Net Equity Components In Financial Statements

The determination of the net equity components has been the object of doubts by certain companies at the time they are preparing their Balance Sheets.

Prior to the enactment of Law no. 11 638/07, article 178 of Law no. 6 404/76 (Business Corporation Act) established that the net equity was divided into the following components: "capital stock, capital reserves, revaluation reserves, profit reserves and accrued profits or earnings."

However, that wording was amended by Law no. 11 638/07 and said new legal provision established that the companies' net equity was then composed of the following accounts: "capital stock, capital reserves, equity valuation adjustments, profit reserves, treasury stock and accrued losses."

In other words, the Business Corporation Act no longer provides for the "accrued profits" (related to previous fiscal years) as one of the accounts forming the legal entities' net equity (likewise, it no longer provides for the revaluation reserve account).

In view of that change, it is possible to consider that when legal entities subject to Law no. 6 404/76 are preparing their Financial Statements (and their Balance Sheets as well), they can no longer consider in their net equity an account in which they have recorded profits accrued from previous years (considering the cancellation of said accounting category as an account forming the net equity). As a consequence, it is possible to conclude that as of said rule, the profits accrued in a certain fiscal year must be fully allocated for distribution among the partners, constitution of profit reserves (according to the legally authorized situations and limits), or capital increase.

In our view, the abovementioned article 178 is a rule providing for the recording and preparation of Financial...