilian open companies are required to provide the following disclosure in explanatory notes: (a) the accounting policy adopted for financial charges on loans; (b) the amount of financial charges capitalized during the period; (c) the capitalization rate used to determine the amount of financial charges eligible for capitalization; (d) the information on the amount of expenses supported by linked financing and the nature of this linkage (contractual, capital budget, management statement, etc.); and (e) indication of the total financial charges of the period, the portion capitalized in the period, and the net charges that affected the period's results.
19. Disclosures of Related Parties
19.1 The motivation for the existence of explanatory notes on "related parties"
Within the securities market, the disclosure of transactions between related parties is currently regulated by CVM Deliberation No. 26/86 and is also the subject of the international pronouncement IAS No. 24, revised in 1986, and the recommendations of the CVM "Corporate Governance Guide" in item III.4.
The nature of transactions between parties with common interests has led the CVM not to recommend the contracting of this type of business, and this prohibition must appear in the company's bylaws. This recommendation from the CVM's corporate governance guide is based on the difficulty of establishing fairness in the pricing of these operations, as it is presumed that there is a high probability of an interest that may not coincide with the search for the best result for the company and, consequently, for the interests of non-controlling shareholders: shareholders, debenture holders, creditors, etc. Furthermore, it can be inferred that any transaction of this type, to some extent, large or small, consumes some type of resource of the company that would be available for other types of business, credit limits, as well as other types that, if applied in some alternative of lower profitability and admitting that the company's resources are by definition limited and scarce, would certainly reduce the wealth of non-controlling shareholders. These are the reasons why, if such types of transactions are still carried out, detailed disclosure of the conditions under which the businesses were contracted is necessary so that other interested parties in the company can have full knowledge of the operation. In the "Discussion of the Problem," the Ibracon pronouncement, approved by CVM Deliberation No. 26/86, highlights this point:
"To allow for adequate interpretation of the financial statements by their users and by those who, based on them, will make economic-financial decisions, it is necessary that transactions between related parties be disclosed in a manner that provides the reader, and mainly minority shareholders, with sufficient informative elements to understand the magnitude, characteristics, and effects of this type of transaction on the financial situation and results of the company." It is concluded that the existence and disclosure of transactions between related parties is of a sensitive nature and that the disclosure in a summary and non-detailed manner of this type of business leads to distrust and reduces the appreciation of the company's securities.
19.2 Supervision of transactions between related parties
The CVM's corporate governance guide in item III.4 recommends the following:
"The board of directors must ensure that transactions between related parties are clearly reflected in the financial statements and were made in writing and under market conditions. The company's bylaws must prohibit contracts for the provision of services by related parties with remuneration based on billing/revenue and, in principle, loan contracts with the controlling party or related parties. Regardless of the ordinary precautions normally adopted so that proof of contracts celebrated is made in the best possible way, it is imperative that due transparency be given to contracts between related parties, in order to enable shareholders to exercise the essential right of supervision and monitoring of the company's management acts, without prejudice to the duty to promote their wide disclosure to the market, when the contracting constitutes a relevant fact or upon the disclosure of the financial statements."

19.3 Formalization of business between related parties
The CVM's corporate governance guide in item III.4 recommends the following, regarding the need for the form that these types of transactions should take:
"Contracts between related parties must be formalized in writing, detailing their main characteristics (rights, responsibilities, quality, prices, charges, terms, indicators of commutativity, etc.). In assemblies to discuss such contracts, if minority shareholders deem it necessary, they may request an opinion from an independent entity, to be paid by the company." Among the operations observed over the last few years, it should be emphasized that loan contracts between companies of the same economic group are included in this explanatory note and must be backed by contracts that discriminate rights, responsibilities, conditions of commutativity, and other aspects such as prices, terms, and charges, which allow for a reasonable understanding of the economic relationship between the parties.
19.4 Pricing of transactions between related parties
Since the law requires that such contracts be celebrated under market conditions (term, rate, and guarantees), if the related party seeks credit, for example, it must do so under the same conditions it would with third parties. Contracts for the provision of services between the company and the controlling party or related parties must be aligned with the interests of all shareholders of the company. In particular, such contracts should not be based on billing/revenue, as part of the remuneration of the controlling party or the related party will not depend on the operational performance of the company. Special attention must be given to the issue of transfer prices, often used with the objective of maximizing the results of an entity or group of entities. There are several methods used for their definition, based, for example, on the market price, effective or similar, on the cost of the product plus an arbitrated profit margin, or on the standard cost plus profit. Thus, it becomes necessary to disclose the calculation criteria used to determine transfer prices in transactions with related parties. It is observed that Law No. 9.430/96 established fiscal rules on the transfer prices of goods, services, and rights abroad, establishing the methods to be used so that these prices are considered deductible in the calculation of income tax and social contribution. Any relevant consequences of the application of this rule must be considered for disclosure in explanatory notes.
19.5 Disclosure in explanatory note of Transactions with Related Parties
Open companies, when disclosing this type of information, have given greater emphasis to the values resulting from these transactions, which integrate assets, liabilities, and results, without, however, giving the same prominence to the conditions under which the transactions were carried out, the nature of the relationship, and the transfer pricing policy. The disclosure of transactions with related parties must cover the conditions under which these transactions took place, especially regarding prices, terms, and charges, and whether they were carried out under conditions similar to those that would be applicable to unrelated parties, as well as the present and future effects on the financial situation and results of the company. The Ibracon pronouncement, approved by CVM Deliberation No. 26/86, establishes as a criterion for the preparation of this note the following: "The greater or lesser prominence in the disclosure of transactions should be given considering the following facts: (i) if the transaction was carried out under conditions similar to those that would be applied between unrelated parties (regarding prices, terms, charges, quality, etc.) that contracted based on their free will and best interest; and (ii) if the transactions by themselves or by their effects affect or may come to affect, significantly, the financial situation and/or the results of the companies intervening in the operation." The aforementioned pronouncement lists, in a merely exemplary manner, the following types of transactions between related parties that must be the object of disclosure in explanatory notes:
Purchase or sale of products and/or services that constitute the company's social object.
Alienation or transfer of assets.
Alienation or transfer of industrial property rights.
Balances resulting from operations and any other balances receivable or payable.
Novation, forgiveness, or other unusual forms of cancellation of debts.
Provision of administrative services and/or any form of use of the physical structure or personnel of one company by another or others, with or without consideration.
Guarantees, sureties, mortgages, deposits, pledges, or any other forms of guarantees.
Acquisition of rights or call options or any other type of benefit and its respective exercise.
Any non-remunerated transfers.
Preemptive rights to subscribe to securities.
Loans and advances, with or without financial charges, or at favorable rates.
Receipts or payments for the lease or loan of real or movable assets of any nature.
Maintenance of any benefits for employees of related parties, such as: supplementary pension plans, health assistance plans, cafeteria, recreation centers, etc.
Market and technological limitations.
The use of the standard expression in explanatory notes: "Transactions with related parties are carried out at normal market prices and conditions, similar to those carried out with third parties," does not fulfill the determination to clarify about prices and/or pricing policies in these types of transactions and is ineffectual. Even if they are made in large numbers and it becomes unfeasible to detail the price of each price in each operation, it is necessary to clarify the method used, the form of calculation, and average prices, for example.
20. Consolidated Accounting Statements and Accounting of Investments
20.1 Equity Method Evaluation
This was an issue that also led the CVM to request clarifications from a reasonable number of open companies due to the discrepancies found between the values described in the balance sheet and the content of the explanatory note on the subject.
What is expected is that the highlights of the note clarify or complement the other accounting statements in an objective manner, aiming to provide the reader with a complete understanding of the operation. One way for this to materialize is that the quantitative data of the notes are consistent with the items of the balance sheet and the income statement, functioning as a calculation memory that will assist the user in understanding the constitution of the balance of the accounts involved and how this occurred.
20.1.1 Societies Equivalent to an Affiliate
Aiming to preserve the basic premises that underpin the application of the equity method, the CVM began to require, from Instruction No. 247/96, that investments in other societies considered equivalent to affiliates also be evaluated by the MEP. The Instruction defined as equivalent to an affiliate the society that participates in another:
a. indirectly, with 10% (ten percent) or more of the voting capital, without controlling it; b. directly, with 10% (ten percent) or more of the voting capital, without controlling it, regardless of the percentage of participation in the total capital, that is, even if this percentage is less than 10% (ten percent) of the total capital.
Doubts have arisen regarding the way to adjust the MEP in cases of indirect participation. In this case, the open company must adjust the balance sheet of the controlled/affiliated company in which it holds direct participation for the purposes of applying the MEP, or request it, when applicable, to already include such effects in its statements.
This same understanding is applicable in cases where individually the investment of affiliates/controlled companies does not reach the percentage necessary to characterize the affiliation, but the sum of the participations characterizes the company as equivalent to an affiliate.
It is important to emphasize that, in the application of the MEP in equivalent societies, the same conditions of relevance of the investment and influence in the administration defined in articles 4 and 5 of CVM Instruction No. 247/96, and applicable to affiliates, must be observed. An additional care that open companies must have, when applying the MEP in equivalent societies, is regarding the percentage of participation to be used. We remind you that the percentage previously mentioned, of 10% or more of the voting capital, serves to measure the equivalence, not necessarily representing the percentage to be used for the application of the MEP.
20.1.2 Loss of Continuity of the Controlled/Affiliated Company's Operations
The issue presented is whether the change in the line of activity of the controlled/affiliated company would characterize a loss of continuity, for the purposes of article 6 and the sole paragraph of article 8 of CVM Instruction No. 247/96. The Explanatory Note to the aforementioned instruction, in its item 4c, transcribed below, clarifies this issue well:
"Investments in affiliates and controlled companies that have clear and effective evidence of discontinuity should not be evaluated by the MEP. These are companies that are in the process of liquidation, extinction, or that are operating under severe long-term restrictions, which prejudice their ability to transfer funds (art. 6)."
Thus, it is clear that the simple change in the line of activity of the controlled/affiliated company does not characterize a loss of continuity, and the investment should continue to be evaluated by the MEP.
20.1.3 Future Sale of the Investment
The Instruction establishes that in the case of investment in controlled/affiliated companies that are operating normally, where there is evidence of sale in the near future, the criterion of evaluation by the MEP must be maintained until the base date considered for the sale (art. 7). The issue that has been raised refers to the term "base date," that is, whether the investment should be evaluated based on the balance sheet of the date of sale. It is worth mentioning, preliminarily, that article 7 aimed to clarify that the intention to sell the investment, even if formalized by a protocol of intentions or other document, does not characterize the loss of continuity, and the investment should continue to be evaluated by the MEP until the moment the sale is finalized. Regarding the base balance for this evaluation, the ideal is to use that which was adopted for determining the sale price, considering the date lags admitted in paragraph 1 of article 10 of the aforementioned instruction. It is also worth remembering that fiscal legislation admits a lag of up to 30 (thirty) days for the application of the MEP, in the case of write-off of the investment, and this may be the "base date" to be used by the company to comply with CVM standards.
20.1.4 Permanent Losses in Investments Evaluated by the Equity Method
The main change made in this topic concerns the need to constitute a provision for losses, when there is a deficit liability and there is a clear intention of the investor to maintain its financial support to the investee (§ 1 of Art. 12). The provision for losses must be presented in the permanent asset by deduction of the book value of the investment (including therein the goodwill and unamortized discount), with the excess presented in a specific account in the liability (§ 2 of Art. 12). It is important to emphasize that the investor should constitute such a provision, as already mentioned, only when there is a clear intention to maintain financial support or formal or operational responsibility to cover a deficit liability, this procedure not being applicable in cases where, despite the existence of a deficit liability, the investee does not show signs of paralysis or the need for financial support from the investor. Another aspect to be clarified is regarding the determination contained in letter "a" of item I of article 12 for the investor to constitute a provision for "coverage of effective losses due to events that result in losses not provided for by affiliates and controlled companies in their accounting statements." It has been questioned whether the investor should not adjust the equity of the controlled/affiliated company first, as advocated in item I of article 11, in order to eliminate the effects resulting from the diversity of accounting criteria. The CVM agrees with such argumentation, however, the command of letter "a" of item I of article 12 constitutes an additional mechanism in situations where the standardization of accounting criteria is not sufficient to contemplate the provisioning of possible losses. An example to be considered is the case of loss expectations, resulting from fiscal contingencies due to judicial demands promoted exclusively by the controlled/affiliated company, which the administration of the controlling/investor company deems prudent to constitute a provision for probable losses. Within this theme, due attention is also being required for the constitution of provisions aimed at covering losses, effective or potential, founded on the reasons listed in item II of article 12 of CVM Instruction No. 247/96. We understand that this is an extremely relevant subject and, consequently, requires constant monitoring, by the company's administration, of the adequate value of these investments, as well as of its own economic substance. The accounting recording of loss provisions should be promoted:
a) when resulting from debts with third parties, in the current liability or long-term payable account, according to the payment term; b) when resulting from losses of credits against the invested societies, in the current asset or long-term realizable account; c) in other cases, in an investment correcting account.
20.1.5 Goodwill/Discount in the Subscription of Capital Increase
The Explanatory Note to CVM Instruction No. 247/96, in its item 7, brought important clarifications regarding the change in the treatment to be given to the goodwill/discount determined in cases of subscription where there is a variation in the percentage of participation, also presenting a numerical example. In that example, we arrived at the existence of a goodwill in the investor Co. B in the amount of $200. In view of the doubts that still persist on this subject, we present the same example in another way:
a) The subscription right of Co. B was 30% (previous participation) of the capital increase, therefore of $ 360 ($1200 X 30% or 120 shares at $3 each) and on this portion there is no figure of goodwill/discount or gain/loss. b) The portion effectively "acquired" by Co. B (that is, subscribed above its right) was $840 (70% x $1200 or 280 shares at $3 each) of the capital increase. The calculation of the goodwill can be demonstrated as follows:
Equity of XYZ after capital increase $3,200
(:) No. of shares of capital 1,400
(=) Book Value per share $2.2857
(x) No. of shares "acquired" 280
(=) "Acquisition" at Book Value $640
() Cost of Acquisition $840
(=) Goodwill $200
What is sought to emphasize, in this example, is that the figure of goodwill/discount arises in the investor when it "acquires" an additional portion of participation and only on this portion. Therefore, the subscription, even if at a value above/below the book value of the share, does not generate goodwill/discount if it is carried out in the exact proportion prior to the capital increase. By the same reasoning, it is also concluded that, in the cases where the right to subscription is exercised by a percentage lower than the previous participation (or even if this right is not exercised), the investor reduces its share in the capital and, in the existence of previously constituted reserves, it determines, in this way, a loss due to variation in the percentage of participation on these reserves.
20.1.6 Goodwill / Discount originating from Investments evaluated by equity method
The explanatory notes accompanying the accounting statements must contain precise information about the affiliates and the controlled companies.
One of the items of extreme importance for inferring future results, provided for in item VIII of article 20 of the

CVM Instruction No. 247/96 determines that "the basis and rationale adopted for the establishment and amortization of goodwill or discount, and the unamortized amounts, as well as the criteria, discount rate, and terms used in the projection of results" must be disclosed. Thus, the economic reasons that determined the bases and rationale for the accounting of goodwill and/or discount, and the amounts accounted for as amortization in the period and the amortization bases for subsequent periods, must be clearly identified and disclosed.

It must be emphasized that the accounting recognition of goodwill (and its maintenance) is intimately associated with its economic rationale; disclosures that include evasive or generic definitions are not accepted. It is worth recalling the provision of Article 14, § 2, item "a", of CVM Instruction No. 247/96, including the wording given by CVM Instruction No. 285/98, which recommends the immediate recognition of the loss of economic substance, attested by the mandatory periodic review (at least once a year) of future results projections. The same procedure must be adopted for goodwill whose economic rationale is not justified (§ 5).

20.1.7 Elimination of Unrealized Profits

The Explanatory Note of CVM Instruction No. 247/96, in item 5, brings clarifications on the concept involving this new form of elimination of unrealized profits, in addition to presenting the numerical example summarized below:

Example 1

Controlled Company's Equity R$ 1,200
% Participation 60%
Realized Profits R$ 167
Unrealized Profits R$ 200
Book Value of Investment R$ 500

Calculation of Equity Method

Calculation by previous standard (revoked)	Calculation by current standard (in force)
Equity R$ 1,200	Equity R$ 1,200
less: unrealized profits (200)	participation percentage 60%
Adjusted Equity 1,000	Equity R$ 720
participation percentage 60%	less: unrealized profits (200)
Total Investment R$ 600	Total Investment 520
Book value of investment 500	Book value of investment 500
Equity method result 100	Equity method result 20

20.1.8 Calculation of the Equity Method

As mentioned in the Explanatory Note to CVM Instruction No. 247/96, the figure of unrealized profit only exists in transactions between the parent and the controlled entity; that is, it is as if the transaction had been made between two departments belonging to the same entity, but with distinct legal personalities. In this case, the transaction should not generate profit in the entity. However, since there are third parties (minority shareholders) with rights to participate in this profit, this fact must be recognized by the parent, both in its individual statements and in the consolidated statements. Another way to highlight the amount of the parent's profit, in the example above, would be:

Total Profit R$ 367
Unrealized Profit (200)
Minority Profit (40% of R$ 367) (147)
Parent's Profit 20

Another aspect, not covered in the Explanatory Note, concerns the elimination of unrealized profits in cases where control is exercised indirectly, that is, where there is more than one investor in the controlled entity, which could lead to a multiple and undue elimination of unrealized profits.

Considering the data above, let us look at an example where the participation in controlled "C" is presented as follows:
Parent "A" owns 100% of controlled "B" and 15% of indirect controlled "C"; Controlled "B" owns 45% of Company "C".

Assuming the occurrence of unrealized profit, in the amount of R$ 200, in an asset sale operation from "C" to "B", we would have:
"B" when evaluating the investment in "C" must eliminate this unrealized profit; and "A" when evaluating the investment in "C" must also eliminate it.
However, if "A" and "B" proceed this way, the unrealized profit will be eliminated in duplicate.

To obtain the adequate reflection of the elimination of unrealized profit, in cases of controls shared by companies of the same economic conglomerate, such unrealized profit must be attributed to the controllers in the proportion held by each one over the total participation in the controlled entity. Thus, for the purpose of the Equity Method (MEP), we would have:

Participation of more than one company of the same "economic group" in an investee Elimination of unrealized profit from "C" in "A" | Elimination of unrealized profit from "C" in "B" --- | --- Equity R$ 1,200 | Equity R$ 1,200 Participation percentage 15% | Participation percentage 45% Equity Method R$ 180 | Equity Method R$ 540 less: unrealized profits (1) (50) | less: unrealized profits (2) (150) Total Investment 130 | Total Investment 390 Book value of investment 125 | Book value of investment 375 Equity method result 5 | Equity method result 15

Calculation of the elimination of unrealized profit of R$ 200:
(1) [(0.15 / 0.60)] x R$ 200 = R$ 50
(2) [(0.45 / 0.60)] x R$ 200 = R$ 150

As observed, the sum of the equity method result is the same found in the 1st example.

It is important to note that, in the situations of this example, the unrealized profit must necessarily be attributed proportionally to the parent companies/investors, highlighting the hypothesis of only one of the companies eliminating it, given the distortions resulting from the values recorded in the individual balance sheets, which may bring effects to third parties, notably minority shareholders of these parents.

In the example above, for simplification, we assumed that "A" has 100% of the capital of "B", however, if there were any minority participation in B, the attribution of the entire unrealized profit to company A or B would lead to a favoring/disadvantaging of these, including with respect to dividends.

20.1.9 Investment acquired from an investee with Negative Equity

In the situation where the investee presents a net liability, also called negative equity, CVM Instruction 247, in § 2 of Article 12, guides towards the establishment of a provision for losses up to the limit of the book value of the investment to which it refers, with the excess, when applicable, and in accordance with CVM Instruction No. 247/96, presented in a specific account in the liability (see item 17.1.4).

If, at the time of acquisition of the investment, the value of the Investee's Equity is already negative, the initial balance of the equity method must be negative, with the goodwill representing the difference between this result and the acquisition cost. The total initial investment, of course, will be positive, representing the effective value paid. This goodwill must be recorded and amortized according to its economic rationale (asset appreciation, expectation of future profitability, or recovery of losses and rights of exploration/concession). This practice allows for a better recognition of the future results of the investee, through the combination of the equity method result opposing the amortization of goodwill based on its economic rationale, as well as allowing for a better presentation of consolidated equity.

The recording of the equity method must be normal from then on unless any additional losses surpass the investment, in which case, the equity method result progressively reduces the investment to zero, that is, not recording a negative investment value. The accounting treatment of goodwill in subsequent operations of incorporation, such as the investee incorporating the investor, for example, must also be done taking into account the same principle.

20.1.10 Equity Method when the existence of differentiated rights

The corporate structure of Brazilian companies presents a series of specific characteristics, and the application of the equity method must adapt to these specifics. In this sense, CVM Instruction No. 247/96 determines in its Art. 11, item IV, that for the determination of the value of the equity method, the investor must recognize the effects resulting from classes of shares with the right to fixed preferential dividend, cumulative dividend, and with differentiation in profit participation.

The objective here is to recognize, in the application of the equity method, the existence of a distinction between participation in capital and participation in the distribution of results. For example, there may be a situation where each shareholder has a 50% participation in capital, while, by virtue of a shareholders' agreement, the distribution of profit is carried out considering percentages of 60% and 40%. In this case, there must be recognition of this distinction in the process of equity method and consolidation of financial statements to consider this distinction.

The example above mentions the hypothesis of the existence of an agreement between shareholders; however, there may be other instruments for establishing differentiated rights that will entail the recognition of their effects in the application of the equity method and in the consolidation of financial statements.

20.2 Consolidated Financial Statements

CVM Instruction No. 247/96 determines that the public company that has investments in controlled companies, including jointly controlled companies, and the command society of a group of companies that includes a public company must, at the end of each fiscal year, prepare consolidated financial statements (Art. 21).

It also provides that CVM may, in special cases and upon prior request, authorize the exclusion of one or more controlled companies from the consolidated financial statements (§ 1 of Art. 23).

Therefore, the public company that wishes to exclude a controlled company from its Consolidated Financial Statements must request prior authorization for the mentioned exclusion, instructing its request with the following information:
a. financial statements of the controlled companies and the parent, relating to the 3rd quarter of the fiscal year in which the exclusion is being requested, compared with the previous year; b. amount of gross revenue of the parent and controlled companies, from operations with third parties;
c. amount of non-operational credits of the parent with the controlled companies, and
d. other information on transactions between the parent and the controlled companies or among the latter.

The requests for exclusion must be addressed to the Superintendence of Accounting Standards and Auditing of this CVM. It is worth noting that, once granted, the authorization will be valid only for the fiscal year in which the exclusion is being requested.

20.2.1 Consolidation of Financial Statements of Jointly Controlled Companies

This topic provides for the procedures that must be adopted for the preparation of consolidated statements, which include jointly controlled companies (Art. 32 to 34), here defined as those in which no shareholder exercises, individually, the powers provided for in Article 3 of the Instruction.

These provisions reach, mainly, but not exclusively, the so-called joint ventures in which, through the existence of a contractual agreement and proportional shares of participation, two or more entities undertake an economic activity subject to joint control.

Article 32 determines that the components of assets and liabilities, revenues and expenses of jointly controlled companies must be aggregated to the consolidated financial statements of each investor, in proportion to their participation in its share capital.

However, it has been verified that there may be situations where the participation in results does not correspond to participation in capital but rather to the production and distribution of results. In these cases, each investor must reflect in the consolidated result statement the effective share of participation it has in the investee's results. Thus, CVM understands that the jointly controlled company must prepare and provide the financial statements intended for the consolidation of each investor, observing such peculiarities, and it is still incumbent upon it to disclose, in an explanatory note, this procedure and the amounts involved.

Similarly, there may be balances of active/passive operations with the investors. In this case, it is reiterated that such components must be eliminated from the investor's financial statements proportionally to its participation in capital, and the remaining balances of such operations, above/below this participation, must appear in said statements as operations with third parties (in this case, with the other partners).

20.2.2 Consolidation of Special Purpose Entities (SPEs)

20.2.2.1 Exclusive Investment Funds

Exclusive investment funds have specific characteristics that must be considered to treat them as SPEs. The conditions for non-consolidation are rarely met for these types of funds, and therefore, as a general rule, they must be consolidated.

Exclusive funds usually represent only a vehicle for the company to diversify its investments in a portfolio convenient in terms of cash flow and profitability, with the neutrality of the tax treatment of funds (since the operations carried out by the fund are not subject to Income Tax Withholding, nor is CPMF levied on the fund's financial movement). Thus, in essence, the fund's assets are actually the company's assets, and must be considered as such, for the purpose of disclosure in consolidated financial statements, evidencing, separately, their nature.

20.2.2.2 Credit Rights Investment Funds (FIDCs)

Credit Rights Investment Funds (FIDC), whose constitution and operation are authorized by Resolution No. 2,907/91 of the National Monetary Council, were regulated by CVM Instruction No. 356/2001, amended by CVM Resolution No. 393/2003. FIDCs have characteristics of both structured finance operations and investment funds.

FIDCs can be open or closed, and composed of senior quotas (subscribed by the investor and which do not subordinate to the others for amortization and redemption purposes) and subordinated quotas (usually subscribed by the company that originally held the receivables, as additional guarantee of the operation), or only senior quota. At least 50% of the equity of an FIDC must be represented by credit rights, which must respect certain eligibility criteria determined by its regulation, which contemplates the FIDC's operation rules. The portion of the FIDC's equity not invested in credit rights can be maintained in financial assets.

From the point of view of public companies that originally held the receivables, they must observe the terms of CVM Instruction No. 408, of August 18, 2004, and, as applicable, disclose what Article 5 of this Instruction provides.

Public companies that originally held the receivables, as indicated in the Explanatory Note to CVM Instruction No. 408, must observe that the Basic Accounting Conceptual Framework, approved by CVM Deliberation No. 29/86, as well as the Fundamental Accounting Principles approved by CFC Resolution No. 750/93, require that transactions and other events be accounted for and disclosed according to their essence and economic reality, and not only by their legal form. In this sense, since the decision to derecognize accounts receivable, or when preparing the aforementioned disclosures, the public company must also consider:
a) whether control over the assigned receivables remains with the company, as evidence of this control may be cited, among others: physical custody of the title, collection management with autonomy to establish deadlines or payment conditions, and the receipt/transit of resources from these receivables in the company's current account or collection account; b) whether it still retains any right regarding the assigned receivables (interest, default and/or fines, portion of the cash flow itself); c) whether it still retains the risks and responsibilities regarding the assigned credits, for example, repurchase of overdue and unpaid credits due to contractual obligation or even spontaneous repurchase of credits with such frequency that characterizes habituality; or d) whether, in essence or habituality, the company provides guarantees to FIDC investors regarding the expected receipts and yields, even if informally.

Regarding responsibility for losses, often a first reading of the circumstance can lead to a mistaken conclusion. For example, in cases where the company is responsible only for 5% of the portfolio, this percentage may be considered irrelevant compared to the set of receivables. However, if the credits involved are exclusively from selected customers (conventionally solvent) and the historical loss of the company's portfolio as a whole is 3% of its sales, it is clear that the risks are not transferred to the fund. Other ways for the company to assume risks can be observed through mechanisms such as fines in an amount that could represent the probable loss of the portfolio, possibility of substitution of certain receivables due to negotiations with customers, eventual extensions of maturity of titles, among others.

Observing these characteristics, cases where consolidation will not be required should be rare, since the operation will, in essence, be a financing. In any circumstance, the procedure adopted by the company must be the subject of disclosure in an explanatory note, which will describe the firm evidence on which the company's administration relied to support the decision to consolidate or not the FIDC.

If the company prepares its financial statements also under other accounting principles, notably American or international principles, consolidating the FIDC in these situations, it is not appropriate, including by the very objective and origin of CVM Instruction No. 408 (harmonization with IASB (SIC 12) and FASB (FIN 46) standards, as described in the Explanatory Note to Instruction No. 408), that for local purposes the FIDC ceases to be consolidated in the financial statements prepared in accordance with accounting practices adopted in Brazil.

When consolidating the FIDC in its financial statements, it is expected that the value received by the company be classified uniformly among companies, in light of the essence of the operation. In this sense, when the operation is analyzed and concluded that the resources received via FIDC in the consolidated balance sheet have the characteristic of financing, they must be classified as debt in the liability. Thus, in the FIDC consolidation process, the receivables balance would return to be presented in the group of accounts receivable from customers, and the amount of the FIDC's equity would be reflected as consolidated financing, with the eventual balance of subordinated quotas held by the company being eliminated in this consolidation process.

On the other hand, if the public company has assigned to a credit rights fund its future cash flow, resulting from contracts maintained with customers for the future delivery of products or services, the value received by the company must continue to be recorded in a liability account, which demonstrates the corresponding financial obligation. In this case, the financial costs of the operation must be appropriated pro rata temporis to the appropriate financial expense item.

20.2.2.3 Disclosure in explanatory note of special purpose entities (SPEs)

The consolidation of financial statements, as has been required by CVM Instruction No. 247/96, has been based on the existence of a corporate link between controlling companies and their controlled entities. However, transactions involving SPEs have become increasingly common today, and the consolidation approach, based exclusively on voting capital, has proven insufficient for the full disclosure of economic activities as a whole. Currently, we encounter various situations in which, even without the existence of corporate links, an entity actually holds control over the activities and benefits of another, bearing the majority of the consequent risks of these activities. The lack of consolidation of these entities allows certain businesses "controlled" by public companies to fail to be fully evidenced, affecting, often significantly, the information on the financial and equity situation of the company as a whole.

Due to the need to evidence the aforementioned situations, CVM issued Instruction No. 408, of August 18, 2004, which establishes that public companies must include, in addition to controlled or jointly controlled companies, SPEs, when the essence of their relationship with the public company indicates that the activities of these entities are controlled directly or indirectly, individually or jointly, by the public company.

In its Art. 5, Instruction No. 408/04 cites the following minimum information that must be disclosed in an explanatory note to the...

respective financial statements:
I – name, nature, purpose and activities developed by the SPE; II – participation in equity and results of the SPE; III – nature of its involvement with the SPE and type of exposure to losses, if any, arising from this involvement; IV – amount and nature of credits, obligations, revenues and expenses between the company and the SPE, assets transferred by the company and rights of use over assets or services of the SPE; V – total assets, liabilities and equity of each SPE; VI – guarantees, sureties, mortgages or other guarantees granted in favor of the SPE; and VII – the identification of the principal beneficiary or group of principal beneficiaries of the SPE's activities, in the case referred to in art. 4.

20.2.3 Consolidation in Reduction or Exemption of Taxes in Incentivized Area
When adopting the accounting method recommended in item 8.1 (The Disclosure of the Income Tax Provision), of this Circular Letter, for controlled companies, the equity method income recorded by the controlling company is composed of a proportional portion resulting from the accounting of that tax incentive, recorded in the controlled companies as a Capital Reserve. In this circumstance, when preparing the Consolidated Financial Statements, the accumulated results account, presented in Consolidated Equity, is equal to that of the controlling company, because the investments are eliminated against the Equity of the controlled companies, however it is different from the consolidated result. This difference is explained by the non-elimination of the portion related to the tax incentive, thus generating a reconciliation item between the results of the controlling company and consolidated that must be indicated in the explanatory notes to the consolidated financial statements, as provided in art. 31, item IV, of CVM Instruction No. 247/96. However, to eliminate this reconciliation item and better reflect in the consolidated statements the economic essence of the enjoyment of the tax incentive, one can adjust, directly in the Consolidated Statement of Results, the effects resulting from the mentioned tax incentive. If so opted, such adjustment must be presented in the line item of income tax and additional expenses of the said statement. Additionally, in an explanatory note, the following information must be disclosed: which controlled companies are beneficiaries of tax incentives; the amount, percentage and conditions for enjoying the incentives and the information that the said incentives were adjusted in the Consolidated Statement of Results in the line item of income tax and additional expenses. To allow a better understanding of the above, a numerical example is developed below, where the Financial Statements of a wholly-owned subsidiary, its controlling company and the respective consolidation are presented.

CONTROLLED
(8.1)
CONTROLLING
CONSOLIDATED
P&L 31/12/X0 31/12/X1 31/12/X0 31/12/X1 31/12/X1 Revenue 1,000 1,000 Expense (600) (600) Equity method

Profit 264
(400) Cap. Res.
136
Acc. Res. 400
IT/SS (34%) (136) (136)
(a)
Net Profit 264 400 400
BALANCE SHEET M1
(b)
Adjustment M2
(b)
Adjustment
Asset:
Current:
Cash 1,200 1,600 1,600 1,600
Permanent;
Investment 1,200 1,600 (1,600)
1,200 1,600 1,600 1,200 1,600 1,600
Liability:
Current:
Provision
IT/SS
136 (136)
136
Equity:
Capital 1,200 1,000 1,000 (1,200) 1,000
Cap. Res. 136 136 (136)
Acc. Prof. 264 264 200 600 (264) 600
1,200 1,600 1,600 1,200 1,600 (1,600) 1,600
Obs.: (a) It was considered that the subsidy refers to the full exemption of IT/SS; (b) M1 and M2 represent the balances of the respective accounts, before and after the proposed adjustment, respectively.

20.3 Reverse Merger – CVM Instruction No. 349/01
Most of the reverse merger operations that CVM has observed and analyzed so far begin with the constitution by the controlling company of a "vehicle" company, to which the value of the investment evaluated by the equity method plus the value of the corresponding goodwill is transferred as capital contribution. Subsequently, this "vehicle" company is merged by the investee that gave rise to that goodwill. This merger model allowed for the possibility of tax benefit from the goodwill, creating, accountingly, a kind of tax credit based on the future reduction of income tax and social contribution, due to the possibility of amortizing this goodwill. However, this model ended up distorting the figure of the merger in its real economic dimension. CVM, with the objective of better regulating this matter and preserving the quality of financial statements, issued CVM Instruction No. 349/01, determining that in cases of reverse merger, the goodwill based on profitability perspective or concession right should be recognized by the amount of the expected tax benefit. This recognition is done by the creation of a provision, in the acquired company, in the amount of the difference between the value of the goodwill and the tax benefit resulting from its amortization. Without this determination, the goodwill would be duplicated without any economic foundation for such. In this sense, the Explanatory Note to CVM Instruction No. 349/01 clarifies:
"CVM Instruction No. 319/99, by providing that the counterpart of the goodwill could be registered entirely in a special reserve account (art. 6, § 1), ended up making possible, in cases of goodwill based on economic foundation based on intangibles or in perspective of future profitability, the recognition of an equity increase without effective economic substance. The creation of a company with the sole purpose of serving as a vehicle to transfer, from the original controlling company to the controlled, the goodwill paid in its acquisition, ended up distorting the figure of the merger in its economic dimension. This distortion occurs because, when the merger process of the vehicle company is concluded, the investment and, consequently, the goodwill remain unchanged in the original controlling company. (...). Thus, it becomes necessary that, in the evaluation of the investment in the controlling company, the amounts of the equity method and the remaining goodwill be restored." The controlling company, in this case, is the original investor, that is, the one that paid the goodwill when acquiring the investment, and that remains after the merger of the "vehicle" company. Thus, the changes introduced by CVM Instruction No. 349 had a predetermined objective: mergers through the creation of a "vehicle" company in which there could be the recognition of an asset and an equity increase without economic substance. However, in cases where there is no interposition of a "vehicle" company, being merged the original investor, and where the economic foundations that gave rise to the goodwill remain valid, the same should be maintained in its entirety and amortized under the conditions and period originally established. In this case, the creation of the provision mentioned in CVM Instruction No. 349 may be unnecessary or even undue.

20.4 Disclosure in Explanatory Notes of Consolidated Financial Statements and Accounting of Investments
20.4.1 Goodwill/Bargain Purchase
The explanatory notes must contain precise information indicating the basis and foundation adopted for the constitution and amortization of goodwill or bargain purchase and unamortized amounts, as well as criteria, discount rate and periods used in result projections. Unjustified goodwill, that is, which does not have an economic foundation, must be recognized immediately as a loss, in the result of the period, explaining in an explanatory note the reasons for its existence. (CVM INSTRUCTION NO. 247/96)

20.4.2 Condensed Statements
Open companies that have made additional publications of their financial statements, beyond the publications ordered by corporate law, may do so in condensed form provided that accompanied, at minimum, by the following explanatory notes:
a) changes in accounting practices compared to the previous social year; investments in other companies, when relevant, specifying the final amount and the equity method result in each investment and the values related to goodwill, bargain purchases and loss provisions; interest rates, maturities and real burdens on long-term debts; number of shares that make up the social capital discriminating species and classes; reconciliation of the result calculated by full correction with that calculated by corporate legislation; and amount of fiscal loss capable of being used in subsequent periods; and b) any information not contained in the above information and that are relevant for knowledge of the company's situation. (CVM INSTRUCTION NO. 232/95)

20.4.3 Equity Method
The explanatory notes accompanying the financial statements must contain precise information about affiliates and controlled companies, indicating, at minimum:
I – name of the affiliate and controlled company, the number, species and class of shares or capital quotas owned by the investor, the percentage of participation in social capital and voting capital and the trading price on the stock exchange, if any; II – equity, net profit or loss of the period, as well as the amount of proposed or paid dividends, relating to the same period; III – credits and obligations between the investor and the affiliates and controlled companies specifying terms, financial charges and guarantees; IV – guarantees, sureties, mortgages or pledges granted in favor of affiliates or controlled companies; V – revenues and expenses in operations between the investor and the affiliates and the controlled companies; VI – individualized amount of the adjustment, in the result and equity, resulting from the evaluation of the book value of the investment by the equity method, as well as the book balance of each investment at the end of the period; VII – calculation memory of the individualized amount of the adjustment, when this does not result solely from the application of the percentage of participation in social capital on the results of the investee, if relevant; VIII – basis and foundation adopted for the constitution and amortization of goodwill or bargain purchase and unamortized amounts, as well as criteria, discount rate and periods used in result projections; IX – conditions established in shareholders' agreement regarding influence on administration and distribution of profits, evidencing the numbers relating to cases where the proportion of voting power is different from the proportion of participation in voting social capital, directly or indirectly; X – reciprocal participations existing; and XI – effects on assets, liabilities, equity and result resulting from discontinued investments. The period of coverage of the financial statements of affiliates/controlled companies must be identical to that of the investor. The use of non-identical periods is admitted, in cases where this fact represents an improvement in the quality of the information produced, being the change evidenced in an explanatory note. The investment in an affiliate that, due to the reduction of the book value of the investment, ceases to be relevant, will continue to be evaluated by the equity method, if this reduction is not considered permanent, all its effects being evidenced, separately, in an explanatory note. (LAW NO. 6.404/76, ARTICLE 247; CVM INSTRUCTION NO. 247/96)

20.4.3 Consolidated Financial Statements
The explanatory notes accompanying the consolidated financial statements must contain precise information about the controlled companies, indicating:
I – criteria adopted in consolidation and the reasons why a certain controlled company was excluded; II – subsequent events to the end of the social year that have, or may come to have, a relevant effect on the financial situation and future consolidated results; III – effects, on the elements of consolidated equity and result, of the acquisition or sale of a controlled company, during the social year, as well as the insertion of a controlled company into the consolidation process, for the purpose of comparability of the financial statements; and IV – events that caused a difference between the amounts of equity and net profit or loss of the investor, in comparison with the corresponding amounts of equity and net profit or loss consolidated.

In an explanatory note to the consolidated financial statements, the amount of the main groups of assets, liabilities and result of the controlled companies together must also be disclosed, as well as the percentage of participation in each of them.
The open company affiliated with a group of companies must indicate, in a note to its published financial statements, the body and the date on which the last consolidated financial statements of the group's controlling company to which it is affiliated were published.
In consolidated statements, which include transactions between related parties, the information and values relating to transactions not eliminated in consolidation must be evidenced.
(LAW NO. 6.404/76, ARTICLE 275, CVM INSTRUCTION NO. 247/96 and CVM DELIBERATION NO. 26/86)

20.4.5 Corporate Investments Abroad
The company must evidence the same information required for investments in controlled/affiliated companies in the Country.
The criteria for calculating the financial statements of investees abroad, as well as the criteria for conversion to the national currency, must be mentioned in the summary of accounting practices.
(CVM DELIBERATION NO. 28/86)

21. Financial Instruments: Disclosure, Presentation, Recognition and Measurement
    21.1 Current Situation
    Since the matter was regulated by CVM, a significant lag continues to be observed between the content of Instruction and Explanatory Note No. 235/95 and the practice of disclosure of financial instruments by Brazilian open companies. It is CVM's expectation that open companies pay attention to the subject, so that the quality of information produced by Brazilian companies can be equated with the best international practices and meet the expectation of the investor community. When speaking of financial instruments, it is impossible to dissociate the issue of risk. Financial instruments (derivatives in particular) serve, primarily, as risk management strategies of a given open company; or leverage (aiming at profits) the exposure of a given open company to risk factors inherent to it, or reduce it (aiming at mitigating losses). Sometimes, financial instruments subject the open company to other risk factors for which it was not originally exposed, consequence of the type of market in which they are traded (over-the-counter instruments, for example, offer exposure to credit risk, which in turn is eliminated in operations with exchange instruments) or the nature of the instrument itself (leverage clauses in certain contracts entered into, which potentialize gains or losses, or "covenant" clauses that anticipate the liquidation of a debt instrument, for example). This information, obligatorily, should be present in the explanatory notes prepared by open companies. The explanatory note for financial instruments must, to tell the truth, contain, in an integrated manner, a qualitative description of the market risk factors that affect the business of a given open company (risk of prices of its merchandise, interest rate risk, exchange rate risk, credit risk, inflationary risk, liquidity risk, etc.), the strategy adopted by the company's administration for the management of these risks, and in what context the financial instruments are inserted. CVM encourages those open companies that may wish to provide additional quantitative information about market risk factors to which they are subject, in an explanatory note. CVM has observed that some open companies have been improving the quality of disclosure by making available information generated by risk measurement systems such as VAR – Value at Risk. Another point that must be addressed concerns accounting procedures. Information regarding the accounting policy dispensed to the financial instrument (measurement criterion, accounting classification received, registration of equity effects, among others) must be disclosed, so that users of the information are not prejudiced in their analyses.

21.2 Presentation, recognition and measurement of financial instruments
For illustrative purposes, a possible model of explanatory note is proposed, considering credit risk, exchange rate risk and merchandise price risk:
"The company's business comprises the extraction and sale of iron ore, for the domestic and foreign markets. The main market risk factors that affect the company's business can be enumerated as follows:
Credit Risk: possibility of the company incurring losses due to financial problems with its customers, which force them not to honor their commitments with the company. To reduce this type of risk, the company enters into ancillary contracts with its customers that oblige them to maintain a certain level of indebtedness and liquidity. Once these levels are exceeded, the early liquidation of the debt by the company occurs and, if the case, the execution of any guarantees offered. Exchange Rate Risk: possibility of the company incurring losses due to fluctuations in exchange rates, which reduce nominal invoiced values or increase values raised in the market. To reduce this type of risk, the company enters into derivative contracts in exchange markets, as demonstrated in a specific table. Iron Ore Price Risk: possibility of the company incurring losses due to price fluctuations of iron ore, in the domestic and foreign markets. To reduce this type of risk, the company enters into derivative contracts in exchange and over-the-counter markets, as demonstrated in a specific table. Credit Risk The company's sales policy is intimately associated with the level of credit risk to which it is willing to subject itself in the course of its business. The selectivity of its customers, as well as the diversification of its receivables portfolio, monitoring of sales financing terms by business segment and position limits, are procedures that the company adopts in order to minimize any potential default problems with its commercial partners. The same credit risk management policies are observed in the contracting of over-the-counter derivatives. The table below indicates the evaluation of accounts receivable balances classified by credit risk measurement (rating) of customers:
Customer Credit Rating ()
Contract Term Moody’s Classification Standard & Poor’s Classification Between 1 and 4 years Aa3 AA More than 4 years Aaa AAA Exposure Up to R$ XXX million Aa3 AA Up to R$ XXXX million Aaa AAA Diversification 31.12.20X0 31.12.20X1 XYZ & Co. 6% 6% ABC & Co. 8% 7% Wk & Co. 7% 6% Other Customers () 79% 81% Total Portfolio 100% 100% (*) other customers with participation of no more than 5% of the receivables portfolio Observation: The example presented informs about the risk involved in sales financing in terms of credit quality, concentration by main customers and sales financing term. The Moody's and Standard & Poor's classifications are examples of ratings prepared by independent entities based on qualitative and quantitative criteria. The open company must disclose the criteria chosen for the elaboration of the risk measurement (rating) of its customers, detailing the algorithm used in the classification. It is recommended that objective criteria be elected. Exchange Rate Risk The company's indebtedness and the result of its operations are significantly affected by the market risk factor exchange rate (US dollar). Resources were raised in foreign currency (US dollar), on 01.01.20X1, to finance its working capital. On 01.04.20X1, resources were obtained from the US banking institution (Bank XYZ) to finance the expansion of the company's installed capacity, aiming to meet the company's future objectives of increasing its participation in the international market. The strategy defined by the company, at the beginning of the 2001 social year, focused predominantly on the international market. With this, there was the expectation that the company's dollar revenue would act as a natural hedge for its working capital loan (there would be a balancing of its cash flow), which effectively happened during the year. The company's net exposure, at the moment, to the market risk factor exchange rate is demonstrated below:
Book Value Fair Value
31.12.20X2 31.12.20X3 31.12.20X2 31.12.20X3
Loan R$ XXXXX R$ XXXXX R$ XXXXX R$ XXXXX
Financing R$ XXXX R$ XXXX R$ XXXX R$ XXXX
R$ XXXXX R$ XXXXX R$ XXXXX R$ XXXXX
Dollar Assets R$ XXX R$ XXX R$ XXX R$ XXX
Hedge Instruments R$ XXX R$ XXX R$ XXX R$ XXX
Net Exposure R$ XXX R$ XXX R$ XXX R$ XXX
The measurement method used for the calculation of the fair value of all elements, with the exception of hedge instruments, was that of discounted cash flow, considering expectations of liquidation or realization of liabilities and assets and market rates in effect on the information cutoff date. For hedge instruments, the market quotation of the contracts on the information cutoff date was used. Market Risk Factor: Exchange Rate Amortization Plan/Expectation of Realization 20X4 20X5 20X6 20X7 20X8 Total Currency US$:

1. Liability Floating Rate
   Working Capital Loan
   Principal R$ XXX R$ XXX R$ XXXXX
   Interest R$ XX R$ XX R$ XXX
   Expected Libor X.X% X.X% X.X%
2. Liability Fixed Rate
   Financing
   Principal R$ XXX R$ XXX R$ XXX R$ XXX R$ XXX R$ XXXXX Interest R$ XX R$ XX R$ XX R$ XX R$ XX R$ XXX Contracted Interest Rate X.X% X.X% X.X% X.X% X.X% X.X%
3. Asset Accounts Receivable
   R$ XXX R$ XXX R$ XXXXX
   Market Risk Factor: Exchange Rate
   Hedge Instruments:
   Exchange Market
   Maturity
   Futures Contracts
   Purchased
   20X2 20X3 20X4 20X5 20X6 a) Notional Value
   US$ XXXX thousand
   US$ XXXX thousand
   US$ XX thousand US$ XX thousand US$ XX thousand b) Contracted Rate for future R$ X,XX R$ X,XX R$ X,XX R$ X,XX R$ X,XX Total (a x b) R$ XXXXX R$ XXXXX R$ XXXXX R$ XXXXX R$ XXXXX Derivative contracts had their notional values registered in clearing accounts and gains and losses, when financially realized, registered in result accounts.

Iron Ore Price Risk
The strategy adopted by the company to minimize its exposure to the iron ore price risk factor is the execution of future settlement contracts (over-the-counter and exchange), which guarantee the realization of its stocks at a certain level.
Its stocks turn over on average every three months, which is why every three months a rollover of future settlement contracts is made.
Market Risk Factor:
Commodity Price
31.12.20X2 31.12.20X3
Book Value Fair Value Book Value Fair Value
Iron ore stocks
$XXX
Hedge Instruments:

1. Over-the-Counter Market Maturity Fair Value
   Sold Forward Contract April/X4 July/X4 October/X4 on 31.12.20X3 a) Notional Value X tons X tons X tons $XXX b) Contracted future price $ X.XX $ X.XX $ X.XX Total (a x b) $ XXXXX $ XXXXX $ XXXXX
2. Exchange Market Maturity Fair Value
   Sold Future Contract April/X4 July/X4 October/X4 on 31.12.20X3 a) Notional Value X tons X tons X tons $XXX b) Contracted future price $ X.XX $ X.XX $ X.XX Total (a x b) $ XXXXX $ XXXXX $ XXXXX The measurement method used to calculate the fair value of stocks and exchange instruments was the market value of these at the cut-off date of the information. For over-the-counter instruments, the method used to calculate fair value was discounted cash flow, considering settlement or realization expectations and prevailing market rates at the cut-off date of the information. Derivative contracts had their notional values recorded in clearing accounts and gains and losses, when financially realized, recorded in income accounts.

21.3 Effects arising from the application of Bacen Circulars nos. 3,068/01 and 3,082/02 and Susep Circular no. 192/02
The Central Bank of Brazil issued Circular no. 3,068 at the end of 2001, establishing categories for classification and respective criteria for evaluation and recording of securities acquired by financial institutions and other entities authorized to operate by the Central Bank of Brazil, producing effects from June 30, 2002. The Superintendence of Private Insurance – SUSEP also adopted new criteria for evaluation and accounting classification of securities acquired by insurance companies, capitalization societies, and open complementary pension entities, with effects produced from June 30, 2002. Previously, this CVM pronounced itself in the sense that it considers the procedures contained in the normative of the Central Bank harmonized with international best practices. Given this understanding and also aiming to provide consistent treatment with the move, publicly-held companies that are investors or controlling entities of entities subject to those normative, with respect to the effects on equity method and consolidated financial statements must, exclusively, dispense with reflective treatment, that is, the adjustments resulting from the initial adoption of those normative must be equally recorded in the investor directly to equity. In the same way, reflective recording must be adopted for the counterpart arising from the marking to market of the portfolio of securities classified as available for sale, recognizing the effects in the result or, while not realized, in a highlighted account of equity that evidences its nature.

21.4 Accounting for hedge operations according to international standard
It is important to consider that, although the accounting for hedge operations has not yet been the subject of a specific CVM standard, its use, provided it does not conflict with corporate law, should be aligned with international accounting best practices.
The IASB revised the IAS 39 standard in December 2003 for application in January 2005 with significant modifications. Below is a free translation and summary of the initial paragraphs that define and qualify the hedge operation.
39.85 "Hedge accounting recognizes in the result the compensatory effects arising from modification in the fair value of hedge instruments and hedged items.
39.86 Hedge operations can be of three types:
a) fair value hedge: hedge protection against changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, or still, of an identified portion of an asset or liability or of a firm commitment that is attributable to a particular risk and that can affect the result; b) cash flow hedge: protection against exposures to variations in cash flows that (i) are attributable to specific risks associated with assets or liabilities (such as variable interest rates on future payments)) or a highly probable projected transaction and (ii) that can affect the result; c) hedge of a net investment in foreign operations as defined in IAS 21. A hedge against exchange rate risks in a firm commitment can be accounted for either as a fair value hedge or as a cash flow hedge.
39.88 Hedge relationships qualify for hedge accounting under paragraphs 89-102 of IAS 39 only if:
a) There is written documentation at the time of the hedge conception that identifies: (i) the hedging instrument, the hedged item and the risk to be hedged; (ii) the risk management objective and the strategy to take the hedge; and (iii) how its effectiveness will be measured, specifying the approaches to be used for prospective and retrospective effectiveness testing; b) It is expected that the hedge will be highly effective in compensating for modifications in fair value or cash flows attributable to the hedged risk, in line with the risk management strategy originally documented for the specific hedge operation (in paragraph BC 136 annex Basis for Conclusions and in AG105-AG113 Application Guidance, the pronouncement qualifies the range of 80:125 percent of hedge results to be considered as "almost completely compensated"); c) In the cash flow hedge, the projected transaction subject to the hedge must be highly probable and must present an exposure to cash flow variations that can affect the result; d) The effectiveness of the hedge must be measured reliably. This requires that the fair value of a hedge instrument and the fair value (or cash flows) of the hedged item be measured reliably; e) The hedge must be evaluated continuously and must have been effective throughout the period for which it was proposed." Regarding disclosure aspects, the IASB, in paragraphs 58 and 59 of IAS 32 pronouncement, establishes that:
The entity must disclose the following items, separately for fair value hedge, cash flow hedge and hedge of net investment in foreign countries, as defined in IAS 39:
a) description of the hedge (description of the type of hedge if fair value, cash flow or net investment abroad and of the operation itself); b) description of financial instruments designated as hedge instruments and their fair values at the balance sheet date; c) nature of the risks protected by hedge; d) for cash flow hedges, the periods in which flows are expected to occur, their reflection in the result, and the description of any projected transaction for which hedge accounting was previously used but which is not expected to still occur. When gains or losses of a hedge instrument in a cash flow hedge operation have been recognized directly in equity, the entity must disclose:
a) the amount recognized during the period; b) the amount that was written off from equity and recognized in the result during the period, and c) the amount that was written off from equity during the period and included in the initial measurement of the acquisition cost or in another book value of a non-financial asset or liability in a projected and highly probable hedge transaction.

21.5 The issue of the Substance Over Form principle in the disclosure of financial instruments
It is not uncommon for situations where the legal-formal aspects surrounding an operation related to financial instruments do not reflect its true economic aspect and, consequently, its real effects on the equity of companies.
In this sense, the Basic Conceptual Structure of Accounting, approved and endorsed by CVM Deliberation no. 29/1986, preaches: "Accounting has a great relationship with the legal aspects surrounding equity, but, often, the legal form may fail to reflect the economic essence. In these situations, Accounting must be guided by its objectives of well informing, following, if necessary for that, the essence instead of the form." For example, an operation based solely on its contractual aspects, not considering its economic aspects, can be accounted for as generating immediate or deferred gains, when, in fact, these gains, when existing, must be recognized over the period of the contract. Item IV of the Explanatory Note to CVM Instruction no. 235/95, although referring to so-called related-party transactions, alerted regarding the prevalence of substance over form in the accounting of financial instruments. Therefore, administrators and independent auditors must dedicate special attention to these operations, in the sense of reporting in their accounting reports the true economic effects resulting from these operations. Finally, it is possible that a hedge instrument has an underlying item distinct from the item subject to the hedge, or still, a distinct term from the object of the hedge. The nature of this operation must be identified and controlled by the company and can be characterized as hedge accounting, if the conditions provided for in the international pronouncement IAS 39 have been met.

21.6 Disclosure in explanatory note of financial instruments
The publicly-held company must evidence, whenever relevant:
a) the market value of all financial instruments, recognized or not as asset/liability in its balance sheet; b) the criteria and assumptions adopted for determining this value; and c) the policies of action and control of operations in derivative markets and the risks involved.
Article 4 of CVM Instruction no. 235/95 dispenses with the disclosure of market values of accounts receivable and payable. The CVM also understands that it is unnecessary to disclose the market values of other accounts receivable and payable with a term compatible with the normal operations of the company. This dispensation was based on the fact that accounts receivable and payable, as well as other monetary items, were adjusted to present value as required by CVM Instruction no. 191/92.
The above dispensation, however, does not apply to accounts receivable from government entities or others resulting from long-term contracts, whose possibility of receipt within three months is not effectively assured. In this case, the market value must be informed in an explanatory note or, in the absence of this information, an estimate of discount based on the cost of its financing must be indicated, according to the term provided for its receipt. The proposed model does not exhaust all disclosure needs, or even its own identification, and therefore, it should be adapted and carefully analyzed by the company's administration and its independent auditors. MODEL FOR NON-FINANCIAL COMPANIES Note X Financial Instruments The company participates in operations involving the financial instruments described below, with the objective of... (the objectives and the policy of action and control of operations must be disclosed). The following criteria and assumptions were used in determining the market values of each financial instrument, (disclose the financial instruments whose market values are different from the book values):
(a) The estimated market values of the company's financial instruments, assets and liabilities, on December 31, 19X1, registered in equity accounts and that present market values different from those recognized in the financial statements, can be demonstrated as follows:
Thousands of reais
Book value Market value
Financial applications
Accounts receivable from Government entities and long-term contracts Investments Medium-term loans and financing Debentures Others (detail)

The market values of investments were estimated... (describe) The estimated market values of medium-term loans and financing (between three months and one year) were obtained... (describe) The book value of financial instruments referring to other assets and liabilities is approximately equivalent to their market value.
(b) The nominal values of financial instruments, not registered in accounting on December 31, 19X1, are summarized below (market values must be disclosed, when applicable):
Thousands of reais clearing account equity account Global value Amount to be received/received (to be paid/paid) Future contracts Purchase commitments Foreign currency Interbank market Fixed rate Indices Shares Others Sales commitments Foreign currency Interbank market Fixed rate Indices Shares Others Options contracts Purchase commitments Foreign currency Interbank market Fixed rate Indices Shares Others Sales commitments Foreign currency Interbank market Fixed rate Indices Shares Others Thousands of reais clearing account equity account Global value Amount to be received/received

(to be paid/paid)
Contracts and "swaps"
Purchase commitments
Foreign currency
Interbank market
Fixed rate
Indices
Shares
Others
Sales commitments
Foreign currency
Interbank market
Fixed rate
Indices
Shares
Others
(c) Future contracts, locked options have terms less than 90 days; "swap" contracts have the following maturities:
Thousands of reais
Up to 90 days
From 91 to 180 days
From 81 to 360 days
Above 360 days
(d) The risks involved in contracting these operations can be summarized as follows: (describe market, credit, operational, currency and legal risks) (CVM INSTRUCTION NO. 235/95 AND CVM/SNC/SEP/Nº 01/96 CIRCULAR OFFICE)

22. Discontinued Operations
    In situations where a company, based on its strategic planning and formal business plan, decides to discontinue jointly a group of assets, eventually associated with liabilities, in a single transaction, a special nature disclosure is required. This disclosure has the general objective of highlighting the ability to generate results and cash flows between current operations and operations to be discontinued. This group of assets can be characterized in various ways: (i) as a business segment characterized as a group of cash and result generating units, (ii) as a single cash and result generating unit, or, (iii) as part of a cash and result generating unit. What characterizes these assets as "non-current and held for sale" is the expectation of recovering their value through a sale transaction and not through their consumption on a continuous basis. In this sense and in order to provide higher quality information, publicly-held companies must, whenever relevant, disclose in an explanatory note information regarding discontinued operations, which are currently considered in the international pronouncement IAS 35 "Discontinued Operations". This pronouncement considers discontinuation based on the magnitude of the operation, such as the abandonment or transfer of a business segment, establishing a basis to segregate this information from operations that will continue. It should be observed that the IASB put to public discussion in 2003 a draft pronouncement under the title ED 4 Disposal of Noncurrent Assets and Presentation of Discontinued Operations, dealing with matters associated with reducing the differences between the international standard and the American standard SFAS 144 Accounting for the Impairment or Disposal of Long-Lived Assets, in the aspects of identification of operations to be discontinued, evaluation and disclosure. With the objective of advancing in the disclosure of information of this type, this information required for discontinued operations can be presented in an explanatory note, without modification of the form of the financial statements currently in use. For general guidance purposes, the main points to be observed in the preparation of this explanatory note are summarized and adapted below, based on the free translation and reading of the current wording of the IAS 35 pronouncement.

22.1 Definition
For the purpose of disclosure in the financial statements, a discontinued operation is a relatively large component of an entity:
a. that, in accordance with a determined plan, the entity is: (i) substantially disposing of the component in its entirety, such as selling in a single transaction, by spin-off or capital reduction; (ii) disposing in parts, such as selling the assets and liquidating the liabilities of the component individually; or (iii) closing by abandonment. b. that, isolated, represents an important business segment or geographic area of operations; and
c. that can be differentiated operationally and for financial reporting purposes.

22.2 Initial Disclosure Event
The initial disclosure event is the occurrence of one of the following events: (a) the entity has signed a sales contract for all assets attributable to the discontinued operation; or (b) the entity's board of directors or board of trustees has (i) both approved a detailed formal plan for discontinuation (ii) and made the announcement of the plan.

22.3 Impairment Losses on Assets
The approval and announcement of a plan for discontinuation are an indication that the assets attributable to the discontinued operation may have suffered impairment of their recoverable amount or that a loss, previously recognized for these assets, must be increased or reversed. Therefore, the disclosure in the explanatory note of discontinued operations must also consider the policies for recognition and measurement of these events.

22.4 Disclosure in explanatory note of discontinued operations

22.4.1 Initial Disclosure
An entity must include the following information in an explanatory note regarding a discontinued operation in its financial statements of the period in which the initial disclosure event occurs, as cited above. a. a description of the discontinued operation; b. business segment or geographic segment of which it is part;
c. the date and nature of the event, initially disclosed;
d. the date or period in which it is expected that the discontinuation will be completed, if known or determinable; e. the accumulated values, at the balance sheet date, of the total assets and liabilities to be alienated or liquidated; f. the values of revenues, expenses and profit or loss before taxes, of the ordinary activities attributable to the discontinued operation in the current social year disclosed and the income tax expense related; g. the values of cash flows (statement of sources and applications of resources) attributable to the operational, investment and financing activities, of the discontinued operation during the period of the disclosed social year.

22.4.2 Other Disclosures
When an entity alienates assets or liquidates liabilities attributable to a discontinued operation or closes agreements for the sale of these assets or the liquidation of these liabilities, it must include in an explanatory note, in the period in which the event occurs, the following information:
a. for any gain or loss that is recognized in the alienation of assets or in the liquidation of liabilities attributable to the discontinued operation (i) the value of the profit or loss and (ii) the income tax expenses related to this profit or loss; b. the net selling price or price range (after reducing the expected decommissioning costs) of those net assets for which the entity has signed one or more firm sales agreements, the expected time of receipt of these cash flows and the book value of these net assets.

22.4.3 Update of Disclosures
In the periods subsequent to that in which the initial disclosure of the event occurred, in the explanatory note on discontinued operations, a description of any significant change in the value or periods of the cash flows relative to the assets and liabilities to be alienated or liquidated and the events that caused these changes must be disclosed. These disclosures must continue in the financial statements until that period in which the discontinuation is completed. The discontinuation is completed when the plan is substantially fulfilled or abandoned, even if the payments of the buyer(s) to the seller have not yet been concluded. If an entity abandons or withdraws a plan that was previously reported as a discontinued operation, this fact and its effect must be disclosed.

22.4.4 Separate Disclosure for Each Discontinued Operation
All disclosures must be presented separately for each discontinued operation.

22.4.5 Presentation of Disclosures
The disclosures of discontinued operations shall be presented in explanatory notes to the financial statements, except for the disclosure of the value of profit or loss before taxes, recognized in the alienation of assets or liquidation of liabilities attributable to the discontinued operation, which must be included in the statement of result.

22.4.6 Disclosure in Interim Financial Reports

The explanatory notes of an interim financial report must describe any significant activities or events that have occurred since the completion of the most recent annual report, relating to a discontinued operation, and any significant changes in the amounts or timing of cash flows related to assets and liabilities to be disposed of or settled.

23. Provisions, Contingent Liabilities and Contingent Assets

Accounting statements for fiscal years beginning on January 1, 2006, notwithstanding the incentive for their immediate application, shall consider the provisions contained in Pronouncement NPC 22 from Ibracon on Provisions, Contingent Liabilities, Contingent Liabilities and Contingent Assets, approved by CVM Resolution No. 489, of October 3, 2005. The objective of this Standard is to ensure that appropriate recognition criteria and measurement bases are applied to provisions, contingent liabilities and contingent assets, and that sufficient information is disclosed in the explanatory notes to the accounting statements so as to allow users to understand their nature, timing and value.

The Standard must be applied by all entities in the accounting and disclosure of liabilities, provisions, contingent liabilities and contingent assets, except:

(a) those resulting from financial instruments recorded at market value; (b) those resulting from executory contracts, except when the contract is onerous. Executory contracts are contracts by which neither party has fulfilled any of its obligations or both parties have only partially fulfilled their obligations to an equal extent; (c) those arising from insurance policies in insurance entities; and (d) those covered by another standard issued by Ibracon or a regulatory body, such as those related to construction contracts, income tax and social contribution and employee benefits.

As previously mentioned, the Circular Letters issued by the CVM technical area have, among other objectives, the purpose of clarifying doubts regarding the application of Accounting Standards by Open Companies. In this sense, comments follow regarding the application of some items of CVM Resolution No. 489/05.

23.1 Scheduled Shutdowns

One of the issues arising from the effectiveness of CVM Resolution No. 489/05 concerns the application of item 13 of NPC 22 in the accounting treatment of the provision for scheduled shutdown, which aims to restore the service capacity of fixed assets. The hypothesis raised is to reverse (and no longer constitute) the balance of the provision for scheduled shutdown existing at the end of the 2005 fiscal year. In this regard, we transcribe Ibracon Technical Interpretation No. 01/2006, which summarizes Brazilian and international standards and clarifies the procedures that open companies should adopt.

Ibracon Technical Interpretation (IT) No. 01/2006

Accounting treatment of costs with relevant maintenance of fixed assets

Introduction

Certain segments of the industry, such as naval, aviation, steelmaking, agroindustry and petrochemical, perform relevant maintenance on fixed assets at regular intervals during their economic useful life. These maintenance activities are carried out to restore or maintain the original performance standards provided by suppliers and represent the only alternative for the use of the asset until the end of its useful life.

For these maintenance activities, entities halt the operations of the asset or group of assets for a certain period of time and generally incur the following main expenses:
a. Main components and parts. b. Own or contracted third-party services for the replacement of components and parts.
c. Own or contracted services for relevant maintenance and cleaning.
d. Fixed plant costs during the maintenance period, inventory losses, etc.

The prevailing accounting practice in Brazil has been the establishment of a provision on a monthly basis, to reflect the total of expenses and costs to be incurred in the planned period of maintenance.

A less used alternative is to account for the expenses and costs of the maintenance period in an asset account deferred for amortization in the period between the current maintenance and the next.

This IT does not discuss, therefore, provisions for costs with cleaning and repairs referred to in paragraph 14 of NPC 22, which are obligations regardless of future acts of an entity.

Convergence with international standards

On October 3, 2005, through Resolution No. 489, the Securities and Exchange Commission (CVM) endorsed the Accounting Standard and Procedure 22 (NPC 22) Provisions, Contingent Liabilities, Contingent Liabilities and Contingent Assets, recently issued by IBRACON. This standard enters into force for accounting statements of periods beginning on January 1, 2006, or after this date, with its immediate application encouraged, and revokes previous provisions, including the IBRACON Pronouncement XXII Contingencies.

The issuance of NPC 22 aims at the convergence of Brazilian accounting practices with International Accounting Standards. In this process, maintenance with the objective of restoring the original conditions of the asset comes to merit a new evaluation, in substitution to the current practice of establishing provisions for future expenses.

Aspects of NPC 22 and other related standards

Items 13 to 16 of NPC 22 bring concepts different from those previously applied regarding the establishment of provisions for maintenance that restore the original service capacity of fixed assets. Let us see:

13. Accounting statements present the financial position of an entity at the end of the period (balance sheet date) and not its possible position in the future. Therefore, no provision is recognized for costs that need to be incurred to operate in the future. The only liabilities recognized in the balance sheet of an entity are those that exist on the balance sheet date.

14. Only obligations arising from past events and existing independently of future acts of an entity (such as the future conduct of its business) are recognized as provisions. Examples of these obligations are fines or costs with cleaning and repairs due to environmental damage, which would result in the outflow of resources for their settlement, regardless of future acts of the entity. Similarly, an entity recognizes a provision for the costs of discontinuation of an industrial installation to the extent that it is obliged to rectify any damage already caused.

15. An obligation always involves another interested party to whom the obligation is owed. However, it is not necessary to know the identity of the interested party to whom this obligation is owed. By virtue of an obligation always involving a commitment with another party, a decision by the board of directors or management will not originate an obligation not formalized on the balance sheet date, unless the decision has been communicated before this date, to third parties affected by it, in a sufficiently specific manner to create in them a valid expectation that the entity will fulfill its responsibilities.

16. An event that does not immediately generate an obligation may generate it at a later date, due to changes in law or because an act (for example, a public declaration in which the entity commits to do something) of the entity gives rise to an unformalized obligation.

From the paragraphs transcribed above, it is concluded that the current accounting practice adopted in Brazil to establish a provision for costs with the maintenance of fixed assets must be altered by virtue of the recognition only of past transactions existing on the balance sheet date as a liability. In this sense, the standard identifies the formation of the provision for scheduled shutdowns as a future transaction at the discretion of the administrators. The cost of replacement caused by the shutdown for scheduled maintenance is not recognized because, on the balance sheet date, no obligation to replace parts, pieces and to contract services exists, regardless of the future actions of the entity and even the intention to incur this type of expenses depends on the decision to continue operating the equipment. The change in this practice must, however, take into account the content of the balances of fixed assets, accumulated depreciation and provision for scheduled shutdowns, applying the concepts determined in other standards, notably NPC 7 Fixed Assets, issued by IBRACON, on January 18, 2001.

For better understanding of the subject, we transcribe below some items of NPC 7:

31. The expenditure on repairs or maintenance of fixed assets is incurred to restore or maintain the future economic benefits that the entity may expect from the originally assessed performance standard of the asset. As such, it is usually recognized as an expense when incurred. For example, the cost of services or review of the factory and equipment is usually an expense, since it restores, rather than increases, the originally assessed performance standard.

32. The appropriate accounting treatment for expenditures incurred after the acquisition of a fixed asset depends on the circumstances that were taken into account in the original measurement and recognition of the respective fixed asset and on whether the subsequent expenditure is recoverable. For example, when the carrying amount already takes into account a loss in economic benefits, the subsequent expense to restore the expected future economic benefits of the asset is capitalized, provided that the carrying amount after capitalizing the expenses is recoverable through the normal operations of the company. This is also the case when the purchase cost of an asset already reflects the obligation or commitment of the entity to incur future expense, necessary to put the asset in operating conditions. An example of this could be the acquisition of a building needing renovation. In such circumstances, the subsequent expenditure is added to the carrying amount of the asset, to the extent that it can be recovered by the future use of this asset.

33. The main components of some fixed assets may need to be replaced at regular intervals. For example, a furnace may need refractory lining after a certain number of hours of use, or the interior of an aircraft may need replacement several times during the life of the fuselage. Components are accounted for as individual and separate assets because they have different useful lives from those of the fixed assets to which they relate. Therefore, provided that the recognition criteria in paragraph 17 are met and that the entity has established the depreciation period, based on the useful life of these separate assets (and not the item to which they belong), the expenditure incurred in the replacement or renewal of the component is capitalized as the acquisition of a separate asset and the replaced asset is written off from the books.

According to NPC 7, fixed asset items may contain a component that will require maintenance or major overhaul, including its replacement, in order to avoid loss in economic benefits. This component is generally not billed separately nor specifically identified, however, conditioned to the ability to be estimated, based on the expected current cost of a major maintenance or overhaul, it must be controlled separately. Thus, in order to satisfy NPC 7, the entity that purchases or constructs an asset must measure, at the time of purchase, the value of the component to be replaced based on supplier data, on the history of costs with major maintenance or overhaul, etc., segregating these components in accounting. This implies that, from the total purchase value of the fixed asset, a part, at current prices, must be separated to correspond to the estimated value to be consumed until the scheduled time of the next shutdown, to occur in a period greater than one year. For better clarification, an example has been developed which is contained in the annex of this IT.

In 2003, during the revision of IAS 16, the IASB made two changes in the pronouncement directly associated with the theme of this IT. The first of them was to make it even clearer that the determination of depreciation charges must be done separately for each significant part of the fixed asset that the entity expects to use for at least more than one fiscal year, and the second related to the treatment of subsequent disbursements after the initial recognition of the asset. Regarding subsequent disbursements, IAS 16 states:

12. According to the recognition principle of paragraph 7, an entity does not add to the carrying amount of a fixed asset item the day-to-day maintenance costs of said fixed asset item. On the contrary, these costs are recognized in the results when incurred. Day-to-day maintenance costs are primarily labor costs and fast consumption items, including small parts. The purpose of these expenditures is often described as being for "repairs and maintenance" of a fixed asset item.

13. Parts of some fixed asset items may need to be replaced at regular intervals. For example, a furnace may need to be restored (with refractory bricks) after a quantity of hours of use or the interiors of airplanes such as seats and galleys may require replacement several times during the economic useful life of the airplanes. Fixed asset items may also be acquired for a less frequent recurring replacement, such as the replacement of the interior walls of a building, or for a non-recurring replacement. According to the recognition principle of paragraph 7, an entity adds to the carrying amount of a fixed asset item the cost of parts replaced in this item, when the cost is incurred, if the recognition criteria are met. The carrying amount of the replaced parts is written off in accordance with the provisions of this standard (see paragraph 6772 of the original standard).

14. The condition for the continuous operation of a fixed asset item (for example, an aircraft) may be the regular performance of relevant maintenance to seek failures, regardless of whether the parts of this item are replaced or not. When each relevant maintenance is carried out, its cost is recorded in fixed assets, as a replacement, if the recognition criteria are satisfied. Any remaining carrying amount of the cost of the previous maintenance (distinct from physical parts) is then written off. This occurs regardless of whether the cost of the previous maintenance was identified in the transaction in which the item was acquired or constructed. If necessary, the estimated cost of a future similar maintenance can be used as an indicator of the cost of the existing maintenance component, when the item was acquired or constructed.

Paragraph 7, cited in the body of paragraphs 12 and 13, has the following wording:

7. The cost of a fixed asset item shall be recognized as an asset if, and only if: (a) it is probable that future economic benefits associated with the item will flow to the entity; and (b) the cost of the item can be measured reliably.

Appendix C of International Accounting Standards (IAS) 37, the basis for the preparation of NPC 22, in the process of convergence of accounting standards, indicates that a provision for maintenance of asset goods is not recognized, because, on the balance sheet date, no obligation to perform this maintenance exists, regardless of the future actions of the entity, even if the intention to incur expenses depends on the entity opting to continue operating these goods or performing their maintenance. This conclusion is transmitted with the following examples:

Example 11 A: Restoration Costs - No Legal Requirement A furnace has a lining that needs to be replaced, for technical reasons, every five years. On the balance sheet date, the lining has already been in use for three years.
Current obligation as a consequence of a mandatory past event – There is no current obligation.
Conclusion – No provision is recognized (see paragraphs 14 and 1719 original standard).
The cost of replacing the lining is not recognized because, on the balance sheet date, no obligation to replace the lining exists, regardless of the future actions of the entity – even the intention to incur expenses depends on it deciding to continue operating the furnace or replace the lining. Instead of recognizing a provision, the depreciation of the lining takes into account its consumption, i.e., it is depreciated over five years. The costs with the new lining then incurred are capitalized with the consumption of each new lining by depreciation over the subsequent five years.

Example 11 B: Restoration Costs - Legal Requirement The law requires an aviation entity to overhaul its aircraft once every three years.
The current obligation as a consequence of a mandatory past event – There is no current obligation.
Conclusion – No provision is recognized (see paragraphs 14 and 1719 original standard).
The costs of overhauling an aircraft are not recognized as a provision for the same reasons that the cost of replacing the lining is not recognized as a provision in Example 11 A. Even a legal requirement to perform the overhaul does not make the overhaul costs a liability, because there is no obligation to overhaul the aircraft. Regardless of the future actions of the entity, it could avoid future expenses through its future actions, for example, by selling the aircraft. Instead of recognizing a provision, the depreciation of the aircraft takes into account the future incidence of maintenance costs, i.e., an amount equivalent to the expected maintenance costs is depreciated over three years.

IBRACON Guidance

As mentioned at the beginning of this IT, the accounting practice prevailing in Brazil was to establish a provision for relevant expenses with the maintenance of fixed assets. With the issuance of NPC 22, for the aforementioned reasons, entities must cease to establish such a provision, and the adjustment must be treated as a change in accounting practice.

The effects of changes in accounting practice are recorded in Accumulated Profits or Losses. However, before proceeding with this adjustment, it is necessary to analyze the provision constituted until then, including its nature, to which part of the fixed asset it is related...

linked, such as how fixed assets are recorded and depreciated, and the scheduled time for maintenance and service execution. A study on this matter could lead to the conclusion, for example, that the total reversal of the balance of the Provision for Accumulated Profits or Losses account is not appropriate.

In some cases, it is possible to observe that the entity is establishing a provision that includes, mainly, the cost of replacing relevant parts of the asset or specific components with a shorter useful life (for example, three years) than the asset as a whole (for example, ten years). From this observation, two conclusions may be drawn:

a. If the entity is applying the concepts of NPC 7, with depreciation separated for parts, pieces, and services necessary to restore the original service conditions of the fixed assets over periods shorter than that of the main equipment, it is producing a cost overlap. First, through the depreciation of the relevant parts, and second, through the establishment of the provision. In this situation, the provision related to the portion of fixed assets should be written off to the result (current year portion) and equity (prior years portion).

b. If the entity is not depreciating separately the parts, pieces, and services necessary to restore the original service conditions of the fixed assets according to their economic useful life, the costs related to the establishment of the provision will be partially overlapping(1). In this situation, the provision related to the overlap must be written off to the result (current year portion) and equity (prior years portion), and the non-overlapping portion of the provision to the accumulated depreciation account. Immediately following, the depreciation criterion should be reviewed, as described below. ((1) The partial overlap consists of the implicit portion of the parts, pieces, and services to be replaced that were being depreciated together with the main fixed asset).

The eventual balance of the provision previously recorded, which contemplated expenses related to services, inventory loss during the shutdown, and fixed costs to be incurred during the shutdown, must be reversed, credited to the result of the current year (current year portion) and equity (prior years portion). The aforementioned expenses must be recorded when incurred.

As commented in this IT, the correct application of NPC 22 presupposes the adequate application of the guidelines and concepts of other accounting standards. That is, the need to segregate in fixed assets certain costs related to implicit values that make up the total cost, such as those for relevant maintenance including disassembly, reassembly, and cleaning. These implicit costs should be segregated from the whole at the time of purchase or construction of the asset, provided they can be estimated with certainty, and depreciated during the period between the installation date and the scheduled shutdown date.

Thus, expenses incurred related to relevant maintenance are included as a component of fixed assets and depreciated until the next scheduled shutdown, with the simultaneous accounting write-off of the cost and accumulated depreciation of these initially identified components now replaced.

In addition to the concept discussed in the previous paragraph, others must also be observed and include: (i) the provision for the reduction of the asset to its recoverable value (impairment); (ii) the general criterion for recognizing fixed assets, through which an asset is only recognized if it is probable that future economic benefits associated with the item will flow to the entity, and if the cost of the item can be measured with certainty; and (iii) the modality of subsequent expenditures and/or costs.

Regarding the modality of subsequent expenditures and/or costs, it is important to note that it is not sufficient to consider that these will contribute to the search for future benefits. It is fundamental the concept of day-to-day maintenance costs, contained in the international fixed asset standard. It is the understanding of IBRACON that only the capitalization of relevant maintenance costs, discussed in this IT, executed in certain industries in a programmed manner during the economic useful life of the asset, is acceptable.

Therefore, the capitalization, establishment, or maintenance of a provision for expenses unlinked to the fixed asset, such as fixed costs to be incurred as a result of the scheduled shutdown, involving personnel expenses, depreciation of fixed asset items that make up the plant, contracted electrical energy demand, eventual losses of materials in process or raw materials, etc., is not acceptable. Consequently, for the application of NPC 22, if the provision for scheduled shutdown includes any of these items, they must be written off to the result (portion constituted in the current year) or Accumulated Profits or Losses (portion formed in prior years). These expenditures and/or costs, when incurred, must be recorded directly in the operating result, for example in the line of cost of sales, as appropriate, with the necessary highlights and disclosures for an adequate understanding of the circumstance, in accordance with NPC 27, which deals with Disclosure of Financial Statements.

Also, for the reasons stated, the second alternative, considered less used in Brazil (see introduction), of accounting for the expenses and costs of the maintenance period in a deferred asset account for amortization in the period between the current and the next maintenance, is not adequate and should be discontinued, adopting the guidance of this IT.

23.2 Taxes
23.2.1 Fundamentals in the Estimate for Accounting of Taxes

Another issue arising from the understanding of NPC 22 refers to the interpretation of example 4(a) of Annex II of the aforementioned Deliberation vis-à-vis the text of the Standard. The example mentions that the introduction of a new tax or the alteration of a tax rate, inserted by legal device, even if considered by the administration of an entity as unconstitutional, must be subject to registration because it is a legal obligation and not a provision or a passive contingency, considering the concepts provided in the NPC.

The judgment necessary for the accounting of this type of transaction must consider the following concepts:

A legal obligation is one that derives from a contract (through explicit or implicit terms), a law, or another instrument based on law.

The triggering event, in the context of this standard, is a past event that creates a present obligation, legal or not formalized, for an entity.

A provision must be recognized when:

a. an entity has a present legal or not formalized obligation as a consequence of a past event;

b. it is probable that resources will be required to settle the obligation; and

c. the amount of the obligation can be estimated with sufficient certainty.

In rare cases, it is not clear whether there is a present legal or not formalized obligation. In these cases, it is presumed that a past event gives rise to a present obligation when, taking into account all available evidence, it is probable that a present obligation exists at the balance sheet date.

The evidence considered includes any additional evidence, provided by events subsequent to the balance sheet date. Based on this evidence:

a. when it is probable that a present obligation exists at the balance sheet date, the entity recognizes a provision (if the recognition criteria described in item 10 are met); and

b. when it is not probable that a present obligation exists at the balance sheet date, the entity discloses a passive contingency,

unless the possibility of outflow of resources is remote (item 70). (CVM Deliberation No. 489/05).

The act of evaluating and measuring is inherent to Accounting itself. It is the exercise of analysis and judgment on any situation that requires an appreciation of facts, information, and a decision-making process to achieve an objective. This objective, in Accounting, must be to ensure that financial statements are endowed with qualitative characteristics that are the attributes that make them useful to users. One of these characteristics is reliability.

The reliability of a measurement is ensured by the fidelity or accuracy with which it represents what it proposes to represent, ensuring the user the non-existence of relevant errors or biases; therefore, to be reliable, the information must have representational fidelity and be verifiable and neutral.

In this context, management will always have the prerogative to exercise its judgment regarding an accounting treatment. However, this judgment will always have limits, which will be greater or smaller, and in some cases practically non-existent, depending on the event under examination.

Present in human behavior, an evaluation implies consequences, which can be positive or negative regarding its objectives, depending on a series of factors, among which, information bases used, variables considered, criteria, concepts, and principles adopted, and even beliefs, values, and skills of the evaluator.

For Accounting, as already referred to, the reliability of a measurement is ensured by the fidelity or accuracy with which it represents what it proposes to represent. "Accounting tends, within the broad degrees of judgment that the use of Principles allows us to employ, to choose the smallest of the equally relevant evaluations for the asset and the largest for the obligations.

This understanding should not be confused or distorted with the effects of accounting earnings manipulation, but viewed in light of the vocation for safeguard, care, and neutrality that Accounting must have, especially regarding the excesses of enthusiasm and valuations by the administration and owners of the entity. Let us not forget that, especially in the case of publicly held companies, their main obligation is towards the market and investors." (CVM Deliberation No. 29/86).

The evaluation regarding tax obligations is an example of the exercise of judgment where the limits are very small or practically non-existent. On the one hand, management is limited by the legal system that imposes compliance with legislation and consequently the accounting recognition of the tax obligation; on the other hand, Accounting Principles guarantee the prerogative of management to make judgment on the accounting treatment to be followed.

At this point, one must resort to the Accounting Principles themselves, or more specifically to the Convention of Conservatism together with the Convention of Objectivity.

"For equally relevant procedures, resulting from the application of Principles, preference will be given, in decreasing order: a) those that can be proven by documents and objective criteria; b) those that can be corroborated by consensus of qualified persons of the profession, gathered in research committees or entities that have authority over accounting principles...

As we saw in another topic, Accounting is a arduous exercise to maximize relevance, practicality, and objectivity. Regarding the restriction of objectivity, in order for financial statements to be as reliable as possible, accountants need to decide on the attribute or event that will be measured and select appropriate measurement procedures.

According to Hendriksen, objectivity has been conceptualized in different ways by people and different accountants, namely:

1. measurements and assessments of an impersonal nature or that occur outside the thinking of the person or persons performing them;

2. measurements based on professional consensus of qualified experts;

3. measurements and assessments based on evidence and verifiable documentation;

4. the value of the statistical dispersion of measurements of an attribute, when carried out by several researchers." (CVM Deliberation No. 29/86).

23.2.2 The Estimate of Taxes

Based on these fundamentals, the example in question should not be viewed as an extreme position. At the moment when management faces the examination regarding the treatment to be given to a tax, it must keep in mind that the Standard provides for its registration and, only in some rare cases, has at its disposal, provided it is substantiated in the Fundamental Accounting Principles, the prerogative to exercise its judgment regarding its registration as an obligation. If evaluating the need for registration, this should be maintained until its extinction by one of the forms provided in art. 156 of the National Tax Code.

Still regarding the same example, it also mentions:

"In a subsequent step, the lawyer communicates that the action was judged procedente in a certain instance. Even if there is a tendency for gain, and even if the lawyer considers it probable to win the case definitively, because the creditor (the Union) still has the right to appeal, the situation is not yet considered practically certain, and therefore, the gain should not be recorded. It should be noted that the situation evaluated is that of an active contingency, and not a passive contingency to be reversed, because the liability, as said in the previous item, is a legal obligation and not a provision or a passive contingency."

This situation must be understood in the context in which the entity, facing a change in tax rate or the introduction of a new tax, opts (evaluates) for its collection (payment), but, considering the possibility that this tax may be declared unconstitutional, files a lawsuit alleging unconstitutionality of the law.

In this context, the recognition of a gain/asset must be conditioned to a final decision in the process (res judicata or equivalent decision) that directly benefits the company, that is, when it is "practically certain" a future cash inflow.

23.3 PIS/COFINS

In a recent decision, the Supreme Federal Court – STF issued a ruling on the so-called "broadening of the tax base" for PIS and COFINS. This issue is linked to the treatment of the above-mentioned issue.

In this topic, in addition to everything already commented, it is necessary to consider the behavior of the judiciary regarding disputes related to the questioning of taxes. As an example, one can cite the decisions related to the IPI credit-prize, where, at first, the judgments issued were considered definitive, only to later find out that there was still a judicial path to be taken, leaving the issue unresolved in that sphere.

Therefore, as already addressed, the accounting registration of the effects of this item is conditioned to the res judicata of a decision that directly benefits the company. Thus, if the financial statements are disclosed after the date of res judicata, the effects of the decision must be recognized in these statements.

Based on this scenario and in complement to the understanding of the technical area of this CVM, we are attaching in this item the Ibracon Technical Communication 02/2006, regarding the accounting procedures to be followed as a result of the aforementioned STF decision.

Ibracon Technical Communication No. 02 /2006

This Technical Communication (CT) aims to confirm the accounting procedures to be followed as a result of a recent decision of the Supreme Federal Court regarding the so-called "broadening of the tax base" of PIS and COFINS, in light of the accounting practices adopted in Brazil.

Context

Paragraph 1 of art. 3 of Law No. 9.718/98 defined the concept of gross revenue for the incidence of the contribution to the Social Integration Program – PIS and the Contribution for the Financing of Social Security – COFINS ("social contributions") as being the total of revenues earned by the legal entity, which resulted in the "broadening of the tax base", since the previous legislation provided for its incidence on gross turnover.

Several companies are questioning judicially the constitutionality of this broadening of the tax base for PIS and COFINS. Because there is a law that determines said collection and because this requirement is considered a legal obligation, companies carried out the accounting registration of the respective obligation, at the time the triggering event occurred, making the collection of these social contributions based on another understanding than that of paragraph 1 of art. 3 of Law No. 9.718/98, or leaving these taxes unpaid. Other companies made the collection as provided in the cited paragraph 1, filing or not a lawsuit.

On November 9, 2005, in a plenary session, the Supreme Federal Court (STF) judged, in four individual processes, unconstitutional paragraph 1 of art. 3 of Law No. 9.718/98, which defined as gross revenue, for the purposes of incidence of the contributions to PIS and COFINS, the total of revenues earned by the legal entity. According to the votes delivered (the ruling has not yet been published), the STF understood that this norm, when enacted, was incompatible with the then current constitutional text, which provided for the incidence of social contributions only on the turnover of legal entities and not on the total of their revenues.

Subsequently to these four decisions, other processes, by monocratic decisions, had the same outcome. In the judgment of these processes, the rapporteur ministers referred to the decision of the STF plenary session of November 9, 2005, previously mentioned.

It should be noted that the STF decisions were not issued in a Direct Action of Unconstitutionality – ADIN; therefore, they benefit only and exclusively the parties involved in the mentioned appeals. Even for these decisions, it must be verified if all the necessary procedural requirements have been completed to consider them as res judicata.

For companies in general, it must be observed that Law No. 9.718/98 was issued with a presumption of legitimacy and, thus, must be obeyed by all taxpayers until it is removed from our legal system, which may occur:

a) by recognition of the unconstitutionality of the norm based on an unappealable judicial decision in a special appeal valid only for the parties integrated into the procedural relationship, object of the appeal;

b) by recognition of the unconstitutionality of the norm resulting from an unappealable judicial decision issued in a Direct Action of Unconstitutionality – ADIN, applicable to all taxpayers;

c) by cessation of the effects of the norm due to a Resolution issued by the Federal Senate, also applicable to all taxpayers.

What is discussed in this CT is whether other companies that did not have their processes judged by the STF or, if judged, did not have the necessary requirements completed to consider them as res judicata, could carry out the reversal of the legal obligation arising from the "broadening of the tax base", or the recognition of an asset. It is also discussed whether those companies that have not yet filed appeals could recognize an asset regarding values collected until then.

Position of Ibracon

The conditions for the reversal of the recording of liabilities must be analyzed from the study of accounting theory and its

Basic Conceptual Structure, both necessary for a broad understanding of this topic.

Liabilities, once recorded, must be maintained until an event or transaction allows them to be removed from the accounting records. The most common event for the extinction of a liability occurs through the payment of the due amount, by delivering cash or another asset. Another form of extinction can occur through the forgiveness of the debt, when a debtor is relieved of payment.

Regarding legal obligations, notably those of a tax nature derived from a law regularly placed in the legal system, there are other forms for their extinction. According to art. 156 of the National Tax Code, the tax credit is extinguished by: (i) payment; (ii) compensation; (iii) settlement and remission; (iv) prescription and decadence; (v) conversion of deposit into revenue; (vi) advance payment and homologation; (vii) consignation in payment; (viii) unappealable administrative decision; (ix) judicial decision against which no further appeal is possible; or (x) dation in payment with real estate.

Note that the favorable and unappealable judicial decision referred to in item (ix) above as a form of extinguishing the tax obligation, under the Brazilian judicial system, produces effects only with respect to the parties involved in the process.

Thus, while none of these situations, which involve the extinction of tax obligations, are present, the tax obligation remains, and there is no talk of its extinction, which results in the need to maintain the accounting records of these obligations.

Similarly, a company that in the past paid PIS and COFINS and filed or may file a lawsuit to recover the paid amount, or to compensate such payments with other taxes, should not record the asset until its process is judged in its favor, definitively.

Thus, only companies that obtained a favorable and unappealable decision by December 31, 2005, and for which all procedural requirements necessary to consider it res judicata were completed by the date of disclosure of the financial statements, must proceed with the reversal, in the fiscal year ending on December 31, 2005, of the obligation recorded until then.

Companies that obtain a favorable decision after December 31, 2005, even if before the disclosure of the financial statements, should not reflect the effects of this decision in 2005, but only in the fiscal year in which it occurs.

For understanding the topic, follows an example:

Let us imagine a company whose fiscal year ended on December 31, 2005, and disclosed its financial statements on January 30, 2006.

Hypothesis	Decision Date	Publication Date of Decision	Date of Res Judicata	Reversal of Obligation in 2005
1	10/11/2005	30/11/2005	10/12/2005	YES
2	10/12/2005	19/12/2005	10/2/2006	NO
3	15/12/2005	1/2/2006	11/2/2006	NO
4	1/2/2006	10/2/2006	20/2/2006	NO

If, unlike the example, the financial statements are disclosed after the respective date of res judicata, the conclusions of hypotheses 2 and 3, regarding the reversal of the obligation, would become YES.

Res judicata occurs when, from the decision rendered, no further type of appeal that could modify it is possible, which normally occurs because the period for admitting a certain appeal has passed. This information can be obtained from the attorneys representing the cases.

The topic discussed in this Technical Circular was already present in Technical Interpretation 03/2002, of February 18, 2002, from Ibracon, whose questions are reproduced below:

"Question 4
In situations where the Company has not yet obtained a final favorable decision for the recovery of a tax or the extinction of the recorded tax obligation, but there is favorable jurisprudence for other Companies in identical cases, and the evaluation of the lawyers is that the chances of a favorable outcome are probable, can that Company recognize the contingent gain based on the jurisprudence and the opinion of the lawyers?

Answer
Even in situations where there is favorable jurisprudence, this is not sufficient to provide a basis for recognizing the contingent gain, as this does not ensure a final favorable decision for the Company, as many other factors can influence this decision, for example, the branch of activity, the formalization of the process, etc.

Even if it is considered that the Company has an injunction and there is favorable jurisprudence, the concept described above applies equally (non-recognition of the gain). The Company must make disclosure in an explanatory note regarding the subject.

Question 5
In cases of processes not yet finally judged where the Company discusses the recovery of taxes allegedly paid in excess and obtains an injunction allowing compensation of those values with other taxes, should it register the contingent gain supported by this injunction?

Answer
As the injunction is a provisional instrument, the registration of a contingent gain is not yet possible, as the realization of the gain is not definitive.
The Company will proceed with the compensation from a financial point of view; however, the compensated tax must still appear as a liability until the final outcome of the case, as its liquidation is also provisional, and if the outcome is unfavorable to the Company, it must pay the tax previously compensated with the legal additions.

The present Technical Communication is consistent with NPC 22, which entered into force from January 1, 2006, and with Technical Interpretation IBRACON n°. 03/02, issued on February 18, 2002.

23.4 Disclosure in explanatory notes of Provisions, Contingent Liabilities and Contingent Assets

23.4.1 Disclosure in explanatory notes of Scheduled Shutdowns
By complying with IT Ibracon nº 01/2006, the company must clarify the accounting policies and practices adopted, highlighting the estimated values and periods for scheduled shutdowns in the note related to fixed assets; The company may also observe the guidance of item 5 of this Circular Letter, when dealing with aspects of changes in accounting practices related to the accounting of the effect of scheduled shutdowns.

23.4.2 Disclosure in explanatory notes of Provisions, Contingent Liabilities and Contingent Assets
Normally, contingent assets or contingent gains should not be recorded; only when their obtaining or recovery is effectively assured should they be recognized in accounting. A possible gain in administrative or judicial actions should only be recognized when, having gone through all necessary instances, the company obtains a favorable decision. If the company has already recognized revenue involving an asset in dispute (accounts receivable, for example), it must then constitute a provision for losses in proportion to the contingent value.

If there is a challenge by the debtor, but the company considers that it has objective conditions to evidence its right, leaving no doubt regarding this right and the chance of receipt, it may not make the provision as long as it evidences in an explanatory note to the financial statements the existence of the challenge.

(ORIENTATION OPINION CVM Nº 15/87)
The CVM recommends that in the preparation of explanatory notes on contingent liabilities, the following be informed, at minimum: (i) nature of the contingency (labor, social security, tax, civil, environmental, etc.), (ii) detailed description of the contingent event involving the company, (iii) chance of occurrence of the contingency (probable, possible or remote), (iv) instances in which contingent liabilities are under discussion (administrative or judicial, lower or higher courts), (v) jurisprudence on contingent liabilities, (vi) evaluation of the consequences of contingent liabilities on the company's business.

23.5 Annex: Ibracon Technical Interpretation 03/2002
Accounting treatment of contingent gains
Due to the difficulties being encountered by professionals in the treatment of judicial, fiscal, and other claims made by companies in lawsuits, Ibracon deemed it appropriate to reaffirm its understanding regarding the accounting treatment related to the so-called contingent gains. In this context, this Technical Interpretation aims to guide the application of paragraph 7 of Pronouncement XXII – Contingencies, in the accounting treatment of contingent gains, specifically directed at judicial processes in the recovery of taxes or the extinction of recorded tax obligations.

Question 1
What characterizes a contingent gain?

Answer
Based on Pronouncement XXII – Contingencies, from Ibracon, these are potential gains that have conditions or situations of undefined solution at the date of the end of the fiscal year or period to which the financial statements refer and, as such, depend on events that may or may not occur.
In this context, a contingent gain corresponds to the potential right to recover a tax paid or the potential extinction of a recorded tax obligation.

Question 2
Under what circumstances can a company register a contingent gain according to Brazilian accounting practices?

Answer
Paragraph 7 of Pronouncement XXII – Contingencies, from Ibracon, defines when a contingent gain must be recognized, as reproduced below:
"As a general rule, contingent gains should not be accounted for in obedience to the accounting convention of conservatism, by which revenue should only be recognized when realized."

On the same subject, CVM issued Orientation Opinion nº. 15/87 which addresses the subject as follows:
"The convention of Conservatism (also called Prudence) stipulates that among alternative sets of evaluation for assets equally valid, according to fundamental principles, Accounting will choose the one that presents the lowest current value for the asset and the highest for liabilities. This understanding should not be confused or distorted with the effects of accounting result manipulation, but viewed in light of the vocation for protection, care, and neutrality that Accounting must have, especially regarding excesses of enthusiasm and valuations by the administration and owners of the entity (see item 6.3 of the pronouncement attached to CVM Deliberation n°. 29/86) By this convention, contingent assets or contingent gains should not be recorded; only when their obtaining or recovery is effectively assured should they be recognized in accounting. Thus, a possible gain in administrative or judicial actions should only be recognized when, having gone through all necessary instances, the company obtains a favorable decision. If the company has already recognized revenue involving an asset in dispute (accounts receivable, for example), it must then constitute a provision for losses in proportion to the contingent value."

Question 3
In situations where the Company has obtained a final favorable decision on a contingent gain, what is the moment of its accounting recognition? Upon the judicial decision or upon its financial realization?

Answer
With no further possibilities of appeal by the opposing party, the risk of non-realization of the contingent gain is considered "remote" and, therefore, the Company must recognize the gain in accounting when the final judicial decision produces its effects, which normally occurs after publication in the Official Gazette. This means that it will no longer be a contingent gain but rather a right of the Company, for which the Company's administration, before its registration, must take into account the mentioned in the following paragraph. Before the registration of the contingent gain and periodically after its registration, the Company's administration must evaluate the recovery capacity on the asset, as the opposing party may become unable to honor this commitment or its future use may be uncertain. In subsequent evaluations after its registration, the need for a provision for asset devaluation must be considered.

Question 4
In situations where the Company has not yet obtained a final favorable decision for the recovery of a tax or the extinction of the recorded tax obligation, but there is favorable jurisprudence for other Companies in identical cases and the evaluation of the lawyers is that the chances of a favorable outcome are probable, can that Company recognize the contingent gain based on the jurisprudence and the opinion of the lawyers?

Answer
Even in situations where there is favorable jurisprudence, this is not sufficient to provide a basis for recognizing the contingent gain, as this does not ensure a final favorable decision for the Company, as many other factors can influence this decision, for example, the branch of activity, the formalization of the process, etc.
Even if it is considered that the Company has an injunction and there is favorable jurisprudence, the concept described above applies equally (non-recognition of the gain). The Company must make disclosure in an explanatory note regarding the subject.

Question 5
In cases of processes not yet finally judged where the Company discusses the recovery of taxes allegedly paid in excess and obtains an injunction allowing compensation of those values with other taxes, should it register the contingent gain supported by this injunction?

Answer
As the injunction is a provisional instrument, the registration of a contingent gain is not yet possible, as the realization of the gain is not definitive.
The Company will proceed with the compensation from a financial point of view; however, the compensated tax must still appear as a liability until the final outcome of the case, as its liquidation is also provisional, and if the outcome is unfavorable to the Company, it must pay the tax previously compensated with the legal additions.

Question 6
Is the practice adopted in Brazil harmonized with best international practices?

Answer
Yes, the accounting practices adopted in Brazil are harmonized with the international standards prescribed in IAS nº. 37 which deals with the subject, issued by the International Accounting Standards Committee. These standards, in summary, conclude that "A company should not recognize a contingent asset."
In the same line is the North American accounting treatment prescribed in FASB 5, issued by the Financial Accounting Standards Board.

24. Intangible Assets

24.1 Accounting treatment of intangible assets in Brazil
Intangible assets in Brazil are generally considered as deferred assets, which, in item V of article 179 of the corporate law, are defined as "applications of resources that will contribute to the formation of results of more than one fiscal year, (...)".
The NPC nº VII pronouncement from Ibracon establishes the condition for capitalizing these expenses, generally rights linked to the destiny of the entity, and their recoverability, that is, their link with revenues to be obtained in future periods. If this is not possible, the aforementioned pronouncement (in item b of paragraph 2) determines that "the capitalized amounts must be immediately amortized in their entirety". The international pronouncement IAS 38 defines an intangible asset as "an identifiable non-monetary asset without physical substance, held for use in the production or supply of goods or services, for rental to others, or for administrative purposes". It conditions this definition to the general definition of assets, that is, (a) an asset is controlled by a company as a result of past events and, (b) from which future economic benefits are expected to be generated for the entity. For the recognition and accounting of an intangible asset, IAS 38 conditions it to the requirement of filling the definition of an intangible asset (cited previously) and the possibility of estimating the cost of this asset with security. Furthermore, the entity must evaluate the probability of generating future economic benefits by these assets "which represent the best estimate of the administration regarding the set of economic conditions that will exist during the useful life of the asset". Note that, essentially, both Brazilian and international standards recognize the deferred asset, provided that the generation of future incremental revenues resulting from the existence of these assets is probable. However, this is not the position of American pronouncements, which in SFAS nº 2 – Accounting for Research and Development Costs, determine that research and development expenses – R&D – be appropriated to results as an expense, which obliges companies listed on American exchanges to evidence this divergence. In the case of a company in the pre-operational phase, there would be no doubt in stating that, in the absence of indication of loss of economic substance of the respective project and maintaining the premises of the business plan that led the open company to start it, such expenses could, or rather, should be capitalized. This statement is based on the premise that said business plan already contemplated that the revenues to be obtained, during a certain period of time, will be unequivocally linked to that initial effort (sacrifice) materialized by the expenditures incurred. In addition, we can also state that these, when realized, will be incremental, that is, capable of increasing the capacity to generate revenues, in addition to being specific to the condition of the asset, as in the case of expenses with "startup" and pre-operational, which must be capitalized, unless they are necessary to bring the asset to working conditions. The same grounds apply to the company in operation, that is, for an expense to meet the necessary conditions to be
deferred, it must be unequivocally linked to the obtaining of incremental revenue in the future, the period of time in which it will be realized must be recognized, there must be no evidence of loss of economic substance of the project or alteration, for the worse, of fundamental premises of the respective business plan that justified the project, and the incremental revenue must be fully demonstrated. Therefore, the focus is on the incremental revenue on which the linkage of the expense to be deferred must fall. The opposite of this situation would be the incorrect capitalization of regular expenses to maintain the research and development department, for example, which does not constitute the formation of assets capable of non-ordinary services and generating incremental revenues. In the same direction, generic and non-specific expenses related to the general functioning of the company should not, for this reason, be capitalized (recorded as assets) because they are not costs specifically related to a qualifying asset. It is not sufficient to merely narratively and generically state that the expense was incurred with the object of contributing to the formation of future results, as this is the essence or reason for the existence of an expense. The expense represents the use or consumption of goods and services in the process of producing revenues or, in other words, it must be clear that every and any expenditure made by a company aims to obtain future revenue of greater value. Therefore, the points for the judgment of value on deferred expenses to be emphasized are: (i) the absence of fact or event that indicates the deterioration of the future profitability prospects of the project, as stated in the business plan that justified the engagement of the open company in the project, and (ii) the linkage of these expenses with future incremental revenues, specific to the asset to which they are related. These are the crucial points to be considered in the exercise of judgment regarding the deferral of incurred expenses.

24.2 Why Corporate Brands Should Not Be Accounted For
The subject of accounting for intangibles carries the difficulty of understanding how intangible assets should be evaluated, which are characterized by the lack of physical substance and a high degree of uncertainty in the estimate of future benefits. Many intangibles are characterized by having value only for a particular company, have an indefinite useful life, and are subject to wide fluctuations in value because their benefits are based on some type of competitive advantage. In any hypothesis, only acquired intangibles are accounted for, which is provided for and accepted by international, American, and Brazilian standards. This, indeed, is a foundation of accounting reports that are based on the recognition of transactions between entities and, therefore, do not provide for the accounting of assets created internally and not yet recognized in market transactions. The fact that the corporate brand or even product brands can be evaluated through appraisals does not mean that they should be accounted for. Remember that the explicit purpose of the accounting report is to present a measurement of the result and cash flows of an entity in a certain period and not to produce an estimate of the value of that same entity. The problem treated here arises when the administrator intends to include the value of the corporate brand in assets and encounters opposition from accountants, independent auditors, that is, the conflict arises between the existence of an economic object capable of producing future profits and the set of opinions and pronouncements that prevent the accounting of the corporate brand as it is a subjective goodwill. The subjectivity of the methods of measuring the economic fact before the moment of sale led to international accounting pronouncements to only consider acquired goodwill, as can be observed in paragraphs 48, 49 and 50 of IAS 38, transcribed below, which explicitly prohibit the recognition of internally generated goodwill, which we could classify as the "most sensitive" intangible asset:

48. Internally generated goodwill should not be recognized as an asset.

49. (...) internally generated goodwill is not recognized as an asset because it is not an identifiable resource (i.e., it is not separable nor does it arise from a contract or legal right) controlled by the entity that can be measured by its cost.

50. The differences between the market value of an entity and the amount of its net assets at any given time may capture factors affecting the value of the entity. However, these differences do not represent the cost of intangible assets controlled by the entity. (free translation)

24.3 Expenses with share placement – underwriting operation
This topic was the subject of great discussion in 2005, due to divergences regarding the understanding of the accounting treatment to be applied to the expenses in question.
It is convenient to highlight that this subject was already the object of disclosure in Circular Letter/CVM/SNC/SEP No. 01/2005, where in item 24.1 CVM, as an example regarding the accounting treatment of intangible assets in Brazil, expressed its technical position on the subject, namely:
"...underwriting operation, for the launch of new shares to the public. These expenses, typically composed of the preparation of prospectuses, reports, professional fees, legal publications, advertising, commissions of financial intermediaries, should be recognized as an expense in the result of the period in which they are incurred, since there is no clear link with a qualifying asset and with future results". (Emphasis added) This position of CVM has as its technical support, basically, the Accounting Principle of Confrontation of Expenses with Revenues and Accounting Periods. The main motivation for the discussion arises from the fact that the accounting treatment to be applied to expenses related to the initial public offering and share placement is not provided for in Brazilian corporate legislation, nor in national accounting standards, consequently generating, value judgment on the most appropriate accounting treatment for recording this transaction. It should be noted that the exercise of value judgment often provides distinct understandings and positions on the same subject. However, all analyses and interpretations must be carried out in light of the basic conceptual structure of accounting and guided in the direction of convergence with international accounting standards. The question refers, in a general way, to the capitalization or not of expenses with share placement. It was suggested, more specifically, that such expenses be treated in the group of "Prepaid Expenses", being appropriated to the result in proportion to the expectation of earning future revenues. CVM understands that the referred expenses constitute expenses because their triggering events have already been incurred (often even paid). This statement leads us to the initial understanding that the entity's equity must be reduced by an amount identical to the expenses incurred with the initial public offering and share placement. However, analyzing this operation oriented towards convergence with international accounting standards that deal with the subject, we have that they refer to expenses with the initial public offering and share placement to the accounting standards issued by both IASB and FASB, namely, IAS 32 (revised in 2003 – incorporated SIC 17) and FAS 141/01 (replaced APB 16), respectively. In both standards, it is stated that the value of expenses incurred in the initial public offering and share placement must be recognized in a contra account of Shareholders' Equity. The reasoning underlying this position is that the costs incurred in the equity operation are necessary to complete the transaction, therefore, being part of it. From the perspective of the entity issuing the resources, what matters is the net amount raised, whose amount will be used in the financing of its activities. The expenses incurred in this process are exclusively linked to it, being regarded as a necessary sacrifice for the raising of the intended resources and, therefore, as
rectifiers of the amount entered into the Shareholders' Equity of the entity. As cited at the beginning of this item, our corporate and accounting legislation is silent on this subject. With regard to the reduction of Shareholders' Equity, there are specific accounting procedures provided for equity transactions, such as reimbursement, redemption and amortization of shares, as well as cases of loss of the period and treasury shares. In general, the acquisition of shares issued by the company itself should be evidenced as a rectifier of the item that served as the basis for its acquisition, or the capital account itself, in cases of reduction of share capital. From all that has been stated, from a purely technical point of view, our position is that the most appropriate accounting treatment, free from legal aspects, would be the recording of expenses with initial public offering and share placement in specific item(s) of Shareholders' Equity, rectifying those where the amount contributed by shareholders was recorded (capital and/or share premium – if any). This position is based on convergence with international accounting standards and, mainly, because we believe that the net effect of the transaction represents the resources that will effectively finance the company's activities and, since both are recorded in Shareholders' Equity, they ratify the financing decision exercised by the company. However, until there is a Brazilian accounting standard to this effect, we understand that such expenses must be recorded in the result of the period in which they are incurred, in a specific item that characterizes their non-recurring nature.

24.4 Disclosure in explanatory note of Deferred Assets
Their composition and criteria for amortization must be disclosed. Companies benefiting from tax incentives must provide more detailed information, specifying the status of the incentivized projects.
(CVM ORIENTATION OPINION No. 18/90)

25. Share-based compensation
    25.1 Introduction
    The growing use by Brazilian companies of remuneration programs through the grant of stock purchase options to employees and the revision of international pronouncements on the subject due to public debates in the form of accounting, makes the subject relevant for the considerations of this circular letter.
    On February 19, 2004, IASB issued IFRS 2 Share-Based Payment, for application from January 1, 2005. On March 31, 2004, the Financial Accounting Standards Board – FASB issued a draft pronouncement that, in the same direction as IASB and with only a few minor differences, addresses transactions in which a company exchanges employee services for (a) equity instruments of the company or (b) liabilities based on the fair value of equity instruments. The American draft pronouncement eliminates the possibility of using APB Opinion No. 25, Accounting for Stock Issued to Employees, and requires the recording of this type of transactions based on the fair value-based method. The general rule of these pronouncements, applicable to the accounting of share-based compensation plans, is the recognition of cost over the required service period (vesting period) measured through option pricing models.

25.2 Overview
The listed employer company may adopt several types of plans to remunerate executives and employees by granting options to purchase shares issued by the company. In conventional stock purchase grant plans, for example, the employer company grants options to purchase a fixed number of shares of the company, at a set price, during a specific period, in exchange for current or future services of executives and employees. This type of remuneration is common in the American market and, to a lesser extent, in the European community markets, as a way to align the objectives of investors with the objective of administrators and employees. In Brazil, there are few disclosed cases of companies with this type of remuneration plan, possibly motivated by the low delegation of powers of controlling investors to administrators, given the identification of controlling shareholders with administrators, forming a single group of interest. In any case, Brazilian companies with shares traded in foreign markets must follow international recommendations that provide for the accounting of these programs in their income statement, i.e., the effect of the option plan on the income statement.

25.3 The concept of stock options as employee remuneration
In the most common configuration, the stock option gives the employee the right to purchase a certain number of shares of the company at a fixed price for a certain number of years. The price at which the option is granted is usually the market price on the date the options are granted. The logic of this benefit is the expectation that the share price will rise and employees will be able to buy it by exercise (purchase) at a lower price than was referenced at the time of grant and sell it at the current market price, for example. The grant of shares to employees is considered a flexible form of remuneration that aims to attract and motivate employees by granting a part of the future growth of the company. This form also makes sense for listed companies that intend to maintain a continuous form of remuneration and employee participation in the administration of the company. The general idea is the benefit of increased productivity and retention of talent added to the relatively small dilution of capital through the grant of stock options. The positive effect of remuneration to employees through the grant of options depends, to a large extent, on the creation of a real and significant commitment to the destiny of the company. In the design of an option program, it is necessary to consider the number of shares that will be available to be exercised and how many employees will receive the right to receive these options each year so that there is regularity in the grant of this type of remuneration and in the expected beneficial effects. This consideration is important so that there is the possibility of including future employees in this type of remuneration. Another important consideration is the intention to grant the benefit to all employees or only to some key employees. The answer to these and other questions will determine the type of plan, the time provided for its duration, the characteristics of eligibility, allocation, valuation, time of grant, vesting periods and exercise price of the options. In the practice of companies in more developed markets, options are typically subject to a period of three to five years of service (vesting period), which means that if any employee has 20% of this period only 20% of the options can be exercised, or still, an employee can, typically, exercise options to which they have the right at any time, proportionally to the eligibility period. Some companies may offer an alternative exercise of options without disbursement in which the employee exercises the option and the company pays an amount equal to the difference between the market price less the exercise price. In other cases, it is necessary for employees to disburse the amount necessary to pay for the shares at the exercise price agreed in the share-based remuneration plan.

25.4 Accounting situation under US standards
SFAS 123, Accounting for Stock-Based Compensation, encourages the recognition of the "fair value" of share-based compensation plans as an expense on the date of grant of these benefits, but allows companies to continue accounting for these plans according to the rules of APB No. 25, Accounting for Stock Issued to Employees. In APB No. 25, remuneration expenses are estimated according to the "intrinsic value", i.e., the difference between the quotation value and the exercise price of the option, on the date when the exercise price and the number of options are known. Most American companies grant a fixed number of options with an exercise price equal to the share price on the date of grant of the benefit, which, under APB 25 rules, is the same date of measurement and, therefore, results in the recognition of a value equal to zero in expense. Firms that apply the estimation method of APB No. 25 must disclose in the explanatory note the estimated value of the grant of this benefit through the concept of fair value, i.e., using an adequate pricing method to estimate the expense with the advantage granted, i.e., the effect on the result and earnings per share. In summary, in the general current practice of American companies, the APB No. 25 standard, Accounting for Stock Issued to Employees of 1972, is adopted, in which the fair value is disclosed in the explanatory notes to the financial statements with the recognition of a zero value in remuneration expenses (income statement account).

25.5 Accounting under international standards IFRS 2
IFRS 2 requires an entity to reflect in the results and financial position the effects of share-based payment transactions, including expenses associated with stock options granted to employees. It includes the following topics: (i) all stock options and stock purchase plans, (ii) rights referenced in shares, when a payment depends on the share price, (iii) transactions with suppliers involving a share-based payment in exchange for goods or services of non-employees. The key principle for recording transactions in which goods and services are received with reference to the equity instruments of the entity must be measured by the fair value method of the goods and services received. If the value cannot be estimated reliably, then the fair value of the equity instruments granted must be used. In the case of share-based remuneration to employees, the measurement of the amount of the transaction is made at the beginning of the grant period and the valuation process is focused on the specific terms and conditions of the grant of shares or stock options to employees because it is not possible to estimate the fair value of employee services received reliably. The application of fair value by IFRS 2 results in an expense in the result, even if the exercise price of the option granted to employees is the same as the share price of the company on the grant date, given the application of option pricing models. In general lines, the IFRS 2 pronouncement aims that the user of accounting information has access to disclosure: (i) the nature and extent to which share-based payment contracts existed during the accounting period; (ii) how the fair value was determined and, (iii) the effect of the share-based payment transactions on the result and financial position in the period.

25.6 The controversy over the estimation and pricing methods of options
In the estimation of expenses corresponding to the grant of stock options to employees, companies must choose a pricing method capable of measuring the present effect of this type of instrument. The Black-Scholes model and the binomial model are the most popular for the valuation of stock options. Each of these models is based on subjective premises such as volatility, i.e., its historical tendency to increase or decrease over a certain period of time. Although the valuation of these financial instruments is imperfect since, for example, it considers options as freely tradable while options granted to employees suffer a set of restrictions, it is considered that: (i) it is preferable to have some type of estimate rather than no estimate and, (ii) it is possible to make some adjustments in the inputs in the option pricing models to consider these differences, such as expected volatility, expected life and probability of acquiring the right (vesting).

25.7 Corporate aspects of the approval of the option plan
Approval by shareholders is a relevant aspect for the existence of the option plan. This type of remuneration plan implies the modification of the company's share capital structure and, furthermore, that it does not substantially modify the participation relationships, must be approved by the General Assembly of shareholders or by the Board of Directors. This topic must also be considered in the corporate governance rules established so that investors have full understanding of the amounts involved both in the company's result and in the general shareholding position. Although share-based compensation intends to incentivize in employees and administrators the behavior that shareholders desire, there are ethical aspects that must be present in the behavior of these employees when proposing and changing accounting rules in general and, especially, in the disclosure of information that is capable of inflating expectations of future profits.

25.8 Glossary of some of the main terms used in option plans
acquisition of the right (vesting): delivery, by the company, of a benefit corresponding to the right of an employee acquired gradually by the time of service rendered; option plan approval date: the plan must be approved by the Board of Directors or General Assembly; disclosure date: the Option Plan is disclosed in accordance with CVM Instruction No. 358/02; grant date: the date on which an option is granted to an individual, or the date on which a company and the employee agree (as provided in a share-based remuneration agreement) on the grant date of the right on equity instruments, under certain conditions (vesting conditions), by which this right will be exercised; vest date: date from which an option can be exercised and sold; exercise date: the option is usually exercised between two dates: the date from which the conditions of the plan make exercise possible (vesting date), fixed after the grant date, and the expiration date, which is usually fixed a few years later; expiration date: is the last day on which an option can be exercised, or sold; on this date the employee's rights are extinguished, i.e., they lose their value; vested right – vested or that meets contractual conditions exercise: decision to buy the share through the option; equity instrument: contract identified to the residual result of the company's assets minus all liabilities; stock option as remuneration: a right issued by a listed company to an individual to purchase an amount of shares of the company at a set price, within a specified period of time; vesting period: period between the grant date and the date on which all eligibility conditions (vesting conditions) of an option plan have been met;

Stock Option Plan: a contract that gives its holder the right, but not the obligation, to subscribe to shares of a company at a fixed or determinable price within a certain period of time. (a contract containing a set of rules defined in a document that gives the employee the right to buy a share of the company on a future date). exercise price: the price at which a share can be purchased through the exercise of an option (strike price); expected life: the period of time between the grant date and the date on which it is estimated that the option will be exercised; grant value: represents the face value of the option. This value is calculated based on the application of the pricing method used. expected value: represents the value of the remuneration offered to the participant and not necessarily the realized gain; it is the present value of future gains; the quantification can be done with several methodologies, the most common being the Black-Scholes and Binomial models. fair value: the amount by which an asset can be traded in an active market, where the buyer and seller have knowledge of the subject and independence from each other, without it corresponding to a compulsory transaction or resulting from a liquidation process, or, in the absence of an active market for a given financial instrument: a) the value that can be obtained with the trading of another financial instrument of similar nature, term, and risk, in an active market; or b) the net present value of future cash flows to be obtained, adjusted based on the prevailing interest rate in the market, for instruments of similar nature, term, and risk.

25.9 Accounting for Stock-Based Compensation Plans
The management and information problems arising in international companies have led an increasing number of companies to voluntarily recognize the costs associated with the grant of stock options as expenses recognized in the income statement. This trend supports and reinforces the understanding of international bodies to recognize the effect on the result of this type of remuneration plans estimated at fair value, that is, through adequate pricing methods. It is the understanding of the technical area of this CVM that companies must account for expenses related to the grant of shares as a form of remunerating employees using an adequate pricing method. However, while there is no express determination in this sense, listed companies must disclose in a note to the financial statements what the amount of the period's result and Shareholders' Equity would be if this accounting had been done.

25.10 Disclosure in Notes to the Financial Statements of Option Plans
The objective of initiating the process of understanding this issue within the Brazilian capital market led to the provisions of the Ibracon Pronouncement on Accounting for Employee Benefits approved by CVM Resolution No. 371, which determines the disclosure, at a minimum, of the following information: (i) the nature and conditions of stock purchase option plans; (ii) the accounting policy adopted; and (iii) the quantity and value by which the shares were issued. To fulfill the disclosure objectives, and to comply with Article 176 of the Corporate Law, which provides for the disclosure of stock options granted and exercised in the fiscal year, the company must disclose in the Notes to the Financial Statements and in the Quarterly Information Form – ITR the following information regarding Option Plans, always comparatively to the respective previous periods:
I the existence of Option Plans, with a description of their nature and conditions (including eligibility conditions for beneficiaries).
II the quantity, description of the nature and conditions (including, where applicable, rights to dividends, voting, conversion, exercise and expiration dates) and amount of options granted, exercised, and expired, if applicable, held by each group of beneficiaries, including their exercise price or, if applicable, the method of calculation to obtain it. The measure of beneficiaries' eligibility to exercise the right must be indicated (for example, the time elapsed since the grant date of the option relative to the total time until the beneficiary can exercise the option); III the percentage of dilution of participation to which current shareholders will eventually be subjected in the event of the exercise of all options to be granted; IV regarding exercised options, a description of the shares delivered, in quantity, class, and type, and the total and unit exercise price relative to each of the classes and types and their respective market value on the respective dates; V the dates or periods in which options may be exercised by beneficiaries and any expiration dates; VI a description of any transactions involving treasury shares to effect the redemption of options, indicating the quantity of shares, by class and type, as well as the value received by the company; and VII the effect on the Income Statement and Shareholders' Equity if this accounting had been done.

26. Corporate Matters
    26.1 Law No. 10,303/2001 – Changes to the Corporate Law
    Law No. 10,303, of October 31, 2001, brought some changes to provisions of Law No. 6,404/76. The first change is that contained in item II, of §1, of the new wording of art. 124. By this provision, the notice period for the first call for a general meeting in a listed company becomes 15 (fifteen) days, and for the second call, 8 (eight) days.
    The second change refers to the documents that must be made available to shareholders up to one month before the date scheduled for the Ordinary General Meeting. Law No. 10,303/2001 added the opinion of the fiscal council, including dissenting votes, and other documents pertinent to the matters included in the agenda, to the list of documents available to shareholders. Another very significant change is that made in articles 197 and 202, which deal with the constitution of the Reserve for Profits to be Realized. The change brought by the new Law is that the Reserve for Profits to be Realized is no longer constituted by the amount of profits to be realized, as defined by Art. 197, but rather by the portion of the mandatory dividend exceeding the amount of realized profit. No less important is the modification of art. 196, which determines the annual review of a capital budget that encompasses a period longer than one fiscal year, a budget used to support the constitution of a Reserve for Profits – Retention of Profits. This budget must include the main items of investment in working capital and fixed capital with the main sources of financing – own and third-party capital – projected, as well as the premises that support it. The content of the capital budget must receive adequate disclosure in the IAN form, and it is recommended that it be considered in the preparation of the Management Report and in the performance comments in the ITR form. Reinforcing the understanding that CVM has maintained over time, § 6 of the new article 202 establishes that profits that are not destined for profit reserves, in accordance with articles 193 to 197, must be distributed as dividends.

26.2 Participation in Results Not Referenced in Profit
Employee participation in profits or results is provided for in Article 7, item XI, of the Constitution, and regulated by Law No. 10,101/00.
Although it is a complex subject, our objective is merely to issue an understanding regarding the accounting treatment of participations in profits or results, given the different accounting treatments adopted by some listed companies.
It is the understanding of this CVM that the classification provided for in item VI, of article 187, of Law No. 6,404/76, applies only to statutory participations provided for in corporate law and that have profit as a base and are determined in accordance with the provisions of said Law.
Therefore, any gratification to employees, even those denominated as participation in profits or results, that does not fully observe the conditions provided for in the corporate law, must be classified as operating cost or expense, regardless of its denomination or calculation base.

26.3 Reserve for Profits to be Realized – Law No. 10,303/01
From the effective date of Law No. 10,303/01, the Reserve for Profits to be Realized began to be constituted by the amount of the mandatory dividend, calculated in accordance with the bylaws or art. 202, which exceeds the realized portion of the net profit of the fiscal year.
Thus, the amounts constituted from the effective date of Law No. 10,303/01 come to represent the deferred dividend itself and no longer its base in realization.
However, the previous balance constituted under the previous rule still has that characteristic, that is, upon its realization, it will constitute the calculation base for dividends.
Given this differentiated characteristic in the constitution of the reserve, it is necessary to alert that there must be adequate segregation of the amounts that make up the balances of the Reserve for Profits to be Realized constituted before and after the effective date of Law No. 10,303/01.
Alternatively, the listed company in this situation may uniformize those amounts, transforming the previous balance to adapt it to the new form of realization of the reserve. Only the portion that will be paid as a dividend should be kept in the Reserve for Profits to be Realized account, with the remaining balance reversed and destined in accordance with article 19 of CVM Instruction No. 247/96 (capital increase, distribution of dividends and/or constitution of other profit reserves or absorption of fiscal year losses, meeting legal requirements).

26.4 Retention of Profits
Legally, shareholders have the right to receive, as mandatory dividends, at least the portion of profits established in the bylaws. This statutorily stipulated dividend must be the minimum remuneration due to the shareholder. Any remaining balance of undistributed profit must be mandatorily destined, in accordance with corporate law, with no indiscriminate retentions allowed either as a reserve or in the accumulated profits account. Destinations made under the title of retention of profits must be justified by a capital budget approved by the general meeting, and their classification should be made, preferably, in a specific reserve account. However, their classification in the accumulated profits account is admitted, provided that their nature is evidenced and the provisions of art. 196 of the corporate law are observed. We must also emphasize that CVM Instruction No. 323/00 defines as an abusive exercise of control power the approval by the controlling shareholder of the constitution of a profit reserve that does not meet the prerequisites for such constitution, as well as the retention of profits without a budget approved in a General Meeting justifying this retention.

26.5 Effect on the Calculation of Mandatory Dividends Resulting from the Accounting Treatment of Exchange Gains
Given the doubts raised by some listed companies regarding the accounting treatment to be given to exchange gains with liabilities indexed in foreign currency and regarding their computation in the calculation base of mandatory dividends, we present the following clarifications.

1. Item 4 of CVM Advisory Opinion No. 13, of July 6, 1987, provides regarding exchange variations:
   "4. Guided by the fundamental principles of accounting, the Securities and Exchange Commission clarifies that the listed company should observe the following procedures regarding exchange variations resulting from changes in the exchange rate:
   a) variations resulting from the adjustment of credits and obligations in foreign currency, due to changes in the exchange rate, constitute revenue or expense and integrate the determination of the result in the fiscal year in which the exchange changes occur; b) when they refer to obligations linked to the financing of assets...".
2. However, a problem arises regarding the payment of dividends, relative to the portion of such gains included in the result of the fiscal year: in the case of exchange gains originating from the existence of long-term liabilities, their recognition may imply an immediate impact on cash flow to meet that payment, generating financial problems for the company.
3. The understanding of the CVM, in such cases, is that, although realized from an accounting perspective, this gain constitutes an unrealized result from a financial viewpoint. Thus, in the same way that "profit on sale payable after the end of the following fiscal year" is treated (art. 197, sole paragraph, letter "c", of Law No. 6,404/76), the company may consider this gain as unrealized when eventually constituting a reserve for profits to be realized, within the limitations established in the caput of said article.
4. This understanding is supported by the very statement of reasons that forwarded the Bill for Corporate Law, when dealing with reserves and retention of profits:
   "The reserve for profits to be realized is regulated in the Bill so that the mandatory dividend can be fixed as a percentage of the fiscal year's profit without risk of creating financial problems for the company".
5. The reversal of the reserve, and its consequent computation in the calculation base of mandatory dividends, will occur when there is a reversal of the expectations of exchange gains or upon the maturity of each long-term contract, whichever occurs first, which gave rise to the aforementioned exchange gains.

26.6 Disclosure in Notes to the Financial Statements of Shareholders' Equity Items and Corporate Matters
26.6.1 Treasury Shares
The acquisition of its own issued shares represents a return of invested capital and should be shown as a deduction from a specific reserve account. The note to the financial statements should indicate:
a) the objective for acquiring its own shares; b) the quantity of shares acquired or alienated during the fiscal year, highlighting types and classes; c) the weighted average acquisition cost, as well as the minimum and maximum costs; d) the net result of alienations occurring during the fiscal year; and e) the market value of the types and classes of treasury shares, calculated based on the last quotation, on the stock exchange or over-the-counter, prior to the end date of the fiscal year. (CVM INSTRUCTIONS NOS. 10/80 AND 69/87 AND CVM ADVISORY NOTE NO. 59/86)

26.6.2 Social Capital
The number, types, and classes of shares that make up the social capital shall be disclosed, and, for each type and class, the respective quantity and, if any, the nominal value. The advantages and preferences conferred to the various classes of shares, according to statutory norms, shall also be disclosed.
(LAW NO. 6,404/76, ARTICLE 176)

26.6.3 Authorized Capital
A company that has authorized capital must disclose this fact in a note to the financial statements, specifying:
a) the limit of authorized increase, in capital value and number of shares, and the types and classes that may be issued; b) the competent body to deliberate on the issuances (General Meeting or Board of Directors); c) the conditions to which the issuances are subject; d) the cases or conditions in which shareholders will have the right of preference for subscription, or the non-existence of this right; and e) stock purchase options, if any, to administrators, employees, or natural persons who provide services to the company or society under its control. (LAW NO. 6,404/76. ARTICLE 168, §1º)

26.6.4 Destination of Profits Stated in Shareholder Agreements
The annual management report should contain information on the profit reinvestment and dividend distribution policy stated in shareholder agreements filed with the company.
(LAW NO. 6,404/76, ARTICLE 118)

26.6.5 Dividend per Share
The amount of dividend per share of the social capital, divided by type and class of shares, should be indicated in the Statement of Changes in Shareholders' Equity, observing the different advantages and the existence of treasury shares.
(LAW NO. 6,404/76, ARTICLE 186 AND CVM INSTRUCTION NO. 59/86)

26.6.6 Proposed Dividends
The demonstration of the calculation of dividends proposed by the administrators, the payment policy, and whether these will be paid corrected monetarily or not must be disclosed.
(CVM ADVISORY OPINIONS NOS. 15/87 AND 21/90)

26.6.7 Interest on Equity
In notes to the financial statements and to quarterly information (ITRs), the criteria used to determine these interests, the policies adopted for their distribution, the amount of income tax incident, and, when applicable, their effects on mandatory dividends should be informed.
(CVM RESOLUTION NO. 207/96)

26.6.8 Remuneration of Administrators
The amount of remuneration should be disclosed in the income statement itself or in a note to the financial statements.
(CVM ADVISORY OPINION NO. 04/79)

26.6.9 Reserves – Detailing
The company may evidence, in a note to the financial statements or in an analytical table, the subdivisions of reserves, when their evidence in the Statement of Changes in Shareholders' Equity becomes too extensive for publication purposes.
(CVM INSTRUCTION NO. 59/86)

26.6.10 Reserves for Profits to be Realized
The calculation of the reserve should be demonstrated, evidencing the amount and nature of the values constituted, the realized amount, the parameters used, and the future effect on dividends.
(ADVISORY NOTE TO CVM INSTRUCTION NO. 59/86 AND CVM ADVISORY OPINION NO. 24/92)

26.6.11 Retention of Profits
The retention of profits may present itself with various denominations, such as: reserve for expansion, for reinvestment, etc., and may still be included in the Accumulated Profits account. In any circumstance, its constitution, maintenance, and legal basis must be disclosed in a note to the financial statements, as well as the main lines of the capital budget that supports the retention. The justifications and the main lines of the respective capital budget must be explicit. Profits not destined, even if kept in accumulated profits, characterize themselves as improper retention of profits. (LAW NO. 6,404/76, ARTICLE 196 AND ADVISORY NOTE TO CVM INSTRUCTION NO. 59/86)

26.6.12 Multiple Voting
The listed company must disclose the minimum percentage of participation in the voting social capital for the shareholder to request the adoption of multiple voting in its general meeting, which will deal with the election of the members of the Board of Directors. This disclosure must be made mandatorily in the notice of call for the meeting and, optionally, together with the financial statements closing the fiscal year. (CVM ADVISORY OPINION NO. 24/92)

27. Reduction in the Recoverable Amount of Assets
    The preparation of the standard on the reduction in the recoverable amount of assets is in the final phase of public hearing at Ibracon and under analysis by the Advisory Committee of Accounting Standards. This draft was included in the circular letter with the objective of anticipating its main points and is part of the convergence effort with international standards undertaken by Ibracon and CVM. Objective and Scope 1 The objective of Accounting Standard and Procedure NPC No. 16 – Reduction in Recoverable Amount of Assets is to define procedures aiming to ensure that assets are not registered accounting-wise at a value higher than that capable of being recovered over time through use in the entity's operations or in its eventual sale. If there is clear evidence that assets are registered at a value not recoverable in the future, the entity must immediately recognize the impairment, through the constitution of a provision for losses. 2 NPC 16 applies to all assets or group of relevant assets related to industrial, commercial, and service activities, updating and complementing the mentions to this theme contained in previously issued standards related to investments not evaluated by the equity method, fixed assets, deferred assets, and revaluation of assets. NPC 16 does not apply to assets resulting from construction contracts in construction companies, deferred tax assets, and assets related to financial instruments.

Process of identifying the existence of impaired assets 3 The entity must assess, when preparing annual financial statements, whether there is any indication that its assets or group of assets have lost relevant economic representativeness. If there is an indication, the entity must perform an assessment and account for any impairment of the assets. 4 The following indications, among others, must be considered:
External sources, observed during the period or when preparing the financial statements The market value of the asset has decreased significantly more than would be expected as a result of the passage of time or normal use; Significant changes have occurred, or will occur in the near future, in the technological, market, economic, or legal environment in which the entity operates or in the market to which the asset is destined; Market interest rates or other market rates of return on investments have increased, and these increases will likely affect the discount rate used in calculating the value of an asset in use and will significantly reduce the recoverable amount of the asset; and The carrying amount of the entity's equity has become greater than the market value of its shares. Internal sources Available evidence of obsolescence or physical damage; Significant changes with adverse effects on the entity have occurred, or will occur in the near future, in the extent or manner in which an asset is used or will be used. These changes, among others, include: the asset becoming idle, the asset that management plans to discontinue, restructure, or write off early; or, furthermore, the asset that becomes classified as having a finite useful life instead of an indefinite one; and Internal reports or surveys that evidence, for example, the existence of extraordinary construction expenditures, excessive capitalization of financial charges, etc., and indicate that the economic performance of an asset is, or will be, worse than expected. Determination of recoverable amount 5 NPC 16 defines recoverable amount as the higher value between the net selling price of the asset and its value in use. If either of these values exceeds the carrying amount of the asset, there will be no impairment nor need to estimate the other value. 6 The best evidence of the net selling price of assets is obtained from a formalized sales contract. If no formal contract exists, the price may be obtained from the trading value in an active market, less the necessary selling expenses. If these sources are also unavailable, the price must be based on the best available information to reflect the value that an entity could obtain, on the balance sheet date, for the alienation of the asset in a negotiation with a knowledgeable, interested, and independent party, without corresponding to a compulsory transaction or resulting from a liquidation process, after deducting disposal expenses. In determining this value, the entity may consider the result of recent transactions for similar assets, within the same industry sector in which it operates. 7 The value in use of assets will be estimated based on future cash flows derived from the continuous use of related assets, using a discount rate to bring these cash flows to present value. 8 Future cash flows must be estimated for the asset in its current condition. Estimates of future cash flows must not include:
(a) future cash inflows or outflows expected for a future restructuring with which the entity is not yet formally committed, or improvement or enhancement of the asset's performance; and (b) cash inflows or outflows from financial activities or receipts or payments of income taxes.
9 The estimate of future cash flows must be based on forecasts and/or budgets approved by the entity's management, and it is advisable to adopt a five-year period. Longer periods should be avoided due to the degree of uncertainty contained in the assumptions; however, they may be accepted if justified.
10 The discount rate must be a pre-tax rate that reflects current market assessments of the time value of money and the specific risks of the asset. This rate represents the return that investors would require if they were to choose an investment that generated cash flows of values, time, and risk profile equivalent to those that the entity expects to extract from the asset. This discount rate must be estimated, from implicit rates, in current market transactions for similar assets or still based on the weighted average cost of capital of a listed entity that has a similar asset, in terms of potential service and risks of the asset under review. However, the discount rate must not reflect the risks for which future cash flow estimates have been adjusted nor projected inflation if the flows are in a currency of constant purchasing power. Otherwise, the effect of the assumptions will be considered in duplicate. 11 When a rate is not directly available in the market, the entity must estimate the discount rate considering the time value of money for periods up to the end of the asset's useful life and the risks that future cash flows may differ in terms of values and period from the estimates. As a starting point, the entity may consider the following rates: (a) the weighted average cost of capital of the entity determined by the use of techniques such as the Capital Asset Pricing Model; and (b) the borrowing rate obtained by the entity. 12 The recoverable amount of an asset must be estimated for each of the cash-generating units. If it is not possible to estimate the recoverable amount of each of the asset's units, the entity must determine the recoverable amount of the cash-generating unit to which the asset belongs. A cash-generating unit is the smallest group of assets that includes the asset and generates cash inflows, which are largely independent of the cash inflows from other assets or groups of assets. 13 It is considered that the recoverable amount of an asset, individually, cannot be determined if: (a) the value of the asset in use, in isolation, generates insignificant cash values, clearly disconnected from what would be the return value of the asset in the market; and (b) the asset does not generate cash inflows that can be largely independent of those from other assets. In these cases, the value in use and, therefore, the recoverable amount, must be determined for the unit considered the cash-generating unit of the group of assets. Recognition of losses 14 If the recoverable amount of the asset is less than the carrying amount, the difference between these values must be adjusted by the establishment of a loss provision, reducing the assets, in counterpart to the period's result. In the case of revalued assets, the amount of the reduction must reverse a previous revaluation, being debited to a reserve in equity. If this reserve is insufficient, the excess must be accounted for in the period's result. 15 After the recognition of the loss
provision, the depreciation, amortization, and depletion expense of the impaired assets must be calculated in future periods by the new carrying amount determined, adjusted to the period of its remaining useful life. Reversal of loss provision for impairment 16 The entity must assess at the end of the fiscal year whether there is any indication, based on external and internal sources of information, that a loss recognized in previous years should be reduced or eliminated. If positive, the established provision must be reversed in whole or in part to the credit of the period's result. Disclosures 17 The entity must disclose the information provided for in NPC 16, summarized as follows:
a. The value of the loss (reversal of loss) with impairments recognized in the period, and any effects on revaluation reserves; b. The events and circumstances that led to the recognition or reversal of the impairment;
c. List of items comprising the cash-generating unit and a description of the reasons justifying the manner in which the cash-generating unit was identified; and
d. If the recoverable amount is the net selling value, disclose the basis used to determine this value, and if the recoverable amount is the value in use of the asset, the discount rate used in this estimate.
28. Special Topics
28.1 Queries on Accounting Matter
As part of its duties, the CVM maintains a service to exercise elucidatory or orientation activities towards agents of the securities market or any investor. Constituting an important communication channel, this service is widely used by these agents and especially by open companies regarding accounting matters.
The CVM, through norms and standards, guides companies to disclose minimum information, considered essential for the market, establishing qualitative and quantitative indicators.
It is up to the administrators of the companies, as responsible for their disclosure, to promote the continuous evaluation of additional information needs to the public, given their access and knowledge of the facts and their greater capacity to assess their relevance.
It is up to the independent auditor to apply a set of technical procedures aimed at issuing an opinion on the adequacy with which the financial statements represent the net assets and financial position, the result of operations, the changes in equity, and the sources and applications of resources of the audited entity.
It is always important to remember that Accounting is a social science and, as such, is characterized as the language of business and markets and is embodied in concepts, definitions, methodologies, techniques, and practices that arise from the interaction and conflicts between groups.
In this sense, there has been an increasing incidence of queries regarding the change of a certain practice or accounting procedure. These queries often bring to the CVM's knowledge the aspirations and demands of the market.
This communication channel is considered of great importance in the process for establishing norms and standards of accounting. However, it is equally important that all agents involved participate in this process. In this sense, the participation of the independent auditor is an essential condition for the broad debate of the issues under examination. Therefore, the guidance is that queries, which deal with the change or adoption of new practices or accounting procedures, should be accompanied by the prior manifestation of the independent auditor regarding their position on the matter queried.
28.2 Other disclosures in explanatory notes
28.2.1 Eletrobrás Credits
The criterion used for the establishment of the loss provision and the amounts involved, including the balances of loans not yet converted into shares, must be disclosed in the explanatory notes.
(CVM DELIBERATION NO. 70/89)
28.2.2 Privatization Program
Open companies involved in privatization processes must disclose, together with their financial statements, all acts and relevant facts known to their administrators, whose revelation does not put at risk the legitimate interest of the company, due to the importance of the privatization process, especially regarding its effects for valuation and decision-making purposes by the user of the company's accounting information. The explanatory note must discriminate, when relevant, at least the following information:
a) operational mode of privatization (individual alienation or in block, if it has more than one participation subject to privatization, through auction, public offering, capital increase with waiver of subscription, alienation, lease or rental of assets and facilities, transformation, merger, spin-off, dissolution, etc.); b) stage of the privatization process, including a brief history of relevant facts that occurred during the period; c) carrying value of the investment subject to privatization and evaluation method, book value on the date of the financial statement/information, market value, if applicable (last three average quotes up to the date of publication or submission of ITRs) and the value of the evaluation; d) amount of the impairment or permanent loss provision, and respective basis, or clarification of the reasons that determined the non-provisioning; e) precise information regarding transactions with related parties, in the form of CVM DELIBERATION NO. 26/86, highlighting the asset and liability balances, revenues, and expenses resulting from transactions carried out with companies subject to privatization; f) amount of resources to be used in the settlement of debts with the public sector, value of the eventual balance to be applied in the acquisition of long-term federal public debt securities and conditions under which the applications will be made, if already known at the time of the disclosure of the quarterly information or financial statements; and g) judicial and labor disputes, including with the employees' pension fund, and the amounts involved. (CVM GUIDANCE OPINION NO. 24/92)
28.2.3 Real Estate Fund
The following information must be subject to disclosure in the explanatory note:
a) analytical information on the position of real estate investments, at the end of the period, detailing each development, with address, total/built area, stage in which it is, its characteristics, net applied value, and market value, as specified in item "c" of paragraph III of article 17 of CVM INSTRUCTION NO. 205, as well as its movement during the period; b) market value of other assets; c) information on expenses with the Fund's administration fee and with the Investment Consultant, their percentages relative to the average semi-annual net equity, and accounting appropriation made, identifying any portion incorporated into the asset; and d) explanation of the calculation of the distribution of results to the unit holders. Values related to the commercialization of business points in "shopping malls" and similar ("res sperata") must be recognized as revenue over the periods of their respective initial lease contracts, and their accounting as an asset of any nature before the period of its registration in revenue is not admitted. In the explanatory notes to the financial statements, the administrator institution of the Real Estate Investment Fund must inform the average period of appropriation of this revenue. (CVM INSTRUCTION NO. 206/94)
28.2.4 Incorporation, Merger, and Spin-off
The company must perform and disclose, at the end of each fiscal year, an analysis on the recovery of the value of goodwill, when the economic basis was the acquisition of the right to exploration, concession, or permission delegated by the Public Power or the expectation of future results, in order to:
a) record the value losses of the applied capital when it is evident that there will not be sufficient results to recover this value; or b) revise and adjust the criteria used for determining its economic useful life and for calculating and the term of its amortization.
(CVM INSTRUCTION NO. 319/99)
28.2.5 Profit or Loss per Share
The company must disclose in the statement of the period's result the net profit/loss per share of the social capital.
(LAW NO. 6.404/76, ARTICLE 187)

28.2.6 Insurance
It must be informed if there are liabilities or interests covered and on which assets.
(CVM GUIDANCE OPINION NO. 15/87)
29. Audit
29.1 Importance and role of Independent Auditors
Within the scope of the securities market – MVM, within the measures adopted for its strengthening as a source of stimulus and financing for the growth and development of the country's economic and productive activity, this Securities and Exchange Commission, in recent years, has been fulfilling its legal competence through the improvement of the regulatory framework and the effective monitoring of the performance of the participants of the said market. In this context, the development of the MVM requires an adequate system for the disclosure of economic-financial information of open companies, with the aim of providing liquidity and efficiency to that market, considering the principles of transparency and complete disclosure (full disclosure) of information that has or may have influence on the investment decisions of investors. Thus, such information disclosed by open companies must by law be audited by qualified professionals who, although hired by them, must adopt an independent and impartial posture in the provision of their services, insofar as the final product of their work has repercussions not only before the audited entity, but mainly before the external public (minority shareholders, potential investors, creditors, regulatory bodies, self-regulatory entities – stock exchanges, investment analysts, risk rating agencies). Recognizing that such professionals, called independent auditors, play a fundamental role in this entire process, the regulation of the independent audit activity in the MVM is based on the following premises:
the importance of an independent audit system as an indispensable support for the activities developed by the regulatory body; the figure of the independent auditor as an indispensable element for market credibility and as an instrument of inestimable value in the protection of investors, insofar as their function is to ensure the fidelity and reliability of the financial statements of the audited entity; the accuracy and clarity of the financial statements, including disclosure in explanatory notes of information indispensable to the visualization of the net assets and financial situation and the results of the audited entity, depend on an effective audit system and, fundamentally, on the auditor's awareness of their true role within this context; and the need for the market to have highly qualified independent auditors who, at the same time, enjoy a high degree of independence in the exercise of their activity. Given the importance of independent auditors for market credibility, the CVM embodied in Instruction No. 308/99 all the requirements for registration and performance of these professionals in the securities market. The requirements contained in the aforementioned instruction, complemented by the professional norms emanating from the representative bodies of the accounting class (Federal Council of Accounting – CFC and Institute of Independent Auditors of Brazil – IBRACON), are based on two attributes that essentially reflect the expectations that the investing public and regulatory bodies have regarding independent auditors: technical-professional competence and independence in the relationship with the audited entity. In this sense, the innovations contained in CVM Instruction No. 308/99 aim to promote the level of technical-professional competence of auditors operating in the MVM, through the mandatory system of internal quality control, periodically reviewed by a peer, within the process of external quality control review (peer review), as well as the maintenance of a continuing education program for all accountants on the technical staff of the audit firm and for the independent auditor as an individual. For professionals intending to operate in the MVM, a technical qualification exam was also instituted to assess their knowledge of professional norms and corporate legislation, as a sine qua non condition for obtaining registration with this CVM. It is worth noting that the requirements contained in the CVM's norms prompted the elaboration of a set of professional norms issued by the representative bodies of the accounting class and independent auditors, which, in a spirit of cooperation, helped to promote and implement a new culture, aiming to harmonize the interests of the regulatory body and those of the self-regulation system entities. Thus, the programs are conducted directly by permanent committees integrated by representatives of the Federal Council of Accounting – CFC and the Institute of Independent Auditors of Brazil –
IBRACON, with their activities monitored by the technical area of this CVM. The CVM hopes to continue counting on the support of the mentioned class entities, aiming, in the near future, the transition from a model of direct state regulation to a model of professional self-regulation, in which the class bodies would be primarily responsible for the registration and supervision of the independent audit activity, with the CVM responsible for verifying the efficiency of the model and any interventions, while this model is not fully functioning or if it proves inadequate. In this line, the CFC/CRCs system, with the support of this CVM, implemented the creation of the National Registry of Independent Auditors (CNAI), through CFC Resolution No. 1.019/05, having been a first step towards the achievement of the greater objective of promoting the self-regulation system. Furthermore, regarding the attribute of independence of auditors in relation to audited entities, the CVM understands that in the view of the external public, the auditor must be independent in fact and in appearance, so that the objectivity and skepticism that the audit professional must have in the execution of their work are not called into question. Therefore, within the MVM, consulting services and any other service that might generate a conflict of interest were prohibited, concomitantly, with the

audit services for the same client, in accordance with the list established in Article 23 of CVM Instruction No. 308/99 (currently suspended in its application by virtue of a judicial decision). Furthermore, still within the spirit of preserving the independence of auditors with respect to the audited entities, the rotation rule instituted in Article 31 of CVM Instruction No. 308/99 is pertinent, in that the prolonged relationship between the auditor and the client, in the view of the external public, reduces the perception of independence of such professional, potentially compromising the quality of the service provided and diminishing investor confidence.

Therefore, the mechanisms introduced in CVM Instruction No. 308/99 aim, primarily, to contribute to the operation in the market of audit professionals of high technical standards and who, at the same time, preserve the requirements of competence and ethics required of these professionals.

29.2 Rotation of Independent Auditors

Article 31 of CVM Instruction No. 308 establishes that the independent auditor, whether an individual or a legal entity, cannot provide services for the same client for a period exceeding five consecutive years, counted from the date of this Instruction, requiring a minimum interval of three years for their re-hiring.

In this sense, it is worth noting that the five-year period established is counted from the date of publication of the Instruction, which occurred on 19/05/1999, not reaching past time. Thus, publicly held companies and other entities registered with this CVM must observe the counting of the 5 (five) year period for the replacement of their independent auditors, with the date of 19/05/2004 being the deadline for the 1st rotation of auditors.

For publicly held companies and other entities registered with this CVM that hired their independent auditors on a date subsequent to 19/05/1999, in light of the understanding of Article 31 of CVM Instruction No. 308, the deadline for the application of the rotation rule will be the date of the 5th anniversary of the hiring of said auditors.

However, nothing prevents the audited entity from replacing its independent auditor(s) in a period shorter than five years; however, in the event of re-hiring, the minimum interval of three years must be observed.

For the full compliance with the principle contained in the rule of rotation of independent auditors, in certain circumstances, the simple change of audit firm is not sufficient. Considering that this rule was established to prevent the prolonged relationship between the auditor and the audited entity from diminishing independence and objectivity in the execution of work, when changing independent auditors, at least the professionals who worked at the previous audit firm and who participated in the work at the audited entity for 5 (five) or more years, in the event of being hired by the substitute audit firm, must, to preserve the essence of the rule, observe a cooling-off period of 3 (three) years to return to audit work at said audited entity.

Additionally, it is opportune to recall that both the publicly held company and the independent auditor, upon the change of auditor, must observe the provisions that determine the disclosure of these changes and the reasons for which they occurred.

29.3 Conflict of Interest

For the perfect exercise of the activity of independent audit, the professional must, essentially, be exempt from interests linked to the audited entity, not allowing such interests to condition their performance in the execution of work and, consequently, in the issuance of audit reports and opinions.

In harmony with this premise, the CVM considers that 3 (three) are the essential prerequisites for the performance of independent auditors in the securities market:

1st) the market must have highly qualified auditors; 2nd) at the same time, these auditors must enjoy a high degree of independence, and 3rd) the need for the auditor to become aware that their primary responsibility is with the external public, users of the audited financial statements.

Independence is a fundamental issue, and the most relevant aspect is not the fact that the auditor is independent or maintains their attitude of independence with respect to their client, but rather, and this is the crucial point, if he, in addition, appears to have independence. To the extent that the auditor's independence is put on trial by society, the information they audit tends to undergo the same process. For this reason, the CVM understands that the provision of other services for the audited entity may configure a decrease in the degree of independence of the auditor and generate situations of conflict of interest.

Articles 22 and 23 of CVM Instruction No. 308/99 define the hypotheses of impediment and incompatibility for the independent auditor to provide other services, in addition to external audit services, to the audited entity.

Article 22 provides that "independent audit may not be performed by the Independent Auditor – Individual, the partners and the other members of the technical staff of Independent Auditor – Legal Entity when it is configured, in their performance at the audited entity, its subsidiaries, holding companies or members of the same economic group, the infringement of the norms of the Federal Council of Accounting – CFC regarding independence". Article 23 lists the services whose provision jointly with external audit services is prohibited to the independent auditor and to the individuals and legal entities linked to him.

On the other hand, Articles 19 and 20 establish that the independent auditor must comply with the specific norms of the CVM and observe, furthermore, the norms emanating from the Federal Council of Accounting – CFC and the technical pronouncements of the Brazilian Institute of Independent Auditors – IBRACON, considering that there is no conflict with a specific norm of the CVM, with respect to professional conduct, the exercise of the activity and the issuance of opinions and audit reports.

Within the scope of the self-regulation system, CFC Resolution No. 1.034/05 (which revoked CFC Resolution No. 961/03) is the current professional norm that deals with the independence of the independent auditor with respect to the relationship with the audited entity. The aforementioned norm defined the concepts regarding the attribute of independence of independent auditors and the circumstances that represent a threat to the loss of independence of these professionals, as follows:

Concepts:
a) independence – capacity that the audit entity has to judge and act with integrity and objectivity, allowing the issuance of impartial reports or opinions with respect to the audited entity, shareholders, partners, quota holders, cooperatives and all other parties that may be related to its work. Thus, the professional must have independence of thought and appear independent from the perspective of the external public. b) independence of thought – posture that allows expressing an opinion without being affected by influences that compromise professional judgment, allowing the person to act with integrity, objectivity and professional skepticism; c) appearance of independence – avoid facts and significant circumstances to the point that a well-informed third party, having knowledge of all pertinent information, including the safeguards applied, conclude within reason that the integrity, objectivity or professional skepticism of an audit entity or a member of the audit team have been compromised.

Circumstances that represent a threat to the loss of independence:
a) self-interest threat – occurs when an audit entity or a member of the audit team could benefit from a financial interest in the audited entity, or another self-interest conflict with the same. b) self-review threat – occurs when the result of previous work needs to be re-analyzed when drawing conclusions about audit work or when a member of the audit team was previously an administrator or director of the audited entity, or was an employee whose position allowed them to exercise direct and important influence over the object of the audit work. c) advocacy threat – occurs when the audit entity or a member of the audit team defend or appear to defend the position or opinion of the audited entity, to the point of potentially compromising or giving the impression of compromising objectivity. This may be the case of the audit entity or member of the audit team that subordinates their judgment to that of the audited entity. d) familiarity threat – occurs when, due to a close relationship with an audited entity, its administrators, directors or employees, an audit entity or member of the audit team become too identified with the interests of the audited entity. e) intimidation threat – occurs when a member of the audit team encounters obstacles to act objectively and with professional skepticism due to threats, real or perceived, from administrators, directors or employees of an audited entity.

CFC Resolution No. 1.034/05 establishes the list of situations and types of services provided by independent auditors that, in addition to those described in the aforementioned Article 23 of CVM Instruction No. 308/99, may cause conflict of interest, namely:
a. employment or similar links by administrators, executives or employees of the audited entity maintained previously with the audit entity; b. members of the audit entity who, previously, were administrators, executives or employees of the audited entity;
c. bookkeeping services;
d. internal audit services for the audited entity; e. information system consulting services; f. litigation support, judicial or extrajudicial expertise services; g. corporate finance and similar services; and h. senior executive selection services.

However, the aforementioned CFC Resolution No. 1.034/05 preaches that in situations regarding the provision of other services to the audited entity, the independent auditor must observe certain parameters that, according to the nature of these services, may or may not be provided in addition to external audit services. For example, the aforementioned professional norm allows the independent auditor to provide tax planning services to the audited entity, provided that the independent auditor prepares it on strictly scientific bases, that the planning is legally supported, supported by suitable documentation and that the fees do not include a variable portion proportional to the benefit obtained by the audited entity. However, the sole paragraph of Article 23 of CVM Instruction No. 308/99 prohibits the provision of consulting services regarding tax planning to the audited entity.

Furthermore, according to item VII of the aforementioned sole paragraph of Article 23 of CVM Instruction No. 308/99, the provision of any other product or service that influences or may come to influence decisions taken by the administration of the audited institution is prohibited.

In view of the above, within the scope of the securities market, independent auditors, with respect to situations related to conflict of interest, and administrators of audited entities must observe, primarily, the norms emanating from the CVM, supplemented by the norms of the CFC in points where these are more comprehensive.

Notwithstanding, it must be clarified to the market that: (i) item II and the sole paragraph of Article 23 and Article 24 of CVM Instruction No. 308/99 had their efficacy suspended with respect to audit firms affiliated with the Union of Accounting Services Companies of the State of São Paulo (SESCONSP), due to a judicial decision issued in a writ of mandamus (process No. 1999.61.00.0373056, pending before the 1st Federal Court of São Paulo), as well as with respect to the company Ernst & Young Independent Auditors S/S in a Writ of Mandamus filed by it (process No. 1999.61.00.0299646, pending before the 9th Federal Court of São Paulo); (ii) The CVM filed the appropriate appeals in both processes before the Regional Federal Court of the 3rd Region, which are pending judgment; (iii) In light of this, auditors registered with this agency are relieved from observing the provisions of said Articles 23 and 24. However, CVM Instructions Nos. 381/03 and 409/04 determine to publicly held companies and administrators of investment funds the disclosure of information regarding the provision of any service by the Auditor that is not external audit, as addressed in item 29.4 below.

29.4 Disclosure of Non-Audit Services

Publicly held companies and other issuers of securities must disclose in their financial statements closed from 31/12/2003 onwards, information regarding the provision, by their independent auditor or persons linked to him, of any other service that is not external audit, as determined by CVM Instruction No. 381/03.

According to the Instruction, companies must disclose in the Administrators' Report the following information about these other services:
the date of hiring, the duration period, if greater than one year, and the indication of the nature of each service provided; the total value of contracted fees and its percentage in relation to fees related to external audit services; the policy or procedures adopted by the company to avoid the existence of conflict of interest, loss of independence or objectivity of its independent auditors. summary of the reasons that, in its understanding, the provision of other services does not affect the independence and objectivity necessary for the performance of external audit services. In the event of alteration, during the fiscal year, due to new hiring, cancellation or modification of contracts, this information must be updated in the Quarterly Information – ITRs). The audited entity may refrain from disclosing the total value of contracted fees and its percentage in relation to the fees for external audit services, if the remuneration paid for other services is not relevant (less than 5% of the remuneration for external audit services); however, in all cases, the information must be disclosed whether the independent auditors provided or did not provide other services, in addition to external audit services, to the audited entity. It is also emphasized that the independent auditor must declare to the audited entity the reasons that, in its understanding, the provision of another service, which is not external audit, does not affect its independence and objectivity. A summary of this disclosure must also be disclosed by the audited entity in its annual reports. With the objective of alerting publicly held companies and their respective independent auditors about the obligation to disclose information regarding the provision of non-audit services, the CVM issued the OFFICIAL LETTER/CIRCULAR/CVM/SNC/SEP No. 02/2005 reporting the monitoring activities and guidance actions, initially of an educational nature only, so far exercised by this agency with companies that failed to comply with such obligation. Furthermore, said official letter emphasized that in the analysis of the information regarding the fiscal year of 2005, companies that do not fully comply with the requirements contained in CVM Instruction No. 381/03 will be subject to the application of sanctions provided for in Article 11 of Law No. 6.385/76, as it is a serious nature infraction; as well as will have to resubmit the DFP form to the CVM and republish their financial statements in the newspaper in which they were originally published, containing the correction of identified flaws and omissions. Finally, according to CVM Instruction No. 409/04 (which revoked CVM Instruction No. 386/03), administrators of investment funds must disclose in explanatory notes to the financial statements of said funds, the information required by CVM Instruction No. 381/03.

29.5 Relationship with the Independent Auditor and the Responsibility of Administrators

CVM Instruction No. 308/99, in its Articles 26 to 29, establishes duties and responsibilities of administrators and fiscal council members in their relationship with independent auditors.

Consequently, it must be emphasized that the care for independence is not the exclusive task of the auditor. In this aspect, Article 27 combined with Article 29 of CVM Instruction No. 308/99 establishes that the administrators of the audited entities, as well as the respective members of the Fiscal Council, will be held responsible for hiring independent auditors who do not meet the conditions provided in the cited norm, especially regarding their independence (existence of conflict of interest) and the regularity of their registration with this Securities and Exchange Commission.

Among these responsibilities, Article 28 determines that the administration of the audited entity must notify the CVM, within 20 days of the occurrence, of the change of auditor, which must, obligatorily, contain the consent of the replaced auditor.
Said article also disciplines the hypotheses of lack of communication by the audited entity and by the auditor, as well as the disagreement of the latter with the justifications presented by the audited entity.
It is worth noting that the automatic update of registration data by the publicly held company or even the change of independent auditors due to compliance with the rotation rule does not eliminate the need to send the communication required in Article 28 of Instruction No. 308/99, resulting, in case of non-compliance, in the application of a daily fine, without prejudice to other applicable sanctions.

29.6 Technical Qualification Examination

From 26/11/2004, when the 1st Technical Qualification Examination was held, requests for registration as Independent Auditor – Individual, Independent Auditor – Legal Entity and for registration as Technical Responsible for Audit

Independent – Legal Entity, obligatorily, together with the other documents necessary for its validation, must be accompanied by the certificate of approval in the technical qualification exam.

According to Resolution CFC No. 1031/05, the Exam will be applied 2 (two) times each year, in the months of May and November, on a date and time fixed by the Federal Council of Accounting (CFC), in the Edital.

29.7 Annual Information

In compliance with Article 16 of CVM Instruction No. 308/99, independent auditors registered with this CVM (individuals or legal entities) must send to the CVM the annual information (Annex VI), competence 2005, until the last business day of the month of April (deadline of 28/04/2006), noting that late submission will result in the application of a daily coercive fine, in accordance with Article 18 of the aforementioned Instruction.

It is worth remembering that independent auditors must send their annual information via the internet, considering two alternatives: a) presentation by filling out the "web" form (for auditors whose information is reduced) and b) presentation in standard XML file (for auditors with a large volume of information).

For the electronic submission of annual information, independent auditors, on the CVM page (www.cvm.gov.br), must proceed as follows: "Document Submission", type CPF and password, "Document Submission via Form" or "Document Upload (XML file)" and follow the instructions on the screen.

On the other hand, independent auditors who do not have the conditions to send their annual information via the internet may send them in printed form by mail, provided they are accompanied by a justified statement of the reasons for not sending them electronically.

29.8 Internal Quality Control

CVM Instruction No. 308/99 determines, in its Article 32, that independent auditors must implement an internal quality control program, according to the guidelines issued by the Federal Council of Accounting – CFC and the Institute of Independent Auditors of Brazil – IBRACON, which aims to guarantee full compliance with the standards governing the activity of auditing financial statements and the standards issued by this commission.

On August 26, 2005, the Federal Council of Accounting issued Resolution CFC No. 1036/05 approving NBC T 11.8 – Supervision and Quality Control, which entered into force on January 1, 2006, revoking the provisions of item 11.2.4 of NBC T 11, approved by Resolution CFC No. 820/97; as well as all provisions in NBC T 11 – IT 06, approved by Resolution CFC No. 914/01.

In defining the rules and procedures for internal quality control, several factors must be considered, mainly regarding the structure of the auditor's technical team, size, culture, organization, and complexity of the services to be performed. Such rules and procedures must be formally documented and known to all persons linked to the independent auditors, and must also be made available to the Federal Council of Accounting, for monitoring and inspection; to other regulators of market activities; as well as to the clients of the audit services themselves.

Internal quality control must cover all activities of the auditors, such as administrative and technical procedures of independent audit. In the case of the auditor acting without the collaboration of assistants, quality control will be inherent to their professional qualification. The program must also include an action plan to remedy flaws detected in the quality verification process and the monitoring of its implementation.

29.9 External Quality Control – Peer Review

Article 33 of CVM Instruction No. 308/99 determined that independent auditors must have their internal quality controls reviewed by their peers, according to the guidelines issued by the Federal Council of Accounting – CFC and the Brazilian Institute of Independent Auditors – IBRACON.

Thus, Resolution CFC No. 1008/04, of 10/08/2004, consolidated the rules on the external review of quality control.

It is emphasized that despite the educational and preventive nature of the 1st external quality review, aiming at the continuous improvement of audit procedures applicable in the execution of work and compliance with professional audit standards, non-observance of the provisions contained in Resolution CFC No. 1008/04 constitutes a disciplinary offense subject to the penalties provided for in letters "c", "d", and "e" of Article 27 of Decree-Law 9295/46 and, when applicable, the Professional Ethics Code for Accountants (CEPC), in addition to resulting in non-compliance with Article 20 of CVM Instruction No. 308/99, being subject to the application of the penalties provided for in Article 35 of the aforementioned Instruction.

Within the spirit that External Quality Review is considered an essential element in the search for improvement of independent audit services, the Federal Council of Accounting CFC through Resolution No. 1008/04, improving and perfecting the mechanisms of the review process, in its item 14.2.4.2, resolved that those who fall under the items transcribed below cannot act as reviewing auditors:

"... a) who have their registration suspended or cancelled by the Securities and Exchange Commission (CVM); b) when the last Review Report was issued with 'Adverse Opinion' or 'Disclaimer of Opinion' or was not approved by the CRE; c) when they have not complied with the deadlines determined by the CRE in the previous review; d) who have not previously been submitted to External Quality Review; e) when, in the opinion of the CRE, the qualification contained in the last Review Report is of a serious nature, the audited auditor must be informed, previously, of this condition; and f) when, in the unanimous opinion of the CRE members, the reviewer cannot be accepted, the reviewing auditor must be informed, previously, of this condition".

In 2005, the first four-year cycle was completed since the implementation of the program in 2002. During this period, given the educational/preventive nature of the program, no coercive/punitive measures were adopted against independent auditors whose reviewers issued review reports with qualifications, disclaimers of opinion, or even adverse opinions. However, independent auditors who did not adequately comply with or did not submit to the external quality control review program were summoned and/or notified to provide explanations, resulting, in some cases, in the application of a coercive fine.

Starting in 2006, when a new four-year cycle begins, the external quality control review program will take on a regulatory character, and from then on, independent auditors who receive review reports issued with qualifications, disclaimers of opinion, or even adverse opinions, may be submitted to administrative sanctioning processes, subjecting themselves to the penalties provided for in Law No. 6.385/76 and its subsequent amendments.

29.10 Continuing Professional Education Program

Accountants who work in the activity of independent audit have the need and the ethical-professional duty to keep themselves updated regarding the legal and professional standards of their activity, in addition to seeking constant updates regarding the standards that the entities they audit must observe (corporate legislation, tax legislation, and specific standards of the respective sector).

Thus, Article 34 of CVM Instruction No. 308/99 determines that independent auditors operating in the MVM must maintain a continuing professional education program for their entire workforce, according to the guidelines approved by the Federal Council of Accounting – CFC and the Institute of Independent Auditors of Brazil – IBRACON, with a view to guaranteeing quality and full compliance with the standards governing the exercise of the activity of auditing financial statements.

Resolution CFC No. 1060/05 (which revoked Resolutions CFC No. 995/04 and 1014/04) deals with the implementation and implementation of the continuing professional education program, which must be observed by Independent Auditors – Individuals and by all accountants part of the technical staff of Independent Auditors – Legal Entities, duly registered with this CVM and enrolled in the newly created National Registry of Independent Auditors (CNAI). The activities valid for the purposes of fulfilling the continuing professional education program are described in Annex I of the aforementioned Resolution. Annex II refers to the guidelines for registration of training entities (responsible for events recognized by CFC/CRCs for the calculation of points/hours of participation of auditors) and Annex III refers to the model of the "activity report" which annually, until January 31 of the year following the base calendar year of the program, must be sent to the Regional Council of Accounting of the jurisdiction of the respective independent auditor. It is important to note that there is no need to send the "activity report" to the CVM, since, after analysis of the data, the CFC will inform which auditors have or have not complied with the aforementioned standard.

The standard provides that independent auditors must, from 2005, comply with a minimum of 32 points/hours, according to the criteria and procedures defined in the resolutions mentioned in the previous paragraph. Non-compliance constitutes an offense to Art. 2, Item I, and Art. 11, Item IV of the Professional Ethics Code for Accountants.

29.11 Audit of Subsidiaries

The main aspect to be emphasized is the obligation to be audited, by an independent auditor registered with the CVM, all subsidiaries included in the consolidation. In this sense, it would be ideal for this examination to be carried out by the same auditor of the controlling company; when this is not possible, either by decision of the administration or by compliance with the rotation rule, it is essential that the auditor of the subsidiary makes their working papers available to the auditor of the controlling company (sole paragraph, Article 35 of CVM Instruction No. 247/96).

The problems pointed out by the market refer to subsidiaries located abroad and the difficulty of meeting the requirement of examination by an auditor registered with the CVM, as well as the issue of difficulty in accessing working papers if it is not the same audit in Brazil when abroad.

In these cases, the auditor of the controlling company, in Brazil, must guide their analysis and verification to the extent necessary and sufficient to be able to certify and issue the opinion on the statements of the controlling company and on the consolidated statements without any restriction to any group of accounts (in particular, to the asset "Investments"). The open company obliged to prepare and disclose consolidated financial statements must provide its independent auditor with all conditions so that there are no limitations in the scope of their work.

29.12 Audit in Merger, Consolidation, and Spin-off Operations

Article 12 of CVM Instruction No. 319 establishes the obligation of independent audit of the financial statements that serve as the basis for merger, consolidation, or spin-off operations involving an open company. This instruction does not obligate the audit of the set of statements normally required by corporate law and CVM standards. Given some doubts that arose in the market, we must clarify that, as the text itself mentions, only the statements prepared to effectuate this type of operation (basically the balance sheet and the statement of income for the period) must be subject to audit.

29.13 Audit of Transactions with Related Parties

An important item that has been worrying the CVM concerns the disclosure of information regarding transactions carried out with related parties, as required by CVM Deliberation No. 26/86. This is fundamental information, especially for non-controlling shareholders, insofar as the effects of these transactions can significantly impact current and future results, coming to influence decision-making by those shareholders and investors in general.

The Federal Council of Accounting, which approved NBC T 11.14 through Resolution CFC No. 1039/05, determines that the auditor must examine relevant transactions with related parties, applying the necessary procedures to obtain information about the purpose, nature, and extent of the transactions, with special attention to those that seem abnormal. Therefore, the auditor must verify if these transactions are properly disclosed, and in the event that the administration does not disclose or proceeds with incomplete or incorrect disclosure, it will be up to the auditor to report such fact in their opinion.

The CFC also determines that the auditor must execute sufficient audit procedures to obtain evidence that the transactions, balances, and information related to related parties were adequately identified and disclosed by the entity's administration in the financial statements subject to examination. It is worth remembering that non-observance of the aforementioned standard constitutes a disciplinary offense subject to the penalties provided for in letters "c", "d", and "e" of Article 27 of Decree-Law No. 9.295/46 and, when applicable, the Professional Ethics Code for Accountants (CEPC).

Notwithstanding the aspects related to disclosure, given the provisions of Articles 115, 116, 117, 145, 153 to 165 of Law No. 6.404/76 and CVM Instruction No. 323/2000, the independent auditor must observe whether the formalization, execution, and adequate description of the circumstances established in those documents meet the concept of equal conditions or market conditions, and, if necessary, communicate the fact to the CVM, in accordance with the provisions of Article 25 of CVM Instruction No. 308/1999.

At this point, the action of the independent auditor is important in the sense of verifying the existence, and consequently, taking care of its adequate revelation, of contractual instruments or other document signed that disciplines operations with related parties.

29.14 Distribution of Results

Art. 25, of CVM Instruction No. 308/99, determines that the independent auditor must verify if the allocation of results of the audited company is in accordance with the provisions of corporate law, the standards issued by the CVM, and with the company's bylaws. Any irregularity found, the auditor must communicate the fact to the CVM, within 20 (twenty) days, from its occurrence. The failure to communicate the fact to the CVM constitutes an offense of an objective nature, subject to the initiation of an Administrative Process of Summary Procedure, as provided in Art. 38 of the same Instruction.

29.15 Monitoring of the Performance of Independent Auditors Regarding Information Disclosed in the Explanatory Notes of Open Companies

In the course of monitoring the performance of independent auditors in the MVM, in 2006, the technical area of this Commission will examine, by sampling, the audit opinions issued on the financial statements of open companies. In the aforementioned financial statements, it will be verified if the information required by some normative acts of this CVM, such as: CVM Deliberation No. 273; CVM Deliberation No. 371; CVM Instruction No. 235/95; CVM Instruction No. 371/02 and CVM Instruction No. 408/04, have been evidenced/disclosed in explanatory notes, and, in the absence of adequate evidence/disclosure of these information, if the selected opinions present the corresponding mention, in accordance with NBC T 11 – IT 05 – Opinion of Independent Auditors of Financial Statements, approved by Resolution CFC No. 830/98.

30. Annex – Consolidation of Explanatory Notes

30.1 Disclosure in Explanatory Notes (1.7)

30.1.1 Objectives and aspects of Explanatory Notes (1.7.1)

Disclosure is one of the basic objectives of Accounting in the Capital Market, so as to guarantee to all types of users complete and reliable information about the financial situation and results of the company. The explanatory notes that integrate the financial statements must present quantitative and qualitative information in an ordered and clear manner so that the capacity to communicate relevant aspects of the content presented in the statements is exhausted.

The international standard (paragraph 91 of IAS 1, revised in 1997) established the following objectives for the explanatory notes:
a) present information about the criteria that support the preparation of financial statements and specific accounting policies selected and applied for significant transactions and events; b) disclose the information required by International Accounting Standards that are not presented anywhere else in the financial statements; c) provide additional information that is not presented in the statements themselves, but that is considered necessary for a fair presentation.

The publication of Explanatory Notes to Financial Statements is provided for in § 4 of Art. 176 of Law No. 6.404/76, which establishes that "the statements will be complemented by Explanatory Notes and other analytical tables or financial statements necessary to clarify the financial situation and results of the fiscal year". In this law, the explanatory notes must discriminate, clearly and objectively, the clarifications necessary for the correct understanding of the content of the financial statements, based on the items provided for in § 5 of Art. 176 of the corporate law. This implies that the explanatory notes do not deal with the exception of some accounting procedure in the statements but rather clarify a set of integrated information, that is, the disclosure of the accounting practices used. They should not be used to rectify, as they do not in fact, the application of inadequate accounting practices. The explanatory notes are also descriptions or details of amounts related to the items that make up the financial statements: the balance sheet, the statement of income, the statement of sources and uses of resources, and the changes in equity.

Explanatory notes should avoid obviousness as well as elaborate writing; their main objective is to highlight to the reader of financial statements: a) which alternative was chosen for an accounting treatment when there is more than one accepted, or b) expand information that is not feasible in the body of the pieces that constitute the set of financial statements. Mainly (but not only) all potential or contingent liabilities, possible or probable, reflected or not in the financial statements will be evidenced in notes or in demonstrative tables. The demonstrative tables should be

used to discriminate relevant investments, financial leasing, guarantees, loans and financing, and other information where the quantitative aspect predominates.
In this direction, NBC T 6.2, approved by CFC Resolution No. 737/92, cites in item 6.2.3 the following "aspects to be observed in the preparation of explanatory notes":
a) the information must encompass the factors of integrity, authenticity, accuracy, sincerity, and relevance; b) the texts must be simple, objective, clear, and concise; c) the subjects must be ordered following the order observed in the accounting statements, both for the groupings and for the accounts that compose them; d) related subjects must be grouped according to their common attributes; e) the data must allow comparisons with those of previous period dates; f) references to laws, decrees, regulations, Brazilian accounting standards, and other normative acts must be grounded and restricted to cases where such citations contribute to the understanding of the subject treated in the explanatory note. Generic notes should be avoided because they provide a disservice to competent information and are detrimental to analysis, such as, for example, "...rates permitted by legislation..." or, redundantly, "...prepared in accordance with the law...", or still, "...in accordance with corporate, tax, and specific regulations of the regulatory bodies of the matter...". Regarding redundancy, note that the unnecessary nature of reporting that "...were prepared in accordance with the law..." stems from the fact that it is not admissible to confess that it could be different (which would mean disobeying the law).

30.1.2 Differences between national and international accounting procedures (1.7.2)
Considering the international reach achieved by the IASB (IFRS/IAS) and the commitment and effort of regulatory bodies and standard setters to seek convergence with them, it is recommended that publicly-held companies disclose in an explanatory note the reconciliation of differences between the accounting practices adopted in Brazil and international accounting practices. However, there is no impediment for it to be prepared in relation to the accounting standards of other countries in which the publicly-held company must, by obligation, disclose to the market its financial statements, due to obtaining registration for the trading of its issued securities. When deciding on the disclosure of the reconciliation, the entity's management must observe how equivalent these practices are. Financial statements prepared according to a certain accounting practice can be considered equivalent to those prepared according to the accounting practices adopted in Brazil when both analyses, of both sets of statements, allow investors a similar decision in terms of investment or alienation of an investment previously held. If the accounting practices of both sets are equivalent and, therefore, do not indicate a lack of similarity in the investor's decisions, there will be no need to include an explanatory note, reconciliation, or reclassification of numbers. The issue then arises if the principles and/or practices are not equivalent and, therefore, indicate a lack of similarity in the investor's decisions. In this latter case, the presentation of the reconciliation of differences between the accounting practices adopted in Brazil and other accounting practices must be quantitative and qualitative. Thus, the disclosure of the reconciliation requires the preparation and disclosure, at a minimum, of the following information:
a) reconciliation between the net profits (losses) of the period and/or fiscal year; b) reconciliation between the net equity at the balance sheet date; c) explanation of the nature of the main reconciliation items.
In certain cases, it is possible that the divergences are of such magnitude that only the preparation of new financial statements according to another set of accounting principles other than those prevalent in Brazil is the solution. In other cases, there may be some instances of partial equivalence that can be resolved or remedied, depending on the nature of the divergences. These divergences may include additional disclosures, reconciliations, etc. This judgment must be made by the management and agreed upon by the independent auditors of the publicly-held company, and must be supported by procedures accepted by regulatory bodies and standard setters for accounting.

30.2 Disclosure in explanatory note of Provision for Doubtful Accounts (2.2)
The criteria adopted for the establishment of the provision for doubtful credit collection must be disclosed, as well as any change in the criterion or in the manner of its application, occurring during the fiscal year.
(ORIENTING OPINION CVM NO. 21/90)

30.3 Disclosure in explanatory note of Inventories (3.2)
30.3.1 Disclosure in explanatory note of inventories (3.2.1)
Whenever there is a significant change in stocking levels, this fact must be the subject of clarification in an explanatory note.
Publicly-held companies that, with CVM authorization, are in the implementation phase of a cost accounting system, must clarify the fact in an explanatory note, subjecting themselves, regarding the effects, to the applicable restrictions that may be pointed out by the independent audit.

(CIRCULAR LETTER/CVM/PTE NO. 309/86 and ORIENTING OPINION CVM NO. 27/94)
30.3.2 Idle Capacity (3.2.2)
Information must be provided to give notice of the dimension of the fact, such as: the existence, expectation of change, and accounting treatment related to idle capacity (ORIENTING OPINION CVM NO. 24/92).
In this regard, paragraph 11 of the international pronouncement IAS – 2 states:
"The allocation of fixed indirect production costs to conversion costs is based on normal production capacity. Normal capacity is the production expected to be achieved, on average, over several periods or seasonal periods, under normal conditions, taking into account the reduction in capacity resulting from planned maintenance. The actual level of production can be used if it is close to normal capacity. The amount of fixed indirect costs allocated to each unit of production does not increase as a consequence of low production or factory idleness. Unallocated indirect costs are treated as expenses in the period in which they were incurred. (...)".

30.4 Disclosure of explanatory notes to cash flow statements (4.2)
IAS 7 and SFAS 95 require disclosures in explanatory notes on certain topics of the cash flow statement:

Topic	SFAS 95	IAS 7
Cash and cash equivalents components	Requires disclosure of the criteria the company uses in considering investments classified as cash equivalents.	Requires disclosure of the components the company is considering as cash and cash equivalents and must present a reconciliation between the values in its cash flow statement with the items in the balance sheet. The effect of any change in policy to determine the components of cash and cash equivalents must be disclosed (IAS 8).
Interest, dividends, and income tax	Interest (net of capitalized amounts) and income tax paid must be highlighted only if the indirect method is used; dividends paid can be grouped with other distributions to owners; and interest and dividends received can also constitute a single sub-item.	Interest and dividends, paid and received, and income tax paid must be shown individually in the cash flow statement, regardless of whether the direct or indirect method is used.
Extraordinary items	No special procedure is necessary to highlight cash flows arising from extraordinary items.	Must be classified as resulting from operating, investing, or financing activities, as the case may be, separately disclosed, by those that originated them, and evidenced in accordance with IAS 8.
Cash flow per share	Prohibits the disclosure of any index related to cash flow per share.	Does not make reference.
Hedging activities	Requires disclosure of the criteria used to classify hedges of identifiable transactions in the same category as the items that originated them.	Does not require disclosure of the criteria used.
Unavailable cash balances	Does not make reference.	Must disclose unavailable cash and cash equivalents balances, along with management comments.
Other disclosures	Does not make reference.	Encourages disclosure of: . Value of loans obtained but not used, . Value of cash flows by activity in joint ventures; . Value of cash flows derived from increases in operational capacity separately from those necessary to maintain operational capacity; . Value of flows by economic activity and geographic region.

The company must also consider other clarification items for users in additional explanatory notes, such as: (a) the disclosure of interest and charges paid in the year, including those capitalized from activations in assets under construction; (b) the total income tax and CSSL paid in the year, and (c) any transactions or events that did not alter cash but are relevant to inform about the company's resource flow (and which are expressly excluded from the cash flow statement by IAS 7. As an accounting policy, the company may also determine that any cash flow from investing and financing activities that is greater than 5% of the total value of the activity involved be discriminated separately. In this case, the company judged that, by opening up the composition of these cash flows, it would facilitate the evaluation of the activity's behavior for the investor/market analyst.

30.5 Disclosure in Explanatory Note of Accounting Practices, Changes in Accounting Estimates, and Correction of Errors (5.7)
30.5.1 Adoption of a New Accounting Practice (5.7.1)
If the initial application of a Standard has a relevant effect on the current period or any prior period presented, except if it is impracticable to quantify the adjustment, or if this initial application results in a relevant effect in future periods, the entity must disclose the following:
(a) the standard to which it refers;
(b) when applicable, that the change in accounting practice is being made in accordance with the specific transitional provisions of the Standard; (c) the nature of the change in accounting practice; (d) when applicable, the description of the transitional provisions; (e) if applicable, the transitional provisions that may cause effects in future periods; (f) the amount of the adjustment for the current period and for each prior period presented, demonstrating the adjustment in each line of the financial statements and, if applicable, in the calculation of earnings per share; (g) the amount of the adjustment relating to periods prior to those included in the comparative information; and (h) if retrospective application becomes impracticable for any prior period, the reasons that led to this circumstance and a description of how and from when the change in accounting practice was applied. These disclosures do not need to be repeated in subsequent financial statements after the change in accounting practice. When a voluntary change in accounting practice has a relevant effect in the current and prior periods, except if the quantification of the adjustment is impracticable, the entity must disclose the following:
(a) the nature of the change in accounting practice; (b) an explanation of why the application of the new accounting practice provides better presentation or more reliable information; (c) for the current period and each prior period presented, to the extent that it is practicable:
(d) the value of the adjustment in each account of the financial statements affected; and (e) the impact on the calculation of earnings per share; (f) if practicable, the amount of adjustments relating to periods prior to those presented; and (g) if retrospective application for a given prior period or for periods prior to those presented is impracticable, describe the circumstances of that limitation and a description of how and from when the change in accounting practice was applied. These disclosures do not need to be repeated in subsequent financial statements after the change in accounting practice. When the entity does not early adopt a new accounting standard already issued by a regulatory body, but not yet in force, it must disclose:
(a) such fact; and
(b) if practicable, an estimate of the effects that the change(s) would cause in the financial statements, if it were applied.
When proceeding in accordance with the provision of item 28, the entity must consider the following disclosure:
(a) identification of the standard;
(b) the nature of the imminent change or changes in accounting practices; (c) the effective date of the standard; (d) the date on which the entity plans to adopt the standard; and (e) either an explanation of the impact that the initial application of the standard may cause in the financial statements or information that the effect of the adoption of the standard is not known, nor capable of being estimated.

30.5.2 Changes in Accounting Estimates (5.7.2)
The nature and amount of the change in an accounting estimate, which has a relevant effect in the current period or is expected to have a relevant effect in subsequent periods, must be disclosed, unless the effect in subsequent periods is not capable of being estimated.
If the amount of the effect on subsequent periods of a change in accounting estimate is not capable of being estimated, the entity must disclose such fact.

30.5.3 Correction of Prior Period Errors (5.7.3)
The entity must disclose the following:
(a) the nature of the prior period error;
(b) the amount of the correction relating to each prior period presented, indicating:
i. adjustment by account of the financial statement; and
ii. effect on the calculation of earnings per share;
(c) the amount of the correction relating to periods prior to those included in the comparative information; and (d) if the retrospective adjustment is impracticable for a given period, the description of the circumstances that led the entity to that conclusion, the form, and the indication of the period from which the error was corrected.
These disclosures do not need to be repeated in subsequent financial statements after the correction of errors.

30.6 Disclosure in explanatory note of Subsequent Events (6.1)
Events occurring between the end of the fiscal year and the date of disclosure of the financial statements that have, or may come to have, a relevant effect on the financial situation and future results of the company must be disclosed.
(LAW NO. 6.404/76, ARTICLE 176)

30.7 Disclosure in explanatory note of Income Tax (8.3.7)
30.7.1 Income Tax and Social Contribution (8.3.7.1)
The financial statements and/or the explanatory notes must highlight the following information, when relevant:
a) amount of current and deferred taxes recorded in the result, equity, assets, and liabilities; b) nature, basis, and expected term for realization of each deferred tax asset and obligation; c) effects on assets, liabilities, result, and equity resulting from adjustments due to changes in rates or changes in the expectation of realization or settlement of deferred assets or liabilities; d) amount of temporary differences and unused tax losses for which a deferred tax asset was not recognized, with the indication of the value of the taxes that did not qualify for this recognition; e) reconciliation between the amount debited or credited to the income tax and social contribution result and the product of the accounting result before income tax multiplied by the applicable rates, also disclosing such rates and their calculation bases; f) the nature and amount of assets whose tax basis is lower than its book value. (CVM RESOLUTION NO. 273/98)

30.7.2 Deferred Tax Asset (8.3.7.2)
It is necessary to clarify that, in any situation, including for cases of companies that have recognized deferred tax assets before the entry into force of CVM Instruction No. 371/02 and that do not recognize additional value to that balance, disclosure in the explanatory note of the following information is mandatory (items I, II, and III of article 7):
"I - estimate of the portions of realization of the deferred tax asset, discriminated year by year for the first 5 (five) years and, from then on, grouped in maximum periods of 3 (three) years, including for the portion of the deferred tax asset not recorded that exceeds the realization period of 10 (ten) years referred to in item II of art. 2; II - effects resulting from eventual alteration in the expectation of realization of the deferred tax asset and respective grounds, as provided in art. 4, III - in the case of newly constituted companies, or in the process of operational restructuring or corporate reorganization, description of the administrative actions that will contribute to the future realization of the deferred tax asset". This also applies to the disclosure, in the explanatory note, of the grounded justification of the actions implemented by the company, aiming to generate taxable profit in the future. These actions represent fundamental requirements for the company to be able to maintain tax credits in the asset in the absence of a profitability history (art. 3, sole paragraph). (CVM INSTRUCTION NO. 371/02)

30.8 Disclosure in explanatory note of information by business segment (9.1)
Segment information aims to provide users of financial statements with information on the size, contributions to the result, and growth trends of the different operational or geographic areas in which the company operates, allowing for prospective analysis regarding risks and perspectives of a diversified company. Recalling that financial statements aim to allow the projection of expected future cash flows, it is particularly relevant that the generation of such cash flows can be evaluated by analysts and investors by business area or by geographic region of operation of the publicly-held company or the business conglomerate that includes it. Segmented information provides the user with the opportunity to know the performance of each area or main business managed by the company. Knowledge of this mix is important information insofar as the user can effectively compare these performances, not only within a company, but eventually also in relation to other companies. When analyzing a given sector, the investor may encounter companies that present a global performance that was not fostered in the basic area of operation, but rather by other activities or non-repetitive businesses. The statements presented in segmented form also serve to elucidate this circumstance, as they will allow users to evaluate the performance of each activity. From this aspect, CVM encourages the disclosure of this information by publicly-held companies, especially for those that publish consolidated statements. For the presentation of information by segments, it is necessary, preliminarily, to define the segments to be highlighted. A segment comprises a component of a company that is involved in the production of goods and services, or group thereof, subject to risks and returns different from other segments. It is important to remember that, as a general principle, the company must use the same logic of analysis for decision-making used in management reports by its administrators in the structure of the information of activities by business segment. The company, to highlight its segments, must adopt the form of "business" or "geographic area", or both. If the form used by administrators does not allow for rapid segmentation, the company may use some rules for its grouping into segments. For example, as defined in the international standard IAS 14, the segmentation used for a business segment must observe: (i) the nature of the products or services; (ii) nature and technology of the production processes; (iii) types of markets in which the products and services are sold; (iv) main classes of customers; (v) channels and methods of product distribution and (vi) when applicable, the existence of a specific regulatory environment. In turn, the use of the form of segment by geographic area comprises an identifiable part of a company focused on operations in a given country, group of countries, or, as in the Brazilian case, due to possessing continental dimensions, the various
regions of the country. Once the segments are established, whether by "business" and/or "geographic area", the company must also establish which form of disclosure should be considered as primary or secondary, as it will have a direct effect on the content of the information made available. The segmented information that must be included, considering the primary disclosure format (business or geographic area) based on international standard 14 (IAS 14), are: (i) revenues, expenses, and result obtained by the segment; (ii) assets and liabilities involved in the segment; (iii) capital expenditures in the segment; (iv) depreciation, amortization, and other significant expenses; (v) reflections in the segment of results with equity method; (vi) nature and value of extraordinary items, provided they are directly attributable to a segment or capable of allocation, on rational bases; (vii) significant contingencies directly attributable to the segment, and (viii) reconciliations between the segmented information and the accumulated information, as well as any other relevant segmented information used by administrators in the decision-making process. For the secondary format, the company must disclose, at least, the following information: (i) the value of the assets of each segment; (ii) the revenues from sales to external customers (excluding sales between departments/areas of the same company - intersegment) and (iii) capital expenditures of the segment. If the company adopts and exercises its operational activities in a single segment, of business or geographic area, the information must be disclosed. With the aim of exemplifying the disclosure by segments, we demonstrate below information by segments in compliance with the standards issued by the IASB. In this sense, it is convenient to remember that such information is only an example of the minimum information required and that, as a determination of those standards, the model to be used must be consistent with the information used internally during the decision-making process by the manager. Only for the purpose of illustrating the type of note required, the example of a manufacturing company, with operations in several regions, is presented below:
"NOTE XXX SEGMENT INFORMATION
The segment information is based on two formats: the primary reflects the management structure adopted by the group,"

while the secondary refers to division by products. The primary segmentation format, by managerial responsibility and geographic areas, represents the company's management structure. The group's main activity is food trade. The other activities, poultry products line and feeds, are managed on a regional basis. The secondary disclosure format, represented by product lines, is divided into five categories, or segments. The results by segment represent the contribution of the different segments to the formation of the result, encompassing administrative expenses, research and development costs, and the Group's profit. The unallocated items comprise corporate expenses, research and development costs, amortization of any goodwills, and, for product segments, restructuring and other minor costs. Specific expenses with product research and development are allocated directly to the segments. The assets of each segment comprise properties, equipment, receivables, inventories, and prepaid expenses. The unallocated items represent research and development assets, including any goodwill. Liabilities comprise debts to suppliers and other obligations, provisions, and deferred revenues. Eliminations represent movements between the various companies of the Group, between different segments.

The assets and liabilities segmented by geographic area are represented at year-end value. The assets by product line represent the annual average, which management believes is the best indication of the level of capital investment for decision-making purposes.

By Geographic Area
In millions of Reais 2002 2001 2002 2001
Sales Results
Region 1 6,685 6,571 696 688
Region 2 6,649 6,381 882 876
Region 3 3,864 3,927 650 668
Other Activities 3,976 3,476 537 504
21,174 20,355 2,765 2,736
Unallocated items (460) (439)
Profit from operations 2,305 2,297

The breakdown of sales by geographic area is performed by customer destination. Inter-segment sales are not significant.

In millions of Reais 2002 2001 2002 2001
Assets Liabilities
Region 1 3,127 3,228 1,346 1,320
Region 2 2,748 2,625 919 865
Region 3 1,724 1,724 613 648
Other activities 2,187 1,965 804 724
9,786 9,542 3,682 3,557
Unallocated items 7,605 2,659 290 97
Eliminations (280) (212) (280) (212)
17,111 11,989 3,692 3,442

In millions of Reais
2002 2001 2002 2001
Capital Expenditures Depreciation of properties and equipment

Region 1 238 236 201 222
Region 2 187 191 174 192
Region 3 156 138 110 120
Other activities 293 237 139 130
874 802 624 664
Unallocated items
(a) 29 23 21 20
903 825 645 684 a) Corporate, research and development fixed assets.

By Product Line
In millions of Reais 2002 2001 2002 2001
Sales Results
Product Line 1 6,005 5,761 1,065 1,080
Product Line 2 5,739 5,493 643 655
Product Line 3 5,331 5,158 506 487
Product Line 4 2,811 2,744 309 291
Product Line 5 1,288 1,199 313 303
21,174 20,355 2,836 2,816
Unallocated items (a) (531) (519)
Profit from operations 2,305 2,297 a) Corporate, research and development expenses and restructuring costs.

In millions of Reais 2002 2001
Assets
Product Line 1 2,772 2,663
Product Line 2 2,782 2,804
Product Line 3 2,155 2,245
Product Line 4 1,587 1,671
Product Line 5 715 647
10,011 10,030

In millions of Reais 2002 2001
Capital Expenditures
Product Line 1 266 234
Product Line 2 143 132
Product Line 3 115 98
Product Line 4 62 62
Product Line 5 25 28
611 554
Administration, distribution, research and development 292 271 903 825

In the example transcribed above, we can verify that the primary disclosure format is that of geographic area, dividing activities into three large groups: Region 1, Region 2, and Region 3. With the division used, sales, results, assets, and liabilities were presented, as well as information regarding capital expenditures and depreciation. In the example, information by product group was also demonstrated, in respect of IASB standards, which represent the secondary disclosure format.

30.9 Disclosure in explanatory note of Information that Reflects the Effects of Price Changes (10.2)
30.9.1 Statements in Constant Purchasing Power Currency (10.2.1)
CVM understands that, in the voluntary disclosure of data in constant purchasing power currency, a minimum content of information must be presented, such as:
a) income statement: net operating revenue, gross profit, net financial expenses, net profit/loss; b) balance sheet: inventories and advances, permanent assets, total assets, and shareholders' equity; and c) the reconciliation with the result and with the shareholders' equity determined in the commercial bookkeeping.

Still within the assumptions that guide the Information Disclosure Policy, it is recommended that companies, together with their auditors, evaluate the convenience not only of the voluntary presentation of this type of information. They must also consider the convenience of its insertion as an explanatory note to the published accounting statements and the quarterly information sent to CVM or even the presentation of these statements and complete quarterly information, in constant purchasing power currency.

(ORIENTATION OPINION CVM NO. 29/96)

30.10 Disclosure in explanatory note of Fixed Assets (11.3)
30.10.1 Revaluation of Fixed Assets (11.3.1)
The company must disclose:
a) the bases of revaluation and the appraisers (in the 1st year of revaluation); b) the history and date of revaluation; c) the summary of the accounts subject to revaluation and respective values; d) the effect on the result of the period, arising from depreciations, amortizations, or exhaustion on the revaluation and subsequent write-downs; e) the treatment regarding dividends and participations; f) the treatment and values involved regarding taxes and contributions; and g) in the case of partial revaluation, which items and accounts were revalued and which were not, with indication of the previous net book value of the new evaluation and the revaluation registered by account or nature.

In the case of revaluation reserves constituted before 01/01/93, the following must be disclosed:
a) the portion of special monetary correction - Law No. 8.200/91 that is included in the Reserve; b) the amount realized in the period; and c) the tax effect on the balance of the reserve that exceeds the portion referred to in letter "a" above.

CVM allowed open companies the right to opt, until 31/03/99, for the following procedures:
a) adoption of market value for the evaluation of fixed assets; b) adoption of the corrected cost method, being able to keep assets at revaluation values; c) return to the corrected cost criterion, reverting existing revaluations.

The effects of the decision taken must retroact to the beginning of the fiscal year in which the procedure was adopted, and the fact occurring and its impact, if any, on the accounting statements of the current and previous fiscal years must be the subject of disclosure in an explanatory note.

(CVM INSTRUCTION NO. 197/93 AND CVM RESOLUTIONS NOS. 183/95 AND 288/98)

30.11 Disclosure in explanatory note of Financial Leases (12.1)
Lessee companies must disclose, at a minimum, the following:
a) value of the asset and liability, if configured as a financed purchase; b) balance, value, and number of installments, embedded interest, monetary variation; and c) other information relating to long-term contracts.

Lessor companies must disclose in an explanatory note:
a) the criteria currently used for accounting for their operations, including those that necessitate present value adjustments for not meeting the Fundamental Principles of Accounting; and b) the present value adjustments of the future flows of the financial lease portfolios, evidencing the effect of Income Tax.

(CIRCULAR LETTER/CVM/PTE NO. 578/85, CVM INSTRUCTION NO. 58/86, CVM ORIENTATION OPINION NO. 15/87 AND LAW NO. 6.404/76, ARTICLE 176, § 5, "e")

30.12 Disclosure in explanatory note of Sales or Services to be Performed (13.1.2)
The recording of an account receivable presupposes that the revenue recognition principle is met. Thus, it is inadmissible to record accounts receivable having as a counterpart an account of future period results. In the case of advance billing or contracts with guaranteed receipt for accounts regarding sales or services to be performed, the company must, when relevant, disclose the fact and respective amounts.

(CVM ORIENTATION OPINION NO. 21/90)

30.13 Disclosure in explanatory note of Retirement and Pension Plans (14.11)
The following information must be disclosed in the accounting statements of the Sponsoring Entity:
a. The accounting policy adopted by the Entity in the recognition of actuarial gains and losses; b. A general description of the plan's characteristics;
c. A reconciliation of the assets and liabilities recognized in the balance sheet, demonstrating at least the following:
i. The present value, at the balance sheet date, of actuarial obligations that are fully uncovered;
ii. The present value, at the balance sheet date, of actuarial obligations (before deducting the fair value of plan assets) that are fully or partially covered;
iii. The fair value of plan assets at the balance sheet date;
iv. The net value of unrecognized actuarial gains or losses;
v. The value of unrecognized past service cost in the balance sheet; and
vi Any value not recognized as an asset due to the rule established in paragraph 49.g of this pronouncement. d. A statement of the movement of the net actuarial liability (asset) during the period; e. The total expense recognized in the income statement for each of the following items:
i. Current service cost;
ii. Interest cost;
iii. Effective and expected return on plan assets;
iv. Actuarial losses and gains;
v. Amortized past service cost; and
vi. The effect of any increase, or reduction, or early settlement of the plan.
f. The main actuarial assumptions used at the balance sheet date, including, when applicable:
i. The rates used for discounting the actuarial obligation to present value;
ii. The expected rates of return on plan assets;
iii. The estimated salary increase indices; and
iv. Any other relevant assumption used.

(item 81 of CVM RESOLUTION NO. 371, OF DECEMBER 13, 2000)

30.14 Disclosure in explanatory note of Concessions (15.2)
Technical Communication 03/03 Ibracon
Concessions
After the approval of a draft for public hearing of NPC Accounting of Government Concessions, IBRACON had the opportunity to analyze the responses received in the public hearing process conducted by the Securities and Exchange Commission (CVM). During this time, IBRACON learned that the IASB (International Accounting Standards Board) is initiating a study on the matter as it is of international interest. Since IBRACON's objective is to edit NPC harmonized with international accounting standards (IFRS/IAS), it was concluded necessary and prudent to wait for the position that will be adopted internationally before issuing a pronouncement by IBRACON.

On the other hand, IBRACON is already contributing to the international debate by passing on the results of studies and discussions already held to the IASB. Therefore, it would not be opportune to request any alteration at this moment in the treatment currently adopted by Brazilian companies.

However, IBRACON considers it indispensable that companies provide a minimum of information so that users are provided with minimal elements for decision-making. In this context, it is required from companies operating with concessions to disclose the following information:

Concession Assets

1. The following information must be disclosed, at the date of each closing of the fiscal year or period, when applicable:
   a. assets subject to the concession and their total values, concession term, fixed payment commitments, with description also of variable commitments both regarding their calculation and their incidence; b. residual amount of the concession, with indication of the nominal value and the present value of installments to be paid in the 12 months following the closing of the fiscal year or period and of installments to be paid after this 12-month period, indicating the interest rate used to calculate the present value;
   c. residual value of the concession fixed assets at the date of the accounting statements that must be transferred to the granting authority at the end of the contract (corresponding to assets with residual life greater than the concession and with a clause of transfer to the granting authority);
   d. amount paid to the granting authority during the fiscal year or period of the accounting statements; e. bases for appropriation to the result of costs with remuneration of the granting authority; and f. terms of other financial commitments (maintenance and investments), including variable ones, such as those based on collected tariffs.

Related Parties
2. Considering the peculiar characteristics of a concession, disclosures regarding balances and transactions with related parties must be made, when relevant and applicable, in explanatory notes to the accounting statements of the public service concessionaire and/or use of public asset referred to, which are divided into three categories:
(a) Operating transactions:
i. amounts recorded in the accounting statements of the concessionaires regarding expenses with services such as, for example, maintenance of highways/railways;
ii. amounts recorded regarding purchase and sale, as well as payables or receivables balances resulting from operations;
iii. provision of administrative services and/or any form of use of the physical structure or personnel of one company by the other, with or without consideration;
iv. receipts or payments for the lease of real estate or movable assets of any nature;
v. amounts of real estate or movable assets of any nature received or delivered on loan; and
vi. other transactions deemed relevant.
(b) Investment transactions:
i. amount of contracts already celebrated in execution and recorded in the entity's accounting statements;
ii. amounts of contracts to be executed and indication of the fiscal years in which they will be completed;
iii. alienation or transfer of assets from the asset; and
iv. acquisition of rights or purchase options or any other type of benefit and its respective exercise.
(c) Transactions with loans/financing:

i. loans and advances, with or without financial charges, and the rates practiced;
ii. revenues or expenses recorded in the fiscal year/period regarding the loans or advances referred to in i;
iii. guarantees, sureties, mortgages, deposits, pledges, or any other forms of guarantees; and
iv. novation, forgiveness, or other forms of cancellation of debts.

30.15 Disclosure in explanatory note of Government Subsidies (16.1)
The company must disclose the following information:
(a) The existence, nature, and measurable amounts of government subsidies or government assistance from which the entity benefits, as well as the accounting practices.
(b) Non-compliance with contracted conditions regarding subsidies or the existence of other contingencies.
(c) Main commitments assumed by the entity due to subsidies.
(d) Possible subsidies to be recognized, after contractual conditions are met.

30.16 Disclosure in explanatory note of the Effects of Changes in Exchange Rates (17.10)
In explanatory notes to the accounting statements and quarterly information, the amounts of assets and liabilities in foreign currency, the risks involved, the degree of exposure to these risks, the policies and financial instruments adopted to reduce risk, as well as, in the case of recording, in deferred assets, the net negative result derived from the adjustment of the values in reais of obligations and credits, the amount of expenses and revenues resulting from exchange rate variation, as well as the contemplated destination, the amortization bases, and the values amortized in each period, must be disclosed, when relevant.

(CVM RESOLUTION NO. 294/99)

30.17 Disclosure in explanatory note of the cost of loans (18.4)
30.17.1 Debentures (18.4.1)
The terms of the debentures must be disclosed, including indicating the existence of a renegotiation option clause and the periods in which renegotiations must occur. When the company acquires debentures of its own issuance, it must disclose this fact and its value in an explanatory note.

(CVM ORIENTATION OPINION NO. 21/90)

30.17.2 Long-Term Obligations (18.4.2)
The interest rates, maturity dates, guarantees, currency, and method of updating long-term obligations must be disclosed.

(LAW NO. 6.404/76, ARTICLE 176)

30.17.3 Liens, Guarantees, and Contingent and Contingent Liabilities (18.4.3)
Real liens on elements of the asset, guarantees provided to third parties, and other contingent/contingent liabilities must be disclosed. Contingent facts that generate, due to their peculiarities, reserves or provisions for contingencies, and even those whose probability is difficult to calculate or whose value is not measurable, must be evidenced in an explanatory note, and in the latter case, the reasons for the impossibility of this measurement must also be mentioned.

(LAW NO. 6.404/76, ARTICLE 176 AND EXPLANATORY NOTE TO CVM INSTRUCTION NO. 59/86)

30.17.4 REFIS (18.4.4)
Open companies must disclose, relative to the fiscal years in which they remain in the REFIS program, in explanatory notes to their accounting statements and quarterly information, the following information:
a) the amount of debts included in REFIS, segregated by type of tax and nature (principal, fines, and interest); b) the present value of debts subject to liquidation based on gross revenue, as well as the values, terms, rates, and other assumptions used to determine this present value; c) the amount of tax credits, including those resulting from tax losses and negative bases of social contribution, used to liquidate interest and fines; d) the amount paid in the period to amortize debts subject to liquidation based on gross revenue; e) the detail of adjustments recorded as extraordinary items; f) the guarantees provided or assets listed and respective amounts; g) the mention regarding the obligation of regular payment of taxes, contributions, and other obligations as an essential condition for maintaining the payment conditions provided in REFIS; and h) any and all imminent risk associated with loss of the special payment regime.

(CVM INSTRUCTION NO. 346/00)

30.17.5 Disclosure in Explanatory Note on Interest Capitalization (18.4.5)
In line with IAS 23, Brazilian publicly-held companies are required to make the following disclosure in the explanatory note: (a) the accounting policy adopted for financial charges on loans; (b) the amount of financial charges capitalized during the period; (c) the capitalization rate used to determine the amount of financial charges eligible for capitalization; (d) information on the amount of expenses borne by linked financing and the nature of this linkage (contractual, capital budget, management statement, etc.); and (e) indication of the total financial charges of the period, the portion capitalized in the period, and the net charges that affected the period's result.

30.18 Disclosure in Explanatory Note on Related-Party Transactions (19.5)
Publicly-held companies, when disclosing this type of information, have given greater emphasis to the values resulting from these transactions, which integrate assets, liabilities, and results, without, however, giving the same prominence to the conditions under which the transactions were carried out, the nature of the relationship, and the transfer pricing policy.

The disclosure of related-party transactions must cover the conditions under which these transactions occurred, especially regarding prices, terms, and charges, and whether they were carried out under conditions similar to those that would be applicable to unrelated parties, as well as the present and future effects on the company's financial position and results.

The Ibracon pronouncement, approved by CVM Resolution No. 26/86, establishes as a criterion for the preparation of this note the following: "Greater or lesser prominence in the disclosure of transactions should be given considering the following facts: (i) whether the transaction was carried out under conditions similar to those that would be applied between unrelated parties (regarding prices, terms, charges, quality, etc.) that contracted based on their free will and best interest; and (ii) whether the transactions by themselves or by their effects affect or may come to affect, significantly, the financial situation and/or the results of the companies involved in the operation."

The aforementioned pronouncement lists, in a merely exemplary manner, the following types of related-party transactions that must be subject to disclosure in explanatory notes:

Purchase or sale of products and/or services that constitute the company's corporate purpose.
Alienation or transfer of assets.
Alienation or transfer of industrial property rights.
Balances resulting from operations and any other balances receivable or payable.
Novation, forgiveness, or other unusual forms of debt cancellation.
Provision of administrative services and/or any form of use of the physical structure or personnel of one company by another or others, with or without consideration.
Guarantees, sureties, mortgages, deposits, pledges, or any other forms of guarantees.
Acquisition of rights or call options or any other type of benefit and its respective exercise.
Any non-remunerated transfers.
Preemptive rights to subscribe to securities.
Loans and advances, with or without financial charges, or at favorable rates.
Receipts or payments for the lease or loan of real or personal property of any nature.
Maintenance of any benefits for employees of related parties, such as: supplementary pension plans, health assistance plans, cafeteria, recreation centers, etc.
Market and technological limitations.

The use of the standard expression in explanatory notes: "Related-party transactions are carried out at normal market prices and conditions, similar to those carried out with third parties," does not fulfill the requirement to clarify prices and/or pricing policies in these types of transactions and is ineffectual. Even if they are made in large numbers and it becomes unfeasible to detail each price in each operation, it is necessary to clarify the method used, the calculation method, and average prices, for example.

30.19 Disclosure in Explanatory Note on Special Purpose Entities (SPEs) (20.2.2.3)
The consolidation of financial statements, as required by CVM Instruction No. 247/96, has been based on the existence of corporate links between controlling companies and their subsidiaries. However, transactions involving SPEs have become increasingly common today, and the focus of consolidation, based exclusively on voting capital, has proven insufficient for the full disclosure of economic activities as a whole. Currently, we face various situations where, even without the existence of corporate links, an entity effectively holds control over the activities and benefits of another, bearing most of the consequent risks of these activities. The lack of consolidation of these entities allows certain businesses "controlled" by publicly-held companies to fail to be fully evidenced, often affecting, significantly, the information on the financial and equity situation of the company as a whole.

Due to the need to evidence the aforementioned situations, CVM issued Instruction No. 408, of August 18, 2004, which establishes that publicly-held companies must include, in addition to controlled or jointly controlled societies, SPEs, when the essence of their relationship with the publicly-held company indicates that the activities of these entities are controlled directly or indirectly, individually or jointly, by the publicly-held company.

In its Article 5, Instruction No. 408/04 cites the following minimum information that must be disclosed in explanatory notes to the respective financial statements:

I – name, nature, purpose, and activities developed by the SPE; II – participation in the equity and results of the SPE; III – nature of its involvement with the SPE and type of exposure to losses, if any, resulting from this involvement; IV – amount and nature of credits, obligations, revenues, and expenses between the company and the SPE, assets transferred by the company, and rights of use over assets or services of the SPE; V – total assets, liabilities, and equity of each SPE; VI – guarantees, sureties, mortgages, or other guarantees granted in favor of the SPE; and VII – the identification of the main beneficiary or group of main beneficiaries of the SPE's activities, in the case referred to in Article 4.

30.20 Disclosure in Explanatory Note on Consolidated Financial Statements and Accounting of Investments (20.4)

30.20.1 Goodwill/Bargain Purchase (20.4.1)
The explanatory notes must contain precise information indicating the basis and foundation adopted for the constitution and amortization of goodwill or bargain purchase, and unamortized amounts, as well as criteria, discount rates, and terms used in the projection of results. Unjustified goodwill, that is, that does not have an economic foundation, must be recognized immediately as a loss, in the result of the exercise, clarifying in an explanatory note the reasons for its existence. (INSTRUCTION CVM NO. 247/96)

30.20.2 Condensed Statements (20.4.2)
Publicly-held companies that have made additional publications of their financial statements, beyond the publications ordered by corporate law, may do so in a condensed form provided that they are accompanied, at minimum, by the following explanatory notes:
a) changes in accounting practices compared to the previous social year; investments in other societies, when relevant, explicitly stating the final amount and the result of equity method in each investment and the values related to goodwill, bargain purchases, and provisions for losses; interest rates, maturities, and real burdens on long-term debts; number of shares that make up the social capital, discriminating species and classes; reconciliation of the result calculated by full correction with that calculated by corporate law legislation; and amount of fiscal loss eligible for use in subsequent years; and b) any information not contained in the above-mentioned information that is relevant for understanding the company's situation. (INSTRUCTION CVM NO. 232/95)

30.20.3 Equity Method (20.4.3)
The explanatory notes accompanying the financial statements must contain precise information about affiliates and subsidiaries, indicating, at minimum:
I – name of the affiliate and subsidiary, the number, species, and class of shares or capital quotas owned by the investor, the percentage of participation in social capital and voting capital, and the trading price on the stock exchange, if any; II – net equity, net profit or loss of the exercise, as well as the amount of dividends proposed or paid, relating to the same period; III – credits and obligations between the investor and the affiliates and subsidiaries, specifying terms, financial charges, and guarantees; IV – guarantees, sureties, mortgages, or pledges granted in favor of affiliates or subsidiaries; V – revenues and expenses in operations between the investor and the affiliates and subsidiaries; VI – individualized amount of the adjustment, in the result and net equity, resulting from the evaluation of the book value of the investment by the equity method, as well as the book balance of each investment at the end of the period; VII – calculation memory of the individualized amount of the adjustment, when this does not result solely from the application of the percentage of participation in social capital on the results of the investee, if relevant; VIII – basis and foundation adopted for the constitution and amortization of goodwill or bargain purchase, and unamortized amounts, as well as criteria, discount rates, and terms used in the projection of results; IX – conditions established in shareholders' agreements regarding influence on administration and distribution of profits, evidencing the numbers relating to cases where the proportion of voting power is different from the proportion of participation in voting social capital, directly or indirectly; X – reciprocal participations existing; and XI – effects on assets, liabilities, net equity, and results resulting from discontinued investments.

The period of coverage of the financial statements of affiliates/subsidiaries must be identical to that of the investor. The use of non-identical periods is admitted, in cases where this fact represents an improvement in the quality of the information produced, with the change evidenced in an explanatory note.

The investment in an affiliate that, due to the reduction of the book value of the investment, ceases to be relevant, will continue to be evaluated by the equity method, provided that this reduction is not considered permanent, and all its reflections must be evidenced, separately, in an explanatory note.
(LAW NO. 6.404/76, ARTICLE 247; CVM INSTRUCTION NO. 247/96)

30.20.4 Consolidated Financial Statements (20.4.4)
The explanatory notes accompanying the consolidated financial statements must contain precise information about subsidiaries, indicating:
I – criteria adopted in consolidation and the reasons why a certain subsidiary was excluded; II – subsequent events to the closing date of the social year that have, or may come to have, a relevant effect on the consolidated financial situation and future results; III – effects, on the elements of consolidated equity and results, of the acquisition or sale of a controlled society, during the social year, as well as the insertion of a subsidiary into the consolidation process, for the purposes of comparability of the financial statements; and IV – events that caused a difference between the amounts of net equity and net profit or loss of the investor, in comparison with the corresponding amounts of net equity and net profit or loss consolidated.

In an explanatory note to the consolidated financial statements, the amount of the main groups of assets, liabilities, and results of jointly controlled societies must also be disclosed, as well as the percentage of participation in each of them.
The publicly-held company affiliated with a group of societies must indicate, in a note to its published financial statements, the body and the date on which the last consolidated financial statements of the group controlling society to which it is affiliated were published.

In consolidated statements, which include transactions with related parties, the information and values relating to transactions not eliminated in consolidation must be evidenced.
(LAW NO. 6.404/76, ARTICLE 275, CVM INSTRUCTION NO. 247/96 AND CVM RESOLUTION NO. 26/86)

30.20.5 Corporate Investments Abroad (20.4.5)
The company must evidence the same information required for investments in subsidiaries/affiliates in the Country.
The criteria for the determination of the financial statements of investees abroad, as well as the criteria for conversion to the national currency, must be mentioned in the summary of accounting practices.
(CVM RESOLUTION NO. 28/86)

30.21 Disclosure in Explanatory Note on Financial Instruments (21.6)
The publicly-held company must evidence, whenever relevant:
a) the market value of all financial instruments, recognized or not as asset/liability in its balance sheet; b) the criteria and premises adopted for the determination of this value; and c) the policies of action and control of operations in derivative markets and the risks involved.

Article 4 of CVM Instruction No. 235/95 exempts the disclosure of the market values of accounts receivable and payable. CVM also understands that it is unnecessary to disclose the market values of other accounts receivable and payable with a term compatible with the normal operations of the company. This exemption was based on the fact that accounts receivable and payable, as well as other monetary items, are adjusted to present value as required by CVM Instruction No. 191/92.

The above exemption, however, does not apply to accounts receivable from government entities or others resulting from long-term contracts, whose possibility of receipt within a period of up to three months is not effectively assured. In this case, the market value must be informed in an explanatory note or, in the absence of this information, an estimate of discount based on the cost of its financing, according to the term provided for its receipt, must be indicated.

The proposed model does not exhaust all disclosure needs, or even its own identification, and therefore, it must be adapted and carefully analyzed by the company's management and its independent auditors.

MODEL FOR NON-FINANCIAL COMPANIES
Note X Financial Instruments
The company participates in operations involving the financial instruments described below, with the objective of... (the objectives and the policy of action and control of operations must be disclosed).
The following criteria and premises were used in the determination of the market values of each financial instrument, (disclose the financial instruments whose market values are different from the book values):

(a) The estimated market values of the company's financial instruments, assets, and liabilities, as of December 31, 19X1, recorded in equity accounts and that present market values different from those recognized in the financial statements, can be demonstrated as follows:

Thousands of reais
Book Value Market Value
Financial Applications
Accounts Receivable from Governmental Entities and Long-Term Contracts Investments Medium-Term Loans and Financing Debentures Others (detail)

The market values of investments were estimated... (describe) The estimated market values of medium-term loans and financing (between three months and one year) were obtained... (describe) The book value of financial instruments relating to other assets and liabilities is approximately equivalent to its market value.

(b) The nominal values of financial instruments, not registered in accounting as of December 31, 19X1, are summarized below (market values must be disclosed, when applicable):

Thousands of reais
Compensation Account Equity Account
Global Value Value to be Received/Received (to be Paid/Paid)

Future Contracts
Purchase Commitments
Foreign Currency
Interbank Market
Fixed Rate
Indices
Stocks
Others

Sale Commitments
Foreign Currency
Interbank Market
Fixed Rate
Indices
Stocks
Others

Options Contracts
Purchase Commitments
Foreign Currency
Interbank Market
Fixed Rate
Indices
Stocks
Others

Sale Commitments
Foreign Currency
Interbank Market
Fixed Rate
Indices
Stocks
Others

Thousands of reais
Compensation Account Equity Account
Global Value Value to be Received/Received (to be Paid/Paid)

Contracts and "Swaps"
Purchase Commitments
Foreign Currency
Interbank Market
Fixed Rate
Indices
Stocks
Others

Sale Commitments
Foreign Currency
Interbank Market
Fixed Rate
Indices
Stocks
Others

(c) Future contracts, locked options have terms less than 90 days; "swap" contracts have the following maturities:

Thousands of reais
Up to 90 days
From 91 to 180 days
From 81 to 360 days
Above 360 days

(d) The risks involved in contracting these operations can be summarized as follows: (describe market, credit, operational, currency, and legal risks) (CVM INSTRUCTION NO. 235/96 AND CVM OFFICIAL CIRCULAR/SNC/SEP NO. 01/96)

30.22 Disclosure in Explanatory Note on Discontinued Operations (22.4)

30.22.1 Initial Disclosure (22.4.1)
An entity must include the following information in an explanatory note relating to a discontinued operation in its financial statements of the period in which the initial disclosure event occurs, as cited above. a. a description of the discontinued operation; b. the business segment or geographic segment to which it belongs;
c. the date and nature of the event, initially disclosed;
d. the date or period in which it is expected that the discontinuation will be completed, if known or determinable;

e. the accumulated values, on the balance sheet date, of total assets and liabilities to be sold or settled; f. the values of revenues, expenses, and profit or loss before taxes, from ordinary activities attributable to the discontinued operation in the current fiscal year disclosed, and the related income tax expense; g. the values of cash flows (statement of sources and applications of funds) attributable to the operating, investing, and financing activities, of the discontinued operation during the period of the fiscal year disclosed.

30.22.2 Other Disclosures (22.4.2)
When an entity sells assets or settles liabilities attributable to a discontinued operation or enters into agreements for the sale of those assets or the settlement of those liabilities, it must include in the explanatory notes, in the period in which the event occurs, the following information:
a. for any gain or loss that is recognized in the sale of assets or settlement of liabilities attributable to the discontinued operation (i) the value of the profit or loss and (ii) the income tax expenses related to that profit or loss; b. the net selling price or price range (after reducing expected derecognition costs) of those net assets for which the entity has signed one or more firm sale agreements, the expected time of receipt of these cash flows, and the book value of these net assets.

30.22.3 Update of Disclosures (22.4.3)
In periods subsequent to that in which the initial disclosure of the event occurred, in the explanatory note on discontinued operations, a description of any significant change in the value or periods of the cash flows related to the assets and liabilities to be sold or settled must be disclosed, as well as the events that caused these changes.
These disclosures must continue in the financial statements until that period in which the discontinuation is completed. The discontinuation is completed when the plan is substantially fulfilled or abandoned, even if the payments from the buyer(s) to the seller have not yet been concluded.
If an entity abandons or withdraws a plan that was previously reported as a discontinued operation, this fact and its effect must be disclosed.

30.22.4 Separate Disclosure for Each Discontinued Operation (22.4.4)
All disclosures must be presented separately for each discontinued operation.

30.22.5 Presentation of Disclosures (22.4.5)
The disclosures of discontinued operations shall be presented in the explanatory notes to the financial statements, except for the disclosure of the value of profit or loss before taxes, recognized in the sale of assets or settlement of liabilities attributable to the discontinued operation, which must be included in the income statement.

30.22.6 Disclosure in Interim Financial Reports (22.4.6)
The explanatory notes of an interim financial report must describe any significant activities or events that have occurred since the completion of the most recent annual report, relating to a discontinued operation, and any significant changes in the values or timing of the cash flows related to the assets and liabilities to be sold or settled.

30.23 Disclosure in explanatory note of Provisions, Contingent Liabilities and Contingent Assets (23.4)

30.23.1 Disclosure in explanatory note of Scheduled Shutdowns (23.4.1)
When complying with Ibracon IT No. 01/2006, the company must clarify the accounting policies and practices adopted, highlighting the estimated values and periods for scheduled shutdowns in the note regarding fixed assets; The company may also observe the guidance of item 5 of this Circular Letter, when dealing with aspects of changes in accounting practices related to the accounting of the effect of scheduled shutdowns.

30.23.2 Disclosure in explanatory note of Provisions, Contingent Liabilities and Contingent Assets (23.4.2)
Normally, contingent assets or contingent gains should not be recorded; only when their obtaining or recovery is effectively assured should they be recognized accounting-wise. A possible gain in administrative or judicial actions should only be recognized when, after going through all necessary instances, the company obtains a favorable decision. If the company has already recognized revenue involving an asset in dispute (accounts receivable, for example), it must then establish a provision for losses in proportion to the contingent value. If there is a challenge by the debtor, but the company considers that it has objective conditions to evidence its right, leaving no doubt regarding this right and the chance of receipt, it may not make the provision as long as it evidences in the explanatory notes to the financial statements the existence of the challenge. (CVM GUIDANCE OPINION NO. 15/87) CVM recommends that in the preparation of explanatory notes on contingent liabilities, the following information be provided, at a minimum: (i) nature of the contingency (labor, social security, tax, civil, environmental, etc.), (ii) detailed description of the contingent event involving the company, (iii) chance of occurrence of the contingency (probable, possible or remote), (iv) instances in which contingent liabilities are under discussion (administrative or judicial, lower or higher courts), (v) case law on contingent liabilities, (vi) assessment of the consequences of contingent liabilities on the company's business.

30.24 Disclosure in explanatory note of Deferred Assets (24.4)
Their composition and criteria for amortization must be disclosed. Companies benefiting from tax incentives must provide more detailed information, specifying the status of the incentivized projects.
(CVM GUIDANCE OPINION NO. 18/90)

30.25 Disclosure in explanatory note of option plans (25.10)
The objective of initiating the process of knowledge of this issue within the Brazilian capital market led to the provisions of the Ibracon Pronouncement on the Accounting of Employee Benefits approved by CVM Resolution No. 371, which determines the disclosure, at a minimum, of the following information: (i) the nature and conditions of the stock option plans; (ii) the accounting policy adopted; and (iii) the quantity and value by which the shares were issued. To fulfill the disclosure objectives, and comply with article 176 of the corporate law which provides for the disclosure of stock options granted and exercised in the fiscal year, the company must disclose in the Explanatory Note to the financial statements and in the Quarterly Information Form – ITR the following information relating to Option Plans, always comparatively to the respective previous periods:
I the existence of Option Plans, with a description of their nature and conditions (including eligibility conditions for beneficiaries).
II the quantity, description of the nature and conditions (including, where applicable, rights to dividends, voting, conversion, exercise and expiration dates) and amount of options granted, exercised and expired, if applicable, held by each group of beneficiaries, including their exercise price or, if applicable, the method of calculation to obtain it. The measure of eligibility of beneficiaries to exercise the right must be indicated (for example, the time elapsed since the date of grant of the option in relation to the total time until the beneficiary can exercise the option); III the percentage of dilution of participation to which current shareholders will eventually be subjected in the event of exercise of all options to be granted; IV regarding exercised options, description of the shares delivered, in quantity, class and type, and the total and unit exercise price relative to each of the classes and types and their respective market value on the respective dates; V the dates or periods in which options may be exercised by beneficiaries and any expiration dates; VI description of any negotiations involving treasury shares to redeem the options, indicating the quantity of shares, by class and type, as well as the value received by the company; and VII – the effect on the Income Statement and on Shareholders' Equity, if this accounting had been done.

30.26 Disclosure in explanatory note of equity items and corporate matters (26.6)

30.26.1 Treasury Stock (26.6.1)
The acquisition of shares of its own issuance represents a return of invested capital and shall be demonstrated as a deduction from a specific reserve account. The explanatory note must indicate:
a) the objective in acquiring its own shares; b) the quantity of shares acquired or sold during the fiscal year, highlighting types and classes; c) the weighted average acquisition cost, as well as the minimum and maximum costs; d) the net result of the sales that occurred during the fiscal year; and e) the market value of the types and classes of treasury shares, calculated based on the last quotation, on the stock exchange or over-the-counter, prior to the closing date of the fiscal year. (CVM INSTRUCTIONS NOS. 10/80 and 69/87 and CVM EXPLANATORY NOTE NO. 59/86)

30.26.2 Share Capital (26.6.2)
The number, types and classes of shares that make up the share capital shall be disclosed, and, for each type and class, the respective quantity and, if any, the nominal value. The advantages and preferences conferred to the various classes of shares, according to statutory rules, shall also be disclosed.
(LAW NO. 6.404/76, ARTICLE 176)

30.26.3 Authorized Share Capital (26.6.3)
The company that has authorized capital must disclose this fact, in an explanatory note, specifying:
a) the limit of authorized increase, in value of capital and number of shares, and the types and classes that may be issued; b) the competent body to deliberate on the issuances (General Assembly or Board of Directors); c) the conditions to which the issuances are subject; d) the cases or conditions in which shareholders will have the right of preference for subscription, or the absence of this right; and e) stock purchase option, if any, to administrators, employees or natural persons who provide services to the company or society under its control. (LAW NO. 6.404/76. ARTICLE 168, §1º)

30.26.4 Profit Allocation Constant in Shareholder Agreement (26.6.4)
The annual report of administrators must contain information on the profit reinvestment and dividend distribution policy constant in shareholder agreements filed with the company.
(LAW NO. 6.404/76, ARTICLE 118)

30.26.5 Dividend per Share (26.6.5)
The amount of dividend per share of the share capital, divided by type and class of shares, shall be indicated in the Statement of Changes in Shareholders' Equity, observing the different advantages and the existence of treasury shares.
(LAW NO. 6.404/76, ARTICLE 186 AND CVM INSTRUCTION NO. 59/86)

30.26.6 Proposed Dividends (26.6.6)
The demonstration of the calculation of dividends proposed by administrators, the payment policy and whether these will be paid corrected monetarily or not must be disclosed.
(CVM GUIDANCE OPINIONS NOS. 15/87 and 21/90)

30.26.7 Interest on Equity Capital (26.6.7)
In explanatory notes to the financial statements and to quarterly information (ITRs), the criteria used to determine these interests, the policies adopted for their distribution, the amount of income tax levied and, when applicable, their effects on mandatory dividends shall be informed.
(CVM RESOLUTION NO. 207/96)

30.26.8 Remuneration of Administrators (26.6.8)
The amount of remuneration shall be disclosed in the income statement itself or in an explanatory note.
(CVM GUIDANCE OPINION NO. 04/79)

30.26.9 Reserves – Detail (26.6.9)
The company may evidence, in an explanatory note or in an analytical table, the subdivisions of reserves, when their evidence in the Statement of Changes in Shareholders' Equity becomes too extensive for publication purposes.
(CVM INSTRUCTION NO. 59/86)

30.26.10 Reserves of Profits to be Realized (26.6.10)
The calculation of the reserve must be demonstrated, evidencing the amount and nature of the values constituted, the amount realized, the parameters used and the future effect on dividends.
(EXPLANATORY NOTE TO CVM INSTRUCTION NO. 59/86 AND CVM GUIDANCE OPINION NO. 24/92)

30.26.11 Retention of Profits (26.6.11)
The retention of profits may present itself with various denominations, such as: reserve for expansion, for reinvestment, etc., and may still be included in the Retained Earnings account. In any circumstance, its constitution, maintenance and legal basis must be disclosed in an explanatory note, as well as the main lines of the capital budget that supports the retention. The justifications and the main lines of the respective capital budget must be explicit. Profits not allocated, even if kept in retained earnings, are characterized as improper retention of profits. (LAW NO. 6.404/76, ARTICLE 196 AND EXPLANATORY NOTE TO CVM INSTRUCTION NO. 59/86)

30.26.12 Multiple Voting (26.6.12)
The publicly held company must disclose the minimum percentage of participation in the voting share capital for the shareholder to request the adoption of multiple voting in its general assembly, which will deal with the election of the members of the Board of Directors. This disclosure must be made mandatorily in the notice of convocation of the assembly and, optionally, together with the financial statements closing the fiscal year. (CVM GUIDANCE OPINION NO. 24/92)

30.27 Disclosure in explanatory note of Reduction in the recoverable amount of assets (27)
The publicly held company must disclose the following information provided in NPC 16:
a. The value of the loss (reversal of loss) with impairments recognized in the fiscal year, and any eventual reflections in revaluation reserves; b. The events and circumstances that led to the recognition or reversal of the impairment;
c. List of items that make up the cash-generating unit and a description of the reasons that justify the way the cash-generating unit was identified; and
d. If the recoverable amount is the net selling value, disclose the basis used to determine this value and, if the recoverable amount is the value of the asset in use, the discount rate used in this estimate.

30.28 Other disclosures in explanatory note (28.2)

30.28.1 Electrobrás Credits (28.2.1)
The criterion used for the establishment of the provision for losses and the amounts involved, including the balances of loans not yet converted into shares, must be disclosed in an explanatory note.
(CVM RESOLUTION NO. 70/89)

30.28.2 Privatization Program (28.2.2)
They must be disclosed by publicly held companies involved in privatization processes, together with their financial statements, all acts and relevant facts that are known to their administrators, whose revelation does not put at risk the legitimate interest of the company, due to the importance of the privatization process, especially with regard to its effects for valuation and decision-making purposes by the user of the company's accounting information. The explanatory note must discriminate, when relevant, at a minimum, the following information:
a) operational mode of privatization (individual sale or in block, if it has more than one participation subject to privatization, through auction, initial public offering, capital increase with waiver of subscription, sale, lease or rental of assets and facilities, transformation, merger, spin-off, dissolution, etc.); b) stage of the privatization process, including a brief history of relevant facts that occurred during the period; c) book value of the investment subject to privatization and evaluation method, book value on the date of the financial/accounting information, market value, when applicable (last three average quotations up to the date of publication or submission of the ITRs) and the value of the evaluation; d) amount of the provision for impairment or permanent loss, and respective basis, or clarification of the reasons that determined the non-provisioning; e) precise information regarding transactions with related parties, in the form of CVM RESOLUTION NO. 26/86, with emphasis on active and passive balances, revenues and expenses arising from transactions carried out with companies subject to privatization; f) amount of resources to be used in the settlement of debts with the public sector, value of the eventual balance to be applied in the acquisition of long-term federal public debt securities and conditions under which the applications will be made, if already known at the time of disclosure of the quarterly information or financial statements; and g) judicial and labor disputes, including with the employees' pension fund, and the amounts involved. (CVM GUIDANCE OPINION NO. 24/92)

30.28.3 Real Estate Fund (28.2.3)
The following information must be subject to disclosure in an explanatory note:
a) analytical information on the position of real estate investments, on the closing date of the period, detailing each development, with address, total/built area, stage in which it is, its characteristics, net applied value and market value, as specified in item "c" of item III of article 17 of CVM INSTRUCTION NO. 205, as well as its movement during the period; b) market value of other assets; c) information on expenses with the Fund's administration fee and with Investment Consultant, their percentages relative to the average semi-annual shareholders' equity and accounting appropriation made, identifying any portion incorporated into the asset; and d) explicit calculation of the distribution of results to unitholders. The values related to the commercialization of business points in "shoppings" and similar ("res sperata") must be recognized as revenue over the periods of their respective initial lease contracts, and their accounting as an asset of any nature before the period of its registration in revenue is not admitted. In an explanatory note to the financial statements, the institution administering the Real Estate Investment Fund must inform the average period of appropriation of this revenue. (CVM INSTRUCTION NO. 206/94)

30.28.4 Incorporation, Merger and Spin-off (28.2.4)
The company must perform and disclose, at the end of each fiscal year, an analysis on the recovery of the value of goodwill, when the economic basis was the acquisition of the right of exploration, concession or permission delegated by the Public Power or the expectation of future results, in order to:
a) register the losses of the value of the capital applied when it is evident that there will not be sufficient results to recover this value; or b) revise and adjust the criteria used to determine its economic useful life and for the calculation and term of its amortization.
(CVM INSTRUCTION NO. 319/99)

30.28.5 Earnings or Loss per Share (28.2.5)
The company must disclose in the income statement of the fiscal year the net earnings/loss per share of the share capital.
(LAW NO. 6.404/76, ARTICLE 187)

30.28.6 Insurance (28.2.6)
It must be informed if there are any and on which assets, the liabilities or interests covered.
(CVM GUIDANCE OPINION NO. 15/87)

1Actuarial
2Actuarial Liability