Petrobras (PBR)

3 Changes in accounting practices

Law 11.638/07, of December 28, 2007, and Provisional Measure 449/08, of December 3, 2008, amended and revoked certain accounting matters of Brazilian Corporation Law 6.404/76 aiming at future convergence of Brazilian accounting practices with the International Financial Reporting Standards (IFRS). The Accounting Pronouncements Committee (CPC) was created with the objecting publishing the accounting technical pronouncements in line with IFRS. We present below the technical pronouncements issued and approved by CVM up till December 31, 2008.

Provisional Measure 449/08 also introduced the Transition Tax Regime which establishes the treatment for the tax affects on the methods and criteria introduced by the new laws and regulations.

The Company adopted these pronouncements for the first time, to the extent necessary, in the preparation of the financial statements for fiscal year 2008, as permitted by CVM Resolution 565/08 and presented the initial adjustments on January 1, 2008, the transition date, without retroactive effects on the financial statements for 2007.

Below, we present a summary of the pronouncements adopted:

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Table of Contents

1. Changes in accounting practices

Law 11.638/07 of December 28, 2007,and Provisional Measure 449/08 of December 3, 2008, altered and revoked certain provisions dealing with accounting matters in Law 6.404/76 (Corporate Law) aiming to align Brazilian accounting practices with international standards (IFRS). The Accounting Pronouncements Committee (CPC) was set up in order to issue technical accounting pronouncements in line with IFRS norms. The following table lists those pronouncements that had been ratified by the CVM by December 31, 2008.

Provisional Measure 449/08 also instituted the Transitional Tax Regime, which establishes the treatment of the tax impact on the methods and criteria introduced by the new legislation.

The Company adopted these pronouncements for the first time (when applicable) in the preparation of the 2008 financial statements, pursuant to CVM Resolution 565/08 and Provisional Measure 449/08, having effected the initial adjustments on January 1, 2008, the transition date, to the retained earnings account with no retroactive effect on the 2007 statements.

There follows a summary of the pronouncements adopted:

1.1 Statement of Cash Flows (SFC) and Statement of Added Value (SAV)
Even before reporting of SFC and SAV became compulsory, the Company reported them as additional information. However, a few changes were made to the structure of these statements, pursuant to CPC 03 and CPC 09.

1.2 Impairment of assets
CPC 01 establishes procedures to ensure that the Company’s assets are not booked at an amount higher than can be recovered through their use or sale. If there is clear evidence that assets are being valued at more than the future recoverable amount, the Company should immediately book the depreciation by constituting a provision for losses.

35

PETROBRAS SYSTEM		Appendices

Assets are valued based on the lowest cash generating unit, when applicable. The recoverable amount is the amount obtained from a given use based on future cash flows, discounted for interest before taxes.

The Company has already adopted this procedure. However, based on the current procedure, loss provisions may be reversed if there are indications that these can be recovered..

1.3 The effects of changes in foreign exchange rates and the conversion of financial statements
CPC 02 establishes the criteria for defining the functional currency and converting the financial statements of subsidiaries, associated companies and branch offices, whose functional currency differs from that of the holding company.

As a result of the adoption of CPC 02, the following procedures changed:

a) The exchange variations on investments in subsidiaries and associated companies, whose functional currency differs from the holding company’s, are now booked under shareholders’ equity as accrued conversion adjustments and transferred to the result when investments are actually made.

Until 2007, the exchange variation affected the year’s results as equity income.

b) In a stable economic scenario, the income statement of investee companies, whose functional currency differs from the holding company’s, are now converted at the average monthly exchange rate, and other equity items at the historic rate.

Previously, the year-end exchange rate at was used to convert such items..

1.4 Intangible assets
CPC 04 establishes the accounting treatment for those intangible assets that are not specifically covered by other pronouncements.

The Company has already been reporting its intangible assets in accordance with CVM Resolution 488/05 of October 3, 2005.

Goodwill arising from the acquisition of a controlling interest (subsidiaries and jointly-owned companies) is now booked under intangible assets and goodwill from the acquisition of interests in associated companies continues to be booked under Investments.

As of 2009, these goodwill amounts will not be amortized over the period and extension of the projections that determined them, pursuant to CPC 13 (Initial Adoption of Law 11.638/07 and Provisional Measure 449/08) and are subject to the impairment test.

1.5 Related party disclosures
The Company has widened the scope of information disclosed in the notes to the financial statements on transactions and balances with related parties, pursuant to CPC 05.

1.6 Contracts involving the transfer of benefits, risks and control of assets.
CPC 06 establishes procedures for booking and disclosing transactions in which there are contractual commitments with or without the transfer of benefits, risks and control of assets.

The Company now books under fixed assets, based on the fair value or present value of the minimum contract payments, whichever is lower, the rights to physical assets used in the maintenance of the Company’s business activities, arising from transactions involving the transfer of the benefits, risks and control of these assets, as well as the related liabilities.

Previously, these transactions were treated as costs/expenses related to freight, rent or the provision of services.

1.7 Government subsidies and assists

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PETROBRAS SYSTEM		Appendices

CPC 07 defines the tax incentives arising from donations or government subsidies for investments, received on or after January 1, 2008, which are booked as revenue throughout the period against the expenses they are intended to offset on a systematic base, which is applied in Petrobras in the following manner:

a) Subsidies with reinvestments: in the same ratio as the asset’s depreciation;
b) Direct subsidies related to profits from exploration: directly in the result.

The amounts booked in the result in 2008 will be allocated to the Tax Incentive Reserve.
The balance of the capital reserve relating to donations and subsidies for investment on December 31, 2007, will be maintained under shareholders’ equity until they are fully used, pursuant to Law 6.404/76.

1.8 Transaction costs and gains from the issue of marketable securities
CPC 08 establishes the accounting procedures for recognizing, measuring and disclosing the transaction costs and gains from the issue of shares and/or debt securities.

The Company discloses share and debt positions at the amount received, net of said transaction costs, losses and gains.

1.9 Adjustment to present value
CPC 12 establishes the basic conditions for applying the adjustment-to-present-value method for valuing assets and liabilities arising from long-term and material short-term transactions. The Company has already adopted this procedure for material transactions.

1.10 Financial Instruments
CPC 14 establishes the principles for recognizing and measuring financial assets and liabilities and certain purchase agreements involving unfinanced items and the disclosure of financial derivative instruments.

As a result, the following changes were adopted:

Cash flow hedge transactions are now booked in the balance sheet at their fair value, when qualified as an effective hedge, with an impact on shareholders’ equity, and subsequently reclassified in the result when the transaction that is the object of the hedge has an impact on the result. Previously, these transactions were recorded in the result on their financial settlement.

Financial derivative instruments used as a hedge against variations in oil and oil product prices are now marked to market throughout their validity periods, with an impact on the financial result. Previously, these adjustments were only recorded in the result on their financial settlement.

The adjustment to market value of securities classified as available for sale are now recorded under shareholders’ equity until their settlement, when they are transferred to the result. Previously, these adjustments impacted the result.

1.11 Equity investments
Pursuant to Provisional Measure 449/08, investments in associated companies in which management has substantial influence and in other companies that are part of the same group or jointly owned will be assessed by the equity method, No relevant effects were identified in regard to this item.

Previously, the equity method was only applied to significant investments in associated companies in which management had an influence, or in which the Company retained 20% or more of the capital.

1.12 Deferred charges
Provisional Measure 449/08 eliminated deferred charges, allowing the balance of December 31, 2008, to be maintained. This will continue to be amortized over 10 years, subject to the impairment test.

1.13 Future results

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PETROBRAS SYSTEM		Appendices

Future results were eliminated as of fiscal year 2008 due to the amendment of Law 6.404/76 by Provisional Measure 449/08. However, the existing balances on December 31, 2008 and 2007 were reclassified under non-current assets as deferred revenue.

Discounts arising from expected future results were reclassified under non-current liabilities in the consolidated financial statements.

1.14 Revaluation reserve
Law 11.638/07 does not permit new spontaneous revaluations of fixed assets.

The Company opted to maintain the balance of the respective revaluation reserves on December 31, 2007 until their total realization.

1.15 Non-operating revenue and expenses
Non-operating revenue and expenses were eliminated as of fiscal year 2008, due to the amendment of Law 6.404/76 by Provisional Measure 449/08. However, the existing balances on December 31, 2008 and 2007 arising from the sale and write-off of permanent assets were reclassified under other operating revenue and expenses, except for those arising from capital gains or losses from investments, which were reclassified under equity income.

1.16 Effects of the adoption of Law 11.638/07 and Provisional Measure 449/08
The effects from the adoption of the new legislation on the result and shareholders’ equity, net of tax effects when applicable, are shown below:

38

PETROBRAS SYSTEM		Appendices

1. Changes in accounting practices

Law 11.638/07 of December 28, 2007,and Provisional Measure 449/08 of December 3, 2008, altered and revoked certain provisions dealing with accounting matters in Law 6.404/76 (Corporate Law) aiming to align Brazilian accounting practices with international standards (IFRS). The Accounting Pronouncements Committee (CPC) was set up in order to issue technical accounting pronouncements in line with IFRS norms. The following table lists those pronouncements that had been ratified by the CVM by December 31, 2008.

Provisional Measure 449/08 also instituted the Transitional Tax Regime, which establishes the treatment of the tax impact on the methods and criteria introduced by the new legislation.

The Company adopted these pronouncements for the first time (when applicable) in the preparation of the 2008 financial statements, pursuant to CVM Resolution 565/08 and Provisional Measure 449/08, having effected the initial adjustments on January 1, 2008, the transition date, to the retained earnings account with no retroactive effect on the 2007 statements.

There follows a summary of the pronouncements adopted:

1.1 Statement of Cash Flows (SFC) and Statement of Added Value (SAV)
Even before reporting of SFC and SAV became compulsory, the Company reported them as additional information. However, a few changes were made to the structure of these statements, pursuant to CPC 03 and CPC 09.

1.2 Impairment of assets
CPC 01 establishes procedures to ensure that the Company’s assets are not booked at an amount higher than can be recovered through their use or sale. If there is clear evidence that assets are being valued at more than the future recoverable amount, the Company should immediately book the depreciation by constituting a provision for losses.

35

PETROBRAS SYSTEM		Appendices

Assets are valued based on the lowest cash generating unit, when applicable. The recoverable amount is the amount obtained from a given use based on future cash flows, discounted for interest before taxes.

The Company has already adopted this procedure. However, based on the current procedure, loss provisions may be reversed if there are indications that these can be recovered..

1.3 The effects of changes in foreign exchange rates and the conversion of financial statements
CPC 02 establishes the criteria for defining the functional currency and converting the financial statements of subsidiaries, associated companies and branch offices, whose functional currency differs from that of the holding company.

As a result of the adoption of CPC 02, the following procedures changed:

a) The exchange variations on investments in subsidiaries and associated companies, whose functional currency differs from the holding company’s, are now booked under shareholders’ equity as accrued conversion adjustments and transferred to the result when investments are actually made.

Until 2007, the exchange variation affected the year’s results as equity income.

b) In a stable economic scenario, the income statement of investee companies, whose functional currency differs from the holding company’s, are now converted at the average monthly exchange rate, and other equity items at the historic rate.

Previously, the year-end exchange rate at was used to convert such items..

1.4 Intangible assets
CPC 04 establishes the accounting treatment for those intangible assets that are not specifically covered by other pronouncements.

The Company has already been reporting its intangible assets in accordance with CVM Resolution 488/05 of October 3, 2005.

Goodwill arising from the acquisition of a controlling interest (subsidiaries and jointly-owned companies) is now booked under intangible assets and goodwill from the acquisition of interests in associated companies continues to be booked under Investments.

As of 2009, these goodwill amounts will not be amortized over the period and extension of the projections that determined them, pursuant to CPC 13 (Initial Adoption of Law 11.638/07 and Provisional Measure 449/08) and are subject to the impairment test.

1.5 Related party disclosures
The Company has widened the scope of information disclosed in the notes to the financial statements on transactions and balances with related parties, pursuant to CPC 05.

1.6 Contracts involving the transfer of benefits, risks and control of assets.
CPC 06 establishes procedures for booking and disclosing transactions in which there are contractual commitments with or without the transfer of benefits, risks and control of assets.

The Company now books under fixed assets, based on the fair value or present value of the minimum contract payments, whichever is lower, the rights to physical assets used in the maintenance of the Company’s business activities, arising from transactions involving the transfer of the benefits, risks and control of these assets, as well as the related liabilities.

Previously, these transactions were treated as costs/expenses related to freight, rent or the provision of services.

1.7 Government subsidies and assists

36

PETROBRAS SYSTEM		Appendices

CPC 07 defines the tax incentives arising from donations or government subsidies for investments, received on or after January 1, 2008, which are booked as revenue throughout the period against the expenses they are intended to offset on a systematic base, which is applied in Petrobras in the following manner:

a) Subsidies with reinvestments: in the same ratio as the asset’s depreciation;
b) Direct subsidies related to profits from exploration: directly in the result.

The amounts booked in the result in 2008 will be allocated to the Tax Incentive Reserve.
The balance of the capital reserve relating to donations and subsidies for investment on December 31, 2007, will be maintained under shareholders’ equity until they are fully used, pursuant to Law 6.404/76.

1.8 Transaction costs and gains from the issue of marketable securities
CPC 08 establishes the accounting procedures for recognizing, measuring and disclosing the transaction costs and gains from the issue of shares and/or debt securities.

The Company discloses share and debt positions at the amount received, net of said transaction costs, losses and gains.

1.9 Adjustment to present value
CPC 12 establishes the basic conditions for applying the adjustment-to-present-value method for valuing assets and liabilities arising from long-term and material short-term transactions. The Company has already adopted this procedure for material transactions.

1.10 Financial Instruments
CPC 14 establishes the principles for recognizing and measuring financial assets and liabilities and certain purchase agreements involving unfinanced items and the disclosure of financial derivative instruments.

As a result, the following changes were adopted:

Cash flow hedge transactions are now booked in the balance sheet at their fair value, when qualified as an effective hedge, with an impact on shareholders’ equity, and subsequently reclassified in the result when the transaction that is the object of the hedge has an impact on the result. Previously, these transactions were recorded in the result on their financial settlement.

Financial derivative instruments used as a hedge against variations in oil and oil product prices are now marked to market throughout their validity periods, with an impact on the financial result. Previously, these adjustments were only recorded in the result on their financial settlement.

The adjustment to market value of securities classified as available for sale are now recorded under shareholders’ equity until their settlement, when they are transferred to the result. Previously, these adjustments impacted the result.

1.11 Equity investments
Pursuant to Provisional Measure 449/08, investments in associated companies in which management has substantial influence and in other companies that are part of the same group or jointly owned will be assessed by the equity method, No relevant effects were identified in regard to this item.

Previously, the equity method was only applied to significant investments in associated companies in which management had an influence, or in which the Company retained 20% or more of the capital.

1.12 Deferred charges
Provisional Measure 449/08 eliminated deferred charges, allowing the balance of December 31, 2008, to be maintained. This will continue to be amortized over 10 years, subject to the impairment test.

1.13 Future results

37

PETROBRAS SYSTEM		Appendices

Future results were eliminated as of fiscal year 2008 due to the amendment of Law 6.404/76 by Provisional Measure 449/08. However, the existing balances on December 31, 2008 and 2007 were reclassified under non-current assets as deferred revenue.

Discounts arising from expected future results were reclassified under non-current liabilities in the consolidated financial statements.

1.14 Revaluation reserve
Law 11.638/07 does not permit new spontaneous revaluations of fixed assets.

The Company opted to maintain the balance of the respective revaluation reserves on December 31, 2007 until their total realization.

1.15 Non-operating revenue and expenses
Non-operating revenue and expenses were eliminated as of fiscal year 2008, due to the amendment of Law 6.404/76 by Provisional Measure 449/08. However, the existing balances on December 31, 2008 and 2007 arising from the sale and write-off of permanent assets were reclassified under other operating revenue and expenses, except for those arising from capital gains or losses from investments, which were reclassified under equity income.

1.16 Effects of the adoption of Law 11.638/07 and Provisional Measure 449/08
The effects from the adoption of the new legislation on the result and shareholders’ equity, net of tax effects when applicable, are shown below:

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PETROBRAS SYSTEM		Appendices