Ofício-Circular CVM/SNC/SEP 02/07

OFÍCIO-CIRCULAR/CVM/SNC/SEP/Nº02/2007
Rio de Janeiro, May 18, 2007.
SUBJECT: Public Hearing Notice on consolidated financial statements based on international accounting standards

Dear Directors of Investor Relations and Independent Auditors,

The Securities and Exchange Commission (CVM) has opened a public hearing for the draft instruction that provides for the preparation and disclosure of consolidated financial statements, based on the international accounting standard. This instruction aligns with the process of convergence with these international standards while allowing, during the period from 2007 to 2009, the option to present consolidated statements according to the standards of the International Accounting Standards Board – IASB, and sets the fiscal year ending in 2010 for Brazilian publicly-held companies to mandatorily adopt international accounting standards.

Given its importance, the CVM believes that all factors recommend the disclosure of consolidated financial statements by Brazilian publicly-held companies under the set of international accounting standards issued by the International Accounting Standards Board - IASB. These consolidated statements, universally considered more suitable for the analysis of securities, are provided for in our corporate law and do not produce any material effects on shareholders' rights, allowing for different treatment of individual financial statements. Furthermore, the incentive to converge Brazilian accounting standards with those referenced in the international environment is based on the clear need for comparability of financial statements of companies seeking resources available in the global financial market and the consequent need for alignment with the accounting standards that support the preparation of this information.

Therefore, we are forwarding a copy of the hearing notice requesting that suggestions and comments regarding this draft instruction be sent, by June 30, 2007, to the Superintendence of Accounting Standards and Auditing, via email: AudpublicaSNC0207@cvm.gov.br or to Rua Sete de Setembro, 111/27th floor – Centro- Rio de Janeiro – CEP 20050-901.

Sincerely,

Original signed by Original signed by
ELIZABETH LOPEZ RIOS MACHADO
Superintendent of Corporate Relations
ANTONIO CARLOS DE SANTANA
Superintendent of Accounting Standards and
Auditing

Deadline: June 30, 2007

The Securities and Exchange Commission – CVM submits to Public Hearing, in accordance with art. 8, § 3, I, of Law No. 6,385, of December 7, 1976, the draft Instruction that provides for the preparation and disclosure of consolidated financial statements based on the international accounting standard.

1. Introduction

The issuance of a norm that allows publicly-held companies to adopt, in their consolidated financial statements, international accounting standards until the fiscal years ending on December 31, 2009, when this adoption would become mandatory, fits into the strategy adopted by the CVM for some time with the aim of having the Brazilian capital market follow the international movement towards the unification of accounting standards.

The incentive to converge Brazilian accounting standards with those referenced in the international environment is guided by the clear need for comparability of financial statements of companies seeking resources available in the global financial market and the consequent need to maintain a flow of quality information over time. In this context, one of the indispensable conditions for raising resources in international markets is the disclosure of financial statements with a high degree of quality and transparency, so that favorable conditions are produced that benefit the market as a whole, through the reduction of investor risk and the cost of capital for companies. For companies and the Brazilian market to be adequately inserted in this international context, it is necessary for the regulatory body to promote, within its competence, the convergence of the Brazilian accounting standard with the international one.

The reform of the norms of the Companies Law regarding company accounting has been proceeding in the National Congress and, it is hoped, will be concluded shortly. This, however, does not prevent the CVM, having competence to regulate the accounting standard for consolidated statements, from doing so immediately regarding them. And the cost that may result from this movement seems to be more than compensated by the benefits that Brazilian companies could reap from facilitating international investors' access to their consolidated statements in an international standard. On the other hand, the current stage of development of our capital market already authorizes, in the opinion of the CVM, the imposition of such a cost, as more and more local issuers raise resources here applied by foreign investors.

For these reasons, the CVM believes that all factors recommend the disclosure of information by Brazilian publicly-held companies under the set of international accounting standards issued by the International Accounting Standards Board - IASB. These statements, universally considered more suitable for the analysis of securities, are provided for in corporate law and do not produce any material effects on the economic rights of shareholders, which allows them to be treated differently from individual financial statements, which serve as the basis for determining the relationships between companies and their shareholders.

The aspects that justify the adoption of the international accounting standard for consolidated statements are presented below and demonstrate that the evolution brought by the globalization of markets must be followed by the construction of national and world institutions that can regulate it. In the transition phase in which we find ourselves, there is still an evident comparative disadvantage regarding the quality of accounting information currently produced by Brazilian publicly-held companies, with the consequent risk of disapproval or requirement of other statements by global investors.

2. International Regulation

The power supporting international accounting regulation originated in the rapprochement between the International Accounting Standards Board – IASB and the International Organization of Securities Commissions - IOSCO, of which Brazil has been a participant since its inception, which led to the reformulation, in 2000 (Sydney Resolution), not only of a set of IASB pronouncements accepted and endorsed by IOSCO, but also of the IASB itself, which aimed, among other issues, to obtain the necessary representativeness at the global level. This process resulted in the obligation imposed by the European Union on its member countries to adopt, from 2005 onwards, the international standards issued by the IASB for their consolidated statements, reaching in this intent about 7,000 publicly-held companies.

In the same direction, the rapprochement with the North American capital market was made through the Memorandum of Understanding (Norwalk Agreement) signed between the IASB and the US Financial Accounting Standards Board - FASB, in 2002, under the auspices of the Securities Exchange Commission - SEC, when an agenda was created for the convergence in the short and medium terms of their respective pronouncements. Thus, in late February 2006, the FASB and the IASB issued a Memorandum of Understanding – MoU establishing a set of adequate conditions so that by 2008 the requirement for reconciliation of IFRS to US GAAP in the financial statements of foreign companies registered in the US would be removed.

On another front, the Committee of European Securities Regulators - CESR - will admit to European markets only issuing companies from other countries whose accounting standards are equivalent to International Financial Reporting Standards - IFRS (standards issued by the IASB), that is, only when such accounting standards meet the requirements established for the preparation of reports and forms required by European stock exchange regulatory bodies. It is noted that the application of this requirement was recently extended until 2009, with the aim of establishing a two-year transition period for the European Commission (European Commission – EC) to monitor the convergence process. Moreover, this Commission also considers the need for foreign authorities responsible for market regulation in their countries to publicly commit to a detailed work program that facilitates the convergence of their accounting standards with IFRS.

The year 2009 was adopted in a manner consistent with IASB actions, which does not foresee the applicability of new IFRSs before that year, nor the substantial reformulation of existing standards until January 1, 2009, so that, thus, there is a stable reference base for the adoption of international accounting standards. The horizon for FASB/IASB convergence is also expected for 2009, although there are differences regarding the accounting topics to be addressed throughout the process and despite the complexity of minor aspects.

In the current situation, Brazilian publicly-held companies whose securities are traded on American exchanges adopt US GAAP (Generally Accepted Accounting Practice), based on pronouncements issued by the Financial Accounting Standards Board – FASB. There are also Brazilian publicly-held companies in the regulated markets of the European Union (European Union – EU), which now comprises 27 countries. It should be added that, in total, 100 countries, including Russia, Canada, Australia, New Zealand, Singapore, Hong Kong, and Japan, already have IFRSs as the main reference in their process of regulating accounting standards.

3. The CVM's Effort in Convergence with IFRSs

The main effort of the CVM is currently focused on reformulating the legal framework provided for in the Brazilian corporate law, in order to bring within the scope of the accounting standards issued by the CVM the capacity to continuously improve the regulation on the production and disclosure of accounting information. The reference structure of Brazilian accounting standards, in this reform process, are the pronouncements and interpretations emanating from the International Accounting Standards Board (IASB), an organization that brings together the representative entities of almost all countries participating in the global market, including Brazil, which has been a participant since its foundation. This effort is currently supported by the Accounting Pronouncements Committee - CPC, constituted as an organ similar to the IASB and FASB for the specific aspects of the Brazilian accounting environment.

Within the scope of the legal reform of accounting regulation, the CVM has been supporting the Bill No. 3,741/00, currently proceeding in the Chamber of Deputies, which aims to modernize the provisions emanating from Law 6,404/76, mainly those contained in its chapters XV, XVI, XVIII, and XX, which bring the accounting matter to the new reality of the world economy, taking into account the process of market globalization, as well as the evolution that has occurred in accounting standards at the global level.

The origin of this project dates back to the Capital Market Development Plan, approved by the CVM in October 1988. Subsequently, with the purpose of implementing this Development Plan, the reformulation of Laws 6,385 and 6,404 was proposed, initiating a process that has not yet been completed in its aspects of reformulating the accounting framework.

The core of the changes in corporate law lies in the segregation between the provisions of tax or special law and the accounting standards that support information for the investor (§ 2 of art. 177) and the international reference for the definition of these standards (§ 5 of art. 177). Regulatory efforts for convergence are being made on three fronts: i) Bill No. 3,741; ii) CVM norms that approve pronouncements aligned with international standards; and iii) the issuance of a circular informing the understanding of the CVM's technical area on Brazilian accounting practice, including transition aspects.

In addition to the reasons mentioned and which undoubtedly evidence a growing movement towards convergence, it is revealed to us, at this first moment and as a way to maintain the insertion of Brazilian publicly-held companies in the international capital market and for the other reasons presented below, the need for the adoption, by these companies, of a set of accounting practices more suitable and thus considered international, such as IFRSs, in order to promote the preparation and disclosure of high-quality consolidated accounting information. Let us see the reasons:

a) the commitment to convergence signed by IOSCO, of which the CVM is a participant; b) it is preferable for companies that already prepare their standards according to American standards, even if by reconciliation or "adaptation", because the American accounting approach is related to a legal and infra-legal mesh that is its own, which makes its accounting standards intertwined with the principles of American corporate law, commercial law, and securities law; c) the IASB has its standards, the IFRSs, elaborated with independence, and is a private research entity managed by 14 members chosen by the 22 trustees of the IASC, and has its consultation and discussion process with wide global participation, so that it is not dominated by a particular geographic interest while American standards issued by the FASB, followed by companies registered in the US, have their enforcement power derived from the SEC and from the American Congress; d) the cost of following the American standard is, overall, higher than the cost of following IFRS standards, due to the hiring of audit services for adaptations and reconciliations, the larger volume of American standards compared to international ones, the greater difficulty in capitalizing knowledge of American standards, again compared to international standards; e) the issuance of accounting reports also has institutional and national influence, given that they are issued in a specific cultural environment, and therefore it is possible to infer that they are qualified differently by investors, which reinforces the need for a single standard to be followed by companies seeking resources in the international market, for the benefit of the global image of Brazilian publicly-held companies and the strengthening of educational infrastructure.

4. Consolidated Financial Statements

These statements are currently regulated by CVM Instruction No. 247, of March 27, 1996, with the alterations introduced by CVM Instruction No. 285, of July 31, 1998. These norms emanate from the CVM's power in regulating the evaluation of investments in affiliated and controlled companies and on the procedures for preparation and disclosure of consolidated financial statements, provided for: (i) in item "c" of paragraph III of article 248 of the corporate law, which delegates to the CVM the norms on the application of the equity method in the case of a publicly-held company; and, (ii) in the sole paragraph of article 249 of Law No. 6,404/76, which allows the CVM to issue norms on companies whose statements should be covered in the consolidation.

This set of norms intends, in summary, to present to the reader of the financial statements an aggregated view of the financial position of the controlling company and other controlled companies from the concept of control, which here must be understood as the capacity of the controller to direct the activities of its controlled company(ies) and to control the benefits and bear risks arising from this activity.

In addition to specific aspects regarding consolidated accounting information, paragraph 3 of article 177 of the corporate law gives the CVM power to regulate on the financial statements of publicly-held companies, as well as, in the same sense, items I, II, and IV of § 1 of article 22 of Law No. 6,385/76, as transcribed below:

§ 1 It is the responsibility of the Securities and Exchange Commission to issue norms applicable to publicly-held companies regarding:
I - the nature of the information they should disclose and the frequency of disclosure; II - management report and financial statements; (...)
IV - accounting standards, reports, and opinions of independent auditors;

Consolidated statements, of high informational power and subject to regulation by the CVM, in the specific case of publicly-held companies, have the additional advantage of not serving as a basis for tax assessment, nor for the distribution of results or other corporate effects, which does not happen with individual statements. Furthermore, consolidated statements are the statements primarily used for the disclosure of accounting information in the main international markets.

Therefore, there is the possibility of establishing a set of norms capable of regulating consolidated financial statements outside the scope of the accounting standards expressed in corporate and tax law, which at this moment do not have sufficient flexibility to keep up with the evolution and growing complexity of accounting within the capital market. These norms could then be aligned with the set of international standards issued by the IASB, by virtue of international commitments assumed by the CVM and the Brazilian government within the framework of the G-8 countries (promote international accounting standards for economic growth - G8 Declaration), and by the interest in supporting Brazilian publicly-held companies in raising resources from international markets.

It should also be noted that within the financial sector, the Central Bank of Brazil took the initiative to establish a work program with the objective of complete adherence to standards issued by the IASB and IFAC with effects on financial statements, up to 2010 (Bacen Communication 14,259/06).

5. Proposal for Discussion

It is intended, in the convergence process, a "de facto" realization and not only "de jure", as would occur if only the content of national norms were reformed and there was no effective application of internationally recommended procedures. In this direction, for such convergence of fact and law to occur, it is necessary, and even indispensable, the involvement of all entities and instances linked to accounting, in a common effort towards the evolution of our accounting practices with those internationally established.

Fostering Growth and Promoting a Responsible Market Economy – A G8 Declaration (Evian 2003)

The convergence effort currently being made, by itself, does not solve the problem of building an environment conducive to attracting capital, making it necessary to go further, with the objective of stimulating the adherence of all national companies to a superior informational standard, currently represented by international accounting standards. A possible solution for the need to evolve current accounting standards could pass through a process that stimulated the early adoption, by companies participating in the securities market, of the international accounting standard, and which, in turn, would begin and end in the demonstration of the influence that this level of information can achieve on investor confidence. Furthermore, in this first phase, it is necessary to decisively and urgently influence the option that Brazilian companies have to adopt or not international accounting standards (IFRSs) in the preparation and disclosure of consolidated accounting information and which, in turn, are those of most interest to market analysts and investors.

In this sense, the CVM is submitting to public hearing, aiming to promote a broad debate with all interested agents in this convergence process, the draft instruction, attached, allowing publicly-held companies to prepare consolidated financial statements until the 2009 fiscal year, adopting, for this purpose, the international accounting standard in substitution to the accounting standard currently used. Additionally, explanatory notes to these consolidated statements would be disclosed reconciling consolidated profit or loss and equity with those presented in the individual financial statements.

The CVM is particularly interested in obtaining the market's manifestation regarding the convenience and opportunity of this regulation, as well as regarding the possible reflections on the cost/benefit relationship of its implementation.

It is worth noting that, during this period, the CVM will intensify the process of review, updating, and issuance of its accounting standards, applicable also to the individual financial statements of publicly-held companies, aiming to accelerate the process it has been adopting of convergence with the international standard.

6. Deadline and Submission of Suggestions

Suggestions and comments, in writing, should be sent, by June 30, 2007, to the Superintendence of Accounting Standards and Auditing, preferably via email: AudpublicaSNC0207@cvm.gov.br or to Rua Sete de Setembro, 111/27th floor – Centro- Rio de Janeiro – CEP 20050-901.

The suggestions and comments received will be considered public access, and the CVM may disclose them, in summary or in their entirety.

Rio de Janeiro, May 15, 2007.
Original signed by
MARCELO FERNANDEZ TRINDADE
President

CVM INSTRUCTION NO. XX, OF XX OF XXXXX OF 2007.

Provides for the preparation and disclosure of consolidated financial statements, based on the international accounting standard.

The PRESIDENT OF THE SECURITIES AND EXCHANGE COMMISSION - CVM makes public that the Collegiate Board, in a meeting held on XXXXXX, based on the provisions of the sole paragraph of Article 249 of Law No. 6,404, of December 15, 1976, and items I, II, and IV of the sole paragraph of Article 22 of Law No. 6,385, of December 7, 1976, and

CONSIDERING:
a) the importance and necessity that Brazilian accounting practices be convergent with international accounting practices, either due to the increase in transparency and reliability in our financial information, or by enabling, at a lower cost, access of national companies to external financing sources; b) that the CVM has been developing efforts since the last decade to enable this convergence, either through the improvement of its regulations or by presenting the Executive Branch with a draft bill, now transformed into Bill No. 3,741/2000; c) that markets and regulators of other countries and international blocks, engaged in this process, are increasingly seeking to develop mechanisms restricting access for those countries that have not yet adopted or committed to adopting international accounting standards; and d) that it is essential to find alternatives to accelerate this convergence process, without imposing extraordinary costs without adequate return, and establishing a reasonable deadline for publicly held companies to prepare.

RESOLVED:

Art. 1st - Publicly held companies shall, from the fiscal year ending in 2010, present their consolidated financial statements adopting the international accounting standard issued by the International Accounting Standard Board – IASB.

Sole Paragraph. The provisions of the caput of this article also apply to the consolidated statements of the previous fiscal year presented for comparative purposes.

Art. 2nd - It is optional for publicly held companies, until the 2009 social fiscal year, to present their consolidated financial statements with the adoption of the international accounting standard issued by the International Accounting Standard Board – IASB, in substitution for the Brazilian accounting standard.

Sole Paragraph - In an explanatory note to the consolidated financial statements, without prejudice to the provisions of Art. 31 of CVM Instruction No. 247, of March 27, 1996, the effects of events that caused differences between the amounts of controlling shareholders' equity and net income or loss must be disclosed, in the form of a reconciliation, in comparison with the corresponding amounts of consolidated equity and net income or loss, due to the adoption of the provisions of this article.

Art. 3rd - Independent auditors must issue an opinion on the adequacy of the consolidated financial statements to international accounting standards, as well as on the sufficiency and adequacy of the explanatory note referred to in the sole paragraph of Art. 2nd.

Art. 4th - This Instruction enters into force on the date of its publication in the Official Gazette of the Union.

MARCELO FERNANDEZ TRINDADE
President