IFRS and CPCs The new Brazilian

accounting environment
Aspects to be considered by Investor Relations
2010/11
1 IFRS and CPCs The new Brazilian accounting environment
Introduction
We are experiencing a period of signifcant change in
the Brazilian, economic, accounting and regulatory
environments. The introduction of new accounting
policies adopted in Brazil Brazilian GAAP - and their
alignment with IFRS, represents the biggest change to
fnancial reporting for Brazilian companies since the
enactment of Law 6404 in 1976.
The role of the investor relations professional is to help
the investor understand, on a timely basis, how the
changes arising from the new accounting standards
affect the fnancial data and investment decisions.
The purpose of this Guide is to provide guidance and
information that contribute to communicating the effects
of the conversion to the new standards and minimize
potential risks upon disclosure of fnancial data.
We trust you will fnd the Guide useful.
Fernando Alves Ricardo Florence
Territory Senior Partner President
PwC Brazil Brazilian Institute of
Investor Relations
3 IFRS and CPCs The new Brazilian accounting environment
Executive summary 4
(a) IFRS and the new basis for BR GAAP (CPCs) 6
(b) Potential impacts 12
(c) Challenges 22
(d) The European experience 28
(e) Publications 32
Contents
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Executive Summary
International Financial Reporting Standards (IFRS) and
the new Brazilian accounting standards, the CPCs (issued
by the Brazilian Accounting Standards Committee (CPC
in Portuguese)) affect the fnancial statements of listed
companies, fnancial institutions that have an Audit
Committee, and large Brazilian companies (as defned)
as of December 31, 2010. All other companies (Small and
Medium-sized Enterprises) are also affected though can
apply standards specifc to SMEs. Comparative fnancial
data for 2009 (including the 2010/09 quarterly information
- ITRs for listed companies) must be restated based on the
new accounting standards.
In order to avoid surprises it is essential to communicate the
changes caused by the adoption of the new standards in a
structured and planned manner, so that investors are able to
understand their impacts. The IR professional must be prepared
to answer questions from investors, such as:
Will the historical trend analysis be reperformed?
Will there be an impact on the EBITDA?
Will there be an effect on the guidance or on the valuation?
How can we help investors and market analysts?
What will be the consequences for short- and long-term
investors?
The times change,
and we change
with them
Ovid
The times they
are a-changin
Bob Dylan
5 IFRS and CPCs The new Brazilian accounting environment
This Guide presents various aspects to be considered by IR professionals in the next
few months during the preparation of fnancial statements and disclosure of results to
the market:
(a) IFRS and the new basis for BR
GAAP (CPCs)
The new global accounting language,
its adoption around the world, and the
process of convergence of Brazilian
standards.
(b) Potential impacts
The main impacts including volatility
of results (use of fair value), signifcant
changes in accounting concepts, and
increase in the disclosure level required,
such as segment information.
(c) Challenges
The investor relations professionals two
main challenges: (i) to understand the
changes and work with the internal team
that coordinates the transition; and (ii) to
explain to Brazilian and foreign investors
in a structured manner avoiding surprises.
(d) The European experience
Lessons learned from preparing
and presenting consolidated IFRS
fnancial statements by European listed
companies in 2005, when the new
standards were frst required by the
European Union.
(e) Publications
Suggested titles for additional reading,
sources of information, and examples of
good practices.
Note that while the new accounting standards may change the companys net income,
EBITDA and equity, they will not change its the strategy, performance, or cash fows.
The new standards require long term loans in default at year-end to be classifed
as current liabilities even if subsequently rectifed via a waiver.
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(a) IFRS and the new basis
for BR GAAP (CPCs)
7 IFRS and CPCs The new Brazilian accounting environment
IFRS a brief history
IFRSs are issued by the International Accounting Standards Board (IASB). The
frst international standards, then known as IASs, were issued in 1973, but the global
movement towards the adoption of IFRS started only after the Enron scandal in 2002,
driven by a belief that a principles-based set of standards would better refect the
underlying economics of transactions rather than stringent rules-based standards.
IFRS adoption began in 2002 when the European Union required that all 7,000
European listed companies adopt IFRS in their consolidated fnancial statements
from 2005. Other countries, including Australia, Hong Kong, South Africa, and some
from Eastern Europe, adopted them at the same time. The current wave of countries
adopting includes Brazil, South Korea, India and Canada. International convergence
will be achieved only when the United States permits the use of IFRS. A decision
should be made in 2011, for implementation, perhaps, at the earliest, from 2015.
Adoption of IFRS around the world
Countries seeking convergence with
the IASB or pursuing adoption of
IFRSs
Countries that require or permit IFRSs
United States
8 PwC | IBRI
Adoption of IFRS in Brazil
applicable to consolidated fnancial
statements and the standards used
for calculating the basis for payment
of dividends or taxes (the individual
fnancial statements). Although
Brazilian companies are not able to
enjoy all options permitted under IFRS
(for example, voluntary revaluation
of property, plant and equipment is
prohibited in Brazil by law), and are
required to include supplemental
information not required by IFRS
(for example, the statement of value
added). This does not preclude the
application of IFRS in full.
The IFRS SME (Small and Medium-
sized Entities), applicable to small
and medium-sized entities (SMEs),
cannot be used in Brazil, but there is
an equivalent CPC for SMEs. This can
be applied by entities that are neither
large nor publicly accountable -
basically non-listed and limited liability
companies. The IFRS for SME cannot be
applied by fnancial institutions.
As we can see from the map, IFRS
is becoming the offcial accounting
language in the world and the adoption
of IFRS in Brazil was unavoidable.
In September 2010, the Brazilian
Securities Commission (CVM) issued
Instruction 485, which requires that
the consolidated fnancial statements of
listed companies should be presented
under both IFRS and the Brazilian
accounting standards issued by the
Accounting Standards Committee (the
CPCs), the new BR GAAP (companys
management should attest that the
fnancial statements were prepared
in conformity with both standards).
However, for the individual parent
company fnancial statements, only
the CPCs should be applied. Other
regulators may also determine the
use of IFRS, e.g. the Central Bank and
insurance regulator (SUSEP).
IFRSs main focus is on the consolidated
fnancial information of the economic
entity comprising the parent company
and its subsidiaries. There are a few
differences between the standards
9 IFRS and CPCs The new Brazilian accounting environment
The new BR GAAP and the CPCs
The changes in Brazilian standards
started with the enactment of Law
11638/07. This law established three
fundamental platforms for the IFRS
convergence process:
It granted the CVM the authority
to establish accounting standards
in Brazil previously accounting
standards were established through
laws. As a law can only be changed by
another law, any regulatory change
required a long and bureaucratic
process that could take years to be
concluded. In an environment in
which markets change very quickly,
regulation needs to be equally agile.
It established that the CVM, when
determining accounting standards,
should ensure that they are in
conformity with international
accounting standards: IFRS; and
It permitted the CVM to enter into
agreement with an independent entity
to seek advice on the accounting
standard setting process this was
achieved through an agreement
between the CVM and the CPC.
In 2008, the CPC issued 14 standards
to kick-off the convergence between BR
GAAP and IFRS. These standards are, in
essence, translations of the equivalent
IFRS standards. However, there are still
some minor differences.
The second phase of the convergence
process started in 2009, upon the issuance
of a further 26 standards that came into
effect for the December 31, 2010, fnancial
statements thus bringing the new
Brazilian accounting standards into line
with international standards.
Some Brazilian listed companies
presented their 2010 quarterly
information packages (ITR) with
comparative data (e.g. income statement
for the frst quarter ended March 31,
2009 and balance sheet as of December
31, 2009), using the new BR GAAP but
most made use of the option provided by
CVM Instruction 603, which permitted
deferral of presentation of the fnancial
information based on the new Brazilian
accounting standard until such time
as the fnancial statements for the year
ended December 31, 2010 are presented
(together with the comparative balances
for 2009 quarter-ends and opening
balance sheet as of January 1, 2009).
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Principles-based standards
As IFRS is principles-based rather than
rules-based, it can allow for different
accounting treatments for similar
circumstances. This feature could be
interpreted as a weakness; however, it
is much more diffcult not to refect the
economic substance in principles-based
standards than in rules-based standards,
since IFRS always tries to promote the
concept of substance over form.
In view of the possible treatments
permitted, it is important to clearly
disclose the accounting policies used and
apply these consistently. In spite of being
principles-based, there are rules in IFRS
that must be followed.
Which fnancial statements should
be presented and explained
The CVM requires the adoption of IFRS
and CPCs in the consolidated fnancial
statements of listed companies. The
Central Bank and SUSEP require IFRS or
modifed IFRS for consolidated fnancial
statements. Other regulators may have
different requirements.
For entities that are not subject to
different requirements from the
regulator (for example, the Central
Bank), the individual fnancial
statements of the parent company
(including its subsidiaries under the
equity method of accounting) should be
prepared to conform to Brazilian CPCs.
Comparative amounts should be restated
under the new accounting standards,
in order to compare 2010 with 2009
(unless there is an exemption granted by
a regulator).
The fnancial statements under IFRS
must include comparatives. Therefore,
companies that present their fnancial
statements for the year ended December
31, 2010 under IFRS should restate the
2009 amounts under the same standards
in order to meet this requirement.
Certain Brazilian regulators are
exempting companies from presenting
11 IFRS and CPCs The new Brazilian accounting environment
comparatives in 2010. However, it is important
to point out that when using this exemption the
company cannot state that it is using IFRS until
such time as it presents the information on a
comparative basis.
The fnancial statements should include a
reconciliation between the consolidated and the
individual equity and proft or loss. It is important that
management understands any reconciling items, so as
to be able to explain them to investors.
2010 ITRs, with comparative information for 2009,
should also be presented under the new standards.
CVM Resolution 603 permits these ITRs to be
presented during 2010 as part of the companys
normal reporting schedule, or together with the 2010
annual fnancial statements, in frst few months
of 2011.
Despite being prepared under different accounting
frameworks (e.g.: CPC and IFRS or COSIF (Brazilian
Central Bank accounting rules) and IFRS), companies
are not prevented from continuing to present the
consolidated and individual fnancial statements in
the same document.
It is fundamentally
important to
determine which
fnancial statements
should be presented
and which are the
applicable accounting
standards, including
the requirements of the
relevant regulator.
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(b) Potential impacts
13 IFRS and CPCs The new Brazilian accounting environment
The fgures related to
2010, those published
in 2009, and the
corresponding ITRs
will need to be restated.
Systems need to be
adapted, people have to
be retrained, internal
information should be
upgraded, KPIs modifed,
bank covenants may need
to be renegotiated, and
the fnancial statements
structured to include
a greater volume of
disclosures.
Increased volatility of net income
IFRS requires a greater use of fair value accounting.
The application of fair value to fnancial instruments
held for trading, the recognition of fair value of
derivatives, either separate or embedded in other
contracts, will likely result in increased volatility of
the companys proft or loss.
The prohibition of goodwill amortization and the
requirement to perform an annual impairment test
could also result in increased income statement
volatility. The annual impairment test for assets
could result in the recognition of an impairment
charge: until recently under old Brazilian accounting
standards goodwill amortization was permitted,
allowing for the asset to reduce over the amortization
period; under the new standard, this cost is no longer
amortized, but is subject to an annual impairment test.
Companies with biological assets will have to present
these assets at fair value, impacting the gross margin,
net income and EBITDA. The IR professional must
seek to educate the market/investor to distinguish
between changes in the companys performance and
those derived from fair value volatility.
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Signifcant increase in disclosures
For most companies there will be a
signifcant increase in information
disclosed in the notes to the annual
fnancial statements. The accounting
policies are more complex and more
comprehensive; information required on
the impairment test is signifcant; listed
companies must present information
segregated by segment. In the frst year
of IFRS/CPC adoption, the presentation
of a note explaining the effect of the
transition to IFRS will also be required.
A study conducted in the United
Kingdom soon after the frst adoption of
IFRS in 2005 revealed that the number
of pages of the fnancial statements of a
listed company increased, on average,
by 56%.
However, the regulator permitting, there
should be a signifcant reduction in the
volume of information required to be
presented quarterly in the ITRs prepared
under IAS 34 / CPC 21.
Redefnition of revenue
One of the most sensitive points in the
accounting universe is the timing of
revenue recognition, for example. When
can a company recognize a sale? When
an order is placed by the customer? When
the invoice is issued? When the product
is delivered to the customer? When the
customer pays for the purchase? It may
seem a somewhat philosophical issue,
but it is essential to determine when the
revenue is actually earned and when it
can be recorded in the companys proft or
loss for that period.
In general, the accounting standard
establishes that this timing should
coincide with the revenue triggering
event. However, the timing of the
triggering event can change depending
on the industry in which the company
operates, for example: in general, this
triggering event is the transfer of the
asset that is being sold, that is, if your
company sold a pair of shoes today and
the customer left the store with the
product, the company already has the
right to recognize the revenue, even
if the customer will only pay for the
purchase after 60 days. This issue is more
sensitive when we consider companies
which use long operating cycle such as
a construction company. The customer
15 IFRS and CPCs The new Brazilian accounting environment
purchased the apartment off plan and
has already started to make payments, but
the company will only deliver it in a few
years. In this case, what is the appropriate
timing to recognize the revenue?
We could apply the same analogy to
companies in the telecommunications,
agribusiness, concession and other
industries.
Another signifcant change is related
to presentation of revenue. Today we
recognize gross revenues as the sum of
invoices issued by companies. Under IFRS,
taxes on revenue (PIS, COFINS, ISS, IPI,
ICMS, etc.) should reduce the amount of
revenue presented. The IR professional
needs to explain to the investor that the
reduction in the revenue number does not
mean a deterioration in the companys
performance.
Covenants
IFRS establishes different criteria to
classify and present certain types of
fnancial instruments in the balance
sheet (convertible debt and some types of
preferred shares). The IFRS tendency is to
have higher liabilities than under the old
BR GAAP. This may have a material impact
on fnancial ratios, generating effects on
compliance with debt covenants.
IFRS does not allow the curing of debt
covenants breaches via waivers in the
period between the balance sheet date and
the issuance of the fnancial statements
to avoid reclassifying the debt to current.
Therefore, any defaults should be
renegotiated and waivers obtained before
the balance sheet date, to avoid debt
reclassifcations to short term.
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Dividends
The calculation of dividends is based
on the companys individual fnancial
statements prepared under the new
CPCs. It is important to consider the
effects of the new accounting standards,
the increased volatility of proft or loss,
and the additional use of fair values in
the calculation of minimum mandatory
dividends and availability of distributable
profts. If profts are increased as a result
of the fair value measurement of fnancial
instruments, but these assets have not yet
been sold, this unrealized proft may not
necessarily be distributable, particularly
if we consider that market volatility can
change the gain/loss position of these
assets at some time in the future.
Earnings per share
IFRS and CPCs require the presentation
of earnings per share based on earnings
attributable to the parent companys
equity holders and the weighted average
number of shares outstanding during the
period. Diluted earnings per share are
also presented, considering the impact
of additional shares to be issued as a
result of convertible debt, employee stock
option plans, etc.
Income tax
The determination of income tax and
social contribution and of certain other
taxes is still based on the Brazilian GAAP
concepts at December 31, 2007. This
Transitory Tax Regime (RTT) ensures
that the new accounting regime has
little effect for tax purposes. However,
the need to maintain good controls
over the widening gap between tax and
accounting balances and preparing a tax
balance sheet are critical.
The resulting differences will generate
material effects on the deferred income
taxes, and the income tax/social
contribution expense recognized in the
income statement will be signifcantly
different from the tax actually paid.
Functional currency
The functional currency is the currency
of the economic environment in which
each entity operates. For most Brazilian
companies, the functional currency is the
Brazilian Real. But for companies that
have high exposure in foreign markets,
the determination requires judgment. In
this case, all the companys accounting
records should be maintained in the
currency of that market (dollars, euro,
yuan, etc.). The effects of changes in
foreign exchange rates can be signifcant.
In these cases, explaining the concept of
the functional currency to the investor, as
17 IFRS and CPCs The new Brazilian accounting environment
well as the effects on the determination
of changes in foreign exchange rates
recognized in proft or loss and taxes can
be a challenge.
Biological assets
All biological assets (forests, plantations,
animals, etc.) should be recognized
at their fair value, that is, the selling
price less expenses to be incurred in
the sale. Many biological assets do not
have an active market, so valuation
techniques and models need to be
applied to determine the fair values. For
companies operating in these industries
it is important to be able to explain the
business performance and differentiate
it from the changes in fair values over
which management has little or no
control. The impact of volatility on
earnings for guidance purposes is likely
to be signifcant.
Business combinations
The new standards require that goodwill
arising on business acquisitions be
determined based on the fair value
of assets and liabilities acquired. In
the past, goodwill was determined by
comparing the amount actually paid
for the asset with the carrying amount
of the acquired companys book equity.
Under the new standard, the company
needs to measure all assets at fair value
at the purchase date. Goodwill will be
calculated by comparing the purchase
consideration to the fair value of these
assets. In general, goodwill will be lower
than the amount determined under old
Brazilian GAAP.
Intangible assets, including trademarks,
relationship with customers and
technologies, should be identifed in the
acquired entity and measured at their fair
value.
Goodwill should be tested for impairment
annually. Impairment expenses can be
very material and need to be carefully
communicated to the market.
Step acquisitions can generate material
gains recorded in proft or loss, which can
be counter-intuitive and not always easily
explained.
In general terms, negative goodwill is no
longer refected in the balance sheet, it is
rather credited (as a gain) in the income
statement.
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Segment information
Listed companies should present segment
information. The standard requires the
presentation of segment information
from the point of view of management,
and should follow the format provided to
the companys chief operating decision
maker.
Management may be uncomfortable
disclosing strategically sensitive
information to the market and to its
potential competitors. Nevertheless,
it should also consider that this can
be an excellent opportunity to explain
its business. The challenge for the
professionals from the fnance and
investor relations areas is to fnd a balance
between these two demands.
Segment information is considered of
great importance by investors. A survey
conducted by PwC in 2007 concluded that
companies that disclose quality segment
information can differentiate themselves
from their competitors, allowing investors
to perform a more accurate risk analysis
by segment.
Quarterly Information (ITRs)
IFRS (IAS 34) and CPCs (CPC 21) permit
the presentation of condensed interim
fnancial information.
The purpose of interim fnancial
statements is to update the investor on
signifcant events which occurred during
the period since the issuance of the
previous annual fnancial statements.
It is not necessary to repeat information
already known by the investor. If
accounting policies had not changed,
for example, it would not be necessary
to repeat them in the ITR; if the status
of litigation has not changed during
the quarter, it will not be necessary to
repeat the information presented in the
previous annual fnancial statements.
19 IFRS and CPCs The new Brazilian accounting environment
Impacts on specifc industries
IFRS/CPCs have specifc rules for
the recognition of biological assets,
concessions, construction/development
companies, banks, insurance companies,
and telecommunications businesses.
For companies operating in such
industries it is important to understand
the nuances of the new standards, debate
them with other entities in the same
industry, perform benchmarking, and
learn from peers abroad that already
adopt IFRS.
Treasury operations
IFRS requires a greater sophistication in
the disclosure of fnancial instruments
and treasury operations. Items to be
considered include:
Hedges against exchange rate
volatility, interest rate risk, etc. How
to explain the consequences of the
decision of applying, or not, hedge
accounting;
Recognition of changes in fair values
of investments in proft or loss;
Disclosure of techniques used to
measure the fair values of fnancial
instruments;
Careful analysis of debt convertible
into shares. This can frequently involve
a compound instrument (components
of debt, equity and/or embedded
derivatives), which should be
classifed in the balance sheet as debt
or as a derivative, which will impact
debt/equity ratios or proft or loss.
The relationship with rating agencies
should also be considered, and the effects
of the changes should be well explained.
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EBITDA and its variants
Although the CVM discourages the use of Non-GAAP measures,
the use of EBITDA permits the use of a standard measure that
is similar to operating cash generation (although not equal
because of the application of accruals accounting) to better
explain the entitys performance to the market, while complying
with the requirements of IFRS/CPCs.
As mentioned above, the standard on segment reporting
requires the disclosure of information used by the companys
chief operating decision maker to assess the performance
of segments. If EBITDA or Adjusted EBITDA is used, this
information should be presented in the note on segments (and
reconciled to accounting data).
Based on a survey conducted by PwC in Europe in 2006, 45%
of French companies and 47% of British companies presented a
measure of proft that management considered better explained
business performance. Such measures included:
Proft or loss excluding
exceptional items.
Proft or loss before non-
recurring items.
Proft or loss before
signifcant items.
Proft or loss before
special items.
Proft or loss before specifc
items.
Normalized proft or loss.
Underlying proft or loss.
Current operating proft
or loss.
The change in the fair value of biological assets impacts
EBITDA as the unrealized component does not affect cash, this
change is often presented as an adjustment in the calculation of
Adjusted EBITDA.
21 IFRS and CPCs The new Brazilian accounting environment
Explaining the transition
In addition to being useful for investors, both IFRS 1 and CPC 37
require the presentation of a reconciliation note between equity
and proft or loss under the previous BR GAAP presented in 2009
and under the new standards to be presented in 2010.
In the frst year of adoption of IFRS / CPCs (and in the future
when there are changes in accounting policies), it is also
necessary to present an opening balance sheet (the balance
sheet at the date of transition to IFRS/CPCs).
Disclosure of accounting policies, judgments and
critical estimates
IFRS/CPCs require a description of the critical accounting
policies in the preparation of fnancial statements, including
the most important estimates and judgments used. As each
company is different and faces particular challenges, key
decisions made by management to be presented in the fnancial
statements should be carefully considered. Sensitivity analysis
of making (or not) a specifc accounting decision can be used to
communicate its signifcance.
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(c) Challenges
23 IFRS and CPCs The new Brazilian accounting environment
Planning how best to
disclose in a consistent
and structured
manner can avoid
misunderstandings and
questions.
Develop a disclosure timetable and strategy
A disclosure timetable and a process of communication
and guidance to analysts and investors are
fundamental. Explain the timetable to the market,
making it clear what information will be presented and
when. Information restated under IFRS/CPCs should
include: the opening balance sheet and proft or loss
for the comparative year; key accounting policies
selected and the main impacts.
The early communication of changes is much
more useful to the investor than the disclosure of all
information only in the presentation of the results
for 2010. The investor needs time to absorb the new
standards, reperform historical trend analyses and
consider their impact on the companys valuation.
Communicate the changes objectively in a stand-
alone presentation to explain the transition to IFRS/
CPCs. Do not communicate the consequences of the
adoption of IFRS/CPCs together with the presentation
of other fnancial information or of the companys
performance. Try to avoid mixing concepts of impacts
of accounting changes and actual changes of the
business.
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Communicate with suffcient detail so
that the investor is able to understand
the impact. Investors are not necessarily
IFRS/CPC specialists; therefore, it will be
necessary to explain complex concepts
in a simple and clear language. Explain
the impact on proft or loss and on the
balance sheet, including each change
and its effect. This should be made line
by line if necessary. Provide materials
and presentations so that the investor
is able to follow and understand the
explanations. Do not seek to economize
on communication. Invest in conference
calls or webcasts, if necessary.
Manage the expectations of the
market. Present a timetable. If
information is preliminary, make it
clear. Eliminate the negative surprise
factor. Negative impacts are better
absorbed when explained calmly and
in advance. Monitor the reaction of
investors and analysts and correct any
misunderstandings.
Understand and communicate
The IR professional needs to
understand the concepts supporting the
adjustments to be able to explain them
with clarity. The IRO or member of his/
her team should be part of the Steering
Committee that makes important
decisions on accounting policies and
other approaches selected by the
company.
As mentioned in section 2, there will
be higher volatility of proft or loss (in
view of the greater use of fair value,
business combination, intangible assets,
impairment test, functional currency,
fnancial instruments, and hedge
accounting).
Make it clear that the changes in
accounting practices do not change the
basis of the business nor the cash fow/
cash balance. There may be changes
in the form of presentation of cash
provided by operations and investing
and fnancing activities.
Anticipate questions and potential
doubts, for example, on selection of
accounting policies, level of investment
in new systems or consulting, impact (if
any) on dividends.
25 IFRS and CPCs The new Brazilian accounting environment
IFRS standards continue to evolve
The IASB has an aggressive action
program to update and reform the
standards on fnancial instruments,
revenue recognition, leases, employee
benefts, jointly controlled operations
and presentation of fnancial statements,
among others in the next two to three
years. It is important to be aware of the
possible changes and the impact on the
decisions made now.
Documents impacted
It is not only the fnancial statements
that will be affected by the change in
the accounting standards adopted:
press releases, earnings guidance,
benchmarking, ITRs, Reference Form
(CVM 480) and Form 20-F (if applicable),
but also other presentations based
on fnancial information, including
communications with analysts,
management discussion & analysis
(MD&A), roadshow documents, etc., all
will have to be adapted and redesigned
according to the new accounting
language.
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Regulatory
requirements
The requirements of CVM
Instruction 358 and effects
on Disclosure Committees
need to be considered. Is
information to be disclosed
subject to these rules? The
communication plan and
the timetable should be
adapted to the regulatory
framework and approved
at the appropriate
management level.
The Supervisory Board
and the Audit Committee
should follow up on
the work of IR on the
disclosure of information
and guidance to the
market. In the case of
companies listed with
the SEC, Section 302 of
SarbOx, which addresses
the certifcation by the
CEO/CFO of Disclosure
Controls and Procedures,
should be reviewed
considering the accounting
changes and controls over
disclosures.
Companies registered with the SEC
(Foreign Private Issuers)
The SEC has various
specifc standards on IFRS
presentation, especially for
frst-time adoption.
Clearly, the fnancial
statements under IFRS
prepared by the company
and fled with CVM will
be the same as those fled
with SEC (in reais or in
dollars), so not requiring
any reconciliation between
previous BR GAAP and US
GAAP. It is not necessary to
present information under
US GAAP in these cases.
For companies registered
with the US Securities and
Exchange Commission
(SEC), there will be a
signifcant impact on the
SarbOx environments.
Key controls will need
to be redocumented and
tested under IFRS. Any
communication plan can
be negatively impacted by
the requirement to publicly
disclose a defciency in
controls.
Brazilian companies that
report US GAAP in dollars
based on SFAS 52 or in
reais under US GAAP can
maintain this standard for
SEC purposes. As the SEC
permits Foreign Private
Issues to report (since
2007) using IFRS, several
companies are switching
from US GAAP to IFRS.
27 IFRS and CPCs The new Brazilian accounting environment
Brazilian initial public offerings (IPO)
Consider whether the Brazilian prospectus or offering
memorandum will be prepared under IFRS or under
previous GAAP. Normally it is useful to present
information under full IFRS or CPCs (and not under CPC
for small and medium-sized entities) to avoid changes
soon after the IPO. There can be signifcant impacts on
the timetable.
Consistency
When there are various listed companies in an economic
group, an alignment will be necessary to ensure
consistency in the application and disclosure strategy of
the parent company, subsidiaries and other investees.
The determination of effects on associates can be a
challenge due to the lack of control over the process.
The transition to IFRS
/ CPCs is not only a
challenge, but also an
opportunity to explain
the business.
28 PwC | IBRI
(d) The European experience
29 IFRS and CPCs The new Brazilian accounting environment
Since the end of 2007, Brazilian
companies have been aware that
they would need to present fnancial
statements under IFRS by December
2010 and had nearly three years to
prepare and plan for the transition to the
new standards. Three years was also the
deadline set for European companies to
prepare for their change, between 2002
and 2005.
However, we have experienced a volatile
regulatory environment in the last few
years, a fnancial crisis, and resultant
global recession: there are good reasons
to justify the slow move towards the
conversion to IFRS and communication
of impacts to the market.
Although there is little time to prepare
the market and investors for the changes,
we can learn something from the
European experience.
Preparation of the market with
early disclosures
The European market was inundated
by represented documents that clearly
explained the impact of the change to
IFRS on the opening balance sheet and on
proft or loss for the quarter or six-month
period and for the comparative year.
Among the frst major companies to
represent their IFRS balance sheet was
the British pharmaceutical company
AstraZeneca. In this Guide we have
included some examples, such as those of
Unilever, TOTAL and Brambles, that can
be used as benchmark communication
both in Brazil and for foreign investors.
PwC surveys related to investors
and analysts
In 2006 PwC conducted several surveys
in Europe on the process of transition
to IFRS, explaining the expectations of
CFOs, controllers, analysts, and investors.
30 PwC | IBRI
Some of the conclusions were:
Analysts had high expectations as
to the quality of the information
disclosed in the fnancial statements
and during the transition;
Analysts did not expect to be surprised
during the IFRS implementation;
Specifc training or guidance on IFRS
helped analysts to better understand
the impact of the transition to IFRS;
73% of the investors said that the
change to IFRS had some impact on
their valuation of the company;
12% were decided not to invest in a
company due to the change to IFRS
while 21% were led to invest in a
company due to the change to IFRS;
and
63% of the investors said that an
understanding of the companys cash
fows was the most important aspect of
the fnancial statements.
There was also consistency in
the comments of the companies
management:
More than one third experienced
unexpected impacts during the process
of transition to IFRS;
85% said that it was more diffcult to
explain the results under IFRS than
under the previous GAAP (55% of
whom stated it was only a little more
diffcult);
Most of the transition work was related
to investments, share-based payments,
and deferred income taxes; and
Three months after the publication of
the frst IFRS balance sheet, 58% had
not converted all internal processes to
IFRS.
31 IFRS and CPCs The new Brazilian accounting environment
Consider the impact on analysts
Few analysts were trained in IFRS.
It is important that the changes be
communicated in a simple, clear and
understandable language.
Senior managements commitment
The transition to IFRS is seen as an
important change and the dedication
of appropriate resources and the
sponsorship of senior management in
relation to other priorities are important
for the success of the project.
Impact on share price
A survey conducted by PwC United
Kingdom after the frst wave of disclosures
of fnancial information represented
under IFRS revealed that the share price
varied up to 5 percent and, on average, 1
or 2 percent on the date the information
was published.
32 PwC | IBRI
(e) Publications
Publications in Portuguese
Illustrative fnancial statements in accordance with IFRS and the new Brazilian
GAAP
http://www.pwc.com/br/pt/ifrs-brasil/cia-abc-modelo.jhtml
Navegador Contbil weekly electronic publication on the adoption of IFRS and CPCs
in Brazil (in Portuguese). To receive it, you can register at the following address:
www.pwc.com/br/navegadorcontabil
Various Brazilian companies already adopt IFRS and/or CPCs in their fnancial
statements, among them Souza Cruz, TAM, Gol, Gerdau, and Renner. The fnancial
statements can be downloaded directly from their websites or from the CVM website.
33 IFRS and CPCs The new Brazilian accounting environment
Publications in English
Consolidated illustrative fnancial statements in IFRS 2010
www.pwc.com/gx/en/ifrs-reporting/ifrs-illustrative-fnancial-statements-pwc-publications.jhtml
Segment reporting an opportunity to explain the business
www.pwc.com/en_GX/gx/ifrs-reporting/pdf/segment_reporting-fyer.pdf
IFRS and US GAAP - Similarities and differences September 2009. Despite the
convergence process this book has 244 pages!
www.pwc.com/us/en/issues/ifrs-reporting/publications/ifrs-and-us-gaap-similarities-and-differences-september-2010.jhtml
Some representation documents / representation of information
under IFRS
Unilever (Anglo-Dutch)
www.unilever.com/images/Restatement%20document%20IFRS%20revised%202%20November%2020051_tcm13-11993.pdf
TOTAL (French)
www.total.com/MEDIAS/MEDIAS_INFOS/758/FR/normes-IFRS.pdf?PHPSESSID=6ce25ce942e5c9fbaae15c53ac7b9a4f
Brambles (Australian)
www.brambles.com/BXB/Company/ShowPage.aspx?CPID=2724&EID=10000000&PageName=IFRS Briefing and Future Reporting in US Dollars
Other useful sites
www.iasb.org
www.ibri.org.br
www.pwc.com/br
www.reportleadership.com
This publication is also available in Portuguese.
2011 PricewaterhouseCoopers Brazil. All rights reserved. In this document, PwC refers to PricewaterhouseCoopers Brazil, which
is a member f rm of PricewaterhouseCoopers International Limited, each member f rm of which is a separate legal entity.