05/03/2008- Amendments on the Corporation Law by the publication of Law No. 11.638/07
The publication of Law Nº 11,638 dated on December 28th, 2007, brought some important changes for the Corporation Law (Law Nº. 6.404/76), as it is related mainly to the financial statements, profit and reserves and caused controversy regarding its applicability in large Limited Liability
companies. The new law, which is already in effect and which provisions will be implemented this year, amended and repealed both the Corporation Law and Law N.º 6.385/76, which lays down on the securities market.
The first change is on Article 176 of the Corporation Law. From the last writing, the called Statement of Origin and Appropriation of Funds (Demonstração das Origens e Aplicações de Recursos = DOAR), was replaced by Cash Flow Statement (Demonstração de Fluxo de Caixa = DFC) and Statement of Ad-Valorem – if the company is a public-held corporation (Demonstração de Valor Adicionado = DVA), which should be approved by the Annual General Meeting – AGO (art. 176, V). Both DFC as DVA can be disclosed without indicating the amount related to the previous year, in the first year of the law.
Also in this provision, the value, which exempt the closely-held companies from the publication of Statement of Origin and Appropriation of Funds, was changed. Previously, closely-held companies with assets up to R$ 1,000,000.00 (One million Reais) in the date of the balance sheet, did not need to publish the balance sheet prepared. Now, such figures is lower than R$ 2,000,000.00 (Two million Reais). It is very important to emphasize that as a result of the change mentioned above, the obligation of publication now refers to the Cash Flow Statement (DFC), since it
replaced the Statement of Origin and Appropriation of Funds (DOAR).
Regarding the commercial accounting, the rules dispatched by the securities Commission (CVM) – mandatory for publicly-held corporations – can be adopted by the closely-held ones. Therefore, the new law established that such rules should be developed in accordance to international accounting standards.
Also, regarding the bookkeeping, it was created a possibility of segregation of the tax commercial accounting, since the law established an alternative for companies to include the tax law provisions. However, it is necessary then to determine the profit base for taxation so the proper adjustments
can be made in order the statements to be in accordance with the of Corporation Law. Such statements will be subject to an audit by an independent auditor.
Another important amendment refers to the balance sheet. Among the Assets has been included the Intangible Assets. In this new subgroup will be classified the rights related to intangible assets (trademarks, patents, goodwill, among others). Therefore, Assets is now divided into Investments, Fixed Assets, Intangible and Other Assets.
Besides Assets, the Shareholders' Equity, which is one of the groups of Liabilities classification, also has changed. From the original division was excluded Appraisal Surplus, included Treasury Stock and therefore continued with Capital, Capital Reserves, Adjustments and Equity Evaluation, Capital Gains, Treasury Stock and Accrued loss. It is important to emphasize that in relation to the Appraisal Surplus, Article 6 of the new law established that the existing balances should be kept until their effective implementation or returned until the end of the financial year of 2008.
Also about the changes on the Assets and Liabilities, the new law created new evaluation criteria, which the applications in financial instruments classified in Current Assets or in Long-term Receivables will be evaluated (i) by its Market Value or equivalent in case of applications for trading or available for sale, and (ii) by the acquisition cost or issue amount updated according to the legal or contractual provisions. Regarding the Liabilities, evaluation criteria is related to the duties, charges and risks classified in
long term Liabilities, which will be adjusted to their present value.
Another amendment in relation to assets and liabilities refers to the section "merger, amalgamation and spin-off" of the Corporation Law. In this topic, assets and liabilities of the Company that will be merged or will be a result from amalgamation or spin-off – from transactions conducted between unrelated parties and linked to effective control transaction – will be accounted in a Market Value.
In the same section, the method of evaluation was also modified for
investments of associated Company and Holding Company. From now on, the method of equity accounting will be used covering all investments in associated companies, which the administration has significant influence or participates with 20% of the voting capital in holding and other companies of the same group in which has participation. Previously, the parameter of participation was the total capital.
As stated previously, the applicability of this law regarding the Limited Liability companies brought doubts on the obligation to publish their financial statements. It is considered as large companies those that have – in the previous financial year – total assets exceeding $ 240 million or annual gross revenue exceeding $ 300 million.
Despite the new law created a requirement for financial statements’ publication to obligate large Limited Liability companies to follow the provisions of the Corporation Law, such determination refers only to the
bookkeeping and preparation of financial statements.
It is understood, therefore, that large Limited Liability Companies are obligated to follow the rules for accounting of assets in Market Values, to submit their financial statements to independent auditors’ review, but not to disclose their balance sheets. For this procedure, effective rule is still
established in the Civil Code.
From the analysis of the new law, it is concluded that such amendments increased the transparency of financial statements and put an end to the regulatory barriers that restrained the insertion of publiclyheld companies on the international scene.
Source: Almeida Advogados