The Adoption Of The True And Fair View And Substance Over Form Concepts In Brazil

On September 20, 2011, the Board of the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários - CVM) decided to adopt the concepts of true and fair view or faithful representation (representação verdadeira e apropriada) and substance over form (primazia da essência sobre a forma) in the Brazilian accounting system. This decision was announced by means of CVM Opinion (Parecer de Orientação) No. 37, of September 22, 2011, and the arguments raised therein are outlined below.

According to CVM, the new accounting system brought from the enactment of Law No. 11638 of December 28, 2007 incorporated several innovations to Brazilian accounting in order to produce financial statements more useful to investors and other external users in their processes of resource allocation. This new system resulting from the adoption of international accounting standards (IFRS) aims to improve the informational infrastructure of the domestic capital markets, reducing asymmetries.

Many concepts brought by IFRS are not necessarily novel doctrine to Brazilian accounting but they are certainly new to the practice of many professional accountants and to the accounting environment of the Brazilian companies. This is an important change in a cultural paradigm that is very present in the Brazilian economic and financial environment under which economic events were interpreted and, consequently, recorded and measured mainly according to their legal form.

Two interrelated concepts are essential to understanding this new reality: (i) true and fair view; and (ii) the primacy of substance over form. Accounting only fulfill its essential function of providing useful information to decision-making process of its users if it truly reflects the underlying economic reality. For the faithful representation (true and fair view) to be achieved, it is paramount to note the primacy of economic substance over legal form of economic events.

Thus, the change began with the enactment of Law 11638/2007 and rescues the fundamental characteristic of the financial statements, which should accurately represent the reality of the economic effects of transactions, regardless of their legal treatment.

The principle of "substance over form" permeates the whole process of recognition, measurement and disclosure of accounting information. Thus, the accounting rules should not serve as a shield that prevents the true and fair representation of the economic transactions. In the...