Explanatory Note to CVM Instruction 57

EXPLANATORY NOTE TO CVM INSTRUCTION 57.
Ref.: CVM INSTRUCTION NO. 57, of December 17, 1986, which provides for the updating of values in the financial statements of publicly held companies.

Brazilian financial statements have aimed and succeeded, in the form of Article 185 of LAW NO. 6.404/76, in evidencing the consequences of the variation in the purchasing power of the currency on the equity and results of companies, never constituting a cause for the emergence, maintenance, growth, reduction, or elimination of inflationary rates.

The legislator's objective was to keep intact the information intended to serve as a basis for decisions, both by the management levels of the company and by third parties - creditors, government, investors in the securities market (especially) and others.

The non-consideration of the "effects of the modification in the purchasing power of the national currency on the value of the elements of equity and the results of the fiscal year" (emphasis added to the cited Art. 185) of the publicly held company implies the presentation of unrealistic balance sheets and results. Such results become over or under-estimated, depending on the company's equity structure. Companies, especially capitalized ones, are unfairly penalized, including with the risk of significant resource drain.

Especially in this year of 1986, with the chance and appeal for greater capitalization of the publicly held company and with the effective response to the stimulus received, the non-application of LAW NO. 6.404 would be punishing exactly those societies that fulfilled the great objective of strengthening the Brazilian stock market. (There were, only in 1986, until November, Cz$15.5 billion in issuances, of which 91% by the national private capital).

Under these conditions, the Securities and Exchange Commission (CVM), in obedience not only to the legislation in force but also to the fundamental principles of Accounting (see, regarding this, items 5.1 and 5.2 of CVM RESOLUTION NO. 29/86), resolved, within the scope of publicly held companies, to adopt the National Treasury Note - OTN, for the updating of values in financial statements. To avoid distortions, this update takes into account the pro-rata value of the OTN, calculated based on Art. 1 of DECREE-LAW NO. 2.290, of 21.11.86.

However, as can be inferred from the Explanatory Notes to CVM Instructions Nos. 50 and 52 of 1986, the adequate value for updating the balances of fixed assets and equity on 28.02.86 was Cz$99.50 for each OTN, and the use of the value of Cz$106.40 occurred only for homogenization with fiscal legislation. Applying now the entire variation of the OTN from the subsequent period on the Cz$106.40 would mean an overvaluation of the inflationary effect in the financial statements. Therefore, this Instruction defines that the base value for updating is the pro-rata of Cz$99.50.

EXPLANATORY NOTE TO CVM INSTRUCTION 57.
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Thus, the value of the accounting record of the update should be made taking into account the difference between the balances calculated in the form of Article 2 and the values currently accounted for, eliminating, therefore, the effects of the complementary correction (OTN of Cz$106.40).

Given that this difference has as a counterpart a specific result account, it becomes necessary that the balance of the complementary monetary correction, accounted for in the account of "Adjustments of the Economic Stabilization Program D.L. No. 2.284/86", be added to it, so that the global effect of the inflation that occurred after 28.02.86 can be obtained in this result. For example, a company that closed its fiscal year on 31.10.86 and had acquired, in February 1986, a fixed asset for Cz$1,000,000,000.00, would present, after the special monetary corrections (Cz$99.50) and complementary (Cz$106.40), the accounting values of this asset respectively at Cz$1,069,439.40 and Cz$1,143,601.53. The balance of the complementary monetary correction would be Cz$74,162.13. Considering the accumulated percentage until October of the IPC (10.25%), the calculation and accounting record of the value update would be carried out as follows:

Balance on 28.02.86 (at pro-rata OTN of Cz$99.50) 1,069,439.40 Update Index X 1.1025 Accumulated balance per Art. 2 1,179,056.94 (-) Existing balance before update = 1,143,601.53 Value to be recorded (§ 1 of Art. 2) 35,455.41

Effect of Inflation on the Result from March to October:
Complementary Monetary Correction 74,162.13
Update according to calculation above 35,455.41 Effect on the Result from March to October/86 109,617.54

This effect is exactly equal to 10.25% on 28.02.86, of Cz$1,069,439.40. To avoid rectification of already registered values of depreciation, write-downs, and other realizations, the maintenance of the values already accounted for (based on the OTN of Cr$106.40) is admitted, because, by updating the accounts of fixed assets and equity and their corrections, the effects of the small existing differences are eliminated in a practical manner.

The updating of interim results is only a technically correct procedure when it does not produce an effect on the net profit of the fiscal year. In this way, its adoption at this moment was sought to be avoided, taking into account, among other things, that this procedure would require more detailed standardization.

EXPLANATORY NOTE TO CVM INSTRUCTION 57.
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Debts and credits in OTN to be settled after 28.02.87 should not undergo update only in March 1987, registering only at that moment the effect of the monetary variation that, economically and accountingly, belongs, by the accrual basis, to an entire preceding period. It is necessary, for compliance with accounting principles, and consequently to the Companies Law, that these items undergo update proportional to the variation incurred even if the formalization of the alteration of the nominal value of the OTN occurs on 01.03.87.

CLOSING OF THE FISCAL YEAR OUTSIDE 31/12 MAY CAUSE DISTORTION

CVM INSTRUCTIONS NOS. 1/78 and 15/80 already determine that, for the purposes of equity equivalence of consolidation, the publicly held company must promote adjustments in the financial statements of its controlled and affiliated companies when these follow accounting criteria different from those of the investing company. As a reinforcement to the specific situation of the moment, this obligation is recalled for the hypothesis that the invested societies may not be following the monetary updates determined for credits, fixed assets, obligations, and equity.

Finally, it is worth remembering that the CVM was given the competence to issue norms on financial statements and accounting standards of publicly held companies, with the objective of providing the securities market with reliable information that allows for a correct analysis of the financial situation of these companies.

For companies with the closing of the fiscal year outside the date of December 31, there may, unfortunately, inaccuracy regarding the result of each period, for which the attention of each user of their financial statements is called.

RIO DE JANEIRO, DECEMBER 17, 1986.
Original signed by
LUIS OCTÁVIO DA MOTTA VEIGA
President