Rossi Residencial S.A.

Transcrição

1 (Convenience Translation into English from the Original Previously Issued in Portuguese) Rossi Residencial S.A. Individual and Consolidated Financial Statements for the Year Ended December 31, 2012 and Independent Auditor s Report Deloitte Touche Tohmatsu Auditores Independentes

2 Rossi Residencial S/A Financial Statements (DFP) December 31, 2012 Contents Independent auditor s review report... 1 Financial statements Balance sheets... 4 Income statements... 6 Statements of comprehensive income... 7 Statements of changes in equity... 8 Cash flow statements... 9 Statements of value added Notes to financial statements Management report Other information considered significant by the company Report of the fiscal council Directors statement on financial statements

3 (Convenience Translation into English from the Original Previously Issued in Portuguese) INDEPENDENT AUDITOR S REPORT To the Shareholders, Board of Directors and Management of Rossi Residencial S.A. São Paulo Introduction We have audited the accompanying individual and consolidated financial statements of Rossi Residencial S.A. (the Company ), identified as Parent and Consolidated, respectively, which comprise the balance sheet as of December 31, 2012 and the income statement, statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of the individual and consolidated financial statements in accordance with accounting practices adopted in Brazil and the consolidated financial statements in accordance with International Financial Reporting Standards (IFRSs), applicable to real estate development entities in Brazil and approved by the Accounting Pronouncements Committee (CPC), the Securities and Exchange Commission (CVM), and the Federal Accounting Council (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. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conduct our audit in accordance with Brazilian and International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company s preparation and fair presentation of the financial statements 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 Company s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by Management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. 1

4 Deloitte Touche Tohmatsu Opinion on the Financial Statements Prepared in Accordance with Accounting Practices Adopted in Brazil In our opinion, the individual (Parent) and consolidated financial statements present fairly, in all material respects, the financial position of Rossi Residencial S.A. as of December 31, 2012, and its financial performance, its comprehensive income, and its cash flows for the year then ended in accordance with accounting practices adopted in Brazil. Opinion on the Consolidated Financial Statements Prepared in Accordance with International Financial Reporting Standards (IFRSs), Applicable to Real Estate Development Entities in Brazil, as Approved by the Accounting Pronouncements Committee (CPC), the Brazilian Securities and Exchange Commission (CVM) and the Federal Accounting Council (CFC) In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Rossi Residencial S.A. as of December 31, 2012, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with the IFRSs applicable to real estate development entities in Brazil, as approved by the CPC, the CVM, and the CFC. Emphasis of matter As described in Note 2 to the financial statements, the individual and consolidated financial statements have been prepared in accordance with accounting practices adopted in Brazil. The consolidated financial statements prepared in accordance with IFRSs applicable to real estate development entities in Brazil also consider OCPC 04 Application of Technical Interpretation ICPC 02 to Brazilian Real Estate Development Entities, issued by the CPC. Such technical guideline addresses the recognition of real estate revenues and involves issues related to the meaning and application of the concept of continuous transfer of risks, rewards and control on the sale of real estate units, as detailed in note 2 to the financial statements. Our opinion regarding this matter is unqualified. As described in Note 2 to the financial statements, the individual financial statements have been prepared in accordance with accounting practices adopted in Brazil. In the case of Rossi Residencial S.A. these accounting practices differ from the IFRSs applicable to real estate development entities in Brazil, applicable to separate financial statements, only with respect to the measurement of investments in subsidiaries and joint ventures by the equity method of accounting which, while for purposes of IFRSs applicable to real estate development entities in Brazil, they would be measured at cost or fair value. Our opinion regarding this matter is unqualified. Other matters Statements of value added We have also audited the individual and consolidated statements of value added ( DVA ), for the year ended December 31, 2012, prepared under the responsibility of the Company s management, the presentation of which is required by the Brazilian Corporate Law for publicly-traded companies and as supplemental information for IFRSs, which do not require a presentation of DVA. These statements were subject to the same auditing procedures described above and, in our opinion, are fairly presented, in all material respects, in relation to the financial statements taken as a whole. 2

5 Deloitte Touche Tohmatsu Audit of the individual and consolidated accounting information for the year ended December 31, 2011 The individual and consolidated financial statements for the year ended December 31, 2011, presented for purposes of comparison, were previously audited by other independent auditors, and their report thereon, dated October 8, 2012, did not contain any modification. The accompanying individual and consolidated interim financial information has been translated into English for the convenience of readers outside Brazil. São Paulo, March 25, 2013 DELOITTE TOUCHE TOHMATSU Auditores Independentes Walter Dalsasso Engagement Partner 3

6 Rossi Residencial S.A and Subsidiaries (Convenience Translation into English from the Original Previously Issued in Portuguese) ROSSI RESIDENCIAL S.A. AND SUBSIDIARIES BALANCE SHEETS AS AT DECEMBER 31, 2012 AND 2011 (In thousands of Brazilian reais - R$) Parent Consolidated ASSETS Note 12/31/ /31/ /31/ /31/2011 CURRENT ASSETS Cash and cash equivalents 5 351, , , ,787 Securities 6 460, , , ,940 Trade receivables 7 194, ,911 2,725,571 2,341,668 Properties for sale 8 129, ,910 1,552,486 1,606,008 Other receivables 9 308, , , ,206 Total current assets 1,444,424 1,222,770 6,428,450 5,507,609 NONCURRENT ASSETS Securities 6 330, , , ,574 Trade receivables 7 85,429 72, , ,724 Properties for sale 8 93,083 23, , ,985 Escrow deposits 17 36,601 44,449 47,672 54,735 Related parties 19 2,206,188 1,916, Deferred income tax and social contribution ,905 Investments 10 2,798,250 2,426, Property, plant and equipment 11 28,262 29,190 66,418 88,067 Intangible assets 12 31,259 13,096 56,490 57,743 Total noncurrent assets 5,609,850 4,764,415 1,803,513 1,626,733 TOTAL ASSETS 7,054,274 5,987,185 8,231,963 7,134,342 The accompanying notes are an integral part of these financial statements. 4

7 Rossi Residencial S.A. and Subsidiaries (Convenience Translation into English from the Original Previously Issued in Portuguese) ROSSI RESIDENCIAL S.A. AND SUBSIDIARIES BALANCE SHEETS AS AT DECEMBER 31, 2012 AND 2011 (In thousands of Brazilian reais - R$) Parent Consolidated LIABILITIES Note 12/31/ /31/ /31/ /31/2011 CURRENT Construction financing - real estate loans ,689 91, , ,091 Working capital loans , , , ,196 Debentures , , , ,515 Trade payables - 30,625 9, ,351 94,161 Payables for purchase of land 15 9,324 16, , ,690 Payroll and related charges - 11,008 20,425 36,573 38,533 Taxes and contributions payable - 1,777 2,704 42,757 53,705 Dividends payable ,685-80,685 Employees' and management's profit sharing payable 24 4,526 15,223 4,526 15,223 Advances from customers , , ,660 Deferred taxes and contributions 18 4,982 10, , ,483 Equity deficit of investees and other , ,992 54,744 31,807 Total current liabilities 1,776, ,656 2,975,295 2,304,749 NONCURRENT Construction financing - real estate loans , ,000 1,973,142 1,451,386 Working capital loans ,045 33, ,885 33,333 Debentures , , , ,000 Payables for purchase of land 15 20,437 13, , ,661 Taxes and contributions payable 17 21,356 21,356 25,823 25,823 Provision for risks 17 49,441 23,903 52,059 26,522 Provision for work guarantees - 36,371 19,372 37,532 19,748 Related parties 19 1,259,257 1,061, Deferred taxes and contributions 18 2,185 2,716 41,578 54,589 Other payables , , , ,829 Total noncurrent liabilities 2,980,154 3,160,827 2,958,556 2,844,891 EQUITY Capital 25 2,573,526 2,025,145 2,573,526 2,025,145 Treasury shares 25 (80,870) (36,972) (80,870) (36,972) Capital reserves 25 37,222 22,577 37,222 22,577 Accumulated losses - (231,766) (26,048) (231,766) (26,048) Total equity 2,298,112 1,984,702 2,298,112 1,984,702 TOTAL LIABILITIES AND EQUITY 7,054,274 5,987,185 8,231,963 7,134,342 The accompanying notes are an integral part of these financial statements. 5

8 Rossi Residencial S.A and Subsidiaries (Convenience Translation into English from the Original Previously Issued in Portuguese) ROSSI RESIDENCIAL S.A. AND SUBSIDIARIES INCOME STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011 (In thousands of reais - R$, except earnings (loss) per share) Parent Consolidated Note 12/31/ /31/ /31/ /31/2011 NET REVENUES , ,729 2,714,588 2,837,138 COST OF PROPERTIES SOLD AND SERVICES PROVIDED 21 (190,732) (194,480) (2,141,531) (2,146,137) GROSS PROFIT (LOSS) (39,776) (4,751) 573, ,001 OPERATING INCOME (EXPENSES) Administrative 22 (181,391) (232,561) (216,879) (256,711) Executive officers' fees (4,344) (4,587) (4,344) (4,587) Selling 22 (54,882) (54,981) (285,775) (265,163) Depreciation and amortization (6,866) (6,108) (7,175) (6,223) Equity in subsidiaries , , Other operating expenses, net 22 (68,336) (19,879) (52,135) (12,620) INCOME (LOSS) BEFORE FINANCE INCOME (COSTS) (153,419) 33,358 6, ,697 Finance income 23 67, , , ,330 Finance expenses 23 (119,395) (128,516) (237,900) (186,120) INCOME (LOSS) BEFORE TAXES (205,718) 78,804 (121,851) 161,907 INCOME TAX AND SOCIAL CONTRIBUTION 18 Current - - (127) (56,153) (49,282) Deferred (27,714) (33,948) NET PROFIT (LOSS) FOR THE YEAR (205,718) 78,677 (205,718) 78,677 EARNINGS (LOSS) PER SHARE ATTRIBUTABLE TO THE COMPANY'S SHAREHOLDERS (IN R$ PER SHARE) Basic 25 (0.7442) Diluted 25 (0.7397) The accompanying notes are an integral part of these financial statements. 6

9 Rossi Residencial S.A. and Subsidiaries (Convenience Translation into English from the Original Previously Issued in Portuguese) ROSSI RESIDENCIAL S.A. AND SUBSIDIARIES STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011 (In thousands of Brazilian reais - R$) Parent Consolidated 12/31/ /31/ /31/ /31/2011 NET PROFIT (LOSS) FOR THE YEAR (205,718) 78,677 (205,718) 78,677 OTHER COMPREHENSIVE INCOME COMPREHENSIVE INCOME FOR THE YEAR (205,718) 78,677 (205,718) 78,677 The accompanying notes are an integral part of these financial statements. 7

10 Rossi Residencial S.A and Subsidiaries (Convenience Translation into English from the Original Previously Issued in Portuguese) ROSSI RESIDENCIAL S.A. AND SUBSIDIARIES STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011 (In thousands of Brazilian reais - R$) Retained earnings Treasury Capital (accumulated Note Capital shares reserve losses) Total BALANCES AS AT DECEMBER 31, ,022,921 (24,385) 9,208 (24,040) 1,983,704 Capital increase 2, ,224 Treasury shares - (12,587) - - (12,587) Share-based compensation ,888-12,888 Capital reserve Net profit for the year ,677 78,677 Proposed dividends (80,685) (80,685) BALANCES AS AT DECEMBER 31, ,025,145 (36,972) 22,577 (26,048) 1,984,702 Capital increase , ,613 Shares issued 25 (23,232) (23,232) Treasury shares 25 - (43,898) - - (43,898) Share-based compensation ,645-14,645 Net loss for the year - - (205,718) (205,718) BALANCES AS AT DECEMBER 31, ,573,526 (80,870) 37,222 (231,766) 2,298,112 The accompanying notes are an integral part of these financial statements. 8

11 Rossi Residencial S.A. and Subsidiaries (Convenience Translation into English from the Original Previously Issued in Portuguese) ROSSI RESIDENCIAL S.A. AND SUBSIDIARIES STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011 (In thousands of Brazilian reais - R$) Parent Consolidated 12/31/ /31/ /31/ /31/2011 CASH FLOW FROM OPERATING ACTIVITIES Income (loss) before income tax and social contribution (205,718) 78,804 (121,851) 161,907 Adjustments not representing cash inflow or outflow: Depreciation and amortization 6,852 6,205 35,802 29,407 Allowance for doubtful accounts 11,971 6,182 11,971 6,233 Provision for civil claims 14,774 5,756 29,336 5,924 Provision for labor claims 21,270-21,270 - Provision for work guarantees 16,998 10,964 17,784 11,045 Provision for share-based compensation 14,645 13,369 14,645 13,369 Provision for profit sharing 15,583 37,616 15,583 37,616 Equity in subsidiaries (202,176) (356,225) - - Gain (loss) on investments sold 1,295 1,652 (773) 4,061 Loss on impaired assets 30,591 12,264 27,904 13,135 Deferred taxes and contributions (6,264) (1,813) 6,180 11,108 Financial interest and charges, net 55,558 (46,726) (94,236) (152,578) (224,621) (231,952) (36,385) 141,227 Changes in current and noncurrent assets and liabilities: Increase (decrease) in long-term investments - 286, ,947 Increase (decrease) in trade receivables 103, , ,041 (506,220) Increase (decrease) in properties for sale (16,426) 68,237 (257,645) (581,528) Increase (decrease) in other credits, net of items under liabilities 60, ,180 (168,747) (187,361) Increase in other assets 7,848 (1,799) 7,063 (3,823) Increase (decrease) in payables for purchase of land (142) 70,797 (177,008) 196,612 Decrease in taxes and contributions (927) (940) (67,100) (22,099) Increase (decrease) in advances from customers (801) (913) (37,658) 4,894 Decrease in employees' and management profit sharing payable (26,280) (32,335) (26,280) (32,335) Increase (decrease) in other liabilities (22,315) 5,266 (39,071) 49,132 Net cash (used in) provided by operating activities (119,697) 655,364 (645,790) (654,554) CASH FLOW FROM INVESTING ACTIVITIES Acquisition of investments (191,748) (428,501) - - Dividends received 48, Redemption of securities (268,925) (230,220) (219,303) (257,504) Purchase of property, plant and equipment items, net of disposals (3,330) (18,943) (11,559) (62,583) Acquisition of software (20,757) (9,029) (20,896) (9,029) Net cash (used in) provided by investing activities (435,860) (686,693) (251,758) (329,116) CASH FLOW FROM FINANCING ACTIVITIES Related-party transactions (121,643) (289,657) - - Dividends paid (80,685) (83,071) (80,685) (83,071) Capital increase 571,613 2, ,613 2,224 Treasury shares (43,898) (12,587) (43,898) (12,587) Debt: Funds raised 724,909 1,125,274 2,016,707 2,178,993 Repayment (363,751) (558,785) (1,191,513) (856,191) Debentures: Funds raised 33, ,000 33, ,000 Repayment (195,873) (113,390) (195,873) (113,390) Net cash provided by financing activities 524, ,008 1,110,088 1,265,978 NET INCREASE IN CASH AND CASH EQUIVALENTS (31,148) 188, , ,308 CASH AND CASH EQUIVALENTS At the beginning of year 382, , , ,479 At the end of year 351, , , ,787 The accompanying notes are an integral part of these financial statements. 9

12 Rossi Residencial S.A and Subsidiaries (Convenience Translation into English from the Original Previously Issued in Portuguese) ROSSI RESIDENCIAL S.A. AND SUBSIDIARIES STATEMENTS OF VALUE ADDED FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011 (In thousands of Brazilian reais - R$) Parent Consolidated 12/31/ /31/ /31/ /31/2011 REVENUES Sale of properties and services provided 156, ,004 2,785,073 2,924,298 Allowance for doubtful accounts (11,971) (6,182) (11,971) (6,233) 144, ,822 2,773,102 2,918,065 INPUTS FROM THIRD PARTIES Cost of properties sold (67,332) (61,130) (1,685,552) (1,785,648) Materials, energy, third-party services and other (90,493) (97,982) (256,479) (243,987) Loss on assets (30,591) (12,264) (27,904) (13,135) (188,416) (171,376) (1,969,935) (2,042,770) GROSS VALUE ADDED (43,515) 24, , ,295 Depreciation and amortization (6,852) (6,205) (35,802) (29,407) Wealth created by the entity (50,367) 18, , ,888 VALUE ADDED FROM TRANSFER Equity in subsidiaries 202, , Finance income 67, , , ,330 Other items , , , , ,469 TOTAL VALUE ADDED FOR DISTRIBUTION 218, , ,712 1,059,357 Distribution of value added Personnel Direct compensation 137, , , ,825 Benefits 4,253 5,997 43,026 21,432 F.G.T.S. 9,035 8,482 21,427 16, , , , ,894 Taxes, rates and contributions Federal 26,566 41, , ,289 State - - 2,894 2,223 Municipal 2,391 4,530 38,700 59,536 28,957 46, , ,048 Third-party capital compensation Interest 236, , , ,122 Rental 8,392 6,909 12,263 10, , , , ,738 Own capital compensation Retained earnings (losses incurred) (205,718) 78,677 (205,718) 78,677 (205,718) 78,677 (205,718) 78, , , ,712 1,059,357 The accompanying notes are an integral part of these financial statements. 10

13 Rossi Residencial S.A. and Subsidiaries (Convenience Translation into English from the Original Previously Issued in Portuguese) ROSSI RESIDENCIAL S.A. AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011 (Amounts in thousands of Brazilian reais - R$, except amounts per share or unless otherwise stated) 1. GENERAL INFORMATION Rossi Residencial S.A. ( Company or Rossi Residencial ) and its investees are engaged in: (a) the development, building and sale of residential and commercial properties, and land subdivision; and (b) the provision of engineering services through own operations, by holding interests in joint ventures (Special Purpose Entities (SPEs)) and consortiums. The Company is a corporation domiciled in Brazil with registered head offices in São Paulo, State of São Paulo, registered with the Brazilian Securities and Exchange Commission (CVM) since July 1, 1997, and with shares traded on the São Paulo Stock Exchange (BM&F BOVESPA - RSID3). The individual and consolidated financial statements on Rossi Residencial for the year ended December 31, 2012 were authorized for disclosure by the Board of Directors on March 25, 2013, in accordance with Article 25, VI, of CVM Instruction 480/ SIGNIFICANT ACCOUNTING POLICIES The individual financial statements for the year ended December 31, 2012 have been prepared in accordance with accounting practices adopted in Brazil, which comprise the standards issued by the CVM and the technical pronouncements, interpretations and guidelines issued by the Accounting Pronouncements Committee (CPC), and is in accordance with the International Financial Reporting Standards (IFRSs) applicable to real estate development entities in Brazil, as approved by the CPC, the CVM and the Federal Accounting Council (CFC), including OCPC 04 - Application of Interpretation ICPC 02 to Brazilian Real Estate Development Entities, as regards to the recognition of revenues, costs and expenses arising from real estate development operations during the progress of construction (percentage of completion method (POC)). Certain matters related to the meaning and application of the concept of continuous transfer of the risks, rewards and control of ownership in real estate sales are being analyzed by the International Financial Reporting Interpretation Committee (IFRIC). The results of such analysis might lead the Company to revise its accounting policies related to revenue recognition. The Company carries out the developments through the joint ventures (Special Purpose Entities - SPE) and consortia, whose project-related assets, as at December 11

14 Rossi Residencial S.A and Subsidiaries 31, 2012, are not part of real estate development segregation structures, as permitted by Law 10931/04. The financial statements have been prepared taking into consideration the historical cost as the base value and adjusted to reflect the financial assets and financial liabilities measured as a balancing item to profit or loss for the year. In preparing the financial statements in accordance with IFRSs applicable to real estate development entities in Brazil, accounting estimates were used and judgment was exercised by the Company s management. The areas in which the assumptions and estimates are significant for the financial statements are disclosed in Note Basis of consolidation The financial statements have been prepared in conformity with the relevant consolidation procedures and statutory provisions. In consolidation investments in investees and intragroup balances receivable and payable and revenues and expenses are eliminated. As control of investees is shared, they are proportionately consolidated, based on the percentage ownership interest held in each investee (Note 10). The accounting policies are consistently applied in all consolidated companies and the financial statements of investees are prepared for the same reporting period. The exclusive mutual fund, managed by independent fund managers, is organized as a special purpose entity (SPE), since the Company has control over its operations, and fully assumes its risks and rewards. Accordingly, this fund is consolidated in the financial statements. Securities held through such funds are recorded in line items Cash and cash equivalents or Held-for-trading securities, taking into account the original maturity of the securities and the funds investment strategies, which forecast trading these securities within periods that qualify the related amounts as highly liquid (Notes 5 and 6). 12

15 Rossi Residencial S.A. and Subsidiaries 2.2. Segment information Management believes that the disclosure of segment information is not applicable to the Company s activities since Management s activity monitoring, performance assessment and decision-making is made to allocate funds at each real estate development and not at segment level. It believes, therefore, that the investees Rossi Consultoria de Imóveis Ltda. (Rossi Vendas) and Rossi Indústria de Artefatos de Concreto Ltda. (Rossi Pré- Moldados) are not independent businesses Functional and reporting currency The financial statements are presented in Brazilian reais (R$), which is the functional currency of the Company and its investees. The Company does not have any foreign currency-denominated transactions Cash and cash equivalents Cash equivalents are held to meet short-term cash commitments and not for investment or any other purposes. The Company holds short-term investments, basically represented by Bank Certificates of Deposit (CDBs) and investment funds, and considers cash equivalents amounts readily convertible to a known cash amount and which are subject to an insignificant risk of change in value. Therefore, an investment fund normally qualifies as a cash equivalent only when it has a short maturity of, for example, three months or less from the date of acquisition Securities The securities are classified as follows: held-to-maturity securities, available-for-sale securities and held-for-trading securities. Held-for-trading securities are stated at fair value against profit or loss. Classification depends on the purpose for which the investment was acquired. When the purpose of acquiring the investment is the investment of funds so as to obtain earnings in the short-term, they are classified as held-for-trading securities; when the intent is to invest funds to keep investments held to maturity, they are classified as held-to-maturity investments, provided that Management has the intention and financial condition to keep the investment held to maturity. The Company does not have any transactions that can be classified as available-for-sale securities. 13

16 Rossi Residencial S.A and Subsidiaries 2.6. Trade receivables Carried at present and realizable values. The classification between current and noncurrent is made based on the expected maturity flow of the contracts. Receivables from real estate development Adjusted for inflation according to contractual clauses, as follows: Up to the delivery of the properties sold, based on the National Civil Construction Index (INCC). After the delivery of the properties sold, using the General Market Price Index (IGP-M) fluctuation, plus 12% interest per year ( Price table). The sale of land plots is adjusted using the IGP-M or INCC fluctuation. The adjustment to present value is calculated on the uncompleted units and is accounted using the same allocation criteria of revenue from the sale of properties. The discount rate is represented by the Company s weighted average borrowing cost, less projected IGP-M for a 12-month period. The allowance for doubtful accounts is set up based on an analysis of the receivables realization risks, in an amount deemed sufficient by Management to cover estimated possible losses on the realization of these receivables, substantially taking into consideration the portions of collateral transfer of receivables as guarantees of promissory notes, as well as inflation adjustments of past-due receivables, since basically the portfolio is guaranteed by the properties sold. The Company and its investees assign and/or securitize receivables related the loans obtained through the collateral transfer of completed projects. The Company conducts securitization transactions through the issuance of Mortgage Assignment Agreement (CCIs), which are assigned to financial institutions, under which no mortgage obligations are assumed and, therefore, such amount is reimbursed by the Company in case of nonpayment. For these securitization transactions, the amount credited by financial institutions is accounted for as a liability since the Company is still subject to credit risks and is the manager of such portfolio Properties for sale Properties for sale are carried at construction cost, which does not exceed their net realizable value. In the case of properties under construction, the inventory portion represents the cost incurred in the unsold units, consisting of the apartments, houses and commercial complexes construction costs. This line item also includes materials to be used in works, financial charges and expenses on new projects. The Company acquires land for future real estate developments, for payment in legal tender, with a share of project revenue, or through a physical barter, 14

17 Rossi Residencial S.A. and Subsidiaries with the commitment of delivering real estate units in the project to be developed in the related land or in other developments. The classification between current and noncurrent is carried out based on the expected launching period of the real estate developments. The Company and its investees annually test properties for sale and land for future developments for impairment to determine if events or changes in economic, operational or technological circumstances indicate that such assets might be impaired. The criterion of this test takes into consideration the expected real estate development launchings, the projected discounted cash flow, and the market value of the properties Investments The Company s and its investees investments are accounted for by the equity method of accounting. The Company holds interests in other entities, basically consisting of joint ventures, in which the developers have a contractual agreement that establishes the joint control of several of the investees activities. The Company recognizes its interests in investees using the proportionate consolidation method. The Company consolidates its stake in the assets, liabilities, income and expenses of the investees, on a per line item basis, in its consolidated financial statements. The investees financial statements are prepared for the same year of the Company s financial statements. Adjustments are made to the Company s consolidated financial statements to eliminate the Company s share of the investee s assets and liabilities, income and expenses, and unrealized gains and losses on intragroup transactions. Losses on transactions are immediately recognized if the loss provides evidence of asset impairment. Goodwill Represents the price paid on acquisition that exceeds the carrying amount of the Company s interest in an investee s equity. If the acquisition cost exceeds the carrying amount of the acquired share of an investee s equity, the difference is allocated to profit or loss for the year using the realization of the investee s assets as amortization criteria. In cases where the acquisition cost is lower, the difference is recognized as gain in profit or loss for the year Property, plant and equipment Carried at purchase cost, less depreciation recorded on a straight-line basis using the applicable rates. This cost includes expenses on the construction of sales stands when their estimated useful lives exceed 12 months, and are depreciated over their useful lives (Note 11). 15

18 Rossi Residencial S.A and Subsidiaries Residual values, useful lives and the depreciation method are reviewed at the end of each annual reporting period and adjusted as appropriate. A property, plant and equipment item is derecognized on disposal or when no economic benefit is expected from its use or disposal. Any gain or loss arising from the derecognition of the asset is included in profit or loss for the year Intangible assets Software licenses Software licenses acquired are carried at purchase cost and are qualified according to their estimated useful lives at the rates described in Note 12. Software maintenance costs are recognized as expenses when incurred. Any amount in excess of the carrying amount on the acquisition of assets, arising from the surplus of trade receivables, is classified in Intangible assets in the consolidated Taxes a) Current income tax and social contribution Corporate income tax (IRPJ) (25%) and social contribution on net income (CSLL) (9%) are calculated based on at the combined statutory rate of 34%. Deferred income tax is generated by temporary differences at the end of the reporting period between the tax bases of assets and liabilities and their carrying amounts. As permitted by the tax law, certain investees opted for taxation based on deemed income. For those investees, the IRPJ and CSLL tax base is calculated at the rate of 8% and 12% on gross revenue, respectively, on which the regular tax rates of the related tax are levied. The Company s project-related assets are part of real estate development equity segregation structures, as permitted by Law 10931/04. b) Deferred income tax and social contribution Deferred tax assets are recognized to the extent that it is probable that future taxable income will be available for offset against temporary differences. When it is not probable that the deferred tax assets will be realized, no accounting recognition is made (Note 18). 16

19 Rossi Residencial S.A. and Subsidiaries Payables for purchase of land and advances from customers In real estate purchase transactions, commitments can be undertaken for payment in cash, classified as payables for purchase of land, or with the delivery of future real estate units, classified as advances from customers. The amounts are recognized according to the contractual clauses, based on the fair value of the land purchased, and in the cases of future delivery of real estate units, by determining the product that will be developed in the land. Obligations are discharged substantially with the completion of the works (revenue recognition) Other current and noncurrent assets and liabilities An asset is recognized in the balance sheet when it is probable that future economic benefits will flow to the Company and its cost or value can be reliably measured. A liability is recognized in the balance sheet when the Company has a legal or constructive obligation as a result of a past event and it is probable that an outflow of funds be required to settle it. Liabilities include contractual charges or inflation adjustments, when applicable. Provisions are recognized based on the best estimates of the risk involved. Assets and liabilities are classified as current when their realization or settlement is likely to occur within the next twelve months. Otherwise, assets and liabilities are stated as noncurrent Provisions for risks The accounting policies for recognition and disclosure of the contingent liabilities and legal obligations are as follows: provisions for risks are recognized when losses are assessed as probable and amounts can be reliably measured. Contingent liabilities assessed as possible losses are only disclosed in the notes to financial statements and the contingent liabilities assessed as remote losses are not disclosed; and (b) legal obligations are recorded as noncurrent regardless of any assessment on the likelihood of a favorable outcome in proceedings (Note 17) Impairment losses of nonfinancial assets Assets are annually tested for impairment to determine whether events or changes in economic, operating or technological circumstances indicate that they might be impaired. Whenever such evidences are identified and an asset s carrying amount exceeds its recoverable value, an allowance for impairment is recognized to reduce the carrying amount to the recoverable value. 17

20 Rossi Residencial S.A and Subsidiaries Adjustments to present value of assets and liabilities Monetary assets and liabilities as adjusted to their present value on initial recognition of the transaction, taking into consideration the contractual cash flows, the explicit interest rate, and in certain cases the implicit interest rate of the related assets and liabilities, and the market rates used for similar transactions. Subsequently, they are allocated to profit or loss using the effective interest method in relation to the contractual cash flows Employee benefits a) Profit sharing program The Company has an employee and management profit sharing program, as provided for by the relevant prevailing legislation, which can be either under voluntary programs maintained by the companies or agreements with employees or trade unions, and which is approved at the Board of Director s Meeting. The provision for employee and management profit sharing bonuses is accounted for on an accrual basis, based on the criteria and assumptions established in the Company s profit sharing program (Note 24.a). b) Pension plan The Company contracted a supplementary pension plan for its employees and officers, as a defined contribution pension plan (PGBL). In view of the type of the plan, Company contributions are classified as defined and directly accounted for, as the Company s obligation in each fiscal year is determined by the amounts to be contributed in the period. Consequently, no actuarial valuations are necessary to measure the obligation or expense, and there is no possibility of any actuarial gain or loss. c) Stock option plan The purpose of the stock option plan is granting Company stock to officers and managerial level employees, and individuals who provide services to the Company or to its subsidiary. The Plan has a stock option ceiling that results in a maximum dilution of 3% of the Company s capital on the date each program is approved. The strike price is defined for each plan. 18

21 Rossi Residencial S.A. and Subsidiaries After the option is exercised, the Board of Directors determines if the Company s capital should be increased by issuing new shares to be subscribed by the participants, in accordance with Article 166, III, of Law 6404/76, or if treasury shares will be used to settle the exercise of stock options, pursuant to relevant regulation. Pursuant to Article 171, paragraph 3 of Law 6404/76, shareholders do not have any preemptive right on the grant and exercise of the options deriving from the plan. The share-based payment, qualified as an equity instrument (equity settled) is calculated based on the amount attributed to the services received from employees in the plans, which is determined at the fair value of the stock options granted, set on the date each plan was granted using an option pricing model, and is recognized as an expense during the vesting period, namely between the date the stock options are granted and the date they become vested, as a balancing item to equity Financial instruments Financial assets and financial liabilities are recognized when an entity becomes a party to the contractual provisions of the instrument. Financial assets and financial liabilities are initially measured at fair values. The fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm s length transaction. Transaction costs directly attributable to the acquisition or issuance of financial assets and financial liabilities are added to or deducted from the fair value of financial assets and financial liabilities, if applicable, after their initial recognition, except for financial assets and financial liabilities at fair value through profit or loss. Financial assets Financial assets are classified into the following specific categories: (i) financial assets measured at fair value through profit or loss; (ii) held-tomaturity investments; (iii) loans and receivables; and (iv) available-for-sale financial assets. Classification depends on the nature and purpose of the financial assets and is determined upon initial recognition. (i) At fair value through profit or loss Financial assets and liabilities are measured at fair value through profit or loss when they are held for trading and are actively and frequently traded, mainly in the short term. Such assets are measured at fair value and their variances are recognized in finance income (costs) for the year. 19

22 Rossi Residencial S.A and Subsidiaries (ii) Investments held to maturity Non-derivative financial assets with fixed or determinable payments and fixed maturity, which the Company has the positive intent and ability to hold to maturity. These are carried at cost plus contractual income earned as a balancing item to profit or loss for the year, using the effective interest method. (iii) Loans and receivables These include loans and receivables assets with fixed or determinable payments not quoted in an active market. Loans and receivables are adjusted according to the effective rate of the underlying transaction. The effective rate is the rate set out in the contracts and adjusted according to the related costs of each transaction. (iv) Available-for-sale financial assets Available-for-sale financial assets correspond to non-derivative financial assets that are designated as available-for-sale or are not classified as: (a) loans and receivables; (b) held-to-maturity investments; or (c) financial assets at fair value through profit or loss. Financial liabilities Financial liabilities are classified either as Financial liabilities at fair value through profit or loss or Other financial liabilities. (i) Financial liabilities at fair value through profit or loss Financial liabilities are classified as at fair value through profit or loss when they are either held for trading or designated as at fair value through profit or loss. Change in fair value losses are recognized in profit or loss. (ii) Other financial liabilities Other financial liabilities, including borrowings, financing and debentures, are initially measured at fair value, net of transaction costs. Subsequently, they are measured at amortized cost under the effective interest method, and finance costs are recognized based on effective compensation. The effective interest method is a method of calculating the amortized cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts the estimated future cash payments through the expected life of the financial liability. Income is recognized on an effective interest basis for debt instruments other than those financial assets classified at fair value through profit or loss. 20

23 Rossi Residencial S.A. and Subsidiaries Treasury shares They are equity instruments that have been bought back by the Company (treasury shares) and are recognized at cost and deducted from equity. No gain or loss is recognized in the profit or loss for the year on the purchase, sale, issuance or cancelation of the Company s own equity instruments. Any differences between the carrying amount and the consideration paid are recognized in Other capital reserves Revenue and expense recognition a) Revenue from property development and sale Revenue is recognized to the extent it is probable that economic benefits will be generated and when it can be reliably measured. For installment sales of a completed unit, revenue is recognized at the time the sale is performed, regardless of the term for receipt of the amount established by contract. Fixed interest and inflation adjustments based on the IGP-M or the INCC are allocated to profit or loss, in line item Real estate sales, on an accrual basis. In sales of units under construction, revenue is allocated according to the criteria established by the guidelines contained in OCPC 01, as follows: (i) the incurred cost of units sold, including cost of land, is fully allocated to profit or loss; (ii) revenues from sales are allocated to profit or loss using the percentage-of-completion method of each project, which is measured as according to the cost incurred prorated to the total budgeted cost of the related projects; (iii) revenues from sales calculated according to item (ii), including inflation adjustments, net of installments already received, are accounted for as trade receivables or advances from customers, according to the relationship between the accounted for revenues and the amounts received; (iv) financial charges on real estate financing, of debts incurred to acquire land, debentures and working capital are capitalized at the cost of each project, when linked to construction, and allocated to profit or loss proportionally to the units sold. The financial charges attributed to unsold units are classified in properties for sale; (v) selling expenses inherent to the sales activity are classified as incurred as projects are advertised or the expenses incurred, or on an accrual basis. Selling expenses consist basically of advertising and sales commissions; (vi) the provision for warranties is set up at an amount considered sufficient by Management to cover possible future disbursements, considering units delivered in the warranty period, at the historical cost; (vii) barters, for the delivery of properties to be built, are recognized at fair value and accounted for as a component of the land bank, as a balancing item to advances from customers in liabilities, when the underlying contractual clauses are complied; (viii) the Company assessed its real estate unit sales contracts and the contracts entered into by its investees based on the analyses addressed by OCPC 04, and 21

24 Rossi Residencial S.A and Subsidiaries believes that the contracts entered into are within the scope of CPC 17 Construction Arrangements, since the risks and rewards of ownership are continuously transferred to the committed buyer of the property. Termination of agreements In case of termination of real estate unit sale agreement, the revenues and costs recognized in profit or loss are reversed, charged against Sale of real estate and credited to Cost of sales and services, as a balancing item to Inventories of properties for sale. The amount to be reimbursed to customers is accounted for in Payables for customer termination in current liabilities. b) Revenue from services Revenues from services provided are represented by project management and real estate management activities, recognized on an accrual basis Earnings (loss) per share Basic earnings (loss) per share are calculated by dividing profit (loss) for the year attributable to the holders of the Company s common shares by the weighted average number of common shares outstanding in the period. Diluted earnings (loss) per share are calculated by dividing profit (loss) for the year attributable to the holders of the Company s common shares by the weighted average number of common shares outstanding in the period plus the weighted average number of common shares that would be issued if all potential common shares were effectively converted into common shares Business combination The acquisition method is used to account for each business combination conducted by the Company. The acquisition cost is measured as the fair value of the transferred assets, the equity instruments issued and the liabilities incurred or assumed on the transaction date. Expenses related to the acquisition are recognized in the profit or loss for the year, when incurred. Identifiable assets acquired and liabilities assumed are measured at fair value on acquisition date. The acquisition cost exceeding the fair value of identifiable assets acquired and liabilities assumed is recorded as goodwill and, if lower, it is recognized as gain on bargain purchase in profit or loss for the year on the acquisition date. In transactions where the Company acquires the control of a business in which it held an equity interest immediately before the acquisition date, such initial equity interest is measured at fair value on the date the control is acquired, which in case of a gain on bargain purchase, is recognized in profit or loss for the year. 22

25 Rossi Residencial S.A. and Subsidiaries New standards and interpretations issued and not yet adopted Certain standards, revised standards and IFRS interpretations issued by the IASB are not yet effective for the financial statements for the year ended December 31, 2012, as follows: - IFRS 9 - Financial Instruments. - IFRS 10 - Consolidated Financial Statements. - IFRS 11 - Join Arrangements. - IFRS 12 - Disclosure of Interests in Other Entities. - IFRS 13 - Fair Value Measurement. - IFRIC 20 - Stripping Costs in the Production Phase of a Surface Mine. - Amendments to IFRS 7 - Disclosures - Offsetting Financial Assets and Financial Liabilities. - Amendments to IFRS 9 and IFRS 7 - Mandatory Application Date of IFRS 9 and Transition Disclosure. - Amendments to IFRS 10, IFRS 11 and IFRS 12 Consolidated Financial Statements, Joint Arrangements and Disclosure of Interests in Other Entities: Transition Guide. - Amendments to IAS 1 Presentation of Other Finance Income (Costs). - Amendments to IAS 19 - Employee Benefits. - Amendments to IAS 27 - Separate Financial Statements. - Amendments to IAS 28 - Investments in Associates and Subsidiaries. - Amendments to IAS 32 - Offsetting Financial Assets and Financial Liabilities. - Amendments to IFRSs Annual Improvement Cycle. The CPC has not yet issued the pronouncements and amendments related to the new and revised IFRSs above. Because of the CPC s and the CVM s commitment to keep the set of standards issued updated according to the changes made by the IASB, it is expected that such pronouncements and amendments will be issued by the CPC and approved by the CVM by the date they become effective. 23