Financial Statements
Years ended December 31, 2018 and 2017
FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017
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Index
1. | Independent Auditors’ Report | 3 |
2. | Statements ofFinancial Position | 10 |
3. | Statements of Income (Loss) | 12 |
4. | Statements of Comprehensive Income (Loss) | 13 |
5. | Statements of Changes in Shareholders’ Equity | 14 |
6. | Statements of Cash Flows | 15 |
7. | Statements of Added Value | 16 |
8. | Management Report | 17 |
9. | Explanatory Notes to the Financial Statements | 45 |
10. | Opinion of the Fiscal Council | 171 |
11. | Opinion of the Audit Committee | 172 |
12. | Opinion of the Executive Board | 175 |
Independent Auditor’s Report on the Individual andConsolidated Financial Statements
(A free translation of the original report in Portuguese, as filed with the Brazilian Securities Commission (CVM), containing individual and consolidated financial statements prepared in accordance with accounting practices adopted in Brazil and in accordance with International Financial Reporting Standards (IFRS) issued by International Accounting Standards Board – IASB)
To the Shareholders of BRF S.A.
Itajaí - SC
Opinion
We have audited the individual and consolidated financial statements of BRF S.A. (“the Company”), respectively referred to as Parent company and Consolidated, which comprise the statement of financial positionas of December 31, 2018 and the statements of income (loss), comprehensive income (loss), changes in equity and cash flows for the year then ended, and the explanatory notes comprising the significant accounting policies and other explanatory information.
In our opinion, the accompanying financial statements present fairly, in all material respects, the individual and consolidated financial position of BRF S.A. as of December 31, 2018, and of its individual and consolidated financial performance and its individual and consolidated cash flows for the year then ended, in accordance with accounting practices adopted in Brazil and with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB).
Basis for opinion
We conducted our audit in accordance with the Brazilian and International Standards on Auditing. Our responsibilities under those standards are further described in the “Auditors’ responsibilities for the audit of theindividual and consolidatedfinancial statements” section of our report. We are independent of the Company and its subsidiaries in accordance with the relevant ethical requirements included in the Accounting Professional Code of Ethics (“Código de Ética Profissional do Contador”) and in the professional standards issued by Brazilian Federal Accounting Council (“Conselho Federal de Contabilidade”), and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Emphasis of matter
We draw attention to explanatory notes 1.2 and 1.3 to the financial statements, which describe the investigations involving the Company in the context of the Brazilian Federal Police operations named “Carne Fraca” and “Trapaça”, as well as their current and potential developments, such as the Responsibility Administrative Process (“PAR -Processo Administrativo de Responsabilização”) issued by the Brazilian Office of the Comptroller General (“CGU - Controladoria Geral da União”) in light of Law 12,846/2013 (“Anti-corruption Law”) and the class action in the United States of America. In the current stage of the investigations and actions, it is not possible to determine the potential financial and non-financial impacts on the Company resulting from them and of their potential developments and, consequently, to record additional potential losses which could have a material adverse effect on the Company´s financial position,results of operations and cash flows in the future. Our opinion is unmodified in respect of this matter.
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Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the individual and consolidated financial statements of the current period. These matters were addressed in the context of our audit of the individual and consolidated financial statements as a whole, and in forming our opinion thereon and therefore, we do not provide a separate opinion on these matters.
Impairment test of goodwill originated from business combinations and other non-financial assets - Notes 3.12, 3.14, 12 and 18 to the individual and consolidated financial statements
The Company has goodwill on expected future profitability that is allocated to the cash generating units and that must be tested annually to verify the need of impairment. The determination of the recoverable amount of the Company's cash generating units of the continued operations involves significant judgments in establishing the assumptions used in the projections of cash flows, such as growth and discount rates, which may result in a material impact on the individual and consolidated financial statements. Additionally, the Company is in the process of sale of its operations in Argentina, Europe and Thailand, and, with the discontinuance of these operations and the measurement of the recoverable amount of these assets at fair value less costs to sell, a relevant loss was recorded in the year. For these reasons, we considered this matter as significant in our audit.
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How the matter was addressed in our audit
We evaluated the design, implementation and effectiveness of key internal controls related to the preparation and review of the analysis of the cash generating units´ recoverable amount for the continuing operations and the fair value less costs to sell for the discontinued operations. With the assistance of our specialists in corporate finance, we evaluated the methodology and the assumptions used in the preparation of the cash flow projections, including growth and discount rates. We compared the projections with the five-year strategic plan of the Company approved by the Board of Directors, and evaluated the sensitivity of results considering possible changes in the key assumptions. We compared the recoverable amount calculated based on the discounted cash flows with the carrying amounts, per cash generating unit, and we evaluated the Company's disclosures, mainly those related to the assumptions used in calculating the recoverable amount of goodwill. We read the signed contracts related to the sales of the assets in Argentina, Europe and Thailand and recalculated the impairment loss of these assets based on these documents and compared with the position calculated by the Company. We also evaluated the disclosures related to the recoverable amounts of the goodwill originated in business combinations and other non-financial assets on the individual and consolidated financial statements.
Adjustments that would affect the measurement and disclosure of the recoverable amounts of the assets related to the discontinued operations were identified, which were not recorded by Management as these were considered immaterial. Based on the results of the procedures summarized above, we consider acceptable the conclusion reached by the Company that no impairment loss recognized for the continuing operations and that is also acceptable the impairment loss recognized for the other assets related to the discontinued operations, as well as the related disclosures, in the context of the individual and consolidated financial statements taken as a whole.
Realization of deferred income taxes and social contribution assets - Notes 3.15 and 13 to the individual and consolidated financial statements
The deferred income tax and social contribution assets from tax losses carry forward and negative basis of social contribution are recorded to the extent that the Company considers that is probable the generation of future taxable income against which these credits will be compensated. The estimate of generation of future taxable income requires judgment over the assumptions used and the interpretation of tax laws. The amount of deferred tax assets recognized may vary significantly if different assumptions are applied to the projection of future taxable income, which may impact the individual and consolidated financial statements. For these reasons, we consider this matter significant in our audit.
How the matter was addressed in our audit
We evaluated the design, implementation and effectiveness of the key internal controls related to the preparation and review of the business plan, budget, technical studies and analysis of projections of future taxable income made available by the Company. With the assistance of our corporate finance specialists, we evaluated the main assumptions and the methodology used in the preparation of the future taxable income projections, especially those related to expectations of sales prices of the products, commodity costs, operating and administrative expenses and the consistency of these
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assumptions with the five-year strategic plan approved by the Board of Directors. We also evaluated the sensitivity of results considering reasonably possible changes in the key assumptions. In addition, with the assistance of our tax specialists, we considered the application of the tax laws and tax deductions. At the date of the financial statements, we analysed the evidences that indicate the probability of recovery of deferred tax assets, as well as those that justify the estimated periods for the Company to use them. We evaluated whether the Company's projections indicated sufficient future taxable income to allow the realization of tax losses carry forwards and negative basis of social contribution recognized as deferred tax assets. We also evaluated the adequacy of the disclosures made in the individual and consolidated financial statements, mainly those related to the expected realization of deferred tax assets.
Based on the results of the procedures summarized above, we consider acceptable the amount of the deferred tax assets and the respective disclosures, in the context of the individual and consolidated financial statements taken as a whole.
Measurement of tax contingencies - Notes 3.17 and 26 to the individual and consolidated financial statements.
The measurement and disclosure of contingencies require that the Company applied significant judgements in the determination of the likelihood of loss of administrative and legal proceedings arising from tax contingencies and the amounts involved. Eventual changes in the assumptions on the likelihood of loss of these contingencies may cause a relevant effect on the individual and consolidated financial statements. Due to these aspects and the relevance of the amounts involved, we consider this matter as significant in our audit.
How the matter was addressed in our audit
We evaluated the design, implementation and effectiveness of the key internal controls related to the determination of the likelihood of loss of tax contingencies. We evaluated, with the involvement of our legal and tax specialists, the analysis prepared by the Company's of the likelihood of loss of the main tax contingencies. We obtained confirmations on the tax contingencies from the Company's external lawyers. We also evaluated the Company's disclosures in relation to the nature and amounts involved of the tax contingencies.
Based on the results of the procedures summarized above, we considered acceptable the provisions recorded as well as the disclosures of contingent liabilities, in the context of the individual and consolidated financial statements taken as a whole.
Revenue recognition and trade discounts - Note 3.28 to the individual and consolidated financial statements
Revenue from the sale of goods is recognised when the Company and its subsidiaries satisfy the performance obligation by transferring the goods to the customer. The determination of the amount of the revenue recognised involves careful analysis of the trade discounts given to customers, which may have a variety of commercial conditions such as trade discounts, incentives and rebates in both domestic and foreign markets. Due to the high volume of transactions, the relevance of the amounts involved and the level of judgement that may impact the moment and the amount recognised asrevenues deduction from sales of goods in the individual and consolidated financial statements, we consider this matter as significant in our audit.
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How the matter was addressed in our audit
We considered the Company and its subsidiaries’ revenue recognition policy, including the determination of trade discounts. We evaluated the design, implementation and effectiveness of the key internal controls related to revenue recognition. We evaluated, for a sample, if revenues and trade discounts were recognized in accordance with supporting documentation, amount and period. For a sample of trade discounts, we inspected the signed contracts with the customers of the Company, we recalculated the amount of the recorded trade discount and compared with the amount calculated and recorded by the Company. We obtained external information from the Company’s customers over the outstanding amount of trade discounts, incentives and rebates at year-end and compared with the positions of discounts, incentives and rebates recorded by the Company at year-end. We also evaluated the adequacy of the Company and its subsidiaries' disclosures, in relation to the accounting policies adopted for revenue recognition.
Our tests revealed deficiencies in the design and effectiveness of internal controls related to the recognition of certain punctual trade discounts. As a result, we extended our substantive procedures beyond those originally planned to obtain sufficient and adequate audit evidence regarding the recognition of these transactions. Adjustments that would affect the measurement and disclosure of the amounts of revenues from sales of goods were identified, which were not recorded by Management as these were considered immaterial. Based on the results of the procedures summarized above, we consider acceptable the recognition of revenue and trade discounts recorded by the Company as well as the related disclosures, in the context of the individual and consolidated financial statements taken as a whole.
Othermatters – Statements of value added
The individual and consolidated statements of value added (DVA) for the year ended December 31, 2018, prepared under the responsibility of the Company’s management, and presented herein as supplementary information for IFRS purposes, have been subject to audit procedures performed with the audit of the Company's financial statements. In order to form our opinion, we assessed whether those statements are reconciled with the financial statements and accounting records, as applicable, and whether their format and contents are in accordance with criteria determined in the Technical Pronouncement 09 (CPC 09) - Statement of Value Added. In our opinion, the statements of value added have been fairly prepared, in all material respects, in accordance with the criteria determined by the aforementioned Technical Pronouncement, and are consistent with the overall individual and consolidated financial statements.
OtherInformation
Management is responsible for the other information comprising the management report.
Our opinion on the individual and consolidated financial statements does not cover the management report and we do not express any form of assurance conclusion thereon.
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In connection with our audit of the individual and consolidated financial statements, our responsibility is to read the management report and, in doing so, consider whether the management report is materially inconsistent with the individual and consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement on the management report, we are required to report that fact.We have nothing to report in this regard.
Responsibilities of Management and Those Charged with Governance for the Individual and Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of the individual and consolidated financial statements in accordance with accounting practices adopted in Brazil and International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board (IASB), and for such internal control as management determines is necessary to enable the preparation of individual and consolidated financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the individual and consolidated financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Company’s financial reporting process.
Auditors’ Responsibilities for the Audit of the Individual and Consolidated Financial Statements
Our objectives are to obtain reasonable assurance about whether the individual and consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Brazilian and International Standards on Auditing will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these individual and consolidated financial statements.
As part of an audit in accordance with Brazilian and International Standards on Auditing, we exercise professional judgment and maintain professional skepticism throughout the audit.We also:
· | Identify and assess the risks of material misstatement of the individual and consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. |
· | Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. |
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· | Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. |
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· | Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the individual and consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors’ report. However, future events or conditions may cause the Company to cease to continue as a going concern. |
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· | Evaluate the overall presentation, structure and content of the individual and consolidated financial statements, including the disclosures, and whether the individual and consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. |
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· | Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within thegroup to express an opinion on the individual and consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. |
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the individual and consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditors’ report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.
São Paulo, February 25, 2019
KPMG Auditores Independentes
CRC 2SP014428/O-6
(original signed in Portuguese)
Guilherme Roslindo Nunes
Contador CRC 1SP195631/O-1
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(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais,unless otherwise stated)
| ![]() |
STATEMENT OF FINANCIAL POSITION | |||||||||
Parent company |
| Consolidated | |||||||
ASSETS | Note | 12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | ||||
CURRENT ASSETS | |||||||||
Cash and cash equivalents | 6 | 3,826,698 | 3,584,701 | 4,869,562 | 6,010,829 | ||||
Marketable securities | 7 | 303,613 | 166,322 | 507,035 | 228,430 | ||||
Trade accounts receivable, net | 8 | 5,280,864 | 7,325,588 | 2,604,928 | 3,919,022 | ||||
Notes receivable | 8 | 110,281 | 107,434 | 115,113 | 113,127 | ||||
Interest on shareholders' equity receivable | 30 | 1,178 | 7,352 | 7,304 | 6,187 | ||||
Inventories | 9 | 2,916,873 | 2,817,784 | 3,877,294 | 4,948,168 | ||||
Biological assets | 10 | 1,459,804 | 1,261,556 | 1,513,133 | 1,510,480 | ||||
Recoverable taxes | 11 | 340,116 | 468,715 | 560,389 | 728,918 | ||||
Income and social contribution tax recoverable | 11 | 410,340 | 373,319 | 506,483 | 499,341 | ||||
Derivative financial instruments | 22 | 177,344 | 49,132 | 182,339 | 90,536 | ||||
Restricted cash | 15 | 256,284 | 108,795 | 277,321 | 127,821 | ||||
Other current assets |
| 533,477 | 1,064,851 | 683,694 | 961,093 | ||||
15,616,872 | 17,335,549 | 15,704,595 | 19,143,952 | ||||||
Assets held for sale | 12 | 371,187 | 35,452 | 3,326,305 | 41,571 | ||||
Total current assets | 15,988,059 | 17,371,001 | 19,030,900 | 19,185,523 | |||||
NON-CURRENT ASSETS | |||||||||
Marketable securities | 7 | 178,264 | 359,318 | 290,625 | 568,805 | ||||
Trade accounts receivable, net | 8 | 7,964 | 5,944 | 7,963 | 6,260 | ||||
Notes receivable | 8 | 88,959 | 115,805 | 88,959 | 116,394 | ||||
Recoverable taxes | 11 | 3,140,000 | 2,226,146 | 3,142,547 | 2,418,155 | ||||
Income and social contribution tax recoverable | 11 | 6,809 | 6,809 | 7,246 | 20,010 | ||||
Deferred income and social contribution taxes | 13 | 1,517,576 | 883,953 | 1,519,652 | 1,369,366 | ||||
Judicial deposits | 14 | 669,098 | 676,732 | 669,098 | 688,940 | ||||
Biological assets | 10 | 999,396 | 773,560 | 1,061,314 | 903,654 | ||||
Restricted cash | 15 | 584,300 | 407,803 | 584,300 | 407,803 | ||||
Other non-current assets | 72,116 | 67,118 | 177,372 | 87,157 | |||||
Investments in subsidiaries and join ventures | 16 | 4,043,558 | 4,960,752 | 86,005 | 68,195 | ||||
Property, plant and equipment, net | 17 | 9,831,173 | 9,189,492 | 10,696,998 | 12,190,583 | ||||
Intangible assets | 18 | 3,153,713 | 2,939,316 | 5,019,398 | 7,197,636 | ||||
Total non-current assets | 24,292,926 | 22,612,748 | 23,351,477 | 26,042,958 | |||||
TOTAL ASSETS | 40,280,985 | 39,983,749 | 42,382,377 | 45,228,481 |
See accompanying notes to the financial statements.
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(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais,unless otherwise stated)
| ![]() |
STATEMENT OF FINANCIAL POSITION | |||||||||
Parent company | Consolidated | ||||||||
LIABILITIES | Note | 12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | ||||
CURRENT LIABILITIES | |||||||||
Short-term debt | 19 | 3,689,173 | 4,038,367 | 4,547,389 | 5,031,351 | ||||
Trade accounts payable | 20 | 4,844,981 | 4,635,382 | 5,552,434 | 6,445,486 | ||||
Supply chain finance | 21 | 885,783 | 648,914 | 885,783 | 715,189 | ||||
Payroll and related charges | 527,187 | 469,913 | 555,016 | 635,097 | |||||
Tax payable | 262,055 | 228,962 | 402,971 | 426,028 | |||||
Interest on shareholders' equity | 1,018 | 1,723 | 6,247 | 1,916 | |||||
Employee and management profit sharing | 54,350 | 95,900 | 63,653 | 95,900 | |||||
Derivative financial instruments | 22 | 224,331 | 282,619 | 235,035 | 299,491 | ||||
Provision for tax, civil and labor risks | 26 | 491,756 | 516,597 | 495,584 | 536,089 | ||||
Pension and other post-employment plans | 25 | 91,010 | 76,610 | 94,728 | 85,185 | ||||
Advances from related parties | 30 | 3,416,713 | 3,051,892 | - | 5 | ||||
Other current liabilities | 368,832 | 344,146 | 518,271 | 602,640 | |||||
14,857,189 | 14,391,025 | 13,357,111 | 14,874,377 | ||||||
Liabilities directly associated with the assets held for sale | 12 | 13 | - | 1,131,529 | - | ||||
Total current liabilities | 14,857,202 | 14,391,025 | 14,488,640 | 14,874,377 | |||||
NON-CURRENT LIABILITIES | |||||||||
Long-term debt | 19 | 15,354,273 | 9,508,371 | 17,618,055 | 15,413,027 | ||||
Trade accounts payable | 20 | 179,844 | 195,843 | 179,844 | 196,771 | ||||
Tax payable | 162,240 | 169,108 | 162,239 | 171,225 | |||||
Provision for tax, civil and labor risks | 26 | 854,329 | 998,743 | 854,667 | 1,237,116 | ||||
Deferred income and social contribution taxes | 13 | - | - | 65,774 | 155,303 | ||||
Liabilities with related parties | 30 | 7,067 | 68,504 | - | - | ||||
Advances from related parties | 30 | 1,162,440 | 2,566,061 | - | - | ||||
Employee benefits plans | 25 | 313,355 | 271,269 | 373,423 | 343,100 | ||||
Other non-current liabilities | 425,608 | 614,614 | 1,107,958 | 1,124,780 | |||||
Total non-current liabilities | 18,459,156 | 14,392,513 | 20,361,960 | 18,641,322 | |||||
EQUITY | 27 | ||||||||
Capital | 12,460,471 | 12,460,471 | 12,460,471 | 12,460,471 | |||||
Capital reserves | 115,354 | 115,097 | 115,354 | 115,097 | |||||
Income reserves | - | 101,367 | - | 101,367 | |||||
Loss accumulated | (4,279,003) | - | (4,279,003) | - | |||||
Treasury shares | (56,676) | (71,483) | (56,676) | (71,483) | |||||
Accumulated other comprehensive loss | (1,275,519) | (1,405,241) | (1,275,519) | (1,405,241) | |||||
Equity attributable to interest of controlling shareholders | 6,964,627 | 11,200,211 | 6,964,627 | 11,200,211 | |||||
Equity attributable to non-controlling interest | - | - | 567,150 | 512,571 | |||||
Total equity | 6,964,627 | 11,200,211 | 7,531,777 | 11,712,782 | |||||
TOTAL LIABILITIES AND EQUITY | 40,280,985 | 39,983,749 | 42,382,377 | 45,228,481 |
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(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais,unless otherwise stated)
| ![]() |
STATEMENTS OF INCOME (LOSS) | |||||||||
Parent company | Consolidated | ||||||||
Note | 12.31.18 | Restated 12.31.17 | 12.31.18 | Restated 12.31.17 | |||||
CONTINUED OPERATIONS | |||||||||
NET SALES | 31 | 24,459,546 | 25,539,142 | 30,188,421 | 28,314,160 | ||||
Cost of sales | 35 | (21,606,445) | (20,974,396) | (25,320,753) | (22,601,215) | ||||
GROSS PROFIT | 2,853,101 | 4,564,746 | 4,867,668 | 5,712,945 | |||||
OPERATING INCOME (EXPENSES) | |||||||||
Selling expenses | 35 | (3,281,469) | (3,131,640) | (4,513,594) | (4,208,683) | ||||
General and administrative expenses | 35 | (301,790) | (236,027) | (551,165) | (462,523) | ||||
Impairment loss on trade and other receivables | 35 | (25,327) | (45,948) | (46,269) | (67,471) | ||||
Other operating expenses, net | 33 | 51,410 | (292,605) | 19,311 | (333,467) | ||||
Income from associates and joint ventures | 16 | 69,309 | (315,042) | 17,715 | 22,383 | ||||
INCOME BEFORE FINANCIAL RESULTS AND INCOME TAXES | (634,766) | 543,484 | (206,334) | 663,184 | |||||
Financial expenses | 34 | (3,073,656) | (2,772,330) | (3,891,106) | (3,445,449) | ||||
Financial income | 34 | 911,697 | 950,650 | 1,649,632 | 1,563,691 | ||||
LOSS BEFORE TAXES FROM CONTINUED OPERATIONS | (2,796,725) | (1,278,196) | (2,447,808) | (1,218,574) | |||||
Current income taxes | 13 | - | 86,396 | (6,842) | 41,227 | ||||
Deferred income taxes | 13 | 681,757 | 207,555 | 340,144 | 210,582 | ||||
LOSS FROM CONTINUED OPERATIONS | (2,114,968) | (984,245) | (2,114,506) | (966,765) | |||||
DISCONTINUED OPERATIONS | |||||||||
LOSS FROM DISCONTINUED OPERATIONS | 12 | (2,333,093) | (141,327) | (2,351,740) | (132,089) | ||||
LOSS FOR THE YEAR | (4,448,061) | (1,125,572) | (4,466,246) | (1,098,854) | |||||
|
| ||||||||
Net Loss From Continued Operation Attributable to | |||||||||
Controlling shareholders | (2,114,968) | (984,245) | (2,114,968) | (984,245) | |||||
Non-controlling interest | - | - | 462 | 17,480 | |||||
(2,114,968) | (984,245) | (2,114,506) | (966,765) | ||||||
Net Loss From Discontinued Operation Attributable to | |||||||||
Controlling shareholders | (2,333,093) | (141,327) | (2,333,093) | (141,327) | |||||
Non-controlling interest | - | - | (18,647) | 9,238 | |||||
(2,333,093) | (141,327) | (2,351,740) | (132,089) | ||||||
LOSSES PER SHARE FROM CONTINUED OPERATIONS |
| ||||||||
Weighted average shares outstanding - basic | 811,294,251 |
| 803,559,763 | ||||||
Losses per share - basic | 28 | (2.60691) |
| (1.22486) | |||||
Weighted average shares outstanding - diluted | 811,294,251 |
| 803,559,763 | ||||||
Losses per share - diluted | 28 | (2.60691) | (1.22486) | ||||||
| |||||||||
LOSSES PER SHARE FROM DISCONTINUED OPERATIONS | |||||||||
Weighted average shares outstanding - basic | 811,294,251 |
| 803,559,763 | ||||||
Losses per share - basic | 28 | (2.87577) |
| (0.17588) | |||||
Weighted average shares outstanding - diluted | 811,294,251 |
| 803,559,763 | ||||||
Losses per share - diluted | 28 | (2.87577) |
| (0.17588) | |||||
|
12
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais,unless otherwise stated)
| ![]() |
STATEMENTS OF COMPREHENSIVE INCOME (LOSS) | |||||||||
Parent company | Consolidated | ||||||||
Note | 12.31.18 | Restated 12.31.17 | 12.31.18 | Restated 12.31.17 | |||||
Loss for the year | (4,448,061) | (1,125,572) | (4,466,246) | (1,098,854) | |||||
Other comprehensive income (loss) | |||||||||
Gain (loss) on foreign currency translation adjustments | 14,144 | (73,124) | 84,361 | 33,354 | |||||
Losses on marketable securities at FVTOCI | 7 | (126,951) | (41,732) | (126,951) | (41,732) | ||||
Taxes on unrealized losses on marketable securities at FVTOCI | 7 | 20,783 | 11,472 | 20,783 | 11,472 | ||||
Unrealized gains (losses) on cash flow hedge | 4 | 264,311 | (49) | 264,311 | (49) | ||||
Taxes on unrealized gain (loss) on cash flow hegde | 4 | (88,324) | 3,758 | (88,324) | 3,758 | ||||
Net other comprehensive income, to be reclassified to the statement of income in subsequent periods | 83,963 | (99,675) | 154,180 | 6,803 | |||||
Actuarial gains on pension and post-employment plans | 25 | 1,474 | 1,533 | 1,474 | 1,533 | ||||
Taxes on realized gains on pension and post-employment plans | 25 | (1,147) | (19) | (1,147) | (19) | ||||
Net other comprehensive income (loss), with no impact into subsequent statement of income | 327 | 1,514 | 327 | 1,514 | |||||
Total comprehensive income (loss), net | (4,363,771) | (1,223,733) | (4,311,739) | (1,090,537) | |||||
Attributable to | |||||||||
Controlling shareholders | (4,363,771) | (1,223,733) | (4,363,771) | (1,223,733) | |||||
Non-controlling interest | - | - | 52,032 | 133,196 | |||||
(4,363,771) | (1,223,733) | (4,311,739) | (1,090,537) |
See accompanying notes to the financial statements.
13
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais,unless otherwise stated)
| ![]() |
STATEMENTS OF CHANGES IN EQUITY | |||||||||||||||||||||||||||
Attributed to of controlling shareholders | |||||||||||||||||||||||||||
| Capital reserves | Income reserves | Other comprehensiveincome (loss) | ||||||||||||||||||||||||
Paid-in capital | Capital reserve | Treasury shares | Legal reserve | Reserve for capital increases | Reserve for tax incentives | Acumulated foreign currency translation adjustments | Marketable securities at FVTOCI | Gain (losses) on cash flow hedge | Actuarial losses | Retained earnings (losses) | Total equity | Non-controlling interest | Total shareholders' equity | ||||||||||||||
BALANCES AT DECEMBER 31, 2016 | 12,460,471 | 41,006 | (721,856) | 540,177 | 170,756 | 639,742 | (693,835) | (25,998) | (575,861) | 5,376 | - | 11,839,978 | 379,375 | 12,219,353 | |||||||||||||
Comprehensive income (loss) (1) | |||||||||||||||||||||||||||
Loss on foreign currency translation adjustments | - | - | - | - | - | - | (73,124) | - | - | - | - | (73,124) | 106,478 | 33,354 | |||||||||||||
Unrealized loss in marketable securities at FVTOCI | - | - | - | - | - | - | - | (30,260) | - | - | - | (30,260) | - | (30,260) | |||||||||||||
Unrealized gains in cash flow hedge | - | - | - | - | - | - | - | - | 3,709 | - | - | 3,709 | - | 3,709 | |||||||||||||
Actuarial gains (losses) on pension and post-employment plans | - | - | - | - | - | - | - | - | - | (15,248) | 16,762 | 1,514 | - | 1,514 | |||||||||||||
Loss for the year | - | - | - | - | - | - | - | - | - | - | (1,125,572) | (1,125,572) | 26,718 | (1,098,854) | |||||||||||||
SUB-TOTAL COMPREHENSIVE INCOME (LOSS) | (73,124) | (30,260) | 3,709 | (15,248) | (1,108,810) | (1,223,733) | 133,196 | (1,090,537) | |||||||||||||||||||
Appropriation of income (loss) | |||||||||||||||||||||||||||
Loss absorbing with legal reserve | - | - | - | (438,810) | - | - | - | - | - | - | 438,810 | - | - | - | |||||||||||||
Loss absorbing with future capital increase | - | - | - | - | (30,258) | - | - | - | - | - | 30,258 | - | - | - | |||||||||||||
Loss absorbing with reserve for tax incentives | - | - | - | - | - | (639,742) | - | - | - | - | 639,742 | - | - | - | |||||||||||||
Share-based payments | - | 25,621 | - | - | - | - | - | - | - | - | - | 25,621 | - | 25,621 | |||||||||||||
Acquisition of non-controlling interest | - | 48,470 | - | - | - | - | - | - | - | - | - | 48,470 | - | 48,470 | |||||||||||||
Treasury shares sold | - | - | 650,373 | - | - | - | - | - | - | - | - | 650,373 | - | 650,373 | |||||||||||||
Losses in treasury shares sold | - | - | - | - | (140,498) | - | - | - | - | - | - | (140,498) | - | (140,498) | |||||||||||||
BALANCES AT DECEMBER 31, 2017 | 12,460,471 | 115,097 | (71,483) | 101,367 | - | - | (766,959) | (56,258) | (572,152) | (9,872) | - | 11,200,211 | 512,571 | 11,712,782 | |||||||||||||
Adoption of IFRS 9 | - | - | - | - | - | - | - | - | - | - | (17,087) | (17,087) | 2,547 | (14,540) | |||||||||||||
Restatement by hyperinflation | - | - | - | - | - | - | - | - | - | - | 130,210 | 130,210 | - | 130,210 | |||||||||||||
Comprehensive income (loss) (1) | |||||||||||||||||||||||||||
Gains on foreign currency translation adjustments | - | - | - | - | - | - | 14,144 | - | - | - | - | 14,144 | 70,217 | 84,361 | |||||||||||||
Unrealized losses on marketable securities at FVTOCI | - | - | - | - | - | - | - | (42,193) | - | - | - | (42,193) | - | (42,193) | |||||||||||||
Unrealized gains in cash flow hedge | - | - | - | - | - | - | - | - | 175,987 | - | - | 175,987 | - | 175,987 | |||||||||||||
Actuarial gains (losses) on pension and post-employment plans | - | - | - | - | - | - | - | - | - | (18,216) | 18,543 | 327 | - | 327 | |||||||||||||
Realized loss in marketable securities at FVTOCI | - | - | - | - | - | - | - | - | - | - | (63,975) | (63,975) | (63,975) | ||||||||||||||
Loss for the year | - | - | - | - | - | - | - | - | - | - | (4,448,061) | (4,448,061) | (18,185) | (4,466,246) | |||||||||||||
SUB-TOTAL COMPREHENSIVE INCOME (LOSS) | 14,144 | (42,193) | 175,987 | (18,216) | (4,493,493) | (4,363,771) | 52,032 | (4,311,739) | |||||||||||||||||||
Appropriation of income (loss) | |||||||||||||||||||||||||||
Loss absorbing with legal reserve | - | - | - | (101,367) | - | - | - | - | - | - | 101,367 | - | - | - | |||||||||||||
Share-based payments | - | 477 | 14,807 | - | - | - | - | - | - | - | - | 15,284 | - | 15,284 | |||||||||||||
Loss on controlling changes | - | (220) | - | - | - | - | - | - | - | - | - | (220) | - | (220) | |||||||||||||
BALANCES AT DECEMBER 31, 2018 | 12,460,471 | 115,354 | (56,676) | - | - | - | (752,815) | (98,451) | (396,165) | (28,088) | (4,279,003) | 6,964,627 | 567,150 | 7,531,777 |
(1) All changes in other comprehensive income are presented net of taxes.
See accompanying notes to the financial statements.
14
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais,unless otherwise stated)
| ![]() |
STATEMENTS OF CASH FLOWS | ||||||||
Parent company | Consolidated | |||||||
12.31.18 | Restated 12.31.17 | 12.31.18 | Restated 12.31.17 | |||||
OPERATING ACTIVITIES | ||||||||
Loss from continuing operations | (2,114,968) | (984,245) | (2,114,506) | (966,765) | ||||
Adjustments to reconcile loss to net cash |
|
|
|
| ||||
Depreciation and amortization | 767,867 | 755,260 | 962,677 | 895,528 | ||||
Depreciation and depletion of biological assets | 584,414 | 613,721 | 784,524 | 736,768 | ||||
Loss on disposals of property, plant and equipments | 50,499 | 18,958 | 51,004 | 8,423 | ||||
Provision for losses in inventories | 258,974 | 213,739 | 352,164 | 224,659 | ||||
Provision for tax, civil and labor risks | 176,922 | 423,516 | 214,439 | 443,318 | ||||
Tax Amnesty Program ("PERT") | - | (449,822) | - | (449,822) | ||||
Income from associates and joint ventures | (69,309) | 315,042 | (17,715) | (22,383) | ||||
Financial results, net | 2,161,959 | 1,821,680 | 2,241,474 | 1,881,758 | ||||
Deferred income tax | (681,757) | (207,555) | (340,144) | (210,582) | ||||
Others | 162,030 | 153,971 | 176,799 | 244,852 | ||||
Cash flow provided by operating activities before working capital | 1,296,631 | 2,674,265 | 2,310,716 | 2,785,754 | ||||
Trade accounts receivable | 3,311,148 | 1,151,249 | 992,512 | (682,100) | ||||
Inventories | 10,433 | (351,764) | (226,046) | 35,173 | ||||
Biological assets - current assets | (40,433) | 195,078 | (50,093) | 224,854 | ||||
Trade accounts payable | (1,482,641) | (499,990) | (1,051,368) | 1,085,360 | ||||
Supply chain finance | 236,869 | (686,668) | 170,940 | (621,242) | ||||
Cash generated by operating activities | 3,332,007 | 2,482,170 | 2,146,661 | 2,827,799 | ||||
Investments in securities at FVTPL | (273,675) | - | (273,678) | 7,609 | ||||
Redemptions of securities at FVTPL | 143,669 | 53,148 | 143,669 | 53,336 | ||||
Interest received | 143,129 | 362,787 | 177,299 | 405,502 | ||||
Interest on shareholders' equity received | 10,913 |
| 40,668 |
| 3,606 |
| 26,828 | |
Payment of tax, civil and labor provisions | (329,983) | (497,330) | (355,605) | (509,285) | ||||
Interest paid | (772,121) | (1,072,953) | (1,147,351) | (1,323,275) | ||||
Payment of income tax and social contribution | - |
| - |
| (737) |
| (37,177) | |
Other assets and liabilities | (1,582,337) | (205,007) | (265,480) | (781,530) | ||||
Net cash provided by operating activities | 671,602 | 1,163,483 | 428,384 | 669,807 | ||||
Net cash (applied) provided by operating activities from discontinued operations | (3,949) | 98,777 | (132,699) | (20,451) | ||||
Net cash provided by operating activities | 667,653 |
| 1,262,260 | 295,685 | 649,356 | |||
INVESTING ACTIVITIES | ||||||||
Investments in securities at amortized cost | - | (80,622) | (213,697) | (97,552) | ||||
Redemptions of securities at amortized cost | - | 86,260 | 179,667 | 118,593 | ||||
Investments in securities at FVTOCI | (5,194) | - | (5,194) | - | ||||
Redemptions of securities at FVTOCI | 140,886 | 15,011 | 140,886 | 238,349 | ||||
Redemption (Investments) in restricted cash |
| (248,585) | 2,314 | (249,366) | 74,742 | |||
Additions to property, plant and equipment | (459,473) | (607,492) | (578,037) | (681,184) | ||||
Additions to biological assets - non-current assets | (569,974) | (570,844) | (845,311) | (681,681) | ||||
Proceeds from disposals of property, plant and equipment | 261,576 | 150,284 | 261,576 | 150,284 | ||||
Additions to intangible assets | (18,578) | (48,890) | (20,535) | (51,056) | ||||
Business combination, net of cash | - | (59,186) | - | (1,119,651) | ||||
Cash received from merger of subsidiary | 38,896 | - | - | - | ||||
Sale/(Acquisition) of participation in joint ventures and associated entities | 3,351 | (1,208) | 3,351 | (1,208) | ||||
Capital increase in associates and joint ventures | (125,751) | (401,519) | - | - | ||||
Advance for future capital increase | - | (1,205) | - | - | ||||
Net cash used in investing activities | (982,846) | (1,517,097) | (1,326,660) | (2,050,364) | ||||
Net cash used in investing activities from discontinued operations | (155,868) | (179,751) | (89,219) | (84,149) | ||||
Net cash used in investing activities | (1,138,714) | (1,696,848) | (1,415,879) | (2,134,513) | ||||
FINANCING ACTIVITIES | ||||||||
Proceeds from debt issuance | 6,264,830 | 5,964,332 | 6,500,102 | 8,020,243 | ||||
Repayment of debt | (5,453,236) | (6,202,397) | (6,223,963) | (7,332,523) | ||||
Treasury shares disposal | - | 509,875 | - | 509,875 | ||||
Commercial leasing | (99,018) | (144,971) | (102,397) | (149,924) | ||||
Net cash provided by financing activities | 712,576 | 126,839 | 173,742 | 1,047,671 | ||||
Net cash provided (used in) by financing activities from discontinued operations | - | - | (99,818) | 9,412 | ||||
Net cash provided by financing activities | 712,576 | 126,839 | 73,924 | 1,057,083 | ||||
EFFECT ON EXCHANGE RATE VARIATION ON CASH AND CASH EQUIVALENTS | 482 | 35,945 | 71,452 | 81,984 | ||||
Net increase (decrease) in cash and cash equivalents | 241,997 | (271,804) | (974,818) | (346,090) | ||||
At the beginning of the year | 3,584,701 | 3,856,505 | 6,010,829 | 6,356,919 | ||||
At the end of the year (1) | 3,826,698 | 3,584,701 | 5,036,011 | 6,010,829 |
(1) In Consolidated, the cash includes the amount of R$166,449 related to assets held for sale (note 12).
See accompanying notes to the financial statements.
15
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais,unless otherwise stated)
| ![]() |
STATEMENT OF ADDED VALUE | ||||||||
Parent company | Consolidated | |||||||
12.31.18 | Restated 12.31.17 | 12.31.18 | Restated 12.31.17 | |||||
1 - REVENUES | 28,128,875 | 28,674,489 | 34,250,445 | 31,729,046 | ||||
Sales of goods and products | 27,649,115 | 28,558,830 | 33,644,611 | 31,612,225 | ||||
Other income | 71,166 | (435,656) | 61,741 | (527,332) | ||||
Revenue related to construction of own assets | 442,564 | 570,797 | 585,386 | 693,614 | ||||
Allowance for doubtful accounts | (33,970) | (19,482) | (41,293) | (49,461) | ||||
2 - RAW MATERIAL ACQUIRED FROM THIRD PARTIES | (19,907,750) | (18,982,752) | (23,574,128) | (20,537,943) | ||||
Costs of goods sold | (17,495,398) | (16,310,458) | (20,160,093) | (16,986,999) | ||||
Materials, energy, third parties services and other | (2,552,133) | (2,468,103) | (3,602,958) | (3,350,434) | ||||
Reversal (provision) for inventories losses | 139,781 | (204,191) | 188,923 | (200,510) | ||||
3 - GROSS ADDED VALUE (1-2) | 8,221,125 | 9,691,737 | 10,676,317 | 11,191,103 | ||||
4 - DEPRECIATION AND AMORTIZATION | (1,352,281) | (1,368,981) | (1,747,201) | (1,632,296) | ||||
5 - NET ADDED VALUE (3-4) | 6,868,844 | 8,322,756 | 8,929,116 | 9,558,807 | ||||
6 - RECEIVED FROM THIRD PARTIES | 983,892 | 638,017 | 1,671,943 | 1,590,256 | ||||
Income from associates and joint ventures | 69,309 | (315,042) | 17,715 | 22,383 | ||||
Financial income | 911,697 | 950,650 | 1,649,632 | 1,563,691 | ||||
Others | 2,886 | 2,409 | 4,596 | 4,182 | ||||
7 - ADDED VALUE TO BE DISTRIBUTED (5+6) | 7,852,736 | 8,960,773 | 10,601,059 | 11,149,063 | ||||
8 - DISTRIBUTION OF ADDED VALUE | 7,852,736 | 8,960,773 | 10,601,059 | 11,149,063 | ||||
Payroll | 3,664,294 | 3,896,538 | 4,794,575 | 4,892,179 | ||||
Salaries | 2,682,986 | 3,032,687 | 3,609,390 | 3,765,991 | ||||
Benefits | 780,624 | 662,071 | 945,236 | 886,707 | ||||
Government severance indemnity fund for employees | 200,684 | 201,780 | 239,949 | 239,481 | ||||
Taxes, Fees and Contributions | 2,855,281 | 3,073,413 | 3,530,040 | 3,454,893 | ||||
Federal | 780,773 | 1,149,621 | 1,498,010 | 1,572,715 | ||||
State | 2,042,414 | 1,892,375 | 1,994,580 | 1,845,443 | ||||
Municipal | 32,094 | 31,417 | 37,450 | 36,735 | ||||
Capital Remuneration from Third Parties | 3,448,129 | 2,975,067 | 4,390,950 | 3,768,756 | ||||
Interests | 3,090,888 | 2,803,909 | 3,910,718 | 3,479,053 | ||||
Rents | 357,241 | 171,158 | 480,232 | 289,703 | ||||
Interest on Own-Capital | (2,114,968) | (984,245) | (2,114,506) | (966,765) | ||||
Loss of the year | (2,114,968) | (984,245) | (2,114,968) | (984,245) | ||||
Non-controlling interest | - | - | 462 | 17,480 |
See accompanying notes to the financial statements.
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18
19
20
21
22
23
24
25
26
27
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30
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32
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35
36
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38
39
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(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
1. COMPANY’S OPERATIONS
BRF S.A. (“BRF”) and its consolidated subsidiaries (collectively the “Company”) is a multinational Brazilian Company, which owns a comprehensive and diverse portfolio of products and it is one of the world’s largest producers of foods. With a focus on raising, producing and slaughtering of poultry and pork for processing, production and sale of fresh meat, processed products, pasta, frozen vegetables and soybean by-products, among which the following are highlighted:
· Whole chickens and frozen cuts of chicken, turkey and pork;
· Ham products, bologna, sausages, frankfurters and other smoked products;
· Hamburgers, breaded meat products and meatballs;
· Lasagnas, pizzas, cheese breads, pies and frozen vegetables;
· Margarine; and
· Soy meal and refined soy flour, as well as animal feed.
BRF is a public company, listed on the New Market of B3 (“Brasil, Bolsa, Balcão”), under the ticker BRFS3, and listed on the New York Stock Exchange (“NYSE”), under the ticker BRFS. Its headquarters are located at 475 Jorge Tzachel street, in the City of Itajaí, State of Santa Catarina.
Our portfolio strategy is focused on creating new, convenient, practical and healthy products for our consumers based on their needs. We seek to achieve that goal through strong innovation to provide us with increasing value-added items that will differentiate us from our competitors and strengthen our brands.
The Company's business model is by means of a vertical and integrated production system, which are distributed through an extensive distribution network, reaching the 5 continents, to meet supermarkets, retail stores, wholesalers, restaurants and other institutional customers. In addition, our facilities are strategically located near to their raw material suppliers or its main consumption centers.
The Company has as main brands Sadia, Perdigão, Qualy, Chester®, Perdix, Paty and Banvit that are highly recognized, especially in Brazil, Turkey and the Middle East. On February, 2018 the Company launched the Kidelli band in Brazil, which presents a portfolio of products different from other brands and very diversified, based on poultry and pork, offering our quality products with competitive prices.
The Company went through a financial and operational restructuringduring 2018, detailed in note 1.4, which resulted in a change in its management structure, so that the Company's activities were organized into 4 operational segments: Brazil, International, Halal and Other segments (note 5). Thus, the numbers of 2017 were adjustments and restated.
45
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
1.1. Equity interest
Accounting method | % equity interest | ||||||||||||
Entity |
| Main activity | Country | Participation | 12.31.18 | 12.31.17 | |||||||
BRF Energia S.A. |
|
| Commercialization of eletric energy |
| Brazil |
| Direct |
| Consolidated |
| 100.00% |
| 100.00% |
BRF GmbH | Holding | Austria | Direct | Consolidated | 100.00% | 100.00% | |||||||
BRF Foods LLC | Import and commercialization of products | Russia | Indirect | Consolidated | 99.90% | 99.90% | |||||||
BRF France SARL | (l) | Marketing and logistics services | France | Indirect | Consolidated | 100.00% | 100.00% | ||||||
BRF Global Company Nigeria Ltd. | Marketing and logistics services | Nigeria | Indirect | Consolidated | 99.00% | 99.00% | |||||||
BRF Global Company South Africa Proprietary Ltd. | Import and commercialization of products | South Africa | Indirect | Consolidated | 100.00% | 100.00% | |||||||
BRF Global Company Nigeria Ltd. | Marketing and logistics services | Nigeria | Indirect | Consolidated | 1.00% | 1.00% | |||||||
BRF Global GmbH | (b) | Holding and trading | Austria | Indirect | Consolidated | 100.00% | 100.00% | ||||||
BRF Foods LLC | Import and commercialization of products | Russia | Indirect | Consolidated | 0.10% | 0.10% | |||||||
Qualy 5201 B.V. | (b) (l) | Import, commercialization of products and holding | The Netherlands | Indirect | Consolidated | 100.00% | 100.00% | ||||||
Xamol Consultores Serviços Ltda. | (l) | Import and commercialization of products | Portugal | Indirect | Consolidated | 100.00% | 100.00% | ||||||
BRF Japan KK | Marketing and logistics services | Japan | Indirect | Consolidated | 100.00% | 100.00% | |||||||
BRF Korea LLC | Marketing and logistics services | Korea | Indirect | Consolidated | 100.00% | 100.00% | |||||||
BRF Shanghai Management Consulting Co. Ltd. | Advisory and related services | China | Indirect | Consolidated | 100.00% | 100.00% | |||||||
BRF Shanghai Trading Co. Ltd. | Commercialization and distribution of products | China | Indirect | Consolidated | 100.00% | 100.00% | |||||||
BRF Singapore PTE Ltd. | Marketing and logistics services | Singapore | Indirect | Consolidated | 100.00% | 100.00% | |||||||
BRF Germany GmbH | (l) | Import and commercialization of products | Germany | Indirect | Consolidated | 100.00% | 100.00% | ||||||
BRF GmbH Turkiye Irtibat | (g) | Import and commercialization of products | Turkey | Indirect | Consolidated | - | 100.00% | ||||||
BRF Holland B.V. | (l) | Import and commercialization of products | The Netherlands | Indirect | Consolidated | 100.00% | 100.00% | ||||||
Campo Austral S.A. | (k) | Industrialization and commercialization of products | Argentina | Indirect | Consolidated | 2.66% | 2.66% | ||||||
Eclipse Holding Cöoperatief U.A. | (k) | Holding | The Netherlands | Indirect | Consolidated | 0.01% | 0.01% | ||||||
BRF B.V. | (l) | Industrialization, import and commercialization of products | The Netherlands | Indirect | Consolidated | 100.00% | 100.00% | ||||||
ProudFood Lda | Import and commercialization of products | Angola | Indirect | Consolidated | 10.00% | 10.00% | |||||||
BRF Hungary LLC | Import and commercialization of products | Hungary | Indirect | Consolidated | 100.00% | 100.00% | |||||||
BRF Iberia Alimentos SL | (l) | Import and commercialization of products | Spain | Indirect | Consolidated | 100.00% | 100.00% | ||||||
BRF Invicta Ltd. | Import, commercialization and distribution of products | England | Indirect | Consolidated | 69.16% | 69.16% | |||||||
Invicta Food Products Ltd. | (l) | Import and commercialization of products | England | Indirect | Consolidated | 100.00% | 100.00% | ||||||
BRF Wrexham Ltd. | (l) | Industrialization, import and commercialization of products | England | Indirect | Consolidated | 100.00% | 100.00% | ||||||
Invicta Food Group Ltd. | (b) (l) | Import, commercialization and distribution of products | England | Indirect | Consolidated | 100.00% | 100.00% | ||||||
Invicta Foods Ltd. | (l) | Import, commercialization and distribution of products | England | Indirect | Consolidated | 100.00% | 100.00% | ||||||
Invicta Foodservice Ltd. | (l) | Import, commercialization and distribution of products | England | Indirect | Consolidated | 100.00% | 100.00% | ||||||
Universal Meats (UK) Ltd. | (b) (l) | Import, Industrialization, commercialization and distribution of products | England | Indirect | Consolidated | 100.00% | 100.00% | ||||||
BRF Italia SPA | (l) | Import and commercialization of products | Italy | Indirect | Consolidated | 67.00% | 67.00% | ||||||
Compañía Paraguaya Comercial S.A. | Import and commercialization of products | Paraguay | Indirect | Consolidated | 99.00% | 99.00% | |||||||
Campo Austral S.A. | (k) | Industrialization and commercialization of products | Argentina | Indirect | Consolidated | 50.48% | 50.48% | ||||||
Itega S.A. | (k) | Holding | Argentina | Indirect | Consolidated | 96.00% | 96.00% | ||||||
Eclipse Holding Cöoperatief U.A. | (k) | Holding | The Netherlands | Indirect | Consolidated | 99.99% | 99.99% | ||||||
Buenos Aires Fortune S.A. | (k) | Holding | Argentina | Indirect | Consolidated | 5.00% | 5.00% | ||||||
Campo Austral S.A. | (k) | Industrialization and commercialization of products | Argentina | Indirect | Consolidated | 8.44% | 8.44% | ||||||
Eclipse Latam Holdings | (k) | Holding | Spain | Indirect | Consolidated | 100.00% | 100.00% | ||||||
Buenos Aires Fortune S.A. | (k) | Holding | Argentina | Indirect | Consolidated | 95.00% | 95.00% | ||||||
Campo Austral S.A. | (k) | Industrialization and commercialization of products | Argentina | Indirect | Consolidated | 6.53% | 6.53% | ||||||
Campo Austral S.A. | (k) | Industrialization and commercialization of products | Argentina | Indirect | Consolidated | 31.89% | 31.89% | ||||||
Itega S.A. | (k) | Holding | Argentina | Indirect | Consolidated | 4.00% | 4.00% | ||||||
Golden Foods Poultry Limited | (l) | Holding | Thailand | Indirect | Consolidated | 48.52% | 48.52% | ||||||
Golden Poultry Siam Limited | (l) | Holding | Thailand | Indirect | Consolidated | 51.84% | 51.84% | ||||||
Golden Poultry Siam Limited | (l) | Holding | Thailand | Indirect | Consolidated | 48.16% | 48.16% | ||||||
BRF Thailand Limited | (l) | Import, Industrialization, commercialization and distribution of products | Thailand | Indirect | Consolidated | 100.00% | 100.00% | ||||||
BRF Feed Thailand Limited | (l) | Import, Industrialization, commercialization and distribution of products | Thailand | Indirect | Consolidated | 100.00% | 100.00% | ||||||
Golden Foods Sales (Europe) Limited | (l) | Holding and trading | England | Indirect | Consolidated | 100.00% | 100.00% | ||||||
Golden Quality Foods Europe BV | (l) | Import, commercialization and distribution of products | The Netherlands | Indirect | Consolidated | 100.00% | 100.00% | ||||||
Golden Quality Foods Netherlands BV | (l) | Import, commercialization and distribution of products | The Netherlands | Indirect | Consolidated | 100.00% | 100.00% | ||||||
Golden Foods Siam Europe Limited | (b) (l) | Import, commercialization and distribution of products | England | Indirect | Consolidated | 100.00% | 100.00% | ||||||
Golden Quality Poultry (UK) Ltd | (l) | Import, commercialization and distribution of products | England | Indirect | Consolidated | 100.00% | 100.00% | ||||||
Perdigão Europe Lda. | Import and export of products | Portugal | Indirect | Consolidated | 100.00% | 100.00% | |||||||
Perdigão International Ltd. | Import and export of products | Cayman Island | Indirect | Consolidated | 100.00% | 100.00% | |||||||
BFF International Ltd. | Financial fundraising | Cayman Island | Indirect | Consolidated | 100.00% | 100.00% | |||||||
Highline International | (a) | Financial fundraising | Cayman Island | Indirect | Consolidated | 100.00% | 100.00% | ||||||
Sadia Overseas Ltd. | Financial fundraising | Cayman Island | Indirect | Consolidated | 98.00% | 98.00% | |||||||
ProudFood Lda | Import and commercialization of products | Angola | Indirect | Consolidated | 90.00% | 90.00% | |||||||
Sadia Chile S.A. | Import and commercialization of products | Chile | Indirect | Consolidated | 40.00% | 40.00% | |||||||
Sadia Foods GmbH | (c) | Import and commercialization of products | Germany | Indirect | Consolidated | - | 100.00% | ||||||
SATS BRF Food PTE Ltd. | Import, industrialization, commercialization and distribution of products | Singapore | Joint venture | Equity pick-up | 49.00% | 49.00% | |||||||
BRF Global Namíbia | Import and commercialization of products | Namibia | Indirect | Consolidated | 100.00% | 100.00% | |||||||
Wellax Food Logistics C.P.A.S.U. Lda. |
| Import and commercialization of products | Portugal | Indirect | Consolidated | 100.00% | 100.00% | ||||||
BRF Luxembourg Sarl |
| Holding |
| Luxemburgo |
| Direct |
| Consolidated |
| 100.00% |
| 100.00% | |
BRF Austria GmbH | Holding | Austria | Indirect | Consolidated | 100.00% | 100.00% | |||||||
One Foods Holdings Ltd | Holding | United Arab Emirates | Indirect | Consolidated | 100.00% | 100.00% | |||||||
Al-Wafi Food Products Factory LLC | Industrialization and commercialization of products | United Arab Emirates | Indirect | Consolidated | 49.00% | 49.00% | |||||||
Badi Ltd. | Holding | United Arab Emirates | Indirect | Consolidated | 100.00% | 100.00% | |||||||
Al-Wafi Al-Takamol International for Foods Products | Import and commercialization of products | Saudi Arabia | Indirect | Consolidated | 75.00% | 75.00% | |||||||
BRF Al Yasra Food K.S.C.C. ("BRF AFC") | Import, commercialization and distribution of products | Kuwait | Indirect | Consolidated | 49.00% | 49.00% | |||||||
BRF Foods GmbH | Industrialization, import and commercialization of products | Austria | Indirect | Consolidated | 100.00% | 100.00% | |||||||
Al Khan Foodstuff LLC ("AKF") | Import, commercialization and distribution of products | Oman | Indirect | Consolidated | 70.00% | 70.00% | |||||||
FFM Further Processing Sdn. Bhd. | Industrialization, import and commercialization of products | Malaysia | Indirect | Consolidated | 70.00% | 70.00% | |||||||
FFQ GmbH | (i) | Industrialization, import and commercialization of products | Austria | Indirect | Consolidated | 100.00% | - | ||||||
SHB Comércio e Indústria de Alimentos S.A. | (f) (j) | Industrialization and commercialization of products | Brazil | Indirect | Consolidated | - | 99.99% | ||||||
TBQ Foods GmbH | Commercialization of products | Austria | Indirect | Consolidated | 60.00% | 60.00% | |||||||
Banvit Bandirma Vitaminli | Holding | Turkey | Indirect | Consolidated | 91.71% | 91.71% | |||||||
Banvit Enerji ve Elektrik Üretim Ltd. Sti. | Commercialization of eletric energy | Turkey | Indirect | Consolidated | 100.00% | 100.00% | |||||||
Banvit Foods SRL | Industrialization of grains and animal feed | Romania | Indirect | Consolidated | 0.01% | 0.01% | |||||||
Nutrinvestments BV | Holding | The Netherlands | Indirect | Consolidated | 100.00% | 100.00% | |||||||
Banvit ME FZE | Marketing and logistics services | United Arab Emirates | Indirect | Consolidated | 100.00% | 100.00% | |||||||
Banvit Foods SRL | Industrialization of grains and animal feed | Romania | Indirect | Consolidated | 99.99% | 99.99% | |||||||
One Foods Malaysia SDN. BHD. | (d) | Marketing and logistics services | Malaysia | Indireta | Consolidated | 100.00% | 100.00% | ||||||
Federal Foods LLC | Import, commercialization and distribution of products | United Arab Emirates | Indirect | Consolidated | 49.00% | 49.00% | |||||||
Federal Foods Qatar | Import, commercialization and distribution of products | Qatar | Indirect | Consolidated | 49.00% | 49.00% | |||||||
SHB Comércio e Indústria de Alimentos S.A. | (f) (j) | Industrialization and commercialization of products | Brazil | Indirect | Consolidated | - | 0.01% | ||||||
BRF Hong Kong LLC | Import, commercialization and distribution of products | Hong Kong | Indirect | Consolidated | 100.00% | 100.00% |
46
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
Accounting method | % equity interest | ||||||||||||
Entity |
| Main activity | Country | Participation | 12.31.18 | 12.31.17 | |||||||
Establecimiento Levino Zaccardi y Cia. S.A. | (a) (k) |
| Industrialization and commercialization of dairy products |
| Argentina |
| Direct |
| Consolidated |
| 99.94% |
| 99.94% |
BRF Pet S.A. |
|
| Industrialization and commercialization and distribution of feed and nutrients for animals |
| Brazil |
| Direct |
| Consolidated |
| 100.00% |
| 100.00% |
PP-BIO Administração de bem próprio S.A. | (h) |
| Management of assets |
| Brazil |
| Affiliate |
| Equity pick-up |
| 66.66% |
| 33.33% |
PSA Laboratório Veterinário Ltda. |
| Veterinary activities |
| Brazil |
| Direct |
| Consolidated |
| 99.99% |
| 99.99% | |
Sino dos Alpes Alimentos Ltda. | (a) | Industrialization and commercialization of products | Brazil | Indirect | Consolidated | 99.99% | 99.99% | ||||||
PR-SAD Administração de bem próprio S.A. | (e) |
| Management of assets |
| Brazil |
| Affiliate |
| Equity pick-up |
| - |
| 33.33% |
Quickfood S.A. | (k) |
| Industrialization and commercialization of products |
| Argentina |
| Direct |
| Consolidated |
| 91.21% |
| 91.21% |
Sadia Alimentos S.A. | (k) |
| Holding |
| Argentina |
| Direct |
| Consolidated |
| 43.10% |
| 43.10% |
Avex S.A. | (k) | Industrialization and commercialization of products | Argentina | Indirect | Consolidated | 33.98% | 33.98% | ||||||
Sadia International Ltd. |
|
| Import and commercialization of products |
| Cayman Island |
| Direct |
| Consolidated |
| 100.00% |
| 100.00% |
Sadia Chile S.A. | Import and commercialization of products | Chile | Indirect | Consolidated | 60.00% | 60.00% | |||||||
Sadia Uruguay S.A. | Import and commercialization of products | Uruguay | Indirect | Consolidated | 5.10% | 5.10% | |||||||
Avex S.A. | (k) | Industrialization and commercialization of products | Argentina | Indirect | Consolidated | 66.02% | 66.02% | ||||||
Compañía Paraguaya Comercial S.A. | Import and commercialization of products | Paraguay | Indirect | Consolidated | 1.00% | 1.00% | |||||||
Sadia Alimentos S.A. | (k) | Holding | Argentina | Indirect | Consolidated | 56.90% | 56.90% | ||||||
Sadia Overseas Ltd. |
|
| Financial fundraising |
| Cayman Island |
| Direct |
| Consolidated |
| 2.00% |
| 2.00% |
Sadia Uruguay S.A. |
|
| Import and commercialization of products |
| Uruguay |
| Direct |
| Consolidated |
| 94.90% |
| 94.90% |
SHB Comércio e Indústria de Alimentos S.A. | (f) (j) |
| Industrialization and commercialization of products |
| Brazil |
| Direct |
| Consolidated |
| - |
| - |
UP Alimentos Ltda. | (m) |
| Industrialization and commercialization of products |
| Brazil |
| Affiliate |
| Equity pick-up |
| 50.00% |
| 50.00% |
Vip S.A. Empreendimentos e Participações Imobiliárias |
|
| Commercialization of owned real state |
| Brazil |
| Direct |
| Consolidated |
| 100.00% |
| 100.00% |
Establecimiento Levino Zaccardi y Cia. S.A. | (a) (k) | Industrialization and commercialization of dairy products | Argentina | Indirect | Consolidated | 0.06% | 0.06% | ||||||
PSA Laboratório Veterinário Ltda. | Veterinary activities | Brazil | Indirect | Consolidated | 0.01% | 0.01% | |||||||
Sino dos Alpes Alimentos Ltda. | (a) |
| Industrialization and commercialization of products |
| Brazil |
| Indirect |
| Consolidated |
| 0.01% |
| 0.01% |
(a) Dormant subsidiaries.
(b) The wholly-owned subsidiary BRF Global GmbH, operates as a trading in the European market and owns 101 direct subsidiaries in Madeira Island, Portugal, with an investment as of December 31, 2018 of R$4,913 (R$3,617 as of December 31, 2017) and a direct subsidiary in Den Bosch, The Netherlands, denominated Qualy 20 with an investment as of December 31, 2018 of R$7,360 (R$6,471 as of December 31, 2017). The wholly-owned subsidiary Qualy 5201 B.V. owns 212 subsidiaries in The Netherlands being the amount of this investment as of December 31, 2018 of R$20,725 (R$20,210 as of December 31, 2017). The indirect subsidiary Invicta Food Group Ltd. owns 120 direct subsidiaries in Ashford, England, with an investment of R$44,805 as of December 31, 2018 (R$126,570 as of December 31, 2017). The indirect subsidiary Universal Meats (UK) Ltd owns 99 direct subsidiaries in Ashford, England with an investment of R$45,052 as of December 31, 2018 (R$41,636 as of December 31, 2017). The indirect subsidiary Golden Foods Siam Europe Ltd (GFE) owns 32 subsidiaries in Ashford, England with an investment of R$44 as of December 31, 2018 (R$16 as of December 31, 2017). The purpose of these subsidiaries is to operate in the European market to increase the Company’s market share, which is regulated by a system of poultry and turkey meat import quotas.
(c) On February 28, 2018, Sadia Foods GmbH closed the activities.
(d) On June 21, 2018, BRF Malaysia Sdn. Bhd changed its name to One Foods Malaysia SDN. BHD..
(e) On July 31, 2018 the Company sold its equity stake in PR-SAD.
(f) On September 01, 2018, BRF Foods GmbH and One Foods Holdings Ltd., which jointly held 100% of equity stake in SHB Comércio e Indústria de Alimentos S.A., sold their stakes to BRF S.A..
(g) On October 02, 2018, BRF GmbH Turkiye Irtibat closed the activities.
(h) On October 05, 2018, PP-BIO increased its equity interest in 33.33%, totaling 66.66% of the equity.
(i) On October 12, 2018, FFQ GmbH was incorporated.
(j) On December 31, 2008, SHB Comércio e Indústria de Alimentos SA was merged into the parent company BRF S.A . note (1.7).
(k) Subsidiaries in Argentina included in discontinued operations (note 12).
(l) Subsidiaries in Europe and Thailand included in discontinued operations (note 12).
(m) On December 2018, UP Alimentos Ltda. ended its activities.
47
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
1.2. Investigations involving BRF
The Company has been subject to two external investigations, denominated “Carne Fraca Operation” in 2017 and “Trapaça Operation” in 2018, as detailed below. The Company’s Audit and Integrity Committee is conducting independent investigations, along with the Independent Investigation Committee, composed of external members and with external legal advisors in Brazil and abroad with respect to the allegations involving BRF employees and former employees in the scope of the aforementioned operations and other ongoing investigations.
For the year ended December 31, 2018, the main impacts observed as result of the referred operations were recorded in: (i) cost of goods sold in the amount of R$403,300 (R$285,028 in 12.31.17) mostly related to inventory losses, adjustments to net realizable value and idleness, (ii) other operating expenses in the amount of R$78,889 (R$78,347 in 12.31.17) mostly related to expenditures with lawyers, legal advisors and consultants, and (iii) sales deductions in the amount of R$10,606 related to legal expenses with import quotas in Europe, which totaled R$492,795 (R$363.375 in 12.31.17).
The independent investigations create, in addition to the impacts already recorded, uncertainties about the outcome of these operations which may result in penalties, fines and normative sanctions, right restrictions and other forms of liabilities, for which the Company is not able to make a reliable estimate of the potential losses.
The outcomes may result in payments of substantial amounts, which may cause a material adverse effect on the Company´s financial position, results and cash flows in the future.
1.2.1. Carne Fraca Operation
On March 17, 2017, BRF became aware of a decision issued by a judge of the 14th Federal Court of Curitiba - Paraná, authorizing the search and seizure of information and documents, and the detention of certain individuals in the context of the Carne Fraca Operation. Two BRF employees were detained (subsequently released) and three were identified for questioning.
In April 2017, the Brazilian Federal Police and the Brazilian federal prosecutors filed charges against BRF employees, which were accepted by the judge responsible for the process, and its main allegations in this phase involve misconduct related to improper offers and/or promises to government inspectors.
On June 04, 2018, the Company was informed about the establishment of a responsibility administrative process (“PAR”) by the Office of the Comptroller General (“CGU”), under the Law Nº 12,846/2013 (“Anti-corruption Law”), which aims to verify eventual administrative responsibilities related to the facts object of the criminal lawsuitNº 5016879-04.2017.4.04.7000, (“Criminal Lawsuit”) in progress under the 14th Federal Court of the subsection of Curitiba/PR, as a consequence of the Carne Fraca Operation.
48
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
BRF has informed certain regulators and governmental entities, including the U.S. Securities and Exchange Commission and the U.S. Department of Justice about the Carne Fraca Operation and is cooperating with the authorities.
On September 28, 2018, the sentence of the Criminal Lawsuit in first instance was published, discharging one of the BRF employees and convicting the other one for six months of detention with the possibility of substitution for a right-restricting penalty. The Brazilian federal prosecutors presented appeal to the first instance decision. The appeal is being analyzed by the Federal Regional Court of the 4th region.
1.2.2. Trapaça Operation
On March 5, 2018, the Company learned of a decision issued by a judge of the 1st Federal Court of Ponta Grossa/PR, authorizing the search and seizure of information and documents due to allegations involving misconduct relating to quality violations, improper use of feed components and falsification of tests at certain BRF manufacturing plants and accredited labs. Such operation was denominated as Trapaça Operation. Still on March 5, 2018, BRF received notice from the Ministry of Agriculture, Livestock and Food Supply (“MAPA”) immediately suspending exports from its Rio Verde/GO, Carambeí/PR and Mineiros/GO plants to 12 countries that require specific sanitary requirements for the control of the bacteria group Salmonella spp and Salmonella pullorum.
On May 14, 2018, the Company received the formal notice that 12 plants located in Brazil were removed from the list that permits imports of animal origin products by the European Union’s countries. The measure came into force as of May 16, 2018 and affects only the plants located in Brazil and which have export licenses to the European Union, not affecting the supply to other markets or other BRF plants located outside Brazil and that export to the European market.
On October 15, 2018, the Federal Police Department submitted to the 1st Federal Criminal Court of the Judicial Branch of Ponta Grossa – PR the final report of its investigation in connection to the Trapaça Operation. The police inquiry indicted 43 people, including former key executives of the Company.
1.2.3. Governance enhancement
The Company, in the light of the facts related to the investigations of the authorities collaborates to the complete clarification of the facts. In this sense, the Company has decided to move away, independently of the results of the investigations, all employeesmentioned in the Federal Police’s final report of the Trapaça Operation until all facts are fully clarified.
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(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
BRF interacts in a wide and transparent way with the authorities, with the objective of collaborating with the full elucidation of the facts. Simultaneously, it will proceed with the internal investigations led by the Independent Investigation Committee and by the Audit and Integrity Committee to clarify all the facts identified or that may be identified in the future.
The Company believes that this cooperation process with the authorities strengthens and consolidates its governance through ongoing actions to ensure the highest levels of safety standars, integrity and quality, as well as greater autonomy to its Compliance Department.
Among the actions implemented, are: (i) strengthening in the risk management, specially compliance, (ii) strengthening of the Compliance, Internal Audit and Internal Controls departments, (iii) issuance of new policies and procedures specifically related to the anticorruption law, (iv) reputational verification of business partners, (v) revision of the process of internal investigation, (vi) expansion of the independent reporting channel, (vii) review of transactional controls, and (viii) new consequence policy for misconduct.
1.3. U.S. Class Action
On March 12, 2018, a shareholder class action lawsuit was filed against the Company and certain current and former administrators in the U.S. Federal District Court in the city of New York alleging that the Company and those administrators engaged in securities fraud or other unlawful business practices mentioned, among others, in theCarne Fraca andTrapaça Operations. On July 2, 2018, the referred Court appointed the City of Birmingham Retirement and Relief System as lead plaintiff in the action. On August 31, 2018, the lead plaintiff filed an amended class action complaint, and a second amendment complaint was presented on December 5, 2018. An unfavorable outcome of the class action may have a material impact for the Company. However, since this lawsuit is in its early stages, it is not possible to make a reasonable estimate of eventual losses.
1.4. Financial and operational restructuring plan
On June 29, 2018, the Board of Directors approved the financial and operational restructuring plan of the Company ("the Plan"), with the objective to improve its share capital structure, by reducing its debt leverage, which also enhances its controlling and quality processes.
The Company’s decision is it to focus its transactions in the Brazilian market, in Asia and in the Muslim market. Then, the segmentation of the businesses was changed as shown in note 5.
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(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
As a result of the plan, the following actions will be taken: (i) sale of operational units in Argentina (denominated Argentina Operations), and Europe and Thailand (denominated Europe and Thailand Operations); (ii) sale of real estate and non-operating assets; (iii) sale of non-controlling interests in companies and (iv) operational restructuring plan with the purpose to adjust its productive structure to the market demand and includes adjustments in its the production lines, collective paid leave and a reduction of around 5% of the factory unit employees in Brazil.
During the fourth quarter of 2018, the Company evolved in the negotiations for the sale the assets abovementioned in items (i) and (ii) and met the requirements for its classifications as assets held for sale and discontinued operations (note 12).
On July 20, 2018, following the simplification of the organizational structure, the Company’s Board of Directors approved the hiring and the appointment of new executives for the following positions (i) Sidney Manzaro, assumed his position on August 13, 2018, as Vice-President of Brazilian Market, in substitution of Alexandre Almeida (ii) Vinícius Guimarães Barbosa, assumed his position on August 01, 2018, as Vice-President of Operations and (iii) Bruno Ferla, who previously served as a consultant to the Company and heading its Legal Department, assumed his position on August 01, 2018, as Vice-President of Institutional Affairs, Legal, and Compliance.
For the year ended December 31, 2018, the impacts recorded due to the operational restructuring plan previously mentioned, such includes termination of contracts with suppliers and outgrowers, employee terminations, inventory and biological assets losses, as well as increase in idleness, in total amount of R$213,508 and were recorded in (i) cost of goods sold in the amount of R$195,727 an (ii) other operating expenses in the amount of R$17,781.
1.5. Strike of truck drivers
There was a national strike lasting approximately 10 days which resulted in blocked roads and interruption of the transport of goods and supplies, impacting several of the company´s facilities plants. As a result of the strike, the Company incurred in inventory and biological assets losses and idleness during the days of the strike, as well incurred in additional logistics costs to restart its activities. For the year ended December 31, 2018, such losses amounted to R$85,038 and were recorded in (i) cost of goods sold in the amount of R$72,673 and (ii) selling expenses in the amount of R$12,365.
1.6. Credit rights investment fund (“FIDC”)
On December 12, 2018, the Company concluded the structuring of the Credit rights investment fund – BRF Customers (“FIDC BRF”), whose exclusive objective is to acquire receivables originated from commercial operations between the Company andits customers in Brazil.
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(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
The structuring was made in association with the coordinators Banco Bradesco BBI S.A., BB – Banco de Investimento S.A. and Banco Votorantim S.A. in the format of a close-end fund and has a duration of 5 years.
From the 875,000 quotas that were subscribed and paid-in, 787,500 are senior quotas, 21,875 mezzanine A quotas, 51,012 mezzanine B quotas and 14,613 junior quotas, in the amounts of R$787,500, R$21,875, R$51,012 and R$14,613 respectively. The Company holds the 14,613 junior quotas, which are recorded as marketable securities (note 7).
The transfer of the receivables to the FIDC BRF fulfil the requirements for derecognition of financial assets according to CPC 48 / IFRS 9 and, therefore, the Accounts Receivable transferred are written-off of the Company’s financial statements. The effects of the discount rate charged on the transfer are recorded in the account of Financial Expenses (note 34).
This operation occurs in continuity to the operational and financial restructuring plan and allows an additional offer of credit for domestic customers.
1.7. Incorporation of the wholly-owned subsidiary SHB Comércio e Indústria de Alimentos S.A. ("SHB")
On December 31, 2018, the wholly-owned subsidiary SHB was merged into BRF S.A. with the objective of unifying and centralizing the Company's activities related to the Halal products business, in order to promote greater simplification, efficiency and transparency of the organizational structure.
1.8. Seasonality
In Brazil operating segment, as well as in discontinued operations related to the activities of Argentina, in months of November and December of each year, the Company is impacted by seasonality due to Christmas and New Year’s Celebrations, being the best-selling products in this period: turkey, Chester®, ham and pork loins.
In Halal operating segment (former name of One Foods), seasonality is due to Ramadan, which is the holy month of the Muslim Calendar. The start of Ramadan depends on the beginning of the moon cycle and therefore can vary each year.
2. MANAGEMENT’S STATEMENT AND BASIS OF PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS
The Company’s consolidated financial statements are prepared in accordance with theInternational Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”), introduced in Brazil through Brazilian Accounting Pronouncements Committee (“CPC”).
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(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
The Company’s individual and consolidated financial statements are expressed in thousands of Brazilian Reais (“R$”), as well as the amounts of other currencies disclosed
in the financial statements, when applicable, were also expressed in thousands, unless otherwise stated.
The preparation of the Company’s financial statements requires Management to make judgments, use estimates and adopt assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, as well as the disclosures of contingent liabilities, as of the reporting date. However, the uncertainty inherent to these judgments, assumptions and estimates could result in material adjustments to the carrying amount of the affected assets and liabilities in future periods.
The Company reviews its judgments, estimates and assumptions on a quarterly basis.
The individual and consolidated financial statements were prepared on the historical cost basis except for the following items which are measured at fair value:
i. derivative and non-derivative financial instruments;
ii. share-based payments;
iii. biological assets; and
iv. certain assets held for sale are recorded at fair value less cost to sell.
The Company’s Management notes that the individual and consolidated financial statements were prepared under the going concern assumption.
In addition, all the relevant information was disclosed in the explanatory notes, in order to clarify and complement the accounting basis used in the preparation of the financial statements and used by the Management.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
3.1. Consolidation: includes the BRF’s individual financial statements and the financial statements from subsidiaries where BRF has direct or indirect control. All transactions and balances between BRF and its subsidiaries have been eliminated upon consolidation, as well as the unrealized profits or losses arising from transactions between the Company and its subsidiaries. Non-controllinginterest is presented separately.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
3.2. Functional currency and foreign currency transactions: the financial statements of each subsidiary included in consolidation are prepared using the currency of the main economic environment where it operates.
The financial statements of foreign subsidiaries are translated into Brazilian Reais in accordance with their functional currency using the following criteria:
Foreign subsidiaries with functional currency – Argentine Peso, Thailand Bath, Chilean Peso, United Arab Emirates Dirham, Euro, Forint Hungary, Hong Kong Dollar, Kuwait Dinar, Oman Riyal, Pound Sterling, South African Rand, Renminbi Yuan China, Ringgit Malaysia, Riyal Saudi Arabia, Riyal Qatar, Romanian Leu, Ruble Russia, Singapore Dollar, Turkish Lira, Uruguayan Peso, U.S. Dollar, Vietnamese Dong, Won South Korea and Yen.
· Assets and liabilities are translated at the exchange rate in effect at year-end;
· Statement of income accounts are translated based on the monthly average rate; and
· The cumulative effects of gains or losses upon translation are recognized as Accumulated Foreign Currency Translation Adjustments component of other comprehensive income.
Parent company and foreign subsidiaries with functional currency – Brazilian Reais
· Non-monetary assets and liabilities are translated at the historical rate of the transaction;
· Monetary assets and liabilities are translated at the exchange rate in effect at year-end;
· Statement of income accounts are translated based on monthly average rate;
· The cumulative effects of gains or losses upon translation of monetary assets and liabilities are recognized in the statement of income; and
· The cumulative effects of gains or losses upon translation of non-monetary assets and liabilities are recognized in the other comprehensive income.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
Goodwill arising from business combination with entities in foreign market is expressed in the functional currency of that entity and converted by the closing exchange rate for the reporting currency of the parent company, with the effects recognized in other comprehensive income.
The accounting policies have been consistently applied by all subsidiaries included in consolidation, with the exception of the adoption of new accounting standards as discloses in notes 3.7 and 3.28.
3.3. Investments: investments in associates and joint ventures are initially recognized at cost and adjusted thereafter for the equity method. In the investments in associates, the Company must have significant influence, which is the power to participate in the financial and operating policy decisions of the investee, without having its control or joint control of those policies. In investments in joint ventures there is a contractually agreed sharing of control through an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.
3.4. Business combinations: are accounted for using the purchase method. The cost of an acquisition is the sum of the consideration paid, evaluated based on the fair value at acquisition date, and the amount of any non-controlling interests in the acquiree. For each business combination, the Company recognizes any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquirer’s net assets. Costs directly attributable to the acquisition are accounted for as an expense when incurred.
When the investment has simply been moved from one part of the group to another, the acquirer in a common control transaction use book value (carry-over basis) accounting.
When acquiring a business, management evaluate the assets acquired and the liabilities assumed in order to classify and allocate them assessing the terms of the agreement, economic circumstances and other conditions at the acquisition date.
Goodwill is initially measured as the excess of the consideration paid over the fair value of the net assets acquired.
After initial recognition, goodwill is measured at cost, net of any accumulated impairment losses. For purposes of impairment testing, the goodwill recognized in a business combination, as from the acquisition date, is allocated to each of the Company’s cash generating units.
3.5. Segment information: an operating segment is a component of the Company that carries out business activities from which it can obtain revenues and incur expenses. The operating segments reflect how the Company’s management reviews financial information to make decisions. The Company’s management has identified reportable segments, which meet the quantitative and qualitative disclosure requirements. The segments identified for disclosure represent mainly sales channels. The information according to the characteristics of the products is also presented, based on their nature, as follows: poultry, pork and others, processed and other sales.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
3.6. Cash and cash equivalents: include cash on hand, bank deposits and highly liquid investments in fixed-income funds and/or securities with maturities, upon acquisition, of 90 days or less, which are readily convertible into known amounts of cash and subject to insignificant risk of change in value. The investments classified in this group, due to their nature, are measured at fair value through the profit and loss.
3.7. Financial instruments:The Company adopted CPC 48 / IFRS 9 Financial Instruments in replacement of IAS 39 Financial Instruments: Recognition and measurement from January 01, 2018. The changes in accounting policies and its impacts to the financial statements are described below:
Classification of Financial Assets
CPC 48 / IFRS 9 contains a new classification and measurement approach for financial assets which contains three principal classification categories: measured at amortized cost, fair value through other comprehensive income (FVOCI) and fair value through profit and loss (FVTPL). The standard eliminates the IAS 39 categories of held to maturity, held for trading, loans and receivables and available for sale.
This change did not cause any retrospective impact in the measurement of the Company’s financial assets. Prospectively, for equity instruments measured at FVOCI, when settled or transferred, the gains and losses accumulated in other comprehensive income no longer affect income statement, being immediately reclassified to accumulated profits or losses, in equity.
The classification of financial assets is based on individual characteristics of the instrument and the business model of the portfolio in which it is contained. For already existent financial instruments on January 01, 2018, the Company has considered the categories on the following manner:
(i) Financial assets held to maturity and loans and receivables were transferred to the amortized cost category;
(ii) Financial assets held for trading were transferred to the FVTPL classification;
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
(iii) Financial assets available for sale were transferred to the FVOCI classification;
The charts related to financial instruments in notes 4 and 7 now follow the categories described above.
Hedge accounting
The Company has chosen to apply the new hedge accounting requirements of CPC 48 / IFRS 9. The standard requires that hedge accounting relationships are aligned with the Company’s risk management objectives and strategy, the application of a more qualitative and forward-looking approach to assessing hedge effectiveness and prohibits voluntary discontinuation of hedge accounting.
For financial instruments designated into cash flow hedge relations, the Company has begun to account for the time value of purchased options, the forward element of forward contracts and foreign currency basis spreads as cost of hedging, into other comprehensive income. When the instrument is terminated, the costs of hedge are reclassified to the income statement together with the intrinsic values of the instrument.
The categories and designation models for hedge accounting remain unchanged.
Impairment of Financial Assets
CPC 48 / IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with a forward-looking ‘expected credit loss’ model. This model is applicable to financial assets measured at amortized cost or at FVOCI, except for equity instruments.
For financial investments and cash and equivalents, the Company did not have any relevant impact on credit losses, due to the elevated ratings of its counterparties.
For trade receivables and notes receivables, the Company has elected the practical expedient of the aging-based provision matrix in the item B5.5.35 of CPC 48 / IFRS 9, with the appropriate groupings of the receivables.
The Company prepared a study of historical losses and recoveries of its customers portfolios for every acting region, taking into consideration the dynamics of the markets and the instruments hired to reduce credit exposures, such as: letters of credit, insurances and guarantees. In addition to the analysis of the consolidated portfolios, specific clients with different credit risks were treated separately.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
Based on the studies, expected losses indexes were calculated for each portfolio and aging class. The indexes were applied to the accounts receivable balances and generated the amounts of expected credit losses. The Company monitors the indexes, customers and portfolios constantly, recognizing the respective changes into the impairment loss on trade and other receivables account.
The adoption of the new standard has impacted the Company’s equity as per below:
Retained Earnings | Impact of IFRS 9 adoption | |
Increase in expected credit losses with trade accounts receivable | 12,613 | |
Increase in expected credit losses with notes receivable | 6,499 | |
Increase in expected credit losses with financial investments | 1,391 | |
Deferred taxes | (5,963) | |
Impact on 01.01.18 | 14,540 |
Transition
Changes in accounting policies resulting from the adoption of CPC 48 / IFRS 9 were applied retrospectively, except as described below:
· The Company took advantage of the exemption allowing it not to restate comparative information for prior periods with respect to classification and measurement (including impairment) changes. Differences in carrying amounts of financial assets and financial liabilities resulting from the adoption of CPC 48 / IFRS 9 were recognized in retained earnings at January 01, 2018; and
· The new hedge accounting requirements were applied prospectively.
3.8. Adjustment to present value: the Company measures the adjustment to present value of outstanding balances of non-current trade accounts receivable, trade payables and other non-current liabilities, being recorded in reducing accounts of the respective line items against financial result. The Company adopts the weighted average of the cost of funding to determine the adjustment to present value to those assets and liabilities, which corresponds to annual rate of 11.40% on December, 2018 (12.70% p.a. on December 31, 2017).
3.9. Trade accounts receivables and other receivables: are recorded at the invoiced amount and adjusted to present value, when applicable, net of allowance for doubtful accounts.
The Company adopts procedures and analysis to establish credit limits and substantially does not require collateral from customers. In the event of default,collection attempts are made, which include direct contact with customers and collection through third parties. Should these efforts prove unsuccessful, court measures are considered and the notes are reclassified to non-current assets at the same time an allowance is recognized. The notes are written-off from the allowance when management considers that they are not recoverable after taking all appropriate measures to collect them.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
3.10. Inventories: are evaluated at average acquisition or formation cost, not exceeding their net realizable value. The cost of finished products includes raw materials, labor, cost of production, transport and storage, which are related to all process needed to make the products ready for sale. Provisions for obsolescence, adjustments to net realizable value, impaired items and slow-moving inventories are recorded when necessary. Usual production losses are recorded and are an integral part of the production cost of the respective month, whereas abnormal losses, if any, are recorded directly as cost of sales.
3.11. Biological assets: The consumables and production biological assets (live animals) and the forest are measured at their fair value, being applied the cost approach technique to live animals and market approach to the forest. In the determination of the live animal’s fair value, all the inherent losses to the production process were considered.
3.12. Assets held for sale and discontinued operations: Such assets are measured at carrying amount or fair value less costs to sell, whichever is lower, and are not depreciated or amortized. Such items are only classified under this account when the sale is highly probable and they are available for immediate sale under their current conditions. In 2018, it was necessary to recognize impairment losses for these assets (note 12).
The statement of income and cash flows from discontinued operations are presented separately from those of continuing operations of the Company.
The comparative periods are reclassified in the case of the statement of income for the year and cash flows, however the balance sheet remains as presented in the past.
3.13. Property, plant and equipment: stated at the cost of acquisition or construction, less accumulated depreciation and impairment losses, when applicable. The borrowing costs are capitalized as a component of construction in progress, pursuant to with CPC 20 / IAS 23, considering the weighted average interest rate of the Company’s debt at the capitalization date.
Depreciation is recognized based on the estimated economic useful life of each asset on a straight-line basis. The estimated useful life, residual values anddepreciation methods are annually reviewed and the effects of any changes in estimates are accounted for prospectively. Land is not depreciated.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
The Company annually performs an analysis of impairment indicators of property, plant and equipment. The recoverability of these assets was tested for impairment in 2018, and no adjustments were identified. The realization of the test involved the adoption of assumptions and judgments, as disclosed in note 18. In accordance with CPC 01 / IAS 36, an impairment for loss for property, plant and equipment, is only recognized if the related cash-generating unit is devalued. Such condition is also applied if the asset’s recoverable amount is less than its carrying amount. The recoverable amount of asset or cash-generating unit is the greater of its value in use and its fair value less cost to sell.
Gains and losses on disposals of property, plant and equipment items are calculated by comparing the proceeds of the disposals with their net book values and recognized in the statement of income at the disposal date.
3.14. Intangible assets: Intangible assets acquired are measured at cost at the time they are initially recognized. The cost of intangible assets acquired in a business combination corresponds to the fair value at the acquisition date. After initial recognition, intangible assets are presented at cost less accumulated amortization and impairment losses, when applicable. Internally-generated intangible assets, excluding development costs, are not capitalized but recognized in the statement of income as incurred.
The useful life of intangible assets is assessed as finite or indefinite.
Intangible assets with a finite life are amortized over the economic useful life and reviewed for impairment whenever there is an indication that their carrying values may be impaired. The amortization period and method for an intangible asset with a finite useful life are reviewed at least at the end of each fiscal year. The amortization of intangible assets with a finite useful life is recognized in the statement of income as an expense related to its use and consistently with the economic useful life of the intangible asset.
Intangible assets with an indefinite useful life are not amortized, but are tested annually for impairment on an individual basis or at the cash generating unit level. The Company records goodwill and trademarks as intangibles assets with indefinite useful life.
Goodwill recoverability was tested for fiscal year 2018 and no impairment loss was identified. Such test involved the adoption of assumptions and judgments, disclosed in note 18.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
3.15. Income taxes: in Brazil, are comprised of corporate income tax (“IRPJ”) and social contribution tax (“CSLL”), which are calculated monthly on taxable income, at the rate of 15% plus 10% surtax for IRPJ, and of 9% for CSLL, considering the offset of tax loss carryforwards, up to the limit of 30% of annual taxable income.
The income from foreign subsidiaries is subject to taxation pursuant to the local tax rates and legislation. In Brazil, these incomes are taxed according to the Law 12.973/14, respecting the tax treaty signed by each country with Brazil in order to avoid double taxation.
Deferred taxes are recorded on IRPJ and CSLL tax losses, and on temporary differences between the tax basis and the carrying amount on assets and liabilities and classified as non-current assets, as required by CPC 26 / IAS 1. When the Company’s analysis indicates that the realization of these credits is not probable, the asset is derecognized. In 2018, the need to derecognise part of the Company's deferred tax assets was identified, as demonstrated in note 13.3.
Deferred tax assets and liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and they relate to income taxes levied by the same tax authority on the same taxable entity. In the consolidated financial statements, the Company’s tax assets and liabilities can be offset against the tax assets and liabilities of the subsidiaries if, and only if, these entities have a legally enforceable right to make or receive a single net payment and intend to make or receive this net payment, or recover the assets and settle the liabilities simultaneously. Therefore, for presentation purposes, the balances of tax assets and tax liabilities are being disclosed separately.
Deferred tax assets and liabilities must be measured by enacted or substantially enacted rates that are expected to be applicable for the period when the assets are realized and liabilities settled.
3.16. Accounts payable and trade accounts payable: are initially recognized at fair value plus any accrued charges, monetary and exchange variations incurred through the balance sheet date.
3.17. Provision for tax, civil and labor risks and contingent liabilities: are established when the Company has a present obligation, formalized or not, as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation and its amount can be reliably estimated.
The Company is part of various lawsuits, including, tax, labor and civil claims, mainly in Brazil. The assessment of the likelihood of an unfavorable outcome in these lawsuits includes the analysis of the available evidence, the hierarchy of the laws, available prior court decisions, as well as the most recent court decisions and their importance to the Brazilian legal system, as well as the opinion ofexternal legal counsel. The provisions are reviewed and adjusted to reflect changes in the circumstances, such as the applicable statute of limitation, conclusions of tax inspections or additional exposures identified based on new claims or court decisions.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
A contingent liabilities of business combinations are recognized if they arise from a present obligation that arose from past events and if their fair value can be measured reliably and subsequently are measured at the higher of:
· the amount that would be recognized in accordance with the accounting policy for the provisions above that comply with CPC 25 / IAS 37; or
· the amount initially recognized less, where appropriate, of recognized revenue in accordance with the policy of recognizing revenue from customer contracts CPC 47 / IFRS 15.
As a result of the business combinations with Sadia, the Company recognized contingent liabilities related to tax.
3.18. Leases: lease transactions in which the risks and rewards of ownership are substantially transferred to the Company are classified as finance leases. When there is no significant transfer of the risks and rewards of ownership, lease transactions are classified as operating leases.
Finance lease agreements are recognized in property, plant and equipment and in liabilities at the lower of the present value of the minimum future payments of the agreement and the fair value of the asset, including, when applicable, the initial direct costs incurred in the transaction. The amounts recorded in property, plant and equipment are depreciated and the underlying interest is recorded in the statement of income in accordance with the terms of the lease agreement.
Operating lease agreements are recognized as straight-line expenses throughout the lease terms.
Gains or losses arising from sale-leaseback transactions classified after the sale of the assets as operating leases are recognized as follows:
- Immediately in profit or loss when the transaction was measured at fair value;
- If the transaction price is established below or above the fair value, the profit or loss is recognized immediately in profit or loss, unless the result is offset by future lease payments below market value.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
On January 01, 2019, CPC 06 / IFRS 16 is effective, whose impacts are described in note 37.
3.19. Share based payments: the Company provides share based payments restricted stock for its executives, which are settled with Company shares. The Company adopts the provisions of CPC 10 / IFRS 02, recognizing as an expense, on a straight-line basis, the fair value of the options granted, over the length of service required by the stock options plan or share, with a corresponding entry to equity. The accumulated expense recognized reflects the acquired vesting period and the Company's best estimate of the number of shares to be acquired.
The expense or income arising from the movement during the year is recognized in the statement of income according to the function performed by the beneficiary. Expense is reversed/trued up in case of failure to satisfy a service vesting condition (forfeiture).
The effect of outstanding options is reflected as additional dilution in the calculation of diluted earnings per share.
3.20. Pension and other post-employment plans: the Company sponsors three supplementary defined benefit and defined contribution plans, as well as other post-employment benefits, for which, an actuarial appraisal is annually prepared by an independent actuary and are reviewed by management. The cost of defined benefits is established separately for each plan using the projected unit credit method.
The measurements comprise the actuarial gains and losses, the effect of a limit on contributions and returns on plan assets, are recognized in the balance sheet with a contra entry in other comprehensive income when incurred. These measurements are not reclassified to statement of income in subsequent periods.
The Company recognizes the net defined benefit asset, when:
· controls a resource and has the ability to use the surplus to generate future benefits;
· the control is a result of past events; and
· the future economic benefits are available to the Company in the form of a reduction in future contributions or a cash refund, either directly to the Company or indirectly to another deficitary plan. The asset ceiling is the present value of those future benefits.
The past service cost is recognized in the statement of income at the earliest ofthe following dates:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
· when the plan amendment or curtailment occurs, or
· when the Company recognizes related restructuring costs.
The past service cost and net interest on net defined benefit liability or asset are recognized in the statement of income.
3.21. Earnings (Losses) per share: basic earnings (losses) per share are calculated by dividing the net profit (loss) attributable to the holders of ordinary shares of the Company by (losses) the weighted average number of ordinary shares during the year. Diluted earnings per share are calculated by dividing the net profit (loss) attributable to the holders of ordinary shares of the Company by the weighted average number of ordinary shares during the year, plus the weighted average number of ordinary shares that would be issued when converting all dilutive potential ordinary shares into ordinary shares.
3.22. Employee and management profit sharing: employees are entitled to profit sharing based on certain targets agreed upon on an annual basis, whereas directors are entitled to profit sharing based on the provisions of the bylaws, proposed by the Board of Directors and approved by the shareholders. The profit sharing amount is recognized in the statement of income for the period in which the targets are attained.
3.23. Financial income and expenses: include interest income on financial assets, dividend income (except for dividends received from equity investees), gains on disposal of available for sale financial assets, exchange rate variation on assets (situations in which there is a devaluation of the national currency against the currency of the asset in question), changes in fair value of financial assets measured at fair value through profit or loss, adjustment to present value (trade accounts receivable, notes receivable, short-term debt and trade accounts payable), gains and losses on hedging instruments that are recognized in income,interest on loans and financing and monetary variation on contingencies and tax credits. Interest income is recognized in earnings through the effective interest method.
3.24. Grants and government assistance: government subsidies are recognized at fair value when there is reasonable assurance that the conditions established are met and related benefits will be received. Theamounts recorded in the statement of income when excluded from the income tax and social contribution calculation basis are transferred in shareholders’ equity, as a reserve of tax incentives, unless there are accumulated losses.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
3.25. Transactions and balances in foreign currency: the transactions in foreign currency are translated into the functional currency of the company using the exchange rates at the transaction date. Balances of monetary items denominated in foreign currency are translated using the exchange rates in effect at the balance sheet date or settlement, being that gains or losses on exchange rate variation are recognized in the financial result.
The exchange rates in Brazilian Reais effective at the balance sheet dates were as follows:
Exchange rate at the balance sheet date | 12.31.18 | 12.31.17 | ||
Thailand Bath (THB) | 0.1198 | 0.1015 | ||
Kwait Dinar (KWD) | 12.7755 | 10.9791 | ||
United Arab Emirates Dirham (AED) | 1.0550 | 0.9006 | ||
Singapore Dollar (SGD) | 2.8464 | 2.4753 | ||
U.S. Dollar (US$ or USD) | 3.8748 | 3.3080 | ||
Vietnamese Dong (VND) | 0.0002 | 0.0002 | ||
Hong Kong dollar (HKD) | 0.4948 | 0.4233 | ||
Euro (€ or EUR) | 4.4390 | 3.9693 | ||
Forint Hungary (HUF) | 0.0138 | 0.0128 | ||
Yen (JPY) | 0.0353 | 0.0294 | ||
Romanian leu (RON) | 0.9527 | 0.8511 | ||
Pound Sterling (£ or GBP) | 4.9617 | 4.4714 | ||
Turkish Lira (TRY) | 0.7331 | 0.8752 | ||
Argentinian Peso ($ or ARS) | 0.1029 | 0.1755 | ||
Chilean Peso (CLP) | 0.0056 | 0.0054 | ||
Uruguayan Peso (UYU) | 0.1199 | 0.1149 | ||
South African Rand (ZAR) | 0.2699 | 0.2690 | ||
Renminbi Yuan China (CNY) | 0.5636 | 0.5087 | ||
Saudi Riyal (SAR) | 1.0330 | 0.8821 | ||
Qatar Riyal (QAR) | 1.0643 | 0.9088 | ||
Omani Riyal (OMR) | 10.0696 | 8.6011 | ||
Ringgit Malaysia (MYR) | 0.9382 | 0.8180 | ||
Ruble Russia (RUB) | 0.0556 | 0.0574 | ||
Won South Korea (KRW) | 0.0035 | 0.0031 |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
Average rates | 12.31.18 | 12.31.17 | ||
Thailand Bath (THB) | 0.1130 | 0.0942 | ||
Kwait Dinar (KWD) | 12.1043 | 10.5318 | ||
United Arab Emirates Dirham (AED) | 0.9950 | 0.8692 | ||
Singapore Dollar (SGD) | 2.7071 | 2.3130 | ||
U.S. Dollar (US$ or USD) | 3.6545 | 3.1920 | ||
Vietnamese Dong (VND) | 0.0002 | 0.0001 | ||
Hong Kong dollar (HKD) | 0.4663 | 0.4096 | ||
Euro (€ or EUR) | 4.3092 | 3.6071 | ||
Forint Hungary (HUF) | 0.0135 | 0.0117 | ||
Yen (JPY) | 0.0331 | 0.0285 | ||
Romanian leu (RON) | 0.9265 | 0.7896 | ||
Pound Sterling (£ or GBP) | 4.8701 | 4.1150 | ||
Turkish Lira (TRY) | 0.7696 | 0.8759 | ||
Argentinian Peso ($ or ARS) | 0.1369 | 0.1934 | ||
Chilean Peso (CLP) | 0.0057 | 0.0049 | ||
Uruguayan Peso (UYU) | 0.1190 | 0.1115 | ||
South African Rand (ZAR) | 0.2764 | 0.2401 | ||
Renminbi Yuan China (CNY) | 0.5521 | 0.4726 | ||
Saudi Riyal (SAR) | 0.9744 | 0.8512 | ||
Qatar Riyal (QAR) | 1.0039 | 0.8727 | ||
Omani Riyal (OMR) | 9.4947 | 8.2978 | ||
Ringgit Malaysia (MYR) | 0.9053 | 0.7435 | ||
Ruble Russia (RUB) | 0.0582 | 0.0548 | ||
Won South Korea (KRW) | 0.0033 | 0.0028 |
3.26. Accounting judgments, estimates and assumptions: as mentioned in note 2, in the process of applying the Company’s accounting policies, management made the following judgments which have a material impact on the amounts recognized in the consolidated financial statements:
Main judgments:
· control, significant influence and consolidation (note 1.1);
· share-based payment transactions (note 24);
· definition of the moment when ownership is transferred in recognizing revenue.
Main estimates:
· fair value of financial instruments (note 4);
· impairment of non-financial assets (note 5 and 18);
· allowance for doubtful accounts (note 8);
· net realizable value provision for inventories (note 9);
· fair value of biological assets (note 10);
· loss on the reduction of recoverable value of taxes (note 11 and 13);
· fair value of assets held for sale (note 12);
· useful lives of property, plant and equipment and intangible (note 17 and 18);
· pension and post-employment plans (note 25);
· provision for tax, civil and labor risks (note 26); e
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
The Company reviews the estimates and underlying assumptions used in its accounting estimates on a quarterly basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised.
3.27. Statement of added value: the Company prepared individual and consolidated statements of added value (“DVA”) in accordance with CPC 09, which are submitted as part of these financial statements in accordance with BR GAAP. For IFRS represents additional financial information.
3.28. CPC 47 / IFRS 15 – Revenue from contracts with customers: as of January 01, 2018, the Company adopted the CPC 47 / IFRS 15, whose content was assessed, and it was concluded that the measurement and recognition of revenue did not change substantially.
Revenues are recognized when the sales value is reliably measurable and when the Company no longer has control over the goods sold, or otherwise any involvement related to the ownership, it is probable that economic benefits will be received by the Company and the risks and benefits were fully transferred to the purchaser.
The Company´s sales can be done either at sight payments or term payments, which are discounted to present value in order to recognize the financial component (note 3.8). The average days outstanding is 31 days.
3.29. CPC 42 / IAS 29 - Hyperinflationary economies:On June 14, 2018, the National Institute of Statistics and Census of Argentina (“INDEC”), disclosed the wholesale price index data for May 2018, which has been consistently published in Argentina and used as a basis for monitoring the inflation in the country. Considering the data published it can be observed that the accumulated inflation in the last 3 years exceeded 100%, and supported by other qualitative analysis, the Company could conclude that as of July 01, 2018, Argentina was considered a country with hyperinflationary economy.
As a result, the Company has adopted the CPC 42 / IAS 29 - Financial Reporting in Hyperinflationary Economies.
Non-monetary items and income statement balances were restated to reflect the terms of the measuring unit current at the end of the reporting exercise. The balances were calculated by applying the changes on the index from the initial recognition date to the reporting date.
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(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
As the hyperinflation concepts are applicable only to the subsidiaries located in Argentina, and the Parent company is not on a country with hyperinflationary economy, there is an accounting policy election and the Company decided to don´t restate prior periods as required by the CPC 02 / IAS 21. The impacts of the changes on net monetary position from the initial recognition date until December 31, 2017 were recorded against Equity, generating a positive impact of R$130,210, while the changes on the monetary position for the year ended December 31, 2018were recorded against the result of discontinued operations.
The translation of the balances of a hyperinflationary economy to the reporting currency were based on the closing rate of the reporting period for both balance sheet and income statement balances.
The impact caused by the adoption of the abovementioned standard on the Company´s net result was a gain of R$364,650 in the parent company and R$369,972 in the consolidated balances, both recorded in discontinued operations.
The Company used the General Consumer Price Index (“IPC”) for restating the balances from January 01, 2017 until current period. For restating items from prior periods until December 31, 2016 the Company used the National Wholesale Price Index (“IPIM”), as until December 2016 the IPC wasn´t published in a consistent basis to assure the reliability of the index. Both indexes were obtained from INDEC.
The inflation rates used in 2017 and 2018 are described in the table below:
Period | Accumulated inflation rates | |
2016 | 34.60% | |
2017 | 24.80% | |
2018 | 48.01% |
3.30. Comparability of the statement of income and cash flows: In 2018, for a better presentation of expenses by function, the Company reclassified expenses with employee benefits plan, share-based payment, labor contingencies (public civil lawsuit) and certain discoutinued production lines.
For the purposes of comparability with the previous year, the Company reclassified the amount of R$500,136 during the year ended December 31, 2017 from other operating income (expenses), net, to (i) cost of sales in the amount of R$484,058 (ii) selling expenses in the amount of R$13,390 and (iii) administrative expenses in the amount of R$2,688 mainly impacted by the cancellation of shares granted. The amount related to discontinued operations in R$2,768, reclassified from other operation income (expenses) to costs of sales.
68
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
For the cash flow, the Company reclassified the expenses with finance lease previously classified as operating activities to financing activities in the amount of R$144,971 in the parent company and R$149,924 in the consolidated.
4. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
4.1. Overview
In the ordinary course of business, the Company is exposed to credit, liquidity and market risks, which are actively managed in compliance with the Financial Risk Management Policy and Strategic Documents (“Risk Policy”) and internal guidelines subject to such policy.
The Risk Policy is under the management of the Board of Directors, Risk Management Committee and Financial Risk Management department, with clear and defined roles and responsibilities, as follows:
· The Board of Directors is responsible for approving the Risk Policy further defining the tolerance limits for the different risks identified as acceptable to the Company on behalf of its shareholders. The current risk policy was reviewed and approved and is valid until on November 26, 2019;
· The Financial Risk Management Committee formally and subordinated to the Executive Board, is in charge of the execution of the Risk Policy, which comprises the supervision of the risk management process, planning and verification of the impacts of the decisions implemented, as well as the evaluation and approval of hedging strategies and monitoring the risk exposure levels to ensure compliance with Risk Policy; and
· The Risk Management Department has the key role in monitoring, evaluating and reporting the financial risks taken by the Company.
The Risk Policy determines that derivatives can only be used for hedge purposes, and prohibits entering into any leveraged derivative transaction. Additionally, any individual hedge operation (notional amount) must not exceed 2.5% of the Company’s shareholders’ equity.
4.2. Credit risk management
The Company is exposed to credit risk related to the financial assets held by: trade and non-trade accounts receivable, marketable securities, derivative instruments and cash and equivalents.
69
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
a. Accounts receivable credit risk
Credit risk associated with trade accounts receivable is actively managed through specific systems and is supported by internal policies for credit analysis. The significant level of diversification and geographical dispersion of the customer portfolio significantly reduces the risk, however, the Company choses to complement the risk management tactic by acquiring insurance policies for specific markets. The impairment of these financial assets is carried out based on CPC 48 / IFRS 9 (note 3.7).
b. Counterparty credit risk
Credit risk associated with marketable securities, cash and cash equivalents and derivative instruments is limited to counterparties with Investment Grade ratings. The risk concentration is constantly assessed according to credit ratings and the Company’s portfolio.
On December 31, 2018, the Company had financial investments over R$100,000 at the following financial institutions:Banco Bradesco, Banco BIC,Banco BTG Pactual,Banco do Brasil, Banco Itaú, Banco Safra, Banco Santander, Caixa Econômica Federal, HSBC and J.P. Morgan Chase Bank.
The Company also held derivative contracts with the following financial institutions:Banco Bradesco, Banco do Brasil, Banco Itaú, Banco Santander, Banco Votorantim,Bank of America Merrill Lynch,Citibank, ING Bank, Morgan Stanley and Rabobank.
4.3. Capital management and liquidity risk
The Company is exposed to liquidity risk as far as it needs cash or other financial assets to settle its obligations in the respective terms. The Company’s cash and liquidity strategy takes into consideration historical results volatility scenarios as well as simulations of sectorial and systemic crisis, grounded by allowing resilience in scenarios of capital restriction.
BRF’s ideal capital structure definition is essentially associated with (i) cash strength as tolerance factor to liquidity shocks, contemplating an analysis of minimum cash, (ii) financial leverage and (iii) maximization of the opportunity cost of capital.
The Company is constantly seeking to diversify sources of financing in order to reduce the concentration of its credit exposure, as well as to monitor the financial and capital markets in search of opportunities that improve its net debt in order to optimize the relation to the cost of capital and the average term of the amortization of its obligations.
As guideline, the gross debt must be concentrated in the long term. On December 31, 2018, the long term consolidated gross debt represented 78.7% (74.3% as of December 31, 2017) of the total indebtedness with an average term higher than 3 years.
70
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
The Company monitors the net debt and indebtedness as set forth below:
Consolidated | |||||||
12.31.18 | 12.31.17 | ||||||
Current | Non-current | Total | Total | ||||
Foreign currency debt | (1,470,309) | (10,067,995) | (11,538,304) | (11,101,349) | |||
Local currency debt | (3,077,080) | (7,550,060) | (10,627,140) | (9,343,029) | |||
Derivative financial instruments liabilities | (235,035) | - | (235,035) | (299,491) | |||
Gross debt | (4,782,424) | (17,618,055) | (22,400,479) | (20,743,869) | |||
Marketable securities and cash and cash equivalents | 5,376,597 | 290,625 | 5,667,222 | 6,808,064 | |||
Derivative financial instruments assets | 182,339 | - | 182,339 | 90,536 | |||
Restricted cash | 277,321 | 584,300 | 861,621 | 535,624 | |||
Net debt | 1,053,833 | (16,743,130) | (15,689,297) | (13,309,645) |
The table below summarizes the significant commitments and contractual obligations that may impact the Company’s liquidity:
Parent company | |||||||||||||||
12.31.18 | |||||||||||||||
Book | Cash flow contracted | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 onwards | ||||||||
Non derivative financial liabilities | |||||||||||||||
Loans and financing | 11,555,643 | 13,463,920 | 3,968,051 | 3,608,087 | 3,617,609 | 613,407 | 1,656,766 | - | |||||||
BRF bonds | 7,487,803 | 8,965,072 | 302,616 | 302,616 | 302,616 | 2,968,401 | 2,113,703 | 2,975,120 | |||||||
Trade accounts payable | 4,809,452 | 4,857,422 | 4,857,422 | - | - | - | - | - | |||||||
Supply chain finance | 885,783 | 885,783 | 885,783 | - | - | - | - | - | |||||||
Financial lease | 215,373 | 305,519 | 82,464 | 56,182 | 29,560 | 23,612 | 19,630 | 94,071 | |||||||
Operational lease | - | 2,125,135 | 421,085 | 103,454 | 108,173 | 49,382 | 157,269 | 1,285,772 | |||||||
Derivative financial liabilities | |||||||||||||||
Financial instruments designated as cash flow hedge | |||||||||||||||
Currency derivatives (NDF) | 20,928 | 17,115 | 17,115 | - | - | - | - | - | |||||||
Commodities derivatives - Soybean (NDF) | 3,311 | 3,311 | 3,311 | - | - | - | - | - | |||||||
Commodities derivatives - Corn (NDF) | 3,586 | 3,586 | 3,586 | - | - | - | - | - | |||||||
Commodities derivatives - Soybean meal (NDF) | 2,672 | 2,672 | 2,672 | - | - | - | - | - | |||||||
Commodities derivatives - Soybean oil (NDF) | 4,357 | 4,357 | 4,357 | - | - | - | - | - | |||||||
Currency derivatives (options) | 68,531 | 68,531 | 68,531 | - | - | - | - | - | |||||||
Commodities derivatives (Future) | 59 | 59 | 59 | - | - | - | - | - | |||||||
Financial instruments not designated as cash flow hedge | |||||||||||||||
Currency derivatives (NDF) | 12,366 | 36,148 | 36,148 | - | - | - | - | - | |||||||
Currency derivatives (Future) | 9,367 | 9,367 | 9,367 | - | - | - | - | - | |||||||
Swap (index / currency / stocks) | 99,154 | 98,943 | 98,943 | - | - | - | - | - |
71
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
Consolidated | |||||||||||||||
12.31.18 | |||||||||||||||
Book | Cash flow contracted | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 onwards | ||||||||
Non derivative financial liabilities | |||||||||||||||
Loans and financing | 12,418,998 | 14,324,430 | 4,791,906 | 3,644,742 | 3,617,609 | 613,407 | 1,656,766 | - | |||||||
BRF bonds | 7,487,803 | 8,965,072 | 302,616 | 302,616 | 302,616 | 2,968,401 | 2,113,703 | 2,975,120 | |||||||
BFF bonds | 342,958 | 369,901 | 24,187 | 345,714 | - | - | - | - | |||||||
BRF GMBH bonds | 1,915,685 | 2,611,616 | 84,277 | 84,277 | 84,277 | 84,277 | 84,277 | 2,190,231 | |||||||
Trade accounts payable | 5,516,905 | 5,564,895 | 5,564,895 | - | - | - | - | - | |||||||
Supply chain finance | 885,783 | 885,783 | 885,783 | - | - | - | - | - | |||||||
Financial lease | 215,373 | 305,519 | 82,464 | 56,182 | 29,560 | 23,612 | 19,630 | 94,071 | |||||||
Operational lease | - | 2,126,381 | 421,656 | 103,731 | 108,434 | 49,432 | 157,319 | 1,285,809 | |||||||
Derivative financial liabilities | |||||||||||||||
Financial instruments designated as cash flow hedge | |||||||||||||||
Swap (Interest rate and exchange rate) | 82 | 408 | 408 | - | - | - | - | - | |||||||
Currency derivatives (NDF) | 20,928 | 17,115 | 17,115 | - | - | - | - | - | |||||||
Commodities derivatives - Corn (NDF) | 3,586 | 3,586 | 3,586 | - | - | - | - | - | |||||||
Commodities derivatives - Soybean meal (NDF) | 2,672 | 2,672 | 2,672 | - | - | - | - | - | |||||||
Commodities derivatives - Soybean oil (NDF) | 4,357 | 4,357 | 4,357 | - | - | - | - | - | |||||||
Commodities derivatives - Soybean (NDF) | 3,311 | 3,311 | 3,311 | - | - | - | - | - | |||||||
Currency derivatives (options) | 75,779 | 75,779 | 75,779 | - | - | - | - | - | |||||||
Commodities derivatives (Future) | 59 | 59 | 59 | - | - | - | - | - | |||||||
Financial instruments not designated as cash flow hedge | |||||||||||||||
Currency derivatives (NDF) | 12,366 | 36,148 | 36,148 | - | - | - | - | - | |||||||
Currency derivatives (Future) | 9,367 | 9,367 | 9,367 | - | - | - | - | - | |||||||
Swap (index / currency / stocks) | 99,154 | 98,943 | 98,943 | - | - | - | - | - | |||||||
Commodities derivatives (Future) | 3,374 | 3,374 | 3,374 | - | - | - | - | - |
4.4. Market risk management
a. Interest rate risk
Interest rate risk is the one that may cause economic losses to the Company resulting from volatility of the rates, affecting its assets and liabilities.
The Company’s Risk Policy does not restrict exposure to different interest rates, neither establishes limits for fixed or floating rates. However, the Company continually monitors
the market interest rates, in order to evaluate any need to enter into hedging transaction to protect from the exposure to fluctuation of such rates and manage the mismatch between its financial investments and debts.
The Company’s indebtedness is essentially linked to the London Interbank Offered Rate ("LIBOR"), fixed coupon (“R$ and USD”), Interbank Deposit Certificate (“CDI”) and Broad Consumer Price Index (“IPCA”). In situations of adverse market changes that result in an increase in LIBOR, CDI and IPCA, the cost of floating-rate debt rises and on the other hand, the cost of fixed-rate debt decreases in relative terms.
Regarding the marketable securities, the Company holds mainly instruments indexed by the Interbank Deposit Certificate ("CDI") for investments in Brazil and fixed coupon (“USD”) for investments in the foreign market.
72
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
The derivative instruments held to reduce the interest rate risk exposure as of December 31, 2018 are set forth below:
12.31.18 | |||||||||||||
Cash flow hedges - Derivative instruments | Maturity | Hedged Object | Asset | Liability | Notional | Fair value (R$) | |||||||
Subsidiaries | |||||||||||||
Interest rate swap | 02.01.19 | Debt | LIBOR 6M + 2.70% p.a. | 5.90% p.a. | 25,000 | US$ | (42) | ||||||
Interest rate swap | 02.01.19 | Debt | LIBOR 6M + 2.70% p.a. | 5.88% p.a. | 25,000 | US$ | (40) | ||||||
Total Consolidated | (82) | ||||||||||||
12.31.18 | |||||||||||||
Derivative instruments not designated | Maturity | Hedged Object | Asset | Liability | Notional | Fair value (R$) | |||||||
Parent company and Consolidated | |||||||||||||
Interest rate swap | 04.02.19 | Debt | R$ (Fixed 9.61% p.a.) | 95.00% CDI | 250,000 | BRL | 13,314 | ||||||
Interest rate swap | 04.02.19 | Debt | R$ (Fixed 9.61% p.a.) | 93.54% CDI | 248,960 | BRL | 13,761 | ||||||
27,075 |
b. Foreing exchange risk
Foreign exchange risk is the one that may cause unexpected losses to the Company resulting from volatility of the FX rates, reducing its assets or revenues or increasing its liabilities and costs. The Company’s exposure is managed in two dimensions: balance sheet exposure and operating income exposure.
i. Balance sheet exposure
The Risk Policy regarding balance sheet exposure has the objective to balance assets and liabilities denominated in foreign currencies, hedging the Company’s balance sheet by using natural hedges, over-the-counter derivatives and exchange traded futures.
The Company’s consolidated financial statements are mainly impacted by variations in the following currencies: Kuwait Dinar, United Arab Emirates Dirhan, U.S. Dollar, Euro, Yen, Turkish Lira, Saudi Arabian Riyal, Qatari Riyal and Russian Ruble, Thai Baht, Pound Sterling, Argentinan Peso. The last three shall loose relevance in 2019, aligned with the discontinuation of the Argentina, Europe and Thailand Operations.
Assets and liabilities denominated in foreign currency which exchange variations are recognized in the income statement are as follows, summarized in Brazilian Reais:
73
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
Consolidated | ||||
12.31.18 | 12.31.17 | |||
Cash and cash equivalents | 127,266 | 278,147 | ||
Trade accounts receivable | 65,820 | 862,197 | ||
Trade accounts payable | (861,341) | 31,446 | ||
Loans and financing | (7,347,953) | (6,136,406) | ||
Hedge | 5,209,168 | 3,049,698 | ||
Investments, net | 2,571,870 | 1,985,689 | ||
Other assets and liabilities, net | 376 | (15,378) | ||
Exposure in result | (234,794) | 55,393 |
The investments, net line item is comprised of natural hedges derived from assets and liabilities of foreign subsidiaries with Brazilian Reais as functional currency.
The net P&L exposure is mainly composed of the following currencies:
12.31.18 | 12.31.17 | |||||||
Net P&L Exposure | in thousands | Equivalent in thousands of R$ | in thousands | Equivalent in thousands of R$ | ||||
Argentinian Peso | 1,812,808 | 186,538 | 1,066,311 | 187,138 | ||||
Euros | (87,725) | (389,412) | (41,024) | (162,835) | ||||
Pound Sterling | (14,373) | (71,314) | 2,931 | 13,106 | ||||
Yen | 114,574 | 4,041 | 1,309,736 | 38,506 | ||||
Rubles | 1,649,338 | 91,720 | 1,334,278 | 76,601 | ||||
Turkish Liras | (475,568) | (348,639) | (391,238) | (342,411) | ||||
U.S. Dollars | 75,429 | 292,272 | 74,150 | 245,288 | ||||
Total | (234,794) | 55,393 |
The Company’s foreign subsidiaries have amounts denominated in Brazilian Reais registered as trade accounts payable, which reduces the exposure to liabilities in foreigncurrencies registered in Brazil. On December 31, 2017, this effect overcame the amount of trade accounts payable in foreign currencies registered in Brazil, generating an inversion of the trade accounts payable exposure when compared to December 31, 2018.
In other situations, this dynamic may also occur for cash and cash equivalents.
In addition, the Company has a foreign exchange exposure related to investments abroad that impacts shareholders’ equity equivalent to R$5,872,018 on December 31, 2018 (R$5,519,344 on December 31, 2017). This exposure does not contemplate the effects of the financial instruments designated as hedging instruments, whose changes in fair value present a temporary effect on shareholders’ equity.
The derivative financial instruments hired to hedge foreign currency balance sheet exposure on December 31, 2018 are not designated as hedge accounting and are setforth below:
74
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
12.31.18 | |||||||||||||
Derivative instruments not designated | Asset | Liability | Maturity | Notional | Average Rate | Fair value (R$) | |||||||
Parent company | |||||||||||||
Non-deliverable forward | USD | BRL | 1st Qtr. 2019 | 127,000 | US$ | 3.9152 | (2,529) | ||||||
Non-deliverable forward | EUR | BRL | 1st Qtr. 2019 | 396,000 | EUR | 4.5145 | (9,112) | ||||||
Non-deliverable forward | GBP | BRL | 1st Qtr. 2019 | 49,000 | GBP | 4.9844 | (725) | ||||||
Futures - B3 | USD | BRL | 02.2019 | 594,750 | US$ | 3.8786 | (9,367) | ||||||
Currency swap | US$ + 2.61% p.a. | 89.00% CDI | 04.2019 | 50,353 | US$ | - | 4,433 | ||||||
Currency swap | US$ + 4.67% p.a. | 109.00% CDI | 11.2019 | 55,000 | US$ | - | 4,893 | ||||||
(12,407) | |||||||||||||
Subsidiaries | |||||||||||||
Non-deliverable forward | EUR | US$ | 1st Qtr. 2019 | 100,000 | EUR | 1.1468 | 2,411 | ||||||
Collar | TRY | US$ | 1st Qtr. 2019 | 50,000 | US$ | 5.6215 | (799) | ||||||
Total Consolidated | (10,795) |
ii. Operating income exposure
The Risk Policy regarding operating income exposure has the objective to hedge revenues and costs denominated in foreign currencies. The Company is supported by internal models to measure and monitor these risks, and uses financial instruments for hedging, designating the relations as cash flow hedges.
The derivative and non-derivative financial instruments designated as cash flow hedges for FX operating exposure on December 31, 2018 are set forth below:
75
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
12.31.18 | |||||||||||||||
Cash flow hedges - Derivative instruments | Hedged object | Asset | Liability | Maturity | Notional | Average Rate | Fair value (R$) | ||||||||
Parent company | |||||||||||||||
Non-deliverable forward | USD Exports | BRL | US$ | 1st Qtr. 2019 | 70,000 | US$ | 3.8642 | (1,512) | |||||||
Non-deliverable forward | USD Exports | BRL | US$ | 2nd Qtr. 2019 | 20,000 | US$ | 3.8868 | (253) | |||||||
Non-deliverable forward | USD Exports | BRL | US$ | 3rd Qtr. 2019 | 30,000 | US$ | 3.9845 | 1,162 | |||||||
Non-deliverable forward | USD Cost | BRL | US$ | 1st Qtr. 2019 | 54,830 | US$ | 3.8014 | (4,515) | |||||||
Non-deliverable forward | USD Cost | BRL | US$ | 2nd Qtr. 2019 | 40,846 | US$ | 3.9258 | 341 | |||||||
Non-deliverable forward | USD Cost | BRL | US$ | 3rd Qtr. 2019 | 11,677 | US$ | 4.1418 | 2,232 | |||||||
Non-deliverable forward | USD Cost | BRL | US$ | 4th Qtr. 2019 | 2,531 | US$ | 3.9441 | (60) | |||||||
Non-deliverable forward | EUR Exports | BRL | EUR | 1st Qtr. 2019 | 10,000 | EUR | 4.4645 | 236 | |||||||
Non-deliverable forward | JPY Exports | BRL | JPY | 1st Qtr. 2019 | 6,365,637 | JPY | 0.0351 | (1,794) | |||||||
Collar | USD Exports | BRL | US$ | 1st Qtr. 2019 | 385,000 | US$ | 3.9664 | 22,814 | |||||||
Collar | USD Exports | BRL | US$ | 2nd Qtr. 2019 | 180,000 | US$ | 3.9560 | 3,939 | |||||||
Collar | USD Exports | BRL | US$ | 3rd Qtr. 2019 | 80,000 | US$ | 4.0912 | 7,603 | |||||||
Collar | USD Exports | BRL | US$ | 4th Qtr. 2019 | 35,000 | US$ | 3.9471 | (1,470) | |||||||
28,723 | |||||||||||||||
Subsidiaries | |||||||||||||||
Collar | USD Exports | BRL | US$ | 1st Qtr. 2019 | 25,000 | US$ | 3.5172 | (7,239) | |||||||
Total Consolidated | 21,484 | ||||||||||||||
12.31.18 | |||||||||||||||
Cash flow hedges - Non-derivative instruments | Coverage | Asset | Liability | Maturity | Notional | Average Rate | Fair value (R$) (1) | ||||||||
Parent company and consolidated | |||||||||||||||
Export prepayment - PPE | USD Exports | - | US$ | 01.2019 to 02.2019 | 33,333 | US$ | 1.8758 | (129,160) | |||||||
Bond BRF SA BRFSBZ5 | USD Exports | - | US$ | 06.2022 | 118,662 | US$ | 2.0213 | (561,352) | |||||||
Bond BRF SA BRFSBZ3 | USD Exports | - | US$ | 05.2023 | 150,000 | US$ | 2.0387 | (581,220) | |||||||
(1,271,732) |
(1) Notional amount converted by the Ptax rate at the end of the period or partial revocation dates. This amount represents the total that may impact the Company's shareholders' equity.
c. Commodities price risk
In the ordinary course of business, the Company purchases commodities, mainly corn, soybean, soybean meal and soybean oil, individual components of the production costs.
Corn, soy, grain prices are subject to volatility resulting from weather conditions, harvest productivity, transport and warehouse costs, government agricultural policies, FX rates and international market prices, among other factors.
The Risk Policy establishes coverage limits to the flow of purchases of corn, grain and soy with the purpose of reducing the impact due to a price increase of these raw materials. The hedge may be reached using derivatives or by inventory management.
The financial instruments designated as cash flow hedges and fair value hedges for the commodities price exposure on December 31, 2018 are set forth below:
76
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
12.31.18 | |||||||||||||
Cash flow hedges - Derivative instruments | Hedged object | Index | Maturity | Quantity | Average rate (US$/Ton) | Fair value (R$) | |||||||
Parent company and consolidated | |||||||||||||
Non-deliverable forward - buy | Soybean meal purchase - floating price | Soybean meal - CBOT | 1st Qtr. 2019 | 6,000 | ton | 144.56 | (1,468) | ||||||
Non-deliverable forward - buy | Soybean meal purchase - floating price | Soybean meal - CBOT | 2nd Qtr. 2019 | 14,007 | ton | 128.80 | (674) | ||||||
Non-deliverable forward - buy | Soybean meal purchase - floating price | Soybean meal - CBOT | 3rd Qtr. 2019 | 21,001 | ton | 127.54 | (447) | ||||||
Non-deliverable forward - buy | Soybean meal purchase - floating price | Soybean meal - CBOT | 4th Qtr. 2019 | 9,997 | ton | 127.21 | (83) | ||||||
Non-deliverable forward - buy | Soybean purchase - fixed price | Soybean - CBOT | 1st Qtr. 2019 | 17,000 | ton | 356.46 | (1,819) | ||||||
Non-deliverable forward - buy | Soybean purchase - fixed price | Soybean - CBOT | 2nd Qtr. 2019 | 28,996 | ton | 342.35 | (901) | ||||||
Non-deliverable forward - buy | Corn purchase - floating price | Corn - CBOT | 1st Qtr. 2019 | 14,999 | ton | 143.04 | 267 | ||||||
Non-deliverable forward - buy | Corn purchase - floating price | Corn - CBOT | 2nd Qtr. 2019 | 45,989 | ton | 148.56 | 396 | ||||||
Corn futures - buy | Corn purchase - floating price | Corn - B3 | 1st Qtr. 2019 | 10,800 | ton | 599.58 | - | ||||||
Corn futures - buy | Corn purchase - floating price | Corn - B3 | 2nd Qtr. 2019 | 23,490 | ton | 611.43 | (58) | ||||||
Non-deliverable forward - buy | Soybean oil purchase - floating price | Soybean oil - CBOT | 1st Qtr. 2019 | 9,999 | ton | 726.42 | (4,357) | ||||||
(9,144) | |||||||||||||
12.31.18 | |||||||||||||
Fair value hedges - Derivative instruments | Hedged object | Index | Maturity | Quantity | Average rate (US$/Ton) | Fair value (R$) | |||||||
Parent company and consolidated | |||||||||||||
Non-deliverable forward - sell | Corn purchase - floating price | Corn - CBOT | 1st Qtr. 2019 | 364,711 | ton | 157.56 | 14,038 | ||||||
Non-deliverable forward - sell | Corn purchase - floating price | Corn - CBOT | 2nd Qtr. 2019 | 263,724 | ton | 157.28 | 4,409 | ||||||
Non-deliverable forward - sell | Corn purchase - floating price | Corn - CBOT | 3rd Qtr. 2019 | 84,289 | ton | 153.06 | (605) | ||||||
Non-deliverable forward - sell | Corn purchase - floating price | Corn - CBOT | 1st Qtr. 2019 | 22,150 | ton | 157.40 | 78 | ||||||
17,920 |
d. Stock price risk
On August 16, 2017, the Company sold shares held in treasury and entered into a Total Return Swap instrument registered in B3, in equivalent amount, with maturity on February 05, 2019 and no possibility of renewal. By this instrument, the Company will receive or pay the variation on the stock price (BRFS3) in exchange for the payment of interest indexed to CDI. This swap does not qualify as hedge accounting and therefore was not designated as such. Additionally, there are securities given as guarantee to the counterparty, as demonstrated in note 15.
The position of the Total Return Swap on December 31, 2018 is set forth below:
12.31.18 | |||||||||||
Derivative instruments not designated | Maturity | Asset | Liability | Notional | Fair value (R$) | ||||||
Parent company and consolidated | |||||||||||
Total Return Swap | 02.2019 | BRFS3 | 110.00% CDI | 170,031 | R$ | (99,154) | |||||
(99,154) |
4.5. Hedge accounting
4.5.1. Relations designated as hedge accounting
The Company applies hedge accounting rules for derivative and non-derivative financial instruments that qualify as cash flow hedges and fair value hedges, in accordance withthe Risk Policy determinations. For all the hedge relations, the hedge index, which represents the proportion of the object hedged by the instrument, is 100%.
77
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
The Company formally designates its hedge accounting relations in compliance with CPC 48 / IFRS 09 and the Risk Policy. The hedge accounting relations used by the company as of December 31, 2018 and their effects are described below:
i. Cash flow hedge accounting – exports in foreign currencies
The future exports in foreign currencies are highly probable and qualify as hedged object since the Company expects to keep its sales in foreign currencies for future periods, based on sales already committed and historical exports.
The derivative and non-derivative financial instruments used for hedging (detailed in note 4.4.b.ii) have a direct economic relation with the objects risk, since both are transactions in the same currency. The main source of ineffectiveness in this relation is the possible mismatch between the instruments maturity dates and the sales dates. However, this mismatch is limited within the month of designation and it is not expected to compromise the hedge relation.
ii. Cash flow hedge –commodities
The future commodities purchases are highly probable and qualify as hedge object as far as these inputs are essential for the productive process of the Company. The exposure consists of purchases already committed and of historical purchase volumes.
The derivative instruments used as hedge (detailed in note 4.4.c) have a strong economic relation with the objects risk, since the purchase prices negotiated with the suppliers are indexed to the same prices used as coverage. The main source of ineffectiveness is the sales seasonality, which in atypical situations may delay or anticipate the orders. It is not expected that this ineffectiveness may compromise the hedge relation.
iii. Fair value hedge – commodities
The Company has agreements with suppliers for future purchases at fixed prices. These agreements are firm commitments, which the company designates as fair value hedge objects.
The derivative instruments used as hedge (detailed in note 4.4.c) have a strong economic relation with the objects risk, since the purchase prices negotiated with the suppliers are indexed to the same prices used as coverage. There are no identified sources of ineffectiveness that may compromise the hedge relation.
78
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
4.5.2. Gains and losses with hedge accounting instruments
The gains and losses with the instruments designated as cash flow hedge, while unrealized, are registered as a component of other comprehensive income. For hedging instruments designated in fair value hedge relations, the unrealized gains and losses are recorded in inventories, item in which the object will be registered at initial recognition.
Parent company | ||||||||||||
12.31.18 | ||||||||||||
Cash flow hedge | Fair value hedge | |||||||||||
Interest | Foreign exchange | Commodities | Commodities | |||||||||
Derivatives | Derivatives | Non-derivatives | Derivatives | Derivatives | Total | |||||||
Fair value at the beginning of the exercise | (2,452) | (160,816) | (1,679,461) | (8,748) | 1,761 | (1,849,716) | ||||||
Settlement | 820 | 487,152 | 605,998 | 28,381 | 11,025 | 1,133,376 | ||||||
Inventories | - | - | - | (7,443) | 3,952 | (3,491) | ||||||
Other comprehensive income | 2,194 | 193,198 | 81,869 | (11,526) | - | 265,735 | ||||||
Operating result - income | - | (379,825) | (43,914) | - | - | (423,739) | ||||||
Operating result - cost | - | - | - | (9,808) | 1,182 | (8,626) | ||||||
Financial result | (562) | (110,986) | (236,224) | - | - | (347,772) | ||||||
|
|
|
|
|
| |||||||
Fair value at the end of the exercise | - | 28,723 | (1,271,732) | (9,144) | 17,920 | (1,234,233) |
Consolidated | ||||||||||||
12.31.18 | ||||||||||||
Cash flow hedge | Fair value hedge | |||||||||||
Interest | Foreign exchange | Commodities | Commodities | |||||||||
Derivatives | Derivatives | Non-derivatives | Derivatives | Derivatives | Total | |||||||
Fair value at the beggining of the exercise | (13,299) | (161,049) | (1,679,461) | (8,748) | 1,761 | (1,860,796) | ||||||
Settlement | 5,307 | 576,353 | 647,882 | 28,381 | 11,025 | 1,268,948 | ||||||
Inventories | - | - | - | (7,443) | 3,952 | (3,491) | ||||||
Other comprehensive income | 8,472 | 185,966 | 81,869 | (11,526) | - | 264,781 | ||||||
Operating result - income | - | (379,825) | (43,914) | - | - | (423,739) | ||||||
Operating result - cost | - | (86,089) | (41,884) | (9,808) | 1,182 | (136,599) | ||||||
Financial result | (562) | (113,873) | (236,224) | - | - | (350,659) | ||||||
|
|
|
|
|
| |||||||
Fair value at the end of the exercise | (82) | 21,483 | (1,271,732) | (9,144) | 17,920 | (1,241,555) |
4.6. Sensitivity analysis
The Management understands that the most relevant risks that may affect the Company’s income are: volatility of commodities prices, stock prices and foreign exchange rates. Currently the fluctuation of the interest rates do not affect significantly the Company’s results since Management has chosen to keep at fixed rates a considerable portion of its debts.
The scenarios below are compliant with CVM Instruction 475/08 and present the possible impacts of the financial instruments considering situations of increase and decrease in the selected risk factors. The amounts of exports used correspond to the notional amount of the financial instruments designated for hedge accounting.
79
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
The information used in the preparation of the analysis are based on the position as of December 31, 2018, which were described in the items above. The future results to be measured may diverge significantly of the estimated values if the reality presents different than the considered premises. Positive values indicate gains and negative values indicate losses.
80
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
3.8748 | 3.4873 | 2.9061 | 4.8435 | 5.8122 | ||||||||
Parity - Brazilian Reais x U.S. Dollar | Current | Scenario I | Scenario II | Scenario III | Scenario IV | |||||||
Transaction/Instrument | Risk | Scenario | 10% appreciation | 25% appreciation | 25% devaluation | 50% devaluation | ||||||
Designated as hedge accouting | ||||||||||||
Non-deliverable forward | Devaluation of R$ | 4,139 | 93,215 | 226,828 | (218,549) | (441,238) | ||||||
Options - currencies | Devaluation of R$ | 32,716 | 278,018 | 680,930 | (559,363) | (1,242,296) | ||||||
Export prepayments | Devaluation of R$ | (66,633) | (53,717) | (34,343) | (98,922) | (131,212) | ||||||
Bonds | Devaluation of R$ | (495,355) | (391,254) | (235,102) | (755,608) | (1,015,861) | ||||||
Exports (object) | Appreciation of R$ | 526,486 | 117,669 | (530,515) | 1,527,351 | 2,619,071 | ||||||
Cost (object) | Appreciation of R$ | (1,353) | (43,931) | (107,798) | 105,091 | 211,536 | ||||||
Not designated as hedge accouting | ||||||||||||
NDF - Purchase | Appreciation of R$ | (5,136) | (54,346) | (128,161) | 117,889 | 240,914 | ||||||
Future purchase - B3 | Appreciation of R$ | (2,250) | (232,704) | (578,384) | 573,884 | 1,150,019 | ||||||
Net effect | (7,386) | (287,050) | (706,545) | 691,773 | 1,390,933 | |||||||
4.4390 | 3.9951 | 3.3293 | 5.5488 | 6.6585 | ||||||||
Parity - Brazilian Reais x Euro | Current | Scenario I | Scenario II | Scenario III | Scenario IV | |||||||
Transaction/Instrument | Risk | Scenario | 10% appreciation | 25% appreciation | 25% devaluation | 50% devaluation | ||||||
Designated as hedge accouting | ||||||||||||
Non-deliverable forward | Devaluation of R$ | 255 | 4,694 | 11,353 | (10,843) | (21,940) | ||||||
Exports (object) | Appreciation of R$ | (255) | (4,694) | (11,353) | 10,843 | 21,940 | ||||||
Not designated as hedge accouting | ||||||||||||
NDF - Purchase EUR x US$ | Devaluation of R$ | (480) | (44,870) | (111,455) | 110,494 | 221,468 | ||||||
NDF - Purchase | Devaluation of R$ | (29,899) | (205,684) | (469,360) | 409,562 | 849,023 | ||||||
Net effect | (30,379) | (250,554) | (580,815) | 520,056 | 1,070,491 | |||||||
4.9617 | 4.4655 | 3.7213 | 6.2021 | 7.4426 | ||||||||
Parity - Brazilian Reais x GBP | Current | Scenario I | Scenario II | Scenario III | Scenario IV | |||||||
Transaction/Instrument | Risk | Scenario | 10% appreciation | 25% appreciation | 25% devaluation | 50% devaluation | ||||||
Designated as hedge accouting | ||||||||||||
Non-deliverable forward | Devaluation of R$ | (1,112) | (25,425) | (61,893) | 59,669 | 120,449 | ||||||
Net effect | (1,112) | (25,425) | (61,893) | 59,669 | 120,449 | |||||||
0.0353 | 0.0317 | 0.0265 | 0.0441 | 0.0529 | ||||||||
Parity - Brazilian Reais x JPY | Current | Scenario I | Scenario II | Scenario III | Scenario IV | |||||||
Transaction/Instrument | Risk | Scenario | 10% appreciation | 25% appreciation | 25% devaluation | 50% devaluation | ||||||
Designated as hedge accounting | ||||||||||||
Non-deliverable forward | Devaluation of R$ | (1,099) | 21,353 | 55,030 | (57,228) | (113,357) | ||||||
Exports (object) | Appreciation of R$ | 1,099 | (21,353) | (55,030) | 57,228 | 113,357 | ||||||
Net effect | - | - | - | - | - | |||||||
150.60 | 135.54 | 112.95 | 188.25 | 225.90 | ||||||||
Price parity CBOT - Corn - US$/Ton | Current | Scenario I | Scenario II | Scenario III | Scenario IV | |||||||
Transaction/Instrument | Risk | Scenario | Decrease 10% | Decrease 25% | Increase 25% | Increase 50% | ||||||
Designated as hedge accounting | ||||||||||||
Non-deliverable forward - Corn sale | Increase in the price of corn | 18,061 | 60,943 | 125,268 | (89,147) | (196,354) | ||||||
Non-deliverable forward - Corn purchase | Decrease in the price of corn | 803 | (2,756) | (8,095) | 9,700 | 18,597 | ||||||
Cost (object) | Decrease in the price of corn | (18,864) | (58,187) | (117,173) | 79,447 | 177,757 | ||||||
Net effect | - | - | - | - | - | |||||||
124.99 | 112.49 | 93.74 | 156.24 | 187.49 | ||||||||
Price parity CBOT - Soybean meal - US$/Ton | Current | Scenario I | Scenario II | Scenario III | Scenario IV | |||||||
Transaction/Instrument | Risk | Scenario | Decrease 10% | Decrease 25% | Increase 25% | Increase 50% | ||||||
Designated as hedge accounting | ||||||||||||
Non-deliverable forward - Soybeal meal purchase | Decrease in the price of soybean meal | (955) | (3,425) | (7,130) | 5,221 | 11,397 | ||||||
Cost (object) | Increase in the price of soybean meal | 955 | 3,425 | 7,130 | (5,221) | (11,397) | ||||||
Net effect | - | - | - | - | - | |||||||
332.31 | 299.08 | 249.23 | 415.39 | 498.46 | ||||||||
Price parity CBOT - Soybean - US$/Ton | Current | Scenario I | Scenario II | Scenario III | Scenario IV | |||||||
Transaction/Instrument | Risk | Scenario | Decrease 10% | Decrease 25% | Increase 25% | Increase 50% | ||||||
Designated as hedge accounting | ||||||||||||
NDF - Soybean purchase | Decrease in the price of soybean | (2,719) | (8,642) | (17,526) | 12,088 | 26,894 | ||||||
Cost (object) | Increase in the price of soybean | 2,719 | 8,642 | 17,526 | (12,088) | (26,894) | ||||||
Net effect | - | - | - | - | - | |||||||
613.99 | 552.59 | 460.49 | 767.48 | 920.98 | ||||||||
Price parity CBOT - soybean oil - US$/Ton | Current | Scenario I | Scenario II | Scenario III | Scenario IV | |||||||
Transaction/Instrument | Risk | Scenario | Decrease 10% | Decrease 25% | Increase 25% | Increase 50% | ||||||
Designated as hedge accounting | ||||||||||||
NDF - Soybean oil purchase | Decrease in the price of soybean oil | (4,356) | (6,735) | (10,303) | 1,591 | 7,538 | ||||||
Cost (object) | Increase in the price of soybean oil | 4,356 | 6,735 | 10,303 | (1,591) | (7,538) | ||||||
Net effect | - | - | - | - | - | |||||||
21.93 | 19.74 | 16.45 | 27.41 | 32.90 | ||||||||
Price parity - Shares BRFS3 - R$ | Current | Scenario I | Scenario II | Scenario III | Scenario IV | |||||||
Transaction/Instrument | Risk | Scenario | Decrease 10% | Decrease 25% | Increase 25% | Increase 50% | ||||||
Not designated as hedge accounting | ||||||||||||
Stock swap | Decrease in the share price | (99,154) | (108,024) | (121,329) | (76,978) | (54,803) | ||||||
Net effect | (99,154) | (108,024) | (121,329) | (76,978) | (54,803) |
81
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
4.7. Financial instruments by category
Parent company | |||||||
12.31.18 | |||||||
Amortized cost | Fair value through other comprehensive income | Fair value through profit and loss | Total | ||||
Assets | |||||||
Cash and bank | 106,230 | - | - | 106,230 | |||
Cash equivalents | - | - | 3,720,468 | 3,720,468 | |||
Marketable securities | 87,697 | 83,782 | 310,398 | 481,877 | |||
Restricted cash | 840,584 | - | - | 840,584 | |||
Trade accounts receivable | 5,085,604 | - | 203,224 | 5,288,828 | |||
Other credits | 199,240 | - | - | 199,240 | |||
Derivatives not designated | - | - | 36,401 | 36,401 | |||
Derivatives designated as hedge accounting (1) | - | - | 140,943 | 140,943 | |||
Liabilities | |||||||
Trade accounts payable | (5,024,825) | - | - | (5,024,825) | |||
Supply chain finance | (885,783) | - | - | (885,783) | |||
Loans and financing | 19,043,446 | - | - | 19,043,446 | |||
Finance lease payable | (215,373) | - | - | (215,373) | |||
Derivatives not designated | - | - | (120,887) | (120,887) | |||
Derivatives designated as hedge accounting (1) | - | - | (103,444) | (103,444) | |||
19,236,820 | 83,782 | 4,187,103 | 23,507,705 |
(1) All derivatives are measured at fair value. Those designated as hedge accounting have their gains and losses also affecting other comprehensive income and inventories.
Parent company | |||||||
12.31.17 | |||||||
Amortized cost | Fair value through other comprehensive income | Fair value through profit and loss | Total | ||||
Assets | |||||||
Cash and bank | 146,331 | - | - | 146,331 | |||
Cash equivalents | - | - | 3,438,370 | 3,438,370 | |||
Marketable securities | 82,418 | 276,900 | 166,322 | 525,640 | |||
Restricted cash | 516,598 | - | - | 516,598 | |||
Trade accounts receivable | 7,331,532 | - | - | 7,331,532 | |||
Other credits | 223,239 | - | - | 223,239 | |||
Other receivables | 28,897 | - | - | 28,897 | |||
Derivatives not designated | - | - | 25,432 | 25,432 | |||
Derivatives designated as hedge accounting (1) | - | - | 23,700 | 23,700 | |||
Liabilities | |||||||
Trade accounts payable | (4,831,225) | - | - | (4,831,225) | |||
Supply chain finance | (648,914) | - | - | (648,914) | |||
Loans and financing | (13,546,738) | - | - | (13,546,738) | |||
Finance lease payable | (226,477) | - | - | (226,477) | |||
Derivatives not designated | - | - | (88,664) | (88,664) | |||
Derivatives designated as hedge accounting (1) | - | - | (193,955) | (193,955) | |||
(10,924,339) | 276,900 | 3,371,205 | (7,276,234) |
(1) All derivatives are measured at fair value. Those designated as hedge accounting have their gains and losses also affecting other comprehensive income and inventories.
82
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
Consolidated | |||||||||
12.31.18 | |||||||||
Amortized cost | Fair value through other comprehensive income | Fair value through profit and loss | Total | ||||||
Equity instruments | Debt instruments | ||||||||
Assets | |||||||||
Cash and bank | 722,838 | - | - | - | 722,838 | ||||
Cash equivalents | - | - | - | 4,146,724 | 4,146,724 | ||||
Marketable securities | 331,395 | 139,469 | 16,398 | 310,398 | 797,660 | ||||
Restricted cash | 861,621 | - | - | - | 861,621 | ||||
Trade accounts receivable | 2,409,667 | - | - | 203,224 | 2,612,891 | ||||
Other credits | 204,072 | - | - | - | 204,072 | ||||
Derivatives not designated | - | - | - | 41,387 | 41,387 | ||||
Derivatives designated as hedge accounting (1) | - | - | - | 140,952 | 140,952 | ||||
Liabilities | |||||||||
Trade accounts payable | (5,732,278) | - | - | - | (5,732,278) | ||||
Supply chain finance | (885,783) | - | - | - | (885,783) | ||||
Loans and financing | (22,165,444) | - | - | - | (22,165,444) | ||||
Finance lease payable | (215,373) | - | - | - | (215,373) | ||||
Derivatives not designated | - | - | - | (124,261) | (124,261) | ||||
Derivatives designated as hedge accounting (1) | - | - | - | (110,774) | (110,774) | ||||
(24,469,285) | 139,469 | 16,398 | 4,607,650 | (19,705,768) |
(1) All derivatives are measured at fair value. Those designated as hedge accounting have their gains and losses also affecting other comprehensive income and inventories.
Consolidated | |||||||||
12.31.17 | |||||||||
Amortized cost | Fair value through other comprehensive income | Fair value through profit and loss | Total | ||||||
Equity instruments | Debt instruments | ||||||||
Assets | |||||||||
Cash and bank | 1,670,117 | - | - | - | 1,670,117 | ||||
Cash equivalents | - | - | - | 4,340,712 | 4,340,712 | ||||
Marketable securities | 256,978 | 328,816 | 15,447 | 195,994 | 797,235 | ||||
Restricted cash | 535,624 | - | - | - | 535,624 | ||||
Trade accounts receivable | 3,925,282 | - | - | - | 3,925,282 | ||||
Other credits | 229,521 | - | - | - | 229,521 | ||||
Other receivables | 28,897 | - | - | - | 28,897 | ||||
Derivatives not designated | - | - | - | 63,081 | 63,081 | ||||
Derivatives designated as hedge accounting (1) | - | - | - | 27,455 | 27,455 | ||||
Liabilities | |||||||||
Trade accounts payable | (6,642,257) | - | - | - | (6,642,257) | ||||
Supply chain finance | (715,189) | - | - | - | (715,189) | ||||
Loans and financing | (20,444,378) | - | - | - | (20,444,378) | ||||
Finance lease payable | (232,575) | - | - | - | (232,575) | ||||
Derivatives not designated | - | - | - | (90,701) | (90,701) | ||||
Derivatives designated as hedge accounting (1) | - | - | - | (208,790) | (208,790) | ||||
(21,387,980) | 328,816 | 15,447 | 4,327,751 | (16,715,966) |
(1) All derivatives are measured at fair value. Those designated as hedge accounting have their gains and losses also affecting other comprehensive income and inventories.
83
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
4.8. Fair value of the financial instruments
According to CPC 46 / IFRS 13 the fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Depending on the inputs used for measurement, the financial instruments at fair value are classified into 3 hierarchy levels:
· Level 1 – Prices quoted (not adjusted) for identical instruments in active markets. In this category are investments in stocks, credit linked notes, savings accounts, overnights, term deposits, Financial Treasury Bills (“LFT”) and investment funds are classified at level 1;
· Level 2 – Prices quoted in active markets for similar instruments, prices quoted for identical or similar instruments in non-active markets and evaluation models for which inputs are observable. Investments in Bank Deposit Certificates (“CDB”) and derivatives, which are measured by well-known pricing models: discounted cash flows and Black-Scholes. The observable inputs are interest rates and curves, volatility factors and foreign exchange rates; and
· Level 3 – Instruments whose significant inputs are non-observable. The Company does not have financial instruments in this classification.
The table below presents the overall classification of financial instruments measured at fair value by measurement hierarchy. For the period ended on December 31, 2018, there were no changes between the 3 levels of hierarchy.
Parent company | |||||||||||
12.31.18 | 12.31.17 | ||||||||||
Level 1 | Level 2 | Total | Level 1 | Level 2 | Total | ||||||
Financial Assets | |||||||||||
Fair value through other comprehensive income | |||||||||||
Stocks | 83,782 | - | 83,782 | 276,900 | - | 276,900 | |||||
Fair value through profit and loss | |||||||||||
Savings account and overnight | 21,126 | - | 21,126 | 108,148 | - | 108,148 | |||||
Bank deposit certificates | - | 3,695,621 | 3,695,621 | - | 3,324,888 | 3,324,888 | |||||
Financial treasury bills | 295,699 | - | 295,699 | 166,322 | - | 166,322 | |||||
Investment funds | 3,721 | - | 3,721 | 5,334 | - | 5,334 | |||||
Derivatives | - | 177,344 | 177,344 | - | 49,132 | 49,132 | |||||
Financial Liabilities | |||||||||||
Fair value through profit and loss | |||||||||||
Derivatives | - | (224,331) | (224,331) | - | (282,619) | (282,619) | |||||
404,328 | 3,648,634 | 4,052,962 | 556,704 | 3,091,401 | 3,648,105 |
84
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
Consolidated | |||||||||||
12.31.18 | 12.31.17 | ||||||||||
Level 1 | Level 2 | Total | Level 1 | Level 2 | Total | ||||||
Financial Assets | |||||||||||
Fair value through other comprehensive income | |||||||||||
Credit linked notes | 16,398 | - | 16,398 | 15,447 | - | 15,447 | |||||
Stocks | 139,469 | - | 139,469 | 328,816 | - | 328,816 | |||||
Fair value through profit and loss | |||||||||||
Savings account and overnight | 401,145 | - | 401,145 | 649,618 | - | 649,618 | |||||
Term deposits | 21,150 | - | 21,150 | 157,974 | - | 157,974 | |||||
Bank deposit certificates | - | 3,720,708 | 3,720,708 | - | 3,527,786 | 3,527,786 | |||||
Financial treasury bills | 295,699 | - | 295,699 | 166,322 | - | 166,322 | |||||
Investment funds | 3,721 | - | 3,721 | 35,006 | - | 35,006 | |||||
Derivatives | - | 182,339 | 182,339 | - | 90,536 | 90,536 | |||||
Financial Liabilities | |||||||||||
Fair value through profit and loss | |||||||||||
Derivatives | - | (235,035) | (235,035) | - | (299,491) | (299,491) | |||||
877,582 | 3,668,012 | 4,545,594 | 1,353,183 | 3,318,831 | 4,672,014 |
Except for the items set forth below, the book value of all other financial instruments approximates their fair value. The fair value of financial instruments set forth below is based in prices observed in active markets, level 1 of the fair value hierarchy.
Parent company and Consolidated | |||||||||
|
| 12.31.18 | 12.31.17 | ||||||
Maturity | Book | Fair | Book | Fair | |||||
BRF bonds | |||||||||
BRF SA BRFSBZ5 | 2022 | (451,542) | (456,190) | (369,627) | (406,699) | ||||
BRF SA BRFSBZ4 | 2024 | (2,898,940) | (2,695,884) | - | - | ||||
BRF SA BRFSBZ3 | 2023 | (1,888,811) | (1,754,586) | (1,608,257) | (1,578,661) | ||||
BRF SA BRFSBZ7 | 2018 | - | - | (503,802) | (502,363) | ||||
BRF SA BRFSBZ2 | 2022 | (2,248,510) | (2,189,975) | (1,997,537) | (1,974,482) | ||||
Parent company | (7,487,803) | (7,096,635) | (4,479,223) | (4,462,205) | |||||
BFF bonds | |||||||||
Sadia Overseas BRFSBZ7 | 2020 | (342,958) | (349,241) | (292,211) | (299,883) | ||||
Bonds BRF - SHB | |||||||||
BRF SA BRFSBZ4 | 2024 | - | - | (2,465,396) | (2,427,849) | ||||
Bonds BRF Gmbh | |||||||||
BRF SA BRFSBZ4 | 2026 | (1,915,685) | (1,702,211) | (1,628,927) | (1,553,088) | ||||
Quickfood bonds | |||||||||
Quickfood | 2022 | - | - | (167,966) | (167,966) | ||||
Consolidated | (9,746,446) | (9,148,087) | (9,033,723) | (8,910,991) |
On December 31, 2018, the balance of the bond of Quickfood was reclassified to liabilities directly associated with the assets held for sale, according to note 12.
85
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
5. SEGMENT INFORMATION
The operating segments are reported consistently with the management reports provided to the chief operating decision maker for assessing the performance of each segment and allocating resources.
With the discontinuation of Operations in Argentina, Europe and Thailand the Company has changed its operating segments which primarily observe the Company's business areas, being: (i) Brazil; (ii) Halal (formerly One Foods); (iii) International, which absorbed the continued operations formerly reported in the Southern Cone, and no longer presenting operations in Europe and Thailand; and (iv) Other Segments. During the fourth quarter of 2018, the Southern Cone was extinct.
These segments include sales of all distribution channels and operations subdivided according to the nature of the products whose characteristics are described below:
· Poultry: involves the production and sale of whole poultry and in-natura cuts.
· Pork and other: involves the production and sale of in-natura cuts.
· Processed: involves the production and sale of processed foods, frozen and processed products derived from poultry, pork and beef, margarine, vegetable and soybean-based products.
· Other sales: involves the sale of flour for food service and others.
Other segments are divided into:
· Ingredients: commercialization and development of animal health ingredients, human nutrition, plant nutrition (fertilizers) and health care (health and wellness).
· Other segments: commercialization of agricultural products.
86
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
The net sales for each reportable operating segment are set forth below:
Consolidated | ||||
Net sales | 12.31.18 | Restated | ||
Brazil | ||||
In-natura | 3,996,797 | 3,489,846 | ||
Poultry | 3,197,061 | 2,697,462 | ||
Pork and other | 799,736 | 792,384 | ||
Processed | 12,271,343 | 11,681,579 | ||
Other sales | 16,624 | 17,187 | ||
16,284,764 | 15,188,612 | |||
Halal | ||||
In-natura | 6,685,054 | 5,588,845 | ||
Poultry | 6,632,891 | 5,554,431 | ||
Other | 52,163 | 34,414 | ||
Processed | 1,295,557 | 909,658 | ||
Other sales | 312,660 | 195,533 | ||
8,293,271 | 6,694,036 | |||
International | ||||
In-natura | 4,213,485 | 4,736,902 | ||
Poultry | 3,382,415 | 3,401,429 | ||
Pork and other | 831,070 | 1,335,473 | ||
Processed | 553,419 | 653,954 | ||
Other sales | 242 | 222,644 | ||
4,767,146 | 5,613,500 | |||
Other segments | ||||
Ingredients | 436,153 | 269,248 | ||
Other sales | 407,087 | 548,764 | ||
843,240 | 818,012 | |||
30,188,421 | 28,314,160 |
87
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
The operating income for each reportable operating segment is set forth below:
Consolidated | ||||
12.31.18 | Restated | |||
Brazil | 610,123 | 960,681 | ||
Halal | 323,875 | 7,527 | ||
International | (282,291) | 46,080 | ||
Other segments | 87,388 | 71,880 | ||
Ingredients | 115,000 | 52,066 | ||
Other sales | (27,612) | 19,814 | ||
Sub total | 739,095 | 1,086,168 | ||
Corporate | (909,839) | (422,984) | ||
(170,744) | 663,184 |
(1) For comparability of information see note 3.3.
The Corporate line presented above refers to relevant events not attributable to the normal course of its business either to the operating segments. For the year ended December 31, 2018, the main events were R$492,795 related to Trapaça Operation (note 1.2.2), R$225,600 related recognition of PIS/COFINS to be recoverable (note 11.2),R$213,508 related to the operational restructuring plan (note 1.4) and R$85,038 related to strike of the truck drivers (note 1.5). For the year ended December 31, 2017, the main events were: R$332,926 in provisions for contingencies, mainly public civil actions, R$157,502 in expenses related to Weak Flesh Operation, R$205,873 provision for adjustment to realizable value of inventories related to Weak Flesh Operation, R$51,857 in business combination costs related to Banvit, R$36,718 in business combination costs related to Lactalis divestiture, R$9,859 in health insurance claims, R$147,664 gain on tax amnesty program and other events of R$31,271.
No customer individually or in aggregate accounted (economic group) for more than 5% of net sales for the year ended on December 31, 2018 and 2017.
The goodwill and intangible assets with indefinite useful life (trademarks) arising from business combination were allocated to the reportable operating segments, considering the nature of the products manufactured in each segment (cash-generating unit), as presented below:
88
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
Consolidated | |||||||||||
Goodwill | Trademarks | Total | |||||||||
12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | ||||||
Brazil | 1,151,498 | 1,151,498 | 982,478 | 982,478 | 2,133,976 | 2,133,976 | |||||
Halal | 1,465,197 | 1,388,084 | 353,684 | 389,207 | 1,818,881 | 1,777,291 | |||||
International | 78,270 | 1,345,423 | - | 24,498 | 78,270 | 1,369,921 | |||||
Southern Cone | - | 307,223 | - | 253,727 | - | 560,950 | |||||
2,694,965 | 4,192,228 | 1,336,162 | 1,649,910 | 4,031,127 | 5,842,138 |
Information referring to the total assets by reportable segments is not being disclosed, as it is not included in the set of information made available to the chief operating decision maker, which take investment decisions and determine allocation of assets on a consolidated basis.
6. CASH AND CASH EQUIVALENTS
Average rate (p.a.) | Parent company | Consolidated | |||||||
12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | ||||||
Cash and bank accounts | |||||||||
U.S. Dollar | - | 8,075 | 13,462 | 118,895 | 525,058 | ||||
Brazilian Reais | - | 94,967 | 123,022 | 97,376 | 135,013 | ||||
Euro | - | 2,927 | 6,021 | 52,779 | 181,756 | ||||
Other currencies | - | 261 | 3,826 | 453,788 | 828,290 | ||||
106,230 | 146,331 | 722,838 | 1,670,117 | ||||||
Cash equivalents | |||||||||
In Brazilian Reais | |||||||||
Investment funds | 1.80% | 3,721 | 5,334 | 3,721 | 5,334 | ||||
Savings account | 2.56% | 49 | 4,038 | 49 | 4,038 | ||||
Bank deposit certificates | 5.75% | 3,695,621 | 3,324,888 | 3,720,708 | 3,527,786 | ||||
3,699,391 | 3,334,260 | 3,724,478 | 3,537,158 | ||||||
In U.S. Dollar | |||||||||
Term deposit | - | - | - | - | 66,247 | ||||
Overnight | 0.54% | 21,077 | 104,110 | 401,096 | 645,580 | ||||
Other currencies | |||||||||
Term deposit | 2.68% | - | - | 21,150 | 91,727 | ||||
21,077 | 104,110 | 422,246 | 803,554 | ||||||
3,826,698 | 3,584,701 | 4,869,562 | 6,010,829 |
89
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
7. MARKETABLE SECURITIES
Average interest rate (p.a.) | Parent company | Consolidated | |||||||||||
WATM (1) | Currency | 12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | ||||||||
Fair value through other comprehensive income | |||||||||||||
Credit linked note (a) | 1.08 | US$ | 3.85% | - | - | 16,398 | 15,447 | ||||||
Stocks (b) | - | R$ and HKD | - | 83,782 | 276,900 | 139,469 | 328,816 | ||||||
83,782 | 276,900 | 155,867 | 344,263 | ||||||||||
Fair value through profit and loss | |||||||||||||
Financial treasury bills (c) | 5.31 | R$ | 6.40% | 295,699 | 166,322 | 295,699 | 166,322 | ||||||
Fundo de Investimentos - FIDC (d) | 4.96 | R$ | - | 14,699 | - | 14,699 | - | ||||||
Investment funds | - | ARS | - | - | - | - | 29,672 | ||||||
310,398 | 166,322 | 310,398 | 195,994 | ||||||||||
Amortized cost | |||||||||||||
Sovereign bonds and others (c) | 3.36 | AOA and R$ | 3.82% to 6.40% | 87,697 | 82,418 | 331,395 | 256,978 | ||||||
481,877 | 525,640 | 797,660 | 797,235 | ||||||||||
Current | 303,613 | 166,322 | 507,035 | 228,430 | |||||||||
Non-current (2) | 178,264 | 359,318 | 290,625 | 568,805 |
(1) Weighted average maturity in years.
(2) Maturity within up to September 01, 2024.
(a) The credit linked note is a structured operation with a first-class financial institution that bears periodic interest (LIBOR + spread) and corresponds to a credit note that contemplates the Company’s risk.
(b) Is composed as set forth below:
Quantity of shares | Share value | Total | ||||||||||||
Entities | Ticker | 12.31.18 |
| 12.31.17 | 12.31.18 |
| 12.31.17 | 12.31.18 |
| 12.31.17 | ||||
Minerva | BEEF3 | 15,204,100 | 26,000,000 | 4.99 | 10.65 | 75,868 | 276,900 | |||||||
Cofco Meat | 1610 | 77,583,000 | 77,583,000 | HKD1,45 / R$0,72 | HKD1,58 / R$0,67 | HKD112.495 / R$55.686 | HKD122.581 / R$51.916 | |||||||
Eletrobras | ELET6 | 275,039 | - | 28.17 | - | 7,748 | - | |||||||
Engie Brasil | EGIE3 | 5,055 | - | 33.02 | - | 167 | - |
(c) Comprised of Financial Treasury Bills (“LFT”) remunerated at the rate of the Special System for Settlement and Custody (“SELIC”) and securities of the Angola Government denominated in Kwanzas.
(d) Application in junior quotas of the Credit rights investment fund (“FIDC BRF”), as described in note 1.6.
90
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
The unrealized loss on the marketable securities measured at fair value through other comprehensive income, recorded in Shareholders' Equity, corresponds to the accumulated amount of R$98,451 net of income tax of R$43,767 (loss of R$56,259 net of income tax of R$22,984 as of December 31, 2017). The loss realized on disposal of these investments, recorded in accumulated losses, is R$63,975. The balance of expected credit losses in marketable securities measured at amortized cost at on December 31, 2018 is R$8,974, of which R$7,557 was recognized in the financial expenses for the year.
Additionally, on December 31, 2018, of the total of marketable securities, R$288,010 (R$16,196 as of December 31, 2017) were pledged as collateral (without restrictions for use) for operations with future contracts denominated in U.S. Dollars, traded on the B3 S.A. – Brasil, Bolsa, Balcão (“B3”).
8. TRADE ACCOUNTS RECEIVABLE AND OTHER RECEIVABLES, NET
Parent company | Consolidated | ||||||
12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | ||||
Trade accounts receivable, net | |||||||
Domestic customers | 1,098,173 | 1,618,579 | 1,098,750 | 1,622,769 | |||
Domestic related parties | 233 | 831,962 | - | 2,583 | |||
Foreign customers | 368,949 | 337,222 | 1,973,981 | 2,753,998 | |||
Foreign related parties | 4,270,689 | 4,962,508 | 59,284 | 27,215 | |||
5,738,044 | 7,750,271 | 3,132,015 | 4,406,565 | ||||
( - ) Adjustment to present value | (7,768) | (11,261) | (10,276) | (13,728) | |||
( - ) Expected credit losses | (441,448) | (407,478) | (508,848) | (467,555) | |||
5,288,828 | 7,331,532 | 2,612,891 | 3,925,282 | ||||
Current | 5,280,864 | 7,325,588 | 2,604,928 | 3,919,022 | |||
Non-current | 7,964 | 5,944 | 7,963 | 6,260 | |||
Notes receivable | 230,544 | 254,303 | 235,376 | 260,585 | |||
( - ) Adjustment to present value | (344) | (313) | (344) | (313) | |||
( - ) Expected credit losses | (30,960) | (30,751) | (30,960) | (30,751) | |||
199,240 | 223,239 | 204,072 | 229,521 | ||||
Current | 110,281 | 107,434 | 115,113 | 113,127 | |||
Non-current (1) | 88,959 | 115,805 | 88,959 | 116,394 |
(1) Weighted average maturity of 2.89 years.
The assignment of credits to FIDC BRF, as presented in note 1.6, demonstrated a significant reduction in the amount of accounts receivable - third parties in the country. On December 31, 2008, the amount transferred to the Fund is R$ 643,675.
Part of the balance with foreign related parties is tied to Agribusiness ReceivableCertificate (“CRA) operation, as disclosed in the note 19.2.
91
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
12.31.18 | ||||||||||
Parent company and Consolidated | ||||||||||
Operation | Date | Maturity | Average rate | Principal value | Updated Value | |||||
CRA 2019 - 2sd Issue | 04.19.2016 | 04.19.2019 | 96,5% CDI | 1,000,000 | 1,026,945 | |||||
CRA 2020 - 3th Issue | 12.16.2016 | 12.16.2020 | 96,0% CDI | 780,000 | 781,661 | |||||
CRA 2023 - 3th Issue | 12.16.2016 | 12.18.2023 | IPCA + 5,90% | 720,000 | 788,896 | |||||
2,500,000 | 2,597,502 |
On December 31, 2018 notes receivable are comprised mainly by receivables from the sales of several other assets and farms with an amount of R$189,132.
The trade accounts receivable from related parties are disclosed in note 30. The consolidated balances, refers to transaction with joint ventures SATS BRF, in foreign market.
The rollforward of the allowance for expected credit losses is set forth below:
Parent company | Consolidated | ||||||
12.31.18 |
| 12.31.17 | 12.31.18 | 12.31.17 | |||
Beginning balance | (407,478) | (387,996) | (467,555) | (406,456) | |||
Inicial adoption IFRS 9 | (2,644) | - | (12,612) | - | |||
Incorporation of companies (1) | (114) | - | - | - | |||
Transfer - held for sale (2) | - | - | 8,991 | - | |||
Business combination | - | - | - | (11,638) | |||
Provision | (25,327) | (45,948) | (46,357) | (75,322) | |||
Write-offs | 38,493 | 30,607 | 49,445 | 30,833 | |||
Exchange rate variation | (44,378) | (4,141) | (40,760) | (4,972) | |||
Ending balance | (441,448) | (407,478) | (508,848) | (467,555) |
(1) Amount arising from incorporation of SHB (note 1.7).
(2) Amount transferred to discontinued operations (note 12).
The aging of trade accounts receivable is as follows:
92
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
Parent company | Consolidated | ||||||
12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | ||||
Current | 5,252,593 | 7,287,311 | 2,451,597 | 3,272,086 | |||
Overdue | |||||||
01 to 60 days | 27,115 | 48,894 | 133,002 | 364,336 | |||
61 to 90 days | 4,506 | 10,022 | 25,435 | 98,937 | |||
91 to 120 days | 4,626 | 10,065 | 10,575 | 33,650 | |||
121 to 180 days | 12,791 | 7,925 | 27,029 | 74,633 | |||
181 to 360 days | 17,143 | 16,478 | 36,783 | 170,771 | |||
More than 360 days | 419,270 | 369,576 | 447,594 | 392,152 | |||
( - ) Adjustment to present value | (7,768) | (11,261) | (10,276) | (13,728) | |||
( - ) Expected credit losses | (441,448) | (407,478) | (508,848) | (467,555) | |||
5,288,828 | 7,331,532 | 2,612,891 | 3,925,282 |
9. INVENTORIES
Parent company | Consolidated | ||||||
12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | ||||
Finished goods | 1,340,593 | 1,309,298 | 2,200,763 | 2,986,521 | |||
Work in process | 139,818 | 107,037 | 140,466 | 154,976 | |||
Raw materials | 767,061 | 846,257 | 847,494 | 1,086,304 | |||
Packaging materials | 71,889 | 56,369 | 73,755 | 86,998 | |||
Secondary materials | 333,182 | 272,638 | 337,969 | 321,105 | |||
Warehouse | 176,444 | 147,776 | 196,228 | 239,757 | |||
Imports in transit | 97,586 | 91,678 | 103,954 | 103,904 | |||
Other | 23,602 | 20,845 | 9,979 | 11,414 | |||
(-) Adjustment to present value | (33,302) | (34,114) | (33,314) | (42,811) | |||
2,916,873 | 2,817,784 | 3,877,294 | 4,948,168 |
The costs of sales attributed to products sold during the year ended December 31, 2018 totaled R$21,564,493 in the parent company and R$25,320,753 in the consolidated (R$20,974,396 in the parent company and R$22,601,215 in the consolidated in the same period of the previous year). Such amounts include the additions and reversals of inventory provisions, set forth in the table below:
Parent company | |||||||||||||||
Provision for adjustment to realizable value | Provision for deterioration | Provision for obsolescence | Total | ||||||||||||
12.31.18 |
| 12.31.17 | 12.31.18 |
| 12.31.17 | 12.31.18 |
| 12.31.17 | 12.31.18 | 12.31.17 | |||||
Beginning balance | (209,681) | (35,409) | (41,098) | (10,629) | (6,370) | (6,920) | (257,149) | (52,958) | |||||||
Additions | (263,010) | (204,275) | (85,857) | (37,652) | (8,600) | (1,815) | (357,467) | (243,742) | |||||||
Reversals | 98,493 | 30,003 | - | - | - | - | 98,493 | 30,003 | |||||||
Write-offs | 313,212 | - | 87,764 | 7,183 | 10,310 | 2,365 | 411,286 | 9,548 | |||||||
Incorporation of companies (1) | - | - | (12,183) | - | (348) | - | (12,531) | - | |||||||
Ending balance | (60,986) | (209,681) | (51,374) | (41,098) | (5,008) | (6,370) | (117,368) | (257,149) |
(1) Amount arising from the merger of SHB (note 1.7).
93
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
Consolidated | |||||||||||||||
Provision for adjustment to realizable value | Provision for deterioration | Provision for obsolescence | Total | ||||||||||||
12.31.18 |
| 12.31.17 |
| 12.31.18 |
| 12.31.17 |
| 12.31.18 |
| 12.31.17 |
| 12.31.18 | 12.31.17 | ||
Beginning balance | (253,720) | (93,530) | (66,394) | (26,211) | (6,914) | (7,649) | (327,028) | (127,390) | |||||||
Additions | (317,039) | (240,668) | (153,245) | (62,408) | (25,286) | (2,416) | (495,570) | (305,492) | |||||||
Reversals | 143,406 | 80,833 | - | - | - | - | 143,406 | 80,833 | |||||||
Write-offs | 342,813 | - | 152,823 | 22,348 | 19,940 | 2,232 | 515,576 | 24,580 | |||||||
Restatement by Hyperinflation | (4,924) | - | (526) | - | - | - | (5,450) | - | |||||||
Transfer - held for sale (1) | 23,898 | - | 7,214 | - | 326 | - | 31,438 | - | |||||||
Business combination | - | - | - | 23 | - | 849 | - | 872 | |||||||
Exchange rate variation | 76 | (355) | (458) | (146) | (95) | 70 | (477) | (431) | |||||||
Ending balance | (65,490) | (253,720) | (60,586) | (66,394) | (12,029) | (6,914) | (138,105) | (327,028) |
(1) Amount arising from the assets held for sale (note 12).
In 2018, the roll-forward of provisions presented above includes the impacts related toTrapaça Operation (note 1.2.2) and Operational restructuring plan (note 1.4), and for 2017 is related toCarne Fraca Operation (note 1.2.1).
On December 31, 2018 and December 31, 2017, there were no inventory items pledged as collateral.
10. BIOLOGICAL ASSETS
The balance of biological assets is segregated in current and non-current assets are set forth below:
Parent company | Consolidated | ||||||
12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | ||||
Live animals | 1,459,804 | 1,261,556 | 1,513,133 | 1,510,480 | |||
Total current | 1,459,804 | 1,261,556 | 1,513,133 | 1,510,480 | |||
Live animals | 636,503 | 535,842 | 698,421 | 639,799 | |||
Forests | 362,893 | 237,718 | 362,893 | 263,855 | |||
Total non-current | 999,396 | 773,560 | 1,061,314 | 903,654 | |||
2,459,200 | 2,035,116 | 2,574,447 | 2,414,134 |
94
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
The rollforward of biological assets for the year is set forth below:
Parent company | |||||||||||||||||||||||||||
Current | Non-current | ||||||||||||||||||||||||||
Live animals | Total | Live animals |
| Forests |
| Total | |||||||||||||||||||||
Poultry | Pork |
| Poultry | Pork |
|
|
|
| |||||||||||||||||||
12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | ||||||||||||||
Beginning balance | 461,881 | 759,852 | 799,675 | 857,895 | 1,261,556 | 1,617,747 | 235,425 | 328,552 | 300,417 | 293,034 | 237,718 | 269,968 | 773,560 | 891,554 | |||||||||||||
Additions/Transfer | 269,774 | 372,285 | 1,818,312 | 1,692,004 | 2,088,086 | 2,064,289 | 38,453 | 36,322 | 233,607 | 203,790 | 24,632 | 29,932 | 296,692 | 270,044 | |||||||||||||
Changes in fair value (1) | 581,728 | 636,041 | 204,028 | 49,473 | 785,756 | 685,514 | 13,199 | 43 | (147,302) | (119,035) | 90,384 | 3,850 | (43,719) | (115,142) | |||||||||||||
Harvest | - | - | - | - | - | - | - | - | - | - | (30,529) | (35,159) | (30,529) | (35,159) | |||||||||||||
Write-off | - | - | - | - | - | - | - | - | - | - | (8,133) | (3,660) | (8,133) | (3,660) | |||||||||||||
Transfer between current and non-current | 51,626 | 52,123 | 69,537 | 77,372 | 121,163 | 129,495 | (51,626) | (52,123) | (69,537) | (77,372) | - | - | (121,163) | (129,495) | |||||||||||||
Transfer to assets held for sale | - | - | - | - | - | - | - | - | - | - | (1,046) | 118 | (1,046) | 118 | |||||||||||||
Transfer to inventories | (993,300) | (1,197,307) | (1,961,272) | (1,877,069) | (2,954,572) | (3,074,376) | - | - | - | - | - | - | - | - | |||||||||||||
Transfer to related parties | - | (161,113) | - | - | - | (161,113) | - | (77,369) | - | - | - | (27,331) | - | (104,700) | |||||||||||||
Merger (2) | 157,815 | - | - | - | 157,815 | - | 83,867 | - | - | - | 49,867 | - | 133,734 | - | |||||||||||||
Ending balance | 529,524 | 461,881 | 930,280 | 799,675 | 1,459,804 | 1,261,556 | 319,318 | 235,425 | 317,185 | 300,417 | 362,893 | 237,718 | 999,396 | 773,560 | |||||||||||||
Consolidated | |||||||||||||||||||||||||||
Current | Non-current | ||||||||||||||||||||||||||
Live animals | Total | Live animals |
| Forests |
| Total | |||||||||||||||||||||
Poultry | Pork |
| Poultry | Pork |
|
|
|
| |||||||||||||||||||
12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | ||||||||||||||
Beginning balance | 699,947 | 770,691 | 810,533 | 874,248 | 1,510,480 | 1,644,939 | 325,821 | 349,102 | 313,978 | 298,275 | 263,855 | 269,968 | 903,654 | 917,345 | |||||||||||||
Additions/Transfer | 415,422 | 547,946 | 1,819,960 | 1,692,004 | 2,235,382 | 2,239,950 | 246,247 | 84,254 | 233,607 | 203,790 | 31,909 | 35,279 | 511,763 | 323,323 | |||||||||||||
Business combination | - | 102,967 | - | - | - | 102,967 | - | - | - | - | - | - | - | - | |||||||||||||
Changes in fair value (1) | 966,951 | 1,290,357 | 228,149 | 88,697 | 1,195,100 | 1,379,054 | (95,926) | (31,026) | (144,704) | (113,359) | 106,956 | 7,391 | (133,674) | (136,994) | |||||||||||||
Harvest | - | - | - | - | - | - | - | - | - | - | (36,565) | (41,248) | (36,565) | (41,248) | |||||||||||||
Write-off | - | - | - | - | - | - | (6,197) | (8,376) | - | (150) | (8,133) | (3,660) | (14,330) | (12,186) | |||||||||||||
Transfer between current and non-current | 65,131 | 69,892 | 71,445 | 78,673 | 136,576 | 148,565 | (65,131) | (69,892) | (71,445) | (72,489) | - | - | (136,576) | (142,381) | |||||||||||||
Transfer to inventories | (1,539,499) | (2,076,152) | (1,980,490) | (1,921,193) | (3,519,989) | (3,997,345) | - | - | - | - | - | - | - | - | |||||||||||||
Exchange variation | (18,656) | (5,754) | (6,514) | (1,896) | (25,170) | (7,650) | (3,542) | 1,759 | (5,747) | (2,089) | - | - | (9,289) | (330) | |||||||||||||
Restatement by Hyperinflation | - | - | - | - | - | - | 86 | - | 3,082 | - | - | - | 3,168 | - | |||||||||||||
Transfer to assets held for sale (3) | (6,443) | - | (12,803) | - | (19,246) | - | (20,122) | - | (11,586) | - | 4,871 | (3,875) | (26,837) | (3,875) | |||||||||||||
Ending balance | 582,853 | 699,947 | 930,280 | 810,533 | 1,513,133 | 1,510,480 | 381,236 | 325,821 | 317,185 | 313,978 | 362,893 | 263,855 | 1,061,314 | 903,654 |
(1) The fair value variation of biological assets includes depreciation of breeding stock and depletion of forests in the amount of R$584,414 (R$613,721 for the year ended December 31, 2017) in the parent company and R$811,772 (R$758,668 or the year ended December 31, 2017) in the consolidated.
(2) Amount arising from the merger of SHB (note 1.7).
(3) Amount arising from the assets held for sale (note 12).
95
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
The acquisitions of biological assets for production (non-current) occur when there is an expectation that the production plan cannot be met with its own animals and, usually, these acquisitions refer to immature animals in the beginning of the life cycle.
The living animals comprises poultry and pork and are segregated into consumable and for production.
The animals classified as consumables are those intended for slaughtering to produce in-natura meat or processed products. Until they reach the adequate weight for slaughtering, they are classified as immature. The slaughtering and production process occurs sequentially and in a very short period of time, so that only live animals ready for slaughtering are classified as mature.
The animals classified as for production (breeding stock) are those that have the function of producing other biological assets. Until they reach the age of reproduction they are classified as immature and when they are able to initiate the reproductive cycle, they are classified as mature.
The Company determined that cost approach is the most appropriate methodology in order to obtain the fair value of its live animals, as disposed in CPC 46 / IFRS 13. This is mainly due to the short life period of the animal, and the price that would be received in a sale in an active market that represent the amount near to the cost to produce an animal in the same level of maturity.
For the breeding stock the production cost is reduced throughout its life considering its normal devaluation.
The Company determined that income approach is the most appropriate methodology in order to obtain the fair value of its forests, as the asset value is correlated to the present value of the future cash flows generated by the biological asset.
96
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
The quantities and balances per live animal assets are set forth below:
Parent company | |||||||
12.31.18 | 12.31.17 | ||||||
Quantity | Value | Quantity | Value | ||||
Consumable biological assets | |||||||
Immature poultry | 168,716 | 529,524 | 116,134 | 461,881 | |||
Immature pork | 4,011 | 930,280 | 3,903 | 799,675 | |||
Total current | 172,727 | 1,459,804 | 120,037 | 1,261,556 | |||
Production biological assets | |||||||
Immature poultry | 5,509 | 103,678 | 4,776 | 89,488 | |||
Mature poultry | 10,688 | 215,640 | 7,669 | 145,937 | |||
Immature pork | 203 | 74,071 | 191 | 59,292 | |||
Mature pork | 439 | 243,114 | 437 | 241,125 | |||
Total non-current | 16,839 | 636,503 | 13,073 | 535,842 | |||
189,566 | 2,096,307 | 133,110 | 1,797,398 | ||||
Consolidated | |||||||
12.31.18 | 12.31.17 | ||||||
Quantity | Value | Quantity | Value | ||||
Consumable biological assets | |||||||
Immature poultry | 188,248 | 582,853 | 199,337 | 699,947 | |||
Immature pork | 4,011 | 930,280 | 3,987 | 810,533 | |||
Total current | 192,259 | 1,513,133 | 203,324 | 1,510,480 | |||
Production biological assets | |||||||
Immature poultry | 6,538 | 134,425 | 6,693 | 117,188 | |||
Mature poultry | 11,958 | 246,811 | 11,113 | 208,633 | |||
Immature pork | 203 | 74,071 | 229 | 67,819 | |||
Mature pork | 439 | 243,114 | 445 | 246,159 | |||
Total non-current | 19,138 | 698,421 | 18,480 | 639,799 | |||
211,397 | 2,211,554 | 221,804 | 2,150,279 |
The Company has forests as collateral for loan and tax/civil contingencies in the amount of R$66,345 in the parent company and consolidated (R$56,126 in the parent company and consolidated as of December 31, 2017).
97
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
10.1. Table of sensitivity analysis
The live animals and forests fair value is determined using non-observable information and the best practices and data available at the moment the appraisal is done, being classified as level 3 in the fair value hierarchy, as required by CPC 46 / IFRS 13.
Impact on fair value measurement | ||||||||
The estimated fair value can be change if: | ||||||||
Asset | Valuation methodology | Non observable significant inputs | Increase | Decrease | ||||
Forests | Income approach | Estimated price of standing wood | Increase in the price of wood | Decrease in the price of wood | ||||
Productivity per hectare estimated | Increase in yield per hectare | Decrease in yield per hectare | ||||||
Harvest and transport cost | Decrease of harvest cost | Increase of harvest cost | ||||||
|
| Discount rate | Descrease in discount rate | Increase in discount rate |
The assumptions applied include sensitivity to the prices used in the evaluation and the discount rate used in the discounted cash flow. Prices refer to the prices obtained in the regions in which the Company is located and obtained through market research. The discount rate corresponds to the average cost of capital and other assumptions to a market participant.
The weighted average price used in the appraisal of the biological assets (forests) for the period ended December 31, 2018 was equivalent to R$33.00 (thirty-three Reais) per stereo (R$30.00 per stereo at December 31, 2017).
The real discount rate used in the appraisal of the biological assets (forests) for the period ended December 31, 2018 was 7.01% (7.51% at December 31, 2017).
11. RECOVERABLE AND INCOME AND SOCIAL CONTRIBUTION TAXES
Parent company | Consolidated | ||||||
Recoverable taxes | 12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | |||
ICMS ("State VAT") | 1,517,304 | 1,397,484 | 1,632,110 | 1,681,938 | |||
PIS and COFINS ("Federal Taxes to Social Fund Programs") | 941,864 | 323,456 | 946,399 | 430,165 | |||
IPI ("Federal VAT") | 836,674 | 781,779 | 836,676 | 791,226 | |||
INSS ("Brazilian Social Security") | 307,865 | 280,415 | 307,897 | 280,442 | |||
Other | 52,329 | 50,150 | 155,779 | 123,805 | |||
(-) Provision for losses | (175,920) | (138,423) | (175,925) | (160,503) | |||
3,480,116 | 2,694,861 | 3,702,936 | 3,147,073 | ||||
Current | 340,116 | 468,715 | 560,389 | 728,918 | |||
Non-current | 3,140,000 | 2,226,146 | 3,142,547 | 2,418,155 | |||
Income and social contribution tax | |||||||
Income and social contribution tax (IR/CS) | 426,134 | 389,113 | 522,758 | 528,380 | |||
(-) Provision for losses | (8,985) | (8,985) | (9,029) | (9,029) | |||
417,149 | 380,128 | 513,729 | 519,351 | ||||
Current | 410,340 | 373,319 | 506,483 | 499,341 | |||
Non-current | 6,809 | 6,809 | 7,246 | 20,010 |
98
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
The rollforward of the provision for losses is set forth below:
Parent company | |||||||||||||||||||||||
ICMS ("State VAT") | PIS and COFINS ("Federal Taxes to Social Fund Programs") | Income and social contribution tax | IPI ("Federal VAT") | Other | Total | ||||||||||||||||||
12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | ||||||||||||
Beginning balance | (104,698) | (114,292) | (19,717) | (19,717) | (8,985) | (8,985) | (13,562) | (14,740) | (446) | (2,002) | (147,408) | (159,736) | |||||||||||
Additions | (61,837) | (19,472) | - | - | - | - | - | - | (3,315) | (2,307) | (65,152) | (21,779) | |||||||||||
Write-offs | 34,672 | 29,066 | 2,299 | - | - | - | - | 1,178 | 156 | 3,863 | 37,127 | 34,107 | |||||||||||
Incorporation of companies (1) | (9,101) | - | - | - | - | - | - | - | (371) | - | (9,472) | - | |||||||||||
Ending balance | (140,964) | (104,698) | (17,418) | (19,717) | (8,985) | (8,985) | (13,562) | (13,562) | (3,976) | (446) | (184,905) | (147,408) |
(1) Amounts arising from the incorporation of SHB (note 1.7).
Consolidated | |||||||||||||||||||||||
ICMS ("State VAT") | PIS and COFINS ("Federal Taxes to Social Fund Programs") | Income and social contribution tax | IPI ("Federal VAT") | Other | Total | ||||||||||||||||||
12.31.18 |
| 12.31.17 |
| 12.31.18 |
| 12.31.17 |
| 12.31.18 |
| 12.31.17 |
| 12.31.18 |
| 12.31.17 |
| 12.31.18 |
| 12.31.17 |
| 12.31.18 | 12.31.17 | ||
Beginning balance | (122,892) | (114,293) | (19,717) | (19,894) | (9,029) | (9,029) | (13,562) | (14,740) | (4,332) | (6,655) | (169,532) | (164,611) | |||||||||||
Additions | (80,004) | (37,665) | - | - | - | - | - | - | (3,687) | (2,307) | (83,691) | (39,972) | |||||||||||
Write-offs | 61,926 | 29,066 | 2,299 | 177 | - | - | - | 1,178 | 513 | 3,963 | 64,738 | 34,384 | |||||||||||
Exchange rate variation | - | - | - | - | - | - | - | - | 1,527 | 667 | 1,527 | 667 | |||||||||||
Transfer - held for sale (1) | - | - | - | - | - | - | - | - | 2,004 | - | 2,004 | - | |||||||||||
Ending balance | (140,970) | (122,892) | (17,418) | (19,717) | (9,029) | (9,029) | (13,562) | (13,562) | (3,975) | (4,332) | (184,954) | (169,532) |
(1) Amount transferred to discontinued operations (note 12).
11.1.State ICMS (“VAT”)
Due to its (i) export activity, (ii) tax benefits, (iii) domestic sales that are subject to reduced tax rates and (iv) acquisition of property, plant and equipment, the Company generates tax credits that are offset against debits generated in sales in the domestic market or transferred to third parties and/or suppliers.
The Company has ICMS credit balances in the states of Paraná, Santa Catarina, Mato Grosso do Sul and Amazonas, which will be carried out in the short and long term, based on a recovery study approved by Management.
11.2. PIS and COFINS
Tax credits onContribution to the Social Integration Program (“PIS”) and Contribution to Social Fund Programs (“COFINS”)arise from credits on purchases of raw materials usedin the production of exported products or products that are taxed at zero rate, such as in-naturameat and margarine.
In the year 2018, the credits of the company SHB were incorporated into the Parent Company (note 1.7).
On November 27, 2018, the Company, based on a final decision of its merged company Perdigão Agroindustrial, had recognized its right to exclude ICMS from the PIS and COFINS calculation basis from 1992 to 2009. In the face of final and unappealable of this lawsuit, the Company calculated and accounted for thePIS/COFINS credit, which will be previously qualified for compensation with federal taxes. The value of the asset recognized in the recoverable taxes item is R$556,970, of which the principal amount of R$225,600 was recorded in other operating income and interest and monetary restatements of R$331,370 recorded in financial income. The Company has other lawsuits of a similar nature in progress, as described in note 26.3.1.
99
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
The realization of these credits will occur through compensation with domestic sales operations of taxed products, with other federal taxes, and more recently with social security contributions, or even, if necessary, for requests for restitution or compensation.
11.3. Income and social contribution taxes
These correspond to withholding taxes on marketable securities, interest and prepayments of income and social contribution taxes, which are realizable by offsetting them against other federal taxes.
100
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
12. ASSETS AND LIABILITIES HELD FOR SALE
On December 7, 2018, the Company concluded a contract of purchase and sale of its subsidiary Quickfood S.A. in Argentina, whereby Marfrig agreed to acquire 91.89% of its share capital for US$60,000 (equivalent to R$232,488). In addition, on the same date, it entered into a contract in which Marfrig makes the commitment to purchase the properties and equipment of the Várzea Grande-MT plant, as well as an agreement for the supply of finished goods for the Company for 60 months. On January 23, 2019, the sale of properties and equipment was concluded for R$100,000.
Following the signing of the commitment contracts of Quickfood S.A. by Marfrig, on January 02, 2019, the sale of the shares representing 91.89% of the subsidiary's capital was completed. On this date, Marfrig paid the amount of US$ 54,891 (equivalent to R$212,692) to BRF S.A..
On December 19, 2018, the Company concluded an Instrument for the Purchase and Sale of Shares of its subsidiary Avex S.A. in Argentina, whereby Granja Tres Arroyos S.A. and Fribel S.A. agreed to acquire 100% of its share capital for US$50,000 (equivalent to R$193,740). On February 4, 2019 the transaction was completed. The sale value was US$44,824, of which US$22,500 was paid in cash and US$22,324 through the settlement of liabilities of Avex S.A. with BRF.
During the fourth quarter of 2018, the Company has received binding offers for its subsidiary Campo Austral S.A. in Argentina and on January 10, 2019, a sale agreement has been executed for US$35,500 (equivalent to R$137,555). The transaction consists of (i) the sale of the plant located in the City of Florencio Varela, in Argentina, and all related assets and liabilities, including the "Bocatti" and "Calchaquí" trademarks, to the Argentinean company BOGS S.A. , (ii) the sale of 100% of the shares issued by Campo Austral S.A., including its San Andrés de Giles and Pilar plants and the Campo Austral trademark, to the Argentinean company La Piamontesa de Averaldo Giacosa y Compañía S.A..
Additionally, the negotiations for the sale of the operations in Europe and Thailand have developed significantly. On February 7, 2019 the Company has executed a sale and purchase agreement with Tyson International Holding Co., providing for the terms and conditions for the sale of 100% of the shares held by the Company in subsidiaries located in Europe and Thailand. The amount agreed in this transaction is US$340,000 (equivalent to R$1,317,432).
The closing of the sale transactions of Campo Austral and Europe and Thailand businesses are subject to the confirmation of the precedent conditions applicable to transactions of similar nature.
101
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
The balances of the assets reclassified to assets held for sale and liabilities directly associated with assets held for sale are reflected below.
In the parent company, the balances refer substantially to the investments in direct subsidiaries and intangible assets related to the Argentina and Europe operations, in addition to the property, plant and equipment of the Várzea Grande plant. In the consolidated, the balances refer to the assets and liabilities of the Argentina, Europe and Thailand operations, the assets of the Várzea Grande plant and other property, plant and equipment held for sale.
BALANCE SHEETS | |||||||||||||||||
Parent company | Consolidated | ||||||||||||||||
12.31.18 | 12.31.17 |
|
|
|
|
| 12.31.18 | 12.31.17 | |||||||||
Investment in Discontinued Operations | Others | Total | Others | Operations from Argentine | Operation from Europe and Thailand | Others | Total | Others | |||||||||
ASSETS | |||||||||||||||||
CURRENT ASSETS | |||||||||||||||||
Cash and cash equivalents | - | - | - | - | 31,683 | 134,766 | - | 166,449 | - | ||||||||
Marketable securities | - | - | - | - | 68,686 | - | - | 68,686 | - | ||||||||
Trade accounts receivable, net | - | - | - | - | 244,654 | 333,187 | - | 577,841 | - | ||||||||
Inventories | - | - | - | - | 254,142 | 645,241 | - | 899,383 | - | ||||||||
Biological assets | - | - | - | - | 19,246 | - | - | 19,246 | - | ||||||||
Recoverable taxes | - | - | - | - | 59,721 | 48,738 | - | 108,459 | - | ||||||||
Assets held for sale | - | - | - | - | 4 | 401 | - | 405 | - | ||||||||
Other current assets | - | - | - | - | 18,087 | 6,264 | - | 24,351 | - | ||||||||
Total current assets | - | - | - | - | 696,223 | 1,168,597 | - | 1,864,820 | - | ||||||||
NON-CURRENT ASSETS | |||||||||||||||||
Trade accounts receivable, net | - | - | - | - | 571 | - | - | 571 | - | ||||||||
Deferred income and social contribution taxes | - | - | - | - | - | 7,967 | - | 7,967 | - | ||||||||
Biological assets | - | - | - | - | 11,586 | 20,122 | - | 31,708 | - | ||||||||
Recoverable taxes | - | - | - | - | 4,788 | - | - | 4,788 | - | ||||||||
Other non-current assets | - | - | - | - | 7,299 | 473 | - | 7,772 | - | ||||||||
Investments in subsidiaries and join ventures | 219,666 | - | 219,666 | - | 20 | - | - | 20 | - | ||||||||
Property, plant and equipment, net | - | 131,406 | 131,406 | 35,452 | 329,590 | 327,224 | 169,798 | 826,612 | 41,571 | ||||||||
Intangible assets | 20,115 | - | 20,115 | - | 318,706 | 263,341 | - | 582,047 | - | ||||||||
Total non-current assets | 239,781 | 131,406 | 371,187 | 35,452 | 672,560 | 619,127 | 169,798 | 1,461,485 | 41,571 | ||||||||
TOTAL ASSETS | 239,781 | 131,406 | 371,187 | 35,452 | 1,368,783 | 1,787,724 | 169,798 | 3,326,305 | 41,571 | ||||||||
LIABILITIES | |||||||||||||||||
CURRENT LIABILITIES | |||||||||||||||||
Short-term debt | - | - | - | - | 88,395 | - | - | 88,395 | - | ||||||||
Trade accounts payable | - | - | - | - | 270,796 | 155,068 | - | 425,864 | - | ||||||||
Payroll and related charges | - | - | - | - | 42,152 | 42,662 | - | 84,814 | - | ||||||||
Liabilities with related parties | - | - | - | - | 197 | - | - | 197 | - | ||||||||
Employee and management profit sharing | - | - | - | - | 2,973 | 3,005 | - | 5,978 | - | ||||||||
Tax payable | - | - | - | - | 13,600 | 24,831 | - | 38,431 | - | ||||||||
Other current liabilities | - | - | - | - | 51,125 | 95,219 | - | 146,344 | - | ||||||||
Total current liabilities | - | - | - | - | 469,238 | 320,785 | - | 790,023 | - | ||||||||
NON-CURRENT LIABILITIES | |||||||||||||||||
Long-term debt | - | - | - | - | 67,378 | - | - | 67,378 | - | ||||||||
Deferred income and social contribution taxes | - | - | - | - | 142,013 | 26,161 | - | 168,174 | - | ||||||||
Provision for tax, civil and labor risks | - | - | - | - | 70,571 | 366 | - | 70,937 | - | ||||||||
Other non-current liabilities | 13 | - | 13 | - | 22 | 34,995 | - | 35,017 | - | ||||||||
Total non-current liabilities | 13 |
| - | 13 | - | 279,984 | 61,522 | - | 341,506 | - | |||||||
TOTAL LIABILITIES AND EQUITY | 13 | - | 13 | - | 749,222 | 382,307 | - | 1,131,529 | - | ||||||||
Assets and liabilities held for sale | 239,768 | 131,406 | 371,174 | 35,452 | 619,561 | 1,405,417 | 169,798 | 2,194,776 | 41,571 |
102
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
When reclassifying to assets held for sale, assets began to be measured at the lower of the book value previously recorded and the fair value net of selling expenses. This measurement led to the recording of an impairment of these assets in the amounts of R$56,497 in continued operations and R$2,476,153 in discontinued operations.
The consolidated balance of other comprehensive income correlated to these operations on December 31, 2018 is R$700,995 related to cumulative translation adjustment and hyperinflation. This balance will be recognized as an expense at the moment of the effective sale.
On December 31, 2018 the Argentine, Europe and Thailand operations accomplished the requirements of CPC 31 / IFRS 15 and therefore were classified as Discontinued Operations. The income statement and cash flow statement of these operations are as follows:
STATEMENTS OF INCOME (LOSS) - DISCONTINUED OPERATIONS | ||||||||
|
|
|
|
| 12.31.18 | |||
Parent company |
| Consolidated | ||||||
Operations from Argentine | Operation from Europe and Thailand | Total | ||||||
NET SALES | (93,194) | 1,737,435 | 2,603,152 | 4,340,587 | ||||
Cost of sales | 20,976 | (1,691,123) | (2,331,270) | (4,022,393) | ||||
GROSS PROFIT (1) | (72,218) | 46,312 | 271,882 | 318,194 | ||||
OPERATING INCOME (EXPENSES) | ||||||||
Selling expenses | - | (175,910) | (220,408) | (396,318) | ||||
General and administrative expenses | (6,380) | (36,130) | (83,585) | (119,715) | ||||
Impairment loss on trade and other receivables | - | (4,664) | 4,576 | (88) | ||||
Other operating expenses, net | (86,160) | 2,703 | (36,380) | (33,677) | ||||
Income from associates and joint ventures | 307,818 | - | - | - | ||||
INCOME (LOSS) BEFORE FINANCIAL RESULTS AND INCOME TAXES | 143,060 | (167,689) | (63,915) | (231,604) | ||||
Financial expenses | - | 261,521 | 132,182 | 393,703 | ||||
Financial income | - | 88,250 | 1,779 | �� 90,029 | ||||
INCOME BEFORE TAXES FROM CONTINUED OPERATIONS | 143,060 |
| 182,082 | 70,046 | 252,128 | |||
Current income taxes | - | (13) | (22,952) | (22,965) | ||||
Deferred income taxes | - | (113,287) | 8,537 | (104,750) | ||||
NET INCOME | 143,060 | 68,782 | 55,631 | 124,413 | ||||
Impairment loss on the remesuarement to fair value less cost to sell | (2,476,153) | (1,060,039) | (1,416,114) | (2,476,153) | ||||
LOSS FROM DISCONTINUED OPERATIONS | (2,333,093) | (991,257) | (1,360,483) | (2,351,740) | ||||
|
|
| ||||||
Net Loss From Discontinued Operation Attributable to | ||||||||
Controlling shareholders | (2,333,093) | (995,135) | (1,337,958) | (2,333,093) | ||||
Non-controlling interest | - | 3,878 | (22,525) | (18,647) |
(1)The negative effect on revenue refers to the hedge accounting result in sales for discontinued operations. The positive effect on cost refers to allocations of expenses to products destined to the markets of discontinued operations.
103
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
STATEMENTS OF INCOME (LOSS) - DISCONTINUED OPERATIONS | ||||||||
|
|
|
|
| 12.31.17 | |||
Parent company |
| Consolidated | ||||||
Operations from Argentine | Operation from Europe and Thailand | Total | ||||||
NET SALES | 15,420 | 2,024,932 | 3,130,260 | 5,155,192 | ||||
Cost of sales | 58,879 | (1,845,924) | (2,602,265) | (4,448,189) | ||||
GROSS PROFIT (1) | 74,299 | 179,008 | 527,995 | 707,003 | ||||
OPERATING INCOME (EXPENSES) | ||||||||
Selling expenses | - | (221,467) | (238,047) | (459,514) | ||||
General and administrative expenses | (10,052) | (39,746) | (72,377) | (112,123) | ||||
Impairment loss on trade and other receivables | - | (1,052) | (6,799) | (7,851) | ||||
Other operating expenses, net | (23,300) | (50,573) | (4,048) | (54,621) | ||||
Income from associates and joint ventures | (182,274) | - | - | - | ||||
INCOME (LOSS) BEFORE FINANCIAL RESULTS AND INCOME TAXES | (141,327) | (133,830) | 206,724 | 72,894 | ||||
Financial expenses | - | (342,860) | 65,637 | (277,223) | ||||
Financial income | - | 71,625 | 5,778 | 77,403 | ||||
INCOME (LOSS) BEFORE TAXES FROM CONTINUED OPERATIONS | (141,327) | (405,065) | �� 278,139 | (126,926) | ||||
Current income taxes | - | (1,311) | (23,286) | (24,597) | ||||
Deferred income taxes | - | 4,030 | 15,404 | 19,434 | ||||
INCOME (LOSS) FROM DISCONTINUED OPERATIONS | (141,327) | (402,346) | 270,257 | (132,089) | ||||
|
|
| ||||||
Net Loss From Discontinued Operation Attributable to | ||||||||
Controlling shareholders | (141,327) | (389,480) | 248,153 | (141,327) | ||||
Non-controlling interest | - | (12,866) | 22,104 | 9,238 |
(1)The negative effect on revenue refers to the hedge accounting result in sales for discontinued operations. The positive effect on cost refers to allocations of expenses to products destined to the markets of discontinued operations.
104
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
STATEMENTS OF CASH FLOWS - DISCONTINUED OPERATIONS | ||||||||
Parent company | Consolidated | |||||||
12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | |||||
OPERATING ACTIVITIES FROM DISCONTINUED OPERATIONS | ||||||||
Loss | (2,333,093) | (141,327) | (2,351,740) | (132,089) | ||||
Adjustments to reconcile loss to net cash |
|
|
|
| ||||
Depreciation and amortization | - | - | 228,789 | 263,820 | ||||
Depreciation and depletion of biological assets | - | - | 27,248 | 21,900 | ||||
Loss on disposals of property, plant and equipments | - | - | 8,629 | 8,629 | ||||
Provision for tax, civil and labor risks | - | - | (66,968) | 134,226 | ||||
Income from associates and joint ventures | 1,448,949 | 182,274 | - | - | ||||
Impairment | 719,385 | - | 2,476,152 | - | ||||
Financial results, net | - | - | (483,802) | 199,820 | ||||
Deferred income tax | - | - | 104,750 | (19,434) | ||||
Restatement by hyperinflation | - | - | (426,535) | - | ||||
Others | - | - | (17,388) | (45,271) | ||||
Cash flow provided by operating activities before working capital | (164,759) | 40,947 | (500,865) | 431,601 | ||||
Trade accounts receivable | - | - | 37,892 | (104,595) | ||||
Inventories | - | - | 71,670 | (319,712) | ||||
Biological assets - current assets | - | - | 3,024 | 4,922 | ||||
Trade accounts payable | - | - | (269,404) | (161,057) | ||||
Supply chain finance | - | - | (374) | 318 | ||||
Cash generated by operating activities | (164,759) | 40,947 | (658,057) | (148,523) | ||||
Investments in securities at FVTPL | - | - | (403,242) | (321,487) | ||||
Redemptions of securities at FVTPL | - | - | 340,696 | 322,100 | ||||
Interest received | - | - | - | - | ||||
Interest paid | - | - | (29,815) | (45,700) | ||||
Other assets and liabilities | 160,810 | 57,830 | 617,719 | 173,159 | ||||
Net cash (used in) provided by operating activities from discontinued operations | (3,949) | 98,777 | (132,699) | (20,451) | ||||
INVESTING ACTIVITIES FROM DISCONTINUED OPERATIONS | ||||||||
Additions to property, plant and equipment | - | - | (57,280) | (52,467) | ||||
Additions to biological assets - non-current assets | - | - | (31,840) | (31,548) | ||||
Additions to intangible assets | - | - | (99) | (134) | ||||
Capital increase in associates and joint ventures |
| (22,825) | (16,358) | - | - | |||
Advance for future capital increase | (133,043) | (163,393) | - | - | ||||
Net cash used in investing activities from discontinued operations | (155,868) | (179,751) | (89,219) | (84,149) | ||||
FINANCING ACTIVITIES FROM DISCONTINUING OPERATIONS |
|
|
|
| ||||
Proceeds from debt issuance | - | - | 821,674 | 1,678,121 | ||||
Repayment of debt | - | - | (921,492) | (1,668,709) | ||||
Net cash (used in) provided by financing activities from discontinued operations | - | - | (99,818) | 9,412 | ||||
Net decrease in cash and cash equivalents | (159,817) | (80,974) | (321,736) | (95,188) | ||||
At the beginning of the year | - | - | 488,185 | 583,373 | ||||
At the end of the year | (159,817) | (80,974) | 166,449 | 488,185 |
105
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
13. INCOME AND SOCIAL CONTRIBUTION TAXES
13.1. Deferred income and social contribution taxes
Parent company | Consolidated | ||||||
12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | ||||
Assets | |||||||
Tax loss carryforwards (corporate income tax) | 1,722,283 | 1,023,439 | 1,723,991 | 1,438,911 | |||
Negative calculation basis (social contribution tax) | 651,803 | 400,219 | 652,418 | 401,404 | |||
Temporary differences | |||||||
Provisions for tax, civil and labor risks | 322,987 | 376,953 | 322,987 | 397,955 | |||
Suspended collection taxes | 22,945 | 12,345 | 22,945 | 12,345 | |||
Allowance for doubtful accounts | 126,624 | 116,085 | 126,627 | 116,086 | |||
Provision for property, plant and equipment losses | 37,110 | 2,768 | 37,110 | 6,286 | |||
Provision for losses on tax credits | 62,668 | 46,994 | 62,670 | 53,180 | |||
Provision for other obligations | 106,869 | 92,464 | 106,869 | 92,753 | |||
Provision for inventory losses | 39,508 | 87,289 | 39,508 | 98,601 | |||
Employees' benefits plan | 137,484 | 118,279 | 137,484 | 127,403 | |||
Unrealized losses on derivatives financial instruments | 30,494 | 80,387 | 30,494 | 80,387 | |||
Unrealized losses on inventories | - | - | 2,359 | 4,443 | |||
Provision for losses - notes receivables | 6,859 | 13,340 | 6,859 | 13,664 | |||
Business combination - Sadia (1) | 84,587 | 206,799 | 84,587 | 206,799 | |||
Other temporary differences | 87,106 | 67,143 | 131,104 | 96,766 | |||
3,439,327 | 2,644,504 | 3,488,012 | 3,146,983 | ||||
Temporary differences | |||||||
Unrealized gains on fair value | (101,400) | (36,170) | (101,400) | (38,495) | |||
Difference between tax basis and accounting basis of goodwill amortization | (318,454) | (301,805) | (318,454) | (301,805) | |||
Difference between tax depreciation rate and accounting depreciation rate (useful life) | (754,094) | (684,704) | (754,094) | (694,240) | |||
Business combination - Sadia (1) | (724,015) | (727,098) | (724,015) | (727,098) | |||
Business combination - AKF | - | - | (19,152) | (17,835) | |||
Business combination - Dánica and Avex | - | - | - | (4,470) | |||
Business combination - Invicta | - | - | - | (30,926) | |||
Business combination - other companies | - | - | (20,421) | (35,796) | |||
Other - exchange rate variation | - | - | (60,752) | (54,854) | |||
Other temporary differences | (23,788) | (10,774) | (35,846) | (27,401) | |||
(1,921,751) | (1,760,551) | (2,034,134) | (1,932,920) | ||||
�� | |||||||
Total deferred tax | 1,517,576 | 883,953 | 1,453,878 | 1,214,063 | |||
Total Assets | 1,517,576 | 883,953 | 1,519,652 | 1,369,366 | |||
Total Liabilities | - |
| - |
| (65,774) |
| (155,303) |
1,517,576 | 883,953 | 1,453,878 | 1,214,063 |
(1) The deferred tax asset on the business combination with Sadia is mainly computed on the difference between the goodwill amortization tax basis and goodwill accounting basis identified in the purchase price allocation. Deferred tax liability on business combination with Sadia is substantially represented by the fair value of property, plant and equipment, trademarks and contingent liabilities.
106
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
Parte inferior do formulárioThe roll-forward of deferred tax is set forth below:
Parent company | Consolidated | ||||||
12.31.18 |
| 12.31.17 | 12.31.18 | 12.31.17 | |||
Beginning balance | 883,953 | 740,300 | 1,214,063 | 946,967 | |||
Deferred income and social contribution taxes recognized in the statement of income | 681,757 | 207,555 | 340,144 | 210,582 | |||
Deferred income and social contribution taxes writte-off for fiscal loss and negative calculation basis - PERT | - | (56,949) | - | (56,949) | |||
Deferred income and social contribution taxes recognized in other comprehensive income | (68,688) | 15,211 | (68,688) | 15,211 | |||
Deferred income and social contribution taxes not recognized in the statement of income - (SHB dropdown) | - | (22,831) | - | - | |||
Deferred income and social contribution taxes on disposals of goodwill from BRF Gmbh and Invicta | - | - | - | 44,368 | |||
SHB incorporation | 19,343 | - | - | - | |||
Deferred income and social contribution taxes related to discontinued operations | - | - | (35,414) | 19,434 | |||
Other | 1,211 | 667 | 3,773 | 34,450 | |||
Ending balance | 1,517,576 | 883,953 | 1,453,878 | 1,214,063 |
13.2. Estimated time of realization
Deferred tax arising from temporary differences will be realized as these differences are settled. The period of the settlement or realization of such differences is uncertain and is tied to several factors that are not under control of the Management.
When assessing the likelihood of the realization of deferred tax assets on income tax loss carryforward and negative calculation basis of social contribution tax, Management considers the Company’s budget, strategic plan and projected taxable income, which were approved by the Company's Board of Directors and Fiscal Council. Based on this estimate, Management believes that it is more likely than not that the deferred tax will be realized, as set forth below:
Parent company | Consolidated | ||
2019 | - | 116 | |
2020 | 31,737 | 31,853 | |
2021 | 134,087 | 134,319 | |
2022 | 183,987 | 184,219 | |
2023 | 286,184 | 286,416 | |
2024 to 2026 | 1,009,643 | 1,010,433 | |
2027 onwards | 728,448 | 729,053 | |
2,374,086 | 2,376,409 |
107
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
13.3. Income and social contribution taxes reconciliation
Parent company | Consolidated | ||||||
12.31.18 | Restated | 12.31.18 | Restated | ||||
Loss before income and social contribution taxes - continued operations | (2,796,725) | (1,278,196) | (2,447,808) | (1,218,574) | |||
Nominal tax rate | 34% | 34% | 34% | 34% | |||
Credit (expense) at nominal rate | 950,887 | 434,587 | 832,255 | 414,315 | |||
Reconciling itens | |||||||
Income from associates and joint ventures | (78,291) | (223,671) | (104,011) | (64,060) | |||
Exchange rate variation on foreign investments | 101,856 | 116,556 | 110,034 | 71,670 | |||
Difference of tax rates on results of foreign subsidiaries | - | - | 389,467 | (205,128) | |||
Deferred tax assets not recognized (1) | (247,482) | - | (591,707) | - | |||
Results from foreign subsidiaries | (71,132) | (127,826) | - | - | |||
Stock options | (5,842) | (7,312) | (5,842) | (7,312) | |||
Transfer price | (35,354) | (13,156) | (79,043) | (15,826) | |||
Investment grant | 59,236 | 49,083 | 59,236 | 49,083 | |||
Special Regime for the Reintegration of Tax Values for Exporting Companies (Reintegra) | 1,961 | 6,631 | 2,300 | 8,402 | |||
Write-off of unrealized tax assets (2) | - | - | (268,701) | - | |||
Other permanent differences | 5,918 | 59,059 | (10,686) | 665 | |||
681,757 | 293,951 | 333,302 | 251,809 | ||||
Current income tax | - | 86,396 | (6,842) | 41,227 | |||
Deferred income tax | 681,757 | 207,555 | 340,144 | 210,582 |
(1) Amount referring to the non-recognition of deferred tax on tax loss and negative basis in the amount of R$727,888 in the parent company and R$2,104,784 in the consolidated.
(2) R$ 268,701 related to the write-off of deferred income tax and social contribution for the merger of SHB.
The taxable income, current and deferred income tax from foreign subsidiaries is set forth below:
Consolidated | |||
12.31.18 | 12.31.17 | ||
Taxable income from foreign subsidiaries, before taxes | 1,066,082 | (446,678) | |
Current income tax credit from foreign subsidiaries | (6,742) | (42,548) | |
Deferred income tax from foreign subsidiaries | (247,946) | (37,461) |
Company determined that the earnings recorded by the holdings of its wholly-owned subsidiaries located abroad will not be redistributed.
Such resources will be used for investments in the subsidiaries, and thus no deferred income tax was recognized. The total of undistributed earnings corresponds to R$3,401,418 as of December 31, 2018 (R$3,182,430 as of December 31, 2017).
Brazilian income taxes are subject to review for a five-year period, during which the tax authorities might audit and assess the Company for additional taxes and penalties. Subsidiaries located abroad are taxed in their respective jurisdictions, according to local regulations.
108
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
14. JUDICIAL DEPOSITS
The rollforward of the judicial deposits is set forth below:
Parent company | |||||||||||||||
Tax | Labor | Civil, commercial and other | Total | ||||||||||||
12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | ||||||||
Beginning balance | 292,517 | 312,416 | 348,248 | 370,056 | 35,967 | 42,295 | 676,732 | 724,767 | |||||||
Additions | 16,702 | 23,232 | 164,521 | 181,684 | 2,685 | 7,793 | 183,908 | 212,709 | |||||||
Reversals | (3,034) | (52,319) | (45,755) | (78,152) | (2,572) | (4,418) | (51,361) | (134,889) | |||||||
Write-offs | (31,938) | (9,015) | (143,913) | (136,496) | (8,612) | (10,472) | (184,463) | (155,983) | |||||||
Price index update | 14,130 | 18,203 | 14,269 | 11,156 | 1,410 | 769 | 29,809 | 30,128 | |||||||
Incorporation of companies (1) | - | - | 14,278 | - | 195 | - | 14,473 | - | |||||||
Ending balance | 288,377 | 292,517 | 351,648 | 348,248 | 29,073 | 35,967 | 669,098 | 676,732 |
(1) Amounts arising from the incorporation of SHB (note 1.7).
Consolidated | |||||||||||||||
Tax | Labor | Civil, commercial and other | Total | ||||||||||||
12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | ||||||||
Beginning balance | 292,543 | 312,437 | 360,033 | 377,440 | 36,364 | 42,694 | 688,940 | 732,571 | |||||||
Additions | 19,056 | 23,361 | 181,688 | 188,326 | 2,874 | 7,793 | 203,618 | 219,480 | |||||||
Transfer - held for sale (1) | (66) | - | (6,826) | - | - | - | (6,892) | - | |||||||
Reversals | (5,304) | (52,449) | (47,153) | (78,736) | (2,971) | (4,418) | (55,428) | (135,603) | |||||||
Write-offs | (31,948) | (9,015) | (146,221) | (136,528) | (8,612) | (10,472) | (186,781) | (156,015) | |||||||
Price index update | 14,142 | 18,228 | 14,555 | 11,160 | 1,416 | 767 | 30,113 | 30,155 | |||||||
Exchange rate variation | (47) | (19) | (4,425) | (1,629) | - | - | (4,472) | (1,648) | |||||||
Ending balance | 288,376 | 292,543 | 351,651 | 360,033 | 29,071 | 36,364 | 669,098 | 688,940 |
(1) Amount transferred to discontinued operations (note 12).
15. RESTRICTED CASH
Average interest rate (p.a.) | Parent company | Consolidated | |||||||||||
Maturity (1) | Currency | 12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | ||||||||
Bank deposit certificates (2) | 1.81 | R$ | 6.70% | 504,480 | 326,385 | 504,480 | 326,385 | ||||||
National treasury certificates (3) | 1.25 | R$ | 19.55% | 233,692 | 190,213 | 233,692 | 190,213 | ||||||
Bank deposit (4) | - | US$ | - | - | - | 21,037 | 19,026 | ||||||
Time Deposit (5) | 1.47 | US$ | 3.89% | 102,412 | - | 102,412 | - | ||||||
840,584 | 516,598 | 861,621 | 535,624 | ||||||||||
Current | 256,284 | 108,795 | 277,321 | 127,821 | |||||||||
Non-current | 584,300 | 407,803 | 584,300 | 407,803 |
(1) Weighted average maturity in years.
(2) The deposit was pledged as collateral in the disposal of the dairy segment to Groupe Lactalis (“Parmalat”) with maturity in 2021 and by the transaction of total return swap, with maturity in 2019 (note 4.4.ii.d) and the sale of company Gale with maturity in 2020.
(3) The national treasury certificates, which mature in 2020, are pledged as collateral for the loan obtained through the Special Program Asset Restructuring (“PESA”) (note 18).
(4) Deposit linked to operations in the international market.
(5) Time Deposit linked to operations of Credit Export Notes (NCE).
109
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
16. INVESTMENTS
16.1. Investments breakdown
Parent company | Consolidated | ||||||
12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | ||||
Investment in associates and affiliates | 4,042,451 | 4,797,461 | 70,546 | 54,088 | |||
Goodwill Quickfood | - | 162,183 | - | - | |||
Goodwill SATS BRF | - | - | 7,059 | 6,139 | |||
4,042,451 | 4,959,644 | 77,605 | 60,227 | ||||
Other investments | 1,107 | 1,108 | 8,400 | 7,968 | |||
4,043,558 | 4,960,752 | 86,005 | 68,195 |
110
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
16.2. Rollforward of the interest in subsidiaries and affiliates – Parent Company
Subsidiaries | Affiliates | ||||||||||||||||||||||||||||||||||
BRF Energia S.A. | BRF GmbH | Establec. Levino Zaccardi | BRF Pet S.A. | BRF Luxembourg SARL | PSA Labor. Veter. Ltda | Quickfood S.A. | Sadia Alimentos S.A. | Sadia International Ltd. | Sadia Uruguay S.A. | Sadia Overseas S.A. | SHB Com. Ind. De Alimentos S.A. | VIP S.A. Empr. e Particip. Imob | PP-BIO | PR-SAD | UP! Alimentos Ltda | Total | |||||||||||||||||||
12.31.18 | 12.31.17 | ||||||||||||||||||||||||||||||||||
a) Capital share as of December 31, 2018 | |||||||||||||||||||||||||||||||||||
% of share | 100.00% | 100.00% | 99.94% | 100.00% | 100.00% | 99.99% | 91.89% | 43.10% | 100.00% | 94.90% | 2.00% | 100.00% | 100.00% | 66.67% | 0.00% | 50.00% | |||||||||||||||||||
Total number of shares and membership interests | 6,963,854 | 1 | 100 | 27,664,086 | 100 | 5,463,850 | 36,469,606 | 594,576,682 | 900,000 | 2,444,753,091 | 50,000 | 1,479,049,565 | 14,249,459 | - | - | 1,000 | |||||||||||||||||||
Number of shares and membership interest held | 6,963,854 | 1 | 100 | 27,664,086 | 100 | 5,463,849 | 33,511,650 | 256,253,695 | 900,000 | 2,319,989,778 | 1,000 | 1,479,049,565 | 14,249,459 | - | - | 500 | |||||||||||||||||||
- | |||||||||||||||||||||||||||||||||||
b) Information as of December 31, 2018 | |||||||||||||||||||||||||||||||||||
Capital stock | 5,972 | 6,523 | 1,186 | 27,664 | 42,783 | 5,564 | 95,132 | 338,054 | 2,933 | 497,012 | 165 | - | 50 | - | - | 1 | |||||||||||||||||||
Shareholders' equity | 199 | 5,022,730 | (13) | 27,059 | (109,463) | 5,760 | (4,767) | 21,374 | 225,860 | 67,077 | 1,360 | - | 2,290 | - | - | 16,494 | |||||||||||||||||||
Income (loss) for the exercise | 114 | 225,663 | (42) | (3,603) | 606,467 | 201 | (13,556) | (66,464) | (12,173) | (129,485) | (17) | (160,048) | 66 | - | - | 25,938 | |||||||||||||||||||
c) Balance of investments as of December 31, 2018 | |||||||||||||||||||||||||||||||||||
Beginning balance | 1,290 | 4,454,751 | 42 | 30,561 | - | 5,559 | 169,710 | 17,260 | 205,190 | 65,466 | 24 | - | 2,240 | 2,242 | 5,308 | 1 | 4,959,644 | 5,032,717 | |||||||||||||||||
Adjustment of previous years (adoption of IFRS 9 and hyperinflation) | - | 146,167 | - | - | 1,468 | - | 214,492 | (80,784) | (7,622) | (144,762) | - | - | - | - | - | 128,959 | - | ||||||||||||||||||
Equity pick-up | 114 | (1,213,644) | (42) | (3,603) | 606,467 | 201 | (1,136) | (40,466) | (16,466) | (204,442) | - | (160,048) | 66 | - | - | 12,969 | (1,020,030) | (835,903) | |||||||||||||||||
Hyperinflation on goodwill | - | - | - | - | - | - | 133,220 | - | - | - | - | - | - | - | - | 133,220 | - | ||||||||||||||||||
Unrealized profit in inventory | - | - | - | 101 | - | - | 467 | - | - | (30) | - | - | - | - | - | - | 538 | (367) | |||||||||||||||||
Disposals by incorporation | - | - | - | - | - | - | - | - | - | - | - | (540,444) | - | - | - | - | (540,444) | - | |||||||||||||||||
Exchange rate variation on goodwill | - | - | - | - | - | - | (205,948) | - | - | - | - | - | - | - | - | - | (205,948) | (28,093) | |||||||||||||||||
Amortization of fair value of assets and liabilities acquired | - | - | - | - | - | - | (2,660) | - | - | - | - | - | - | - | - | - | (2,660) | (3,838) | |||||||||||||||||
Advance for future capital increase | - | - | - | - | - | - | 133,043 | - | - | - | - | - | - | - | - | - | 133,043 | 164,598 | |||||||||||||||||
Exchange rate variation on foreign investments | - | 263,183 | - | - | (77) | - | - | - | 36,492 | - | (22) | - | - | - | - | - | 299,576 | 342,812 | |||||||||||||||||
Other comprehensive income | - | 60,533 | (13) | - | (341,958) | - | 165,756 | 100,339 | 7,914 | 214,984 | 25 | (2,275) | - | - | - | - | 205,305 | (39,268) | |||||||||||||||||
Capital increase | - | - | - | - | - | - | - | 22,825 | - | 125,751 | - | 1,437,023 | - | 1,957 | 527 | - | 1,588,083 | 96,593 | |||||||||||||||||
Reversal of provision for losses on investments | - | - | - | - | (318,931) | - | - | - | - | - | - | - | - | - | - | - | (318,931) | (105,857) | |||||||||||||||||
Reduction of the impairment of investment | - | - | - | - | - | - | (406,452) | - | - | - | - | - | - | - | - | - | (406,452) | - | |||||||||||||||||
Dividends and interests on shareholders' equity | - | - | - | - | - | - | - | - | - | - | - | - | (16) | - | - | (4,723) | (4,739) | (31,152) | |||||||||||||||||
Premium paid in the acquisition of non-controlling entities | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | 6,884 | |||||||||||||||||
Adjustments on put option over non-controlling interest | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | 41,587 | |||||||||||||||||
Sale of equity stake | - | - | - | - | - | - | - | - | - | - | - | - | - | - | (5,835) | - | (5,835) | - | |||||||||||||||||
Gain or loss on equity stake changes | - | - | - | - | (56,432) | - | - | - | - | - | - | (734,256) | - | - | - | - | (790,688) | - | |||||||||||||||||
Provision for losses on investments | - | - | 13 | - | 109,463 | - | - | - | - | - | - | - | - | - | - | - | 109,476 | 318,931 | |||||||||||||||||
Transfer to held for sale and discontinued operations | - | - | - | - | - | - | (200,492) | (19,174) | - | - | - | - | - | - | - | - | (219,666) | - | |||||||||||||||||
1,404 | 3,710,990 | - | 27,059 | - | 5,760 | - | - | 225,508 | 56,967 | 27 | - | 2,290 | 4,199 | - | 8,247 | 4,042,451 | 4,959,644 |
The exchange rate variation result on the investments in foreign subsidiaries, whose functional currency is Brazilian Reis, for the year ended December 31, 2018 totaled R$330,526, (gain of R$213,530 in the same period of the previous year) was recognized as financial result in the consolidated statement of income.
On December 31, 2018, these associates, affiliates and joint ventures do not have any restriction to repay their loans or advances to the Company.
111
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
17. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment rollforward is set forth below:
Parent company | |||||||||||||
Weighted average depreciation rate (p.a.) | 12.31.17 | Additions | Disposals | Incorporation of companies (1) | Transfers (2) | 12.31.18 | |||||||
Cost | |||||||||||||
Land | - | 490,073 | 55 | (25,700) | 68,728 | (28,305) | 504,851 | ||||||
Buildings and improvements | - | 4,734,021 | 317 | (109,542) | 683,593 | 1,782,916 | 7,091,305 | ||||||
Machinery and equipment | - | 6,620,016 | 57,421 | (198,937) | 1,018,813 | 274,027 | 7,771,340 | ||||||
Facilities | - | 1,840,046 | 665 | (19,959) | 187,599 | (1,991,105) | 17,246 | ||||||
Furniture and fixtures | - | 108,423 | 6 | (3,186) | 10,834 | (13,345) | 102,732 | ||||||
Vehicles | - | 13,168 | - | (116) | 962 | (6,523) | 7,491 | ||||||
Construction in progress | - | 357,197 | 442,564 | - | 47,800 | (428,931) | 418,630 | ||||||
Advances to suppliers | - | 257 | 1,271 | - | - | (1,261) | 267 | ||||||
14,163,201 | 502,299 | (357,440) | 2,018,329 | (412,527) | 15,913,862 | ||||||||
Depreciation | |||||||||||||
Buildings and improvements | 3.01% | (1,515,130) | (139,693) | 27,442 | (219,083) | (686,298) | (2,532,762) | ||||||
Machinery and equipment | 5.86% | (2,791,283) | (406,878) | 114,314 | (461,955) | 60,623 | (3,485,179) | ||||||
Facilities | 3.55% | (612,992) | (75,381) | 11,960 | (65,437) | 740,055 | (1,795) | ||||||
Furniture | 8.51% | (48,385) | (7,160) | 1,988 | (6,228) | 4,053 | (55,732) | ||||||
Vehicles | 12.67% | (5,919) | (630) | 110 | (833) | 51 | (7,221) | ||||||
(4,973,709) | (629,742) | 155,814 | (753,536) | 118,484 | (6,082,689) | ||||||||
9,189,492 | (127,443) | (201,626) | 1,264,793 | (294,043) | 9,831,173 |
(1) Amounts arising from merger of SHB (note 1.7).
(2) Refers to the transfer of R$95,443 to intangible assets, R$24,631 to biological assets and R$173,969 to assets held for sale.
112
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
Parent company | |||||||||||||
Weighted average depreciation rate (p.a.) | 12.31.16 | Additions | Disposals | Transfers SHB | Transfers | 12.31.17 | |||||||
Cost | |||||||||||||
Land | - | 547,952 | 6,221 | (1,446) | (68,774) | 6,120 | 490,073 | ||||||
Buildings and improvements | - | 5,216,174 | 53,229 | (35,147) | (672,616) | 172,381 | 4,734,021 | ||||||
Machinery and equipment | - | 7,248,188 | 56,736 | (148,644) | (1,006,026) | 469,762 | 6,620,016 | ||||||
Facilities | - | 1,893,687 | 14,492 | (24,948) | (177,152) | 133,967 | 1,840,046 | ||||||
Furniture | - | 116,121 | - | (2,659) | (10,375) | 5,336 | 108,423 | ||||||
Vehicles | - | 13,672 | - | (19) | (901) | 416 | 13,168 | ||||||
Construction in progress | - | 753,279 | 570,797 | (3,902) | - | (962,977) | 357,197 | ||||||
Advances to suppliers | - | 1,997 | 15,876 | - | - | (17,616) | 257 | ||||||
15,791,070 | 717,351 | (216,765) | (1,935,844) | (192,611) | 14,163,201 | ||||||||
Depreciation | |||||||||||||
Buildings and improvements | 3.04% | (1,584,343) | (137,458) | 16,692 | 186,697 | 3,282 | (1,515,130) | ||||||
Machinery and equipment | 5.95% | (2,861,030) | (389,367) | 92,246 | 365,375 | 1,493 | (2,791,283) | ||||||
Facilities | 3.72% | (600,665) | (73,721) | 10,166 | 50,423 | 805 | (612,992) | ||||||
Furniture | 7.96% | (48,283) | (7,600) | 2,075 | 5,456 | (33) | (48,385) | ||||||
Vehicles | 19.94% | (5,965) | (707) | 19 | 728 | 6 | (5,919) | ||||||
(5,100,286) | (608,853) | 121,198 | 608,679 | 5,553 | (4,973,709) | ||||||||
10,690,784 | 108,498 | (95,567) | (1,327,165) | (187,058) | 9,189,492 |
113
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
Consolidated | |||||||||||||||
Weighted average depreciation rate (p.a.) | 12.31.17 | Additions | Disposals | Restatement by Hyperinflation (1) | Exchange rate variation | Transfers (2) | 12.31.18 | ||||||||
Cost | |||||||||||||||
Land | - | 706,218 | 95 | (25,700) | 32,747 | (17,201) | (159,281) | 536,878 | |||||||
Buildings and improvements | - | 6,102,831 | 4,775 | (113,433) | 205,324 | (4,336) | 1,251,069 | 7,446,230 | |||||||
Machinery and equipment | - | 8,881,223 | 64,342 | (234,503) | 346,825 | (77,797) | (707,170) | 8,272,920 | |||||||
Facilities | - | 2,175,032 | 727 | (21,053) | 256 | 8,861 | (2,019,508) | 144,315 | |||||||
Furniture and fixtures | - | 171,482 | 25,255 | (5,598) | 9,472 | 1,604 | (42,313) | 159,902 | |||||||
Vehicles | - | 28,508 | 3,087 | (729) | 2,826 | 210 | (16,500) | 17,402 | |||||||
Construction in progress | - | 453,946 | 585,386 | - | 15,451 | (25,205) | (619,882) | 409,696 | |||||||
Advances to suppliers | - | 13,643 | 444 | - | - | 1,214 | (1,876) | 13,425 | |||||||
18,532,883 | 684,111 | (401,016) | 612,901 | (112,650) | (2,315,461) | 17,000,768 | |||||||||
Depreciation | |||||||||||||||
Buildings and improvements | 3.00% | (1,872,565) | (188,064) | 28,923 | (63,456) | (12,515) | (471,255) | (2,578,932) | |||||||
Machinery and equipment | 5.95% | (3,656,477) | (562,721) | 136,085 | (192,710) | (218) | 655,620 | (3,620,421) | |||||||
Facilities | 4.49% | (724,477) | (93,786) | 12,981 | (151) | 3,472 | 778,705 | (23,256) | |||||||
Furniture | 8.09% | (77,745) | (17,033) | 3,162 | (7,023) | (746) | 28,323 | (71,062) | |||||||
Vehicles | 19.91% | (11,036) | (2,074) | 465 | (2,644) | 875 | 4,315 | (10,099) | |||||||
(6,342,300) | (863,678) | 181,616 | (265,984) | (9,132) | 995,708 | (6,303,770) | |||||||||
12,190,583 | (179,567) | (219,400) | 346,917 | (121,782) | (1,319,753) | 10,696,998 |
(1) Refers to the price index update as disclosed in note 3.30.
(2) Refers to the transfer of R$122,081 to intangible assets, R$31,909 to biological assets and R$1,165,763 to assets held for sale.
114
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
Consolidated | |||||||||||||||
Weighted average depreciation rate (p.a.) | 12.31.16 | Additions | Business combinations | Disposals | Transfers | Exchange rate variation | 12.31.17 | ||||||||
Cost | |||||||||||||||
Land | - | 575,911 | 6,221 | 123,466 | (1,997) | 6,146 | (3,529) | 706,218 | |||||||
Buildings and improvements | - | 5,648,592 | 60,249 | 258,827 | (36,692) | 183,626 | (11,771) | 6,102,831 | |||||||
Machinery and equipment | - | 7,994,146 | 57,939 | 389,052 | (175,429) | 569,819 | 45,696 | 8,881,223 | |||||||
Facilities | - | 2,047,923 | 14,766 | - | (25,783) | 137,333 | 793 | 2,175,032 | |||||||
Furniture | - | 163,475 | 2,081 | 16,096 | (4,175) | 5,812 | (11,807) | 171,482 | |||||||
Vehicles | - | 27,323 | 288 | 4,775 | (8,934) | 4,780 | 276 | 28,508 | |||||||
Construction in progress | - | 886,004 | 693,614 | 13,635 | (5,631) | (1,091,007) | (42,669) | 453,946 | |||||||
Advances to suppliers | - | 16,098 | 15,750 | - | - | (17,616) | (589) | 13,643 | |||||||
17,359,472 | 850,908 | 805,851 | (258,641) | (201,107) | (23,600) | 18,532,883 | |||||||||
Depreciation | |||||||||||||||
Buildings and improvements | 3.02% | (1,694,486) | (183,996) | (11,403) | 16,954 | 3,723 | (3,357) | (1,872,565) | |||||||
Machinery and equipment | 5.93% | (3,193,879) | (567,212) | (20,986) | 107,395 | 3,535 | 14,670 | (3,656,477) | |||||||
Facilities | 3.78% | (646,314) | (91,292) | - | 10,796 | 489 | 1,844 | (724,477) | |||||||
Furniture | 8.05% | (66,502) | (13,432) | (45) | 3,138 | (910) | 6 | (77,745) | |||||||
Vehicles | 19.99% | (12,053) | (3,185) | (2,728) | 7,151 | (1,250) | 1,029 | (11,036) | |||||||
(5,613,234) | (859,117) | (35,162) | 145,434 | 5,587 | 14,192 | (6,342,300) | |||||||||
11,746,238 | (8,209) | 770,689 | (113,207) | (195,520) | (9,408) | 12,190,583 |
115
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
The Company has fully depreciated items that are still operating, which are set forth below:
Parent company | Consolidated | ||||||
12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | ||||
Cost | |||||||
Buildings and improvements | 143,805 | 119,772 | 151,830 | 138,171 | |||
Machinery and equipment | 663,766 | 603,457 | 692,079 | 699,989 | |||
Facilities | 83,318 | 65,837 | 85,564 | 74,048 | |||
Furniture and fixtures | 20,893 | 15,007 | 27,285 | 22,724 | |||
Vehicles | 4,794 | 4,059 | 5,346 | 5,262 | |||
916,576 | 808,132 | 962,104 | 940,194 |
During the year ended December 31, 2018, the Company capitalized interest in the amount of R$17,232 in the parent company and R$19,612 in the consolidated (R$31,579 in the parent company and R$33,604 in the consolidated as of December 31, 2017). The weighted average interest rate utilized to determine the capitalized amount was 5.99% p.a. in the parent company and 3.27% p.a. in the consolidated (7.41% p.a. in the parent company and in the consolidated as of December 31, 2017). The amount related to discontinued operations is R$12,357 in the consolidated on December 31, 2018 (R$1,788 as of December 31, 2017).
On December 31, 2018, except for the built to suit agreement mentioned in note 23.2, the Company had no commitments assumed related to acquisition or construction of property, plant and equipment items.
The property, plant and equipment items that are pledged as collateral for transactions of different natures are set forth below:
Parent company | Consolidated | |||||||||
12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | |||||||
Type of collateral | Book value of the collateral | Book value of the collateral | Book value of the collateral | Book value of the collateral | ||||||
Land | Financial/Tax | 239,039 | 238,837 | 239,039 | 329,969 | |||||
Buildings and improvements | Financial/Tax | 1,220,707 | 1,184,999 | 1,231,452 | 1,290,431 | |||||
Machinery and equipment | Financial/Labor/Tax/Civil | 1,877,369 | 2,072,362 | 1,926,562 | 2,318,729 | |||||
Facilities | Financial/Tax | 579,408 | 540,561 | 575,530 | 540,891 | |||||
Furniture and fixtures | Financial/Tax | 18,624 | 20,940 | 19,371 | 21,930 | |||||
Vehicles | Financial/Tax | 550 | 851 | 609 | 1,469 | |||||
Other | Financial/Tax | - | - | - | 429 | |||||
3,935,697 | 4,058,550 | 3,992,563 | 4,503,848 |
116
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
18. INTANGIBLE ASSETS
The intangible assets rollforward is set forth below:
| Parent company | ||||||||||||||
Weighted average amortization rate (p.a.) | 12.31.17 | Additions | Disposals | Incorporation of companies (1) | Transfer - held for sale (2) | Transfers | 12.31.18 | ||||||||
Cost | |||||||||||||||
Non-compete agreement | - | 29,876 | 33,748 | - | - | - | - | 63,624 | |||||||
Goodwill | - | 1,542,929 | - | - | 553,659 | (312,933) | - | 1,783,655 | |||||||
Ava | - | 49,368 | - | - | - | - | - | 49,368 | |||||||
Eleva Alimentos | - | 503,558 | - | - | 304,582 | (111,511) | - | 696,629 | |||||||
Incubatório Paraíso | - | 656 | - | - | - | - | - | 656 | |||||||
Paraíso Agroindustrial | - | 16,751 | - | - | - | - | - | 16,751 | |||||||
Perdigão Mato Grosso | - | 7,636 | - | - | - | - | - | 7,636 | |||||||
Sadia | - | 964,960 | - | - | 249,077 | (201,422) | - | 1,012,615 | |||||||
Outgrowers relationship | - | 15,022 | - | - | - | - | - | 15,022 | |||||||
Trademarks | - | 1,173,000 | - | - | - | (20,115) | - | 1,152,885 | |||||||
Patents | - | 6,100 | - | - | - | - | (130) | 5,970 | |||||||
Software | - | 453,289 | - | (119,590) | 5,127 | (85) | 95,501 | 434,242 | |||||||
3,220,216 | 33,748 | (119,590) | 558,786 | (333,133) | 95,371 | 3,455,398 | |||||||||
Amortization | |||||||||||||||
Non-compete agreement | 44.99% | (14,915) | (20,331) | - | - | - | - | (35,246) | |||||||
Outgrowers relationship | 13.24% | (9,588) | (1,964) | - | - | - | - | (11,552) | |||||||
Patents | 20.00% | (4,228) | (827) | - | - | - | - | (5,055) | |||||||
Software | 19.63% | (252,169) | (115,003) | 119,584 | (2,242) | 51 | (53) | (249,832) | |||||||
(280,900) | (138,125) | 119,584 | (2,242) | 51 | (53) | (301,685) | |||||||||
2,939,316 | (104,377) | (6) | 556,544 | (333,082) | 95,318 | 3,153,713 |
(1) Amounts arising from the merger of SHB (note 1.7).
(2) Amounts transferred to discontinued operations (note 12).
| Parent company | ||||||||||||
Weighted average amortization rate (p.a.) | 12.31.16 | Additions | Disposals | Transfers SHB | Transfers | 12.31.17 | |||||||
Cost | |||||||||||||
Non-compete agreement | - | 18,365 | 11,511 | - | - | - | 29,876 | ||||||
Goodwill | - | 2,096,587 | - | - | (553,658) | - | 1,542,929 | ||||||
Ava | - | 49,368 | - | - | - | - | 49,368 | ||||||
Eleva Alimentos | - | 808,140 | - | - | (304,582) | - | 503,558 | ||||||
Incubatório Paraíso | - | 656 | - | - | - | - | 656 | ||||||
Paraíso Agroindustrial | - | 16,751 | - | - | - | - | 16,751 | ||||||
Perdigão Mato Grosso | - | 7,636 | - | - | - | - | 7,636 | ||||||
Sadia | - | 1,214,036 | - | - | (249,076) | - | 964,960 | ||||||
Outgrowers relationship | - | 14,702 | 320 | - | - | - | 15,022 | ||||||
Trademarks | - | 1,173,000 | - | - | - | - | 1,173,000 | ||||||
Patents | - | 6,100 | - | - | - | - | 6,100 | ||||||
Software | - | 452,869 | 38,007 | (176,361) | (4,439) | 143,213 | 453,289 | ||||||
3,761,623 | 49,838 | (176,361) | (558,097) | 143,213 | 3,220,216 | ||||||||
Amortization | |||||||||||||
Non-compete agreement | 39.82% | (5,051) | (9,864) | - | - | - | (14,915) | ||||||
Outgrowers relationship | 13.15% | (7,669) | (1,919) | - | - | - | (9,588) | ||||||
Patents | 27.42% | (3,191) | (1,037) | - | - | - | (4,228) | ||||||
Software | 19.92% | (293,967) | (133,587) | 175,047 | 338 | - | (252,169) | ||||||
(309,878) | (146,407) | 175,047 | 338 | - | (280,900) | ||||||||
3,451,745 | (96,569) | (1,314) | (557,759) | 143,213 | 2,939,316 |
117
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
| Consolidated | |||||||||||||||
Weighted average amortization rate (p.a.) | 12.31.17 | Additions | Disposals | Transfers | Restatement by Hyperinflation (1) | Exchange rate variation | Transfer - held for sale (2) | 12.31.18 | ||||||||
Cost | ||||||||||||||||
Non-compete agreement | - | 62,043 | 33,748 | - | - | 9,057 | (130) | (14,706) | 90,012 | |||||||
Goodwill | - | 4,192,228 | - | - | - | 323,904 | 116,744 | (1,937,911) | 2,694,965 | |||||||
AKF | - | 131,494 | - | - | - | - | 22,451 | - | 153,945 | |||||||
Alimentos Calchaquí | - | 157,908 | - | - | - | 840 | (65,323) | (93,425) | - | |||||||
Ava | - | 49,368 | - | - | - | - | - | - | 49,368 | |||||||
Avex | - | 16,026 | - | - | - | 20,650 | (6,629) | (30,047) | - | |||||||
Banvit Bandirma Vitaminli | - | 193,750 | - | - | - | - | (31,457) | - | 162,293 | |||||||
BRF AFC | - | 131,922 | - | - | - | - | 21,585 | - | 153,507 | |||||||
BRF Holland B.V. | - | 25,979 | - | - | - | - | 3,074 | (29,053) | - | |||||||
BRF Invicta | - | 131,926 | - | - | - | - | 14,467 | (146,393) | - | |||||||
Dánica | - | 4,079 | - | - | - | 5,679 | (1,687) | (8,071) | - | |||||||
Eclipse Holding Cooperatief | - | 1,315 | - | - | - | 94,177 | (544) | (94,948) | - | |||||||
Eleva Alimentos | - | 808,140 | - | - | - | - | - | (111,511) | 696,629 | |||||||
Federal Foods LLC | - | 63,843 | - | - | - | - | 10,945 | - | 74,788 | |||||||
Federal Foods Qatar L.L.C | - | 313,189 | - | - | - | - | 53,590 | - | 366,779 | |||||||
GFS Group | - | 771,604 | - | - | - | - | 130,348 | (901,952) | - | |||||||
GQFE - Golden Quality Foods Europe | - | 2,779 | - | - | - | - | 328 | (3,107) | - | |||||||
Incubatório Paraíso | - | 656 | - | - | - | - | - | - | 656 | |||||||
Invicta Food Group | - | 715 | - | - | - | - | 78 | (793) | - | |||||||
Paraíso Agroindustrial | - | 16,751 | - | - | - | - | - | - | 16,751 | |||||||
Perdigão Mato Grosso | - | 7,636 | - | - | - | - | - | - | 7,636 | |||||||
Quickfood | - | 97,133 | - | - | - | 202,558 | (40,181) | (259,510) | - | |||||||
Sadia | - | 1,214,036 | - | - | - | - | - | (201,423) | 1,012,613 | |||||||
Universal Meats Ltd. | - | 51,979 | - | - | - | - | 5,699 | (57,678) | - | |||||||
Import quotas | - | 111,731 | - | - | - | - | 12,251 | (123,982) | - | |||||||
Outgrowers relationship | - | 15,022 | - | - | - | - | - | - | 15,022 | |||||||
Trademarks | - | 1,649,910 | - | - | - | 250,731 | (140,196) | (424,283) | 1,336,162 | |||||||
Patents | - | 6,867 | 16 | - | (68) | - | (199) | (550) | 6,066 | |||||||
Customer relationship | - | 1,220,801 | - | - | - | 149,089 | 19,281 | (493,132) | 896,039 | |||||||
Supplier relationship | - | 2,049 | - | - | - | - | 369 | (2,418) | - | |||||||
Software | - | 516,308 | 2,040 | (121,929) | 121,828 | 30,460 | (2,372) | (54,503) | 491,832 | |||||||
7,776,959 | 35,804 | (121,929) | 121,760 | 763,241 | 5,748 | (3,051,485) | 5,530,098 | |||||||||
Amortization | ||||||||||||||||
Non-compete agreement | 32.70% | (23,501) | (26,794) | - | - | (5,786) | 920 | 9,359 | (45,802) | |||||||
Import quotas | 89.94% | (93,139) | (14,365) | - | - | - | (11,325) | 118,829 | - | |||||||
Outgrowers relationship | 13.24% | (9,590) | (1,963) | - | - | - | - | - | (11,553) | |||||||
Patents | 19.98% | (4,886) | (840) | - | - | (892) | 202 | 1,267 | (5,149) | |||||||
Customer relationship | 9.50% | (154,530) | (99,700) | - | - | (55,599) | (11,751) | 149,130 | (172,450) | |||||||
Supplier relationship | 5.00% | (102) | (115) | - | - | - | (25) | 242 | - | |||||||
Software | 19.68% | (293,575) | (127,449) | 121,929 | 253 | (26,967) | 3,624 | 46,439 | (275,746) | |||||||
(579,323) | (271,226) | 121,929 | 253 | (89,244) | (18,355) | 325,266 | (510,700) | |||||||||
7,197,636 | (235,422) | - | 122,013 | 673,997 | (12,607) | (2,726,219) | 5,019,398 |
(1) Refers to the price index update as disclosed in note 3.30.
(2) Amounts transferred to assets held for sale (note 12).
118
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
| Consolidated | ||||||||||||||
Weighted average amortization rate (p.a.) | 12.31.16 | Additions | Disposals | Business combination | Transfers | Exchange rate variation | 12.31.17 | ||||||||
Cost | |||||||||||||||
Non-compete agreement | - | 51,283 | 11,511 | - | 545 | - | (1,296) | 62,043 | |||||||
Goodwill | - | 4,343,550 | - | - | (203,659) | - | 52,337 | 4,192,228 | |||||||
AKF | - | 129,518 | - | - | (2,120) | - | 4,096 | 131,494 | |||||||
Alimentos Calchaquí | - | 341,988 | - | - | (152,257) | - | (31,823) | 157,908 | |||||||
Ava | - | 49,368 | - | - | - | - | - | 49,368 | |||||||
Avex | - | 18,775 | - | - | - | - | (2,749) | 16,026 | |||||||
Banvit Bandirma Vitaminli | - | - | - | - | 203,781 | - | (10,031) | 193,750 | |||||||
BRF AFC | - | 162,624 | - | - | (33,372) | - | 2,670 | 131,922 | |||||||
BRF Holland B.V. | - | 22,505 | - | - | - | - | 3,474 | 25,979 | |||||||
BRF Invicta | - | 119,092 | - | - | - | - | 12,834 | 131,926 | |||||||
Dánica | - | 4,779 | - | - | - | - | (700) | 4,079 | |||||||
Eclipse Holding Cooperatief | - | 209,950 | - | - | (202,126) | - | (6,509) | 1,315 | |||||||
Eleva Alimentos | - | 808,140 | - | - | - | - | - | 808,140 | |||||||
Federal Foods LLC | - | 70,474 | - | - | (7,345) | - | 714 | 63,843 | |||||||
Federal Foods Qatar L.L.C | - | 308,468 | - | - | - | - | 4,721 | 313,189 | |||||||
GFS Group | - | 684,368 | - | - | - | - | 87,236 | 771,604 | |||||||
GQFE - Golden Quality Foods Europe | - | 2,407 | - | - | - | - | 372 | 2,779 | |||||||
Incubatório Paraíso | - | 656 | - | - | - | - | - | 656 | |||||||
Invicta Food Group | - | 645 | - | - | - | - | 70 | 715 | |||||||
Paraíso Agroindustrial | - | 16,751 | - | - | - | - | - | 16,751 | |||||||
Perdigão Mato Grosso | - | 7,636 | - | - | - | - | - | 7,636 | |||||||
Quickfood | - | 113,793 | - | - | - | - | (16,660) | 97,133 | |||||||
Sadia | - | 1,214,036 | - | - | - | - | - | 1,214,036 | |||||||
Universal Meats Ltd. | - | 57,577 | - | - | (10,220) | - | 4,622 | 51,979 | |||||||
Import quotas | - | 58,155 | - | - | 42,197 | - | 11,379 | 111,731 | |||||||
Outgrowers relationship | - | 14,702 | 320 | - | - | - | - | 15,022 | |||||||
Trademarks | - | 1,313,194 | - | - | 386,853 | - | (50,137) | 1,649,910 | |||||||
Patents | - | 6,917 | 6 | (1) | - | 22 | (77) | 6,867 | |||||||
Customer relationship | - | 815,285 | - | - | 403,525 | 10,579 | (8,588) | 1,220,801 | |||||||
Supplier relationship | - | 14,562 | - | (1,991) | - | (10,579) | 57 | 2,049 | |||||||
Software | - | 503,998 | 40,301 | (176,855) | 2,661 | 146,300 | (97) | 516,308 | |||||||
7,121,646 | 52,138 | (178,847) | 632,122 | 146,322 | 3,578 | 7,776,959 | |||||||||
Amortization | |||||||||||||||
Non-compete agreement | 27.59% | (7,734) | (16,140) | - | - | - | 373 | (23,501) | |||||||
Import quotas | 73.63% | (21,697) | (63,545) | - | - | - | (7,897) | (93,139) | |||||||
Outgrowers relationship | 13.15% | (7,669) | (1,921) | - | - | - | - | (9,590) | |||||||
Patents | 27.42% | (3,912) | (1,057) | 1 | - | - | 82 | (4,886) | |||||||
Customer relationship | 7.59% | (81,332) | (72,234) | - | 191 | - | (1,155) | (154,530) | |||||||
Supplier relationship | 5.00% | (1,992) | (94) | 1,991 | - | - | (7) | (102) | |||||||
Software | 19.93% | (324,756) | (144,995) | 175,484 | - | - | 692 | (293,575) | |||||||
(449,092) | (299,986) | 177,476 | 191 | - | (7,912) | (579,323) | |||||||||
6,672,554 | (247,848) | (1,371) | 632,313 | 146,322 | (4,334) | 7,197,636 |
Amortization of outgrowers relationship is recognized as a cost of sales in the statement of income, the amortization of customer relationship is recognized in selling expenses, while non-compete agreement, patents and software amortization is recorded according to its use as cost of sales, administrative or sales expenses.
Trademarks recorded in intangible assets come mainly from the business combination with Sadia and Banvit and are considered assets with indefinite useful life.
The goodwill is based on expected future profitability supported by valuation reports, after purchase price allocation.
Goodwill and intangible assets with indefinite useful life (trademarks) are allocated to cash-generating units as presented in note 5.
The calculation of the value in use of non-financial assets is done annually using the discounted cash flow method. In 2018, the Company used the strategic plan and annual budget with growing projections until 2023 and the average perpetuity of thecash generating units of 3.06% from this date, based on historical information of previous years, economic and financial projections from each specific market that the Company has operations and additionally include official information disclosed by independent institutions and government agencies, such as banks, economic advisories, the International Monetary Fund (IMF), Brazilian Central Bank (BACEN), among others.
119
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
The discount rate adopted by the Management varied from 9.33% to 10.22%, depending on the operating segment. The assumptions in the table below were also adopted:
2019 | 2020 | 2021 | 2022 | 2023 | ||||||
GDP Brazil | 2.57% | 3.05% | 3.07% | 2.67% | 2.63% | |||||
GDP Halal | 3.30% | 3.20% | 3.20% | 3.20% | 3.20% | |||||
Inflation Brazil | 4.09% | 4.23% | 4.00% | 4.00% | 4.00% | |||||
Exchange rate - BRL / USD | 3.68 | 3.71 | 3.75 | 3.80 | 3.84 | |||||
Exchange rate - EUR / USD | 0.85 | 0.84 | 0.82 | 0.81 | 0.80 |
The rates above do not consider any tax effect.
Based on management analyses performed during 2018, no impairment loss was identified.
In addition to the above mentioned recovery analysis, management prepared a deterministic sensitivity analysis considering the variations in the EBIT margin and in the discount rate as presented below:
| Variations |
| |||
Apreciation (devaluation) | 1.0% | 0.0% | -1.0% | ||
BRAZIL | |||||
Discount rate | 11.22% | 10.22% | 9.22% | ||
Ebit Margin | 10.32% | 9.32% | 8.32% | ||
INTERNATIONAL | |||||
Discount rate | 10.33% | 9.33% | 8.33% | ||
Ebit Margin | 11.05% | 10.05% | 9.05% | ||
HALAL | |||||
Discount rate | 11.17% | 10.17% | 9.17% | ||
Ebit Margin | 11.42% | 10.42% | 9.42% |
The Company in its sensitivity analysis has not identified possible and reasonable scenarios in which identified the need forimpairment in the intangible assets with indefinite useful life.
120
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
19. LOANS AND FINANCING
Parent company | |||||||||||||||||||||||||||||
Charges (p.a.) | Weighted average | WAMT (1) | Current | Non-current | 12.31.18 | Captured | Incorporation of companies (2) | Amortization | Interest paid | Interest accrued | Exchange rate variation | Current | Non-current | 12.31.17 | |||||||||||||||
Local currency | |||||||||||||||||||||||||||||
Working capital | 'Fixed rate / 118% of CDI | 7.78% | 3.3 | 1,695,391 | 4,167,633 | 5,863,024 | 4,377,986 | 55,348 | (1,074,301) | (136,809) | 255,582 | - | 1,461,324 | 923,894 | 2,385,218 | ||||||||||||||
Certificate of agribusiness receivables | 96.40% of CDI / IPCA + 5.90% | 6.08% | 1.6 | 1,114,904 | 1,482,598 | 2,597,502 | - | 781,661 | (996,985) | (155,916) | 198,102 | - | 1,076,870 | 1,693,770 | 2,770,640 | ||||||||||||||
Development bank credit lines | Fixed rate / Selic / TJLP + 1.25% | 6.16% | 1.1 | 220,414 | 44,131 | 264,545 | - | - | (315,119) | (20,346) | 29,928 | - | 313,311 | 256,771 | 570,082 | ||||||||||||||
Bonds | (7.75% on 12.31.17) | (7.75% on 12.31.17) | - | - | - | - | - | - | (500,000) | (19,375) | 15,573 | - | 503,802 | - | 503,802 | ||||||||||||||
Export credit facility | 109.45% of CDI | 9.02% | 3.2 | 39,294 | 1,586,033 | 1,625,327 | 1,621,124 | - | (1,850,000) | (188,743) | 153,748 | - | 39,198 | 1,850,000 | 1,889,198 | ||||||||||||||
Special program asset restructuring | Fixed rate / IGPM + 4.90% | 12.45% | 1.4 | 3,761 | 269,665 | 273,426 | - | - | - | (8,101) | 32,161 | - | 3,532 | 245,834 | 249,366 | ||||||||||||||
Fiscal incentives | 2.40% | 2.40% | 0.5 | 3,317 | - | 3,317 | 57,246 | - | (57,500) | (445) | 450 | - | 3,566 | - | 3,566 | ||||||||||||||
3,077,081 | 7,550,060 | 10,627,141 | 6,056,356 | 837,009 | (4,793,905) | (529,735) | 685,544 | - | 3,401,603 | 4,970,269 | 8,371,872 | ||||||||||||||||||
Foreign currency | |||||||||||||||||||||||||||||
Bonds | 3.85% | 3.85% | 4.5 | 68,053 | 7,419,750 | 7,487,803 | - | 2,898,940 | - | (186,482) | 206,566 | 593,358 | 40,111 | 3,935,310 | 3,975,421 | ||||||||||||||
Export credit facility | LIBOR + 0.95% | 4.76% | 1.6 | 329,847 | 384,463 | 714,310 | - | - | (655,480) | (55,712) | 48,613 | 181,017 | 594,039 | 601,833 | 1,195,872 | ||||||||||||||
Advances for foreign exchange rate contracts | 4.67% + e.r. US$ | 4.67% + e.r. US$ | 0.8 | 214,192 | - | 214,192 | 208,474 | - | - | - | 1,077 | 4,641 | - | - | - | ||||||||||||||
Development bank credit lines | (UMBNDES + 1.73% on 12.31.17) | (6.22% on 12.31.17) | - | - | - | - | - | - | (3,851) | (192) | 470 | - | 2,614 | 959 | 3,573 | ||||||||||||||
612,092 | 7,804,213 |
| 8,416,305 | 208,474 | 2,898,940 | (659,331) | (242,386) | 256,726 | 779,016 | 636,764 | 4,538,102 | 5,174,866 | |||||||||||||||||
3,689,173 | 15,354,273 | 19,043,446 | 6,264,830 | 3,735,949 | (5,453,236) | (772,121) | 942,270 | 779,016 | 4,038,367 | 9,508,371 | 13,546,738 |
(1) Weighted average maturity in years.
(2) Amounts arising from the incorporation of SHB (note 1.7).
121
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
Parent company | |||||||||||||||||||||||||||||||
Charges (p.a.) | Weighted average | WAMT | Current | Non-current | 12.31.17 | Captured | Transfers SHB | Amortization | Interest paid | Interest accrued | Exchange rate variation | Price index update | Current | Non-current | 12.31.16 | ||||||||||||||||
Local currency | |||||||||||||||||||||||||||||||
|
|
| |||||||||||||||||||||||||||||
Working capital | 7.78% | 7.78% | 0.8 | 1,461,324 | 923,894 | 2,385,218 | 3,308,768 | (64,564) | (2,229,186) | (154,410) | 198,484 | - | - | 1,326,126 | - | 1,326,126 | |||||||||||||||
Certificate of agribusiness receivables | 96.51% of CDI / IPCA + 5.90% | 7.41% | 2.4 | 1,076,870 | 1,693,770 | 2,770,640 | - | - | (779,190) | (393,809) | 313,562 | - | - | 168,110 | 3,461,967 | 3,630,077 | |||||||||||||||
Development bank credit lines | Fixed rate / Selic / TJLP + 1.48% | 6.78% | 1.7 | 313,311 | 256,771 | 570,082 | 62,439 | - | (403,772) | (37,256) | 47,360 | 195 | 20,104 | 381,303 | 499,709 | 881,012 | |||||||||||||||
Bonds | 7.75% (7.75% on 12.31.16) | 7.75% (7.75% on 12.31.16) | 0.4 | 503,802 | - | 503,802 | - | - | - | (38,750) | 46,425 | - | (6,806) | 4,140 | 498,793 | 502,933 | |||||||||||||||
Export credit facility | 100.35% of CDI | 6.91% | 1.2 | 39,198 | 1,850,000 | 1,889,198 | - | - | - | (214,311) | 181,212 | - | - | 72,297 | 1,850,000 | 1,922,297 | |||||||||||||||
Special program asset restructuring | Fixed rate / IGPM + 4.90% | 4.36% | 2.2 | 3,532 | 245,834 | 249,366 | - | - | - | (8,055) | 9,735 | (1,661) | (2,209) | 3,546 | 248,010 | 251,556 | |||||||||||||||
Other secured debts | (8.50% on 12.31.16) | (8.50% on 12.31.16) | - | - | - | - | - | - | (129,874) | (8,904) | 9,185 | - | 11 | 32,331 | 97,251 | 129,582 | |||||||||||||||
Fiscal incentives | 2.40% | 2.40% | 0.5 | 3,566 | - | 3,566 | 34,405 | - | (30,911) | (220) | 220 | - | - | 72 | - | 72 | |||||||||||||||
3,401,603 | 4,970,269 | 8,371,872 | 3,405,612 | (64,564) | (3,572,933) | (855,715) | 806,183 | (1,466) | 11,100 | 1,987,925 | 6,655,730 | 8,643,655 | |||||||||||||||||||
Foreign currency | |||||||||||||||||||||||||||||||
Bonds | 3.50% | 3.50% | 4.9 | 40,111 | 3,935,310 | 3,975,421 | - | (2,424,133) | - | (139,208) | 155,038 | 298,364 | - | 48,170 | 6,037,190 | 6,085,360 | |||||||||||||||
Export credit facility | LIBOR + 1.58% | 4.04% | 1.6 | 594,039 | 601,833 | 1,195,872 | 2,558,720 | - | (2,424,237) | (72,916) | 76,738 | 73,231 | - | 311,606 | 672,730 | 984,336 | |||||||||||||||
Advances for foreign exchange rate contracts | (2.39% + e.r. US$) + e.r. US$ | (2.39% + e.r. US$) + e.r. US$ | - | - | - | - | - | - | (199,322) | (4,742) | 347 | (9,123) | - | 212,840 | - | 212,840 | |||||||||||||||
Development bank credit lines | UMBNDES + 1.73% | 6.22% | 1.0 | 2,614 | 959 | 3,573 | - | - | (5,905) | (372) | 1,213 | (265) | - | 5,884 | 3,018 | 8,902 | |||||||||||||||
636,764 | 4,538,102 | 5,174,866 | 2,558,720 | (2,424,133) | (2,629,464) | (217,238) | 233,336 | 362,207 | - | 578,500 | 6,712,938 | 7,291,438 | |||||||||||||||||||
4,038,367 | 9,508,371 | 13,546,738 | 5,964,332 | (2,488,697) | (6,202,397) | (1,072,953) | 1,039,519 | 360,741 | 11,100 | 2,566,425 | 13,368,668 | 15,935,093 |
122
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
Consolidated | ||||||||||||||||||||||||||||
Charges (p.a.) | Weighted average | WAMT (1) | Current | Non-current | 12.31.18 | Captured | Transfer - held for sale (2) | Amortization | Interest paid | Interest accrued | Exchange rate variation | Current | Non-current | 12.31.17 | ||||||||||||||
Local currency | ||||||||||||||||||||||||||||
Working capital | 'Fixed rate / 118% of CDI | 7.78% | 1.7 | 1,695,390 | 4,167,633 | 5,863,023 | 4,431,145 | - | (1,235,896) | (149,702) | 262,113 | - | 1,631,469 | 923,894 | 2,555,363 | |||||||||||||
Certificate of agribusiness receivables | 96.40% of CDI / IPCA + 5,90% | 6.08% | 1.6 | 1,114,904 | 1,482,598 | 2,597,502 | - | - | (996,985) | (223,143) | 245,978 | - | 1,097,882 | 2,473,770 | 3,571,652 | |||||||||||||
Development bank credit lines | Fixed rate / Selic / TJLP + 1.25% | 6.16% | 1.1 | 220,414 | 44,131 | 264,545 | - | - | (315,119) | (20,346) | 29,928 | - | 313,311 | 256,771 | 570,082 | |||||||||||||
Bonds | (7.75% on 12.31.17) | (7.75% on 12.31.17) | - | - | - | - | - | - | (500,000) | (19,375) | 15,573 | - | 503,802 | - | 503,802 | |||||||||||||
Export credit facility | 109.45% of CDI | 9.02% | 3.2 | 39,294 | 1,586,033 | 1,625,327 | 1,621,124 | - | (1,850,000) | (188,743) | 153,748 | - | 39,198 | 1,850,000 | 1,889,198 | |||||||||||||
Special program asset restructuring | Fixed rate / IGPM + 4.90% | 12.45% | 1.4 | 3,761 | 269,665 | 273,426 | - | - | - | (8,101) | 32,161 | - | 3,532 | 245,834 | 249,366 | |||||||||||||
Fiscal incentives | 2.40% | 2.40% | 0.5 | 3,317 | - | 3,317 | 57,246 | - | (57,500) | (445) | 450 | - | 3,566 | - | 3,566 | |||||||||||||
3,077,080 | 7,550,060 | 10,627,140 | 6,109,515 | - | (4,955,500) | (609,855) | 739,951 | - | 3,592,760 | 5,750,269 | 9,343,029 | |||||||||||||||||
Foreign currency | ||||||||||||||||||||||||||||
Bonds | 4.07% | 4.07% | 4.8 | 99,568 | 9,646,878 | 9,746,446 | - | (87,113) | (14,791) | (466,552) | 506,484 | 1,278,497 | 105,080 | 8,424,841 | 8,529,921 | |||||||||||||
Export credit facility | LIBOR + 0.25% | 2.47% | 0.8 | 998,730 | 384,462 | 1,383,192 | 8,395 | - | (1,067,367) | (75,878) | 67,621 | 299,693 | 953,502 | 1,197,226 | 2,150,728 | |||||||||||||
Advances for foreign exchange rate contracts | 4.67% + e.r. US$ | 4.67% + e.r. US$ | 0.8 | 214,192 | - | 214,192 | 208,474 | - | - | - | 1,077 | 4,641 | - | - | - | |||||||||||||
Development bank credit lines | (UMBNDES + 1.73% on 12.31.17) | (6.22% on 12.31.17) | - | - | - | - | - | - | (3,851) | (192) | 471 | - | 2,613 | 959 | 3,572 | |||||||||||||
Working capital | 46.84% | 46.84% | - | - | - | - | 813,279 | (68,660) | (898,283) | (3,632) | 46,025 | (56,617) | 128,156 | 39,732 | 167,888 | |||||||||||||
Working capital | 21.91% (15.95% on 12.31.17) + e.r TRY | 21.91% (15.95% on 12.31.17) + e.r TRY | 0.7 | 157,819 | 36,655 | 194,474 | 193,058 | - | (216,610) | (21,057) | 35,934 | (46,091) | 249,240 | - | 249,240 | |||||||||||||
1,470,309 | 10,067,995 | 11,538,304 | 1,223,206 | (155,773) | (2,200,902) | (567,311) | 657,612 | 1,480,123 | 1,438,591 | 9,662,758 | 11,101,349 | |||||||||||||||||
4,547,389 | 17,618,055 | 22,165,444 | 7,332,721 | (155,773) | (7,156,402) | (1,177,166) | 1,397,563 | 1,480,123 | 5,031,351 | 15,413,027 | 20,444,378 |
(1) Weighted average maturity in years.
(2) Amounts transferred to discontinued operations (note 12).
123
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
Consolidated | |||||||||||||||||||||||||||||||
Charges (p.a.) | Weighted average | WAMT | Current | Non-current | 12.31.17 | Captured | Business combination | Amortization | Interest paid | Interest accrued | Exchange rate variation | Price index update | Current | Non-current | 12.31.16 | ||||||||||||||||
Local currency | |||||||||||||||||||||||||||||||
Working capital | 7.79% | 7.79% | 0.8 | 1,631,469 | 923,894 | 2,555,363 | 3,579,445 | - | (2,400,985) | (162,218) | 212,995 | - | - | 1,326,126 | - | 1,326,126 | |||||||||||||||
Certificate of agribusiness receivables | 96.51% of CDI / IPCA + 5,90% | 7.41% | 2.4 | 1,097,882 | 2,473,770 | 3,571,652 | 780,000 | - | (779,190) | (393,809) | 334,574 | - | - | 168,110 | 3,461,967 | 3,630,077 | |||||||||||||||
Development bank credit lines | Fixed rate / Selic / TJLP + 1.48% | 6.78% | 1.7 | 313,311 | 256,771 | 570,082 | 62,439 | - | (403,772) | (37,256) | 47,359 | 196 | 20,104 | 381,303 | 499,709 | 881,012 | |||||||||||||||
Bonds | 7.75% (7.75% on 12.31.16) | 7.75% (7.75% on 12.31.16) | 0.4 | 503,802 | - | 503,802 | - | - | - | (38,750) | 46,425 | - | (6,806) | 4,140 | 498,793 | 502,933 | |||||||||||||||
Export credit facility | 100.35% of CDI | 6.91% | 1.2 | 39,198 | 1,850,000 | 1,889,198 | - | - | - | (214,311) | 181,212 | - | - | 72,297 | 1,850,000 | 1,922,297 | |||||||||||||||
Special program asset restructuring | Fixed rate / IGPM + 4.90% | 4.36% | 2.2 | 3,532 | 245,834 | 249,366 | - | - | - | (8,055) | 9,736 | (1,662) | (2,209) | 3,546 | 248,010 | 251,556 | |||||||||||||||
Other secured debts | (8.50% on 12.31.16) | (8.50% on 12.31.16) | - | - | - | - | - | - | (129,874) | (8,904) | 9,185 | - | 11 | 32,331 | 97,251 | 129,582 | |||||||||||||||
Fiscal incentives | 2.40% | 2.40% | 0.5 | 3,566 | - | 3,566 | 34,405 | - | (30,911) | (220) | 220 | - | - | 72 | - | 72 | |||||||||||||||
3,592,760 | 5,750,269 | 9,343,029 | 4,456,289 | - | (3,744,732) | (863,523) | 841,706 | (1,466) | 11,100 | 1,987,925 | 6,655,730 | 8,643,655 | |||||||||||||||||||
Foreign currency | |||||||||||||||||||||||||||||||
Bonds | 4.08% | 4.08% | 6.0 | 105,080 | 8,424,841 | 8,529,921 | 77,129 | - | (395,970) | (382,020) | 410,433 | 326,687 | - | 489,229 | 8,004,433 | 8,493,662 | |||||||||||||||
Export credit facility | LIBOR + 1.85% | 3.35% | 2.2 | 953,502 | 1,197,226 | 2,150,728 | 3,576,033 | - | (2,981,166) | (98,501) | 105,475 | 238,293 | - | 312,219 | 998,375 | 1,310,594 | |||||||||||||||
Advances for foreign exchange rate contracts | (2.39% on 12.31.16) + e.r. US$ | (2.39% on 12.31.16) + e.r. US$ | - | - | - | - | 4,065 | - | (203,396) | (4,741) | 347 | (9,115) | - | 212,840 | - | 212,840 | |||||||||||||||
Development bank credit lines | UMBNDES + 1.73% | 6.22% | 1.0 | 2,613 | 959 | 3,572 | - | - | (5,906) | (372) | 1,213 | (264) | - | 5,883 | 3,018 | 8,901 | |||||||||||||||
Working capital | 23.10% | 23.10% | 1.5 | 128,156 | 39,732 | 167,888 | 1,584,848 | - | (1,629,418) | (19,777) | 59,246 | (119,739) | - | 236,908 | 55,820 | 292,728 | |||||||||||||||
Working capital | 15.95% + e.r TRY | 15.95% + e.r TRY | 0.1 | 249,240 | - | 249,240 | - | 389,151 | (40,644) | (41) | 5,103 | (104,329) | - | - | - | - | |||||||||||||||
1,438,591 | 9,662,758 | 11,101,349 | 5,242,075 | 389,151 | (5,256,500) | (505,452) | 581,817 | 331,533 | - | 1,257,079 | 9,061,646 | 10,318,725 | |||||||||||||||||||
5,031,351 | 15,413,027 | 20,444,378 | 9,698,364 | 389,151 | (9,001,232) | (1,368,975) | 1,423,523 | 330,067 | 11,100 | 3,245,004 | 15,717,376 | 18,962,380 |
124
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
19.1. Working capital
Rural credit: The Company and its subsidiaries entered into rural credit loans with several commercial banks, under a Brazilian Federal government program that promotes investments in rural activities.
Working capital in foreign currency: Refers to credit lines taken from financial institutions and utilized primarily to short term working capital and import operations of subsidiaries located in Turkey. The loans are denominated in Argentine Pesos and Turkey Lira with maturity in 2019 and 2020.
19.2. Agribusiness receivables certificates (“CRA”)
On April 19, 2016, the Company completed the CRA issuance related to the public distribution offering of the 1st series of the 9th Issue by Octante Securitizadora S.A. (“Securitization Company”) in the amount of R$1,000,000 net of interest, which will mature on April 19, 2019 and were issued with a coupon of 96.50% p.a. of the DI rate, payable every each 9 months. The CRAs arise from the Company’s exports contracted with BRF Global GmbH and were assigned and/or promised to the Securitization Company.
On December 22, 2016, the Company completed the CRA issuance related to the public distribution offering of the 1st and 2nd series of the 1st Issue by Vert Companhia Securitizadora, in the amount of R$1,500,000 net of interest. The 1st series CRA were issued with a coupon of 96.00% p.a. of the DI rate, with will mature on December 16, 2020 and payable every each 8 months. The 2nd series CRA were issued with a coupon of 5.8970% p.a. updated by the Amplified Consumer Price Index (“IPCA”), with will mature on December 18, 2023 and with interest payable every each 16 or 18 months. The CRAs arise from the Company’s exports contracted with BRF Global GmbH and BRF Foods GmbH.
19.3. Development bank credit lines
The Company and its subsidiaries have several outstanding obligations with National Bank for Economic and Social Development (“BNDES”). The loans were obtained for the acquisition of equipment and expansion of productive facilities.
FINEM: Credit lines of Financing for Enterprises ("FINEM") which are subject to the variations of UMBNDES, TJLP and SELIC currency basket. The values of principal and interest are paid in monthly installments, with maturities between 2019 and 2020 and are secured by pledge of equipment, facilities and mortgage on properties owned by the Company.
FINEP: Credit lines of Financial of Studies and Projects (“FINEP”) obtained with reduced charges for projects of research, development and innovation, with maturity in 2019.
125
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
19.4. Bonds
BFF Notes 2020: On January 28, 2010, BFF International Limited issued senior notes in the total value of US$750,000, whose notes are guaranteed by BRF, with a nominal interest rate of 7.25% p.a. and effective rate of 7.54% p.a. maturing on January 28, 2020. On June 20, 2013, the amount of US$120,718 of these senior notes was exchanged by Senior Notes BRF 2023 and on May 15, 2014, the amount of US$409,640 was repurchased with part of the proceeds obtained from the Senior Notes BRF 2024. On May 28, 2015, the Company concluded a Tender Offer, in amount of US$101,359, such that the outstanding balance amounted to US$118,283 and the premium paid, net of interest, was US$15,964 (equivalent of R$52,028). On September 14, 2016, the Company concluded a Tender Offer, in amount of US$32,183 (equivalent of R$104,888), being the premium paid, net of interest, was US$4,103 (equivalent of R$13,372). The premium paid to holders of existing bonds was recorded as a financial expense.
Senior Notes BRF2022: On June 6, 2012, BRF issued senior notes of US$500,000, with nominal interest rate of 5.88% p.a. and an effective rate of 6.00% p.a. maturing on June 6, 2022. On June 26, 2012, the Company reopened this transaction for an additional amount of R$250,000, with nominal interest rate of 5.88% p.a. and effective rate of 5.50% p.a. On May 28,2015, the Company concluded a Tender Offer, in amount of US$577,130, such that the outstanding balance amounted to US$172,870 and the premium paid, net of interest, was US$79,355 (equivalent of R$258,626). On September 14, 2016, the Company concluded a Tender Offer, in amount of US$54,208 (equivalent of R$176,669), being the premium paid, net of interest, was US$5,692 (equivalent of R$18,551). The premium paid to holders of existing bonds was recorded as a financial expense.
Senior Notes BRF 2022 (“Green Bonds”): On May 29, 2015, BRF concluded a Senior Notes offer of 7 (seven) year in the total amount of EUR500,000, which will mature on May 03, 2022 (“Senior Notes BRF 2022”), issued with a coupon (interest) of 2.75% p.a. (yield to maturity 2.822%), payable annually beginning on June 03, 2016.
Senior Notes BRF 2023: On May 15, 2013, BRF completed international offerings of 10 year bonds in the aggregate amount of US$500,000 (the “USD Bonds”), which will mature on May 22, 2023 (“Senior Notes BRF 2023”), issued with a coupon (interest) of 3.95% per year (yield to maturity 4.135%), payable semi-annually beginning on November 22, 2013.
Senior Notes BRF 2024: On May 15, 2014, BRF completed international offerings of 10 year bonds in the aggregate amount of US$750,000 (the “USD Bonds”), which will mature on May 22, 2024 (“Senior Notes BRF 2024”), issued with a coupon (interest) of 4.75% p.a. (yield to maturity 4.952%), payable semi-annually beginning on November 22, 2014.
126
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
Senior Notes BRF 2026: On September 29, 2016, BRF through its wholly-owned subsidiary BRF GmbH concluded a Senior Notes offer of 10 years duration in the total amount of US$500,000, with will mature on September 29, 2026, issued with a coupon (interest) of 4.35% p.a. (yield to maturityde 4.625%), payable semi-annually beginning on March 29, 2017.
19.5. Export credit facilities
Export prepayments: Under the terms of each of these credit facilities, the Company entered into loans which must be evidenced subsequently by the trade accounts receivable related to the exports of its products, with maturities between 2019 and 2023.
Commercial credit lines: Denominated in Euros with quarterly interest payments and principal maturing in 2019 and are utilized for purchases of imported raw materials and other working capital needs.
19.6. Special Program Asset Recovery (“PESA”)
The Company has a loan facility obtained through the Special Program for Asset Recovery (“Programa Especial de Saneamento de Ativos”) promoted by the federal government and securitized by commercial financial institutions. Such loan facility is subject to the variations of the General Market Price Index (“IGPM”) plus interest of 4.90% p.a.. The principal is payable in a single installment with maturity date in 2020, being secured by endorsements and pledges of public debt securities (note 15).
19.7. Rotative credit line (“Revolver Credit Facility”)
With the purpose of improving its financial liquidity, the Company and its wholly-owned subsidiary BRF Global GmbH obtained a credit line Revolving Credit Facility ("Revolver Credit Facility") in the amount of US$1,000,000, with a maturity date in May 2019, from a syndicate comprised of 28 banks. The transaction was structured to allow the Company to utilize the credit line at any time, during the contracted period.On December 31, 2018 the line is avalable but not used.
19.8. Loans and financing maturity schedule
The maturity schedule of the loans and financing balances is as follows:
127
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
Parent company | Consolidated | ||
12.31.18 | 12.31.18 | ||
2019 | 3,697,724 | 4,555,943 | |
2020 | 3,026,033 | 3,395,433 | |
2021 | 2,936,023 | 2,936,023 | |
2022 | 3,072,727 | 3,072,727 | |
2023 | 3,399,909 | 3,399,909 | |
2024 onwards | 2,911,030 | 4,805,409 | |
19,043,446 | 22,165,444 |
19.9. Guarantees
Parent company | Consolidated | ||||||
12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | ||||
Total of loans and financing | 19,043,446 | 13,546,738 | 22,165,444 | 20,444,378 | |||
Mortgage guarantees | 267,862 | 577,218 | 267,862 | 577,218 | |||
Related to FINEM-BNDES | 217,620 | 462,842 | 217,620 | 462,842 | |||
Related to tax incentives and other | 50,242 | 114,376 | 50,242 | 114,376 |
The Company is the guarantor of a loan obtained by Instituto Sadia de Sustentabilidade from the BNDES. The loan was obtained with the purpose of allowing the implementation of biodigesters in the farms of the outgrowers which take part in the Company´s integration system, targeting the reduction of the emission of Greenhouse Gases. The value of these guarantees on December 31, 2018 totaled R$5,956 (R$17,306 as of December 31, 2017).
The Company is the guarantor of loans related to a special program, which aimed the local development of outgrowers in the central region of Brazil. The proceeds of such loans are utilized by the outgrowers to improve farm conditions and will be paid by them in 10 years, taking as collateral the land and equipment acquired by the outgrowers through this program. The value of these guarantees on December 31, 2018 totaled R$29,794 (R$87,062 as of December 31, 2017).
On December 31, 2018, the Company contracted bank guarantees in the amount of R$783,952 (R$1,477,817 as of December 31, 2017) offered mainly in litigations involving the Company´s use of tax credits. These guarantees have an average cost of 1.57% p.a. (1.09% p.a. as of December 31, 2017).
19.10. Commitments
In the normal course of the business, the Company enters into agreements with third parties for the purchase of raw materials with future delivery, mainly of corn and soymeal. The agreed prices in these agreements can be fixed or to be fixed. The Company enters into other agreements, such as electricity, packaging supplies andmanufacturing activities. The amounts of the agreements at the date of these financial statements are set forth below:
128
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
Parent company | Consolidated | |||
12.31.18 | 12.31.18 | |||
2019 | 3,967,752 | 4,338,133 | ||
2020 | 487,402 | 527,766 | ||
2021 | 257,509 | 257,509 | ||
2022 | 158,868 | 158,868 | ||
2023 | 111,608 | 111,608 | ||
2024 onwards | 315,036 | 315,036 | ||
5,298,175 | 5,708,920 |
20. TRADE ACCOUNTS PAYABLE
Parent company | Consolidated | ||||||
12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | ||||
Domestic suppliers | |||||||
Third parties | 4,682,899 | 4,214,285 | 4,700,830 | 4,647,729 | |||
Related parties | 15,008 | 53,064 | - | 16,592 | |||
4,697,907 | 4,267,349 | 4,700,830 | 4,664,321 | ||||
Foreign suppliers | |||||||
Third parties | 374,573 | 605,078 | 1,079,438 | 2,030,710 | |||
Related parties | 315 | 3,375 | - | - | |||
374,888 | 608,453 | 1,079,438 | 2,030,710 | ||||
(-) Adjustment to present value | (47,970) | (44,577) | (47,990) | (52,774) | |||
5,024,825 | 4,831,225 | 5,732,278 | 6,642,257 | ||||
Current | 4,844,981 | 4,635,382 | 5,552,434 | 6,445,486 | |||
Non-current | 179,844 | 195,843 | 179,844 | 196,771 |
For the year ended December 31, 2018, the days payable outstanding is 94 days (97 days on December 31, 2017).
On the suppliers balance as of December 31, 2018, R$1,300,777 in the parent company and R$1,301,304 in the consolidated (R$1,596,448 in the parent company and R$1,787,714 in the consolidated as of December 31, 2017) corresponds to the supply chain finance transactions on which there were no changes in the payment terms and prices negotiated with the suppliers.
The information on accounts payable involving related parties is set forth in note 30. The trade accounts payable to related parties refer to transactions with associates UP! indomestic market.
129
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
21. SUPPLY CHAIN FINANCE
Parent company | Consolidated | ||||||
12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | ||||
Supply chain finance - Domestic suppliers | 715,335 | 476,698 | 715,335 | 518,417 | |||
Supply chain finance - Foreign suppliers | 170,448 | 172,216 | 170,448 | 196,772 | |||
885,783 | 648,914 | 885,783 | 715,189 |
The Company has partnerships with several financial institutions that allow the suppliers to borrow against their future receivables. The suppliers have the freedom to choose whether to participate and if so, with which institution. The anticipation allows the suppliers to better manage their cash flow needs. This flexibility allows the Company to intensify its commercial relations with the network of suppliers by potentially leveraging benefits such as preference for supply in case of restricted supply, better price conditions and / or more flexible payment terms, among others.
The Company has not identified a material change in the existing commercial conditions with its suppliers.
On December 31, 2018, the discount rates applied to the supply chain finance transactions agreed between our suppliers and the financial institutions in the internal market were set between 0.52% to 0.75% p.m. (0.57% to 0.84% p.m. on December 31, 2017).
On December 31, 2018, the discount rates applied to the supply chain finance transactions agreed between our suppliers and the financial institutions in the external market were set between 0.31% to 0.50% p.a. (0.19% to 0.29% p.m. on December 31, 2017).
130
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
22. DERIVATIVE FINANCIAL INSTRUMENTS
Parent company | Consolidated | ||||||
12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | ||||
Derivatives designated as hedge accounting | |||||||
Assets | |||||||
Non-deliverable forward (NDF) | 16,765 | 663 | 16,765 | 1,138 | |||
Currency option contracts | 101,417 | 20,262 | 101,426 | 23,542 | |||
Commodities (corn) non-deliverable forward (NDF) | 22,169 | 783 | 22,169 | 783 | |||
Corn future contracts - B3 | 1 | 24 | 1 | 24 | |||
Corn option contracts - B3 | - | 789 | - | 789 | |||
Commodities (soybean) non-deliverable forward (NDF) | 591 | 1,056 | 591 | 1,056 | |||
Commodities (soybean oil) non-deliverable forward (NDF) | - | 123 | - | 123 | |||
140,943 | 23,700 | 140,952 | 27,455 | ||||
Liabilities | |||||||
Non-deliverable forward of currency (NDF) | (20,928) | (5,846) | (20,928) | (6,769) | |||
Currency option contracts | (68,531) | (22,851) | (75,779) | (25,916) | |||
Commodities (corn) non-deliverable forward (NDF) | (3,586) | (4,593) | (3,586) | (4,593) | |||
Corn future contracts - B3 | (59) | - | (59) | - | |||
Corn option contracts - B3 | - | (554) | - | (554) | |||
Commodities (soybean) non-deliverable forward (NDF) | (3,311) | - | (3,311) | - | |||
Commodities (soybean meal) non-deliverable forward (NDF) | (2,672) | (3,015) | (2,672) | (3,015) | |||
Soybean meal option contracts | - | (1,488) | - | (1,488) | |||
Commodities (soybean oil) non-deliverable forward (NDF) | (4,357) | (112) | (4,357) | (112) | |||
Exchange rate contracts currency (Swap) | - | (155,496) | (82) | (166,343) | |||
(103,444) | (193,955) | (110,774) | (208,790) | ||||
Derivatives not designated as hedge accounting | |||||||
Assets | |||||||
Non-deliverable forward of currency (NDF) | - | 239 | 2,411 | 36,412 | |||
Currency option contracts | - | - | 2,575 | 1,476 | |||
Exchange rate contracts currency (Swap) | 36,401 | 25,193 | 36,401 | 25,193 | |||
36,401 | 25,432 | 41,387 | 63,081 | ||||
Liabilities | |||||||
Non-deliverable forward of currency (NDF) | (12,366) | (1,964) | (12,366) | (1,964) | |||
Currency future contracts - B3 | (9,367) | (249) | (9,367) | (249) | |||
Swap (index / currency / stocks) | - | - | (3,374) | (2,037) | |||
Deliverable forwards contracts | (99,154) | (86,451) | (99,154) | (86,451) | |||
(120,887) | (88,664) | (124,261) | (90,701) | ||||
Current assets | 177,344 | 49,132 | 182,339 | 90,536 | |||
Current liabilities | (224,331) | (282,619) | (235,035) | (299,491) |
131
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
The collateral given in the transactions set forth above are disclosed in note 7.
23. LEASES
The Company is lessee in several contracts, which can be classified as operating or finance lease.
23.1. Operating lease
The minimum future payments of non-cancellable operating lease are set forth below:
Parent company | Consolidated | ||
12.31.18 | 12.31.18 | ||
2019 | 421,085 | 421,656 | |
2020 | 103,454 | 103,731 | |
2021 | 108,173 | 108,434 | |
2022 | 49,382 | 49,432 | |
2023 | 157,269 | 157,319 | |
2024 onwards | 1,285,772 | 1,285,809 | |
2,125,135 | 2,126,381 |
The payments of operating lease agreements recognized in the statement of income in the year ended December 31, 2018 amounted to R$357,241 in the parent company and R$480,232 in the consolidated (R$171,158 in the parent company and R$289,703 in the consolidated in the same period of the previous year). The amount related to discontinued operations in the consolidated is R$13,693 in the year ended December 31, 2018 (R$17,014 at December 31, 2007).
In 2018, Sale-leaseback transaction in the amount of R$175,000, of which R$140,000 refers to the Distribution Center of Vitória de Santo Antão (PE) and R$35,000 related to the Property in Duque de Caxias (RJ). Sales with subsequent rental of the same property, guaranteeing the Purchasers the receipt of the rents for the determined term of 20 years and 10 years respectively, both were classified as operating leases with immediate gain for the Company of R$62,000, recorded in other operating results.
132
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
23.2. Finance lease
The Company enters into finance leases mainly for the acquisitions of machinery, equipment, vehicles, software and buildings, set forth below:
| Parent company | Consolidated | |||||||
Weighted average depreciation rate | 12.31.18 | 12.31.17 | 12.31.18 | Restated | |||||
Cost | |||||||||
Machinery and equipment | 129,589 | 91,923 | 129,589 | 97,591 | |||||
Software | 68,424 | 97,083 | 68,424 | 97,083 | |||||
Buildings | 214,171 | 216,560 | 214,171 | 216,560 | |||||
Facilities | 14,492 | 14,692 | 14,492 | 14,692 | |||||
426,676 | 420,258 | 426,676 | 425,926 | ||||||
Accumulated depreciation | |||||||||
Machinery and equipment | 35.15% | (75,422) | (42,930) | (75,422) | (45,070) | ||||
Software | 39.85% | (57,486) | (84,578) | (57,486) | (84,578) | ||||
Buildings | 6.75% | (74,527) | (58,836) | (74,527) | (58,836) | ||||
Facilities | 6.67% | (1,725) | (719) | (1,725) | (719) | ||||
(209,160) | (187,063) | (209,160) | (189,203) | ||||||
217,516 | 233,195 | 217,516 | 236,723 |
(1) The period of depreciation of leased assets corresponds to the lowest of term of the contract and the useful life of the asset, as determined by CPC 06 / IAS 17.
The minimum future payments required for these finance leases are segregated as follows, and were recorded in current and non-current liabilities:
Parent company and Consolidated | |||||
12.31.18 | |||||
Present value of minimum payments | Interest | Minimum future payments | |||
2019 | 64,762 | 17,702 | 82,464 | ||
2020 | 42,141 | 14,041 | 56,182 | ||
2021 | 20,952 | 8,608 | 29,560 | ||
2022 | 16,356 | 7,256 | 23,612 | ||
2023 | 12,844 | 6,786 | 19,630 | ||
2024 onwards | 58,318 | 35,753 | 94,071 | ||
215,373 | 90,146 | 305,519 |
The contract terms for both modalities, with respect to renewal, adjustment andpurchase option, are according to market practices. In addition, there are no clauses of contingent payments or restrictions on dividends distribution, payments of interest on shareholders’ equity or obtaining debt.
133
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
In addition, the Company also has commitments regarding financial leases, related to a built to suit agreement for the construction of facilities which will be built by third parties. The agreements term will be 13 years from the signing date as well as the charge of rent expenses. If the Company defaults on its obligations, it will be subject to fines and/or acceleration of outstanding rent installments falling due, according to the terms of the contract. The contract was classified as a finance lease.
The estimated schedule of future payments related to this agreement is set forth below:
Parent company and Consolidated | ||
12.31.18 | ||
2019 | 9,423 | |
2020 | 9,423 | |
2021 | 9,423 | |
2022 | 9,423 | |
2023 onwards | 84,806 | |
122,498 |
24. SHARE-BASED PAYMENT
24.1. Stock options plan
The Company grants stock options to its employees eligible by the Board of Directors, which are determined in stock options plans that were approved by a Ordinary and a Special Meeting of Shareholders on March 31, 2010 (Plan I) and April 08, 2015 (Plan II).
Plan I comprises two instruments: (i) annual stock option grant, and (ii) an additional stock option grant, which the employee might adhere using part of its profit sharing bonus. Plan II comprises only the annual grant.
The vesting conditions are based on attainment of results and in the value of the Company businesses.
The plans include shares issued by the Company up to the limit of 2% of the total stock, and its purpose is to: (i) attract, retain and motivate the beneficiaries, (ii) add value for shareholders, and (iii) encourage the view of entrepreneur of the business.
The plans are managed by the Board of Directors, within the limits established by thegeneral guidelines of the plan and applicable legislation.
134
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
The quantity of granted options is determined by the Board of Directors, with an exercise price equivalent to the average amount of the closing price of the share at the last twenty trading sessions of the B3, prior to the grant date. The exercise price is updated monthly by the variation of the Amplified Consumer Price Index (“IPCA”) between the grant date and the month prior to the option exercise notice by the beneficiary.
The vesting period during which the participant can not exercise the purchase of the shares for Plan I is 1 to 3 years and for Plan II is 1 to 4 years, respecting the following deadlines from the grant date of the option.
Plan I | Plan II | |||||
Quantity | Deadline | Quantity | Deadline | |||
1/3 | 1 year | 1/4 | 1 year | |||
2/3 | 2 years | 2/4 | 2 years | |||
3/3 | 3 years | 3/4 | 3 years | |||
- | - | 4/4 | 4 years |
After the vesting period and within no more than five years for Plan I and six years for Plan II from the grant date, the beneficiary is no longer entitled to the right to the unexercised options. To satisfy the exercise of the options, the Company may issue new shares or use shares held in treasury.
The breakdown of the outstanding granted options is presented as follows:
Date | Quantity | Grant (1) | Strike price (1) | |||||||||||
Grant date | Beggining of exercise | End of the exercise | Options granted | Outstanding options | Fair value of the option | Granting date | Updated IPCA | |||||||
Plan I |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
04.04.14 | 04.03.15 | 04.03.19 | 1,552,564 | 407,556 | 12.56 | 44.48 | 58.11 | |||||||
05.02.14 | 05.01.15 | 05.01.19 | 1,610,450 | 314,113 | 14.11 | 47.98 | 62.27 | |||||||
12.18.14 | 12.17.15 | 12.17.19 | 5,702,714 | 1,540,640 | 14.58 | 63.49 | 80.27 | |||||||
8,865,728 | 2,262,309 | |||||||||||||
Plan II |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
04.26.16 | 04.30.17 | 12.30.22 | 8,724,733 | 2,375,000 | 9.21 | 56.00 | 61.48 | |||||||
05.31.16 | 05.31.17 | 12.30.22 | 3,351,220 | 1,327,100 | 10.97 | 46.68 | 50.85 | |||||||
03.30.17 | 03.30.18 | 12.29.23 | 863,528 | 193,045 | 9.45 | 38.43 | 40.59 | |||||||
12,939,481 | 3,895,145 | |||||||||||||
21,805,209 | 6,157,454 |
(1) Amounts expressed in Brazilian Reais.
24.2. Stock options plan – Restricted shares
In 2018, 2,857,394 restricted shares were granted in accordance with the plan that wereapproved by an Ordinary and a Special Meeting of Shareholders on April 26, 2018. The purpose of this plan is: (i) to stimulate the expansion, success and achievement of the Company's social objectives; (ii) to align the interests of the Company's shareholders with those of the eligible persons; and (iii) to enable the Company and the companies under its control to attract and retain the persons related to it.
135
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
Under the terms of the plan, directors may be elected, statutory or not, and people occupying other positions of the Company or subsidiaries. The granting of rights to beneficiaries is conditional on: (i) continuity of the employment relationship with the Company for 3 years after the grant date; (ii) achievement of a minimum shareholder return defined by the Board of Directors in the granting agreements and determined at the end of the vesting period; or (iii) any other conditions determined by the Board of Directors in each grant made.
Each year, or whenever it deems it appropriate, the Board of Directors shall approve the granting of restricted shares, electing the beneficiaries in favor of which the Company will sell the restricted shares, establishing the terms, quantities and conditions of acquisition of rights related to restricted shares.
The total number of restricted shares that may be granted under the plan shall not exceed 0.5% of the registered common shares, in book-entry form without par value, representing the Company's total share capital.
Date | Quantity | Grant (1) | ||||||
Grant | Term of acquisition of the right | Shares granted | Outstanding shares | Fair value of the shares | ||||
Restricted shares plan |
|
|
|
|
|
|
|
|
08.31.17 | 08.31.19 | 716,846 | 250,334 | 41.85 | ||||
04.26.18 | 04.26.20 | 276,000 | 276,000 | 22.29 | ||||
06.14.18 | 06.14.20 | 270,000 | 270,000 | 20.00 | ||||
10.01.18 | 10.01.20 | 2,311,394 | 2,294,717 | 21.44 | ||||
3,574,240 | 3,091,051 |
136
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
24.3. Rollforward of the stock options plan and outstanding granted options
The rollforward of the outstanding granted options for the year ended December 31, 2018 is presented as follows:
Consolidated | ||
Outstanding options/shares as of December 31, 2017 | 12,872,189 | |
Issued - grant of 2018 | ||
June 2018 - (Restricted shares plan) | 270,000 | |
April 2018 - (Restricted shares plan) | 276,000 | |
May 2018 | 150,000 | |
October 2018 | 2,311,394 | |
Antecipated transfer | ||
Antecipated transfer on april 2018 (Restricted shares plan) | (200,100) | |
Exercised: | ||
Exercised on December of 2018 (Restricted shares plan) | (214) | |
Exercised on December of 2017 (Restricted shares plan) | (76,163) | |
Forfeiture: | ||
Grant of 2018 | (150,000) | |
Grant of 2017 | (733,168) | |
Grant of 2017 (Restricted shares) | (396,786) | |
Grant of 2016 | (2,976,160) | |
Grant of 2014 | (1,917,974) | |
Grant of 2014 | (75,645) | |
Grant of 2013 | (304,968) | |
Outstanding options/shares as of December 31, 2018 | 9,048,405 |
The weighted average exercise prices of the outstanding options conditioned to services is R$60.05 (sixty Brazilian Reais and five cents), and the weighted average of the remaining vesting period is 35 months.
The Company records as capital reserve in shareholders’ equity the fair value of the options in the amount of R$262,306 (R$261,836 as of December 31, 2017). In the statement of income in the year ended December 31, 2018 the amount recognized as expense was R$470 (R$25,628 as of December 31, 2017).
During the year ended on December 31, 2018, no executive exercised stock options.
137
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
24.4. Fair Value Measurement
The weighted average fair value of options outstanding as of December 31, 2018 was R$10.11 (ten Brazilian Reais and eleven cents) (R$11.36 as of December 31, 2017). The fair value of the stock options was measured using the Black-Scholes pricing model, based on the following assumptions:
12.31.18 | ||||
Plan I | Plan II | |||
Expected maturity of the option: | ||||
Exercise in the 1st year | 3.0 years | 3.5 years | ||
Exercise in the 2nd year | 3.5 years | 4.0 years | ||
Exercise in the 3rd year | 4.0 years | 4.5 years | ||
Exercise in the 4th year | - | 5.0 years | ||
Risk-free interest rate | 5.86% | 6.34% | ||
Volatility | 25.38% | 27.43% | ||
Expected dividends over shares | 1.16% | 2.43% | ||
Expected inflation rate | 4.00% | 3.89% |
24.5. Expected period
The expected period is that in which it is believed that the options will be exercised and was determined under the assumption that the beneficiaries will exercise their options at the limit of the exercise period.
24.6. Risk-free interest rate
The Company uses as risk-free interest rate the National Treasury Bond (“NTN-B”) available on the date of calculation and with maturity equivalent to the terms of the option.
24.7. Volatility
The estimated volatility took into account the weighting of the trading history of the Company’s shares.
24.8. Expected dividends
The percentage of dividends used is based on the average payment of dividends per share in relation to the market value of the shares for the past four years.
138
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
24.9. Expected inflation rate
The expected average inflation rate is based on estimated IPCA by Central Bank of Brazil, considering the remaining average terms of the option.
25. EMPLOYEES BENEFITS PLANS
25.1. Pension plans
The Company sponsors pension plans for its employees and executives as presented below:
Plan | Modality | Adhesions | ||
Plan I | Defined Benefit | Closed | ||
Plan II | Defined Benefit | Closed | ||
Plan III | Defined Contribution | Open | ||
FAF | Defined Benefit | Closed |
These plans are managed by BRF Previdência a pension fund entity of non-economic nature and non-profit, through its Deliberative Board which is responsible for defining pension premises and policies, as well as establishing fundamentals guidelines and organization, operation and management rules. The Deliberative Board is composed of representatives from the sponsor and participants, the proportion of 2/3 and 1/3 respectively.
a. Defined benefit plans
Plan I and II are structured as defined benefit during the accumulation of mathematics provisions with option to change the account balance to be applicable in lifetime monthly income on the grant date benefit. The main actuarial risks are (i) survival time over the ones set out in the mortality tables and (ii) actual return on equity below the actual discount rate.
The main purpose of Fundação Attílio Francisco Xavier Fontana (“FAF”) plan is to supplement the benefit paid by the Brazilian Social Security (“INSS – Instituto Nacional de Securidade Social”), calculated proportionally according to the length of service performed and in line with the type of retirement. The main actuarial risks are (i) survival time over the ones set out in the mortality tables, (ii) turnover lower than expected, (iii) salary growth higher than expected, (iv) actual return on assets below the actual discount rate, (v) amendment of the rules of social security and actual family composition of the retired employee or executive different from the established assumption.
139
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
In plans I and II, the contributions performed by the participants are made by the sponsor in equal basic contributions. In the Plan FAF, the contribution is made through a percentage actuarially defined for the participant and the sponsor. The actuarial calculations of the plans managed by BRF Previdência are made by independent actuaries, on an annual basis, according to the rules in force.
In case of a deficit result in plans, it must be supported by the sponsor, participants and beneficiaries, in the proportion of their contributions.
The economic benefit presented as an asset, considers only the part of the surplus that is actually recoverable. The form of recovery of the surplus of the plans will be through reductions in future contributions.
On December 31, 2018, the Deliberative Council and the competent regulatory body approved the incorporation of Plan I by Plan II, preserving the acquired rights of the assistants linked to the Plans and the accumulated right. The merger was motivated by the fact that these are plans with identical structure, closed for new accessions and considering that the sponsors belong to the same economic group.
b. Defined contribution plan
Plan III is a defined contribution plan, where contributions are known and the benefit amount depends directly on the contributions made by participants and sponsors, time of contribution and of the result obtained through investment of contributions. The contributions are made on a 1 to 1 basis (the contributions of the sponsor are equal to the basic contributions of the participants) and that may vary from 0.7% to 7.0% according to the salary range of the participant. The contributions made by the Company in the years ended December 31, 2018 and December 31, 2017 amounted R$18,708 and R$17,511 respectively. On December 31, 2018, the plan has 34,975 participants (33,551 participants as of December 31, 2017).
If participants of the plans I, II and III end the employment relationship with the sponsor, the balance formed by the contributions of the sponsor not used for the payment of benefits, will form a fund of overage of contributions that may be used to compensate the future contributions of the sponsor.
140
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
c. Rollforward of defined benefit plans
The assets and actuarial liabilities are presented below:
141
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
Consolidated | |||||||
FAF | Plan I and II | ||||||
12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | ||||
Composition of actuarial assets and liabilities | |||||||
Present value of actuarial liabilities | 2,498,564 | 2,275,862 | 17,447 | 16,009 | |||
Fair value of assets | (3,193,931) | (3,077,392) | (27,819) | (26,682) | |||
(Surplus) Deficit | (695,367) | (801,530) | (10,372) | (10,673) | |||
Irrecoverable surplus - (asset ceiling) | 695,367 | 801,530 | 8,502 | 8,452 | |||
Net actuarial (assets) liabilities | - | - | (1,870) | (2,221) | |||
Rollforward of irrecoverable surplus | |||||||
Beginning balance of irrecoverable surplus | 801,530 | 838,331 | 8,452 | 8,087 | |||
Interest on irrecoverable surplus | 78,069 | 93,893 | 821 | 910 | |||
Changes in irrecoverable surplus during the year | (184,232) | (130,694) | (771) | (545) | |||
Ending balance of irrecoverable surplus | 695,367 | 801,530 | 8,502 | 8,452 | |||
Rollforward of present value of actuarial liabilities | |||||||
Beginning balance of the present value of liabilities | 2,275,862 | 2,000,331 | 16,009 | 15,215 | |||
Interest on actuarial obligations | 215,403 | 217,325 | 1,497 | 1,642 | |||
Current service cost | 27,972 | 26,832 | - | - | |||
Benefit paid | (129,057) | (117,543) | (1,276) | (1,489) | |||
Actuarial losses - experience | 35,950 | (48,666) | 782 | (592) | |||
Actuarial losses - hypothesis | 72,434 | 197,583 | 435 | 1,233 | |||
Ending balance of actuarial liabilities | 2,498,564 | 2,275,862 | 17,447 | 16,009 | |||
Rollforward of fair value assets | |||||||
Beginning balance of the fair value of plan assets | (3,077,392) | (2,838,662) | (26,682) | (26,452) | |||
Interest income on assets plan | (293,472) | (311,238) | (2,534) | (2,907) | |||
Benefit paid | 129,057 | 117,543 | 1,276 | 1,489 | |||
Return on assets higher (lower) than projection | 47,876 | (45,035) | 121 | 1,188 | |||
Ending balance of fair value assets | (3,193,931) | (3,077,392) | (27,819) | (26,682) | |||
Rollforward of comprehensive income | |||||||
Beginning balance | 26,812 | 23,321 | (1,284) | (2,075) | |||
Reversion to statement of income | (26,812) | (23,321) | 1,284 | 2,075 | |||
Actuarial gains (losses) | (108,384) | (148,917) | (1,217) | (641) | |||
Return on assets higher (lower) than projection | (47,876) | 45,035 | (121) | (1,188) | |||
Changes on irrecoverable surplus | 184,232 | 130,694 | 771 | 545 | |||
Ending balance of comprehensive income | 27,972 | 26,812 | (567) | (1,284) | |||
Costs recognized in statement of income | |||||||
Current service costs | (27,972) | (26,832) | - | - | |||
Interest on actuarial obligations | (215,403) | (217,325) | (1,497) | (1,642) | |||
Projected return on assets | 293,472 | 311,238 | 2,534 | 2,907 | |||
Interest on irrecoverable surplus | (78,069) | (93,893) | (821) | (910) | |||
Costs recognized in statement of income | (27,972) | (26,812) | 216 | 355 | |||
Estimated costs for the next year | |||||||
Costs of defined benefit | (27,972) | (27,972) | 216 | 216 | |||
Estimated costs for the next year | (27,972) | (27,972) | 216 | 216 |
d. Actuarial assumptions and demographic data
The main actuarial assumptions and demographic data used in the actuarial calculations are summarized below:
142
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
Consolidated | |||||||
FAF | Plan I e II | ||||||
12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | ||||
Actuarial assumptions | |||||||
Economic hypothesis | |||||||
Discount rate | 9.22% | 9.74% | 9.19% | 9.72% | |||
Inflation rate | 4.00% | 4.25% | 4.00% | 4.25% | |||
Wage growth rate | 4.68% | 4.93% | N/A | N/A | |||
Demographic hypothesis | |||||||
Schedule of mortality | AT-2000 | AT-2000 | AT-2000 | AT-2000 | |||
Schedule of disabled mortality | RRB-1983 | RRB-1983 | RRB-1983 | RRB-1983 | |||
Demographic data | |||||||
Number of active participants | 7,137 | 7,924 | - | - | |||
Number of participants in direct proportional benefit | 30 | 10 | - | - | |||
Number of assisted beneficiary participants | 6,498 | 6,233 | 51 | 51 |
e. The composition of the investment portfolios
The composition of the investment portfolios are presented below:
FAF | Plans I and II | |||||||||||||||
12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | |||||||||||||
Composition of the fund's portfolio | ||||||||||||||||
Fixed income | 2,306,657 | 72.2% | 2,238,139 | 72.7% | 24,021 | 86.4% | 23,065 | 86.4% | ||||||||
Variable income | 362,511 | 11.3% | 363,624 | 11.8% | 2,260 | 8.1% | 2,491 | 9.3% | ||||||||
Real estate | 271,165 | 8.5% | 197,692 | 6.4% | - | - | - | - | ||||||||
Structured investments | 233,476 | 7.3% | 257,530 | 8.4% | 1,472 | 5.3% | 1,082 | 4.1% | ||||||||
Transactions with participants | 20,122 | 0.7% | 20,407 | 0.7% | 66 | 0.2% | 44 | 0.2% | ||||||||
3,193,931 | 100.0% | 3,077,392 | 100.0% | 27,819 | 100.0% | 26,682 | 100.0% | |||||||||
% of nominal return on assets | 9.36% | 10.90% | 7.50% | 8.92% |
f. Forecast and average term of payments of obligations
The following amounts represent the expected benefit payments for future years and the average duration of the plan obligations:
FAF | Plans I and II | ||
2019 | 141,424 | 1,310 | |
2020 | 150,629 | 1,355 | |
2021 | 161,810 | 1,400 | |
2022 | 172,563 | 1,447 | |
2023 | 183,291 | 1,492 | |
2024 onwards | 1,093,663 | 8,113 |
g. Sensitivity analysis of defined benefit plan - FAF
The quantitative sensitivity analysis regarding the relevant assumptions of defined benefit plan – FAF on December 31, 2018 is presented below:
143
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
Assumptions utilized | Variation of (+1%) | Variation of (-1%) | ||||||||
Relevant assumptions | Average rate | Actuarial liabilities (1) | Average rate | Actuarial liabilities (1) | ||||||
Benefit plan - FAF | ||||||||||
Discount rate | 9.22% | 10.22% | (263,140) | 8.22% | 321,660 | |||||
Wage growth rate | 4.68% | 5.68% | 79,917 | 3.68% | (54,751) |
(1) Variation of actuarial liabilities.
25.2. Employee benefits: description and characteristics of benefits and associated risks
Parent company | Consolidated | ||||||
Liabilities | Liabilities | ||||||
12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | ||||
Medical assistance | 149,046 | 132,495 | 149,046 | 132,845 | |||
F.G.T.S. Penalty (1) | 167,588 | 142,673 | 167,588 | 161,342 | |||
Award for length of service | 55,134 | 44,640 | 55,134 | 49,328 | |||
Other | 32,597 | 28,071 | 96,383 | 84,770 | |||
404,365 | 347,879 | 468,151 | 428,285 | ||||
Current | 91,010 | 76,610 | 94,728 | 85,185 | |||
Non-current | 313,355 | 271,269 | 373,423 | 343,100 |
(1) FGTS – Government Severance Indemnity Fund for Employees
The Company offers the following post-employment and other employee benefits plans in addition to the pension plans, which are measured by actuarial calculation and recognized in the financial statement:
a. F.G.T.S. retirement related penalty
As settled by the Regional Labor Court (“TRT”) on April 20, 2007, retirement does not affect the employment contract between the Company and its employees. The benefit paid is equivalent to 50% of F.G.T.S being 40% corresponding to a penalty and 10% of social contribution. Main actuarial risks related are (i) survival time over the ones set out in the mortality tables, (ii) turnover lower than expected and (iii) salary growth higher than expected.
b. Medical Plan
The Company offers to the retired employee according to the Law No. 9,656/98 a medical plan with fixed contribution, which guarantees to the retired employee that contributed to the health plan by reason of employment relationship, for at least 10 years, the right of maintenance as beneficiary, on the same conditions of coverage enjoyed when the employment contract was in force. Main actuarial risks related are (i) survival time over the ones set out in the mortality tables, (ii) turnover lower thanexpected and (iii) medical costs growth higher than expected.
144
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
c. Award for length of service
The Company usually rewards employees that attain at least 10 years of services rendered and subsequently every 5 years, with an additional remuneration ranging from 1 to 5 times current salaries at the date of the event (the longer the service time the higher the remuneration), provided they remain as active employees. Main actuarial risks related are (i) survival time over the ones set out in the mortality tables, (ii) turnover lower than expected and (iii) salary growth higher than expected.
d. Retirement compensation
On retirement, employees with over 10 years of service to the Company are eligible for additional compensation from 1 to 2 current wages in force at the time of retirement. Main actuarial risks related are (i) survival time higher than the ones set out in the mortality tables, (ii) turnover lower than expected and (iii) salary growth higher than expected.
e. Life insurance
The Company offers life insurance benefit to the employees who, at the time of their termination, are retired and during the employment contract opted for the insurance. For the employees with 10-20 years of service, the maintenance period of insurance is 2 years, from 21 years of service, the period is 3 years. Main actuarial risks related are (i) survival time higher than the ones set out in the mortality tables, (ii) turnover lower than expected and (iii) salary growth higher than expected.
f. Rollforward of post-employment plans
The rollforward of actuarial liabilities related to other benefits, prepared based on actuarial report reviewed by Management, are as follows:
145
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
Consolidated | ||||||||||||||||
Medical plan | F.G.T.S. penalty | Award for length of service | Others (1) | |||||||||||||
12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | |||||||||
Composition of actuarial liabilities | ||||||||||||||||
Present value of actuarial liabilities | 149,046 | 132,845 | 167,588 | 161,342 | 55,134 | 49,328 | 96,383 | 84,770 | ||||||||
Net actuarial liabilities | 149,046 | 132,845 | 167,588 | 161,342 | 55,134 | 49,328 | 96,383 | 84,770 | ||||||||
Rollforward of present value of actuarial liabilities | ||||||||||||||||
Beginning balance of present value of actuarial liabilities | 132,845 | 112,320 | 161,342 | 137,190 | 49,328 | 52,018 | 84,770 | 82,135 | ||||||||
Interest on actuarial liabilities | 12,705 | 12,322 | 12,239 | 13,165 | 4,033 | 5,138 | 2,545 | 2,867 | ||||||||
Current service costs | 207 | 201 | 6,514 | 5,953 | 2,096 | 2,090 | 751 | 867 | ||||||||
Past service costs - changes in plan | - | 2,914 | - | - | - | - | - | - | ||||||||
Benefits paid directly by the Company | (6,550) | (1,121) | (20,107) | (16,601) | (9,738) | (9,454) | (6,746) | (4,105) | ||||||||
Present value of actuarial liabilities calculated in 2018 | - | - | - | - | - | - | 10,214 | - | ||||||||
Actuarial (gains) losses - experience | 5,449 | (5,119) | 10,698 | 14,841 | 9,578 | (46) | 4,940 | 2,049 | ||||||||
Actuarial (gains) losses - demographic hypothesis | - | (2,396) | (5,945) | (4,311) | (739) | (1,780) | (943) | (755) | ||||||||
Actuarial losses - economic hypothesis | 4,390 | 13,724 | 2,847 | 11,105 | 576 | 1,362 | 852 | 1,712 | ||||||||
Ending balance of liabilities | 149,046 | 132,845 | 167,588 | 161,342 | 55,134 | 49,328 | # | 96,383 | 84,770 | |||||||
Rollforward of fair value assets | ||||||||||||||||
Benefits paid directly by the Company | 6,550 | 1,121 | 20,107 | 16,601 | 9,738 | 9,454 | 6,746 | 4,105 | ||||||||
Contributions of the sponsor | (6,550) | (1,121) | (20,107) | (16,601) | (9,738) | (9,454) | (6,746) | (4,105) | ||||||||
Ending balance of fair value of assets | - | - | - | - | - | - | - | - | ||||||||
Rollforward of comprehensive income | ||||||||||||||||
Beginning balance | (37,406) | (31,196) | (86,497) | (64,862) | (37,510) | (37,974) | (15,950) | (12,944) | ||||||||
Actuarial gains (losses) | (9,839) | (6,209) | (7,600) | (21,635) | (9,415) | 464 | (4,849) | (3,006) | ||||||||
Ending balance of comprehensive income | (47,245) | (37,405) | (94,097) | (86,497) | (46,925) | (37,510) | (20,799) | (15,950) | ||||||||
Costs recognized in statement of income | ||||||||||||||||
Interest on actuarial liabilities | (12,705) | (12,322) | (12,239) | (13,165) | (4,033) | (5,138) | (2,545) | (2,867) | ||||||||
Current service costs | (207) | (201) | (6,514) | (5,953) | (2,096) | (2,090) | (751) | (867) | ||||||||
Past service costs | - | (2,913) | - | - | - | - | - | - | ||||||||
Cost recognized in statement of income | (12,912) | (15,436) | (18,753) | (19,118) | (6,129) | (7,228) | (3,296) | (3,734) | ||||||||
Estimated costs for the next year | ||||||||||||||||
Current service costs | - | (207) | (6,471) | (6,514) | (2,574) | (2,096) | (8,061) | (751) | ||||||||
Interest on actuarial liabilities | (13,503) | (12,705) | (11,840) | (12,239) | (4,366) | (4,033) | (4,192) | (2,545) | ||||||||
Estimated costs for the next year | (13,503) | (12,912) | (18,311) | (18,753) | (6,940) | (6,129) | (12,253) | (3,296) |
(1) Considers the sums of the retirement compensation and life insurance benefits.
g. Actuarial assumptions and demographic data
The main actuarial assumptions and demographic data used in the actuarial calculations are summarized below:
Consolidated | ||||||||||||
Medical plan | F.G.T.S. penalty | Others (1) | ||||||||||
Actuarial assumptions | 12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | ||||||
Economic hypothesis | ||||||||||||
Discount rate | 9.26% | 9.76% | 8.76% | 9.30% | 8.76% | |||||||
Inflation rate | 4.00% | 4.25% | 4.00% | 4.25% | 4.00% | 4.25% | ||||||
Medical inflation | 7.12% | 7.38% | N/A | N/A | N/A | N/A | ||||||
Wage growth rate | N/A | N/A | 5.18% | 4.25% | 5.18% | 4.25% | ||||||
F.G.T.S. balance growth | N/A | N/A | 4.00% | 4.00% | N/A | N/A | ||||||
Medical plan | F.G.T.S. penalty | |||||||||||
Actuarial assumptions | 12.31.18 |
| 12.31.17 | 12.31.18 |
| 12.31.17 | ||||||
Demographic hypothesis | ||||||||||||
Schedule of mortality | AT-2000 | AT-2000 | AT-2000 | AT-2000 | ||||||||
Schedule of disabled | N/A | N/A | RRB-44 | RRB-44 | ||||||||
Schedule of turnover - BRF's historical | 2,018 | 2,017 | 2,018 | 2,017 | ||||||||
Demoraphic data | ||||||||||||
Number of active participants | 1,141 | 1,287 | 83,966 | 86,817 | ||||||||
Number of assisted beneficiary participants | 609 | 643 | - | - |
146
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
(1) Includes retirement compensation and life insurance benefits.
h. Forecast and average duration of payments of obligations
The following amounts represent the expected benefit payments for future years (10 years), from the obligation of benefits granted and the average duration of the plan obligations:
Payments | Medical plan | F.G.T.S. penalty | Award for length of service | Others | Total | |||||
2019 | 6,451 | 64,854 | 10,591 | 12,832 | 94,728 | |||||
2020 | 7,067 | 15,314 | 8,861 | 7,579 | 38,821 | |||||
2021 | 7,728 | 16,961 | 8,891 | 8,758 | 42,338 | |||||
2022 | 8,387 | 15,837 | 6,452 | 8,227 | 38,903 | |||||
2023 | 9,120 | 18,492 | 7,244 | 8,914 | 43,770 | |||||
2024 to 2028 | 58,722 | 81,644 | 34,359 | 49,688 | 224,413 | |||||
Weighted average duration - in years | 14.00 | 3.78 | 4.26 | 8.25 | 6.71 |
i. Sensitivity analysis of post-employment plans
The Company made the sensitivity analysis regarding the relevant assumptions of the plans on December 31, 2018, as presented below:
Assumptions utilized | (+) Variation | (-) Variation | ||||||||
Relevant assumptions | Average (%) |
| Actuarial liabilities (1) | Average (%) |
| Actuarial liabilities (1) | ||||
Medical plan | ||||||||||
Discount rate | 9.26% | 10.26% | (17,028) | 8.26% | 20,723 | |||||
Medical inflation | 7.12% | 8.12% | 20,306 | 6.12% | (16,970) | |||||
F.G.T.S. penalty | ||||||||||
Discount rate | 8.76% | 9.76% | (5,548) | 7.76% | 6,135 | |||||
Wage growth rate | 5.18% | 6.18% | 950 | 4.18% | (886) | |||||
Turnover | Historical | +3% | (18,857) | -3% | 25,794 |
(1) Variation of actuarial liabilities.
26. PROVISION FOR TAX, CIVIL AND LABOR RISKS
The Company and its subsidiaries are involved in certain legal proceedings arising from the normal course of business, which include civil,commercial and other processes (including environmental and regulatory proceedings), tax, social security and labor risks.
The Company classifies the risk of unfavorable decisions in the legal proceedings as “probable”, “possible” or “remote”. The Company records provisions for losses classified as "probable", as determined by the Company’s Management, based on legal advice, which reflect the estimated probable losses. Contingencies classified as "possible" loss are disclosed (but not provisioned) based on reasonably estimated amounts.
147
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
The Company’s management believes that, based on the elements existing at the base date of these financial statements, its provision for tax, civil, commercial and other, as well for labor risks, accounted for according to CPC 25 / IAS 37 is sufficient to cover estimated losses related to its legal proceedings, as set forth below.
26.1. Contingencies for probable losses
The rollforward of the provisions for tax, civil, commercial and other, and labor risks is summarized below:
Parent company | |||||||||||||||||||
Tax | Labor | Civil, commercial and other | Contingent liabilities | Total | |||||||||||||||
12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | ||||||||||
Beginning balance | 272,879 | 256,461 | 508,923 | 434,397 | 363,138 | 117,325 | 370,400 | 496,034 | 1,515,340 | 1,304,217 | |||||||||
Additions | 29,824 | 150,394 | 312,407 | 519,669 | 39,315 | 118,536 | - | - | 381,546 | 788,599 | |||||||||
Reversals | (107,034) | (33,535) | (222,304) | (241,678) | (142,893) | (67,039) | (769) | (125,634) | (473,000) | (467,886) | |||||||||
Payments | (4,935) | (127,016) | (299,515) | (326,985) | (25,533) | (43,329) | - | - | (329,983) | (497,330) | |||||||||
Price index update | 39,416 | 26,575 | 102,910 | 123,520 | 30,303 | 237,645 | - | - | 172,629 | 387,740 | |||||||||
Incorporation of companies (1) | - | - | 64,292 | - | 15,261 | - | - | - | 79,553 | - | |||||||||
Ending balance | 230,150 | 272,879 | 466,713 | 508,923 | 279,591 | 363,138 | 369,631 | 370,400 | 1,346,085 | 1,515,340 | |||||||||
Current | 491,756 | 516,597 | |||||||||||||||||
Non-current | 854,329 | 998,743 |
(1) Amounts arising from the incorporation of SHB (note 1.7).
Consolidated | |||||||||||||||||||
Tax | Labor | Civil, commercial and other | Contingent liabilities | Total | |||||||||||||||
12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | ||||||||||
Beginning balance | 303,388 | 281,715 | 691,724 | 479,742 | 407,451 | 122,504 | 370,642 | 499,910 | 1,773,205 | 1,383,871 | |||||||||
Additions | 42,280 | 177,087 | 390,877 | 704,000 | 58,100 | 164,057 | - | 10,979 | 491,257 | 1,056,123 | |||||||||
Business combination | - | - | - | 1,754 | - | - | - | - | - | 1,754 | |||||||||
Reversals | (128,945) | (50,805) | (325,790) | (270,804) | (169,025) | (75,102) | (769) | (139,503) | (624,529) | (536,214) | |||||||||
Payments | (4,972) | (127,017) | (324,643) | (338,934) | (25,991) | (43,334) | - | - | (355,606) | (509,285) | |||||||||
Price index update | 39,415 | 26,575 | 120,476 | 128,529 | 32,337 | 241,986 | - | - | 192,228 | 397,090 | |||||||||
Exchange rate variation | (8,452) | (4,167) | (37,894) | (12,563) | (8,921) | (2,660) | (100) | (744) | (55,367) | (20,134) | |||||||||
Transfer - held for sale (1) | (12,565) | - | (46,237) | - | (11,993) | - | (142) | - | (70,937) | - | |||||||||
Ending balance | 230,149 | 303,388 | 468,513 | 691,724 | 281,958 | 407,451 | 369,631 | 370,642 | 1,350,251 | 1,773,205 | |||||||||
Current | 495,584 | 536,089 | |||||||||||||||||
Non-current | 854,667 | 1,237,116 |
(1) Amounts transferred to liabilitiesdirectly associated with the assets held for sale (note 12).
26.1.1 Tax
The tax contingencies consolidated and classified as probable losses relate to the following main legal proceedings:
ICMS: The Company discusses administratively and judicially judgments of ICMS arising from the ICMS tax credits on mainly related to the acquisition of use and consumption materials, property, plant and equipment, communication service, presumed credit, alleged underpayment of tax rate differential, tax rebate, isolated fine and others, in amount to R$100,731 (R$153,956 as of December 31, 2017).
148
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
PIS and COFINS: The Company discusses administratively and judicially the use of certain tax credits arising from the acquisition of raw materials to offset federal taxes, which amount is R$125,123 (R$106,548 as of December 31, 2017).
Other tax contingencies: The Company recorded other provisions for tax claims related to payment of social security contributions (SAT, INCRA, FUNRURAL, Education Salary), contributions due to joint liability for services provided by third parties, through assignment
of labor debits included in REFIS with deposit awaiting consolidation and conversion into payment, in addition to debits as tax debts arising from differences of accessory obligations, import taxes, industrialized products tax, payment of compensation fees and
others. In view of the amnesty payments the provision amounted in R$47,527 (R$51,580 as of December 31, 2017).
26.1.2 Labor
The Company is defendant in several labor claims individual or with the Public Minister, mainly related to overtime, time spent by the workers for changing uniforms, in-commuting hours, rest breaks, occupational accidents, among others. None of these labor claims is individually significant. The Company recorded a provision based on past history of payments and loss prognosis.
26.1.3 Civil, commercial and others
Civil contingencies are mainly related to claims relating to traffic accidents, moral and property damage, physical casualties, consumer relations, allegations contractual breaches, and allegations of noncompliance with legal obligations, among others.
26.1.3.1 Investigation by the Turkish Competition Board
The Turkish Competition Board initiated an investigation for the determination of whether the undertakings engaged in the industry of chicken meat production including Banvit, an indirect subsidiary of BRF, violated the Turkish Competition Laws by controlling domestic price levels and volumes, and controlling supply in the Aegean region during the period between November 2013 and July 2017.
The Company has received an investigation report and an additional opinion from the competition authority and has submitted three written defenses. An oral hearing before the Competition Board will be held on February 27, 2019. Following the oral hearing, the Competition Board will issue its short form decision within 15 days and later the reasoned decision, which sets out the grounds for the fine, if applicable.
Based on the evidences that are presented in the Investigation Report, in the Additional Opinion and the continuing stance of the Investigation Committee requesting a fine to be imposed on the Company, it can be deemed probable that the Company will receivea fine of some sort. There is still a wide range of possibilities, unclear elements and significant level of uncertainty regarding the calculation of the potential fine amount. Based on the unclear elements and uncertain variables set out, it is not possible to make a precise estimation regarding the exact magnitude of the fine that would be imposed by the Competition Board in case it ultimately resolves that the Company has violated the Competition Law at the end of the Investigation. Accordingly, in the year ended December 31, 2018, no provision related to the subject process was recognized. Additionally, there are clauses in Banvit’s purchase agreement and insurance policy that may cover partially or fully future losses.
149
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
26.2. Contingencies classified as a risk of possible loss
The Company is involved in other tax, civil, labor and social security contingencies, for which losses have been assessed as possible by management with the support from legalcounsel and therefore no provision was recorded. On December 31, 2018 the total amount of the possible contingencies was R$13,965,789 (R$13,278,353 as of December 31, 2017), of which R$369,631 (R$370,642 as of December 31, 2017) was recorded at fair value as a result of business combinations with Sadia according to the requirements of item 23 of CPC 15 / IFRS 3.
26.2.1 Tax
Tax contingencies with a risk of possible loss amounted to R$12,336,852 (R$11,469,911 as of December 31, 2017), from which R$369,631 (R$370,203 as of December 31, 2017) was recorded at fair value as a result of business combination with Sadia, Avex and Dánica group, according to the requirements of item 23 of CPC 15 / IFRS 3.
The most relevant tax cases are set forth below:
Profits earned abroad: The Company was assessed by the Brazilian Internal Revenue Service for alleged underpayment of income tax and social contribution on profits earned by its subsidiaries located abroad, in a total amount of R$524,521 (R$506,285 as of December 31, 2017). The Company’s legal defense is based on the facts that the subsidiaries located abroad are subject exclusively to the full taxation in the countries in which they are based as a result of the treaties signed to avoid double taxation. The total profits earned abroad are disclosed in note 13.3.
Income Tax and Social Contribution: The Company discusses administratively and judicially several tax assessment notices involving compensation of tax losses, refunds and offset of income and social contribution tax credits against other federal tax debts, including credits arising from the Plano Verão legal dispute. Also, on February 05, 2015 BRF received a tax assessment notice, related to the compensation of tax loss carryforwards and negative calculation basis up to limit of 30% when it has incorporatedone of the groups entity during calendar year 2012. The contingent liabilities relative to the subjects discussed totaled R$1,311,087(R$1,276,383 as of December 31, 2017).
150
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
ICMS: The Company is involved in the following disputes associated to the ICMS tax: (i) alleged undue ICMS tax credits generated by tax incentives granted by certain States local rules (“guerra fiscal”) in a total amount of R$1,724,760 (R$1,690,576 as of December 31, 2017); (ii) maintenance of ICMS tax credits on the acquisition of certain products with a reduced tax burden (“cesta básica”) in a total amount of R$816,372 (R$789,864 as of December 31, 2017); (iii) absence of evidence to prove the balances of exports in the amount of R$396,209 (R$333,768 as of December 31, 2017)and (iv) R$2.061.830 (R$1.946.163as of December 31, 2017)related to other ICMS claims.
Related to the disputes involving “guerra fiscal” (item i above), on December, 18, 2017 was published the Agreement ICMS Nº 190/2017 which regulates a Supplementary Law Nº 160/2017, allowing, after the necessary internal regulations of the States, the remission of the debts assessed/executed. On November 01, 2018 was published new ICMS Agreement nº 109/18 which partially amended ICMS Agreement nº 190/17, extending the deadlines for validating tax incentives and remitting debts to 2019.
Related to the “ICMS cesta básica” (item ii above), in a meeting held on October 16, 2014 the Federal Supreme Court ("STF") was favorable to Tax Authority of State of Rio Grande do Sul, in the judgment of the extraordinary appeal No.635,688 submitted by company Santa Lúcia, understanding as improper the integral maintenance of ICMS tax credits on the reduced tax basis of food products that composes the basic food basket. The decision has a wide reflection effect (applicable to all taxpayers). However, there is still a claim for clarification waiting to be judged, requesting more details related to the timing of such decision (i.e. whether the decision will have retrospective effects), which suggests the need to wait for this final decision to recognize the effects on our financial statements.
IPI: The Company discusses administratively and judicially the non-ratification of compensation of IPI credits resulting from purchases of exempted goods, sales to Manaus Free Zone and purchases of supplies of non-taxpayers with PIS and COFINS being some cases having favorable decisions. Such discussed debits totaled the amount of R$445,147 (R$441,748 as of December 31, 2017).
PIS and COFINS: The Company is involved in administrative proceedings regarding (i) offsetting of credits against other federal tax debts, (ii) disputes about the application (or not) of tax exemptions to some of our products (seasoned meats), iii) levied on the sale of certain types of products (non processed meat), (iv) Decrees 2.445 and 2.449 (“semestralidade”) and others in the amount of R$4,363,107 (R$4,001,214 as of December 31, 2017).
Social Security Taxes: The Company is involved in disputes related to social security taxes allegedly due on payments to service providers as well as joint responsibility withcivil construction service providers and others in a total amount of R$244,537 (R$262,933 as of December 31, 2017).
151
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
Other Contingencies: The Company is involved in proceedings regarding to a requirement of a fine of 50% of the compensation amount of PIS/COFINS and IRPJ not approved awaiting final decision of the processes, basis of calculation of social contribution on net income, tax on services and others of several natures, fees, property tax, import tax, IOF, as well as an isolate fine arising from alleged errors on Digital Fiscal Bookkeeping (“EFD”) on 2012, totaling R$449,282 (R$189,996 as of December 31, 2017).
26.2.2 Labor
On December 31, 2017 the contingencies assessed as possible loss totaled R$125,505 (R$139,333 as of December 31, 2017).
26.2.3 Civil
The civil contingencies for which losses were assessed as possible totaled R$1,503,432 (R$1,714,910 as of December 31, 2017) and were mainly related to claims for damages, including moral damages, arising from work accidents, traffic accidents, consumer relations, allegations of contractual noncompliance, allegations of noncompliance with legal obligations, among others.
26.2.4 Other
The Company has been subject to two external investigations, denominated “Carne Fraca Operation” in 2017 and “Trapaça Operation” in 2018, as well as a shareholders class action also in 2018. The development of these processes and the already incurred effects are described in the notes 1.2 and 1.3.
26.3. Contingent Assets
26.3.1 Exclusion of VAT (ICMS) from PIS and COFINS tax base
On March 15, 2017, the Supreme court in the judgment of the Extraordinary Appeal No. 574.706 of the State of Paraná, moved by Import, Export and Oil Industry ("IMCOPA"), established the thesis, with general repercussion, that the ICMS is not part of the tax basis for PIS and COFINS. The judgment of the Extraordinary Appeal it is still pending the assessment of the opposing objections by the Union.
The Company has in its name an estimated contingent asset in the amount of R$954,566,corresponding to PIS / COFINS paid in the past, including ICMS in thecalculation base. In addition, the Company has other actions on the same subject by merged companies, with favorable decisions, whose amounts are already being determined and will be recognized upon final res judicata (note 11.2).
152
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
27. SHAREHOLDERS’ EQUITY
27.1. Capital stock
On December 31, 2018, the capital subscribed and paid by the Company is R$12,553,418, which is composed of 812,473,246 book-entry shares of common stock without par value. The value of the capital stock is net of the public offering expenses of R$92,947.
The Company is authorized to increase the capital stock, irrespective of amendment to the bylaws, up to the limit of 1,000,000,000 common shares, in book-entry form without par value.
27.2. Breakdown of capital stock by nature
Consolidated | |||
12.31.18 | 12.31.17 | ||
Common shares | 812,473,246 | 812,473,246 | |
Treasury shares | (1,057,224) | (1,333,701) | |
Outstanding shares | 811,416,022 | 811,139,545 |
27.3. Rollforward of outstanding shares
Consolidated | ||||
Quantity of outstanding of shares | ||||
12.31.18 | 12.31.17 | |||
Shares at the beggining of the exercise | 811,139,545 | 799,005,245 | ||
Sale of treasury shares | - | 12,134,300 | ||
Anticipated transfer of restricted shares | 276,477 | - | ||
Shares at the end of the exercise | 811,416,022 | 811,139,545 |
153
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
27.4. Treasury shares
Loss absorption | Reserve balances | |||||||||
Limit on | ||||||||||
capital % | 12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | ||||||
Actuarial loss FAF | - | (18,543) | (16,762) | - | - | |||||
Legal reserve | 20 | (101,367) | (438,810) | - | 101,367 | |||||
Capital increase reserve | 20 | - | (30,258) | - | - | |||||
Reserve for tax incentives | - | - | (639,742) | - | - | |||||
(119,910) | (1,125,572) | - | 101,367 |
Legal reserve: On December 31, 2018, the reserve was zero, once R$101,367, partial amount of loss for the year.
27.5. Capital reserve
27.5.1 Capital reserve
Capital Reserves | |||
12.31.18 | 12.31.17 | ||
Result on disposal of shares | (40,660) | (40,660) | |
Granted shares canceled | (32,434) | (32,434) | |
Valuation of stock exchange | 166,192 | 166,192 | |
Shares based payment | 262,306 | 261,829 | |
Goodwill on acquisition of non-controlling entities | (40,534) | (40,534) | |
Acquisition of non-controlling entities | (199,296) | (199,296) | |
Loss on the change in equity interest - Subsidiaries | (220) | - | |
115,354 | 115,097 |
27.5.2Treasury shares
The Company has 1,057,224 shares in treasury, with an average cost of R$53.60 (fifty-three Brazilian Reais and sixty cents) per share, with a market value corresponding to R$23,185.
Consolidated | ||||
Quantity of outstanding of shares | ||||
12.31.18 | 12.31.17 | |||
Shares at the beggining of the exercise | 1,333,701 | 13,468,001 | ||
Sale of treasury shares | - | (12,134,300) | ||
Anticipated transfer of restricted shares | (276,477) | - | ||
Shares at the end of the exercise | 1,057,224 | 1,333,701 |
27.6 Breakdown of the capital by owner
The shareholding position of shareholders holding more than 5% of the voting capital,management and members of the Board of Directors is presented below (unaudited):
154
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
12.31.18 | 12.31.17 | |||||||
Shareholders | Quantity | % | Quantity | % | ||||
Major shareholders | ||||||||
Fundação Petrobras de Seguridade Social - Petros (1) | 93,226,766 | 11.47 | 92,716,266 | 11.41 | ||||
Caixa de Previd. dos Func. Do Banco do Brasil (1) | 86,506,952 | 10.65 | 86,605,452 | 10.66 | ||||
Management | ||||||||
Board of Directors | 6,376,083 | 0.78 | 41,220,470 | 5.07 | ||||
Executives | 31,662 | 0.00 | 157,546 | 0.02 | ||||
Treasury shares | 1,057,224 | 0.13 | 1,333,701 | 0.16 | ||||
Other | 625,274,559 | 76.97 | 590,439,811 | 72.68 | ||||
812,473,246 | 100.00 | 812,473,246 | 100.00 |
(1) The pension funds are controlled by employees that participate in the respective entities.
The Company is bound to arbitration in the Market Arbitration Chamber, as established by the arbitration clause in its bylaws.
28. LOSS PER SHARE
Continued operations | 12.31.18 | 12.31.17 | |
Basic numerator | |||
Loss for the year attributable to controlling shareholders | (2,114,968) | (984,245) | |
Basic denominator | |||
Common shares | 812,473,246 | 812,473,246 | |
Weighted average number of outstanding shares - basic (except treasury shares) | 811,294,251 | 803,559,763 | |
Loss per share basic - R$ | (2.60691) | (1.22486) | |
Diluted numerator | |||
Loss for the year attributable to controlling shareholders | (2,114,968) | (984,245) | |
Diluted denominator | |||
Weighted average number of outstanding shares - basic (except treasury shares) | 811,294,251 | 803,559,763 | |
Weighted average number of outstanding shares - diluted | 811,294,251 | 803,559,763 | |
Loss per share diluted - R$ | (2.60691) | (1.22486) |
155
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
Discontinued operations | 12.31.18 | 12.31.17 | |
Basic numerator | |||
Loss for the year attributable to controlling shareholders | (2,333,093) | (141,327) | |
Basic denominator | |||
Common shares | 812,473,246 | 812,473,246 | |
Weighted average number of outstanding shares - basic (except treasury shares) | 811,294,251 | 803,559,763 | |
Loss per share basic - R$ | (2.87577) | (0.17588) | |
Diluted numerator | |||
Loss for the year attributable to controlling shareholders | (2,333,093) | (141,327) | |
Diluted denominator | |||
Weighted average number of outstanding shares - basic (except treasury shares) | 811,294,251 | 803,559,763 | |
Weighted average number of outstanding shares - diluted | 811,294,251 | 803,559,763 | |
Loss per share diluted - R$ | (2.87577) | (0.17588) |
12.31.18 | 12.31.17 | ||
Basic numerator | |||
Loss for the year attributable to controlling shareholders | (4,448,061) | (1,125,572) | |
Basic denominator | |||
Common shares | 812,473,246 | 812,473,246 | |
Weighted average number of outstanding shares - basic (except treasury shares) | 811,294,251 | 803,559,763 | |
Loss per share basic - R$ | (5.48267) | (1.40073) | |
Diluted numerator | |||
Loss for the year attributable to controlling shareholders | (4,448,061) | (1,125,572) | |
Diluted denominator | |||
Weighted average number of outstanding shares - basic (except treasury shares) | 811,294,251 | 803,559,763 | |
Weighted average number of outstanding shares - diluted | 811,294,251 | 803,559,763 | |
Loss per share diluted - R$ | (5.48267) | (1.40073) |
Diluted result is calculated considering the numbers of dilutive potential ordinary shares (stock options and restricted shares). However, due to loss disclosed for the year ended December 31, 2018 and 2017, the numbers of dilutive potential ordinary shares (stock options) has antidilutive effect and therefore was not considered in the calculation ofdiluted loss per share.
156
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
29. GOVERNMENT GRANTS
The Company has tax benefits related to ICMS for investments granted by the governments of states as follows: Programa de Desenvolvimento Industrial e Comercial de Mato Grosso (“PRODEIC”), Programa de Desenvolvimento do Estado de Pernambuco (“PRODEPE”) and Fundo de Participação e Fomento à Industrialização do Estado de Goiás (“FOMENTAR”). Such incentives are directly associated to the manufacturing facilities operations, job generation and to the economic and social development in the respective states.
On December 31, 2018, this incentive totaled R$174,223 (R$144,362 as of December 31, 2017) composing so, the Reserve for Tax Incentives.
30. RELATED PARTIES – PARENT COMPANY
As part of the Company’s operations, rights and obligations arise between related parties, resulting from transactions of purchase and sale of products, loans agreed based on contracts, on market or commutative conditions for similar transactions.
All the transactions and balances among the Company and its subsidiaries were eliminated in the consolidation and refer to commercial and/or financial transactions.
The price of transactions of the purchase, sale, industrialization, and sharing of costs which are commutative between BRF SA and SHB, were determined based on cost plus tax impacts, in order to preserve the value chain of the companies. As of December 31, 2018, with the incorporation of SHB by BRF S.A. (note 1.7), these transactions will no longer exist.
157
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
30.1. Transactions and balances
The balances of the transactions with the related parties are as follow:
Accounts receivable | Dividends and interest on the shareholders' equity receivable | Loan contracts | Trade accounts payable | Advance for future capital increase | Other rights | Other obligations | |||||||||||||||||||
12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | 12.31.17 | 12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | |||||||||||||
Al-Wafi Food Products Factory LLC | - | - | - | - | - | (70) | (62) | - | - | 30 | 31 | (891) | (945) | ||||||||||||
Avex S.A. | 137,804 | 107,018 | - | - | - | - | - | - | - | - | 25,468 | - | - | ||||||||||||
Banvit | - | - | - | - | - | - | - | - | - | 47 | - | - | - | ||||||||||||
BFF International Ltd. | - | - | - | - | - | - | - | - | - | 2,113 | 1,804 | - | - | ||||||||||||
BRF Al Yasra | - | - | - | - | - | - | - | - | - | - | - | (3,847) | (3,279) | ||||||||||||
BRF Energia S.A. | - | - | 27 | 27 | - | (14,841) | - | 1,205 | 1,205 | - | - | - | - | ||||||||||||
BRF Foods GmbH | 2,558,263 | 350 | - | - | - | - | (52) | - | - | - | - | - | - | ||||||||||||
BRF Foods GmbH - Branch | - | - | - | - | - | - | - | - | - | 719 | 402 | (1,666) | (1,422) | ||||||||||||
BRF Foods LLC | - | - | - | - | - | - | - | - | - | 407 | 397 | - | - | ||||||||||||
BRF Global GmbH | 1,387,910 | 4,700,124 | - | - | - | - | (3,048) | - | - | - | - | (3,700,581) | (1) | (4,793,195) | |||||||||||
BRF GmbH | - | - | - | - | - | - | (15) | - | - | - | - | (1,584) | (1,355) | ||||||||||||
BRF Hong Kong | - | 351 | - | - | - | - | - | - | - | - | - | - | - | ||||||||||||
BRF Pet S.A. | 233 | 76 | 438 | 438 | - | (167) | - | - | - | 3 | - | - | - | ||||||||||||
Campo Austral | 48,722 | 27,548 | - | - | - | - | - | - | - | - | - | - | - | ||||||||||||
Federal Foods | - | - | - | - | - | - | - | - | - | - | - | (78) | (67) | ||||||||||||
Federal Foods Catar | - | - | - | - | - | - | - | - | - | - | - | (135) | (116) | ||||||||||||
FFM Further | - | - | - | - | - | - | - | - | - | 70 | 70 | - | - | ||||||||||||
Highline International Ltd. | - | - | - | - | - | - | - | - | - | - | - | (7,067) | (6,033) | ||||||||||||
One Foods Holdings | - | - | - | - | - | - | - | - | - | 5,444 | 4,266 | - | - | ||||||||||||
Perdigão International Ltd. | - | - | - | - | (33,648) | - | - | - | - | - | - | (870,371) | (1) | (754,402) | |||||||||||
Quickfood S.A. | 19,860 | 9,704 | - | - | - | (111) | (83) | 133,043 | 163,393 | - | - | - | (29,399) | ||||||||||||
Sadia Alimentos S.A. | 16,665 | 16,665 | - | - | - | (134) | (115) | - | - | - | - | - | - | ||||||||||||
Sadia Chile S.A. | 94,789 | 94,620 | - | - | - | - | - | - | - | - | - | - | - | ||||||||||||
Sadia Uruguay S.A. | 6,676 | 6,128 | - | - | - | - | - | - | - | - | - | - | - | ||||||||||||
SHB Com. e Ind. de Alim. S.A | - | 829,303 | - | - | - | - | (36,472) | - | - | - | 294,663 | - | (62,591) | ||||||||||||
UP! Alimentos Ltda. | - | 2,583 | - | 6,190 | - | - | (16,592) | - | - | - | 5,107 | - | (5) | ||||||||||||
VIP S.A. Empreendimentos e Partic. Imob. | - | - | 713 | 697 | - | - | - | - | - | - | - | - | - | ||||||||||||
Wellax Foods Logistics C.P.A.S.U. Lda. | - | - | - | - | - | - | - | - | - | - | 178 | - | - | ||||||||||||
Edavila Consultoria Empresarial Eireli | - | - | - | - | - | - | - | - | - | - | - | - | (40) | ||||||||||||
Total | 4,270,922 | 5,794,470 | 1,178 | 7,352 | (33,648) | (15,323) | (56,439) | 134,248 | 164,598 | 8,833 | 332,386 | (4,586,220) | (5,652,849) |
(1) The amount corresponds to export pre-payment, usual operation between the productive units in Brazil with the wholly-owned subsidiary BRF Global GmbH that operates as a trading in the international market.
158
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
Revenue | Financial results, net | Purchases | |||||||||
12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | ||||||
Avex S.A. | 91,533 | 54,787 | - | - | (584) | (404) | |||||
BRF Energia S.A. | - | - | - | - | (215,248) | (159,830) | |||||
BRF Foods GmbH | - | 2,748 | - | - | - | - | |||||
BRF Global GmbH | 4,384,665 | 5,468,085 | (85,804) | (95,944) | - | - | |||||
BRF Hong Kong | - | 351 | - | - | - | - | |||||
BRF Pet S.A. | 746 | - | - | - | (136) | - | |||||
Campo Austral | 20,307 | 27,537 | - | - | - | - | |||||
Perdigão International Ltd. | - | - | (48,626) | (50,234) | - | - | |||||
Quickfood S.A. | 30,473 | 49,173 | - | - | (1,566) | (1,212) | |||||
Sadia Alimentos S.A. | - | 1,754 | - | - | - | - | |||||
Sadia Chile S.A. | 94,851 | 168,299 | - | - | - | - | |||||
Sadia Uruguay S.A. | 21,376 | 14,601 | - | - | - | - | |||||
SHB Com. e Ind. de Alim. S.A | 3,009,556 | 3,208,139 | - | - | (2,011,972) | (1,974,867) | |||||
UP! Alimentos Ltda. | 11,585 | 16,299 | - | - | (119,305) | (187,980) | |||||
Corall Consultoria LTDA. | - | - | - | - | - | (3) | |||||
Instituto de Desenvolvimento Gerencial S.A. | - | - | - | - | - | (910) | |||||
Edavila Consultoria Empresarial Eireli (1) | - | - | - | - | (40) | (480) | |||||
Total | 7,665,092 | 9,011,773 | (134,430) | (146,178) | (2,348,851) | (2,325,686) |
(1) Entity on which BRF has no equity interest, but have relationship with the Board of Directors, and provided international marketing and innovation advisory services to the Company.
All companies set forth in note 1.1, which describes the relationship with BRF as well as the nature of the operations of each entity, are controlled by BRF, except for UP! Alimentos, PP-BIO and SATS BRF which are associates or joint ventures.
The Company also recorded a liability in the amount of R$1,290 (R$3,749 as of December 31, 2017) related to the fair value of the guarantees offered to BNDES concerning a loan made by Instituto Sadia de Sustentabilidade.
Due to the acquisition of biodigesters from Instituto Sadia de Sustentabilidade, as of December 31, 2018 the Company recorded a payable to this entity of R$4,666 included in other liabilities (R$13,557 as of December 31, 2017).
159
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
The Company entered loans agreement with its subsidiaries. Below is a summary of the balances and rates charged for the transactions at the balance sheet date:
|
| 12.31.18 |
|
| 12.31.17 | |||||||
Counterparty | Interest rate (p.a.) | Interest rate (p.a.) | ||||||||||
Creditor | Debtor | Currency | Balance | Balance | ||||||||
BRF GMBH | BRF Global GmbH | US$ | 1,438,778 | 3.3% | 1,162,950 | 4.3% | ||||||
BRF GMBH | Federal Foods Qatar | US$ | 520,679 | 4.5% | 507,878 | 2.5% | ||||||
BRF Foods Gmbh | BRF Global GmbH | US$ | 520,551 | 2.0% | - | - | ||||||
Sadia International Ltd. | Wellax Food Logistics | US$ | 223,299 | 4.5% | 191,541 | 1.5% | ||||||
Perdigão International Ltd. | BRF Global GmbH | US$ | 205,768 | 3.4% | 154,237 | 3.2% | ||||||
BRF GMBH | BRF Global GmbH | EUR | 161,535 | 2.0% | 148,279 | 0.9% | ||||||
BRF Invicta Food | BRF Invicta | GBP | 118,443 | 1.8% | 172,049 | 2.0% | ||||||
BRF GMBH | Perdigão International Ltd. | US$ | 88,354 | 3.9% | - | - | ||||||
BRF GMBH | BRF Foods LLC | US$ | 83,224 | 2.5% | 69,605 | 2.5% | ||||||
BRF GMBH | Eclipse Holding Cooperatief | US$ | 25,863 | 4.5% | - | - | ||||||
Wellax Food Logistics | BRF GMBH | US$ | 20,826 | 3.9% | - | - | ||||||
BRF GMBH | BFF International | US$ | 15,907 | 1.2% | - | - | ||||||
BRF Holland B.V. | BRF BV | EUR | 15,158 | 0.0% | - | - | ||||||
Qualy B. V. | BRF Holland B.V. | EUR | 12,567 | 0.6% | - | - | ||||||
BRF GMBH | BRF Hong Kong | US$ | 12,454 | 4.5% | 10,233 | 3.6% | ||||||
BRF Foods Gmbh | One Foods Holdings | US$ | 12,092 | 2.7% | 21,782 | 2.7% | ||||||
BRF GMBH | Sadia International Ltd. | US$ | 6,081 | 5.2% | 4,936 | 5.2% | ||||||
Perdigão International Ltd. | BRF Foods LLC | US$ | 4,841 | 1.0% | 4,093 | 1.0% | ||||||
Golden Quality Foods Netherlands | BRF Holland B.V. | EUR | 4,218 | 0.6% | - | - | ||||||
BRF Wrexham | Invicta Food Product | GBP | 3,399 | 1.8% | - | - | ||||||
Wellax Food Logistics | BRF Foods LLC | US$ | 2,702 | 7.0% | 2,189 | 7.0% | ||||||
BRF GMBH | BRF Austria GmbH | US$ | 957 | 4.0% | 786 | 4.0% | ||||||
Campo Austral S.A. | Buenos Aires Fortune S.A. | ARS | 669 | 20.0% | 952 | 20.0% | ||||||
Invicta Foods Limited | Invicta Food Group Limited | GBP | 451 | 1.0% | 402 | 1.0% | ||||||
Eclipse Holding Cooperatief | Eclipse LATAM Holdings | EUR | 333 | 20.0% | 298 | 20.0% | ||||||
Avex S.A. | Buenos Aires Fortune S.A. | ARS | 286 | 20.0% | 91 | 20.0% | ||||||
Golden Quality Foods Netherlands | BRF Holland B.V. | EUR | 53 | 0.6% | 445 | 0.6% | ||||||
Campo Austral S.A. | Itega | ARS | 27 | 20.0% | 39 | 20.0% | ||||||
Perdigão International Ltd. | BRF GMBH | US$ | - | - | 208,908 | 5.2% | ||||||
BRF GmbH | BRF Foods GmbH | US$ | - | - | 107,955 | 1.2% | ||||||
Qualy 5201 B.V. | BRF Holland B.V. | EUR | - | - | 78,258 | 0.6% | ||||||
Perdigão International Ltd. | BRF S.A | US$ | - | - | 33,648 | 1.8% | ||||||
BRF Holland B.V. | BRF Wrexam | GBP | - | - | 2,568 | 3.0% | ||||||
Golden Quality Foods Europe | BRF Holland B.V. | EUR | - | - | 1,789 | 0.6% |
30.2. Other Related Parties
The Company leased properties owned by FAF. For the year ended December 31, 2018, the total amount paid as rent was R$16,924 (R$15,759 in the same period of the previous year). The rent value was set based on market conditions.
160
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
30.3. Granted guarantees
All granted guarantees on behalf of related parties were disclosed in note 19.9.
30.4. Management remuneration
Key management personnel include board members, statutory directors and the head of internal audit.
The total remuneration and benefits paid to these professionals are set forth below:
Consolidated | |||
12.31.18 | 12.31.17 | ||
Salary and profit sharing | 40,082 | 32,796 | |
Short term benefits (1) | 47 | 406 | |
Private pension | 564 | 568 | |
Post-employment benefits | 132 | 246 | |
Termination benefits | 10,070 | 5,825 | |
Share-based payment | 5,621 | 17,010 | |
56,516 | 56,851 |
(1) Comprises: Medical assistance, educational expenses and others.
In addition, the executive officers who are also an integral part of the key management personnel received between remuneration and benefits the total amount of R$38,413 for year ended December 31, 2018 (R$23,038 in the same period of the previous year).
161
(A FREE TRANSLATION INTO ENGLISH OF THE ORIGINAL PREVIOUSLY ISSUED IN PORTUGUESE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
31. NET SALES
Parent company | Consolidated | ||||||
12.31.18 | Restated | 12.31.18 | Restated | ||||
Gross sales | |||||||
Brazil | 20,651,178 | 19,350,023 | 20,651,193 | 19,350,033 | |||
Halal | 3,038,250 | 3,297,856 | 9,040,670 | 7,494,307 | |||
International | 4,563,693 | 6,703,704 | 4,963,062 | 5,796,032 | |||
Other segments | 848,460 | 788,485 | 958,441 | 895,490 | |||
29,101,581 | 30,140,068 | 35,613,366 | 33,535,862 | ||||
Sales deductions | |||||||
Brazil | (4,366,478) | (4,159,570) | (4,366,429) | (4,161,421) | |||
Halal | (112,779) | (87,628) | (747,399) | (800,271) | |||
International | (65,098) | (152,667) | (195,916) | (182,532) | |||
Other segments | (97,680) | (201,061) | (115,201) | (77,478) | |||
(4,642,035) | (4,600,926) | (5,424,945) | (5,221,702) | ||||
|
|
|
| ||||
Net sales | |||||||
Brazil | 16,284,700 | 15,190,453 | 16,284,764 | 15,188,612 | |||
Halal | 2,925,471 | 3,210,228 | 8,293,271 | 6,694,036 | |||
International | 4,498,595 | 6,551,037 | 4,767,146 | 5,613,500 | |||
Other segments | 750,780 | 587,424 | 843,240 | 818,012 | |||
24,459,546 | 25,539,142 | 30,188,421 | 28,314,160 |
32. RESEARCH AND DEVELOPMENT COSTS
Consist of expenditures on internal research and development of new products which are recognized in the statement of income when incurred. The expenditures amounted to R$53,476 for the year ended December 31, 2018 (R$51,958 in the same period of the previous year).
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
33. OTHER OPERATING INCOME (EXPENSES), NET
Parent company | Consolidated | ||||||
12.31.18 | Restated | 12.31.18 | Restated | ||||
Income | |||||||
Recovery of expenses (1) | 282,449 | 118,519 | 285,309 | 119,907 | |||
Provision reversal | 23,362 | 12,986 | 27,920 | 13,428 | |||
Scrap sales | 10,818 | 9,851 | 14,724 | 14,487 | |||
Tax amnesty program ("PERT") | - | 147,664 | - | 147,664 | |||
Other | 38,065 | 51,302 | 59,709 | 87,452 | |||
354,694 | 340,322 | 387,662 | 382,938 | ||||
Expenses | |||||||
Expenses arising from Trapaça Operation (2) | (76,883) | (67,495) | (78,889) | (78,347) | |||
Net loss from the disposals of property, plant and equipment | (50,499) | (18,958) | (59,633) | (21,178) | |||
Rewards and short-term incentive | (22,640) | (100,542) | (47,025) | (101,500) | |||
Costs on business disposed | (27,848) | (36,718) | (27,848) | (36,718) | |||
Other employees benefits | (24,099) | (33,268) | (25,037) | (33,224) | |||
Provision for civil and tax risks | (9,584) | (179,484) | (18,013) | (180,773) | |||
Restructuring | (17,781) | (13,872) | (17,781) | (14,933) | |||
Demobilization expenses | (14,493) | (44,454) | (14,848) | (44,663) | |||
Insurance claims costs | (7,843) | (22,645) | (9,436) | (25,058) | |||
Expected credit losses | (1,801) | (9,697) | (2,664) | (13,646) | |||
Other | (49,813) | (105,794) | (67,177) | (166,365) | |||
(303,284) | (632,927) | (368,351) | (716,405) | ||||
51,410 | (292,605) | 19,311 | (333,467) |
(1) The balance in 2018 refers mainly to recognition of PIS / COFINS to be recoverable in the amount of R$225,600 (note 11.2).
(2) In 2018, expenses arising from Trapaça Operation (note 1.2.2) and in 2017 expenses arising from Carne Fraca Operation (note 1.2.1).
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
34. FINANCIAL INCOME (EXPENSES), NET
Parent company | Consolidated | ||||||
12.31.18 | 12.31.17 | 12.31.18 | Restated | ||||
Financial income | |||||||
Interest on assets | 586,547 | 296,918 | 596,374 | 302,494 | |||
Exchange rate variation on other assets | 30,179 | - | 404,579 | - | |||
Exchange rate variation on net assets of foreign subsidiaries (1) | - | - | 330,523 | 213,460 | |||
Interest on cash and cash equivalents | 121,999 | 231,518 | 159,316 | 267,781 | |||
Interests on financial assets classified as | |||||||
Amortized cost | 84,387 | 61,661 | 98,649 | 61,661 | |||
Fair value throught profit and loss | 13,983 | 19,525 | 14,544 | 19,825 | |||
Fair value throught other comprehensive income | - | - | 651 | 8,209 | |||
Exchange rate variation on marketable securities | 2,832 | 38,884 | 44,996 | - | |||
Gains from derivative transactions, net | 71,770 | - | - | - | |||
Tax amnesty program ("PERT") | - | 302,144 | - | 302,144 | |||
Exchange rate variation on other liabilities | - | - | - | 388,117 | |||
911,697 | 950,650 | 1,649,632 | 1,563,691 | ||||
Financial expenses | |||||||
Interest on loans and financing | (909,387) | (1,044,888) | (1,281,766) | (1,367,685) | |||
Exchange rate variation on loans and financing | (748,252) | (416,822) | (1,265,861) | (190,352) | |||
Adjustment to present value | (228,330) | (247,850) | (277,371) | (283,280) | |||
Interest on liabilities | (101,559) | (418,675) | (245,991) | (469,216) | |||
Losses on derivative transactions, net | - | (269,046) | (212,672) | (117,238) | |||
Exchange rate variation on other liabilities | (691,332) | (105,244) | (169,538) | - | |||
Losses price to be fixed transactions | (103,451) | (19,259) | (112,841) | (22,337) | |||
Taxes on financial transactions | (36,196) | (33,782) | (79,265) | (81,434) | |||
Impairment on marketable securities | - | - | (7,557) | - | |||
Exchange rate variation on other assets | - | (21,680) | - | (593,534) | |||
Exchange rate variation on marketable securities | - | - | - | (94,612) | |||
Interest expenses on loans to related parties | (134,430) | (146,178) | - | - | |||
Others | (120,719) | (48,906) | (238,244) | (225,761) | |||
(3,073,656) | (2,772,330) | (3,891,106) | (3,445,449) | ||||
(2,161,959) | (1,821,680) | (2,241,474) | (1,881,758) |
(1) Refers to gains and losses on translation of assets and liabilities reported by the Company’s subsidiaries whose functional currency is Real.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
35. STATEMENT OF INCOME BY NATURE
The Company has chosen to disclose its statement of income by function and thus presents below the details by nature:
Parent company | Consolidated | ||||||
12.31.18 | 12.31.17 | 12.31.18 | 12.31.17 | ||||
Costs of sales | |||||||
Raw materials and consumables (1) | 15,893,812 | 15,137,832 | 17,790,900 | 15,024,871 | |||
Depreciation | 1,083,341 | 1,108,052 | 1,381,226 | 1,304,955 | |||
Amortization | 58,423 | 67,732 | 78,627 | 91,225 | |||
Salaries and employees benefits | 2,861,458 | 2,995,578 | 3,637,727 | 3,679,921 | |||
Others | 1,709,411 | 1,665,202 | 2,432,273 | 2,500,243 | |||
21,606,445 | 20,974,396 | 25,320,753 | 22,601,215 | ||||
Sales expenses | |||||||
Depreciation | 65,342 | 61,483 | 69,525 | 64,128 | |||
Amortization | 42,584 | 44,927 | 65,575 | 65,478 | |||
Salaries and employees benefits | 933,697 | 975,748 | 1,190,189 | 1,210,708 | |||
Indirect and direct logistics expenses (2) | 1,401,620 | 1,306,812 | 2,260,379 | 2,034,641 | |||
Marketing | 404,731 | 361,537 | 507,979 | 462,090 | |||
Others | 433,495 | 381,133 | 419,947 | 371,638 | |||
3,281,469 | 3,131,640 | 4,513,594 | 4,208,683 | ||||
Administrative expenses | |||||||
Depreciation | 17,088 | 17,199 | 21,453 | 28,108 | |||
Amortization | 37,118 | 33,748 | 78,713 | 38,285 | |||
Salaries and employees benefits | 138,229 | 95,024 | 260,604 | 215,297 | |||
Fees | 23,554 | 24,303 | 28,621 | 30,907 | |||
Others | 85,801 | 65,753 | 161,774 | 149,926 | |||
301,790 | 236,027 | 551,165 | 462,523 | ||||
Impairment Loss on Trade and Other Receivables | |||||||
Impairment Loss on Trade and Other Receivables | 25,327 | 45,948 | 46,269 | 67,471 | |||
25,327 | 45,948 | 46,269 | 67,471 | ||||
Other operating expenses (3) | |||||||
Depreciation | 48,385 | 35,840 | 52,082 | 40,117 | |||
Others | 254,899 | 597,087 | 316,269 | 676,288 | |||
303,284 | 632,927 | 368,351 | 716,405 |
(1) To the year ended December 31, 2018, included expenses in the amount of R$403,300 arising from Trapaça Operation (note 1.2.2), R$195,727 arising from restructuring plan (note 1.4) and R$72,852 arising from strike of trucker drive (note 1.5). To the year ended December 31, 2017, included expenses in the amount of R$81,582 in the parent company and R$83,397 in the consolidated arising from Carne Fraca Operation.
(2) To the year ended December 31, 2018, included expenses in the amount of R$12,365 arising from strike of trucker drive (note 1.5).
(3) The composition of other operating expenses is disclosed in note 33.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
36. INSURANCE COVERAGE
The Company´s insurance policy considers the concentration and relevance of the risks identified in its risk management program. Thus, the contracted insurance coverage are adequate to the entity´s size, activities and for amounts considered reasonable for Management to cover any damages. The Company also follows the orientations provided by its advisors.
12.31.18 | ||||
Assets covered | Coverage | Amount of coverage | ||
Operational risks | Coverage against damage to buildings, facilities, inventory, machinery and equipment, loss of profits | 1,067,508 | ||
Carriage of goods | Coverage of goods in transit and in inventories | 981,460 | ||
Civil responsability | Third party complaints | 309,984 |
Each legal entity has its own coverages, which are not complementary.
37. NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
37.1. CPC 06 / IFRS 16 - Leases
The Company has assessed the estimated impact arising from adoption of this pronouncement in its consolidated financial statement, as described below. We emphasize that the effective impact of adoption on January 01, 2019 may change due to:
· the Company is concluding the implementation, testing and assessment of controls over its new IT systems for the management of leasing agreements;
· the discount rate;
· the lease portfolio structure; and
· an assessment whether it will exercise any renewal options and the choice to use practical expedients and recognition exemptions.
CPC 06 / IFRS 16 introduces a single model for the accounting of leases for the lessee, for which should be recognized a right-of-use the underlying asset and a lease liability representing its obligation to make payments. Assets classified as short-term lease and lease of low-value items, are exempt from this treatment. The accounting model for lessor remains unchanged, meaning the lessors continue to classify the leases asfinancial or operating.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
For leases in which the Company is a lessee, will be recognize new assets and liabilities arising from lease agreements of lands, outgrowers relationship, offices, distribution centers, vehicles, among others. The nature of expenses related to those lease agreements will now change because the Company will recognise a depreciation charge for right-of-use assets and interest expense on lease liabilities.
Previously, the Company recognised operating lease expense on a straight-line basis over the term of the lease.
Based on information currently available, the Company estimates that it will recognise in its consolidated financial statement a right-of-use asset and a lease liability of approximately R$2,700,000 on January 01, 2019. Given the complexity of the topic, until the initial adoption of this pronouncement there may be a variation in relation to the estimated value which the Company estimates to be up to 20% of the amount disclosed herein. The adoption of CPC 06 / IFRS 16 does not affect the Company's ability to comply with any contractual agreements.
At the date of initial adoption, the Company will choose the modified retrospective approach, whose cumulative effect will be recognised as an adjustment to the opening balance of retained earnings on January 01, 2019, with no comparative information.
The Company will choose to use the exemptions provided by the pronouncement for lease agreements whose term expires in 12 months from the date of initial adoption and lease agreements whose underlying asset is low-value.
37.2. ICPC 22 / IFRIC 23 Uncertainty over Income Tax Treatments
The interpretation ICPC 22 / IFRIC 23 clarifies how to apply the recognition and measurement requirements in CPC 32 / IAS 12 when there is uncertainty over income tax treatments. In such a circumstance, the Company shall recognize and measure its current or deferred tax asset or liability applying the requirements in IAS 12 based on taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates determined applying this interpretation. The interpretation is valid from January 1, 2019.
The Company is evaluating the possible effects from the adoption of the interpretation, and until the present moment no relevant impact has been identified.
38. TRANSACTIONS THAT DO NOT INVOLVE CASH OR CASH EQUIVALENTS
The following transactions did not involve cash or cash equivalents during the year ended December 31, 2018:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
(i) Capitalized interest arising from loans: To the year ended December 31, 2018, amounted to R$17,232 in the parent company and R$19,612 in the consolidated (R$31,579 in the parent company and R$33,604 in the in the same period of the previous year); The amount related to discontinued operations is R$12,357 in the consolidated on December 31, 2018 (R$1,788 at December 31, 2007); and
(ii) Addition of financial lease:To the year ended December 31, 2018, amounted to R$42,826 in the parent company and R$48,794 in the consolidated (R$109,859 in the parent company and R$117,257 in the consolidated in the same period of the previous year);
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 (Amounts expressed in thousands of Brazilian Reais, unless otherwise stated) | ![]() |
39. APPROVAL OF THE CONSOLIDATED FINANCIAL STATEMENTS
BOARD OF DIRECTORS | |
Chairman (Non-Independent) | Pedro Pullen Parente |
Vice-Chairman (Independent) | Augusto Marques da Cruz Filho |
Independent Member | Dan Ioschpe |
Independent Member | Flávia Buarque de Almeida |
Independent Member | Francisco Petros O. L. Papathanasiadis |
Independent Member | José Luiz Osório de Almeida Filho |
Independent Member | Luiz Fernando Furlan |
Independent Member | Roberto Antonio Mendes |
Independent Member | Roberto Rodrigues |
Member (Non-Independent) | Walter Malieni Júnior |
FISCAL COUNCIL | |
Chairman | Attílio Guaspari |
Member | Marcus Vinicius Severini |
Member | André Vicentini |
AUDIT COMITTEE (1) | |
Comittee Coordinator (Independent) | Francisco Petros O. L. Papathanasiadis |
Member (Independent) | Roberto Antonio Mendes |
Member (Non-Independent) | Walter Malieni Júnior |
External Member and Financial Specialist | Fernando Maida Dall`Acqua |
External Member | Sérgio Ricardo Silva Rosa |
(1) On January 31, 2019 Sérgio Ricardo Silva Rosa has been replaced by Thomás Tosta de Sá. | |
BOARD OF EXECUTIVE OFFICERS (2) | |
Global Chief Executive Officer | Pedro Pullen Parente |
Global Chief Operating Officer, | Lorival Nogueira Luz Júnior |
Vice President of Finance and Investor Relations | Elcio Ito |
Vice President of Operations and Procurement Officer | Vinícius Barbosa |
(2) On January 31, 2019, approved the appointment of Ivan de Souza Monteiro to the position of Vice President of Finance and Investor Relations, in substitution to Elcio Ito.His investiture is scheduled to take place on March 11, 2019. | |
Marcos Roberto Badollato | Joloir Nieblas Cavichini |
Controller | Accountant – CRC 1SP257406/O-5 |
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FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017 Commentary about the company projections behavior | ![]() |
According to the Material Fact dated June 29, 2018, Management's expectation was that the net leverage calculated as the Net debt/Adjusted EBITDA reached 4.35x at the end of 2018 and 3.00x at the end of 2019, after the execution of the Operational and Financial Restructuring Plan.
However, due to the challenging macroeconomic scenario in Argentina and the uncertainties regarding Brexit, the goal of the Plan was not entirely achieved. Consequently, in the year ended December 31, 2018, the Company's net leverage, including the pro forma effects of the sale of assets in Argentina, Europe and Thailand, as well as the total of funds from FIDC, reached 5.07x. For 2019, according to the Material Fact released on February 7, 2019, Management expects that this index will reach 3.65x at the end of the year.
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FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017
| ![]() |
OPINION OF THE FISCAL COUNCIL
The Fiscal Council of BRF S.A., in fulfilling its statutory and legal duties, reviewed:
(i) the financial statements (parent company and consolidated) for the fiscal year ended on December 31, 2018.
(ii) the Management Report; and
(iii) the report issued without qualification by KPMG Auditores Independentes on February 22, 2018;
Based on the documents reviewed and on the explanations provided, the members of the Fiscal Council, undersigned, issued an opinion that the financial statements and the management report appropriately are presented in a position to be considered by the Annual General Meeting.
São Paulo, February 25, 2019.
Attílio Guaspari
Chairman
Marcus Vinicius Dias Severini
Fiscal Council Member
André Vicentini
Fiscal Council Member
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FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017
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Summarized Annual Report of the Audit and Integrity Committee
Summary of the Audit Committee Activities in 2018
The current composition of the Audit and Integrity Committee was elected on June 14, 2018, pursuant to the meeting of the Board of Directors, and have been meeting monthly since the election, in ordinary and extraordinary meetings, in the total of fourteen meetings, and the main topics of discussion are described in the following paragraphs. The Audit and Integrity Committee met with the Fiscal Council in a reserved opportunity and has discussed the main issues monitored during the year in a monthly basis with the Board of Directors.
Issues discussed by the Audit and Integrity Committee
During the period from June 14, 2018 to December 8, 2018, participated in the meeting the Global Chief Executive Officer of the Company, the Vice-Presidents, Executive Directors, Executive Managers, Internal Auditors, Independent Auditors and external advisors to enable the understanding of the processes, internal controls, risks, possible deficiencies and eventual plans for improvement, as well as issuing their recommendations to the Board of Directors and Executive Board of the Company.
The main topics discussed by the Audit and Integrity Committee were:
· Discussion of the planning, scope and main conclusions obtained in the quarterly review (ITR) and opinion on the issuance of the financial statements of 2018;
· Monitoring the analysis on the internal controls of the Company with emphasis on the most critical items;
· Monitoring the implementation of improvements indicated in the internal controls report, as well as the respective action plans of the internal areas for the correction or improvement of the issues;
· Discussion, approval and supervision of the work Plan and budget of the Internal Audit;
· Monitoring the accomplishment of the Plan and approval of eventual revisions;
· Monitoring and analysis of the outcomes of special investigations;
· Monitoring the Internal Audit reports;
· Monitoring the implementation of the action plans resulted from the audit reports, with emphasis on the most critical issues, reporting to the Board of Directors the most relevant ones;
· Monitoring the Compliance activities, and the highly critical investigations conducted by the Compliance Department, in special the internal investigations related to the Carne Fraca and Trapaça Operations;
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FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017
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· Monitoring the class action lawsuit filed in the U.S. Federal District Court in the Southern District of New York alleging, among other things, that the Company, a officer and certain of its former officers and directors engaged in securities fraud or other unlawful business practices related to the Trapaça and Carne Fraca operations. In order to monitor the process, the Audit and Integrity Committee hired advisors specialized in SEC, meeting in Brazil and in the United States;
· Evaluation and monitoring of the effectiveness of Internal Controls for mapping processes, key controls and indicators, as well as monitoring the action plans to avoid significant deficiencies that could be reported in the financial statements;
· Discussion and evaluation the corporate risks map;
· Monitoring the inquiries and complaints received by Transparency Hotline;
· Monitoring the adoption of the Compliance policies, practices and trainings by the management and employees pursuant the anti-corruption law requirements;
· Monitoring the management of the conduct adjustment declaration entered with regulatory bodies;
· Monitoring the questions related to the regulatory bodies and the respective answers sent by the Management;
· Discussion and evaluation of stocks controls;
· Discussion and evaluation of the process of revenue cutoff;
· Discussion and evaluation of the fixed asset control and demobilization plan;
· Discussion and evaluation of the accounting and controls for client bonus;
· Discussion of the implementation of controls in the subsidiaries of the Company;
· Opinion for approval, by the Board of Directors, of the annual financial statements;
· Review and comments on the quarterly financials (ITR);
· Evaluation and monitoring, with the management and Internal Audit, of the adequacy of the related parties’ transactions executed by the Company;
· Discussion and monitoring the update of the Reference Form;
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FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017
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STATUTORY AUDIT COMMITTEE OPINION
In the exercising of its legal and statutory duties, BRF’s Audit Committee has examined the financial statements (parent company and consolidated) for the fiscal year ending December 31, 2018; the Management Report; and the report issued without qualification by KPMG Auditores Independentes.
There were no instances of significant divergences between the Company’s management, the independent auditors and the Audit Committee with respect to the Company’s Financial Statements.
Based on the examined documents and the clarifications rendered, the undersigned members of the Audit Committee are of the opinion that the financial statements in all material respects are fairly presented and should be approved.
São Paulo, February 25, 2019.
Francisco Petros O. L. Papathanasiadis
Audit Committee Coordinator
Roberto Antonio Mendes
Independent Member
Walter Malieni Júnior
Board Member
Fernando Maida Dall Acqua
External Member and Financial Specialist
Sérgio Ricardo Silva Rosa(1)
Independent Member
(1) On January 31, 2019 Sérgio Ricardo Silva Rosa has been replaced by Thomás Tosta de Sá.
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FINANCIAL STATEMENTS Year ended December 31, 2018 and 2017
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OPINION OF EXECUTIVE BOARD ON THE CONSOLIDATEDFINANCIAL STATEMENTS AND INDEPENDENT AUDITOR’S REPORT
In compliance with the dispositions of sections V and VI of article 25 of CVM Instruction No. 480/09, the executive board of BRF S.A., states:
(i) reviewed, discussed and agreed with the Company's consolidated financial statements for the fiscal year ended on December 31, 2018; and
(ii) reviewed, discussed and agreed with opinions expressed in the KPMG Auditores Independentes, reported on the Company's consolidated financial statements for the fiscal year ended on December 31, 2018.
São Paulo, February 25, 2019.
Pedro Pullen Parente
Global Chief Executive Officer
Lorival Nogueira Luz Júnior
Global Chief Operating Officer
Elcio Ito(1)
Vice President of Finance and Investor Relations
Vinícius Barbosa
Vice President of Operations and Procurement Officer
(1) On January 31, 2019, approved the appointment of Ivan de Souza Monteiro to the position of Vice President of Finance and Investor Relations, in substitution to Elcio Ito. His investiture is scheduled to take place on March 11, 2019.
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