Explanatory Note to CVM Instruction 469

Ref. CVM Instruction No. 469, of May 2, 2008, which provides for the application of Law No. 11,638, of December 28, 2007, and amends CVM Instructions No. 247, of March 27, 1996, and No. 331, of April 4, 2000.

Introduction

With the enactment of Law No. 11,638, of December 28, 2007, which amends and introduces new provisions to Law No. 6,404, of December 15, 1976, known as the Corporations Law, the conditions were created for Brazilian accounting standards and practices applicable to the individual financial statements of corporations to converge with international accounting practices.

Regarding Chapter XV of Law 6,404 of 1976, which deals with accounting matters, Law No. 11,638 of 2007 determined that the Securities and Exchange Commission (CVM) would issue more detailed regulations regarding the application of the changes. Some aspects will have to be regulated in 2008, others in 2009 and 2010. In this sense, the CVM, together with the Accounting Pronouncements Committee (CPC), developed a work program aimed at issuing, still in 2008, a set of norms directly related to the accounting changes introduced by Law No. 11,638 of 2007. This work program is available on our main page on the World Wide Web (www.cvm.gov.br) under the item "Accounting and Audit".

Notwithstanding the future issuance of these norms, always keeping in mind the legal mandates and convergence with pronouncements issued by the International Accounting Standards Board (IASB), it is necessary to immediately alter some norms already issued by the CVM, as well as clarify other issues related to the changes produced by Law No. 11,638 of 2007.

In a communication to the market, made on January 14, 2008, the CVM expressed its preliminary understanding regarding the application of Law No. 11,638 of 2007, and how the regulation process of such Law would be developed, in addition to requesting, through a public hearing, the presentation of doubts and suggestions regarding the matter.

Thus, as part of the process of incorporating the changes introduced by Law No. 11,638 of 2007 into Brazilian accounting standards and practices, and taking into account the suggestions and doubts arising from the aforementioned public hearing, the CVM issued Instruction No. 469 of May 2, 2008 ("Instruction"), which provides for the immediate adaptation needs of some norms and clarifies other issues related to the changes produced by Law No. 11,638 of 2007.

1. Application of Law No. 11,638/07 - ITR and Special Statements

Articles 1 and 2 of the Instruction reaffirm and formalize the CVM's understanding, already expressed through a market communication on January 14, 2008, that the changes introduced by Law No. 11,638 of 2007 apply to financial statements prepared from the fiscal year starting on January 1, 2008, including the specially prepared statements to comply with the provisions of Article 45, §2, and Article 204, §1 of Law No. 6,404 of 1976, with their application to Quarterly Information Forms - ITR of 2008 and to the specially prepared statements for registration purposes with the CVM, in accordance with Article 7, item X, of CVM Instruction No. 202 of December 6, 1993, being optional.

Regarding financial statements closing the fiscal year, the mandatory application of the changes introduced by Law No. 11,638 of 2007 applies to statements closed on December 31, 2008, or on a later date. In the case of companies that started the fiscal year before January 1, 2008, mandatory application will occur only for financial statements closed from 2009 onwards. For example, companies whose fiscal year begins on May 1 will only be obliged to comply with Law No. 11,638 of 2007 in statements closed on April 30, 2009. The same applies to specially prepared statements at any date from the effective date of Law No. 11,638 of 2007, to comply with the provisions of Article 45, §2, and Article 204, §1 of Law No. 6,404 of 1976.

Article 2 of the Instruction allows the application of the changes introduced by Law No. 11,638 of 2007 for ITRs and for specially prepared statements for registration purposes with the CVM (Article 7, item X, of CVM Instruction No. 202 of 1993).

A public company that does not choose to adapt immediately will comply with the command of the sole paragraph of Article 1 of the Instruction, which provides for the mandatory disclosure, in a note to the explanatory notes of the 2008 ITRs, of a description of the changes that may have an impact on its financial statements closing the fiscal year, as well as an estimate of their possible effects on equity and the result of the period or the clarification of the reasons that prevent the presentation of this estimate.

Alternatively, if the company chooses to apply the changes introduced by Law No. 11,638 of 2007 in the 2008 ITRs and in the specially prepared statements for registration purposes with the CVM (Article 7, item X, of CVM Instruction No. 202 of 1993), Article 2 of the Instruction imposes the following conditions:

1. all changes to Law No. 6,404 of 1976 produced by Law No. 11,638 of 2007 must be included;
2. the changes must be based on the guidelines and norms issued by the CVM;
3. in the absence of specific CVM norm or guideline, IASB norms must be used in their entirety; and
4. the effects on the result and equity resulting from these changes must be disclosed in a note.

The requirement referred to in item 1 above aims to prevent the company from adopting, at its exclusive choice, one or more changes that may cause partial impacts on its quarterly results. It does not, however, prevent the company from additionally presenting information in line with international standards, if this has been its disclosure policy, such as segment information, Statement of Cash Flows - DCF, and discontinued operations. The adoption of norms issued by the CVM still in 2008 that reflect the changes of Law No. 11,638 of 2007, whose application is immediate for all public companies, will not imply full and voluntary adoption of the changes of Law No. 11,638 of 2007.

The application of norms issued by the IASB, in the case of absence of guidelines and norms issued by the CVM, provided for in item 3 above, is restricted to the changes produced by Law No. 11,638 of 2007.

As an example of a subject for which there is already a CVM norm and guideline, we can cite CVM Instruction No. 235 of March 23, 1995, which deals with the presentation and disclosure, in a note, of the market value of financial instruments, recognized or not in the financial statements of public companies. Also regarding presentation and disclosure, there are the guidelines contained in item 21 of CVM SNC/SEP Circular Letter No. 01 of February 14, 2007. An example of a matter on which the CVM has not issued norms or guidelines is the recognition and measurement of these financial instruments. Given that there is still no specific CVM norm on the matter, the standard to be adopted must be that provided for in International Financial Reporting Standards IAS - 39. Another example of a subject not regulated by the CVM, but already provided for in the new law and which, therefore, must be applied based on the norms issued by the IASB, is the provision in new item IV of Article 179 of Law No. 6,404 of 1976. In this case, the international standard to be applied in leasing operations must be that provided for in International Financial Reporting Standards - IAS- 17.

The disclosure requirement provided for in item 4 above aims to enable, in this transition phase, the presentation of the result and equity without the effects brought by Law No. 11,638 of 2007, and its comparison with companies that do not opt for that option. This disclosure is not confused with that required in the sole paragraph of Article 1 of the Instruction, which refers to an estimate by the company's management regarding possible impacts on future statements.

The full adoption of norms issued by the IASB is provided only for consolidated financial statements, in accordance with CVM Instruction No. 457 of July 13, 2007. The aforementioned CVM Instruction No. 457 of 2007 makes it mandatory, from the fiscal year ending in 2010, the presentation of consolidated financial statements with the adoption of the international accounting standard, according to pronouncements issued by the IASB, and optionally, until the fiscal year of 2009, in substitution for the Brazilian accounting standard, under the conditions it specifies. However, as already mentioned, the CVM, together with the CPC, established an agenda for the preparation of joint regulation aimed at reducing or eliminating the differences between individual statements and IFRS consolidated statements.

The determinations contained in the Instruction must be observed from the first ITR of 2008, both for those that present the effects of Law No. 11,638 of 2007 only at the end of the period, as provided for in Article 1 of the Instruction, and for those companies that adopt from the first ITR the provisions of Law No. 11,638 of 2007, as provided for in Article 2.

2. Balances of Capital Reserves Changed by Law No. 11,638 of 2007

Capital reserves must essentially reflect contributions made by shareholders that are directly related to the formation or increase of share capital. In this sense, Law No. 11,638 of 2007 abolished the capital reserves "Premium Received on the Issuance of Debentures" and "Donations and Subsidies for Investment".

The premium on the issuance of debentures is part of the trading conditions of these securities, which constitute liabilities of the company and, therefore, cannot be considered as a capital reserve (equity).

Donations and subsidies for investment must be considered a reduction in the cost of the asset to which they refer, in the case of non-monetary assets, or, in other cases, as revenue to be appropriated to the result of the fiscal year in which their realization occurs. Thus, donations and subsidies for investment are to be recorded, immediately or upon realization, in the result of the fiscal year, affecting, therefore, the net profit of the fiscal year, which is the basis for the calculation of both dividends and income tax and social contribution.

In some cases, the distribution of profits may imply the loss of this benefit. In these cases, Article 195-A of Law No. 6,404 of 1976, introduced by Law No. 11,638 of 2007, contemplates the possibility of the company allocating to the reserve for tax incentive profits, the portion of net profit resulting from donations or government subsidies for investments, which may be excluded from the base for calculating the mandatory dividend (item I of the caput of Article 202 of Law No. 6,404 of 1976).

Subsidies must be recognized as revenue on a rational and systematic basis over time, in order to match them with the respective costs. Until recognized as revenues, gains from donations or subsidies for investment will be recorded as unrealized results. The CVM will issue a specific norm approving a pronouncement that is being drafted by the CPC dealing with this matter.

Given that the balances of existing reserves until the enactment of Law No. 11,638 of 2007 were formed based on the provisions of Law No. 6,404 of 1976, it would not be appropriate in these cases to alter this framework through retroactive adjustments or any reclassification that would imply a change in this right.

Thus, the Instruction establishes that the balances existing at the beginning of the 2008 fiscal year may be maintained indefinitely in the respective reserve accounts, for their use in the manner of Article 200 of Law No. 6,404 of 1976.

In addition, the Instruction creates a transitional rule to allow that, while the CVM does not issue a specific norm regulating this matter, premiums received on the issuance of debentures and donations and subsidies for investment resulting from events and operations occurring in the 2008 fiscal year, be recorded in specific accounts of future fiscal year results, with disclosure of the fact and the values involved in a note.

3. Revaluation Reserve

Law No. 11,638 of 2007 eliminated the possibility of spontaneous revaluation of assets and, consequently, the figure of the revaluation reserve, which includes the periodic revaluations provided for in CVM Deliberation No. 183 of June 19, 1995. Thus, the balances existing in the revaluation reserves constituted before the effective date of Law No. 11,638 of 2007, including the revaluation of controlled and affiliated companies, may be maintained until their effective realization or reversed by the end of the fiscal year in which Law No. 11,638 of 2007 entered into force, that is, 2008 (Article 6, Law No. 11,638 of 2007).

The deadline for reversal provided for in Law No. 11,638 of 2007 applies to statements to be closed in the first fiscal year of its effectiveness. In the case of a company that started the fiscal year after January 1, 2008, the deadline falls on the financial statements closed in 2009. For example, in the case of companies whose fiscal year begins on May 1, 2008, the reversal may be recorded until April 30, 2009.

As the decision to maintain or reverse the balances existing in the revaluation reserves may have relevant effects on future results, public companies must disclose the option adopted until the presentation of the second ITR of the fiscal year starting in 2008.

§ 5 of Article 4 of the Instruction establishes uniformity of treatment by mentioning that public companies must use the same alternative for their own and reflected revaluations and determine their controlled companies and recommend their affiliated companies to adopt the same alternative. In cases where affiliated companies adopt an alternative different from that recommended by the public company, the investor must adjust the financial statements of the investee with a view to maintaining this uniformity of procedures.

The maintenance of the balance of the revaluation reserve and, consequently, the revalued value of the asset, does not eliminate the obligation of periodic verification of its recoverable amount, as provided for in CVM Deliberation No. 527 of November 1, 2007.

4. Accumulated Profits

Although the original wording of Law No. 6,404 of 1976 had already determined the allocation of all the result of the fiscal year, the previous wording, by providing for the existence of a final balance in the accumulated profits account, raised doubts and even the possibility of indiscriminate and unjustified retentions.

Given that all net profit of the fiscal year must be allocated, according to the principles contained in Articles 194 to 197, the current wording of Law No. 6,404 of 1976 eliminated the possibility of having an accumulated profits balance at the end of the fiscal year.

Evidently, the accumulated profits account and the demonstration of its movement were not eliminated, which must be presented separately or, in the case of public companies, as part of the statement of changes in equity. This account, however, has an absolutely transitional nature, and will be used to serve as a counterparty to the reversals of profit reserves and to the allocations of profit.

5. New Statements

5.1. Statement of Added Value - DVA

The newly created Statement of Added Value - DVA aims to evidence how much wealth a company has produced, that is, how much value it has added to its factors of production, and how this wealth was distributed (among employees, government, shareholders, capital financiers) and how much remained retained in the company.

The DVA is a very useful statement, even from a macroeconomic point of view, since, conceptually, the sum of the added values (or aggregated values) of a country actually represents its gross domestic product - GDP. However, there is a temporal difference between the economic model and the accounting model of DVA. While the first uses the concept of production, the accounting statement uses the concept of sales to obtain the added value or wealth created by the company.

The DVA also serves to guide investors who aim to know information of a social and productivity nature. The requirement to present the DVA is related to the so-called social balance, which, presented together with the accounting statements, expands knowledge about economic activities and their value to society.

The added value of a company, prepared in accounting form, represents how much value it adds to the inputs it acquires in a given period and is generally obtained by the difference between sales and the total of inputs acquired from third parties. This value will also have the meaning of all remuneration of the efforts applied in the company's activity.

This view is different from the usual structure of accounting information. Statements aim to present the owner's view in equity, through the subtraction of assets and liabilities, and in net result, through the subtraction of revenues and expenses, both representing the residue that remunerates the risks of shareholders' capital. In this case, the result can be observed as a part of the wealth destined to the owner, unlike the added value (DVA) which demonstrates all destinations of the wealth generated by the company as the remuneration of financiers, employees, and shareholders, in addition to taxes paid to the government.

DVAs are already prepared by a significant group of Brazilian public companies. The general lines for preparing this statement have already received guidance in CVM circular letters, as can be observed in item 1.12 of CVM/SNC/SEP Circular Letter No. 01 of 2007. This guidance should be used for the preparation and disclosure of the DVA while the CVM does not issue a specific accounting norm on the matter.

It should be noted that the DVA was inserted by Law No. 11,638 of 2007 into the set of financial statements that public companies must present at the end of each fiscal year, and is therefore subject to all rules of approval, disclosure, and audit applicable to other statements. It is also worth noting that, although not required in international standards, the CVM sees no conflict with them, since the DVA, in addition to being additional information, adds considerable quality to the basic set of statements required by the IASB.

5.2. Statement of Cash Flows

Law No. 11,638 of 2007, in line with international standards, provides for the replacement of the statement of sources and applications of resources - DOAR by the statement of cash flow - DCF.

The DCF shows the modifications that occurred in the balance of cash (cash and cash equivalents) of the company in a given period, through flows of receipts and payments.

It should be clarified that the provisions contained in items III and IV of Article 188 of Law No. 6,404 of 1976, which were not expressly revoked by Law No. 11,638 of 2007, deal specifically with information related to DOAR, which was replaced and, therefore, are not applicable to DCFs.

6. Share-Based Compensation

International accounting principles recommend the accounting recognition of expenses related to the grant of shares as a form of remunerating employees, using an appropriate pricing method. The recommendations issued by the CVM are in line with such recommendation (item 25.9 of CVM/SNC/SEP Circular Letter No. 01 of 2007). However, there is still no Brazilian accounting rule recommending the accounting recognition of expenses related to the grant of shares as a form of remunerating employees. The lack of a rule determining that companies account for the effect of share-based compensation plans in the result does not prevent public companies, if they wish, from doing so, as advocated by international standard IFRS 2 - Share-based Payment.

While there is no express determination requiring the accounting of such expenses, public companies that do not voluntarily account for expenses resulting from shares as a form of remuneration of employees must disclose, in a note, at least what would be the amount of the period's result and equity if this accounting had been done.

To meet the disclosure objectives and comply with Article 176 of Law No. 6,404 of 1976, which provides for the disclosure of share purchase options granted and exercised in the fiscal year, the company must disclose, in a note to the accounting statements and ITRs, the following information regarding option plans, always comparatively to previous periods:

1. in the existence of option plans, with a description of their nature and conditions (including eligibility conditions for beneficiaries);

2. the accounting policy adopted;

3. the quantity, description of the nature and conditions (including, when 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 the beneficiaries' eligibility to exercise the right must be indicated (for example, the time elapsed since the date of grant of the option relative to the total time until the beneficiary can exercise the option);

4. 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;

5. regarding exercised options, description of the shares delivered, in quantity, class, and species, and the total and unit exercise price relative to each of the classes and species and their respective market value on the respective dates;

6. the dates or periods in which options may be exercised by beneficiaries;

7. description of any negotiations involving treasury shares to redeem the options, indicating the quantity of shares, by class and species, as well as the value received by the company; and

8. the effect on the statement of the result of the fiscal year and on equity, if this accounting had been done.

9. Present Value Adjustments

The most appropriate methodology to know the value of resources over time is their capitalization at a certain interest rate, so that they refer to a future date. The same applies to the calculation of the respective discount to which the same rate must be applied.

This methodology was introduced into the Brazilian corporate environment through Law No. 11,638 of 2007, and is provided for in the new wording of items VIII of Article 183 and III of Article 184 of Law No. 6,404 of 1976, which deal with the criteria for the valuation of assets and liabilities, respectively, and determine the present value adjustment of long-term assets and liabilities and of short-term assets and liabilities, if in the latter the effects are

relevant.

There has long been the intention to make the present value adjustment mandatory in the evaluation of monetary items, a practice of recognized qualitative potential, and the disclosure of accounting information. CVM Instruction No. 192, of July 15, 1992, was the first attempt to introduce such a concept. CVM Instruction No. 192, of 1992, provided for the evaluation of monetary items and the disclosure of accounting information. However, the application of such a command was restricted to supplementary information in constant purchasing power currency from CVM Instruction No. 191, of July 15, 1992.

The economic environment in which CVM Instructions No. 191 and 192, of 1992, were developed was significantly distinct from the one we experience today. Both inflation rates and interest rates were extremely high, demanding the application of present value adjustment to all pre-fixed monetary items, understood here as those transactions generating rights and obligations payable or receivable in currency, at a future date and in previously determined amounts. It was also discussed whether to apply this procedure to post-fixed monetary items, in order to eliminate possible effects, for example, of subsidized interest.

Thus, the central object of the application of the present value adjustment, at that time, was pre-fixed monetary assets and liabilities, different from the current provision, which expands the object of adjustment to all long-term assets and liabilities and those of short-term, when the effects are relevant. This fact, in itself, already represents a topic for discussion, because what is intended with the present value adjustment of credits and obligations is not the elimination of the presence of an expectation of future yield or charge embedded in monetary assets and liabilities, but rather the need to obtain the values representative of the time of the operation.

Considering the above, in principle, items subject to present value adjustment would include, in addition to pre-fixed monetary assets and liabilities resulting from the execution of operational activity, those resulting from loans, advances, tax provisions, labor provisions, corporate provisions, tax credits (ICMS, PIS, etc.), deferred active or passive income tax, among others.

However, the concept of present value adjustment presupposes firm knowledge of three fundamental elements for its application, namely: (i) the amount to be discounted; (ii) the realization/settlement dates; and (iii) the discount rate. Considering these elements, we must exclude from the cited group some tax credits, when there is no certainty of how much and when it will be realized.

Analogously and in line with the provisions of item 53 of IAS 12 – Income Taxes, we must also exclude deferred income tax (active or passive) regarding which the level of uncertainty of when and/or how much is significant, both for that resulting from tax losses and for those originating from temporary differences.

The methodology for present value adjustment of pre-fixed items also does not include values that, despite being fixed and subject to settlement at a future date, are recognized as classic cases of pure monetary items, such as advances to employees and dividends payable. Such items are not formed in counterpart to revenues, expenses, or non-monetary assets and are already recorded in the currency of purchasing power of the date of the transaction.

It should be noted that credits and obligations subject to post-fixed variations, having their respective values periodically updated, will always be recorded by the value of the currency on the date of disclosure of the financial statements.

The Instruction establishes that, while CVM does not regulate this matter, CVM Deliberations No. 489, of October 3, 2005, and No. 527, of 2007, should be used as guidance. Thus, the discount rate to be used must consider current market evaluations regarding the time value of money and specific risks for the asset and liability, as provided for in item 38 of NPC 22 and items 53 to 55 of CPC 01, respectively approved by CVM Deliberations No. 489, of 2005, and No. 527, of 2007.

Additionally, in items not covered by the Instruction and CVM Deliberations No. 489, of 2005, and No. 527, of 2007, the provisions contained in CVM Instruction No. 191, of 1992, may be applied, provided they are not conflicting with the basic guidance above, such as: (i) regardless of the rate to be used, the quantification of the present value adjustment must be performed on an exponential basis "pro rata die", from the origin of each transaction; (ii) present value adjustments of credits and obligations must be appropriated to the accounts to which they are linked, that is, present value adjustments of credits will correct the values of the respective revenues generated; present value adjustments of obligations will correct the values of the respective assets and expenses incurred; and (iii) reversals of present value adjustments of qualifying monetary assets and liabilities must be appropriated as financial revenues or expenses. When present value discounting of provisions is used, its book value increases each period to reflect the passage of time. This increase is also recognized as a financial expense.

8. Merger, Consolidation, and Spin-off Operations

Section 3 of Article 226 of Law No. 6.404, of 1976, requires that the value of assets and liabilities and, consequently, of equity be adjusted to market prices, whenever there is a merger, consolidation, or spin-off operation that results from or involves an effective transfer of control and that has been carried out between independent parties. Societal reorganizations made within the same economic group are therefore not covered. This procedure brings Brazilian accounting practices closer to international accounting practices regarding the accounting for business combinations or concentrations of business activities.

Law No. 11.638, of 2007, therefore determines that market price evaluation in societal reorganizations must be recorded when there is objectivity for this recognition. In this case, objectivity occurs when the reorganization has resulted from an effective transaction with third parties (independent party) in which the negotiation process validates the market price.

Given that there is still no specific regulation on the application of the procedure provided for in Law No. 11.638, of 2007, the sole paragraph of Article 9 of the Instruction provides for the possibility that these operations carried out during 2008 be temporarily accounted for at their book value, to be adjusted to market value by the end of the current fiscal year, at which point CVM will have issued specific rules establishing the procedures to be adopted.

Notwithstanding, operations for the acquisition of permanent investments in controlled and affiliated companies are subject to the provisions of CVM Instruction No. 247, of March 27, 1996, which provides for a procedure partially convergent with international standards when dealing with the accounting for goodwill or bargain purchase in the acquisition of investments evaluated by the equity method. CVM Instruction No. 285, of July 31, 1998, which amends CVM Instruction No. 247, of 1996, establishes that goodwill for future profitability is only that which exceeds the market value of assets and liabilities.

9. Sponsor Companies of BDR Programs

The trading of securities deposit certificates – BDR, at levels II and III, in the Brazilian capital market allows for the raising of public resources in Brazil by companies established abroad, which implies the need for company registration with CVM. This registration was regulated by CVM Instructions No. 331, of April 4, 2000, and No. 332, of April 4, 2000, amended by CVM Instruction No. 431, of May 29, 2006, which imposes on sponsor companies of BDR programs the obligation to provide information to Brazilian investors in a manner equivalent to other Brazilian companies.

The obligation to reconcile equity and income statement figures was previously requested so that it would be possible to compare the set of accounting information provided by both Brazilian and foreign companies. By determining convergence with international accounting standards, the changes made by Law No. 11.638, of 2007, defined a new standard for comparing accounting information of Brazilian and foreign open companies, which made the presentation of the reconciliation note previously due unnecessary.

Finally, financial statements must continue to be presented in national current currency to preserve the comparability and understandability of accounting information for Brazilian investors.

10. Evaluation of Investments in Affiliated Companies

Law No. 11.638, of 2007, altered the scope of application of the equity method for investments in affiliated companies classified in permanent assets. By eliminating the concept of relevance and establishing the figure of "significant influence," the possibility was created for some investments in affiliated and equivalent companies to be evaluated by the equity method, while other investments may cease to be evaluated by such a method.

In view of this, CVM is presenting the procedures to be adopted in these cases and, concomitantly, conducting a partial review of CVM Instruction No. 247, of 1996, which deals with the matter. In this review, basically, the changes brought by Law No. 11.638, of 2007, are being incorporated. A broad review of CVM Instruction No. 247, of 1996, will be carried out to contemplate the other changes resulting from recent technical pronouncements of the CPC, approved by CVM, as well as to make it fully compatible with international standards.

The figure of "significant influence" introduced by the new wording of Article 248 of Law No. 6.404, of 1976, is understood by international accounting standards as the power to participate in the decisions of the financial and operational policies of the investee, without, however, exercising control over such policies. CVM Instruction No. 247, of 1996, in its Article 5, sole paragraph, exemplifies evidence of influence in the management of the affiliated company:

1. participation in its social deliberations, including the existence of common administrators;
2. power to elect or dismiss one or more of its administrators;
3. relevant volume of transactions, including the provision of technical assistance or technical information essential for the activities of the investee;
4. significant technological and/or economic-financial dependence;
5. permanent receipt of detailed accounting information, as well as investment plans; or
6. common use of material, technological, or human resources.

In the same sense, International Financial Reporting Standards IAS – 28, issued by the IASB, provides that the existence of significant influence by an investor is generally evidenced by one or more of the following forms:

1. representation on the governing body or equivalent management body of the investee;
2. participation in decision-making processes, including participation in decisions on dividends and other distributions;
3. material transactions between the investor and the investee;
4. exchange of management personnel; or
5. provision of essential technical information.

The new Article 248 also introduced the need to evaluate by the equity method investments in other companies that are part of the same group or are under common control.

The figure of "common control" is directly related to the economic essence of the accounting entity and, as such, must be understood. The economic dimension of the entity is delimited as the set of entities, even if legally distinct, that are in the same group or whose control is exercised by the same entity or set of entities. Let us see the issue through an example:

1. company XYZ controls companies A, B, and C;
2. company A is an open company and participates with 10% of the voting capital of companies B and C;
3. thus, company A will evaluate investments in B and C by the equity method, since all are under the common control of XYZ.

Finally, as prescribed by CVM Deliberation No. 207, of 1996, interest on own equity received from investments evaluated by the equity method must be accounted for as a credit to the investment account.

Original signed by
MARIA HELENA DOS SANTOS FERNANDES DE SANTANA
President