Direcional Engenharia S.A.
Financial statements in accordance with
accounting practices adopted in Brazil and IFRS at December 31, 2013
and independent auditor's report
2
Direcional Engenharia S.A.
We have audited the accompanying financial statements of Direcional Engenharia S.A. (the "Company"), which comprise the balance sheet as at December 31, 2013 and the statements of income, comprehensive income, changes in equity and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information.
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, 2013 and the consolidated statements of income, comprehensive income, changes in equity and 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 parent company and
consolidated financial statements in accordance with accounting practices adopted in Brazil, and for the consolidated financial statements in accordance with the International Financial Reporting Standards (IFRS) applicable to 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), 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 conducted 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.
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 entity's internal control. An audit also includes evaluating the appropriateness of the 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 audit opinion.
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 at December 31, 2013, and its financial performance 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 the International Financial Reporting Standards (IFRS) applicable to 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)
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 at December 31, 2013, and their consolidated financial performance and cash flows for the year then ended, in accordance with the International Financial Reporting Standards (IFRS) applicable to 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).
Emphasis of matter
As described in Note 2.1, the parent company and consolidated financial statements have been prepared in accordance with accounting practices adopted in Brazil. The consolidated financial statements prepared in accordance with the IFRS applicable to Brazilian 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 2.16. Our opinion is not qualified in respect of this matter.
We have also audited the parent company and consolidated statements of value added for the year ended December 31, 2013, which are the responsibility of the Company's management. The presentation of these statements is required by Brazilian corporate legislation for listed companies, but they are considered supplementary information for IFRS. 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.
Audit of prior-year amounts
The original financial statements of the Company for the year ended December 31, 2012, prepared before the consideration of the adjustments described in Note 2.18 were audited by another firm of auditors whose report, dated March 25, 2013, expressed an unmodified opinion on those statements.
As part of our audit of the financial statements for the year ended December 31, 2013, we also have audited the adjustments described in Note 2.18, that were made to restate the financial statements for the year ended December 31, 2012, presented for comparison purposes. In our opinion, these adjustments are appropriate and were correctly recorded. We were not engaged to audit, review or apply any other procedures to the Company's financial statements for 2012 and, therefore, we do not express any opinion or any form of assurance on the financial statements for that year taken as a whole.
Belo Horizonte, March 17, 2014
PricewaterhouseCoopers Guilherme Campos e Silva
Auditores Independentes Contador CRC 1SP218254/O-1 “S” MG
CRC 2SP000160/O-5 "F" MG
Parent company Consolidated Notes 12/31/2013 12/31/2012 1/1/2012 12/31/2013 12/31/2012 1/1/2012
Restated Restated Restated Restated
Current assets
Cash and cash equivalents 4 189,469 124,158 122,940 489,776 374,580 362,255
Financial investments - - - - 52,775 75,313 -
Trade receivables - real estate development 5 1,425 1,686 4,318 1,203,136 1,236,634 883,596
Trade receivables - services rendered 5 - - - 188,681 88,796 112,139
Land to be developed 6.1 - - - 87,086 380,833 254,279
Completed real estate units 6.2 1,862 727 615 89,608 97,438 46,043
Real estate units under construction 6.3 - - - 219,425 201,930 220,388
Related parties 7.1 24,192 39,063 47,912 37,046 44,673 37,085
Taxes recoverable - 15,066 12,803 10,305 17,315 14,122 11,097
Other credits - 16,718 13,854 13,107 56,920 51,994 51,012
Total current assets 248,732 192,291 199,197 2,441,768 2,566,313 1,977,894
Non-current assets
Trade receivables - real estate development 5 7 11 95 180,454 138,458 199,620
Land to be developed 6.1 3,513 1,865 29,989 615,178 259,356 256,112
Related parties 7.1 20,487 65,801 34,756 20,489 65,801 34,756
Other credits - 9,046 8,785 8,768 35,880 65,528 15,328
Investments 8 1,578,422 1,325,508 1,014,960 37,154 24,730 34,468
Property and equipment 9 77,350 36,195 24,178 100,908 59,340 46,604
Intangible assets - 1,448 2,109 2,003 1,825 2,348 2,270
Total non-current assets 1,690,273 1,440,274 1,114,749 991,888 615,561 589,158
Total assets 1,939,005 1,632,565 1,313,946 3,433,656 3,181,874 2,567,052
The accompanying notes are an integral part of this quarterly financial information.
Parent company Consolidated
Note 12/31/2013 12/31/2012 1/1/2012 12/31/2013 12/31/2012 1/1/2012
Restated Restated Restated Restated
Current liabilities
Loans and financing 10 78,228 62,990 4,843 308,165 362,532 281,478
Trade payables - 4,691 1,351 1,057 72,992 30,862 43,666
Labor liabilities 11 6,380 10,211 9,679 42,201 37,962 35,523
Tax obligations 12 329 163 516 59,421 56,556 61,467
Payables for properties 13 - - - 32,531 31,362 34,448
Advances from customers 14 - - - 68,074 96,873 75,878
Proposed dividends 17.3.3 57,051 56,261 41,614 57,051 56,900 42,346
Other payables 15 38,681 25,079 23,123 92,235 81,658 96,183
Related parties 7.1 15,145 51,345 29,490 7,929 6,629 11,281
Total current liabilities 200,505 207,400 110,322 740,599 761,334 682,270
Non-current liabilities
Long-term assets
Loans and financing 10 237,852 75,049 28,967 582,135 430,633 200,014
Provision for warranties 16.1 - - 56 21,537 15,823 13,921
Tax obligations 12 - - - 7,686 5,927 14,225
Payables for properties 13 - - - 204,707 132,770 117,066
Advances from customers 14 - - - 260,932 290,594 203,725
Provision for tax, labor and civil contingencies 16.2 1,640 1,738 798 14,629 9,100 5,091
Other payables 15 - 20,386 17,022 - 20,386 17,022
Related parties 7.1 26,180 - - - - -
Total non-current liabilities 265,672 97,173 46,843 1,091,626 905,233 571,064
Equity 17
Share capital 702,982 497,158 496,686 702,982 497,158 496,686
Capital reserves 224,106 444,201 241,165 224,106 444,201 241,165
Stock option grant 5,005 1,556 23,433 5,005 1,556 23,433
Treasury shares (28,137) (12,659) (15,846) (28,137) (12,659) (15,846)
Revenue reserves 568,872 397,726 411,343 568,872 397,726 411,343
1,472,828 1,327,992 1,156,781 1,472,828 1,327,992 1,156,781
Interest in SCPs and SPEs - - - 128,603 187,315 156,937
1,472,828 1,327,992 1,156,781 1,601,431 1,515,307 1,313,718
Total liabilities and equity 1,939,005 1,632,565 1,313,946 3,433,656 3,181,874 2,567,052
The accompanying notes are an integral part of this quarterly financial information.
Parent company Consolidated
Notes 2013 2012 2013 2012
Restated Restated
Net operating income 18.1 3,367 2,493 1,743,929 1,448,779
Cost of real estate sold and services rendered 18.2 (413) 199 (1,340,379) (1,049,974)
Gross profit 2,954 2,692 403,550 398,805
Operating income (expenses):
General and administrative expenses 18.3 (69,269) (89,454) (104,395) (97,640)
Selling expenses 18.3 (4,657) (7,799) (41,188) (40,329)
Equity with the earnings (losses) of subsidiaries 8 323,652 315,198 11,790 271
Other operating expenses - (14,665) (10,789) (11,036) (7,165)
235,061 207,156 (144,829) (144,863)
Finance result
Financial expenses 19 (23,912) (6,078) (31,111) (15,108)
Financial income 19 14,094 21,268 32,586 38,870
(9,818) 15,190 1,475 23,762
Profit before income and social contribution taxes 228,197 225,038 260,196 277,704
Income and social contribution taxes 20 - - (23,742) (20,237)
Profit for the year 228,197 225,038 236,454 257,467
Profit attributable to:
Non-controlling interest in SCPs and SPEs - - (8,257) (32,429)
Profit attributable to:
Direcional Engenharia S.A. 228,197 225,038 228,197 225,038
Earnings per share - R$
Basic 17.4 1.48 1.46
Diluted 17.4 1.46 1.41
The accompanying notes are an integral part of this quarterly financial information.
Parent company Consolidated
2013 2012 2013 2012
Restated Restated
Profit for the year 228,197 225,038 236,454 257,467
Total comprehensive income for the year 228,197 225,038 236,454 257,467
Profit attributable to
Owners of the parent 228,197 225,038
Non-controlling interests 8,257 32,429
236,454 257,467
The accompanying notes are an integral part of this quarterly financial information.
Attributable to owners of the parent
Capital reserves Revenue reserves
Notes
Capital stock
Treasury shares
Issue / disposal of shares
For capital increase
Stock options
granted Legal Retained
For investment
Accumulated profit
Equity - Parent Company
Non- controlling
interest
Equity - Consolidated
At January 1, 2012 496,686 (15,846) 241,165 - 23,433 25,345 329,643 56,355 - 1,156,781 75,701 1,232,483
Effects of changes in accounting policies 2.2.1 - - - - - - - - - - 81,236 81,235
Opening balance (restated) 496,686 (15,846) 241,165 - 23,433 25,345 329,643 56,355 - 1,156,781 156,937 1,313,718
Capital increase with public offering of shares 472 - - - - - - - - 472 - 472
Sale of treasury shares 17.2.3 - 3,187 (2,788) - - - - - - 399 - 399
Realization of equity instruments - - - - (23,433) - 23,433 - - - - -
Stock options granted and recognized - - - - 1,566 - - - - 1,566 - 1,566
Capital decrease by non-controlling stockholders - - - - - - - - - - (2,050) (2,050)
Profit for the year - - - - - - - - 225,038 225,038 32,428 257,466
Constitution of capital increase reserve - - - 205,824 - - (37,047) - (168,777) - - -
Complementary dividends - - - - - - (3) - (56,261) (56,265) - (56,265)
At December 31, 2012 497,158 (12,659) 238,377 205,824 1,566 25,345 316,026 56,355 - 1,327,992 187,315 1,515,307
Capital increase with capital reserves 205,824 - - (205,824) - - - - - - - -
Stock options granted and recognized - - - - 3,439 - - - - 3,439 - 3,439
Capital decrease by non-controlling stockholders - - - - - - - - - - (66,969) (66,969)
Profit for the year - - - - - - - - 228,197 228,197 8,257 236,454
Reserve for capital increase - - - - - - - 171,146 (171,146) - - -
Proposed dividends - - - - - - - - (57,051) (57,051) - (57,051)
Repurchase of shares - (24,673) - - - - - - - (24,673) - (24,673)
Sale of treasury shares 17.2.3 - 9,195 (4,278) - - - - - - 4,917 - 4,917
Transactions with non-controlling stockholders - - (9,993) - - - - - - (9,993) - (9,993)
At December 31, 2013 702,982 (28,137) 224,106 - 5,005 25,345 487,172 56,355 - 1,472,828 128,603 1,601,431
The accompanying notes are an integral part of this quarterly financial information.
Parent company Consolidated
2013 2012 2013 2012
Restated Restated
Operating activities
Profit before income and social contribution taxes 228,197 225,038 260,196 277,704
Adjustments to reconcile results with cash and cash equivalents
provided by operating activities
Depreciation and amortization 6,495 3,107 15,589 9,505
Equity in the earnings (losses) of subsidiaries (323,652) (315,198) (11,790) (271)
Provision for warranties - (56) 5,714 1,902
Interest on loans and financing 22,802 5,628 76,948 58,922
Provision for tax, labor and civil contingencies (98) 940 5,529 4,009
Income from barter transactions - - (61,866) (50,673)
Taxes - - 967 (5,533)
Present value adjustment - receivables - - (5,576) (4,026)
Provision for stock option plan 3,439 1,566 3,439 1,566
Reversal of provision - (1,674) - (1,649)
Provision for profit sharing 3,429 4,844 3,429 7,203
Non-controlling interest - - - -
Increase (decrease) in assets
Accounts receivables 265 4,391 (102,807) (262,858)
Inventories (2,783) 28,011 22,324 57,832
Sundry receivables (3,125) (763) 24,722 (51,182)
Related parties 60,185 (21,797) 52,939 (38,234)
Taxes recoverable (2,263) (2,498) (3,193) (3,025)
Prepaid expenses - - - -
(Decrease) increase in liabilities
Trade payables 3,340 295 42,130 (12,804)
Labor liabilities (7,260) (4,312) 810 (4,764)
Tax obligations 166 (353) 1,151 (9,540)
Payables for properties - - (32,098) (19,975)
Advances from customers - - 18,462 (29,437)
Trade payables (6,784) 5,319 (9,809) (11,161)
Related parties (10,020) 21,855 1,300 (4,652)
(27,667) (45,657) 308,510 (91,141)
Income and social contribution taxes paid - - (21,235) (18,373)
Net cash (used in) provided by operating activities (27,667) (45,657) 287,275 (109,514)
Cash flows from investing activities
Increase in investments (SPCs and SPEs) (35,973) (31,596) (2,777) 6,093
Increase in property and equipment (46,125) (14,736) (55,515) (22,241)
Increase in intangible assets (864) (494) (1,119) (78)
Financial investments - - 22,538 (75,313)
Dividends received 106,711 36,246 2,143 3,916
Net cash (used in) provided by investing activities 23,749 (10,580) (34,730) (87,623)
Cash flows from financing activities
Capital contribution, net of expenses - 472 - 472
Repurchase of shares - Treasury shares (19,756) - (19,756) -
Goodwill paid on acquisition of non-controlling interests (9,993) - (9,993) -
Dividends paid (56,261) (41,618) (56,900) (41,711)
New loans 241,090 128,108 614,211 616,078
Repayment of borrowings (63,048) (24,278) (515,164) (305,765)
Interest paid (22,803) (5,229) (82,778) (57,562)
Capital decrease by non-controlling stockholders - - (66,969) (2,050)
Net cash (used in) provided by financing activities 69,229 57,455 (137,349) 209,462
Increase in cash and cash equivalents 65,311 1,218 115,196 12,325
Cash and cash equivalents
At the beginning of the period 124,158 122,940 374,580 362,255
At the end of the period 189,469 124,158 489,776 374,580
Increase in cash and cash equivalents 65,311 1,218 115,196 12,325
The accompanying notes are an integral part of this quarterly financial information.
Parent company Consolidated
2013
2012 2013 2012
Restated
Restated
Revenue
Real estate sold and services rendered 3,968 3,749 1,791,682 1,481,678
Other income (14,665) (10,789) (11,036) (7,165)
Reversal of provision for impairment of trade receivables - - - -
(10,697) (7,040) 1,780,646 1,474,513
Inputs acquired from third parties
Raw materials used (1,392) (1,028) (1,004,633) (758,882)
Materials, electricity, outsourced services and other operating expenses (19,866) (20,573) (48,168) (48,183)
Other (14,086) (15,770) (22,144) (22,756)
(35,344) (37,371) (1,074,945) (829,821)
Gross value added (46,041) (44,411) 705,701 644,692
Depreciation and amortization, net (6,495) (2,996) (15,610) (8,771)
Net value added generated by the Company (52,536) (47,407) 690,091 635,921
Value added received through transfer
Equity in the results of investees 323,652 315,198 11,790 271
Finance income 14,094 21,268 32,586 38,870
337,746 336,466 44,376 39,141
Total value added to distribute 285,210 289,059 734,467 675,062
Distribution of value added
Personnel 32,500 56,687 395,407 349,351
Taxes, fees and contributions 601 1,256 71,495 53,136
Value distributed to providers of capital 23,912 6,078 31,111 15,108
Retained earnings 228,197 225,038 228,197 225,038
Profit attributed to non-controlling interest - - 8,257 32,429
285,210 289,059 734,467 675,062
All amounts in thousands of reais, unless otherwise indicated
1 General information
Direcional Engenharia S.A. ("Direcional" or the "Company") is a publicly-held Company organized under the Brazilian corporation laws. The shares of Direcional are traded on the São Paulo Futures, Commodities and Securities Exchange - BM&FBovespa S.A. (BM&FBovespa) under the ticker symbol DIRR3. The Company is domiciled in Brazil and headquartered at Rua Grão Pará, 466, Belo Horizonte, in the State of Minas Gerais.
Direcional is a real estate development and construction company engaged in developing large low- income-oriented projects, primarily focused on the Northern, Midwestern and Southeastern regions.
Over its 32 years' experience in developing and building low-income-oriented projects, the Company has established a verticalized structure and a standardized construction process, which has allowed the construction of large-scale projects.
The Company performs its development and construction activities through Special Partnerships (SCPs) and Special Purpose Entities (SPEs) in the normal course of business in order to enable the
establishment of partnerships, thereby permitting it to accompany projects individually, facilitate the obtaining of financing for production and improve financial and accounting control. Both its SCPs and its SPEs are exclusively engaged in the real estate sector and, in most cases, associated with a specific venture.
These financial statements were authorized during the Board of Directors' Meeting held on March 17, 2014.
2 Summary of significant accounting policies
The main accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to the periods presented, unless otherwise stated.
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 financial statements
The consolidated financial statements were prepared in accordance the accounting practices adopted in Brazil, pursuant to Technical Pronouncement CPC 26 (R1) - Presentation of Financial Statements and the International Accounting Standard (IAS) 1 Presentation of Financial Statements issued by the International Accounting Standards Board (IASB), including Guidance OCPC 04 on the application of
Technical Interpretation ICPC 02 to Brazilian Real Estate Development Entities, issued by the Brazilian Accounting Pronouncements Committee (CPC), approved by the Securities and Exchange Commission (CVM) and by the Federal Accounting Council (CFC).
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 financial statements comprise the financial statements of the parent company and of its subsidiaries and jointly-owned subsidiaries, as mentioned in Note 8 (jointly, "the Group").
The Company performs its development and construction activities through Special Partnerships (SCPs) and Special Purpose Entities (SPEs), whose operations are 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 and are disclosed together with the consolidated financial statements.
In the parent company financial statements, subsidiaries and corporate or incorporate joint ventures are recorded based on the equity accounting method, 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 results, the financial statements of the subsidiaries and associates are prepared for the same period as that of the Company and, when necessary, adjustments are made to their accounting policies so that they are in accordance with those adopted by the Company.
The share in the results of the subsidiaries and associates is recorded in the parent company's statement of income as equity in the results of subsidiaries, 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 investment 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 income.
In the case of Direcional Engenharia S.A., the accounting practices adopted in Brazil applicable to the parent company financial statements differ from IFRS applicable to separate financial statements only in relation to the measurement of investments in subsidiaries, jointly-controlled subsidiaries and associates based on the equity accounting method, instead of cost or fair value in accordance with IFRS.
(c) Changes in accounting policies and disclosures
The following pronouncements have been adopted by the Group for the first time in the financial year beginning on January 1, 2013 and have material impacts on the Group:
(i) CPC 19 (R2)/IFRS 11, "Joint arrangements" focuses on the joint rights and obligations of the parties to the arrangement rather than its legal form. There are two types of joint arrangements: joint operations and joint ventures. Joint operations arise where the investors have rights to the assets and obligations for the liabilities related to the arrangement. A joint operator accounts for its related assets, liabilities, revenue and expenses. Joint ventures arise where the investors have rights to the net assets of the arrangement, and are accounted for under the equity method. Proportional consolidation is no longer allowed. See Note 2.23 for the impact of adoption on the financial statements.
(ii) CPC 36 (R3)/IFRS 10, "Consolidated financial statements" is based on the identification of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company. See Note 2.23 for the impact of the changes on the financial statements.
(iii) CPC 40 (R1)/IFRS 7, "Financial instruments: Disclosures". This amendment includes new disclosure requirements on asset and liability offsetting.
(iv) CPC 45/IFRS 12, "Disclosures of interests in other entities" includes the disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, structured entities and other off balance sheet vehicles.
(v) CPC 46/IFRS 13, "Fair value measurement" aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements.
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) 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. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are 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, liabilities assumed by the Company and 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 at the acquisition date. The Group recognizes any non-controlling interest in the acquiree either at fair value or at the non-controlling interest's proportionate share of the acquiree's net assets.
Non-controlling interests are determined on each acquisition.
The excess of: (i) consideration transferred; (ii) the amount of non-controlling interest on 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 consideration transferred, non-controlling interest recognized and previously held interest measured is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the statement of income for the year (Note 2.11).
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 Company ceases to have control, any retained interest in the entity is measured to
its fair value, with the change in carrying amount recognized in the results. The fair value is the carrying amount for the purposes of subsequently accounting for the retained interest as 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. See Note 2.10 for the impairment of non- financial assets, including goodwill.
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, the segregated financial information of which is available and regularly reviewed by the chief operating decision maker on funds to be allocated to the segment and for the evaluation of 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".
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 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 income.
2.5 Cash and cash equivalents
Cash and cash equivalents include cash on hand, bank deposits and other short-term highly liquid investments maturing in up to three months, with immaterial risk of change in value. The balance is presented net of bank overdrafts in the statement of cash flows. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet.
2.6 Financial assets 2.6.1 Classification
The Company classifies its financial assets, upon initial recognition, according to the following categories: at fair value through profit or loss, loans and receivables, available-for-sale and held to maturity. The classification depends on the purpose for which the financial assets have been acquired.
At December 31, 2013 and 2012, the Company did not have financial assets classified as available for sale and held to maturity.
(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 realization in the short-term. All financial assets in this category are classified as current assets.
(b) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments
that are not quoted in an active market. They are included in current assets, except for 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",
"Trade receivables from services provided" and "Cash and cash equivalents", except financial investment.
