Explanatory Note to CVM Instruction No. 108

EXPLANATORY NOTE TO CVM INSTRUCTION NO. 108/89.
Ref.: CVM Instruction No. 108/89 of 12/04/89, which provides for changes introduced in CVM Instruction No. 64, of 05/19/87, which regulates the preparation and publication of supplementary accounting statements in currency of constant purchasing power.

INTRODUCTION
The various modifications occurring in the Brazilian economy during the current 1989 fiscal year, altering the monetary standard, extinguishing and subsequently reintroducing the system of monetary correction of financial statements, induced the need for the CVM to make constant adjustments to the rules on the preparation and publication of supplementary accounting statements, provided for in CVM Instruction No. 64, of May 19, 1987. Such modifications were addressed in CVM Instructions No. 97, of 04/27/89 and CVM No. 101, of 07/17/89, as well as the orientations contained in CVM Circular Letter No. 018/89, of 07/28/89. Given the occurrence of the regulation issued by the Federal Revenue Secretariat, starting with the discipline of monetary correction of financial statements, for tax purposes, by Law No. 7.799, of July 10, 1989, it is necessary to unify procedures to facilitate the preparation and disclosure of economic-financial information of open companies.

MONETARY STANDARD
With the creation of the National Treasury Bonus (BTN), replacing the National Treasury Obligation (OTN), as well as the rules defined for its update, the BTN was adopted as the monetary standard for the purposes of the correction procedures instituted by CVM Instruction No. 64, of 05/19/87. Thus, this Instruction maintained the provisions of CVM Instruction No. 101, of 07/17/89, regarding the application of the BTN as an indexer for the purpose of monetary correction of supplementary accounting statements, in the same manner established in Law No. 7.799, of 07/10/89.

CORRECTION CRITERIA
This Instruction maintains the two criteria introduced in CVM Instruction No. 101/89, presenting one more option, which has already been used by some open companies, authorized by the CVM.
Under these conditions, the following criteria may be used for the bookkeeping of transactions in the BTN monetary standard:
a) Fiscal BTN (daily) for all transactions; b) Average Fiscal BTN, also for all transactions; or c) Mixed criterion, where transactions involving accounts subject to monetary correction provided for in tax legislation are in daily BTNf and the others in average BTNf. The last criterion, like the first, allows the company to use only one "Auxiliary Ledger in BTNf". In addition, it facilitates the preparation and disclosure of information, both for tax purposes and for compliance with CVM rules, without any distortions. The method of calculating the average BTNf is in accordance with tax norms, avoiding duplication of controls.

PRESENT VALUE ADJUSTMENTS
The adjustments to be made to credits and obligations, with the objective of purging the inflation embedded in term operations, presents two options for applying the present value discount rate. The first alternative is the rate practiced by the company in its transactions, which confers better understanding of the values involved. However, due to the difficulties that may arise for its perfect identification, particularly in operations with suppliers, a second option is presented: the rate of variation of the value of BTNf in the month of the end of the period - that is, the variation between the BTNf of the last day of the previous month and the BTNf of the last day of the month of the balance sheet. The use of the "pro-rata" day criterion aims to adjust the value according to the days to be elapsed until the maturity date of the credit or obligation, based on the adopted discount rate.

GAINS AND LOSSES ON MONETARY ITEMS
Accounts relating to gains and losses on monetary items and present value adjustments provided for in CVM Instruction No. 64/87 are much better presented, with the addition of the inflation rate, when reducing the values to which they refer. The Explanatory Note of that Instruction already provided for this reclassification. Thus, losses on customers should be considered as reducers of sales revenues, gains on suppliers will reduce the cost of products sold, losses on salary advances and gains with salaries and social charges payable will increase and reduce, respectively, personnel expenses, etc. The same effect will occur with present value adjustments of customers, suppliers and other pre-fixed monetary items that contain overvaluation due to the expectation of inflation and that are subject to such adjustments.

FINAL PROVISIONS
Considering that this Instruction encompasses all the provisions of CVM Instruction No. 101/89, as well as including other alternatives and procedures more consistent with the recent changes in the relevant legislation, it was decided to revoke said Instruction, replacing it with CVM Instruction No. 108/89. Original signed by MARTIN WIMMER President