July 2007

By Rodney A. Alves and Patrick Del Duca

The flourishing of Brazil's stock market has raised pressure to harmonize Brazilian corporate governance standards with those used internationally.  Accordingly, Brazil's COMISSÃO DE VALORES MOBILIÁRIOS (CVM), its securities regulatory commission, on July 13, 2007 adopted Instruction No. 457, which mandates that the consolidated financial statements of listed Brazilian companies be prepared in compliance with the International Accounting Standards Board (IASB) rules.

Listed Brazilian companies may start using the IASB rules immediately, but to allow time to adjust to them, their use does not become mandatory until the accounting year ending in 2010, at which time the prior year’s accounts must also be presented in conformity with the IASB rules so as to permit comparison.  Achieving compliance with the IASB rules imposes a significant additional cost on Brazilian companies, due to the requirement in the first year of preparation of the financial statements under the IASB rules to present the statements using generally accepted Brazilian accounting principles as well, so as to highlight the differences.  Moreover, the independent auditors are to express an opinion even before the requirement to comply with the IASB rules becomes mandatory, on the adequacy of the company’s accounting practices relative to international standards.

Despite the costs of implementing the new accounting standards, the additional reliability and transparency of the resulting financial statements to investors, including particularly international investors, may reduce the cost of access to capital.  The move to financial statements prepared in accord with the IASB rules is a step towards a more developed stock market founded on the disclosure of information with a high degree of quality and transparency.  In adopting the new requirement, Brazil’s securities regulator telegraphs its view that the Brazilian stock market is mature enough to accommodate greater rigor in corporate governance and accounting standards.

Contributors:  Rodney Almeida Alves, ManattJones Global Strategies, Los Angeles, CA; Juliana Martines, Felsberg e Associados Law Firm, São Paulo, Brazil; and Patrick Del Duca, Manatt, Phelps & Phillips, Los Angeles, CA.

As published in the ABA International Latin America & Caribbean Committee's Latin American Legal Developments Newsletter.  For more information about ABA International, please visit the Section website at www.abanet.org/intlaw.