Explanatory Note to CVM Instruction 118

EXPLANATORY NOTE TO CVM INSTRUCTION NO. 118, OF MAY 7, 1990.
REF.: CVM Instruction No. 118, of May 7, 1990, which establishes procedures for the preparation of quarterly information (ITRs) of open companies, starting from periods closed that include the month of March 1990, and provides measures regarding the disclosure of effects produced by Laws Nos. 8033, of April 12, 1990.

INTRODUCTION:
The various modifications occurring in the Brazilian economy since March 16, 1990, resulting from the Federal Government's Economic Stabilization Plan, require the preparation and disclosure of information pertinent to the immediate reflections on the equity of open companies, as well as the effects that may influence their future results.

At this opportunity, the CVM decided to regulate the methodology to be used in the preparation of quarterly information (ITRs) to be presented by open companies, starting from periods closed that include the month of March 1990, with the objective of improving the data made available to the user.

To meet this purpose, the respective CVM Instruction establishes the minimum information to be provided by open companies, not only regarding modifications to their equity through the implementation of the aforementioned economic stabilization plan, but also regarding possible reflections on the company's future activities. Furthermore, it introduces the obligation of review of quarterly information by independent auditors, in order to increase the reliability necessary for all its users.

QUARTERLY INFORMATION (ITRs)
Quarterly information will be prepared normally in the manner provided for in CVM INSTRUCTION NO. 60/87, with the alterations introduced by CVM Instructions Nos. 73/87 and 108/89, including regarding the use of the specific form and its annexes.

Open companies that are institutions authorized to operate by the Central Bank of Brazil will fill in the quarterly information including the month of March 1990 with the data of March 15, 1990, required by BACEN Circular No. 1667, of April 11, 1990.

All values in New Cruzados recorded until March 16, 1990, will be converted to Cruzeiros at the parity of NCz$ 1.00/Cr$ 1.00, so that the financial statements comprising the ITRs are expressed in Cruzeiros.

EXPLANATORY NOTE TO CVM INSTRUCTION NO. 118, OF MAY 7, 1990.
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Assets and liabilities held in New Cruzados will be presented in explanatory notes or in a supplementary statement to evidence the nature of their balances and, where applicable, the measures adopted by the company for their negotiation, particularly regarding values blocked by order of the Central Bank of Brazil.

Assets and liabilities in foreign currency will be converted to Cruzeiros, based on the floating exchange rates published by the Central Bank of Brazil for the last business day of the quarter to which the ITR refers.

For quarterly information including the month of March 1990, investments evaluated by the equity method will be recorded based on financial statements of subsidiaries prepared on the same date as those of the parent company. In subsequent quarters, the criteria established in item XIV of CVM INSTRUCTION NO. 01/78 may be used.

Due to possible difficulties in obtaining, in a timely manner, data from affiliated companies for the calculation of equity method in the quarter including the month of March 1990, the option to use statements prepared up to 60 (sixty) days before the date of the ITRs in question remains, as provided for in annex XIV of CVM INSTRUCTION NO. 01/78.

In determining the quarterly result, provisions for income tax, including state tax, and for social contribution, as well as administrative participations provided for in item VI of Art. 187 of LAW NO. 6404/76, will only be computed if a provision for the mandatory minimum dividend provided for in the statutes has been established.

The portion related to withholding income tax provided for in LAW NO. 7713/88 must be computed.

Subsequent events, which are relevant, will be the subject of explanatory notes with the clarifications necessary to understand their reflections.

In the analysis that the administrators of open companies make regarding relevant subsequent events known until the date when the ITRs are being finalized, the following minimum aspects announced must be researched with a view to disclosing the company's situation to the users of the respective ITRs.

Such matters, here related in an exemplary and non-exhaustive manner, must merit disclosure when relevant for understanding the operational scenario of the open company, even if not resolved or under negotiation with third parties.

The relevant subsequent operational aspects requiring disclosure, according to Article 7 of the Instruction, can be understood in the following major categories regarding representative changes concerning the operational condition since the last quarter or balance sheet:
a) sales, accounts receivable from customers, collections;

EXPLANATORY NOTE TO CVM INSTRUCTION NO. 118, OF MAY 7, 1990.
3 b) purchases, accounts payable to suppliers of inputs, payments; c) need, volume, and cost of raising new resources for the turnover of operations, or possibility, volume, and interest rate of application of any financial and administrative surplus from the cash flow, in general; d) personnel situation: eventual idleness, concluded or initiated union negotiations aiming to reduce working hours and salaries, reductions of staff implemented and/or negotiated with personnel and unions; e) level of production, changes in "MIX", new products, discontinuation of previously existing products; f) expansion and investment projects: comment on abandonment, temporary or not, of projects of this nature planned or already initiated; comment on such projects eventually initiated in the quarter in reference; g) sources of financing: comment on the need and feasibility of obtaining medium and long-term credits from suppliers (national and foreign), shareholders, and/or credit and financing institutions (private or official, national or non-national) and plans to obtain new resources from the securities market; h) indications of probable losses, not provisioned, in the fixed assets of the open company or its subsidiaries/affiliates resulting from;

• temporary discontinuity or idleness caused by a reduction in the level of operations;
• elimination of a product line;
• revaluations of assets made at market prices that may not represent the economic reality in the subsequent period;
• reduction in the ability to recover the value of the asset in operations;
  i) indications of probable losses in deferred assets, mainly pre-operational expenses, due to:
• discontinuation of expansion, modernization, and similar projects,
• reduction in the ability to recover this asset in future operations,

EXPLANATORY NOTE TO CVM INSTRUCTION NO. 118, OF MAY 7, 1990.
4 j) indications of probable losses, not provisioned, in permanent investments resulting from risks related to the matters cited in items a) to i) above, affecting such subsidiaries or affiliates.

The simplified list, previously indicated, must be adapted, mainly for financial institutions and other activities subject to specific regulation.

REVIEW OF QUARTERLY INFORMATION BY INDEPENDENT AUDITORS The CVM wishes to emphasize that the special review, by independent auditors, of the quarter including the month of March 1990, as well as the limited reviews of subsequent quarters, must be endowed with an eminently critical character regarding:

• adequate identification and disclosure of aspects of a relevant nature of the ITRs that merit disclosure in explanatory notes, concerning assets, liabilities, and results of the respective quarter.
• adequate identification and disclosure of aspects of a relevant nature that constitute subsequent events;
• reasonableness of the data and information of a accounting and financial nature regarding the operational situation up to the moment when the disclosures are being finalized to be made public.

To the extent that the special review of the quarter including the month of March 1990 and the subsequent limited quarterly reviews become an integral part of the work plan of Independent Auditors in their relationship with their clients who are open companies, it is expected that the times for execution of examinations for reports of annual accounting statement audits (or semi-annual in the case of financial institutions) will be reviewed in a manner to dilute the work throughout the fiscal year, instead of concentrating them in a smaller number of stages.

Internal control tests and analytical reviews, distributed throughout the fiscal year, must allow, under normal conditions:

• increased efficiency of auditors in detecting possible problems to be resolved before the annual balance sheet;
• increased quality of information made public, through more frequent discussion of relevant aspects to be disclosed between the management of the open company and its auditors;
• anticipation of the closing and audit of annual financial statements, given the anticipation of problem resolution.

EXPLANATORY NOTE TO CVM INSTRUCTION NO. 118, OF MAY 7, 1990.
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In this sense, the CVM's expectation is that the involvement of Auditors in quarterly reviews can be, at least in part, compensated by a lesser involvement in their end-of-year visit to examine the balance sheet and other accounting documents, in addition to contributing to the improvement of information made public.

DEADLINES
For the forwarding of quarterly information, as provided for in Art. 13 of CVM INSTRUCTION NO. 60/87, new deadlines are established.
The reduction of the deadlines for the disclosure of quarterly information aims to provide better transparency and greater security to market investors, since knowledge of the situation of open companies at shorter intervals allows decisions more consistent with the available data.

OTHER INSTITUTIONS
Open companies that are institutions authorized to operate by the Central Bank of Brazil must present their quarterly information in the manner of the Instruction to which this explanatory note refers, however, they may use the data contained in the statements regarding March 15, 1990, required by BACEN Circular No. 1667, of April 11, 1990, plus the comments regarding subsequent events and the respective report of the special review by Independent Auditors. Other open companies subject to specific regulation fall under the provisions of the Instruction to which this explanatory note refers without any modifications.