1. MESSAGE FROM MANAGEMENT

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1 MANAGEMENT REPORT 2016 The Management of Marfrig Global Foods ( Marfrig ) presents the Management Report and Financial Statements, accompanied by the reports of the Audit Board and Independent Auditors, for the fiscal year ended December 31, MESSAGE FROM MANAGEMENT According to the latest report from the International Monetary Fund (IMF), the world economy is expected to end the year with growth of 3.1%. The stronger growth in more mature economies was partially offset by slower growth in certain emerging economies. The World Bank defined 2016 as a year a stagnation in global trade, timid investment and high political uncertainty in various economies. In Brazil, the 3.5% contraction in GDP growth in the year, coupled with the turbulent political scenario, symbolize the challenges faced by the local economy. In a year that remained challenging, Marfrig s strategy was based on its strategic plan Focus to Win, in which financial discipline and operating performance figure prominently. As a simpler and leaner corporation focused on the Keystone and Beef divisions, the Company has consolidated its position as a leading supplier of proteins to the global food service industry. Keystone s product portfolio and operational footprint in better-performing markets, such as the United States, which reached full employment in the second half of the year, and China, whose economy continued to be driven by expansionary monetary policy, supported record-high results by the division in In the Beef Division, the presence in key South American markets, the focus on serving the more resilient channels in each local market and the capacity to export to various consumer markets partially mitigated the negative cattle cycle in Brazil, the effects from volatile exchange rates and the lower average beef prices in the international market. In its capital structure, Marfrig continued to advance its liability management process, which aims to lengthen the debt maturity profile and reduce the average debt cost, by placing US$1 billion in a 7-year bond in the international market. The proceeds were used to repurchase and settle shorter-term and higher-cost senior notes with aggregate principal of around US$950 million. In October 2016, the risk-rating agency Fitch upgraded Marfrig s credit rating to BB-, with a stable outlook. In early 2017, Moody s revised its rating outlook from stable to positive, following the mandatory conversion of debentures by the BNDES. Turning to Marfrig s main financial indicators, gross revenue came to R$20 billion, virtually stable in relation to 2015, influenced by the average depreciation in the Brazilian real and the higher sales volumes at the Keystone Division, which offset the lower international commodity prices and the lower sales volumes at the Beef Division. Company s consolidated adjusted EBITDA came to R$1.6 billion, down 8.5% from EBITDA margin contracted 70 bps to 8.2%. The lower margin at the Beef Division, which followed the downward trend in industry margins (export spreads, based on the average price from Secex and the average fed cattle price from ESALQ, fell 20%), was partially offset by the continued solid performance at Keystone, a leading global supplier of higher-value protein products to the food service industry mainly in the United States and Asia, which posted record-high adjusted EBITDA in In mid-2016, and in keeping with the strategy to grow via higher-value products, the Keystone Division began construction on a new plant in Thailand. With investment of around US$34.5 million and annual processed food production capacity of 30,000 tons, the new plant will serve the regional market as well as other export markets, such as Europe and Japan. 1

2 MANAGEMENT REPORT 2016 After years of negotiation, the trade agreement between Brazil and the United States authorizing fresh beef exports from Brazil was finally signed in August The authorization of meatpackers by the Ministry of Agriculture was completed in record time, with Marfrig Global Foods becoming the first company to export products to the United States, from its unit in Bataguassu, Mato Grosso. This opening not only creates an important opportunity for Brazilian exports, but also should lead to the opening of other markets that follow the standards of the U.S. Department of Agriculture (USDA), such as Canada and Mexico. Marfrig s commitment to sustainable development once again yielded important recognition. According to the annual audit report of the Greenpeace Pact for sourcing cattle in the Amazon biome, Marfrig was the only company in the industry to register no incidents of non-compliance in all audits. Another highlight was the recognition of the Company's leadership in Latin America by CDP Forest (Carbon Disclosure Program), which addresses climate change, the environment and water resources in the value chain. The commitment undertaken by the Company not to source animals from areas that have been banned by the environmental agency IBAMA, coupled with our efforts to monitor suppliers, ensured us a score of A, attesting to our industry leadership. Acknowledgements Despite Brazil s recession and the adverse global scenario, Marfrig and its team remained committed to delivering results. I express my sincere gratitude to everyone for their commitment during the year. To our Clients, Suppliers, the Financial Markets and Shareholders, thank you for your trust and partnership. We will continue to pursue service excellence to create a leading global food company. Marfrig s long-term strategy will remain focused on becoming more efficient and innovating more, supported by a solid capital structure and the consistent generation of profits and free cash flow. I wish all of us an excellent 2017, and am certain that Marfrig will grow stronger with each passing year! Marcos Antonio Molina dos Santos Chairman of the Board The year 2016 was a period of consolidation for the organization. Today, Marfrig is leaner and more focused, while maintaining its highly globalized and diversified operations. Our actions have been guided by operational and financial discipline, and, despite a scenario marked by instability, we remained committed to generating positive free cash flow and maintaining our investments. We are pleased to serve our clients with quality and innovation, and will continue to strengthen our leadership in sustainability and animal welfare. I thank everyone who supported Marfrig and reaffirm our commitment to the strategy outlined and our focus on creating a solid and profitable company. Martin Arias Secco Chief Executive Officer 2

3 MANAGEMENT REPORT MARFRIG GLOBAL FOODS Marfrig Global Foods is a Brazilian multinational company with a broad international footprint, with operations in 12 countries, and is one of the most diversified and largest companies in the global protein industry. Its business model is formed by 48 production units, distribution centers and offices located in South America, North America, Europe, Oceania and Asia. Its activities include the production, processing, further processing, sale and distribution of foods made from animal proteins, as well as a variety of other food products, such as frozen vegetables and desserts. With around 30,000 employees, the Company operates in the food service, retail and food processing segments offering innovative, safe and healthy solutions. It has a diversified and comprehensive portfolio of products that can be found in major restaurant and supermarket chains, reaching the tables of millions of consumers in some 100 countries. Its business model comprises two divisions, both of which have global operations: Keystone: one of the largest global suppliers of higher-value protein products to the fast food (quick service restaurants or QSRs), retail and food processing industries. Headquartered in the United States, Keystone s operating platform and footprint span over seven U.S. states and five countries in Asia and Oceania. Committed to innovation and the highest food safety and quality standards, it combines vast expertise in the food industry with a strong focus on clients to offer a complete mix of fresh and frozen products. Beef: one of the main beef producers in the world, with vast expertise in Brazil s food service segment, it also has a strong presence in foreign markets, where it is equally recognized for the quality of its products. Marfrig s international operations in South America focus on exporting premium beef and lamb cuts and on leveraging the strategic position it enjoys in Uruguay, Chile and Argentina, which gives its access to major consumer markets around the world. 3. PERFORMANCE According to the USDA, the global consumption of proteins (beef, poultry and pork) in 2016 amounted to million tons. Emerging markets (Latin America, Asia and Africa) accounted for 56% of this amount, with China accounting for 52% of these markets. The continuation of China s policy to stimulate domestic growth and to expand the middle class has had a positive influence on protein consumption in both emerging and global markets. Industry Scenario Poultry and Food Service segment United States In the United States, after margins were affected by an outbreak of avian flu in 2015, the industry s profitability improved throughout The reopening of export markets to U.S. products and falling raw material costs were some of the key factors. The average price of corn and soybean meal based on CBOT fell 10.5% and 4%, respectively, from In the food service segment, the U.S. National Restaurant Association (NRA) estimates restaurant industry sales of US$783 billion in 2016, for the seventh consecutive year of real sales growth. The restaurant industry segments posting the best performances in same-store sales and store traffic were Quick Service, Fine Dining and Upscale Casual, according to a report by Black Box Intelligence. McDonald's reported same-store sales growth of 1.7% in its 2016 annual report, despite the decline in store traffic. APMEA In the APMEA region, global food service chains continued to expand. McDonald s, for example, reported growth 3

4 MANAGEMENT REPORT 2016 in store numbers in markets such as China, South Korea and Australia, which combined had 3,782 stores, or 170 more than in 2015 (with growth concentrated in China). China Despite the country s slower growth, various trends have sustained growth in China s food service industry, such as rising incomes, urbanization and growing demand for more-convenient foods and for high-quality processed foods. And as China s population continues to migrate to urban areas, where consumers require packaged foods, the processed food industry should continue to expand over the coming years. Thailand The USDA estimates that Thai chicken exports grew by 8% in 2016, to 670,000 tons, supported in part by the product s competitiveness improving in relation to Brazilian chicken and by the lower supply from China. Of total chicken volume exported in 2016, the USDA estimates that 70% consisted of processed poultry products. The USDA also estimates that domestic consumption grew by 3% in Thailand s domestic market still consumes primarily fresh chicken (60% to 70% of all chicken sold domestically). However, the expectation is that the readyto-eat meal and QSR segments will grow by around 4% to 5% p.a. over the next few years. Malaysia In Malaysia, growing urbanization, a shift in lifestyles and the higher participation of women in the labor force should lead consumers to eat more away from home, which should drive both the country s demand for chicken and its food service industry. Industry Scenario Beef Brazil Brazilian beef export volume was stable in relation to Export revenue, however, fell 7%, due to the lower average price in U.S. dollar in the international market. On the other hand, after more than 15 years of negotiation, the United States, one of the world's largest consumer markets, opened up its market to Brazilian fresh beef imports. Meanwhile, the scenario in the domestic market remained challenging. Brazil s recession, along with mounting unemployment and higher inflation, has adversely affected domestic consumption. On the other hand, Brazil s food service industry, one of Marfrig s focal points, posted sales of R$154 billion in 2016, up 7.1% from 2015, according to data from the Brazilian Association of Food Companies (ABIA). On the supply side, the current moment in the country s beef cycle has limited the availability of fed cattle, which has helped to keep the market relatively balanced. In this scenario, the average cattle price increased 5.1%, according to the ESALQ index. Uruguay On the other hand, Uruguay registered gradual margin expansion throughout The higher cattle supply led to lower costs, which were partially neutralized by lower export prices, which accompanied the dynamics of the international market. 4

5 MANAGEMENT REPORT Consolidated Results Net Revenue Marfrig Global posted consolidated net revenue of R$19 billion in 2016, down slightly (-1.1%) on the prior year. Despite the positive impacts from (i) the 4.8% appreciation in the U.S. dollar against the Brazilian real; and (ii) the 5% growth in Keystone s sales volume; revenue was adversely affected by (iii) the lower average price at the Keystone Division, influenced by falling grain and meat prices, given its pricing model, in which sales prices are pegged to commodity prices; and (iv) the 8% drop in sales volume at the Beef Division. Marfrig remains a highly globalized company and one of the protein industry s largest and most diversified companies, as the following charts show. The international operations (Keystone and Beef International) accounted for 62.8% of total revenue in Considering the exports from the Brazilian operation, the international market accounted for 78% of the Company s total sales. Meanwhile, sales in Brazil s domestic market accounted for 22% of the total. By Operation By product By currency Cost of Goods Sold In 2016, COGS amounted to R$17 billion, in line with the previous year, which is explained by (i) the depreciation in the average price of the Brazilian real against the U.S. dollar; and (ii) the higher average price of fed cattle in Brazil, which rose 5.1%, according to ESALQ; with these factors offset by (iii) lower grain costs at Keystone, following the trend in the market, where corn and soy meal prices fell by 10.5% and 4%, respectively (source CBOT). The shift in the contributions to COGS between divisions is explained by the lower volumes at the Beef Division and the higher volumes at Keystone. 5

6 MANAGEMENT REPORT 2016 Gross Profit and Gross Margin In 2016, gross profit amounted to R$2.2 billion, down 5.4% from However, the contribution by Keystone increased 80 bps to 40% or R$873 million of consolidated gross profit. Gross margin was 11.3%, down 50 bps compared to 2015, due to margin contraction in the beef operation, which was partially offset by significant margin expansion at the Keystone Division. Selling, General and Administrative Expenses SG&A expenses amounted to R$1 billion, increasing 5.6% on the prior year, reflecting the effects from the translation into Brazilian real of amounts in the international operations. Note that the total increase in these expenses lagged IPCA inflation in the year, of 6.3%. Selling expenses increased by R$28 million, which is explained by higher logistics expenses with exports on higher fuel prices, reflecting the rise in crude oil prices in international markets, and by the effects from the weaker Brazilian real in the period. General and administrative expenses increased 6.5% from 2015, mainly due to the effect from currency translation on international expenses, which was partially offset by the decrease with personnel expenses at the Beef Division, reflecting the efforts to improve productivity. Adjusted EBITDA and Adjusted EBITDA Margin In 2016, consolidated adjusted EBITDA amounted to R$1.6 billion, down 8.5% on the prior year. In 2016, Adjusted EBITDA margin was 8.2%, down 70 bps from the 8.9% margin in The main factors explaining this performance were (i) lower spreads in the Beef Division; and (ii) lower sales volume in the Beef Division; with these factors partially offset by (ii) the 16% growth at the Keystone Division; and (iii) the depreciation in the Brazilian real against the U.S. dollar. In 2016, Keystone accounted for 55% of Adjusted EBITDA, compared to 42% in

7 MANAGEMENT REPORT Keystone Division The Keystone Division posted sales volume growth of 5% in Net revenue in 2016 came to US$2.7 billion, in line with the previous year. The stability is explained by the lower costs with outside meat and grains, resulting in a lower average sales price (since most sales contracts are linked to commodity-price variation), which was partially offset by (i) the continued successful strategy to expand through Key Accounts, which posted growth of 17% at the global level; and (ii) the recovery in leg quarter prices, following the reopening of the international market to U.S. exports, which was affected by avian flu until mid In Brazilian real, the unit s net revenue amounted to R$9.4 billion, accounting for 49% of the Company s consolidated net revenue. In the United States (which accounts for 70% of the operation), net revenue came to US$1.9 billion, growing by around 1.0% on In the case of APMEA (which accounts for 30% of Keystone s operation), net revenue was US$781 million, down 1% from the US$792 million registered in the previous year. In summary, the higher sales volume (+5%) was partially offset by the lower average price, which was influenced by lower raw material costs, as mentioned above. Gross profit advanced 16.3% on 2015 to US$251 million. Gross margin expanded by 130 bps to 9.3%, due to (i) the continued successful strategy to grow through Key Accounts, with a solid contribution from No Antibiotic Ever (NAE) products; and (ii) lower grain prices in the United States, which reduced the cost of animal feed. In 2016, selling, general and administrative (SG&A) expenses amounted to US$69 million, down 0.9% from SG&A expenses as a ratio of net revenue stood at 2.6%, in line with the previous year (2.6%). Consequently, adjusted EBITDA was US$252 million, growing 16.3% from 2015 to set a new record. EBITDA margin was 9.3%, expanding 130 bps on the prior year. In Brazilian real, adjusted EBITDA in 2016 was R$875 million, increasing 19.9% from Beef Division The Beef Division posted net revenue of R$9.9 billion in 2016, down 5.8% from the prior year to account for 51% of the Company s consolidated revenue. The lower sales volume was partially offset by the higher average price, which was influenced by the depreciation in the Brazilian real against the U.S. dollar. In 2015, exports accounted for 45% of the Beef Division s revenue, reflecting the Company s competitive positioning in the global beef industry. A highlight in the year was the opening of the U.S. market to fresh beef imports from Brazil. Today, the Company has 4 plants in Brazil certified to export to the United States. Including Uruguay, this increases to 8 plants. Also worthy of note the priorization of exports from the Beef Division to more profitable destinations. China, after opening its market to Brazilian fresh beef in 2015, accounted for 23% of the Company s total export volume (includes exports from Uruguay), which represents growth of 74% on the previous year. Gross profit in 2016 was R$1.3 billion, down from R$1.6 billion in 2015, with adjusted gross margin contracting 170 bps to 13.1%. This result is explained by (i) the lower sales volumes in Brazil and Argentina (asset divestments); (ii) lower spreads in the brazilian operation, due to 5.1% increase in the average price for fed cattle compared to 2015, based on the ESALQ index, given the lower supply of fed cattle (cattle cycle); which were partially offset by (iii) the recovery in sales volume in Uruguay; and (iv) the priority given to serving more profitable channels in Brazil, with a focus on the food service and small retailers. Selling, general and administrative expenses amounted to R$806 million in the year, increasing 6.5% from 2015 to account for 8.1% of the unit s net revenue. This increase was mainly concentrated in expenses with export logistics, as noted earlier, which were partially offset by the lower costs with administrative personnel. 7

8 MANAGEMENT REPORT 2016 In this context, the Beef Division posted adjusted EBITDA of R$719 million, down from R$1.0 billion in the prior year. EBITDA margin was 7.2%, down 240 bps from the 9.6% margin in Financial Result The net financial result in 2016 was an expense of R$2.0 billion, compared to an expense of R$3.1 billion in Excluding the effects from exchange variation, the net financial expense declined by R$91 million. The highlights in the period were (i) the decline in net interest income (expenses) of R$158 million, reflecting the liability management actions; and (ii) the net gain of R$292 million from the mark-to-market adjustment of derivatives (market operations); partially offset by (iii) the non-recurring results with the repurchase of senior notes in 2015 and 2016, with a net negative effect of around R$170 million; and (iv) the increase in other expenses related to working capital operations Net Result For comparison purposes and due to the asset divestment process, the following analysis considers only the net result from continuing operations, i.e., excluding any gains from asset divestments. Marfrig posted a net loss of R$726 million in 2016, which represents improvement of 49% from the net loss of R$1,424 million in Cash Flow In 2016, the Company s free cash flow was R$39 million. Cash flow benefitted from the results generated by the Keystone Division, the decline in interest expenses resulting from the liability management actions in the year, cost discipline and working capital improvements. Nevertheless, the challenges faced by the Beef Division, the still-high debt costs and interest expenses with the mandatorily convertible debentures, which were converted in January 2017, had a substantial impact on the closing cash position. 8

9 MANAGEMENT REPORT 2016 Free Cash Flow 2016 (R$ million) 3.5. Capital Structure, Liquidity and Rating Indebtedness and Debt Profile Net debt in U.S. dollar remained stable to end the year at US$1.8 billion. In Brazilian real, net debt stood at R$5.9 billion, down 17.5%. Consolidated gross debt was US$3.4 billion, which is US$340 million or 10% lower than in 2015, which is basically explained by the capital raised during 2016 through credit facilities at the Keystone Division and by the outstanding balance of the 2023 bond issue. The balance of cash and marketable securities stood at US$1.6 billion, increasing by US$270 million or 26.4% from the prior year, which is explained by the same reasons above. In line with the goal to lengthen the maturity profile and reduce the cost of its debt, the Company issued US$1 billion in 2023 senior notes (bonds) in the year, whose proceeds were allocated primarily to repaying shorter-dated, higher-cost debt. Liquidity and Debt In Management s opinion, the ratio that best reflects the Company s current leverage is the ratio of net debt to adjusted LTM EBITDA from continued operations. This ratio stood at 3.69x, improving 40 bps from 4.09x at the end of the previous year. It is important to note that bank and market funding transactions include contractual provisions that allow for excluding currency translation effects from the leverage ratio calculation. Accordingly, the ratio for this purpose ended 4Q16 at 2.40x (for more information, see Note 35.6 to the 2016 financial statements). Debt Maturity Schedule (R$ million) At December 31, 2016, the average duration of outstanding debt was 3.9 years (versus 4.1 years in 2015), with only 13% of debt maturing in the short term. At the end of the year, the average cost of the Company s debt was 7.3% p.a., down 60 bps from 7.9% p.a. in

10 MANAGEMENT REPORT 2016 Debt Maturity Schedule (R$ million) 5,279 3,146 1,455 1,222 2,131 1,906 1,290 Cash & Equiv Financial Indicators Net Debt / EBITDA LTM - Excl. FX Variation Short Term Debt (%) 13.05% 16.57% Net Debt / adj. EBITDA LTM Cont Long Term Debt (%) 86.95% 83.43% Average Cost of Debt (p.a.) 7.26% 7.88% Debt in R$ (%) 6.0% 6.7% Duration (months) Debt in other currencies (%) 94.0% 93.3% Credit Risk Rating Global Scale In 2016, Marfrig remained focused on improving its operating and financial performance by executing its business strategy and its Liability Management plan. Credit rating agencies have been tracking the Company s efforts and continually improving their ratings. In October 2016, Fitch Rating published a report upgrading Marfrig s corporate rating to BB-, with a stable outlook. The main factors leading to the upgrade were Company s liability management actions, which have lengthened its debt maturity profile, reduced its debt cost, liquidity and leverage improvement, as well as the expectation of higher free cash flow stemming from its lower financial expenses, the continued solid performance of its Keystone Division and the positive scenario for the beef industry in Brazil. In the same period, S&P reaffirmed Marfrig s corporate rating of B+, with a positive outlook. In early 2017, Moody s updated its report, which reaffirmed Marfrig s B2 rating and upgraded the outlook from stable to positive. 10

11 MANAGEMENT REPORT Investments In 2016, investments came to R$526 million, increasing approximately R$79 million from 2015, influenced mainly by the investments made at the Keystone Division and to the effects from the translation of amounts at the international units to Brazilian real, which is the Company s functional currency. The increase in its investments demonstrates its commitment to continually improving its plants and preparing its businesses for growth, especially in the United States and Asia. 4. GUIDANCE In November 2016, given the better visibility of the macroeconomic and industry scenarios, the Company opted to revise its guidance announced in February. As explained at the time, the main factors leading to this revision were (i) the appreciation in the Brazilian real against the U.S. dollar; (ii) the reduction in commodity prices in the international market; (iii) the contraction in beef spreads; and (iv) the continued operation of a plant in Argentina. All actual results were in line with guidance announced. Receita Faixa-alvo 2014 (1) Guidance Faixa-alvo 2016 (1) 2014 (1) Actual 2016 R$ 21 a 23 bilhões R$ 19 to R$ 20 billion Atingido 2014 Atingido R$ bilhões R$ 19 billion R$ 21 a 23 R$ 21 Net Revenue Margem Receita EBITDA (2) 7,5% bilhões - 8,5% bilhões 8,5% Margem Adjusted Investimentos 8.5% 9.0% 8.2% EBITDA Margin (2) EBITDA (2) 7,5% R$ ,5% R$ 8,5% 639 (CAPEX) Faixa-alvo milhões 2014 (1) Atingido milhões 2014 Investimentos R$ 600 R$ 639 Fluxo Investment (CAPEX) de caixa livre R$450 to Neutro R$550 a R$ 100 R$ para o acionista (3) milhões 21 a 23 milhões 21 Receita milhões milhões (Capex) million Faixa-alvo bilhões 2014 Fluxo de caixa livre million Neutro a R$ 100 (1) Atingido bilhões R$ para Free Cash Flow to Margem o acionista R$0 (3) milhões milhões to R$100 R$ 39 shareholders (3) EBITDA (2) 7,5% 21-8,5% a 23 R$ 8,5% 21 Receita million bilhões million bilhões Investimentos R$ 600 R$ 639 (1) Assumptions based on the exchange (CAPEX) Margem rate of R$3.47/US$1.00 (average milhões exchange rate: milhões 1Q16 - R$3.91; 2Q16 - R$3.51; 3Q16 - EBITDA R$3.25; 4T16e - R$3.20/US$1.00). (2) 7,5% - 8,5% 8,5% Fluxo de caixa livre (2) Excludes non-recurring items. Neutro a R$ 100 R$ 56 para Investimentos o acionista (3) Operating cash flow after capital expenditure, interest (3) R$ milhões 600 R$ milhões 639 (CAPEX) expenses milhões and income tax. milhões Fluxo de caixa livre Neutro a R$ 100 para o acionista (3) milhões R$ 56 milhões 5. CORPORATE GOVERNANCE Marfrig Global Foods S.A. has a business management model that complies with the rules of the Securities and Exchange Commission of Brazil (CVM), the Novo Mercado Regulations of the São Paulo Stock Exchange 11

12 MANAGEMENT REPORT 2016 (BM&FBovespa) and the recommendations of the Brazilian Code of Corporate Governance Best Practices of the Brazilian Corporate Governance Institute (IBGC). The Group conducts its business based on transparency in the reporting of information to its various stakeholders (shareholders, investors, clients, consumers, suppliers, employees and society) and adopts corporate governance practices that exceed legal recommendations and obligations. In addition to a Board of Directors and a permanent Audit Board, the Company has three Advisory Committees to its Board of Directors, whose main function is ensuring that its activities are conducted to protect and increase the value of its assets and to optimize return on investment in the long term. These committees are the Audit Committee, Financial & Risk Management Committee, Compensation, Corporate Governance & Human Resources Committee and Management Committee. Other instruments and policies supporting Marfrig s corporate governance activities include: Code of Ethics: establishes the ethical foundation for compliance and strengthens governance by defining the values, principles and practices that guide good corporate conduct, in line with best practices and legal requirements. Anticorruption Manual: based on Brazilian anticorruption legislation, the manual informs how the Company s integrity policies translate into processes and practical procedures to be followed. Whistleblowing Channel: called HELPLINE, the channel is made available to all employees, clients, suppliers, service providers, investors, government officials and partners to receive reports on any activity in violation of the Company s standards and policies as well as of governing law, in particular Brazil s Federal Law 12,846/13, which combats corruption. Securities Trading Policy: establishes the rules and procedures to be adopted by the Company and its related persons regarding trading in securities issued by it, assuring to all stakeholders that ethical conduct is adopted by those with access to material information. Disclosure Policy: establishes practices for the disclosure and use of information to be observed by the Controlling Shareholder, Managers and members of the Audit Board, as well as by anyone who, due to their position, function or duties at the Company s, may come to acquire knowledge of a Material Act or Fact of the Company, in accordance with CVM Instruction 358 of January 3, 2002 and with CVM Instruction 369 of June 11, The Company s material facts are published on the news portal of Valor Econômico ( on its Investor Relations website, and on the Regular and Special Information (IPE) system of the Securities and Exchange Commission of Brazil (CVM). Dividend Policy: in accordance with Brazilian Company Law and Marfrig's bylaws, an Annual Shareholders' Meeting must be held within the first four months of each year to decide on the distribution of annual dividends. In dividend distributions, all shareholders are entitled to receive a minimum dividend corresponding to 25% of adjusted net income calculated based on the financial statements. Submission to Market Arbitration Chamber The Company, its shareholders, Managers and Audit Board members undertake to resolve, through arbitration at the Market Arbitration Chamber, any and all disputes or controversies that arise between them related to or arising from, in particular, the application, validity, effectiveness, interpretation, violation (and its effects) of the provisions of Brazilian Company Law, the Company s Bylaws, the rules issued by the National Monetary Council, by the Central Bank of Brazil and by the Securities and Exchange Commission of Brazil and the other rules applicable to the capital markets in general, as well as those in the Novo Mercado Regulations, the Arbitration Regulations, the Sanctions Regulations and the Novo Mercado Listing Agreement. Relationship with the independent auditors 12

13 MANAGEMENT REPORT 2016 Pursuant to CVM Instruction 381/2003, which refers to the rendering of services by our independent auditors, BDO RCS Auditores Independentes SS, we hereby declare that the total fees related to services other than those associated with the independent audit represented less than 5% of the total fees paid to the group of auditors by Marfrig Global Foods S.A. and its subsidiaries, and none of the work affected the independence of the auditors. 6. CAPITAL MARKETS and INVESTOR RELATIONS Marfrig s stock traded on the Novo Mercado segment of the BM&FBovespa (MRFG3) ended the year quoted at R$6.61 per share, for a gain of 4% from end Average daily financial trading volume in the stock increased 10%, from R$15.0 million to R$16.5 million. The ADRs traded on the over-the-counter market (MRRTY) ended the year quoted at US$1.98 per share, up 29% from In the same period, the S&P Index declined by 10% to 2,239 points. In the composition of the Bovespa Index valid from September to December 2016, Marfrig ranked 56 th in terms of liquidity, which is four places down from the previous portfolio, and had a weighting of 0.19% in the index. The above figures show that we are on the right path. They are the result of the Company s efforts to improve its relations with investors and regularly participate in all market events to create opportunities for explaining our strategy, fundamentals, commitment to transparency and respect for those who support and understand the business. It also reflects the accomplishments of various areas of Marfrig, which is working to create a company focused more on value creation, financial discipline and teamwork at the global level. 7. SOCIAL and ENVIRONMENTAL PERFORMANCE Since 2013, when it implemented its Focus to Win strategy, Marfrig has consistently strengthened the strategic pillars of Sustainable Development, which permeate all business units and are a reference for developing local actions that together foster and ensure the sustainability of the entire production system. The Company is committed to always balancing the economic, social and environmental aspects of its business in order to contribute to the development of society and help preserve the planet. The pillars forming the Company s Sustainability strategy are (1) Clients, (2) Suppliers, (3) the Environment, (4) Workplace, (5) Economic and (6) Social. Given its leading position in promoting sustainable production and preserving biodiversity, the Company upholds, and continues to uphold and strengthen, various public commitments in partnership with major organizations. 13

14 MANAGEMENT REPORT 2016 The highlights in 2016 include: Greenpeace Pact: public commitment signed by Marfrig in October 2009, through which it undertakes not to source animals from deforested areas and/or areas that violate indigenous land rights and/or conservation units, with the Company subjected to annual audits by independent audit companies to verify compliance with the requirements of the agreement. In 2016, Marfrig once again achieved an excellent result by becoming the industry s only company to achieve 100% for the third straight year. It is also the only company with geo-referenced maps for 100% of its suppliers in the Amazon Biome. Rainforest Alliance Certified: after launching in 2015, in partnership with a European client, the first Rainforest Alliance certified hamburger, which will serve retail chains in Europe with beef produced in accordance with the highest environmental, social, economic, animal welfare and production management standards, in 2016, Brazilian consumers also were able to buy products with this seal. The Nature Conservancy (TNC): partnership signed in 2013 with NGO TNC and Walmart to foster sustainable cattle raising in southeastern Pará state. In 2016, beef from the project was introduced in the market through two Walmart stores in Brasília. The project will be highlighted in TNC s global annual report, which is distributed to thousands of representatives of companies, foundations, governments and NGOs around the world. CDP Forest: Marfrig Global Foods was recognized for its leadership in Latin America by the Forest Program of the Carbon Disclosure Program (CDP), which addresses climate change, the environment and water resources in the value chain. The recognition is for the Company s efforts to reduce deforestation in the value chain, i.e., reducing Scope 3 carbon emissions. The commitment undertaken by the Company in 2009 not to source animals from areas that have been banned by IBAMA, coupled with efforts to monitor suppliers, ensured a score of A, attesting to its industry leadership. Animal Welfare: the Beef Division has a department dedicated exclusively to promoting animal welfare and good management practices in the production chain. The team is formed by highly trained zootechnicians and veterinarians, who monitor the evolution in indicators, assess the decision-making process and develop training programs. In 2016, Marfrig created the Animal Welfare Committee, which works to share the lessons learned and the results achieved by teams at each plant, with a focus on the industry s overall development. The pursuit and maintenance of dignified treatment is essential to preserving the quality and safety of the brand s products. It is the only way to guarantee customer satisfaction and continuous improvement in all animal management stages. As a result of these efforts, the Beef Division has become a reference in animal welfare. Meanwhile, the Keystone Division has maintained its leadership in animal welfare by participating on the animal welfare committees of the National Chicken Council and the American Association of Avian Pathologists, and becoming involved in the Poultry Welfare Alliance. We also worked with one of our main clients, McDonald s, to develop and implement guidelines on bird welfare in slaughter operations. San José Unit: located in Uruguay, the unit concluded and started operating a new wastewater treatment plant, for investment of US$2million. The unit is a reference in the country, since the plant eliminates all nitrogen and phosphorus in wastewater. The plant also has its own laboratory for conducting routine controls. A reference and pioneer in its market segments, Marfrig adopts the principle of guaranteeing transparency and advancing sustainability. For this reason, it publishes an annual report in accordance with the framework of the Global Reporting Initiative (GRI), which features the major achievements and challenges on the work fronts established by its sustainability pillars. A full version of the document is available on the Company s Investor Relations website: 14

15 MANAGEMENT REPORT SOCIAL RESPONSIBILITY Grounded in the principles of social responsibility, the units of Marfrig Global Foods develop important programs to support local communities. These include: Social Campaigns Back to School: drive for collecting school materials; Winter Clothing: drive for collecting winter clothing; Food Drive; Blue November: awareness campaign focusing on the prevention and diagnosis of prostate cancer; Pink October: awareness campaign focusing on the importance of the prevention and early diagnosis of breast cancer; Combatting Discrimination. KEYSTAR In June 2015, Marfrig launched the global philanthropic program Keystone Cares, which works to focus and expand the local impact of the Company s contributions through pre-established guidelines and a policy for food donations. Keystone Cares focuses on three areas: Public Nutrition, Support for Local Communities and Mitigating the Impacts from Environmental Disasters. For more information, go to: 9. PEOPLE MANAGEMENT The business performance of Marfrig Global Foods is the product of the efforts of its 29,203 employees located in the various countries where it operates. Accordingly, the Company strives to support its professionals in their career development through good practices in attracting, retaining and developing talent, while also encouraging diversity in the workplace. Number of Employees by Business Unit Change (%) Holding company % Beef 17,464 18, % Keystone 11,688 11, % Total 29,203 30, % Net revenue per employee R$ 662,000 R$ 624,000 In 2016, the people management area focused on improving processes, such as social restructuring, access and time clock control, managing employees during leave, improving benefits and implementing the federal government project esocial. As a result, we obtained significant gains such as reduction in turnover and in overtime. Yet in 2016, the Company launched a 12-month trainee program where 26 people joined the Beef division with the objective of developing inovative and talented team. Each of the participants was assigned with a project, and by the conclusion of the program, the 3 best ones were awarded by the leadership team. In 2016, an engagement survey was conducted by Keystone. The results show an engagement score of 71%, for improvement of 5 percentage points from the last survey conducted in Dedicated groups were created to implement improvement plans in the areas of communication and recognition. Furthermore, as part of the talent development plan, Keystone offered development programs to 35 leaders in the United States and APMEA. 15

16 MANAGEMENT REPORT OUTLOOK The outlook for 2017 is positive, with forecasts pointing to moderate growth in comparison with The IMF projects world GDP growth of 3.4%, driven by better prospects for the United States, China, Europe and Japan. The recovery in oil and commodity prices should relieve some of the pressure on commodity export markets, also contributing to this scenario. In the United States, promises of fiscal stimulus and infrastructure investments support GDP growth forecasts of 2.3%, according to the latest IMF report. In China, the expectation is for a continuation of the stimulus measures approved by the government. In Brazil, after two years of recession, forecasts point to GDP growth of 0.5% in the year. In this context, the expectation is for growth in per-capita income and consequently in per-capita consumption of animal proteins at the global level. In the global beef industry, the expectation is for a favorable scenario. In the United States, the outlook is for a more balanced market with better margins, reflecting the better supply. Meanwhile, Australia should continue to reduce its presence in global markets to rebuild its herd. In China, the combination of stable domestic supply and growing demand should support higher beef imports. In Brazil s beef industry, the expectation of a higher supply of fed cattle should support a recovery in domestic beef consumption and also boost exports. The Brazilian Association of Meat Exporters (ABIEC) forecasts growth in beef exports of 11% in In the poultry industry, the consensus is that the current level of commodity prices will support industry margins. At the global level, production is projected to increase in leading producer countries, such as the United States and Brazil. In China, supply should remain stable with growing demand from the food service industry and from home consumption. The risk factors to this scenario are associated with a slowdown in world economic growth and sharper depreciations in the currencies of emerging countries, which could lead to contraction in household consumption. Specifically in relation to the protein industry, disease remains a key risk factor for the business. Marfrig s strategy will remain focused on capturing potential growth in the global protein industry and on creating value for shareholders by maintaining its commitment to strengthening its business through: 1. Operational improvements, productivity and margin expansion. 2. Diversifying the customer base and organic growth projects at the Keystone Division. 3. Capturing market share gains in value-added channels in the Beef Division. 4. Accelerating growth in the Asian market by expanding Keystone s operations in the food service channel and growing exports from the Beef Division. 5. Financial discipline, with a permanent focus on deleveraging and increasing free cash flow. 16

17 MANAGEMENT REPORT 2016 APPENDIX RECONCILIATION OF ADJUSTED EBITDA (R$ million) Net Profit / Loss (726.4) (1,424.1) (+) Provision for income and social contribution taxes (341.5) (688.2) (+) Non-controlling Interest (+) Net Exchange Variation ,052.9 (+) Net Financial Charges 1, ,046.6 (+) Depreciation & Amortization (+) Equity Income EBITDA 1, ,492.3 (+) Other Operacional Revenues/Expenses Adj. EBITDA 1, ,741.8 Note: the consolidated result of Marfrig reflects the Company s decision to maintain one primary processing plant in Argentina, which led to the requirement to restate the 2015 financial statements for comparison purposes. The results from discontinued operations in 2016 reflect: (i) the divestment of the beef jerky business (Marfood, in the USA); (ii) the asset divestments in Argentina, and (iii) the divestment of the feedlot business in Brazil (MFG Agropecuária). 17

18 Independent auditor s report Individual and consolidated financial statements As at December 31, 2016 EO/LGPS/LJP/YTV/IMPM/SC 0653i/17

19 Individual and consolidated financial statements As at December 31, 2016 Contents Independent auditor s report Statements of financial position Statements of income Statements of comprehensive income Statements of changes in equity Statements of cash flows Statements of value added Notes to the financial statements 2

20 INDEPENDENT AUDITOR S REPORT ON THE INDIVIDUAL AND CONSOLIDATED FINANCIAL STATEMENTS To the Shareholders and Management of Marfrig Global Foods S.A. São Paulo SP Opinion We have audited the individual and consolidated financial statements of Marfrig Global Foods S.A. ( the Company or Parent Company ), identified as parent company and consolidated, respectively which comprise the balance sheet as at December 31, 2016 and the respective statements of income, comprehensive income, changes in equity and cash flows for the year then ended, as well as the corresponding notes to the financial statements including a summary of significant accounting policies. In our opinion the accompanying consolidated financial statements present fairly, in all material respects, the individual and consolidated financial position of Marfrig Global Foods S.A. as at December 31, 2016, its individual and consolidated financial performance and its individual and consolidated cash flows for the year then ended in accordance with Brazilian accounting practices and International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board (IASB). Basis for opinion We conducted our audit in accordance with Brazilian and International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor s Responsibilities for the Audit of the Individual and Consolidated Financial Statements section of our report. We are independent of the Company and its controlled companies in accordance with the relevant ethical principles established in the Code of Ethics for Professional Accountants and in the professional standards issued by the Brazilian Federal Association of Accountants, and we have fulfilled our other ethical responsibilities in accordance with these standards. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current year. These matters were addressed in the context of our audit of the individual and consolidated financial statements as a whole and in forming our opinion thereon, and we do not provide a separate opinion on these matters. 3

21 Revenue recognition The Company s revenue recognition involves the use of different billing systems in several locations, due to the range of businesses held by the Company and its controlled companies, which process a large number of data, with a combination of different products sold in several countries, with price variations during the year, arising from the different marketing actions and plans in each of its business units. Details on the accounting policy related to revenue recognition are described in Note Results of operations. Audit response Evaluation of the relevant Information Technology systems used by the Company and its controlled companies; Tests on revenue from sales of products, domestic and foreign market, through sampling, aiming to: (i) examine the sales invoices of products; (ii) examine the respective financial settlement from these clients; (iii) understand and test the manual entries to all revenue accounts, when relevant; (iv) examine the invoices issued for relate-party transactions and its elimination from the consolidation process; Evaluation of the appropriateness of the assumptions used by Management and if the adopted policies for revenue recognition are in conformity with Brazilian accounting practices and the IFRS. Realization of deferred income and social contribution tax assets As stated in Note 12, the Company and its controlled companies have deferred income and social contribution tax assets recorded in the amounts of R$ 1,944,363 and R$ 2,135,395 in the individual and consolidated financial statements, respectively, as at December 31, 2016, arising from income and social contribution tax losses, as well as from differences temporarily non-deductible and/or taxable. Management evaluates, at least annually, the risk of impairment of this asset, based on the financial model of cash flow discounted from future taxable income, which requires Management to adopt certain assumptions based on information from its internal reports, which involves significant judgement on the Company s future profits, in a way that any adjustment in the assumptions used may generate significant effects on the evaluation and impacts on the Company s financial statements, taken as a whole. Audit response Questioning about the forecasts of future cash flows prepared by Management and the process used in its preparation, including the comparison with its most recent business plans; Questioning about the main assumptions and criteria adopted by Management regarding the long-term growth rates forecasted through comparisons with economic and sectorial forecasts and discount rate; Evaluation of the reasonableness of capital cost used in the forecasts; Evaluation of the extension of the changes in the assumptions that would be individual or collectively necessary to result in impairment of this asset. 4

22 Evaluation of intangible assets and goodwill impairment loss As stated in Note 15, the Company and its controlled companies have goodwill and intangible assets recorded in the amounts of R$ 1,372,356 and R$ 2,815,130 in the individual and consolidated financial statements, respectively, as at December 31, 2016, which substantially refer to acquisition of companies in previous years. Management evaluates, at least annually, the risk of impairment of these assets, based on the value in use method or on the financial model of discounted cash flow, which requires Management adopts certain assumptions based on information from its internal reports, which involves significant judgement on the Company s future results, in a way that any adjustment to the assumptions used may have significant effects on the evaluation and impacts on the Company s financial statements, taken as a whole. Audit response Evaluation and questioning about the forecasts of future cash flows prepared by Management and the process used in its preparation, including the comparison with its most recent business plans; Test of the value in use, which involves questioning about the main assumptions and criteria adopted by Management regarding the long-term growth rates forecasted through comparisons with economic and sectorial forecasts and discount rate, evaluating the capital cost for the Company; Analysis of the changes in the assumptions that would be necessary, individual or collectively, to result in impairment of these assets, as well as considering the probability of these changes occurring to the main assumptions and criteria adopted. Realization of federal and state tax credits As stated in Note 9, the Company and its controlled companies have federal and tax credits recorded in the amounts of R$ 2,760,578 and R$ 2,963,988, respectively, in the individual and consolidated financial statements, as at December 31, The accumulation of tax credits in the meat packing industry is inherent to the business, due to the tax incentives granted by Brazilian legislation to exporters. Management evaluates the risk of impairment of these assets, when the probability for using these tax credits is remote, considering the following legal alternatives: (i) offsetting against other federal and state taxes, in accordance with the current tax legislation; (ii) payments to suppliers; (iii) acquisition of equipment, inputs and consumables, through negotiation with the suppliers; (iv) request of approval and reimbursement, in cash, of the mentioned tax credits. Audit response Analysis of the existence of non-approval of tax credits taken during the year; Obtaining confirmation from the Company s legal counselors regarding the ongoing requests for refund of tax credits; Analysis, by sampling, of the acquisitions of inputs, equipment and payment of suppliers during the year; Analyzing, by sampling, the offsetting of federal and state tax credits against tax debts of the same nature, as well as evaluating, by sampling, the requests for refund carried out during the year. 5

23 Provisions for tax, social security, labor and civil contingencies As stated in Note 25, the Company and its controlled companies are party to legal and administrative proceedings at civil, labor, social security and tax levels, which arise from the normal course of its business. As at December 31, 2016, the Company has matters of tax nature being discussed at several procedural levels, in the total amount of R$ 1,416,072, of which R$ 1,758 is provisioned, referring to proceedings classified as probable loss, based on the opinion of its legal counselors. The situations where losses are classified as possible are object of disclosure at its historic values and where losses are classified as remote they are not disclosed. Considering the relevance of the amounts involved and critical judgment regarding the probability of a favorable outcome in the legal disputes, any changes in the regulatory environment, in predictions and/or judgement may bring relevant impacts on the individual and consolidated financial statements of the Company. Audit response Obtaining confirmation from the Company s legal counselors for the ongoing tax proceedings; Evaluation of the amounts and likelihood of loss and, for certain tax proceedings, obtaining the opinion of tax specialists on the reasonableness of the predictions from the legal counselors and evaluation of the arguments and/or defense thesis. Legal investigations related to corruption and fraud As stated in Note , the Company was mentioned in investigations conducted by the Federal Police and Federal Public Prosecution Office, whose summons are substantially related to the illegal favoring of the Company in obtaining loans and financing from a certain public federal bank, with supposed payment of undue advantages to public officers. The illegal favoring in the raising of loans and financing from federal public banks is in disagreement with several levels of Brazilian and international legislation and it is subject to penalties by means of fines, criminal proceedings, contingencies and future restrictions to the Company and the its Management members to conduct its activity in the capital markets of Brazil. The Company s Management, through its Compliance department, is contributing to the investigations and has provided access to the information requested by the authorities. Audit response Verification of the ongoing proceedings and obtaining confirmation from the Company s legal counselors for these matters; Analysis of the loans and financing agreements entered into with a certain federal public bank in the periods mentioned in the legal investigations, paying attention if the conditions, fees and terms are compatible with the conditions offered by private banks and by the market; Tests on documents, based on sampling, to evaluate the existence of payments to the companies and/or people mentioned in the investigations the Company is involved. 6

24 Other matters Statement of value added The individual and consolidated statements of value added for the year ended December 31, 2016, prepared under the responsibility of the management of Marfrig Global Foods S.A., and presented as supplemental information for IFRS purposes, were submitted to the same audit procedures followed for the audit of the financial statements of Marfrig Global Foods S.A. In order to form an opinion, we have checked whether these statements are reconciled with the financial statements and accounting records, as applicable, and whether its form and contents meet the criteria established in Accounting Pronouncement CPC 09 - Statement of Value Added. In our opinion, the statements of value added were properly prepared, in all material respects, in accordance with the criteria established in that Technical Pronouncement and are consistent with the individual and consolidated financial statements taken as a whole. Other information accompanying the financial statements and auditor s report The Company s management is responsible for this other information that comprises the Management Report. Our opinion on the individual and consolidated financial statements does not cover the Management Report and we do not express any form of audit conclusion thereon. In connection with our audit of the individual and consolidated financial statements, our responsibility is to read the Management Report and, in doing so, consider whether the report is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this Management Report, we are required to report that fact. We have nothing to report in this regard. Responsibilities of management and those charged with governance for the financial statements Management is responsible for the preparation and fair presentation of the individual and consolidated financial statements in accordance with Brazilian accounting practices and the IFRSs, issued by IASB, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the individual and consolidated financial statements, Management is responsible for assessing the Company s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company and its controlled companies or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company s and its controlled companies financial reporting process. 7

25 Auditor s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the individual and consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Brazilian standards and ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with Brazilian standards and ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the individual and consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion; The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company s internal control; Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management; Conclude on the appropriateness of management s use of the going concern basis of accounting and, based on the audit evidence obtained, whether uncertainty exists related to events or conditions that may cast significant doubt on the Company s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor s report. However, future events or conditions may cause the Company to cease to continue as a going concern; Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. 8

26 We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current year and are therefore the key audit matters. We describe these matters in our auditor s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. São Paulo, February 23, BDO RCS Auditores Independentes SS CRC 2 SP /O-1 Esmir de Oliveira Accountant CRC 1SP /O-0 9

27 Balance sheet At December 31, 2016 and December 31, 2015 (In thousands of Brazilian reais R$) Assets Liabilities and Shareholders' Equity Parent Consolidated Parent Consolidated Reclassified Reclassified Reclassified Reclassified Note 12/31/ /31/ /31/ /31/2015 Note 12/31/ /31/ /31/ /31/2015 Current assets Current liabilities Cash and cash equivalents 4 396, ,982 3,291,705 1,630,368 Trade accounts payable , ,905 1,853,426 1,734,425 Marketable securities 5 1,515,911 1,601,157 1,986,936 3,373,842 Supply chain finance ,331 84, ,331 84,566 Trade accounts receivable - domestic 6 149, , , ,010 Accrued payroll and related charges ,126 90, , ,015 Trade accounts receivable - foreign 6 326, , , ,707 Taxes payable 19 91,855 53, , ,961 Inventories of goods and merchandise 7 518, ,066 1,257,616 1,496,964 Loans and financing , ,341 1,198,039 1,772,411 Biological assets , ,174 Notes payable , , , ,645 Recoverable taxes 9 1,075, ,249 1,240,328 1,289,571 Lease payable 22 2,808 5,491 11,936 38,166 Prepaid expenses 8,005 7, , ,733 Interest on debentures , , , ,807 Notes receivable , , ,548 48,034 Advances from customers 590, , , ,304 Advances to suppliers 9,184 8,874 23,988 45,274 Mandatory deed convertible into shares 24 2,147,392-2,147,392 - Assets held or sale - 188, ,981 Liabilities related to held-for-sale assets - 4, ,711 Other receivables 15,979 6, ,893 66,797 Other payables 47,667 35, , ,638 4,282,484 4,675,346 9,303,178 9,842,455 5,332,771 2,240,271 7,382,969 5,406,649 Non-current liabilities Loans and financing , ,457 9,695,799 10,112,889 Non-current assets Taxes payable , , , ,116 Marketable securities Deferred income and social contribution taxes , ,683 Court deposits 64,085 35,476 65,427 50,834 Provisions for contingencies 25 76,991 45,289 87,739 46,219 Notes receivable , ,596 96, ,868 Lease payable ,286 26,560 23,520 Deferred income and social contribution taxes 12 1,944,363 1,329,137 2,135,395 1,657,342 Debentures payable , , Recoverable taxes 9 1,684,696 1,396,893 1,723,660 1,595,672 Notes payable 23 9,243,201 10,212, , ,474 Other receivables 10,279 2,887 41,493 53,036 Advances from clients ,448-4,240,705 3,179,989 4,063,594 3,718,663 Mandatory deed convertible into shares 24-2,129,720-2,129,720 Other , ,577 10,871,953 13,910,911 11,775,032 14,353,198 Investments 13 4,728,591 6,178,722 16,268 26,024 Property, plant and equipment 14 2,487,214 1,837,551 4,009,397 4,311,263 Biological assets ,236 59,804 Equity Intangible assets 15 1,372, ,832 2,815,130 2,645,270 Share Capital ,278,127 5,276,678 5,278,127 5,276,678 8,588,151 8,939,105 6,892,031 7,042,361 (-) Share issue expenses 27.1 (108,210) (108,210) (108,210) (108,210) Capital reserve 184, , , ,642 Issue of common shares 184, , , ,800 12,828,856 12,119,094 10,955,625 10,761,024 Acquisition of shares in subsidiaries (158) (158) (158) (158) Profit reserves 40,122 39,580 40,122 39,580 Legal reserve ,476 44,476 44,476 44,476 Retained earnings 7,348 7,348 7,348 7,348 Treasury shares (12) (554) (12) (554) Treasury shares canceled (11,690) (11,690) (11,690) (11,690) Other comprehensive income 27.3 (241,972) (1,174,029) (241,972) (1,174,029) Asset valuation adjustment (2,054,151) (3,913,161) (2,054,151) (3,913,161) Cumulative translation adjustment ,812,179 2,830,019 1,812,179 2,830,019 Equity amounts related to assets held for sale (90,887) - (90,887) Accumulated losses (4,246,093) (3,575,403) (4,246,093) (3,575,403) Controlling shareholders' equity 906, , , ,258 Non-controlling interest , ,374 Total Assets 17,111,340 16,794,440 20,258,803 20,603,479 Total liabilities and shareholders' equity 17,111,340 16,794,440 20,258,803 20,603,479 The accompanying notes are an integral part of the parent company and consolidated financial statements. 10

28 Statement of income Fiscal years ended December 31, 2016 and 2015 (In thousands of Brazilian reais R$) Parent Consolidated Reclassified Reclassified YTD YTD YTD YTD Note Net Sales 28 5,961,249 6,083,412 19,333,453 19,549,362 Cost of products and goods sold 29 (5,073,028) (5,063,579) (17,157,373) (17,249,936) Gross profit 888,221 1,019,833 2,176,080 2,299,426 Operating income (expenses) (750,984) (773,565) (1,162,910) (1,265,223) Selling expenses 29 (348,846) (295,617) (599,748) (571,661) General and administrative expenses 29 (99,209) (61,334) (447,711) (420,318) Equity in earnings (losses) of subsidiaries 65,810 (432,389) (6,434) (23,760) Other operating income (expenses) (368,739) 15,775 (109,017) (249,484) Net income (loss) before net financial income (loses) 137, ,268 1,013,170 1,034,203 Financial income (expenses) 30 (1,358,186) (2,370,306) (2,034,710) (3,099,427) Financial income 371, , , ,213 Exchange gain 1,391,307 1,583,030 1,820,651 2,037,403 Financial expenses (1,717,440) (1,823,627) (2,439,544) (2,642,774) Exchange Loss (1,404,020) (2,278,525) (1,899,631) (3,090,269) Loss before tax effects (1,220,949) (2,124,038) (1,021,540) (2,065,224) Income and social contribution taxes 494, , , ,222 Current and deferred income tax , , , ,071 Current and deferred social contribution , , , ,151 Net income (loss) in the year from continuing operations (726,432) (1,424,117) (680,023) (1,377,002) Net income (loss) in the year from discontinued operations 38 47, ,095 47, ,095 Net income (loss) in the year before interest (679,205) (586,022) (632,767) (538,907) Attributable to: Marfrig Global Foods - controlling interest - continuing operations (726,432) (1,424,117) (726,432) (1,424,117) Marfrig Global Foods - controlling interest - discontinued operations 47, ,095 47, ,095 Controlling interest - Total (679,205) (586,022) (679,205) (586,022) Non-controlling interest - continuing operations ,409 47,115 Non-controlling interest - discontinued operations Total non-controlling interest ,438 47,115 (679,205) (586,022) (632,767) (538,907) Basic and diluted losses per common share - continuing operations 32 (1.3035) (1.1261) (1.3941) (2.7365) Basic and diluted losses per common share - discontinued operations Total basic and diluted losses per common share 32 (1.3035) (1.1261) (1.3035) (1.1261) The accompanying notes are an integral part of the parent company and consolidated financial statements. 11

29 Statement of changes in shareholders equity fiscal years ended December 31, 2016 and 2015 (In thousands of Brazilian reais R$) Attributable to controlling shareholders Profit reserves Other comprehensive income Share Capital Share issue expenses Capital reserve Legal reserve Profit retention Treasury shares Treasury shares cancelled Equity valuation adjustment Cumulative translation adjustments Equity amounts related to assets held for sale Accumulated losses Total Total controlling interest Total noncontrolling interest Total shareholders' equity At December 31, ,276,678 (108,210) 184,642 44,476 7,348 (3,685) (11,690) (1,713,198) 1,275,127 - (2,998,023) 1,953,465 1,953, ,260 2,071,725 Exchange variation on investments, net (2,332,809) - (102,851) - (2,435,660) (2,435,660) 34,999 (2,400,661) Exchange variation - balance sheet translation ,554,892 11,964-1,566,856 1,566,856-1,566,856 Realization of Deemed Cost (8,642) - - 8, Reclassification between Equity accounts , , , ,180 Interest rate hedge - Parent company and reflecting from Subsidiaries , ,308 4,308-4,308 Write-off (acquisition) of treasury shares , ,131 3,131-3,131 Net income (loss) in the year (586,022) (586,022) (586,022) 47,115 (538,907) At December 31, ,276,678 (108,210) 184,642 44,476 7,348 (554) (11,690) (3,913,161) 2,830,019 (90,887) (3,575,403) 643, , , ,632 Attributable to controlling shareholders Profit reserves Other comprehensive income Share Capital Share issue expenses Capital reserve Legal reserve Profit retention Treasury shares Treasury shares cancelled Equity valuation adjustment Cumulative translation adjustments Equity amounts related to assets held for sale Accumulated losses Total Total controlling interest Total noncontrolling interest Total shareholders' equity At December 31, ,276,678 (108,210) 184,642 44,476 7,348 (554) (11,690) (3,913,161) 2,830,019 (90,887) (3,575,403) 643, , , ,632 Capital increase 1, ,449 1,449-1,449 Exchange variation on investments, net ,867, ,852-1,969,873 1,969,873 (52,626) 1,917,247 Exchange variation - balance sheet translation (1,017,840) (11,965) - (1,029,805) (1,029,805) - (1,029,805) Realization of Deemed Cost (8,515) - - 8, Interest rate hedge - Parent company and reflecting from Subsidiaries Write-off (acquisition) of treasury shares Net income (loss) in the year (679,205) (679,205) (679,205) 46,438 (632,767) At December 31, ,278,127 (108,210) 184,642 44,476 7,348 (12) (11,690) (2,054,151) 1,812,179 - (4,246,093) 906, , ,186 1,100,802 OK OK OK OK OK OK OK OK OK VERIFICAR OK OK OK OK The accompanying notes are an integral part of the parent company and consolidated financial statements. 12

30 Statements of cash flow Fiscal years ended December 31, 2016 and 2015 (In thousands of Brazilian reais R$) Reclassified Reclassified YTD YTD YTD YTD Loss in the year from continuing operations (726,432) (1,424,117) (726,432) (1,424,117) Parent Consolidated Items not affecting cash 134,798 1,045,487 1,580,580 2,386,807 Depreciation 137, , , ,229 Amortization 26,116 12, ,719 85,156 Non-controlling interest ,409 47,115 Provision for contingencies 11,558 5,174 37,418 9,320 Deferred taxes (494,516) (699,922) (443,753) (736,225) Equity in earnings (losses) of subsidiaries (65,810) 432,389 6,434 23,760 Exchange variation on financing (101,198) 730,037 (99,306) 717,985 Exchange variation on other assets and liabilities 113,911 (34,542) 178, ,880 Interest expenses on financial debt 99, , , ,273 Interest expenses on financial leasing ,117 2,417 Interest expenses on debentures 363, , , ,362 Cost with issue of financial operations 28,623 21, , ,077 Leasing adjustment to present value 850 (580) 850 (580) Estimated non-realization of inventories 5,000 12,000 4,087 11,979 Impairment loss ,450 Estimated losses with doubtful accounts 5, ,198 (2,463) Gain from bargain purchase - (75,193) - (75,193) Derecognition of fixed asset 2,450 10,845 10,649 61,265 Equity changes 1,154,059 2,838, ,813 1,092,158 Trade accounts receivable 198,309 37, , ,259 Current inventory and biological assets 45, , , ,468 Court deposits (9,673) 13,898 (14,112) 13,823 Accrued payroll and related charges 19,025 30,685 15,523 34,869 Trade payables and supplier chain financing 119, , ,996 93,484 Current and deferred taxes (51,878) (13,191) (121,223) 58,859 Notes receivable and payable 838,536 2,230,395 (231,550) 130,958 Other assets and liabilities (5,175) 133,906 (16,931) 329,438 Cash flow provided by operating activities 562,425 2,459,473 1,675,961 2,054,848 Investing activities Investments (113,071) (141,517) (61,283) (42,416) Net effect from merger 21, Investments in fixed and non-current biological assets (155,728) (226,935) (453,917) (400,199) Investments in intangible assets (6,559) (3,534) (10,882) (4,659) Cash flow from investing activities (254,248) (371,986) (526,082) (447,274) Financing activities Dividends received 20, , Interest settled debentures / Bonds (344,240) (298,161) (986,039) (838,892) Loans and financing 105,246 (1,579,570) 605,104 (3,260,342) Loans granted 1,870,230 2,271,732 7,403,837 6,873,024 Loans settled (1,764,984) (3,851,302) (6,798,733) (10,133,366) Leasing payable (7,023) 4,432 (18,109) (15,915) Leasing granted - 8,866 19,095 35,129 Leasing settled (7,023) (4,434) (37,204) (51,044) Mandatory deed convertible into shares (7,589) (9,651) (7,589) (9,651) Treasury shares 542 3, ,131 Capital increase 1,449-1,449 - Cash flow used in financing activities (231,229) (1,085,239) (404,642) (4,121,669) Exchange variation on cash and equivalents (80,380) 118,732 (539,287) 512,369 Discontinued operations net of cash (NE 38) 37,485 (86,258) 68,481 4,347,139 Cash flow in the year 34,053 1,034, ,431 2,345,413 Cash and cash equivalents Balance at end of period 1,912,192 1,878,139 5,278,641 5,004,210 Balance at start of period 1,878, ,417 5,004,210 2,658,797 Change in the year 34,053 1,034, ,431 2,345,413 The accompanying notes are an integral part of the parent company and consolidated financial statements. 13

31 Statement of added value Fiscal years ended December 31, 2016 and 2015 (In thousands of Brazilian reais R$) Parent Consolidated Reclassified Reclassified YTD YTD YTD YTD Revenue 6,296,178 6,347,398 19,809,754 20,034,023 Sales of goods and services 6,307,405 6,348,207 19,797,232 19,984,304 Other revenues ,864 28,090 Losses with doubtful accounts (11,227) (809) (8,342) 21,629 Inputs purchased from other firms (including taxes - ICMS, IPI, PIS and Cofins) Cost of goods sold and services rendered 4,718,976 4,009,360 4,734,986 3,801,335 15,107,391 12,484,556 17,119,597 14,278,843 Material, energy, outsourced services and other 709, ,651 2,614,042 2,806,200 Loss / Recovery of assets - - 8,793 34,554 Gross value added 1,577,202 1,612,412 4,702,363 2,914,426 Depreciation and amortization 163, , , ,385 Net value created by company 1,413,207 1,481,095 4,237,594 2,480,041 Value added received through transfer 1,399,152 2,451,757 1,944,522 6,239,192 Equity In Earnings (Losses) of Subsidiaries 65,810 (432,389) (6,434) (23,760) Financial income and exchange rate gains 1,763,274 1,731,846 2,304,465 2,633,616 Other (including Discontinued Operations) (429,932) 1,152,300 (353,509) 3,629,336 Total value added to be distributed 2,812,359 3,932,852 6,182,116 8,719,233 Value added distribution 2,812,359 3,932,852 6,182,116 8,719,233 Employees 453, ,130 2,221,120 2,183,555 Direct compensation 366, ,867 1,834,647 1,806,683 Benefits 59,765 63, , ,716 FGTS (severance pay fund) 26,908 20,853 34,543 29,156 Taxes payable (237,250) (5,572) 11,882 83,024 Federal (476,414) (192,982) (317,691) (215,483) State 238, , , ,831 Municipal , Value distributed to providers of capital 3,275,523 4,082,316 4,581,881 6,991,561 Interest 3,121,460 4,102,152 4,339,175 5,733,043 Rentals 41,728 56,728 69,543 63,660 Other (including Discontinued Operations) 112,335 (76,564) 173,163 1,194,858 Value distributed to shareholders (679,205) (586,022) (632,767) (538,907) Loss in the year from operations (679,205) (586,022) (679,205) (586,022) Non-controlling interest 46,438 47,115 The accompanying notes are an integral part of the parent company and consolidated financial statements. 14

32 Statement of comprehensive income Fiscal years ended December 31, 2016 and 2015 (In thousands of Brazilian reais R$) Parent Consolidated Reclassified Reclassified YTD YTD YTD YTD Net income (loss) in the year (679,205) (586,022) (632,767) (538,907) Exchange variation on net investments 1,969,873 (2,435,660) 1,969,873 (2,435,660) Exchange variation on balance sheet translation (1,029,805) 1,566,856 (1,029,805) 1,566, ,068 (868,804) 940,068 (868,804) Total comprehensive income (loss) for the year 260,863 (1,454,826) 307,301 (1,407,711) Attributable to: Marfrig Global Foods - controlling interest - continuing operations 213,636 (2,292,921) 213,636 (2,292,921) Marfrig Global Foods - controlling interest - discontinued operations 47, ,095 47, ,095 Marfrig Global Foods - Total controlling interest 260,863 (1,454,826) 260,863 (1,454,826) Non-controlling interest - continuing operations ,409 47,115 Non-controlling interest - discontinued operations Total non-controlling interest ,438 47,115 The accompanying notes are an integral part of the parent company and consolidated financial statements. 15

33 1. Operations Marfrig Global Foods S.A. is a multinational company operating in the food and food service industries in Brazil and around the world. It has a diversified and comprehensive portfolio of products and its operations are founded on its commitment to excellence and quality, which has assured its products presence in the world s largest restaurant chains and supermarkets, as well as homes in nearly 100 countries. The Corporation s activities include the production, processing, further processing, sale and distribution of animal proteins (beef, lamb and poultry) and a variety of other food products, such as breaded products, ready-to-eat meals, fish, frozen vegetables and desserts, among others. Marfrig Global Foods S.A. was incorporated on June 6, 2000 and became a corporation on March 26, The Corporation was registered with the Brazilian Securities and Exchange Commission (CVM) under No on June 18, 2007 and carried out its initial public offering (IPO) on June 29, Its shares were listed on the Novo Mercado listing segment of the BM&FBovespa S.A. - Securities, Commodities and Futures Exchange (Brazilian Stock Exchange) under the stock symbol MRFG3. On January 22, 2014, the Annual and Extraordinary Shareholders' Meeting held at the Corporation s headquarters amended Article 1 of the Corporation s Bylaws, altering the Corporation s name to Marfrig Global Foods (formerly Marfrig Alimentos S.A.). On December 31, 2016, its subscribed and paid-in Share Capital was represented by 521,300,754 common shares, of which 205,749,692, or 39.47% of the Share Capital, was controlled by MMS Participações Ltda. and its partners, individually. On the same date, the free float was 315,230,597 shares, representing 60.47% of the Share Capital of the Corporation, which held 1,281 shares in treasury, while its Board of Directors and Executive Board held 319,184 shares, representing 0.06% of the capital. MMS Participações Ltda. is controlled by Marcos Antonio Molina dos Santos and Marcia Aparecida Pascoal Marçal dos Santos, each holding a 50% ownership interest. Because it is listed on the Novo Mercado special corporate governance segment of the Brazilian Stock Exchange, the Corporation is subject to arbitration under the Market Arbitration Chamber, pursuant to the arbitration clause in its by-laws. The Corporation s stock is also a component of the main performance indicators of Brazil s Capital Markets, such as the Bovespa Index (Ibovespa, the most important indicator of the average performance of Brazilian stocks). Marfrig stock is also a component of the stock indexes of the Brazilian Stock Exchange: Broad Brazil Index (IBRA); Brazil Index (IBrX); Consumption Sector Index (ICON); Corporate Governance Trade Index (IGCT); Special Corporate Governance Stock Index (IGCX); Novo Mercado Corporate Governance Index (IGNM); Industrial Sector Index (INDX); Special Tag-Along Stock Index (ITAG); BM&FBovespa Value Index (IVBX); Small Cap Index (SMLL). The Corporation established an integrated and geographically diversified business model, which consists of production units located in strategic places, combined with a broad distribution network with access to the world s main channels and consumer markets. Marfrig currently operates 47 processing units, distribution centers and offices in Brazil and in 11 other countries in South America, North America, Europe, Oceania and Asia. 16

34 The Corporation believes that continuous improvement in its internal processes will enable it to further enhance efficiency and cut costs, which, coupled with a result-driven management that is committed to profitable growth, will drive profitability and cash generation. The Corporation s ownership structure, financial and equity position should be considered within the context of the integrated activities of the following segments, which are organized as used by the Management to take decisions, each with their own structures and segmented into: Marfrig Beef The Marfrig Beef business unit is a pioneer in the sale and promotion of beef, with the focus on serving the domestic market in Brazil, especially the food service industry, as well as the export market, with clients from all over the world. Marfrig Beef is renowned in many countries for the quality of its premium products, having taken advantage of the favorable scenario in Brazil s cattle industry and foreign exchange to strengthen its position in international markets. Its international operations in South America are concentrated in exporting premium beef cuts and leveraging its strategic geographic position in Uruguay, which ensures access to the world s main consumer markets. Keystone - The Keystone business unit is a supplier of food made from animal protein to major global restaurant chains, with strong presence in the United States and Asia. Committed to innovation and the highest food safety and quality standards, it combines vast expertise in the food industry with a strong focus on clients to offer a complete mix of fresh and frozen products. 17

35 Summary of the equity interests held by the Corporation by business segment: Equity interests MARFRIG BEEF Parent Company Marfrig Global Foods S.A. Subsidiaries Core Activity Processing and marketing of product (formed by 10 cattle slaughter facilities in operation, 2 of which also used in beef processing, 1 of is also used for slaughtering lamb, 1 producing home and personal care products, 1 animal feed plant, located in the States of São Paulo, Mato Grosso, Mato Grosso do Sul, Para, Rondonia, Goias and Rio Grande do Sul, in addition to 6 Distribution Centers in the States of São Paulo, Rio de Janeiro e Parana, 1 of which used for beef processing). Core Activity Masplen Ltd Holding company Pampeano Alimentos S.A. Producer of canned meat and other processed products Marfrig Overseas Ltd Specific Purpose Entity - SPEs MF Foods USA Inc. Marketing of products MFG Comercializadora de Energia Ltda Energy trading and associated services Marfrig Argentina S.A. Processing and marketing of products Frigorífico Tacuarembó S.A. Processing and marketing of products Inaler S.A. Processing and marketing of products Marfrig Chile S.A. Processing and marketing of products Frigorífico Patagônia S.A. Processing and marketing of products Prestcott International S.A. Holding company Cledinor S.A. Processing and marketing of products: beef and lamb Establecimientos Colonia S.A. Processing and marketing of products Weston Importers Ltd Trading company CDB Meats Ltd Processing of products Marfrig Peru S.A.C. (lamb meatpacker in from December to May, fish, clam and king crab processing in other months) Marketing of poultry, beef, fish and seafood HOLDING BV Marfrig Holdings (Europe) B.V KEYSTONE Keystone Foods (UK) Ltd Keystone Foods International Ltd Keystone International S.a.r.l Mckey Luxembourg Holdings S.a.r.l MFG (USA) Holdings Inc Holding company whose purpose is to obtain funding Holding Holding Holding Holding of the companies Keystone with operations focused on Asia Holding of the companies Keystone with operations focused on the USA (Keystone companies jointly are composed of 4 poultry slaughter plants 13 further processing plants) 18

36 Discontinued Operation MOY PARK Moy ParK Ltd Subsidiaries Kitchen Range Foods Ltd Moy Park (BondCo) Plc MARFRIG BEEF MFG Agropecuária Ltda Processing and marketing products (composed of 4 poultry slaughter plants, 14 further processing units) Processing and marketing products Holding company incorporated to conduct the first issue of Senior Notes in GBP Agriculture and cattle raising (composed of 6 feedlot units) Core Activity 2. Presentation and preparation of the individual and consolidated financial statements 2.1. Statement of compliance (with IFRS and CFC accounting standards) Consolidated financial statements The Corporation s consolidated financial statements were prepared and are presented in accordance with accounting practices adopted in Brazil and with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). The separate financial statements of the parent company were prepared in accordance with the accounting practices adopted in Brazil and are disclosed jointly with the consolidated financial statements. The accounting practices adopted in Brazil include those provided for in Brazilian corporations law, the Brazilian Accounting Standards (NBCs) and resolutions and instructions issued by the Securities and Exchange Commission of Brazil (CVM). The parent company and consolidated Statement of Added Value (DVA) is required under Brazilian Corporation Law and the accounting practices adopted in Brazil applicable to public companies. IFRS standards do not require said statement. As a result, under IFRS, this statement is being presented as supplementary information, without prejudice to the complete set of financial statements. Individual financial statements The parent company financial statements were prepared based on the accounting practices adopted in Brazil and resolutions issued by CFC, observing the accounting guidelines based on Brazilian Corporation Law (Federal Law 6,404/76), which include the provisions introduced, amended and revoked by Law 11,638 of December 28, 2007, Law 11,941 of May 27, 2009 (former Provisional Presidential Decree 449 of December 3, 2008) and Law 12,973 of May 13,

37 There is no difference between the Group s shareholders equity and consolidated income (loss) and the parent company s shareholders equity and income (loss) disclosed in the parent company financial statements. Thus, the Group s consolidated/parent company financial statements are being presented in the same document. The Management of the Corporation approved the issue of these parent company and consolidated financial statements on February 22, 2017, and according his judgment, warrants in that all material information is substantiated and corresponds to that used in its management activities Basis of presentation The parent company and consolidated financial statements are denominated in Brazilian real (R$), which is the reporting currency, and all amounts are rounded to thousands of Brazilian real, unless otherwise stated. The consolidated financial statements were prepared on the historical cost basis, unless otherwise stated, such as certain assets and financial instruments, which may be stated at fair value. The preparation of parent company and consolidated financial statements in accordance with IFRS and NBCs requires Management to make certain accounting estimates. The areas involving considerable judgment or use of estimates for the parent company and consolidated financial statements are stated in note Foreign currency translation Functional and reporting currency The financial statements of each consolidated subsidiary and those used as a basis for accounting for investments under the equity method are prepared using the functional currency of each entity. Under NBC TG 02/R2 (CVM Resolution 640/10) effect of changes in exchange rates and translation of financial statements, functional currency is the currency of the primary economic environment in which the entity operates. To define the functional currency of each subsidiary, Management considered which currency significantly influences the sale price of their goods and services and the currency in which most of their production input costs are paid or incurred. The consolidated financial statements are expressed in Brazilian real (R$), which is the functional and reporting currency of Marfrig Global Foods S.A. 20

38 Transactions and balances Foreign currency transactions are translated into the functional currency of the Corporation using the exchange rate at the transaction date. Gains and losses resulting from the difference between the monetary asset and liability balance translation at the year-end and the translation of the transaction balances are recognized in the income statement. Non-monetary assets and liabilities in foreign currency measured at fair value are translated at the exchange rate on the date on which their fair value is determined and the differences resulting from such translation will be recognized under other comprehensive income on the closing date of each period or fiscal year. Group companies The results of operations and the financial position of all consolidated subsidiaries and investments accounted for under the equity method, whose functional currency differs from the reporting currency, are translated from the reporting currency, as follows: i. Asset and liability balances are translated using the exchange rate in effect at the date of the consolidated financial statements; ii. Statement of operation accounts are translated using the monthly average exchange rate; and iii. All differences arising from the foreign currency translation are recognized in shareholders equity and in consolidated comprehensive income (loss) under Cumulative translation adjustments. 3. Summary of significant accounting practices 3.1. Significant accounting practices The significant accounting practices adopted to prepare these financial statements are as follows: Results of operations Results of operations are recorded on the accrual basis. Revenue Revenue arising from the sale of goods is recognized when the Group transfers all risks and benefits of ownership of the asset to the buyer and it is probable that the Group will receive the agreed payment. The property of risks and benefits is transferred when the products are shipped with the corresponding sales invoice, taking into account the incoterms. These conditions are met when the goods are transferred to the buyer, complying with main freights modalities used by the Corporation. 21

39 Revenue is shown net of taxes on returns, rebates and discounts and the consolidated financial statements are also net of intercompany sales eliminations and unrealized profits on inventories. Financial revenue and expenses Revenue comprises gains on changes in the value of financial assets and liabilities measured at fair value through profit or loss, as well as interest income obtained with the effective interest method. They include interest income on invested amounts (including financial assets/liabilities available for sale), gains on the disposal of financial assets available for sale and changes in the fair value of financial assets measured at fair value through profit or loss. Interest income is recognized in the statement of operations using the effective interest method. Financial expenses basically comprise interest on loans. Loan costs directly attributable to acquisition, construction or manufacture of a qualified asset are capitalized jointly with the investment Segment reporting The information by operating segment is based on internal reporting to the chief operating decision maker, according to NBC TG 22/R2 (CVM Resolution 582/09) Information by segment. The chief operating decision makers are the chief executive officer, the chief financial officer and the chief executive of each business segment (Marfrig Beef and Keystone). This Management identified the two main reportable segments that are strategically organized according to business unit, as per note Accounting estimates The preparation of the parent company and consolidated financial statements in accordance with Brazilian accounting practices and IFRS requires Management to make estimates and assumptions that, in its best judgment, affect the reported amounts of assets and liabilities. These estimates and assumptions include, when applicable, the determination of the residual value of property, plant and equipment, allowance for estimated doubtful accounts, estimated inventory losses, deferred Income and Social Contribution tax assets and provisions for tax, labor and civil contingencies. Transaction settlement involving those estimates may result in values different from estimates, due to the inherent inaccuracy of the process. The Corporation and its subsidiaries review estimates and assumptions at least quarterly. The issues requiring Corporation s estimates are as follows: Useful life of property, plant and equipment and intangible assets with finite useful lives; Measurement of the fair value of biological assets; Impairment of taxes; Loss on impairment of intangible assets with undefined life, including goodwill; 22

40 Measurement of items arising from business combinations at fair value; Fair value of financial instruments and derivatives; Estimated loss on doubtful accounts; Estimated loss with inventory obsolescence; Deferred Income and Social Contribution tax assets; Provisions (legal, tax, labor and civil proceedings); Stock option plan; Financial instruments Non-derivative financial instruments include financial investments, debt and equity instruments, accounts receivable and other receivables, cash and cash equivalents, loans and financing, as well as accounts payable and other debts. Non-derivative financial instruments are initially recognized at their fair values plus, for instruments that are not recognized at fair value through profit or loss, any directly attributable transaction costs. Regarding financial investments and instruments classified as cash and cash equivalents, after initial recognition, non-derivative financial instruments are measured according to their respective classification, as follows: Measured at fair value through profit or loss An instrument is measured at fair value through profit or loss if it is held for trading, i.e. designated as such upon initial recognition. Financial instruments are designated at fair value through profit or loss if the Corporation manages these investments and makes decisions to buy and sell the investments based on the investment s fair value according to the Corporation s investment and risk Management strategy. After initial recognition, transaction costs that are attributable to the acquisition of the investment are recognized in the statement of operations when incurred. Financial instruments stated at fair value through profit or loss are measured at fair value and changes in fair value are recognized in the statement of operations. The Corporation s instruments recorded in this category are described in note 5. Loans and receivables Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market, initially recognized at fair value plus any associated transaction costs. After initial recognition, loans and receivables are measured at amortized cost using the effective interest method, excluding any impairment loss. Financial liabilities Financial liabilities are measured at amortized cost using the effective interest method, adjusted for any reductions in the settlement value. 23

41 Derivative financial instruments and hedge accounting Derivative financial instruments designed in hedge operations are initially recognized at their fair value on the date of the derivative contract, and subsequently revaluated also at fair value. Derivatives are presented as financial assets when the fair value of the instrument is positive and as financial liabilities when their fair value is negative. Any gains or losses arising from changes in the fair value of derivatives during the year are recorded directly in the income statement, except for the effective portion of the cash flow hedges, which are recognized directly in shareholders equity as other comprehensive income. The amounts booked under other comprehensive income are immediately transferred to the income statement when the transaction underlying the hedge affects profit or loss Foreign currency Management defined the Brazilian real as the functional currency of the Corporation and its companies in Brazil, according to the provisions of NBC TG 02/R2 (CVM Resolution 640/10) effects on changes in foreign exchange rates and translation of financial statements, approved by CVM Resolution No. 640/10. The functional currency of foreign companies is the legal tender of the country in which they operate, except for companies located in the Netherlands and in Uruguay, whose functional currency is the US dollar. Translations into the reporting currency are also in accordance with NBC TG 02/R2 (CVM Resolution 640/10) effects on changes in foreign exchange rates and translation of financial statements). Foreign currency transactions, i.e., all transactions not made in the functional currency, are translated using the exchange rate on the transaction date. Monetary assets and liabilities denominated in foreign currency are translated into the functional currency at the closing exchange rate. Non-monetary assets and liabilities acquired or entered into in foreign currency are translated using the exchange rates on the transaction dates or the dates at which they are stated at fair value when fair value is used. Exchange rate variation gains or losses on monetary and non-monetary assets and liabilities are recognized in the statement of income. 24

42 3.1.6 Current and non-current assets Cash and cash equivalents Consist of cash, banks and short-term highly liquid financial investments that are readily converted to known amounts of cash and that are subject to an insignificant risk of changes in value. Marketable Securities These include virtually all investments of the following types: Time deposit, Interestbearing deposit, Repurchase agreements and Credit Link Note (CLN). These investments may be readily redeemed and have an insignificant risk of change in value. Trade accounts receivable Trade accounts receivable are recorded at the fair value and when applicable, discounted to present value, according to NBC TG 12 (CVM Resolution 564/08) Present value adjustment. The estimated loss with doubtful accounts is set up in an amount deemed sufficient by Management to cover possible losses on the realization of receivables, calculated on an individual basis. Inventories Inventories are stated at the average acquisition or production cost, adjusted at net realizable value, if lower than the average cost. Investments Corporation s investments in subsidiaries and affiliates are accounted for using the equity method in the parent company financial statements. Property, plant and equipment Property, plant and equipment are stated at acquisition or construction cost, less depreciation calculated using the straight-line method at the rates mentioned in note 14 and take into consideration the estimated useful lives of assets and property lease terms with respect to leasehold improvements. Finance charges on financing agreements incurred when property, plant and equipment items are being built are capitalized until the asset begins its operations. Other expenditures are capitalized only if the economic benefits associated with the property, plant and equipment item increase. Another type of cost is recognized as an expense when incurred. Pursuant to NBC TG 01/R3 (CVM Resolution 639/10) asset impairment, an asset is tested for impairment on an annual basis. The asset s value must be estimated only if there is any indication of impairment. 25

43 Lease Finance lease Certain lease agreements transfer substantially all risks and benefits of ownership of an asset to the Corporation. These agreements are finance leases and are initially recognized as property, plant and equipment with an offsetting entry to liabilities at the lowest of present or fair values, according to NBC TG 06/R2 (CVM Resolution 645/10) commercial leasing operations. The Corporation s leasing operations are described in note Operating lease Certain agreements are classified as operating leases when its substance does not meet the finance lease requirements. Payments of these agreements are recognized as expenses in the statement of operations on a straight-line basis over the period the agreements are effective and the asset is used. The Corporation s lease transactions are described in note Intangible assets Intangible assets consist of assets acquired from third parties, including through business combinations, and those generated internally by the Corporation. They are stated at acquisition or formation cost, less amortization calculated using the straight-line method, and based on the recovery estimated periods. Intangible assets with indefinite useful lives and goodwill resulting from expected future profitability are not amortized and are tested annually for impairment. The goodwill represents the excess of total consideration paid over the difference between the fair value of acquired assets and liabilities assumed on the takeover date of the acquired company. Goodwill is capitalized as an intangible asset and any impairment is recognized in the statement of operations. Whenever the fair value of the acquired assets and assumed liabilities exceeds total consideration paid, the full difference will be recognized in the consolidated comprehensive loss on the acquisition date. The Corporation s intangible assets are described in note Biological assets According to NBC TG 29/R2 (CVM Resolution 596/09) - biological assets and agricultural products, agricultural activity is the management of the biological transformation of assets (living animals and/or plants) for sale, into agricultural products or into additional biological assets. The Corporation classifies living cattle and poultry as biological assets. 26

44 The Corporation recognizes biological assets when it controls these assets as a result of past events and it is probable that future economic benefits will flow to the Corporation and the fair value of the asset can be reliably measured. Under NBC TG 29/R2 (CVM Resolution 596/09) biological assets and agricultural products, biological assets should be measured on initial recognition and at the end of each reporting period at fair value less costs to sell, unless fair value cannot be reliably measured. The Corporation values cattle at its fair value based on market prices, while poultry is valued at the acquisition cost since there is no market for poultry Impairment Impairment tests on goodwill and other intangible assets with indefinite economic useful life are annually conducted at the end of the year. Other non-financial assets, such as property, plant and equipment and intangible assets are submitted to impairment tests whenever events or changes in circumstances indicate that its book value may not be recoverable. Once the book value of an asset exceeds its recoverable value (i.e., the highest between the use and fair value minus selling costs), a loss is recognized to bring the book value to its recoverable value. When it is not possible to estimate the impairment of an individual asset, the impairment test is conducted in its cash generating unit (CGU): the smallest group of assets to which the asset belongs and for which there are cash flows separately identifiable. The Corporation adopts as CGU for assessing the recoverable value of an asset, its segmentation by business unit. Goodwill recorded in the initial recording of an acquisition is allocated to each BU of the group that expects to benefit from combination synergies that originated the goodwill, for purposes of impairment testing. Impairment losses are included in the statement of operations. An impairment loss recorded as goodwill is not reversed Current and non-current liabilities Current and non-current liabilities are stated at known or estimated amounts, plus the related charges, exchange rate gains (losses) and/or monetary changes incurred through the balance sheet date, when applicable Provisions Provisions are recorded in case of probable exit of future economic benefits resulting from past events and these can be safely estimated Share-based compensation plan The effects of the share-based compensation plan are calculated at fair value and recognized in the balance sheet and the statement of operations as contract conditions are met and as commented in note

45 Income and Social Contribution taxes Income Tax is calculated on taxable income. Income and Social Contribution taxes are paid monthly on estimated calculation bases, at the rates and in the manners provided for in prevailing legislation. Deferred tax assets recognized for Income and Social Contribution tax losses and temporary differences are recognized pursuant to tax legislation and NBC TG 32/R3 (CVM Resolutions 371/02 and 599/09) - income taxes. They take into consideration the Corporation s history of profitability and the expected future generation of taxable income supported by an annually reviewed technical feasibility study. The Corporation and its subsidiaries opted for the Transition Tax System (RTT) established by Executive Act No. 449/08, converted into Law No. 11,941 of May 27, 2009, declaring their irrevocable option for RTT in the Corporate Income Tax Return of Deferred tax assets and liabilities are recognized when the carrying amount of an asset or liability differs from their tax base, except for the differences that arise from: The initial recognition of goodwill; The initial recognition of an asset or liability in a transaction that is not a business combination and at the time of the transaction affects neither book income or taxable income; and The investments in subsidiaries and joint ventures where the Group is able to control the timing of the reversal of the difference and it is probable that the reversal will not occur in the foreseeable future. Deferred tax asset is recognized only if it is probable that taxable income will be available against which the difference can be utilized. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized and the liability is settled, based on tax rates and laws that have been enacted or substantively enacted by the end of the reporting period. Deferred tax assets and liabilities are offset when the legally enforceable right to offset current tax assets and liabilities exists and the deferred tax assets and liabilities relate to income taxes levied by the same taxing authority on the following cases: For the same entity of the taxable group; For different entities of the group that intend to settle on a net basis or realize the asset and settle the liability at the same time, in each future year in which significant amounts of deferred tax assets and deferred tax liabilities are to be realized or settled. 28

46 Dividends and Interest on Equity Management s proposal for distribution of dividends and interest on equity within the mandatory minimum dividend amount is recorded as current liabilities since it is considered a legal obligation set forth in the bylaws. The amount that exceeds mandatory minimum dividend, which is declared by Management before the end of the reporting period and has not yet been approved by the shareholders, is recorded as proposed additional dividend in shareholders equity Earnings per share Basic Basic earnings/losses per share is calculated by dividing the earnings or losses attributable to the Corporation s controlling and non-controlling shareholders by the weighted average number of common shares outstanding during the period, pursuant to NBC TG 41/R1 (CVM Resolution 636/10) earnings/losses per share, excluding the common shares held as treasury shares. Diluted Diluted earnings/losses per share is calculated by dividing the earnings/losses attributed to the Corporation s common shareholders by the weighted average number of common shares, which would be issued in the conversion of all diluted potential common shares into common shares. The effect of dilution of earnings (loss) per share does not generate significant difference between basic and diluted earnings (loss). The dilution percentage is shown in note Share issuance expenses In accordance with NBC TG 08 (CVM Resolution 649/10) transaction costs and premium on issue of securities, transaction costs incurred with the raising of funds through the issuance of equity securities should be separately recorded in a valuation allowance which reduces shareholders equity, less possible tax effects Treasury shares Treasury shares are Corporation shares acquired by the Corporation itself and kept in the treasury with the specific purpose of carrying out the Corporation s stock option plan, as per note Treasury shares are recorded in a separate account, and, for the purpose of balance sheet presentation, are deducted from the Income Reserve, whose balance was used in such operation. 29

47 Business combination Business combinations are recognized using the acquisition method. Cost of an acquisition is the sum of the consideration transferred, measured at fair value on the acquisition date, and any non-controlling interest in the acquiree. For each business combination, the acquirer should measure the non-controlling interest in the acquiree at the fair value or based on the acquirer s share in fair value of the acquiree s identifiable net assets. Costs that are directly attributable to the acquisition should be recorded as an expense when incurred. In a business acquisition, Management assesses the assets acquired and the liabilities assumed with the objective of classifying and allocating them according to contractual provisions, economic circumstances and relevant conditions on the acquisition date. Goodwill is initially measured as the excess of the consideration transferred in the business combination over the fair value of the net assets acquired (identifiable assets and liabilities assumed, net). If the consideration is less than the fair value of the net assets acquired, the difference should be recognized as a gain in the statement of operations Consolidation Accounting practices are uniformly applied to all consolidated companies and are consistent with those applied in previous years. Description of the main consolidation procedures: Elimination of the balances of intercompany assets and liabilities; Elimination of ownership interest, reserves and retained earnings of subsidiaries; Elimination of the balances of intercompany revenues and expenses and unrealized profits resulting from intercompany transactions Discontinued operations and assets held for sale An operation is classified as discontinued operation when it is sold or it complies with criteria for classification as held-for-sale, if it occurs first. When an operation is classified as a discontinued operation, the statements of income and cash flows are presented as if the operation was discontinued since the beginning of comparative year, for which reason the note reclassified was included in the statements as at December 31, These assets are measured by the lower between the book value and the fair value less selling expenses. Once they are classified as held-for-sale, intangible and fixed assets can no longer be amortized or depreciated. 30

48 The result from discontinued operations is presented as a single amount in the statement of income, and includes the total result after these operations Income Tax and Social Contribution less any impairment loss, and is presented in notes Statement of value added The Corporation prepared the parent company and consolidated statement of value added in accordance with NBC TG 09 (CVM Resolution 557/08) statement of value added, which is an integral part of the financial statements under applicable Brazilian accounting standards to publicly-held companies, while it represents additional information for IFRS standards New IFRS standards and interpretations by the IFRS Interpretations Committee (IFRIC) of IASB The issues and amendments of IFRS standards made by the International Accounting Standards Board (IASB) that come into force for the fiscal year begun in 2016 had no impact on the Corporation s financial statements. Furthermore, the IASB issued/revised certain IFRS standards to be adopted in fiscal year 2017 and fiscal years afterwards. The Corporation is assessing the impacts on its Financial Statements from the adoption of the following standards: IFRS 2 Share-based payments Addresses changes, clarifying how to account for certain types of share-based transactions. Such changes are effective for the fiscal years starting on or after January 1, IFRS 9 - Financial instruments Replaces standard IAS 39 and addresses certain issues regarding the application of the standard and introduces the concept of fair value through comprehensive income for measuring certain types of debt instruments, in addition to including requirements for recognition of asset impairment losses related to the registry of expected credit-impaired financial assets and commitments to renegotiate such credits and hedge accounting. The standard is effective for years starting on or after January 1, IFRS 15 Revenue from Contracts with Customers Establishes the principles for revenue recognition and for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with a customer, with the document issued subsequently clarifying important aspects of the standard. The standard is effective for fiscal years starting on or after January 1, IFRS 16 Leases Establishes aspects regarding the recognition, measuring and reporting of leases. The standard is effective for fiscal years starting on or after January 1, IAS 12 Income Tax Addresses the recognition of deferred income tax assets for deductible temporary differences. The revised standard is effective for fiscal years starting on or after January 1,

49 IAS 7 Statement of Cash Flows Addresses changes to the disclosure of liabilities from financing activities. The revised standard is effective for fiscal years starting on or after January 1, Restatements IFRS 3 Business Combinations and IFRS 11 Joint Arrangements IASB published a public consultation to amend both standards and to clarify the definition of a business and how to account for previously held interests Consolidated financial statements The consolidated financial statements include the accounts of the Corporation and its subsidiaries, as per the table summarizing the equity interests of the Corporation in note 1 operations. The financial statements of subsidiaries located abroad were originally prepared in domestic currency, according to the applicable laws of each country where the companies are located. They were converted into the accounting practices issued by the International Accounting Standards Board (IASB) at their relating functional currencies. Later, those financial statements were translated into Brazilian Reais, using the exchange rate prevailing on the balance sheet date Reclassification in the statements of income and of cash flow in the year ended December 31, 2015 On June 21, 2015, the Corporation disclosed through a Material Fact notice the Final Agreement for the Purchase and Sale of Ownership Interest and Other Covenants with JBS S/A, which laid out the terms and conditions for the sale to JBS S.A. of all ownership interests held by Marfrig in Moy Park Holdings Europe Ltd., parent company of the companies operating the Moy Park business unit. On September 28, 2015 the sale was effectively completed with the meeting of all conditions and approvals required to close the Transaction. On September 30, 2015, the Management Committee decided to hold for sale all assets of Marfrig Argentina S.A. and MF Foods USA, Inc., both part of the Marfrig Beef business unit, and authorized the Corporation s management to carry out all efforts to comply with said decision. There was no reclassification to Marfrig Argentina S.A., in accordance with Note 11. On December 29, 2015, the Corporation s Management decided to sell the assets of the company MFG Agropecuária Ltda, which is part of the Marfrig Beef business segment, to Mr. Marcos Antonio Molina dos Santos. In compliance with the provisions of NBC TG 31/R3 and for comparison purposes, the Corporation and its subsidiaries restated their statements of income, of cash flow, of comprehensive income and notes to the financial statements for the year ended December 31,

50 3.4. Reclassification of Deferred Income and Social Contribution Taxes in the Balance Sheet and Notes The balance Sheet and notes discussing deferred Income and Social Contribution Taxes for the base date December 31, 2015 are being reclassified in compliance with NBC TG 32/R3 Taxes on Profit, which enables the offsetting of deferred tax assets using deferred tax liabilities within the same taxable entity. The Corporation reclassified deferred tax liabilities as of December 31, 2015, in the consolidated amount of R$312,470, which previously were classified as Deferred Income and Social Contribution taxes under Non-current liabilities, to Deferred Income and Social Contribution Taxes under Non-current assets. The following table summarizes the impacts on the parent company balance sheet: December 31, 2015 Originally Reported Adjustment Reclassified Deferred income tax 1,042,051 (66,000) 976,051 Deferred social contribution 376,846 (23,760) 353,086 Total assets 1,418,897 (89,760) 1,329,137 Deferred income tax 66,000 (66,000) - Deferred social contribution 23,760 (23,760) - Total liabilities 89,760 (89,760) - Total deferred taxes 1,329,137-1,329,137 The following table summarizes the impacts on the consolidated balance sheet of the Corporation: Originally Reported Adjustment Reclassified December 31, 2015 Deferred income tax 1,519,126 (282,318) 1,236,808 Deferred social contribution 450,686 (30,152) 420,534 Total assets 1,969,812 (312,470) 1,657,342 Deferred income tax 577,001 (282,318) 294,683 Deferred social contribution 30,152 (30,152) - Total liabilities 607,153 (312,470) 294,683 Total deferred taxes 1,362,659-1,362,659 Said reclassification did not affect the statements of income, of cash flow or of value added for the fiscal year ended December 31,

51 4. Cash and cash equivalents The Corporation adopts the policy of presenting the following items within the cash and cash equivalents group: Cash on hand; Demand deposits. Parent Consolidated 12/31/16 12/31/15 12/31/16 12/31/15 Cash and banks 390, ,187 3,283,625 1,487,624 Cash equivalents 5,988 17,795 8, , , ,982 3,291,705 1,630,368 Parent Consolidated 12/31/16 12/31/15 12/31/16 12/31/15 Cash and banks: Brazilian real 81,151 31,564 82,200 36,379 US dollar 290, ,805 2,670,410 1,056,741 Euro 24,546 29, ,429 68,814 Pound sterling - - 4,739 21,220 M alaysian ringgit ,147 53,300 Chinese Yuan , ,195 Australian dollar ,134 18,445 Thai Baht (Thailand) ,928 65,871 South Korean Won ,271 46,546 Honk Kong dollar - - 6,645 29,940 Uruguayan peso ,897 13,978 Chilean peso - - 5,006 7,636 Argentine peso - - 6,541 - Other , ,982 3,291,705 1,630, Marketable Securities Parent Consolidated 12/31/16 12/31/15 12/31/16 12/31/15 Marketable securities 1,515,911 1,601,157 1,987,787 3,374,753 1,515,911 1,601,157 1,987,787 3,374,753 34

52 The Corporation s financial investments by type are as follows: Parent Held-for-trading: PMPV (1) Currency Average interest rate p.a.% 12/31/16 12/31/15 Bank deposit certificates - CDB (2) - BRL 13.34% 256, ,328 Repurchase and reverse repurchase agreements - BRL 12.97% 317, ,265 Interest-bearing deposit 0.56 USD 2.63% 805, ,900 Fixed income bond - BRL 13.65% 20,897 72,922 Credit-linked note - CLN (2) 0.55 USD 1.00% 98, ,279 FIDC 0.46 BRL 17.13% 17,495 17,463 Total 1,515,911 1,601,157 Total current 1,511,911 1,601,157 Held-for-trading: PMPV (1) Currency Consolidated Average interest rate p.a.% 12/31/16 12/31/15 Bank deposit certificates - CDB (2) - BRL 13.30% 257, ,804 Repurchase and reverse repurchase agreements - BRL 12.97% 317, ,265 Repurchase and reverse repurchase agreements - Peso 24.00% 2,270 - Repurchase and reverse repurchase agreements - USD - 7,434 - Interest-bearing deposits - BRL Interest-bearing deposits 0.56 USD 2.63% 805, ,900 Time Deposit - USD - - 1,322,636 Credit-linked note - CLN (2) 0.55 USD 1.00% 195, ,246 FIDC 0.46 BRL 17.63% 17,494 17,463 Fixed income bonds - BRL 13.65% 20,897 72,922 Fixed income bonds - USD 5.69% 363, ,333 Total 1,987,787 3,374,753 Total current 1,986,936 3,373,842 Total non-current (1) Weighted average maturity in years. (2) Transactions have daily liquidity and can be redeemed at any time. Said maturity is the maturity of the operation. The Corporation maintains the following types of financial investments: 5.1 Bank Certificate of Deposit (CDB) Bank certificates of deposit are investments made at prime financial institutions at variable rates and yield on average 96% to 100% of the variation in the Interbank Deposit Rate (CDI). 5.2 Repurchase and reverse repurchase agreements Transactions based on outstanding daily cash denominated in Brazilian real, U.S. dollars and Argentinean pesos that bear interest which ranges from 95% to 102% of the Interbank Deposit Rate (CDI). This operation has immediate liquidity, for it can be early redeemed without yield loss. 35

53 5.3 Interest-bearing deposits The investments of this type are made in Brazilian real and U.S. dollar and bear interest at fixed rates and measured by the amortized cost. 5.4 Time Deposit Fixed-rate investments issued by top tier financial institutions on international markets. 5.5 Credit Linked Note (CLN) The Credit Linked Notes (CLN) comprise a financial instrument exclusively used to generate resources among the Group s companies and correspond to a credit note used to mitigate the Corporation s credit risk, as presented in note The resources applied in these instruments derive from funds raised in the international capital markets issued by Marfrig Group s foreign subsidiaries, which due to cash management and liquidity strategy are maintained at the issuing foreign subsidiaries. The average yield rate is 1.00% p.a. and they are measured by the amortized cost per annum. 5.6 FIDC Fundos de Investimentos em Direitos Creditórios (Receivables Backed Investment Funds) These are shares of an investment fund that invests in receivables rights. 5.7 Fixed Income Bonds These are investments in fixed income securities issued by top tier financial institutions at fixed rates. 36

54 6. Trade accounts receivable domestic and foreign customers Parent Consolidated 12/31/16 12/31/15 12/31/16 12/31/15 Trade accounts receivable - domestic 149, , , ,010 Trade accounts receivable - foreign 326, , , ,525 (-) Advances on export contracts (ACEs) - (458,818) - (458,818) 475, , ,468 1,003,717 Amounts not yet due 398, , , ,559 Amounts overdue From 1 to 30 days 44,543 33, , ,453 From 31 to 60 days 28,778 94,282 99, ,419 From 61 to 90 days 3,926 6,039 33,174 49,104 More than 90 days 19,441 8,214 29,368 21,026 (-) Advances on export contracts (ACEs) - (458,818) - (458,818) (-) Estimated losses with doubtful accounts (19,441) (8,214) (29,368) (21,026) 475, , ,468 1,003,717 The estimated loss with doubtful accounts was set up in an amount deemed sufficient by Management to cover possible losses on the realization of receivables. Aiming to achieve the best estimate possible, concerning the realization of such credits, and therefore duly set up an allowance for estimated losses with doubtful accounts as at December 31, 2016, the Corporation's Management analyzed particular aspects about its customers, such as business activity, general credit situation, the market s economic situation and notes due for more than 90 days and whose settlement is not considered as possible. The Corporation does not have a history of relevant problems with collection, and the Accounts Receivable Department rates each customer upon acceptance and credit granting. Changes in estimated losses for credit risks are as follows: 37

55 Parent Consolidated Balance on December 31, 2015 (8,214) (21,026) Estimate accrued in the year (9,018) (13,280) Estimate reversed in the year 3,024 2,568 Written-off credits - 1,721 Exchange rate variation Merger of subsidiary (5,233) - Reversal due to divestment - (341) Balance on December 31, 2016 (19,441) (29,368) A receivables backed investment fund (Fundo de Investimento de Direitos Creditórios - FIDC) was created in June 2014 to sell a portion of the receivables from the installment sale in the domestic market, up to the limit of R$160 million (principal), of which R$16 million consists of mezzanine subordinated shares. On December 31, 2016, was R$128,513 of bills traded with the fund MRFG. In December 2016, the Corporation's wholly-owned subsidiary Keystone Foods Intermediate LLC structured a program to sell non-recourse receivables with a prime financial institution in the United States. The program's main objective is to convert into cash the term sales originated in the U.S. market. The securitization program has purpose to trade up to US$60 million (R$196 million), and is structured based on a three-year contract. Through the program, the Corporation receive up to 90% of total balance its eligible receivables, observing the program rules, and limited to the contractual capacity, being 10% such as the operating rate. On December 31, 2016, US$53.6 million (R$174.4 million) had been negotiated under the program. For sales paid in installments, the Corporation uses working capital financing lines available in financial markets. 7. Inventories of products and merchandise In the years ended December 31, 2016 and 2015, inventories of finished products were carried at average purchase and/or production cost, as explained in note 3.1.6: Parent Consolidated 12/31/16 12/31/15 12/31/16 12/31/15 Finished products 514, , ,775 1,166,483 Raw materials , ,376 Packaging material and storeroom supplies 34,604 24, , ,194 (-) Estimated losses (30,566) (25,566) (33,695) (30,089) 518, ,066 1,257,616 1,496,964 38

56 The Corporation grounds its estimates on historical losses, as follows: Parent Consolidated Balance on December 31, 2015 (25,566) (30,089) Reversal of estimates 7,000 7,913 Recognition of estimates (12,000) (12,024) Translation gains (losses) Balance on December 31, 2016 (30,566) (33,695) 8. Biological assets Consolidated Reclassified Current 12/31/16 12/31/15 Biological assets - cattle 2,382 33,017 Biological assets - poultry 110, ,157 Total current biological assets 112, ,174 Non-current Biological assets - poultry 51,236 59,804 Total non-current biological assets 51,236 59,804 Total biological assets 163, ,978 The Corporation's current biological assets are composed of live animals segregated among the categories: poultry and cattle. Animals classified in this group are those intended for slaughtering for production of fresh meat and/or processed products in the next 12 months. Due to the short formation period of poultry, as well as not having a quotation to poultry and pigs market, the Corporation evaluated these biological assets and identified no material adjustments in relation to acquisition cost. In this case, the Corporation believes that the fair value of biological assets is substantially represented by the formation cost, given the short life cycle of the animals. With respect to beef cattle, these are animals kept in feedlots for fattening and slaughter. The balance presented in this item is available for use over the next 12 months. The Corporation valuated these animals at fair value, based on the "Mark to Market - MtM concept, considering the market prices of the arroba 1 of cattle, and recognized the effects of these valuations directly in the statement of operations. The Corporation s noncurrent biological assets are composed of live poultry, classified as breeding stock and intended for reproduction. These assets are amortized on a straight-line basis over the useful life of the animals. Poultry for reproduction have an average useful life of up to 60 weeks. 1 Arroba = A unit of weight equivalent to 15 Kg. 39

57 40

58 The changes in biological assets are as follows: Current biological assets: Consolidated Balance on December 31, ,174 Increase due to purchases 38,910 (-) Write-off for slaughter (1,404,901) Costs of input for fattening 1,411,617 (-) Decrease due to sales (105,565) Net increase (decrease) due to births (deaths) (623) Change in fair value less estimated sale expenses (*) 17,254 Balance sheet translation (27,303) Reversal due to divestment 22,891 Balance on December 31, ,454 * Only applicable to cattle Non-current biological assets: Consolidated Balance on December 31, ,804 Increase due to purchases 38,981 (-) Write-off for slaughter (5,238) Costs of input for fattening 40,302 Amortization (72,403) Balance translation (10,210) Balance on December 31, , Recoverable taxes Reclassified Reclassified 12/31/16 12/31/15 12/31/16 12/31/15 ICMS (State VAT) 534, , , ,869 PIS and Cofins (taxes on sales) credits 2,499,746 1,870,043 2,581,502 2,700,967 IRPF / IRPJ and CSLL (taxes on income) recoverable 424,516 97, , ,553 Other 12,963 63,214 85, ,239 (-) Estimated losses from non-realization (710,785) (451,389) (712,479) (676,385) 2,760,578 2,182,142 2,963,988 2,885,243 Current assets 1,075, ,249 1,240,328 1,289,571 Non-current assets 1,684,696 1,396,893 1,723,660 1,595,672 Parent Consolidated 41

59 9.1 ICMS (State VAT) The balance of recoverable ICMS derives from credits taken for ICMS paid on the acquisition of raw, packaging and other materials and inputs, in amounts higher than the debts generated from domestic sales, since foreign market sales are free from this tax. The Corporation has been seeking ways to optimize these balances by offsetting debits under a non-cumulative regime for the domestic market, or through transfers to third parties, upon payment to suppliers of equipment, raw materials, consumption materials and, for certain states, requests for cash reimbursement. In 2016, the Corporation intensified its efforts to take advantage of opportunities to realize these credits in order to improve its cash flow. 9.2 PIS and COFINS taxes Pursuant to Laws No /02 and /03, this line item consists of noncumulative PIS and COFINS credits on the acquisition of raw, packaging, and other materials used in the goods sold in foreign markets. In 2016, the Corporation was successful in its efforts to optimize these tax credits, although its export model in Brazil allows the continuous generation of credits. Furthermore, the Corporation is engaged in guaranteeing and registering its credits before the Federal Revenue Service. 9.3 IRRF / IRPJ and CSLL recoverable Refers to the amounts of withholding of income tax at source on services rendered to related companies located abroad and financial investments, prepayments of income and social contribution taxes, calculated based on estimation, suspense account balance sheet and taxation based on annual taxable income, payable via offsetting of income and social contribution taxes calculated on profit for future periods, as well as offsetting of other federal taxes owed and managed by the Federal Revenue Service of Brazil (SRF). 9.4 Estimated losses from non-realization of tax credits The estimated losses for non-realization of tax credits were calculated based on the best estimated of realization of the Corporation s recoverable taxes balances, in which main credits are mainly from PIS/COFINS. In the year ended December 31, 2016, the changes in this item were as follows: Parent Company Consolidated Balance at December 31, 2015 (451,389) (676,385) Accrual of estimates (36,094) (36,094) Merger of subsidiary (223,302) - Balance at December 31, 2016 (710,785) (712,479) 42

60 10. Notes receivable Parent Consolidated 12/31/16 12/31/15 12/31/16 12/31/15 Related-party transactions (1) 717,391 1,289,604 46,740 - Market transactions receivable 53,628 14, , ,499 Other notes receivable 33,742 1,378 94,937 11,403 Total 804,761 1,305, , ,902 Current assets 267, , ,548 48,034 Non-current assets 537, ,596 96, ,868 (1) Includes the remaining balance of the direct subsidiary sale transaction as described in note The Parent Company s notes receivable mostly consist of balances resulting from transactions with its subsidiaries (related parties), as described in note Related-party transactions The following tables, except for transactions with the controlling shareholders, show the transactions between the Corporation and its wholly owned subsidiaries as at December 31, 2016: Parent 12/31/ Accounts Accounts Notes Notes December 31, 2016 receivable payable receivable payable Purchases Sales Cledinor S.A. - 11, ,937 - Establecimientos Colonia S.A. - 6, ,755 - Frigorífico Tacuarembó S.A. - 9, ,012 11,805 - Inaler S.A. - 6, ,980 - MF Foods USA Inc Marfrig Argentina S.A - 3, ,267-11,150 - Marfrig Chile S.A. 28, , ,462 Marfrig Holdings (Europe) BV ,541, ,579 Marfrig Overseas Ltd , MFB Marfrig Frigorificos Brasil S.A , ,423 MFG Comercializadora de Energia Ltda ,761 7,839 34,559 - Pampeano Alimentos S.A. 44, , ,329 Keystone Foods UK Limited 100, , ,278-71,390 Keystone Foods International Limited 2,976-38,822 9, Controlling shareholders - 1,618 46,740-3, ,139 40, ,391 8,780, , ,452 43

61 Parent 12/31/ Accounts Accounts Notes Notes Asset held Advances December 31, 2015 receivable payable receivable payable Purchases Sales for sale from clients Cledinor S.A. - 42, , Establecimientos Colonia S.A. - 18, , Frigorífico Tacuarembó S.A. - 26,521 1,148 25,615 11, Inaler S.A. - 19, , MF Foods USA Inc Marfrig Argentina S.A ,464 - Marfrig Chile S.A. 3, , , Marfrig Holdings (Europe) BV 5,412-38,637 8,671,032-5, Marfrig Overseas Ltd , , MFB Marfrig Frigorificos Brasil S.A 110,947 38,513 1,005, , , MFG Agropecuária Ltda , MFG Comercializadora de Energia Ltda ,953 12, Pampeano Alimentos S.A. 19, , , Controlling shareholders - 1, , , , ,980 1,289,604 9,369, , , ,149 10,869 Consolidated Outstanding Balance Recognized as profit or loss Receivables Payables Income Expense 12/31/16 12/31/15 12/31/16 12/31/15 12/31/16 12/31/15 12/31/16 12/31/15 Controlling shareholders 65, ,618 12, ,365 14,208 Key management personnel , ,373 3,226 Other related parties , , ,904-65, ,707 13, , ,642 17,434 The controlling shareholders own membership interests in other entities that have businesses with Marfrig Group. The aggregate amount of transactions is represented in the table above under other related parties. Most of transactions refer primarily to sale of animals for slaughter. These transactions are carried out on an arm s length basis, in accordance with internal guidelines formally established by the Corporation that are periodically verified by the Corporation management to attest their compliance with market conditions. On June 30, 2014, the Corporation signed an Agreement for the Purchase of Cattle and Equipment and the Hiring of employees, through its wholly owned subsidiary MFG Agropecuária Ltda., with the current controlling shareholder of the Grupo Marfrig Global Foods S.A., Mr. Marcos Antonio Molina dos Santos, by which the Corporation undertook to sell said assets and liabilities to the controlling shareholder in an irrevocable manner. The transaction was duly approved by the Audit Committee the Marfrig Group, led by an independent director. 44

62 These assets were being sold at the market value and, as for the purchase and sale of cattle, and purchase of equipment, they are duly registered in the results since the second quarter of 2014, without causing any losses to the Corporation. The balance presented in this note, as Receivables, refers to the net effect of the sale of cattle, acquisition of equipment, less costs of transfer of labor, less the amounts paid by the controlling shareholder through the fourth quarter of This thus materializes all transfers of assets and liabilities so that all the underlying items of said agreement have been transferred to the buyer. The controlling shareholder fully settled said agreement in the last quarter of The Corporation s controlling shareholder, MMS Participações Ltda., and its sole partners, have endorsed some financial agreements of the Corporation. In case of default, creditors can demand payment directly from the controlling shareholder and from its partners and, if they make the payment, they will be entitled to reimbursement from the Corporation. The Corporation did not pay any commissions or other amounts to the appraisers. On December 19, 2016, the Board of Directors decided, among other things, that the Corporation shall be represented exclusively by its Officers and Attorney-in-Fact (Article 26 of the Bylaws) for acts and transactions in amounts of up to R$500 million or US$200 million, depending on the currency in which they are carried out. For acts and transactions in amounts greater than R$500 million or US$200 million, the approval by the Board of Directors is required. The nature of related-party transactions between Marfrig Group companies is represented by commercial transactions (purchases and sales) and sending of cash for payment of such transactions, as well as for working capital. Intercompany loans (instruments receivable and payable) in Brazil (parent company and subsidiaries) are managed by checking accounts held between the companies based on the centralized cash system managed by the parent company. For transactions with subsidiaries abroad, the loan rate is 3% plus 6-month LIBOR (London Interbank Offered Rate). Purchases and sales of products are made at market values. No guarantees or estimated losses with doubtful accounts are required. These transactions involve purchase and sale of fresh meat and cattle, poultry and lamb processed products. Transactions between subsidiaries do not have an impact on consolidated financial statements, given that they are eliminated in consolidation. 11. Asset Divestment Divestment of the Beef Jerky Businesses 45

63 On September 30, 2015, the Management Committee decided to hold for sale all assets of the subsidiary Marfood USA, Inc., (part of the Marfrig Beef business), and authorized the Corporation s management to carry out all efforts to comply with said decision. On January 30, 2016, the Corporation concluded the sale of the beef jerky business of Marfood USA, Inc. to The Classic Jerky Company, a subsidiary of Link Snacks, Inc. for US$3.1 million (R$ 12,7 million on the transaction date). The impact of the sale in the result from discontinued operations was a loss R$ 1.1 million, which is irrelevant in the period. With the sale of the beef jerky business, Marfood USA, Inc., organized under the company name MF Foods USA, Inc., will concentrate its operations on the sale of meatpacking products (canned food and non-refrigerated meat for future processing) in the U.S. market and surrounding region, aiming to maintain the group s service capillarity in the segment. Divestment of units in Argentina On September 30, 2015, the Management Committee decided to hold for sale the assets of the Marfrig Argentina S.A. business unit, which is part of the Marfrig Beef business segment, and authorized the Corporation s management to carry out all efforts to comply with said decision. On April 6, 2016, Marfrig announced to the market, through a Material Fact notice, the execution of an agreement for the sale ( Transaction ) of certain units in Argentina to Black Bamboo Enterprises S.A. (Foresun Group People s Republic of China). The units are located in a) Hughes (Santa Fé Province); b) Vivoratá (Buenos Aires Province); c) Unquillo (Córdoba Province); and d) Monte Ralo (Córdoba Province). The total amount of the Transaction is around US$75 million and payment will be made in installments. The initial payment, of US$34.0 million (R$121.2 million), was made on the disclosure date, upon delivery of the Hughes unit. The remaining balance will be paid within 12 months upon delivery of the other units. In addition, an advance of US$2.4 million (R$7.9 million) was made in the last quarter of At December 31, 2016, the effect from the sale on the results from discontinued operations was a gain of R$48.5 million. The meatpacking unit in Vila Mercedes, located in the province of São Luís, will be maintained and consequently will not be made available for sale, as per the approval formalized in the minutes of the Management Committee meeting held on June 28, Therefore, this operation, which previously was recognized, measured and presented in the accounting statements as held-for-sale non-current assets, in accordance with NBC TG 31/R3 (IFRS 5), were reclassified and presented in this interim financial statements as investment, under non-current assets, as well as classified as Continuing operation in the statements of income, of comprehensive income and cash flows for the years ended December 31, 2016 and

64 12. Deferred Income and Social Contribution Taxes - Assets Parent Consolidated Reclassified Reclassified 12/31/16 12/31/15 12/31/16 12/31/15 Income tax 1,422, ,051 1,608,218 1,236,808 Social contribution tax 521, , , ,534 Non-current assets 1,944,363 1,329,137 2,135,395 1,657,342 Deferred tax assets These tax credits consist of deferred Income and Social Contribution Taxes, calculated on temporary add-backs/exclusions that were added/excluded to the taxable income and the social contribution tax basis in prior and current years, as well as tax losses, temporary add-backs and future utilization for tax purposes of goodwill paid due to future profitability, which will be realized from 2017 onwards. Tax credits recognized for income and social contribution tax losses and temporary differences are supported by taxable income projections and expectations for recoverability based on internal feasibility studies, prepared by expert professionals, which are annually reviewed by the Corporation's Management. These credits were recognized according to provisions referred to in note Deferred tax liabilities Refer to (i) deferred taxes recorded when property, plant and equipment items adopted deemed cost as of January 1, 2009 in accordance with NBC TG 27/R3 (CVM Resolution 583/09) property, plant and equipment and (ITG 10 (CVM Resolution 619/09), which will be settled as revalue assets are sold, written off, depreciated or amortized, according to their respective useful lives established in the appraisal report, and (ii) the effect of deferred federal taxes calculated on the effects of NBC TG 15/R3 (CVM Resolution 665/11 business combination. The following table presents the reconciliation of deferred taxes in the fiscal year ended December 31, 2016: 47

65 ASSETS Parent Consolidated Description IRPJ CSLL IRPJ CSLL Balance on December 31, , ,086 1,236, ,534 (-) Realization of taxes on tax losses/csll tax loss carryforwads (394,988) (142,196) (489,717) (176,298) Deferred taxes on tax losses/csll tax loss carryforwads 286, , , ,106 Deferred taxes on additions/temporary exclusions 768, , , ,639 (-) Realization of deferred taxes on additions/temporary exclusions (338,493) (121,857) (353,067) (127,466) Merger of subsidiary 150,608 54, Gain or loss from translation - - (65,609) - Reversal due to divestment Other ,875 6,392 Balance on December 31, ,448, ,996 1,642, ,024 LIABILITIES Controladora Consolidado Descrição IRPJ CSLL IRPJ CSLL Balance on December 31, ,673 6,392 Realization of revaluation reserve (1,042) (375) (1,068) (384) Realization of deemed cost (2,664) (959) (3,225) (161) Merger of subsidiary 28,843 2, Balance on December 31, ,137 1,519 34,380 5,847 Total deferred assets, net 1,422, ,477 1,608, ,177 In relation to the assumptions for technical feasibility studies, in 2013, the Corporation launched an operational and corporate restructuring process to adjust its capital structure and indebtedness to its business model. Initially, in October 2013, the Corporation announced to the market the Focus to Win strategic plan, which was soon implemented. The targets established for the period from 2014 to 2016 were mostly achieved. The Focus to Win plan has the following pillars: a) specific agenda of productivity gains in the Beef Brazil business; b) margins under control; c) acceleration of organic growth, especially increasing the share of exports in total revenue in the Marfrig Beef business, and increased diversification of the client base at the Keystone business; d) focus on more profitable sales channels; e) higher integration of business platforms at the global level; f) divestments of non-strategic operating activities; g) reductions in gross debt and in the interest rates of funding transactions. Based on this, and consistent with the established guidelines, in 2013, the Corporation began the restructuring process with the divestments of the Seara and Zenda businesses. In keeping with this process, in 2015, the Corporation continued the process and concluded the divestment of the Moy Park business unit for approximately US$1.5 billion. The transaction helped to reduce the Corporation s leverage and, consequently improve its profit outlook. 48

66 In fiscal year 2016, the Corporation divested its Beef Jerky operations in the United States and part of its beef processing operations in Argentina. It also divested its feedlot operation in Brazil. Also in the fiscal year, the Corporation restructured and lengthened its long-term debt, which improved the management of its financial expenses. In its efforts to improve and optimize its operating structure, the Corporation centralized most of its operations into a single entity, through the merger of its wholly-owned subsidiary MFB Marfrig Frigoríficos Brasil S/A. In 2017, the Corporation will continue its efforts to restructure its businesses to converge them to its strategic plan. Therefore, the main value drivers will focus on the international units, especially Keystone, which is well positioned to capture opportunities in chickenbased processed products in the United States as well as in various Asian countries. Regarding the improvement of its capital structure and financial management, the conversion of the mandatorily convertible deed represents an important ally of the Corporation in its efforts to reduce financial expenses. The Corporation will continue to closely monitor the market to identify other opportunities for reducing its interest rates as part of its capital structure management process. Note that the projections were based on the assumptions for net income and historical data on profitability in each segment, taking into account the diverse economic scenarios of each market where the Corporation operates, due to its global and diversified presence (approximately 63% of revenue came from international units, and most of them are located in economically stable countries). The expected realization of "Deferred Tax Assets, based on a technical feasibility study as per CVM Instruction 371 of June 27, 2002 is as follows: Year Parent Consolidated , , , , , , , , , , to ,034,554 1,042,127 1,944,363 2,135, Investments Parent Consolidated 12/31/16 12/31/15 12/31/16 12/31/15 Interest in subsidiaries 4,728,581 6,178, Other investments ,268 26,024 4,728,591 6,178,722 16,268 26,024 49

67 13.1 Investments (Parent) Investments in subsidiaries on December 31, 2016: No. of units of interest/shares Ownership percentage in voting capital Country Share capital Equity Net income (loss) for the year Equity value according to % interest MFB Marfrig Frigorificos do Brasil S.A. - - Brazil - - (37,562) - Marfrig Chile S.A. 9, Chile 81, ,240 25, ,555 Inaler S.A 66,247, Uruguay 4,781 35,695 (11,652) 35,695 Frigorífico Tacuarembó S.A 163,442, Uruguay 20, ,881 53, ,064 Masplen Ltd 5, Jersy Island 12,031 (9,616) (17,919) (14,394) Prestcott International S.A 79,638, Uruguay 9,523 84,371 7,667 84,371 Establecimientos Colonia S.A 80,647, Uruguay 85,555 31,970 (9,384) 31,801 MF Foods USA, Inc. 50, USA ,751 - Marfrig Overseas Ltd Cayman Island - (157,463) (214,800) (157,463) Marfrig Argentina S.A. 1,133,456, Argentina 537,267 (109,320) 10,685 (109,278) MFG Comercializadora de Energia Ltda 149, Brazil - (4,099) (3,276) (4,099) Marfrig Holdings(Europe) BV 426, Netherland 1,518,464 2,878, ,514 2,878,579 Marfrig Peru S.A.C. 5, Peru 6 (361) 41 (361) Keystone Foods (UK) Limited 2, UK 924, ,525 15, ,525 Keystone Foods International Limited 2, UK 463,856 1,204,586 18,941 1,204,586 Total 3,657,702 4,734, ,156 4,728,581 50

68 The following table presents a summary of the financial information of the subsidiaries: Total assets Total liabilities Non-controlling interest Net revenue Group's profit/loss sharing (1) MFB Marfrig Frigorificos do Brasil S.A ,684,659 (37,562) Marfrig Chile S.A. 250, , ,432 24,981 Inaler S.A 191, , ,094 (11,652) Frigorífico Tacuarembó S.A 414, , ,841 53,193 Masplen Ltd 344, , ,163 (17,919) Prestcott International S.A 188, , ,080 7,667 Establecimientos Colonia S.A 260, , ,337 (9,384) MF Foods USA, Inc ,661 43,751 Marfrig Overseas Ltd 2,778,347 2,935, (214,800) Marfrig Argentina S.A. 261, ,488 (66) 531,995 10,678 MFG Comercializadora de Energia Ltda 12,922 17,022-79,263 (3,276) Marfrig Holdings(Europe) BV 10,145,246 7,266,667-8,866, ,514 Marfrig Peru S.A.C Keystone Foods (UK) Limited 2,598,506 2,118, ,156 15,825 Keystone Foods International Limited 5,222,492 3,390, ,088 18,941 Total 22,668,964 17,306, ,315, ,998 (1) The balance corresponds to the Corporation s ownership interest in its subsidiaries, adjusted by any unrealized profits at the time of consolidation. 51

69 13.2 Breakdown of investments (parent) Effect of reverse equity interest in the equity accounts of subsidiaries. Book balance on 12/31/2015 Asset valuation adjustment Aquisition/ Write-off Reclassification (2) Capital increase / (reduction) Dividends Equity in earnings (losses) of subsidiaries (1) Discontinued operations Balance sheet translation effect Book balance on 12/31/2016 MFB Marfrig Frigorificos do Brasil S.A (4) 305,947 - (268,385) (37,562) Marfrig Chile S.A. 110, ,926 - (16,798) 118,555 Inaler S.A. 66,594 (31) (9,499) (11,650) - (9,719) 35,695 Frigorífico Tacuarembó S.A. 219,081 (167) (52,488) 53,545 - (38,907) 181,064 Masplen Ltd 8, (22,697) - 2 (14,394) Prestcott International 118,601 (70) (21,768) 7,667 - (20,059) 84,371 S.A. Establecimientos Colonia S.A 49, (9,553) - (7,846) 31,801 MF Foods USA, Inc ,746 (118,739) ,751-23,612 - Marfrig Overseas Ltd 55, (214,800) - 1,935 (157,463) Marfrig Argentina S.A. - (15,562) - (133,656) 18,372 - (34,879) 48,516 7,931 (109,278) MFG Comercializadora (823) (3,276) - - (4,099) de Energia Ltda Marfrig Holdings(Europe) BV (3) 5,246,322 32,800 (1,723,977) ,514 - (915,080) 2,878,579 Marfrig Peru S.A.C. (465) (361) Keystone Foods (UK) Limited (3) , ,825 - (22,540) 479,525 Keystone Foods International Limited (3) - - 1,238, ,941 - (52,519) 1,204,586 Total 6,178,587 (217,588) (252,395) (83,755) 68,793 (1,049,925) 4,728,581 17,976 18,372 48,516 (1) The balance corresponds to the Corporation s ownership interest in its subsidiaries. (2) The balance corresponds to the reclassification of investments previously recorded as asset held for sale, as described in Note 11. (3) In November 2016, the companies Keystone Foods UK Limited and Keystone Foods International Limited, through a restructuring process, were transferred from Marfrig Holdings (Europe) BV to Marfrig Global Foods. As a result, the Keystone Group became a direct investment of the Parent Company. (4) Company merged into the Parent Company in October 2016, as per Note Assets Held for Sale Book balance on 12/31/2015 Asset valuation adjustment Acquisition/ Write-of Capital increase/ (reduction) Equity in earnings (losses) of subsidiaries (1) Reclassifications (2) Balance sheet translation effect Book balance on 12/31/16 MF Foods USA, Inc. (111,655) (3,165) ,739 (3,919) - Marfrig Argentina S.A. (174,459) (12,194) - 31,940 (2,982) 133,656 24,039 - MFG Agropecuária Ltda. 97,322 - (98,214) Total (188,792) (15,359) (98,214) 31,940 (2,090) 252,395 20,120 - (1) The balance corresponds to the Corporation s ownership interest in its subsidiaries. (2) The balance corresponds to the reclassification of investments previously recorded as asset held for sale, as described in Note

70 13.3 Sale of ownership interest Sale of indirect subsidiary In accordance with the material fact notice released to the market on June 21, 2015, the Corporation entered into, on June 19, 2015, an Agreement for the Purchase and Sale of Ownership Interest and Other Covenants, which laid out the terms and conditions for the sale by the Corporation to JBS S.A. of certain ownership interests in the companies of the Group operating the Moy Park business unit. On the execution date, the transaction amount was established at approximately US$1.5 billion, of which (i) US$1.19 billion refers to cash payment to Marfrig and (ii) GBP200 million refers to Moy Park s net debt assignment. On September 28, 2015, the Corporation concluded the sale of all ownership interest held in Moy Park Holdings Europe Ltd., parent company of companies that operate the "Moy Park business unit. As such, control of that entity was then transferred to JBS. On the conclusion date, estimated settlement price of the transaction, as recorded in the balance sheet, was composed as follows: (i) cash payment to Marfrig in the amount of US$1.21 billion (R$4.73 billion) and; (ii) installment payment to Marfrig of US$53.8 million (R$210 million), settled on October 27, Under the agreement, the parties prepared their reports for verifying the estimated settlement price and, in mutual agreement, defined the final price adjustment of the transaction. In the quarter ended December 31, 2015, the Corporation recognized the price adjustment payable to JBS of US$46.5 million (R$180 million), of which US$21.5 million (R$83.2 million) was disbursed during this year. The additional adjustment of R$180 million, plus the price adjustment in the prior quarter of R$210 million, resulted in a total price adjustment of R$30 million. Thus, the adjusted result before taxes from the sale of Moy Park was R$1,396 million and recorded on the consolidated statement of income for the year under Net income (loss) from discontinued operations at December 31, Gains and losses in the current year, related to the divested business, were recorded under Net income (loss) in the year from discontinued operations, and the gains and losses in the comparison years were reclassified pursuant to NBC TG 31/R3 (CVM Resolution 598/09) non-current assets held for sale and discontinued operations. 53

71 R$ '000 Sales price 4,736,868 Adjustment of sales price (*) 30,275 (-) Expenses with legal counsels and independent consultants (14,905) (=) Adjusted sales price 4,752,238 (-) Write-off of assets and other comprehensive income (3,356,439) (=) Income (loss) from the sale before taxes 1,395,799 Income and social contribution taxes (474,572) (=) Profit (loss) from the operation 921,227 (*) Price adjustment arises mainly from variation in working capital and net debt in the divested companies, according to the agreement. Divestment of direct subsidiary On March 30, 2016, the Corporation concluded, as per the notice to the market dated February 10, 2016, the related party transaction involving the sale of the ownership interest it held in the subsidiary MFG Agropecuária Ltda. ( MFG ) to the controlling shareholder, Mr. Marcos Antonio Molina dos Santos. The negotiation between the parties reflects commercial conditions for the sale of ownership interests strictly compatible with those typically practiced in the market, supported, as a condition precedent for the transaction, by a technical Valuation Report prepared by the audit and consulting firm PricewaterhouseCoopers Auditores Independentes. The purchase agreement entered into between the parties, among other terms and conditions, provides for the following conditions for consummation of the transaction: (i) sales price of R$95 million, which includes the amount of R$13.2 million as pre-fixed interests; (ii) discount from an advance in the amount of R$10.9 million received by the Corporation from Mr. Marcos Molina, as payment; (iii) settlement of the outstanding balance in nine quarterly installments. The transaction was the object of consideration and approval by the Audit Committee, Management Committee and Financial and Risk Management Committee of Marfrig, and was submitted to examination and approval, in accordance with the shareholders agreement. The divestment of MFG is aligned with the strategic plan Focus to Win, which aims to streamline the operations and to focus more on key assets. The result of the transaction, after the taxes, was a loss of R$10.9 million, recorded in the consolidated statement of income for the year under Net income (loss) from discontinued operations. The following amounts reflect the transactions mentioned above: 54

72 R$ '000 Sales price 95,000 (-) Financial interest incurred during the contract (*) (13,212) (-) Expenses with legal counsels and independent consultants (93) (-) Write-off of assets (98,214) (=) Income (loss) from the sale before taxes (16,519) Effect of Income and social contribution taxes 5,616 (=) Profit (loss) from the operation (10,903) (*) Financial interest provided by contract to be paid as installments are received. Considering the impact of interest expenses in the gain/loss from sale, the loss, net of tax effects, would be R$ 2.2 million. Gains and losses in the current year, related to the divested business, were recorded under Net income (loss) in the year from discontinued operations, and the gains and losses in the comparison years were reclassified pursuant to NBC TG 31/R3 (CVM Resolution 598/09 non-current assets held for sale and discontinued operations) Acquisition of ownership interest On May 25, 2015, Marfrig acquired a business formed by the following assets: (a) acquisition of all shares of Mercomar Empreendimentos e Participações Ltda, including the previously leased units of Capão do Leão (Rio Grande do Sul), Mato Leitão (Rio Grande do Sul), Pirenópolis (Goiás), Tucumã (Pará) and Nova Londrina (Paraná). In consideration, Marfrig will pay the amount of R$428.2 million. The payment of the amount of R$428.2 million will be divided in two phases: a down payment of R$4 million and the remaining balance of R$424.2 million divided into 24 quarterly installments with a grace period of three years for the payment of principal. Interests will be restated at the CDI overnight rate plus 1.5% per year and will be paid in 36 quarterly installments. On the acquisition date, in accordance with NBC TG 15 (R3) Business Combination, the Corporation measured the assets acquired and liabilities assumed at fair value, based on appraisal reports prepared by external experts engaged by the Corporation, observing fair and consistent criteria, assumptions and projection methodologies for transactions of this nature. Initially, no liabilities or provisions for contingencies were identified that should be recognized on the acquisition date, as the acquired company was incorporated recently and does not have a history of activities that could generate liabilities of this nature. The fair values of these assets and liabilities were measured at R$503.4 million, and any fair value gains associated with said assets were adequately recognized under property, plant and equipment and intangible assets. The Management of the Corporation revised the adopted assumptions and criteria and considered that the value of these assets was fairly measured on the acquisition date. Furthermore, all deferred tax effects on the fair value gain were duly recognized. The values above are presented in the following table: 55

73 R$ '000 Assets of the company Mercomar e Empreendimentos e Participações Ltda (a) 441,825 Cash and equivalents 2 Property, plant and equipment 441,823 Book value of acquired assets and assumed liabilities 441,825 Fair value of property, plant and equipment according to independent expert report (b) 186,516 Fair value of intangible assets according to independent expert report (c) 348,528 Deferred tax liabilities (31,693) Fair value of acquired assets 503,351 Contractual acquisition value 428,158 (=) Bargain purchase - Gain in the operation (d) 75,193 Income and social contribution tax rate 34% Income and Social Contribution taxes 25,566 (a) (b) (c) (d) Mercomar Empreendimentos e Participações Ltda., company that received the assets held by Frigorífico Mercosul S/A and its affiliates, incorporated on April 27, These assets are formed by all goods and rights related to the five (5) units located in: Capão do Leão/RS; Tucumã/PA; Mato Leitão/RS; Nova Londrina/PR and Pirenópolis /GO. The acquired amount is included in the changes in property, plant and equipment, under additions, in note 14 of the accounting statements for the fiscal year ended December 31, The acquired intangible assets amount is included in the changes in intangible assets, under additions, in note 15 of the accounting statements for the fiscal year ended December 31, The acquisition resulted in a bargain purchase, the effect of which gain was recorded in the income statement under Other operating income (expenses). Tax effects were also recognized. The Corporation s Management monitors the effects of acquisitions, observing recording periods, which may not exceed one year from the date of acquisition, in accordance with NBC TG 15 (R3) - Business Combination. On September 30, 2015, the Corporation approved and completed the merger of Mercomar Empreendimentos e Participações Ltda. (Merged Company) into MFB Marfrig Frigoríficos do Brasil S.A. (Merging Company), in accordance with the terms of the Merger Agreement presented to shareholders at the time. The share capital of the Merging Company and the Merged Party are wholly owned by Marfrig Global Foods S.A. and as such, they are part of the same economic group. This merger did not involve any non-controlling shareholders, and aimed merely to simplify the group s ownership structure Merger of subsidiary On September 30, 2016, the Corporation released a Material Fact notice announcing the proposal for the merger of MFB Marfrig Frigoríficos Brasil S.A. The operation was approved in the Extraordinary Shareholders Meeting (AGE) held on October 31, 2016, when the company was fully merged into the parent company Marfrig Global Foods S.A. The merger aimed to simplify the ownership and operational structure of Marfrig Global Foods S.A. and did not require any change in the Corporation s share capital (or any substitution of shares for shares in the Corporation or issue of 56

74 new shares), since the Corporation already held 100% of the capital of the Merged Company. Therefore, the parent company financial statements presented herein consolidate the accounting records of the merged company as of November 2016, with the exception of the operating results through October 31, 2016, whose impacts on the income statement of the Parent Company are presented under Equity income (loss). The merger of MFB Marfrig Frigoríficos Brasil resulted in material changes to certain items of the Corporation s parent company financial statements. 14. Property, plant and equipment The following tables show the weighted average annual depreciation rate determined using the straight-line method and based on the economic useful life of the assets and their balances: Changes in acquisition cost of the parent company Parent 12/31/16 Description Average annual depreciation rates Acquisition Cost Additions Write-offs Merger of subsidiary Transfers Accumulated depreciation Net Cost Plots of land - 31, , ,462 Constructions and buildings 3.00% 808,082 3, , (159,681) 897,349 Machinery and equipment 12.46% 506,702 15,059 (1,920) 101,315 (373) (268,120) 352,663 Furniture and fixtures 9.78% 16, (314) 7, (8,754) 15,305 Facilities 4.64% 918,998 - (142) 165, ,476 (224,495) 979,572 Vehicles 18.58% 32, (9,137) (2,362) 21,338 IT equipment 20.26% 11, (5) (8,366) 4,272 Aircraft 10.69% 382 5, (414) 5,114 Advance for acquisition of property, plant and equipment 0.00% - 2,084 (300) ,784 Leasehold improvements 11.77% 58, ,864 - (18,474) 139,689 Lease - vehicles 20.00% 19, (24) (19,123) 26 Lease - computer hardware 20.00% 26, (509) (16,774) 8,890 Lease - machinery 10.00% 11, (10,117) 1,741 Lease - facilities - 18, (18,240) - Lease - buildings - 6, (6,314) - Construction in progress - 4, ,324-3,326 (120,193) - 15,809 Other (118) 200 2,470, ,728 (11,818) 634,199 - (761,352) 2,487,214 57

75 Changes in net balance of the parent company: Parent 12/31/15 12/31/2016 Description Average annual depreciation rates Net Additions Write-offs Merger of subsidiary Transfers Depreciation Net Plots of land - 31, , ,462 Constructions and buildings 3.00% 669,664 3, , (21,263) 897,349 Machinery and equipment 12.46% 293,891 15,059 (1,065) 101,315 (373) (56,164) 352,663 Furniture and fixtures 9.78% 8, (189) 7, (1,403) 15,305 Facilities 4.64% 738,989 - (74) 165, ,476 (44,554) 979,572 Vehicles 18.58% 21, (755) ,338 IT equipment 20.26% 4, (2) (810) 4,272 Aircraft 10.69% - 5, (32) 5,114 equipment - - 2,084 (300) ,784 Leasehold improvements 11.77% 51, ,864 - (11,816) 139,689 Lease - vehicles 20.00% (24) (70) 26 Lease - computer hardware 20.00% 11, (509) (2,284) 8,890 Lease - machinery 10.00% 1, (213) 1,741 Construction in progress - 4, ,324-3,326 (120,193) - 15,809 Other ,837, ,728 (2,385) 634,199 - (137,879) 2,487,214 Changes in consolidated acquisition cost: Consolidated 12/31/16 Description Average annual depreciation rates Acquisition Cost Additions Write-offs Reclassification Transfers Translation Accumulated Depreciation Net Cost Plots of land - 132, (2,335) - - (13,132) - 117,297 Constructions and buildings 1.88% 2,576,901 4,565 (1,093) - 15,439 (146,273) (789,959) 1,659,580 Machinery and equipment 6.14% 2,450,140 28,595 (19,305) ,046 (101,820) (1,590,048) 868,068 Furniture and fixtures 4.79% 119,827 5,030 (5,490) 956 6,566 (3,003) (91,807) 32,079 Facilities 4.64% 1,166, (737) - 152,752 (1,596) (344,500) 973,467 Vehicles 15.63% 94,630 1,180 (10,455) (2,386) (51,124) 31,980 IT equipment 21.06% 64, (49) (192) (59,819) 5,538 Aircraft 10.69% 382 5, (414) 5,114 Advance for acquisition of property, plant and equipment ,084 (369) ,784 Leasehold improvements 9.78% 279,338 2,169 (3,442) 4 16,650 (4,151) (77,557) 213,011 Lease - vehicles 20.00% 20, (41) 40 (20,239) 26 Lease - computer hardware 20.00% 26, (509) - (17,225) 8,906 Lease - machinery 2.38% 143, (3,108) (133,226) 7,620 Lease - facilities - 18, (18,790) - Lease - buildings - 11, (11,577) - Construction in progress - 90, ,305 (5,172) (26,896) (291,936) (7,487) - 82,778 Other - 2, (1,386) - - 2,605 (1,960) 2,149-7,198, ,797 (49,833) (25,476) - (280,503) (3,208,245) 4,009,397 58

76 Changes in consolidated net balance: Description Consolidated 12/31/15 12/31/16 Average annual depreciation rates Net Additions Write-offs Reclassification Transfers Translation Depreciation Net Plots of land - 132, (2,335) - - (13,132) - 117,297 Constructions and buildings 1.87% 1,861,805 4,565 (1,066) - 15,439 (146,273) (74,890) 1,659,580 Machinery and equipment 6.19% 1,005,915 28,595 (177) ,046 (101,820) (164,951) 868,068 Furniture and fixtures 4.75% 31,458 5,030 (523) 956 6,566 (3,003) (8,405) 32,079 Facilities 4.62% 876, (669) - 152,752 (1,596) (54,566) 973,467 Vehicles 15.14% 37,849 1,180 (821) (2,386) (3,977) 31,980 IT equipment 21.16% 5, (47) (192) (1,610) 5,538 Aircraft 20.00% - 5, (32) 5,114 Advance for acquisition of property, plant and equipment ,084 (369) ,784 Leasehold improvements 9.67% 225,661 2,169 (304) 4 16,650 (4,151) (27,018) 213,011 Lease - vehicles 20.00% (41) 40 (92) 26 Lease - computer hardware 20.00% 11, (509) - (2,284) 8,906 Lease - machinery 1.72% 30, (3,108) (19,983) 7,620 Construction in progress - 90, ,305 (5,172) (26,896) (291,936) (7,487) - 82,778 Other (1,386) - - 2,605 (7) 2,149 4,311, ,797 (12,869) (25,476) - (280,503) (357,815) 4,009,397 According to NBC TG 06/R2 (CVM Resolution 645/10) lease operations, the assets acquired by the Corporation under a finance lease started to be recorded as property, plant and equipment, including their respective depreciation, as mentioned above, with an offsetting entry to lease payable, shown in note 22. Pursuant to NBC TG 01/R3 (CVM Resolution 639/10) asset impairment, an asset is tested for impairment on an annual basis. The asset s value must be estimated only if there is any indication of impairment. If any indication of impairment is found, recoverability analysis comprises projecting the profitability and future cash of the Corporation s business units, which are discounted to present value to identify the degree of recoverability of the asset. During the year ended December 31, 2016, the book values of the Corporation s assets were not higher than the amounts which could be obtained by use or sale. Nevertheless, in November 2016, the Corporation prepared, by engaging an external advisory firm, a valuation report of temporarily idle assets, and no impairment loss was verified. The Corporation and its subsidiaries recorded property, plant and equipment that are fully depreciated and still in operation, as well as temporarily idle items, as follows: 59

77 Description Parent 12/31/16 Temporarily idle property, plant and equipment Property, plant and equipment fully depreciated and still in operation Land 9,770 - Constructions and buildings 124, Machinery and equipment 29,527 94,265 Furniture and fixtures 3,722 2,164 Facilities 31, Vehicles - 25,499 IT equipment 1 25,174 Aircraft Leasehold improvements 32, , ,383 Consolidated 12/31/16 Description Temporarily idle property, plant and equipment Property, plant and equipment fully depreciated and still in operation Property, plant and equipment not in operation and not classified as held for sale Land 9, Constructions and buildings 124,835 4,450 - Machinery and equipment 29, ,443 - Furniture and fixtures 3,722 2, Facilities 31, Vehicles - 25,588 - IT equipment 1 25, Aircraft Leasehold improvements 32, , , Intangible assets The Corporation has the subgroup intangible assets, composed of non-current assets, presented pursuant to NBC TG 04/R3 (CVM Resolution 644/10) intangible assets, as shown in the summary below: Amortization rate Useful life 12/31/16 12/31/15 12/31/16 12/31/15 Goodwill , ,483 1,049, ,479 Trademark and patents 1.96% ,883 22, , ,091 Software 11.91% ,428 29,730 58,066 35,549 Client relationship 10.00% ,321 45,333 Client relationship - Indefinite - - 1,052,285 1,280,873 Right of use (*) 5.50% ,302 52,214 49,302 52,214 Sales channels (*) 5.50% , , , ,522 Other intangible assets 25.00% ,396 2,209 1,372, ,832 2,815,130 2,645,270 Parent Consolidated (*) Amounts from the merger of subsidiary Mercomar Empreendimentos e Participações Ltda. Into the subsidiary MFB Marfrig Frigoríficos do Brasil S.A., as described in note

78 Breakdown of intangible assets Parent Consolidated Balance on December 31, ,832 2,645,270 (+) Addition 6,559 10,882 (+) Effects from merger of subsidiary (-) Write-off (65) (65) (-) Amortization (26,116) (35,316) (+/-)Reclassification - 25,475 (+/-) Exchange variation 468, ,884 Balance on December 31, ,372,346 2,815,130 Goodwill from the acquisition of businesses by September 30, 2008 (last acquisition previous to transition date as of January 1, 2009, referring to complete adoption of the International Financial Reporting Standards (IFRS)) was calculated based on the accounting standards previous to NBC TG 15 (CVM Resolution 665/11) - business combination. According to IFRS Optional Exemptions, the Corporation decided to adopt IFRS in all business acquisitions as from September 30, These goodwill amounts were based on expected future profitability, and supported by valuation reports from experts. The trademarks acquired from third parties, prior to December 31, 2009, were measured at the paid amount, while trademarks and list of clients acquired as part of business combination after September 30, 2008 were calculated at fair value pursuant to NBC TG 15/R3 (CVM Resolution 665/11) business combination. According to NBC TG 01/R3 (CVM Resolution 639/10) asset impairment, the impairment test of goodwill and intangible assets with indefinite useful lives is conducted annually, and other intangible assets with finite useful lives are tested whenever there is evidence of non-realization of those items. Intangible assets represented by patents and a list of clients are amortized at their respective useful lives, if applicable. Certain intangible assets of the Corporation have undefined useful lives, according to the experts' valuation, and are annually tested for impairment. Such analysis comprised projecting the profitability and future cash of the Corporation s business units, which are discounted to present value to identify the degree of recoverability of the asset. Discounted cash flows to assess asset impairment were prepared for a period close to 10 years. This cash flow is in line with the Corporation s strategic plan and growth projections based on past information and market projections prepared by nongovernmental agencies and entities. Estimated impairment losses include the fair value adjustment of assets held for sale. In the year ended December 31, 2016, the Corporation did not identify any indications of asset recorded in its books at an amount higher than that recoverable through use or sale. 61

79 15.1 Changes in intangible assets (parent) Changes in the Intangible assets accounts of parent company for the year ended December 31, 2016 are as follows: Balance on December 31, 2015 Acquisition/ writeoff Exchange rate variation Merger of subsidiary Reclassification / amortization Balance on December 31, 2016 Inaler S.A. - Goodwill 38,379-30, ,320 Frigorífico Tacuarembó S.A. - Goodwill 58,496-45, ,423 Masplen Ltd - Goodwill 17,258-13, ,933 Prescott International S.A. - Goodwill 22,922-17, ,319 Establecimientos Colonia S.A - Goodwill 114, , ,467 Keystone International - Goodwill 274, , ,005 Sales channels 291, (16,257) 275,265 Rights of use 52, (2,912) 49,302 Software and systems 29,730 6, (6,947) 29,429 Trademarks and patents 22, ,883 Total 922,832 6, , (26,116) 1,372,346 The goodwill generated from acquisitions of ownership interests abroad is expressed in the business unit s functional currency and is translated at the closing rate, in accordance with NBC TG 02/R2 (CVM Resolution 540/10) effects of changes in exchange rates and translation of accounting statements. 62

80 15.2 Changes in intangible assets (subsidiaries) Book balance on December 31, 2015 Reclassification (1) Acquisitions Exchange variation on translation Amortization Merger of subsidiary Book balance on December 31, 2016 Marfrig Chile S.A. 31,291-8 (5,169) (86) - 26,044 Goodwill 31, (5,132) ,903 Trademarks and patents/software/others (37) (86) Masplen Ltd (42) Trademarks and patents/software/others (42) Prestcott International S.A 17, (2,958) (120) - 14,858 Goodwill 17, (2,839) ,328 Trademarks and patents/software/others (119) (120) Frigoríficos Tacuarembó S.A 1, (217) (170) - 1,312 Trademarks and patents/software/others 1, (217) (170) - 1,312 Inaler S.A (102) (101) Trademarks and patents/software/others (102) (101) Establecimientos Colonia S.A (150) (143) Trademarks and patents/software/others (150) (143) Marfrig Argentina S.A (26) - 87 Goodwill Trademarks and patents/software/others (26) - 87 MFB - Marfrig Frig. BR S.A (98) (152) - Trademarks and patents/software/others (98) (152) - Keystone Foods UK Limited - 14,467 - (664) ,803 Goodwill - 14,467 - (664) ,803 Keystone Foods International Limited - 1,445,462 1,861 (61,307) (908) - 1,385,108 Goodwill Client relationship - 1,140,428 - (48,436) (386) - 1,091,606 Trademarks and patents/software/others - 305,034 1,861 (12,871) (522) - 293,502 Marfrig Holdings (Europe)BV 1,669,665 (1,434,453) 1,909 (229,615) (7,506) - - Goodwill 19,793 (14,466) - (5,327) Client relationship 1,326,205 (1,140,428) - (181,325) (4,452) - - Trademarks and patents/software/others 323,667 (279,559) 1,909 (42,963) (3,054) - - Total 1,722,438 25,476 4,323 (300,101) (9,200) (152) 1,442,784 (1) In November 2016, the companies Keystone Foods UK Limited and Keystone Foods International Limited, through a restructuring process, were transferred from Marfrig Holdings (Europe) BV to Marfrig Global Foods. As a result, the Keystone Group became a direct investment of the Parent Company. 16. Trade payables Parent Consolidated 12/31/16 12/31/15 12/31/16 12/31/15 Third parties 698, ,926 1,836,976 1,687,210 Related parties (1) 40, ,979 16,450 47, , ,905 1,853,426 1,734,425 (1) Most of trade and other accounts payable include balances from transactions with its Subsidiaries (related parties), as described in Note

81 17. Supply chain finance Parent Consolidated 12/31/16 12/31/15 12/31/16 12/31/15 Supply chain finance 149,331 84, ,331 84, ,331 84, ,331 84,566 The Corporation entered into an agreement with financial institutions to structure Supply chain finance operations with certain suppliers. 18. Accrued payroll and related charges Parent Consolidated 12/31/16 12/31/15 12/31/16 12/31/15 INSS (social security contribution) payable 70,574 35,206 71,421 43,465 Salaries and payroll obligations 62,411 52, , ,107 Other social charges and benefits payable 4,141 3, , , ,126 90, , ,015 On November 21, 2005, Law No was enacted allowing the offsetting of INSS debts against federal tax credits. This procedure was regulated by Interministerial Ordinance No. 23 dated February 2, In addition, article 2 of Law /07 establishes responsibility to the Brazilian Federal Revenue Service concerning the employees social security contributions levied on their contribution salaries, according to item c, sole paragraph, Article 11 of Law 8.212/91 and Article 104 of Law /05. The Corporation currently has a favorable court decision that determines that the Federal Revenue Service of Brazil should analyze the requests for Reimbursement filed by the Corporation and also establishes the recognition of the possibility to offset credits related to PIS and COFINS taxes with social security contributions, upon use of tax credits to pay the dues. The Corporation believes it holds sufficient credits to settle its debits and therefore, based on the opinion of its legal counsel, is carrying out the offset of social security debts with PIS/COFINS tax credits. An Interlocutory Appeal was filed by the National Treasury against said court decision, which was judged and the decision maintained with regard to the requirement of analysis by the Federal Revenue Service of Brazil of the requests for Reimbursement filed by the Corporation. However, the decision was altered regarding the right to suspend the enforceability of the dues. As a result, the Corporation requested the court to recognize the possibility of offsetting the PIS and COFINS credits with social security contributions using the tax credits to pay the debts, to be undertaken by the Federal Revenue Service of Brazil. 64

82 To formalize said credits, the Corporation filed Requests for Reimbursement with the Federal Revenue Service of Brazil. These requests indicate the existence of sufficient credits to settle the Corporation s debts, at the occasion of occurrence of the facts and events, using the tax credits to pay such debts. However, given the start of the period to include dues settled with PIS and COFINS credits, which has been challenged by Brazil s Federal Revenue Service, in order to improve its positioning and relationship with the Federal Revenue Service, the Corporation chose to include the dues settled until December 2013 in the World Cup REFIS. Consequently, the credits settled were once again included in the balance sheet. This does not mean that the Corporation has withdrawn or changed its opinion, as mentioned above. Thus, for dues after December 31, 2013, use of tax credits to pay dues will continue to be requested. In the year ended December 31, 2016, the Corporation does not sponsor postemployment benefit plans with actuarial liability characteristics. 19. Taxes payable Parent Consolidated 12/31/16 12/31/15 12/31/16 12/31/15 ICMS (State VAT) payable ,618 Special tax debt installment payment plan - Refis (1) 706, , , ,801 Income tax payable ,464 56,544 Social contribution tax payable - - 7,551 7,173 Social contribution payable - PGFN (2) 50,400 46,704 50,400 46,704 Other taxes payable 57,084 23,800 77,942 65, , , , ,077 Current liabilities 91,855 53, , ,961 Non-current liabilities 722, , , ,116 (1) Laws 11,941/09, 12,865/13 and 12,996/14, which reopened the period for adhesion. (2) Office of the General Counsel to the National Treasury Special Tax Debt Installment Payment Plan Law 11,941/09 On September 30, 2009, the Corporation joined the Special Tax Debt Installment Payment Program (New REFIS), established by Law No. 11,941, of May 27, It provides for the payment in installments of debts due to the Brazilian Federal Revenue Service (SRF), the Office of the National Treasury Attorney-General (PGNF), and the Brazilian Social Security Institute (INSS). The Corporation declared debts with those agencies and transferred to the plan debts included in other payment plans (Special Tax Debt Installment Payment Plan - Law No. 10,684/03 PAES and Extraordinary Tax Debt Installment Payment Plan Executive Act No. 303/06 PAEX), to be settled within 180 months. 65

83 During the consolidation process of the abovementioned program, the Corporation decided not to include the lawsuit / , totaling originally R$29,844, which was reclassified to taxes payable, under non-current liabilities. In view of the waiver of the installment payment program, debits were adjusted in accordance with law in effect on the date of the taxable event, resulting in additional fine, interest and restatement amounting to R$20,556 and a total debit of R$50,400, as presented below: Debits reclassified to taxes payable 12/31/16 12/31/15 Social contribution payable- PGFN 11,260 10,434 Income tax payable - PGFN 30,502 28,266 Withholding income tax payable - PGFN 8,638 8,004 50,400 46,704 Reopening of the Period for joining the program Law 12,865/2013 and Law 12,996/2014 On December 20, 2013 and August 25, 2014, the Corporation joined the Reopening of Law 11,941 of 2009, which governs the payment in installments of dues with the Federal Revenue Service of Brazil (SRF), the Attorney General of the National Treasury (PGFN) and the National Social Security Institute (INSS), stating its outstanding dues with these organs, to be settled within 180 months, as shown below: 12/31/16 12/31/15 12/31/16 12/31/15 Opening balance 517, , , ,751 (+) Adhesion to the installment payment program 2,423-2,423 - (-) Exclusion of installment payment program (194) - (4,170) - (+) Inflation adjustment interest 56,575 29,151 73,791 51,574 (-) Payments made / tax credits (47,828) (36,619) (64,193) (55,853) (+) Merger of subsidiary 178, Parent Consolidated (+/-) Reversal due to asset held for sale (15,671) Debt balance 706, , , ,801 Current liabilities 66,654 41,962 66,733 60,034 Non-current liabilities 639, , , ,767 66

84 20. Loans and financing Local currency Credit facility Charges (% p.a.) Parent Weighted average interest rate (p.a.) Weighted average maturity (years) Balance on 12/31/16 Balance on 12/31/15 FINAME/FINEP TJLP + Fixed Rate 6.05% ,936 NCE/Working Capital/CDCAS Fixed Rate+%CDI 16.63% , ,965 Total local currency 16.62% 388, ,901 Foreign currency: NCE/Prepayment (US$) / ACC (US$) Fixed Rate+ FX (US$) + Libor 6.38% , ,897 Total foreign currency 6.38% 693, ,897 Total loans and financing 10.06% 1,081, ,798 Current liabilities 823, ,341 Non-current liabilities 258, ,457 Local currency Credit facility Charges (% p.a.) Consolidated Weighted average interest rate (p.a.) Weighted average maturity (years) Balance on 12/31/16 Balance on 12/31/15 FINAME/FINEP TJLP + Fixed Rate 4.01% ,836 26,641 NCE/Working capital (R$)/CDCAS Fixed Rate+%CDI 16.63% , ,965 Total local currency 16.04% 407, ,606 Foreign currency Prepayment/NCE / ACC (US$) Fixed Rate + FX (US$) + Libor 6.38% , ,341 Bonds (US$) Fixed Rate + FX 8.10% ,725,506 8,845,300 Bank loan (US$) Fixed Rate + FX 2.90% ,629,040 1,400,299 Revolving credit facility Libor % , ,515 PAE (US$) Fixed Rate + FX 2.14% ,766 58,360 Tradable liabilities Fixed Rate ,879 Total foreign currency 6.92% 10,486,654 11,310,694 Total Loans and financing 7.26% 10,893,838 11,885,300 Current liabilities 1,198,039 1,772,411 Non-current liabilities 9,695,799 10,112,889 67

85 The Corporation s types of loans and financing can be described as follows: Senior Notes BONDS These are long-term funding operations denominated in foreign currencies involving the issue of debt securities abroad (Bonds) exclusively to qualified institutional investors (Rule 144A/Reg S), not registered at the Securities and Exchange Commission of Brazil (CVM), in accordance with the Securities Act of 1933, as amended. The Corporation, through its subsidiaries, has conducted eight funding operations of this nature since 2006, as detailed below: The first bond operation was concluded in November 2006, upon the issue by Marfrig Overseas Ltd., a wholly-owned subsidiary of the Corporation, of US$375 million in Senior Notes, with a 9.625% p.a. coupon, semi-annual interest payment beginning in May 2007 and maturity of principal in 10 years (November 2016), which were assigned foreign currency risk ratings of B1 by Moody s and B+ by Standard & Poor s and Fitch. The proceeds from the issue were used for the acquisition by the Corporation of business units in Argentina and Uruguay. In March 2010, Senior Note holders approved the amendment of certain clauses included in the Indenture that governs this issue, including the change in and/or omission of restrictions applicable to the guarantees provided by the Corporation and its subsidiaries. Said amendment did not comprise any change in the financial conditions of this debt, which maintained the same maturity term and interest rate originally established (this addendum, jointly with the indenture, the First Issue ). The First Issue is guaranteed by Marfrig Global Foods S.A. and Marfrig Holdings (Europe) BV. In September 2013, based on the conclusion of the fifth operation, the Corporation repurchased Bonds in the approximate amount of US$191 million, corresponding to 50.97% of the outstanding Senior Notes of the First Issue. As a result of the tender offer, the First Issue was amended through a complementary indenture that sets forth, among other things, the elimination of virtually all the restrictive covenants of the Indenture; In May 2016, based on the conclusion of the eighth operation, the Corporation repurchased the principal amount of approximately US$43.4 million, or 23.58% of remaining outstanding Notes of the First Issue. In November 2016, the Corporation fully settled the principal of the outstanding Senior Notes from the First Issue, in the aggregate amount of US$140.5 million, plus the respective interest of US$6.7 million, representing an aggregate amount of US$147.2 million. 68

86 The second operation was conducted in April 2010, upon the issue by Marfrig Overseas Ltd. of US$500 million in Senior Notes, with a coupon of 9.50% p.a., semiannual interest payments beginning in November 2010 and maturity of principal in 10 years (November 2020), which were assigned foreign currency risk ratings of B1 by Moody s and B+ by Standard & Poor s and Fitch. This operation also was guaranteed by Marfrig Global Foods S.A. and Marfrig Holdings (Europe) B.V. and its proceeds were used to lengthen the debt profile of the Corporation ( Second Issue ). In March 2014, the Corporation concluded the re-tap of its Senior Notes linked to the Second Issue in the aggregate amount of US$275 million ( Additional Notes ). The Additional Notes were consolidated into a single series with the Senior Notes of the Second Issue, with coupon of 9.50% p.a. (yield of 9.43% p.a. for the issue). The additional notes were assigned foreign currency risk ratings of B2 by Moody s and B by Standard & Poor s and Fitch. The issue of Additional Notes issue is guaranteed by Marfrig Global Foods. S.A. and its subsidiary Marfrig Holdings (Europe) B.V. On October 28, 2015, Marfrig Global Foods S.A. announced the conclusion of a cash tender offer for the Senior Notes issued by Marfrig Overseas Ltd., with the principal amount of US$94.5 million of the 2020 Senior Notes, or approximately 12.20% of the notes outstanding, duly offered under the terms of the Joint Tender Offer. The holders of the 2020 Senior Notes tendered received US$ for each US$1, in principal of the notes, which includes the prepayment of US$30.00 plus any accrued and unpaid interest through the settlement date; In April 2016, the Corporation announced the repurchase and cancellation of notes in the aggregate amount of US$10.7 million through purchases made in the market between October 2015 and February In May 2016, based on the conclusion of the eighth operation, the Corporation repurchased the principal amount of approximately US$185.0 million, or 27.62% of the remaining outstanding Notes of the Second Issue. The third operation was concluded in May 2011 and comprised the issue by Marfrig Holdings (Europe) B.V. of US$750 million in Senior Notes, with a coupon of 8.375% p.a., semiannual interest payment beginning in November 2011 and maturity of principal in 7 years (May 2018), which were assigned foreign currency risk ratings of B1 by Moody s and B+ by Standard & Poor s and Fitch. The operation was guaranteed by Marfrig Global Foods S.A. and Marfrig Overseas Limited and the proceeds were used to lengthen the debt profile of the Corporation and to strengthen its working capital ( Third Issue ). On October 28, 2015, Marfrig Global Foods S.A. announced the conclusion of a cash tender offer for the Senior Notes issued by Marfrig Holdings (Europe) B.V, with the principal amount of US$150.8 million of the 2018 Senior Notes, or approximately 20.81% of the notes outstanding, duly offered under the terms of the Joint Tender Offer. The holders of the Senior Notes tendered received US$ for each US$1, in principal of the notes, which includes the prepayment of US$30.00 plus any accrued and unpaid interest through the settlement date; In April 2016, the Corporation announced the repurchase and cancellation of notes in the aggregate amount of US$6.9 million through purchases made in the market between October 2015 and February

87 In May 2016, based on the conclusion of the eighth operation, the Corporation repurchased the principal amount of approximately US$285.2 million, or 50.29% of the remaining outstanding Notes of the Third Issue. The fourth operation was concluded in January 2013 and comprised the issue by Marfrig Holdings (Europe) B.V. of US$600 million in Senior Notes, with a coupon of 9.875% p.a., semiannual interest payments beginning in July 2013 and maturity of the principal in 4.5 years (July 2017), which were assigned foreign currency risk ratings of B2 by Moody s and B+ by Standard & Poor s and Fitch. This operation was guaranteed by Marfrig Global Foods S.A. and Marfrig Overseas Ltd. and the proceeds were used to lengthen the debt profile of the Corporation and to strengthen its working capital ( Fourth Issue ); In connection with the Additional Notes of the Second operation, the Corporation carried out a tender offer to acquire the Bonds of the Fourth Issue maturing in 2017 and the Fifth Issue maturing in Based on the conclusion of this offering, the Corporation repurchased Bonds in the approximate amount of US$72.8 million, or 12.14% of the outstanding Notes of the Fourth Issue. Based on the conclusion of the seventh operation, the Corporation repurchased the principal in the approximate amount of US$371.8 million, or 70.54% of the outstanding Notes of the Fourth Issue. Due to the results of the early repurchase, the Fourth Issue was amended through an additional indenture, providing, among other things, the elimination of practically all covenants from the Indentures; In April 2016, the Corporation announced the repurchase and cancellation of notes in the aggregate amount of US$2.1 million through purchases made in the market between October 2015 and February In May 2016, based on the conclusion of the eighth operation, the Corporation repurchased the principal amount of approximately US$57.5 million, or 37.58% of the remaining outstanding Notes of the Fourth Issue. In July 2016, the Corporation announced the full redemption of the remaining outstanding Senior Notes arising from the Fourth Issue, in the aggregate outstanding amount of US$95.6 million. In August 2016, after the effective payments, the Notes were duly canceled by the Bank of New York Mellon ( Trustee ). The fifth operation was concluded in September 2013 and comprised the issue by Marfrig Holdings (Europe) B.V. of US$400 million in Senior Notes, with a coupon of 11.25% p.a., semiannual interest payments beginning in March 2014 and maturity of the principal in 8 years (September 2021), which were assigned foreign currency risk ratings of B2 by Moody s and B by Standard & Poor s and Fitch. This operation was guaranteed by Marfrig Global Foods S.A. and Marfrig Overseas and the proceeds were used to lengthen the debt profile of the Corporation and to strengthen its working capital ( Fifth Issue ). Also in connection with the Fifth Issue, the Corporation carried out a consent solicitation and tender offer to acquire the Bonds of the First Issue, which mature in 2016; In March 2014, in connection with the Additional Notes of the Second operation, the Corporation carried out a tender offer to acquire the Bonds of the Fifth Issue, maturing in Based on the conclusion of this offering, the Corporation repurchased Bonds in the approximate amount of US$57.1 million or 14.28% of the outstanding Bonds of the Fifth Issue; 70

88 In June 2014, in connection with the Seventh Issue, the Corporation carried out a tender offer together with a consent solicitation, for 2021 Bonds of the Fifth Issue. Based on the conclusion of these offers, the Corporation repurchased a total principal amount of about (i) US$291.5 million, or 85.03% of the outstanding Notes of the Fifth Issue. As a result of the early tender offer, the Fifth Issue was amended through a complementary indenture that set forth, among other things, the elimination of virtually all the covenants in the Indenture. On September 29, 2015, Marfrig Holdings (Europe) B.V. announced the cash tender offer for Senior Notes from the Fifth Issue, in the aggregate principal of US$51.3 million ("Offer I"). On October 28, 2015, Marfrig Global Foods S.A. announced the conclusion of a cash tender offer for the Senior Notes issued by Marfrig Holdings (Europe) B.V, with the principal amount of US$22.2 million of the 2021 Senior Notes, or approximately 43.30% of the notes outstanding, duly offered under the terms of the Joint Tender Offer. The holders of the 2021 Senior Notes tendered received US$ for each US$1, in principal of the notes, which includes the prepayment of US$30.00 plus any accrued and unpaid interest through the settlement date; In April 2016, the Corporation announced the repurchase and cancellation of notes in the aggregate amount of US$1.3 million through purchases made in the market between October 2015 and February The sixth operation was carried out on September 28, 2015, due to the settlement of the transaction governed by the Agreement for the Purchase and Sale of Ownership Interest and Other Covenants dated June 19, 2015, which formalized, among other things, the sale by the Corporation to JBS S.A. of certain rights and ownership interest in companies in its group that owned the Moy Park business unit, the Sixth Issue, together with Additional Notes linked thereto, are no longer recorded on the Corporation's consolidated balance sheet; The seventh operation was carried out in June 2014 and comprised the issue by Marfrig Holdings (Europe) B.V. of US$850 million in Senior Notes, with a coupon of 6.875% p.a., semiannual interest payments starting in December 2014 and maturity of the principal in 5 years (June 2019), which were assigned foreign currency risk ratings of B2 by Moody s and B by Standard & Poor s. This operation was guaranteed by Marfrig Global Foods S.A. and Marfrig Overseas Ltd., with the proceeds used to reduce the cost and lengthen the profile of debt ( Seventh Issue ). On September 29, 2015, Marfrig Holdings (Europe) B.V. and Marfrig Overseas Limited also announced the cash tender offer for Senior Notes from the Seventh Issue ("Offer II") and the Third Issue ( Offer III ), both issued by Marfrig Holdings (Europe) B.V.; and by Marfrig Overseas, for the Second Issue ( Offer IV ), Offer II, Offer III and Offer IV in the total amount of up to US$500 million, with the possibility of increasing the offer by up to US$150 million. Offer I, Offer II, Offer III and Offer IV, jointly referred to as Offers; On October 28, 2015, the Corporation notified the market of the settlement of the Cash Tender Offers for Senior Notes, and total principal amount of R$406.5 million was accepted for acquisition and paid under the terms of the Tender Offers of September 29, 2015 and October 14, Of this amount, the Corporation settled 71

89 US$138.9 million maturing 2019, issued by the subsidiary Marfrig Holdings (Europe) B.V. In April 2016, the Corporation announced the repurchase and cancellation of notes in the aggregate amount of US$50.7 million through purchases made in the market between October 2015 and February The eighth operation was concluded in May 2016 and comprised the issue by Marfrig Holdings (Europe) B.V. of US$750 million in Senior Notes, with a coupon of 8.00% p.a. and yield of 8.25% p.a., semiannual interest payments beginning in December 2016 and maturity of the principal in 7 years (June 2023), which were assigned foreign currency risk ratings of B2 by Moody s and B+ by Standard & Poor s and Fitch. This operation was guaranteed by Marfrig Global Foods S.A. and Marfrig Overseas and the proceeds were used to reduce costs and lengthen the debt profile of the Corporation ( Eighth Issue ). On June 29, 2016, Marfrig Global Foods S.A. announced an additional issue of Senior Notes in connection with the Eighth Issue, in the aggregate amount of US$250 million. The Additional Notes due on June 8, 2023 were issued with yield of 7.625% p.a. and were assigned foreign-currency credit-risk ratings of B2 by Moody s and B+ by Standard & Poor's (S&P) and Fitch, both with a positive outlook. The transaction carried out in late June was settled in July Guarantees for loans and financing: Parent Consolidated 12/31/16 12/31/15 12/31/16 12/31/15 Balance of financing 1,081, ,798 10,893,838 11,885,300 Guarantees: Promissory notes 195, , , ,672 Trade notes 42,978 65,243 42,978 65,243 Bank guarantee 104, ,719 - Surety 339, , , ,860 Leased asset Export document ,843 83,065 Facilities - 1,855-90,658 Marketable securities 5,358 8,745 5,358 8,745 Mortgage ,752 50,801 No guarantees 394, ,786 9,938,422 11,042, Covenants The loan agreements are ruled by covenant of 4.75 times, in its most restrictive form, in relation to consolidated indebtedness level, as maximum quotient of Net Debt/annualized (last 12 months) EBITDA ratio. The schedule of maturities is presented in note

90 The penalty for breach of this covenant is the same as generally applied in the financial markets, which is the early maturity of the debt, which is then reclassified as current liabilities. The leverage ratio is calculated as follows: 12/31/16 Consolidated gross debt 11,150,401 (-) Consolidated cash and cash equivalents 5,278,641 Consolidated net debt 5,871,760 LTM EBITDA in the year ended December 31, ,574,529 EBITDA ratio 3.73 Consolidated net debt 5,871,760 (-) Effect from exchange variation (carve-out) 2,094,275 Consolidated adjusted net debt 3,777,485 Leverage ratio 2.40 In accordance with note 35.6 Capital Management, due to the contractual provisions (carve-out) that allow the exclusion of foreign exchange variation effects from the calculation of leverage ratio (net debt/ebitda LTM), the Corporation clarifies that based on this methodology, the current leverage ratio (net debt/ebitda LTM) stood at 2.40x. 21. Debentures payable and interest on debentures Parent Consolidated 12/31/16 12/31/15 12/31/16 12/31/15 Debentures payable 570, , (-) Cost with debenture issue (65) (124) - - Interest on convertible and non-convertible debentures 343, , , ,789 (-) Withholding income tax on debenture interest (45,276) (51,982) (45,276) (51,982) 867, , , ,807 Current liabilities 297, , , ,807 Current Liabilities - Interest on debentures 569, , The Corporation, with assistance from its financial advisors, structured during the second quarter of 2013, an issue of non-convertible debentures maturing on January 22, 2019 in the amount of R$570,000. This operation formalized the process of internalizing a portion of the financial resources derived from the Senior Notes issued by its subsidiary Marfrig Holding Europe BV in January The operation was structured in such a way as to not affect the Corporation s consolidated statements. The Corporation does not have a renegotiation clause for the debentures, and therefore it does not believe on the need to report the information required under item of Circular Letter/CVM/SNC/SEP no. 01/07 in the notes to the financial statements. Interest due on mandatorily convertible debentures was also accrued as per note

91 Debt, debentures and interest on debentures were as follows: Local currency 12/31/16 12/31/15 12/31/16 12/31/15 Loans and financing 388, , , ,606 Interest on debentures 297, , , ,807 Debentures payable 569, , Foreign currency Parent Consolidated 1,256,216 1,397, , ,413 Loans and financing 693, ,897 10,486,654 11,310, , ,897 10,486,654 11,310,694 1,949,781 1,781,788 11,150,401 12,122,107 Loans and financing fall due and pay interest as follows: Parent Consolidated 12/31/16 12/31/15 12/31/16 12/31/ ,455-2,009, ,120, ,604 1,454,602 1,011, ,933 48,827 1,221,747 2,330, , ,889 2,131,263 2,591, ,906,145 3,215, , , ,205, , ,146, Total 1,949,781 1,781,788 11,150,401 12,122, Lease payable The Corporation is a lessee in various agreements, classified as operating or finance leases Finance lease According to NBC TG 06/R2 (CVM Resolution 645/10) commercial leasing, finance lease operations are now recognized under the Corporation s current and non-current liabilities, with an offsetting entry of the leased asset recorded in property, plant and equipment, according to note 14, while financial leasing operations are guaranteed by the leased assets themselves: 74

92 Parent Credit facility Charges (% p.a.) Weighted average interest rate (p.a.) Weighted average maturity (years) Balance on 12/31/16 Future payments 12/31/16 Balance on 12/31/15 Domestic currency Finance lease of vehicles CDI + Rate 13.53% Finance lease of IT equipment CDI + Rate 16.70% 1.2 4,336 4,034 10,359 Finance lease of machinery and equipment CDI + Rate 13.50% ,375 Interest payable (887) - (2,201) Finance lease - discount to present value (312) - (1,163) Total domestic currency 3,472 4,358 8,777 Total Parent Company 3,472 4,358 8,777 Current liabilities 2,808 5,491 Non-current liabilities 664 3,286 Consolidated Credit facility Charges (% p.a.) Weighted average interest rate (p.a.) Weighted average maturity (years) Balance on 12/31/16 Future payments 12/31/16 Balance on 12/31/15 Domestic currency Finance lease of vehicles CDI + Rate 13.53% Finance lease of IT equipment CDI + Rate 16.70% 1.2 4,336 4,034 10,359 Finance lease of machinery and equipment CDI + Rate 13.50% ,375 Interest payable (887) - (2,201) Finance lease - discount to present value (312) - (1,163) Total domestic currency 3,472 4,358 8,777 Foreign currency Finance lease of machinery and equipment Rate 3.35% ,024 41,286 52,909 Total foreign currency 35,024 41,286 52,909 Total Consolidated 38,496 45,644 61,686 Current liabilities 11,936 38,166 Non-current liabilities 26,560 23,520 According to NBC TG 12 (CVM Resolution 564/08) present value adjustment, finance lease payable was discounted to present value, at the initial recognition date, as described in note to the financial statements for the fiscal year ended December 31,

93 Lease contracts fall due as follows: Domestic currency Parent Consolidated 12/31/16 12/31/15 12/31/16 12/31/15 Up to one year 2,808 5,491 2,808 5,491 From one to five years 664 3, ,286 Total domestic currency 3,472 8,777 3,472 8,777 Foreign currency Up to one year - - 9,128 32,674 From one to five years ,896 20,235 Total foreign currency ,024 52,909 Total 3,472 8,777 38,496 61,686 The schedule for future payments of the finance lease is as follows: Parent Consolidated 12/31/16 12/31/15 12/31/16 12/31/15 Domestic currency Up to one year 3,516 6,814 3,516 6,814 From one to five years 842 4, ,165 Total domestic currency 4,358 10,979 4,358 10,979 Foreign currency Up to one year ,139 34,621 From one to five years ,147 21,678 Total foreign currency ,286 56,299 Total 4,358 10,979 45,644 67,278 76

94 22.2. Operating lease Operating lease as at December 31, 2016 is as follows: Parent Financial institution Leased asset Start date Weighted average interest rate (p.a) Weighted average maturity (years) Total amount leased Expense at 12/31/16 Local currency LEONI EMPREEND IMOBIL Meatpacking plant 1/1/2014 IGP-M year 3.0 2, BRASIL FOOD SERV. GROUP.SA BFG Meatpacking plant 10/1/14 IGP-M year ,848 13,906 URUPA IND E COM DE ALIM LTDA Meatpacking plant 10/1/15 IGP-M year ,800 3,960 TOTAL S/A Meatpacking plant 7/1/216 IGP-M year ,860 8,409 Total local currency 199,028 26,803 Foreign currency AVN AIR LLC Aircraft 12/1/ % 1.8 7,823 1,151 Total foreign currency 7,823 1,151 Total local and foreign currency 206,851 27,954 Consolidated Financial institution Leased asset Start date Weighted average interest rate (p.a) Weighted average maturity (years) Total amount leased Expense at 12/31/16 Local currency LEONI EMPREENDIMENTOS IMOB. Meatpacking plant 1/1/14 IGP-M year 3.0 2, BRASIL FOOD SERV. GROUP.SA BFG Meatpacking plant 10/1/14 IGP-M year ,848 13,906 URUPA IND E COM DE ALIM LTDA Meatpacking plant 10/1/15 IGP-M year ,800 3,960 TOTAL S/A Meatpacking plant 7/1/16 IGP-M year ,860 8,409 Total local currency 199,028 26,803 Foreign currency AVN AIR LLC Aircraft 12/1/ % 1.8 7,823 1,151 Bank of America Aircraft 4/15/ % ,032 7,381 Ford Motor Credit CO. Vehicles 7/28/ % Sundry leasers Property 11/5/16 Fixed term ,182 20,467 Sundry leasers Machinery and Equipment 12/22/16 Fixed term ,691 29,599 Sundry leasers Vehicles 12/25/16 Fixed term ,438 6,064 Total foreign currency 477,379 64,866 Total local and foreign currency 676,407 91,669 77

95 The balance of the operating lease payable falls due as follows: Parent Consolidated 12/31/16 12/31/16 (at present value) (at present value) Domestic currency Up to one year 23,294 23,294 From one to five years 66,401 66,401 Total domestic currency 89,695 89,695 Foreign currency Up to one year 1,190 70,313 From one to five years ,120 Over 5 years - 38,083 Total foreign currency 2, ,516 Total 91, ,211 The operating leases the Corporation enters into have no restrictions or contingencies, follow market practices and include, in some cases, price adjustment clauses during their effective term. The value of the leased assets is calculated at total definitive cost, which includes costs of transportation, taxes and documentation. Finance lease obligations are calculated on the total definitive cost, by applying a predefined percentage for each agreement. In the event of termination, the lessor will have the option of cumulatively: (i) unilaterally cancelling all rights arising from the lease agreement; (ii) claiming the return of the leased goods; and (iii) accelerating the maturity of the lease agreement. In that case, the lessee undertakes to pay unsettled debts, including installments overdue and falling due, besides possible outstanding expenses, taxes and charges, plus a fine of 10% on the debt balance. The lessee, without prejudice to the lessor, may file a claim for damages. In relation to the renewal option, the lessee should previously communicate their intention to renew the lease agreement, otherwise the renewal is automatic, the conditions of which should be agreed upon between the parties. In the event the parties do not reach an agreement, the lessee should opt for purchasing the goods at market value or returning them. 78

96 23. Notes payable Parent Consolidated 12/31/16 12/31/15 12/31/16 12/31/15 Notes payable for investments in Brazil (a) 431, , , ,692 Notes payable - Sponsorships (b) - 50,000-50,000 Market transactions payable (c) 314, , , ,418 Related parties (d) 8,780,070 9,369, Trade payables divestment (e) ,525 Other 23,788 29,787 24,165 34,484 9,549,257 10,402, ,868 1,255,119 Current liabilities 306, , , ,645 Non-current liabilities 9,243,201 10,212, , ,474 (a) The amount refers primarily to the acquisition of all shares in Mercomar Empreendimentos e Participações Ltda., as described in Note (b) On March 8, 2010, the Corporation signed a sponsorship agreement with the Brazilian Football Confederation (CBF) to sponsor the Brazilian football teams, including men s and women s national association football teams administered by the CBF ( Teams ). The agreement allowed the disclosure of the sponsorship of the Teams through display and associations of various brands owned by MARFRIG. Said contract was terminated early and the parties are discussing in court the terms of said termination. In 2016, this amount was reclassified to provision for civil claims, as described in Note (c) In the note 35, we break down financial instrument operations practiced by the Corporation. The Corporation and its subsidiaries are subject to market risks related to foreign exchange variations, interest rates fluctuations and commodities prices variations. These represent the amount of derivatives payable. (d) The breakdown of balance can be seen in note (e) The amounts refer to price adjustment in the sale of Moy Park Group, as described in note The amount of US$25 million (R$84 million) was disbursed during the year. 24. Mandatory deed convertible into shares Parent Consolidated 12/31/ /31/15 12/31/ /31/15 Convertible mandatory deed 2,150,000 2,150,000 2,150,000 2,150,000 Cancelation of debentures (450) (450) (450) (450) Issue expenses (58,421) (50,832) (58,421) (50,832) Amortization of issue expenses 56,263 31,002 56,263 31,002 2,147,392 2,129,720 2,147,392 2,129,720 79

97 According to the Indenture for the Second Issue of Debentures Convertible into Shares of (Mandatory Deed) Marfrig Global Foods S.A., the Corporation issued two hundred and fifty thousand (250,000) debentures, mainly convertible into shares, with unit par value of R$10, amounting to R$2,500,000. The Mandatory Deed was issued on July 15, 2010 through private subscription, with maturity within 60 months, annually restated at the interest rate at 100% of the accumulated variation of average interbank deposit rates of a day, plus spread of one per cent (1%). Remuneration of the Mandatory Deed is recognized as current liabilities and collateralized by a bank guarantee provided by Banco Itaú BBA S.A. All two hundred and fifty thousand (250,000) debentures were subscribed on various dates during, and the main debenture holder is BNDES Participações S.A. As defined in said Indenture and except for the cases of voluntary conversion, the conversion price will be lower than the following items: (i) R$21.50, plus the percentage of interest paid to debenture holders over the par value of the issues, less earnings distributed to each share, both restated at CDI as from the actual payment, in the case of interest on debentures, or the date of debentures less earnings, in the case of earnings, until the conversion date; and (ii) the higher between the market price and R$24.50, the latter without adjustment for earnings in cash or monetary restatement. The Corporation, based on the essence of the operation (equity) and on the characteristics thereof, initially recorded the Mandatory Deed (principal) as Capital Reserve, under Shareholders' Equity. However, the Securities and Exchange Commission of Brazil (CVM), through Official Letter CVM/SEP/GEA-5/no. 329/2012 dated October 10, 2012, stated its opinion of this instrument and ordered: (i) the accounting reclassification of the Mandatory Deed; and (ii) the re-filing of the 2011 financial statements with comparisons to the 2010 financial instatements. The Corporation abided by the order of the CVM, proceeding with the full reclassification of the Mandatory Deed to the specific accounting line non-current liabilities. The previous method of accounting was based on accounting and legal opinions issued specifically regarding this matter. Said reclassification does not affect any terms and conditions of the Mandatory Deed and there is no effect on the financial indebtedness of the Corporation, on the servicing of its debt or on its financial covenants, since, unlike others items under the liabilities of the Corporation, the Mandatory Deed may not be liquidated into cash or cash equivalents, but only into common shares issued by the Corporation. The Corporation spent R$12,328 to issue the Mandatory Deed, which was initially recorded as a valuation allowance to the Capital Reserve account. The surety was renewed annually bringing the expenses with the issue of the Mandatory Deed to R$41,180 on June 30, These expenses were also reclassified under non-current liabilities, as a deduction from the account Mandatory Deed Convertible into Shares. As determined by the Corporation, the value started to be amortized on a monthly basis. Because of the paying in of such debentures made by BNDES Participações S.A., MMS Participações Ltda. and BNDES Participações S.A. have entered into a Shareholders' Agreement with the purpose of regulating the relationship between the parties as shareholders of Marfrig Global Foods S.A. 80

98 On February 5, 2013 the Corporation conducted a capital increase, within the authorized limit due to the conversion of thirty-five thousand (35,000) debentures from the 2 nd Issue of Convertible Debentures of the Corporation that were held by BNDES Participações S.A. BNDESPAR into forty-three million and seven hundred fifty thousand (43,750,000) common shares issued by the Corporation, in accordance with Item III of the Private Deed of the 2 nd Issue of Debentures Convertible Into Shares of Marfrig Global Foods S.A. that was entered into by the Corporation and Planner Trustee DTVM Ltda. on July 22, 2010, and as per the Material Fact published on October 24, The Shares resulting from the conversion have the same characteristics and conditions and enjoy all of the same rights and advantages ascribed by law and by the bylaws that are attributed to the existing common shares issued by the Corporation. As a result of the abovementioned conversion of debentures, there was a material increase in the ownership interest held by the shareholder BNDESPAR, which now holds common shares representing 19.63% of the Share Capital of the Corporation. On January 6, 2014, the Board of Directors of the Corporation approved the submission to the Meeting of Shareholders of the proposal for Fifth (5 th ) Issue of Unsecured Convertible Debentures in a Single Series in the aggregate amount of R$2,150,000 (5 th Issue of Convertible Debentures of the Corporation). On January 22, 2014, the shareholders of the Corporation, assembled in an Extraordinary Shareholders' Meeting, approved said Firth Issue of Convertible Debentures of the Corporation in the aggregate amount of R$2,150,000, in a single series, upon the issue of 215,000 thousand debentures at the unit face value of R$10, restated by an interest rate corresponding to 100% of the cumulative variation in the average overnight rate for one day, plus a spread of one percent (1%). The interest is paid annually on the following dates: January 25, 2015, January 25, 2016; with the last payment date coinciding with the maturity date, on January 25, The Fifth Issue had the objective, within the limits of its indenture, of fully redeeming the debentures of the Second Issue of Convertible Debentures of the Corporation. Likewise, the debentures of the Fifth Issue of Convertible Debentures of the Corporation are mandatorily convertible into shares of the Corporation on the Maturity Date, with the conversion price corresponding to the lowest of the following amounts: (i) R$21.50, restated annually by an interest rate corresponding to the overnight rate plus one percent (CDI+1%), less any and all payments received by shareholders (dividends or interest on equity); or (ii) the highest between the market price, as defined in the indenture as the weighted average market price of MRFG3 stock quoted in the spot market of the BM&FBovespa in the sixty (60) trading sessions immediately prior to the conversion date, and R$21.50 (without adjustment for cash dividends or monetary restatement). On March 17, 2014, the Corporation released a Notice to the Market announcing the conclusion of the issue and subscription of its Fifth Issue of Convertible Debentures, with the subscription of 214,955 Debentures, with unit face value of R$10, as per the information received from the agent bank Itaú Unibanco S.A., and that 45 unsubscribed debentures were canceled by the Corporation. 81

99 On March 28, 2014, the Corporation published a Notice to the Market informing that, as decided in the Meeting of Debenture Holders of the Second Issue of Convertible Debentures of the Corporation, held on January 22, 2014, of a total of 215,000 debentures of the Second Issue: a) 214,900 were used by the respective debenture holders to pay up the debentures of the Fifth Issue of Convertible Debentures of the Corporation; and b) 100 outstanding debentures were fully redeemed, on the date hereof, which resulted in the cancelation of all 215,000 debentures of the Second Issue of Convertible Debentures of the Corporation and the consequent conclusion of said Second Issue of Debentures. Lastly, on January 25, 2017, the mandatory deeds held by BNDES were fully converted, as per Note Tax, labor and civil contingencies 25.1 Provisions The Corporation and its subsidiaries are involved in several civil, administrative, tax, social security and tax proceedings, in the ordinary course of business, for which provisions based on legal counsel s estimates have been set up. The principal information about these proceedings is presented below: Parent Consolidated 12/31/16 12/31/15 12/31/16 12/31/15 Labor and social security 42,292 30,422 52,931 31,321 Tax 1,758 1,758 1,758 1,758 Civil 32,941 13,109 33,050 13,140 76,991 45,289 87,739 46,219 The following table shows the changes in provisions in the year ended December 31, 2016: Parent Consolidated Labor and social security Tax Civil Total Labor and social security Tax Civil Total Balance on December 31, ,422 1,758 13,109 45,289 31,321 1,758 13,140 46,219 Addition ,000 50,000 25,736-50,123 75,859 Reversal (8,228) - (30,213) (38,441) (8,228) - (30,213) (38,441) Gain/loss from translation Reversal due to divestment , ,579 Merger of subsidiary 20, , Balance on December 31, ,292 1,758 32,941 76,991 52,931 1,758 33,050 87,739 82

100 Labor and social security As at December 31, 2016, the Corporation and its subsidiaries are parties to various labor claims. Based on the Corporation s and its subsidiaries payment history, a provision of R$52,931 was set up. In the opinion of the Management and legal counsel, this provision is sufficient to face probable losses. Most of the labor claims filed against the Corporation and its subsidiaries refer to matters usually questioned in this industry, such as dismissal for just cause, preparation time, breaks for personnel who work in refrigerated environments, commuting time and ergonomic risk, among others. The Management of the Corporation believes no individual labor claim is relevant Tax The Corporation accrues provisions for tax contingencies as a reserve for risks not incurred in the amount of R$1, Civil Based on the opinion of legal advisors, the Management recognized on December 31, 2016 a provision for the amount of shares considered to be of probable risk, totaling R$33,050. The civil suits of the Corporation and its subsidiaries involve disputes typically related to business agreements and indemnities. The early terminations include the agreement for sponsorship of the Brazilian National Football Teams entered into with the Brazilian Football Confederation (CBF) Contingent Liabilities Contingent liabilities, which are not recorded in the books of account, according to prevailing legislation, are shown below: Parent Consolidated 12/31/16 12/31/15 12/31/16 12/31/15 Labor and social security 223,074 95, , ,637 Tax 1,416, ,409 1,418,198 1,076,778 Civil ,640,027 1,077,216 1,644,698 1,201, Labor and social security The labor and social security lawsuits in which the Corporation and its subsidiaries are parties typically involve issues usually claimed in the segment, such as dismissal without cause, preparation time, breaks for persons working in refrigerated environments, overtime, ergonomic hazards and others, which are individually insignificant. 83

101 Tax The main tax matters discussed at court that in the opinion of the Management and legal counsel are rated as possible losses for the Corporation and its subsidiaries is presented below. a) Federal Taxes and Contributions As at December 31, 2016, the Corporation was a party to administrative proceedings and court claims filed by the Federal Government at the total historical value of R$681,471, claiming: (i) (ii) Deduction of ICMS from PIS and COFINS tax bases. This last lawsuit refers to a refund request at the historical value of R$68,552, for which a provision was not accrued, given that according to the opinion of the legal counsel, they are considered only possible losses. The Corporation has filed administrative defenses that are pending final judgments and allege non-enforceability due to miscalculation of their tax bases, and that inspectors estimated the amounts according to assumptions; Income and Social Contribution Taxes due to measurement of profits of foreign subsidiaries at the historical amount of R$37,279, which is the subject-matter of the administrative defense under the allegation of failure to comply with the accrual basis principle, the non-constitutionality of law provision (Article 74 of Provisional Measure /2011) and infringement of dual taxation treaties signed by Brazil, where also no provision was recorded in view of the possible chance of loss; (iii) Income and Social Contribution Taxes - Failure to accrue in net income when determining the taxable base, as well as in the CSLL calculation base, the income from branches, subsidiaries or affiliated companies determined for fiscal year 2008 in the historical amount of R$38,094. An administrative defense was presented. It is important to note that because this does not involve a tax credit, but rather the disallowance of a tax loss and negative calculation base for CSLL, the effect on deferred assets is the amount indicated in the proceeding; (iv) (v) (vi) No increase in taxable income and CSLL base for profits earned abroad in calendar year 2009, disallowance of goodwill amortization and non-subjection to tax of interest from loan agreements in force with subsidiaries abroad, in the historical amount of R$83,910. An administrative defense was submitted. Disallowance of the negative balance of income tax (IRPJ) for 2008, with partial approval of the offsets made, due to the non-recognition of a portion of the credit a debit was created in the historical amount of R$24,980, against said disallowance a statement of nonconformance was presented so that the entire credits of the Corporation could be recognized; Disallowance of the negative balance of income tax (IRPJ) for 2007, whose disallowances of offsets make up a debit in the historical amount of R$37,337, which arose from the supposed utilization of improper credit to settle the monthly estimates of the elements that cause the negative balance; 84

102 (vii) Disallowance of amounts deducted from the calculation base of income and social contribution taxes as interest on equity, and disallowance as RTT of the amounts "adjustment to present value," "share issue expenses,, goodwill amortization, biological assets, financial transaction costs and business combination, in the historical amount of R$84,633; (viii) The Corporation has a tax deficiency notice related to the requirement of additional contribution to SENAI in the historical amount of R$689. Said action is awaiting analysis of the appeal and export report presented by the company; (ix) (x) (xi) The Corporation has a tax deficiency notice related to the requirement of additional contribution to SENAI in the historical amount of R$1,213, for alleged error in taxing the activities of its establishments; The Corporation has a tax deficiency notice in the amount of R$1,487 filed due to alleged insufficient non-cumulative credits of PIS/Cofins taxes in domestic and export markets (first quarter of 2010 to second quarter of 2011), to cancel the PIS/Cofins dues declared in Dacon. The objection submitted required the suspension of judgment of the objection until the final analysis of each of the reimbursement requests, which will prove the existence of credits; The Corporation has administrative proceedings associated with federal tax credits offset against social security debts, in the amounts of R$7,144 and R$2,659, respectively. The companies are party to a court action discussing their right to the offset; (xii) The Corporation and its subsidiary Pampeano have federal tax debts, whose collection suits are individually immaterial, totaling R$142,460; (xiii) The Corporation is facing Tax Foreclosure that seeks to collect social security debt for the period from December 2013 to November 2014, in the historical amount of R$147,233. Despite the proceeding, there is a request for settlement of the debt through the use of tax credits based on a decision made in a specific legal claim, which recognized this right, and a portion of the liabilities that form such foreclosures (services rendered by cooperative members through work cooperatives and FUNRURAL) cannot be recorded as overdue tax liabilities, since a final and unappealable decision has already been granted in favor of the companies regarding the liabilities related to the services contracted from the cooperative, while other rulings have also required the suspension of collections related to FUNRURAL; (xiv) The Corporation is party to Federal Tax Foreclosure, in the historical amount of R$3,801, in which it was attributed joint and several liability for the alleged succession, regardless of the discussion of succession, there is a preliminary discussion regarding the time-barring of the Treasury right to redirect the demand against Marfrig. The Corporation joined the tax installment payment program envisaged by Law 12,996/14, which reopened the period for joining the tax installment payment program provided for by Law 11,941/09, granting the prerogative to taxpayers that pay their overdue debits in installments by December 31, 2013 World Cup REFIS. The following debits were subject to such installment payments: i) social security contributions, ii) arising from settlements not ratified; and iii) Import 85

103 PIS/COFINS, whose amounts are mentioned in note 19 Taxes, rates and contributions. Said adhesion was made effective with tax credits approved and available, which were duly backed by a court ruling on September 30, Pampeano also adhered to the installment payments program provided for by Law 12,966/14, which reopened the period for joining the tax installment payment program provided for by Law 11,941/09, granting the prerogative to taxpayers who pay their overdue debits in installments by December 31, 2013 World Cup REFIS. Debits subject to the adhesion refer to social security contributions, whose amounts are mentioned in note 19 Taxes, rates and contributions. b) State VAT ICMS On December 31, 2016, the Corporation had administrative proceedings, and court claims in the historical amount of R$736,007, claiming the following: (i) (ii) The discussions on ICMS involving the Corporation in administrative proceedings filed by the Finance Departments of the States of São Paulo, Goiás, Bahia, Rio Grande do Sul, Rondônia and Ceará that question the credits from the transfer of goods, the allocation of presumed tax credit arising from slaughtering activities, non-fulfillment of ancillary obligations, wrong issuance of invoices, credit granted and non-payment of ICMS ST, claimed credit of ICMS in the acquisition of beef cattle from another state, lack of proof of export of goods, which amount to the historical value of R$60,161. Of this amount, R$13,226 was the subject of a court claim related to the credit granted by the State Government of São Paulo, praying for interlocutory relief against its enforceability; The Corporation is challenging the collection imposed for the lack of supporting documentation to prove the entrance of goods through the Free-Trade Zone of Manaus, at the historical value of R$969. (iii) In the State of Mato Grosso, the actions refer to the disregard of the tax regimen established with the State, the absence of issuance of electronic invoice, irregular issue of tax document and export evidence corresponding to R$3,751. (iv) (v) The most significant proceedings regarding ICMS were filed by the Finance Department of the State of São Paulo claiming amounts related to deemed credit taken on transfer invoices of goods sent by the branches located in the states of Mato Grosso do Sul and Goiás to the branches in the State of São Paulo, that is, a "Tax War. The assessed amounts correspond to the difference between the amount separately identified in the goods receiving documents at the distribution center and that paid to the State of origin. The total historical amount claimed in these proceedings is R$547,048; The Corporation has a Tax Deficiency Notice regarding the charge of ICMS debits, issued by the Tax Authority of the State of São Paulo for alleged non-payment of ICMS-ST for inbound goods acquired from rural agricultural producers, submission of GIA with incorrect information, alleged undue credits granted in a higher amount than that established by law, failure to reverse ICMS credits arising from exempt shipments and non-payment of ICMS for exports outside the period set by law, in the historical amount of R$6,013; 86

104 (vi) It also received Tax Deficiency Notices discussing the collection of ICMS debts filed by the Finance Departments of the state of Rondônia related to the disallowance of ICMS credits in view of breach of an ancillary obligation, error in determining the ICMS calculation base, not including freight in the ICMS calculation base in the amount paid for transport services, circulation of goods with invoice considered questionable, non-compliance with the minimum price in the state and omission of the ICMS declaration in the Periodic Tax Statement (DIP), all of which led to the tax collection notice for the historical amount of R$347; (vii) Tax Deficiency Notices discussing the collection of ICMS taxes in the state of Goiás related to the disallowance of ICMS tax credits due to noncompliance with accessory obligations, error in the basis for calculation of the value due in ICMS taxes, failure to return credits granted after goods were returned, failure to return ICMS credits on the acquisition of inputs/goods proportionally to disbursements, failure to substantiate exports of goods abroad, which amount to a historical amount of R$117,706; (viii) The subsidiary Pampeano has a Tax Deficiency Notice involving the collection of ICMS debts filed by the Finance Department the State of Rio Grande do Sul, related to the collection of ICMS debts for the alleged issue of invoice without declaring the ICMS in the outflow of goods from that state, in the historical amount of R$12. c) Taxes on Services of Any Nature (ISSQN) On December 31, 2016, the Corporation had tax deficiency notices issued by the municipalities of Santo André in São Paulo and of Mineiros in Goiás claiming the payment of ISSQN related to the alleged retention and nonpayment of the respective tax credit levied on the provision of services received, in the historical amount of R$ Civil The civil suits of the Corporation and its subsidiaries involve disputes typically related to business agreements and indemnities, which are not individually relevant Additional Information on Contingent Liabilities Remote Risk On December 31, 2016 the Corporation, based on the opinion of its Management and legal advisors, classified the amount of R$237,061 as Remote Risk, not including it in the balance informed in note 25.2 Contingent Liabilities Tax. (i) Contributions destined to Social Security to FUNRURAL and GIRALT, three deficiency notices, the first related to 2006 and 2007, the second related to 2008 and the third related to 2009 and 2010, at the historical amount of R$237,061, all of which already were the subject of an administrative defense alleging the nonconstitutionality of said contribution based on the Federal Supreme Court s decision, the application of which at the administrative level is supported by Article 26 A of Decree 70,235/72; 87

105 (ii) With regard to federal administrative and judicial proceedings deemed as remote risk, as described earlier in note 22.3 for the period ended June 30, 2014, the Corporation and its subsidiary MFB joined the tax installment payment program instituted by Law 12,966/14, which reopened the period for joining the tax installment payment program provided for by Law 11,941/09, granting the prerogative to taxpayers that pay their overdue debits in installments by December 31, 2013 World Cup REFIS. The debits subject to adhesion refer to social security contributions and Import PIS/COFINS, whose amounts are mentioned in note 19 - Taxes, rates and contributions Ongoing investigations a) Operation Acrônimo For Operation Acrônimo, the Corporation has provided all information required by the authorities and has been accompanying the ongoing police investigation, and to date no formal accusations, criminal charges or information have been filed against any officers or directors. The internal Compliance Department has assessed the facts and documents related to the merit of the investigation and has concluded that no irregularities occurred in the acts for which the Corporation is being investigated. Despite such findings, the Corporation offered to collaborate with the Federal Police and with Federal Prosecution Office to clarify the facts and provide any information/documents that may be required. b) Operation Cui Bono With regard to Operation Cui Bono, the Corporation also has been collaborating with the Federal Prosecution Office (MPF) and with other federal authorities to clarify the facts cited in the police investigation into the matter, and to date the authorities have not filed any charges and/or information against any of its officers or directors. The internal Compliance Department has opened an internal investigation to assess the existence or not of the matters cited in the investigation. Furthermore, the Corporation clarifies that it publishes and monitors the application of its Code of Ethics and Conduct, which contains guidelines for corporate conduct, and reaffirms that it does not tolerate the practice of any crimes or wrongdoings of any kind by any of its officers, directors, employees, suppliers or partners. 26. Deferred Income and Social Contribution Taxes Liabilities Consolidated 12/31/16 12/31/15 Income Tax 269, , , ,683 Deferred income tax liabilities refer to the taxes calculated on temporary differences, as well as translation gains and losses recognized as deferred tax liabilities resulting from the translation of balances into foreign currencies other than the Corporation s functional currency, which are recorded at the foreign subsidiaries and settled in future fiscal years. 88

106 Below are the changes in deferred taxes in the year ended December 31, 2016: Consolidated Description IRPJ CSLL Balance on December 31, ,683 - Deferred taxes on temporary differences 62,879 - Reversal of deferred taxes on temporary differences 3,862 - Other (7,589) - Translation gains/losses (84,219) - Balance on December 31, , Shareholders equity 27.1 Share capital Subscribed and paid-in share capital as at December 31, 2016 totals R$5,278,127 and is represented by 521,300,754 common shares without par value (R$5,276,678 as of December 31, 2015, represented by 520,747,405 shares). Under the scope of the primary public offering of common shares of the Corporation in December 2012, a total of 131,250,000 common shares were issued at the aggregate subscription price of R$1,050,000, as per the minutes of the meeting of the Board of Directors held on December 10 and 21, As per the Minutes of the Board of Directors Meeting held on July 30, 2012, a total of 1,236,549 registered common shares, previously held in treasury, were canceled. Based on NBC TG 08 (CVM Resolution 649/10) transaction costs and premium on issue of securities, the Corporation recorded under shareholders equity the costs incurred with the processes of funding (R$108,210) through public share offering and private share issue. On February 5, 2013, the Corporation carried out a capital increase, within the authorized limit, in a Meeting of the Board of directors, due to the conversion of thirtyfive thousand (35,000) debentures from the 2 nd Issue of Convertible Debentures of the Corporation that were held by BNDES Participações S.A. (BNDESPAR) into 43,750 million common shares ( Shares ) issued by the Corporation, as explained in note 24. In 2016, the Corporation conducted capital increases involving the issue of 553,349 new shares, in the aggregate amount of R$1,449,038, to meet the needs of the stock option plan in effect ( Stock Options ). Pursuant to the Corporation s by-laws, at the discretion of the Board of Directors, Share Capital can be composed of up to 630 million common shares, including share capital, regardless of amendments to the by-laws. Also at discretion of the Board of Directors, the Corporation can issue shares and debentures convertible into shares or subscription warrants without pre-emptive rights or with the period reduction provided for in paragraph 4 of article 171 of Law No /76. Their placement should be made through sale on stock exchange or public subscription, or by means of exchange for shares in a public offering for control acquisition, under the terms of the law and within the limit of authorized capital. The Board of Directors defines issuance conditions (prices and periods). 89

107 The call option of shares, the conditions under which shareholders will have preemptive rights to subscription, or the inexistence of such right in relation to Management, employees, or individuals who render services to the Corporation or other companies under its control are presented in note On January 26, 2017, Marfrig Global Foods informed its shareholders and the general market that, due to the final maturity of the convertible debentures on January 25, 2017, the 214,955 debentures were converted into 99,979,068 common shares, in accordance with Note Income reserves Legal reserve It is 5% (five per cent) of the Corporation s net income, as defined in its by-laws and current legislation. In 2016 and 2015, the Corporation did not recognize legal reserve given that it recorded loss. Accordingly, the balance as of December 31, 2016 remained at R$44, Treasury shares Share buyback program Shares repurchased were held in treasury for exercise of stock options by the beneficiaries of the Corporation's Stock Option Plan and/or subsequent cancellation or sale. In the year ended December 31, 2016, there was no ongoing share buyback program and Marfrig did not acquire any shares. Treasury shares On December 31, 2016, Marfrig held one thousand, two hundred eighty-one (1,281) common shares in treasury, which were booked at the amount of R$12 thousand, which corresponds to an average cost of nine reais and forty-five centavos (R$9.45) per share. Changes in treasury shares in the year are shown in the table below: Held in Treasury Number of Shares Value (R$ '000) Balance as at 12/31/ , (-) Disposal - Stock options (57,269) (542) Balance as at 12/31/2016 1,

108 27.3 Other comprehensive income Asset and liability valuation adjustment This account recognizes, before being recorded in the statement of operations, corresponding entries of increases or decreases in the amount attributed to asset and liability items arising from their adjustment to market price on investments in subsidiaries directly and indirectly held by the Corporation. Such accumulated effect will be transferred to the statement of operations for the year as gain or loss only upon the disposal or write-off of the investment. This account also recognized the effects from the adoption of deemed cost, transactions hedging the interest rate risk of the parent company and the impact of its subsidiaries and currency differences in the translation of transactions abroad Cumulative translation adjustment This account records exchange rate gains (losses) resulting from the translation of the foreign subsidiaries interim financial statements. The investee s functional currency is different from that of the Corporation Amounts under Shareholders Equity related to assets held for sale In compliance NBC TG 31/R3 (CVM Resolution 598/09) Non-Current Assets Held for Sale and Discontinued Operation, the Corporation segregated from the balance of other comprehensive income recorded in its shareholders equity the amounts related to assets held for sale Dividends payable The Corporation s mandatory dividend is at least 25% of the adjusted net income determined in the Corporation s financial statements, pursuant to Brazilian Corporate Law and the Corporation s by-laws. The annual statement of dividends, including their payment, in addition to mandatory minimum dividends, are approved at an Annual Shareholders Meeting by majority voting of Marfrig s shareholders and will depend on various factors. Among these factors are the Corporation s operating results, financial conditions, cash needs, future prospects and others which Marfrig s Board of Directors and shareholders deem relevant. At a meeting held on February 22, 2017, in view of the net loss recorded in the period, the Board of Directors did not submit to the Annual Shareholders Meeting the proposal for distribution of dividends for Interest on equity capital The Corporation did not recognize interest on shareholders equity for the fiscal years ended December 31, 2016 and

109 27.6 Non-controlling interest Refers to the interest of non-controlling shareholders in the Corporation s equity. 28. Net sales Parent Consolidated Reclassified 12/31/16 12/31/15 12/31/16 12/31/15 Revenue from sales of products Domestic sales 3,754,633 3,438,755 14,410,494 13,880,166 Foreign sales 2,552,772 2,909,452 5,386,739 6,104,138 6,307,405 6,348,207 19,797,233 19,984,304 Deductions from gross sales Taxes on sales (152,230) (103,924) (214,790) (200,909) Returns and discounts (193,926) (160,871) (248,990) (234,033) (346,156) (264,795) (463,780) (434,942) Net sales 5,961,249 6,083,412 19,333,453 19,549, Costs and expenses by nature The Corporation has decided to present the statements of income by function. The breakdown by nature is below: Parent Consolidated Reclassified 12/31/16 12/31/15 12/31/16 12/31/15 Cost of sales Inventory costs 4,659,556 4,677,021 14,735,719 15,108,036 Depreciation 128, , , ,918 Amortization 6,947 7,521 87,581 78,588 Employee salaries and benefits 278, ,018 1,991,506 1,725,394 5,073,028 5,063,579 17,157,373 17,249,936 Administrative expenses Depreciation 9,242 7,730 13,652 10,845 Amortization 19,169 4,792 20,138 6,568 Employee salaries and benefits 50,822 65, , ,667 Other 19,976 (16,715) 157, ,238 99,209 61, , ,318 Selling expenses Depreciation Employee salaries and benefits 26,186 27,397 81,355 63,962 freights 252, , , ,071 Other 70,040 58, , , , , , ,661 92

110 30. Net financial result The Corporation s net financial income (expenses) is as follows: Financial income Reclassified 12/31/16 12/31/15 12/31/16 12/31/15 Market transactions 247, , , ,451 Interest received, earnings from marketable securities 103,930 42, ,030 99,334 Discounts, other 20,274 5,045 44, ,428 Total financial income 371, , , ,213 Exchange rate gains 1,391,307 1,583,030 1,820,651 2,037,403 Financial expense Provisioned interest, debentures and leasing with financial institutions (1,322,758) (1,062,341) (1,222,860) (1,333,580) Market transactions (83,110) (548,949) (257,517) (582,602) Bank expenses, commissions, fees, financial discounts, other (311,572) (212,337) (959,167) (726,592) Total financial expense (1,717,440) (1,823,627) (2,439,544) (2,642,774) Parent Consolidated Exchange rate losses (1,404,020) (2,278,525) (1,899,631) (3,090,269) Net financial result (1,358,186) (2,370,306) (2,034,710) (3,099,427) 31. Management compensation The compensation policy is designed to establish the criteria, responsibilities and directions for the short- and long-term compensation program of Marfrig Group s Management (Bonus and Stock Option). The purpose of this policy is to motivate the Corporation s executive officers to grow and develop to achieve maximum performance, in line with the business objectives, through a short- and long-term reward pay-out. The Compensation, Corporate Governance and Human Resources Committee is the advisory body to the Board of Directors in assessing management compensation. The committee is composed solely of members of the Corporation s Board of Directors and one of them is the Committee Coordinator. The parameters used to determine Management s compensation are based on market practices. 93

111 31.1 Board of directors The Board of Directors compensation consists of a fixed and variable portion. Fixed portion An annual amount is set for each member and paid on a monthly basis. Variable portion Short-term bonus or stock option-based payment. The board members compensation is determined through market research with the major companies in the industry whereby a compensation base is defined and submitted to Marfrig Global Foods s Compensation, Corporate Governance and Human Resources Committee for validation Officers appointed as per Bylaws The Board of Executive Officers compensation consists of a fixed and variable portion. Fixed portion An annual amount is set for each member and paid on a monthly basis. Variable portion Consists of short-term (bonus) and long-term (stock option) compensation. In general, the goals set by the Corporation for Management evaluation refer to economic objectives and individual goals. The gain on the Stock Option Plan is tied to the appreciation of the market price of the share, i.e. the value added to the Corporation by the performance of the individual and the Management as a whole will reflect on the gain on the stock option plan. At the same time the employees interests are aligned with the Corporation s interests in the long term. The exercise price of the stock options related to share-based compensation under Specific Programs is the average of the last 20 trading sessions prior to the first business day of March of each year and the grant price with a 50% discount starting with the grants in The vesting period follows these criteria: 25% after 12 months of the grant; 25% after 24 months of the grant; 25% after 36 months of the grant; 25% after 48 months of the grant. The officers compensation is determined through market research with the major companies in the industry whereby measurement criteria are established according to the significance of the position within the organization. The macro policies are approved by the Compensation, Corporate Governance and Human Resources Committee. 94

112 31.3 Audit Board The Corporation s Audit Board was set up after approval at the Annual Shareholders Meeting held on April 30, In the by-laws amended by the Special Shareholders Meeting held on March 11, 2011, the Audit Board became a permanent body. The Audit Board s is fixed on an annual basis and paid on a monthly basis. There is no variable portion Consolidated compensation Management and Board members compensation is made up of the compensation of six members of the Board of Directors (the other three opted for not receiving compensation as board members, one of whom is also a member of the Statutory Board of Executive Officers and receives compensation from that body), six members of the Audit Board (there of whom are alternate members) and five officers appointed as per the Corporation s by-laws. The added value of the compensation received by the Corporation s Management and Board members for their services is defined through market practices, with the participation of the Compensation, Corporate Governance and Human Resources Committee, made up exclusively of members of the Board of Directors of the Corporation, one of whom acts as Coordinator of the Committee: 12/31/16 12/31/15 Consolidated Management compensation 23,655 24,255 Total 23,655 24, Stock option plan On May 29, 2009, the Annual Shareholders Meeting approved the amendment and restatement of the Stock Option Plan (Plan), with the purpose of: (i) promoting value generation to the Corporation s shareholders, through alignment of their interests with those of the Management, employees and outsourced employees of Marfrig or its subsidiaries and (ii) enabling a higher level of attraction, retention and motivation of strategic employees. The Plan is managed by the Board of Directors, within the limits established in the general guidelines and applicable legislation. The general guidelines of the plan are disclosed in detail in the Corporation s Reference Form. The Board of Directors may create stock option programs with specific conditions regarding the participants, the number of options to be granted, performance targets to be achieved, exercise price discounts and other conditions ( Specific Programs ). Specific Programs were created in which the exercise price of the Stock Option is equivalent to the average stock quote in the last 20 trading sessions of the BM&FBOVESPA S.A. prior to the reference date of the first business day of March each year, over which a 50% discount shall apply. 95

113 During the year ended December 31, 2016, 57,269 shares were transferred and 553,349 shares were issued to the Management of the Corporation under the stock option plans. The changes in options exercised throughout the year are shown in the tables below: Total options exerc ised by month Number of shares exerc ised Average Market Price¹ (R$ per share) January/ February/ March/16 57, April/16 102, May/16 94, June/16 120, July/16 37, August/16 37, September/16 160, October/ November/ December/ Options exerc ised ,618 ¹ Average monthly quote disclosed by BM&FBOVESPA Bolsa de Valores, Mercadorias e Futuros S.A., related to Marfrig's common shares, traded under ticker MRFG3. (Options) Consolidated Changes Opening balance 2,265,365 3,405,169 Options granted 1,225,449 1,581,017 Options exercised (610,618) (331,179) Options canceled and expired (197,114) (2,389,642) Closing balance 2,683,082 2,265,365 The expected dilution of ownership interest of current shareholders, when stock options are exercised at the vesting date, up to the limit of shares held in the treasury for this purpose, is 0.51% of all shares at December 31, 2016, as detailed in the table below: Percentage of Dilution ESP VII LP Plan ESP VIII LP Plan ESP IX LP Plan ESP X LP Plan Total Granting date 4/5/2013 4/30/2014 6/24/ /7/2016 Unexercised agreements 49, , ,931 1,184,455 2,683,082 Treasury stock (1,281) Total shares except treasury stock 521,299,473 Percentage of dilution 0.01% 0.09% 0.19% 0.23% 0.51% 96

114 The Corporation recognized expenses relating to granting of plans in effect for the year ended December 31, 2016, as detailed in the table below: Effects from the exercise of options (R$ '000) Amount received from sale of shares - Exercised options 1, (-) Cost of treasury shares disposed of (541.5) (3,131.0) (-) Cost of shares issued (1,449.0) - Effect on disposal of shares (397.4) (2,215.8) Due to the exercise of stock options, the Corporation incurred costs with the sale of treasury shares of R$542. At December 31, 2016, the book value of treasury shares was recorded under the Corporation s shareholders' equity in the amount of R$12 (R$554 at December 31, 2015). The fair value of the options was measured on an indirect basis, according to the Black- Scholes pricing method, based on the following assumptions: Standard deviation: 33.30%. Volatility is measured taking into consideration the daily prices of the Corporation s shares traded on the Brazilian stock exchange (BM&FBOVESPA) under the ticker MRFG3, from July 1, 2016 to December 31, 2016; Risk-free interest rate: 7.50% p.a. The Corporation uses as risk-free interest rate the Long Term Interest Rate (TJLP) annualized on calculation date and available on the federal revenue service website The fair value of options as of December 31, 2016 ranged between a minimum of R$1.67 and a maximum of R$4.82 per share for SPECIAL plans. 97

115 Changes to the stock option programs are presented below: Plans Granting Date Performance (vesting) period Option expiration date Options granted Vested options Options exercised in the period Options cancelled and/or expired in the period Options exercised and/or cancelled in prior periods Unexercised agreements Option exercise price Options Exercised/Canceled in Previous Periods 7,201,675 3,335,856 2,215,489 2,265,365 ESP VI LP /24/2012 3/3/2016 9/2/ , ,447 66,271 23, ,783 0 R$ ,001,788 1,001,788 66,271 23, ,124 0 ESP VII LP /5/2013 3/3/2016 9/2/ ,380 87,380 29,177 22,702 35,501 0 R$ ESP VII LP /5/2013 3/3/2017 9/2/ ,380 1, ,509 35,367 49,504 R$ , ,337 29,177 25, ,628 49,504 ESP VIII LP /30/2014 3/3/2016 9/2/ , , ,096 22, ,602 0 R$ ESP VIII LP /30/2014 3/3/2017 9/2/ ,910 3, , , ,539 R$ ESP VIII LP /30/2014 3/3/2018 9/2/ ,910 3, , , ,653 R$ ,499,640 1,256, ,096 31,741 1,790, ,192 ESP IX LP /24/2015 3/3/2016 9/2/ , , ,074 39,667 54,575 0 R$ ESP IX LP /24/2015 3/3/2017 9/2/ , ,036 54, ,705 R$ ESP IX LP /24/2015 3/3/2018 9/2/ , ,036 54, ,705 R$ ESP IX LP /24/2015 3/3/2019 9/2/ , ,036 54, ,521 R$ ,581, , ,074 75, , ,931 ESP X LP /7/2016 3/3/2017 9/2/ , , ,158 R$ ESP X LP /7/2016 3/3/2018 9/2/ , , ,158 R$ ESP X LP /7/2016 3/3/2019 9/2/ , , ,158 R$ ESP X LP /7/2016 3/3/2020 9/2/ , , ,981 R$ ,225, , ,184,455 Total on 12/31/2016 8,427,124 4,686, , ,114 4,936,310 2,683,082 Plans Granting Date Market value of unvested options at the end of the period (R$ '000) Market value of outstanding vested options at the end of the period (R$ '000) Effects in the result of the period in case of recognition (R$ '000) ESP VI LP /24/2012 n/a n/a 0.0 n/a n/a 0.0 ESP VII LP /5/2013 n/a n/a 0.0 ESP VII LP /5/ ESP VIII LP /30/2014 n/a n/a 0.0 ESP VIII LP /30/2014 1, ,079.7 ESP VIII LP /30/2014 1, , , ,159.9 ESP IX LP /24/2015 n/a n/a 0.0 ESP IX LP /24/2015 1, ,393.1 ESP IX LP /24/2015 1, ,393.1 ESP IX LP /24/2015 1, , , ,178.5 ESP X LP /7/2016 1, ,060.8 ESP X LP /7/2016 1, ,060.8 ESP X LP /7/2016 1, ,060.8 ESP X LP /7/2016 1, , , ,242.6 Total on 12/31/ , ,

116 32. Earnings (loss) per share The following table shows the calculation of earnings (loss) per share for the years ended December 31, 2016 and 2015 (in thousands, unless otherwise stated): Reclassified 12/31/16 12/31/15 Profit (loss) attributable to shareholders from continuing operations (726,432) (1,424,117) Profit (loss) attributable to shareholders from discontinued operations 47, ,095 Profit (loss) attributable to shareholders from the Corporation (679,205) (586,022) Weighted average number of shares in the year (units) 521,300, ,747,405 Weighted average number of shares held in treasury (units) (227,017) (322,736) Weighted average number of outstanding common shares (units) 521,073, ,424,669 Basic and Diluted Earnings (Losses) (in R$) from continuing operations (1.3941) (2.7365) Basic and Diluted Earnings (Losses) (in R$) from discontinued operations Earnings or losses attributable to shareholders of the Company (1.3035) (1.1261) The Corporation has debentures mandatorily convertible into common shares, which are not added to the calculation of diluted earnings per share. 33. Segment reporting Marfrig Global Foods S.A. is a multinational Brazilian-originated company dedicated to the production, processing and sale in domestic and foreign markets of diversified food products, focusing on products of animal protein. The Corporation has built an integrated business model, geographically diverse, consisting of production bases located in places with significant competitive advantages in cost and a distribution network with access to major consumer markets in the world. The Corporation is strategically organized into two main reporting segments: 99

117 Marfrig Beef - A pioneer in the Brazilian market in the marketing and promotion of beef and lamb, Marfrig maintains a strong presence in the food service segment and a significant presence in export markets. Its international operations in South America are concentrated in exporting premium beef cuts and leveraging its strategic position in Uruguay, Chile and two trading companies in Europe and Peru, with access to the world s main consumer markets. Keystone - A global company focused on producing and developing multi-protein foods to serve major global restaurant chains, with a strong presence in Asia and the United States. The Keystone Foods business unit has a long history of a commercial relationship with a major global client that generates revenues diversified across Asian and European countries and, in particular, the United States. Sales to this client amounted to R$5.3 million, or 56.3% of the business unit s total revenue and 27.4% of the Group s consolidated total revenue, on December 31, 2016, making the Corporation a strategic supplier to said client. Commercial agreements with said client vary from market to market, and are based on market conditions previously agreed upon by the parties. The business unit has a long relationship with said client, which reinforces the strategic alliance between both companies. Due to the importance of this relationship, a significant portion of Keystone's accounts receivable refer to this strategic client. On December 31, 2016 and 2015, Keystone Foods did not have significant credit losses with any of its clients. Due to the contribution of this client to the business unit and to the Corporation as a whole, the capacity of Keystone s management to maintain a mutually beneficial relationship with this client is key to sustaining and continually growing the business. In this context, the market conditions affecting said client are very relevant to Keystone and are subject to constant evaluation and discussion by management. The group s global platform is present in four continents, with 47 industrial complexes and offices in the Americas, Asia, Europe and Oceania, with a distribution system that allows us to export to over 100 countries. The Corporation provides information to the market, combined by segment of activity similar to that considered by its managers when taking strategic decisions. 100

118 The consolidated balance sheet and statement of operations summarized by information segment are as follows: 12/31/16 12/31/15 Assets Marfrig Beef Holding BV Keystone Total Reclassified Marfrig Beef Holding BV Reclassified Keystone Discontinued Segment Current assets 7,505, ,324 1,536,113 9,303,178 5,704,581 1,679,662 1,928, ,981 9,842,455 Non-current assets 3,883,984 90,911 88,699 4,063,594 3,339,230 53, ,557-3,718,663 Investments 31-16,237 16, ,889-26,024 Property, plant and equipment 2,943,449-1,065,948 4,009,397 2,992,160-1,319,103-4,311,263 Biological assets ,236 51, ,804-59,804 Intangible assets 1,430,020-1,385,110 2,815, ,397-1,649,873-2,645,270 15,763, ,235 4,143,343 20,258,803 13,031,503 1,733,538 5,308, ,981 20,603,479 Total Current liabilities 6,099,767 89,934 1,193,268 7,382,969 3,835, ,580 1,240, ,711 5,406,649 Non-current liabilities 3,501,536 6,198,089 2,075,407 11,775,032 6,928,435 6,313,427 1,111,336-14,353,198 9,601,303 6,288,023 3,268,675 19,158,001 10,764,359 6,480,007 2,351, ,711 19,759,847 12/31/16 12/31/15 Discontinued Reclassified Reclassified Discontinued Marfrig Beef Holding BV Keystone Segment Total Marfrig Beef Holding BV Keystone Segment Total Net Revenue 9,952,587-9,380,866-19,333,453 10,563,195-8,986,167-19,549,362 COGS (8,649,934) - (8,507,439) - (17,157,373) (8,995,727) - (8,254,209) - (17,249,936) Equity income (loss) - (82,853) 76,419 - (6,434) - (11,341) (12,419) - (23,760) Net financial income (loss) (1,428,558) (351,264) (254,888) - (2,034,710) (2,489,445) (378,346) (231,636) - (3,099,427) Income and social contribution taxes 488,257 26,991 (173,731) - 341, ,296 78,446 (114,520) - 688,222 Controlling interest in net income (loss) - continuing operations (549,406) (411,026) 234,000 - (726,432) (1,190,870) (315,509) 82,262 - (1,424,117) Controlling interest in net income (loss) - discontinued operations ,227 47, , ,095 Non-controlling interest in net income (loss) - continuing operations ,281-46,409 (81) - 47,196-47,115 Non-controlling interest in net income (loss) - discontinued operations (i) (ii) This segment reporting reflects the Corporation s fiduciary structure; The Corporation believes that Marfrig Holding (Europe) BV, with its business of raising funds and holding ownership interest in other subsidiaries of the Group, should be segregated from this information in order to better report the Keystone and Marfrig Beef business segments. 101

119 (iii) Discontinued Segment refers to the sale of the Moy Park and the sale of assets relating to Marfrig Beef (MF Foods USA Inc., MFG Agropecuária Ltda. and Marfrig Argentina S.A.), as per note

120 34. Insurance coverage The Corporation s policy is to insure its property, plant and equipment and inventories subject to risk, at amounts deemed sufficient to cover possible losses, taking into consideration the nature of its activities and the insurance advisors opinion. Based on the maximum risk weighting, the Corporation does not have a policy of maintaining insurance policies to protect against lost profits, given the broad geographic distribution of its plants and the fact that its operations can be reorganized in the event that any need arises. The risk assumptions adopted, given their nature, are not part of the scope of an audit of financial statements and, accordingly, were not reviewed by the Corporation's independent auditors. Below is a summary of the amounts insured by the Corporation: Parent Consolidated Description 12/31/16 12/31/15 12/31/16 12/31/15 Buildings and meatpacking plants 2,578,480 2,114,604 4,417,874 4,873,289 Inventories 223, , , ,996 Third-party warehouse 20,300 26,825 20,300 30,825 Vehicles 20,707 19,390 34,167 35,743 Transportation of goods 65,182 78, , ,607 Officers' guarantees 162, , , ,478 Civil liability 20,000 20, , ,127 Aircraft 852, , , ,417 Other 459, , , ,199 4,402,279 3,435,144 6,802,682 6,855, Financial instruments - derivatives and risk management - consolidated Overview The Corporation and its subsidiaries are exposed to market risks related to exchange rate gains (losses), interest rate and commodities price fluctuations of a nature considered normal to their business. In order to minimize these risks, the Corporation has policies and procedures to minimize these exposures and may use hedging instruments, as long as previously approved by the Board of Directors. Among the Corporation s guidelines we highlight: Monitoring levels of exposure to each market risk; measuring these risks; setting limits for making decisions and using hedging mechanisms, always aiming at minimizing the foreign exchange exposure of its debts, cash flows and interest rates. 103

121 On December 19, 2016, the Board of Directors decided, among other things, that the Corporation shall be represented exclusively by its Officers and Attorney-in-Fact (Article 26 of the Bylaws) for acts and transactions in amounts of up to R$500 million or US$200 million, depending on the currency in which they are carried out. For acts and transactions in amounts greater than R$500 million or US$200 million, the approval by the Board of Directors is required. The Corporation only enters into transactions with derivatives or similar instruments that offer a minimum protection against: foreign currencies, interest rates and commodity prices, and also adopts a conservative policy of not entering into transactions that could affect its financial position. The Corporation does not enter into leveraged transactions with derivatives or similar instruments The Corporation also has a sound financial policy, maintaining a high level of cash balance, cash equivalents and short-term financial investments. At the same time, the maturity of the Corporation s long-term indebtedness is such way that it is not concentrated in any single year. 104

122 35.2. Financial instruments by category The Corporation s financial assets and liabilities are classified as below: Parent Financial assets Held for Amortized Cost trading 12/31/16 12/31/15 12/31/16 12/31/15 Cash and cash equivalents 390, ,187 5,988 17,795 Marketable Securities 98, ,279 1,417,911 1,483,878 Trade accounts receivable 475, , Notes receivable - derivatives ,628 14,766 Related parties 717,391 1,289, Total financial assets 1,681,155 2,113,908 1,477,527 1,516,439 Financial liabilities Held for Amortized Cost trading 12/31/16 12/31/15 12/31/16 12/31/15 Trade accounts payable and supply chain finance 888, , Loans, financing and debentures 1,651,911 1,503, Finance lease 3,472 8, Notes payable - derivatives , ,174 Notes payable - investments Brazil 431, , Notes payable - sponsorship - 50, Interest on debentures 297, , Related parties 8,780,070 9,369, Total financial liabilities 12,053,063 12,336, , ,

123 Consolidated Financial assets Held for Amortized cost trading 12/31/16 12/31/15 12/31/16 12/31/15 Cash and cash equivalents 3,283,625 1,487,624 8, ,744 Marketable Securities 195, ,247 1,791,819 3,127,506 Trade accounts receivable 790,468 1,003, Notes receivable - derivatives , ,499 Related parties 46, Total financial assets 4,316,801 2,738,588 2,108,538 3,667,749 Financial liabilities Held for Amortized cost trading 12/31/16 12/31/15 12/31/16 12/31/15 Trade accounts payable and supply chain fina 2,002,757 1,818, Loans, financing and debentures 10,893,838 11,885, Finance lease 38,496 61, Notes payable - derivatives , ,418 Notes payable - investments Brazil 431, , Notes payable - sponsorship - 50, Interest on debentures 256, , Total financial liabilities 13,622,884 14,481, , ,418 Details of the accounting policies and methods used (including criteria for recognition, measurement bases and criteria for recognition of gains and losses) for each class of financial instruments and equity are presented in note Comparison of market value and respective fair values Market values for the financial instruments are shown below: 12/31/16 Consolidated 12/31/15 Book value Market value Book value Market value Cash and cash equivalents 3,291,705 3,291,705 1,630,368 1,630,368 Marketable Securities 1,987,787 1,987,787 3,374,753 3,374,753 Trade accounts receivable 790, ,468 1,003,717 1,003,717 Notes receivable - derivatives 308, , , ,499 Trade accounts payable and supply chain finance 2,002,757 2,002,757 1,818,991 1,818,991 Loans and financing 10,893,838 10,893,838 11,885,300 11,885,300 Finance lease 38,496 38,496 61,686 61,686 Payables - derivatives 405, , , ,418 Interest on debentures 256, , , ,

124 The fair value of financial instruments is similar to the book value and largely reflects the values that would be obtained if they were traded in the market Breakdown of Derivative Financial Instruments The breakdown of Marfrig Group s derivative financial instruments follows: Consolidated Notional Instrument Hedged Item Exchange Maturity Long Short USD Notional R$ MTM R$ Transactions designated as Hedge Accounting Swap Interest Rate OTC 2018 LIBOR USD 132, ,831 (1,413) Swap Interest Rate OTC 2019 LIBOR USD 187, ,081 (14,586) NDF Exchange rate OTC 2017 USD GBP 18,408 57,814 3,010 NDF Exchange rate OTC 2017 USD EUR Transactions not designated as Hedge Accounting Swap Interest Rate OTC 2017 BRL USD 230, ,301 (190,780) Swap Interest Rate OTC 2017 USD BRL 230, , ,780 Swap Interest Rate CETIP 2018 CDI USD 19,933 64,963 (70,581) (83,552) NDF Exchange rate OTC 2016 USD THB 1,000 3,259 - NDF Exchange rate OTC 2017 AUD MYR NDF Exchange rate OTC 2017 JPY MYR (4) NDF Exchange rate OTC 2017 JPY THB NDF Exchange rate OTC 2017 KRW USD 17,806 58,030 (2,335) NDF Exchange rate OTC 2017 MYR USD 28,564 93,094 (6,305) NDF Exchange rate OTC 2017 SGD MYR NDF Exchange rate OTC 2017 THB MYR 443 1,444 (34) NDF Exchange rate OTC 2017 USD AUD 2,980 9,712 (15) NDF Exchange rate OTC 2017 USD MYR 43, ,214 2,970 NDF Exchange rate OTC 2017 USD THB 65, ,881 (811) NDF Exchange rate OTC 2017 EUR AUD 961 3,133 (24) NDF Exchange rate OTC 2017 EUR THB 1,476 4,809 (109) NDF Exchange rate OTC 2016 USD CLP 7,373 24, (6,384) Options Soy meal CBOT 2017 USD USD 450 1, Options Soy meal CBOT 2018 USD USD SWAP Soy meal CBOT 2017 USD USD 41, ,288 2,792 SWAP Soy meal CBOT 2018 USD USD 2,325 7, SWAP Fed cattle CBOT 2017 USD USD 20,098 65,500 (338) SWAP Corn CBOT 2017 USD USD 52, ,608 (11,338) Futures Fed cattle BM&F 2016 BRL BRL (4,783) (15,590) 819 (6,898) (96,834) 107

125 Assets and liabilities presented on the balance sheet under securities receivable and trade accounts payable regarding derivative transactions, which are intended for equity hedging, are shown below: Consolidated 12/31/16 12/31/15 Notes receivable - derivatives (note 10) 308, ,499 Notes payable - derivatives (note 23) (405,473) (643,418) Total, net (96,834) (245,919) In the year ended December 31, 2016, a consolidated net financial gain of R$34,466 was recorded from market transactions, of which R$257,517 corresponded to expenses and R$291,983 to income Derivative Financial Instruments subject to Cash Flow Hedge Accounting In November 2013, the Marfrig group adopted hedge accounting policies for financial instruments exposed to cash flow changes. As a result, the variations in fair value of derivatives designated as hedge are recognized directly in shareholders' equity, under other comprehensive income. The amounts booked under other comprehensive income are immediately transferred to the income statement when the transaction underlying the hedge affects profit or loss. The Corporation documents, at the start of the operation, the relation between the hedge instruments and the underlying hedged items, as well as the objectives of the risk management and the strategy to carry out various hedge operations. The documentation for operations designated as hedge accounting evidences control of the effectiveness and the operation, and includes: Hedged item; Financial instrument; Strategy for managing the risk to be hedged; Effectiveness of the hedge instrument, reliably measured; Evaluation of the hedge on an ongoing basis throughout the duration of the contract. The Corporation also documents its assessment, both at the start of the hedge as well as periodically, that the derivatives used in the hedge operations are highly effective in offsetting the variations in the fair value of the underlying hedge items. Therefore, all instruments designated as hedge accounting are effective, highly probable and neutralize the exposure to variations in the cash flow that could affect results. 108

126 The effectiveness of the operations is periodically controlled in a reliable and documented manner throughout the duration of the contract, through statistical correlation between the fair value or cash flows of the hedged position and the hedging instrument, or by comparing previous changes in the fair value or cash flows of the hedged position attributable to the hedged risk with previous changes in the fair value or in the cash flows of the hedging instrument. Consolidated Gain / Loss Instrument Asset (Hedged Item) Liability (Risk Exposure) Maturity Notional USD Notional BRL Balance (MTM) R$ Equity Result Swap LIBOR USD , ,831 (1,413) 207 (1,620) Swap LIBOR USD , ,081 (14,586) (8) (14,578) NDF USD GBP ,408 57,814 3,010-3,010 NDF USD EUR (12,971) 199 (13,170) Market risk The Corporation is exposed to market risks arising from commodity prices, interest rates and exchange rates. For each risk, the Corporation conducts a continuous management and sensitivity studies presented in this note Commodity price risk management During its activities, the Corporation and its subsidiaries purchase some commodities, such as: cattle, grains and energy, which are the biggest individual components of the production cost and are subject to certain variables. The price of cattle acquired from third parties is directly related to market conditions, and is influenced by domestic availability and foreign market demand. Maize and soya bean meal ( grains ) are subject to volatility resulting from weather conditions, crop yield, transport costs, warehousing costs, agricultural policy, exchange rates, international prices, among others, which is not under Management s control. So as to reduce the impact over commodities, the Corporation and its subsidiaries manage inventory levels, keep cattle in feedlots and trade derivative financial instruments in the futures market. The Corporation and its subsidiaries purchase financial instruments to reduce the price risk related to the needs for commodities within 12 months. A substantial part of these hedge instruments come from the futures market at the Chicago Board of Trade (CBOT). 109

127 The position of derivatives related to commodity risks is shown below: Consolidated Exchange Instrument Futures contract Maturity Notional USD Notional R$ MTM R$ Result on 12/31/2016 CBOT Options Soy meal , CBOT Options Soy meal CBOT SWAP Soy meal , ,288 2,792 2,792 CBOT SWAP Soy meal ,325 7, CBOT SWAP Fed cattle ,098 65,500 (338) (338) CBOT SWAP Corn , ,608 (11,338) (11,338) BM&F Futures Fed cattle 2016 (4,783) (15,590) , ,163 (6,898) (6,898) Sensitivity analysis of commodity price risk To provide information about the behavior of market risks that the Corporation and its subsidiaries were exposed to as at December 31, 2016, three scenarios are considered and the probable scenario is the fair value as at December 31, 2016 and two more scenarios with deterioration of 25% and 50% of the risk variable taken into account, denominated as Possible and Remote, respectively. The base prices for commodity futures are referenced to the prices quoted on the Chicago Board of Trade (CBOT) for contracts maturing on December 31, With regard to commodity risk, following are the sensitivity scenarios: Stress scenario - Derivatives Commodities Consolidated Probable Scenario Possible Scenario Remote Scenario MTM Result MTM Result MTM Result (6,898) (6,898) (8,622) (8,622) (10,347) (10,347) Stress scenario - Derivatives Commodities Soy Meal Probable Scenario Possible Scenario Remote Scenario MTM Result MTM Result MTM Result 3,959 3,959 4,949 4,949 5,938 5,938 Stress scenario - Derivatives Commodities Corn Probable Scenario Possible Scenario Remote Scenario MTM Result MTM Result MTM Result (11,338) (11,338) (14,172) (14,172) (17,006) (17,006) Probable Scenario Stress scenario - Derivatives Commodities Cattle Possible Scenario Remote Scenario MTM Result MTM Result MTM Result

128 Interest rate risk management Interest rate risk refers to the Corporation s risk of incurring economic losses due to negative changes in interest rates. This exposure basically refers to changes in market interest rates which affect the Corporation s assets and liabilities indexed to the TJLP (long-term interest rate), LIBOR (London Interbank Offered Rate) or CDI (interbank deposit rate). In order to reduce debt service costs, the Corporation and its subsidiaries continually monitor market interest rates to assess the need to enter into new derivative contracts to hedge its operations against the risk of fluctuations of these rates. The risk of exposure to interest rate for the Corporation and its subsidiaries as at December 31, 2016 and 2015 is as follows: Consolidated 12/31/16 12/31/15 Exposure to CDI rate: NCE / Working capital/cdas/debentures 644, ,772 (-) CDB-DI (R$) (257,489) (196,804) Subtotal 387, ,968 Exposure to LIBOR rate: NCE/ACC/Prepayment (US$) 695, ,341 Revolving credit facility (US$) 411, ,515 Subtotal 1,106, ,856 Exposure to TJLP rate: FINAME / FINEM / FINEP 18,836 26,641 Subtotal 18,836 26,641 Total 1,512,600 1,605,465 The Corporation entered into non-speculative swap contracts to minimize the effects of exchange rates fluctuations on the settlement of its loans and financing, as below: Consolidated 12/31/16 12/31/15 Instrument Register Receivable Payable Notional US$ Notional BRL MTM MTM Interest Rate Swap CETIP LIBOR USD 320,000 1,042,912 (15,999) (30,728) Interest Rate Swap OTC BRL USD 230, ,301 (190,780) (358,359) Interest Rate Swap OTC USD BRL 230, , , ,359 Interest Rate Swap CETIP CDI USD 19,933 64,963 (70,581) (152,570) 801,595 2,612,477 (86,580) (183,298) 111

129 Consolidated 12/31/16 Instrument Register Maturity Receivable Payable Notional US$ Notional BRL MTM Interest Rate Swap OTC 2018 LIBOR USD 132, ,831 (1,413) Interest Rate Swap OTC 2019 LIBOR USD 187, ,081 (14,586) Interest Rate Swap OTC 2017 BRL USD 230, ,301 (190,780) Interest Rate Swap OTC 2017 USD R$ 230, , ,780 Interest Rate Swap CETIP 2018 CDI USD 19,933 64,963 (70,581) 801,595 2,612,477 (86,580) Interest rate risk sensitivity Analysis To provide information about the behavior of market risks that the Corporation and its subsidiaries are exposed to as at December 31, 2016, three scenarios are considered and the probable scenario is the fair value as at December 31, 2016 and two more scenarios with deterioration of 25% and 50% of the risk variable taken into account, denominated as Possible and Remote, respectively.7 Sensitivity scenarios for interest rate risk are below: Stress scenario - Swap Int Rate - Consolidated Probable Scenario Possible Scenario Remote Scenario MTM Result MTM Result MTM Result (86,580) (86,580) (96,832) (96,832) (106,577) (106,577) Stress scenario - Swap Int Rate CDI vs. USD Probable Scenario Possible Scenario Remote Scenario MTM Result MTM Result MTM Result (70,581) (70,581) (72,905) (72,905) (72,970) (72,970) Stress scenario - Swap Int Rate Libor vs. USD Probable Scenario Possible Scenario Remote Scenario MTM Result MTM Result MTM Result (15,999) (15,999) (23,927) (23,927) (33,607) (33,607) Exchange rate risk management Exchange rate risk consists of the risk of foreign exchange fluctuations leading the Corporation and its subsidiaries to incur losses and causing a reduction in the values of assets or an increase in the values of liabilities. The Corporation s main current exchange rate exposure relates to the US dollar fluctuation against the Brazilian real. 112

130 Given that approximately 79% of the Corporation s revenues are denominated in currencies other than the Brazilian real, the Corporation has a natural hedge against the maturities of future obligations in foreign currency. The Corporation also has a sound financial policy, maintaining a high level of cash balance and short-term financial investments with solid financial institutions. We believe that the Corporation s and its subsidiaries' consistent financial policy, grounded in a well-distributed capital structure, allows it to consolidate synergies achieved through the acquisitions made. Outstanding foreign currency and derivatives position Assets and liabilities in foreign currency are presented as follows: Parent Exposure Effects of exchange Description 12/31/16 12/31/15 rate gains (losses) 2016 Operating Trade accounts receivable 326, ,482 (217,634) ACE (advance on export contracts) - (458,818) 164,836 Imports payable (15,987) (48,059) 19,267 Subtotal 310, ,605 (33,531) Financial Loans and financing (693,565) (383,897) 101,198 Balance of banks and marketable securities (*) 1,218, ,697 (80,380) Subtotal 525,240 (21,200) 20,818 Total 835, ,405 (12,713) Exchange rate gains 1,391,307 Exchange rate losses (1,404,020) Exchange rate gains (losses), net (12,713) (*) Refers only to banks and marketable securities that generated exchange rate gains (losses). 113

131 Consolidated Exposure Effects of exchange rate gains (losses) Description 12/31/16 12/31/ Operating Trade accounts receivable 393, ,824 (378,567) ACE (advance on export contracts) - (458,818) 164,836 Imports payable (154,511) (214,014) 16,997 Other (62,735) (30,869) 928 Subtotal 176, ,123 (195,806) Financial Loans and financing (10,486,654) (11,310,694) 104,121 Notes payable Balance of banks and marketable securities (*) 539, ,248 (68,944) Other - (333,820) 81,605 Subtotal (9,947,619) (11,107,266) 116,826 Total (9,771,283) (10,841,143) (78,980) Exchange rate gains 1,820,651 Exchange rate losses (1,899,631) Exchange rate gains (losses), net (78,980) (*) Refers only to banks and marketable securities that generated exchange rate gains (losses). Over the course of 2016, the Corporation contracted Non-Deliverable Forwards (NDFs) and futures contracts, all of them non-speculative in nature, to minimize the effects of the foreign exchange variation on its overseas subsidiaries, as per the breakdown shown in note , the results of which are accounted for under the items "Exchange Rate Gains and Exchange Rate Losses Exchange rate risk sensitivity Analysis To provide information about the behavior of market risks that the Corporation and its subsidiaries were exposed to as at December 31, 2016, three scenarios are considered and the probable scenario is the fair value as at December 31, 2016 and two more scenarios with deterioration of 25% and 50% of the risk variable taken into account, denominated as Possible and Remote, respectively. The market future curve of December 31, 2016 was applied for currencies, with notional value of R$/US$ As for exchange rate risk, following are the sensitivity scenarios: 114

132 Stress Scenario - balance sheet exposure to foreign exchange Probable Possible Remote 12/31/2016 scenario scenario scenario Parent (12,713) 195, ,073 Subsidiaries (66,266) (2,650,281) (5,300,562) (78,979) (2,455,244) (4,910,489) Liquidity risk and capital management Liquidity risk arises from the Corporation s and its subsidiaries working capital management and the amortization of the principal and finance charges of debt instruments. This is the risk that the Corporation and its subsidiaries will find to settle its falling due payables. The Corporation and its subsidiaries manage their capital based on parameters to optimize the shareholding structure focused on liquidity and leverage metrics that enable a return to shareholders over the medium term, consistent with the risks assumed in the transaction. The purpose of capital management is to define the best financing structure for the Corporation and its subsidiaries. The main indicator for monitoring such management is the modified immediate liquidity ratio, which is the ratio between cash and cash equivalents and the leverage ratio - current indebtedness (short term). Consolidated 12/31/16 12/31/15 Short-term cash, cash equivalents and marketable securities 5,278,641 5,004,210 Short-term loans and financings 1,198,039 1,772,411 Interest on debentures 256, ,807 Modified liquidity ratio The main indicators for monitoring such management is the modified immediate liquidity The leverage ratio - monitoring the ratio of net debt (total debt indebtedness less cash and cash equivalents) to LTM EBITDA at levels considered to be manageable for continuity of operations, in accordance with the following calculation method: 115

133 12/31/16 Consolidated gross debt 11,150,401 (-) Consolidated cash and equivalents 5,278,641 Consolidated net debt 5,871,760 (-) Effect from exchange variation (carve-out (1) ) 2,094,275 Consolidated adjusted net debt 3,777,485 LTM EBITDA for the period ended December 31, ,574,529 Leverage ratio 2.40 (1) Contractual provisions, in this case related to exchange variation on foreign-denominated loans, which allow these effects to be excluded from the calculation of the leverage ratio for the specific purpose of compliance with covenants. Based on the analysis of these indices, the management of working capital is defined so as to keep Corporation s and its subsidiaries natural leverage at levels equal or lower than the leverage ratio deemed adequate. The following table presents contractual terms (representing undiscounted contractual cash flows) of financial liabilities: Consolidated December 31, Onwards Total Trade accounts payable and supply chain finance 1,818, ,818,991 Loans, financing and debentures 1,772,411 1,011,436 2,330,304 2,591,132 4,180,017 11,885,300 Interest on debentures 236, ,807 Derivative financial liabilities 79, , ,733 25, ,418 Total 3,907,233 1,394,420 2,486,037 2,616,809 4,180,017 14,584,516 December 31, Onwards Total Trade accounts payable and supply chain finance 2,002, ,002,757 Loans, financing and debentures 1,198,039 1,221,747 2,131,263 1,906,145 4,436,644 10,893,838 Interest on debentures 256, ,563 Derivative financial liabilities 321,862 69,025 14, ,473 Total 3,779,221 1,290,772 2,145,849 1,906,145 4,436,644 13,558, Credit risk The Corporation and its subsidiaries are subject to credit risk. Credit risk deals with group s financial losses if a client or counterpart in a financial instrument fails to comply with contractual obligations, which arise from most receivables. 116

134 The Corporation and its subsidiaries limit their exposure by analyzing credit and managing client s portfolio, seeking to minimize the economic exposure to a certain client and/or market that may represent significant losses. The Global Credit Risk Policy determines the guideline for financial credit risk management based on the following: Limit of counterparty s credit risk concentration to 15% of total current assets; Investments in solid and prime financial institutions, based on their financial rating; Balance between assets and liabilities. Conducted evaluations are based on information flows and follow-up of the volume of purchases in the market. The internal controls cover the assignment of credit limits. The maximum exposure to credit risk for the Corporation and its subsidiaries are the trade accounts receivable shown in note 6, where the value of the effective risk of possible losses is presented as provision for credit risk is also shown. Values subject to credit risk: Parent Consolidated 12/31/16 12/31/15 12/31/16 12/31/15 Cash and cash equivalents 396, ,982 3,291,705 1,630,368 Marketable securities 1,515,911 1,601,157 1,987,787 3,374,753 Receivables from Brazilian clients 149, , , ,010 Receivables from foreign clients 326, , , ,707 Other receivables 26,258 9, , ,833 Total 2,413,921 2,335,037 6,225,346 6,128, Fair value of financial instruments The method used by the Corporation to determine market value consists in calculating the future value based on contracted conditions and determining the present value based on market curves obtain from Bloomberg s database, except for futures market derivatives whose fair values are calculated based on the on daily adjustments of variations in market prices of commodities and futures acting as consideration. According to IFRS 7, the Corporation and its subsidiaries classify the measurement of fair value according to hierarchical levels which reflect the importance of indices used in such measurement, as follows: Level 1: Prices quoted in (non-adjusted) active market for identical assets and liabilities; 117

135 Level 2: Other available information, except those of Level 1, where quoted prices relate to similar assets and liabilities, whether directly, by obtaining prices in active markets, or indirectly, such as evaluation techniques using active market data. Level 3: Indices used for the calculation do not derive from an active market. The Corporation and its subsidiaries do not have instruments at this measurement level. Currently, the fair value of all the financial instruments of the Marfrig Group is reliably measured and hence these are classified as level 1 and 2, as shown below: Consolidated Level 1 Level 2 Level 3 Current assets Cash and cash equivalents Marketable securities - held for trading - 1,987,787 - Notes receivable - derivatives 12, ,456 - Non-current liabilities Notes payable - derivatives (25,465) (380,008) - Total (13,282) 1,904,235 - Management understands that the results obtained with derivative transactions are in line with the risk management strategy adopted by the Corporation and its subsidiaries. 36. Income and social contribution taxes Income and Social Contribution Taxes were calculated according to prevailing legislation and Federal Law 12,973/2014, which rescinds the Transition Tax System provided for in Federal Law 11,941/09, and the Corporation began the adoption of corporate accounting (to comply with the NBC TGs) and of tax accounting (to comply with income and social contribution tax legislation). Income and Social Contribution Tax calculations and returns, when required, are open to review by tax authorities for varying statutory years in relation to the payment or filing date. Below are the calculation and reconciliation of income and social contribution taxes in the income statements for the year: 118

136 Continued Continued Parent Parent Consolidated Consolidated Tax 12/31/16 12/31/15 12/31/16 12/31/15 Income (loss) before tax effects (1,220,949) (2,124,038) (1,021,540) (2,065,224) Add-backs Add-backs of corporate income tax (IRPJ) 3,263,149 2,522,583 3,240,795 2,424,815 Add-backs of social contribution tax (CSLL) 3,263,149 2,522,583 3,342,181 2,414,582 (-) Deductions (-) Deductions from IRPJ (1,563,508) (2,840,186) (959,878) (3,020,429) (-) Deductions from CSLL (1,563,508) (2,840,186) (871,449) (3,020,429) Tax base Income tax base 478,692 (2,441,641) 1,259,377 (2,660,838) Social contribution tax base 478,692 (2,441,641) 1,449,192 (2,671,071) Companies with income tax loss - - (21,497) (1,276) Companies with social contribution tax loss carryforwards - - (825) - Calculation base after carry forwards of IRPJ 478,692 (2,441,641) 1,237,880 (2,662,114) Calculation base after carry forwards of CSLL 478,692 (2,441,641) 1,448,367 (2,671,071) (-) Tax loss carryforwards (143,607) - (143,620) - (-) Social contribution tax loss carryforwards (143,607) - (143,620) - Calculation base after carry forwards Calculation base after carry forwards of IRPJ 335,085 (2,441,641) 1,094,260 (2,662,114) Calculation base after carry forwards of CSLL 335,085 (2,441,641) 1,304,747 (2,671,071) Income tax (15%) 50, ,708 69,263 Surtax (10%) 33,484-33,484 - (-) PAT (1,798) - (1,798) - Total income tax 81, ,394 69,263 Social contribution tax (9%) 30,158-30,043 1,418 Total taxes 112, ,437 70,681 Effect on Statement of Operations - Current Taxes (2) 112, ,437 70,681 Tax Group 12/31/16 12/31/15 12/31/16 12/31/15 (-) Income tax - current Current liabilities (2) (81,949) - (183,394) (69,263) Tax paid abroad Current liabilities 165, ,655 - Deferred income tax - Assets (1) Non-current assets 321, , , ,507 Deferred income tax - Liabilities (1) Non-current liabilities 3,706 4,438 (62,448) (43,122) Net (3) Income (loss) 408, , , ,122 (-) Social contribution tax - current Current liabilities (2) (30,158) - (30,043) (1,418) Deferred social contribution tax - Assets (1) Non-current assets 115,690 58, ,981 73,164 Deferred social contribution tax - Liabilities (1) Non-current liabilities 1,334 1,598 1,546 1,782 Net (3) Income (loss) 86,866 59,652 76,484 73,528 (1) Refer to deferred Income and Social Contribution Taxes calculated on: taxes whose payment has been suspended (estimates), and which were added to the calculation of the taxable income and the social contribution tax basis; utilization for tax purposes of the goodwill paid on future profitability and income and social contribution tax losses, which are stated in notes 12 and 26. (2) Corresponds to Income Tax and Social Contribution due on the current results of the year and effectively paid/offset during the year and/or to be paid/offset in subsequent years. (3) The difference between the values of taxes in this note and the values in the Statement of Income, which is an integral part of this financial information, refers to taxes on the sale of Moy Park and MFG Agropecuária (according to note 13.3) and Marfrig Argentina s assets (according to note 11). 119

137 37. Sustainable Development Social and Environmental Performance Since 2013, when it implemented its FOCUS TO WIN strategy, Marfrig has consistently strengthened the strategic pillars of Sustainable Development, which permeate all business units and are a reference for developing local actions that together foster and ensure the sustainability of the entire production system. The Corporation is committed to always balancing the economic, social and environmental aspects of its business in order to contribute to the development of society and help preserve the planet. The pillars forming the Corporation s Sustainability strategy are: (1) customers, (2) suppliers, (3) the environment, (4) workplace, (5) economic and (6) social. Given its leading position in promoting sustainable production and preserving biodiversity, the Corporation upholds, and continues to uphold and strengthen, various public commitments in partnership with major organizations. Key initiatives in Brazil in 2016 follow: Greenpeace Pact: public commitment signed by Marfrig in October 2009, through which it undertakes not to source animals from deforested areas and/or areas that violate indigenous land rights and/or conservation units, with the Corporation subjected to annual audits by independent audit companies to verify compliance with the requirements of the agreement. In 2016, Marfrig registered once again an excellent result in the audit for the period from June 7 to June 16, 2016, related to the activities carried out in