30/04/24

IFRS 18 and the Brazilian Corporate Law

By Alexandre Pontes and João Paulo Morello, Head of M&A and TAX and Managing Partner of Coelho & Morello Advogados.

IFRS 18, issued in April 2024 by the IASB (International Accounting Standards Board), is a game-changer for financial statement presentation, particularly impacting the DRE (Demonstração do Resultado do Exercício) and accompanying notes. Here’s a breakdown of its key changes and potential challenges: 

  

Streamlined DRE: IFRS 18 advocates for a simplified DRE format focusing on three core categories: revenues, costs, and expenses. This enhances readability and analysis for users like investors and analysts, allowing them to grasp a company’s financial performance more readily. 

  

Potential Conflict with Brazilian Law: A snag emerges when considering the Brazilian Lei das Sociedades por Ações (A). The LSA mandates the disclosure of specific information within the DRE that isn’t included in the new IFRS 18 model. This creates a potential headache for companies seeking to adopt the international standard, as they might need to adapt the IFRS 18 format to comply with LSA requirements, increasing complexity and cost. 

  

Departure from Traditional Expense Classification: Traditionally, companies classified expenses based on a combination of nature (e.g., rent, salaries) and function (e.g., selling, administrative). IFRS 18 offers more flexibility. Companies can now choose to classify expenses solely by nature or function, whichever method provides the most insightful information for users. This newfound flexibility contrasts with the LSA’s requirement to segregate expenses between “custo” (cost) and “despesa” (expense), creating an additional hurdle for Brazilian companies aiming to fully conform to IFRS 18. 

  

In essence, while IFRS 18 offers a user-friendly and potentially more informative DRE format, Brazilian companies might face challenges due to potential conflicts with local regulations. Careful planning and consideration are crucial to ensure a smooth adoption process.