Financial Statements CVC Brasil Operadora e Agência de Viagens S.A. and Subsidiary. December 31, 2013 With Independent Auditor s Report

Transcription

1 Financial Statements CVC Brasil Operadora e Agência de Viagens S.A. and Subsidiary December 31, 2013 With Independent Auditor s Report

2 and Subsidiary Financial Statements December 31, 2013 Contents Independent auditor s report on financial statements... 1 Financial Statements Balance sheets... 3 Statements of income... 5 Statements of comprehensive income... 6 Statements of changes in shareholders equity... 7 Statements of cash flows... 8 Statements of value added... 9 Notes to Financial Statements... 10

3 Condomínio São Luiz Av. Presidente Juscelino Kubitschek, 1830 Torre I - 8º Andar - Itaim Bibi São Paulo - SP - Brasil Tel: (5511) ey.com.br Convenience translation into English from the original previously issued in Portuguese. Independent auditor s report on financial statements The Shareholders, Board of Directors and Officers CVC Brasil Operadora e Agência de Viagens S.A. Santo André - SP We have audited the accompanying individual and consolidated financial statements of CVC Brasil Operadora e Agência de Viagens S.A. ( Company ), identified as Company and Consolidated, respectively, which comprise the balance sheets as of December 31, 2013, and the related statements of income, comprehensive income, changes in shareholders equity and cash flows for the year then ended, and a summary of significant accounting practices and other explanatory information. Management s responsibility for the financial statements Management is responsible for the preparation and fair presentation of the individual financial statements in accordance with the accounting practices adopted in Brazil and of the consolidated financial statements in accordance with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and in conformity with the accounting practices adopted in Brazil, and for such internal control as determined by management to be necessary for the preparation of financial statements free from material misstatement, whether due to fraud or error. Auditors responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Brazilian and international standards on auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether these financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal controls relevant to the Company s preparation and fair presentation of the Company s financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purposes of expressing an opinion on the effectiveness of the Company s internal controls. An audit also includes evaluating the appropriateness of accounting practices used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. 1 Uma empresa-membro da Ernst & Young Global Limited

4 Opinion on the individual financial statements In our opinion, the individual financial statements referred to above present fairly, in all material respects, the financial position of CVC Brasil Operadora e Agência de Viagens S.A. at December 31, 2013, its financial performance and its cash flows for the year then ended in accordance with the accounting practices adopted in Brazil. Opinion on the consolidated financial statements In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of CVC Brasil Operadora e Agência de Viagens S.A. at December 31, 2013, its consolidated financial performance and consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and the accounting practices adopted in Brazil. Emphasis of matter As mentioned in Note 2, the individual financial statements were prepared in accordance with the accounting practices adopted in Brazil. In the case of CVC Brasil Operadora e Agência de Viagens S.A., these practices differ from the IFRS, as applicable to the separate financial statements, solely with respect to the measurement of investments in subsidiaries, affiliates and jointly-owned subsidiaries under the equity method, while such investments would be measured at cost or fair value for IFRS purposes. Our opinion is not modified due to this matter. Other matter Statements of value added We have also audited the individual and consolidated statements of value added for the year ended December 31, These statements are the responsibility of the Company's management and are required to be presented by Brazilian corporate law for publicly held companies, and are considered supplementary information under IFRS, whereby statements of value added are not required. These statements have been subject to the same audit procedures previously described, and, in our opinion, are presented fairly, in all material respects, in relation to the overall financial statements. São Paulo, February 4, ERNST & YOUNG Auditores Independentes S.S. CRC-2SP015199/O-6 Anderson Pascoal Constantino Accountant CRC-1SP190451/O-5 2

5 Convenience translation into English from the original previously issued in Portuguese. CVC Brasil Operadora e Agência de Viagens S.A. Balance sheets December 31, 2013 and 2012 (In thousands of reais) December 31, 2013 Company December 31, 2012 December 31, 2013 Consolidated December 31, 2012 Notes Assets Current assets Cash and cash equivalents 5 44, ,877 44, ,000 Derivative instruments 4.4 / Accounts receivable 6 1,246, ,407 1,249, ,407 Advances to suppliers 7 283, , , ,839 Prepaid expenses 8 139,883 99, , ,384 Other 19,032 10,441 19,348 14,273 Total current assets 1,733,400 1,366,842 1,740,282 1,373,903 Noncurrent assets Accounts receivable - related parties 17 17,949 6,664 5,451 2,110 Deferred tax assets , , , ,135 Investments Fixed assets 10 10,522 12,833 12,312 15,524 Intangible assets , , , ,972 Other 2,636 2,396 2,794 2,402 Total noncurrent assets 333, , , ,143 Total assets 2,066,845 1,711,303 2,069,379 1,720,046 3

6 December 31, 2013 Company December 31, 2012 December 31, 2013 Consolidated December 31, 2012 Notes Liabilities and shareholders equity Current Loans and financing Derivative instruments 4.4/ Suppliers 308, , , ,492 Accounts payable - related parties ,787 54, ,430 54,526 Advance sales of travel packages 18 1,079, ,899 1,082, ,202 Salaries and social charges 18,816 21,184 24,019 26,199 Taxes payable and contributions 18,651 7,893 19,260 8,037 Dividends payable 14,750-14,750 - Other 36, ,273 37, ,073 Total current liabilities 1,633,696 1,251,152 1,639,451 1,259,895 Noncurrent Loans and financing Allowance for insufficiency of assets over liabilities 9 3, Accounts payable - related parties 17 99, ,537 99, ,537 Provision for legal claims 13 13,886 10,903 13,886 10,903 Total noncurrent liabilities 116, , , ,519 Shareholders equity Capital stock 15.a 82,728 56,257 82,728 56,257 Capital reserve 192, , , Profit reserve 40,492-40,492 - Treasury shares 15.d - (17,652) - (17,652) Accumulated losses - (49,578) - (49,578) Other comprehensive income (loss) 4.4 1,016 (295) 1,016 (295) Total shareholders equity 316, , , ,632 Total liabilities and shareholders equity 2,066,845 1,711,303 2,069,379 1,720,046 See accompanying notes. 4

7 Statements of income December 31, 2013 and 2012 (In thousands of reais, except per share data) Company Consolidated Year ended December 31, Year ended December 31, Notes Gross revenue 636, , , ,364 Taxes and deductions from gross revenue (37,886) (36,616) (41,302) (40,003) Net revenue 598, , , ,361 Operating expenses Selling expenses 20 (134,812) (126,742) (134,922) (127,038) General and administrative expenses 20 (157,329) (194,701) (204,762) (237,828) Depreciation and amortization 20 (23,397) (10,791) (24,270) (11,467) Equity results 9.c (3,931) (2,267) - - Other operating expenses 20 (11,462) (86,225) (11,689) (86,285) Income before financial results 267, , , ,743 Financial income 16 7,972 15,380 8,055 15,496 Financial expenses 16 (98,861) (133,641) (98,946) (133,811) Financial expenses, net (90,889) (118,261) (90,891) (118,315) Income before income tax and social contribution ,590 43, ,655 42,428 Income tax and social contribution 14 (64,908) (23,474) (62,973) (22,316) Current (28,377) (36,920) (28,377) (36,920) Deferred (36,531) 13,446 (34,596) 14,604 Net income 111,682 20, ,682 20,112 Earnings per share - basic Earnings per share - diluted See accompanying notes. 5

8 Statements of comprehensive income December 31, 2013 and 2012 (In thousands of reais, except per share data) Company and Consolidated December 31, Net income 111,682 20,112 Change in fair value of cash flow hedges 1,986 (3,744) Tax effect of change in fair value of cash flow hedges (675) 1,095 Comprehensive income to be classified into income statement in the subsequent year 1,311 (2,649) Total comprehensive income 112,993 17,463 See accompanying notes. 6

9 Statements of changes in shareholders equity December 31, 2013 and 2012 (In thousands of reais) Notes Capital Stock Capital reserve Share-based payment reserve Goodwill reserve Legal reserve Profit reserve Working capital reserve Expansion reserve Reserve of retained earnings Treasury Shares Accumulated losses Other comprehensive income Total Balances on December 31, ,786 13, , (17,652) (69,690) 2, ,295 Capitalization of goodwill reserve 15.a 26,471 - (26,471) Restricted shares granted 15.e Stock options granted 15.b - 22, ,380 Cash flow hedge effect, net (2,649) (2,649) Net income for the year ,112-20,112 Balances on December 31, ,257 36, , (17,652) (49,578) (295) 210,632 Reserve capitalization of goodwill 15.a 26,471 - (26,471) Restricted shares granted 15.e Reversal of restricted shares granted 15.d (1,482) - - (617) Stock options granted 15.b - 14, ,803 Reversal of treasury shares 15.d - (19,134) , Cash flow hedge effect, net ,311 1,311 Net income for the year , ,682 Appropriation of legal reserve 15.g , (3,105) - - Dividends 15.f (14,750) - (14,750) Appropriation of working capital reserve 15.g , (11,062) - - Appropriation of expansion reserve 15.g , (11,062) - - Initial public offering expenses 15.h (6,862) - (6,862) Retained earnings 15.g ,263 - (15,263) - - Balances on December 31, ,728 33, ,828 3,105 11,062 11,062 15, , ,281 See accompanying notes. 7

10 Statements of cash flows December 31, 2013 and 2012 (In thousands of reais, except per share data) Company Consolidated December 31, December 31, Cash flows from operating activities Net income for the year 111,682 20, ,682 20,112 Adjustments to reconcile net income for the period with cash generated in operating activities: Deferred income tax and social contribution 36,531 (13,446) 34,596 (14,604) Depreciation and amortization 23,397 10,791 24,270 11,467 Provision for earn-out (Note 17.c) 5,134 94,537 5,134 94,537 Allowance for doubtful accounts Provision for legal claims 11,025 9,984 11,025 9,984 Share-based payment expenses 14,268 22,874 14,268 22,874 Online indemnification, unpaid 1,642 19,734 1,642 19,734 Interest 16,433 21,632 16,433 21,632 Equity results 3,931 2, Other 3, , , , , ,338 Decrease / (increase) in assets Trade accounts receivable (458,314) (33,144) (461,730) (33,144) Advance to suppliers (101,384) 12,598 (101,458) 12,641 Prepaid expenses (40,593) 7,948 (40,352) 4,858 Other (20,645) (12,155) (9,327) (9,481) Increase / (decrease) in liabilities Suppliers 38,764 8,315 39,128 8,536 Accounts payable related parties 2,353 3,119 (3,004) 5,434 Advance sales of travel packages 284,340 (38,675) 285,135 (36,372) Salaries and social charges (2,368) 2,945 (2,180) 3,047 Taxes payable and contributions 10,758 (15,869) 11,223 (16,357) Other (38,302) 15,786 (37,752) 16,074 Net cash generated from (used in) operating activities (97,172) 139,955 (96,435) 141,574 Cash flow from investing activities Fixed assets (873) (3,850) (1,046) (4,508) Intangible assets (78,727) (54,487) (79,186) (55,498) Net cash used in investing activities (79,600) (58,337) (80,232) (60,006) Cash flow from financing activities Payments of debt to shareholders (44,000) (44,000) (44,000) (44,000) Payments of interest (16,780) (23,033) (16,797) (23,069) Initial public offering expenses (6,862) - (6,862) - Net cash used in financing activities (67,642) (67,033) (67,659) (67,069) Cash flow hedge effect 1,986 (3,746) 1,986 (3,746) Increase (decrease) in cash and cash equivalents (242,428) 10,839 (242,340) 10,753 Cash and cash equivalents at the beginning of the period 286, , , ,247 Cash and cash equivalents at the end of the period 44, ,877 44, ,000 See accompanying notes. 8

11 Statements of value added December 31, 2013 and 2012 (In thousands of reais, except per share data) Company Consolidated December 31, December 31, Revenue 635, , , ,082 Revenue from rendering services 636, , , ,364 Allowance for doubtful accounts (425) (282) (425) (282) 2. Inputs acquired from third parties (156,587) (250,657) (160,316) (254,762) Third-party services and other (145,562) (240,673) (149,291) (244,778) Legal and administrative proceedings (11,025) (9,984) (11,025) (9,984) Gross value added 479, , , , Depreciation and amortization (23,397) (10,791) (24,270) (11,467) 4. Net value added produced by the entity 455, , , ,853 Equity results (3,931) (2,267) Value added received in transfer 451, , , ,853 Financial income 7,972 15,380 8,055 15,496 Total value added to be distributed 459, , , ,349 Total value added distributed (459,928) (370,572) (505,535) (412,349) 6. Distribution of value added Personnel (85,750) (96,264) (116,192) (123,355) Direct compensation (61,004) (63,541) (84,766) (85,073) Stock option (14,268) (22,875) (14,268) (22,875) Benefits (6,133) (5,492) (10,504) (9,284) Social security charges (4,345) (4,356) (6,654) (6,123) Taxes, fees and contributions (117,744) (75,889) (125,209) (83,607) Federal (104,567) (62,985) (110,247) (68,835) Local (13,177) (12,904) (14,962) (14,772) Interest and rent (144,752) (178,307) (152,452) (185,275) Interest (97,286) (131,992) (97,371) (132,163) Credit card fee (43,065) (42,203) (43,065) (42,203) Other (4,401) (4,112) (12,016) (10,909) 7. Return on own capital Dividends (14,750) - (14,750) - Compensation of acccumulated loss (49,578) - (49,578) - Initial public offering expenses (6,862) - (6,862) - Appropriation for profit reserves (25,229) - (25,229) - Retained earnings (15,263) (20,112) (15,263) (20,112) See accompanying notes. 9

12 Notes to the financial statements 1. General information CVC Brasil Operadora e Agência de Viagens S.A. ("CVC" or the " Company") is a privately-held corporation headquartered in Santo André, State of São Paulo, CVC operates through its subsidiary CVC Serviços Agência de Viagens Ltda, ( CVC Serviços ). The Company was established on March 25, 2009, and began its operations on December 1, CVC and its subsidiary are engaged in providing tourism products and services and in selling, either separately or in an aggregate manner (tour packages), air tickets, ground transportation, hotel reservations, cruise line tickets and other tourism services to customers. As of December 31, 2013, CVC owned 33 stores (through CVC Serviços), 761 CVC exclusive branded stores and had commercial relationships with approximately 6,500 registered travel agents to sell CVCbranded products and services throughout Brazil. CVC also had agreements with a local representative to sell CVC-branded products and services in Argentina and Uruguay. The tourism services rendered by CVC are offered directly to customers by independent service providers and based on terms and conditions agreed to between CVC and its customers. CVC s business model is organized and supported under the Brazilian Tourism Law (Law 11,771/08). On December 23, 2009, The Carlyle Group ( Carlyle ), a Washington, D.C.-based global alternative asset management firm, purchased 63.6% of the shares of CVC Brasil Operadora e Agência de Viagens S.A., the successor of Operadora e Agência de Viagens CVC Tour Ltda ( CVC Tur ), which consisted of spun-off assets from CVC Tur and eight other entities, through a special purpose vehicle named CBTC Participações S.A. On December 9, 2013, common shares of CVC commenced trading on the BM&FBOVESPA exchange under the ticker CVCB3. Initially 33,750,000 shares were offered through a secondary public offering, representing 26.02% of Company shares. On January 10, 2014, the secondary public offering of common shares issued by the Company was concluded. Due to the offering underwriters exercise of an over-allotment option, 91,600 additional shares were sold, totaling 33,841,600 shares representing approximately 26.09% of Company s capital stock. The issuance of the Company and consolidated financial statements was authorized by the Board of Directors on February 4,

13 2. Summary of significant accounting policies The principal accounting policies applied in preparing the Company and Consolidated financial statements are set forth below Basis of preparation The preparation of the Company and Consolidated financial statements requires the use of certain critical accounting estimates and also the exercise of judgment by the Company's administration in applying the Company's management policies. Those areas that require higher level judgment and have greater complexity, as well as areas where assumptions and estimates are significant to the financial statements, are disclosed in Note 3. a) Company and consolidated financial statements The Company and consolidated financial statements were prepared and presented in accordance with accounting practices adopted in Brazil, wich are based on accounting pronouncements, orientations and interpretations issued by the Accounting Pronouncements Committee (CPCs). b) Consolidated financial statements The Consolidated financial statements have also been prepared and presented in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board Consolidation The Consolidated financial statements includes the financial statements of CVC Brasil Operadora e Agência de Viagens S.A. and its wholly-owned subsidiary, CVC Serviços Agência de Viagens Ltda. Subsidiaries are all entities in which a company has power to govern the financial and operating policies and holds, in general, shares representing more than half of the voting rights. The existence and effect of potential voting rights currently exercisable or convertible are taken into account in determining whether or not a company controls another entity. A subsidiary is fully consolidated from date of purchase, which corresponds to the date when a company obtains control, and is excluded from consolidation from date when such control is lost. 11

14 2. Summary of significant accounting policies (Continued) 2.2. Consolidation (Continued) The Company financial statements of the subsidiary CVC Serviços is prepared on the same closing date of the Company and thus with consistent accounting policies. All balances between the Company and CVC Serviços, revenues and expenses, unrealized gains and losses and any dividends are fully eliminated in the Consolidated financial statements. In the Company Financial statements, the investment in subsidiary CVC Serviços is presented in accordance with the equity method of accounting. There are no differences between Company and Consolidated shareholders equity and net income Foreign currency translation a) Functional currency and reporting currency The items included in the financial statements of each entity are measured using the currency of the primary economic environment in which the company operates ("functional currency"). The Company and Consolidated financial statements are presented in R$ (Brazilian reais), which is the functional currency and reporting currency of the Company. b) Transactions and balances Operations with foreign currencies are translated into the functional currency using the exchange rates prevailing on the transaction or evaluation dates in which items are also measured. The foreign exchange gains and losses arising on the settlement of these transactions and the translation at exchange rates at the end of the period relating to assets and liabilities in foreign currencies are recognized in the statement of income as financial income or expense Cash and cash equivalents Cash and cash equivalents include cash, cash account balances and financial investments redeemable within three months and with insignificant risk of change in its market value. The financial investments included in cash and cash equivalents are mostly classified as financial assets at fair value through profit or loss. 12

15 2. Summary of significant accounting policies (Continued) 2.5. Financial instruments Financial instruments are recognized only as of the date on which the Company and its subsidiary become part of the contractual provisions of the financial instruments. When recognized, they are initially recorded at their fair value plus transaction costs that are directly attributable to the acquisition or issuance, except for financial assets and liabilities classified at fair value through profit or loss, where such costs are recorded directly in the income of the period. The subsequent measurement of financial instruments occurs on each balance sheet date in accordance with the rules established for each type of classification of financial assets and liabilities Financial assets a) Initial recognition and measurement Financial assets are classified as financial assets at fair value through profit or loss, loans and receivables, investments held to maturity, available for sale financial assets, derivatives or classified as effective hedging instruments, according to the situation. The Company determines the classification of its financial assets at the time of initial recognition, when it becomes part of the contractual provisions of the instrument. Financial assets are initially recognized at fair value plus, in the case of investments not designated at fair value through income, transaction costs that are directly attributable to the acquisition of the financial assets. b) Subsequent measurement Assets are classified into one of the following categories, according to the purpose for which they were issued or acquired: Financial assets at fair value through profit or loss: include financial assets held for trading and financial assets designated upon initial recognition at fair value through profit or loss. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the short term. 13

16 2. Summary of significant accounting policies (Continued) 2.5. Financial instruments (Continued) Financial assets (Continued) b) Subsequent measurement (Continued) The Company, when applicable, assesses its financial assets at fair value through income when there is the purpose and condition of trading them in a short time. When the Company is unable to negotiate these financial assets due to inactive markets, and management's intention of selling them in the near future suffers significant changes, the Company may elect to reclassify these financial assets. This evaluation does not affect any financial assets designated at fair value through profit or loss using the fair value option at the time of presentation. Loans and receivables: are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are classified as current assets, except those with maturities greater than 12 months after the balance sheet date (which are classified as noncurrent assets). Loans and receivables of the Company mainly comprise trade accounts receivable, advances to suppliers, receivables from related parties and other receivables. c) De-recognition of financial assets A financial asset (or, where appropriate, a part of a financial asset or part of a group of similar financial assets) is written off and the financial impact on the balance sheet is recognized when: The rights to receive cash flows from the asset expires; and The Company has transferred its rights to receive cash flows from the asset. 14

17 2. Summary of significant accounting policies (Continued) 2.5. Financial instruments (Continued) Financial assets (Continued) d) Impairment of financial assets The Company evaluates at the end of each period whether there is objective evidence that the financial asset or group of financial assets is impaired. An asset or group of financial assets is impaired if there is objective evidence of one or more events occurring after the initial recognition of assets (a "loss event") with possible impacts on the estimated future cash flows of a financial asset or group of financial assets. The criteria that the Company uses to determine whether there is objective evidence of an impairment loss include: (i) Significant financial difficulty of the issuer or debtor; (ii) A breach of contract, such as default or late payment of interest or principal; (iii) The Company, for economic or legal reasons relating to the financial difficulty of the borrower, ensures to the borrower a grant that the creditor would not consider; (iv) It becomes probable that the borrower will declare bankruptcy or other financial reorganization; (v) Disappearance of an active market for that financial asset because of financial difficulties; and (vi) Observable data indicating that there is a measurable reduction in the estimated future cash flows from a portfolio of financial assets since the initial recognition of those assets, although the decrease cannot be identified with the individual financial assets in the portfolio, including: Adverse changes in the status of payment of borrowers in the portfolio; and National or local economic conditions that correlate with defaults on assets in the portfolio. 15

18 2. Summary of significant accounting policies (Continued) 2.5. Financial instruments (Continued) Financial assets (Continued) d) Impairment of financial assets (Continued) The Company assesses, first, whether there is objective evidence of impairment. The amount of the loss is measured as the difference between the book value of assets and present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the original interest rate in force on the financial assets. The amount of the asset is reduced and the value of the loss is recognized in the income statement. If a loan or held to maturity investment has a variable interest rate, the discount rate to measure an impairment loss is the current effective interest rate determined in accordance with the contract. The Company may measure impairment based on fair value of an instrument using an observable market price. If in a subsequent period, the value of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment is recognized (as an improvement in creditworthiness of the borrower), the reversal of previously recognized impairment loss is recognized in the income statement Financial liabilities a) Initial recognition and measurement Financial liabilities are classified as financial liabilities measured at fair value through profit or loss, loans or financing or derivatives designated as hedging instruments in an effective hedge, where applicable. The Company defines the classification of its financial liabilities upon initial recognition. All financial liabilities are initially recognized at fair value, plus, in the case of loans and financing, costs of directly attributable operation as appropriate. 16

19 2. Summary of significant accounting policies (Continued) 2.5. Financial instruments (Continued) Financial liabilities (Continued) b) Subsequent measurement Loans and financing: After initial recognition, loans and financing paid are subsequently measured at amortized cost by adopting the effective interest rate method. Loans and financing of the Company include primarily finance leases and obligations with FIP GJP recorded in Accounts payable - related parties, related to the acquisition of Company s shares. c) De-recognition of financial assets A financial liability is de-recognized when the obligation related to such liability is settled, canceled or expired. When an existing financial liability is replaced by another from the same creditor, on substantially different terms, or when the terms of an existing liability are substantially modified, the replacement or modification is treated as a derecognition of the original liability and recognition of a new liability. The difference between the respective book values is recognized in income Offsetting of financial instruments Financial assets and liabilities are offset and the net amount is reported on the balance sheet when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle them on a net basis or realize the asset and settle the liability simultaneously Hedge accounting The Company uses derivative financial instruments in order to minimize the risks arising from exposure to foreign currency, represented by future payments to be made in foreign currency to foreign suppliers or linked to foreign currency to domestic suppliers. 17

20 2. Summary of significant accounting policies (Continued) 2.5. Financial instruments (Continued) Hedge accounting (Continued) Derivative financial instruments in hedge operations are initially recognized at fair value on the date the derivative contract is entered into and are revalued prospectively at fair value. Derivatives are presented as financial assets when the fair value of the instrument is positive and as financial liabilities when the fair value is negative. Any gains or losses resulting from changes in the fair value of derivatives are recorded directly to the income statement as financial expenses, except for the effective portion of cash flow hedges, which is recognized directly in Shareholders equity under other comprehensive income. When the Company s documented risk management strategy for a specific hedge relationship excludes from the hedge effectiveness evaluation a specific component of gain or loss or the related cash flows of the hedge instrument, this excluded component of gain or loss is immediately recognized in financial income (expenses). The amounts recorded in other comprehensive income are immediately transferred to the income statement when the hedged transaction affects profit or loss. The hedged cash flows and their respective effects on the income statement are expected to take place, substantially, within 12 months from the balance sheet date. If occurrence of the forecast transaction or firm commitment is no longer expected, the amounts previously recognized in equity are transferred to the income statement. If the hedge instrument expires or is sold, terminated or exercised without substitution or rolling, or if its classification as hedge is revoked, the gains or losses previously recognized in comprehensive income remain deferred in equity under other comprehensive income. The Company uses forward exchange contracts to hedge its exposure to foreign exchange risk in connection with highly probable future transactions and firm commitments. See Note 4.4 for further details. 18

21 2. Summary of significant accounting policies (Continued) 2.6. Trade accounts receivable The trade accounts receivable are generally recognized as the total value of the transaction and adjusted by the allowance for doubtful receivables, if necessary. The allowance is substantially based on past due receivables, and specific accounts receivable deemed uncollectible Advances to suppliers Advances to suppliers consists primarily of advance payments to hotels, airlines, among other, including payments for tickets already sold and not boarded Intangible assets Intangible assets acquired separately are initially valued at cost. Following initial recognition, intangible assets are carried at cost less accumulated amortization and any accumulated impairment losses Software Acquired software licenses are capitalized based on the costs incurred to acquire the software and make it ready for use. The costs associated with software maintenance are recognized as expenses as incurred. Development costs that are directly attributable to the design and testing of identifiable and unique software products, controlled by the Company, are recognized as intangible assets when the following criteria are met: It is technically feasible to finish the software for it to be available for use; The Company s management plans to complete the software and use or sell it; The software can be sold or used; 19

22 2. Summary of significant accounting policies (Continued) 2.8. Intangible assets (Continued) Software (Continued) It can be shown that it is likely that the software will generate future economic benefits; Adequate technical, financial and other resources are available to complete the development and use or sell the software; The expenses attributable to the software during its development can be measured reliably. The directly attributable costs that are capitalized as part of the software product include costs allocated to employees in software development and an appropriate share of direct expenses applicable. The costs also include the financing costs incurred during the software development. Other development expenses that do not meet these criteria are recognized as expenses as incurred. Development costs previously recognized as an expense are not recognized as assets in the subsequent period Virtual site (Website) Includes spending on entitlement sales through shop that belonged to exclusive agents and development expenditures of the virtual site (website) Exclusivity agreement Remuneration for conversion into franchise refers to amounts paid to agents (third parties) in accordance with commercial relations exclusivity agreements related to the transition to the new franchise model to assure exclusivity in the sale of the Company s products. The main characteristics of such agreements are (i) 10-year initial term, renewable upon completion as agreed upon between the parties; (ii) performance goals; (iii) pre-stablished roles and territories; and (iv) standardized procedures and sales commissions. 20

23 2. Summary of significant accounting policies (Continued) 2.8. Intangible assets (Continued) Useful life Intangible assets are amortized by the straight-line method based on the lesser of i) the finite useful life or ii) the period during which the economic benefits are generated. The amortization period and method are reviewed at a minimum at the end of each year and tests for impairment are performed when there are indications that the intangible asset may not be recoverable. Changes in the expected useful life or in the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortization period or method, as appropriate, and are treated as changes in accounting assumptions. The amortization expense of intangible assets with definite useful lives is recognized in the income statement for the period and in the corresponding category consistent with the function of the intangible asset. Intangible amortization is calculated based on the useful lives below: Software and website Exclusivity agreement Years Up to 5 years Up to 10 years 2.9. Fixed assets Fixed assets are stated at acquisition or construction cost, net of allowance for reduction of the recoverable amount. When significant components of fixed assets are restored, the Company records such components as individual items with useful lives of specific depreciation rates. The maintenance and repair costs are expensed as incurred. Depreciation of fixed assets is calculated using the straight-line method to allocate their cost to their residual values over the estimated useful life as follows: Years Facilities and leasehold improvements Equipment Furniture and fixtures IT equipment up to 10 years or lease term up to 10 years up to 10 years up to 5 years The residual values and useful lives of assets are reviewed and adjusted if appropriate, at the end of each year. 21

24 2. Summary of significant accounting policies (Continued) 2.9. Fixed assets (Continued) The book value of an asset is adjusted immediately to its recoverable value if the asset's book value is greater than its estimated recoverable value. Gains and losses from disposals are determined by comparing the results with the book value and recognized in Other operating expenses in the statements of income. The depreciation rates used represent the useful life of the assets which shows that the asset value is close to its fair value Suppliers Trade accounts payable to suppliers mainly refer to obligations to pay for travel services, and are classified as current liabilities if the payment is due in the period of up to one year. Otherwise, the accounts payable are presented as noncurrent liabilities Loans and financing Loans and financing are recognized initially at fair value, net of costs incurred in the transaction and are subsequently stated at amortized cost. Any difference between the values obtained (net of transaction costs) and the settlement value is recognized in the income statement during the period in which loans are outstanding, using the effective interest rate. Fees paid in the issuance of the loan are recognized as transaction costs of the loan, since it is likely that some or all of the loan is drawn. In this case, the fee is deferred until the drawing occurs. While there is evidence of the likelihood of drawing all or part of the loan, the rate is capitalized as an advance payment and amortized over the loan period to which it relates. Loans and financing are classified as current liabilities unless the Company has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. 22

25 2. Summary of significant accounting policies (Continued) Provisions Provisions are recognized when: (i) There is a present or not formalized obligation (constructive obligation ) as a result of past events; (ii) It is probable that an outflow of resources is required to settle the obligation; and (iii) The value has been reliably estimated. Provisions are measured at present value of expenses that should be required to settle the obligation using a pre-tax rate, which reflects current market evaluations of time value of money and the specific risks to the obligation. The increase in the obligation due to the passage of time is recognized as financial expense Taxes and contributions a) Current income tax and social contribution Taxes on profits comprise income and social contribution taxes. Income tax is determined at 15%, plus a 10% surtax on profits in excess of R$240 in the period of 12 months, while social contribution tax is computed at 9% on taxable profit, recognized on the accrual basis. The Corporate Income Tax (IRPJ) and Social Contribution on Net Profits (CSLL) are recognized in the statement of the income except to the extent that they relate to items recognized directly in the shareholders equity or comprehensive income. In this case, the tax is also recognized in the shareholders equity or comprehensive income. The charges of current IRPJ and CSLL are calculated based on the tax laws enacted or substantially enacted on the balance sheet date. The Company s management shall periodically review the positions taken by the Company in the income tax returns with respect to situations in which the applicable tax regulations gives rise to interpretations. It establishes allowances, where appropriate, based on estimated values of payments to tax authorities. Tax prepayments or recoverable taxes are stated in current assets based on the forecast of their realization. 23

26 2. Summary of significant accounting policies (Continued) Taxes and contributions (Continued) b) Deferred income tax and social contribution Income tax and social contribution are recognized on temporary differences arising from differences between the tax bases of assets and liabilities and their book values in the financial statements. However, the income tax and social contributions are not recorded if it results from the initial recognition of an asset or liability in a transaction other than a business combination, which at the time of the transaction does not affect the income, nor the taxable income (tax loss). Income tax and social contribution taxes are determined enacted tax rates (and tax laws) enacted or substantially enacted at the balance sheet date, and should be applied when the respective deferred tax asset is realized or when the deferred tax liability is settled. The active income tax and social contribution tax are recognized only in proportion to the probability that future taxable income will be available and against which the temporary differences can be used. The deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred tax assets and liabilities relate to income taxes levied by the same tax authority on the tax entity or different taxable entity where there is the intention to settle the balances on a net basis. c) Taxes on revenues Service revenues are subject to the following taxes and contributions, at the following nominal rates: Social Contribution on Gross Revenue for Social Integration Program (PIS) % Social Contribution on Gross Revenue for Social Security Financing (COFINS) - 3% On Services Tax (ISSQN) - 2% to 5% These charges are presented as sale deductions in the statements of income. 24

27 2. Summary of significant accounting policies (Continued) Loyalty program In September 2012, the Company introduced a pilot project of its customer loyalty program, by which customers earn points that are exchanged for travel packages. In accordance with the regulation of the program, customers earn 1 point for every R$1.00 spent, and these points expire within 18 months. The obligations related to the customer loyalty program are analyzed at net fair value of the breakage estimate per point and multiplied by the number of points at the end of every month. These obligations are recorded under Customer loyalty program advance sales of travel packages and are recognized as revenue at customer boarding referring to the travel package exchanged for loyalty points. The Company calculates the breakage estimate using historical data. Future opportunities may significantly change the customer profile. These changes may lead to significant changes in the deferred revenue balance, as well as in the recognition of revenue from this program Share-based compensation Since January 1, 2010, the Company has granted to its executives and management compensation in the form of share-based payment. The Company measures the cost of transactions settled with shares to its employees based on the fair value of equity instruments on the date of grant. The estimated fair value of share-based payments requires determining the most appropriate evaluation model for the grant of equity instruments, which depends on the terms and conditions of the shares granted. This also requires determining the most appropriate data for a valuation model, including the expected life of the option, future events, volatility and dividend yield and related assumptions. The assumptions and models used to estimate the fair value of share-based payments are disclosed in Note 15.b. The costs of these transactions are recognized in the income statement during the period in which the right is acquired (the period during which the specific conditions of acquisition of rights must be met) against the capital reserve in shareholders' equity Capital stock Common shares are classified as shareholders equity (Note 15.a) and direct incremental costs attributable to the issuance of new shares or option are shown in the shareholders equity as deduction from the amount raised, net of taxes. 25

28 2. Summary of significant accounting policies (Continued) Treasury shares Treasury shares are the Company s shares acquired by the Company and kept in treasury (Note 15.d). Treasury shares are recorded in a separate account, and, for the purpose of presentation and disclosure, are deducted from the shareholders equity. The effects of purchase, sale, issuance or cancelation are not recognized on the statement of income Revenue recognition a) Gross revenue Gross revenue comprises the fair value of the consideration received or receivable for the development and intermediation of services of tour packages. The Company recognizes revenue when the amount of revenue can be measured reliably, it is probable that future economic benefits will flow to the entity and when the risks are substantially transferred, which occur at the time of departure. The tour packages are sold by CVC Serviços or through travel agencies authorized to sell tour packages. Packages include airfare, ground transportation, hotel reservations, land packages and sea cruise packages, among other services, rendered by the Company. Substantially all travel services are provided directly to customers through partners, to whom the Company charges a percentage of income or from whom the Company receives a commission for services rendered. The amount charged or the commission received corresponds to the revenue recognized, CVC Serviços records fees received from CVC for the sale of tour packages prepared and administered as its own revenue, which is eliminated for consolidation purposes. Revenue from tour packages is recorded as advance sales of tour packages in current liabilities due to the obligation to provide such services, Revenue from service provision is recognized when the passenger makes the departure. All expenses directly related to the travel services are recognized concurrently with the associated revenue. The results of operations are determined in accordance with the accrual basis. 26

29 2. Summary of significant accounting policies (Continued) Leasing a) Finance leasing agreements Leasing agreements in which the Company holds substantially all the risks and benefits of ownership are classified as finance leasing. These are capitalized at the inception of the lease term at the lower value between the fair value of the leased asset and the present value of minimum lease payments. Each installment paid on the lease is partly allocated to liabilities and partly allocated to financial charges in order to maintain a constant rate on the balance of the outstanding debt. Corresponding obligations, net of financial charges, are included in noncurrent liabilities, interests on financial expenses are recognized in the income statement over the lease term in order to produce a constant periodic interest rate on outstanding liability for each period. Equipment acquired through finance leases is depreciated over its useful life. b) Operating lease agreements Leases are classified as operating when there is no transfer of risks and benefits of ownership of the leased items. Payments on lease installments (excluding the cost of services, such as insurance and maintenance) that are classified as operating lease agreements are recognized as expenses on a straight line basis over the life of the contract Distribution of dividends and interest on shareholders equity As defined in section 9.1 of the Shareholders Agreement executed on December 1, 2009, the shareholders must not approve the distribution of dividends (including mandatory dividends), interest on shareholders equity or any other profit sharing arrangement so long as the Company holds and has not fully paid its debt to FIP GJP (Note 17), or until an initial public offering (IPO) has occurred. As a result of the company's IPO on December 9, 2013, the Company will proceed with the payment of minimum dividends for the year ended December 31, 2013, in accordance with Brazilian corporate law (Lei das Sociedades por Ações). 27