EFFECTS OF ADOPTION OF LAW 11.638/07 AND PROVISIONAL MEASURE 449/08

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After the adjustments resulting from the implementation of Law 11.638/07, described in detail below, the net profit for 2008 was R$ 32.988 million in the Petrobras System (Consolidated) and R$ 36.470 million in Petrobras (Parent company).

Effects of adoption of law 11.638/07 and provisional measure 449/08
	(R$ Million)
	Consolidated		Parent company
	Results	Shareholders’ equity	Results	Shareholders’ equity
	Balance according to the financial statements at December 31, 2008:	32.988	138.365	36.470	144.051
> In fiscal year 2008:
Government subsidies and assistance	(557)	76	(557)	76
Financial instruments available for sale	(205)	201	(205)	131
Contractual commitments with the transfer of benefits, risks and control of assets	740	740	740	740
Effects of the changes in the exchange rates and translation of financial statements	635		451
Derivative financial instruments	314	314	(9)	(9)
	927	1.331	420	938
> Pela adoção inicial em 1º de janeiro de 2008:
Derivative financial instruments		49
Contractual commitments with the transfer of benefits, risks and control of assets		(1.387)		(1.387)
		(1.338)		(1.387)
Balances prior to the application of Law 11638/07 and Provisional Measure 449/08	33.915	138.358	36.890	143.602

Description of new accounting practices:

a. Government subsidies and assistance

The Pronouncement 07, issued by Accounting Pronouncements Committee – CPC, establishes that the tax incentives resulting from government donations or subsidiaries for investments, received as from January 1, 2008, are recognized as revenue during the period, compared with the expenses that it intends to offset on a systematic basis, which is applied in Petrobras in the following way:
- >> Subsidies with re-investments: in the same proportion as the depreciation of the asset;
- >> Direct subsidies related to the operating profit: directly in the Profit and Loss accounts. The amounts allocated in the statement of income in 2008 will be distributed to the Tax Incentive Reserve.
The balances of the capital reserves referring to donations and subsidies for investments at December 31, 2007 will be held in shareholders’ equity until their total use, as established in Law 6.404/76.
b. Financial instruments

Financial instruments The CPC 14 establishes principles for the recognition and valuation of financial assets and liabilities and some purchase and sales agreements for non-financial items and for the disclosure of derivative financial instruments.

With the adoption of CPC 14 the cash flow hedges are now recorded in the balance sheet at their fair value, when they are classified as effective hedge, with effects on shareholders’ equity, and later reclassified to the statement of income when the transaction that is hedged has an impact on the results. Previously, these operations were recorded in the statement of income upon their financial settlement.

The derivative financial instruments used for hedge against changes in prices of oil and oil products are now marked to market during their periods of effectiveness, with impacts in the financial results. Previously, these adjustments were also recorded in the statement of income only upon their financial settlement. The adjustment to market value of the securities available for sale is now presented in shareholders’ equity until their settlement, when it will be transferred to the statement of income. Previously, these adjustments impacted the results for the year.
c. Contracts with transfer of benefits, risks and control of assets

The CPC 06 establishes procedures for accounting and disclosure of transactions where there are contractual commitments, with and without transfer of benefits, risks and control of assets.

The Company now records the rights that have as their objects tangible assets intended for the maintenance of the company’s activities resulting from operations that transferred the benefits, risks and control of these assets, as well as their correlated liability, in its property, plant and equipment at their fair value or, if lower, at the present value of the minimum payments of the contract,

Previously, these operations were addressed as costs/expenses for affreightments, leasing or providing services.
d. Effects of the changes in the exchange rates and translation of the financial statements

The CPC 02 establishes criteria for defining the functional currency and translating the financial statements of subsidiaries, affiliated companies and branches with a functional currency different from the functional currency of the parent company. The adoption of CPC 02 changed the following procedures:
- >> The exchange variations on investments in subsidiaries and affiliated companies with a functional currency different from the parent company are now recorded in shareholders’ equity, as an accumulated translation adjustment and are transferred to the statement of income upon realization of the investments. Until fiscal year 2007, this exchange variation affected the results for the year, as gains or losses in equity accounting.
- >>The income statements of invested companies in a stable economic environment with a functional currency different from the parent company are now translated by the monthly average exchange rate, and the other items of shareholders’ equity are now translated at the historic rate. Previously, the exchange rate at year-end was used for translation of these items.
With respect to the suitability of the functional currency, after internal analyses, the current understanding was maintained, i.e. the functional currency of Petrobras, as well as for all its Brazilian subsidiaries, is the Real (R$). The functional currency of some subsidiaries and special purpose entities that operate in the international economic environment is the US dollar and the functional currency of Petrobras Energía Participaciones S.A. (PEPSA) is the Argentine peso.

In addition to the effects presented previously, Law 11638/07 includes other changes that do not impact the results and shareholders’ equity of the companies of the Petrobras System and they are listed in the accompanying notes to the financial statements.

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