The determination of the net equity components has been the object of doubts by certain companies at the time they are preparing their Balance Sheets.

Prior to the enactment of Law no. 11 638/07, article 178 of Law no. 6 404/76 (Business Corporation Act) established that the net equity was divided into the following components: "capital stock, capital reserves, revaluation reserves, profit reserves and accrued profits or earnings."

However, that wording was amended by Law no. 11 638/07 and said new legal provision established that the companies' net equity was then composed of the following accounts: "capital stock, capital reserves, equity valuation adjustments, profit reserves, treasury stock and accrued losses."

In other words, the Business Corporation Act no longer provides for the "accrued profits" (related to previous fiscal years) as one of the accounts forming the legal entities' net equity (likewise, it no longer provides for the revaluation reserve account).

In view of that change, it is possible to consider that when legal entities subject to Law no. 6 404/76 are preparing their Financial Statements (and their Balance Sheets as well), they can no longer consider in their net equity an account in which they have recorded profits accrued from previous years (considering the cancellation of said accounting category as an account forming the net equity). As a consequence, it is possible to conclude that as of said rule, the profits accrued in a certain fiscal year must be fully allocated for distribution among the partners, constitution of profit reserves (according to the legally authorized situations and limits), or capital increase.

In our view, the abovementioned article 178 is a rule providing for the recording and preparation of Financial Statements (more specifically, Balance Sheets). In view of such, we are of the opinion that said rule applies not only to stock corporations, but also to large-sized enterprises, as they are defined in the applicable law.

Hence, in a nutshell, based on the law in effect, our opinion is that upon the fiscal-year closing, the accrued profit account should not show a positive balance. In case the accrued profit account shows a positive balance, it shall be allocated to (a) the profit reserves, as set forth in articles 194 through 197 of the Business Corporation Act, namely: (i) statutory reserve; (ii) reserve for contingencies; (iii) tax incentive reserve; (iv) retained earnings considered in the capital budget approved in a partners' meeting; or (v) realizable profit reserve; (b) capitalized; or (c) distributed as profit.

It should be further reminded that article 199 of the Business Corporation Act limits the profit reserve balance to the capital stock amount. That rule does not apply to reserves for contingencies, tax incentives reserves and realizable profits. The surplus should be used for either capital increase or distribution of dividends.

Maria Lúcia de Almeida Prado e Silva is a partner at Demarest Advogados and head of the firm's Corporate practice.

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.