The Latin American Corporate Governance
Roundtable
April 28, 2000
Disclosure and Transparency
- The Brazilian Scenario Taiki Hirashima - Partner
Arthur Andersen - Brazil
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Disclosure and Transparency:
Topics Related to Brazil
• Accounting and reporting standards - Background
• Financial reporting practices
• Brazilian accounting standards compared to IAS
• Proposed new accounting standards - corporate law
• The independent auditors and Board of Directors desirable communication
• Summary
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Accounting and Reporting Standards - Background
1. Tax legislation;
2. 1976 corporate law;
3.Hyperinflation and requirement of full price-level adjusted
financials for publicly traded companies (late 80’s);
4. Economic plans - impact on tax legislation and corporate
law;
5. The role of accounting profession and regulators.
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Financial Reporting Practices Two Standards (1)
1. Brazilian corporate law standards:
• Inflation accounting prohibited as from
January 1, 1996;
• Valid for all legal and tax purposes;
• Required for CVM reporting;
• The auditors’ report.
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Financial Reporting Practices Two Standards (2)
2. Brazilian GAAP - accounting profession standards
• Requires price-level adjusted financials if inflation
effects are significant;
• Required for SEC reporting;
• “Allowed” as supplementary information for CVM
reporting;
• The auditors’ report.
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Financial Reporting Practices Two Standards (3)
• ADR holders are receiving different set of financial
statements in relation to those published locally.
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Brazilian GAAP Main differences from IAS
• Cash Flow - not part of basic financials
• Pension Benefits - cash basis
• Leasing Accounting - expensing of lease payments
• Segment Information - not disclosed
• Purchase accounting - book value of the acquired
company
• Consolidation - closely held companies
• Others
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Proposed Changes in the Corporate Law Accounting and Reporting Matters (1)
Main changes:
• Cash flow as a basic financial statement;
• Segment information disclosure;
• Accounting records for compliance with tax or special
legislation adjusted for financial reporting;
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Proposed Changes in the Corporate Law Accounting and Reporting Matters (2)
• Leasing accounting;
• Pension accounting;
• Deferral of unrealized profits on intercompany
transactions;
• Discounting of long-term receivable and payable;
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Proposed Changes in the Corporate Law Accounting and Reporting Matters (3)
• Income statement to reflect:
• Prior year adjustment;
• Extraordinary items;
• Consolidation of subsidiaries, regardless of the current
30% limit;
• Purchase accounting - assets and liabilities accounted
for at their fair values.
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Proposed changes in the corporate law General (4)
1. Closely held companies with assets over R$ 120 millions
(+/- US$ 67,000 millions) or gross revenues over R$ 150
millions (+/- US$ 83,000 millions) are required to follow the
same accounting and reporting standards applicable to the
publicly traded companies, and publish their audited
financial statements.
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Proposed changes in the corporate law General (5)
2. Provides for qualification of not-for-profit entities
dedicated to research and publication of accounting and
auditing principles, norms and standards, as civil
society organization of public interest, when certain
conditions are met.
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Proposed changes in the corporate law General (6)
• Deliberative bodies composed by representatives
from segments involved in the preparation, auditing
and analysis of financial statements and from
universities and accounting research institutes.
• Due exposure and approval process for the
pronouncements.
The published standards may be partially or fully adopted
by the CVM and other regulators.
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The Board of Directors and
the Independent auditors - Communication
• The selection process;
• Review and evaluation of the annual audit plan;
• Review and evaluation of the audit results;
• Performance evaluation.
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The Board of Directors and the
Independent auditors - areas of concern
• Fraud and illegal acts;
• Quality of internal controls;
• Quality of financial statements and disclosures;
• Accounting polices;
• Management judgments and accounting
estimates;
• Sensitive disclosures;
• Areas of disagreement with independent
auditors.
• The auditors’ report.
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Summary
1. Accounting profession and regulators need to resolve the
dual reporting practices
2. Changes in the corporate law need to be approved by the
Congress
3. Board of Directors (Audit Committee) and independent
auditors to improve communication.
4. Immediate creation of the Brazilian “FASB” to harmonize
accounting and auditing standards in Brazil (IASC/IFAC
guidelines as benchmarks).
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