Explanatory Note to CVM Instruction 192

Ref.: CVM Instruction No. 192, of July 15, 1992, which provides for present value adjustment and monetary updating in corporate accounting records in order to fully comply with Fundamental Accounting Principles, and takes other measures.

INTRODUCTION

Fundamental Accounting Principles represent the framework from which accounting seeks the direction of its activity; they determine the behavior of accounting professionals regarding administrative acts and events occurring in companies and reflect the category's understanding of those events.

Consequently, their full and correct application provides for the disclosure of corporate information with better quality and greater clarity, especially for those interested in the information disclosed by publicly held companies.

Unfortunately, since the issuance of CVM Deliberation No. 29, of February 5, 1986, full compliance with Fundamental Accounting Principles, according to the definitions contained in the IBRACON Technical Pronouncement, has not yet been achieved. The main obstacles to their total implementation in corporate records were: the lack of understanding of some of their aspects by professionals and users, and the limitations imposed by tax legislation.

However, this Commission understands that the time has come to overcome these barriers, conscious that the full use of Fundamental Accounting Principles is a current necessity for companies to fulfill their role of properly informing the securities market, as well as ascribing to shareholders a dividend, as a percentage of profit, more representative of reality.

THE FULL APPLICATION OF FUNDAMENTAL ACCOUNTING PRINCIPLES.

This Autarchy hopes that, by determining that corporate accounting statements be prepared in total conformity with Fundamental Accounting Principles, it will provide for the disclosure of accounting statements that more adequately represent the economic-financial-asset situation of publicly held companies, greatly facilitating the evaluation of their results and the evolution of their assets.

Non-compliance with some of the Fundamental Accounting Principles, especially the principles of Corrected Cost as a Value Basis, Common Monetary Denominator, and the Accrual Regime, when preparing corporate accounting statements, generates significant distortions in the calculation of results, due to the lack of monetary updating of non-monetary asset elements and the non-realization of present value adjustment of credits and obligations.

The implementation of these procedures will enable the presentation, in the income statement, of values more representative of the company's economic-financial performance.

Another objective to be achieved is the elimination of the disparity between the results obtained in these statements and the net profit or loss found in accounting statements in currency of constant purchasing power, since only the latter are prepared in conformity with those principles.

Thus, the option for the exclusive disclosure of accounting statements in currency of constant purchasing power will be guaranteed, which, given the high inflation rates observed in the country, more adequately express the economic-financial flow, as their values are presented in the same monetary standard, in addition to enabling the reduction of the costs of disclosing corporate information.

These same determinations are applicable to consolidated corporate accounting statements.

PRESENT VALUE ADJUSTMENT OF CREDITS AND OBLIGATIONS IN CORPORATE RECORDS.

LEGAL ASPECTS.

This Commission, considering the importance of "full disclosure" in the decision-making process of capital market participants, has been working over time to improve accounting standards, as is indeed its legal duty.

Despite this, some manifestations have arisen against the compulsory adjustment to present value of credits and obligations in the accounting records of publicly held companies, manifestations derived essentially from the fear of how such a procedure would be treated in the calculation of taxable income.

It is worth remembering, however, that the commitment of this Autarchy is with the disclosure of adequate information that reflects the reality of the asset, economic, and financial situation of publicly held companies, regardless of the consequences at the tax level, which are concerning, but are treated in the tax sphere of the State.

Thus, this Commission understands that a publicly held company could not violate a corporate legal norm, altering the reality of its asset and financial situation, in order to meet other requirements emanating from tax legislation, as provided in paragraph 2 of article 177 of Law No. 6,404, of December 15, 1976.

Technically, the mandatory accounting of present value adjustment is indisputable, due to the quality it adds to accounting information. For this reason, its defense is made here from a legal point of view, the basis of action of the Securities and Exchange Commission (CVM) as a regulator and supervisor of the Brazilian capital market, aimed at strengthening this very important channel for raising public savings by economic units producing national wealth.

In view of the provisions of article 183 and items I, II, and III of article 184 of Law No. 6,404/76, it seems evident that the legislator's intention, when mentioning the balance sheet date, was to make clear that the valuation of all assets and liabilities expressed in currency should reflect the value of this currency on the date the balance sheet is drawn up.

This understanding is confirmed notably in article 184, when, three times consecutively, the expression "up to the balance sheet date" is used.

In article 183, only the expression "In the balance sheet" is used. From this expression, one cannot infer that it is not intended to say or specify "on the balance sheet date," since when referring to "balance sheet," the legislator refers to the provisions of article 176 of the Corporate Law, which deals with the obligation to prepare accounting statements "at the end of each fiscal year," which will have a date, as prescribed by article 175.

Consequently, both asset and liability elements must be evaluated by criteria that express their value "on the balance sheet date."

This is not what, however, has occurred with pre-fixed assets and liabilities. For various reasons, some companies, when they sell their products on credit, issue their fiscal documents at the sales value, as if this were realized "on the invoice due date."

This has caused a credit sale, made in December, for due date in February of the following year, for example, to be recorded and evaluated from its accounting entry, always at its nominal value, that is, by the value of the credit "on its due date," disregarding the time factor.

Considering the legal mandate to apply the accrual regime in accounting, according to article 177 of Law No. 6,404/76, it is not appropriate to imagine that the legislator would be incoherent in the production of his legal text, allowing any asset valuation to be out of agreement with the cited accrual regime.

This Commission, by issuing CVM Instruction No. 64, of May 19, 1987, initiated the process of correcting this problem by introducing the concept of "present value" in the evaluation of asset items.

It is worth noting that, during the discussion of the draft CVM Instruction No. 64/87, aspects related to the evaluation of accounts payable and receivable were addressed, specifically in corporate legislation. At that time, it was concluded that, according to articles 103 and 184 of Law No. 6,404/76, all assets and liabilities should be considered at their values in the currency of the balance sheet date.

Under these conditions, the evaluations of accounts receivable and payable contained distortions, as they were being accounted for based on the values of their respective due dates. Unfortunately, as this procedure was traditionally accepted in the accounting bookkeeping of our Country - a situation that, in many cases, persists to this day - at that time, no measure was adopted to correct this flaw in the accounting records of companies.

Regarding the competence of the Securities and Exchange Commission (CVM) to require such evaluation from publicly held companies, it derives from Law No. 6,385/76 itself, both because the autarchy can impose on violators of the norms of Law 6,404/76 the penalties provided for in its article 11, and because it is competent to issue norms applicable to publicly held companies regarding accounting statements (article 22, sole paragraph, II).

ACCOUNTING ASPECTS.

Similarly to accounting statements in currency of constant purchasing power, all transactions generating rights and obligations payable or receivable in currency, at a future date and in previously determined amounts, must be translated to present value in accounting records, by using the average pre-fixed ANBID rate, in effect at the time of the transaction, observing the convention of materiality.

Here too, the determining factors for the realization of the present value adjustment of credits and obligations are the need to obtain values representative of these credits and obligations at the time of the transaction and the correct application of the principles of Revenue Realization and the Confrontation of Expenses with Revenues and Accounting Periods (Accrual Regime).

These adjustments should not, therefore, be made on values that, although fixed and subject to settlement on a future date, are not formed in counterpart to revenues, expenses, or non-monetary assets, or that are determined by negotiations different from those usually carried out for the purchase and sale of goods and services, being normally accepted as cash or present values, that is, they are already recorded in the currency of purchasing power of the date of the transaction.

The appropriation of present value adjustments of credits and obligations shall be made in the income accounts to which they are linked, and the possibility is also created to begin only from January 1993 the quantification of the present value adjustment on all transactions and the appropriation of the reversals of these adjustments to the account of commercial financial revenues or expenses, without the need to reprepare the accounting statements relating to the previous fiscal year.

MONETARY UPDATING OF NON-MONETARY ASSET ELEMENTS.

LEGAL ASPECTS

It is the understanding of this Commission, exhaustively detailed in its Orientation Opinion No. 24, of January 14, 1992, that, after the revocation of article 185 of Law No. 6,404/76, by article 2 of Law No. 7,730, of January 30, 1989, a gap arose in corporate legislation regarding the limits of the application of monetary correction of non-monetary asset elements, because the subsequent legislation, which began to deal with this subject (Law No. 7,799, of July 10, 1989, Law No. 8,200, of June 28, 1991, and Decree No. 332, of November 4, 1991) did so with a tax focus, but imposing that these records be reproduced in corporate accounting, for reasons of practicality and security in their company supervision activities.

Article 19 of Decree No. 332/91 orders the recognition in commercial bookkeeping of the corrected values of the non-monetary asset elements specified in its article 4. There is, therefore, the obligation to reproduce monetary correction for the asset items referred to therein in corporate accounting, but there is no corporate legal restriction for other asset items to also be so treated.

Corporate-wise, there is, in fact, no limit to the application of monetary updating of asset elements. What exists is the mandate to follow Generally Accepted Accounting Principles (now called Fundamental Accounting Principles), expressed in article 177 of Law No. 6,404/76, for the preparation of accounting statements, which "shall clearly express the situation of the company's assets and the changes that occurred during the fiscal year" (article 176 of the same Law).

ACCOUNTING ASPECTS.

Since non-monetary asset elements are those whose object of evaluation appears in the form of tangible or intangible assets, rights and obligations representing ownership and future receipt or delivery of goods or services, their values are not subject to corrosion caused by inflation.

Thus, the monetary updating of these elements becomes necessary to enable the maintenance of their respective representative values against the variation in the purchasing power of the currency, in order to guarantee their adequate valuation.

This monetary updating, as is already well known, shall be carried out from the present value of non-monetary asset elements, on the date of their formation or acquisition.

By considering this a more adequate procedure, this Commission recommends that the counterpart of the monetary updating of active and passive provisions be posted to the account of active and passive monetary variations.

MONETARY UPDATING OF INTERMEDIATE RESULTS.

The effects of the monetary updating of intermediate results, especially the updating of monthly results, provided for in Law No. 8,383, of December 30, 1991, shall be disregarded when preparing corporate accounting statements relating to the final result of the period.

To solve the problem, the procedures provided for in Orientation Opinion No. 12, of January 12, 1987, shall be adopted, whose application does not entail any reflection in the preparation and disclosure of accounting statements in currency of constant purchasing power.

ADAPTATION DEADLINE.

The possibility is being created for the monetary updating of certain non-monetary asset elements to begin only from January 1993, as well as for present value adjustments covering all operations and their new form of reversal, without the adoption of this alternative implying the re-preparation of accounting statements relating to the 1992 fiscal year.

However, this Commission encourages the immediate implementation of these procedures, as a way to improve the quality of corporate information and to reduce the costs of publishing this information by the exclusive disclosure of accounting statements in currency of constant purchasing power.

GENERAL CONSIDERATIONS.

It is worth remembering that greater and better details on the procedures for present value adjustment and monetary updating of non-monetary asset elements can be obtained by reading the Explanatory Note to CVM Instruction No. 191, of July 15, 1992.

Original signed by
ROBERTO FALDINI
President