Explanatory Note to CVM Instruction No. 189 of June 25, 1992

EXPLANATORY NOTE TO CVM INSTRUCTION NO. 189, OF JUNE 25, 1992.
Ref.: CVM Instruction No. 189, of June 25, 1992, which establishes the accounting treatment to be given to the revaluation reserve, including taxes and contributions levied thereon, in consonance with the effects of Law No. 8,200, of June 28, 1991.

INTRODUCTION
One of the basic functions of the Securities and Exchange Commission (CVM) is to guide participants in the securities market, notably issuers and independent auditors, in order to bring increasingly better information to the market. For this purpose, its actions have been intense in ensuring that accounting statements adequately present the financial position and results of open companies, as they are an important part of the set of information that subsidizes the decision-making process for directing financial resources to various sectors of the economy.

This quasi-didactic function has, over the years, gradually contributed to the establishment of a new culture and a new concept in the dissemination of information from open companies.

In the search for the restoration of the value of the assets of open companies operating in Brazil, which, due to the various economic plans experienced, ceased to present, in the vast majority, the amount equivalent to the original investments and their subsequent increases or decreases, expressed in currency of constant purchasing power, this Commission sought to establish criteria and define guidelines for accounting for the effects of variation in the purchasing power of the national currency in the past, centered on the Fundamental Principles of Accounting, and evolved in the direction that the information disclosed, from then on, respected technical criteria for asset measurement more adequate than those previously practiced by companies.

In light of the foregoing, and given the expiration of the deadline granted to open companies for the application of the provisions of Article 10 of CVM Instruction No. 167, of December 17, 1991, established in the "caput" of Article 2 of CVM Instruction No. 176, of February 6, 1992, this Commission, through CVM Instruction No. 189, of June 25, 1992, determines that the revaluation reserve shall henceforth represent, solely and exclusively, the real increase in the value of the elements of permanent assets, net of taxes and contributions levied on this asset increase.

LEGAL ASPECTS OF THE CHANGE IN THE VALUE OF THE REVALUATION RESERVE The provisions of Article 132, and its subsections, of Law No. 6,404, of December 15, 1976, determine that the General Assembly is responsible for deliberating on matters expressly specified therein, including the examination, discussion, and voting on the company's accounting statements.

Similarly, paragraph 3 of Article 182 of the same Law, which deals with the revaluation reserve, stipulates that it must be recorded based on a report prepared in accordance with Article 8, approved by the General Assembly.

Since the General Assembly assumes characteristics that typify it as a body of the company, its effective and regular installation makes it capable of expressing the sovereign social will. It follows from this assertion that, once the matters submitted to it, including the accounting statements, are approved, they become a perfect and completed legal act.

It must, however, be noted that the General Assembly's deliberation concerning the approval of the aforementioned matters does not confuse itself with the manner in which the company should disclose the values of shareholders' equity. Thus, the General Assembly will approve the value pertaining to the evaluation report. The presentation format of the corresponding revaluation reserve, however, must, in accordance with the provisions of Article 177 of Law No. 6,404/76, adhere to generally accepted accounting principles, now known as fundamental principles of accounting.

The sovereignty of the General Assembly, with the adoption of the intended procedures, will in no way be tarnished, but rather the bookkeeping of the reserve in question will be carried out in a manner that confers greater transparency to the company's financial and asset situation.

It should be highlighted, opportunistically, that there will be no disrespect for the new value of the asset, ascertained by the evaluation report, in accordance with the provisions of Article 8 of the corporate law, which was the subject of deliberation by the General Assembly. The accounting method aimed at, it is necessary to emphasize, concerns the disclosure of accounting information, in no way discrepating from this value, whose approval was effected therein.

The accounting of the revaluation reserve, in this way, insofar as it will facilitate the full understanding of such statements, will provide better visualization of the financial and asset situation of the society. The "full disclosure," adopted by the law as a true principle governing negotiations in the capital market, requires that the company, in its accounting statements, because these constitute the form of communication between it and investors, convey with the greatest accuracy and fidelity possible the values demonstrating its results.

ACCOUNTING OF THE REVALUATION RESERVE AS A REAL INCREASE IN THE VALUE OF THE ASSET On several occasions, open companies, due to the compulsory use of inflationary indices that did not adequately reflect the variation in the purchasing power of the national currency, performed the revaluation of their assets as a way to compensate for the loss in the quality of information regarding the asset situation, often by simply monetarily updating the asset using adequate indices, disregarding that revaluation is a change in accounting criterion, i.e., it is the alteration of the historically corrected monetary cost by the replacement cost of the asset.

In light of this, this Commission understands that, in order to restore the true foundation of revaluation, the company must transfer, to accumulated profits or losses, the portion corresponding to the complementary monetary correction of the IPC relative to the BTNF of the revalued asset, and, to the special capital reserve, the portion related to special monetary correction by the INPC.

It is necessary to emphasize that, although the aforementioned transfers occur during the 1992 fiscal year, they must be effected on the balance of the revaluation reserve existing on December 31, 1991, considering the respective monetary updates and portions made, in accordance with the provisions of Law No. 8,200, of July 28, 1991, and CVM Instructions No. 167/91 and 176/92.

The transfers of the value of the revaluation reserve to accumulated profits or losses and to the special capital reserve, through the posting of respective values to the debit of a contra-account of that reserve, provides the company's accounting with the maintenance of effective control of the revaluation reserve to be realized, both for corporate and tax purposes.

Furthermore, in accordance with the provisions of Article 1 of CVM Instruction No. 167/91, the portion concerning the complementary monetary correction of the IPC relative to the BTNF must be transferred to accumulated profits or losses, net of corresponding taxes and contributions.

POSITIONING OF TAXES AND CONTRIBUTIONS LEVIED ON THE REALIZATION OF THE REVALUATION RESERVE Regarding taxes and contributions levied on the revaluation reserve, this Commission is determining that these be provisioned through the use of a contra-account of the value of the respective reserve. For cases of revaluation reserve already used in the incorporation into social capital or for any other purpose, the provision for taxes and contributions potentially remaining must be effected to the debit of accumulated profits or losses.

This change in accounting practice, in the understanding of this Commission, aims to eliminate from shareholders' equity values that, in reality, represent the company's liabilities, including reaching open companies that incorporated the unrealized revaluation reserve into social capital, without provisioning taxes and contributions, as previously provided in Article 11 of CVM Instruction No. 167/91.

The provisioning of taxes and contributions levied on the revaluation reserve, through the posting of respective values to the debit of a contra-account of that reserve, provides the company's accounting with the same benefits, both in terms of corporate and tax order, already mentioned when analyzing the contra-accounts demonstrating the transfers made to accumulated profits or losses and to the special capital reserve, due to the results obtained by complementary monetary correction and special monetary correction.

For the revaluation reserve already capitalized or already used for any other purpose, there is no question of a contra-account of social capital, since its value can only be reduced in accordance with Article 173 of Law No. 6,404/76, leaving no other alternative than to effect the provisioning of any remaining taxes and contributions in shareholders' equity to the debit of accumulated profits or losses, treating them, finally, as adjustments of prior periods, due to the evolution of accounting practice.

One might question, in another way, whether the preparation of an explanatory note containing the value of taxes and contributions levied on the constituted revaluation reserve would not be sufficient information for the reader of the accounting statements, avoiding the negative impact for companies that were adopting correct accounting practice. However, it is the understanding of this Commission that explanatory notes should not rectify or contradict the values presented in the accounting statements, except temporarily, but rather clarify or detail them, becoming incremental information.

On the other hand, the presentation of the revaluation reserve by its net value of corresponding taxes and contributions is in concordance with the global trend, as an example of the preferential treatment stipulated by E 33 – “Exposure Draft” – 33 of the I.A.S.C. (International Accounting Standards Committee). Entity that acts with the objective of achieving the standardization of international accounting standards.

Another factor that reinforces this positioning is the growing movement of globalization of markets and businesses. This phenomenon has implied an extraordinary increase in the issuance of securities at the international level, and especially in countries of emerging industrialization and of recent and accelerated process of economic liberalization. Foreign investors, to effect the acquisition of securities representing the social capital of Brazilian open companies or the opening of credit lines to our financial institutions, have demanded increasingly the disclosure of accounting statements observing fully the “full disclosure” and international accounting standards.

SPECIAL CASES OF PROVISIONING OF TAXES AND CONTRIBUTIONS REVALUATION OF LANDS Regarding the reserve constituted based on the revaluation of lands or other assets whose realization has no predictable deadline, this Commission recommends the disclosure of an explanatory note evidencing the value of the Long-Term Payable Liability that is in these conditions.

REVALUATION IN INCENTIVIZED COMPANIES
Beneficiary societies of resources originating from tax incentives must observe, when provisioning taxes and contributions levied on the constituted revaluation reserve, the period legally stipulated for the enjoyment of those incentives, disregarding possible extensions not yet defined. If the said extension occurs, the company must reverse the amount provisioned against the contra-account of the revaluation reserve, up to the limit of taxes and contributions that will cease to be collected due to the new fixed term.

REALIZED REVALUATION RESERVES TO THE ACCOUNT OF THE PERIOD RESULT The procedures applicable to the realization of revaluation reserves undergo alteration, no longer admitting the transfer of the realized revaluation reserve to the period result, aiming to homogenize the accounting procedures adopted by open companies.

PRESENTATION OF THE VALUE OF THE REVALUATION RESERVE The presentation of the value of the transfers of the revaluation reserve and the respective taxes and contributions must be carried out by the open company, through the use of specific contra-accounts, with internal use subtitles, which allow informing, separately, the balances of the revaluation reserve for tax purposes, the values transferred to the accounts of special capital reserve or accumulated profits or losses, by nature, and the taxes and contributions levied thereon, as in the following example:

REVALUATION RESERVE
(credit balance – accounting)
.......................................................................................
$
0

REVALUATION RESERVE
(credit balance – tax control).
............................................................................
$
00

(-) TRANSFER COMPLEMENTARY CORRECTION
(debit balance – net of taxes)
..................................................................
$
0

(-) TRANSFER SPECIAL CORRECTION
(debit balance)
......................................................................................................
$
0

(-) PROVISION FOR TAXES AND CONTRIBUTIONS
(debit balance – 50% of 40)
................................................................................
$
0

EFFECTS ON THE CONSOLIDATED FINANCIAL STATEMENTS OF THE PARENT COMPANY Opportunistically, this Commission determines that the effects of the application of the aforementioned procedures must be reproduced in the balance sheet of the invested company or directly in the respective shareholders' equity accounts.

GENERAL CONSIDERATIONS
It should be recalled that, in accordance with the provisions of the “caput” of Article 1 of CVM Instruction No. 170, of January 3, 1992, the amount that remains in the revaluation reserve, after the aforementioned transfers, may not be used to increase social capital or absorb losses, while not realized.

Originally signed by
ROBERTO FALDINI
President