Direcional Engenharia S.A.
Financial statements in accordance with
accounting practices adopted in Brazil and IFRS at December 31, 2015
and independent auditor's report
2
Independent auditor's report
To the Board of Directors and Stockholders Direcional Engenharia S.A.
We have audited the accompanying financial statements of Direcional Engenharia S.A. ("Parent company"), which comprise the balance sheet as at December 31, 2015 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, 2015 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 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.
error. In making those risk assessments, the auditor considers internal control relevant to the entity'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 entity'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 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, 2015, and its financial performance and cash flows for the year then ended, in accordance with accounting practices adopted in Brazil.
Opinion on the consolidated financial statements
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, 2015, 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 consolidated financial statements prepared in accordance with the IFRS applicable to Brazilian real estate development entities also comply 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 as a result of this matter.
Other matters
Supplementary information - statements of value added
We have also audited the parent company and consolidated statements of value added for the year ended December 31, 2015, 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 purposes. 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.
Belo Horizonte, March 14, 2016
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 these financial statements.
Parent company Consolidated
Note
December 31, 2015
December 31, 2014
December 31, 2015
December 31, 2014
Current assets:
Cash and cash equivalents 4 244,029 294,969 436,624 636,110
Financial investments - - 62,541 29,099
Trade receivables - real estate development 5 3,741 5,300 788,169 861,477
Trade receivables - services rendered 5 483 792 334,219 311,019
Land to be developed 6.1 - - 169,224 335,849
Completed real estate units 6.2 - 127 119,951 125,213
Real estate units under construction 6.3 - - 367,115 273,949
Related parties 7.1 40,230 23,566 50,104 41,946
Taxes recoverable 21,598 19,910 26,814 23,256
Other receivables 22,754 22,395 80,102 82,731
Total current assets 332,835 367,059 2,434,863 2,720,652
Non-current assets:
Trade receivables - real estate development 5 164 47,024 152,137 240,735
Land to be developed 6.1 68,415 1,649 1,134,083 805,869
Related parties 7.1 13,217 15,909 13,249 15,910
Other receivables 3,521 3,770 25,529 23,113
Investments 8 1,544,156 1,579,184 37,783 36,839
Property and equipment 9 64,948 84,120 87,086 109,968
Intangible assets 2,394 1,983 2,722 2,434
Total non-current assets 1,696,815 1,733,639 1,452,589 1,234,868
Total assets 2,029,650 2,100,698 3,887,452 3,955,520
Balance sheet
All amounts in thousands of reais (continued)
The accompanying notes are an integral part of these financial statements.
Parent company Consolidated
Note
December 31, 2015
December 31, 2014
December 31, 2015
December 31, 2014
Current liabilities:
Borrowings 10 138,210 137,046 371,584 457,772
Trade payables 6,778 9,974 107,802 129,615
Labor liabilities 11 8,463 8,890 43,956 42,230
Tax liabilities 12 1,089 967 45,756 51,021
Real estate commitments payable 13 - - 36,266 43,440
Advances from customers 14 7,748 - 28,742 54,348
Proposed dividends 17.3.3 - 15,187 46 15,490
Other payables 15 14,202 15,012 25,682 55,831
Related parties 7.1 23,239 33,012 8,549 9,163
Total current liabilities 199,729 220,088 668,383 858,910
Non-current liabilities:
Borrowings 10 102,806 242,405 464,867 490,625
Trade payables - - 7,866
Provision for warranties 16.1 658 617 29,190 24,568
Tax liabilities 12 - 1,846 7,126 9,771
Real estate commitments payable 13 59,019 - 324,130 253,830
Advances from customers 14 - - 546,792 529,034
Provision for tax, labor and civil risks 16.2 2,717 526 35,595 27,251
Other payables 15 - - 26,000 26,000
Related parties 7.1 19,180 19,180 18 -
Total non-current liabilities 184,380 264,574 1,441,584 1,361,079
Equity:
Share capital 17.1 752,982 702,982 752,982 702,982
Capital reserves 17.2 207,832 229,610 207,832 229,610
Stock options granted 2,151 5,005 2,151 5,005
Carrying value adjustments (20,868) (21,717) (20,868) (21,717)
Treasury shares 17.2.3 (41,791) (23,118) (41,791) (23,118)
Revenue reserves 17.3 745,235 711,584 745,235 711,584
Additional proposed dividends 17.3.3 - 11,690 - 11,690
1,645,541 1,616,036 1,645,541 1,616,036
Non-controlling interests - - 131,944 119,495
1,645,541 1,616,036 1,777,485 1,735,531
Total liabilities and equity 2,029,650 2,100,698 3,887,452 3,955,520
The accompanying notes are an integral part of these financial statements.
Parent company Consolidated
Note 2015 2014 2015 2014
Net operating revenue 18.1 9,529 53,141 1,569,577 1,835,613
Cost of real estate sold and services rendered 18.2 (2,463) (34,795) (1,239,094) (1,408,650)
Gross profit 7,066 18,346 330,483 426,963
Operating income (expenses):
General and administrative expenses 18.3 (104,653) (91,753) (105,265) (114,675)
Selling expenses 18.3 (3,559) (7,225) (42,910) (51,723)
Equity in the results of investees 8 241,635 297,313 (1,774) 5,750
Other operating income (expenses) (11,206) 933 (17,267) (22,657)
122,217 199,268 (167,216) (183,305)
Finance result
Finance costs 19 (41,774) (39,526) (48,752) (45,969)
Finance income 19 36,171 28,739 64,983 57,838
(5,603) (10,787) 16,231 11,869
Profit before taxation 123,680 206,827 179,498 255,527
Income tax and social contribution 20 (33) (957) (23,288) (23,311)
Profit for the year 123,647 205,870 156,210 232,216
Profit attributable to:
Non-controlling interests in Special Partnerships (SCPs) and Special
Purpose Entities (SPEs) - - (32,563) (26,346)
Profit attributable to:
Direcional Engenharia S.A. 123,647 205,870 123,647 205,870
Earnings per share - R$
Basic 17.4 0.83 1.34
Diluted 17.4 0.83 1.34
Statement of comprehensive income Years ended December 31
All amounts in thousands of reais unless otherwise stated (A free translation of the original in Portuguese)
The accompanying notes are an integral part of these financial statements.
Parent company Consolidated 2015 2014 2015 2014
Profit for the year 123,647 205,870 156,210 232,216
Total comprehensive income for the year 123,647 205,870 156,210 232,216
Attributable to:
Owners of the Company 123,647 205,870
Non-controlling interests 32,563 26,346
156,210 232,216
The accompanying notes are an integral part of these financial statements.
Attributable to owners of the parent
Capital reserves Revenue reserves
Note
Share capital
Treasury shares
Issue/
disposal of shares
Stock options granted
Carrying value adjustments Legal
Profit retention
For investment
Additional proposed dividends
Retained earnings
Equity - Parent company
Non-controlling interests
Consolidated equity
At December 31, 2013 702,982 (28,137) 234,099 5,005 (9,993) 25,345 316,026 227,501 - - 1,472,828 128,603 1,601,431
Capital decrease by non-controlling interests - - - - - - - - - - - (35,454) (35,454)
Sale of treasury shares 17.2.3 - 5,019 (4,489) - - - - - - - 530 - 530
Transactions with non-controlling interests - - - - (11,724) - - - - - (11,724) - (11,724)
Profit for the year - - - - - - - - - 205,870 205,870 26,346 232,216
Proposed dividends - - - - - - - - - (51,468) (51,468) - (51,468)
Transfer of the profit to reserve - - - - - - - 142,712 - (142,712) - - -
Additional proposed dividends 17.3.3 - - - - - - - - 11,690 (11,690) - - -
At December 31, 2014 702,982 (23,118) 229,610 5,005 (21,717) 25,345 316,026 370,213 11,690 - 1,616,036 119,495 1,735,531
- - - - - - - - - - - - -
Capital increase through capitalization of reserve 50,000 - - - - - - (50,000) - - - - -
Options granted - - - (2,854) - - - - - - (2,854) - (2,854)
Capital decrease by non-controlling interests - - - - - - - - - - - (20,114) (20,114)
Profit for the year - - - - - - - - - 123,647 123,647 32,563 156,210
Increase of investment reserve - - - - - - - 83,651 - (83,651) - - -
Proposed dividends - - - - - - - - - (39,996) (39,996) - (39,996)
Additional proposed dividends - - - - - - - - (11,690) - (11,690) - (11,690)
Repurchase of shares - (40,493) - - - - - - - - (40,493) - (40,493)
Sale of treasury shares 17.2.3 - 229 (187) - - - - - - - 42 - 42
Shares canceled 17.1 - 21,591 (21,591) - - - - - - - - - -
Transactions with non-controlling interests - - - - 849 - - - - - 849 - 849
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
Statement of cash flows Years ended December 31
All amounts in thousands of reais (A free translation of the original in Portuguese)
The accompanying notes are an integral part of these financial statements.
Parent company Consolidated
2015 2014 2015 2014
Operating activities
Profit before taxation 123,680 206,827 179,498 255,527
Adjustments to reconcile the profit with cash from operations:
Depreciation and amortization 22,373 8,837 42,364 19,740
Equity in the results of investees (241,635) (297,313) 1,774 (5,750)
Provision for warranties 41 617 4,622 3,031
Interest on borrowings 38,987 37,895 103,486 85,051
Provision for tax, labor and civil risks 2,191 (1,114) 8,344 12,622
Income from barter transactions - - (19,455) (36,980)
Taxes (1,067) 1,037 (3,051) (6,063)
Adjustment to present value of trade receivables - - 2,750 (6,916)
Provision for stock option plan (2,854) - (2,854) -
Increase (decrease) in assets
Trade receivables 48,728 (51,684) 135,956 165,956
Inventories (166) 3,599 (114,233) (127,724)
Sundry receivables (110) (401) 213 (13,044)
Related parties (4,417) 5,204 (5,489) (324)
Taxes recoverable (1,688) (4,844) (3,558) (5,941)
(Decrease) increase in liabilities
Trade payables (3,196) 5,282 (13,947) 56,623
Labor liabilities (427) 2,510 1,726 29
Tax liabilities 328 490 (2,655) 4,617
Real estate commitments payable - - (40,921) (47,742)
Advances from customers - - (21,603) 5,309
Accounts payable (810) (23,669) (30,149) (10,404)
Related parties (9,731) 10,867 (554) 1,234
Net cash (used in) provided by operations (29,773) (95,860) 222,264 348,851
Income tax and social contribution paid (1,018) - (25,492) (28,180)
Net cash (used in) provided by operating activities (30,791) (95,860) 196,772 320,671
Cash flows from investing activities
Increase in investments (SPCs and SPEs) 102,668 139,906 (6,187) 781
Dividends received 173,994 156,645 3,470 5,284
Additions to property and equipment (12,033) (15,053) (18,614) (28,114)
Increase in intangible assets (1,129) (1,089) (1,156) (1,295)
Financial investments - - (33,442) 23,676
Net cash (used in) provided by investing activities 263,500 280,409 (55,929) 332
Cash flows from financing activities
Treasury shares (41,031) 530 (40,493) 530
Transactions with non-controlling interests 849 (11,724) 849 (11,724)
Dividends paid (66,877) (93,331) (67,136) (93,029)
New borrowings 1,292 133,259 211,857 397,352
Repayment of borrowings (141,731) (79,920) (336,078) (352,755)
Interest paid (36,689) (27,863) (89,214) (79,589)
Capital increase - non-controlling stockholders - - (20,114) (35,454)
Net cash used in financing activities (283,649) (79,049) (340,329) (174,669)
Increase (decrease) in cash and cash equivalents (50,940) 105,500 (199,486) 146,334
Cash and cash equivalents
At the beginning of the year 294,969 189,469 636,110 489,776
At the end of the year 244,029 294,969 436,624 636,110
The accompanying notes are an integral part of these financial statements.
Parent company Consolidated
2015 2014 2015 2014
Revenue
Real estate sold and services rendered 11,206 54,689 1,655,554 1,914,907
Other operating income (expenses) (11,206) 933 (17,267) (22,657)
- 55,622 1,638,287 1,892,250
Inputs acquired from third parties
Raw materials used (2,079) (34,222) (834,607) (1,035,578)
Materials, electricity, outsourced services and other operating expenses (23,725) (25,666) (54,206) (60,530)
Other (6,206) (8,886) (5,253) (10,086)
(32,010) (68,774) (894,066) (1,106,194)
Gross value added (32,010) (13,152) 744,221 786,056
Depreciation and amortization, net (11,311) (8,837) (42,366) (19,740)
Net value added generated by the Company (43,321) (21,989) 701,855 766,316
Value added received through transfer
Equity in the results of investees 241,635 297,313 (1,774) 5,750
Finance income 36,171 28,739 64,983 57,838
277,806 326,052 63,209 63,588
Total value added to distribute 234,485 304,063 765,064 829,904
Distribution of value added
Personnel 67,060 54,503 399,094 404,587
Taxes and contributions 1,710 2,505 109,265 102,605
Remuneration of third-party capital 42,068 41,185 100,495 90,496
Retained earnings 123,647 205,870 123,648 205,870
Profit attributed to non-controlling interests - - 32,563 26,346
234,485 304,063 765,064 829,904
Notes to the financial statements at December 31, 2015
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 34 years of experience in developing and building low-income-oriented projects, the Company has established a verticalized structure and a standardized construction process, which has made the construction of large-scale projects feasible.
The Company carries out its development and construction activities through Special Partnerships (SCPs) and Special Purpose Entities (SPEs) in the normal course of its business, in order to enable the formation of partnerships, permitting it to accompany projects individually, obtain financing easily, and improve financial and accounting control. Both its SCPs and SPEs operate exclusively in the real estate sector and, in most cases, are associated with a specific venture.
These financial statements were approved by the Board of Directors on March 14, 2016.
2 Summary of significant accounting practices and policies
The financial statements have been prepared in accordance with accounting practices adopted in Brazil, including the pronouncements issued by the Brazilian Accounting Pronouncements Committee (CPC), as well as according to the International Financial Reporting Standards (IFRS) issued by the
International Accounting Standards Board (IASB), and disclose all (and only) the applicable significant information related to the financial statements, which is consistent with the information utilized by management in the performance of its duties.
2.1 Basis of preparation
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 with the accounting practices adopted in Brazil, pursuant to Technical Pronouncement CPC 26 (R1), Presentation of Financial Statements, issued by the Brazilian Accounting Pronouncements Committee (CPC), and International Accounting Standard (IAS) 1, Presentation of Financial Statements, 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).
These financial statements are referred to 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 IFRS, the presentation of such statements is considered supplementary information, and not part of the formal financial statements.
The consolidated financial statements comprise the financial statements of the parent company and of its subsidiaries and joint ventures, 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 financial statements
The parent company financial statements have been prepared in accordance with accounting practices adopted in Brazil, pursuant to Technical Pronouncement CPC 26 (R1), Presentation of Financial Statements. They are referred to as the "Parent company" financial statements, and are disclosed together with the consolidated financial statements.
Because the accounting practices adopted in Brazil applicable to parent company financial statements, as from 2014, do not differ from the International Financial Reporting Standards (IFRS) applicable to separate financial statements, which now allow entities to use the equity method to account for investments in subsidiaries in such financial statements, they are also in compliance with IFRS issued by the IASB.
In the parent company financial statements, 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 year 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 earnings and losses of the subsidiaries and associates are recorded in the parent company's statement of income as Equity in the results of investees, representing the profit or loss attributable to the owners of the company.
Notes to the financial statements at December 31, 2015
All amounts in thousands of reais unless otherwise stated
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 income.
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 income.
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. The accounting policies of the subsidiaries are 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 the 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
(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 recorded using the equity method of accounting and are initially recognized at cost. The Group's investment in associates and joint ventures includes goodwill identified on acquisition, net of any accumulated impairment loss.
The Group's share of the profit or loss of its associates and joint ventures is recognized in the statement of income and its share of reserve movements is recognized in the Group reserves. When the Group's share of losses in an associate or joint venture equals or exceeds the carrying amount of the
investment, including any other unsecured receivables, the Group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the associate or jointly-controlled investee.
Unrealized gains on transactions between the Group and its associates and joint ventures are eliminated to the extent of the Group's interest. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. The accounting policies of the associates and jointly-controlled investees are changed changed where necessary to ensure
consistency with the policies adopted by the Group.
If the ownership interest in an associate is reduced but significant influence is retained, only a
proportionate share of the amounts previously recognized in other comprehensive income is reclassified to profit or loss where appropriate.
Dilution gains and losses arising on investments in associates are recognized in the statement of income.
2.3 Segment reporting
Operating segments are defined as components of a development, for which segregated financial information is available and regularly reviewed by the chief operating decision maker, who determines the funds to be allocated to the segment and evaluates its performance. Managerial reports used for decision-making are based on the consolidated financial statements, which are considered as disclosed, that is, only one segment is internally classified as "Real Estate Business".
Notes to the financial statements at December 31, 2015
All amounts in thousands of reais unless otherwise stated
2.4 Foreign currency translation
(a) Functional and presentation currency
Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates ("functional currency"). The parent company and consolidated financial statements are presented in Brazilian reais (R$), which is the Company's functional currency, and also the Group's presentation currency.
(b) Transactions and balances
Foreign currency transactions are translated into the functional currency using the foreign exchange rates prevailing at the dates of the transactions or the dates of valuation when items are remeasured.
Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the statement of income.
2.5 Cash and cash equivalents
Cash and cash equivalents include cash on hand, deposits with banks and other short-term highly liquid investments with original maturities of three months or less, and with immaterial risk of change in value.
The balance is presented net of bank overdrafts in the statement of cash flows. In the balance sheet, bank overdrafts are shown within borrowings in current liabilities.
2.6 Financial assets 2.6.1 Classification
The Group classifies its financial assets, upon initial recognition, in 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 were acquired.
At December 31, 2015 and 2014, 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 the purpose of selling 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 payments or determinable flows that are not quoted in an active market. They are included in current assets, except for those with maturities greater than 12 months after the end of the reporting period, which are classified as non- current assets. The Group's loans and receivables comprise "Trade receivables from real estate development projects” and "Trade receivables from services provided".
2.6.2 Recognition and measurement
Normal purchases and sales of financial assets are typically recognized on the trade date.
Investments are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognized at fair value, and transaction costs are expensed in the statement of income. Financial assets are derecognized when the rights to receive cash flows have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership. Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables are carried at amortized cost using the effective interest rate method.
Gains or losses arising from changes in the fair value of the "Financial assets at fair value through profit or loss" category are presented in the statement of income within "Other operating income (expenses)"
in the period in which they arise.
Dividends on financial assets carried at fair value through profit or loss and available-for-sale equity instruments, such as shares, are recognized in the statement of income as part of other income when the Group's right to receive dividends is established.
The fair values of quoted investments are based on current bid prices. If the market for a financial asset is not active (as well as for unlisted securities), the Group establishes the fair value using valuation techniques. These include the use of recent arm's length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, and option pricing models making maximum use of market inputs and relying to the minimum extent possible on entity-specific inputs.
2.6.3 Offsetting of financial instruments
Financial assets and liabilities are offset and the net amount presented in the balance sheet when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or realize the asset and settle the liability simultaneously.
2.6.4 Impairment of financial assets
The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a "loss event") and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.
The criteria that the Group uses to determine that there is objective evidence of an impairment loss include:
(i) significant financial difficulty of the issuer or debtor;
(ii) a breach of contract, such as a default or delinquency in interest or principal payments;
(iii) the Group, for economic or legal reasons relating to the borrower's financial difficulty, granting to the borrower a concession that a lender would not otherwise consider;
Notes to the financial statements at December 31, 2015
All amounts in thousands of reais unless otherwise stated
(iv) it becomes probable that the borrower will enter bankruptcy or other financial reorganization;
(v) the disappearance of an active market for that financial asset because of financial difficulties; or (vi) observable data indicating that there is a measurable decrease in the estimated future cash flow
from a portfolio of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the portfolio, including:
. adverse changes in the payment status of borrowers in the portfolio, and
. national or local economic conditions that correlate with defaults on the assets in the portfolio.
The amount of any impairment loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset's original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognized in the statement of income. If a loan or held- to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. As a practical expedient, the Group may measure impairment on the basis of an instrument's fair value using an observable market price.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor's credit rating), the reversal of the previously recorded loss is recognized in the statement of income.
2.7 Trade receivables from real estate developments and rendering of services
Trade receivables (current and non-current) refer mainly to sales of residential units – “trade receivables from real estate developments” and to the rendering of construction site management services – “trade receivables from the rendering of services”.
Trade receivables related to real estate developments launched but not completed are determined by applying the Percentage of Completion method (POC) of the construction to the revenue from units sold, monetarily adjusted according to the terms of the sales contracts, less the installments received. If the total amount of the installments received is higher than the accumulated revenue recognized, the balance is recorded in liabilities as advances from customers.
The balance of trade receivables from unfinished units is carried at present value, that is, discounted to present value based on the difference between the contractual interest charged after the delivery of the unit and the National Civil Construction Index (INCC) variations during the construction.
If collection is expected in one year or less, trade receivables are classified as current assets. If not, the part receivable in over one year is presented as non-current assets.
Trade receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest rate method, less provision for impairment of trade receivables.
2.8 Inventory
Land to be developed
Land inventory is stated at the historical cost of formation, which includes all directly related and measurable expenditure, as well as barter transactions at fair value.
Land can be acquired through partnership agreements entered into with landowners (physical and financial barters).
Physical barter: The fair value of land is recorded as a component of land inventory of property for sale, with a corresponding entry to Advances from customers at the moment of signature of the purchase and sale agreement or when any conditional clauses of the agreement have been fulfilled. The income or costs arising from barter transactions are allocated to profit or loss over the real estate construction period.
Financial barter: Under financial barters, the Company transfers to the sellers of the land a percentage on the sale amount. This amount is recorded as a component of land inventory of property for sale, with a corresponding entry to Accounts payable at the moment of signature of the purchase and sale
agreement or contract related to the transaction.
Inventory of land to be developed is classified based on the expected launch date of the development.
Land linked to a development expected to be launched during the next 12 months is recorded under current assets. Land linked to developments to be launched within more than 12 months is classified under non-current assets.
Real estate units under construction
Inventory of units under construction is recorded based on the cost incurred in units yet to be sold, adjusted to the net realizable value when this is lower than the cost incurred.
Cost comprises the acquisition cost of land, expenditure with the project and legalization of the development, materials, labor (own or outsourced) and other construction-related costs, including the financial cost of the capital invested (finance charges on payables for purchases of land and on borrowings incurred during the construction period).
2.9 Property and equipment
Property and equipment are stated at historical cost less accumulated depreciation. Historical cost comprises expenditure that is directly attributable to the acquisition of the items. Historical cost includes finance costs related to the acquisition of qualifying assets.
Subsequent costs are included in the asset's carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with these costs will flow to the Group and they can be measured reliably. The carrying amount of the replaced items or parts is derecognized. All other repairs and maintenance are charged to the statement of income during the financial period in which they are incurred.
Notes to the financial statements at December 31, 2015
All amounts in thousands of reais unless otherwise stated
Depreciation of other assets is calculated using the straight-line method to reduce their cost to their residual values over their estimated useful lives, described in Note 9:
The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period.
Expenses related to on-site sales offices, including construction, furniture and maintenance costs are recognized as property and equipment, provided that the estimated useful lives are not less than 12 months and depreciation is recognized in the statement of income as selling expenses, during their useful lives.
Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognized within "Other operating income (expenses)" in the statement of income.
2.10 Impairment of non-financial assets
Assets that are subject to depreciation or amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized when the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and its value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (Cash-generating units (CGUs)). Non-financial assets, other than goodwill, that were
adjusted due to impairment are subsequently reviewed for possible reversal of the impairment at the balance sheet date.
2.11 Borrowings
Borrowings are recognized initially at fair value, net of transaction costs incurred, and subsequently carried at amortized cost. Any difference between the proceeds (net of transaction costs) and the total amount payable is recognized in the statement of income over the period of the borrowings using the effective interest rate method.
Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the reporting period.
Both general and specific borrowing costs directly related to the acquisition, construction or production of a qualifying asset that requires a substantial period of time to be prepared for its intended use or sale are capitalized as part of the cost of that asset when it is probable that future economic benefits
associated with the item will flow to the Company and costs can be measured reliably. The other borrowing costs are recognized as finance costs in the year in which they are incurred.
2.12 Provisions
Provisions for warranties and legal claims (labor, civil and tax) are recognized when: (i) the Group has a present legal or constructive obligation as a result of past events; (ii) it is probable that an outflow of resources will be required to settle the obligation; and (iii) the amount can be reliably estimated.
Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognized even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.
Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to the time elapsed is recognized as interest expense.
(a) Provision for contingencies
The Group is a party to lawsuits and administrative proceedings. Provisions are recognized for all contingencies related to lawsuits for which it is probable that an outflow of resources will be made to settle the contingency/obligation and a reasonable estimate can be made. 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 any additional exposure identified based on new matters or court decisions.
(b) Provision for warranties
The Group records a provision for warranties for the purpose of covering expenditure incurred on repairs during the period foreseen in the contracts, based on historical data. This provision is recorded in the statement of income (cost of units sold) as the costs are incurred. Any unused remaining balances of the provision are reversed after the guaranteed contractual term. The average term of the guarantee is approximately five years after the units are delivered, as disclosed in Note 16.1.
2.13 Current and deferred income tax and social contribution
The income tax and social contribution benefit or expense for the year comprise current and deferred taxes. Taxes on profit are recognized in the statement of income, except to the extent that they relate to items recognized directly in equity. In such cases, the taxes are also recognized in equity.
The current and deferred income tax and social contribution is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date. Management periodically evaluates positions taken by the Group in income tax returns with respect to situations in which applicable tax regulation is subject to interpretation and establishes provisions, where appropriate, on the basis of amounts expected to be paid to the tax authorities.
The Group performs its development and construction activities through Special Purpose Entities (SPEs) and Special Partnerships (SCPs), which have as their objectives the construction and sale of real estate units. The Company calculates and pays the taxes on revenues from the sale of real estate units on a cash basis and not on the accrual basis of accounting, as established by the Normative instruction 84/79, issued by the Federal Revenue Secretariat 84/79. Also, these specific purpose companies are taxed on their presumed profit, and the income tax is calculated at the rates of 8% (real estate development, including monetary adjustments) and 32% (service rendering) and the social contribution is calculated at the rates of 12% (real estate development) and 32% (service rendering), and 100% on finance income, to which the standard income tax and social contribution rates are applied.
Notes to the financial statements at December 31, 2015
All amounts in thousands of reais unless otherwise stated
The Group has adopted the Special Taxation Regime (RET) applied to builders and real estate developers, which requires compliance with certain rules relating to the segregated assets structure, according to Brazilian Federal Revenue Service Regulatory Instruction (IN RFB) 1,435 of December 30, 2013. The tax burden totals 4%, and may be 1% for the "Minha Casa Minha Vida" (My House My Life) Program.
Direcional Engenharia S.A. (the parent company) is taxed based on the taxable profit method, and the income tax and social contribution are calculated at the standard rate of 15%, plus a 10% surtax, for income tax, and at the rate of 9% for social contribution, on the taxable profit for the year, adjusted in accordance with the criteria established by the prevailing tax legislation.
The current income tax and social contribution are presented net, separated by taxpaying entity, in liabilities when there are amounts payable, or in assets when the amounts prepaid exceed the total amounts due on the reporting date.
Deferred income tax and social contribution are recognized, using the liability method, on temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements. One of the main temporary differences is that of the revenue calculation criterion under the tax (cash basis) and accounting (accruals basis) regimes.
Deferred tax assets are recognized only to the extent it is probable that future taxable profit will be available against which the temporary differences and/or tax losses can be utilized.
Deferred tax assets and liabilities are presented net in the balance sheet when there is a legally enforceable right and the intention to offset them upon the calculation of current taxes, generally when related to the same legal entity and the same tax authority. Accordingly, deferred tax assets and liabilities in different entities are generally presented separately, and not on a net basis.
2.14 Employee benefits (a) Share-based payments
The Group has two equity-settled, share-based compensation plans, under which it receives services from employees as consideration for equity instruments (options) of the Group. The fair value of the employee services received in exchange for the grant of the options is recognized as an expense. The total amount to be recognized is determined with reference to the fair value of the options granted, excluding the impact of any service vesting conditions. The total expense is recognized over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. At the balance sheet date, the entity revises its estimates of the number of options that are expected to vest based on the non-market vesting conditions. It recognizes the impact of the revisions to the original estimates, if any, in the statement of income, with a corresponding adjustment to equity.
The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium when the options are exercised.
Any social security contributions payable in connection with the grant of the share options are considered an integral part of the grant itself, and the charge is treated as a cash-settled transaction.
(b) Profit sharing
The Group recognizes a liability and an expense for profit-sharing based on a methodology that takes into consideration the profit attributed to the Company's stockholders after certain adjustments. The Group recognizes a provision where contractually obliged or where there is a past practice that has created a constructive obligation.
2.15 Share capital
Common and preferred shares are classified in equity.
Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.
Where any Group company purchases the Company's shares (treasury shares), the consideration paid, including any directly attributable incremental costs (net of taxes) is deducted from the equity
attributable to the Company's stockholders until the shares are canceled or reissued. Where such shares are subsequently reissued, any consideration received, net of any directly attributable
incremental transaction costs and the related income tax and social contribution effects, is included in the equity attributable to the Company's stockholders.
2.16 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 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 of operations on the 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:
Notes to the financial statements at December 31, 2015
All amounts in thousands of reais unless otherwise stated
The costs incurred on units sold, including the cost of land, are fully recognized in the statement of income.
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 income 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.
2.17 Distribution of dividends and interest on capital
The distribution of dividends and interest on capital to the Company's stockholders is recognized as a liability in the Group's financial statements at year-end based on the Company's bylaws. Any amount that exceeds the minimum required is only provided on the date it is approved by the stockholders in general meeting.
