Brazilian legislation introduced the convergence towards IFRS as from 2008; it was achieved in a gradual pace, with full adoption being required from the December 31, 2010 closings on. The process of convergence had started earlier on, with the setting up of a Brazilian Accounting Standards Board around 2005, which began preparing the field for the full convergence that ultimately was validated with the 2007 piece of legislation that initiated the whole process. Then, the objective of this chapter is to describe this process, discussing consequences stemming from that adoption. To achieve this, we describe how the Brazilian accounting model has developed since 1940 until 2010, as well as the main technical, conceptual and practical changes derived from this. We understand that, despite all the difficulties, Brazil achieved full success in this process and the ending balance was very positive for the development of accounting practices and of accountants themselves.
TopIntroduction
Objectives and Delimitation of the Chapter
The main objective of this chapter is to describe the process of IFRS adoption in Brazil, with some comments on consequences stemming from that adoption, mainly in management decision taking and in taxation of companies; the description encompasses both the changes tooking place in the legal environment as well as in the standard-setting approach adopted by the country before and after the convergence towards IFRS.
To achieve that aim, we start discussing about some fundamental characteristics of the Brazilian economy - in a scenario-based approach - and how it has been evolving over the last four decades, finalizing with a view of changes that took place in the accounting standard-setting process that ended up in the adoption of IFRS, occurred in 2010. We then discuss the main technical changes in the Brazilian accounting model, the resulting conceptual and practical challenges being faced and, at last, we summarize the convergence process in Brazil, also discussing our future challenges.
Contextualization of the Brazilian Economy and the Adoption of IFRS
Brazil is the largest economy in Latin America and the seventh largest economy in the world1. It has a population of approximately 200 million and a capital market in constant development.
One of the important steps to the continuing development of the capital market in Brazil was the adoption of IFRS. This process began more formally from 2006 and 2007, when the main Brazilian regulators (Central Bank of Brazil - BACEN, Brazilian Securities and Exchange Commission - CVM and Brazilian Private Insurance Superintendence - SUSEP) decided that companies regulated by such bodies would have to adopt the International Accounting Standards from 2010. However, before that, there were some occasional movements, especially by the CVM, towards adopting the international accounting practices.
In the following sections, we describe how was the evolution of the Brazilian Accounting Model prior to the effective adoption of IFRS and how IFRS has been implemented by companies in the Brazilian market. We will also describe the changes in Brazilian accounting model resulting from the adoption of IFRS and discuss the conceptual and practical challenges, in addition to future steps of Accounting in Brazil.
Evolution Of The Brazilian Accounting Model Before The Adoption Of Ifrs
In this section we describe a brief history about the rules that governed the accounting in Brazil and how migration occurred to IFRS.
Before the Brazilian Corporation Law of December, 1976
We started this history from a law issued in 1940: Decree-Law No. 2,627/40. This regulation brought, almost for the first time comprehensively, specific rules for accounting of corporations, such as rules for valuation of assets and also for retention of profits and distribution of dividends.
On the other hand, the accounting model was substantially inferior to the current one. Some examples of accounting practices of that time:
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Accumulated losses were classified in the “asset” side of the balance sheet, and not as a reduction of shareholders' equity;
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There were “pro forma” debit and credit accounts (“Memorandum Accounts” for some off-balance sheet items) being added to Assets and Liabilities in the Balance Sheet;
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The income statement was coupled with the destination of profits and
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There were no notes to the financial statements.
As part of a normal process of development of the economy and the capital market, this accounting model changed dramatically in 1976 with the enactment of Law No. 6,404/76, known in Brazil as the Company Law .