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How Brazil's accountants cope with inflation.

Brazilian accountants have their work cut out for them. With the inauguration of President Fernando Collor De Mello and the creation of the cruzeiro--the third new currency since 1986--yet another twist was added to an already complex financial structure.

On March 15, when, to the relief of virtually all Brazilians, President Jose Sarney stepped down, Brazil was in the midst of a financial panic. In the final days of Sarney's presidency, inflation raged at a rate of 50,000% annually. During the month preceding the change in government, prices rose almost 80%.


President Collor used the crisis to justify draconian measures. The banks closed two days before the inauguration, when Collor announced the blocking of all bank account funds in excess of 50,000 cruzados novos (about $1,000 in the United States) or 20% of the total on deposit in a given account. This applied to all accounts: personal, corporate, checking, savings and overnight.

The blocking of the cruzados novos--worth about $115 billion in the United States--removed from the economy the equivalent of one-quarter of Brazil's gross national product. Collor also introduced a new currency, the cruzeiro. The drastic measures worked; in the month after Collor's inauguration, prices declined at a rate of 6% annually.


While the sudden halt to inflation relieved most Brazilians, the change in policy meant only a change of headaches for accountants. Depending on one's definition of currency, Brazil has as many as four or five in operation, if not actual circulation.

Least significant is the cruzado, which in 1986 replaced the old cruzeiro at an exchange rate of 1,000 to 1, thus eliminating three cumbersome zeros from prices that had become absurdly high. But the anti-inflationary economic plan that accompanied this change in currency failed. In 1989, the cruzado novo (new cruzado) was created, again with three zeros lopped off.

Before printing bills for the new currency, the government stamped cruzados novos on the old cruzados. Consumers had to remember to ignore the last three zeros shown on the bill. Many of these stamped cruzados are still in circulation, along with the colorful notes of the newly minted cruzado novo, which are now being stamped cruzeiro.

When the percentage of inflation was soaring into the thousands, however, currency meant little in financial statements. On a balance sheet, the 100 cruzados novos entered in January had little relationship to the 100 cruzados novos entered in December. Raw materials bought in January and labor costs in March through May could look like a minute fraction of revenues received in July, yet the company might well be losing a lot of money--or it might not. The higher the inflation, the less meaningful the numbers.



Since the 1970s, when inflation dawdled along at 30%, Brazil has used a system of price indexing. In a process known as monetary correction, financial numbers are converted to units resembling a U.S. treasury bond. These bonds, renamed with each change of currency, are assigned a new face value each day in accordance with inflation. The current instrument is known as a BTN (bonos do tesouro nacional). Theoretically, if X number of BTNs will buy a kilo of coffee today, the same number will buy the same amount a year from now, regardless of inflation.

The BTN, therefore, functions as a stable currency. It doesn't circulate as the cruzado, cruzado novo and the cruzeiro do, but it does appear on a company's books and financial statements. All assets, liabilities and other values are entered in one column in the currency for the month incurred and in a second column as an expression of BTNs. BTNs tallied up at the end of the year can be converted into the operating currency for a meaningful, albeit fleeting, idea of how much money is involved. The process makes accounting difficult but possible.

During the wild inflation, some companies used the dollar as a stable currency of reference. In fact, some stores marked prices in dollars, converting them to cruzados novos at the time of sale.

But even monthly conversion to BTNs can't account for price increases of over 3% a day. In the lag between invoicing and actual receipt of funds, a company may lose half the revenue's value. The monetary value of the product shipped and invoiced on the first of the month is not worth the payment received at the end of the month. Nevertheless, both the invoice billed and the payment received are converted into the same BTN value for that month.

All these monetary maneuvers came to a dramatic halt when President Collor replaced the cruzado novo with the cruzeiro. Until the government prints the new cruzeiro notes, the old cruzado novo notes--many of which are stamped cruzado notes--continue to be the money in circulation.



The cruzados novos, however, have not disappeared completely from the accounting scene. The money in the blocked bank accounts is still in unstamped cruzados novos, and depositors are blocked from converting the funds to cruzeiros. Where depositors once had one bank account, they now have two: one in cruzeiros, one in cruzados novos. The cruzeiro account contains up to CR50,000 or 20% of the balance before March 15, plus any cruzeiros deposited since. The money in the cruzado novo accounts cannot be converted to cruzeiros until 18 months after March 15, 1990, when the government promises to convert the money in 12 monthly installments, including monetary conversion (if inflation returns) plus 6% interest.

But to the dismay of accountants, the cruzado novo accounts were not totally frozen. For 30 days, they could be converted into cruzeiros to pay salaries. For 60 days they could be used, as cruzados novos, to pay taxes. For 6 months they could be used to pay debts incurred before March 15. But the debts had to be paid in cruzados novos, not cruzeiros. The funds can be transferred from one cruzado novo account to another but not withdrawn or converted to cruzeiros.

Banks, therefore, now keep two sets of accounting figures: one for cruzeiros and the other for cruzados novos. Likewise, companies must account for both sets of currency. On the books, each cruzado novo account appears as a separate account that will vary according to cruzados novos, credited or debited. With a certain sense of irony, many businesspeople list these accounts under long-term investments. Also, although inflation has dropped dramatically (at least until the cruzados novos reenter the economy), the correction of cruzeiros to BTNs is needed in some financial statements.


The new policy will result in some healthy shifts on balance sheets. Inventories will increase because companies can now afford to keep products in the warehouse. With inflation low, accounts receivable will increase since clients will be allowed to buy on time. In some cases, they'll have to buy on time because virtually no one has more than the equivalent of $1,000 to spend.

With financial speculation less attractive, balance sheets should show higher operational profit and less income from short-term investments. As increasing amounts of money begin to circulate, investments in equipment and other aspects of production probably will increase.

In short, low inflation should produce a measure of economic stability over the next several months, allowing businesses to return to more or less normal operating procedures. However, it remains to be seen if this stable environment will survive the pent-up demand that is certain to accompany the gradual conversion of the blocked cruzados novos to cruzeiros. Indeed, as this article goes to press, inflation is on the rise again.
COPYRIGHT 1990 American Institute of CPA's
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Article Details
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Author:Cheney, Glenn Alan
Publication:Journal of Accountancy
Date:Aug 1, 1990
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