Cielo S.A. and Subsidiaries: (Convenience Translation Into English From The Original Previously Issued in Portuguese)

(Convenience Translation into English from the Original Previously Issued in Portuguese)
Cielo S.A. and Subsidiaries

Consolidated and Individual Financial Statements for the Year Ended December 31, 2012 and Independent Auditors Report
Deloitte Touche Tohmatsu Auditores Independentes
(Convenience Translation into English from the Original Previously Issued in Portuguese) CIELO S.A. AND SUBSIDIARIES BALANCE SHEETS AS OF DECEMBER 31, 2012 AND 2011 (In thousands of Brazilian reais - R$)
Company (BR GAAP) ASSETS CURRENT ASSETS Cash and cash equivalents Trade accounts receivable Trade receivables from subsidiaries Advanced and recoverable taxes Prepaid expenses Other receivables Total current assets NONCURRENT ASSETS Deferred income tax and social contribution Escrow deposits Other receivables Investments Property and equipment Intangible assets: Goodwill on acquisition of investments Other intangible assets Total noncurrent assets Note 12.31.2012 12.31.2011
Consolidated (IFRS and BR GAAP) 12.31.2012 12.31.2011 LIABILITIES AND EQUITY CURRENT LIABILITIES Payables to merchants Borrowings and financing Trade accounts payable Taxes payable Payables to subsidiaries Dividends payable Other payables Total current liabilities NONCURRENT LIABILITIES Borrowings and financing Provision for risks Deferred income tax and social contribution Other payables Total noncurrent liabilities EQUITY Capital Capital reserve Treasury shares Comprehensive income (loss) Earnings reserves Attributed to shareholders of Cielo S.A. Shareholders other than Cielo S.A. Total equity TOTAL LIABILITIES AND EQUITY Note
Company (BR GAAP) 12.31.2012 12.31.2011
Consolidated (IFRS and BR GAAP) 12.31.2012 12.31.2011
4 5 22
282,487 5,586,770 149 4,825 14,006 5,888,237
240,998 2,971,796 134 587 4,609 22,379 3,240,503
431,155 5,872,855 3,076 7,085 24,458 6,338,629
292,915 3,019,499 4,114 4,863 39,939 3,361,330
12 13 14 15 22 18.g) 16
2,680,010 160,606 350,233 494,784 11,409 390,628 128,990 4,216,660
1,660,367 19,666 230,259 385,914 11,055 319,457 108,577 2,735,295
2,974,040 165,040 408,961 502,768 390,628 186,020 4,627,457
1,660,367 19,666 289,815 391,996 319,457 135,797 2,817,098
6 17 7 8 9 10
439,699 745,620 406 738,041 486,301 87,278 63,890 2,561,235
334,442 597,217 664 176,060 508,259 10,143 49,247 1,676,032
451,093 771,635 16,950 503,009 948,404 1,007,469 3,698,560
341,111 622,805 688 522,369 140,101 88,027 1,715,101
13 17 6 16
1,129,661 819,121 6,857 1,955,639
131,182 640,465 771,647
1,949,098 853,133 307,717 13,677 3,123,625
131,182 678,007 25,580 834,769
18.a) 18.b) 18.c) 18.d) 18.e), f) and g)
500,000 99,951 (23,410) 4,979 1,695,653 2,277,173 2,277,173 8,449,472
263,835 88,888 (50,859) 1,107,729 1,409,593 1,409,593 4,916,535
500,000 99,951 (23,410) 4,979 1,695,653 2,277,173 8,934 2,286,107 10,037,189
263,835 88,888 (50,859) 1,107,729 1,409,593 14,971 1,424,564 5,076,431
TOTAL ASSETS
8,449,472
4,916,535
10,037,189
5,076,431
The accompanying notes are an integral part of these financial statements.
(Convenience Translation into English from the Original Previously Issued in Portuguese) CIELO S.A. AND SUBSIDIARIES STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011 (In thousands of Brazilian reais - R$, except earnings per share)
Note NET REVENUES COST OF SERVICES GROSS PROFIT OPERATING INCOME (EXPENSES) Personnel General and administrative Sales and marketing Equity in subsidiaries Other operating expenses, net OPERATING INCOME FINANCE INCOME (EXPENSES) Finance income Financial expenses Revenues from advanced receivables Adjustments to present value Exchange rate changes, net 20 21
Company (BR GAAP) 12.31.2012 12.31.2011 5,008,553 (1,499,387) 3,509,166 4,051,169 (1,273,584) 2,777,585
Consolidated (IFRS and BR GAAP) 12.31.2012 12.31.2011 5,427,406 (1,852,788) 3,574,618 4,208,726 (1,425,240) 2,783,486
21 21 21 7 21 and 29
(124,416) (295,853) (236,412) 2,922 (121,980) 2,733,427
(118,254) (271,125) (184,665) 9,707 (54,909) 2,158,339
(218,282) (225,584) (240,818) (124,669) 2,765,265
(195,116) (176,223) (184,885) (57,189) 2,170,073
28 28 28 28 28
20,102 (84,099) 847,894 (30,419) 5,639 759,117
28,273 (65,433) 611,534 (24,867) 673 550,180
24,552 (101,241) 847,894 (30,419) 5,643 746,429
32,548 (66,255) 611,534 (24,867) 673 553,633
OPERATING INCOME BEFORE INCOME TAX AND SOCIAL CONTRIBUTION INCOME TAX AND SOCIAL CONTRIBUTION Current Deferred NET PROFIT FOR THE YEAR ATTRIBUTED TO Shareholders of Cielo S.A. Shareholders other than Cielo S.A.
3,492,544
2,708,519
3,511,694
2,723,706
23 23
(1,283,184) 105,256 2,314,616
(987,310) 89,118 1,810,327
(1,304,082) 113,006 2,320,618
(997,437) 90,646 1,816,915
2,314,616 6,002 2,320,618 19.b) 19.b) 3.54129 3.53552 2.77084 2.76777 3.54129 3.53552
1,810,327 6,588 1,816,915 2.77084 2.76777
EARNINGS PER SHARE (IN R$) - BASIC EARNINGS PER SHARE (IN R$) - DILUTED
(Convenience Translation into English from the Original Previously Issued in Portuguese) CIELO S.A. AND SUBSIDIARIES STATEMENTS OF COMPRENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011 (In thousands of Brazilian reais - R$)
Company (BR GAAP) 12.31.2012 NET PROFIT FOR THE YEAR COMPREHENSIVE INCOME Exchange differences on translation of foreign transactions: Exchange differences for the year Gains and losses from hedge instruments (bonds) on foreign transactions, net of taxes Gains and losses from hedge instruments (NDFs) on foreign transactions, net of taxes Total comprehensive income for the year TOTAL COMPREHENSIVE INCOME FOR THE YEAR ATTRIBUTED TO Shareholders of Cielo S.A. Shareholders other than Cielo S.A. 2,314,616 12.31.2011 1,810,327
Consolidated (IFRS and BR GAAP) 12.31.2012 12.31.2011 2,320,618 1,816,915
6,845 8,779 (10,645) 4,979 2,319,595
1,810,327
6,845 8,779 (10,645) 4,979 2,325,597
1,816,915
2,319,595 6,002
1,810,327 6,588
(Convenience Translation into English from the Original Previously Issued in Portuguese) CIELO S.A. AND SUBSIDIARIES STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011 (In thousands of Brazilian reais - R$) Attributed to controlling interest Earnings reserves Additional Capital Legal proposed reserve 20,000 (20,000) 52,767 52,767 budget 143,836 180,934 (143,835) 527,267 708,202 (236,165) dividends 346,760 346,760 (346,760) -
Capital Note BALANCES AS OF DECEMBER 31, 2010 Dividends paid in addition to mandatory dividends in 2011 Recognition of reserve for capital budget Capital increase Stock option plan Sale of treasury shares under the stock option plan Net profit for the year Allocation of net profit for the year: Dividends paid Proposed dividends Additional dividends to the minimum mandatory dividends Interest on capital paid Proposed interest on capital Legal reserve Capital budget reserve Effect from other shareholders other than Cielo S.A. on consolidated entities BALANCES AS OF DECEMBER 31, 2011 Capital increase Acquisition of treasury shares Stock option plan Sale of treasury shares under the stock option plan Effect from other shareholders other than Cielo S.A. on consolidated entities Dividends paid in addition to mandatory dividends in 2012 Net profit for the year Other comprehensive incomeExchange differences on translation of foreign transactions: Exchange rate changes on net foreign investments Gains and losses from hedge instruments on foreign transactions, net of taxes Total comprehensive income for the year Allocation of net profit for the year: Legal reserve Dividends paid Interest on capital paid Proposed dividends Additional dividends to the minimum mandatory dividends Proposed interest on capital Capital budget reserve BALANCES AS OF DECEMBER 31, 2012 The accompanying notes are an integral part of these financial statements. 18.a) 18.c) 31 18.c) Capital 100,000 163,835 263,835 236,165 reserve 83,532 5,356 88,888 11,063 -
Treasury shares (68,823) 17,964 (50,859) (5,800) 33,249 -
Earnings retention 901,236 (720,303) (180,934) 1,810,327 (539,975) (311,879) (346,760) (24,100) (7,578) (52,767) (527,267) 2,314,616
Comprehensive income -
Total controlling interest 1,179,781 (720,303) 5,356 17,964 1,810,327 (539,975) (311,879) (24,100) (7,578) 1,409,593 (5,800) 11,063 33,249 (346,760) 2,314,616
Noncontrolling interest 14,470 6,588 (6,087) 14,971 (12,039) 6,002
Total equity 1,194,251 (720,303) 5,356 17,964 1,816,915 (539,975) (311,879) (24,100) (7,578) (6,087) 1,424,564 (5,800) 11,063 33,249 (12,039) (346,760) 2,320,618
18.e) 18.g) 18.g) 18.g) 18.g) 18.g) 500,000
99,951
(23,410)
47,233 100,000
680,213 1,152,250
443,403 443,403
2,314,616 (47,233) (716,508) (31,244) (360,099) (443,403) (35,916) (680,213) -
6,845 (1,866) 4,979 4,979
6,845 (1,866) 2,319,595 (716,508) (31,244) (360,099) (35,916) 2,277,173
8,934 8,934
6,845 (1,866) 2,325,597 (716,508) (31,244) (360,099) (35,916) 2,286,107
(Convenience Translation into English from the Original Previously Issued in Portuguese) CIELO S.A. AND SUBSIDIARIES STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011 (In thousands of Brazilian reais - R$) Company (BR GAAP) 12.31.2012 12.31.2011 3,492,544 8 and 10 8 and 10 9 17 5 13 7 289,070 124 15,275 11,063 46,624 16,500 181,551 30,419 25,888 (2,922) (2,645,393) (15) 587 8,631 (148,403) (216) 973,019 119,974 (735) 354 (8,879) (6,298) 2,398,762 (21,696) (1,180,196) 1,196,870 2,708,519 228,749 (1,108) 16,352 5,356 28,850 147,572 24,867 1,327 (9,707) (803,748) 31 (146) 38,458 (129,972) 172 463,077 84,384 6,151 (14,891) (19,680) (2,207) 2,772,406 1,596 (1,596) (1,012,900) 1,759,506 Consolidated (IFRS and BR GAAP) 12.31.2012 12.31.2011 3,511,694 317,326 124 15,646 11,063 47,161 16,500 181,457 30,419 6,002 35,974 (2,658,232) 4,353 16,290 (148,830) (413) 963,130 119,146 (1,913) 11,025 (6,331) 2,471,591 (25,012) (1,195,970) 1,250,609 2,723,706 237,792 (1,108) 16,664 5,356 28,850 151,263 24,867 6,588 1,327 (834,084) (539) 30,238 (133,601) 91 463,077 109,054 7,795 (20,026) (2,510) 2,814,800 1,596 (1,596) (1,029,223) 1,785,577
Note CASH FLOW FROM OPERATING ACTIVITIES Income before income tax and social contribution Adjustments to reconcile income before income tax and social contribution to net cash provided by operating activities: Depreciation and amortization Recognition (reversal) of provision for losses on property and equipment and intangible assets Residual cost of property and equipment and intangible assets written off or sold Stock option plan Losses on leased equipment Provision for losses Provision for risks Adjustment to present value of trade accounts receivable Interest of shareholders other than Cielo S.A. Interest on borrowings and financing Equity in subsidiaries Increase (decrease) in operating assets: Trade accounts receivable Trade receivables from subsidiaries Advanced and recoverable taxes Other receivables (current and noncurrent) Escrow deposits Advanced expenses Increase (decrease) in operating liabilities: Payables to merchants Trade accounts payable Taxes and contributions Payables to subsidiaries Other payables (current and noncurrent) Payment of tax, civil and labor lawsuits Cash from operations Interest received Interest paid Income tax and social contribution Net cash provided by operating activities CASH FLOW FROM INVESTING ACTIVITIES Capital increase in subsidiaries and joint ventures Dividends from subsidiaries Gain from hedge instruments on foreign transactions Loss from hedge instruments on foreign transactions Cash from subsidiary Servrede - capital reduction Business combination, net of cash Additions to property and equipment and intangible assets, net of borrowings Net cash used in investing activities CASH FLOW FROM FINANCING ACTIVITIES Acquisition of treasury shares Sale of treasury shares under the stock option plan Borrowings in foreign currency Payment of principal Dividends and interest on capital Net cash provided by (used in) financing activities Effect from exchange rate changes on cash and cash equivalents of foreign subsidiary INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS Closing balance Opening balance INCREASE IN CASH AND CASH EQUIVALENTS 4 4
17
17
13
7 7 7
(633,951) 10,800 4,375 (20,504) 3,105 (59,107) (695,282)
(93,101) 2,836 (265,413) (355,678)
4,375 (20,504) (1,365,256) (90,410) (1,471,795)
(85,333) (273,560) (358,893)
18.c) 18.c) 13 13 18.g)
(5,800) 33,249 17,964 961,907 (35,487) (1,413,968) (1,402,336) (460,099) (1,384,372) 41,489 19,456
(5,800) 33,249 2,599,888 (863,727) (1,413,968) 349,642 9,784 138,240
17,964 (1,402,336) (1,384,372) 42,312
282,487 240,998 41,489
240,998 221,542 19,456
431,155 292,915 138,240
292,915 250,603 42,312
(Convenience Translation into English from the Original Previously Issued in Portuguese) CIELO S.A. AND SUBSIDIARIES STATEMENTS OF VALUE ADDED FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011 (In thousands of Brazilian reais - R$)
Note REVENUES Gross operating revenue Losses on leased equipment
Company (BR GAAP) 12.31.2012 12.31.2011
Consolidated (IFRS and BR GAAP) 12.31.2012 12.31.2011
20
5,579,914 (46,624) 5,533,290
4,514,574 (28,850) 4,485,724
6,040,692 (47,161) 5,993,531
4,706,146 (28,850) 4,677,296
INPUTS FROM THIRD PARTIES Cost of services Materials, electric energy, outside services and others Other payables, net Gain (loss) on realization of assets
(1,115,832) (510,185) (66,565) (8,792) (1,701,374) 3,831,916
(953,818) (455,763) (40,836) 1,884 (1,448,533) 3,037,191
(1,426,771) (416,662) (71,464) (8,901) (1,923,798) 4,069,733
(1,043,608) (373,691) (63,920) 1,884 (1,479,335) 3,197,961
GROSS VALUE ADDED RETENTIONS Depreciation and amortization WEALTH CREATED, NET WEALTH RECEIVED IN TRANSFER Equity in subsidiaries Noncontrolling interest Finance income, including exchange rate changes and advanced receivables, net
8 and 10
(289,070) 3,542,846
(228,749) 2,808,442
(317,326) 3,752,407
(237,792) 2,960,169
2,922 843,216 846,138 4,388,984
9,707 615,613 625,320 3,433,762
(6,002) 847,670 841,668 4,594,075
(6,588) 619,888 613,300 3,573,469
28
TOTAL WEALTH FOR DISTRIBUTION DISTRIBUTION OF WEALTH Personnel and related taxes Profit-sharing Taxes and contributions Accrued interest and leasing Dividends and interest on capital Earnings retention WEALTH DISTRIBUTED
26
18.g)
(152,524) (41,594) (1,790,193) (90,056) (747,752) (1,566,865) (4,388,984)
(160,407) (37,118) (1,355,048) (70,862) (564,075) (1,246,252) (3,433,762)
(243,654) (55,680) (1,860,715) (119,409) (747,752) (1,566,865) (4,594,075)
(234,145) (50,192) (1,396,161) (82,644) (564,075) (1,246,252) (3,573,469)
(Convenience Translation into English from the Original Previously Issued in Portuguese) CIELO S.A. AND SUBSIDIARIES NOTES TO THE INDIVIDUAL AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated) 1. GENERAL INFORMATION Cielo S.A. (the Company or Cielo) was established on November 23, 1995 in Brazil, and is primarily engaged in providing services related to credit and debit cards and other payment methods, as well as providing related services, such as signing up of merchants and service providers, rental, installation and maintenance of Point of Sales - POS equipment, and data capture and processing of electronic and manual transactions. Cielo is a corporation headquartered in Barueri, State of So Paulo, whose shares are traded on BM&FBOVESPA S.A. - Bolsa de Valores, Mercadorias e Futuros, under ticker symbol CIEL3, and its subsidiaries comprise Banco do Brasil and Bradesco conglomerates. The operations of the Companys direct and indirect subsidiaries are as follows. Direct subsidiaries Servinet Servios Ltda. (Servinet) - engaged in the provision of maintenance and contacts with merchants and service providers for acceptance of credit and debit cards and other payment methods; development of related activities in the service segment that are of interest to Servinet; and holding investments in other companies as partner or shareholder. Servrede Servios S.A. (Servrede) and CieloPar Participaes Ltda. (CieloPar) mainly engaged in holding investments in other companies as partner or shareholder (holdings). In December 2012, these holdings were merged with an into by the then subsidiaries Multidisplay and Braspag, respectively, at carrying amounts and as of November 30, 2012. Cielo USA, Inc. (Cielo USA) - mainly engaged in holding investments in other companies as partner or shareholder (holdings). As of December 31, 2012, this holding company held the control of Me-S. Companhia Brasileira de Gesto de Servios (Orizon), formerly Orizon Brasil Processamento de Informaes de Sade Ltda. - engaged in the provision of consulting and data processing services to medical companies in general; management of back office services for health operators in general; electronic network interconnection services between health operators and medical and hospital service providers (e.g.: hospitals, clinics and laboratories), and other health system agents and drugstores, based on a single technology platform; scanning and process automation services, call center services and other solutions; card reading and nonfinancial transactions routing services; lease or sale of card readers, other computer-based equipment and systems used for providing its services.
Multidisplay Comrcio e Servios Tecnolgicos S.A. (Multidisplay) - engaged in data transmission services to load fixed or mobile phone credits, the sale of mobile or fixed phone credits, as well as technology, software development and licensing consulting services, product sale, and technology and sales representation services. Paggo Solues e Meios de Pagamento S.A. (Paggo) - engaged in the accreditation of merchants for acceptance of credit and debit cards; the supply and provision of solutions and electronic means for transaction capture and processing arising from the use of credit and debit cards; and the management of payables to and receivables from the network of authorized merchants, through the capture, transmission, data processing and settlement of electronic transactions with credit and debit cards for mobile payments. Braspag Tecnologia em Pagamento Ltda. (Braspag) - engaged in software development; automated transaction processing; IT services for collection and management of trade accounts payable and receivable using the Internet. Indirect subsidiaries Prevsade Comercial de Produtos e de Benefcios de Farmcia Ltda. (Prevsade) Orizons subsidiary engaged in medicine benefit services to corporate customers, healthcare plans, public customers, and large laboratories. Prevsade manages the relationship of its customers employees with drugstores, doctors and the contracting company itself. Precisa Comercializao de Medicamentos Ltda. (Precisa) - Orizons subsidiary engaged in the sale of medicines in general, with focus on health prevention and maintenance, with a scheduled delivery system. Precisa is a drugstore focused on the distribution of medicines to Prevsades customers, especially chronic patients. It is responsible for delivering medicines regularly administered to Prevsades customers with chronicle diseases, such as diabetes, cancer and heart and blood pressure conditions, which allow monitoring the delivery and use of medicines, increasing the treatments effectiveness. M4 Produtos e Servios S.A. (M4 Produtos) - Multidisplays subsidiary engaged in data transmission services to load fixed or mobile phone, prepaid television, prepaid transportation and similar credits; mobile payment and technology consulting services; and software development and licensing. Merchant e-Solutions, Inc. (Me-S) - Cielo USAs subsidiary engaged in the provision of services related to the facilitation of electronic payments with either credit or debit cards, comprising transaction authorization, financial clearing, and the notification of transactions to merchants. Cielo and its subsidiaries are also referred to as Group throughout this report.
10
Corporate restructuring In 2012, the Group implemented a corporate restructuring process to simplify its operating structure: a) CieloPars capital reduction On September 3, 2012, CieloPars capital reduction, in the amount of R$48,718, was approved, and CieloPars interest in Paggo started to be directly held by Cielo. Capital was reduced at carrying amounts and, therefore, no gains or losses were recorded. b) Servredes capital reduction On September 27, 2012, Servredes capital reduction, in the amount of R$3,105, was approved and excess cash and cash equivalents was returned to Cielo. Capital was reduced at carrying amounts and, therefore, no gains or losses were recorded. c) Merger of CieloPar with and into Braspag On December 18, 2012, the Shareholders Meeting approved the downstream merger of CieloPar with and into Braspag, in accordance with the Merger Agreement and Rationale. As a result of this merger, CieloPar was liquidated and Braspag became its successor. CieloPars equity was valued on November 30, 2012 at R$17,874, at its carrying amount, according to the Accounting Valuation Report for Merger Purposes issued by a specialized independent firm. The table below shows the valued net assets: R$ Assets: Cash and cash equivalents Deferred income tax and social contribution Investment in subsidiary Braspag Total merged assets Net assets Braspags investment balance was eliminated upon the merger. d) Merger of Servrede with and into Multidisplay On December 18, 2012, the Extraordinary Shareholders Meeting approved the downstream merger of Servrede with and into Multidisplay, in accordance with the Merger Agreement and Rationale. As a result of this merger, Servrede was liquidated and Multidisplay became its successor. Servredes equity was valued on November 30, 2012 at R$25,187, at its carrying amount, according to the Accounting Valuation Report for Merger Purposes issued by a specialized independent firm. The table below shows the valued net assets: 4 12,845 5,025 17,874 17,874
11
R$ Assets: Cash and cash equivalents Recoverable taxes Deferred income tax and social contribution Investment in Multidisplay subsidiary Total merged assets Net assets Multidisplays investment balance was eliminated upon the merger. e) Acquisition of Merchant e-Solutions In August 2012, Cielo concluded the acquisition, through its direct subsidiary Cielo USA, of 100% of the Me-Ss capital, a US company provider of global payment solutions, which owns a state-of-the-art technological platform developed for the merchant acquisition business, that allowed Me-S to stand out in the US market. This business combination had been completed on January 1, 2012; the Groups consolidated net revenue for the year ended December 31, 2012 would be approximately R$5,963,413, and profit for the year from continuing operations would be approximately R$2,311,912. The Groups Management understands that these pro forma amounts correspond to an approximate measure of the Groups combined performance and, therefore, cannot be used as a basis for comparison in future periods. In order to determine the Groups pro forma consolidated net revenues and profit or loss as if Me-S had been acquired at the beginning of the current year, Management: Calculated the depreciation of equipment acquired based on the fair values arising from the initial recognition of the business combination. Determined the borrowing costs as if such borrowing had been raised on January 1, 2012. Calculated the amortization of the related items to the allocation of goodwill arising on the acquisition as if the allocation was made on January 1, 2012. 2. SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES 2.1. Statement of compliance The Companys financial statements comprise: The Companys financial statements, which have been prepared in accordance with accounting practices adopted in Brazil, identified as Company (BR GAAP). 8 63 16,439 8,677 25,187 25,187
12
The Companys consolidated financial statements, which have been prepared in accordance with the International Financial Reporting Standards - IFRSs issued by the International Accounting Standards Board - IASB and in accordance with accounting practices adopted in Brazil, identified as Consolidated (IFRS and BR GAAP). The accounting practices adopted in Brazil include those established in the Brazilian Corporate Law, as well as the technical pronouncements, instructions and interpretations issued by the Accounting Pronouncements Committee (CPC) and approved by the Brazilian Securities and Exchange Commission (CVM). In the individual financial statements, investments in subsidiaries and joint ventures are stated under the equity method of accounting in accordance with the legislation prevailing in Brazil. Thus, the individual financial statements are not considered to be in conformity with IFRSs, which requires investments in subsidiaries to be accounted for separately from the parent company at fair value or cost. 2.2. Basis of preparation The financial statements have been prepared based on the historical cost, except if otherwise stated. The historical cost is generally based on the fair value of the consideration paid in exchange for assets. 2.3. Functional and presentation currency The individual and consolidated financial statements are presented in Brazilian reais (R$), which is the functional and reporting currency of the Company. In the preparation of the financial statements of each Groups company (headquartered in Brazil and whose functional currency is the Brazilian real (R$)), foreign currency-denominated transactions are stated based on the exchange rates prevailing on the date of each transaction. At the end of each reporting period, monetary items denominated in foreign currency are retranslated at the exchange rates prevailing at the end of the period. Nonmonetary items recorded at fair value determined in foreign currency are retranslated at the rates prevailing on the date fair value was determined. Nonmonetary items measured at the historical cost in a foreign currency are translated using the exchange rate prevailing on the transaction date. Exchange rate changes on monetary items are recognized in net profit or loss for the year in which they occur, except for those arising from foreign currency hedge transactions against risks of changes in foreign exchange rate (investment hedge). Management determined that the functional currency of its foreign subsidiaries is the US dollar. In Cielo USA, the main factor to determine the functional currency was the raising of US dollar-denominated loans for the acquisition of control of Me-S. These loans will be fully settled using the cash from foreign transactions. In addition, with respect to Me-S, the services provided and cash flows are fully stated in US dollars.
13
For purposes of presentation of the consolidated financial statements, the assets and liabilities of subsidiaries Cielo USA and Me-S (based in the USA), originally denominated in US dollars, were translated into Brazilian reais at the exchange rates prevailing at each yearend. Profits or losses were translated at the average monthly exchange rates for the year. Exchange rate changes resulting from such translations were classified in comprehensive income and accumulated in equity. When a foreign transaction is written off (e.g.: disposal of interest, transfer of control of an investee or jointly-controlled entity, or loss of significant influence over an associate, whenever there are foreign transactions), the amount of the accumulated exchange rate change relating to such transaction recorded in the Groups equity is reclassified to profit or loss for the year. The goodwill and adjustments to the fair value of identifiable assets acquired and liabilities assumed arising from the acquisition of a foreign subsidiary are recognized as assets and liabilities and translated based on the exchange rate at the end of the reporting period. Exchange differences are recognized in equity. 2.4. Cash and cash equivalents
Include cash, bank accounts and highly-liquid, short-term investments with insignificant risk of change in value, stated at cost plus interest earned. Cash and cash equivalents are classified as loans and receivables and their income is recorded in profit or loss for the period.
2.5.
Trade accounts receivable and payable to merchants a) Prepayment of receivables - stated at present value, determined on an individual basis, less cash flows of each one of the receivables recorded using the interest rates applied to such transactions. b) Settlement receivables - correspond mainly to the receivables from card association members for processed financial transactions that were authorized but not yet received. These receivables are generally settled on the following day. c) Receivables from merchants - represent the receivables from Me-Ss practice to prepay interchange fees to most merchants over the month and collect these fees at the beginning of the next month, as well as fees that are collected from merchants from transaction procession. d) Transactions pending transfer - refer to transactions carried out by the holders of credit and debit cards issued by financial institutions, consisting of receivables from card-issuing banks, less interchange fees and payables to merchants less processing fees (discount rate), both with maturities of less than one year. e) Settlement payables - correspond to the balances due to customers for processed transactions that have not yet been paid. Me-S pays merchants the amounts received from card association members on the business day subsequent to the day the transaction is captured.
14
f) Merchant deposits - Me-S maintains funds as a security deposit to hedge against of the risk of a client going bankrupt and being unable to pay for the services provided. The amount withhold from each client is based on the risk factors associated to the client, which include, among others, the type of business and the volume of completed transactions. 2.6. Property and equipment Stated at historical cost, less depreciation. Depreciation is calculated under the straight-line method, based on the estimated useful lives of the assets. The estimated useful lives, residual values, and depreciation methods are reviewed at least on an annual basis, and the effects from any changes in estimates are recorded prospectively. Subsequent costs are added to the residual value of property and equipment or recognized as a specific item, as appropriate, only if the economic benefits associated to these items are probable and the amounts can be reliably measured. Other repairs and maintenance are recognized directly in profit or loss when incurred. An item of property and equipment is written off upon disposal or when there is no future economic benefits resulting from its continuous use. Any gain or loss from the sale or write-off of an item of property and equipment is determined by the difference between the sales amount received and the carrying value of the asset sold, recognized in profit or loss. 2.7. Intangible assets Separately acquired intangible assets Separately acquired intangible assets with finite useful lives are stated at cost, less accumulated amortization and accumulated impairment losses thereon. Amortization is recognized on a straight-line basis, based on the estimated useful lives of the assets. The estimated useful life and amortization method are reviewed on an annual basis and the effect of any changes in estimate is accounted for on a prospective basis. Separately acquired intangible assets with indefinite useful lives are carried at cost less accumulated impairment losses. Internally generated intangible assets - research and development expenditure Expenditure on research is recognized as expense when incurred. Internally generated intangible assets resulting from development costs (or from the research phase of an internal project) are recognized if, and only if, the following criteria are met: The technical feasibility of completing the intangible asset so that it will be available for use or sale. The intention to complete the intangible asset to use it or sell it. The ability to use or sell the intangible asset.
15
The ability to demonstrate how the intangible asset will generate probable future economic benefits. The availability of appropriate technical, financial and other resources to complete the development of the intangible asset to use it or sell it. The ability to measure reliably the expenditure attributable to the intangible asset during its development. The amount originally recorded of internally generated intangible assets corresponds to the sum up of the costs incurred since the asset started to meet the recognition criteria previously mentioned. If no internally generated intangible asset may be recognized, the development costs are recognized in profit or loss when incurred. After initial recognition, internally generated intangible assets are stated at cost, less accumulated amortization and impairment losses, similarly to intangible assets acquired separately. Intangible assets acquired in a business combination In the consolidated financial statements, intangible assets acquired in a business combination and recognized separately are stated at fair value on the acquisition date, which is equivalent to cost. Derecognition of intangible assets An intangible asset is written off after sale or when future economic benefits will not result from its use. The gain or loss arising from the derecognition of an intangible asset, measured as the difference between the net disposal proceeds and the carrying amount of the asset, is recognized in profit or loss when the asset is derecognized. 2.8. Impairment of tangible and intangible assets excluding goodwill At the end of each reporting period, the Group reviews the carrying amount of its tangible and intangible assets to determine if there is any indication that these assets might be impaired. If there is such an indication, the recoverable amount of the asset is estimated to measure the amount of impairment loss, if any. When it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. When a reasonable and consistent allocation basis can be identified, corporate assets are also allocated to the cash-generating units or the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pretax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the carrying amount of an asset (or cash-generating unit) exceeds its recoverable amount, the carrying amount is reduced to its recoverable amount, and impairment losses are immediately recognized in the profit or loss.
16
2.9.
Business combinations In the consolidated financial statements, business combinations are stated under the acquisition method. The consideration transferred in a business combination is measured at fair value. Acquisition-related costs have been recognized in profit or loss, when incurred. The identifiable assets acquired and liabilities assumed are recognized at fair value on the acquisition date. Goodwill is measured based on the exceeding amount arising from the sum up of the amount transferred, the noncontrolling interest in the acquiree and the fair value of the acquirers interest previously held in the acquiree on the net amounts on the date of acquisition of the identifiable assets acquired and liabilities assumed. The noncontrolling interests that correspond to current interests and entitle their holders to a proportional portion of the entitys net assets in case of liquidation are measured based on the proportional stake of the noncontrolling interests in the acquirees identifiable net asset amounts recognized. Individual financial statements In the individual financial statements, the Company complies with technical interpretation ICPC 09 - Individual Financial Statements, Separate Financial Statements, Consolidated Financial Statements and Adoption of the Equity Method, according to which the amounts exceeding the acquisition cost on the Companys interest in the fair value of the acquirees identifiable assets, liabilities and contingent liabilities on the acquisition date are recognized as goodwill. Goodwill is added to the carrying amount of the investment. The Companys interests in the fair value of the identifiable assets, liabilities and contingent liabilities exceeding the acquisition cost, after revaluation, is immediately recognized in profit or loss. The amounts transferred and the fair value of assets and liabilities are measured based on the same criteria applicable to the consolidated financial statements.
2.10. Goodwill Goodwill arising from a business combination is stated at cost on the date of the business combination, net of accumulated impairment loss, if any. For impairment test purposes, goodwill is allocated to each one of the cash-generating units of the Company that benefit from the business combination synergies. The cash-generating units to which goodwill was allocated are tested for impairment annually or more frequently, when there is any indication of impairment. If the recoverable amount of a cash-generating unit is lower than its carrying amount, the impairment loss is first allocated to reduce the carrying amount of any goodwill allocated to the unit, and subsequently to the other assets of the cash-generating unit, proportionally to the carrying amount of each of its assets. Any goodwill impairment loss is directly recognized in profit or loss. Impairment losses are not reversed in subsequent periods.
17
When the related cash-generating unit is sold, the amount corresponding to the goodwill is included in the calculation of the gains or losses on the sale. 2.11. Investments in subsidiaries and joint ventures A subsidiary is an entity, including an unincorporated entity such as a partnership, in which the parent company owns, directly or through other subsidiaries, shareholder rights that entitle it, on a permanent basis, to prevail in corporate decisions and grant it the power to elect the majority of the officers. Prevalence in corporate decision-making and the power to elect the majority of the officers, on a permanent basis, presumably occur when the investor owns more than 50% of the voting capital in other entity. Under this method, the components of assets and liabilities and income and expenses of indirect subsidiaries are added to the fully consolidated accounting positions and the book value of noncontrolling interests is determined by applying the interest percentage of noncontrolling shareholders in the subsidiarys equity. Joint ventures are those jointly controlled by the Company and one or more partners. Investments in joint ventures are recognized under the proportionate consolidation method, from the date the joint control is acquired. Under this method, the components of a joint ventures assets and liabilities, and income and expenses are added to the consolidated accounting positions proportionally to the venturers interest in its capital. In the Companys individual financial statements, interests in jointly-controlled entities are recognized under the equity method. When a Groups company carries out transactions with its jointly-controlled entities, the related gains and losses are recognized in the Groups consolidated financial statements only proportionately to the Groups interests in those jointly-controlled entities that are not related to the Group. The Company has investments in foreign subsidiaries whose financial statements were originally prepared in accordance with accounting practices adopted in the United States of America (US GAAP). No adjustments are made to the foreign subsidiaries financial statements because there are no material differences as compared to the accounting practices adopted in Brazil and IFRSs. 2.12. Income tax and social contribution - current and deferred Income tax and social contribution expenses represent the aggregate of current and deferred taxes. Current taxes The provision for the Companys income tax and social contribution is calculated based on the taxable income for the year. Income tax was calculated at the rate of 15%, plus a 10% surtax on annual taxable income exceeding R$240. Social contribution was calculated at the rate of 9% on adjusted net income. Taxable income differs from the profit reported in the statement of income because it excludes income or expenses that are taxable or deductible in other years, and permanently excludes nontaxable or nondeductible items. The provision for income tax and social contribution is calculated individually (by Groups company) based on the statutory rates prevailing at yearend.
18
Deferred taxes Deferred income tax and social contribution are recognized on the differences between assets and liabilities recognized for tax purposes and related amounts recognized in the consolidated financial statements; however, they are not recognized if generated in the first-time recording of assets and liabilities in transactions that do not affect the tax bases, except in business combinations. Deferred income tax and social contribution are determined based on the tax rates and laws in effect at the end of each reporting period and applicable when the respective income tax and social contribution are paid. Deferred tax assets or liabilities are not recognized on temporary differences resulting from goodwill or the initial recognition of other assets and liabilities in a transaction that neither affects taxable income nor book income (except for business combinations). Deferred income tax and social contribution assets are recognized only to the extent that it is probable that there will be a positive tax base for which temporary differences can be used and tax loss carryforwards can be offset. The recovery of deferred tax assets is reviewed at the end of each reporting period and when it is no longer probable that future taxable income will be available to allow the recovery of all or part of the assets, these are adjusted to their expected recoverable amount. Deferred tax assets and liabilities are measured at the rates applicable in the period in which the liability or asset is expected to be settled or realized, according to the tax legislation prevailing at the end of each reporting period or to a new legislation, when this has been substantially approved. The deferred tax assets and liabilities are measured to reflect the tax implication that would arise from the way in which the Group expects, at the end of each reporting period, to recover or settle the carrying amount of these assets and liabilities. Current and deferred taxes are recognized in profit or loss, except when they correspond to items recorded in Comprehensive income, or directly in equity. In these cases, current and deferred taxes are recognized in Comprehensive income, in equity. When current and deferred taxes result from the initial recognition of a business combination, the tax effect is accounted for on the recognition of a business combination. 2.13. Employees benefits The Company and its subsidiaries are co-sponsors of a defined contribution pension plan. Contributions are made based on a percentage of the employees compensation. Payments to defined contribution plans are recognized as expense when the services they entitle to are provided. 2.14. Financial assets and financial liabilities a) Financial assets Financial assets are classified in the following specific categories: (i) at fair value through profit or loss; (ii) held to maturity; (iii) loans and receivables; and (iv) available for sale. Classification is made according to the nature and purpose of the financial assets and is determined upon initial recognition. 19
Financial assets at fair value through profit or loss Financial assets are classified at fair value through profit or loss when they are held for trading or designated at fair value through profit or loss when acquired. A financial asset is classified as held for trading if it is: Acquired principally for the purpose of selling it in the near term. Part of a portfolio of identified financial instruments that are jointly managed and for which there is evidence of a recent actual pattern of short-term profit-taking. A derivative that is not a designated and effective hedging instrument in hedge accounting. A financial asset that is not held for trading can be designated at fair value through profit or loss upon initial recognition when: This designation eliminates or significantly reduces an inconsistency that might arise upon measurement or recognition. It is part of a managed group of financial assets or liabilities, or both, and its performance is evaluated based on fair value according to the risk management or investment strategy documented by the Company and the respective information is internally provided on the same basis. It is part of a contract containing one or more embedded derivatives, and technical pronouncement CPC 38 and rule IAS 39 - Financial Instruments: Recognition and Measurement permits that the combined contract as a whole (assets or liabilities) be designated at fair value through profit or loss. Financial assets at fair value through profit or loss are measured at fair value, with any gains or losses recognized in profit or loss for the year. Net gains or losses recognized in profit or loss include dividends or interest earned by the financial asset. Financial assets held to maturity Financial assets with fixed or determinable payments and fixed maturities, which the Company has the intention and ability to hold to maturity are classified as held to maturity. Held-to-maturity financial assets are measured at amortized cost using the effective interest rate method, less the allowance for impairment losses. Revenue is recognized using the effective interest rate method. Loans and receivables Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market, measured at amortized cost using the effective interest method, less the allowance for impairment losses. Interest income is recognized by applying the effective interest method, except for short-term receivables when the recognition of interest would be immaterial.
20
Available-for-sale financial assets Available-for-sale financial assets are nonderivative financial assets designated as available for sale and not classified in the any of the categories above. Available-for-sale financial assets are measured at fair value. Interest, inflation adjustment and exchange rate changes, if applicable, are recognized in profit or loss when incurred. Changes arising from measurement at fair value are recognized in a specific line item of equity when incurred, and are charged to profit or loss when realized or considered unrecoverable. Effective interest rate method It is a method used to calculate the amortized cost of a financial asset or a financial liability and allocating interest income or interest expenses over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts (including all fees paid or received that are an integral part of the effective interest rate, transaction costs, and other premiums or discounts) through the expected life of the financial asset or, when appropriate, over a shorter period. b) Financial liabilities Financial liabilities are classified as follows: (i) at fair value through profit or loss; or (ii) as other financial liabilities. Financial liabilities at fair value through profit or loss This category includes financial liabilities held for trading or measured at fair value through profit or loss. A financial liability is classified as held for trading if it is: Incurred principally for the purpose of repurchasing it in the near term. Part of a portfolio of identified financial instruments that are jointly managed and for which there is evidence of a recent actual pattern of short-term profit-taking. A derivative that is not designated as an effective hedging instrument. Financial liabilities that are not held for trading can be designated at fair value through profit or loss upon initial recognition when: This designation eliminates or significantly reduces an inconsistency that might arise upon measurement or recognition. They are part of a managed group of financial assets or liabilities, or both, whose performance is valued based on fair value, in accordance with the Companys documented risk management or investment strategy, and whose related information is provided internally on the same basis.
21
They are part of a contract containing one or more embedded derivatives, and IAS 39 permits that the combined contract as a whole (assets or liabilities) is designated at fair value through profit or loss. Financial liabilities at fair value through profit or loss are stated at fair value, with any gains and losses recognized in profit or loss. Net gains or losses recognized in profit or loss comprise any interest paid on financial liabilities. Other financial liabilities Other financial liabilities are initially measured at fair value, net of transaction costs, and are subsequently measured at amortized cost using the effective interest method, with interest expense recognized on a yield basis. The effective interest method is a method for calculating the amortized cost of a financial liability and allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability or, when appropriate, over a shorter period. 2.15. Derivatives The Company entered into Non-deliverable Forward - NDF derivative transactions to manage its exposure to currency fluctuations in foreign investments. The Company used derivatives until raising third-party funds by issuing foreign currency-denominated bonds. The gains and losses on derivatives, net of taxes, are recognized in Comprehensive income in equity, and will be reclassified to profit or loss upon the sale of the foreign investments. There are no outstanding derivatives in the financial statements for the year ended December 31, 2012. 2.16. Hedge accounting In the period from August 23 to November 16, 2012, the Group designated NDF transactions, a hedge instrument for currency risks, as hedge of net investments in foreign transactions. On November 16, 2012, the Group designated the fundraising of third-party funds by issuing bonds, a hedge instrument for foreign currency-related risks, as hedge of net investments in foreign transactions. On the dates the derivative was contracted and the funds related to the bond issue were raised, the Company documented the relationship between the hedging instrument and the hedged asset, including the description of its goals and risk management strategies. Additionally, at the inception of the hedge and on an ongoing basis, the Company documents whether the hedging instrument that is used in a hedge relationship is highly effective in offsetting changes in the fair value. For hedges of net investments in foreign transactions, the gains or losses on the effective portion of the hedging instrument are recorded in Comprehensive income and accumulated in line item Hedge of net investment in foreign transactions, in the case of the NDF designation, and in line item Exchange differences arising on translation foreign loans, in the case of the foreign fundraising (bonds) designation. Any gains or losses on the ineffective portion, if any, are immediately recorded in profit or loss for the year.
22
Any hedge gains and losses related to the accumulated effective portion in the reserve for translation of foreign currency are reclassified to profit or loss for the year when the foreign investment is sold. The Company projects the need to renew or contract new transactions to replace in case the derivative instrument expires before the hedged item. 2.17. Revenue recognition Revenue is measured at the fair value of the amount received or receivable, less estimated returns, commercial discounts and/or bonuses granted and other similar deductions. Revenues from credit and debit card transactions are recognized when transactions are processed. Revenues from credit card transactions payable in installments are recognized in profit or loss when each installment is processed. Revenues from services to associates and merchants are recognized when the service is provided. The income from the dividends of investments is recognized when the shareholders right to receive these dividends is established (provided that it is probable that the future economic benefits will flow to the Group and the amount may be measured reliably). Interest income is recognized when it is probable that the future economic benefits will flow to the Group and the amount may be measured reliably. The interest income is recognized under the straight-line method based on the time and the effective interest rate on the outstanding principal. The effective interest rate is the rate that discounts the estimated future cash receipts during the estimated useful life of the financial assets in relation to the initial net carrying amount of this asset. Revenues from the prepayment of receivables to merchants are recognized on a pro rata basis through their maturities. In the case of Me-S, in the context of its agreements with the banks, it assumes liabilities of the acquiring bank and is, therefore, accountable for the interchange rates. In addition, the bank receives market rates for its services and, therefore, is not exposed to the agreements risks and rewards. Additionally, there are factors such as the portability of the contracts with merchants and the fact that Me-S has a direct interaction with its clients, on a daily basis, and it holds the transactions credit risk. As a result, Me-S is the main debtor and recognizes revenue based on its gross amount and the interchange is recognized as cost of services. 2.18. Provision for risks Recognized when there is a present obligation (legal or constructive) as a result of a past event, with probable outflow of resources, and the amount of the obligation can be reliably estimated.
23
The amount recognized as a provision is the best estimate of the settlement amount at the end of the reporting period, taking into consideration the risks and uncertainties related to the obligation. When the economic benefit required to settle a provision is expected to be received from third parties, this amount receivable is recorded as an asset, only when reimbursement is virtually certain. Provisions recognized by the Company refer substantially to civil and labor lawsuits arising in the normal course of business, filed by third parties or former employees. These contingencies are assessed by the Companys and its subsidiaries Management and its legal counsel, using criteria that allow their proper measurement, despite the uncertainty concerning the decision, their period and amount. Provisions for tax lawsuits are recorded based on the total taxes under legal dispute, plus inflation adjustment and late payment interest incurred through the end of the reporting period. 2.19. Dividends and interest on capital The proposed distribution of dividends and interest on capital made by the Companys Management that does not exceed the mandatory minimum dividends is recognized in line item Dividends payable in current liabilities as it is considered a legal obligation under the Companys bylaws; however, the portion of dividends exceeding mandatory minimum dividends declared by Management after the reporting period but before the issuance of the financial statements is authorized is recognized in line item Proposed additional dividends in equity, whose effects are disclosed in note 18.g). For corporate and accounting purposes, interest on capital is stated as allocation of profit or loss directly in equity. 2.20. Share-based compensation The Company offers a stock option plan to its officers and executives, and the officers and executives of its subsidiary Servinet. Options are priced at fair value on the grant date of the plans and are recognized on a straight-line basis in profit or loss as a contra entry to equity. At the end of each reporting period, the Company reviews its estimates of the number of vested options based on the plans terms and conditions and recognizes the impact of the revision of initial estimates, if any, in the statement of income, as a contra entry to equity. 2.21. Use of estimates The preparation of financial statements requires the Companys and its subsidiaries Management to make estimates that affect certain assets and liabilities, disclosure of contingent liabilities and the reported amounts of revenues and expenses for the year. Significant assets and liabilities subject to these estimates include the residual value of property and equipment and intangible assets, allowance for doubtful accounts (on trade accounts receivable from lease of POS equipment), deferred income tax and social contribution assets, appreciation of derivative financial instruments, impairment of goodwill and provision for risks. Actual results could differ from those estimates. The Company and its subsidiaries review estimates and assumptions annually.
24
2.22. Statement of value added (DVA) The purpose of this statement is to disclose the wealth created by the Company and its distribution during a certain reporting period, and is presented by the Company, as required by the Brazilian Corporate Law, as an integral part of its individual financial statements, and as supplemental information to the consolidated financial statements, since this statement is not required by IFRSs. DVA has been prepared using information obtained in the same accounting records used to prepare the financial statements and pursuant to the provisions of CPC 09 - Statement of Value Added. The first part of DVA presents the wealth created by the Company, represented by revenues (gross sales revenue, including taxes levied thereon, other income and the effects of the allowance for doubtful accounts), inputs purchased from third parties (cost of sales and purchases of materials, energy and services from third parties, including the taxes included upon purchase, the effects of impairment and recovery of assets, and depreciation and amortization) and the value added received from third parties (equity in subsidiaries, finance income and other income). The second part of DVA presents the distribution of wealth among employees, taxes and contributions, compensation to third parties and shareholders. 2.23. New and revised standards and interpretations issued and not yet adopted The Group did not adopt the new and revised IFRSs already issued but not yet adopted below: Effective for annual periods beginning on or after January 1, 2013. IFRS 10 - Consolidated Financial Statements - according to IFRS 10, there is only one consolidation basis, that is, control. In addition, IFRS 10 includes a new definition of control. IFRS 11 - Joint Arrangements - considers how a participation agreement in which two or more entities have a joint control should be classified. IFRS 12 - Disclosures of Interests in Other Entities - it is a disclosure standard applicable to entities with interest in subsidiaries, joint arrangements, associates and unconsolidated, structured entities. IFRS 13 - Fair Value Measurement - provides a single framework for measuring fair value and requires disclosure about fair value measurements. Amendments to IFRS 7 - Disclosure - Offsetting Financial Assets and Liabilities increase the disclosure requirements for transactions involving financial assets. Amendments to IFRS 10, IFRS 11 and IFRS 12 - issued to clarify certain transition rules for the first-time adoption of those IFRSs. IAS 19 (revised in 2011) - Employee Benefits - changes the accounting of defined benefit plans and termination benefits.
25
IAS 27 (revised in 2011) - Separate Financial Statements - reflects changes in the accounting of noncontrolling interest (minority) and mainly outlines the accounting of changes in interest in subsidiaries made after control is obtained. IAS 28 (revised in 2011) - Investments in Associates and Joint Ventures - changes aimed to clarify procedures in the application of impairment tests in associates and joint ventures. Amendments to IFRSs - Annual Improvements to the IFRS cycle 2009 - 2011 include several changes to several IFRSs. Amendments to IFRSs are applicable to annual periods beginning January 1, 2013 or after and include: a) Amendments to IAS 16 - Property - changes to IAS 16 clarify that replacement parts, spare equipment and service equipment must be classified as property as they are in accordance with IAS 16 definition of property and, if not, as inventory. b) Amendments to IAS 32 - Financial Instruments - Presentation - clarify that tax effect of distribution to holders of equity instruments should be accounted for in accordance with IAS 12 - Income Taxes. Effective for annual periods beginning on or after January 1, 2014: Amendments to IAS 32 - Offsetting of Financial Assets and Liabilities - outline the classification of certain rights denominated in foreign currency as equity instruments or financial liabilities. Effective for annual periods beginning on or after January 1, 2015: IFRS 9 - Financial Instruments - introduces new requirements for classification, measurement and write-off of financial assets and liabilities. The Companys Management considered these new standards and interpretations and, except for the adoption of rules IFRS 10 - Consolidated Financial Statements and IFRS 11 - Joint Arrangements, it does not expect significant effects on the amounts reported. The adoption of IFRS 10, which has a new definition of control and additional guidance of control, and the adoption of IFRS 11 will result in changes in the accounting of the investments held by the Group in joint ventures Paggo, Orizon, Precisa, and Prevsade, jointly-held entities according to IAS 31 - Interest in Joint Ventures, currently accounted for by the proportionate consolidation method. Pursuant to IFRS 11, these jointly-held entities are classified as joint ventures and recorded by the equity method of accounting, resulting in the recognition of the Groups proportional interest in their net assets, profit or loss for the year, and comprehensive income in a single line item of the consolidated statement of financial position and the consolidated statement of income or statement of comprehensive income as Investments and Equity in investees, respectively. Management will conduct a detailed review to determine the impact of adopting IFRS 10 and IFRS 11; however, no material changes were identified in the financial statements for the year ended December 31, 2012.
26
CPC had not yet issued certain pronouncements equivalent to IFRSs that became or would become effective on or after December 31, 2012. However, due to CPCs commitment to keep the set of standards issued by IASB up-to-date, these pronouncements and/or amendments issued by IASB are expected to be approved by the time their adoption becomes mandatory. 2.24. Reclassifications The statements of income and cash flows for the year ended December 31, 2011, presented for comparison purposes, were reclassified in order to reflect the tax incentive expenses related to donations to cultural and artistic activities in line item Income tax expenses - current as described in note 23. In the consolidated balance sheet as of December 31, 2011, presented for comparison purposes, the deferred income tax liabilities amounting to R$4,751 previously recorded in noncurrent liabilities were reclassified to noncurrent assets in line item Deferred income tax and social contribution, in the case of tax benefits to be offset within the same jurisdiction. 3. CONSOLIDATED FINANCIAL STATEMENTS The consolidated financial statements include the financial statements of the Company, its subsidiaries and jointly-controlled entities. Control is obtained when the Company has the power to control an entitys financial and operating policies to benefit from its activities. In the Companys individual financial statements, the financial information on subsidiaries and jointly-controlled entities are recognized under the equity method. The profit or loss on the subsidiaries acquired during the year is included in the consolidated statement of income from the effective date of acquisition. The balance of profit or loss is attributable to the Companys owners and noncontrolling interests, despite of losses. When necessary, the subsidiaries financial statements are adjusted to conform their accounting policies to those set by the Group. All intercompany transactions, balances, income and expenses are fully eliminated in consolidation. The consolidated financial statements include the account balances of Cielo (Company), its direct subsidiaries Servinet, Servrede, Cielo USA (beginning August 31, 2012), and CieloPar, indirect subsidiaries Me-S (beginning August 23, 2012), Multidisplay, M4 Produtos and Braspag (beginning May 23, 2011), and proportionately joint ventures Orizon, Prevsade, Precisa and Paggo (beginning February 28, 2011). In preparing these consolidated financial statements, intercompany balances and transactions have been eliminated. For subsidiaries, the full consolidation concept was applied, intended for investments in subsidiaries and entailing the recognition of all assets, liabilities, income and expenses in the parent, thus requiring the recognition of noncontrolling interests. The assets, liabilities, income and expenses of joint ventures Orizon, Prevsade, Precisa and Paggo have been included proportionately to the parents interest in their capital, taking into consideration that the joint control was obtained under Shareholders Agreements entered into between the Company and its partners in these joint ventures, and none of the parties has the power to unilaterally define their financial and operating policies. 27
3.1.
Direct (individual control) and indirect subsidiaries The equity interests held in the consolidated subsidiaries are as follows:
Total capital 12.31.2012 12.31.2011 Direct subsidiaries: Servinet Servrede Cielo USA CieloPar Multidisplay Braspag Indirect subsidiaries: M4 Produtos Me-S 99.99 100.00 50.10 99.99 50.10 100.00 Interest - % Voting capital 12.31.2012 12.31.2011 99.99 100.00 50.10 99.99 50.10 100.00 99.99 99.99 99.99 50.10 99.99 50.10 -
99.99 99.99 99.99 50.10 99.99 50.10 -
The balances of assets and liabilities of direct and indirect subsidiaries as of December 31, 2012 and 2011, and the main statement of income line items for the years then ended are as follows:
12.31.2012 M4 Produtos Braspag 49,632 12,073 61,705 9,395 14,337 23,732 Cielo USA 1,098 1,758,256 1,759,354 4,434 1,121,172 633,748 1,759,354 Braspag 9,676 689 10,365 8,852 16 1,497 10,365
Servinet Assets: Current assets Noncurrent assets Total assets Liabilities and equity: Current liabilities Noncurrent liabilities Equity Total liabilities and equity 26,393 48,398 74,791 25,017 32,181 17,593 74,791 Servinet Assets: Current assets Noncurrent assets Total assets Liabilities and equity: Current liabilities Noncurrent liabilities Equity Noncontrolling interests Total liabilities and equity 29,361 48,454 77,815 23,857 31,795 22,163 77,815
Multidisplay 14,113 31,897 46,010 11,596 34,414 46,010 Servrede 1,848 64,835 66,683 27 29,801 27,810 9,045 66,683
Me-S 321,052 192,047 513,099 320,048 5,982 187,069 513,099 M4 Produtos 42,419 8,575 50,994 41,251 5 9,738 50,994
47,156 5,473 16 14,549 18,243 61,705 23,732 12.31.2011 Multidisplay 10,651 10,102 20,753 8,877 11,876 20,753
CieloPar 1 94,746 94,747 5,605 89,142 94,747
28
12.31.2012 Servinet Profit or loss: Net revenue Gross profit (loss) Operating profit (loss) before finance income (costs) Profit (loss) before income tax and social contribution Profit (loss) for the year 102,828 99,523 Servrede (5,797) CieloPar 4,825 Multidisplay 130,259 7,617
M4 Produtos 42,063 25,366
Braspag 17,589 12,183
Me-S 193,874 51,974
Cielo USA (12,043)
5,623
1,820
(1,849)
12,937
14,943
4,946
22,879
2,088
6,598 4,429
(4,393) (1,318)
(1,844) (1,598)
12,903 12,028
15,507 10,322 12.31.2011
5,436 3,896
22,791 14,131
(7,998) (3,548)
Servinet Profit or loss: Net revenue Gross profit (loss) Profit (loss) from operations before financial income (expenses) Profit (loss) before income tax and social contribution Profit (loss) for the year 102,457 96,891 5,396 6,307 4,261
Servrede (4,872) 3,328 3,494 4,296
CieloPar 5,468 (3,959) (3,959) (3,959)
Multidisplay 81,174 3,478 13,893 13,922 13,202
M4 Produtos 37,385 20,175 15,363 16,053 11,339
Braspag 6,073 3,334 (82) 92 (127)
3.2.
Joint ventures (jointly-controlled entities) Interests in joint ventures include: Equity interest - % Total capital Voting capital 12.31.2012 12.31.2011 12.31.2012 12.31.2011 Joint ventures: Orizon Prevsade Precisa Paggo 40.95 40.95 40.95 50.00 40.95 40.95 40.95 50.00 40.95 40.95 40.95 50.00 40.95 40.95 40.95 50.00
The financial information of the joint ventures was consolidated under the proportionate consolidation method, considering the joint control exercised under Shareholders Agreements. The joint ventures assets and liabilities as of December 31, 2012 and 2011, and the main statement of income line items for the years then ended are as follows:
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Orizon Assets: Current assets Noncurrent assets Total assets Liabilities and equity: Current liabilities Noncurrent liabilities Equity (equity deficiency) Total liabilities and equity 67,245 61,234 128,479 7,369 411 120,699 128,479 Orizon Assets: Current assets Noncurrent assets Total assets Liabilities and equity: Current liabilities Noncurrent liabilities Equity Total liabilities and equity 57,207 56,846 114,053 7,929 1,545 104,579 114,053
12.31.2012 Precisa Prevsade Paggo 22,406 959 23,365 8,208 15,157 23,365 4,431 319 4,750 1,695 3,055 4,750 3,719 502 4,221 3,359 2,000 (1,138) 4,221
12.31.2011 Precisa Prevsade Paggo 20,909 680 21,589 8,595 2,954 10,040 21,589 2,404 10,348 321 396 2,725 10,744 2,014 5,251 47 664 5,493 2,725 10,744 Paggo 379 (6,831)
12.31.2012 Orizon Precisa Prevsade Profit or loss: Net revenue Gross profit (loss) Profit (loss) from operations before financial income (expenses) Profit (loss) before income tax and social contribution Profit (loss) for the year 70,199 31,689 15,903 19,970 16,120 85,809 7,849 6,806 6,662 5,117 10,749 4,827
3,110 (15,037) 3,083 (14,830) 2,391 (14,830)
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Orizon Profit or loss: Net revenue Gross profit (loss) Profit (loss) from operations before financial income (expenses) Profit (loss) before income tax and social contribution Profit (loss) for the year 4. CASH AND CASH EQUIVALENTS 60,510 25,708 11,649 15,866 12,478
12.31.2011 Precisa Prevsade 75,514 3,726 2,453 1,905 1,185 8,181 1,371 541 422 375
Paggo 489 (6,131) (6,805) (6,748) (6,748)
Company Consolidated (IFRS and BR GAAP) (BR GAAP) 12.31.2012 12.31.2011 12.31.2012 12.31.2011 Cash and banks: Local currency Foreign currency Short-term investments: Debentures subject to repurchase agreements (a) Bank certificates of deposit (CDBs) (a) Money Market Deposit Account (MMDA) (b) Total 41,681 14,772 210,671 12,092 3,271 282,487 1,489 15,453 207,508 13,546 3,002 240,998 47,040 101,625 230,857 48,362 3,271 431,155 6,257 15,453 223,296 44,907 3,002 292,915
Short-term investments have the following characteristics: (a) As of December 31, 2012, the average yield of debentures subject to repurchase agreements and CDBs was 102.61% (101.8% as of December 31, 2011) of the Interbank Deposit Certificate (CDI) rate. (b) The funds invested abroad (New York - USA) in MMDA earn yield at a fixed rate of 0.25% per year. The balances in line item Cash and banks consist of cash on hand and cash available in bank accounts in Brazil and abroad, derived primarily from deposits made by credit and debit card-issuing banks, in the case of the Company, and by the card association members, in the case of Me-S. Such amounts are used to settle transactions with merchants. These short-term investments are highly liquid and their fair values do not differ from their carrying amounts.
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5.
TRADE ACCOUNTS RECEIVABLE Company Consolidated (BR GAAP) (IFRS and BR GAAP) 12.31.2012 12.31.2011 12.31.2012 12.31.2011 Prepayment of receivables (a) Settlement receivables (b) Receivables from merchants (c) Bank account blocking (d) Electronic network interconnection services between health operators (e) Meal ticket and transport card capture and processing (f) Receivables from mobile payment services (g) Disputes of credit card charges chargeback (h) Other receivables Total 5,541,085 8,737 12,139 22,469 2,340 5,586,770 2,924,791 5,165 4,769 34,956 2,115 2,971,796 5,541,085 162,793 69,445 8,737 7,110 12,139 43,364 22,469 5,713 5,872,855 2,924,791 5,165 6,857 4,769 38,276 34,956 4,685 3,019,499
(a) As of December 31, 2012, the balance corresponds to prepayment of receivables from the issuing banks within up to 360 days after the date receivables are prepaid to merchants. In addition, as of December 31, 2012, this amount is net of the adjustment to present value relating to the finance income received in advance on the date of release of cash in the amount of R$131,619 (R$101,200 as of December 31, 2011), as it is related to the prepayment of receivables for spot and installment sales with original maturity after the date of the reporting periods. (b) Corresponds to the receivables recognized by subsidiary Me-S. These correspond to the receivables from the card association members for processed financial transactions that were authorized but not yet received by Me-S by the end of the reporting periods. These amounts receivable are usually received on the business day following the transaction capture date. The card association send to Me-S the amounts due to merchants for processing, net of the interchange fee withheld by the card-issuing banks. (c) Correspond to the interchange fees prepaid by subsidiary Me-S to the merchants during the month. These interchange fees, as well as the commission on the services provided by Me-S, are received at the beginning of the month subsequent to the transaction month. Me-S uses an automated clearing house to settle the transactions. (d) The Company offers card-issuing banks to bank account blocking services upon prior approval from merchants to block any transfer of receivables from such merchants to another bank. For these services, the Company receives a commission, which is paid in the month subsequent to the request of the bank account blocking by the card-issuing banks. (e) Receivables from the jointly-controlled entity Orizon arising from the provision of electronic network interconnection services, based on a single technology platform, for exchange of information between health operators and medical and hospital service providers, and any other health system agents and drugstores. 32
(f) Receivables from Companhia Brasileira de Solues e Servios - CBSS arising from the provision of transportation and meal tickets card capture and processing services. (g) Receivables from electronic payment services provided by subsidiaries M4 Produtos and Multidisplay through cell phones and sale of phone credits with credit cards. (h) Refer substantially to receivables from disputes from credit card holders. Chargeback losses for the year ended December 31, 2012 total R$4,839 (R$4,289 as of December 31, 2011). The aging of trade accounts receivable is as follows: Company Consolidated (IFRS and BR GAAP) (BR GAAP) 12.31.2012 12.31.2011 12.31.2012 12.31.2011 Current Up to 45 days past-due Total 6. 5,564,301 22,469 5,586,770 2,936,840 34,956 2,971,796 5,850,386 22,469 5,872,855 2,984,543 34,956 3,019,499
DEFERRED INCOME TAX AND SOCIAL CONTRIBUTION Broken down as follows: Company Consolidated (BR GAAP) (IFRS and BR GAAP) 12.31.2012 12.31.2011 12.31.2012 12.31.2011 Deferred income tax and social contribution assets (a) Deferred income tax and social contribution liabilities (b) 439,699 334,442 451,093 307,717 341,111 -
Deferred income tax and social contribution arise from temporary differences mainly due to temporarily nondeductible provisions and are recorded in noncurrent assets. Deferred income tax and social contribution reflect the tax effects attributable to temporary differences between the tax base of assets and liabilities and the related carrying amount. Reported amounts are monthly reviewed.
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(a) Deferred income tax and social contribution are as follows:

Company (BR GAAP) 12.31.2012 12.31.2011 Temporary differences: Provision for risks Accrual for sundry expenses Discount to present value of prepayment of receivables Allowance for losses on POS equipment Effect on allocation of subsidiary Multidisplay acquisition price Total 274,978 121,026 44,750 1,096 (2,151) 439,699 213,241 85,740 34,408 1,053 334,442 Consolidated (IFRS and BR GAAP) 12.31.2012 12.31.2011 283,766 121,480 44,750 1,097 451,093 224,044 86,357 34,408 1,053 (4,751) 341,111
(b) Breakdown of deferred income tax liabilities recognized by foreign companies. Consolidated (IFRS and BR GAAP) 12.31.2012 Temporary differences: Fair value of Me-Ss intangibles, acquired in 2012 (see note 9) Appreciation of intangibles on acquisition - Me-S Other temporary differences Total 7. INVESTMENTS Company (BR GAAP) 12.31.2012 12.31.2011 Subsidiaries Jointly controlled entities Total 695,064 42,977 738,041 139,115 36,945 176,060 301,735 4,686 1,296 307,717
Main information on subsidiaries, indirect subsidiaries and jointly-controlled entities

Adjusted equity Profit (loss) (shareholders deficit) for the year Equity interest - % Equity in investees Investments 12.31.2012 12.31.2011 12.31.2012 12.31.2011 12.31.2012 12.31.2011 12.31.2012 12.31.2011 12.31.2012 12.31.2011 Servinet Servrede (e) Multidisplay (e) Orizon (a) CieloPar (d) Braspag (d) Paggo (b) Cielo USA Total 17,593 50,858 120,699 18,243 (1,138) 633,748 22,163 27,810 104,579 89,142 4,429 (1,318) 585 16,120 (1,598) 369 (4,614) (3,548) 4,261 4,296 12,478 (3,959) 99.99 50.10 40.95 99.99 50.00 100.00 99.99 99.99 40.95 99.99 4,429 (1,318) 293 6,600 (1,598) 369 (2,305) (3,548) 2,922 4,261 4,296 5,109 (3,959) 9,707 17,593 25,480 43,546 18,243 (569) 633,748 738,041 22,163 27,810 36,945 89,142 176,060
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Indirect jointly-controlled entities

Adjusted equity 12.31.2012 12.31.2011 Prevsade Precisa Multidisplay (e) M4 Produtos Paggo (b) (c) Braspag (d) Me-S 3,055 15,157 14,549 187,069 664 10,040 11,876 9,738 5,493 1,497 Profit (loss) for the year 12.31.2012 12.31.2011 2,391 5,117 11,443 10,322 (10,216) 3,527 14,131 375 1,185 13,202 11,339 (6,748) (127) Equity interest - % 12.31.2012 12.31.2011 40.95 40.95 50.10 100.00 40.95 40.95 50.10 50.10 50.00 100.00 -
(a) The amount of R$5,880 is not reflected in the investment because it refers to the unrealized gain on capital contribution with goodwill, initially reflected in CBGS Ltda. and transferred to the indirect subsidiary CBGS as a result of the merger. In November 2009, CBGS was merged into subsidiary Orizon. (b) As described in note 1, on September 3, 2012, the capital reduction of CieloPar was approved and the interest held by CieloPar in Paggo started to be directly held by the Company. (c) The investment recognized by Cielo considers the adjustments to the opening balance sheet of subsidiary Paggo arising from the adoption of the purchase price allocation procedures, as prescribed by CPC 15 Business Combinations, mainly represented by the provision for losses on software platforms, as described in note 9. (d) As described in note 1, on December 18, 2012, the merger of CieloPar with and into Braspag was approved and the interest held by CieloPar in Braspag started to be directly held by the Company. (e) As described in note 1, on December 18, 2012, the merger of Servrede with and into Multidisplay was approved and the interest held by Servrede in Multidisplay started to be directly held by the Company.
Upon the completed downstream mergers, the Company set up provisions for the maintenance of equity integrity (PMIPL) in the merged companies, and maintained only the tax benefit of goodwill. For consolidation purposes, the goodwill previously recognized was transferred to the Company. The consolidation of the financial statements of jointly-controlled entity Orizon and indirect subsidiaries Prevsade, Precisa, Multidisplay, M4 Produtos, Braspag, Paggo, and Me-S (acquired on August 30, 2012) was based on the financial statements for the year ended November 30, 2012 to calculate the investments as of December 31, 2012. Accordingly, the equity in investees refers to the 12-month period ended November 30, 2012.
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Changes in investments for the years ended December 31, 2012 and 2011 are as follows: R$ Balance as of December 31, 2010 Capital increase in subsidiary - CieloPar Equity in investees Dividends received from Servrede Balance as of December 31, 2011 Capital increase in subsidiary: CieloPar Cielo USA Capital increase through debt assumption - Servrede (a) Exchange differences on foreign investments Effect of the corporate restructuring in September 2012: Capital reduction - CieloPar (b) Capital reduction - Servrede (c) Recognition of PMIPL provision in subsidiaries: Servrede (d) CieloPar (d) Dividends received: Servinet Servrede Equity in investees Balance as of December 31, 2012 76,088 93,101 9,707 (2,836) 176,060 3,500 630,451 31,441 6,845 (46,979) (3,105) (27,842) (24,452) (9,000) (1,800) 2,922 738,041
(a) Refers to the capital increase through the assumption of the debt previously incurred by subsidiary Servrede that was transferred to the parent Cielo after the capital increase. This debt corresponds to the variable portion related to the acquisition of control of Multidisplay and M4 Produtos. (b) CieloPars capital reduction by R$48,718 was based on the merged net assets comprised of: (i) investment of R$1,739; and (ii) transfer of goodwill on the acquisition of Paggo, of R$46,979, to the Company, recorded in intangible assets. (c) As described in note 1, on September 27, 2012, Servredes capital reduction was approved and the excess cash and cash equivalents was returned to the Company. (d) As prescribed by ICPC 09 - Individual Financial Statements, Separate Financial Statements, Consolidated Financial Statements, and Application of the Equity Method of Accounting, and pursuant to CVM Instruction 319/99, as amended by CVM Instruction 349/01, the balance of goodwill and allocated items (net of accumulated amortization) in subsidiaries Servrede and CieloPar, were fully derecognized upon the merger, through a provision set up directly against equity amounting to R$42,185 and R$37,050, respectively. As there are evidences of actual economic benefits to be earned as a result of the future decrease in taxes due to the utilization of the goodwill tax benefit by the merging companies Multidisplay and Braspag, deferred income tax and social contribution assets were recognized against the equity line item referred to above in subsidiaries Servrede and CieloPar amounting to R$14,343 and R$12,597, respectively. The net effect reduced the equity of subsidiaries Servrede and CieloPar by R$27,842 and R$24,453 respectively. 36
8.
PROPERTY AND EQUIPMENT Annual depreciation rate - % POS equipment (*) Data processing equipment Machinery and equipment Facilities Furniture and fixtures Vehicles Total 33 20 10 10 10 20 Company (BR GAAP) 12.31.2011 12.31.2012 Accumulated depreciation Net Net (613,019) 452,618 (26,786) 21,864 (39,629) 1,427 (7,719) 5,470 (3,251) 3,545 (1,131) 1,377 (691,535) 486,301 476,102 18,487 2,450 6,027 3,830 1,363 508,259
Cost 1,065,637 48,650 41,056 13,189 6,796 2,508 1,177,836
Annual depreciation rate - % POS equipment (*) Data processing equipment Machinery and equipment Facilities Furniture and fixtures Vehicles Total 33 20 10 10 10 20
Consolidated (IFRS and BR GAAP) 12.31.2011 12.31.2012 Accumulated Cost depreciation Net Net 1,069,215 64,592 47,409 26,973 10,993 2,535 1,221,717 (616,318) 452,897 (36,566) 28,026 (45,356) 2,053 (14,030) 12,943 (5,280) 5,713 (1,158) 1,377 (718,708) 503,009 476,406 21,697 3,068 13,771 6,065 1,362 522,369
(*) As of December 31, 2012 and 2011, provisions for losses on POS equipment were recorded in the amounts of R$3,223 and R$3,099, respectively, as a reduction of the related line item. Changes in property and equipment for the years ended December 31, 2012 and 2011 are as follows: Company (BR GAAP) Additions/ transfers Write-offs Depreciation 12.31.2012 258,566 8,897 110 172 310 711 268,766 (15,072) (2) (201) (15,275) (266,979) (5,520) (1,133) (729) (593) (495) (275,449) 452,617 21,864 1,427 5,470 3,545 1,378 486,301
12.31.2011 POS equipment Data processing equipment Machinery and equipment Facilities Furniture and fixtures Vehicles Total 476,102 18,487 2,450 6,027 3,830 1,363 508,259
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Consolidated (IFRS and BR GAAP) Foreign Write- exchange Additions offs changes Depreciation 258,764 11,084 94 1,722 570 712 272,946 (15,208) (4) (3) (17) (202) (15,434) (1) 13 1 13 (267,185) (6,400) (1,291) (2,550) (912) (495) (278,833)
Merged net assets 121 1,636 184 7 1,948
12.31.2012 452,897 28,026 2,053 12,943 5,713 1,377 503,009
Company (BR GAAP) Additions Write-offs Depreciation 368,915 13,952 18 3,878 1,341 660 388,764 (14,686) (4) (14,690) (205,069) (4,453) (1,403) (593) (488) (307) (212,313)
12.31.2011 476,102 18,487 2,450 6,027 3,830 1,363 508,259
Consolidated (IFRS and BR GAAP) Additions/ Merged transfers Write-offs Depreciation net assets 368,915 14,969 258 5,511 1,905 684 392,242 (14,695) (4) (4) (394) (147) (10) (15,254) (205,302) (5,363) (1,488) (1,891) (769) (322) (215,135) 150 8 10 58 226
12.31.2011 476,406 21,697 3,068 13,771 6,065 1,362 522,369
As of December 31, 2011, property and equipment items, arising from finance lease operations, only represented by assets classified as data processing equipment, were recorded at net amounts of R$120. As of December 31, 2012, there are no net amounts related to finance lease operations as these assets were depreciated through May 31, 2012. Depreciation of IT equipment acquired through lease operations for the years ended December 31, 2012 and 2011, recorded in line item General and administrative expenses, amounted to R$144 and R$289, respectively. As of December 31, 2012 and 2011, the Company does not have finance leases payable. As of December 31, 2012, the Company entered into loan agreements with the National Bank for Economic and Social Development (BNDES - Finame) to acquire new POS equipment, as described in note 13.(a).
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9.
GOODWILL ON ACQUISITION OF INVESTMENTS The breakdown of goodwill as of December 31, 2012 and 2011 is as follows:
Company (BR GAAP) 12.31.2012 12.31.2011 Health Project (Orizon): Goodwill on acquisition of subsidiary (a) Reclassification of the tax benefit from the goodwill merged into Orizon Prevsade Precisa Multidisplay: Goodwill on acquisition of subsidiary Reclassification of the tax benefit from the goodwill merged into Multidisplay (b) Braspag: Goodwill on acquisition of subsidiary Reclassification of the tax benefit from the goodwill merged into Braspag (b) Paggo Me-S Allowance for losses on goodwill (c) Unrealized profit (d) Total 26,269 20,690 25,966 46,979 119,904 (32,626) 87,278 26,269 26,269 (16,126) 10,143 Consolidated (IFRS and BR GAAP) 12.31.2012 12.31.2011 26,269 13,532 3,179 1,457 20,690 10,658 25,966 13,377 46,979 824,803 986,910 (32,626) (5,880) 948,404 26,269 13,532 3,179 1,457 31,348 39,343 46,979 162,107 (16,126) (5,880) 140,101
(a) In calculating equity in subsidiaries CBGS Ltda. and CBGS in 2009, the effects of PMIPL provisions, in the amounts of R$11,064 and R$15,205, respectively, were eliminated, since the effects related to the goodwill originally reported therein have been reflected in the Company, as established by CVM Instructions 319/99 and 349/01, considering that the mergers carried out in 2009 did not change the economic substance of that goodwill. In calculating equity in subsidiaries Servrede and CieloPar in 2012, the effects of PMIPL provisions, in the amounts of R$20,690 and R$25,966, respectively, were eliminated, since the effects related to the goodwill originally reported therein have been reflected in the Company, as established by CVM Instructions 319/99 and 349/01, considering that the mergers carried out in 2012 did not change the economic substance of that goodwill. (b) As there are evidences of actual economic benefits to be earned as a result of the future decrease in taxes due to the utilization of the goodwill tax benefit by the merging companies Multidisplay and Braspag, deferred income tax and social contribution assets were recognized against the equity line item referred to above in subsidiaries Servrede and CieloPar, amounting to R$14,343 and R$12,597, respectively. In the consolidated financial statements, tax credits were reclassified from line item Deferred income tax and social contribution to line item Goodwill. (c) Refers to the provision for losses on goodwill allocated to Orizon and Paggo, in the amounts of R$16,126 and R$16,500, respectively. (d) Refers to the elimination in the consolidated financial statements for 2009 of the capital gain generated by CBGS Ltda.s investment at market value in Orizon, its then jointly-controlled entity CBGS, in the proportion of CBGS Ltda.s interest in CBGS.
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The Company reviews the carrying amount of goodwill and intangible assets with indefinite useful life on an annual basis, regardless of any indication of impairment. The Company has designated those subsidiaries as cash-generating units. Health Project On January 2, 2008, CBGS subscribed 693,480 new common shares without par value in favor of its parent CBGS Ltda., for R$139,045, which represented its fair value as of that date. As part of the payment, CBGS Ltda. delivered all the shares in Polimed Ltda. and Dativa Conectividade em Sade Ltda. (Dativa) for R$71,691, transferring the goodwill on the acquisition of these subsidiaries in the amounts of R$47,145 and R$9,108, respectively, net of amortization incurred through the transaction date, generating payables of R$67,354 within two years after the transaction. Additionally, as a result of the portion paid in cash, CBGS Ltda. generated goodwill of R$16,764, net of the allowance for losses and amortization incurred through December 31, 2008. The goodwill generated in CBGS Ltda.s capital subscription process is as follows: Goodwill Goodwill recorded in CBGS Ltda. arising from the acquisition of 40.95% interest in CBGS Allowance for losses on goodwill Goodwill recorded in joint venture CBGS: Orizon Dativa Total Acquisition of control - Prevsade and Precisa On March 16, 2009, joint venture CBGS acquired all the shares in Prevsade and Precisa. The investment recorded by CBGS includes a share premium amounting to R$11,322, recorded as goodwill, which is based on expected future earnings of the companies based on the increase in operations expected for future years. Goodwill Prevsade Precisa Total Acquisition of control - Multidisplay In August 2010, the Company acquired, through its direct subsidiary Servrede, 50.1% of the control of Multidisplay and its wholly-owned subsidiary M4 Produtos, which collectively form M4U, pioneering Brazilian company in and leader of the technology platform development segment both for loading cell phones and mobile payments. Under CPC 15 - Business Combinations, the goodwill was measured as the amount by which the sum up of: (a) the consideration transferred as payment for the control of the acquire; and (b) the amount of the noncontrolling interest on the acquiree exceeded the net value (on the acquisition date) of the identifiable assets acquired. 40 7,765 3,557 11,322 Interest - % Net 55,880 (39,116) 16,764 47,145 9,108 73,017 Interest - % Net
99.99 55,880 99.99 (39,116) 16,764 40.95 40.95 19,306 3,731 39,801
40.95 3,179 40.95 1,457 4,636
The price for the acquisition of 50.1% of the capital of M4U totaled R$50,650, of which R$25,600 was paid on the acquisition date and the remaining balance, recorded as Other payables in noncurrent liabilities, will be paid in 37 monthly installments, beginning on the transaction date, contingent to the attainment of certain financial performance goals, set out in the Share Purchase and Sale Agreement. As of December 31, 2011, the amount of the investment recorded by Servrede includes goodwill on acquisition of the subsidiary in the amount of R$31,348, generated as follows: Net assets acquired Fair value of assets acquired (*) Fair value of net assets acquired (-) Total consideration paid Goodwill at December 31, 2011 2,300 17,002 19,302 50,650 31,348
(*) The fair value of the service agreements, software platform and noncompete clauses (identifiable assets acquired) of M4U in August 2010 was recognized based on the appraisal report prepared by independent appraisers. The assessment, which is in accordance with the International Valuation Standards, was conducted based on market evidences related to the prices of similar transactions. The adjustments related to the allocation of purchase price were recognized retrospectively on the amounts recorded upon acquisition, as if the business combination had been concluded on that date. Acquisition of equity interests - Paggo In September 2010, the Company, Tele Norte Leste Participaes S.A. (TNL) and Paggo Acquirer Gesto de Meios de Pagamento Ltda. (Paggo Acquirer, a TNL subsidiary) entered into an Investment Agreement to govern the interests of Paggo Acquirer and the Company (through its subsidiary CieloPar) in a new company called Paggo Solues e Meios de Pagamento S.A. Accordingly, the Company sought to improve its range of products, aligned with its strategy adopted for the mobile payment sector. Paggo Acquirer and the Company hold 50% each of the capital of Paggo. On February 28, 2011, the interest in Paggo was acquired for R$47,000, whose amount was fully paid on the acquisition date. The balance sheet as of February 28, 2011 was considered as the opening balance sheet, as follows: Book value Net assets (liabilities) acquired: Cash and cash equivalents Trade accounts receivable Other receivables Intangible assets Trade accounts payable Other payables Total 35 8,627 1,288 104,406 (9,776) (132) 104,448 Acquisition adjustments (104,406) (104,406) Fair value on acquisition date 35 8,627 1,288 (9,776) (132) 42
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The amount of the investment recorded by CieloPar includes goodwill on acquisition of shares in the amount of R$46,979, generated as follows: Net assets acquired Fair value of assets acquired (*) Total amount paid for the assets acquired Goodwill 52,224 (52,203) 21 47,000 46,979
(*) Corresponds basically to the provision for loss of software licenses recognized in jointly-controlled entity Paggo in the balance sheet as of February 28, 2011, date of recognition of the effects of allocation of goodwill on the acquisition of joint control. The adjustments related to the allocation of the purchase price were recognized retrospectively on the amounts recorded upon acquisition, as if the business combination had been concluded on that date. Based on the appraisal report on the allocation of goodwill arising from the acquisition of Paggo, prepared by independent appraisers, and according to CPC 15 - Business Combinations, the Companys Management believes that the amount paid is basically reflected in expected future earnings, i.e., goodwill. Due to the start of the corporate restructuring described in note 1, the goodwill allocated to CieloPar was used to decrease its capital, which was subsequently recorded in parent Cielo. In September 2012, the provision for losses on goodwill arising from acquisition of jointly-controlled entity Paggo was identified and recorded in the amount of R$16,500. Such loss results from the change in the planning of future revenues, including the changes in the mix of products to be offered, as well as the need for additional investments so as to adjust the jointly-controlled entitys earnings to future planning, which directly affects the cash flows for the next years. The provision for losses was recorded in the statement of income in line item Other operating expenses, net. Acquisition of control - Braspag On May 23, 2011, the Company acquired, through its direct subsidiary CieloPar, 100% of the shares of Braspag, a leading payment processing company in the Brazilian electronic payment industry. All the shares of Braspag were acquired for R$40,000. The balance sheet as of April 30, 2011 was considered as the opening balance sheet, as follows: Book value Net assets (liabilities) acquired: Cash and cash equivalents Trade accounts receivable Property and equipment and intangible assets Trade accounts payable Other payables Total 1,827 2,362 764 (407) (2,922) 1,624 Acquisition adjustments 4,638 (5,605) (967) Fair value at acquisition date 1,827 2,362 5,402 (407) (8,527) 657 42
As of December 31, 2011, the amount of the investment recorded by CieloPar included goodwill on acquisition of shares in the amount of R$39,343, generated as follows: Net assets acquired Fair value of net liabilities acquired (*) Fair value of net assets acquired Acquisition price Goodwill 1,624 (967) 657 40,000 39,343
(*) According to the appraisal report used to allocate the purchase price of Braspag, prepared by independent appraisers taking into consideration the characteristics of the acquiree, the intangible assets identified were the software platform and the customer portfolio totaling R$4,638, net of the provision for tax and social security contingencies of R$5,605. The adjustments related to the allocation of the purchase price were recognized retrospectively on the amounts recorded upon acquisition, as if the business combination had been concluded on that date. Acquisition of control - Me-S In August 2012, the Company completed the acquisition, through its direct subsidiary Cielo USA, of 100% of the shares of Me-S, a US company headquartered in Redwood City, California. The financial statements of Me-S have been prepared in accordance with accounting practices adopted in the United States of America (US GAAP) in US dollars. On the acquisition date, there were no material adjustments to align the US GAAP to the accounting practices adopted in Brazil and the IFRSs. Cielo USA allocated the fair value of Me-Ss assets acquired and liabilities assumed based on a purchase price allocation study (PPA), prepared by a specialized, independent firm; accordingly, the balance sheet in Brazilian reais as of August 31, 2012, considered as the opening balance sheet, is as follows: Book value Net assets (liabilities) acquired: Cash and cash equivalents Other assets Property and equipment Goodwill Intangible assets (a) Deferred income tax - liabilities on the fair value of intangible assets (b) Payables to merchants Other payables (c) Total 93,500 22,194 1,949 67,709 107,734 (87,916) (25,072) 180,098 Acquisition adjustments (67,709) 821,338 (304,254) (8,114) 441,261 Fair value on acquisition date 93,500 22,194 1,949 929,072 (304,254) (87,916) (33,186) 621,359
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(a) Refers to the allocation of the following adjustments at fair value of the following intangible assets: (i) software platform of R$223,300; (ii) relationship with clients of R$512,778; (iii) noncompete agreements with sellers of client portfolios of R$71,862; and (iv) other intangible assets of R$13,398, totaling R$821,338. (b) For acquisition accounting purposes and in accordance with the US tax law, the fair value of the acquisition of the investments allocated to intangible assets is not deductible for US income tax calculation purposes. Accordingly, a provision for deferred income tax was recognized. These deferred amounts are amortized in profit or loss proportionally to the amortization of intangible assets in the year. (c) On acquisition date, a provision for probable losses on tax contingencies amounting to R$8,114 was identified and recognized. The amount of the investment recorded by Cielo USA includes goodwill on acquisition of shares in the amount of R$825,097, generated as follows: Net assets acquired Fair value of assets acquired and liabilities assumed (*) Fair value of net assets acquired Purchase price: Acquisition of control - Me-S Cash and cash equivalents acquired Goodwill (*) Represented basically by the acquisition cost. Changes in intangible asset for the years ended December 31, 2012 and 2011 are as follows:
Company (BR GAAP) Balance as of December 31, 2010 Acquisition of control - Paggo Acquisition of control - Braspag Balance as of December 31, 2011 Effect of the corporate restructuring: CieloPar capital reduction through transfer of interest in Paggo to Cielo Recognition of goodwill due to downstream merger of CieloPar into Braspag (see note 7.(c)) Recognition of goodwill due to downstream merger of Servrede into Multidisplay (see note 7.(c)) Provision for loss of goodwill - Paggo Goodwill on the acquisition of Me-S Foreign exchange losses Balance as of December 31, 2012 10,143 10,143 46,979 25,966 20,690 (16,500) 87,278 Consolidated (IFRS and BR GAAP) 53,779 46,979 39,343 140,101 (16,500) 825,097 (294) 948,404
180,098 441,261 621,359 1,365,256 81,200 825,097
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10. OTHER INTANGIBLE ASSETS Annual amortization rate - % Software Project development Relationship with customers Noncompete agreement Service agreements Total 20 20 10 7.5 20 Company (BR GAAP) 12.31.2012 12.31.2011 Accumulated amortization Net Net (86,989) 35,042 (10,571) 14,473 412 - 7,006 - 6,957 (97,560) 63,890 31,768 17,479 49,247
Cost 122,031 25,044 412 7,006 6,957 161,450
Annual amortization rate - % Software (a) Project development (b) Noncompete agreement (c) Service agreements (d) Relationship with customers (e) Trademarks (f) Total 6.66 - 20 20 7.5 - 50 4 - 20 4 - 20 10
Consolidated (IFRS and BR GAAP) 12.31.2012 12.31.2011 Accumulated Cost amortization Net Net 384,734 154,612 125,338 27,263 516,843 5,924 1,214,714 (100,846) 283,888 (80,985) 73,627 (19,677) 105,661 (235) 27,028 (5,354) 511,489 (148) 5,776 (207,245) 1,007,469 41,859 17,479 12,658 14,674 1,357 88,027
(a) Software - refers to software licenses acquired from third parties and used to provide services relating to information processing and business transactions with customers. Additionally, in 2012, when 100% of Me-Ss capital stock was acquired, the adjustment to fair value of the software platform was recognized in Cielo USA in the amount of R$223,300 (equivalent to US$110,000 thousand). The independent appraisal firm engaged to issue the appraisal report measured the software platforms fair value using the average of the values obtained from applying the approaches Relief-from-Royalty (at a 16% royalty fee) and Cost Approach - Third-party Cost Estimates. The useful life defined for this software platform is 15 years. As of December 31, 2012 and 2011, the provision for discontinued software of R$2,000 is recognized as a reduction of the balance of the respective line item. (b) Project development - refers to expenses on the development of new products or services designed to increase the Companys and its subsidiaries invoicing and revenues. Below are other intangible assets generated from the allocation of the price paid for the acquisition of control of M4U, Braspag and Me-S, in August 2010, May 2011 and August 2012, respectively. These intangible assets were recorded based on appraisal reports prepared as of those dates by independent appraisers. The criteria used to measure the value of these intangible assets are described as follows: (c) Noncompete agreement Multidisplay and M4 Produtos - the amount of the noncompete agreement (With and Without) was calculated under the Income Approach, by using a discount rate of 17.5% per year, perpetuity of 4% per year and estimated useful life of 89 months.
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Me-S - Me-S entered into a contract with Synovus Financial Corporation, under which no competition shall exist in relation to the portfolio acquired from Columbus Bank and Trust Company (CB&T) and any new customers acquired through CB&T as a result of the Recommendation Agreement. The fair value of this agreement was estimated using the With and Without approach, while its useful life was defined to be the expiration date of the agreement. Additionally, Cielo USA entered into a noncompete agreement with approximately 10 employees, maturing 18 months after the end of the transaction. The fair value of this agreement was estimated based on the With and Without approach, and its useful life was defined to be the expiration date of the agreement. (d) Service agreements Multidisplay and M4 Produtos - the four service agreements with telecommunication operators were measured based on the discounted cash flow of each agreement, by using a discount rate of 16.5% per year, during the residual life of each agreement, of approximately 53 months. Me-S - when Me-S acquired CB&Ts customer portfolio, it entered into an agreement under which it would have preference in referring new customers. The fair value of this agreement was estimated based on the Excess Earnings approach, and its useful life was defined to be the expiration date of the agreement, that is, 2020. (e) Relationship with customers Braspag - the principal component of the portfolio of intangible assets is the customer portfolio, which was valued under the Income Approach, taking into consideration the balance of active customers and the respective churn rate, using an estimated useful life of 120 months. Me-S - Me-Ss customer portfolio was classified under three main groups: e-commerce, bank customer and B2B/Others. Each portfolio was valued separately under the Excess Earnings approach and taking into consideration each portfolios specific and individual features. A 10% per year discount rate was used for e-commerce and bank customer portfolios and 11% for B2B/Others. The estimated useful life was based on the years in which each portfolio reaches approximately 80% and 90% of the accumulated amount of the discounted cash flow. An interval between the lowest and the highest value obtained was adopted. (f) Trademarks - valued under the Relief-from-Royalty approach, assuming a 0.3% royalty fee, based on parameters obtained from the Royalty Source Intellectual Property Database, and a discount rate of 10%.
Changes in intangible assets for the years ended December 31, 2012 and 2011 are as follows:
Company (BR GAAP) Reflex of intangible Additions assets Amortization 12,363 12,363 1,526 412 7,006 6,957 15,901 (10,615) (3,006) (13,621)
12.31.2011 Software Project development Relationship with customers Non-compete agreement Service agreements Total 31,768 17,479 49,247
12.31.2012 35,042 14,473 412 7,006 6,957 63,890
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12.31.2011 Software Project development Noncompete agreement Service agreements Relationship with customers Trademarks Total 41,859 17,479 12,658 14,674 1,357 88,027
Additions 245,673 1,220 64,313 20,790 522,829 6,000 860,825
Consolidated (IFRS and BR GAAP) Exchange rate Write-offs Amortization changes (14) (198) (212) (12,065) (6,098) (6,310) (8,341) (5,530) (149) (38,493) (2,761) 400 (714) (95) (7,167) (75) (10,412)
Net assets acquired 11,196 60,824 35,714 107,734
12.31.2012 283,888 73,627 105,661 27,028 511,489 5,776 1,007,469
12.31.2010 Software Project development Total 20,012 20,055 40,067
Additions
Company (BR GAAP) Write-offs Amortization (1,662) (1,662) (13,430) (3,006) (16,436)
Net assets acquired 3,197 1,444 4,641
12.31.2011 31,768 17,479 49,247
26,848 430 27,278
Consolidated (IFRS and BR GAAP) 12.31.2010 Software Project development Noncompete agreement Service agreements Relationship with customers Total 23,247 20,055 14,758 17,446 75,506 Additions 31,517 430 31,947 Write-offs (1,410) (1,410) Amortization (14,692) (3,006) (2,100) (2,772) (87) (22,657)
12.31.2011 41,859 17,479 12,658 14,674 1,357 88,027
Expenses on the amortization of intangible assets were recorded in line items General and administrative expenses and Cost of sales in the statement of income. 11. TRANSACTIONS PENDING TRANSFER The amounts due by credit cardholders through the card-issuing banks and the amounts to be transferred to merchants are recorded in memorandum accounts. As of December 31, 2012 and 2011, the balances of transactions pending transfer are as follows: Company and Consolidated (BR GAAP) 12.31.2012 12.31.2011 Payables to merchants Advances from issuing banks (*) Receivables from issuing banks Total 48,821,639 39,227,878 1,410,133 545,721 (47,551,762) (38,113,232) 2,680,010 1,660,367
(*) The Company makes advanced payments of amounts that credit card issuers are required to transfer to it. 47
In addition to the provision of services consisting of the transfer of credit and debit card transaction amounts between the card-issuing banks and the merchants, the Company also guarantees accredited merchants that they will unconditionally receive the amounts of transactions paid using credit cards. As described in note 24.c), the Company adopts a strategy to mitigate card-issuing banks credit risk and hedges itself against the risk of default by such financial institutions. Based on the insignificant historical amount of Companys losses due to default from card-issuing banks and the current credit risks of these financial institutions, the Company estimates that the fair value of the guarantees provided to merchants is immaterial and, therefore, is not recognized as a liability. 12. PAYABLES TO MERCHANTS Company Consolidated (BR GAAP) (IFRS and BR GAAP) 12.31.2012 12.31.2011 12.31.2012 12.31.2011 Transactions pending transfer (a) Payables to merchants (b) Merchant deposits (c) Total (a) Transactions pending transfer Transactions pending transfer correspond to the difference between the amounts received from cardholders relating to transactions made by cardholders and the amounts to be transferred to merchants. In general, the settlement term for credit card issuers with the Company is 28 days, while the Companys average settlement term with merchants is 30 days. Therefore, the balance payable as of December 31, 2012 and 2011 refers to a float of approximately two days. (b) Payables to merchants Represented by amounts due to merchants by Me-S related to transactions captured and processed until the balance sheet dates. Such amounts are settled on the day following the date on which transactions are captured. (c) Merchant deposits Me-S maintains escrow deposits from clients in order to hedge against the potential risk of complaints from credit card holders due to fraud in the transaction or bankruptcy of merchant. 2,680,010 2,680,010 1,660,367 1,660,367 2,680,010 216,026 78,004 2,974,040 1,660,367 1,660,367
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13. BORROWINGS AND FINANCING Company Consolidated (BR GAAP) (IFRS and BR GAAP) 12.31.2012 12.31.2011 12.31.2012 12.31.2011 Finame (a) Long-term financing - ten-year bonds (b) Total Current Noncurrent Total (a) Finame The weighted average rate of the financial charges is 7.77% per year as of December 31, 2012 (8.74% per year as of December 31, 2011). The Company is the beneficiary of a credit facility with BNDES relating to Finame onlending transactions, i.e., a loan granted by BNDES to finance the acquisition of new machinery and equipment manufactured in Brazil. The amount is transferred in the form of a loan to the Company, which will confer upon the financial institution authorized to operate as financial agent (in this case, Banco do Brasil S.A. and Banco Safra S.A.) the right to receive. These financial institutions enter into the aforementioned financing transactions with the Company. The agreements are collateralized by the transfer of ownership of the assets acquired. Additionally, the Company is required to comply with the provisions applicable to BNDES agreements and the general regulatory conditions of Finame-related transactions. (b) Long-term financing - ten-year bonds In November 2012, the Company and its subsidiary Cielo USA completed a financial transaction whereby bonds were issued in the total amount of US$875 million, out of which US$470 million were issued by the Company and US$405 million were issued by Cielo USA. The amount raised by Cielo USA was used to pay the acquisition of control of Me-S. The proceeds raised by the Company were used to increase its working capital. The financing obtained is subject to an interest rate of 3.75% per year. Interest will be paid on a semiannual basis and principal in November 2022. Costs directly associated with the issuance of these bonds (banks, auditors and legal fees) were recorded in liabilities and are being allocated to profit or loss over the term of the agreement, based on the amortized cost method. There are no financial covenants in connection with the financial transactions of issuance of bonds. 337,437 952,830 1,290,267 160,606 1,129,661 1,290,267 150,848 150,848 19,666 131,182 150,848 337,437 1,776,701 2,114,138 165,040 1,949,098 2,114,138 150,848 150,848 19,666 131,182 150,848
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Changes in borrowings and financing for the year ended December 31, 2012 are as follows: Company (BR GAAP) Balance as of December 31, 2011 New borrowings Principal repayment Exchange rate changes (principal and interest) Accrued interest and charges recognized Interest paid Balance as of December 31, 2012 Borrowings and financing recorded in noncurrent liabilities The borrowings and financing classified as noncurrent as of December 31, 2012 by maturity date is broken down as follows: Company (BR GAAP) 141,421 33,318 5,271 949,651 1,129,661 Consolidated (IFRS and BR GAAP) 141,421 33,318 5,271 1,769,088 1,949,098 150,848 1,184,054 (35,487) (13,340) 25,888 (21,696) 1,290,267 Consolidated (IFRS and BR GAAP) 150,848 2,822,035 (863,727) (5,980) 35,974 (25,012) 2,114,138
Year of maturity 2014 2015 2016 2022 Total 14. TRADE ACCOUNTS PAYABLE
Consolidated (IFRS and BR GAAP) Company (BR GAAP) 12.31.2012 12.31.2011 12.31.2012 12.31.2011 Trade accounts payable Accrued payments to suppliers Total 81,655 268,578 350,233 80,754 149,505 230,259 140,383 268,578 408,961 140,310 149,505 289,815
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15. TAXES PAYABLE Consolidated Company (BR GAAP) (IFRS and BR GAAP) 12.31.2012 12.31.2011 12.31.2012 12.31.2011 Income tax and social contribution, net of prepayments Tax on revenue (Cofins) Withholding income tax (IRRF) Service tax (ISS) Tax on revenue (PIS) Other taxes payable Total 16. OTHER PAYABLES Consolidated Company (BR GAAP) (IFRS and BR GAAP) 12.31.2012 12.31.2011 12.31.2012 12.31.2011 Current liabilities: Accrual for sundry expenses Accrued vacation and related charges Accrued 13th salary and related charges Profit-sharing Payables on the acquisition of subsidiaries (*) Other payables Total Noncurrent liabilities: Payables on the acquisition of subsidiaries (*) Other payables Total 37,658 18,297 41,594 31,441 128,990 42,148 16,987 37,118 12,324 108,577 38,373 29,673 59,590 31,441 26,943 186,020 42,346 27,061 52,215 14,175 135,797 449,544 15,134 14,866 6,343 6,223 2,674 494,784 345,327 13,787 11,838 6,286 5,626 3,050 385,914 454,063 16,058 15,892 7,587 6,550 2,618 502,768 346,875 14,750 12,776 7,628 5,962 4,005 391,996
6,857 6,857
13,677 13,677
25,050 530 25,580
(*) Remaining balance payable for the acquisition of M4U, contingent to the attainment of certain financial performance goals, as described in note 9. 17. PROVISION FOR RISKS AND ESCROW DEPOSITS a) Provision for risks The Company and its subsidiaries are parties to lawsuits and administrative proceedings before courts and governmental bodies, arising in the normal course of business and involving tax, labor, civil and other matters.
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Management, based on information and assessments made by its legal counsel, through the review of pending civil and labor lawsuits and, based on past experience on the amounts claimed in lawsuits, has recognized a provision in an amount considered sufficient to cover probable losses on pending proceedings, as follows:
Company (BR GAAP) Write-offs/ Inflation reversals (ii) adjustment (62) (5,739) (7,541) (13,342) 1,961 1,070 111 3,142
12.31.2011 Tax Civil Labor Total 602,778 10,726 26,961 640,465
Additions (i) 150,599 16,642 27,913 195,154
Payments (5,216) (1,082) (6,298)
12.31.2012 755,276 17,483 46,362 819,121
Consolidated (IFRS and BR GAAP) Write-offs/ Inflation Additions (i) reversals (ii) adjustment 147,196 16,649 32,588 196,433 (62) (6,241) (11,884) (18,187) 2,011 1,070 130 3,211
Payments (5,216) (1,115) (6,331)
12.31.2012 774,546 22,593 55,994 853,133
Additions (i) 128,293 6,412 18,211 152,916
Company (BR GAAP) Write-offs/ Inflation reversals (ii) adjustment (257) (3,342) (4,733) (8,332) 930 1,800 258 2,988
Payments (228) (1,517) (462) (2,207)
12.31.2011 602,778 10,726 26,961 640,465
Consolidated (IFRS and BR GAAP) 12.31.2010 Tax Civil Labor Total 496,683 7,373 19,577 523,633 Additions (i) 125,368 12,017 23,199 160,584 Write-offs/ reversals (ii) (257) (3,342) (8,997) (12,596) Inflation adjustment 1,148 1,800 327 3,275 Payments (531) (1,517) (462) (2,510) Net assets merged 2,990 2,631 5,621 12.31.2011 625,401 16,331 36,275 678,007
(i) Correspond mainly to the increase in the provision for tax risks in the years ended December 31, 2012 and 2011, relating to taxes with suspended payment, recorded as a balancing item to Taxes on services, and other additions to the provision for civil and labor risks, represented by new lawsuits and changes in the assessment of the likelihood of losses made by the legal counsel, which were recorded as a balancing item to Other operating expenses, net, in the statement of income. (ii) Basically represented by the reversal of the provision for civil and labor risks due to prescription of the allowed time to start legal proceedings, settlement of lawsuits or change in the risk of loss as assessed by the Companys and its subsidiaries legal counsel.
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Civil lawsuits Refer basically to collection of transactions made through the Companys system that were not transferred to merchants in view of noncompliance with clauses of the affiliation contract, and compensation for losses caused by transactions not transferred at that time. As of December 31, 2012, the provision for probable losses on civil lawsuits totals R$17,483 (Company) and R$22,593 (Consolidated), and the escrow deposit balance is R$7,248 (Company) and R$9,283 (Consolidated). Additionally, as of December 31, 2012, the Company is a party to public civil lawsuits and civil investigations, most of them filed by the Public Prosecution Office or professional organizations, whose intention is to defend collective interests (such as consumers and workers rights). Judicial decisions may grant rights to groups of people (even without their consent). In many situations, the group that will benefit from a favorable outcome will only be defined after the final decision. Labor lawsuits Refers to labor lawsuits that, as of December 31, 2012, include 273 claims against Cielo and 72 against Servinet, out of which 88 had been filed by former employees. The remaining labor lawsuits, totaling 257, were filed by subcontractors, some of whom claiming the recognition of an employment relationship. The risk of loss on labor claims, when these are started, is assessed as possible. Only after the court decision is issued, the lawsuits are reclassified to probable or remote loss, depending on the decision and based on the history of losses on similar lawsuits. In general, labor lawsuits are related to salary equalization, overtime, annual bonus, rights guaranteed by agreements between the employer and the labor union, recognition of employment relationship, tenure after occupational disease, and pain and suffering. As of December 31, 2012, the provision for probable losses on labor claims amounts to R$46,362 (Company) and R$55,994 (consolidated). Tax lawsuits Refer to differences in interpretation by tax authorities, especially regarding: Cofins - noncumulativeness - in February 2004, the Company and its subsidiary Servinet filed an injunction to avoid payment of Cofins according to Law 10833/03, which requires the noncumulative calculation at the rate of 7.6%, and began to make escrow deposits for amounts determined monthly. As a result, the difference between the Cofins due calculated based on the rate established by the cumulative and noncumulative calculation method is being recorded as provision for risks since then. Escrow deposits have been made for unpaid Cofins amounts. In November 2011, Servinet withdrew the lawsuit for joining the installment payment program introduced by Law 11941/09 and is currently awaiting for the definition of the amounts to be converted into Federal Governments funds and the amounts to be calculated by the company. Cielos lawsuit is halted in the Federal Regional Court of the 3rd Region/SP due to the recognition of the matter by the Federal Supreme Court in the court records of the Extraordinary Appeal, which is pending judgment. As of December 31, 2012, the provision for risks totals R$726,036 (Company) and R$746,592 (Consolidated), and the escrow deposit balance is R$712,507 (Company) and R$733,705 (Consolidated). 53
Amazon Investment Fund (FINAM) - in 2007, the Company received a tax assessment notice for calendar year 2002, fiscal year 2003. The Federal Revenue Service alleges that the Request for Review of Tax Incentive Issue Order (PERC) was not filed within the statutory deadline and, therefore, they do not recognize the portion of corporate income tax (IRPJ) related to FINAM. The administrative proceedings are pending inclusion in the trial docket for judgment of the voluntary appeal filed by the Company by the Administrative Board of Tax Appeals (CARF). As of December 31, 2012, the balance of the provision recognized is R$13,700 (Company and consolidated). Social contribution (CSLL) 2002 - in 2007, a tax assessment notice was filed against the Company to require the payment of CSLL (adjustment portion) for calendar year 2002, plus tax assessment fine (75%) and late payment interest, as well as separate fine (50%) on the estimated CSLL amounts not paid. Due to the maintenance of the tax assessment notice at the administrative level, in July 2011, the Company decided to challenge the amounts in the court. The tax credits were fully deposited in escrow accounts and is being challenged in the court through an annulment action filed in August 2011. Currently, the tax debt annulment action is pending decision. As of December 31, 2012, the balance of the provision recognized is R$11,372 (Company and consolidated), and the escrow deposit amount is R$10,895 (Company and consolidated). Provisional Act 1212/95 - PIS/PASEP - in April 1997, the subsidiary Servinet was granted an injunction that exempted it from the payment of PIS based on billings. The Federal Government filed an appeal that was upheld by the court. On August 26, 2010, the subsidiary filed a debt expiration claim with the Third Region Finance Attorney of So Paulo. This Administrative Proceeding resulted in a Tax Execution Action, which is pending notification for filing of appeals. As of December 31, 2012, the balance of the provision recognized is R$1,941 (Consolidated). The Company and its subsidiaries are challenging other interpretations of the law by tax authorities and, therefore, as of December 31, 2012, recognized provisions for risks in the amounts of R$4,168 (Company) and R$941 (Consolidated). To cover other lawsuits assessed by the legal counsel as possible loss, the Company and its subsidiaries maintains escrow deposits in the amount of R$14,970 (Company) and R$17,752 (Consolidated). The Companys and its subsidiaries Management, based on the opinion of their legal counsel, believes that the actual disbursement of the provision for risks will not occur before December 31, 2017. Additionally, as of December 31, 2012, the Company and its subsidiaries are parties to tax, civil and labor lawsuits assessed by their legal counsel as possible likelihood of losses, for which no provision was recorded, as follows: Company (BR GAAP) Tax Civil Labor Total 85,623 104,810 27,297 217,730 Consolidated (IFRS and BR GAAP) 98,850 104,810 32,057 235,717 54
b) Escrow deposits In the years ended December 31, 2012 and 2011, the Company and its subsidiaries have escrow deposits related to the provision for tax, labor and civil risks, broken down as follows: Company (BR GAAP) 12.31.2011 Addition 12.31.2012 Tax Civil Total 592,458 4,759 597,217 145,914 2,489 148,403 738,372 7,248 745,620
Consolidated (IFRS and BR GAAP) 12.31.2011 Addition Write-off 12.31.2012 Tax Civil and labor Total 616,439 6,366 622,805 145,913 2,971 148,884 (54) (54) 762,352 9,283 771,635 12.31.2011 592,458 4,759 597,217
Company (BR GAAP) 12.31.2010 Addition Write-off Tax Civil and labor Total 464,042 3,203 467,245 128,416 2,215 130,631 (659) (659)
Consolidated (IFRS and BR GAAP) 12.31.2010 Addition Write-off 12.31.2011 Tax Civil and labor Total 18. EQUITY a) Share capital Capital as of December 31, 2012 is represented by 655,096,224 common shares (545,913,520 common shares as of December 31, 2011), fully subscribed and paid in. The Annual and Extraordinary Shareholders Meeting held on April 20, 2012 approved a capital increase of R$236,165 through the partial incorporation of the capital budget reserve. As commented in note 19.a), the number of shares outstanding as of December 31, 2012 is 654,368,446 (544,529,228 shares as of December 31, 2011). 485,596 3,608 489,204 130,843 3,429 134,272 (671) (671) 616,439 6,366 622,805
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Share capital can be increased by up to 2,400,000,000 additional common shares, regardless of any amendments to bylaws, at the discretion of the Board of Directors, which has the power to establish the share issue price, the terms and conditions for subscription and payment of shares up to the authorized capital limit. Except in the cases described below, shareholders will have the preemptive right to subscribe for shares issued in a capital increase, which shall be exercised as from the publication of the minutes of the Board of Directors meeting that approved the capital increase. Within the authorized capital limit, the Company may grant stock option or subscription to Management members and employees. The Board of Directors may exclude the preemptive right or reduce the term for exercising such right in the issuance of shares, debentures convertible into shares or subscription bonus whose placement shall be made upon trade in stock exchanges, public subscription or upon exchange for shares, within the authorized capital limit. The Board of Directors may also resolve on any shares that remained unsubscribed in the capital increase during the term for exercising the preemptive right and establish, prior to their sale on stock exchanges to the benefit of the Company, the apportionment, proportional to the amounts subscribed, among the shareholders that have indicated, in the subscription bulletin or list, interest in subscribing possible remaining shares. b) Capital reserve Represents share-based payment costs and goodwill on the subscription of shares related to capital contributions by shareholders exceeding the amount allocated to capital formation. The capital reserve is R$99,951 as of December 31, 2012 (R$88,888 as of December 31, 2011). c) Treasury shares On March 16, 2012, the Companys Board of Directors, in accordance with article 19 of its bylaws, article 30 of Law 6404/76, CVM Instruction 10/80, as amended, and CVM Instruction 358/02 and subsequent amendments thereto, approved the acquisition of up to 2,000,000 common shares, with no par value, for cancellation, disposal or holding in treasury and, especially, to fulfill the exercise of options granted under the Companys Stock Option Plan, without capital reduction, within 365 days from the disclosure of the material fact. Additionally, these share buybacks are limited to the balance available in the capital reserve calculated in the year, pursuant to articles 1 and 12 of CVM Instruction 10/80. The Companys Management should define the number of shares that will be bought back, within the authorized limits, and the buyback timing.
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Changes in treasury shares are stated as follows: Company (BR GAAP) and Consolidated (IFRS and BR GAAP) Average cost R$ per share Shares Value Balance as of December 31, 2011 Sale in January 2012 Sale in February 2012 Buy-back in March 2012 Sale in March 2012 Sale in April 2012 Balance of treasury shares before the bonus Increase in treasury shares due to the bonus (*) Sale in April 2012 Sale in May 2012 Sale in June 2012 Sale in July 2012 Sale in August 2012 Sale in September 2012 Sale in October 2012 Sale in November 2012 Sale in December 2012 Balance as of December 31, 2012 1,384,292 (7,916) (270,826) 96,850 (41,029) (1,840) 1,159,531 231,907 (137,935) (9,585) (8,912) (341,985) (10,975) (131,559) (9,660) (7,846) (5,203) 727,778 (50,859) 292 9,953 (5,800) 1,585 71 (44,758) 4,437 308 287 11,000 353 4,232 311 252 168 (23,410) 36.74 36.74 36.74 59.89 38.60 38.60 38.60 32.17 32.17 32.17 32.17 32.17 32.17 32.17 32.17 32.17 32.17
(*) Bonus: new common shares were issued, with shareholders being assigned, gratuitously, 1 new common share for each portion of 5 common shares held by them, generating an effect of 231,907 new shares in the total number of shares. The shares bought back will be held in treasury to be later disposed of, cancelled or used in the exercise of stock options granted to the Companys officers and employees. d) Comprehensive income (loss) Represent cumulative translation adjustments for translation into the foreign currency of the foreign investments and gains or losses on instruments designed to hedge foreign investments, net of taxes. The balance of the line item Comprehensive income (loss) as of December 31, 2012 is R$4,979. e) Earnings reserve - legal Recognized with amounts corresponding to 5% of net profit for the year, pursuant to article 193 of Law 6404/76, up to the limit of 20% of capital. The legal reserve balance is R$100,000 as of December 31, 2012 (R$52,767 as of December 31, 2011).
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f) Earnings reserve - capital budget On December 31, 2012, an earnings reserve was recognized due to the retention of a portion of net profit for the year, as prescribed by article 196 of Law 6404/76 and article 5, sole paragraph, of CVM Instruction 469, of May 2, 2008. In 2012, such retention is based on the capital budget, prepared by Management and approved by the Board of Directors on January 30, 2013, which will be submitted for approval at the Shareholders General Meeting to be held on April 26, 2013. The capital budget proposal is based on the working capital investment needs in order to fund the prepayment of receivables (ARV) transaction. If approved, a portion of the retained earnings will be allocated to the increase the Companys capital. The capital budget reserve balance as of December 31, 2012 is R$1,152,250 (R$708,202 as of December 31, 2011). g) Dividends and interest on capital Under Companys bylaws, shareholders are entitled to a minimum dividend of 50% of net income after the recognition of the legal reserve of 5% of net profit for the year until the reserve equals 20% of the capital. The allocation of the remaining balance of net profit for the year is decided at the Shareholders Meeting. At year-end, the Company accrues the minimum dividends not paid during the year up to the limit of the previously mentioned minimum mandatory dividend. Under bylaws, the Company may prepare semiannual or shorter balance sheets and, based on them, in accordance with the limits provided for applicable law, the Board of Directors may approve the distribution of dividends against net income. The Board of Directors may also declare intermediary dividends against existing net income based on the last balance sheet approved by the shareholders. The Board of Directors meeting, held on February 8, 2012, approved the distribution of supplementary dividends and interest on capital, based on the financial statements as of December 31, 2011, in the amounts of R$658,639 (represented by the sum of R$311,879, recorded as dividends payable as of December 31, 2011, and R$346,760, amount in excess of the minimum mandatory dividend recorded in equity as Additional proposed dividends as of December 31, 2011) and R$7,578 as interest on capital (R$6,441, net of IRRF). Dividends were paid to shareholders on March 30, 2012. Pursuant to the minutes of the meeting held on August 23, 2012, the Board of Directors approved the distribution of 70% of net profit for the six-month period ended June 30, 2012 in the amount of R$747,752, of which R$31,244 was distributed as interest on capital and R$716,508 as dividends. Proceeds were paid to shareholders on September 28, 2012. In addition, on February 6, 2013, the Board of Directors approved, ad referendum to the Shareholders General Meeting to be held on April 23, 2013, the proposal for the payment of dividends and interest on capital, in the amount of R$803,502 and R$35,916 (R$30,528, net of IRRF), respectively, related to the profit or loss recorded in the second six-month period of 2012 which, together with the dividends and interest on capital of R$747,752 paid in September 2012, are equivalent to the distribution of 70% of net profit in 2012.
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Dividends were calculated as follows: Profit for the year Earnings reserve - legal reserve Calculation base for minimum dividends Interim dividends paid Accrued dividends Interest on capital paid Accrued interest on capital IRRF on interest on capital Annual mandatory minimum dividends - 50% Amount exceeding mandatory minimum dividends 2,314,616 (47,233) 2,267,383 716,508 360,099 31,244 35,916 (10,074) 1,133,693 443,403
The portion of dividends in excess of mandatory minimum dividends, disclosed by Management after the reporting period of the financial statements but before they are authorized for issuance, should not be recorded as a liability in the financial statements, and the effects from such portion of additional dividends should be disclosed in a separate note. As of December 31, 2012, dividends in excess of the mandatory minimum totaled R$443,403 and was recorded in equity as Additional dividends proposed. 19. EARNINGS PER SHARE a) Change in the number of common shares Shares issued Shares as of December 31, 2011 Exercise of stock options: January 2012 February 2012 Treasury shares buyback - March 2012 Exercise of stock options: March 2012 April 2012 Effect on stock bonus - April 2012 Exercise of stock options: April 2012 May 2012 June 2012 July 2012 August 2012 September 2012 October 2012 November 2012 December 31, 2012 Total Common 544,529,228 7,916 270,826 (96,850) 41,029 1,840 108,950,797 137,935 9,585 8,912 341,985 10,975 131,559 9,660 7,846 5,203 654,368,446
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b) Earnings per share In compliance with CPC 41 - Earnings per Share, the following tables reconcile the net profit and weighted average of outstanding shares with the amounts used to calculate the basic and diluted earnings per share. On April 20, 2012, capital increased by R$236,165 by means of the capitalization of capital budget reserve, whereby the shareholders were assigned, gratuitously, as a bonus, 1 new common share for each portion of 5 common shares. In addition, shareholders are entitled, free of charge, as bonus, to 1 new common share for every 5 common shares held as of April 20, 2012. These events were retrospectively taken into consideration in the calculation of basic and diluted earnings as if they had occurred at the beginning of the oldest reporting period, as follows: Basic earnings per share Company Consolidated (IFRS and BR GAAP) (BR GAAP) 12.31.2012 12.31.2011 12.31.2012 12.31.2011 Net profit for the year available to common shares Weighted average number of outstanding common shares (in thousands) Earnings per share (in R$) - basic Diluted earnings per share Consolidated Company (IFRS and BR GAAP) (BR GAAP) 12.31.2012 12.31.2011 12.31.2012 12.31.2011 Net profit for the year available to common shares Diluted denominator: Weighted average number of outstanding common shares (in thousands) Potential increase in common shares as a result of the stock option plan Total (in thousands) Earnings per share (in R$) - diluted 2,314,616 1,810,327 2,314,616 1,810,327 2,314,616 653,607 3.54129 1,810,327 653,350 2.77084 2,314,616 653,607 3.54129 1,810,327 653,350 2.77084
653,607 1,068 654,675 3.53552
653,350 724 654,074 2.76777
653,607 1,068 654,675 3.53552
653,350 724 654,074 2.76777
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20. NET REVENUE Company Consolidated (BR GAAP) (IFRS and BR GAAP) 12.31.2012 12.31.2011 12.31.2012 12.31.2011 Gross operating revenue Tax on services Total 5,579,914 (571,361) 5,008,553 4,514,574 (463,405) 4,051,169 6,040,692 (613,286) 5,427,406 4,706,146 (497,420) 4,208,726
Gross operating revenue is comprised of commissions charged to merchants, rental of POS equipment and services rendered for the use of network and for the processing of information in medical area, as well as other services related to electronic payment means. 21. EXPENSES BY NATURE The Company elected to present the consolidated statement of income by function. The breakdown of costs of services and net operating expenses by nature is as follows: Consolidated (IFRS and BR GAAP) Company (BR GAAP) 12.31.2012 12.31.2011 12.31.2012 12.31.2011 Personnel expenses Depreciation and amortization Professional services Acquisition costs (a) Sales and marketing (b) Costs on drugs and mobile telephone credits in subsidiaries (c) Other Total Classified as: Cost of services provided Personnel expenses General and administrative expenses Sales and marketing Other operating expenses, net Total 221,208 289,070 237,015 1,172,745 236,412 121,598 2,278,048 1,499,387 124,416 295,853 236,412 121,980 2,278,048 211,008 228,749 214,887 986,701 184,665 76,527 1,902,537 1,273,584 118,254 271,125 184,665 54,909 1,902,537 341,679 317,326 120,532 1,313,198 240,818 150,392 178,196 2,662,141 1,852,788 218,282 225,584 240,818 124,669 2,662,141 311,090 237,792 100,211 990,306 184,885 100,848 113,521 2,038,653 1,425,240 195,116 176,223 184,885 57,189 2,038,653
(a) Acquisition costs are mainly represented by expenses on logistics and maintenance of POS equipment, supplies to merchants, customer registration and service, telecommunication services, and capture and processing of transactions. (b) Marketing and sales expenses include campaigns for trademark development, marketing and advertising, endomarketing and sales incentives to partners and issuing banks. (c) Correspond to the cost of the product sold related to drugs and mobile credits sold by indirect subsidiaries Precisa e Multidisplay, respectively. 61
22. RELATED-PARTY BALANCES AND TRANSACTIONS In the normal course of activities and under market conditions, the Company conducts transactions with related parties, such as receivables from card-issuing banks, which are the financial groups in which its controlling shareholders hold interests, and expenses on and income from services provided by Me-S, Servinet, Orizon, Multidisplay, M4 Produtos, CieloPar, Braspag and Paggo. In conducting its business and engaging services, the Company makes market quotations and surveys intended to find the best technical and pricing terms, and the decision on whether or not a transaction should be conducted is made by the chief decision maker of the function purchasing the product or service, regardless of whether such transaction is conducted with related or unrelated parties. Also, the type of business conducted by the Company requires it to enter into agreements with several card-issuing entities, some of which are its shareholders. The Company believes that all the agreements entered into with related parties are carried out on an arms-length basis. The tables below include the balances as of December 31, 2012 and 2011 and the amount, by type of agreement, shareholders and subsidiaries, of transactions with related parties conducted by the Company related to the years ended December 31, 2012 and 2011:
Company (BR GAAP) 12.31.2012 Subsidiaries Servinet (10,547) Orizon 118 M4U (129) Paggo 16 Braspag 15 (733) Total 88,157 4,026 149 (11,409) (16,129) 12.31.2011
Shareholders Banco Banco do Bradesco Brasil S.A. S.A. Assets (liabilities and equity): Short-term investments (a) Trade accounts receivable Receivables from subsidiaries Payables to subsidiaries (e) Gains (losses) on derivatives (f) 64,323 1,773 (8,561) 23,834 2,253 (7,568)
Total 161,300 2,214 134 (11,055) 12.31.2011
Shareholders Banco Banco do Bradesco Brasil S.A. S.A. Revenues: Income from short-term investments (a) Revenue from other services (b) Revenue from the rental of POS equipment (c)
Company (BR GAAP) 12.31.2012 Subsidiaries Servinet Orizon Multidisplay M4U Paggo Braspag Total
Total
6,190 12,261 -
2,027 12,642 -
247 407
1,373 -
3,681 -
271 -
157 -
8,217 30,632 407
17,442 16,351 1,839
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Shareholders Banco Banco do Bradesco Brasil S.A. S.A. Expenses: Other operating expenses membership commission Other operating expenses (d) Service agreement with Servinet (e) Data processing services (g)
Company (BR GAAP) 12.31.2012 Subsidiaries Servinet Orizon Multidisplay M4U Paggo Braspag Total
12.31.2011
Total
(5,442) (11,415) -
(3,978) (2,474) -
(119,898)
(2,254)
(5,555)
(9,420) (13,889) (119,898) (7,809)
(12,920) (12,319) (119,436) (3,809)
(a) The terms, charges and interest rates of short-term investments were agreed under conditions similar to those applicable to unrelated parties. (b) Correspond to fraud prevention and bank account blocking services provided by the Company to the shareholder banks and commissions for the processing of transactions for M4 Produtos and Multidisplay. These related-party transactions are carried out at prices and under conditions similar to the transactions carried out with other issuing banks. (c) See note 5.(e). (d) Services contracted with shareholder banks, relating to: (i) corporate collective life insurance; (ii) health and dental insurance; and (iii) private pension agreement. The Company understands that the financial conditions adopted by the shareholders in respect of prices, terms and other conditions were applied under conditions similar to those adopted with respect to third parties. (e) The Company engaged Servinet to provide POS equipment installation and maintenance service to merchants. The payment for the services provided is determined based on the costs incurred by Servinet when the service is provided, plus taxes and a payment margin. (f) Refer to gains on transactions to hedge net foreign investments, recorded in comprehensive income, as described in note 24.(e). (g) Refer to data processing services provided by M4 Produtos and Braspag.
Main related-party transactions Balances of issuing banks Receivables from issuing banks, whose net amounts are recorded under the caption Payables to merchants, refer to the amounts payable by the issuers to the Company arising from the transactions carried out with credit and debit cards, which will be subsequently transferred by the Company to the authorized merchants. These related-party transactions are carried out at prices and under conditions similar to the transactions carried out with other issuers of credit or debit cards. Domicile bank incentives The Company entered into agreements with domicile banks to promote the invoicing of commissions and prepayment of receivables. In these agreements, the Company remunerates the banks based on the performance goals established therein.
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Advanced payment of receivables with issuing banks The Company has agreements with issuing banks to transfer in advance the amounts from the transactions carried out by the banks customers with credit cards. These advanced payments are performed in order to generate short-term working capital and the amounts deposited in current account are net of rates for advances, on a pro rata basis, calculated at the market rates that do not significantly differ from those adopted by the issuing banks that are not the Companys shareholders. Use of Cielo authorized network (Value Added Network - VAN) The Company entered into service agreements with Companhia Brasileira de Solues e Servios - CBSS. These services include the capture, authorization and processing of transactions with ALELO cards, as well as services provided to merchants, operational and financial back office services, protection against fraud, issuance of statements and financial control over the electronic transactions resulting from these transactions. The rates and tariffs charged from these related-party transactions are carried out at prices and under conditions similar to the transactions carried out with other banks. VAN services and connectivity rate - Amex On June 30, 2010, the Company entered into a nonexclusive service agreement for the capture of credit card transactions issued under Amex (VAN) card association, with BankPar S.A. (BankPar), a Bradesco Groups company which holds the rights over the American Express (Amex) card association in Brazil. In addition, in December 2011, the Company entered into an amendment to the service agreement to renew the VAN agreement by December 31, 2012, as well as to balance the economic benefits of the Company and BankPar in connection with this agreement, based on the appraisal prepared by the advisors of a specialized investment bank. In financial terms, this balance was performed by including the connectivity rate payable by the Company, in the amount of R$38 million, to BankPar for the technology that provides the Companys access to the systems of the Amexs merchants. The expansion of this partnership with Amex card association has a high potential for generating value to the Company as it represents an addition to its portfolio of card associations. The execution of these documents was approved by the Board of Directors in accordance with the legal restrictions. Bank account blocking Refers to bank account blocking service agreements entered into with various banks, whose service consists of ensuring to the banks the blocking of the bank accounts of the authorized merchants that carry out financial transactions with them. These related-party transactions are carried out at prices and under conditions similar to the transactions carried out with other domicile banks. Recordkeeping of Cielos shares A stock book-entry service agreement entered into between Cielo and Banco Bradesco S.A., whereby the latter provides stock book-entry and share certificate issuance services to the Company.
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Operating services - stock option program Service agreement consisting of rendering operating services for the stock option program and the related grants entered into with Bradesco S.A. Corretora de Ttulos e Valores Mobilirios. Other widespread agreements In addition to the balances recorded, the Company engages other services from the main shareholders, namely: Cash management services. Insurance. Private pension services. Corporate credit card. Payment to suppliers. 23. INCOME TAX AND SOCIAL CONTRIBUTION The effective rate of income tax and social contribution for the years ended December 31, 2012 and 2011 is as follows:
Company (BR GAAP) 12.31.2012 12.31.2011 Income before income tax and social contribution Statutory tax rates - % Income tax and social contribution at statutory rates Interest on capital tax benefit Permanent effect on the RTT adjustment related to the Stock Option Plan (*) Paggo goodwill impairment Recognition of deferred income tax and social contribution assets on adjustments to present value Effect on permanent differences, net Income tax and social contribution Current Deferred 3,492,544 34 (1,187,465) 22,834 (8,033) (5,610) 346 (1,177,928) (1,283,184) 105,256 2,708,519 34 Consolidated (IFRS and BR GAAP) 12.31.2012 12.31.2011 3,511,694 34 2,723,706 34 (926,060) 10,770 (3,817) 11,990 326 (906,791) (997,437) 90,646
(920,896) (1,193,976) 10,770 22,834 (3,817) (8,033) (5,610)
11,990 3,761 (6,291) (898,192) (1,191,076) (987,310) (1,304,082) 89,118 113,006
(*) Refers to the permanent addition of the amounts related to the Stock Option Plan to the income tax and social contribution tax basis, under the Transitional Tax Regime (RTT). In addition, 2011 deferred income tax and social contribution assets were written off, relating to the recognition of this capital reserve, since, up to 2011, it was recorded as temporary difference.
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The donations to the Cultural and Artistic Activities (Rouanet Law), Sports and Fund for Children and Adolescents Rights were recorded in line item Income tax expenses - current. The tax incentives recorded in line item Income tax expenses - current, in Company and Consolidated, for the years ended December 31, 2012 and 2011, totaled R$19,279 and R$19,357, respectively. 24. FINANCIAL INSTRUMENTS The estimated fair values of the Groups financial assets and financial liabilities were determined using available market inputs and appropriate valuation methodologies. However, considerable judgment was required to interpret market input and then develop the most appropriate fair value estimates. Accordingly, estimates presented herein are not necessarily indicative of the amounts that could be realized in the market. The use of different market methodologies may have a significant effect on the estimated realizable values. These financial instruments are managed through operating strategies which aim at obtaining liquidity, security, and profitability. The control policy consists of permanent monitoring of the contracted rates compared to market rates. The Group does not make investments for speculative purposes, either in derivatives or any other risk assets. a) Capital risk management The Group manages its capital to ensure that its companies can continue as going concerns, and at the same time maximizes the return to all their stakeholders by optimizing the debt and equity balance. The Groups equity structure consists of its net debt (borrowings and financing detailed in note 13, less cash and cash equivalents) and equity. The Group is not subject to any external capital requirement. The debt ratio at the end of the year is as follows: Company (BR GAAP) 12.31.2012 12.31.2011 Debt (i) Cash and cash equivalents Net debt Equity (ii) Debt ratio, net (1,290,267) 282,487 (1,007,780) 2,277,173 44.26% Consolidated (IFRS and BR GAAP) 12.31.2012 12.31.2011 (150,848) 292,915 142,067 1,424,564 -
(150,848) (2,114,138) 240,998 431,155 90,150 (1,682,983) 1,409,593 2,286,107 73.62%
(i) Debt is defined as short- and long-term borrowings, as detailed in note 13. (ii) Equity includes the entire share capital and the Groups reserves, managed as capital.
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b) Financial assets and financial liabilities The Groups financial assets and financial liabilities refer to cash and cash equivalents, trade accounts receivable, receivables from subsidiaries, escrow deposits, trade accounts payable to merchants, subsidiaries and due to the acquisition of subsidiaries, suppliers and borrowings and financing. The estimated fair values of financial instruments as of December 31, 2012 are as follows:
12.31.2012 Company Consolidated (IFRS and BR GAAP) (BR GAAP) Carrying Market Carrying Market amount value amount value 282,487 282,487 431,155 431,155 5,586,770 5,586,770 5,872,855 5,872,855 149 149 745,620 745,620 771,635 771,635 350,233 350,233 408,961 408,961 2,680,010 2,680,010 2,974,040 2,974,040 11,409 11,409 31,441 31,441 31,441 31,441 1,290,267 1,294,611 2,114,138 2,119,411
Type Cash and cash equivalents Loans and receivables Trade accounts receivable Loans and receivables Receivables from subsidiaries Loans and receivables Escrow deposits Loans and receivables Trade accounts payable Other financial liabilities Payables to merchants Other financial liabilities Payables to subsidiaries Other financial liabilities Payables on the acquisition of subsidiaries Other financial liabilities Borrowings and financing Other financial liabilities
The market value of financial assets and financial liabilities and short- and long-term financing was determined, when applicable, by using current interest rates available for transactions conducted under similar conditions and with similar maturity dates. c) Credit risk The Company has an instrument to mitigate the credit risk of the VISA card-issuing banks, used as a hedge against the risk of default by such banks. This hedging instrument consists of the commitment assumed by the VISA brand, pursuant to foreign regulations, to guarantee the transfer to the Companys merchants of all sales made with VISA cards on the related due dates in the event of default by an issuer. The guarantee model implemented by the VISA brand together with the Company prescribes the provision of guarantees (collaterals or bank guarantees) considering the credit risk of the issuer, sales volume with VISA cards and residual risk of default by cardholders. The provision of guarantees is mandatory for all card-issuing banks with credit risk, and amounts are reviewed periodically by VISA and the Company. If the issuer does not provide the requested guarantees, it is not accepted as a member of the system or is disqualified as such. Since July 1, 2010, the Company has also started accrediting the MASTERCARD brand, and the related credit risk is guaranteed by the MASTERCARD brand itself, in case of default by the card-issuing banks with the Company. The MASTERCARD brand requires card-issuing banks participating in the system to provide guarantees, collaterals or bank guarantees. If the issuer does not provide the requested guarantees, it is not accepted as a member of the system or is disqualified as such.
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The brand systems also prescribe that cardholders can contest transactions made with credit cards within certain timeframes from the date of the transaction. For this purpose, the Company enters into an affiliate agreement with authorized merchants establishing all rules for acceptance of these cards at the point of sale. If transactions are contested by cardholders and the merchant is no longer an affiliated member at the date of the contestation or has no amounts receivable from the Company, then collection will be made through debit to bank account or outside collection agencies and there may be losses to the Company. The Company leases POS equipment to all affiliated merchants that do not have their own systems to capture transactions. The rent is deducted, on the due date, from the amount of transactions payable to merchants. However, the rent may not be received on the due date whenever there are no amounts payable to merchants. In these cases, the Company collects the rent through debit to future sales, bank account or outside collection agencies, and losses on rent may be incurred. d) Risk of fraud The Company uses a sophisticated antifraud system to monitor transactions with credit and debit cards, which detects and identifies suspected fraud at the time of the authorization and sends an alert message to the card-issuing bank for it to contact the cardholder. e) Derivative transactions Derivative policy According to the internal policy, the Companys finance income (costs) must arise from the generation of cash from its activities rather than from gains in the financial market. Accordingly, it considers that derivatives should only be used to hedge against potential exposures arising from the risks to which it is subject, without speculative purposes. The contra entry to a derivative transaction should be a non-hedged asset or liability. The criteria adopted for definition of the notional value of the derivatives is linked to the amount of the debt and/or assets denominated in foreign currency. Hedges of net investments in foreign operations The Company, through the raising of funds from the issuance of bonds in November 2012, designated as investment hedge of foreign transactions the derivative financial instrument denominated NDF, at the notional amount equivalent to US$470,898 thousand, which is considered sufficient to hedge the foreign investment against the US exchange rate changes. The derivative contracted by the Company to hedge the investment made in Cielo USA (note 7), in the amount of US$310,791 thousand in November 2012, was used to hedge a portion of the Companys investment in the foreign subsidiary against exchange gains and losses, in accordance with the Companys risk management strategy. Derivative amounts are increased by income tax and social contribution gross-up (rate of 34% under Brazilian tax laws). The accumulated profit or loss from derivatives designated as hedge of the foreign net investment, net of tax, is recorded in equity and includes accumulated losses of R$10,645 for the year ended December 31, 2012. 68
The Company, after the funds raised on the issuance of bonds in November 2012 and based on the interpretation 16 of the International Financial Reporting Interpretations Committee IFRIC (ICPC 06 - Net Investment Hedge of Foreign Transactions, issued in July 2008, in accordance with IAS 39 (CPC 38 - Financial Instruments: Recognition and Measurement), elected to designate as hedge for the investment in Cielo USA, in the amount of US$311,981 thousand, the ten-year bonds held by the Company, in the amount of US$470,000 thousand. The designated financial instrument value, i.e., the ten-year bonds, is increased by the income tax and social contribution gross-up (rate of 34% under Brazilian applicable legislation) for purposes of analysis of the hedge accounting effectiveness. The net investment hedge effects were recorded in accordance with CPC 38 and IAS 39 Financial Instruments: Recognition and Measurement. Accordingly, the Company formally designated the transactions by documenting: (i) the hedge purpose; (ii) hedge type; (iii) nature of the hedged risk; (iv) identification of the hedged item; (v) identification of the hedging instrument; (vi) relationship between the hedge and hedged item (retrospective effectiveness test); and (vii) prospective effectiveness. The adoption of the effectiveness tests described in the accounting practices confirmed the effectiveness of the financial instrument; accordingly, in the year ended December 31, 2012, there was no ineffectiveness recorded in profit or loss from net investment hedges in Cielo USA; consequently, gains or losses from these transactions were fully recorded in the Companys equity. f) Currency risk The Group conducts a few transactions in foreign currency, mainly represented by transactions performed by foreign credit card holders in establishments in Brazil. In addition, as described in note 1, on August 31, 2012 the Company acquired the control of Me-S through its holding Cielo USA, both headquartered in the United States of America, whose transactions are conducted in US dollar (functional currency). The exposures to currency risks are managed in accordance with the criteria set by the policies approved using currency futures contracts. As of December 31, 2012, the net exposure to foreign exchange rate risk, in thousands of US dollars, is as follows:
Company (BR GAAP) Assets: Cash and cash equivalents Trade accounts receivable Other assets Investments in foreign currency Intangible assets, including goodwill Total 20,742 311,981 332,723 Consolidated (IFRS and BR GAAP) 63,256 114,001 10,208 854,072 1,041,537
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Company (BR GAAP) Liabilities: Payables to merchants Other liabilities Repayment of borrowings and financing - principal Repayment of borrowings and financing - interest Deferred income tax on items allocated to intangible assets related to the acquisition of Me-S Tax effect on hedge instruments - bonds designated as hedge of the net foreign investment Total Long position in US dollars (6,129) (470,000) (2,030) 159,800 (318,359) 14,364
Consolidated (IFRS and BR GAAP) (150,057) (8,850) (875,000) (4,201) (150,628) 159,800 (1,028,936) 12,601
The Company enters into forward exchange transactions for US dollars to hedge against fluctuations in exchange rates, which reduces significantly potential currency risks. Sensitivity analysis of foreign currency The Group is mainly exposed to US dollar fluctuations. The table below shows the Groups sensitivity to a 10% appreciation and depreciation in Brazilian real (R$) against this currency. 10% is the sensitivity rate used to internally present the foreign currency risks to Managements key personnel and corresponds to Managements assessment of the possible changes in exchange rates. Only outstanding monetary items in foreign currency are included in this sensitivity analysis, whose translation is adjusted at the end of the reporting period based on a change of 10% in exchange rates. The sensitivity analysis includes intercompany borrowings when the loan is denominated in any currency other than the creditors or debtors currency. A positive figure indicates an increase in profit or loss and equity when the Brazilian real is appreciated by 10% against the foreign currency considered. Considering the depreciation of 10% of the Brazilian real against the foreign currency considered, there would be an equivalent effect against profit or loss and equity and the balances presented would be negative. Company Consolidated (IFRS and BR GAAP) (BR GAAP) 12.31.2012 12.31.2011 12.31.2012 12.31.2011 Profit or loss (i) +10% Equity (ii) +10% Profit or loss (i) - 10% Equity (ii) - 10% 2,985 (2,985) 806 (806) 5,834 (5,834) 806 (806) -
(i) Refers mainly to the exposure of trade accounts receivable and trade accounts payable in US dollars at the end of each reporting period.
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(ii) Results from the changes in the fair value of the financial instruments designated as hedge instruments of net foreign investments. The Groups exposure to the foreign currency increased in current year mainly due to the acquisition of foreign investments. In addition, the change in equity from the variation of 10% of the Brazilian real would be null, taking into consideration that the exchange rate changes on the financial instrument (bond loan), net of taxes, would be offset against the foreign transaction translation. g) Interest risk on short-term investments The Companys results of operations are subject to significant fluctuations resulting from short-term investments with floating interest rates. Pursuant to its financial policies, the Company invests its funds in prime banks and has not entered into transactions with financial instruments for speculative purposes. h) Liquidity risk The Group manages the liquidity risk by maintaining proper reserves, bank and other credit facilities to raise new borrowings that it considers appropriate, based on the continuous monitoring of budgeted and actual cash flows, and the combination of the maturity profiles of financial assets and financial liabilities. i) Capital risk management The Group manages its capital to ensure that the Groups companies can continue as going concerns, and at the same time maximizes the return of all their stakeholders by optimizing the debt and equity balance. The Groups equity structure consists of its net debt (borrowings detailed in note 13 less cash and cash equivalents stated in note 4), and equity (which includes capital, reserves, and earnings reserve as stated in nota 18). The Group is not subject to any external capital requirement. j) Interest rate sensitivity analysis - short-term investments and financing The funds from the Companys short-term investments are impacted by changes in the CDI rate (source: Cetip) and borrowings are impacted by the changes in the long-term interest rate (TJLP (source: Central Bank of Brazil - Bacen)) and Libor (source: Bloomberg). As of December 31, 2012, assuming an increase or reduction of 10%, 25% and 50% in the interest rates, there would be an increase or decrease in finance income (costs), as follows: Company (BR GAAP) 10% 25% 50% Short-term investments Borrowings and financing Consolidated (IFRS and BR GAAP) 10% 25% 50%
1,968 4,921 9,842 2,392 5,980 11,960 2,581 6,453 12,906 3,438 8,594 17,188
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25. COMMITMENTS The Company is engaged in the capture, transmission, processing and settlement of transactions with credit and debit cards. To conduct said activities, the Company entered into the following agreements: a) Lease agreements As of December 31, 2012, future annual payments under lease agreements in effect are estimated as follows: Year 2013 2014 2015 Total 13,814 14,688 15,617 44,119
Most contracts specify a termination fine equivalent to three-month rent, and a partial return can be negotiated for each case. b) Telecommunications, POS equipment, technology and logistics services As of December 31, 2012, future payments under telecommunications, POS equipment, and technology and logistics service agreements in effect are estimated as follows: Year 2013 2014 2015 Total 591,524 628,929 668,698 1,889,151
Transactions capture and processing agreements stipulate termination fines totaling R$7,710. Logistics service agreements are in effect since June 2007, with a minimum period of 12 months and a termination fine of R$10,952. Telecommunication agreements do not provide for a termination fine. c) Bank guarantees As of December 31, 2012, based on the agreements in effect, bank guarantees are as follows: Type Guarantee for personal recharge and multioperator (*) 2,500
(*) Collateral assigned to the subsidiary Multidisplay by financial institutions to secure the payment of agreements with mobile telephone companies.
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26. PROFIT-SHARING The Company and its subsidiaries pay profit-sharing to their employees and officers, subject to the achievement of operational goals and specific objectives, established and approved at the beginning of each year. Employees and Management profit-sharing amounts for the years ended December 31, 2012 and 2011 were recorded in line item Personnel expenses in the statement of income, as follows: Consolidated Company (IFRS and BR GAAP) (BR GAAP) 12.31.2012 12.31.2011 12.31.2012 12.31.2011 Employees Officers Total 27. MANAGEMENT COMPENSATION Key Management personnel includes the members of the Board of Directors and the Supervisory Board, the CEO, and the officers. 12.31.2012 Compensation Fixed Variable (*) Officers Board of Directors and Supervisory Board Total (*) Not including the stock option plan (see note 31). Managements (Executive Committee and Board of Directors) overall compensation in 2012, set by the Annual General Meeting held on April 20, 2012, was R$29,000, plus related taxes and contributions thereon, as prescribed by the prevailing laws, whereas the annual compensation payable to the members of the Supervisory Board was R$309. 28. FINANCE INCOME (EXPENSES)
Company (BR GAAP) 12.31.2012 12.31.2011 Finance income: Interest on short-term investments Interest - securitization abroad Other finance income Total 19,684 418 20,102 26,313 1,596 364 28,273 Consolidated (IFRS and BR GAAP) 12.31.2012 12.31.2011 23,919 633 24,552 29,381 1,596 1,571 32,548
29,913 11,681 41,594
27,734 9,384 37,118
42,778 12,902 55,680
40,808 9,384 50,192
Total
4,976 1,602 6,578
9,410 14,386 - 1,602 9,410 15,988
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Company (BR GAAP) 12.31.2012 12.31.2011 Financial expenses: Interest - securitization abroad Late payment interest and fines Late payment interest and risk fines Advanced receivables from issuers Interest on borrowings Charges on borrowings Inflation adjustment on the debt balance relating to the acquisition of a 50.1% interest in M4U Other financial expenses Total Prepayment of receivables: Income from prepayment of receivables (a) Present value adjustment expenses (b) Total Exchange rate changes, net (c) Total (159) (2,977) (49,339) (25,811) (77) (5,736) (84,099) (1,596) (104) (2,826) (51,087) (9,820) (65,433)
Consolidated (IFRS and BR GAAP) 12.31.2012 12.31.2011 (228) (3,046) (49,339) (34,375) (1,599) (6,393) (6,261) (101,241) (1,596) (152) (3,155) (51,087) (10,265) (66,255)
847,894 (30,419) 817,475 5,639 759,117
611,534 (24,867) 586,667 673 550,180
847,894 (30,419) 817,475 5,643 746,429
611,534 (24,867) 586,667 673 553,633
(a) Revenue from the prepayment of receivables in the years ended December 31, 2012 and 2011 comprises income from the transaction volume for the years then ended. (b) As described in note 5.(a), the present value adjustment recorded in the consolidated financial statements was calculated on prepaid receivables. The assumptions adopted for the calculation are as follows:
The interest rates applied were the same interest rates contracted for advances from
customers.
Calculations were carried out separately, discounting cash flows for each recorded
receivable.
The Companys Management recognized the present value adjustment of accounts receivable balance in view of the materiality of values adjusted, of interest rates and transaction terms. Monthly, Management reviews the assumptions mentioned and the changes are recorded in profit or loss for the year. (c) Arises basically from the amount received in US dollars from Visa International Service Association and Mastercard Worldwide related to transactions with foreign credit and debit cards, the receivables securitization abroad transaction (through June 2011), and gains and losses originally denominated in foreign currency, represented by income in the amount of R$8,554 (R$1,730 as of December 31, 2011) and expenses totaling R$2,915 (R$1,057 as of December 31, 2011).
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29. OTHER OPERATING EXPENSES, NET Represented by: Company Consolidated (BR GAAP) (IFRS and BR GAAP) 12.31.2012 12.31.2011 12.31.2012 12.31.2011 Allowance for doubtful accounts Provision for risks, net Losses on frauds and chargeback Allowance for losses on inactive POS equipment Provision for losses on goodwill - Paggo Write-off of property and equipment and intangible assets Revenue from sale of POS equipment Income from contractual fines Other operating income (expenses) Total 30. INSURANCE As of December 31, 2012, the Company has the following insurance agreements: Type Civil liability and Directors and Officers Nominated risks (fire, windstorm and smoke, electrical damages, electronic equipment, theft and flood) Loss of profits Vehicles POS storage POS transportation 31. STOCK OPTION PLAN The Extraordinary General Meeting held on June 1, 2009 ratified the approval of the Companys stock option plan, which is effective for ten years counted from the date of first grant to beneficiaries. Stock options may be granted provided that capital dilution does not exceed, at any time during the effectiveness of the plan, 0.3% per year. The Companys Board of Directors will define the beneficiaries eligible for the stock option plan annually or at the frequency considered appropriate. Insured amount 105,000 36,962 11,117 1,052 58,668 1,250,000 (46,624) (31,912) (4,839) (124) (16,500) (15,275) 3,431 5,207 (15,344) (121,980) (29,275) (28,560) (4,289) 1,108 (16,073) 2,183 8,757 11,240 (54,909) (47,161) (32,429) (4,839) (124) (16,500) (15,646) 3,431 5,207 (16,608) (124,669) (29,275) (32,460) (4,289) 1,108 (16,442) 2,183 8,757 13,229 (57,189)
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At meetings held on July 1, 2009, September 23, 2009, July 6, 2010, July 22, 2011 and July 23, 2012, the Board of Directors approved the first, second, third, fourth and fifth grants of options for the purchase of common and/or restricted shares, respectively, as shown in the table below, without any option for the settlement of options in cash. In 2010 and 2009 (first, second and third grants), the beneficiaries under the Stock Option Plan and Vesting Agreement may exercise the first portion of the stock options granted, equivalent to 1/3 of total, after one year. The Extraordinary General Meeting held in April 2011 approved the changes in the fourth and fifth grants and the following changes to the plan: possibility of eligible employees choosing a stock option plan, a restricted stock plan or a combination of both; exercise of 50% of the options and/or restricted shares after two years and 50% after three years. In addition, the Board of Directors meeting held on February 29, 2012 approved the Companys Management retention plan under the Restrict Shares program. The purpose of this program is to minimize the risks for the Companys business arising from the loss of Management members and enhance the commitment of such members to long-term results. The Management retention program is effective for two years and the shares granted will be donated to the executives who remain in the Company at the end of the program.
Number of shares Cancelled Exercised Bonus Exercise Fair value of price options (R$ per share) (R$ per share) 23.69 35.32 33.33 26.05 44.48 10.43 13.75 13.38 12.48 52.28 18.34
Grant date July 2009 September 2009 July 2010 July 2011 February 2012 July 2012 Total
Granted 1,042,320 220,480 1,073,680 1,315,854 96,850 987,487 4,736,671
Balance
(90,596) (948,230) 68,717 72,211 (55,335) (142,482) 40,505 63,168 (279,307) (532,777) 163,314 424,910 (164,970) (7,132) 262,413 1,406,165 - 19,369 116,219 (7,703) (6,838) 972,946 (597,911) (1,637,459) 554,318 3,055,619
In 2012, the fair value of the options was measured using the Black & Scholes pricing model. In the previous years, the Company used the binomial methodology, based on the following economic assumptions: July and September 2009 Dividend yield Share price volatility Vesting period 6.66% 36.67% 5 years Granting date July 2010 5.73% 37.51% 5 years July 2011 8.87% 38.27% 6 years July 2012 5.36% 31.65% 6 years
The fair value is allocated to profit or loss for the year with a contra entry to the capital reserve on a straight-line basis over a term of up to 36 months. In the year ended December 31, 2012, expenses totaled R$12,851 (R$10,775 as of December 31, 2011), recorded in line item Personnel expenses, and 985,271 shares were exercised in the amount of R$1,788 as of December 31, 2012 (429,653 shares in the amount of R$5,419 as of December 31, 2011), and the total shares granted was recorded in line item Capital reserve as of December 31, 2012 in the amount of R$11,063 (R$5,356 as of December 31, 2011). 76
32. PENSION PLAN The Company contributes monthly to a defined contribution pension plan (PGBL) for its employees, and contributions made during the year ended December 31, 2012 amounted to R$5,370 (R$4,911 as of December 31, 2011), recorded under line items Cost of services and Personnel expenses. 33. NONCASH TRANSACTIONS Company (BR GAAP) 12.31.2012 Acquisition of POS equipment through new Finame loans Capital reduction in CieloPar Exchange differences on net foreign investments Recovery of the effects from the PMIPL provisions in subsidiaries: CieloPar Servrede Capital increase through debt assumption Exchange rate changes on borrowings and financing designated as hedge financial instruments of net foreign investment PPA on the acquisition of Me-S, net of tax effects Proposed dividends and interest on capital 34. SEGMENT REPORTING The Company has a single business segment, which is reported consistently with the internal reports provided to the Chief Operating Decision-Maker - CODM. This segment derives from the provision of services related to the capture and processing of credit and debit card transactions, other payment means and related services. The consolidated financial information significantly represents this segment. With regard to information on geographical area, the Company conducts transactions in Brazil and in the United States of America through its subsidiaries Me-S and Cielo USA. Summarized financial data for those subsidiaries is disclosed in Note 3. 35. APPROVAL OF INDIVIDUAL AND CONSOLIDATED FINANCIAL STATEMENTS The individual and consolidated financial statements were approved by the Companys Board of Directors and authorized for issuance on February 6, 2013. 222,147 46,979 6,845 24,452 27,842 31,441 13,340 396,015 Consolidated (IFRS and BR GAAP) 12.31.2012 222,147 6,845 5,980 517,084 396,015
2012-2388
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Dear Shareholders: We present this Management Report and the Financial Statements of Cielo S. A. for the fiscal year ended December 31, 2012 and 2011, together with the Independent Auditors Report and the Fiscal Council Report.
MESSAGE FROM THE MANAGEMENT 2012 was a unique year not just for Cielo, but also for the electronic payment industry as a whole. From a market standpoint, we saw weaker competition, as demonstrated by sustained growth in financial volumes captures by acquirers. Without a doubt, two competitive advantages were key throughout the year. In the period, we consolidated our leadership in the electronic payments industry with our continued improvement and expansion of our product and service portfolio. In the next twelve months, we expect stiffer competition as we are now the only publicly-held company in the industry and new players are gaining ground, in addition to operating in a market where the baseline will be increasingly demanding. In this scenario marked by the entrance of new players - a healthy environment for industry evolution - we remain confident in our business model and believe in the solidity of our fundamentals, factors reflected in our solid results quarter after quarter. A testament to our solid foundation is the companys market capitalization, which closed the year at R$37.3 billion on the Bovespas last trading day (December 28, 2012). Cielos geographic footprint, with nationwide presence at more than 1.3 million points of sale; our high service level, especially customer service; its state-of-the-art equipment, in which we have invested R$627 million over the past two years; our intrinsic culture of innovation - all of these things have put us in a position of privilege. In our long-term vision, investments in technology and product development over the last three years have helped make Cielo equipment more than just a means of payment. We expanded our role as a service hub for our clients - who feel the difference - and this is a significant boon to our market strategy. Cielos innovation is based on two fundamental pillars - technology and products and services. In terms of our equipment base, we invested more than R$260 million reais in new devices, mostly wireless, bringing clients convenience and savings as the wireless device is also exempted from phone charges. Our base closed the year at 1.7 million POS terminal installed devices at more than 1.3 million commercial establishments. On the other hand, 2012 was marked by new products and unprecedented partnerships. In March, we announced a strategic alliance with Cybersource, an international leader in payment management solutions, to bring the worlds most complete e-commerce fraud prevention solution to Brazil. With this, we joined our e-commerce expertise and CyberSources tool, the most sophisticated payment fraud detection tool in the market. Cielos major e-commerce clients already enjoy this advantage.
RELATRIO DA ADMINISTRAO 1
In May, Cielo introduced to the daily lives of Brazilian merchants and consumers what was considered the biggest industry launch in the last 15 years: Credirio. With this product, the Company hoped to establish a culture of consumer credit as a native feature of their credit card and an evolution of the payment booklet. With this product, merchants can offer an additional payment method that allows cardholders to pay in up to 48 installments, accessing a pre-approved credit line from their checking accounts through their bank cards, while merchants themselves receive payment in full on the following day. We reinforced our solutions portfolio with an easyto-use product that generates sales opportunities, increased volume and higher cash flow for merchants. In addition, merchants can offer consumers the added advantage of simulating the loan payments, maturity, grace period and interest rate at the Cielo POS. Three months later, in August, Cielo acquired 100% of U.S. company Merchant e-Solution, a global provider of payment solutions. Acquiring the company, with presence in Silicon Valley, considered the cradle of technological innovation in the world and the epicenter of the digital revolution in payments, positioned us at a new technological level and reinforced our strategy of expanding our innovative solutions to add value to the businesses of our clients and partners. The acquisition carried a total price tag of US$670 million, representing a multiple of 11x EV/EBITDA 12e. To finance the Merchant e-Solutions (Me-S) acquisition, we looked to the market for our first dollar-denominated debt issue - where we achieved the lowest cost ever for a Brazilian company on the international market - raising US$875 million for a 10-year tenor with historically low interest of 3.75% p.y. The market considered our operation a success not just for its interest rate, but also for the demand at 8 times the offer. Differentiation, loyalty, awareness and engagement have become a fundamental part of the Companys identity where the market maturity process is faced with the challenge of reaching the state of the art. Delivering high technology is an important step in this direction but one that will not hold in isolation as the state of the art is not technology alone. In the social era when everyone is connected and has frequent access to real-time information, engagement is fundamental. Today, communication is increasingly lateral, on a network and with no frontiers. For this reason, Cielos vision included stimulating the social engagement of its clients - merchants - through consumer purchasing experiences at the Cielo POS. In November, we brought to market an unprecedented initiative in Brazil and the world: the solution to put Facebook on Cielo POS, the companys first front in developing B2B2C (business-tobusiness-to-consumer) services for social engagement in the digital age. The project, now in its pilot phase, promises to bring a new dynamic to consumption at the point of sale and an innovative way for merchants to relate with customers. Uniting the physical and virtual worlds in buying experiences, the Facebook on Cielo POS solution integrates the worlds largest social network, Facebook, to our terminals, connecting increasingly common web functionalities like check-ins and recommendations to friends to the act of payment. This new tool will allow merchants to offer their customers check-in directly at the POS, in addition to two new Facebook initiatives: recommending favorite places and earning rewards, as the solution includes a tool that allows merchants to register promotions linked to new social tools on the POS. Check in, recommend favorite places and earn rewards on Facebook with the Cielo POS. Result? More visibility for merchants and social experiences for consumers.
Innovation and originality increase the Companys visibility among its various stakeholders. Proof is found in market awards and recognition, such as being named Best in the Service Industry by Exam magazine for the sixth consecutive year. The Company was also chosen for the twelfth consecutive year as one of the Best Companies To Work For by the guide in Voice S/A magazine, and was also awarded best financial services company in the Epoch Negcios 360 Annual Report from poca Negcios magazine. Cielo was recognized as the best company in Financial Services in the 1000 Best of Dinheiro 2012 ranking by ISTO Dinheiro magazine. Internationally, Cielo won the Best Investor Relations by a Latin American company in the US market award from IR Magazine, one of the main capital market media vehicles, in addition to taking the top spot in the general rankings of Institutional Investor Magazine, winning Best IR Team, Best CEO, Best CFO and Best IR Professional in the Latin American Financials ex-Banks sector according to both the buy-side and the sell-side. In financial terms, our net revenue in 2012, including our net income from prepayment of receivables, expanded 29.0% over 2011 to R$5.427 billion, with net income up 27.9% to R$2.315 billion. Transaction financial volume under the accounting criteria was up 20.3% in the year to R$379.9 billion. Our dividends policy assures, based on the corporate bylaws, the distribution of a minimum annual dividend of 50% of earned income after constitution of a legal reserve with 5% of the net income in the fiscal year until this reserve reaches 20% of the capital stock. Dividends and interest on equity are paid twice a year, in March and September. For 2012, as the Board of Directors approved, ad referendum of the General Meeting, the proposal for payment of interest on equity and dividends will correspond to about 70% of the total net profit in 2012, or R$1.587 billion. Regarding the future, we shall keep on focusing on our exclusiveness and innovation strategy. The pillars supporting this strategy will be the maintenance of the organic growth and a better product and service offer through a diversified portfolio of brands, unique solutions such as our loyalty programs, increased network availability with more modern equipment and greater proximity to our clients through our sales team.
New Products and Services in 2012
March | CyberSource: After a year and a half of analysis of all tools available on the domestic and international markets, Cielo announced an important strategic alliance with CyberSource, a global leader in supplying payment management solutions, to provide a solution that provides virtual merchants the means to maintain trustworthy buyers and precisely identify fraudulent transactions, guaranteeing increased sales conversion at lower operating costs. May | Credirio: Considered the biggest industry launch in the last 15 years, the Credirio product arrived on the Brazilian market as the evolution of the payment booklet. All of the company's POSs were adapted to capture transactions of this type, available for Banco do Brasil and Bradesco cards. The primary advantage for merchants is being able to sell in up to 48 installments while receiving the full sale amount on the following day.
August | Merchant e-Solutions: To reinforce its strategy of expanding its portfolio of innovative solutions to add value to the businesses of clients and partners, Cielo announced the acquisition of 100% of the capital stock of U.S. company Mercant e-Solutions (MeS), a global provider of payment solutions, for the price of US$670 million. Acquiring the company, with presence in Silicon Valley, considered the cradle of technological innovation and the epicenter of the digital revolution, took Cielo to new technological level. November | Planet Payment: An unprecedented initiative in Brazil, the partnership with Planet Payment, a leader in processing international and multi-currency payments, will allow Cielo to offer its clients Pay in Your Currency and Shop in Your Currency solutions. These solutions offer high added-value to Cielos clients and their consumers, especially foreign tourists who will visit Brazil for the 2014 World Cup and 2016 Olympics. With the new tool, foreign consumers can easily pay in their local currencies at the point of sale via Cielo machines. November | Cielo Linkci: The Companys first initiative in B2B2C (business-to-business-to consumer) and unique in Brazil and the world, the launch of the Facebook on the Cielo POS solution promises to bring a new dynamic to consumption at the point of sale and an innovative way for merchants to relate with customers. This new tool will allow merchants to offer their customers check-in directly at the POS, in addition to two new Facebook initiatives: recommending favorite places and earning rewards, as the solution includes a tool that allows merchants to register promotions linked to new social tools on the POS.
OPERATING PERFORMANCE
Transaction Financial Volume In 2012, Cielo captured 5.303 billion transactions, up 14.8% over 2011. The transaction financial volume totaled R$379.9 billion, up 20.3% over the R$315.9 billion in 2011. Specifically with credit cards, transaction financial volume totaled R$241.5 billion in 2012, up 22.3% in the year. With debit cards, transaction financial volume totaled R$138.4 billion in 2012, growing 16.9% in the period.
FINANCIAL PERFORMANCE
Gross Operating Revenue Gross Operating Revenue from capture, transmission, processing and financial settlement of transactions carried out with credit and debit cards and POS rentals totaled R$6.041 billion, increasing 28.4% over 2011.
Cost of Services Provided The cost of services provided increased 30.0% to R$1,852.8 in 2012, compared to R$1,425.2 billion in 2011. This increase was basically composed of: (i) Increase of R$188.5 million derived from costs related to subsidiaries Merchant e-Solutions (Me-S), M4U, Orizon, Paggo and Braspag; (ii) Increase of R$160.8 million in brand fees from the increased number of transactions captured, in addition to the consolidation of Merchant e-Solutions (Me-S) ; (iii) Increase of R$59.8 million from depreciation of POS terminals, chiefly explained by the increase in the total base and the change in the equipment mix with more wireless terminals, which are more expensive; (iv) Increase of R$18.4 million due to the higher transaction volume.
Operating Expenses Operating expenses increased R$195.9 million or 31.9% to R$809.4 million in 2012, compared to R$613.4 million in 2011. Personnel expenses increased 11.9% or R$23.2 million over 2011 due to, among other reasons, the 5% pay raise stipulated in the collective bargaining agreement in 3Q12. General and administrative expenses were up 28.0% or R$49.4 million over the previous year, chiefly due to greater expenses with professional services, especially consulting, largely due to the Merchant e-Solutions (Me-S) acquisition. Marketing and selling expenses increased 30.3% or R$55.9 million in the year with the realization of campaigns with partners (banks, franchises and brands) and incentives paid to partner banks as shared marketing and selling expenses. Marketing and sales expenses accounted for 3.9% of total net revenue in 2012. Other net operating revenues (expenses) increased 118.0% or R$67.5 million, mostly from provisions for doubtful accounts and tax, labor and civil contingencies in 2012.
FINANCIAL RESULT Financial income totaled R$746.4 million, up 34.8% over 2011, chiefly due to the 39.3% increase in revenue from prepayment of receivables adjusted to prevent value, which in 2012 reached R$817.5 million.
EBITDA The Companys Management uses EBITDA as a measurement of its performance. EBITDA consists of net income before income tax and social contribution, financial income (expenses) and depreciation and amortization. EBITDA reached R$3.083 billion in 2012, up 28.0% over 2011.
EBITDA (R$ million) Cielo Net Income Other Shareholders that not of Cielo S.A. Financial Income Income Tax and Social Contribution Depreciation and Amortization EBITIDA % EBITDA Margin 2012 2,314.6 6.0 (746.4) 1,191.1 317.3 3,082.6 56.8% 2011 1,810.3 6.6 (553.6) 906.8 237.8 2,407.9 57.2% 2012 x 2011 27.9% -8.9% 34.8% 31.4% 33.4% 28.0% (0.4)
EBITDA is not an accounting measurement used in the accounting practices adopted in Brazil. It does not represent the cash flow for the presented periods and it should not be considered as an alternative to net income, an operating performance measure or as an alternative to operating cash flow or as a measurement of liquidity.
SUSTAINABILITY
Cielo considers strategic for its business that all commercial practices consider the interests of all stakeholders - clients, cardholders, suppliers, employees, shareholders and society. Thus, the company invests in and implements actions for the greater good, including the sustainability practices that are part of the companys activities on several fronts. Since 2010, the Sustainability Committee, composed of a multidisciplinary team from across company divisions, has supported management in establishing its positioning and strategy for sustainable business development. One of the highlights of this year was the second Greenhouse Gas Inventory, a means of measuring the companys impact in terms of global warming. Throughout the year, Cielo maintained its investments in projects focusing on: cultural and sporting projects to support education and/or youth job training; projects to promote childrens health and that focus on reducing infant mortality; and projects to promote theater and cultural events outside of Rio de Janeiro and So Paulo, in particular musicals and shows; and handicapped accessibility (seeing, hearing and physically impaired). In 2012, Cielo supported the following projects:
Partners in Education - partnership with the Maria Alice Crissima School in Carapicuba under which Cielo supports improved educational performance though management, pedagogical and infrastructure assistance. Anelo Institute - investment in the music education project for youths, providing growth, social integration and human development for children and adolescents in northeastern Campinas. Ayrton Senna Institute - movement to improve public education on a large scale so that children and adolescents learn and fully develop their potential at the right age in the right grade. Bola Dentro - investment in the project carried out at the Villa-Lobos Park Tennis Courts. The project focuses on social and educational assistance to create opportunities for professional training as ball catchers, line judges and professional tennis players. Olhos de Dentro - investment in a project that supports theater arts education for people with disabilities, as well as the general public. Mirim Orchestra - investment in a music education project for underprivileged youth in Rio de Janeiro. South American Melting Pot Institute - art school for children and adolescents in Corumb, Mato Grosso do Sul State that offers citizenship through art, dance and music education and training. Campinas Boldrini Hospital (hospital and research center specializing in childhood cancer) investment in a project that seeks to support continued formal research of hospitalized children and adolescents. Little Prince Hospital (general childrens hospital and research center in Curitiba) - investments in purchasing equipment to better serve patients. GRAACC - Support Group for Children and Adolescents with Cancer (hospital specializing in treating childhood cancer in So Paulo) - investment in conclusion of the new hospital with the purchase of radiology equipment. The company also monitors its sustainability performance using a mix of indicators (Ethos Institute, IBASE and GRI), manages projects with structured analysis of internal and external sustainability impacts and, finally, stimulates partnerships with government and nongovernmental organizations to invest via tax incentives for social and cultural actions focused on youth education and job training focused on social and economic inclusion. Cielos internal communication not only publicizes all social actions, but also works for employee engagement in sustainability. Simple but very important initiatives in terms of return, such as recycling and use of certified paper, for example, are employed as educational tools.
SERVICES PROVIDED BY THE INDEPENDENT AUDITORS
During 2012 and 2011 the Company contracted the independent audit services of Deloitte Touche Tohmatsu. The Company's policy is to comply with regulations that establish restrictions on services rendered by the independent auditors as means of ensuring professional independence. In the fiscal year ended December 31, 2012, Deloitte Touche Tohmatsu provided, in addition to audit of the separate and consolidated financial statements, review of the foreign Bond issue prospectus and services related to preparation of accounting reports. These services totaled approximately R$545 thousand and represent approximately 60% of the total fees for financial statement auditing.
ARBITRATION CHAMBER
The Company is subject to arbitration at the Market Arbitration Chamber, according to the arbitration clause in its bylaws.
CORPORATE GOVERNANCE
The Company has adopted a responsible, transparent, ethical stance in managing its businesses and seeks to improve its corporate governance standards according to best market practices in order to preserve shareholders' rights through equal, clear and open treatment. Cielo has a Board of Directors comprised of 10 members (two independent members) and a Fiscal Council with three members. Besides these corporate bodies, advisory committees were established to make recommendations on business strategy, including long-term strategies, Company performance, and oversight and monitoring of the adopted measures. Currently, besides the Audit Committee, which is provided for in the bylaws, the following advisory committees have been instated: Finance, Personnel and Corporative Governance. The Company has Information Disclosure and Trading polices, as well as a Code of Ethics, which establishes standards of conduct in relationships with all stakeholders: employees, clients, suppliers, investors, regulatory bodies, society and governments.
DECLARATION OF THE BOARD
In compliance with the provisions of CVM Instruction no. 480/09, the Management declares that it has discussed, reviewed and concurred with the views expressed in the independent auditors' report and the respective financial statements for the fiscal year ended December 31, 2012.

Cielo S.A. and Subsidiaries: (Convenience Translation Into English From The Original Previously Issued in Portuguese)

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(Convenience Translation into English from the Original Previously Issued in Portuguese)

Cielo S.A. and Subsidiaries

Deloitte Touche Tohmatsu Auditores Independentes

Company (BR GAAP) 12.31.2012 12.31.2011

Consolidated (IFRS and BR GAAP) 12.31.2012 12.31.2011

282,487 5,586,770 149 4,825 14,006 5,888,237

240,998 2,971,796 134 587 4,609 22,379 3,240,503

431,155 5,872,855 3,076 7,085 24,458 6,338,629

292,915 3,019,499 4,114 4,863 39,939 3,361,330

2,680,010 160,606 350,233 494,784 11,409 390,628 128,990 4,216,660

1,660,367 19,666 230,259 385,914 11,055 319,457 108,577 2,735,295

2,974,040 165,040 408,961 502,768 390,628 186,020 4,627,457

1,660,367 19,666 289,815 391,996 319,457 135,797 2,817,098

439,699 745,620 406 738,041 486,301 87,278 63,890 2,561,235

334,442 597,217 664 176,060 508,259 10,143 49,247 1,676,032

451,093 771,635 16,950 503,009 948,404 1,007,469 3,698,560

341,111 622,805 688 522,369 140,101 88,027 1,715,101

1,129,661 819,121 6,857 1,955,639

131,182 640,465 771,647

1,949,098 853,133 307,717 13,677 3,123,625

131,182 678,007 25,580 834,769

18.a) 18.b) 18.c) 18.d) 18.e), f) and g)

500,000 99,951 (23,410) 4,979 1,695,653 2,277,173 2,277,173 8,449,472

263,835 88,888 (50,859) 1,107,729 1,409,593 1,409,593 4,916,535

500,000 99,951 (23,410) 4,979 1,695,653 2,277,173 8,934 2,286,107 10,037,189

263,835 88,888 (50,859) 1,107,729 1,409,593 14,971 1,424,564 5,076,431

The accompanying notes are an integral part of these financial statements.

(124,416) (295,853) (236,412) 2,922 (121,980) 2,733,427

(118,254) (271,125) (184,665) 9,707 (54,909) 2,158,339

(218,282) (225,584) (240,818) (124,669) 2,765,265

(195,116) (176,223) (184,885) (57,189) 2,170,073

20,102 (84,099) 847,894 (30,419) 5,639 759,117

28,273 (65,433) 611,534 (24,867) 673 550,180

24,552 (101,241) 847,894 (30,419) 5,643 746,429

32,548 (66,255) 611,534 (24,867) 673 553,633

(1,283,184) 105,256 2,314,616

(987,310) 89,118 1,810,327

(1,304,082) 113,006 2,320,618

(997,437) 90,646 1,816,915

1,810,327 6,588 1,816,915 2.77084 2.76777

The accompanying notes are an integral part of these financial statements.

Consolidated (IFRS and BR GAAP) 12.31.2012 12.31.2011 2,320,618 1,816,915

6,845 8,779 (10,645) 4,979 2,319,595

6,845 8,779 (10,645) 4,979 2,325,597

The accompanying notes are an integral part of these financial statements.

Treasury shares (68,823) 17,964 (50,859) (5,800) 33,249 -

Noncontrolling interest 14,470 6,588 (6,087) 14,971 (12,039) 6,002

18.e) 18.g) 18.g) 18.g) 18.g) 18.g) 500,000

2,314,616 (47,233) (716,508) (31,244) (360,099) (443,403) (35,916) (680,213) -

6,845 (1,866) 4,979 4,979

6,845 (1,866) 2,319,595 (716,508) (31,244) (360,099) (35,916) 2,277,173

6,845 (1,866) 2,325,597 (716,508) (31,244) (360,099) (35,916) 2,286,107

(633,951) 10,800 4,375 (20,504) 3,105 (59,107) (695,282)

(93,101) 2,836 (265,413) (355,678)

4,375 (20,504) (1,365,256) (90,410) (1,471,795)

(85,333) (273,560) (358,893)

18.c) 18.c) 13 13 18.g)

(5,800) 33,249 2,599,888 (863,727) (1,413,968) 349,642 9,784 138,240

17,964 (1,402,336) (1,384,372) 42,312

282,487 240,998 41,489

240,998 221,542 19,456

431,155 292,915 138,240