Explanatory Note to CVM Instruction No. 346 of September 29, 2000

EXPLANATORY NOTE TO CVM INSTRUCTION NO. 346, OF SEPTEMBER 29, 2000.
Ref.: CVM Instruction No. 346, of September 29, 2000, which provides for the accounting and disclosure of information, by public companies, of the effects resulting from adherence to the Fiscal Recovery Program - REFIS.

The Fiscal Recovery Program – REFIS, approved by Law No. 9.964, of April 10, 2000, allowed companies the opportunity to regularize, through a special payment and installment system, their tax and social security obligations existing until February 29, 2000.

1. On the other hand, adherence to this Program has important implications in the life of these companies, with reflections on the profile of their debts and on the conditions for access to various sources of financing. Among the most relevant characteristics and implications, we highlight:
   a) consolidation and irrevocable confession of all debts related to taxes and contributions administered by the Federal Revenue Secretariat and the National Institute of Social Security, with maturity until February 29, 2000, with waiver of ongoing judicial processes; b) possibility of payment of the consolidated debt based on a percentage of monthly gross revenue or with installment payments over up to sixty months; c) possibility of settlement of amounts corresponding to interest and late fees or official fines, through the use of credits, own or from third parties, related to a tax or contribution within the scope of REFIS and through the use of fiscal losses and negative bases of social contribution, own or from third parties; d) provision of guarantee or, at the company's discretion, listing of assets comprising its patrimony; and e) regularity in the payment of REFIS and other federal taxes and contributions and in compliance with obligations to the Time Service Guarantee Fund - FGTS and to the Rural Land Tax - ITR.

Accounting Aspects

2. Law No. 9.964/2000 allows the settlement of amounts corresponding to interest and late fees or official fines, through the use of own or third-party credits, related to taxes and contributions included within the scope of REFIS and through the use of fiscal losses and negative bases of social contribution, also own or from third parties, based on rates of fifteen percent and eight percent, respectively. As a result, adjustments may arise due to the rates that were originally used for the accounting of deferred tax assets, as well as due to the accounting of deferred tax assets that were not being recognized.

3. On the other hand, adherence to REFIS also implies the calculation and irrevocable and irrevocable confession of all consolidated debts, including ongoing judicial processes. Consequently, differences may also arise between the consolidated balances and the values that were recorded in accounting. In addition, due to the possibility of using third-party tax credits, fiscal losses and negative social contribution bases, differences may arise between the acquisition value and the utilization value of these credits, as well as between the book value and the sale value to third parties.

4. These adjustments and differences, due to their unusual nature and because they present characteristics of non-recurrence, must be presented in the income statement for the period as an extraordinary item (art. 1, item I). It should also be highlighted that since it is not a change in accounting criterion nor a correction of an involuntary past error, any differences arising in the process of adherence to REFIS, in observance of the provisions of § 1 of art. 186 of Law No. 6.404, of December 15, 1976, cannot be treated as prior period adjustments.

5. Regarding the possibility of accounting recognition of the debt included in REFIS at its present value, it is worth clarifying that:
   a) Monetary liabilities are obligations that normally involve the payment of predetermined amounts, based on contract, agreement or declaration. Conceptually, the current valuation of a monetary liability, as well as of a monetary asset, is the present value of the amounts to be paid (or received) in the future. If a liability can effectively be settled by more than one alternative, its current value will be the present value of the smallest of these alternatives. Normally, in the case of current liabilities, the magnitude of the discount tends not to be significant, allowing its presentation at face value, that is, at the value to be paid at maturity. However, the same does not occur with long-term liabilities (and assets), their present value being extremely relevant. b) Although the theoretical argument can be considered quite solid, there are several practical difficulties associated with this issue, such as the choice of rate and term for discounting, which have led regulators, including internationally, to not yet accept its widespread use. The CVM itself, when issuing CVM Deliberation No. 273, of August 20, 1998 on the Accounting of Income Tax and Social Contribution, in line with international standards, did not determine that fiscal assets and liabilities were discounted to present value. It is worth noting that in the case of REFIS there are still two additional components of uncertainty, which are: the amounts of future revenue, which have a direct implication in the term for debt settlement, and the risk of default or non-compliance with the conditions of REFIS, which eliminates the possibility of settlement under the conditions used in the calculation of the present value. c) The convention of Conservatism (also called the principle of Prudence) stipulates that among alternative sets of valuation for equity equally valid, Accounting will choose the one that presents the lowest current value for the asset and the highest for obligations. This understanding, obviously, should not be confused or distorted with the effects of accounting earnings manipulation, but viewed in light of the vocation for safeguarding, care and neutrality that Accounting needs to have, especially regarding the excesses of enthusiasm and valuation by the administration and owners of the entity (see item 6.3 of the pronouncement attached to CVM Deliberation No. 29, of February 5, 1986). d) By the convention of Conservatism or Prudence, active contingencies or contingent gains should not be recorded; only when their obtaining or recovery is effectively assured should they be recognized in accounting. Contingency is a condition or situation whose final result, favorable or unfavorable, will only be confirmed if one or more uncertain future events occur or do not occur. Uncertainty regarding future events can be expressed by a variety of outcomes that, although statistically quantifiable, may, in many circumstances, not reflect an adequate degree of precision,
   considering the available information. In this sense, a possible reduction of the debt included in REFIS, due to its present value, by the conditions of uncertainty involving this gain, may characterize a contingent gain. e) In addition, the convention of Objectivity establishes that “for equally relevant procedures, resulting from the application of the Principles, preference shall be given, in decreasing order: a) those that can be proven by documents and objective criteria; b) those that can be corroborated by consensus of qualified persons from the profession, gathered in research committees or in entities that have authority over accounting principles” (item 6.1 of the aforementioned CVM Deliberation No. 29/86). The CVM, having discussed this matter in qualified forums, concluded that these two requirements are not being fully met. f) the financial statements prepared in accordance with corporate legislation, the adjustment to present value of assets and liabilities is not a widely used accounting practice. However, it constitutes an additional procedure, applicable to all monetary assets and liabilities in statements prepared in constant purchasing power currency. In addition, CVM Advisory Opinion No. 27, of January 27, 1994 expresses the understanding that there is no prohibition in corporate law for the adoption of present value adjustment, however, its application must be made uniformly, covering all asset and liability items subject to this adjustment.

6. Therefore, considering the aspects referred to above, the CVM understood that it should not prohibit the adoption of the concept of present value adjustment, provided that the public company demonstrates having the conditions to comply with all obligations provided for in the Program. In this way, item II of art. 1 establishes that the company must present the amount of its fiscal liability at its possible realization value (present value). However, given the conditions and restrictions imposed by the Program, and considering that the positive economic effects resulting from adherence do not necessarily occur in the short term, it is not prudent to immediately and fully recognize a gain due to the possibility of reducing the debt to its present value. In this case, to comply with the conventions of Conservatism and Objectivity, the Instruction establishes a more prudent criterion for recognizing these gains. According to items III and IV of art. 1, these gains must be deferred, for recognition in the income statement as the company generates the resources necessary to settle the debt and complies with all obligations assumed upon adhering to REFIS.

Disclosure of Information

7. CVM Instruction No. 31, of February 8, 1984, requires the disclosure of any act or fact of a political-administrative, technical, business or economic-financial nature that may influence in a considerable manner: i) the quotation of securities issued by the public company; ii) the decision of investors to trade with those securities; or iii) the determination of investors to exercise any rights inherent to the status of holder of securities issued by the company.

8. In addition, corporate law and the norms of this CVM determine that financial statements, including quarterly information, must be disclosed accompanied by an explanatory note or demonstrative table necessary for the clarification of the equity situation and the results of the period. CVM Deliberation No. 29/86 clarifies that the main objective of Accounting is “to allow, each main group of users, the evaluation of the economic and financial situation of the entity, in a static sense, as well as to make inferences about its future trends” and that this objective must be adherent, in some explicit or implicit way, to what the user considers as important elements for their decision-making process. It also mentions that, “for the achievement of this objective, it is necessary for companies to emphasize the disclosure of all information that allows not only the evaluation of their equity situation and the mutations of this equity but, in addition, that allows the realization of inferences about their future”.

9. Therefore, the adequate compliance with the above-referenced norms implies the revelation of all present and future effects resulting from adherence to the Fiscal Recovery Program. Art. 2 establishes a minimum list of items that must be disclosed together with the financial statements and quarterly information. We highlight, however, that, to comply with CVM Instruction No. 31/84, it is incumbent upon the administrators of the public company to communicate, immediately, to the CVM and the market any act or relevant fact occurred regarding REFIS.

Signed original by
JOSÉ LUIZ OSORIO DE ALMEIDA FILHO
President