Brazilian GAAP Vs IFRS Overview. An overview of significant differences for Companies converting to IFRS from Brazilian GAAP

Transcription

1 Brazilian GAAP Vs IFRS Overview An overview of significant differences for Companies converting to IFRS from Brazilian GAAP

2 Table of Contents Brazilian GAAP Vs IFRS Overview Framework for the Preparation and Presentation of Financial Statements Accounting Standard for Small and Medium-sized Entities (CPCs for SMEs) CPC 01 (R1) Impairment of Assets CPC 02 Changes in Foreign Exchange Rates and Financial Statements Conversion CPC 18 Investments in Associates, CPC 19 Interests in Joint Ventures, CPC 35 Separate Financial Statements, CPC 36 (R1) Consolidated Financial Statements; ICPC 09 Individual Financial Statements, Separate Financial Statements and Consolidated Financial Statements and Equity Method CPC 20 Borrowing Costs CPC 03 CPC 04 CPC 05 Statement of Cash Flows Intangible Assets Related Party Disclosures CPC 21 Interim Reporting, CPC 22 Operating Segments, CPC 23 Accounting Policies, Changes in Accounting Estimates and Errors, CPC 26 Presentation of Financial Statements CPC 06 CPC 07 CPC 08 CPC 10 CPC 11 Leases Government Grants Transaction Costs and Premium on the Issuance of Debt and Equity Instruments, CPC 38 Financial Instruments: Recognition and Measurement (supersedes CPC 14), CPC 39 Financial Instruments: Presentation, CPC 40 Financial Instruments: Disclosure Share Based Payment Insurance Contracts CPC 13 First Time Adoption of Law 11,638, CPC 37 First Time Adoption of IFRS, CPC 43 Initial Adoption of Technical Pronouncements CPC 15 and 40 CPC 15 Business Combinations CPC 24 CPC 25 Subsequent Events; ICPC 08 Accounting for the Payment of Proposed Dividends Provisions, Contingent Liabilities and Contingent Assets CPC 27 Property, Plant & Equipment, CPC 28 Investment Property, CPC 31 Non- Current Assets Held for Sale and Discontinued Operations, ICPC 01 Concession Contracts CPC 29 CPC 32 CPC 33 Biological Assets Income Taxes Employee Benefits Transition to IFRS Methodology - How we can help you Suggested IFRS Conversion Methodology CPC 16 (R1) Inventory CPC 17 Construction Contracts, CPC 30 Revenue Recognition and CPC 01 Concession Contracts

3 Introduction On 28 January 2010 the Brazilian Federal Council of Accounting and the Brazilian Accounting Pronouncements Committee signed a Memorandum of Understanding (MoU) with the IASB that set the end of 2010 as the date for full convergence with International Financial Reporting Standards (IFRSs) and established a framework for future co-operation between the organisations. The move towards convergence with IFRSs was initiated by the Brazilian Central Bank, reflecting its view of the importance of a single set of IFRSs in use around the world. In 2006 the Brazilian Central Bank announced that financial institutions under its remit will comply with IFRSs from December 2010 in their consolidated statutory financial statements. The Brazilian Securities Commission and the Brazilian Insurance Supervisor issued similar guidelines in In 2008 the Brazilian Congress approved a law which would require the convergence of Brazilian GAAP with IFRSs for the statutory individual financial statements of all listed and unlisted companies. As of 31st December 2008, a total of 14 new standards and one technical orientation had been issued and most of these were required to be applied for Since then, an additional 27 new standards have been issued along with 14 interpretations and two technical orientations.there are also two additional standards relating to the framework for preparing and presenting financial information and specific to small and medium sized entities (SMEs). These new standards are required to be applied to calendar year 2010 and can be found online at In this guide, Brazilian GAAP vs. IFRS: Overview, we take a high level look into existing GAAP differences and provide an overview of where the standards are similar and where they diverge. No publication that compares two sets of accounting standards can include all differences that could arise in light of the huge variety of business transactions that could possibly occur. The existence of any differences and their materiality to an entity s financial statements depends on a variety of specific factors. This brochure focuses on those differences most commonly found in present practices and, where applicable, provides an overview of how and when those differences are expected to converge. 1

4 Brazilian GAAP Vs IFRS Overview In 2010 the Comitê de Pronunciamentos Contábeis (CPC) issued 43 accounting standards, 38 of which were, in essence, equivalent to IFRS. However some of these standards did incorporate additional guidance or clarifications. Brazilian GAAP Standard IFRS Standard Significant Differences Basic Concepts Framework for the Preparation and Presentation of Financial Statements Framework for the Preparation and Presentation of Financial Statements The Framework under BR GAAP contains differences from the IFRS Framework as it relates to items that are not allowed by Brazilian Corporate Law. CPC PME Accounting Standard for Small and Medium-sized Entities (CPCs for SMEs) The International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) Both standards include criteria that entities must meet in order to utilise the pronouncement such as no public debt or equity, but BR GAAP standards also includes size requirements which are consistent with Brazilian Corporate Law. An entity qualifies as an SME in Brazil if specific criteria are met. For example, its revenues should not be greater than R$300 million and its total assets should not be greater than R$240 million. CPC 01 (R1) Impairment of Assets IAS 36 Impairment of Assets CPC 02 Changes in Foreign Exchange Rates and Financial Statements Conversion IAS 21 The Effects of Changes in Foreign Exchange Rates CPC 02 has additional paragraphs which cover the separate IFRS interpretation IFRIC 16 (Hedges of a Net Investment in a Foreign Operation). In addition, CPC 02 says that subsidiaries that are considered as an extension of the parent company must use the same functional currency as the parent. CPC 03 Statement of Cash Flows IAS 7 Statement of Cash Flows CPC 04 Intangible Assets IAS 38 Intangible Assets CPC 05 Related Party Disclosures IAS 24 Related Party Disclosures CPC 06 Leases IAS 17 Leases 2 CPC 07 Government Grants IAS 20 Accounting for Government Grants and Disclosure of Government Assistance CPC 07 includes examples specific to the Brazilian environment as government grants are common in Brazil.

5 Brazilian GAAP Standard IFRS Standard Significant Differences CPC 08 Transaction Costs and Premium on the Issuance of Debt and Equity Instruments CPC 38 Financial Instruments Recognition and Measurement (replaces CPC 14) IAS 32 Financial Instruments Presentation IAS 39 Financial Instruments Recognition and Measurement CPC 39 Financial Instruments: Presentation; CPC 40 Financial Instruments: Disclosure IFRS 7 Financial Instruments: Disclosures CPC 10 Share Based Payment CPC 11 Insurance Contracts IFRS 2 Share Based Payment IFRS 4 Insurance Contracts Description CPC 13 First Time Adoption of Law 11,638; CPC 37 First Time Adoption of IFRS; CPC 43 Initial Adoption of Technical Pronouncements CPC 15 and 40 These CPCs were issued in order to help companies apply the changes brought by Law and the CPCs. They are broadly equivalent to IFRS 1 but there are differenceseliminating alternatives and requiring items primarily due to CPC or Corporate Law constraints or requirements such as the revaluation of assets (not allowed under Corporate Law), presentation of the income statement (under the CPC, entities must present an income statement separate from comprehensive income but the IFRS allows a choice between one statement and two statements), and the effective date of when businesses combinations must be revalued. (Under the CPC, business combinations can only be revalued back to 1 January 2009 but the IFRS allows companies to go back further than this so companies in Brazil should be following the CPC requirements.) Brazilian GAAP Standard IFRS Standard Significant Differences CPC 15 Business Combinations CPC 16 (R1) Inventory IFRS 3 (R) Business Combinations IAS 2 Inventory 3

6 Brazilian GAAP Vs IFRS Overview Brazilian GAAP Standard IFRS Standard Significant Differences CPC 17 Construction Contracts; CPC 30 Revenue Recognition; ICPC 01 Concession Contracts CPC 18 Investments in Associates; CPC 19 Interests in Joint Ventures; CPC 35 Separate Financial Statements; CPC 36 (R1) Consolidated Financial Statements; ICPC 09 Individual Financial Statements, Separate Financial Statements and Consolidated Financial Statements and Equity Method CPC 20 Borrowing Costs CPC 21 Interim Reporting; CPC 22 Operating Segments; CPC 23 Accounting Policies, Changes in Accounting Estimates and Errors; CPC 26 Presentation of Financial Statements IAS 11 Construction Contracts; IAS 18 Revenue; IFRIC 12 Service Concession Arrangements; SIC 29 Service Concession Arrangements: Disclosures IAS 28 Investments in Associates; AS 31 Interests in Joint Ventures; AS 27 Consolidated and Separate Financial Statements CPC 20 Borrowing Costs IAS 34 Interim Financial Reporting; IFRS 8 Operating Segments; IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors; IAS 1 Presentation of Financial Statements O CPC 17 requires additional disclosure relating to gross and net revenues. CPCs 35 and 36 (R1)have a third type of financial statements called individual financial statements. These are parent Company s financial statements in which subsidiaries and joint ventures are presented using the equity method. Joint ventures must use proportionate consolidation under CPC 19 while they have the option of proportionate or equity method consolidation under IFRS. Under IFRS, an entity can include results of an investment in a associate with a different reporting period as long as it iswithin three months of the entity s reporting date. CPC18 only allows a difference of two months. IFRS is silent as to whether or not exchange differences should actually create a credit to the asset due to favourable exchange rates. The CPC says that exchange rate differences should be captured in the capitalisation. IAS 1 does not require the Value Added statement that is required by CPC 26. 4

7 Brazilian GAAP Standard IFRS Standard Significant Differences CPC 24 Subsequent Events; ICPC 08 Accounting for the Payment of Proposed Dividends CPC 25 Provisions, Contingent Liabilities and Contingent Assets CPC 27 Property, Plant & Equipment; CPC 28 Investment Property; CPC 31 Non-current Assets Held for Sale and Discontinued Operations; ICPC 01 Concession Contracts CPC 29 Biological Assets CPC 32 Income Taxes CPC 33 Employee Benefits IAS 10 Events after the Reporting Period IAS 37 Provisions, Contingent Liabilities and Contingent Assets IAS 16 Property, Plant & Equipment; IAS 40 Investment Property; IFRS 5 Non-current Assets Held for Sale and Discontinued Operations; IFRIC 12 Service Concession Arrangements IAS 41 Agriculture IAS 12 Income Taxes IAS 19 Employee Benefits; IAS 26 Accounting and Reporting by Retirement Benefit Plans ICPC 08 explains how dividends are recorded and explicitly states that mandatory dividends under Law 6.404/76 must be recorded as a liability. IFRS has no guidance similar to ICPC 08. Revaluation of assets is not permitted under Law 11,638 while revaluation may be applied (as a policy choice) to an entire class of assets which are then required to be revalued to fair value on a regular basis under IFRS. CPC 31, has an additional category of assets called assets held to be distributed to owners. CPC 32 requires more disclosure as it relates to gross versus net revenue and various taxes specific to Brazil. 5

8 Brazilian GAAP Vs IFRS Overview How we can help you PKF International s suggested IFRS conversion methodology for member firms and how we can help you with your IFRS conversion is highlighted below. IFRS Conversion Our methodology is split into four phases and these will help you with the following; Phase 1: The impact assessment phase will help to identify high level changes and accounting differences for your organisation. Phase 2: Identifying the skills sets and resources to carry out the conversion and designing and planning for the conversion and understanding timelines to ensure business as usual processes are not delayed. Phase 3: When significant accounting differences have been identified and a plan set up for the conversion, the implementation phase can begin. This will involve identifying potential group restructuring and tax benefits to be had before the conversion begins, preparation of skeleton financial statements and embedding the process to name some of the items to be addressed. Phase 4: Finally, at the end of a successful conversion, it is paramount that relevant individuals within the organisation are trained on IFRS, new policies and procedures and systems to ensure all skills have been transferred and to ensure a smooth transition. 6

9 Conversion methodology The diagram below shows that during a conversion project from local GAAP to IFRS it is not only the Finance teams of an organisation which should be involved but also Tax, IT (involving issues around business processes and systems), Regulatory, Human Resources and Training teams. PKF International member firms have proven experience of undertaking this conversion and can help you understand and plan for your company s conversion to IFRS. 1 Impact assessment Training IFRS 2 Design and planning Tax Human Resources Regulatory 4 Training Financial Reporting IT 3 Implementation and embedding processes 7

10 IMPORTANT DISCLAIMER: This publication has been distributed on the express terms and understanding that the authors are not responsible for the results of any actions which are undertaken on the basis of the information which is contained within this publication, nor for any error in, or omission from, this publication. The publishers and the authors expressly disclaim all and any liability and responsibility to any person, entity or corporation who acts or fails to act as a consequence of any reliance upon the whole or any part of the contents of this publication. Accordingly no person, entity or corporation should act or rely upon any matter or information as contained or implied within this publication without first obtaining advice from an appropriately qualified professional person or firm of advisors, and ensuring that such advice specifically relates to their particular circumstances. PKF International is a network of legally independent member firms administered by PKF International Limited (PKFI). Neither PKFI nor the member firms of the network generally accept any responsibility or liability for the actions or inactions on the part of any individual member firm or firms. 8

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