Explanatory Note to CVM Instruction 58

EXPLANATORY NOTE TO CVM INSTRUCTION 58.
Ref.: CVM INSTRUCTION NO. 58, of December 17, 1986, which provides for the accounting by open companies that explore the activity of financial leasing.
With the objective of providing greater transparency to the financial statements of open companies that explore the activity of financial leasing, the Securities and Exchange Commission (Comissão de Valores Mobiliários) issued CVM INSTRUCTION NO. 58, of December 17, 1986.
Companies operating in the financial leasing sector have been adopting accounting criteria that, in most cases, have produced anticipations of revenue with the consequent anticipations of asset increases and compensations that tax legislation has sought to obtain as a result of the anticipation of expenses inserted in the financial statements of leasing companies.
According to fundamental accounting principles and the own objectives of financial statements, substance must always prevail over form when both are not coincident. In the specific case of the financial leasing activity, to comply with this rule, the ideal in terms of accounting statements is its recording as a form of financing. Notwithstanding, a preliminary adjustment of the situation resulting from procedures adopted so far is necessary, in order to minimize the financial effects that a sudden modification could cause in the equity and results of lessor and lessee companies and their tax repercussions. This Instruction reinforces this understanding insofar as it enables the disclosure of the correct value of the equity of lessor companies, as a first step towards the complete use of accounting procedures appropriate to the operations practiced by these companies. Thus, assets generally overvalued by the premature appropriation of revenues and also by the registration of losses, are adjusted to their adequate value, that is, to the present value of the future flows of financial leasing portfolios, discounted by the internal rate of return inserted contractually. It should be noted that, in the calculations of the adjustments analyzed and disclosed in explanatory notes to the interim financial statements of June 30, 1986, the effects resulting from income tax paid in advance in the past as a consequence of the tax accounting criteria adopted were considered, practically in all cases. However, as these taxes paid in advance are not always effectively compensated with results of subsequent fiscal years, careful analysis of this situation is required before the effective consideration of such effects in the calculation of the assets of companies that explore the activity of financial leasing. Companies are being allowed to already consider in the result of the current fiscal year the portion of the integral adjustment that belongs to this fiscal year. However, starting in 1987, it will become mandatory for these adjustments to be effectively recorded in the results of each social fiscal year so that the performance is correctly evidenced in the financial statements of these companies. Additionally, the Instruction mentions the need for the company to summarize the accounting criteria being used. This is important so that, as much as possible, a better understanding of the reason and necessity of the adjustments required by this Instruction is achieved. It is also necessary to inform what the value of the 1986 adjustment would be if it were being taken to the result of this social fiscal year, had this procedure been used since the beginning of the year. But, it is recognized that some companies may not be able to carry out this survey for various reasons that must be explained. However, financial leasing companies that are open companies will have the possibility and need to quantify this value, at least in the part relative to the second half of
1986, since they had sufficient information for the evaluation of equity on June 30, 1986. It is worth clarifying, opportunistically, that the accounting procedures now instituted were widely discussed at the Government level and with representatives of the entity that congregates companies in the sector. Finally, the Instruction cites the need for open companies, which are investors in companies that explore the activity of financial leasing, to also correspond in their records, in an analogous manner, to the adjustments accounted for in their controlled or affiliated companies. If the invested companies, however, are closed companies, the open investing companies must adjust the statements of the controlled or affiliated companies so that the investments evaluated by the equity method and the consolidation of financial statements represent the equity position and the result of the investing company in accordance with fundamental accounting principles and, consequently, with the Corporations Law. Signed original by LUIS OCTÁVIO DA MOTTA VEIGA President