Brazil: The Brazilian Regulator Adopts MERCOSUR Decision 31/10

At the meeting held on February 15, 2011 the Board of the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários - CVM) approved Decision No. 31 of December 16, 2010 issued by the Common Market Council (Conselho do Mercado Comum - CMC) of the South Common Market - MERCOSUR, known simply as MERCOSUR Decision 31/10, which refers to minimal regulation of the securities market on the preparation and disclosure of financial statements for transactions made in the MERCOSUR region with tradable securities of companies with public offering authorized by any of the countries that is member of MERCOSUR.

Decision 31/10 was adopted in Brazil by means of CVM Deliberation No. 659 of February 24, 2011 and does not replace nor revoke in any way the CVM rules applicable to issuers of securities admitted to trading on the Brazilian regulated markets, which continue in full force and effect.

The new minimal regulation adopted by MERCOSUR takes into consideration that: (i) the existence of an integrated securities market enables important projects to be implemented in order to achieve the underlying objectives which justified the creation of MERCOSUR; (ii) the integration process requires standardized rules for disclosure of information by issuers of tradable securities which raise funds from the public in general; (iii) it is important and necessary that the accounting practices in MERCOSUR are converging with international accounting practices; (iv) it will bring increased transparency and reliability to the financial statements and will enable the access of companies based on the MERCOSUR countries to external sources of funding with a lower cost; and (v) it is convenient and necessary to upgrade the accounting standards.

This regulation provides that the companies with authorized public offering that would like to trade their securities in the MERCOSUR should, as from the fiscal year beginning in 2012, submit their quarterly and annual financial statements, adopting the International Financial Reporting Standards - IFRS (Normas Internacionais de Informação Financeira - NIIF) in force, according with the pronouncements issued by the International Accounting Standards Board - IASB.

In explanatory notes to the company´s financial statements, the company must indicate the year in which the rules were applied to its financial statements. Likewise, the following information must be incorporated in the explanatory notes: (a) the changes in the IFRS; (b) an indication of the affected IFRS; (c) the date of its entry into force; and (d) the fiscal year in which such change was applied. The same provisions must also be applied to the preceding fiscal year for comparative purposes.

Companies with authorized public offering, until the end of the 2011 fiscal year, are allowed to submit their quarterly and annual financial statements according to the international financial reporting standards issued by IASB, in lieu of the current accounting standards applicable in the MERCOSUR country that has authorized the public offering.

In a explanatory note to the quarterly and annual financial statements it should be disclosed, in the form of reconciliation, the effects of events that caused the difference between the amounts of net worth value and net income or loss of the parent company, compared with the corresponding amounts of the consolidated net worth value and net income or loss, as a result of the adoption of the international financial reporting standards issued by IASB.

The explanatory notes accompanying the quarterly and annual financial statements must contain accurate information about controlled companies, including: (i) the criteria adopted in the consolidation and the reasons why certain controlled company has been excluded of the consolidation; (ii) events after the financial year´s closing date which have or may have, a material effect on the financial situation and future consolidated results; and (iii) the effects in the consolidated equity and result accounts, of the acquisition or sale of controlled company(ies), in the course of the year and the inclusion of the controlled company(ies) in the consolidation process, in order to compare the respective financial statements.

In the first year of the anticipated adoption of international financial reporting standards, it is not necessary to present, for comparison purposes, the previous year's financial statements which have been prepared in compliance with the domestic accounting standards in force at such time.

Companies with authorized public offering and its subsidiaries included in the consolidation, which trade their securities in the international markets and have already prepared the information contained in their latest audited financial statements following the standards of the IASB, should use such information in the opening balance of the first year of adoption of this minimal regulation.

The independent auditors will issue an opinion on the adequacy of the quarterly and annual financial statements based on the international standards (IFRS).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Walter Stuber
Adriana Maria Gödel Stuber
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