“Loss distribution”: the accounting treatment, corporate and tax ramifications, in Brazil

Abstract

This study describes the accounting treatment and underlying basis of the allocation of losses to partners, not of dividends, but within intra-corporate transactions, according to the IFRS. The study takes into account the fact that there is not always a specific legal requirement for implementation in other countries, as is the case in Brazil, although in the legal literature such treatment is acknowledged internationally. The assumption of accounting loss to a partner's account was originally introduced in the Brazilian Income Tax legislation of 1977. That accounting technique was determined by the Federal Revenue Service. Although Congress was responsible in this period for the accounting discipline, specifically for Corporation Law, they remained silent in this regard. Consequently, the lack of specific legal provisions for corporate accounting standards may have led, in oblique ways, to a small exploration of this topic and its little practical use in the real world. Considering such factors, this research investigates the accounting treatment options currently applicable to this type of transaction in Brazil, under the influence of common law, and various tax and corporate ramifications stemming from its adoption; this paper also aims to publicize possible grounds for propagating the practice, based on the guidelines laid down by the International Accounting Standards Board (IASB). Applying the qualitative research method, it was possible to conclude that the assumption of loss to the partner account is equivalent to a capital contribution, in the form of contributions made by supporting shareholders. For this reason, shareholders record it as investments and the investee company does not record any revenue, although there is an effective equity increase. Due to being a non-onerous act, given the absence of issuance of shares, there is no change in existing equity interests, nor taxation on the agents involved. The allocation of losses to partners is practical in its contractual form, dispensing with the need for share capital to be increased by the partners and later reduced, commonly referred to in European Law as coup d’accordéon and operação harmónio, which simplifies the transaction and corporate records. This work considers the accounting treatment according to the IFRS, while at all times taking into account the legal framework applied to the transaction, locally and according to international corporate literature, with a view to encourage more extensive use and its resultant benefits.