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Ofício 6/2014 - GEMDC / PRESID

Intcrnational Accounting Standards Board30 Cannon StreetLondon EC4M 6XHUnited Kingdom

Dear Members ofthe Board,

A cooperative is a special type of entrepreneurial organization, which seeks efficienteconomic outcomes, valuing the social and human components, A cooperative is also themani festation of individuaIs who compose it, structured in order to strenl,Jthen and add valueto the aetivities undertaken by it. In BraziL this movement is offieially represented by theOCB system, comprising ofthe Organization ofBrazilian Cooperatives ( OCB), thc NationalConfederation of Cooperatives ( CNCOOP ) and the National Service Leaming Coopcrative (SESCOOP ).

The Brazilian Cooperative System has finl1ly established itself in the country's economy andhas contributed to building a fairer society as representative indicators show. There are 6,603cooperatives divided into 13 segments of operation, totaling more than 11 million subscribcrsgenerating around 320,000 direct jobs.

These findings emphasize the development of intemational accounting procedures. ThroughIntemational Accountant Standards ( IAS ) and lntemational FinanciaI Reports Standards(IFRS ) and its technical interpretations, which have been entered by lhe lntemationalAccountant Standard Board (IASB), interpreted and translated in Brazil by the AccountingPronouncements Committee ( CPC ) and regulated by the Federal Accounting Council (CFC), and also validated by the Brazilian Institute of Independent Auditors ( lbracon ) andissucd by regulatory bodies of economie activities, in particular the Brazilian SecuritiesCommission ( CVM ), the Central Bank of Brazil ( Central Bank ) and the National HealthAgency ( ANS )

However, with the advent of these changes, disputes began to arise, among which wehighlight the concept of FinanciaI Instruments ( IAS 39 ) which c1assifies Capital ofCooperatives as a Financiai Instrument (Liabilities ), when in its e sence. this Equity is apatrimonial Instrumcnt.

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Aeeordingly, onee a diseussion oI' lhe eoneeptual strueturel reopened, the OCB Systemhereby manifcsts its definition oI' private equity deseribed in Seetion 5 oI' doeumentDiseussion Paper DP12013/1.

ri Márcio Lopes de FreitasPresident - Sistema OCB

1 IASB has published discussion paper slaling possible changes on lhe Conceplual Structure in July 18th 2013.The deadline for submission of comments is Jan 14'" 2014. The document is available at www.ifrs.org/current-projecls/lASB-proj ects/conceptual- framework/pages/conceptual-framework-summary .aspx

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Thus, we answer question lO ofSection 5 ofthe Discussion Paper DP/2013/12 as follows,

Question 10

The definition of private equity, measurement and presentation of different classesof equity and how to distinguish liabilities from equity seeurities are discussed inparagraphs 5,1-5,59. In the preliminary view ofthe IASB:

( a) The concept table should maintain the current definition of private equity asthe residual value of the assets of the entity after deducting ali of its liabilities.

( b ) The concept table should indicate that the IASB ought to use the definition ofa liability for distinguishing liabilities from equity. The following twoconsequences are:

( I) obligations to issue equity securities are not passive, and( II ) obligations that wil1 arise only on settlement of the reporting entity are

not taxable ( see paragraph 3.89 ( a) ) .

(c) An entity should:

(i) at the end of each period, update the measure of private equity credit. TheIASB would determine the development or revision of private norms if such ameasure would be a direct measure, or an allocation of the total equity.

(ii) recognize updates of such measures in the statement of changes in equity as atransfer ofwealth between the private capital equity ofthe classes.

(d) If an entity does not issue equity securities, it may be appropriate to treat themost subordinate bond like a credit equity, appropriately divuIged. Identifyingwhether this approach should be used, and if so, if it would stil1 be a decision for theIASB to take in the development or revision of eertain precepts.

Do you agree ? Why? If no , what changes would you suggest and why?

, Aval lable at www.ifrs.org/cu rrent-projects/lASB-projects/ conceptual-framework/discusslon-pa per-j uly-2013/documents/discusslon-paper-conceptual-framework-july-2013.pdf

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ANSWER TO QUESTION 10

The definition of private equity, measurement and presentation of different classes ofequity and how to distinguish liabilities from equity securities are discussed inparagraphs 5.1 - 5.59) However, in line of the view of Cooperatives in 8razil, ifnecessary to add the item III in letler "b " of the text as mentioned below:

"(111) Capital share should only be considered Iiabilities upon resignation request,exc1usion or removal of the member."

2. JUSTlFICATlON

The holdings of shareholders in the share capital of lhe cooperative are denominated quotes,which, in certa in situations, exceptionally today, are linked to deIivcring operationallimits ofproduction andlor acquisition of input and credit. This differ diametrically ITomthe concept offund shares or consortia, which, we infer, distinguished rapporteurs are ready to define.

From local laws3 the concept of quota in a cooperative entity is the same as the shareholdersof simple and limited liability companies and shareholders of Corporations4

, which sameconcept is applied in countries such as Spain, France and eligible states in the United States .

In ali countries above mentioned, there is a concept that the shares are considercd equity andhence net worth equity until ransom request occurs. In Brazil, there are only three instancesof reimbursement right: resignation, removal and exc1usion.

Thus, only in the cvent of withdrawal of partner is redemption possiblc (exercise of rightsgivcn to other singIe entrepreneurs or companies), or in the case of liquidation of thcCooperative Organization, lhe quotes of the cooperative holders constitute an instrument ofpatrimonial equity, since there is active evidence of participation in the entity and afterdeducting ali of its Iiabilities.

The shares of cooperative Entities comprises as patrimonial instrument because they can onlybe retumed to members in cases of liquidation, after deduction of ali obligations, e.g, settled

3 Brazilian Law # 5.764, of Dec, 16, 1971, which defines the National Cooperative Politics and establish itsmandate of Cooperative entities. Available at www.planalto.gov.br/cciviI03/leis/15764.htmBrazilian Law # 10.406 of lan 10th 2002 which defines Brazil Civilian Code. Available atwww.planalto.gov.br/ccivil_03/leis/2002/110406.htm4 Brazilian Law # 6.404 of Dec 15, 1976 which states about corporations. Available atwww.planalto.gov.br/cciviI03/leis/16404.htm

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ali liabilities and fund raising/indivisible reserves. No other instrument issued by any otherentity is more residual than this.

Available in NBC-TslO.8:

10.8.1.6- The social capital ofCoaperative entities is formed by shares, which must be recardedindividually because it is a partnership af persans, segregating subscribed capital and capital tobe paid. being able to end, utiIizing auxiliary registers.

10.8.1.7- In coaperative entities the capital accaunt is taken cared afby:

a) free member assaciate, when admitted, through the vaIar afthe shares prescribed in theby-Iaws;

b) subscriptian af new shares, thraugh statute retentian over productian ar service. bycapitalizatian af residue and thraugh incorparatian af reserves, except the indivisible andthase provided in law Item 10.8.2.12 afthese narrns;

c) withdrawal af assaciate by his resignation, removal ar exclusian.

The controversy arises from item "c " of 10.8.1.7, since tms is the possibility of rcturn ofcapital to the member who withdraws from society, resignation, removal or deletion.However, the literal interpretation of IAS 32, interpreted by IFRIC 2, transcribed below, thusprovides:

Question

4. Many financiaI instruments. including capital stacks, have characteristics af equitycapital, including vating rights and rights to participate in dividend distributions. SomefinanciaI instruments give the holder the right to request redemptian for cash or anotherfinanciaI asset, but may include or be subject to limits on whether the financiaI instrumentswill be redeemed or no!. How shauld those redemption terros be evaluated to determine ifthe financiai instruments are classified as liabilities or equity?

Consensus

5. The contractual right of a financiaI instrument ( including shares of coaperative memberentities ) to reguest redernptian, halder does not, by seif , require that financiaI instrumentbc classified as a financiai liability. Ralher, lhe entity must consider ali the terros andconditions of the financiaI instrument in dctermining its classificatian as a financiaI liabilityar equity . These tenns and canditians include relevant locallaws, regulatians and by-Iawsaf the entity at the date af classificatian. but nat expect future amendments to these laws ,regulatians ar statutes.

This interpretation has international scape, including countries lhat allow coaperatives to belaunch in the market, derivative financiaI instruments and non-derivative rights that grantmembership to their carners .

5 Resolution ar the Conselho Federal de Contabilidade (Federal Coufiei! ar Aceouotants) nO 920 ar De, 19th 2001 de2001, which appro\'cs the NBC TIO - Spccific Accounting Issues in Various Entities._The item: NBC T 10.8 - EntidadesCooperativas. Available on site: <htm://www.cfc.org.brlsiswcblSREldocslRES 920.doc>. Acesso em: 11 dcz. 2013.

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In Brazil, until now, through legal prOVISlOns, cooperatives can not issuc financiaIinstrumcnts convcrtible into shares or other corporatc rights6• Can only capitalize on thesubscription quota shares among members. Moreover, the capital7 ofthe Cooperative Entitics,as well as residues and capitalized interest, can only be refunded to mcmbers who resign fromsociety through:

I. Dismissal (rcsignation): requested by the member itsclf, cannot be denied bythe cooperativeS;

11. Elimination (rcrnoval): decided by the cooperative Board of Directors, whenpresented the reasons laid down by law9;

m. Exclusion: when one of the following situations 10 occurs : dissolution of thelegal person; death of individual, civil incapacity (physicallrnental), fails to mcctthe statutory requirements for entry to remain in thc cooperative .

Accordingly, subscriptions and payments of capital, provided for in paragraphs "a " and " b "ofitem 10.8.1.7 NBC -T 10.8, should integrate the equity ofthe Cooperative, as highlightedin items 6-8, the IFRIC 2:

6 . llle shares of the members, which would be classified as equity, if the members had noright to ask for return, refund, compensation or withdrawal, are equity if either of theconditions described in paragraphs 7 and 8 are present. Arrangements for deposits ,including current accounts, term deposits and similar eontraets that arise when members aetas eustomers are finaneialliabilities ofthe entity.

7 . The shares of lhe members are equity if the entity has an unconditional right to refusethc return ofthe sbares oflhe members.

8. The locallaw, regulationsor governingaulhority ofthe entity may impose various typesof prohibitions on lhe returnof the operationsof members , eg unconditionalprohibitions orprohibitions based on liquidityeriteria . Ifredernption is unconditionallyprohibited by locallaw, regulation or the entity's charter, lhe operations of lhe rnernbersare equity. 1I0wever,provisions in local law, regulation or lhe entity's by-laws lhat prohibit redernption only ifeonditions - sueh as liquidityeonstraints - are met ( or not meti do not resull in lhe shares ofthe rnernbersbeing equity .

'Brazilian Law # 5.764, of Dec 16th 1971, LC n. 130/2009; Law 12.690/2012, artides 1.093 to 1.096 of BrazilianCivilian Code, Nalional Cooperalive Couneil Resolulion - CNC and olher documenls from Brazilian CooperaliveOrganizalion.- OCB7 Brazilian Law # 5.764/71, artide 24 paragraph 3rd8 Brazi!ian Law # 5.764/71, artide 32, Brazilian Law # 5.764/71, artide 33I.Brazilian Law # 5.764/71, arlide 35 #

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Brazilian lawll that deals with cooperative entities, impedes the withdrawal of shares beforethe resignation, removal or exclusion of members occurs, delegating to social statue toregulate the manner:

Article 21 . The status of the cooperative, in addition to meeting the provisions of Article4 shall indicate :

[...]III - minimum capital, the value of the quota-share, minimal-parts shares to be subscribedby the member, the mode of payment of quota-shares as well as the conditions for itswithdrawaJ in cases of dismissal , removal or excIusion of associate;

Thus, under the provIslOns of items 7 and 8 of IFRIC 2, only if there is a request ofresignation or an administrative determination of removaI or exclusion, the Entity shalI berequired to pay the former associate capital, surplus and interest, from the moment ofawareness of the event and should immediately reclassify the corresponding values forliability aeeounts, nevertheless, legal or statutory permission must exist in order to makepayment after approval of the accounts in order to preserve the continuity of the Entity ( risksliquidity ), as required by the conceptual premises:

• Liability is a present obligation of the entity arising from past events, thesettlement will demand entity resources' delivery .

• Legal obligation is one that derives from a contract, through its explicit orimplicit terms, law or another legal instrument.

At the time of subscription there does not exist any obligation of the entity to rcpurchaseshares of an associate's parts. Rather, there is a risk of them ever being retumed, in case ofcovering limited or unlimited liability of the cooperative, in the event of liquidation 12 or10ssIJ It's important to highlight that, the statue of cooperative societies prohibits the retumof capital during the permanence of the associate in its corporate framework and provides thepossibility of retention of capital in cases of risks to continuity.

It is worth mentioning that the hypothesis of an associate selling shares to the marketaml/or cooperative society does not yet exist legalIy, since the removal of the associa te, inany way - resignation, removal and exclusion-implies the reduction of capital. There is nolegal decree for the entity to repurchase their shares and hold them in treasury, as a limitedliability company cano The right of the associate to withdraw exists, which, does occur inother societies, which involves the reduction of capital, unless the remaining members decideto purchase new shares, but not those retumed to the migrant. There is a legal permission to

11 Brazilian Law # 5.764/71, article 2112 Brazilian Law # 5.764/71, articles 11 and 1213 Brazilian Law # 5.764/71, article 89

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the associate to sell their shares to another member, with no changes in equity of thecooperative society.

One should take into account that national legislation delegates to the social status the right todetermine the way to retuming quotes, but only in cases of dismissal, removal and exclusion.Whilc associate remains in association with the entity, they are not entitled to withdraw theirshares or ask for a refundo They will only bc payable if cxcrcising right of withdrawal .

Whatever sector of activity of the coopcrative entity, from occurrence of the event (dismissal,removal or exclusion) requiring the entity to refund the capital, the retuming of the share willbe deducted from the share capital and, consequently, the equity of the entity, thereforecharacterizing Iiability ..

Moreover , cooperatives that take rotary instrument capitalizations 14, or stipulate form ofretum of capital different to that provided for in Article 21 of Law 5.76411971, must registersuch instruments as eurrent or non-current liabilities, as mentioncd in item 57 and thefollowing Accounting Standards and Procedures • NPC IBRACON 27 and CFC ResolutionNo. 1.121/2008.

Still, the Brazilian Technical Accounting Standard • NBC TG - 39 , rclated to IAS 32Financiai Instruments , in item 16 , states:

As an cxccption, an instrumcnt that mects the definition of a financiai liability iselassificd as an equity instrument if it has all the fcaturcs and meets the conditions inparagraphs 16A and 16Bor paragraphs 16Cand 160 .

lnstrumcnts with option of sale

16A A financiaI instrumcnt with option of sale ineludes a contractual obligation for theissuer to repurchase or redcem lhat instrument for cash or another financiaI assct onexercise of thc option of sale. As an cxception to the definition of a fmancial 1iability,aninstrument that includes such an obligation is elassified as an equity instrument if it hasall the following eharaeteristics :

(a)gives the holder a pro rata share of the net assets of the entitv on lignidation ofthe entity . The net assets of lhe entity are those asseIs that remain after deducting allother contingencics related to its asscts. The pro rata share is determincd by:

(i) dividing the net assets of the entitv on Iiguidation into units of equal value , and

(ii) multiplving that amount hy the number of units held by the holder of financiaiinstruments ;

(b)the instrument is in the c1ass of instruments subordinated to ali other classes ofinstrumentos. To be in such a elass the instrument :

14 BaseduponCooperativeNationalCouneilResolutionCNC10/1974

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(i) has no prioritv over other c1aims related to lhe assets of the entity on liquidation ,and

(ii) need not be converted into another instrument before it is in the class of instrumentsthat is subordinate to ali other classes of instruments;

( c ) ali financiaI instruments of a c1ass of instruments that is subordinate to ali otherclasses of instruments havc identical features. For example, they ali need to have theoption of salc, and the formula or other method used to calculate the repurchase orredemption pricc is the same for ali instruments of this class;

( d ) besides, contractual obligation for the issuer to repurchase or redeem the instrumentfor cash or another financiai asset, lhe instrument includes no contractual obligation todeliver cash or another financiai asset to another entity or to exchange financiai assets orfinanciaI liabilities with another entity under potentially unfavorable conditions to theentity, and is not a contract that will or rnay be sellled in the entity's own cquityinstruments as set out in item ( b ) of the definition of a financiai liability;

( e) the total expected cash flows assigned to the instrument over its period of existence issubstantially based on the result, the change in the recognition of lhe net assets of thcentity or change in the right value of the recognized and unrecognized net assets of thcentity over the period of existence of the instrument (excluding any effects of theinstrument).

16B For an instrumentto be classified as an equity instrumcnt, in addition to allthe abovefeatures , tbe issuer must bave no other financiaI instrument or conlract tbat bas :

( a) total cash flows based substantially on the result, a change in the recognized netassets or a change in fair value recognized in net assets or unrecognized entity ( excludingany effects of such instrument or contract ) and

( b ) the effect of substantially restricting (reducing) or fixing the residual return to theholders of instruments with option of sale.

For thc purpose of applying this condition, the entity shall not consider non-financialcontracts with a holder of an instrument described in iternl6A that contractualterms andconditions which are sinúlar to the contractual terms and conditions of an equivalentcontract núght occur between a holder of an instrument and non-financial issuer . If theentity cannot determine that this condition is satisfied, should not classifY the instrumentas an equity instrument with option of sale.

Instruments, or components of instruments, that deliver to third part (pro rata) theobligation ofthe entity 's net assets ofthe entity only onliquidation

Therefore, the condilions outlined above allow financiaI instrurncnts, the dirnensions of thecooperative to be registered as an equity instrurncnt.

With reference to lhe above, we requcst consideration of our plea and we would like to rnakeourselves availablc for any further clarifications deerned necessary.

Rcgards,

vj~~~CRC/DF 019344/5-0adson .sollsa@sescoop.cooo.br

FáO£[V;g/CRCIDF 012038/0-0làbson. vogcl@scscooo.cooo.br