Inflation Accounting
Law 6404/76 (the number means that this was the 6404th law enacted in 1976) created the indexation system known as corre��o monet�ria (indexation). This, in turn, required the creation of a new asset group ativo permanente. Ativo permanente means �all assets subject to indexation under Law 6404/76.� The group includes fixed assets, investments and deferred charges.
There is no good translation for Ativo Permanente. You may use permanent assets, but this is a calque and open to misunderstanding. Alternatively, you can use fixed assets, investments and deferred charges, which is far too long. Usually, in the balance sheet itself, I use permanent assets because space is at a premium and the general layout will show any accountant what it is all about. In the Notes to Financial Statements, I often use permanent assets (fixed assets, investments, and deferred charges) the first time around, because there is more room and the explanation will be more necessary. If the term appears a second time, permanent assets will do in most cases.
Much later, CVM implemented the corre��o monet�ria integral (full indexation), a system under which all assets had to be indexed, not only those deemed permanent. This rendered the permanent asset group useless, and should have allowed banks to revert to a more universally understood grouping of accounts.
However, CVM cannot exempt anyone from a legal requirement such as corre��o monet�ria, and thus banks had to publish financial statements with two columns of numbers, one labeled pela legisla��o societ�ria (in accordance with the provisions of the business corporation act�often shortened to per S.A. Law in translation) and the other pela corre��o integral (fully indexed). The fact that often one column showed a profit and the other a loss may have been a source of concern to foreign analysts, but Brazilians knew exactly what that meant.
Both forms of indexation have been extinguished but will be found in financial statements up to 1996 and the ativo permanente is still there.
The Standard Charts of Accounts�COBAN and COSIF
All Brazilian financial institutions are required to use a standard chart of accounts, known as COSIF, an acronym for Plano Cont�bil das Institui��es do Sistema Financeiro Nacional (Standard Chart of Accounts for Brazilian Financial Institutions). COSIF replaced COBAN, the older chart, in 1988.
COSIF has been created by a Central Bank Circular (Circular Letter) and may thus be updated by other Circular Letters from time to time to meet changing requirements. It is a very detailed chart and is constructed on a strict four-level plan. Let me show you how this works.
Imagine BrazilBank holds a controlling interest in PeruLease, a Peruvian company. Check your friendly COSIF manual; it will show
2. [Ativo] Permanente (Permanent Assets)
2.1 Investimentos (Investment)
......
2.1.2 Participa��es em Coligadas e Controladas (Interest in associated and controlled companies)
....
2.1.2.10.20-2 Participa��es em Coligadas e Controladas Avaliadas pelo M�todo de Equival�nca Patrimonial�no Exterior (Interest in associated and controlled companies valued by the equity method�Foreign)
... and there you are. Account 2.1.2.10.20-2 is exactly what you wanted. There are other accounts on the same level for local companies, premium on investment and other strange information banks must disclose in their balance sheets. The longer 10.00-6 tag leaves the Central Bank some maneuvering room for updating the chart, which is done often enough.
So, there is never any doubt about where you should pigeonhole something.
Repeats, other, miscellaneous and sundry
Nice and tidy, no doubt. Also easy to use. Bean counters may change jobs and continue charging and crediting the same accounts as if nothing had happened. It also makes for a high degree of comparability, always desirable in the case of financial statements. It also has its shortcomings, however.
First of all, BrazilBank cannot just show its interest in PeruLease (Peru), under
Equity: R$ XXXX
in its balance sheet. No matter what, it must write out the full name of the account and the full names of all of its controlling (upper level) accounts, even if BrazilBank has just this single investment. Of course, if BrazilBank has just this single investment, accounts 2.1, 2.1.2 and 2.1.2.10.20-2 will show the same balance.
In addition, BrazilBank cannot simply merge smaller balances into, say, a mere Investment account. All must be detailed down to the fourth level.
This results in extremely long balance sheets. A very large US bank may summarize its assets in about 15 lines, but a small Brazilian bank often needs more than 45 lines for the same purpose, not bad if the market seems to be a bit slow at the moment.
Second, even the most detailed system can not cover every detail and COSIF is liberally sprinkled with �other� to accommodate what does not fit anywhere else. For instance, there is no specific account for interests not accounted for by the equity method. So, such investments go into 2.1.2.10.99-6 Outras Sociedades (Other Companies).
This is all very good if BrazilBank has investments in companies of several types and 2.1.2.10.99-6 is used as a basket account for some minor holdings. It does look ridiculous, however, when the only investment is a $10,000 holding in Xptosa and this investment, for whatever reason, is not accounted for by the equity method:
| [Ativo] Permanente | X,XXX,XXX |
| ..... | |
| Investimentos | 10,000 |
| Participa��es em Coligadas e Controladas | 10,000 |
| Participa��es em Coligadas e Controladas�Outras Sociedades | 10,000 |
In other words, we�ll have �other� without anything before it and two accounts that control a single account each. This only makes sense if you have a complete copy of COSIF before you to sort things out. Unfortunately, neither the reader nor the translator are likely to, and so what was intended to provide maximum clarity actually results in maximum obscurity.
Things can get a lot worse, however. The apex, I believe, is to be found in 1.9.8.10.99.9:
1. Ativo (Assets)
....
1.9 Outros Valores e Bens (Other Assets)
.....
1.9.8 Outros Valores e Bens (Other Assets)
1.9.8.10.00-9 Bens n�o de uso pr�prio (Assets not used in banking operations)
.....
1.9.8.10.99.9 Outros (Other)
You will notice that we have Outros Valores e Bens twice in a row. That is not my mistake; that is how it stands in the COSIF chart. But the average reader will think I am crazy. So I cheat a little and translate that as
1. Ativo (Assets)
....
1.9 Outros Valores e Bens (Other Assets)
.....
1.9.8 Outros Valores e Bens (Miscellaneous)
1.9.8.10.00-9 Bens n�o de uso pr�prio (Assets not used in banking operations)
.....
1.9.8.10.99.9 Outros (Sundry)
The big question is: what goes into that account? Easy. Account code 1.9.8.10.00-9 is for assets owned by the bank that cannot be used in banking operations. Mostly stuff received from insolvent debtors. There are specific 5-digit tags for im�veis (real estate�in this particular case what a US Bank would call OREO, Other Real Estate Owned) ve�culos e afins (vehicles and similar assets), etc.�but not for works of art. So, if the bank can not collect a debt and accepts a van Gogh in accord and satisfaction (da��o em pagamento), it is an Ativo, Outros Valores e Bens, Outros Valores e Bens, Bens n�o de Uso Pr�prio, Outros. Now you know. What? You had forgotten about the van Gogh? Sorry about that.
� Copyright Translation Journal and the Author 1997
URL: http://accurapid.com/journal/03money.htm