AMBEV S.A. | CIK:0001565025 |

 

There were significant changes in accounting policies and calculation methods used for the financial statements as of in relation to those presented in the financial statements for the years ended and

 

million unless otherwise indicated, rounded to the nearest million indicated

 

 

The reporting standards below were published and are mandatory for future annual reporting periods. Although IFRSs anticipate early adoption, in Brazil, regulators have prevented this anticipation in order to preserve aspects of comparability. Accordingly, for the year ended these standards were applied in the preparation of these financial statements:

 

(effective from annual periods beginning on or after which will replace IAS introduces a logical approach for the classification of financial assets, which is driven by cash flow characteristics and the business model in which an asset is held; defines a new expected-loss impairment model that will require more effective recognition; and introduces a substantially-reformed model for hedge accounting, with enhanced disclosures about risk management activity. The new hedge accounting model represents a significant overhaul of the policies and aligns the accounting treatment with risk management activities. IFRS also removes the volatility in profit or loss that was caused by changes in the credit risk of liabilities elected to be measured at fair value. The company evaluated the possible impacts arising from the application of IFRS and does identify a significant impact on its financial position and/or its financial performance.

(effective from annual periods beginning on or after requires revenue recognition to depict the transfer of goods or services to customers in amounts that reflect the consideration (that is, payment) to which the Company expects to be entitled in exchange for those goods or services. The new standard will also result in more and enhanced disclosures about revenue, provide guidance for transactions that were previously addressed comprehensively (for example, service revenue and contract modifications) and improve guidance for multiple-element arrangements. In view of the Ambev’s activities, the company does identify that the application of IFRS will have a significant impact on its financial position and/or its financial performance.

 

(effective from annual periods beginning on or after replaces the existing lease accounting requirements and represents a significant change in the accounting and reporting of leases that were previously classified as operating leases, with more assets and liabilities to be reported on the balance sheet and a different recognition of lease costs.

 

The company is in process of assessing the full impact of IFRS and expects changes in the presentation of operating leases in the balance sheet.

 

 

The other amendments to standards effective for annual periods beginning after  have been listed above because of either their non-applicability to or their immateriality to Ambev’s consolidated financial statements.

 

 

The financial statements of subsidiaries, joint arrangements and associates used in its consolidated financial statements are prepared for the same reporting period as Ambev, using consistent accounting policies.

 

All intercompany transactions, balances and unrealized gains or losses on transactions between group companies have been eliminated.

 

The Company controls an entity when it is exposed to or has rights to variable returns due to its involvement with the organization and is able to affect those returns through its power over the entity. In assessing control, potential voting rights are taken into account. Control is presumed to exist where the Company owns, directly or indirectly, more than half of the voting rights (which does always equate to economic ownership), unless it can be demonstrated that such ownership does constitute control.

 

Subsidiaries are consolidated as from the date in which control is obtained to the Company, except when the predecessor basis of accounting is applied for common control transfers. Consolidation is discontinued as from the date control ceases.

 

Ambev uses the purchase method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair value of the assets transferred, the liabilities incurred and the equity interest issued by Ambev. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration agreement, when applicable. Costs related to the acquisition are recognized in income, as incurred. Assets, liabilities and contingent liabilities acquired/assumed in a business combination are recognized initially at their fair values at the acquisition date. Ambev recognizes the non-controlling interest in the acquiree, either at fair value or at the non-controlling interest’s proportionate share of the net assets acquired. The measurement of non-controlling interest to be recognized is determined for each acquisition.

 

The excess: (i) of the consideration paid; (ii) of the amount of any non-controlling interests in the acquiree (when applicable); and (iii) of the fair value, at acquisition date, of any previous equity interest in the acquiree, over the fair value of the net identifiable assets acquired, at the date of acquisition, is recorded as goodwill. When the consideration transferred is less than the fair value of net assets acquired, the difference is recognized directly in income.

 

All intercompany transactions, balances and unrealized gains and losses on transactions between group companies have been eliminated. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is evidence of impairment.

 

Joint arrangements are all entities over which the Company shares control with or more parties. Joint arrangements are classified as either joint operations or joint ventures depending on the contractual rights and obligations of each investor.

 

 

Business combinations between entities under common control have been addressed by IFRS’s. The IFRS is the pronouncement that shall be applied to business combinations, however it explicitly excludes business combinations between entities under common control from its scope.

 

Therefore, in accordance with IAS Management has adopted an accounting practice which is consistent with United States Generally Accepted Accounting Principles (USGAAP) and United Kingdom Generally Accepted Accounting Principles (UKGAAP), the predecessor basis of accounting to record the carrying amount of the asset received, as recorded by the parent company.

 

Under the predecessor basis of accounting, when accounting for a transfer of assets or a swap of shares between entities under common control, the entity that receives the net assets or the equity interests (the acquirer) shall initially record the assets and liabilities transferred at their parent book value at the transfer date. If the book value of assets and liabilities transferred by the parent are different from the historical cost registered by the controlling entity of the entities under common control (the ultimate parent), the financial statements of the acquirer shall reflect the assets and liabilities transferred at the same cost of the ultimate parent.

 

Regarding transactions between entities under common control that involve the disposal or transfer of assets from the subsidiary to its parent company, i.e. - above the level of our consolidated financial statement –, the Company assess the existence of (i) conflict of interests and (ii) economic substance and purpose. Having fulfilled these assumptions, the Company adopted as a policy the concepts of IAS in order to provide adequate visibility and fair impact on the amount of the distributable results to our shareholders, specially the non-controlling interests. This policy also includes assets acquired through the swap of non-cash assets, or swap with a combination of cash and non-cash assets. The assets subject to the swap be of equal or different nature. The cost of such asset is measured at fair value, unless (i) the swap transaction is commercial in nature, or (ii) the fair value of the asset received (and the asset assigned) cannot be reliably measured. The acquired asset is measured through this way even if the assignor entity cannot immediately exclude the asset from its books. If the acquired asset is measurable at fair value, its cost is determined by the book value of the assigned asset.

 

Whenever there is a distribution of assets that is recorded as cash, the asset, before its distribution, is registered at fair value in the income account. This procedure is applicable to the distributions in which the assets are equal in nature and therefore treated equitably. However, similarly to IFRIC in the absence of a specific accounting practice for transactions under common control, we apply this procedure in our accounting practice. Also, we apply the same procedure to sales (products, supplies, etc.) we perform to our controlling entity, where the positive result of the sale is recognized in the income account.

 

 

 

The items included in the financial statements of each subsidiary of the Company are measured using the currency of the primary economic environment in which the entity operates (“functional currency”).

 

The functional and presentation currency of the Company financial statements is the Brazilian Real.

 

 

Foreign currency transactions are accounted for at exchange rates prevailing at the date of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated at the balance sheet date rate. Non-monetary assets and liabilities denominated in foreign currencies are translated at the foreign exchange rate prevailing at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated at exchange rates ruling at the dates the fair value was determined. Gains and losses arising from the settlement of transactions in foreign currencies and resulting from the conversion of assets and liabilities denominated in foreign currencies are recognized in the income statement.

 

The foreign exchange gains and losses related to loans and cash and cash equivalents are presented in the income statement as finance cost or finance income.

 

 

Assets and liabilities of subsidiaries located abroad are translated at foreign exchange rates prevailing at the balance sheet date, while amounts from income statement and cash flows are translated at average exchange rates for the year and the changes in equity are translated at historical exchange rates of each transaction. The translation adjustments arising from the difference between the average exchange rates and the historical rates are recorded directly in Carrying value adjustments.

 

On consolidation, exchange differences arising from translation of equity in foreign operations and borrowings and other currency instruments designated as net investment hedges are recognized in Carrying value adjustments, an equity reserve, and included in Other comprehensive income.

 

The goodwill and fair value adjustments arising from the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.

 

An entity have a monetary item that is receivable from or payable to a foreign operation which settlement is neither planned nor likely to occur in the foreseeable future and do include trade receivables or trade payables. Exchange differences arising shall be recognized initially in other comprehensive income and reclassified from equity to profit or loss on disposal of the net investment.

 

 

The most significant exchange rates used in the preparation of the Company’s financial statements are as follows:

 

						Closing rate												Average rate
Currency		Name		Country		2017				2016				2015				2017				2016				2015
CAD		Canadian Dollars		Canada and Cuba			2.6380				2.4214				2.8124				2.4567				2.6348				2.5661
DOP		Dominican Pesos		Dominican republic			0.0685				0.0700				0.0860				0.0674				0.0755				0.0725
USD		US Dollar		Ecuador (i) , Panamá and Cuba (ii)			3.3080				3.2591				3.9048				3.2017				3.4749				3.2596
GTQ		Quetzal		Guatemala			0.4500				0.4343				0.5129				0.4344				0.4570				0.4265
PEN		Novo Sol		Peru (i)			-				0.9720				1.1440				-				1.0269				1.0396
ARS		Argentinean Peso		Argentina			0.1762				0.2056				0.3003				0.1931				0.2354				0.3581
BOB		Bolivian Peso		Bolivia			0.4753				0.4683				0.5610				0.4600				0.4993				0.4683
PYG		Guarani		Paraguai			0.0006				0.0006				0.0007				0.0006				0.0006				0.0006
UYU		Uruguayan Peso		Uruguay			0.1151				0.1114				0.1304				0.1116				0.1166				0.1197
CLP		Chilean Peso		Chile			0.0054				0.0049				0.0055				0.0049				0.0051				0.0050
COP		Peso colombiano		Colômbia (i)			-				0.0011				0.0012				-				0.0011				0.0012
BBD		Barbadian Dollar		Barbados			1.6307				1.6075				-				1.5783				1.7139				-

 

(i) Until due to exchange of shareholdingsaccording the Note - .

 

(ii) The functional currency of Cuba, the Cuban convertible peso (“CUC”), has a fixed parity with the dollar (“USD”) at balance sheet date.

 

 

Reportable segments are identified based on internal reports regularly reviewed by the chief operating decision maker of the Company for purposes of evaluating the performance of each segment and allocating resources to those segments. Accordingly, segment information is presented on geographical areas, since the risks and rates of return are affected predominantly by the fact that the Company operates in different regions. The Company’s management structure and the information reported to the chief decision are structured the same way.

 

The performance information by business units (Beer and Soft drink (“CSD”) and Non-alcoholic and non-carbonated (“NANC”)), is also used by the decision maker for the Company and is presented as additional information, even though it does qualify as a reportable segment. Internally, the Company’s management uses performance indicators, such as earnings of consolidated operation before interest and taxes (EBIT) and normalized earnings of consolidated operation before interest, taxes, depreciation and amortization (normalized EBITDA) as measures of segment performance to make decisions about resource allocation and performance analysis of consolidated operation. These indicators are reconciled to the profit of the segment in the tables on Note .

 

The Company operates its business through zones identified as reportable segments:

 

▪ Latin America North, which includes our operations (a) in Brazil and Luxembourg, where we operate business sub units: (i) beer and (ii) CSD and NANC; and (b) in Central America Operations (“CAC”), which includes our operations in the Dominican Republic (which also serves the islands of the Caribbean: Saint Vincent, Dominica, Antigua and Barbados), Guatemala (which also serves El Salvador and Nicaragua), Cuba and Panama;

 

▪ Latin America South, which includes our operations in Argentina, Bolivia, Paraguay, Uruguay, Chile, Ecuador, Peru and Colombia.

 

▪ Canada, represented by Labatt’s operations.

 

 

The Company recognizes revenue when the amount of revenue can be measured reliably and it is probable that economic benefits associated with the transaction will flow to the Company.

 

Revenue comprises the fair value of the amount received or receivable upon selling products or rendering services in the ordinary course of business. Revenue is presented net of taxes, returns, rebates and discounts, as well as net of elimination of sales between group companies.

 

 

In relation to the sale of goods, revenue is recognized when the significant risks and rewards of ownership have been transferred to the buyer, and significant uncertainties remain regarding recovery of the consideration due, the costs associated with the possible return of the products, and when there is continuing management involvement with the goods. Revenue from the sale of goods is measured at the fair value of the consideration (price) received or receivable, net of returns, commercial deductions and discounts.

 

As part of its commercial policy, the Company provides unconditional discounts to its customers, which are recorded as s deductions at the time of sales.

Finance income consists of interest received or receivable on funds invested, foreign exchange gains, gains on currency hedging instruments offsetting currency losses, gains on hedging instruments that are part of a hedge accounting relationship, gains on financial assets classified as held for trading, as well as any gains from hedge ineffectiveness.

 

Interest income is recognized on an accrual basis unless collectability is in doubt.

Royalties are classified as cost of goods sold.

 

Finance costs comprise interest payable on borrowings, calculated using the effective interest rate method, foreign exchange losses, losses on currency hedging instruments offsetting currency gains, results on interest rate hedging instruments, losses on hedging instruments that are part of a hedge accounting relationship, losses on financial assets classified as held for trading, impairment losses on financial assets classified as available for sale, as well as any losses from hedge ineffectiveness.

 

All interest costs incurred in connection with borrowings or financial transactions are expensed as incurred as part of finance costs, except when capitalized. Any difference between the initial amount and the maturity amount of interest bearing loans and borrowings, such as transaction costs and fair value adjustments, are recognized in the income statement over the expected life of the instrument on an effective interest rate method. The interest expense component of finance lease payments is also recognized in the income statement using the effective interest rate method.

 

 

Exceptional items are those that in Management’s judgment need to be disclosed separately by virtue of their size or incidence. In determining whether an event or transaction is special, Management considers quantitative as well as qualitative factors such as the frequency or predictability of occurrence, and the potential of impact on the variation of profit or loss. These items are disclosed in the income statement or separately disclosed in the notes to the financial statements. Transactions that give rise to exceptional items are principally restructuring activities, acquisition of subsidiaries, impairment losses, and gains or losses on disposal of assets and investments.

 

 

Income tax and social contribution for the year comprises current tax and deferred tax. Income tax and social contribution are recognized in the income statement, unless they relate to items recognized directly in comprehensive income or other equity accounts. In these cases the tax effect is also recognized directly in comprehensive income or equity account (except interest on shareholder’s equity. See Note (p)).

 

The current tax expense is the expectation of payment on the taxable income for the year, using tax rates enacted, or substantially enacted, at the balance sheet date, and any adjustment to tax payable in respect of previous years.

 

The deferred taxes are recognized using the balance sheet liability approach. This means that a deferred tax liability or asset is recognized for all taxable and tax deductible temporary differences between the tax and accounting basis of assets and liabilities. Under this method, a provision for deferred taxes is also calculated on the differences between the fair value of assets and liabilities acquired in a business combination and their tax basis. IAS prescribes that deferred tax liability on goodwill recognition, and deferred tax asset/liability is recorded: (i) at the initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss; and (ii) on differences related to investments in subsidiaries to the extent that they are reversed in the foreseeable future. The amount of deferred tax provided is based on the expectation of the realization or settlement of the temporary difference, using currently or substantially enacted tax rates.

 

Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different taxable entities which intend either to settle current tax liabilities and assets on a net basis, or to realize the assets and settle the liabilities simultaneously.

 

The deferred tax asset is recognized only to the extent that it is likely that future taxable profits will be available. The deferred income tax asset is reduced to the extent that it is longer probable that the future taxable benefit will occur.

 

 

Property, plant and equipment are measured at cost less accumulated depreciation and impairment losses. The cost includes the purchase price, borrowing cost incurred during the construction period and any other costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management (e.g. nonrefundable tax, transport and the costs of dismantling and removal and site restoration, if applicable). The cost of a self-constructed asset is determined using the same principles as for an acquired asset. The depreciation methods, residual value, as well as the useful lives are reassessed and adjusted if appropriate, annually.

 

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets are capitalized as part of the cost of such assets.

 

Land is depreciated since it is deemed to have an indefinite life.

 

Property, plant and equipment, and depreciation include the effects of the predecessor basis of accounting, according the Note - .

 

 

The Company recognizes in the carrying amount of an item of property, plant and equipment the cost of replacing a component of such an item if it is probable that the future economic benefits embodied with the item will flow to the Company and the cost of the item can be measured reliably. All other costs are expensed as incurred.

 

 

The depreciable amount is the cost of an asset less its residual value. Residual values, if insignificant, are reassessed annually. Depreciation is calculated from the date the asset is available for use, using the straight-line method over the estimated useful lives of the assets.

 

The estimated useful lives of major property, plant and equipment classes as follows:

 

Buildings (years)		25
Plant and equipment (years)		15
Fixtures (years)		10
Fittings (years)		10
External use assets (years)	2	-	5

 

The assets residual values and useful lives are reviewed at least annually. Management uses judgment to assess and ascertain the useful lives of these assets.

 

 

Gains and losses on sales are determined by comparing the results with the carrying amount and are recognized in Other operating income/(expenses) in the income statement.

 

Goodwill arises on the acquisition of subsidiaries, associates and joint arrangements.

 

Goodwill is determined as the excess (i) of the consideration paid; (ii) of the amount of any non-controlling interests in the acquiree (when applicable); and (iii) of the fair value, at acquisition date, of any previous equity interest in the acquiree, over the fair value of the net identifiable assets acquired at the date of acquisition. All business combinations are accounted for by applying the purchase method.

 

In conformity with IFRS , goodwill is carried at cost and is amortized, but tested for impairment at least annually, or whenever there are indications that the cash generating unit to which the goodwill has been allocated be impaired. Impairment losses recognized on goodwill are reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.

 

Goodwill is expressed in the functional currency of the subsidiary or joint operation to which it relates and translated to using the year-end exchange rate.

 

Regarding associates and joint ventures, goodwill is included in the carrying amount of the investment in the associate/joint ventures.

 

If the Company’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognized exceeds the cost of the business combination such excess is recognized immediately in the income statement.

 

Expenditure on internally generated goodwill is expensed as incurred.

 

Goodwill includes the effects of the predecessor basis of accounting (Note (c)).

 

When part of the consideration paid in a business combination is related to brands, these are recognized in a specific Intangible Assets account and measured at fair value at the acquisition date. Subsequently, the value of brands can be reduced in case of impairment losses. Internally generated expenditures for developing a brand are recognized as expenses.

 

Purchased software is measured at cost less accumulated amortization.

 

Amortization related to software is included in cost of sales, distribution and sales expenses, marketing expenses or administrative expenses based on the activity the software supports.

 

Other intangible assets, acquired by the Company, are stated at acquisition cost less accumulated amortization and impairment losses.

Other intangible assets also include multi-year sponsorship rights acquired by the Company. These are initially recognized at the present value of the future payments and subsequently measured at cost less accumulated amortization and impairment losses.

 

 

Intangible assets with definite useful lives are amortized based on the straight-line method over their estimated useful lives. Licenses, supply and distribution rights are amortized over the period in which the rights exist. Brands are considered to have an indefinite life and, therefore, are amortized. Software and capitalized development cost related to technology are amortized over to years.

 

Items that are amortized are tested for impairment on an annual basis.

 

Inventories are initially recorded at the acquisition cost and subsequent valued at the lower of cost and net realizable value. Cost includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition. The weighted average method is used in determining the cost of inventories.

 

The cost of finished products and work in progress comprises raw materials, other production materials, direct labor, other direct costs, gains and losses with derivative financial instruments, and an allocation of fixed and variable overhead based on normal operating capacity. Net realizable value is the estimated selling price in the ordinary course of business, less the cost for bringing inventories to sales conditions and selling costs.

 

Inventories have their amount reduced on a case-by-case basis if the anticipated net realizable value declines below its carrying amount. The calculation of the net realizable value takes into consideration specific characteristics of each inventory category, such as expiration date, remaining shelf life, slow-moving indicators, amongst others.

 

Accounts receivable are initially recognized at fair value and subsequently at amortized cost, less provision for losses on doubtful accounts. An allowance for impairment of trade receivables is established when there is objective evidence that the Company will be able to collect all amounts due according to the original terms of the receivables. An allowance for impairment loss is recorded for an amount considered sufficient by management to cover probable losses upon the realization of receivables. The amount of the allowance is the difference between the asset’s carrying amount and the present value of the estimated future cash flows. The allowance for impairment loss is recognized in the income statement, as are subsequent recoveries of previous impairments. Historically, significant losses in trade receivables have been experienced.

 

 

Cash and cash equivalents include all cash balances, bank deposits, and short-term highly liquid investments with original maturities of months or less with insignificant risks of changes in value, readily convertible into cash. They are stated at face value, which approximates their fair value.

 

For the purpose of the cash flow statement, cash and cash equivalents are presented net of bank overdrafts, when applicable.

 

 

The Company's issued capital consists only of common shares.

 

 

When the Company buys back its own shares, the amount paid, including any additional costs directly attributable is recognized as a deduction from equity attributable to shareholders, in “Treasury shares” line item.

 

 

Incremental costs directly attributable to the issuance of new shares or options are presented in equity as a deduction, net of tax, from the proceeds.

 

Dividends and interest on shareholder’s equity are recognized in the liability on the date that are approved on Board of Directors Meeting, except the minimum statutory dividends provided by the Company’s bylaws, that are recognized as a liability when applicable, at the end of each fiscal year.

 

The expense of interest attributable to capital to shareholders is recognized in income for calculation of Brazilian income and social contribution tax and after are reclassified from shareholders' equity for presentation purposes in financial statements.

 

Interest-bearing loans and borrowings are recognized initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing loans and borrowings are stated at amortized cost with any difference between the initial and maturity amount being recognized in the income statement over the expected life of the instrument on an effective interest rate basis. The Company has interest-bearing loans and borrowings covered by a hedge structure (Note – ).

 

Borrowing costs directly related to the acquisition, construction or production of a qualifying asset, that requires a substantial period of time to get ready for its intended use or sale, are capitalized as part of the cost of that asset when it is probable that future economic benefits associated with the item will flow to the Company and costs can be measured reliably. The other borrowing costs are recognized as finance costs in the period in which they are incurred.

 

Post-employment benefits include pensions managed in Brazil by Instituto Ambev de Previdência Privada – IAPP, post-employment dental benefits and post-employment medical benefits managed by Fundação Zerrenner. Usually, pension plans are funded by payments made by both the Company and its employees, taking into account the recommendations of independent actuaries. Post-employment dental benefits and post-employment medical benefits are maintained by the return on Fundação Zerrenner’s plan assets. If necessary, the Company contribute some of its profit to the Fundação Zerrenner.

 

The Company manages defined benefit and defined contribution plans for employees of its companies located in Brazil and in its subsidiaries located in Dominican Republic, Panama, Uruguai, Bolivia and Canada.

 

The Company maintains funded and unfunded plans.

 

A defined contribution plan is a pension plan under which the Company pays fixed contributions into a fund. The Company has legal or constructive obligations to pay further contributions if the fund does hold sufficient assets to pay all employees for the benefits relating to employee service in the current and prior periods.

 

The contributions of these plans are recognized as expense in the period they are incurred.

 

Typically, defined benefit plans define an amount of pension benefit that an employee will receive on retirement, usually dependent on or more factors such as age, years of service and compensation.

 

For defined benefit plans, expenses are assessed separately for each plan using the projected credit unit method. The projected credit unit method takes into account each period of service as giving rise to an additional unit of benefit to measure each unit separately. Under this method, the cost of providing pensions is charged to the income statement during the period of service of the employee. The amounts charged to the income statement consist of current service cost, interest cost, past service costs and the effect of any settlements and curtailments. The obligations of the plan recognized in the balance sheet are measured at the present value of the estimated future cash outflows using a discount rate equivalent to the government´s bond rates with maturity terms similar to those of the obligation and the fair value of the plan assets.

 

Past service costs result from the introduction of a new plan or changes to an existing plan. They are recognized immediately in the income statement, at the earlier of when: (i) the settlements / curtailments occurs, or (ii) the Company recognizes related restructuring or termination costs, unless those changes are conditioned to the employee’s continued employment, for a specific period of time (the period in which the right is acquired). In such case, the past services costs are amortized using the straight-line method during the period in which the right was acquired.

 

Actuarial gains and losses consist of the effects of differences between the previous actuarial assumptions and what has actually occurred, and the effects of changes in actuarial assumptions. Actuarial gains and losses are fully recognized in Carrying value adjustments.

 

Re-measurements, comprising of actuarial gains and losses, the effect of the asset ceiling and the return on plan assets, both excluding net interest, are recognized in full in the period in which they occur in the statement of comprehensive income. Re-measurements are reclassified to profit or loss in subsequent periods.

 

When the amount of the defined benefit obligation is negative (an asset), the Company recognizes those assets (prepaid expenses), to the extent of the value of the economic benefit available to the Company either from refunds or reductions in future contributions.

 

The Company and its subsidiaries provide post-employment medical benefits, reimbursement of medication expenses and other benefits to certain retirees through Fundação Zerrenner. These benefits are granted to new retirees. The expected costs of these benefits are recognized over the period of employment, using an accounting methodology similar to that for defined benefit plans, including actuarial gains and losses.

 

Termination benefits are recognized as an expense at the earlier of: (i) when the Company is demonstrably committed, without realistic possibility of withdrawal, to a formal detailed plan to terminate employment before the normal retirement date, and (ii) when the Company recognizes costs for a restructuring.

 

 

Bonuses granted to employees and managers are based on pre-defined company and individual target achievement. The estimated amount of the bonus is recognized as an expense in the period the bonus is earned.

 

 

Different share and share option programs allow management and other members appointed by the Board of Directors to acquire shares of the Company. The fair value of the share options is estimated at grant date, using an option pricing model that is most appropriate for the respective option. Based on the expected number of options that will be exercised, the fair value of the options granted is recognized as an expense over the vesting period with a credit to equity. When the options are exercised, equity is increased by the amount of the proceeds received.

 

Trade payables are recognized initially at fair value and subsequently at amortized cost using the effective interest method.

 

Provisions are recognized when: (i) the Company has a present obligation (legal or constructive) as a result of past events; (ii) it is likely that a future disbursement will be required to settle the current obligation; and (iii) a reliable estimate of the amount of the obligation can be made.

 

Provisions, except for the mentioned on item disputes and litigation, are determined discounting the expected future cash flows, to a pre-tax rate, that reflects the current market assessments of the time value of money and, where appropriate, the risks specific to the liability. The increase accruals are recognized as finance expense.

 

A provision for restructuring is recognized when the Company has approved a detailed restructuring plan, and the restructuring has either commenced or has been announced. Costs relating to the ongoing and future activities of the Company are provided for, but recognized when expenses are incurred.. The provision includes the benefit commitments in connection with early retirement and redundancy schemes.

 

A provision for disputes and litigation is recognized when it is more likely than that the Company will be required to make future payments as a result of past events. Such items include but are limited to, several claims, suits and actions filed by or against the Company relating to antitrusts laws, violations of distribution and license agreements, environmental matters, employment-related disputes, claims from tax authorities, and other litigation matters..

 

 

 

The Company classifies its financial assets and liabilities in the following categories: () at fair value through profit or loss, () loans and receivables, () held to maturity and () available for sale. The classification depends on the purpose for which the financial instruments were acquired. Management determines the classification of its financial assets at initial recognition.

 

 

Financial assets and liabilities at fair value through profit or loss are financial instruments held for trading. A financial asset is classified in this category if acquired principally for the purpose of being sold in the short term. Derivatives are also categorized as held for trading unless they are designated as hedges.

 

In general, financial instruments of this category are classified as short-term investments securities, on current assets. Investments with maturities beyond year be classified as short-term based on Management's intent and ability to withdraw them within less than year, as well as, considering their highly liquid nature and the fact that they represent cash available to fund current operations.

 

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are quoted in an active market. They are included in current assets, except for maturities greater than months after the end of the reporting period (these are classified as non-current assets).

 

Investments held to maturity are financial assets acquired with the intention and financial ability to hold them in the portfolio until maturity.

 

 

Available-for-sale financial assets are non-derivative financial assets classified in any other category. Available-for-sale financial assets are classified as non-current assets, unless Management intends to dispose of the investment within months of the end of the reporting period.

 

Investments in debt and equity securities are classified in this category. Equity instruments are undertakings in which the Company does have significant influence or control.

 

Purchases and sales of financial assets and liabilities are recognized on the trade date - the date on which the Company undertakes to buy or sell the asset.

 

Financial assets and liabilities are realized when the rights to receive cash flows from investments have expired or have been transferred, in this case, when the Company has transferred substantially all risks and benefits of ownership.

 

Financial assets and liabilities at fair value through profit and loss are initially recognized at fair value and transaction costs are charged to the income statement. Subsequently, they are carried at fair value. Gains or losses arising from changes in the fair value of financial instruments at fair value through profit or loss are presented in the income statement in the period in which they arise.

 

Loans and receivables are carried at amortized cost using the effective interest rate.

 

Investments held to maturity are initially recognized at fair value plus any directly attributable transaction costs. After initial recognition, investments held to maturity are measured at amortized cost using the effective interest method, reduced by any on loss impairment.

 

Available-for-sale financial assets are initially measured at fair value. Interest and inflation monetary adjustments are recognized in income. Subsequently, available-for-sale financial assets are measured at fair value, with changes in fair value recognized in other comprehensive income, and interests (measured using the effective interest rate method), recognized in income statement.

 

When available-for-sale financial assets are settled or become impaired, the accumulated fair value adjustments recognized in other comprehensive income are included in the income statement.

 

The fair values of investments with public quotations are based on current bid prices. If the market for a financial asset (and for unlisted securities on the stock exchange) is active, the Company establishes fair value by using valuation techniques. These techniques include the use of recent transactions with parties, reference to other instruments that are substantially similar, analysis of discounted cash flows and option pricing models making maximum use of information from the market and with the least possible information generated by the Company's management.

 

 

Management assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired. If any such indication exists, the asset’s recoverable amount is estimated. A financial asset or a group of financial assets is impaired and an impairment loss is recorded only if there is objective evidence of impairment as a result of or more events that occurred after the initial recognition of the asset (“loss event”) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.

 

Financial assets and liabilities are offset and the net amount presented in the balance sheet when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or realize the asset and settle the liability simultaneously.

 

The carrying amounts of non-financial assets, such as property, plant and equipment, goodwill and intangible assets are reviewed, at least, at each reporting date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated.

 

Goodwill, intangible assets that are yet available for use and intangibles with an indefinite useful life are tested for impairment at least annually at the business unit level (which is level below the reportable segment) or whenever there is any indication of impairment.

 

An impairment loss is recognized whenever the carrying amount of an asset or the related cash-generating unit exceeds its recoverable amount. Impairment losses are recognized in the income statement. Intangible assets with an indefinite useful life are tested on a fair value approach applying multiples that reflect current market transactions to indicators that drive the profitability of the asset or the royalty stream that could be obtained from licensing the intangible asset to another party in an arm’s length transaction.

 

The recoverable amount of other assets is determined as the higher of their fair value less costs to sell and value in use. For an asset that does generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. The recoverable amount of the cash-generating units to which the goodwill and the intangible assets with indefinite useful life belong is based on a discounted free cash flow approach, using a discount rate that reflects current valuation models of the time value of money and the risks specific to the asset. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded subsidiaries or other available fair value indicators.

 

In assessing value in use, the estimated future cash flows are discounted to their present value using a discount rate before taxes that reflects current market assessments of the time value of money and the risks specific to the asset.

 

Non-financial assets, except by goodwill are reviewed for possible reversal of the impairment at the reporting date. Impairment losses are reversed only to the extent that the asset’s carrying amount does exceed the carrying amount that would have been determined, net of depreciation or amortization, if impairment loss had been recognized.

 

The Company uses derivative financial instruments in order to mitigate against risks related to foreign currency, interest rates and commodity prices. Derivative financial instruments that, although contracted for hedging purposes, do meet all hedge accounting criteria are recognized at fair value in the income statement.

 

Derivative financial instruments are recognized initially at fair value. Fair value is the amount an asset could be realized and a liability settled, between knowledgeable parties, in an arm’s length transaction. The fair value of derivative financial instruments be obtained from quoted market prices or from pricing models that take into account current market rates, and also credit risk quality of the counterpart.

 

Subsequent to initial recognition, derivative financial instruments are re-measured to their fair value at the balance sheet date. Changes in fair value of derivative financial instruments are recognized in the income statement, except when they are designated as hedge instruments, when any effective portion of gain or loss is recognized directly in other comprehensive income.

 

Cash flow, net investment or fair value hedge accounting is applied to all hedges that qualify for hedge accounting under IAS including the required hedge documentation and hedge effectiveness tests.

 

 

When a derivative financial instrument hedges the variability in cash flows of a recognized asset or liability, the foreign currency risk and the fluctuation of commodity prices associated with a highly probable forecasted transaction, the effective portion of any resulting gain or loss on the derivative financial instrument is recognized directly in other comprehensive income (cash flow hedging reserve). The ineffective portion of any resulting gain or loss is recognized in the income statement.

 

When a hedging instrument or hedge relationship is terminated but the hedged transaction is still expected to occur, the cumulative gain or loss (at that point) remains in other comprehensive income and is reclassified in accordance with the above policy when the hedged transaction occurs. If the hedged transaction is longer probable, the cumulative gain or loss recognized in other comprehensive income is recycled into the income statement immediately.

 

When a derivative financial instrument hedges the variability in fair value of a recognized asset or liability or a firm commitment, any resulting gain or loss on the hedging instrument is recognized in the income statement. The hedged item is also stated at fair value in respect of the risk being hedged, with any gain or loss being recognized in the income statement. The Company does apply the fair value hedge accounting when the hedge item expires, was sold or exercised.

 

 

When a derivative financial instrument hedges the net investment in foreign operations, the effective part of any resulting gain or loss on the derivative financial instrument is recognized directly in other comprehensive income (translation reserve) , while any gains or losses relating to the ineffective portion are recognized in the income statement

 

On disposal of a foreign operation, the cumulative gains or losses recognized directly in other comprehensive income is transferred to the income statement.

 

 

Certain derivative financial instruments do qualify for hedge accounting purposes. Changes in fair value of such derivatives financial instruments are immediately recognized in income statement.

 

 

Leases of assets under which all the risks and rewards of ownership are substantially retained by the lessor are classified as operating leases. Payments made under operating leases are charged to the income statement on a straight-line basis over the term of the lease.

 

When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty is recognized as an expense in the period in which termination takes place.

 

The Company has benefits from Brazilian state tax incentive programs to promote industrial development including the deferral of payment of taxes. These State programs are to promote long-term increases in employment, industrial decentralization, as well as complement and diversify the industrial states.

 

In the case of these States, the tax terms are foreseen in tax law. When conditions to obtain these grants exist, they are under the Company's control. The benefits for the postponement in the payment of such taxes are recorded in the income statement, on an accrual basis.