According to the assessment of Brazilian accounting and auditing practices conducted by the World Bank in 2005, Brazilian Generally Accepted Accounting Principles (GAAP) have been converging with international standards; however, significant areas of inconsistency still exist. The World Bank recommended mandating application of International Financial Reporting Standards (IFRSs) in preparation of consolidated financial statements by all public interest entities and amending the Corporate Law and other legislation to bring Brazilian GAAP in line with international standards. Further, given a fragmented nature of accounting standard-setting with multiple agencies responsible for issuing accounting rules for the entities under their respective jurisdiction, it was advised by the World Bank to establish an independent accounting standard-setting body. It was also suggested to develop a simplified accounting framework for small and medium size enterprises. As indicated on the Deloitte IAS Plus website, following the World Bank assessment, in 2006 the Central Bank of Brazil decided to require application of IFRSs in preparation of consolidated financial statements of banks starting financial year ending December 31, 2010. In 2007, the Securities and Exchange Commission (CVM) followed the suit by issuing Instruction No. 457 which stipulates that all Brazilian listed companies are required to apply IFRSs in their consolidated financial statements starting in 2010 (optional from 2007). However, individual financial statements of banks and listed companies will continue to be prepared under the Brazilian GAAP. The Deloitte IAS Plus website further notes that the accounting bodies and the Brazilian government are considering whether to extend the IFRS requirement to unlisted companies. Moreover, according to Deloitte, the adoption of Law No. 11,638 in 2007 (effective January 1, 2008) amended aspects of the Corporate Law allowing for an alignment of Brazilian accounting practices with the international framework, although not mandating it. Finally, in 2005, the Brazilian authorities established the Accounting Standards Committee (CPC) - an independent accounting standard-setter with a mandate to converge national practices with international requirements. As of July 2007, the CPC had issued two standards based on the corresponding international accounting standard.

General Overview

In 2005, the World Bank conducted a review of accounting and auditing practices in Brazil in order to evaluate the weaknesses and strengths of the accounting and auditing requirements, and to compare the reporting requirements with actual practices. International Financial Reporting Standards (IFRSs) and International Standards on Auditing (ISAs) were used as the benchmarks for assessing national standards. The findings were published in the Report on the Observance of Standards and Codes (ROSC) which was finally released in September 2007. The report contains detailed recommendations to improve the accounting and auditing framework in Brazil along with a section on subsequent developments following the 2005 assessment. The Brazilian Generally Accepted Accounting Principles (GAAP), as defined in the World Bank report, primarily comprise the Corporate Law No. 6,404/76, standards and interpretation issued by the Federal Accounting Council (CFC) and Institute of Independent Auditors of Brazil (IBRACON), and pronouncements issued by the various regulatory agencies. The World Bank observes that the "Brazilian accounting standards for general purpose financial reporting differ significantly from IFRS in a number of key areas" (p. 24). Main areas of discrepancies with IFRSs include lack of a proper cash flow statement, treatment of finance leases and government grants, limited use of fair values, and the fact that not all companies are required to prepare consolidated financial statements. The World Bank assessment also finds that financial reporting in Brazil is influenced by tax accounting and, therefore, the World Bank foresees that this may prove to be a hindrance in further convergence with IFRSs. Additionally, Brazilian GAAP were found to be less demanding than IFRSs in terms of disclosure. The World Bank, therefore, recommended mandating the application of IFRSs in preparation of consolidated financial statements by all public interest entities (which include listed companies, banks, insurance companies, pension funds and large non-listed firms). It also recommended amending the Corporate Law and other legislation to align Brazilian accounting practices with international standards.

According to the World Bank's description of the legal and regulatory framework governing accounting practices in Brazil, the Corporate Law, which codifies many of the accounting standards and financial reporting rules, prescribes requirements for most Brazilian corporations. Limited liability companies are governed by the Brazilian Civil Code.

In 2000, Draft Law No. 3741 was introduced to strengthen Brazil's corporate financial regime by amending the Corporate Law. The proposed law was introduced to enable the legal framework for setting accounting principles based on international requirements. After seven years of review and discussion the draft bill was approved and passed into Law No. 11638 (effective January 1, 2008) in December 2007. The new law modifies the Corporate Law No. 6404 of 1976 allowing for aligning national GAAP with international standards. A 2008 Deloitte publication notes that Law No. 11638 also allows the Securities and Exchange Commission (CVM) to "issue new accounting standards and procedures, applicable to public companies in Brazil, in conformity with such international accounting standards."

Listed entities are subject to CVM-issued accounting and auditing rules. Per the CVM Instruction No. 457, all Brazilian listed companies will be required to apply IFRSs in their consolidated financial statements starting in 2010 (optional from 2007). Empowered by the Securities and Exchange Law No. 6385 of 1976, the CVM is responsible for the monitoring and enforcement of accounting requirements for listed companies and can impose sanctions for non compliance with the given requirements. Overall, the World Bank commended the CVM for having strengthened its enforcement capacity but pointed out that it needs to improve further in order to address the increasingly complex financial reporting requirements for entities listed on the Sao Paulo Stock Exchange (BOVESPA).

With regard to financial institutions, the Central Bank of Brazil (BCB) announced in 2006 its decision to require application of IFRSs in preparation of consolidated financial statements starting year ending December 31, 2010. As explained in the World Bank assessment, the Central Bank enforces accounting standards using a two-tier supervision system and is legally empowered to monitor and enforce accounting requirements. Banks and investment funds share a common legal framework with respect to financial reporting requirements which is governed by the Corporate Law, Accounting Plan for Financial Institutions, and the CVM rules (which apply exclusively to listed banks only if these are not in conflict with the BCB requirements). The World Bank report explains that the Accounting Plan for Financial Institutions includes compulsory chart of accounts, accounting methods and standard formats for reporting. Insurance companies are regulated by the Superintendency of Private Insurance (SUSEP), and their activities are governed by the Corporate Law and the Ministry of Welfare for Pension Funds' (MPAS) and SUSEP's rules.

The Federal Accounting Council or CFC is legally empowered to oversee the profession. The 27 Regional Accounting Councils (CRC) serve under the CFC. The World Bank observes that although the CFC is not legally mandated to issue accounting and auditing standards, its standards are recognized as generally accepted principles. The IBRACON, a not-for-profit organization, although not legally empowered to set accounting and auditing standards, either issues its own accounting pronouncements or collaborates with the CFC and other regulators in the standard-setting process. The World Bank pointed out that "the fact that the responsibilities for accounting standard-setting are scattered across many institutions results in a series of inefficiencies" (p. 20). Therefore, the World Bank recommended establishing an independent accounting standard-setter. In line with the World Bank recommendation, in October 2005, the Accounting Standards Committee (CPC) - an independent accounting standard-setter was established with members from a wide-range of organizations including, but not limited to, the CFC, the BOVESPA and IBRACON. Per the Deloitte IAS Plus website, the CPC's mandate states that its mission is to converge Brazilian accounting requirements with IFRSs. The World Bank report explains that the CVM, the BCB and other regulators monitor and endorse CPC's standards. As of July 2007, the CPC issued two standards on "Impairment of Assets" and "Conversion of Financial Statements to the National Currency." The World Bank also recommended developing a simplified accounting framework for small and medium size enterprises. With regard to the code of ethics, the World Bank assessment points out that "the CFC's Code of Professional Ethics for Accountants is far less developed and comprehensive than IFAC's" (p. 15). The IBRACON and the CFC are listed as members on the IFAC website.

The Principles

IFRS 1: First-time Adoption of International Financial Reporting Standards (effective 2006)

NC

According to a 2006 PricewaterhouseCoopers (PWC) report, Brazilian GAAP have no specific standard for first time adoption. The report adds that "in practice, the standard require retrospective application of all accounting practices adopted in Brazil effective on the date of the entity's first financial statements prepared in accordance with the accounting practices adopted in Brazil" (p. 59).

IFRS 2: Share-based Payment (effective 2005)

NC

According to the 2006 PWC report, there is no guidance on the measurement or recognition of share-based payments under Brazilian GAAP and minimum disclosures are required within a general conceptual framework.

IFRS 3: Business Combinations (effective 2004)

NC

As stated in the report prepared by the United Nations Conference on Trade and Development (UNCTAD) in 2006, in Brazil, there is no legal obligation to assess the fair value of assets and liabilities when a business combination takes place. By contrast, this is mandatory under IFRS. The UNCTAD report points out other differences with regard to accounting for goodwill on business combinations.

IFRS 4: Insurance Contracts (effective 2006)

II

There is insufficient publicly available information as to Brazil's compliance with this principle.

IFRS 5: Non-current Assets Held for Sale and Discontinued Operations (effective 2005)

NC

According to the 2006 PWC report, definition of discontinued operations under Brazilian GAAP is similar to IFRSs; however, there are differences in measurement of such operations.

IFRS 6: Exploration for and Evaluation of Mineral Resources (effective 2006)

II

There is insufficient publicly available information as to Brazil's compliance with this principle.

IFRS 7: Financial Instruments: Disclosures (effective 2007)

II

There is insufficient publicly available information as to Brazil's compliance with this principle.

IAS 1: Presentation of Financial Statements (effective 2007)

NC

According to the 2006 PWC report, there are differences between IFRSs and Brazilian requirements for balance sheet, income statements, and extraordinary items.

IAS 2: Inventories (effective 2005)

II

According to the 2006 PWC report, Brazilian requirements are similar to IFRS; however, no further information on the extent of compliance is publicly available.

IAS 7: Cash Flow Statements (effective 1994)

NC

According to the 2006 PWC report, presentation of cash flow statements is not required under Brazilian standards.

IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors (effective 2005)

NC

According to the 2006 PWC report, differences exist in accounting for retained earnings and comparatives under the international and Brazilian framework.

IAS 10: Events after the Reporting Period (effective 2005)

II

According to the 2006 PWC report, post balance sheet events are accounted for similarly to IFRS. However, no further information on the extent of compliance is publicly available.

IAS 11: Construction Contracts (effective 1995)

II

According to the 2006 PWC report, Brazilian GAAP are similar to IFRSs, however, no further information on the extent of compliance is publicly available.

IAS 12: Income Taxes (effective 2001)

NC

According to the 2006 PWC report, unlike IFRS, the revaluation of land not for sale is not subject to deferred income tax. Also, initial recognition exemption of assets and liabilities does not exist in the Brazilian standards.

IAS 14: Segment Reporting (effective 1998)

NC

According to the 2006 PWC report, disclosure by segments is not required in Brazil.

IAS 16: Property, Plant and Equipment (effective 2005)

NC

According to the 2006 PWC report, differences exist between IFRS and the Brazilian requirements. For instance, under Brazilian GAAP the revaluation of land not for sale is not subject to deferred income tax. Also, "gains and losses from the sale or disposal of assets are recorded as non-operating expenses" (p. 77).

IAS 17: Leases (effective 2005)

NC

According to the 2006 PWC report, unlike IFRS, recording lease agreement as finance lease is not required under the Brazilian framework. Differences also exist in lease classification and lessor accounting. More recently, the 2008 KPMG Investment in Brazil report notes that the changes in accounting standards and reporting requirements will seek convergence with international standards in leasing agreements.

IAS 18: Revenue (effective 1995)

NC

According to the 2006 PWC report, Brazilian GAAP are "similar to IFRSs, however, less guidance can result in differences in practice" (p. 74).

IAS 19: Employee Benefits (effective 2006)

II

According to the 2006 PWC report, under Brazilian GAAP, treatment of defined benefit plans and other employee benefits is similar to IFRSs. However, no further publicly available information as to Brazil's compliance with this principle is available.

IAS 20: Accounting for Government Grants and Disclosure of Government Assistance (effective 1984)

NC

As stated in the 2006 UNCTAD report, unlike IFRS, under Brazilian accounting standards, government investment grants are recognized in a capital reserve in equity when received and without any specific link to the assets or the project's lifespan.

IAS 21: The Effects of Changes in Foreign Exchange Rates (effective 2005)

II

The 2007 World Bank points out that, as of 2007, the CPC issued a standard on "Conversion of Financial Statements to the National Currency," which is based on IAS 21. However, there is no further publicly available information on the extent of compliance with this principle.

IAS 23: Borrowing Costs (effective 1995)

II

According to the 2006 PWC report, under Brazilian GAAP, capitalization of borrowing costs is required while under IFRS it is permitted but not required. There is no further publicly available information as to Brazil's compliance with this principle.

IAS 24: Related Party Disclosures (effective 2005)

II

According to the 2006 PWC report, the definition of related party transactions and required disclosures are similar to IFRSs. However, there is no further publicly available information as to Brazil's compliance with this principle.

IAS 26: Accounting and Reporting by Retirement Benefit Plans (effective 1998)

II

According to the 2006 PWC report, accounting for post retirement benefits is similar to IFRS under Brazilian GAAP. However, there is no further publicly available information as to Brazil's compliance with this principle.

IAS 27: Consolidated and Separate Financial Statements (effective 2005)

NC

According to the 2006 PWC report, differences exist between IFRSs and Brazilian requirements in the definition of subsidiary.

IAS 28: Investments in Associates (effective 2005)

NC

As stated in the 2006 UNCTAD report, there are differences in requirements for application of equity method to investments in associated companies under Brazilian and international framework. Also, "there are some technical differences in the calculation and determination of equity related to provisions, reporting dates, etc." (p. 11).

IAS 29: Financial Reporting in Hyperinflationary Economies (effective 1990)

II

According to the 2006 PWC report, Brazilian GAAP treatment of hyperinflationary financial reporting by foreign entities is similar to IFRSs. However, there is no further publicly available information as to the extent of Brazil's compliance with this principle.

IAS 31: Interests in Joint Ventures (effective 2005)

NC

According to the 2006 PWC report, differences exist between IFRSs and Brazilian requirements in the presentation of joint ventures.

IAS 32: Financial Instruments: Disclosure and Presentation (effective 2005)

II

According to the 2006 PWC report, under IFRSs, capital instruments are classified as liability or equity instrument depending on substance of the issuer's obligations. Under Brazilian rules, classification is based on the instruments' legal form. The 2008 KPMG "Investment in Brazil" report points out that the recent changes in accounting standards and reporting requirements seek convergence with international standards in the area of financial instruments and derivatives. However, there is no further publicly available information as to Brazil's compliance with this principle.

IAS 33: Earnings per Share (effective 2005)

NC

According to the 2006 PWC report, unlike IFRS, under Brazilian GAAP, there is no specific rule in calculating diluted earnings per share. Further, the report explains "the only earnings per share disclosed are the basic earnings per share measured by simply dividing by net income for the year by the number of shares outstanding at the balance sheet date" (p. 89).

IAS 34: Interim Financial Reporting (effective 1999)

NC

According to the 2006 PWC report, "rules for interim financial reporting are similar to IFRS, although with a lower level of disclosure" (p. 92). The 2006 UNCTAD report adds that only financial institutions - under the BCB legislation - are required to prepare and publish monthly and half-yearly balance sheets. Listed companies must prepare quarterly information to be made available to the stock exchange and investors.

IAS 36: Impairment of Assets (effective 2004)

EN

According to the 2006 PWC report, differences existed between IFRSs and Brazilian GAAP on certain aspects of accounting for impairment of assets. However, the 2008 KPMG report points out that "on November 1, 2007, the CPC issued its first Technical Pronouncement No. 1, which established standards for the accounting of asset impairment charges, and it is in line with the International Accounting Standard No. 36" (p. 113). The report adds that Technical Pronouncement No. 1 has been adopted by both the CFC and the CVM.

IAS 37: Provisions, Contingent Liabilities and Contingent Assets (effective 1999)

II

According to the 2006 PWC report, treatment of provisions and contingencies under Brazilian GAAP is similar to IFRSs. However, there is no further publicly available information as to Brazil's compliance with this principle.

IAS 38: Intangible Assets (effective 2004)

NC

According to the 2006 PWC report, differences exist between IFRSs and Brazilian requirements in the classification and accounting for intangible assets acquired from third parties.

IAS 39: Financial Instruments: Recognition and Measurement (effective 2006)

II

As stated in the 2006 UNCTAD report, with regard to accounting and reporting on financial instruments in Brazil, while the BCB's requirements for financial institutions are similar to IFRS, the extent of disclosure required in Brazil is lower relative to IFRS. Also, Brazilian corporate legislation is totally silent on financial instruments and listed companies apply CVM requirements. The 2008 KPMG "Investment in Brazil" report points out that the recent changes in accounting standards and reporting requirements seek convergence with international standards in the area of financial instruments and derivatives. However, there is no further publicly available information as to Brazil's compliance with this principle.

IAS 40: Investment Property (effective 2005)

NC

According to the 2006 PWC report, unlike IFRS, there are no specific rules for industries in general and investment property is treated as property, plant and equipment at its depreciated cost under Brazilian GAAP.

IAS 41: Agriculture (effective 2003)

NC

According to the 2006 PWC report, unlike IFRS, there are no specific rules on accounting for biological assets under Brazilian GAAP And, in general, historical cost is used.