Disclosure and Transparency - The Brazilian Scenario -

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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 TransparencyTopics 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 80s) 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).