This excerpt taken from the PBR 20-F filed Jun 30, 2005.
The FASB adopted FASB Staff Position (FSP SFAS 19-1) on April 4, 2005, which amends SFAS 19 to permit the continued capitalization of exploratory well costs beyond one year if (a) the well found a sufficient quantity of reserves that justify its completion as a producing well and (b) the entity is making sufficient progress assessing the reserves and the viability of the project. The guidance in FSP SFAS 19-1 shall be applied prospectively in the third quarter of 2005 and we do not expect that it will have a material effect on our financial position or results from operations (see notes 2(s) and 27 to our audited consolidated financial statements for information related to the accounting policy currently practiced by us with respect to suspended exploratory wells).
In January 2003, the FASB issued Interpretation No. 46 (FIN 46)Consolidation of Variable Interest Entities. FIN 46 provides guidance on when certain entities should be consolidated or the interests in those entities disclosed by enterprises that do not control them through a majority voting interest. Under FIN 46, entities are required to be consolidated by an enterprise that has the obligation to absorb the majority of expected losses, or the right to receive the majority of expected returns from such entities. Entities identified with these characteristics are called variable interest entities and the interest that enterprises have in these entities are called variable interests. These interests may derive from certain guarantees, leases, loans or other arrangements that result in risks and rewards to the enterprise with the controlling financing interest in such entities, irrespective of such enterprises voting interest in such entities.
We adopted FIN 46 in our 2003 financial statements. Such adoption resulted in the consolidation of a number of special purpose entities related to project financing arrangements in which we had an interest, and which were deemed to be variable interest entities for which we were the primary beneficiary. Prior to adoption of FIN 46, a significant portion of our share of commitments and debt obligations, as well as fixed asset contributions, were related to project financings and already included in the consolidated financial statements as the project financing transactions qualified as capital leases. As a result, adoption of FIN 46 related to the special purpose companies formed in connection with project finance arrangements did not have a significant impact on our financial condition or operating results. While we do not have specific assets set aside and established as collateral for these special purpose entities, we do have certain contractual obligations relating to the debt of the special purpose entities.
As a result of our adoption of FIN 46, at December 31, 2003 we consolidated three thermoelectric power plants that we had previously accounted for as capital leases. With respect to these three thermoelectric plants, we elected to consolidate both assets and liabilities and results of operations, but that election did not have a material impact on our financial condition or operating results. We also determined that we are the primary beneficiary of three additional thermoelectric plants for which we have certain contractual obligations to bear energy market risk. The effect of the consolidation of the assets and liabilities of these three thermoelectric power plants at December 31, 2003 was an increase in our fixed assets of U.S.$1,142 million and an increase in our liabilities of U.S.$1,142 million. We did not consolidate the results of operations of these three thermoelectric plants in 2003 because at year-end 2003, FIN 46 only required balance sheet consolidation. However, results of operations for these companies were consolidated in 2004.
FASB issued FASB Statement No. 153, Exchanges of Non-monetary Assets An Amendment of APB Opinion No. 29, (SFAS 153) in December of 2004. SFAS 153 will be effective for us for asset-exchange transactions beginning on July 1, 2005. Under APB No. 29, assets received in certain types of non-monetary exchanges were permitted to be recorded at the carrying value of the assets that were exchanged (i.e., recorded on a carryover basis). As amended by SFAS 153, assets received in some circumstances will have to be recorded instead at their fair values. In the past, we have not engaged in a large number of non-monetary asset exchanges for significant amounts, and thus do not expect a material impact upon adoption.
FASB issued FASB Interpretation No 47, Accounting for Conditional Asset Retirement Obligations, in March of 2005. FIN 47 clarifies the term conditional asset retirement obligation as used SFAS143 in order to avoid diversity in accounting practice with respect to the effect of uncertainties about the timing and/or method of settlement that are conditional on a future event, when recognizing the fair value of a liability for an asset retirement obligation. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. We do not expect that the adoption of FIN 47 will have a material effect on our financial position or results from operations when it becomes effective on December 31, 2005.