Many Companies Not Recognizing Brazilian SEC Resolution

March 1, 2011

Few companies have realized that assets may suffer an abrupt decrease due to the Brazilian Securities Exchange Commission (CVM) decision from 2008. Neglecting such resolution, beyond causing problems with shareholders, is a crime committed against national and international standards, such as Law 6385, which regulates the securities market.

Resolution 554, issued on November 12, 2008, approved the Accounting Standard CPC 06 from the Brazilian Accounting Pronouncements Committee, which covers lease contracts. According to the pronouncement, the lessees are required to record the leased assets from finance leases on their balance sheets.

There is a major complicating factor in this change. The fact that all assets for a company are to be reevaluated to fair value, not historic costs as defined by pronouncement CPC 01 on recoverable value of assets. “This requires a periodic depreciation rates review due to technological obsolescence, which causes a reduction in the equity,” said João Cota, controller of CSI Leasing Brazil. “Considering the finance lease has become an expensive option for businesses, notably for technology equipment which have a pronounced depreciation in the first two years.”

Before the adoption of this resolution, regardless the lease type (finance or operating), the leased assets did not need to be recorded on the balance sheet. The recording and subsequent depreciation and impairment in both cases were a responsibility of the lessor. “Since its approval, however, it is established that such procedure is applicable only in the case of operating leases, where the risk of obsolescence belongs to the lessor who legitimately
owns the assets. In the case of a finance lease, CPC 06 requires that the lessee records the asset and therefore recognizes the losses arising from the risk of obsolescence on their balance sheet,” says Cota.

Besides resolution No. 554 of the CVM, other important national institutions such as IBRACON (Institute of Independent Auditors of Brazil) and FIPECAFI (Foundations Institute of Accounting, Actuarial and Financial), and international institutions, such as IASB (International Accounting Standards Board) and FASB (Financial Accounting Standards Board), recognize the operating lease as the only type of lease where the assets should be recorded by the lessor, not the lessee.

Cota added, “The crisis in the North American banking system was aggravated because many assets were not properly recorded on balance sheet. So it is important that companies in Brazil start to properly measure their assets to avoid surprises like those in our country.”