| Financial instruments and risk management | 28 Financial i nstruments and r isk m anagement 28.1 Financial instrument categories The Group maintains operations with derivative and non-derivative financial instruments. The control policy consists of monitoring the terms contracted against current terms and conditions in the market. The Company does not make investments of speculative nature in derivatives or any other risk assets. The estimated fair value of the Group's financial instruments considered the following methods and assumptions: • Cash and cash equivalents and financial investment : recognized at cost plus income earned up to the closing date of the financial statements, which approximate their fair value. • Trade receivables : arise directly from the Group's operations, classified at amortized cost, are recorded at their original values, adjusted based on the exchange rate changes, when applicable, and subject to a provision for losses. Their carrying amount is a reasonable approximation of fair value. • Loans and borrowings : classified as financial liabilities measured at amortized cost and are recorded at their contractual values. The contractual flow of loans and borrowings is adjusted to the future value of the liabilities considering the interest until maturity. • Derivative financial instruments: 3 3 Libor 3 • N on-derivatives financial instruments: Based on the Group's risk management and considering the existing natural hedge on exchange rate variations, the Group designated hedge relationships between “highly probable future transactions” (hedged item) and non-derivative financial instruments (hedging instruments), and their exchange effects were recognized at the same time in the OCI. The exchange rate variations in proportions of cash flows from non-derivative financial instruments were designated as hedging instruments. At the inception of designated hedging relationships, the Group documented the risk management objective and strategy for undertaking the hedge. The Group also documented the economic relationship between the hedged item and the hedging instrument, including identification of: (i) the hedging instrument; (ii) the hedged item; (iii) the nature of the risk being hedged; and (iv) the assessment whether the hedging relationship meets the hedge effectiveness requirements. The following table shows the carrying amounts and fair values of financial assets and financial liabilities, segregated by category: December 31, 2022 Amortized cost Assets/liabilities measuredat FVTPL Assets / liabilities measured at FVOCI Total Financial assets Cash and cash equivalents 185,727 - - 185,727 Financial investments 96,299 - - 96,299 Trade receivables 501,671 - - 501,671 Contract assets 217,250 - - 217,250 Derivatives - 11,194 - 11,194 Non-derivatives financial instruments - future exports revenue - - 19,637 19,637 Other assets 41,923 - - 41,923 1,042,870 11,194 19,637 1,073,701 Financial liabilities Suppliers and other payables 33,376 - - 33,376 Loans and borrowings 974,231 - - 974,231 Lease liabilities 62,808 - - 62,808 Accounts payable for business combination 66,561 138,388 - 204,949 Derivatives - 4,109 - 4,109 Non-derivatives financial instruments – future exports revenue - - 35,169 35,169 Contract liabilities 32,136 - - 32,136 Other liabilities 51,031 - - 51,031 1,220,143 142,497 35,169 1,397,809 December 31, 2021 Amortized cost Assets/liabilities measured at FVTPL Total Financial assets Cash and cash equivalents 135,727 - 135,727 Financial investments 798,786 - 798,786 Trade receivables 340,519 - 340,519 Contract assets 134,388 - 134,388 Derivatives - 896 896 Other assets 32,949 - 32,949 1,442,369 896 1,443,265 Financial liabilities Suppliers and other payables 33,566 - 33,566 Loans and borrowings 788,709 - 788,709 Lease liabilities 81,888 - 81,888 Accounts payable for business combination 85,726 - 85,726 Derivatives - 535 535 Contract liabilities 13,722 - 13,722 Other liabilities 15,329 - 15,329 1,018,940 535 1,019,475 28.2 Financial r isk m anagement The Group’s operations are subject to the following risk factors: a. Market r isks The Group is exposed to market risks resulting from the normal course of its activities, such as inflation, interest rates and exchange rate changes. Thus, the Group's operating results may be affected by changes in national economic policy, especially regarding short and long-term interest rates, inflation targets and exchange rate policy. Exposures to market risk are measured by sensitivity analysis. Management interest rate benchmark reform and associated risks A fundamental reform of major interest rate benchmarks is being undertaken globally, including the replacement of some interbank offered rates (lBORs) with alternative nearly risk-free rates (referred to as ‘lBOR reform’). In 2021, the Group undertook amendments to most financial instruments with contractual terms indexed to lBORs such that they incorporated new benchmark rates. As at December 31 2022, the Group’s remaining lBOR exposure is indexed to US dollar LIBOR. The alternative reference rate for all US dollar LIBOR is the Secured Overnight Financing Rate (SOFR). The Group finished the process of implementing appropriate fallback clauses for all US dollar LIBOR indexed exposures in 2021. These clauses automatically switch the instruments from USD LIBOR to SOFR as and when USD LIBOR ceases. As announced by the Financial Conduct Authority (FCA) in early 2022, the panel bank submissions for US dollar LIBOR will cease in mid-2023. The risk Management monitors and manages the Group´s transition to alternative rates. The Management evaluates the extent to which contracts reference lBOR cash flows, whether such contracts will need to be amended as a result of lBOR reform and how to manage communication about lBOR reform with counterparties. The Management reports to the Company´s board of directors regularly and collaborates with other business functions as needed. It provides periodic reports to management of interest rate risk and risks arising from lBOR reform. a.1 Foreign c urrency – Exchange rate changes The Group is exposed to foreign exchange risk to the extent that there is a mismatch between the currencies in which sales, purchases, receivables, and borrowings are denominated and the respective functional currencies of the Company and its subsidiaries. Therefore, foreign exchange risk is inherent to the Group’s business model. The Group’s revenue is mainly denominated in foreign currency and, consequently, is exposed to exchange rate changes. The Group’s expenses, on the other hand, are mainly denominated in the Group’s functional currency (Brazilian Reais) and, consequently, are not exposed to exchange rate changes. The Group is exposed to exchange rate risk on its financial investments, suppliers and other payables, trade receivables, loans and borrowings, accounts payable for business combination, lease liabilities and derivatives. See below the total exposure to foreign currency: December, 2022 December, 2021 US$ £ Other currencies US$ Other currencies Financial investments 96,299 - - 798,786 - Suppliers and other payables (4,229 ) (2,264 ) (2,078 ) (8,763 ) (722 ) Trade receivables 304,617 51,152 12,306 233,724 7,273 Loans and borrowings (223,512 ) - - (266,561 ) - Lease liabilities (29,147 ) (1,009 ) (2,493 ) (32,159 ) (962 ) Accounts payable for business combination (76,859 ) (83,768 ) - - - Derivatives (4,109 ) - - 361 - Net exposure 63,060 (35,889 ) 7,735 725,388 5,589 Cash flow hedge for the Group's future investments: In January 2022, the Group decided to apply hedge accounting for certain financial instruments (non-derivatives), with the purpose of hedging exchange rates in transactions related to highly probable risk operations. On January 3, 2022, the Company designated hedge relationships “highly probable future acquisitions” and non-derivative US dollar financial investment for a total amount of R$ 572,940 (US$ 104,615). On January 27, 2022, as mentioned in note 9.2, the Company acquired the Somo Group. In connection with this acquisition, an amount of R$ 347,704 (US$ 64,615) was used to pay for the acquisition. On September 1, 2022, as mentioned in note 9.4, the Company acquired Transpire. In connection with this acquisition, an amount of R$ 55,545 (US$ 10,725) was used to pay for the acquisition used to pay for the acquisition . The individual hedge relationships were established on a one-to-one basis, that is, each month’s “highly probable future acquisitions” and the proportions of cash flows from financial investments made abroad, used in each hedge relationship, have the same face value in US dollars. The Company considered as “highly probable future acquisitions” only part of its total planned acquisitions. The exposure of the Group's future investments in acquisitions in hard currency to the risk of variations in the R$/US$ exchange rate (liability position) was offset by an inverse exposure equivalent to its US dollars financial investments (asset position) to the same type of risk. Cash flow hedge for the Group's future Revenues : Considering the natural hedge and the risk management strategy, the Group designates hedging relationships to account for the effects of the existing hedge between a foreign exchange gain or loss from proportions of its long-term debt obligations (denominated in U.S. dollars) and foreign exchange gain or loss of its highly probable U.S. dollar denominated future export revenues, so that gains or losses associated with the hedged transaction (the highly probable future exports) and the hedging instrument (debt obligations) are recognized in the statement of profit or loss in the same periods. The schedule of cash flow hedge involving the Company´s future exports as of December 31, 2022 is set below: Present value of hedging instrument notional value at December 31, 2022 Hedging Instrument Hedged Transaction Nature of the Risk Maturity Date US$ R$ Foreign exchange gains and losses on proportion of non-derivative financial instruments cash flows Foreign exchange gains and losses of highly probable future monthly exports revenues Foreign Currency - Real vs U.S. Dollar Spot Rate 2023 to 2026 Citibank (i) 2026 30,000 156,531 Citibank (ii) 2023 3,000 15,653 Bradesco (ii) 2023 3,000 15,653 Citibank (ii) 2023 2,000 10,435 Itaú (ii) 2023 10,000 52,177 Total amounts designated as of December 31, 2022 48,000 250,449 (i) Export credit note - NCE: Refers to financing to export software development services. (ii) Advance on Foreign Exchange Contract (ACC). Changes in the fair value of US$ foreign exchange debt obligation (non-derivative financial instruments) designated as effective cash flow hedges have their effective component recorded in Equity, Other Comprehensive Income (“OCI”) and the ineffective component recorded in Statement of Profit or Loss, in finance income (expense). The amounts accumulated in Equity are recognized in the Statement of Profit or Loss in the years in which the hedged item affects the result, the effects of which are appropriated to the result, in order to minimize the variations in the hedged item. The individual hedge relationships are established on a one-to-one basis, that is, the “highly probable exports” of each month and the proportions of cash flows from foreign exchange debt obligation made abroad, used in each relationship and individual hedge, have the same face value in US dollars. The exposure of the Group's future exports in hard currency to the risk of variations in the R$/US$ exchange rate (liability position) is offset by an inverse exposure equivalent to its US dollars debt (asset position) to the same type of risk. Hedge Accounting Effects The movement of exchange variation accumulated in other comprehensive income as of December 31, 2022, resulting from completed investments in acquisitions during the year are set out below: Exchange variation Balance as of December 31, 2021 Recognized in Other comprehensive income (30,600 ) Reclassified to the statements of financial position - occurred investments in acquisitions 25,263 Reclassified to the statements of profit or loss - ineffective portion 5,337 Balance as of December 31, 2022 - The movement of exchange variation accumulated in other comprehensive income as of December 31, 2022, resulting from completed and expected exports are set out below: Exchange variation Balance as of December 31, 2021 Recognized in Other comprehensive income (23,855 ) Reclassified to the statements of profit or loss - occurred exports 8,323 Balance as of December 31, 2022 (15,532 ) As of December 31, 2022, the annual expectation of realization of the exchange rate variation balance accumulated in equity is R$ 8,951. For all other hedged forecast transactions, the amount accumulated in the hedging reserve and the cost of hedging reserve is reclassified to profit or loss in the same period or periods during which the hedged expected future cash flows affect profit or loss. a. 2 Interest rate risk Derives from the possibility of the Group incurring gains or losses resulting from changes in interest rates applicable to its financial assets and liabilities. The Group may also enter into derivative contracts in order to mitigate this risk. a.3 Sensitivity analysis of non-derivative financial instruments Exchange rate fluctuation and changes in interest rates may positively or adversely affect the financial statements, due to an increase or decrease in the balances of trade receivables and investments in foreign currency and the variation in the balances of financial investments and loans and borrowings. The Group mitigates its risks relating to non-derivative financial assets and liabilities substantially through the contracting of derivative financial instruments. Accordingly, the Group identified the main risk factors that may generate losses for its operations with derivative financial instruments and this sensitivity analysis is based on three scenarios that may impact the Group’s future results and cash flows, as described below: (i) Probable s cenario: The Group’s projections, based on internal and external data, considered the highest projection expected by the Company for the next months: (i) the interest rate index in order to analyze the sensitivity of the index in short-term investments and loans and borrowings was % for CDI and % for (only applicable for some loans and borrowings); (ii) the exchange rate of R$ for US$ and R$ for £, related to the closing rate projected by the Company, for the purposes of analyzing the foreign exchange exposure. Based on these factors, variations in the adverse and remote scenarios were calculated. (ii) Adverse scenario: considered a variation of % in the main risk factor of each transaction. (iii) Remote s cenario: considered a variation of % in the main risk factor of each transaction. For each scenario, the gross finance income or finance costs were calculated, excluding taxes and the maturity flow of each agreement. The base date considered was December 31, 2022, projecting the indexes for one year and verifying their sensitivity in each scenario. Sensitivity analysis for interest rate risk Risk Exposure in R$ Period rates Probable scenario (I) Adverse Scenario (II) Remote Scenario (III) Short-term financial investments Interest rate increase - CDI 58,464 13.65 % 13.95 % 17.44 % 20.93 % 175 2,216 4,256 Loans and borrowings Interest rate increase - CDI (298,443 ) 13.65 % 13.95 % 17.44 % 20.93 % (895 ) (11,311 ) (21,727 ) � Accounts payable for business combination Interest rate increase – CDI (43,348 ) 13.65 % 13.95 % 17.44 % 20.93 % (130 ) (1,643 ) (3,156 ) Loans and borrowings Interest rate increase - Libor (129,701 ) 3.81 % 4.65 % 5.81 % 6.98 % (1,089 ) (2,594 ) (4,112 ) Loans and borrowing Interest rate increase - SOFR (341,170 ) 4.31 % 4.88 % 6.10 % 7.32 % (1,945 ) (6,107 ) (10,269 ) Derivatives (interest rate swap) Interest rate increase - Libor 129,701 3.81 % 4.65 % 5.81 % 6.98 % 1,089 2,594 4,112 Net effect (2,795 ) (16,845 ) (30,896 ) S ensitivity analysis for exchange rate risk Risk Exposure in US$ Probable scenario (i) Adverse Scenario (ii) Remote Scenario (iii) Net exchange variation on transactions Exchange variation in the year Foreign currency appreciation - US$ 5.2177 5.4039 6.7549 8.1059 Financial investments 18,456 3,437 28,371 53,305 Suppliers and other payables (811 ) (151 ) (1,246 ) (2,341 ) Trade receivables 58,381 10,871 89,744 168,617 Loans and borrowings (42,837 ) (7,976 ) (65,849 ) (123,723 ) Derivatives 20,003 3,724 30,748 57,772 Lease liabilities (5,586 ) (1,040 ) (8,587 ) (16,134 ) Accounts payable for business combination (14,582 ) (1,941 ) (21,641 ) (41,341 ) 6,924 51,540 96,155 Risk Exposure in $ Probable scenario (i) Adverse Scenario (ii) Remote Scenario (iii) Net exchange variation on transactions Exchange variation in the year Foreign currency appreciation - £ 6.2785 6.3960 7.9950 9.5940 Suppliers and other payables (361 ) (42 ) (619 ) (1,196 ) Trade receivables 8,147 957 13,985 27,012 Lease liabilities (161 ) (19 ) (276 ) (533 ) Accounts payable for business combination (13,342 ) (1,568 ) (22,902 ) (44,236 ) (672 ) (9,812 ) (18,953 ) b. Credit risk Credit risk refers to the risk that a counterparty will not comply with its contractual obligations, causing the Group to incur financial losses. Credit risk is the risk of a counterparty in a business transaction not complying with an obligation provided by a financial instrument or an agreement with a client, which would cause financial loss. To mitigate these risks, the Group analyzes the financial and equity condition of its counterparties, as well as the definition of credit limits and permanent monitoring of outstanding positions. The Group applies the simplified standard approach to commercial financial assets, where the provision for losses is analyzed over the remaining life of the asset. In addition, the Group is exposed to credit risk with respect to financial guarantees granted to banks. The Group held cash and cash equivalents of R$ 185,727 on December 31, 2022 (R$ 135,727 as of December 31, 2021) and financial investments of R$ 96,299 on December 31, 2022 (R$ 798,786 as of December 31, 2021). The cash and cash equivalents and financial investments are held with bank and financial institution counterparties, which are rated BB- to A+, based on Standard & Poor’s ratings. The carrying amount of financial assets represents the maximum credit exposure. The maximum credit risk exposure on the date of the financial statements is: December 31, 2022 December 31, 2021 Hedge financial instruments (current and non-current) 11,194 896 Cash and cash equivalents 185,727 135,727 Financial investments 96,299 798,786 Trade receivables 501,671 340,519 Contract assets 217,250 134,388 Other receivables (current and non-current) 41,923 32,949 1,054,064 1,443,265 On 31 December 2022, the exposure to credit risk for trade receivables, contract assets and other receivables by geographic region was as follows: December 31, 2022 December 31, 2021 NAE (North America and Europe) 499,626 297,430 North America 426,166 287,992 Europe 73,460 9,438 LATAM (Latin America) 246,270 202,528 APJ (Asia, Pacific and Japan) 14,948 7,917 Total 760,844 507,875 c. Liquidity risk The Group monitors liquidity risk by managing its cash resources and financial investments. Liquidity risk is also managed by the Group through its cash flow projection, which aims to ensure the availability of funds to meet the Group’s both operational and financial obligations. The Group also maintains approved credit lines with financial institutions in order to adequate levels of liquidity in the short, medium and long terms. The maturities of the long-term installments of the loans are described in note 16. The following are the remaining contractual maturities of financial liabilities on the reporting date. The amounts are gross and undiscounted, including contractual interest payments and excluding the impact of netting agreements: 2022 Carrying amount Cash contractual cash flow 6 months or less 6- 12 months 1-2 years 2-5 Years Non-derivative financial liabilities Trade payables 33,376 33,376 33,376 - - - Loans and borrowings 974,231 1,176,743 146,564 107,207 273,298 649,674 Lease liabilities 62,808 70,837 13,903 11,480 17,981 27,473 Accounts payable for business combination 204,949 229,547 64,888 7,484 95,858 61,317 Contract liabilities 32,136 32,136 32,136 - - - Other payables (current and non-current) 51,031 51,031 51,031 - - - Derivatives 4,109 4,109 4,109 - - - Non-derivatives financial instruments 35,169 35,169 35,169 - - - 1,397,809 1,632,948 381,176 126,171 387,137 738,464 2021 Carrying amount Cash contractual cash flow 6 months or less 6- 12 months 1-2 years 2-5 Years Non-derivative financial liabilities Trade payables 33,566 33,566 33,566 - - - Loans and borrowings 788,709 974,942 136,161 88,045 171,022 579,714 Lease liabilities 81,888 87,662 12,435 12,251 22,284 40,692 Accounts payable for business combination 85,726 85,726 1,064 47,860 12,179 24,623 Contract liabilities 13,722 13,722 13,722 - - - Other payables (current and non-current) 15,329 15,329 15,329 - - - Derivatives 535 535 535 - - - 1,019,475 1,211,482 212,812 148,156 205,485 645,029 Bank credit lines December 31, 2022 December 30, 2021 Used - 11,161 Not used 54,786 47,434 54,786 58,595 The Group has credit lines for working capital with the banks HSBC and Citibank, in the amount of US$10,500 or R$54,786, at the exchange rate of 5.2177, the commercial selling rate for U.S. dollars as of December 31, 2022, as reported by the Brazilian Central Bank (note 16). 28.3 Derivative financial instruments The Group holds derivative financial instruments to hedge its foreign currency and interest rate risk exposures. As of December 31, 2022, the Group no longer entered into purchase and sale agreement for derivative financial instruments (NDFs). Fair value estimated for derivative financial instruments contracted by the Group was determined according to information available in the market, mainly through financial institutions and specific methodologies of assessment. However, considerable judgment is necessary to understand market data in order to produce the fair value estimate for each operation. Consequently, the estimates do not necessarily indicate the amounts that will be effectively realized at settlement. For comparison purpose, as of December 31, 2021, the Group had the following agreements for financial derivatives (NDFs): 2021 Maturity Nominal value (US$) Contracted rate Amount in R$ Market rate Fair value February 25, 2022 (560 ) 5.6220 (3,148 ) 5.3459 (17 ) Total (17 ) The Group also used options in order to protect exports against the risk of exchange variation. The Group may enter into zero-cost collar strategies, which consists of the purchase of a put option and the sale of a call option, contracted with the same counterparty and with a net zero premium. The composition of the balances involving options to buy and sell currencies is as follows: 2021 Maturity Nominal value (US$) Contracted rate Amount in R$ Market rate Fair value 01/21/2021 - 01/17/2022 875 Put option 4,900 5.8257 (349 ) 02/25/2021 - 02/25/2022 490 Put option 2,909 5.6490 (170 ) (519 ) 01/21/2021 - 01/17/2022 875 Call option (4,900 ) 5.5563 298 02/25/2021 - 02/25/2022 490 Call option (2,909 ) 5.4690 196 (25 ) During 2021, the Group entered into an interest rate swap transaction with the purpose of hedging the exposure to variable interest rate related to the Export Credit Note – NCE with Citibank. In May 2022, the Group entered a swap operation exchanging the CDI based rate to a US$ prefixed rate, related to a portion of an Export Credit Note - NCE with Bradesco. The interest rate profile of the Group’s interest-bearing financial instruments, as reported to the Group’s Management, is as follows: 2022 Maturity Notional (US$) Amount in R$ Floating rate receivable Fixed rate payable Fair value 07/16/2026 30,000 152,100 3-months LIBOR 3.07% 11,194 07/07/2026 - 100,000 CDI Foreign Exchange + 4.90% (4,109 ) 7,085 2021 Maturity Notional (US$) Amount in R$ Floating rate receivable Fixed rate payable Fair value 07/16/2026 30,000 152,100 3-month LIBOR 3.07% 403 403 28.4 C lassification of financial instruments by type of measurement of fair value The Group has financial instruments measured at fair value, which are qualified as defined below: Level 1 - Level 2 - Level 3 - Carrying amount Fair value December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021 Level 2 Derivatives: Non-Deliverable Forward - NDF - (17 ) - (17 ) Interest rate swap 7,085 403 7,085 403 Call and put option term - (25 ) - (25 ) Total 7,085 361 7,085 361 Non-derivatives Lease liabilities (62,808 ) (81,888 ) (62,808 ) (81,888 ) Loans and borrowings (974,231 ) (788,709 ) (974,231 ) (788,709 ) Accounts payable for business combination (204,949 ) (85,726 ) (204,949 ) (85,726 ) Total (1,241,988 ) (956,323 ) (1,241,988 ) (956,323 ) Total (1,234,903 ) (955,962 ) (1,234,903 ) (955,962 ) Cash and cash equivalents, financial investments, trade receivables, and suppliers and other payables were not included in the table above. The Group understands that these financial instruments have no classification, as the carrying amount of these items is a reasonable approximation of fair value. |
