This time it's for real. Year's-end balance sheets for 2008 will be the first to include international accounting standards, even if only partially. Altogether, 15 deliberations from the Accounting Pronouncements Committee (CPC), the entity responsible for issuing accounting standards in Brazil, will make their debut in these statements. We have come a long way. The discussions started in the 1990s, became Law Project 3,741 in 2000, and then waited another seven years until a presidential sanction gave rise to Law 11,638. Starting then, it has been a race against time to establish the procedures that will support all the modifications introduced by the law.

This progress is important, but it still doesn't make Brazil a user of the International Financial Reporting Standards (IFRS). This is only the first group of pronouncements that have been adopted. Next year, the Brazilian Securities and Exchange Commission (CVM) plans to issue additional standards (see box) so that, in 2010, the country will have adopted 100% of international guidelines. In any case, the immediate changes, which will appear for the first time in accounting statements for 2008, are already quite significant.

The first impression will be a truer portrayal of the companies - one of the main objectives that guide the IFRS. This is the case, for instance, with financial leasing, which was up until then recorded as a sort of rent procedure. In daily life, it's easy to realize that leasing a vehicle, for example, is much more similar to a purchase in installments, and it is this reality that international accounting now recognizes. According to CPC pronouncement 06, derived from IAS standard 17, the company, though not the legal proprietor of the asset, will now present itself as such for accounting purposes.

Considered one of the most complex themes in international accounting, business combinations, which handle merger and acquisition operations, are a separate chapter in the conversion to the IFRS. Together with this comes the new, also more realistic concept of premium. Until then, the premium was simply the difference between the amount paid by the buyer and the equity value of the acquired company, as well as a source of tax benefits. Now, new variables are taken into account. The calculation starts out the same: the equity value of the acquired asset is discounted from the price paid by the acquirer. What are new are the following stages, when the premium is subdivided.

The part of the premium that represents appreciation of assets already was, and continues to be, amortized by the term of the generating asset. Software, for example, is recorded by its cost price in the balance sheet of the company that developed it. If that company is sold and the software is one of the deal's attractions, it's only natural for the buyer to pay much more for it than was recorded in the company's assets. That is the asset's appreciation, and the premium, in this case, continues to be amortizable.

However, the part of the premium resulting from an expected future profitability (known as goodwill) is no longer amortized, and is now updated regularly through a mechanism called impairment. The new format is optional in 2008 balance sheets. José Carlos Bezerra, accounting standards manager at CVM, explains that the provisions of Law 11,638 did not mandate that amortization begin this year. Furthermore, it would be operationally complicated to require that companies change what was practiced throughout 2008.

By making balance sheets more pragmatic, the new accounting standards also make them more volatile, going with the flow of the market's current situation. The exception are companies with operational arms whose functional currency is different from their source country's currency, as provided for in CPC pronouncement 02 (which does not fulfill the determinations expressed in Law 11,638, but follows IAS standard 21) about the effects of the change on exchange rates and conversion of accounting statements. The standard says that exchange variations in assets and liabilities of autonomous subsidiaries (those where functional currency is that of the country where they operate) are no longer included in their parent companies' results. There will only continue to be an impact on the bottom line if the subsidiary is an arm of a company based in Brazil, with local functional currency.

The new treatment of exchange variation is considered more efficient because it does not see variations that simply derive from currency conversion as a generation of results. “It's common for some companies to present a gain due to assets in dollars, and for these results to affect their exchange-traded shares positively, despite their being merely accounting-related in nature. With the new rule, this volatility will be reduced”, says Reginaldo Alexandre, vice-president of the Association of Capital Market Analysts and Investment Professionals of São Paulo (Apimec-SP).

COMPARABILITY AT RISK — Migration to a more modern accounting model has the advantage of increasing transparency. But it will have the onus, at least temporarily, of a lack of comparability. Everything suggests that, instead of revising their 2007 balance sheets in accordance with the new standards (and thus maintaining total comparability between the two years), companies may choose to indicate in an explanatory note the effects of the changes only upon net equity and results. This flexibility was proposed in CPC pronouncement 13, which handles the initial adoption of Law 11,638, which will remain at public hearing until December 4.

This concession by CVM has been made for a reason. Approved at the very end of 2007, Law 11,638 caught everyone by surprise and forced the market, including the regulating authority, to rush to adapt to it throughout this year. In practice, this rush made the CVM and CPC reach December with four pronouncements, essential for preparation of the 2008 balance sheets, and which are still at public hearing. The solution, given the short deadlines for adaptation by the companies, was to give up the complete comparativeness of balances.

“I don't agree with the suggestion (for flexibility). This will harm the people who read the statements”, says Wanderley Olivetti, partner at the Deloitte auditing office. According to him, flexibility goes against the CVM's own Deliberation 506, and in practical terms is not justifiable because the companies already knew, since the start of the year, that such changes would take place and that they would follow the determinations of the International Accounting Standard Board (Iasb). Antônio Carlos Fioravante, auditing partner at Ernst & Young, acknowledges the difficulty that this adaptation represents. He observes that, due to their issuance at the end of the year, the pronouncements will leave little time for companies to make changes.

At PricewaterhouseCoopers (PwC), it is expected that about half of their clients will deliver, already in 2008, results that are fully comparable with those of last year. The other 50%, however, will make use of the flexibility proposed by the CVM. “It's fair to create this exception”, says Tadeu Cendón, PwC partner, given that the accounting migration's more radical changes are being introduced this year.

On the other hand, the requirement of an explanatory note with the impacts on net equity and results can encourage companies to work a little harder to provide the market with a complete comparison of their statements. Charles Krieck, leading auditing partner at KPMG, believes that, among public companies, many will probably remake their 2007 balance sheets. This is especially likely because many companies that are listed at the higher levels of corporate governance were already obligated to present results in line with one of the foreign standards (US Gaap, used in the United States, or IFRS, predominant in Europe) and, therefore, already had some familiarity with international accounting.

Alexandre also believes in a voluntary effort by the companies, despite believing that the flexibility proposed by the CVM would not actually harm the companies' analysis. “It’s true that it may take a bit more work to carry out the analysis”, he says. However, it's important to remember that, according to the CVM, there are 26 more accounting pronouncements on the way in 2009. Some of them, such as the second phase of standards on financial instruments and business combinations, are considered complex. With so much work and change yet to come, the question remains: should we take the risk of having to give up comparability with 2008 in 2009, and thereby have the three fiscal years (2007, 2008 and 2009) incomparable among themselves?

“I don't think so”, replies Bezerra. According to him, comparability is always desirable, despite a temporary separation being justifiable. “We may, exceptionally, give up consistency if this will improve the quality of information.” Edison Arisa, of the CPC, adds that some pronouncements may come into effect only in 2010, given that 2009 will not carry the pressure of issuing standards to comply with a law already in effect. “It's a lot of pressure to have to issue a pronouncement for the current year.”