Direcional Engenharia S.A.
Quarterly information (ITR) at June 30, 2017
and report on review of quarterly information
(A free translation of the original in Portuguese)
Report on review of quarterly information
To the Board of Directors and Stockholders Direcional Engenharia S.A.
Introduction
We have reviewed the accompanying parent company and consolidated interim accounting information of Direcional Engenharia S.A. (the "Company"), included in the Quarterly Information Form (ITR) for the quarter ended June 30, 2017, comprising the balance sheet as at that date and the statements of operations and comprehensive income (loss) for the quarter and six-month period then ended, and the changes in equity and cash flows for the six-month period then ended, and a summary of significant accounting policies and other explanatory information.
Management is responsible for the preparation of the parent company interim accounting information in accordance with the accounting standard CPC 21, "Interim Financial Reporting", issued by the Brazilian Accounting Pronouncements Committee (CPC), and of the consolidated interim accounting information in accordance with International Accounting Standard (IAS) 34, "Interim Financial Reporting", issued by the International Accounting Standards Board (IASB), applicable to Real Estate Development Entities in Brazil, as approved by the CPC, the Brazilian Securities Commission (CVM) and the Brazilian Federal Accounting Council (CFC), as well as for the presentation of this information in accordance with the standards issued by the CVM, applicable to the preparation of the Quarterly Information (ITR). Our responsibility is to express a conclusion on this interim financial information based on our review.
Scope of review
We conducted our review in accordance with Brazilian and International Standards on Reviews of Interim Financial Information (NBC TR 2410, Review of Interim Financial Information Performed by the
Independent Auditor of the Entity, and ISRE 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity, respectively). A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Brazilian and International Standards on Auditing and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
Conclusion on the parent company interim information
Based on our review, nothing has come to our attention that causes us to believe that the accompanying parent company interim accounting information included in the Quarterly Information referred to above has not been prepared, in all material respects, in accordance with CPC 21 applicable to the preparation of the Quarterly Information, and presented in accordance with the standards issued by the CVM.
Conclusion on the consolidated interim information prepared in accordance with CPC 21 and IAS 34 - Interim Financial Reporting, applicable to Brazilian real estate development entities, as approved by the CPC, CVM and CFC
Based on our review, nothing has come to our attention that causes us to believe that the accompanying consolidated interim accounting information included in the quarterly information referred to above has not been prepared, in all material respects, in accordance with CPC 21 and IAS 34, applicable to real estate development entities in Brazil, as approved by the CPC, CVM and CFC, applicable to the preparation of the Quarterly Information (ITR), and presented in accordance with the standards issued by the CVM.
Emphasis of matter
As described in Note 2, the parent company and consolidated interim accounting information was prepared in accordance with accounting practices adopted in Brazil. The consolidated interim accounting information prepared in accordance with the IFRS applicable to real estate development entities also complies with the General Technical Communication (CTG) 04, issued by the CFC. This Communication addresses the recognition of revenue of the real estate development sector, as well as matters related to the meaning and application of the concept of continuous transfer of risks, rewards and ownership on sales of real estate properties, as detailed in Note 2.3. Our report on the review of the quarterly information is not qualified in respect of this matter.
Other matters
Statements of value added
We have also reviewed the parent company and consolidated statements of value added for the six-month period ended June 30, 2017. These statements are the responsibility of the Company's management, are required to be presented in accordance with standards issued by the CVM applicable to the preparation of Quarterly Information (ITR), and are considered supplementary information under IFRS, which do not require the presentation of the statement of value added. These statements have been submitted to the same review procedures described above and, based on our review, nothing has come to our attention that causes us to believe that they have not been prepared, in all material respects, in a manner consistent with the parent company and consolidated interim accounting information taken as a whole.
Belo Horizonte, August 10, 2017
PricewaterhouseCoopers Auditores Independentes CRC 2SP000160/O-5 "F" MG
Guilherme Campos e Silva
Contador CRC 1SP218254/O-1 “S” MG
The accompanying notes are an integral part of this quarterly financial information.
Parent company Consolidated
Note 6/30/2017 12/31/2016 6/30/2017 12/31/2016 Current assets:
Cash and cash equivalents 4 405,897 328,421 442,016 432,735
Financial investments - - - 175,148 134,816
Trade receivables - real estate development 5 2,517 5,440 699,286 772,265
Trade receivables - services rendered 5 - 188 113,308 177,714
Land to be developed 6.1 - - 367,521 174,006
Completed real estate units 6.2 1,480 790 153,132 135,205
Real estate units under construction 6.3 - - 506,725 496,606
Taxes recoverable - 17,116 17,612 22,656 22,424
Receivables for the sale of quotas - 32,000 34,102 32,000 34,102
Other receivables - 40,294 20,996 81,038 61,473
Related parties 7.1 72,183 61,876 65,276 76,926
Total current assets 571,487 469,425 2,658,106 2,518,272
Non-current assets:
Trade receivables - real estate development 5 18 22 126,384 138,364
Land to be developed 6.1 1,649 56,338 1,260,504 1,276,593
Available-for-sale land 6.4 - - 8,078 -
Judicial deposits - 5,975 3,678 14,121 11,595
Other receivables - 15,581 12,793 15,783 12,994
Related parties 7.1 - 8,089 - 8,089
Investments 8 1,396,278 1,452,165 45,137 50,593
Property and equipment 9 39,105 45,054 64,065 69,777
Intangible assets - 2,793 3,193 3,037 3,490
Total non-current assets 1,461,399 1,581,332 1,537,109 1,571,495
Total assets
2,032,886 2,050,757 4,195,215 4,089,767
The accompanying notes are an integral part of this quarterly financial information.
Parent company Consolidated
Note 6/30/2017 12/31/2016 6/30/2017 12/31/2016 Current liabilities:
Borrowings 10 135,013 135,807 358,954 467,295
Trade payables - 3,357 7,155 65,244 99,116
Salaries and social charges 11 9,801 8,759 31,195 26,831
Tax liabilities 12.1 472 813 19,295 23,248
Current income tax and social contribution payable 12.2 - - 906 1,873
Deferred income tax and social contribution payable 12.2 - - 13,772 15,419
Real estate commitments payable 13 - - 46,238 55,786
Advances from customers 14 - - 8,480 5,869
Other payables 15 36,012 39,052 44,591 44,706
Related parties 7.1 24,227 34,977 14,108 13,133
Total current liabilities 208,882 226,563 602,783 753,276
Non-current liabilities:
Borrowings 10 279,907 155,093 619,369 439,565
Trade payables - - - 7,866 7,866
Provision for warranties 16.1 - 540 30,135 43,065
Tax liabilities 12.1 - - 2,676 2,927
Deferred income tax and social contribution payable 12.2 - - 2,522 2,740
Real estate commitments payable 13 - 52,273 739,754 558,585
Advances from customers 14 - 2,416 446,080 472,326
Provision for tax, labor and civil risks 16.2 723 509 35,703 35,999
Other payables 15 - - 26,000 26,000
Related parties 7.1 - 19,180 - -
Total non-current liabilities 280,630 230,011 1,910,105 1,589,073
Equity:
Share capital 17.1 752,982 752,982 752,982 752,982
Capital reserves 17.3 207,077 207,595 207,077 207,595
Stock options granted - 4,622 2,720 4,622 2,720
Carrying value adjustment - (21,180) (20,976) (21,180) (20,976)
Treasury shares (40,993) (41,511) (40,993) (41,511)
Revenue reserves 17.4 640,866 693,373 640,866 693,373
1,543,374 1,594,183 1,543,374 1,594,183
Non-controlling interests - - - 138,953 153,235
1,543,374 1,594,183 1,682,327 1,747,418
Total liabilities and equity 2,032,886 2,050,757 4,195,215 4,089,767
The accompanying notes are an integral part of this quarterly financial information.
Parent company Consolidated
Note 6/30/2017 6/30/2016 6/30/2017 6/30/2016
Net revenue 18.1 2,055 2,637 381,035 788,939
Cost of real estate sold and services rendered 18.2 (170) (12) (343,051) (632,283)
Gross profit
1,885 2,625 37,984 156,656
Operating income (expenses):
General and administrative expenses 18.3 (48,761) (54,591) (55,044) (55,340)
Selling expenses 18.3 (1,071) (1,711) (25,348) (26,103)
Equity in results of investees 8 (1,912) 108,972 (982) (1,301)
Other operating income (expenses) - (1,501) (1,060) (3,205) (5,315)
(53,245) 51,610 (84,579) (88,059)
Finance income and costs
Finance costs 19 (17,548) (21,129) (19,800) (24,582)
Finance income 19 16,401 18,727 25,866 31,585
(1,147) (2,402) 6,066 7,003
Profit (loss) before taxation
(52,507) 51,833 (40,529) 75,600
Income tax and social contribution 20 - - (7,428) (12,034)
Profit (loss) for the period
(52,507) 51,833 (47,957) 63,566
Profit (loss) attributable to:
Non-controlling interests in Special Partnerships (SCPs)
and Special Purpose Entities (SPEs) - - - (4,550) (11,733)
Profit (loss) attributable to:
Direcional Engenharia S.A.
(52,507) 51,833 (52,507) 51,833
Earnings (loss) per share
Basic 17.5 (0.36) 0.35
Diluted 17.5 (0.36) 0.35
The accompanying notes are an integral part of this quarterly financial information.
Parent company Consolidated 6/30/2017 6/30/2016 6/30/2017 6/30/2016
Profit (loss) for the period (52,507) 51,833 (47,957) 63,566
Total comprehensive income (loss) for the period (52,507) 51,833 (47,957) 63,566
Attributable to:
Owners of the parent
(52,507) 51,833 Non-controlling interests
4,550 11,733
(47,957) 63,566
The accompanying notes are an integral part of this quarterly financial information.
Attributable to owners of the parent
Capital reserves Revenue reserves
Note
Share capital
Treasury shares
Issue/
disposal of shares
Stock options granted
Carrying value
adjustment Legal
Profit retention
For investment
Retained earnings (accumulated deficit)
Equity - Parent company
Non-controlling interests
Equity - Consolidated
At December 31, 2015 752,982 (41,791) 207,832 2,151 (20,868) 25,345 316,026 403,864 - 1,645,541 131,944 1,777,485
Options granted 17.3 - - - 323 - - - - - 323 - 323
Capital decrease by non-controlling
interests 17.6 - - - - - - - - - - (6,513)
(6,513)
Profit for the period - - - - - - - - - 51,833 51,833 11,733 63,566
Sale of treasury shares 17.2 - 209 (166) - - - - - - 43 - 43
At June 30, 2016 752,982 (41,582) 207,666 2,474 (20,868) 25,345 316,026 403,864 51,833 1,697,740 137,164 1,834,904
At December 31, 2016 752,982 (41,511) 207,595 2,720 (20,976) 25,345 264,164 403,864 - 1,594,183 153,235 1,747,418
Options granted 17.3 - - - 1,902 - - - - - 1,902 - 1,902
Capital decrease by non-controlling
interests 17.6 - - - - - - - - - - (18,832)
(18,832)
Loss for the period - - - - - - - - - (52,507) (52,507) 4,550 (47,957)
Sale of treasury shares 17.2 - 518 (518) - - - - - - - - -
Transactions with non-controlling
interests 17.6 - - - - (204) - - - - (204) -
(204)
At June 30, 2017 752,982 (40,993) 207,077 4,622 (21,180) 25,345 264,164 403,864 (52,507) 1,543,374 138,953 1,682,327
The accompanying notes are an integral part of this quarterly financial information.
Parent company Consolidated
6/30/2017 6/30/2016 6/30/2017 6/30/2016
Operating activities
Profit (loss) before income tax and social contribution (52,507) 51,833 (40,529) 75,600
Adjustments to reconcile profit (loss) with cash
from operations:
Depreciation and amortization 4,564 4,732 12,255 14,366
Equity in the results of investees 1,912 (108,972) 982 1,301
Provision for warranties (540) 1 (12,930) 5,865
Interest on borrowings 11,691 18,851 37,668 49,252
Provision for tax, labor and civil risks 214 (1,722) (296) (2,162)
Income from barter transactions - - 1,414 (6,040)
Taxes - - (1,881) (1,540)
Adjustment to present value on trade receivables - - (2,592) (665)
Provision for stock option plan 1,902 323 1,902 323
Changes in assets
Trade receivables 3,115 (1,586) 151,957 44,816
Inventories (690) 43,480 (22,743) 5,689
Sundry credits (22,281) (10,669) (22,778) 11,363
Related parties 2,718 (2,645) 19,739 (4,684)
Taxes recoverable 496 1,963 (232) 2,347
Changes in liabilities
Trade payables (6,759) (2,766) (38,550) 2,535
Salaries and social charges 1,042 3,891 4,364 17,410
Tax liabilities (341) (411) (3,329) (1,277)
Real estate commitments payable - (43,480) (35,949) (63,328)
Advances from customers - - (2,990) (974)
Trade payables (3,040) 7,312 (115) 3,557
Related parties (29,930) 11,321 975 (3,355)
Cash provided by (used in) operating activities (88,434) (28,544) 46,342 150,399
Income tax and social contribution paid - - (9,254) (12,802)
Net cash provided by (used in) operating activities (88,434) (28,544) 37,088 137,597
Cash flow from investing activities
Increase in investments (SPCs and SPEs) (59,126) (74,854) 209 (17,577)
Dividends received 113,101 223,156 4,265 4,188
Purchases of property and equipment (138) 973 (2,015) (87)
Additions to intangible assets (52) (622) (63) (654)
Financial investments - - (40,332) (87,964)
Net cash provided by (used in) investing activities 53,785 148,653 (37,936) (102,094)
Cash flows from financing activities
Transactions with non-controlling interests (204) - (204) -
Dividends paid - - - (46)
New borrowings 200,805 154,570 279,785 301,488
Repayment of borrowings (69,926) (75,933) (203,478) (209,969)
Interest paid (18,550) (20,695) (47,142) (47,545)
Capital increase - non-controlling stockholders - - (18,832) (6,513)
Net cash provided by financing activities 112,125 57,942 10,129 37,415
Increase in cash and cash equivalents 77,476 178,051 9,281 72,918
Cash and cash equivalents
At the beginning of the period 328,421 244,029 432,735 436,624
At the end of the period 405,897 422,080 442,016 509,542
The accompanying notes are an integral part of this quarterly financial information.
Parent company Consolidated
6/30/2017 6/30/2016 6/30/2017 6/30/2016
Revenue
Real estate sold and services rendered 2,420 3,890 407,156 843,655
Other operating expenses (1,501) (1,060) (3,205) (5,315)
919 2,830 403,951 838,340
Inputs acquired from third parties
Raw materials used (1,638) (530) (276,808) (443,180)
Materials, electricity, outsourced services and other operating expenses
(6,830) (7,688) (28,269) (7,884)
Other (10,498) (8,435) (10,216) (29,455)
(18,966) (16,653) (315,293) (480,519)
Gross value added (18,047) (13,823) 88,658 357,821
Depreciation and amortization, net (4,564) (4,732) (12,255) (14,366)
Net value added generated by the Company
(22,611) (18,555) 76,403 343,455
Value added received through transfer
Equity in the results of investees (1,912) 108,972 (982) (1,301)
Finance income 16,401 18,727 25,866 31,585
14,489 127,699 24,884 30,284
Total value added to distribute
(8,122) 109,144 101,287 373,739
Distribution of value added
Personnel 26,472 34,929 69,918 190,582
Taxes and contributions 365 1,253 33,549 66,750
Remuneration of third-party capital 17,548 21,129 45,777 52,841 Profits reinvested/(loss) for the period (52,507) 51,833 (52,507) 51,833 Profit attributed to non-controlling interests - - 4,550 11,733
(8,122)
109,144
101,287
373,739
Notes to the quarterly information at June 30, 2017
All amounts in thousands of reais unless otherwise stated 1 Operations
Direcional Engenharia S.A. ("Direcional" or the "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 35 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 August 10, 2017.
2 Summary of significant accounting practices and policies
The quarterly information was prepared in accordance with the Technical Pronouncement CPC 21 (R1), Interim Financial Reporting, of the Brazilian Accounting Pronouncements Committee (CPC), and International Accounting Standard (IAS) 34 - Interim Financial Reporting, issued by the International Accounting Standards Board (IASB), and is being presented in accordance with the standards issued by the Brazilian Securities Commission (CVM), applicable to the preparation of the Quarterly Information (ITR).
This quarterly information was prepared according to the principles, practices and criteria adopted in the preparation of the annual financial statements at December 31, 2016. Accordingly, this quarterly
information should be read together with the aforementioned financial statements, which were approved by the Company's Board of Directors on March 20, 2017 and filed on the same date.
2.1 Basis of preparation
The 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 interim quarterly information
The consolidated quarterly information was prepared in accordance with the accounting practices adopted in Brazil, pursuant to Technical Pronouncement CPC 21 (R1), Interim Financial Reporting, issued by the Brazilian Accounting Pronouncements Committee (CPC), and International Accounting Standard (IAS) 34, Interim Financial Reporting, issued by the International Accounting Standards Board (IASB) ("IFRS"), including Guidance OCPC 04, Application of Technical Interpretation ICPC 02 to Brazilian Real Estate Development Entities, issued by the CPC, as approved by the Brazilian Securities Commission (CVM) and the Brazilian Federal Accounting Council (CFC), and is identified as
"Consolidated".
The presentation of the parent company and consolidated statements of value added is required by the Brazilian corporate legislation and the accounting practices adopted in Brazil 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 consolidated quarterly information comprises the quarterly information of the parent company and of its subsidiaries, as mentioned in Note 8 (jointly the "Group").
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 interim quarterly information
The parent company quarterly information has been prepared in accordance with accounting practices adopted in Brazil, pursuant to Technical Pronouncement CPC 21 (R1), Interim Financial Reporting. It is referred to as the "parent company" quarterly information, and is disclosed together with the consolidated quarterly information.
In the parent company interim quarterly information, subsidiaries 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. The same adjustments are made in the parent company and consolidated financial statements to reach the same profit or loss and equity attributable to the owners of the parent entity.
For the purposes of recognizing equity in the result of operations, the financial statements of the 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 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.
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- by- acquisition 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".
(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 operations 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 operations.
2.3 Revenue recognition
Revenue is shown net of value-added tax, returns, rebates and discounts and, in the consolidated financial statements, after eliminating sales within the Group. The Group recognizes revenue when the amount of revenue can be reliably measured, when it is probable that future economic benefits will result from the transaction and when specific criteria have been met for each of the Group's activities as described below.
(a) Completed real estate units
Revenue from credit sales of completed units is recognized at the time of the delivery, when the most significant risks and rewards of ownership of the real estate units sold are transferred, regardless of the term of receipt of the contractual amount.
Fixed rate interest and monetary variations are recognized on a pro rata temporis basis in the results on an accrual basis, under "Finance income", irrespective of their receipt.
(b) Real estate units under construction
For sales of units under construction, the Company has adopted the procedures and standards
established by CPC 30, Revenue, in relation to the recognition of revenue from the sale of property with the continuous transfer of the most significant risks and rewards of ownership. The classification of the contracts for the sale of developments, for purposes of the application of this standard, was based on Guideline OCPC 04, which determines the application of Technical Interpretation ICPC 02 to Brazilian real estate development entities. Based on these CPC standards and taking into consideration the applicable accounting procedures established by Guideline OCPC 01 (R1), the following procedures are adopted for the recognition of revenue from sales of units under construction:
The costs incurred on units sold, including the cost of land, are fully recognized in the statement of operations.
The percentage of the costs incurred on units sold, including land, in relation to the total estimated cost (POC) is calculated, and this percentage is applied to the fair value of the revenue from units sold (including the fair value of barters made for land), adjusted in accordance with the terms of the sales contracts, which establish the monetary restatement of the amounts receivable according to the National Civil Construction Index (INCC), thereby determining the amount of revenue to be recognized.
The amounts of sales revenue calculated, including the monetary restatement of trade receivables, net of installments already received (including the fair value of barters made for land), are recorded as trade receivables or advances from customers, as applicable.
The fair value of revenue from units sold is calculated at present value based on the higher of the average rate for the Company's borrowings, less inflation effects, and the rate of the National Treasury Note series B (NTN-B), as from the date the contract is signed up to the date scheduled for the delivery of the unit. As from the real estate delivery date, receivables are subject to interest of 12% per year, plus monetary restatement based on the increase in the General Market Price Index (IGP-M). The interest rate for the remuneration of government bonds indexed to the Amplified Consumer Price Index (IPCA) is compatible with the nature, terms and risks of similar transactions under market conditions.
Subsequently, as time elapses, interest is incorporated into the new fair value for the calculation of the revenue to be recognized, to which the POC is applied.
Interest and financial charges on the financing of construction and land purchases are charged to the cost of the development and recognized in the statement of operations according to the units sold, not having an impact on the determination of the percentage of cost incurred in relation to total cost (POC).
(c) Interest income
Interest income is recognized on the accrual basis, using the effective interest rate method. When a loan and receivable instrument is impaired, the Group reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at the original effective interest rate of the instrument.
Subsequently, as time elapses, interest is incorporated into loans and receivables against interest income. This interest income is calculated at the same effective interest rate used to determine the recoverable amount, that is, the original rate of the instrument.
3 Critical accounting estimates and judgments
Accounting estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.
3.1 Critical accounting estimates and assumptions
Based on assumptions, the Group makes estimates concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below:
(a) Recognition of revenue from real estate units under construction
For the purposes of applying the revenue recognition accounting policy, management follows Guidance OCPC 04 on the application of Technical Interpretation ICPC 02 to Brazilian real estate development entities, issued by the CPC and approved by the CVM and the Brazilian Federal Accounting Council (CFC).
The Company and its subsidiaries use the Percentage of Completion (POC) method to account for their contracts to sell units of real estate developments and to render services. The use of the POC method requires the Company 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, in order to establish a proportion of the costs already incurred in relation to the total estimated costs. Revenue is calculated by multiplying this percentage (POC) by the fair value of the revenue from already-contracted sales. Accordingly, revenue is continuously recognized throughout the progress of the real estate development project. This determination requires the use of significant judgment by management.
If OCPC 04 had not been issued and the conclusion regarding the application of ICPC 02 had been that the most significant risks and rewards of ownership of real estate units are not continuously transferred to the buyers during the construction of the real estate development, the major transitory impact on the financial statements would have been a decrease in equity and an adjustment to the profit or loss for the period, since the revenue and the related costs and taxes would be recognized on the delivery of the completed units.
(b) Estimated costs
Total estimated costs, comprising costs incurred and expected to be incurred for the completion of the construction work, are periodically reviewed during the course of the project, and the effect of these reviews of the estimates are reflected in the results of the Company and its subsidiaries, as described in Note 3.1. (a), Revenue recognition, mentioned above.
(c) Provisions for contingencies
The Company recognizes provisions for tax, civil and labor contingencies. The assessment of the likelihood of loss includes the evaluation of available evidence, the hierarchy of laws, available case law, recent court decisions and their significance in the legal system, as well as the opinion of external legal advisors. Provisions are reviewed and adjusted to take into consideration changes in circumstances, such as the applicable statutes of limitations, the conclusions of tax audits or additional exposure identified based on new matters or court decisions. The Company and its subsidiaries are periodically inspected by different authorities, including tax, labor, social security, environmental and sanitary surveillance
agencies. It is not possible to ensure that these authorities will not issue assessments against the Company and its subsidiaries or that these assessments will not be converted into administrative
proceedings and, subsequently, into lawsuits, nor is it possible to conclude on the final outcome of either the administrative proceedings or lawsuits.
4 Cash and cash equivalents
Parent company Consolidated
Description 6/30/2017 12/31/2016 6/30/2017 12/31/2016
Cash and banks 801 411 86,017 51,578
Cash equivalents - financial investments 405,096 328,010 355,999 381,157
Total 405,897 328,421 442,016 432,735
The Company's investments are made through investment funds or in transactions performed directly with leading financial institutions. The Company's policy is to only invest resources in funds or directly in conservative, highly liquid financial instruments. These financial instruments have yields linked to the Interbank Deposit Certificate (CDI) rate, ranging from 86% to 107% of CDI, according to the nature and timing of each instrument. At June 30, 2017, the average annual gross remuneration on the financial instruments of the Company in the last twelve months corresponded to 100.17% of CDI.
5 Trade receivables
Parent company Consolidated
Trade receivables - real estate development (a) 6/30/2017 12/31/2016 6/30/2017 12/31/2016
Completed units 2,184 5,462 270,924 324,277
Incomplete units - - 561,456 595,139
Trade receivables - land sold 351 - 1,456 1,966 (-) Adjustment to present value - - (8,166) (10,753)
2,535 5,462 825,670 910,629
Trade receivables - services rendered
Management of construction work - 188 - 188 Real estate intermediation - - 1,322 982 Construction contracts - - 111,220 175,796 Other services - - 766 748
- 188 113,308 177,714
2,535 5,650 938,978 1,088,343
Current portion 2,517 5,628 812,594 949,979
Non-current portion 18 22 126,384 138,364
(a) Because of the revenue recognition criteria, the balance of trade receivables from incomplete units sold is not fully reflected in the financial statements, since its recording is limited to the portion of revenue recognized, net of installments already received. Note 18.4 presents the balances receivable not recognized in the financial statements.
The consolidated balance of trade receivables at June 30, 2017 and December 31, 2016 is presented net of adjustments to present value amounting to R$ 8,166 and R$ 10,753, respectively. The Company calculated the net present value of trade receivables from units not completed and accounted for the respective amount under the criteria described in CPC 12. At June 30, 2017 and December 31, 2016, the average discount rate of 5.73% was applied, as presented in the National Treasury Note (NTN-B)
coupon.
Trade receivables from real estate sales are restated according to the National Civil Construction Index (INCC) variation until the occupancy permit has been registered. After the registration of the occupancy permit, these amounts are restated at the General Market Price Index (IGP-M) rate and bear interest of 12% p.a.
At June 30, 2017 and December 31, 2016, the Company recorded no estimate for losses in its receivables from sales of real estate units, because the recoverability of the receivables was fully
guaranteed since sales contracts for real estate units establish the termination of a contract in the case of default on payments, after which the Company has the right to resell the real estate unit.
At June 30, 2017 and December 31, 2016, the Company considered that the trade receivables from sales of real estate units are completely realizable and, therefore, recorded no provisions for sales cancelled by the customers.
The composition of trade receivables from real estate development and services rendered at June 30, 2017 and December 31, 2016, which are recorded in current assets in the financial statements, is as follows:
Consolidated 6/30/2017 12/31/2016 Not yet due
1Q17 - 534,130
2Q17 - 172,160
3Q17 515,058 86,922
4Q17 170,026 94,892
1Q18 33,692 -
2Q18 15,982 -
734,758 888,104
Overdue
For up to 30 days 13,407 12,183
From 31 to 60 days 2,382 3,328
From 61 to 90 days 2,898 3,676
From 91 to 120 days 8,679 3,313
From 121 to 150 days 4,241 2,241
From 151 to 180 days 9,326 2,856
More than 180 days 36,903 34,278
77,836 61,875 812,594 949,979
The maturity of amounts not yet due, recorded in non-current assets at June 30, 2017 and December 31, 2016, is scheduled as follows:
Consolidated 6/30/2017 12/31/2016
Up to December 2018 29,211 54,852
Up to December 2019 33,973 24,059
Up to December 2020 16,181 14,992
After December 2020 47,019 44,461
126,384 138,364
