KPMG Brazil - Office Directory · (IAS 2, SIC 1) (Law 6404/76, NPC 02 IBRACON, NBC-T-4)(ARB 43, I78, FIN 1) Cost may be determined based on a FIFO, average cost, or LIFO method

2Accounting practices comparison

KPMG Brazil - Office Directory

São PauloRua Dr. Renato Paes de Barros, 3304530-904 São Paulo, SPTel 55 (11) 3067.3000Fax 55 (11) 3079.3752

Rio de JaneiroAv. Almirante Barroso, 5220031-000 Rio de Janeiro, RJTel 55 (21) 272.2700Fax 55 (21) 544.1338

Belo HorizonteRua Paraíba, 1122 – 13th floor30130-918 Belo Horizonte, MGTel 55 (31) 3261.5444Fax 55 (31) 3261.5151

São CarlosRua Sete de Setembro, 195013560-180 São Carlos, SPTel 55 (16) 274.3900Fax 55 (16) 271.0482

CuritibaAl. Dr. Carlos de Carvalho, 417 - 16th floor80410-180 Curitiba, PRTel 55 (41) 223.4747Fax 55 (41) 223.5750

SalvadorAv. Tancredo Neves, 1672 – Office 40141820-020 Salvador, BATel 55 (71) 341.9633Fax 55 (71) 341.9959

Porto AlegreRua dos Andradas, 1001 – Office 170290020-007 Porto Alegre, RSTel 55 (51) 286.6288Fax 55 (51) 225.3614

CampinasAv. Barão de Itapura, 950 – 6th floor13020-431 Campinas, SPTel 55 (19) 3234.3818Fax 55 (19) 3234.0913

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Preface

KPMG is one of the largest auditing and consulting firms in the world with officesin over one hundred and twenty countries.

We assist our clients in establishing accounting practices that are in accordancewith international or individual country accounting practices. Accordingly, we havedeveloped a comparative study of international, US, and Brazilian accounting practices.This is a summary and does not identify all differences contained in the original texts thatwere consulted during its preparation. Furthermore, its use should not preclude researchin the original literature or consultation with professionals specialized in the area.

The convergence of accounting practices in the international ambit has become the realityat the start of this century, and has occurred within a context of globalized markets andthe increasing presence of foreign capital in Brazil.

International bodies, including IASC, IOSCO, UE and SEC, have sponsored the processto converge accounting practices, viewed as valuable tool to achieve important factorssuch as synergy between the markets, the flow of investments at global levels, etc.

Within this context, KPMG has, for several years, been examining the differing andconverging aspects between international accounting practices, Brazilian practicesand American practices, this has had an important influence on accounting practicesgiven the significant investment in the country.

International accounting practices (IAS) issued by the International Accounting Committee(IASC), today, constitute a source of reference for worldwide accounting practices.Due to the fact that these practices represent a set of high level standards that areconstantly up date with the current demands of the world market, they have graduallybeen accepted in several countries as local accounting practices, or these latter practicesare harmonized with international practices.


What has occurred in Brazil is not different, since Brazilian accounting practices havebeen revised to be consistent with international practices. The reform of Corporation Law,to be voted by the Parliament, has reflected this tendency, whereby various internationalaccounting concepts, mainly with respect to accounting for financial lease operations,segmented information, cash-flow statements, etc, have still not been included as partof the Brazilian accounting practices.

The professionals from KPMG have a fundamental commitment to accompany thedevelopment of accounting practices within this context for all of the levels describedabove, and today have a network of contacts and are organized in groups specializedby subject and will contribute to developing standardizing accounting practices withinthis context.

The combination of our wide client base and our service network in the world’s mostimportant financial markets places us in a privileged position to provide the advicerequired by our clients seeking to participate in the international financial markets.

January, 2001


Abbreviations.............................................................................................................................. 6

1. Inventory............................................................................................................................ 7

2. Depreciation ....................................................................................................................... 9

3. Statements of cash flows ...................................................................................................10

4. Extraordinary items, prior period adjustments, changes

in accounting policy, method, and in accounting estimates ..........................................13

5. Research and development expenses ................................................................................16

6. Contingencies....................................................................................................................18

7. Events after the balance sheet date ...................................................................................20

8. Construction contracts ......................................................................................................21

9. Income taxes ......................................................................................................................22

10. Segment reporting .............................................................................................................24

11. Property, plant and equipment ..........................................................................................26

12. Leases................................................................................................................................28

13. Revenue recognition .........................................................................................................32

14. Retirement benefits ............................................................................................................34

15. Government incentives ......................................................................................................37

16. Foreign exchange............................................................................................................... 38

17. Business combination .......................................................................................................40

18. Investments in associates .................................................................................................43

19. Consolidation and investments in subsidiaries ................................................................44

20. Joint ventures ....................................................................................................................46

21. Other investments and financial instruments ....................................................................47

22. Extinguishment and restructuring of debt .........................................................................56

23. Intangible assets (excluding goodwill) ..............................................................................58

24. Enterprises in the pre-operating stage ..............................................................................59

25. Impairment of assets ..........................................................................................................60

Contents


APB/AICPA Accounting Principles Board Opinion

ARB/AICPA Accounting Research Bulletin

CFC Federal Council of Accountancy

CVM Brazilian Securities Commission

Deliberação/CVM Decision / Brazilian Securities Exchange Commission

FAS/FASB Statement of Financial Accounting Standards

IAS International Accounting Standards

IBRACON Brazilian Institute of Accountants

Law 6,404/76 The Brazilian Corporation Law

NPC/IBRACON Rules and Accounting Procedures /Brazilian Institute of Accountants

PO/CVM Orientative Opinion /Brazilian Securities Exchange Commission

RIR Income Tax Regulation

Abbreviations

7

BRUSAIAS

Accounting practices comparison

Inventory is stated at the lower of cost or netrealisable value, determined on an individualitem basis. Where the individual basis isimpractical, items may be grouped by productlines of similar purpose/use.

Inventories for precious metals and commoditiesused for trading activities may be recorded atmarket value (less selling expenses), even ifthis exceeds cost.

Any write-down of inventory which is no longerrequired is reversed so that the new amount isthe lower of the cost and the revised netrealisable value.

The cost of inventories should comprise allpurchase, conversion and other costs incurredin bringing the inventory to its present locationand condition (including attributable overheads).

Inventory is stated at the lower of cost or marketvalue. This rule may be applied either directly toeach item or to the total of inventory, dependingon the character and composition of the inventory.The method chosen should be that which mostclearly reflects periodic income.

In certain exceptional cases, inventory may bestated above cost (e.g. agricultural, mineral andother products, units of which are interchangeableand have an immediate marketability and forwhich appropriate costs may be difficult toobtain). In this case this fact should be disclosedfully in the financial statements.

Once a provision has been made to write downinventory to market value, it cannot subsequentlybe restored.

Cost refers to the sum of all applicableexpenditures and charges directly or indirectlyincurred in bringing an article to its existingcondition and location. G&A expenses shouldbe included as period charges, except for theportion that can be clearly related to production.Exclusion of all overhead cost from inventoryis not an acceptable accounting method.

Raw materials, merchandises, other materialsand components are stated at the lower ofacquisition cost or market value.Finished goods and work in progress are statedat the lower of production cost or market value.

Inventories for animals, agricultural and mineralproducts, designed for sale, can be carried atmarket value, when the following conditionsexist:n the inventory corresponds to the company’s

primary activity;n the cost of production is difficult to be

determined; andn there is an effective market that allows for

the immediate liquidity of this inventoryand validates its price.

Obsolete and non-useable inventory is stated atits net realizable value and unsaleable inventorymust be written-off.Any write-down of inventory which is no longerrequired must be reversed.

Cost refers to the sum of all applicableexpenditures and charges directly or indirectlyincurred in bringing an article to its existingcondition and location. G&A expenses shouldbe included as period charges, except for theportion that can be clearly related to production.Exclusion of all overhead cost from inventoryis not an acceptable accounting method.

1. Inventory 1. Inventory1. Inventory

(IAS 2, SIC 1) (Law 6404/76, NPC 02 IBRACON, NBC-T-4)(ARB 43, I78, FIN 1)


BRUSAIAS

FIFO or average cost basis are the preferredmethods.The LIFO basis is an acceptable alternative, butif it is adopted, the financial statements shoulddisclose the difference between the amount ofinventories as shown in the balance sheet andeither:n the lower of the amount arrived at using FIFO

or average cost and net realisable value; orn the lower of current cost at the balance sheet

date and net realisable value.

The same type of cost formula need not beused for all inventory; different bases may beappropriate for inventories of different naturesand uses.

1. Inventory 1. Inventory1. Inventory

(IAS 2, SIC 1) (Law 6404/76, NPC 02 IBRACON, NBC-T-4)(ARB 43, I78, FIN 1)

Cost may be determined based on a FIFO,average cost, or LIFO method.The latter is acceptable provided it is also adoptedfor tax purposes.

Cost may be determined based on a FIFO,average cost, or LIFO method.LIFO method is not accepted for tax purposesand is not often used.

9

BRUSAIAS


2. Depreciation 2. Depreciation2. Depreciation

(IAS 16, IAS 22, IAS 38) (NBC-T-4, Pronouncement VII IBRACON)(D40, APB 6, APB 12, ARB 43)

Depreciation should be allocated on a systematicbasis each fiscal period during the useful livesof the assets.

No specific depreciation method is recommended,although the method chosen should be appliedconsistently. The useful lives of the assets shouldbe revised periodically, and the depreciation ratesshould be adjusted.

A change in depreciation method is a changein accounting estimate and should thereforebe accounted for prospectively.

Depreciation should be recognized in a rational andsystematic manner.

Depreciation need not be recognized on individualworks of art or historical treasures whoseeconomic benefit or service potential is used upso slowly that their estimated useful lives areextraordinarily long.

Different depreciation methods are permittedto depreciate tangible capital assets as long asthe method chosen is systematic and rational,with the exception of annuity methods.

A change in accounting in depreciation method(but not of useful life or residual value) is dealtwith as a change in accounting policy, for whichthe cumulative effect to date is put through thecurrent year income statement after extraordinaryitems.

Depreciation should be allocated on a systematicbasis each fiscal period during the useful livesof the assets.

No specific depreciation method is recommended,although the method chosen should be appliedconsistently. The useful lives of the assets shouldbe revised periodically, and the depreciation ratesshould be adjusted.

Although depreciation should be made inaccordance to useful lives, usually enterprisesadopt fiscal rates that are deductible for taxpurposes.

Even though it is not clearly stated in theaccounting rules, the changes in depreciationmethod are usually considered as a change inaccounting estimate and recorded prospectively.


BRUSAIAS 3. Statements of cash flows 3. Statements of cash flows3. Statements of cash flows

(IAS 7) (SFAS 95, C25) (Law 6404/76, PO 24/92, NPC 20 IBRACON)

These statements should be produced as anintegral part of the financial statements (IAS 7).

Cash and cash equivalentsCash flows are inflows and outflows of cash andcash equivalents; they therefore exclude theeffects of exchange rate changes on cash and cashequivalents as this involves no inflow or outflow.

Cash comprises cash on hand and demanddeposits. Cash equivalents are short-term, highlyliquid investments that are readily convertibleto known amounts of cash and which are subjectto an insignificant risk of changes in value. “Short-term” is not defined but the standardsuggests a cut-off of three months maturity(on acquisition by the company). Bank overdraftsrepayable on demand are dealt with as cash andcash equivalents where they form an integral partof the company’s cash management.

Classification and presentation of cash flowsThe cash flow statement should split cash flowsduring the period between operating, investingand financing activities.

A company should choose its own policy forclassifying each of interest and dividends paidas operating or financing activities and eachof dividends received as operating or investingactivities.

All entities, including business enterprise andNPOs, but excluding defined benefit pensionplans, certain other employee benefit plansand certain investment companies, to providea statement of cash flows in general purposefinancial statements.

The SEC will accept without reconciliation toUS-GAAP, a statement of cash flows includedin Form 20-F that complies with IAS 7.

Cash and cash equivalentsA cash flow is an increase or decrease in cashand cash equivalents resulting from a transaction.It therefore excludes the effect of exchange ratechanges on cash and cash equivalents.

Cash and cash equivalents include currency onhand, demand deposits, and short term highlyliquid investments (with original maturities ofthree months or less, or with remaining maturitiesof three months or less at the time of acquisition).

Classification and presentation of cash flowsThe statement of cash flows classifies cashreceipts and payments as either, operating,investing, or financing activities.

Interest received and paid (net of interestcapitalized, which is classed as investing),dividends received and all taxes are includedunder operating activities. Dividends paid areclassed as financing activities.

Presentation of statements of changes in financialposition is required. The statements of cash flowsmay be disclosed as supplementary information.

According to the project for alteration of Law6404/76 the statements of cash flows will replacethe statement of changes in financial position.

Cash and cash equivalentsCash and cash equivalents include not only cashon hand and demand deposits, but also othertypes of accounts which possess the sameliquidity characteristics as cash.

Cash equivalents include highly liquid short terminvestments.

Classification and presentation of cash flowsThe statement of cash flows classifies cashreceipts and payments as either, operating,investing, or financing activities.

Dividends received are classed as operatingactivities and dividends paid are classed asfinancing activities. Interest received and paidand income taxes paid are classified as operatingactivities.

11

BRUSAIAS


Taxes paid should be classified as operatingactivities unless any particular tax cash flow(not merely the related expense in the incomestatement) can be specifically identified with,and therefore classified as, financing or investingactivities.

Net cash flows from all three categories are totaledto show the change in cash and cash equivalentsduring the period, which is then reconciled toopening and closing cash and cash equivalents.The company should disclose the components ofcash and cash equivalents and reconcile these tothe equivalent figures presented in the balancesheet.

When a hedging instrument is accounted for asa hedge of an identifiable position, the cash flowsof the hedging instrument are classified in the samemanner as the cash flows of the position beinghedged.

Cash flows from operating activities may bepresented either by the direct method (grossreceipts from customers etc.) or the indirectmethod (net profit and loss for the period withadjustments to arrive at the total net cash flowfrom operating activities). Although the standardencourages the use of the direct method, inpractice the indirect method is usually used.

Net cash flows from all three activities aretotaled to show the change in cash and cashequivalents during the period, which is thenreconciled to the opening and closing cashand cash equivalents.

Cash flows resulting from certain contracts that arehedges of identifiable transactions should beclassified in the same cash flow category as thecash flow from hedged items.

While companies are encouraged to report grossoperating cash flows by major classes of operatingcash receipts and payments (the direct method),presenting such items net (the indirect method)is allowable in respect of operating activities.Under the direct method, the statement beginswith cash from operations by source (e.g. amountsreceived from/paid to customers, suppliers, andemployees).

The indirect method starts with net income andreconciles it to net cash flows from operatingactivities by adjusting for non-cash items (suchas depreciation) and the net change in mostworking capital items. If the indirect method isused, amounts of interest paid (net of amountscapitalized) and income taxes paid during theperiod are disclosed.

Net cash flows from all three activities aretotaled to show the change in cash and cashequivalents during the period, which is thenreconciled to the opening and closing cashand cash equivalents.

Brazilian corporate law does not deal with thetreatment of cash flows resulting from hedges.

Cash flows from operating activities may bepresented either by the direct method (grossreceipts from customers etc.) or the indirectmethod (net profit and loss for the period withadjustments to arrive at the total net cash flowfrom operating activities).

3. Statements of cash flows 3. Statements of cash flows3. Statements of cash flows



BRUSAIAS

All financing and investing cash flows shouldbe reported gross, with the following exception:receipts and payments may be netted wherethe items concerned (e.g. sale and purchase ofinvestments) are turned over quickly, the amountsare large and the maturities are short.

Other mattersNon-cash investing or financing transactions(e.g. share-for-share acquisition, debt to equityconversion) should be disclosed in order to providerelevant information about investing and financingactivities.

Cash flows arising from a company’s foreigncurrency transactions should be translated into thereporting currency at the exchange rate at the dateof the cash flow (where exchange rates have beenrelatively stable a weighted average can be used).Cash flows of foreign subsidiaries are translatedalso at actual rates (or appropriate average rates).The effect of exchange rate changes on thebalances of cash and cash equivalents arepresented as part of the reconciliation of themovements therein.

Financial institutions may report on a net basiscertain advances, deposits, and repaymentsthereof.activities.

Under both the direct and the indirect method,cash inflows and outflows from investing andfrom financing activities should be reported ona gross basis.

Other mattersInformation about all investing and financingactivities of a company during a period that affectrecognized assets or liabilities but do not resultin cash receipts or payments are also disclosed.For example, the initial recording of a capital(finance) lease results in the recognition of a leasedasset and a corresponding liability in the balancesheet without affecting cash flows.

Cash flows denominated in foreign currenciesare translated into the reporting currency usingthe exchange rates in effect at the time of thecash flows (although a weighted average exchangerate for the period may be used). Exchange rateeffects on cash balances held in foreign currenciesmust be reported as a single line item in thestatement of cash flows.

Banks, savings institutions and credit unionsare permitted to report net cash receipts andpayments for deposits placed with and withdrawnfrom other financial institutions, for time depositsaccepted and repaid and for loans made to andcollected from customers.

No specific requirements to report gross amounts.Usually the amounts on gross basis areconsidered.

Other mattersNon-cash investing or financing transactions(e.g. share-for-share acquisition, debt to equityconversion) should be disclosed in order to providerelevant information about investingand financing activities.

No specific requirements to cash flows inforeign currency. The applicable procedureis similar to IAS.

No specific rules for financial institutions.

3. Statements of cash flows 3. Statements of cash flows3. Statements of cash flows


13

BRUSAIAS


4. Extraordinary items , prior periodadjustments, changes in accounting policy,

method, and in accounting estimates



(IAS 1, IAS 8, IAS 12, IAS 16, IAS 38, SIC 8) (SFAS 16, A35, A06, I13, APB 9, APB 20,APB 30, SAB 67)

(Pronouncement XIV IBRACON,PO CVM 24/92, Law 6404/76)

Extraordinary itemsExtraordinary items are presented, net of tax,as a line item separate from profit on ordinaryactivities after tax.

They are defined as income or expenses that arisefrom events that are clearly distinct from theordinary activities of the enterprise and thereforeare not expected to recur frequently or regularly.

Prior period adjustmentsPrior period adjustment is the benchmarktreatment for:n certain changes in accounting policies; andn corrections of fundamental errors.

Extraordinary itemsExtraordinary items are reported separately afterthe caption, “income after tax from continuingoperations”.The amount of the extraordinary item is shown netof tax with related tax disclosed in parentheses onthe face of the income statement.

Extraordinary items are defined as events thatare both unusual in nature and infrequent inoccurrence. These terms are defined as follows:n Unusual in nature

The underlying event or transaction possessesa high degree of abnormality and is of a typeclearly unrelated to, or only incidentally relatedto, the ordinary and typical activities of theentity, taking into account the environmentin which the entity operates.

n Infrequent in occurrenceThe underlying event or transaction is of a typethat would not reasonably be expected to recurin the foreseeable future, taking into account theenvironment in which the entity operates.

In practice, an event or transaction is consideredto be an ordinary and usual activity of thereporting company unless the evidence clearlysupports its classification as an extraordinaryitem.

Prior period adjustmentsIn single period financial statements, priorperiod adjustments are reflected as adjustmentsof the opening balance of retained earnings.

Extraordinary itemsExtraordinary items (net of income tax) must besegregated from income from ordinary operations,and must be reported as a separate line item inthe income statement. Preferably, extraordinaryitems should be disclosed in the income statementon a per item basis, however, this level of detailmay alternatively be disclosed in the notes to thefinancial statements.

Events or transactions that meet thecharacteristics described below must beclassified as extraordinary items:n the event or transaction is of an unusual nature,

presenting a high level of abnormality, and doesnot relate to the enterprise’s ordinary activities;

n the event or transaction is one which wouldnot be expected to occur frequently; and

n the value of the event or transaction mustrelevant in relation to income beforeextraordinary items.

Prior period adjustmentsAdjustments to the opening balance of retainedearnings are permitted for:n corrections of errors in prior periods

not related to subsequent events; andn changes in accounting policies.




BRUSAIAS

Where a prior period adjustment is applicable,the opening balance of retained earnings andthe comparatives are restated.

In both cases, IAS allows an alternative treatmentwhereby the adjustment may be put through inthe current year with no restatement required.

However, if neither the benchmark treatmentnor a current year adjustment are possible fora change in an accounting policy, the changeshould be made prospectively.

Changes in accounting policy and methodA change in accounting policy should be madewhere required to adopt a new IAS or in anycase where the change will result in a moreappropriate presentation of events or transactionsin the financial statements.

In either case, if the company chooses the currentperiod adjustment method of effecting the change,it should give pro forma information on the prioryear adjustment basis. In all cases the effect ofthe change on all periods presented should bedisclosed, together with the reason for the change.

All new IASs either have their own transitionalrules or, failing that, are by default effected asa change of accounting policy.

When comparative statements are presented,corresponding adjustments are made ofthe amounts of net income, its components,the balances of retained earnings, and otheraffected balances for all of the periods presentedto reflect the retrospective application of theprior period adjustments.

Prior period adjustments may only be made:n to correct errors in prior period financial

statements;n for certain changes in accounting principles;n for certain adjustments related to prior

interim periods of the current fiscal year; orn to reflect accounting changes that are in

effect the statements of a different reportingentity (e.g. pooling-of-interests).

Changes in accounting policy and methodA change in accounting policy must be explainedand justified as preferable. The term accountingprinciple also includes the methods of applyingprinciples.

In most instances prior periods are not adjusted.Instead, the cumulative effect (net of tax) of thechange should be shown in the income statement,after extraordinary items and before net income,in the year in which the change occurs.Income before extraordinary items and net incomeshould be shown on a pro forma basis on the faceof the income statement for all periods presented.The effect of adopting the new principle onincome before extraordinary items and on netincome in the period of the change should alsobe disclosed.

Changes in accounting policy and methodA change in accounting policy must be explainedand justified as preferable.

The effects of changes in the accountingpractices are classified as prior yearadjustments. However, the financialstatements are not restated.If the effect of the adjustments is relevantan appropriate disclosure should be madein the notes.









15

BRUSAIAS


A change in depreciation method, useful lifeor residual value does not qualify as a changein accounting policy.

Changes in accounting estimateChanges in accounting estimates are includedin the net profit or loss for the period in whichthe change occurs (or the period of the changeand future periods if the change affects both).Where material, the effect should be disclosed.

In the following cases, however, the financialstatements of prior periods should be restated:n a change from LIFO to another method

of inventory valuation;n a change in the method of accounting for

long-term construction-type contracts; andn a change to or from the full cost method

of accounting that is used in the extractiveindustries.

These general rules do not apply to a changewhich results from the initial adoption of a newaccounting pronouncement.

A change from one method of computingdepreciation to another is a change in accountingprinciple and should be accounted for accordingly.A change in estimated useful life or residualvalue, however, is a change in an accountingestimate and should be accounted forprospectively.

Changes in accounting estimateChanges in accounting estimates shouldbe accounted for in the period of the changeas if only that period is affected by the change,or in the period of the change and future periodsif those periods are affected.

A change in depreciation method, useful lifeor residual value is not treated as a changein accounting policy.

Changes in accounting estimateChanges in accounting estimates are includedin the net profit or loss for the period in whichthe change occurs (or the period of the changeand future periods if the change affects both).Where material, the effect should be disclosed.










BRUSAIAS5. Research and

development expenses5. Research and

development expenses5. Research and

development expenses

(IAS 36, IAS 38) (SFAS 2, SFAS 68, R55) (Law 6404/76, Pronouncement VIII IBRACON,RIR 99, Art. 327)

Research is original and planned investigationundertaken with the prospect of gaining newknowledge and understanding. Research costsare written off as incurred.

Development is the application of researchfindings or other knowledge to a plan or designfor the production of new or substantiallyimproved materials, products, etc; it does notinclude the maintenance or enhancement ofthe running of ongoing operations.

Development costs should be recorded asexpenses. Only costs incurred in a project whichmeets the following criteria may be capitalized:a. the product/process is clearly defined and

the costs attributed to it can be identifiedseparately;

b. the technical feasibility of the product hasalready been shown;

c. management has indicated its intention toproduce the product/process and place it onthe market, or use it;

d. there is a clear indication of a future market forthe product/process or, if the product/process isintended for internal use, its usefulness has beenclearly shown;

e. there are adequate resources, or resources willbe available to complete the project and placethe process/product on the market.

The deferred development costs should be limitedto the amount the company can reasonably expectto recover from future related earnings, takinginto consideration the future development costsand the costs of production, sale and relatedadministration.

US-GAAP defines the terms research anddevelopment in a similar manner to IAS.Only the costs of materials, equipment, facilitiesand intangibles purchased from others used inresearch and development activities whichhave alternative future uses are capitalized andamortized.With the exception of certain internallydeveloped computer software, all other researchand development costs are not capitalized underUS-GAAP, but rather should be charged toexpense as incurred.

Research and development expenses that willcontribute in the generation of future income formore than one fiscal period may be capitalisedas a deferred asset.

Deferred research and development costs shouldbe valued at cost less accumulated amortization.The amortization period should be determinedbased on the period of expected future benefits.Tax legislation requires a minimum amortizationperiod of 5 years, while accounting legislationallows a maximum amortization period of 10years.

If at any time there are doubts with respect tothe recoverability of deferred research anddevelopment expenses or with respect to theability of the enterprise to continue as a goingconcern, the net book value of deferred researchand development expenses should be writtenoff immediately.

17

BRUSAIAS


Deferred development costs should be allocated tofuture fiscal periods on a systematic basis relatedto either the sale or expected use of the product/process, or its useful life.

5. Research anddevelopment expenses



(IAS 36, IAS 38) (SFAS 2, SFAS 68, R55) (Law 6404/76, Pronouncement VIII IBRACON,RIR 99, Art. 327)


BRUSAIAS

Provisions should be provided when:n an enterprise has a present obligation (legal

or constructive) as a result of a past event;n it is probable that an outflow of resources

embodying economic benefits will berequired to settle the obligation; and

n a reliable estimate can be made of theamount of the obligation.

If these conditions are not met, no provisionshould be recognised.

A contingent liability is:n a possible obligation that arises from past events

and whose existence will be confirmed by theoccurrence or non-occurrence of one or moreuncertain future events not wholly within thecontrol of the enterprise; or

n a present obligation that arises from pastevents but is not recognised because:i) it is not probable than an outflow of resourcesembodying economic benefits will be requiredto settle the obligation; orii) the amount of the obligation cannot bemeasured with sufficient reliability.

Contingent liabilities should be disclosed in thefinancial statements, unless an outflow is onlyremotely likely. Disclosure includes the nature ofthe contingency and where practical the estimatedfinancial effect, an indication of the uncertaintiesand the possibility of any reimbursement.

6. Contingencies 6. Contingencies6. Contingencies

(IAS 37) (SFAS 5, SOP 94-6, C59) (NBC-T-4, Pronouncement XIII IBRACON)

If information available prior to issuing thefinancial statements indicates that it is probablethat, at the balance sheet date, an asset has beenimpaired or a liability has been incurred, andthe amount of loss can be reasonably estimated,then that estimated loss should be accrued.

The following terms are used to describe thelikelihood that a future event will confirm thatan asset had been impaired or a liability had beenincurred at the date of the financial statements:n probable: the future event is likely to occur;n reasonably possible: the chance of the future

event occurring is more than remote but lessthan likely;

n remote: the chance of the future event occurringis slight.

If no accrual is made because the conditionsmentioned above are not met, then disclosure ofthe loss contingency is made, provided that thereis reasonable possibility that a loss, or a furtherloss over and above that accrued, may have beenincurred. The disclosure should indicate thenature of the contingency, give an estimate of thepossible loss or range of loss, or state that suchan estimate cannot be made, and state that it isreasonably possible that this estimate willchange (where this is the case).

A contingent loss must be accrued in the financialstatements when the likelihood of its occurrenceis considered probable and when its value can bereasonably estimated.

Contingencies are classified, in relation to theirrelated risks, as follows:n probable: the future event is likely to occur;n reasonably possible: the chance of the future

event occurring is more than remote but lessthan likely;

n remote: the chance of the future event occurringis slight.

Adequate disclosure of accrued contingent lossesmust be provided for in the notes to the financialstatements.

If the value of the contingent loss cannot bereasonably estimated, adequate disclosure isrequired.

19

BRUSAIAS


Contingent assets should not be recognisedsince this may result in the recognition of incomethat may never be realised. However, whenthe realisation of income is virtually certain,then the related asset is not a contingent assetand its recognition is appropriate.Where an inflow of economic benefits is probable,an enterprise should disclose a brief descriptionof the nature of the contingent assets at the balancesheet data, and, where practicable, an estimateof their financial effect, measured in accordancewith IAS 37.

Gain contingencies are usually not reflected inthe accounts since to do so might be to recognizerevenue prior to realization. While adequatedisclosure regarding gain contingencies isappropriate, care should be exercised to avoidmisleading implications as to the likelihood ofrealization.

In general, gain contingencies should not beaccrued in the financial statements, based onthe requirement that revenue only be recognizedonce realized.Adequate disclosure of the gain, including thenature of the gain and the value of the contingentgain (net of income tax and any other related costsand expenses), is recommended.

6. Contingencies 6. Contingencies6. Contingencies

(IAS 37) (SFAS 5, SOP 94-6, C59) (NBC-T-4, Pronouncement XIII IBRACON)


BRUSAIAS

Material events which take place after thebalance sheet closing date require adjustmentsto the financial statements only if the statementsfurnish additional evidence for events whichhad already occurred at the balance sheet date,or indicate it is no longer reasonable to assumefull or partial continuity of operations.

Where non adjusting events after the balancesheet date are of such importance that non-disclosure would affect the ability of financialstatement users to make proper evaluationsand decisions, disclosure is required.

Dividends declared after the balance sheet datecan either be recognised or disclosed.

7. Events after the balancesheet date



(IAS 10) (SFAS 5, SOP 94-6, C59) ( Law 6404/76)

U.S. Accounting Standards do not deal explicitlywith the treatment of subsequent events;however, Auditing Standards (AU 560) effectivelyestablishes accounting standards in the U.S. withrespect to this issue.

U.S. Auditing Standards distinguish between thefollowing two types of subsequent events, whichrequire consideration by management andevaluation by the independent auditor:n those events that provide additional evidence

with respect to conditions that existed at thedate of the balance sheet and affect theestimates inherent in the process of preparingfinancial statements; and

n those events that provide evidence with respectto conditions that did not exist at the date ofthe balance sheet being reported on but arosesubsequent to that date.

With respect to the first type of subsequent event,U.S. Auditing Standards require that financialstatements be adjusted for any changes inestimates resulting from the use of such evidence.

With respect to the second type, U.S. AuditingStandards state that these events should not resultin adjustment of the financial statements,however some subsequent events of this naturemay be of such a nature that disclosure of themis required to keep the financial statements frombeing misleading.

If significant, the effects of subsequent eventsshould be disclosed.No adjustments to the financial statements arerequired. However, the accounting practicerecognizes the effects of subsequent events inline with IAS.

21

BRUSAIAS


8. Construction contracts 8. Construction contracts8. Construction contracts

(IAS 11, IAS 18) (SFAS 56, ARB 45, SOP 98-1) (Pronouncement XVII IBRACON)

The percentage-of-completion method shouldbe used to record revenue on services andconstruction contracts when the contract outcomecan be reliably estimated. This is said to occurwhen the general revenue recognition criteria aremet, and the stage of completion of the contractcan be reliably measured.

These guidelines are applicable to servicesand construction contracts, irrespective ofthe expected completion period.

No method of assessing the stage of completionis mandated. Percentage-of-work-done andpercentage-of-costs are all possible methodssuggested by the standard.

Where the contract outcome cannot be reliablymeasured, the revenues are recognized only tothe extent of contract costs incurred are expectedto be recovered.

A loss related to a contract should be provided foras soon as it is identified, at an amount sufficientto cover losses incurred to date and future lossesthrough completion of the contract.

The percentage-of-completion accounting is thepreferable method for recognizing revenuecorresponding to long-term construction-typecontracts, if estimates of costs to complete, andof the extent of progress towards completion,are reasonably reliable.

Under this method, revenue (i.e. a percentageof total expected revenue) is recognized basedupon the extent of completion. Ordinarily thisis measured by reference to costs incurred asa percentage of total estimated costs (althoughothers, such as those mentioned in IAS,are possible).

The completed-contract method is preferablewhere there is doubt about the forecasts, eitherbecause of a lack of reliable estimates or becauseof inherent uncertainty.Under this method revenue is recognized onlyif the contract is completed, or substantially so.

For a contract on which a loss is anticipated,generally accepted accounting principles requirerecognition of the entire anticipated loss as soonas the loss becomes evident.

There are three methods accepted:n Percentage-of-completion

Revenue is based upon the extent of completion,which may be measured either by reference tocosts incurred as a percentage of total estimatedcosts, or by reference to the physical stage ofcompletion in comparison to the total contractrequirements.

n Completed contractRevenue and costs are recognized only oncethe contract is completed.

n Installment methodRevenue and costs are recognized based onthe receipt of installments, in accordancewith the terms of the contract.

The above methods are applicable to constructioncontracts with an expected completion period ofgreater than 12 months.

Where the contract outcome cannot be reliablymeasured, revenue is recognized to the extentof costs incurred, that are recoverable.

A loss related to a contract should be provided foras soon as it is identified, at an amount sufficientto cover losses incurred to date and future lossesthrough completion of the contract.


BRUSAIAS 9. Income taxes 9. Income taxes9. Income taxes

(SFAS 109, I27) (NPC 20, CVM Decision 273/98)(IAS 12)

Taxes should be recorded in the financialstatements on the accrual basis, by using theliability method.

A current tax liability or asset is recognized forthe estimated future tax effects attributable totemporary differences and tax loss carry-forwards.

The carrying value of deferred tax assets isrestricted to the amount that can be utilizedagainst future taxable profits that will probablybe available.

The measurement of current and deferred taxliabilities and assets is based on provisions of thesubstantively enacted tax law, which may includeannouncements of future changes; otherwise theeffects of future changes in tax laws or rates arenot anticipated.

A deferred tax liability should be recognised forall taxable temporary differences, unless thedeferred tax arises from:n goodwill for which amortisation is not

deductible for tax purposes; orn the initial recognition of an asset or liability

in a transaction which: i) is not a businesscombination; and ii) at the time of thetransaction, affects neither accountingprofit nor taxable profit (tax loss);

Similar to IAS, the liability method should be usedin accounting for income taxes.

A current tax liability or asset and current taxexpense or benefit are recognized for theestimated taxes payable or refundable based onthe tax returns for the current and previous years.

Deferred tax liabilities or assets are recognizedfor the estimated future tax effects attributable totemporary differences and tax loss carry-forwards.

The balance sheet carrying value of deferred taxassets is reduced, through a valuation allowance,so as to recognize (net) only the amount of anytax benefits that, based on available evidence,are more-likely-than-not to be realized.

The measurement of current and deferred taxliabilities and assets is based on provisions ofthe enacted tax law; the effects of future changesin tax laws or rates are not anticipated.

Similar to IAS, the liability method should be usedin accounting for income taxes.

A deferred tax liability should be recognised inrelation to all taxable temporary differences.

23

BRUSAIAS


A deferred tax asset should be recognised forall deductible temporary differences, unless thedeferred tax arises from:n negative goodwill which is treated as deferred

income in accordance with IAS 22, BusinessCombinations; or

n the initial recognition of an asset or liability ina transaction which:i) is not a business combination; andii) at the time of the transaction, affects neitheraccounting profit nor taxable profit (tax loss);

Deferred tax liabilities and assets should alwaysbe classified as non-current.

Deferred tax liabilities and assets, but not thevaluation allowance, are classified in the balancesheet as either current or non-current according tothe classification of the related asset or liabilityfor reporting purposes. The valuation allowanceis allocated against current and non-current assetspro rata to the allocation of all of the deferred taxassets as a whole.

The expected timing of the reversal of deferredtaxes is not considered in the classification ofdeferred tax balances except in certain instanceswhere a deferred tax balance cannot be related toan identifiable asset or liability for financialreporting purposes.

A deferred tax asset should be recognised forall deductible temporary differences:n when it is likely that the deferred tax asset

can be utilized against future taxable profits,based on budgets and projections providedby administration; or

n where a deferred tax liability which is sufficientin value and in a realization period that makespossible the compensation of the deferred taxasset, exists.

Deferred tax assets and liabilities are classifiedas either a long-term asset or a long term liabilityand are transferred to current assets or currentliabilities when appropriate.

9. Income taxes9. Income taxes

(SFAS 109, I27) (NPC 20, CVM Decision 273/98)(IAS 12)

9. Income taxes


BRUSAIAS 10. Segment reporting10. Segment reporting

(SFAS 131, FTB 79-4, FTB, 79-5, S30)(IAS 14, IAS 36)

10. Segment reporting

Segmental disclosures are required of only thosecompanies with publicly traded equity or debtsecurities, or those which are in the process ofissuing such securities, but not to othereconomically significant entities.

IAS uses a management approach tosegmentation, based on the internal organizationalcomponents into which the company is dividedfor the purposes of internal financial reporting toits board. However, if this is based neither onproduct/service groups nor on geography thenthe basis should instead be identified by lookingto the next lower level of internal organizationthat divides up the company into products/services or geography based components subjectto the provision that each such component mustbe subject to risks and returns that differ fromother components.

Broadly, any component so identified thataccounts for 10% or more of the company’srevenue, results of operating activities ortotal assets, is a disclosable segment.Otherwise, the components may be combinedwith other components on a risk and returnsbasis to form disclosable segments.

The amounts disclosed do not follow themanagement approach. Instead the amountsare an analysis of the relevant figures as statedin the financial statements.

Segmental disclosures apply only to SECregistrants.

An operating segment is a component of abusiness about which separate financialinformation is available that is evaluatedregularly by the chief operating decision-makerin the allocation of resources and assessmentof performance. This may be termed the“management approach”, since the basisof segmentation is the internal managementreporting structure irrespective of whetherthat reflects differences in risks and returnsor operations.

Segmental information is given about anyoperating segment that, broadly, accounts for10% or more of all segments’ revenue, resultsof operating activities, or total assets.

General information, such as factors used toidentify the reportable segments and the typesof products and services from which reportablesegments derive their revenues, are required tobe disclosed. The numerical information isrequired to be stated on the basis upon whichit is reported internally to the chief operatingdecision maker, even if this does accord withthe basis adopted for external reporting in thefinancial statements.

Information by segment is not required.

25

BRUSAIAS


For the primary basis, the following are requiredfor each segment:n revenue, distinguishing between external

customers and inter-segment sales;n results of operations (i.e. broadly before

interest, tax, and associates);n depreciation, impairment, reversal of impairment

and other non-cash expenses (unless cash flowinformation is given);

n operating, investing, and financing cash flows(as an alternative to the previous item);

n the share of results and carrying value of equityaccounted investments for any such investmentsthat can be allocated substantially to a singlesegment;

n total assets;n total liabilities; andn capital expenditures.

There are supplementary requirements if theprimary basis is geography in order thatinformation about both location of operationsand location of customers is given.

For the secondary basis, revenue (external andinter-segment separately), total assets and capitalexpenditure are required to be analyzed.

There is no requirement to disclose a significantcustomer.

In other words, the management approach extendsto the figures also. The total amounts disclosedare required to be reconciled to the equivalentamounts in the financial statements.

The numerical information required for eachsegment is:n profit or loss;n total assets;n the following if they are included in the above

two measures or are otherwise reviewed by thechief-operating decision maker:- revenue distinguishing between external

customers and inter-segment sales;- interest income and expense;- unusual items;- tax;- extraordinary items;- capital expenditure and depreciation

and other significant non-cash items; and- the share of income and net assets of equity

method investees.

In addition, there are supplementary disclosuresof revenue by product/service group, orgeographical region if the management approachbasis are not on such bases.

If a single external customer accounts for 10% ormore of the company’s revenue, this fact togetherwith the amount of that revenue and the segmentin which it arose, must be disclosed.

10. Segment reporting10. Segment reporting

(SFAS 131, FTB 79-4, FTB, 79-5, S30)(IAS 14, IAS 36)

10. Segment reporting


BRUSAIAS11. Property, plant and

equipment11. Property, plant and

equipment

(SFAS 34, SFAS 66, SFAS 67, I67,ARB 43)

(IAS 16, IAS 20, IAS 23, IAS 36,IAS 40, SIC 2)

11. Property, plant andequipment

(NPC 24 IBRACON, CVM Decision 183/95,Pronouncement VII IBRACON)

Property, plant and equipment should be recordedat historical cost (recommended treatment).Financing costs directly attributable to theconstruction of property, plant and equipmentshould be capitalized.

Revaluation of property, plant and equipment isallowed as an alternative. Property, plant andequipment should be revalued to fair value,which is market value or, for plant and equipmentwithout such a value, depreciated replacementcost. If one fixed asset is revalued, the entireasset category should be revalued.Revaluation should be repeated on a regular basis.

Revaluation surpluses are credited to arevaluation reserve within equity unless theyreverse a shortfall previously charged to theincome statement, in which case it is takendirectly to the income statement.

Shortfalls on revaluation are recorded in theincome statement unless they reverse a surplus ofthe same or lesser value previously generated bythe same asset, in which case it is taken directlyto the revaluation reserve. Shortfall is calculatedon an item-by-item basis.

When a revalued asset is written off, therevaluation surplus is transferred to retainedearnings.

Depreciation on a revalued asset is based uponits revalued amount, as are gains and losses ondisposal.

Property, plant and equipment should be recordedat historical cost. Financing costs directlyattributable to the construction of the property,plant and equipment should be capitalized.

Revaluation above historical cost is not permittedexcept in connection with business combinationsaccounted for using the purchase method.

Property, plant and equipment should berecorded at historical cost. Financing costsdirectly attributable to the construction ofthe fixed assets are capitalizable.

Revaluation above historical cost is permitted.Revaluation surpluses are credited to arevaluation reserve within equity.

Where an external valuation reveals that thevalue of a fixed asset is below its book value,the value of property, plant, and equipmentshould be reduced to the extent of the revaluationreserve surplus included in equity, correspondingto the same asset. The corresponding deferred taxbalance should also be adjusted for this negativerevaluation. A provision for losses should beestablished for any excess amount, througha charge to non-operational expenses.This provision should only be recordedif the loss is considered unrecoverable.

A revaluation below historical cost may not berecorded if it is the first time that an asset isbeing subject to external valuation. The companyshould however consider whether the net bookvalue of the asset is recoverable from futureoperations. If the recoverable value of the assetis below its net book value, and if this differenceis not considered recoverable, a provision forlosses should be recorded and charged tonon-operational expenses.

On sale or disposal of a discontinued revaluedasset, the revaluation must be reversed.

27

BRUSAIAS


The difference between the carrying amount ofa revalued asset and its tax base is a temporarydifference and gives rise to a deferred tax liabilityor asset.

Beginning on or after January 1, 2000, thefollowing rules apply to investment properties.Investment properties are land and buildingsheld for rental income and/or capital appreciationrather than for own use or for sale in the ordinarycourse of business. They exclude property heldon operating leases. They may be either treatedas a normal property or be undepreciated andstated at fair value, which is the market value,with changes therein flowing through the incomestatement.

Real estate investment properties are carried atdepreciated historical cost. Depreciation must beprovided on all buildings, including investmentproperties. However, property held for resale isgenerally not depreciated.

SFAS 67 specifies the accounting treatment ofpre-acquisition costs, taxes and insurance, projectcosts, incidental operations, and the allocation ofcapitalized costs to components of a real estateproject, as these items relate to real estate projects.

Upon sale or write-off of real estate assets, thereare safeguards which prevent recognition of profit(full or partial) when the seller could incur futurecosts or when the seller has signed an option torepurchase at a fixed price.

There are no specific requirements for realestate investments. However a provision fordevaluation may be required if the carryingamounts are higher than its realization amounts.



(SFAS 34, SFAS 66, SFAS 67, I67,ARB 43)

(IAS 16, IAS 20, IAS 23, IAS 36,IAS 40, SIC 2)


(NPC 24 IBRACON, CVM Decision 183/95,Pronouncement VII IBRACON)


BRUSAIAS 12. Leases12. Leases

(SFAS 13, SFAS 28, SFAS 98, L10)(IAS 17, IAS 39, SIC 15)

12. Leases

(PO CVM 15/87)

The distinction between a finance and an operatinglease is based on conceptual principles rather thandetailed requirements.

The definitions of finance and operating leases arethe same for lessors as for lessees.

LesseeA lease other than a finance lease is an operatinglease. The rental payments, including anyincentive to enter into the lease, are expensedon a straight line basis or any other systematicbasis more representative of the true patternof benefits to the lease.

A finance lease is one which transferssubstantially all the risks and rewards incidentto ownership of the asset. The followingsituations would normally indicate a financelease for both the lessee and the lessor:n ownership is transferred to the lessee;n a bargain purchase option exists;n the lease term is for the majority of

its economic life;n the present value of minimum lease payments

amounts to substantially all of the fair valueof the leased asset;

n the leased asset is specialized so that majormodifications would be required for its useother than by the lessee.

US-GAAP is similar in concept to IAS 17,however it provides more-specific and more-extensive accounting guidance.

The criteria used to distinguish between a capital(financing) lease and an operating lease aredifferent for the lessee and the lessor.

LesseeFrom the standpoint of the lessee, a lease meetingany one of the following four criteria must betreated as a capital lease:n the lease transfers ownership;n the lease contains a bargain purchase option;n the lease term is equal to or greater than 75%

of the estimated economic life of the property;n the present value of the minimum lease

payments equals or exceeds 90% of the fairvalue of the property, less any investmenttax credit retained by the lessor.

The lessee records a capital lease as an asset andan obligation at an amount equal to the lesser ofthe present value of the minimum lease paymentsat the beginning of the lease term or the fair valueof the leased property.

All leases are considered to be operating leases.Sales revenue in a sale and leaseback transactionis recorded at nominal value, regardless of thecircumstances. Certain disclosures are requiredin explanatory notes.

29

BRUSAIAS


A finance lease should be reflected in the balancesheet of the lessee by recording an asset and aliability of equal value at the onset of the lease,at the lower of the fair value of the leased assetor the present value of the minimum leasepayments discounted at the interest rate implicitin the lease.

The payments made on the leased asset shouldbe allocated between financial expense and theoutstanding liability. The financial expenseshould be allocated over the lease period, sothat a constant interest rate is charged on theremaining balance of the liability for each period.

If it is not certain that the lessee will own theasset at the end of the lease period, the assetshould be fully depreciated over the shorter ofthe lease period or the useful life of the asset.

LessorThe leased assets under a financial lease must berecorded as an account receivable (not as a fixedasset) at the net value of the lease contract.

Financial income related to a financial lease isrecognized by a constant rate of return appliedto the net residual balance of the lease or onthe investment in the lease valued by its futurecash flow.

The leased asset under an operating lease mustbe recorded as a fixed asset. The rental incomeis recorded on a straight line basis over the lengthof the contract or in accordance with the termsof the lease, whichever is more appropriate.

Lease payments should be allocated betweeninterest expense and reduction of the leaseobligation so as to give a constant periodicrate of interest.

If none of the criteria is met, the lease isclassified as an operating lease by the lessee.Neither an asset nor an obligation is recorded.Rental payments, including for example, rentfree periods or cash incentives, are expensedin the income statement generally on a straightline basis, unless some other systematic basisis more representative of the time patternof benefits.

LessorFrom the standpoint of the lessor, a lease is acapital lease if it meets one of the conditionsspecified for the lessee and:n the recoverability of the minimum lease

payments is reasonably predictable; andn no important uncertainties surround the

amount of non-reimbursable costs yet tobe incurred by the lessor under the lease.

Lessor’s capital leases are then furthersubdivided into three categories as follows:n A sales-type lease is one where a manufacturer/

dealer lessor’s cost (or carrying amount ifdifferent from cost) differs from the fair valueof the leased property.

12. Leases12. Leases


12. Leases

(PO CVM 15/87)


BRUSAIAS

Normally, such leases arise when manufacturersor dealers use leasing as a means of marketingtheir products. The minimum lease paymentsplus the unguaranteed residual accruing to thebenefit of the lessor shall be recorded as thegross investment in the lease by the lessor.The lessor records unearned income equal to thedifference between the gross investment in thelease and the sum of the present values of theminimum lease payments and the unguaranteedresidual value. The net investment in the leaseshall consist of the gross investment less theunearned income. The unearned income shall beamortized to income over the lease term so as toproduce a constant periodic rate of return onthe net investment in the lease.

n A leveraged lease is one where, broadly, thelessor finances its net investment in the lease,on a non-recourse basis, with a third party longterm lender. There are special accounting rulesfor these but the key feature is that the netinvestment in the lease is presented net ofthe non-recourse finance.

n Other capital leases are direct financingleases. The minimum lease payments plusthe unguaranteed residual value accruing tothe benefit of the lessor shall be recorded as thegross investment in the lease. The differencebetween the gross investment in the leaseand the cost or carrying amount of the leasedproperty shall be recorded as unearned income.The net investment in the lease shall consistof the gross investment less the unearnedincome. Unearned income shall be amortizedto income over the lease term so as to producea constant periodic rate of return on the netinvestment in the lease.



12. Leases

(PO CVM 15/87)

31

BRUSAIAS


Sales and leaseback transactionsThere are specific rules in relation to leasebacktransactions, depending on the kind of lease(finance or operating lease), as follows:

If the leaseback is a finance lease any excess of salesproceeds over the carrying amount should not beimmediately recognised as income in the financialstatements of a seller-lessee. Instead, it should bedeferred and amortised over the lease term.

If the leaseback is an operating lease, and it is clearthat the transaction is established at fair value, anyprofit or loss should be recognised immediately. If thesale price is below fair value, any profit or loss shouldbe recognised immediately except that, if the loss iscompensated by future lease payments at belowmarket price, it should be deferred and amortised inproportion to the lease payments over the period forwhich the asset is expected to be used. If the sale priceis above fair value, the excess over fair value should bedeferred and amortised over the period for which theasset is expected to be used.

Additionally, where a real estate lease gives rise toa manufacturer/dealer’s profit, the lease is either asales-type capital lease, if the lease eventuallytransfers ownership to the lessee, or an operatinglease in all other cases.

If none of the criteria are met, the lease is classifiedas an operating lease by the lessor. The leasedproperty shall be included with or near property,plant, and equipment in the balance sheet, and theproperty shall be depreciated following thelessor’s normal depreciation policy. Rent shall bereported as income over the lease term as itbecomes receivable according to the provisions ofthe lease.

Sales and leaseback transactionsGenerally, any gain or loss on the sale is deferredand amortized in proportion to the amortizationof the leased asset (if a capital lease) or inproportion to rental payments (if an operatinglease).

A sale and leaseback transaction involving realestate is accounted for as a sale only if thetransaction meets certain criteria:n regarding the extent of the buyer’s investment

in the property being sold;n whether the seller’s receivable is subject to

future subordination and the degree of theseller’s continuing involvement with theproperty after the sale; and

n the seller-lessee will actively use the propertyduring the lease term.

If the transaction does not qualify as a sale,it should be accounted for as a deposit or asa financing.



12. Leases

(PO CVM 15/87)


BRUSAIAS 13. Revenue recognition13. Revenue recognition

(SAB 101, SOP 97-1, SOP 98-9)(IAS 11, IAS 18)

13. Revenue recognition

(Pronouncement XIV IBRACON)

GeneralIn general, revenue is recognized whenthe following three requirements are met:n the revenue can be reliably measured;n it is probable that the economic benefits of

the transaction will flow to the company; andn the costs (both incurred to date and any

to come) can be reliably measured.

GoodsFor goods, the following requirements must alsobe met:n the significant risks and rewards of ownership

of the goods have been transferred to the buyer;n there is no continuing managerial involvement

over the goods to the degree usually associatedwith ownership; and

n there is no effective control over the goods.

See item 8 above with respect constructioncontracts.

GeneralThere is no US standard dealing generally withrevenue recognition. The SEC staff have statedthat based on the specific standards that doexist, they believe revenue should generallybe recognized when:n persuasive evidence of an arrangement exists;n delivery has occurred or services have been

rendered;n the seller’s price to the buyer is fixed

or determinable; andn collectibility is reasonably assured.

GoodsAgain, there are no general rules but the SECstaff have stated that in assessing the aboveconditions, delivery is not considered to haveoccurred unless legal title, and the risks andrewards of ownership of the goods, have beenpassed to the buyer.

See item 8 above with respect to long-termconstruction-type contracts.

GeneralIn general, revenue is recognized when thefollowing criteria are met:a) the process of revenue realization is

complete or virtually complete; andb)a transaction has occured.

GoodsRevenue of goods is recognized at the date ofthe sale, which is usually considered to be thedate on which the ownership of the productis transferred.

Sales of goods and services are normallyrecognized when the invoice is issued.

See item 8 above with respect to constructioncontracts.

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BRUSAIAS


Software revenueWhere the software being sold does not requiresignificant production or customisation, revenueis recognised under the general rules, set outabove.

Where the sale involves multiple elements (e.g.upgrades, enhancements, service) the approachis that revenue on each element of the sale isrecognized separately when the above conditionsare met for that element.

However, for this to apply the revenue must becapable of being allocated by reference to the pricecharged for each element if sold separately and nopart of the delivered element’s revenue must bedependent on delivery of the remainder.

13. Revenue recognition13. Revenue recognition

(SAB 101, SOP 97-1, SOP 98-9)(IAS 11, IAS 18)

13. Revenue recognition

(Pronouncement XIV IBRACON)

Software revenueSoftware is not specifically addressed in IAS 18but would fall under the normal rules.Where the transaction is a simple sale thenthe principles for goods would apply.If other services are bundled together withthe software itself, then contract accountingwould probably be the appropriate treatment.

Software revenueSoftware revenue recognition is not specificallyaddressed in Brazilian GAAP but would followthe general guidance described above.


BRUSAIAS 14. Retirement benefits14. Retirement benefits

(SFAS 87, SFAS 88, P16)(IAS 19)

14. Retirement benefits

(CVM Decision 371,NPC 26 IBRACON)

The actuarial appraisal method used is theprojected unit credit method. IAS does notmandate the frequency of valuations. It requiresthem to be of sufficient regularity that theamounts recognized in the financial statementsdo not differ from those which would be basedon valuations as at the balance sheet date.Thus, a valuation a few months before the yearend is acceptable if it is adjusted for materialsubsequent events (including market price anddiscount rate changes up to the year end).

The total cost is essentially the entire periodicchange in the plan liabilities less assets, asidefrom certain changes not fully recognized.The total comprises the following:n current service cost (increase in the present

value of the benefit obligation due to thecurrent year’s service);

n interest cost (the unwinding of discount inthe present value of the benefit obligation);

n expected return on plan assets;n certain actuarial gains and losses

(i.e. the differences between actual andexpected out-turn of the valuation of theobligation and the assets, including the effectof assumption changes); and

n certain past service costs.

For the purpose of measuring the annual increasein service cost, the attribution of benefits beginswhen the employee joins the benefits plan andterminates when the right to the benefit is nolonger conditional upon future service.

The actuarial appraisal method used is theprojected unit credit method, and the valuationdate can be at or within three months of eachfiscal year end (although the information maybe prepared as at an earlier date and projectedforward to the year end).

The annual pension cost is separated into fourcategories, as follows:n service cost - the actuarial present value

of future service benefits earned by allparticipants during the current year;

n interest cost - the increase in the benefitobligation due to the passage of time;

n actual return on plan assets - determined basedon the fair value of plan assets at the beginningand the end of the period, adjusted forcontributions and benefit payments.

n Net amortization and deferral of the followingcomponents:- the net transition obligation (or asset);- the prior service cost; and- the difference between the estimated and

actual amounts of both the projected benefitobligation and the return on plan assets.

For the purpose of measuring the annual increasein service cost, the attribution of benefits beginswhen the plan grants credit and terminates atretirement (retirement costs) or when theemployee becomes fully eligible (other postretirement benefits).

The actuarial appraisal method used is theprojected unit credit method. It does not mandatethe frequency of valuations. It requires them tobe of sufficient regularity that the amountsrecognized in the financial statements do notdiffer from those which would be based onvaluations as at the balance sheet date.

The total cost is essentially the entire periodicchange in the plan liabilities less assets, asidefrom certain changes not fully recognized.The total comprises the following:n current service cost (increase in the present

value of the benefit obligation due to thecurrent year’s service);

n interest cost (the unwinding of discount inthe present value of the benefit obligation);

n expected return on plan assets;n certain actuarial gains and losses

(i.e. the differences between actual andexpected out-turn of the valuation of theobligation and the assets, including the effectof assumption changes); and

n certain past service costs.

For the purpose of measuring the annual increasein service cost, the attribution of benefits beginswhen the employee joins the benefits plan andterminates when the right to the benefit is nolonger conditional upon future service.

35

BRUSAIAS


Actuarial gains and losses are required to berecognized when the cumulative amount there ofexceeds 10% of the greater of the present value ofthe obligation and the market value of the assets.

The amount recognized is the excess, spread ona straight line basis over the expected remainingworking lives of the employees in the plan.However, it is permitted to account for bothactuarial gains and losses in any systematicmethod that results in faster recognition, forexample ignoring the 10% limit and spreadingthe full amount or even immediate recognitionof the full amount.

Past service cost is the increase in the presentvalue of the obligation, in respect of prior periods’service, due to changes in benefit entitlement.If such entitlements are not conditional on futureservice (i.e. are vested) they are taken in fullimmediately; if they are not vested then theyare spread on a straight-line basis over the perioduntil they vest. In practice most are likely to bevested and charged immediately.

Upon implementation of SFAS 87 in 1987,a calculation was made of the net transitionobligation (or asset) as the excess (or deficit)of the projected benefit obligation over the fairvalue of plan assets. This transition obligation(or asset) was then amortized on a straight linebasis over the greater of the average futureservice period of active participants or 15 years.

The prior service cost is the liability arisingfrom plan supplements or amendments in respectof prior period’s service. It is amortized on astraight-line basis over the average futureservice lives of the active participants or,if most participants are inactive (e.g. retired)over their remaining life expectancy.

The variations between estimated and actualprojected benefit obligation and assets are,in effect, the experience surpluses or deficits(even if they are attributable to changes inthe assumptions. The amortization period isthe average remaining serviced period of activeparticipants. However, SFAS 87 gives employersthe option not to amortize a part of this amount,known as the corridor amount (equal to 10%of the greater of the projected benefit obligationor the market related value of plan assets).

Actuarial gains and losses are required to berecognized when the cumulative amount there ofexceeds 10% of the greater of the present value ofthe obligation and the market value of the assets.

The amount recognized is the excess, spread ona straight line basis over the expected remainingworking lives of the employees in the plan.However, it is permitted to account for bothactuarial gains and losses in any systematicmethod that results in faster recognition, forexample ignoring the 10% limit and spreadingthe full amount or even immediate recognitionof the full amount.

Past service cost is the increase in the presentvalue of the obligation, in respect of prior periods’service, due to changes in benefit entitlement.If such entitlements are not conditional on futureservice (i.e. are vested) they are taken in fullimmediately; if they are not invested then theyare spread on a straight-line basis over the perioduntil they vest. In practice most are likely to bevested and charged immediately.

14. Retirement benefits14. Retirement benefits

(SFAS 87, SFAS 88, P16)(IAS 19)




BRUSAIAS

The discount rate that is used is the assumed rateat which plan liabilities could be settled.

Plan assets are appraised at their fair value(preferably market value).

There is no limit for recognition of any assetby the sponsor.

Multi-employer plans with defined benefitcharacteristics are accounted for as definedbenefit plans.

The discount rate that is used is the rate for topquality corporate bonds at the balance sheet date,taking into consideration the currency and theterms for payment of the benefits.

Plan assets are appraised at their fair value.

The recognition of an asset by the sponsor islimited to the amount of unrecognized actuariallosses and past service cost, net of the presentvalue of available refunds and reductions infuture contributions.


The discount rate that is used is the rate for topquality corporate bonds at the balance sheet date,taking into consideration the currency and theterms for payment of the benefits.

Plan assets are appraised at their fair value.

An asset is recorded by the employer if it isclearly evidenced that the asset may offset futurecontributions or that will be reimbursed in thefuture.


14. Retirement benefits14. Retirement benefits

(SFAS 87, SFAS 88, P16)(IAS 19)



37

BRUSAIAS


15. Government incentives15. Government incentives

(IAS 20)

15. Government incentives

(Law 6404/76)

The values of government incentives, includingthe fair values of non-monetary incentives,should not be recorded until there is reasonablecertainty that (i) the undertaking will meetthe conditions for receiving the incentive, and(ii) the incentive will be received.

Income derived from incentives should berecognized systematically in the income statementover the number of periods it takes to offset therelated costs. Government incentives cannot bedirectly credited to shareholders’ equity.

Government grants related to fixed assets maybe either deducted from the cost of the assetconcerned, and therefore reduce the futuredepreciation charge directly, or be carriedseparately as deferred income that is amortizedover the useful life of the asset.

An incentive granted to offset expenses orlosses already incurred or to provide immediatefinancial support for an undertaking at noadditional related cost should be credited tothe income statement in the period the incentivebecomes realizable.

US-GAAP has no specific requirements forgovernment incentive accounting.In practice accounting is similar to IAS.

Government incentives are recorded whenreceived or granted and are not associatedwith the life of the project or asset.

According to the Corporate Law all incentivesand subventions are recorded as a capital reservein equity account. However, this is not a uniformaccounting practice and in some cases, IASprinciples are followed.


BRUSAIAS 16. Foreign exchange16. Foreign exchange

(IAS 21, IAS 29, SIC 11, SIC 19)

16. Foreign exchange

(Law 6404/76, CVM Decision 28/86,Pronouncement XVIII IBRACON)

(SFAS 52, F60)

Functional CurrencyIAS have no explicit concept of functionalcurrency. Whatever currency the accountsare presented in is known as the “reportingcurrency”, with all other currencies consideredforeign currencies. SIC 19 (effective for periodsbegging on or after January 2001) introduces twonew terms to explain the meaning of “reportingcurrency”: measurement currency (sometimesreferred to as functional currency) andpresentation currency. The role of the functionalcurrency in the translation process is similar tothat of the US functional currency.

Foreign currency transactionsForeign exchange transactions i.e. the assets,liabilities, gain or loss arising therefrom, shouldbe recorded in the reporting currency at theexchange rate in effect on the transaction date.

At each balance sheet date, monetary items(i.e. those assets to be received or paid in fixedor determinable amounts of money) in foreigncurrency should be translated by using the ratein effect at the balance sheet closing date, unlessthere is a future exchange contract. In this case,the contract rate is used. In general, the resultingexchange gains and losses are dealt with in theincome statement.

Functional CurrencyA company’s functional currency is defined as thecurrency of the primary economic environment inwhich the company operates. Normally this is thecurrency of the environment in which thecompany generates and expends cash.

Foreign currency transactionsAt the date the transaction is recognized, eachasset, liability, revenue, expense, gain or lossarising from the transaction is measured andrecorded in the functional currency of thereporting company using the exchange ratein effect at that date.

At each balance sheet date, monetary itemsthat are denominated in a currency other thanthe functional currency of the reporting companyare adjusted to reflect the current exchange rate.In general, the resulting exchange gains and lossesare dealt with in the income statement.

Functional CurrencyNo specific definition of the functional currency.However, the treatment is similar to IAS.

Foreign currency transactionsThe transactions in foreign currency are recordedin the reporting currency at the exchange rate onthe transaction date.

At each, balance sheet date, monetary items inforeign currency should be adjusted to reflect thecurrent exchange rate. In general, the resultingexchange gains and losses are dealt with in theincome statement.

39

BRUSAIAS


Translation of foreign currencyfinancial statementsWhere a foreign operation is an integral partof the operations of the reporting company, itsfinancial statements should be translated as ifits transactions were those of the reportingcompany (as described above).

In most practical cases, the operations are notintegral and are termed “foreign entities”.In these cases, the following procedures shouldbe applied to translate the financial statementsof a foreign entity for future consolidation:a. assets and liabilities are translated at the

rate on the balance sheet date;b. items in the income statement are translated

at rates as at the dates of the relevanttransactions, although an appropriateaverage rate may be used;

c. exchange differences so arising are takendirectly to equity. The cumulative amount ofthis translation adjustment must be disclosed.

Hyper-inflationIf the financial statements of a foreign entity areaffected by high inflation, they should be adjustedfor price-level restatement before translation.As an alternative, “re-measurement” in the“reporting currency” may be performed.

Translation of foreign currencyfinancial statementsWhen an entity is merely an extension of theparent company, its functional currency willoften not be the currency of the country in itis located or the currency in which its recordsare maintained. In that case, the functionalcurrency would be the reporting currency ofthe parent company, and would be translatedas if its transactions were those of the parent(as described above).

For subsidiaries for which the local currency is thefunctional currency, the exchange rate at thebalance sheet date is used to convert the assetsand liabilities at the balance sheet date fromthe functional currency to the reporting currency,as follows:a.assets and liabilities are translated at the rate

on the balance sheet date;b. revenues, expenses, gains and losses are

translated at the exchange rate in effect whenthese items were recognized. In practice anappropriately weighted average rate may beused;

c. translation adjustments are included in othercomprehensive income, and are accumulatedand disclosed as a separate component ofconsolidated stockholders’ equity.

High InflationHighly inflationary economies include those withcumulative inflation of 100% or more over a threeyear period. The financial statements of a foreignentity in such an economy must be remeasuredas if the functional currency were the reportingcurrency.

Translation of foreign currencyfinancial statementsForeign subsidiaries’ financial statements (incomestatement and balance sheet) are translated at theexchange rate on the balance sheet date, unlessthe subsidiary is based in a hyperinflationaryeconomy with no price-level restatement system.In this case, either the historical translation rateor price level accounting is used.

High InflationFor highly inflationary economies the monetaryand nonmonetary methods are required. Theinflation accounting is required for the Brazilianentities under the accounting practices determinedby the Federal Council of Accountants-CFC,which is the Brazilian official professional body.The statutory law (Lei 6404/76) does not requireinflation accounting.

16. Foreign exchange16. Foreign exchange

(IAS 21, IAS 29, SIC 11, SIC 19)

16. Foreign exchange

(Law 6404/76, CVM Decision 28/86,Pronouncement XVIII IBRACON)

(SFAS 52, F60)


BRUSAIAS 17. Business combination17. Business combination

(IAS 7, IAS 22, IAS 27, SIC 9, SIC 17)

17. Business combination

(CVM Instruction 247/96,CVM Instruction 285/98)

(SFAS 79, SFAS 109, B50, APB 16,EITF 95-3, EITF 95-19)

An acquisition of a business or a companyis recorded at cost measured at the date ofacquisition. Cost is either the amount ofcash or cash equivalents paid, or the fair valueof the other purchase consideration given, plusany costs directly attributable to the acquisition.The date of acquisition is the date on whichcontrol is effectively transferred to the acquirer.

Contingent consideration (e.g. possible futurecash payments or stock issues) is provided for atthe outset where it is probable that it will be paid.It is subsequently adjusted against goodwill, asthe estimate of the amount payable is revised.

Any payments made by the acquirer under aguarantee of the value of its shares or debt givenas consideration are not themselves considerationbut are debited to shareholders’ equity or againstthe debt as the case may be.

Costs directly attributable to the acquisitioninclude the usual professional fees as well asthe costs of issuing equity securities but excludethe costs of issuing debt, which are deducted fromthe debt’s carrying value. Internal costs cannotbe included.

The identifiable assets and liabilities of theacquired entity that existed at the date ofacquisition, plus certain restructuring provisions,are brought in at fair value. The identifiable assetsinclude any intangibles that can be reliablymeasured.The difference between the aggregate of the fairvalues and the cost of acquisition is goodwill.

An acquisition of a business or company isrecorded at cost measured at the date on whichthe parties reach agreement and announce thetransaction. Cost is generally measured by the fairvalue of the consideration, or in rare cases, the fairvalue of the company acquired, if that is moreclearly evident. The cost of acquisition alsoincludes those direct costs that would not havebeen incurred had the acquisition not beeninitiated.

Contingent consideration forms part of the costof acquisition and thus goodwill, and is recognizedwhen the contingency is resolved and theconsideration becomes payable (or issuable).

Any payments made under guarantees of thevalue of its shares or debt issued as consideration,would themselves be additional consideration forthe acquisition.

The registration and issue costs of equitysecurities are dealt with as a reduction of equity.

The acquirer records the acquired assets, lessliabilities assumed, at cost to the acquirer.The difference between the cost of an acquiredentity and the sum of the fair values of tangibleand identifiable intangible assets, less liabilitiesassumed, is recorded as goodwill.

There is no clear definition as to the date to beadopted. However, the date of the acquisitionis used.

The basis of accounting is cost. The differencebetween the acquisition cost and the carryingamounts of the net assets acquired are recordedas goodwill.

The goodwill or negative goodwill on acquisitionshould be recorded along with an indicationof the economic justification.

Any payments made under guarantees of thevalue of its shares or debt issued as consideration,would themselves be additional consideration forthe acquisition.

The registration and issue costs of equitysecurities are accounted as an expense.

41

BRUSAIAS


Positive goodwill on a business acquisition iscapitalized and amortized over a finite life usually,although not necessarily always, of less than 20years.

The restructuring provisions that must berecognized, even though they are not a liabilityof the acquired entity, are in respect of theacquirer’s restructuring of the acquired entity,the main features of which have been plannedand announced by the date of acquisition.A detailed formal plan is then required withinthree months of acquisition or by the dateof approval of the financial statements.

Positive goodwill is capitalized and amortizedover a period not to exceed 40 years.

Redundancy and reorganization acquisitionaccruals are generally not allowed; only the directcosts of an acquisition should be included in thecost of a purchased entity. Indirect expenses ofthe acquiring company, including costs associatedwith the closing of duplicate facilities, should becharged to expense when incurred.Costs of a plan to exit an activity of an acquiredcompany, or terminate involuntarily employeesof an acquired company, or relocate employeesof an acquired company, should be recognizedas liabilities assumed in the purchase if specificconditions are met. These conditions are similarto those for restructuring provisions, with theexception that at the time of acquisition,management needs only to begin to assessthe restructuring plan and within one yearto finalize that plan and communicate itto relevant employees.

The goodwill resulting from projected futureearnings is amortized over the period of theprojections or on disposal or impairment of theinvestment. The projections must be reviewedannually and can not exceed a 10-year period.Exceptions are permitted for goodwill paid onpublic concessions, which are amortized over theperiod the concession is granted or on disposalor impairment of the investment.

The goodwill, which is not supported by aneconomic reason (directly related to an assetor based on future earnings), must be writtenoff on the acquisition date.

17. Business combination17. Business combination






BRUSAIAS

Unamortized negative goodwill is presented asa deduction from the asset category containingpositive goodwill, effectively as a negative asset.It is amortized and credited to the incomestatement, as follows:n first, to the extent that it relates to certain

post acquisition costs, at the same timeas those costs;

n the balance, up to an amount of the fair valueof the non-monetary assets acquired, overthe life of the depreciable assets; and

n then any remaining balance, immediately.

Negative goodwill is allocated proportionately toreduce the values assigned to non-current assets(except long-term investments in marketablesecurities).If these non-current assets are thereby reducedto a zero value, any remaining negative goodwillis treated as a deferred credit and is amortizedsystematically to income over the periodestimated to benefit, not exceeding 40 years.

17. Business combination17. Business combination





The negative goodwill is amortized only onthe disposal or impairment of the investment.

43

BRUSAIAS


18. Investments in associates18. Investments in associates

(IAS 1, IAS 28)

18. Investments in associates

(CVM Instruction 247/96, Law 6404/76)(ABP 18, FIN 35, I82)

An associate is an investee (other than asubsidiary) in which the company has significantinfluence; that is, the power to participate in itsfinancial and operating policy decisions.This is presumed to be when the company has20% or more of the voting power, unless it canclearly be demonstrated otherwise.

Associates are accounted for using the equitymethod.

In the balance sheet, an investment in anassociate is stated at cost, i.e. including normalacquisition accounted goodwill, plus the post-acquisition share of profits and other changes innet assets. The share of profits is included in theincome statement in a single line located afterfinance costs and before tax.

The usual inter-company eliminations are made,to the extent of the investor’s interest.The investor’s share of losses of the associateare recognized until the equity investment isreduced to zero and thereafter to the extent ofany investor’s obligation to meet the associate’sobligations.

US-GAAP does not have a comparable definition,rather, it provides guidance as to specificcircumstances under which equity accountingshould be used.

The equity method of accounting is used toaccount for any investments where the investorhas the ability to exercise significant influenceover operating and financial policies of theinvestee. An investor owning 20% or more of thevoting stock of an investee is presumed to havethe ability to exercise significant influence over theinvestee, unless this presumption is overcome bypredominant evidence to the contrary.

An investor using the equity method initiallyrecords an investment at cost. Subsequently, thecarrying amount of the investment is increasedto reflect the investor’s share of income of theinvestee and is reduced to reflect the investor’sshare of losses of the investee or dividendsreceived from the investee. The investor’s shareof the income or losses of the investee is includedin the investor’s net income (after inter-companyeliminations). An investor’s share of after taxearnings or losses from the investee is ordinarilyshown in its income statement as a single amount.

Inter-company profit eliminations are usuallymade to the extent of the investor’s interest.The investor’s share of losses in the associateis recognized until the investment is reduced tozero and thereafter to the extent of any investor’sobligation to meet the associate’s obligations.

An associate is an investee in which a companyretains 10% share in capital. An investee isequivalent to an associate when a) a companyindirectly retains 10% or more of the votingshares without control; b) a company retain10% directly without control and independentlyof the total participation in the capital.

The equity accounting is used for the valuation ofthe relevant investment in each associate and orits equivalent when the investor has influence inthe management or it retains directly or indirectlymore than 20% share of participation.

An investor using the equity method initiallyrecords an investment at cost. Subsequently, thecarrying amount of the investment is increasedto reflect the investor’s share of income of theinvestee and is reduced to reflect the investor’sshare of losses of the investee or dividendsreceived from the investee. The investor’s shareof the income or losses of the investee is includedin the investor’s net income (after inter-companyeliminations). An investor’s share of after taxearnings or losses from the investee is ordinarilyshown in its income statement as a single amount.

The usual inter-company eliminations are made,to the extent of the investor’s interest.The investor’s share of losses of the associateare recognized until the equity investment isreduced to zero and thereafter to the extent ofany investor’s obligation to meet the associate’sobligations.


BRUSAIAS19. Consolidation and

investments in subsidiaries19. Consolidation and

investments in subsidiaries

(IAS 22, IAS 27, SIC 12)

19. Consolidation andinvestments in subsidiaries


(SFAS 94, SFAS 125, C51, APB 18, ARB 51,EITF 96-20)

A parent company which is not in itself asubsidiary should prepare Consolidated financialstatements. Consolidated financial statementsshould include all subsidiaries of the parentexcept in certain circumstances detailed below.

The definition of a subsidiary focuses directlyon the concept of control, that is, the parent’spower to govern the financial and operatingpolicies of an entity so as to obtain benefitsfrom its activities. This differs from an affiliate,which is defined as a company over whichthe parent exercises considerable influence.

A subsidiary should be excluded fromconsolidation in the following two cases:a.control is temporary since the subsidiary

was acquired and controlled exclusivelyfor subsequent sale in the near future; or

b. the subsidiary operates under severe long-termrestrictions which significantly affect its abilityto transfer funds to the parent.

Excluded subsidiaries should be recorded asnon-current investments.

Consolidated financial statements must includethose companies over which the parent companyhas a controlling financial interest though a director indirect ownership of a majority voting interest(over 50% of the outstanding voting shares).

A majority owned subsidiary is not consolidatedif control is likely to be temporary or does not restwith the majority owner (because of bankruptcy,reorganisation, foreign exchange restrictions,governmental controls, etc).

Consolidated financial statements are mandatoryfor:n publicly held companies including joint

ventures; andn holding companies which retain investments

in publicly held companies.

A controlled company in accordance withInstruction 247/96 is:n an investee in which the company, directly

or indirectly retains the rights of an investoron a permanent basis such as:a) the majority of the votes on decisionsof the board; andb) the power to appoint or replacethe management;

n a branch or representation office abroad ifthe corresponding net assets are not includedin the parent company books due to specificregulations; and

n a venture in which the permanent rights ofthe investor are under joint control or exercisedunder a partnership agreement independentlyof the percentage of voting shares.

A subsidiary should be excluded fromconsolidation in the following two cases whose:n there is clear evidence of the impairment

of the operations;n there is clear evidence that the investor will

dispose of the investment in the near future.

45

BRUSAIAS


In the separate parent company financialstatements, investments in subsidiaries andaffiliates should be valued according to theequity method unless the circumstances notedin (a) and (b) above apply, or if the investorceases to have significant influence but maintainsthe investment. Under these circumstances, theaffiliate is recorded as a non-current investment.

There may be a lag of up to three monthsbetween the financial statements of thesubsidiary and those of its parent company.Significant events and transactions involvingboth should be recognized.

Where practical, uniform accounting policiesshould be used throughout the group. If, becauseof impracticability, uniform accounting policiesare not used then this fact should be disclosedtogether with the proportions of the items in thefinancial statements to which different accountingpolicies have been applied.

There is no specific requirement in relation tolag between the dates of the subsidiary’s andthe parent’s financial statements.If the difference in fiscal periods of a parentand subsidiary is not more than three months,it is usually acceptable to use, for consolidationpurposes, the subsidiary’s statements for its fiscalperiod. Material events in the intervening periodshould be disclosed.

While accounting policies throughout the groupmust be in accordance with US-GAAP, uniformityof accounting policies is not required.Disclosure should generally be made whereaccounting policies followed by variousdivisions, subsidiaries, etc. of the companyare not consistent.

There may be a lag of up to two months betweenthe dates of financial statements of a consolidatedsubsidiary and those of its parent.

The effects of adoption of different accountingpractices may be eliminated on determinationof the equity method accounting entries.



(IAS 22, IAS 27, SIC 12)



(SFAS 94, SFAS 125, C51, APB 18, ARB 51,EITF 96-20)


BRUSAIAS 20. Joint ventures20. Joint ventures

(IAS 31)

20. Joint ventures

(CVM Instruction 247/96)(SFAS 94, APB 18)

A joint venture is a contractual arrangement bytwo or more parties jointly to control an economicactivity. Where the activity is carried on througha separate entity (e.g. a company or partnership),it is known as a “jointly controlled entity”.

The participation of a group in a joint venturemay be recorded by using the equity method,or through proportional consolidation unless theconditions for subsidiaries laid out in (a) and (b)in item 18 above apply.Under such circumstances, a joint venture maybe recorded as a non-current investment.

If one joint venture partner no longer has jointcontrol over the venture, use of the equity methodor proportional consolidation should be ceasedimmediately.

US-GAAP does not distinguish betweenassociates, jointly controlled entities, assets,or operations.

Only the equity method is used for joint ventures.

A joint venture is a legal entity under the jointcontrol of two or more investors. A joint venturethat is not established within a company is nota viable legal structure in Brazil.

The assets and liabilities, revenues and expensesare recognized proportionally to the equityinterest of each investor and consolidated intheir respective financial statements.

47

BRUSAIAS


21. Other investments andfinancial instruments


(IAS 21, IAS 39)


(CVM Instruction 235/95)(SFAS 52, SFAS 115, SFAS 125, SFAS 133,SFAS 137, SFAS 138, D50,

F38, F60, I80, ARB 43)

IAS 39 provides rules covering all financialinstruments other than investments insubsidiaries, associates and joint ventures,assets and liabilities arising from leases, assetsand liabilities arising from employee benefit plans,interest in insurance contracts, own equityinstruments, certain guarantees and deferredconsideration on business combinations.

IAS 39 is mandatory for years beginning on orafter January 1, 2001.

All financial instruments are classified as oneof the following:n held-to-maturity assets;n originated-loan-or-receivable assets;n trading assets;n available-for-sale assets;n trading liabilities; andn other liabilities.

All derivatives, other than hedges, are deemed tobe trading assets or liabilities as the case may be.The classification and measurement rules for eachtype of financial instrument are as follows.

Held-to-maturityHeld-to-maturity assets are stated at amortizedcost. A held-to-maturity asset is one which,naturally, has a fixed maturity. It thereforeexcludes equity shares. The entity must havethe positive intent and ability to hold it tomaturity.

US-GAAP provides extensive rules for thefollowing classes of financial instruments:n held-to-maturity debt securities;n trading debt securities and marketable

equity securities;n available-for-sale debt securities and

marketable equity securities;and

n derivatives.

The rules do not apply to investments in equitysecurities accounted for under the equity methodnor to investments in consolidated entities.

SFAS 133 and SFAS 138 is mandatory for fiscalquarters beginning after June 15, 2000.

Held-to-maturity securitiesInvestments in debt securities that the investorhas the positive intention and ability to hold tomaturity should be classified as held-to-maturityand measured at amortized cost.

There are no specific requirement for accountingfor financial instruments. Only disclosures as tothe market value of certain financial instrumentsare required.


BRUSAIAS

The conditions for this are similar to those ofUS-GAAP, however if the company sells anyheld-to-maturity asset in the current or previoustwo years, IAS is more strict in that it prohibitsany asset from being classified as held-to-maturity.In effect, the consequence of such a sale is thatall held-to-maturity assets must be declassifiedas such for three years.

Originated-loan-or-receivable assetsThis category relates to financial assets whichare not to be sold in the short-term and whicharise from the provision of money, goods orservices by the company.An originated-loan-or-receivable (such as tradedebtors or a bank’s advances to customers) isalso stated at amortized cost.

Trading assets and liabilities includingderivativesThis category includes any financial asset orliability held to generate short-term pricingprofits or that is part of a portfolio actuallyused for that purpose. All derivatives otherthan hedges are deemed to be held for trading.

A derivative is defined as a financial instrumentthe value of which changes in response to someunderlying variable and which requires little orno initial net investment compared with otherinstruments that have a similar response to thevariable.

Other amortized cost assetsUS-GAAP has no direct equivalent to originated-loan-or-receivable assets, however all debtsreceivable that are not securities, and all equitysecurities that are not marketable, are usuallycarried at cost, amortized if appropriate.US-GAAP is therefore not necessarily restrictedto original loans and receivables but can alsoextend to purchased ones.

Trading securities and derivativesDebt securities and marketable equity securitiesthat are bought for the purpose of being sold inthe very near future should be classified astrading securities.

A derivative is defined as a financial instrumentthat meets all of the following conditions:n It has some underlying variable (e.g. an interest

rate) and either a notional amount or a paymentprovision (e.g. a specification as to how muchis payable or receivable in response to changesin the underlying) or both.

n It requires little or no initial net investmentcompared with other instruments that have asimilar response to market factors.



(IAS 21, IAS 39)



F38, F60, I80, ARB 43)

49

BRUSAIAS


Derivatives that are embedded in a host contractshould be separately accounted for as derivativeswhere they are not closely related to the hostcontract.

Trading assets (including derivatives) are statedat fair value with changes therein flowing to theincome statement. If the fair value of any suchassets cannot be reliably measured, then the assetis stated at amortized cost, although the standardsuggests that only unquoted equity instrumentsare likely to be incapable of reliable fairvaluation.

Available-for-sale assetsAny asset that does not fall into the previousthree categories is classed as available-for-sale.

The balance sheet treatment is the same as thatfor trading items in that these assets are valuedat fair value.

The company has a policy choice for all available-for-sale items taken together. It may either takethe fair value and losses through to the incomestatement, as for trading items, or it may takethem directly to equity from which they are latertransferred into the income statement on theoccasion of a sale, realization, or impairmentof the asset concerned. The part of the changein fair value that is due to exchange rate changesis always reflected in the income statement.

n Its terms require or permit net settlement, orit can be settled net by another means (e.g. bysome market mechanism) or the item to betransferred in settlement is readily convertibleinto cash or is itself a derivative.

As under IAS, derivatives that are embedded ina host contract should be separately accountedfor as derivatives where they are not clearly andclosely related to the host contract.

Both trading securities and all derivatives,whether assets or liabilities, are stated at fairvalue with changes therein flowing to the incomestatement. If an equity security does not have areadily determinable fair value then it is nottreated as a marketable equity security at all.There is no similar exception for debt securitiesor for derivatives.

Available-for-sale securitiesAll debt and marketable equity securities thatare not classed as held-to-maturity or tradingsecurities are classed as available-for-sale.

These items are stated at fair value.

Changes in fair value, including that elementdue to exchange rate changes, are excluded fromearnings and are reported (net of any tax effectsand minority interest) as a net amount in othercomprehensive income.



(IAS 21, IAS 39)



F38, F60, I80, ARB 43)


BRUSAIAS

A held-to-maturity asset or an originated-loan-orreceivable is impaired if the present value, at theoriginal effective interest rate, of the expectedfuture cash flows (the recoverable amount),is less than book value. The difference is chargedto the income statement. If the recoverable amountlater increases due to an event subsequent tothe original write-down, then the impairmentis reversed to that extent, provided that thisdoes not state the asset at more than amortizedoriginal cost.

For trading assets and available-for-sale assets, ifstated at fair value through the income statement,impairment is not applicable.An available-for-sale asset, for which changesin fair value are reported in equity, is impairedif the fair value (e.g. the present value of its cashflows at the current discount rate) is less thanwhat the amortized cost would have been.The difference is transferred out of equityand charged to the income statement.

HedgingThe IASC has formed an IAS 39 ImplementationGuidance Committee (IGC) that is currentlyaddressing over 100 interpretation issues.The following is a summary of the principalpoints.

If a decline in fair value of a held-to-maturity oran available-for-sale security is considered to beother-than-temporary, then the individual securityshould be written down to fair value which thenbecomes the new cost basis.The amount of the write-down should berecognized in the income statement.There is no adjustment to this new cost basisfor any subsequent recovery in fair value.

HedgingThe FASB has put in place a DerivativesImplementation Group (the DIG) that has or isaddressing over 100 specific application issues.The following is a summary of the principalpoints.



(IAS 21, IAS 39)



F38, F60, I80, ARB 43)

51

BRUSAIAS


The following general conditions apply to alltypes of hedges:n The main requirement for qualification as a

hedge is for the hedge to be, and be expectedto continue to be, highly effective. That is, theoffsetting changes in fair values or cash flowsof the hedge and hedged item must normallybe within 80% and 125% of each other.This must be reliably measurable.

n The effectiveness of the hedge must be based onchanges in fair value or cash flows of all of therisk components of a hedging instrument, withthe exception of the time value of an option andthe forward points on a forward, which may beexcluded. The excluded components flowthrough the income statement.

n The hedge must be documented as such fromthe outset, including the hedge objective,strategy, and how its effectiveness will bemeasured.

Hedges fall into the following three categories:n fair value hedges;n cash flow hedges; andn net investment hedges.

Fair value hedgesA fair value hedge is where:n a derivative is used to hedge changes in fair

value (other than foreign currency risk) ona recognized asset or liability; or

n a derivative or non-derivative is used tohedge foreign currency risk on a recognizedasset or liability.

The following general conditions apply to alltypes of hedges:n The main requirement is for the hedge to

be and be expected to continue to be, highlyeffective. Although SFAS 133 does notquantify this, in practice it is consideredto be within 80% and 125%, as these werethe limits in the predecessor standard.

n The effectiveness of the hedge must be based onchanges in fair value or cash flows of all of therisk components of a hedging instrument, withthe exception of the time value of an option andthe forward points on a forward, which may beexcluded. The excluded components flowthrough the income statement.

n The hedge must be documented as such fromthe outset, including the hedge objective,strategy and how its effectiveness will bemeasured.

The following three hedge accounting modelsare used:n fair value model;n cash flow model; andn net investment currency hedge.

Fair value modelThis model is used for the following typesof hedges:n fair value hedges:

- a derivative used to hedge changes in fairvalue (other than for currency risk) of arecognized asset or liability;

- a derivative used to hedge changes in fairvalue (other than for currency risk) of anunrecognized firmly committed futuretransaction.



(IAS 21, IAS 39)



F38, F60, I80, ARB 43)


BRUSAIAS

The hedge is stated at fair value with changestherein flowing through the income statement.The hedged item is marked-to-market for thehedged risk (even if its normal basis is cost),with the result taken through the incomestatement.

Cash flow hedgesA cash flow hedge is where:n a derivative is used to hedge the future

cash flows (other than for currency risk)on a recognized asset or liability;

n a derivative is used to hedge future cashflows (other than for currency risk) ona future contracted, or uncontracted buthighly probably transaction;

n a derivative or non-derivative is used to hedgea foreign currency risk of future cash flows ona recognized asset or liability; or

n a derivative or non-derivative is used to hedgeforeign currency risk of future cash flows on afuture contracted, or uncontracted but highlyprobable transaction.

n certain foreign currency hedges:- a derivative used to hedge the foreign

currency exposure on a recognized assetor liability;

- a non-derivative used to hedge the foreigncurrency exposure on an unrecognizedfirmly-committed future transaction; or

n a derivative used to hedge the foreign currencyexposure on an unrecognized firmly-committedfuture transaction may be accounted for usingthe fair value model (the alternative is the cashflow model).

The hedge is stated at fair value with changestherein flowing through the income statement.The change in fair value of the hedged item, sofar as attributable to the hedged risk, is reflectedin the item’s carrying value and in the incomestatement.

Cash flow modelThis model is used for the following types ofhedge:n cash flow hedges:

- a derivative used to hedge the futurecash flows (other than for currency risk)on a recognized asset or liability;

- a derivative used to hedge the futurecash flows (other than for currency risk)of a forecast, i.e. probable but not firmlycommitted transaction;

n certain foreign currency hedges:- a derivative used to hedge the foreign

currency exposure of the cash flows ona recognized asset or liability;

- a derivative used to hedge the foreign currencyexposure of a forecast, i.e. probable but notfirmly committed transaction; or



(IAS 21, IAS 39)



F38, F60, I80, ARB 43)

53

BRUSAIAS


The hedge is stated at fair value with changestherein, insofar as they are an effective hedge,initially taken directly to equity. They are latertransferred out of equity when the futuretransaction either: results in an asset or liability,when the cumulative amount is recorded as anadjustment to the cost of that asset or liability;or otherwise affects the income statement inwhich case the cumulative amount is transferredinto the income statement.

To the extent that the hedge is ineffective thegains and losses are immediately dealt within the normal way, for example in the incomestatement if the hedge is a derivative or in theincome statement or equity according tocompany’s policy if the hedge is an available-for-sale (non-derivative) asset.

There is an additional limit to the cumulativeamount that may be reported in equity: it may notexceed the lesser of, on the one hand, the amountnecessary to offset the cumulative change inexpected future cash flows and, on the other hand,the fair value of the cumulative change in expectedfuture cash flows. There is no guidance onmeasuring these amounts.

- a derivative used to hedge the foreigncurrency exposure in an unrecognizedfirmly-committed future transaction maybe accounted for using the cash flow model(the alternative is the fair value model).

It is possible that a hedged future transaction mayfirst be dealt with under the cash flow model as aforecast transaction but subsequently fall underthe fair value model when it becomes a firmlycommitted transaction.

The hedge is stated at fair value with changestherein, insofar as they are an effective hedge,reported in other comprehensive income untilsuch time as the hedged cash flow affects theincome statement. At that time it is transferredout of other comprehensive income and reportedin the income statement.

The ineffective element of the hedge is reportedin the income statement.

There is an additional limit to the cumulativeamount that may be reported in othercomprehensive income: it may not exceed theamount necessary to offset the cumulative changein expected future cash flows. This cumulativelimit can be a derived figure of the total change infair value of the hedge less a computed ineffectiveelement.



(IAS 21, IAS 39)



F38, F60, I80, ARB 43)


BRUSAIAS

The following general rules apply to both fairvalue and cash flow hedges.

A financial item may be hedged with respect toany one or more of its individual risks whereasa non-financial item must be hedged with respectto all of its risks or solely currency risk.

The hedged item must be one that could affectthe income statement, such that, for example,share issues and repurchases cannot be hedged.

There is no equivalent of the US rule that thehedged item must not be one that is remeasuredto fair value through the income statement.

As in the US, the hedged item cannot be aheld-to-maturity asset except as regards creditor foreign currency risk.

Net investment hedgesA net investment hedge is where a derivativeor non-derivative is used to hedge the currencyrisk of a net investment in a foreign entity.Unlike in the U.S., for net investment hedges inconsolidated accounts the hedge need not be heldby the group member holding the investment.

The following general rules apply to both fairvalue and cash flow hedges.

The hedged item, if financial, need not be all of therisks affecting the item’s fair value. It could insteadbe solely interest rate risk, or credit risk (or both).In a fair value hedge of a non-financial item, all ofthe item’s risks must be hedged.

The hedged item must be one which can affectthe income statement.

It must not be an item that is already remeasuredto fair value through the income statement.

The hedged item cannot be a held-to-maturitysecurity except as regards credit or foreigncurrency risk.

Net investment currency hedgeThe net investment currency model is appliedwhen a derivative or non-derivative is used tohedge the foreign currency exposure in a netinvestment in a foreign entity. However, suchhedging is not permitted in consolidatedaccounts unless the group member holdingthe net investment also holds the hedge.



(IAS 21, IAS 39)



F38, F60, I80, ARB 43)

55

BRUSAIAS


These are dealt with similarly to cash flowhedges, i.e. the hedge is stated at fair value withthe currency element thereof, to the extent thatit is an effective hedge, being taken directly toequity until such time as the net investment issold, when the cumulative amount in equityis transferred into the income statement.

If the hedge is a derivative the ineffective elementis reported in the income statement; if the hedgeis a non-derivative it appears to be requirednevertheless to be taken directly to equity forsubsequent transfer to the income statementon a sale of the net investment. There is noguidance on measuring effectiveness.



(IAS 21, IAS 39)



F38, F60, I80, ARB 43)

These hedges are dealt with similarly to cashflow hedges. The hedge is stated at fair valueand, to the extent that it is an effective hedge,the changes therein are reported in othercomprehensive income.When the net investment is sold, it is transferredout of other comprehensive income and reportedin the income statement.


BRUSAIAS22. Extinguishment and

restructuring of debt22. Extinguishment and

restructuring of debt

(IAS 1, IAS 32, IAS 39, SIC 5)

22. Extinguishment andrestructuring of debt

(Law 6404/76)(SFAS 76, SFAS 125, SFAS 114, SFAS 118,SAB 94, D10, D22, APB 14)

Debt is considered extinguished when:n payment is made to the lender; orn the borrower is legally released, either

judicially or by the creditor, from primaryresponsibility for the liability irrespectiveof any guarantee given by the borrower.

IAS does not specify whereabouts in the incomestatement the gain or loss on the extinguishmentof the debt is to be included. However, given thedefinition of extraordinary items, it is veryunlikely that it would fall into that category.

Any assets transferred as part of thisextinguishment are derecognized only if thetransferor loses control of the contractual rightscomprising that asset or that part of the asset.Otherwise, a new liability to the transfereewill need to be recognized at fair value.Any guarantees given should also be recognizedat fair value.

Where a debt is restructured or refinanced onsubstantially modified terms it is accounted foras an extinguishment of the old debt, with aconsequent ordinary gain or loss, and theinception of the new, at fair value. The termsare considered to be substantially modified wherethe present value under the new terms differsby more than 10% from that of the remainingpayments under the old terms.

Debt is considered extinguished for financialreporting purposes when:n the issuer pays the holder and is relieved of

all its obligations with respect to that debt; orn the issuer is legally released, either judicially

or by the holder from being the primaryparty under obligation under the debt.

The difference between the amount paid toextinguish the debt and the net carrying amountof the debt must generally be dealt with as anextraordinary item.

Where a company offers additional securitiesor other consideration to the holders of itsconvertible debt as an incentive to exercisepromptly their rights to convert the debt to equity,the company is required to record as an ordinaryexpense an amount equal to the fair value of theadditional securities or other consideration issuedas an inducement.

The accounting for a troubled debt restructuring,such as when the lender, for reasons relating tothe issuer’s financial difficulties, grants aconcession to the issuer that it would nototherwise consider, is dependent on whetherit is effected:n by a transfer of assets, including repossessions

and foreclosures, or of an equity interest froman issuer to a lender in full settlement of adebt; or

n by a modification of terms.

A debt in arrears is recorded at cost, unless apermanent reduction in its value is projected.In this case, a provision is recorded.

57

BRUSAIAS


In the former case, to the extent that the fairmarket value of the assets transferred, or equityinterest granted, is less than the issuer’s bookvalue of the debt, the difference is generallytreated as an extraordinary gain to the issuerand an ordinary loss to the lender.In the latter case, any issuer’s apparent gainis generally spread forward.



(IAS 1, IAS 32, IAS 39, SIC 5)


(Law 6404/76)(SFAS 76, SFAS 125, SFAS 114, SFAS 118,SAB 94, D10, D22, APB 14)


BRUSAIAS23. Intangible assets(excluding goodwill)

23. Intangible assets(excluding goodwill)

(IAS 36, IAS 38, SIC 6)

23. Intangible assets(excluding goodwill)

(Law 6404/76, Pronouncement VIII IBRACON)

(APB 17, ARB 43)

An intangible asset is an identifiable non-monetaryasset without physical substance, held for use inthe production or supply of goods or services, forrental to others, or for administrative purposes.

As any asset, an intangible asset should berecognised and recorded at cost if:n it is probable that the future economic benefits

that are attributable to the asset will flow tothe enterprise; and

n the cost of the asset can be measured reliably.

Premiums, trademarks, trade names, copyrights,and customer lists that have been generatedinternally may not be considered as assets.

There is a rebuttable presumption that the usefullife of an intangible asset will not exceed 20years from the date when the asset is available foruse. If an enterprise decides to amoritise the assetover a period exceeding 20 years, the recoverableamount of the intangible asset should be estimatedfor impairment testing at least at each financialyear end.

Impairment of intangible assets should beconsidered in accordance with IAS 36 (see item24), and should include intangibles not yetavailable for use at each balance sheet date.

Intangible assets are recorded at cost andamortized over the expected useful life of theasset, up to a maximum of 40 years.Costs related to intangible assets developedinternally which cannot be identified separately,have indeterminate lives or are inherent to a goingconcern should be amortized when incurred.

Permanent decreases in the value of intangibleassets should be recorded immediately.

Application of resources in expenses that willcontribute to the formation of income for morethan one fiscal period can be classified asdeferred assets.

Some examples are:n organizational expenses;n studies and projects;n pre-operational expenses;n research and development expenses;n reorganization and restructuring expenses.

Deferred assets should be valued at cost lessamortization in accordance with the periodof benefit provided by the asset.

If, in any situation, there are doubts in relation tothe recovery of these assets through future profits,or in relation to the going concern of the entity,the amount classed as deferred assets should beimmediately written-off.

Amortization should be in accordance withthe return provided by the asset, but usuallyit follows the tax law: minimum of 5 yearsand maximum of 10 years as requiredby Corporation Law.

59

BRUSAIAS


24. Enterprises in thepre-operating stage


(IAS 36, IAS 38, SIC 6)


(Law 6404/76, Pronouncement VIII IBRACON)

(APB 17, ARB 43)

Expenses incurred by a company that is pre-operational must be immediately accounted for inthe income statement, unless they are of a naturewhich permits capitalization in fixed assets.

US-GAAP requires that companies in thedevelopment stage follow generally acceptedaccounting principles applicable to establishedoperating enterprises.Accounting treatment should be governedby the nature of the transaction rather thanby the degree of maturity of the enterprise.

All costs of an enterprise in the pre-operatingstage besides costs normally capitalized as fixedassets are capitalized as deferred assets.These deferred assets are amortized over a periodbeginning on the start-up date and extending overa minimum of 5 years as required by the fiscallegislation and a maximum of 10 years as requiredby Corporation Law.


BRUSAIAS 25. Impairment of assets25. Impairment of assets

(IAS 16, IAS 36, IAS 38, SIC 14)

25. Impairment of assets

(NPC 24 IBRACON,CVM Decision 183/95)

(SFAS 121, I08)

IAS 36 covers the impairment of virtually all non-financial assets (with the exception for exampleof inventories and deferred taxes) and goodwillplus that of investments, in the parent companyaccounts, in subsidiaries, associates, and jointventures. It does not cover other investments.

Impairment testing is required where there is anindication of a possible impairment, for exampleadverse changes in the business or regulatoryenvironment or in performance.In addition it is required annually for goodwillor intangible assets that have lives of over20 years and, for any intangibles not yetavailable for use.

If review for impairment is required, thenthe relevant assets’ useful lives and depreciationmethod may need to be reviewed and revised.If the recorded value of the asset is superior toits expected recoverable value, a provision foradjustment to recoverable value should beestablished.

In performing impairment testing, assets aregrouped together into the smallest group thatgenerate cash inflows from continuing use thatare largely independent of the cash inflows ofother assets or groups thereof. Such a groupis known as a cash generating unit (CGU).

SFAS 121 provides guidelines for recognitionof impairment losses on long lived assets andcertain intangibles and related goodwill. Its scopeexcludes financial instruments, long term customerrelationships of financial institutions, mortgageand other servicing rights, deferred policyacquisition costs and deferred tax assets.

Companies are required to review assets forpossible impairment when events or changes incircumstances indicate that the carrying amountof an asset may not be recoverable. Examples ofsuch events or changes in circumstances include:declines in market value of assets; changes inthe extent or manner in which assets are used;adverse changes in legal factors, business climateor actions by a regulator; accumulation of costs inexcess of amounts originally expected in acquiringor constructing an asset; and current periodoperating or cash flow losses combined witha history of operating losses and/or projectionsfor continuing losses.

The standard also acknowledges that therecognition of impairment is influenced bydepreciation rates and methods used by acompany. A company that is required to evaluatean asset for impairment is also encouraged tore-evaluate depreciation policies. Any changestherein should be considered separately fromthe measurement of impairment, if any.

Although the statement uses the term asset,that term usually refers to a group of assets.Assets are to be grouped at the lowest level forwhich identifiable cash flows are independentfrom the cash flows of other groups of assets.

NPC 24 covers revaluation of tangible assetsand provides some guidance on the recoverabilityof assets.

Permanent assets must be periodically monitoredin order to determine whether their carryingamounts are not higher than their realizationamounts.

The analysis of recoverability must considerthe grouping of assets and the related assetsregistered as intangible.

61

BRUSAIAS


Goodwill is allocated to each CGU where it canreasonably be done; where it cannot, then twoimpairment tests are carried out, one at individualCGU level without goodwill and the second withthe minimum collection of CGUs to which thegoodwill can be allocated.

The measurement is not separate from therecognition test. An impairment is booked tothe extent that the book value of a CGU exceedsthe recoverable amount. The recoverable amountis considered to be the higher of its value in useand its net selling price.

The value in use is the discounted future netcash flows (pre-tax) from the continuing useof the CGU. The discount rate must reflect anappropriate market premium for the risksinherent in the cash flows.

Goodwill from a business purchase that isassociated with a group of assets being evaluatedfor impairment should be included in the carryingamount of the related assets. If the goodwill isassociated with only part of the assets underevaluation, the goodwill should be allocatedamong the related assets based on the relativefair values of the assets acquired at the acquisitiondate unless there is evidence to support a differentallocation method.

The standard provides a threshold to determinewhether recognition of an impairment is requiredor allowed and a separate calculation to measureimpairment, as follows:n Recognition trigger

The estimated future cash alows to be derivedfrom the use and disposition of an asset,undiscounted and without interest, is comparedwith the carrying amount of the asset.If the expected cash flows are in excess of thecarrying amount, recognition of an impairmentloss is not allowed.

n MeasurementMeasurement of an impairment loss isdetermined by reducing the carrying amountof an asset to its fair value. The reducedcarrying amount becomes the new costbasis for the asset.

Cash flows consist of the future cash inflowsexpected to be generated by an asset less thefuture cash outflows expected to be necessaryto obtain those inflows. The future cash flows arethe company’s best estimate based on reasonableand supportable assumptions and projections.Fair value should be based on quoted marketprices, if available.

No specific treatment exists for goodwill.

A provision for recoverability of an asset isrecorded when the recoverable value of an assetis lower than its carrying value and the reductionis of permanent nature. The recoverable valueis preferably based on the discounted cash flowsof the total Company operations.

25. Impairment of assets25. Impairment of assets

(IAS 16, IAS 36, IAS 38, SIC 14)



(SFAS 121, I08)


BRUSAIAS

Any impairment is allocated first to goodwillthen, pro rata amongst the CGU’s other assets(including intangibles).

If the recoverable amount subsequently increasesthen in some cases the impairment is reversed.The general rule is that this is done where theincrease is caused other than by the unwindingof the discount in the value in use, whereby anasset’s value in use becomes greater than theasset’s carrying amount simply because thepresent value of future cash inflows increases asthey become closer. Where goodwill is concernedthere is an additional test that the originalimpairment was caused by a specific, exceptionalexternal event that was not expected to recur butthat a subsequent external event has reversed itseffect. In all cases the maximum amount of thereversal is such as to restore the assets of theCGU to their original pre-impairment carryingvalue less subsequent depreciation.

Impairment losses are charged to the incomestatement, although no particular location thereinis specified, except where the impaired asset is arevalued one. In that case, it is charged directlyto the revaluation reserve to the extent that itreverses a previous revaluation surplus.

If quoted market prices are not available, the bestinformation available is used. Such informationmay include present value of estimated pre-taxcash flows using a discount rate commensuratewith the risks involved, option pricing models,matrix pricing, option-adjusted spread models,and fundamental analysis.

Any impairment recognized is allocated first togoodwill, notwithstanding that the recoverabilityof the written down goodwill must also beassessed on an entity basis.

Recognition of any subsequent recoveries in fairvalue is prohibited.

Impairment losses are included in income fromcontinuing operations before income taxes.

There is no specific guidance on the allocationof the provision.

The provision to the recoverable amounts of anasset may be reversed if the recoverable amountsincrease. The reversal must be limited to theoriginal carrying amounts of the assets.

There is no specific guidance on the classificationof the provision in the income statement.

25. Impairment of assets25. Impairment of assets

(IAS 16, IAS 36, IAS 38, SIC 14)



(SFAS 121, I08)


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Printed byGráfica Cipriano Ltda.Rua Custódio Serrão, 33505116-010 São Paulo, SPTel 55 (11) 3625.0001Fax 55 (11) 3525.1382

Publicado por / Published byDPP Brasil - Departamento de Práticas ProfissionaisDPP Brazil - Department of Professional Practices

Coordenação / CoordinationJosé Luiz Ribeiro de CarvalhoSócio / Partnere-mail: [email protected]

Equipe técnica DPP / Technical team DPPAuro Suzuki, Fabiana Novaes, Sapna Dayal

Sócios revisores / Partners revisorsDerek Barnes, Jeremy Taylor, Toshiharu Fujii, Timothy Young

Edição de arte / Art EditorialMarketing & Communication

© 2001 KPMG Auditores Independentes, the Brazilianmember firm of KPMG International, a Swiss Association.All rights reserved. May, 2001. 2nd edition: 5,000 copies.Printed in Brazil. Free distribution.

Documents

KPMG Brazil - Office Directory · (IAS 2, SIC 1) (Law 6404/76, NPC 02 IBRACON, NBC-T-4)(ARB 43, I78, FIN 1) Cost may be determined based on a FIFO, average cost, or LIFO method