Direcional Engenharia S.A. Parent company and consolidated financial statements at December 31, 2017 and independent auditor's report

Transcrição

1 (A free translation of the original in Portuguese) Direcional Engenharia S.A. Parent company and consolidated financial statements at December 31, 2017 and independent auditor's report

2 Independent auditor's report To the Board of Directors and Stockholders Direcional Engenharia S.A. Opinion We have audited the accompanying parent company financial statements of Direcional Engenharia S.A. ("Company"), which comprise the balance sheet as and the statements of operations, comprehensive income (loss), changes in equity and cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies. We have also audited the accompanying consolidated financial statements of Direcional Engenharia S.A. and its subsidiaries ("Consolidated"), which comprise the consolidated balance sheet as at December 31, 2017 and the consolidated statements of operations, comprehensive income (loss), changes in equity and cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies. Opinion on the parent company financial statements In our opinion, the parent company financial statements referred to above present fairly, in all material respects, the financial position of Direcional Engenharia S.A. as, and its financial performance and cash flows for the year then ended, in accordance with accounting practices adopted in Brazil. Opinion on the consolidated financial statements In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Direcional Engenharia S.A. and its subsidiaries as, and the consolidated financial performance and cash flows for the year then ended, in accordance with accounting practices adopted in Brazil and with the accounting practices adopted in Brazil and the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB), applicable to the Brazilian real estate development entities, as approved by the Brazilian Accounting Pronouncements Committee (CPC), the Brazilian Securities Commission (CVM), and the Federal Accounting Council (CFC). PricewaterhouseCoopers, Rua dos Inconfidentes 911, 17º e 18º, Belo Horizonte, MG, Brasil , Caixa Postal 289 T: (31) , F: (31) ,

3 Basis for opinion We conducted our audit in accordance with Brazilian and International Standards on Auditing. Our responsibilities under those standards are further described in the "Auditor's Responsibilities for the Audit of the Parent Company and Consolidated Financial Statements" section of our report. We are independent of the Company and its subsidiaries in accordance with the ethical requirements established in the Code of Professional Ethics and Professional Standards issued by the Brazilian Federal Accounting Council, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Emphasis of matter As described in Note 2.1, the consolidated financial statements prepared in accordance with the IFRS applicable to Brazilian real estate development entities in Brazil also comply with the CPC Technical Guidance (OCPC) 04 edited by the CPC. This guidance deals with revenue recognition for this industry and certain matters related to the meaning and application of the concept of the continuous transfer of risks and rewards and of control in the sale of real estate units, as detailed in Note Our conclusion is not qualified in respect of this matter. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the parent company and consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. We planned and performed our audit for the year ended December 31, 2017 considering that the operations of the Company and its subsidiaries remained substantially the same in relation to the prior year. In this context, the key audit matters as well as our audit approach remained substantially aligned to those from the prior year. Matters Why it is a key audit matter How the matter was addressed 3

4 Why it is a key audit matter How the matter was addressed in the audit Recognition of revenue from sales of real estate units under construction (Notes 2.16 (b) and 18) The Company and its subsidiaries use the Percentage of Completion (PoC) method to recognize revenue from their unfinished unit sale contracts related to the real estate development projects as well as revenue from construction services rendered. The use of the POC method requires management to estimate the costs to be incurred up to the completion of the construction and delivery of the completed real estate units pertaining to each real estate development project and each stage of the construction services, in order to establish a proportion of the costs already incurred in relation to the total estimated costs. This proportion is applied on the fair value of the revenue from real estate units sold or from construction services rendered, as adjusted according to the conditions established in the sales contracts, determining the amount of sales revenue to be recognized in each period. We continued to focus on this area in our audit because of the complexity regarding the revenue recognition process, which requires management to apply judgment in determining the cost budget. In addition, any changes in these estimates might significantly affect the profit or loss for the year. Among other audit procedures, we obtained an updated understanding and tested the main internal controls that management established to recognize revenue from sales of real estate units under construction, comprising the preparation, approval, and timely review of estimated costs to be incurred, as well as the calculation of costs incurred by the projects, in comparison with the budgeted costs. We tested, on a sample basis, the information regarding the construction works' budgets as well as other costs incurred by reviewing contracts, tax documents, and payments made. We also analyzed the progress of the construction works via physical inspections. On a sample basis, we compared the system data related to the recognition of revenue from sales of real estate units under construction with management's documents that support the revenue recordings (sales/construction service contracts). We calculated on an independent basis the amounts of revenue from sales of real estate units under construction and compared the balances with the accounting records of the Company and its subsidiaries. Our audit procedures indicated that the judgment and estimates that management used regarding this matter are consistent with the information and documentation obtained. 4

5 Why it is a key audit matter How the matter was addressed in the audit Provisions for contingencies (Notes 2.12 (a) and 16.2) The Company and its subsidiaries are parties to civil, tax, and labor proceedings that arise in the normal course of their activities. Management records a provision in the balance sheet for those proceedings whose likelihood of loss it considers as probable, and discloses those proceedings whose likelihood of loss were assessed as possible. We maintained the focus on this area because the mentioned proceedings usually involve discussions about the subject matter and the complex aspects related to them, in addition to the exercise of judgment by management. Changes in opinions and/or judgment might significantly affect the Company's financial statements. Our audit procedures included, among others, the obtaining of an updated understanding about the significant internal controls involving the identification, the constitution of liabilities, and the disclosures in the explanatory notes. We also updated our understanding of the calculation method adopted, which takes into consideration the history of unfavorable outcomes in civil and labor proceedings of the same nature as well as lawyers' opinions on the matters. We performed confirmation procedures with the law firms that are working in the administrative and legal proceedings in order to confirm the assessment of loss in such opinions, the totality of the information, and the correct amount of the provisions and disclosures. For proceedings considered as more significant, we discussed with the Company's management and legal advisors the reasonableness of the likelihood of loss. We consider that the criteria and assumptions adopted by management to determine the provision for contingencies, as well as the relevant disclosures that were made, are consistent with the legal advisors' opinions. 5

6 Other matters Statements of value added The parent company and consolidated Statements of value added for the year ended December 31, 2017, prepared under the responsibility of the Company's management and presented as supplementary information for IFRS purposes, were submitted to audit procedures performed in conjunction with the audit of the Company's financial statements. For the purposes of forming our opinion, we evaluated whether these statements are reconciled with the financial statements and accounting records, as applicable, and if their form and content are in accordance with the criteria defined in Technical Pronouncement CPC 09 - "Statement of Added Value". In our opinion, these statements of value added have been properly prepared, in all material respects, in accordance with the criteria established in the Technical Pronouncement and are consistent with the parent company and consolidated financial statements taken as a whole. Other information accompanying the parent company and consolidated financial statements and the auditor's report The Company's management is responsible for the other information that comprises the Management Report. Our opinion on the parent company and consolidated financial statements does not cover the Management Report, and we do not express any form of audit conclusion thereon. In connection with the audit of the parent company and consolidated financial statements, our responsibility is to read the Management Report and, in doing so, consider whether this report is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement in the Management Report, we are required to report that fact. We have nothing to report in this regard. Responsibilities of management and those charged with governance for the parent company and consolidated financial statements Management is responsible for the preparation and fair presentation of the parent company financial statements in accordance with accounting practices adopted in Brazil and of the consolidated financial statements in accordance with accounting practices adopted in Brazil and with the IFRS applicable to Brazilian real estate development entities, as approved by the CPC, CVM, and CFC, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the parent company and consolidated financial statements, management is responsible for assessing the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. 6

7 Those charged with governance are responsible for overseeing the financial reporting process of the Company and its subsidiaries. Auditor's responsibilities for the audit of the parent company and consolidated financial statements Our objectives are to obtain reasonable assurance about whether the parent company and consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Brazilian and International Standards on Auditing will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with Brazilian and International Standards on Auditing, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the parent company and consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the internal control of the Company and its subsidiaries. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the ability of the Company to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the parent company and consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Company to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the parent company and consolidated financial statements, including the disclosures, and whether these financial statements represent the underlying transactions and events in a manner that achieves fair presentation. 7

8 Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Belo Horizonte, March 26, 2018 PricewaterhouseCoopers Auditores Independentes CRC 2SP000160/O-5 F MG Guilherme Campos e Silva Contador CRC 1SP218254/O-1 8

9 Balance sheet at December 31 All amounts in thousands of reais (A free translation of the original in Portuguese) Parent company Consolidated Note Current assets: Cash and cash equivalents 4 275, , , ,735 Financial investments , ,816 Trade receivables - real estate development 5 1,327 5, , ,519 Trade receivables - services rendered 5 3, , ,714 Trade receivables - land sold 5 4,956-6,040 1,746 Land to be developed , ,006 Completed real estate units , ,205 Real estate units under construction , ,606 Related parties ,296 61,876 81,576 76,926 Taxes recoverable - 18,559 17,612 24,684 22,424 Receivables for the sale of quotas - 4,000 34,102 4,000 34,102 Other receivables - 45,008 20,996 83,234 61,473 Total current assets 426, ,425 2,351,425 2,518,272 Non-current assets: Trade receivables - real estate development , ,144 Trade receivables - services rendered ,284 - Trade receivables - land sold Land to be developed ,148 56,338 1,516,643 1,276,593 Related parties 7.1-8,089 5,400 8,089 Judicial deposits - 8,115 3,678 18,128 11,595 Other receivables - 10,059 12,793 10,259 12,994 Investments 8 1,450,753 1,452,165 49,501 50,593 Property, plant and equipment 9 34,746 45,054 55,265 69,777 Intangible assets - 2,484 3,193 2,707 3,490 Total non-current assets 1,526,334 1,581,332 1,790,339 1,571,495 Total assets 1,952,816 2,050,757 4,141,764 4,089,767 The accompanying notes are an integral part of these financial statements. 1 of 77

10 Balance sheet at December 31 All amounts in thousands of reais (A free translation of the original in Portuguese) Parent company Consolidated Note Current liabilities: Borrowings , , , ,295 Trade payables - 3,171 7,155 71,174 99,116 Salaries and social charges 11 8,685 8,759 20,571 26,831 Tax liabilities ,506 23,248 Current income tax and social contribution payable ,831 1,873 Deferred income tax and social contribution payable ,237 15,419 Real estate commitments payable 13 20,148-90,441 55,786 Advances from customers ,975 5,869 Other payables 15 47,786 39,052 51,010 44,706 Related parties ,240 34,977 16,812 13,133 Total current liabilities 224, , , ,276 Non-current liabilities: Borrowings , , , ,565 Trade payables ,866 Provision for warranties ,813 43,065 Tax liabilities ,546 2,927 Deferred income tax and social contribution payable ,401 2,740 Real estate commitments payable 13-52, , ,585 Advances from customers 14-2, , ,326 Provision for tax, labor and civil risks ,731 35,999 Other payables ,000 26,000 Related parties , Total non-current liabilities 272, ,011 1,835,658 1,589,073 Equity: Share capital , , , ,982 Capital reserves , , , ,595 Stock options granted - 7,729 2,720 7,729 2,720 Carrying value adjustments - (21,422) (20,976) (21,422) (20,976) Treasury shares - (40,793) (41,511) (40,793) (41,511) Revenue reserves , , , ,373 1,454,964 1,594,183 1,454,964 1,594,183 Non-controlling interests , ,235 1,454,964 1,594,183 1,604,315 1,747,418 Total liabilities and equity 1,952,816 2,050,757 4,141,764 4,089,767 The accompanying notes are an integral part of these financial statements. 2 of 77

11 Statement of operations Years ended December 31 (A free translation of the original in Portuguese) Parent company Consolidated Note Net revenue ,857 7, ,857 1,358,078 Cost of real estate sold and services rendered 18.2 (4,526) (17) (714,399) (1,201,779) Gross profit 5,331 7,223 37, ,299 Operating income (expenses) General and administrative expenses 18.3 (95,247) (103,281) (107,644) (105,135) Selling expenses 18.3 (1,448) (2,594) (63,288) (50,741) Equity in the results of investees 8 (53,684) 76,753 (1,380) (1,480) Other operating income - 3,545 11,065 2,984 4,016 (146,834) (18,057) (169,328) (153,340) Finance income and costs Finance costs 19 (38,359) (44,350) (42,998) (50,278) Finance income 19 36,093 43,326 54,158 67,521 (2,266) (1,024) 11,160 17,243 Profit (loss) before taxation (143,769) (11,858) (120,710) 20,202 Income tax and social contribution 20 (12) (4) (16,725) (21,599) Loss for the year (143,781) (11,862) (137,435) (1,397) Loss attributable to: Non-controlling interests in Special Partnerships (SCPs) and Special Purpose Entities (SPEs) (6,346) (10,465) Loss attributable to: Direcional Engenharia S.A. (143,781) (11,862) (143,781) (11,862) Loss per share Basic 17.5 (0.97) (0.08) Diluted 17.5 (0.97) (0.08) The accompanying notes are an integral part of these financial statements. 3 of 77

12 Statement of comprehensive income (loss) Years ended December 31 All amounts in thousands of reais (A free translation of the original in Portuguese) Parent company Consolidated Profit (loss) for the period (143,781) (11,862) (137,435) (1,397) Total comprehensive loss for the period (143,781) (11,862) (137,435) (1,397) Attributable to: Owners of the parent (143,781) (11,862) Non-controlling interests 6,346 10,465 (137,435) (1,397) The accompanying notes are an integral part of these financial statements. 4 of 77

13 Statement of changes in equity All amounts in thousands of reais (A free translation of the original in Portuguese) Capital reserves Revenue reserves Notes Share capital Treasury shares Issue/ disposal of shares Stock options granted Carrying value adjustments Legal Profit retention For investment Equity - Parent company Noncontrolling interests Equity - Consolidated At December 31, ,982 (41,791) 207,832 2,151 (20,868) 25, , ,864 1,645, ,944 1,777,485 Options granted Capital increase - non-controlling stockholders ,826 10,826 Profit (loss) for the year (11,862) - (11,862) 10,465 (1,397) Proposed dividends (40,000) - (40,000) - (40,000) Sale of treasury shares (237) Transactions with non-controlling interests (108) (108) - (108) At December 31, ,982 (41,511) 207,595 2,720 (20,976) 25, , ,864 1,594, ,235 1,747,418 Options granted , ,009-5,009 Capital decrease by non-controlling interests (10,230) (10,230) Profit (loss) for the year (143,781) - (143,781) 6,346 (137,435) Additional proposed dividends (1) - (1) - (1) Sale of treasury shares (718) Transactions with non-controlling interests (446) (446) - (446) At December 31, ,982 (40,793) 206,877 7,729 (21,422) 25, , ,864 1,454, ,351 1,604,315 The accompanying notes are an integral part of these financial statements. 5 of 77

14 Statement of cash flows Years ended December 31 All amounts in thousands of reais (A free translation of the original in Portuguese) Parent company Consolidated Operating activities Loss before income tax and social contribution (143,769) (11,858) (120,710) 20,202 Adjustments to reconcile profit (loss) with cash from operations: Depreciation and amortization 3,611 9,415 23,026 25,569 Equity in the results of investees 53,684 (76,753) 1,380 1,480 Provision for warranties (524) (118) (8,252) 13,875 Interest on borrowings 30,527 40, , ,453 Provision for tax, labor and civil risks 152 (2,208) (3,268) 404 Expenses with barter transactions - - (989) (8,778) Taxes 12 - (3,005) (2,404) Adjustment to present value on trade receivables - - (5,675) (7,632) Provision for stock option plan 5, , Changes in assets Trade receivables (4,198) (1,262) 258, ,814 Inventories 1,733 42,689 (53,556) (60,254) Sundry credits 4,387 (45,294) 4,543 (14,533) Related parties 7,603 (6,000) (1,961) (21,662) Taxes recoverable (947) 3,986 (2,260) 4,390 Changes in liabilities Trade payables (3,118) 377 (35,598) (8,686) Salaries and social charges (74) 296 (6,260) (17,125) Tax liabilities (204) (281) (279) (2,618) Real estate commitments payable - (43,480) (117,214) (86,988) Advances from customers - - (23,662) (2,596) Trade payables 8,734 (8,095) 6,304 (13,921) Related parties (26,917) 11,781 3,679 4,609 Cash from operating activities (64,299) (85,995) 58, ,168 Income tax and social contribution paid (1) (4) (20,127) (23,252) Net cash provided by (used in) operating activities (64,300) (85,999) 38, ,916 Cash flows from investing activities Increase in investments (SPCs and SPEs) (177,464) (145,431) (5,318) 11,385 Dividends received 125, ,120 5,030 7,270 Purchases of property and equipment (4,051) 848 (9,962) (6,562) Additions to intangible assets (343) (1,681) (388) (1,783) Financial investments ,107 (72,275) Net cash provided by (used in) investing activities (56,666) 200,856 53,469 (61,965) Cash flows from financing activities Transactions with non-controlling interests (446) (108) (446) (108) Dividends paid (1) (40,000) (1) (40,046) New borrowings 218, , , ,088 Repayment of borrowings (124,725) (141,980) (444,938) (396,904) Interest paid (26,099) (32,947) (80,654) (89,696) Capital increase - non-controlling stockholders - - (10,230) 10,826 Net cash provided by (used in) financing activities 67,639 (30,465) (111,749) (67,840) Increase (decrease) in cash and cash equivalents (53,327) 84,392 (19,687) (3,889) Cash and cash equivalents At the beginning of the year 328, , , ,624 At the end of the year 275, , , ,735 The accompanying notes are an integral part of these financial statements. 6 of 77

15 Statement of value added Years ended December 31 All amounts in thousands of reais (A free translation of the original in Portuguese) Parent company Consolidated Revenue Real estate sold and services rendered 12,052 10, ,013 1,452,885 Other operating income 3,545 11,065 2,984 4,016 Provision (reversal of) for impairment of trade receivables ,597 21, ,997 1,456,901 Inputs acquired from third parties Raw materials used (6,859) (1,135) (524,111) (854,420) Materials, electricity, outsourced services and other operating expenses (12,314) (20,351) (65,442) (64,544) Other (22,436) (11,359) (24,048) (12,112) (41,609) (32,845) (613,601) (931,076) Gross value added (26,012) (11,529) 194, ,825 Depreciation and amortization, net (3,611) (9,415) (23,026) (25,569) Net value added generated by the Company (29,623) (20,944) 171, ,256 Value added received through transfer Equity in the results of investees (53,684) 76,753 (1,380) (1,480) Finance income 36,093 43,326 54,158 67,521 (17,591) 120,079 52,778 66,041 Total value added to distribute (47,214) 99, , ,297 Distribution of value added Personnel 56,001 63, , ,642 Taxes and contributions 2,207 3,015 69, ,406 Remuneration of third-party capital 38,359 44,350 93, ,646 Retained earnings (losses) (143,781) (11,862) (143,781) (11,862) Profit attributed to non-controlling interests - - 6,346 10,465 (47,214) 99, , ,297 The accompanying notes are an integral part of these financial statements. 7 of 77

16 (A free translation of the original in Portuguese) Direcional Engenharia S.A. 1 Operations Direcional Engenharia S.A. ("Direcional" or "Company") is a publicly-held company organized under the Brazilian corporation laws, with its shares traded on the São Paulo Futures, Commodities and Stock Exchange (BM&FBovespa) under the ticker symbol DIRR3. The Company is domiciled in Brazil and headquartered at Rua dos Otoni, 177, Belo Horizonte, in the State of Minas Gerais. Direcional is a real estate development and construction company, whose activities include developing large low-income-oriented projects, primarily focused on the Northern, Midwestern and Southeastern regions of Brazil. During its 37 years of experience in developing and building low-income-oriented projects, the Company has established a verticalized structure and a standardized construction process, which has made the construction of large-scale projects feasible. The Company carries out its development and construction activities through Special Partnerships (SCPs) and Special Purpose Entities (SPEs) in the normal course of its business, in order to enable the formation of partnerships, permitting it to accompany projects individually, obtain financing easily, and improve financial and accounting control. Both its SCPs and SPEs operate exclusively in the real estate sector and, in most cases, are associated with a specific venture. These financial statements were approved by the Board of Directors on March 26, Summary of significant accounting practices and policies The financial statements have been prepared in accordance with accounting practices adopted in Brazil, including the pronouncements issued by the Brazilian Accounting Pronouncements Committee (CPC), as well as according to the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB), and disclose all (and only) the applicable significant information related to the financial statements, which is consistent with the information utilized by management in the performance of its duties. 2.1 Basis of preparation These financial statements have been prepared under the historical cost convention, with financial assets and financial liabilities measured at fair value through profit or loss. The preparation of financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Group's accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in Note 3. (a) Consolidated financial statements The consolidated financial statements were prepared in accordance with the accounting practices adopted in Brazil and with the IFRS applicable to Brazilian Real Estate Development Entities, 8 of 77

17 as approved by the CPC, by the Brazilian Securities Exchange Commission (CVM), and the Brazilian Federal Accounting Committee (CFC), which also consider the Guidance OCPC 04, Application of Technical Interpretation ICPC 02 to Brazilian Real Estate Development Entities, issued by the CPC, which deals with the revenue recognition for this industry, as well as to other matters related to the meaning and application of the concept of continuous transfer of risks, benefits, and control on sales of real estate units by real estate companies in Brazil, which is the basis for the revenue recognition, as described in details in Note 2.16 to the financial statements. The subsidiaries included in the consolidation are detailed in Note 8. The presentation of the parent company and consolidated statements of value added is required by the Brazilian corporate legislation for listed companies, while it is not required by IFRS. Therefore, under the IFRS, the presentation of such statements is considered supplementary information, and not part of the set of financial statements. The Company participates in real estate activities through Special Partnerships (SCPs) and Special Purpose Entities (SPEs), with operations carried out on behalf of the lead partner, who is, in general, the project leader. (b) Parent company financial statements The parent company financial statements have been prepared in accordance with accounting practices adopted in Brazil, pursuant to Technical Pronouncement CPC 26 (R1), Presentation of Financial Statements. They are referred to as the Parent company financial statements. In the case of the Company, these practices differ from IFRS applicable to Brazilian real estate development entities in relation to the separate financial statements only in relation to the capitalization of interest incurred by the parent company, regarding the construction in progress of its subsidiaries. For IFRS purposes, this capitalization is allowed only in the consolidated financial statements, not in the separate financial statements. In the parent company financial statements, subsidiaries, associated companies, and corporate or incorporate joint ventures are recorded based on the equity method of accounting, proportionately adjusted to the Group's interest in the contractual rights and obligations. For the purposes of recognizing equity in the result of operations, the financial statements of the jointly controlled subsidiaries and associates are prepared for the same period as those of the Company and, when necessary, adjustments are made to their accounting policies to bring them into line with those adopted by the Company. The Company's shares in the results of the subsidiaries, jointly-controlled subsidiaries, and associates are recorded in the parent company's statement of operations as equity in results of investees, representing the profit or loss attributable to the owners of the Company. After the application of the equity accounting method, the Company determines whether it is necessary to recognize an additional impairment loss on the Company's investments in the subsidiary and associated companies. The Company assesses, at the end of each reporting period, whether there is objective evidence that investments in subsidiaries and associates are impaired. 9 of 77

18 If there is such evidence, the Company calculates the impairment loss as the difference between the recoverable amount of the investment and the carrying amount and recognizes the loss in the parent company's statement of operations. 2.2 Consolidation The following accounting policies are applied in the preparation of the consolidated financial statements. (a) Subsidiaries Subsidiaries are all entities (including structured entities), whether or not of a corporate nature, over which the Group has control. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. They are fully consolidated from the date on which control is transferred to the Group and deconsolidated from the date that control ceases. The Group applies the acquisition 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 instruments issued by the Group. The consideration transferred includes the fair value of assets or liabilities resulting from a contingent consideration arrangement, when applicable. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values on the acquisition date. The Group recognizes any non-controlling interest in the acquiree on an acquisition- byacquisition basis, either at fair value or at the non-controlling interest's proportionate share of the fair value of the acquiree's identifiable net assets. Non-controlling interests are determined on each acquisition. The excess of: (i) the consideration transferred; (ii) the amount of any non-controlling interest in the acquiree; and (iii) the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the Group's interest in the identifiable net assets acquired is recorded as goodwill. If the total of (i), (ii), and (iii) above is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the statement of operations. Transactions, balances and unrealized gains on transactions between Group companies are eliminated. Unrealized losses are also eliminated, unless the transaction provides evidence of impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. (b) Transactions with non-controlling interests The Group treats transactions with non-controlling interests as transactions with equity owners of the Group. For purchases from non-controlling interests, the difference between any consideration paid and the proportion acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded directly in equity, in "Carrying value adjustments". 10 of 77

19 (c) Loss of control of subsidiaries When the Group ceases to have control, any retained interest in the entity is remeasured to its fair value, with the change in carrying amount recognized in profit or loss. The fair value is the carrying amount for the purposes of subsequently accounting for the retained interest in an associate, joint venture or financial asset. In addition, any amounts previously recognized in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognized in other comprehensive income are reclassified to profit or loss. (d) Associates and joint arrangements Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Joint arrangements are all entities over which the Group shares control with one or more parties. Investments in joint arrangements are classified as either joint operations or joint ventures depending on the contractual rights and obligations of each investor. Investments in associates and joint ventures are accounted for using the equity method and are initially recognized at cost. The Group's investment in associates and joint ventures includes goodwill identified on acquisition, net of any accumulated impairment loss. The Group's share of the profit or loss of its associates and joint ventures is recognized in the statement of income and its share of reserve movements is recognized in the Group reserves. When the Group's share of losses in an associate or joint venture equals or exceeds the carrying amount of the investment, including any other unsecured receivables, the Group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the associate or jointly-controlled investee. Unrealized gains on transactions between the Group and its associates and joint ventures are eliminated to the extent of the Group's interest. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates and jointly-controlled investees have been changed where necessary to ensure consistency with the policies adopted by the Group. If the ownership interest in an associate is reduced but significant influence is retained, only a proportionate share of the amounts previously recognized in other comprehensive income is reclassified to profit or loss where appropriate. Dilution gains and losses arising on investments in associates are recognized in the statement of income. 2.3 Segment reporting Operating segments are defined as components of a development, for which segregated financial information is available and regularly reviewed by the chief operating decision maker, who determines the funds to be allocated to the segment and evaluates its performance. Managerial reports used for decision-making are based on the consolidated financial statements, which are considered as disclosed, that is, only one segment is internally classified as "Real Estate Business". 11 of 77

20 2.4 Foreign currency translation (a) Functional and presentation currency Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates ("functional currency"). The parent company and consolidated financial statements are presented in Brazilian reais (R$), which is the Company's functional currency, and also the Group's presentation currency. (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the foreign exchange rates prevailing at the dates of the transactions or the dates of valuation when items are remeasured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the statement of operations. 2.5 Cash and cash equivalents Cash and cash equivalents include cash on hand, deposits with banks and other short-term highly liquid investments with original maturities of three months or less, and with immaterial risk of change in value. The balance is presented net of bank overdrafts in the statement of cash flows. In the balance sheet, bank overdrafts are shown within borrowings in current liabilities. 2.6 Financial assets Classification The Group classifies its financial assets, upon initial recognition, in the following categories: at fair value through profit or loss, loans and receivables, and available for sale. The classification depends on the purpose for which the financial assets were acquired. At December 31, 2017 and 2016, the Company did not have financial assets classified as available for sale. (a) Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category if it was acquired principally for the purpose of selling in the short term. All financial assets in this category are classified as current assets. 12 of 77

21 (b) Loans and receivables Loans and receivables are non-derivative financial assets with fixed payments or determinable flows that are not quoted in an active market. They are included in current assets, except for those with maturities greater than 12 months after the end of the reporting period, which are classified as non-current assets. The Group's loans and receivables comprise "Trade receivables from real estate development projects and "Trade receivables from services provided" Recognition and measurement Financial instruments are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognized at fair value, and transaction costs are expensed in the statement of income. Financial assets are derecognized when the rights to receive cash flows have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership. Availablefor-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables are carried at amortized cost using the effective interest rate method. Gains or losses arising from changes in the fair value of the "Financial assets at fair value through profit or loss" category are presented in the statement of operations within "Other operating income (expenses)" in the period in which they arise. Dividends on financial assets carried at fair value through profit or loss and available-for-sale equity instruments, such as shares, are recognized in the statement of income as part of other income when the Group's right to receive dividends is established. The fair values of quoted investments are based on current bid prices. If the market for a financial asset is not active (as well as for unlisted securities), the Group establishes the fair value using valuation techniques. These include the use of recent arm's length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, and option pricing models making maximum use of market inputs and relying to the minimum extent possible on entity-specific inputs Offsetting of financial instruments 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 legally enforceable right must not be contingent on future events and must be enforceable in the normal course of business and in the event of default, insolvency or bankruptcy of the Company or the counterparty. 13 of 77

22 2.6.4 Impairment of financial assets The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a "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. The criteria that the Group uses to determine that there is objective evidence of an impairment loss include: (i) significant financial difficulty of the issuer or debtor; (ii) a breach of contract, such as a default or delinquency in interest or principal payments; (iii) the Group, for economic or legal reasons relating to the borrower's financial difficulty, granting to the borrower a concession that a lender would not otherwise consider; (iv) it becomes probable that the borrower will enter bankruptcy or other financial reorganization; (v) the disappearance of an active market for that financial asset because of financial difficulties; or (vi) observable data indicating that there is a measurable decrease in the estimated future cash flow from a portfolio of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the portfolio, including:. adverse changes in the payment status of borrowers in the portfolio, and. national or local economic conditions that correlate with defaults on the assets in the portfolio. The amount of any impairment loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset's original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognized in the statement of income. If a loan or heldto-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. As a practical expedient, the Group may measure impairment on the basis of an instrument's fair value using an observable market price. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor's credit rating), the reversal of the previously recorded loss is recognized in the statement of income. 14 of 77

23 2.7 Trade receivables from real estate development and services rendered Trade receivables (current and non-current) refer mainly to sales of residential units trade receivables from real estate developments and to the rendering of construction site management services trade receivables from the rendering of services. Trade receivables related to real estate developments launched but not completed are determined by applying the Percentage of Completion method (POC) of the construction to the revenue from units sold, as monetarily adjusted according to the terms of the sales contracts, less the installments received. If the total amount of the installments received is higher than the accumulated revenue recognized, the balance is recorded in liabilities as advances from customers. The balance of trade receivables from unfinished units is carried at net present value, that is, discounted to present value based on the difference between the contractual interest charged after the delivery of the unit and the National Civil Construction Index (INCC) variations during the construction. If collection is expected in one year or less, trade receivables are classified as current assets. If not, the part receivable in over one year is presented as non-current assets. Trade receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest rate method, less provision for impairment of trade receivables. 2.8 Inventories Land to be developed Land inventory is stated at the historical cost of formation, which includes all directly related and measurable expenditure, as well as barter transactions at fair value. Land can be acquired through partnership agreements entered into with landowners (physical and financial barters). Physical barter: The fair value of land is recorded as a component of land inventory of property for sale, with a corresponding entry to Advances from customers at the time of signature of the purchase and sale agreement or when any conditional clauses of the agreement have been fulfilled. The income or costs arising from barter transactions are allocated to profit or loss over the real estate construction period. Financial barter: Under financial barters, the Company transfers to the sellers of the land a percentage on the sale amount. This amount is recorded as a component of land inventory of property for sale, with a corresponding entry to Accounts payable at the time of signature of the purchase and sale agreement or contract related to the transaction. 15 of 77