Lojas Americanas S.A.

Transcription

1 1. Operational context Lojas Americanas S.A. ( LASA or Company ) is a publicly traded company with shares traded on the BM&FBOVESPA under the codes LAME3 - ON and LAME4 - PN and is engaged in the retail trade of consumer products through 1,306 stores (as of December 31st, ,127 stores), with 815 stores in the traditional model and 491 stores in the Americanas Express model, located in the main capitals and cities of the country, as well as distribution centers. Together with its subsidiaries (the Group ), B2W COMPANHIA DIGITAL ( B2W ) also operates electronic commerce through its subsidiary B2W COMPANHIA DIGITAL ( B2W ), that gathers the websites: (this one with the options of purchases through TV channel and catalog) and besides offering a complete platform of services in the verticals of technology, distribution and consumer financing. 2. Summary of main accounting policies 2.1 Basis of preparation The financial statements have been prepared based on historical cost, except for financial assets at fair value through profit or loss and derivative financial instruments, which are measured at fair value and financial liabilities, which are measured at amortized cost. The issuance of these financial statements was authorized by the Board of Executive Officers on March 1 st, (a) Declaration of conformity The financial statements have been prepared in accordance with accounting practices adopted in Brazil, including pronouncements issued by the Accounting Pronouncements Committee (CPC) for individual and consolidated financial statements and the International Financial Reporting Standards (IFRS) issued by International Accounting Standards Board (IASB)) for the consolidated financial statements, and only show the relevant information specific to the financial statements which are consistent with those used by administration in its management. (b) New standards, changes and interpretations of standards that are not yet in force A series of new standards will be effective for fiscal years beginning after January 1 st, The Group did not adopt these changes in the preparation of these financial statements. The Group does not plan to adopt these standards in advance. It is expected that the following standards will have an impact on the Group s financial statements in the period of initial adoption. IFRS 9 / CPC 48 Financial Instruments The standard comes into force as of January 1 st, 2018 and has as main characteristics the classification and measurement of financial assets and financial liabilities plus the reduction to the recoverable value of financial assets, adopting the prospective model of expected losses in replacement of the model adopted in the previous standard of losses incurred and hedge accounting. This Standard replaces the CPC 38/IAS39.

2 We present below the effects from the adoption of the new standard in comparison with practices maintained until December 31st, 2017: a) Financial assets - Classification and measurement: CPC 48 / IFRS 9 contains a new approach to financial asset classification and measurement that reflects the business model in which the assets are managed and their cash flow characteristics. CPC 48 / IFRS 9 contains three main classification categories for financial assets: measured at amortized cost, at fair value through other comprehensive income (VJORA) and at fair value through profit or loss (VJR). The standard eliminates existing IAS 39 categories held-to-maturity, loans and receivables and available for sale. According to CPC 48/IFRS 9, derivatives embedded in contracts where the host is a financial asset within the scope of the standard are never separated. Instead, the hybrid financial instrument as a whole is evaluated for its classification. The Company is in the final stage of validation regarding the classification and measurement of the Company s financial assets. b) Impairment - Financial assets and contractual assets IFRS 9 replaces the incurred losses model of CPC 38 (IAS 39) with a prospective expected credit loss model. This will require a relevant judgment on how changes in economic factors affect expected credit losses, which will be determined on the basis of weighted probabilities. The new expected loss model will be applied to financial assets measured at amortized cost or VJORA, with the exception of investments in equity instruments and contractual assets. In accordance with CPC 48 / IFRS 9, provisions for expected losses will be measured on one of the following bases: Expected credit losses for 12 months, that is, credit losses that result from possible delinquency events within 12 months after the base date; and expected long-term credit Losses, that is, credit losses that result from all possible delinquency events over the expected life of a financial instrument. The new standard establishes that the Company performs an evaluation, for a fiscal year or for the total term of validity of the individualized financial assets, and assesses the probable effects of expected losses on these financial assets. The Company conducted preliminary studies and will apply the simplified approach that will record the expected losses for the total period of validity of the individualized financial assets. The main financial assets to be evaluated are investments in securities, trade accounts receivable, basically represented by operations with credit card companies and commercial agreements entered into with the Company s main suppliers of goods. The Company is in the final stage of validation of the impacts on the balances of the existing operations.

3 c) Hedge Accounting: In the initial application of CPC 48 / IFRS 9, the Group may choose as the accounting policy to continue to apply the hedge accounting requirements of CPC 38 / IAS 39 instead of the new requirements of CPC 48 / IFRS 9. CPC 48 / IFRS 9 requires the Group to ensure that hedge accounting relationships are aligned with the Company s risk management objectives and strategies and apply a more qualitative and forward-looking approach to assessing the effectiveness of the hedge. CPC 48 / IFRS 9 also introduces new requirements for rebalancing hedging relationships and prohibits the voluntary discontinuation of hedge accounting. Under the new model, it is possible that more risk management strategies, particularly those of hedging a risk component (other than foreign currency risk) of a non-financial item, may qualify for hedge accounting. The Company s hedge accounting operations have as their primary objective the elimination or reduction of volatility in results or in shareholders' equity arising from hedge operations. The Company evaluated the hedge accounting accounting model based on the new requirements established in the standard and concluded that these will not have a significant impact on the Company s financial statements. IFRS 15 / CPC 47 - Revenue from Contracts with Clients IFRS 15 introduces a comprehensive framework to determine if and when a revenue is recognized, and how much revenue is measured. IFRS 15 replaces current revenue recognition standards, including CPC 30 (IAS 18) - Revenue, CPC 17 (IAS 11) - Construction Contracts and CPC 30 - Interpretation and IFRIC 13 - Client Loyalty Programs. The Company plans to adopt CPC 47 / IFRS 15 using the cumulative effect method, with initial application of the standard at the initial date (i.e., 1 January 2018). As a result, the Company will not apply the requirements of CPC 47 / IFRS 15 to the comparative period presented. The Company will use, in principle, the practical files for concluded contracts. This means that completed contracts that started and ended in the same comparative presentation period, as well as contracts that are contracts concluded at the beginning of the earliest period presented, will not be resubmitted. Among the new requirements established in the standard that will come into effect as of 1 January 2018, the stages of accounting for revenue arising from contracts entered into with clients are highlighted. As a result, revenue should be recognized only for the amount that the Company expects to be entitled in the transaction and at the moment in which the transfer of control of goods and services to customers occurs. The Company carried out preliminary studies based on the operations carried out in the fiscal year of In this study, the Company identified which impacts will occur in the sale of services, commercial agreements with suppliers and in intercompany operations. The main preliminary impacts are described below:

4 OPERATION CURRENT TREATMENT TREATMENT IFRS 15 / CPC 47 IMPACTS Services Record of sales revenue, incidental taxes and cost of sales. Commission registration on the sale and incident taxes. Reclassification of the estimated balance of BRL 400,000. Trade agreements with suppliers Registration of the agreement as a reduction of selling expenses. Registration of the agreement as a reduction of cost of sales. Reclassification of expenses with sales for cost of sales in the estimated amount of BRL 192,000. Intercompany transactions (only in the individual financial statements) Record of sales revenue, incidental taxes and cost of sales. Commission registration on the sale and incident taxes. Reduction of intercompany sales revenue in the approximate amount of BRL 448,076 and reduction of cost of sales in the amount of BRL 353,466. Conditional discounts (only in the consolidated financial statements) Registration of the conditional discount granted as financial expense. Registration of the conditional discount granted as a deduction from gross revenue. Reclassification of financial expenses with conditional discounts granted of BRL 265,974 to deduct gross revenue. In the case of extended guarantees, the Company is listed as an agent in the sale of insurance policies, recognizing the commission in the Service Sales Revenue. There is no impact related to this transaction. IFRS 16 / CPC 06 (R2) - Leasing Operations IFRS 16 replaces existing lease standards, including CPC 06 (IAS 17) Leasing Operations and ICPC 03 (IFRIC 4, SIC 15 and SIC 27) Complementary Aspects of Leasing Operations. The standard is effective for annual periods beginning on or after January 1 st, Early adoption is permitted only for financial statements in accordance with IFRSs and only for entities applying IFRS 15 Contracts Revenue with Clients on or before the date of initial application of IFRS 16. IFRS 16 introduces a single model for the accounting of leases in the balance sheet for lessees. A lessee recognizes a right of use asset that represents his right to use the leased asset and a lease liability that represents his obligation to make lease payments. Exemptions are available for short-term leases and low value items. The lessor s accounting remains similar to the current standard, that is, the lessors continue to classify the leases as financial or operating.

5 The rule that will be effective as of January 1 st, 2019, with retrospective effect, establishes that lessees must recognize the liability of future payments and the right to use the leased asset for practically all lease agreements, including the operational ones and, at the option of the Company, excluding smallvalue contracts or with a maturity of less than or equal to twelve months. The Company is evaluating the impact of applying the standard on the financial statements. Preliminary studies indicate that relevant impacts will occur in the income statement in the lines of selling expenses, financial expenses and depreciation and amortization. Regarding the equity accounts, the impacts will occur in the accounts of property, plant and equipment and in financing liabilities. The change required by the standard may have a temporary effect on the result for the year. (c) Demonstration of added value (DVA). The presentation of the Individual and Statement of Added Value (DVA) is required by Brazilian corporate law and by the accounting practices adopted in Brazil applicable to publicly-held companies. IFRS does not require the presentation of this statement. As a consequence, by IFRS, this statement is presented as supplementary information, without prejudice to all financial statements. 2.2 Consolidation (a) Subsidiaries Subsidiaries are all entities (including structured entities) in which the Group has control. Subsidiaries are fully consolidated as of the date the control is transferred to the Group. The consolidation is interrupted from the date on which the Group ceases to have control. The identifiable assets acquired, liabilities and contingent liabilities assumed for the acquisition of subsidiaries in a business combination are initially measured at fair values at the acquisition date. The Group recognizes the non-controlling interest in the acquiree, both at its fair value and the proportional portion of the uncontrolled interest in the fair value of the acquiree s net assets. The measurement of non-controlling interest is determined on each acquisition. Costs related to acquisition are recorded in the income for the year as incurred. Transactions, balances and unrealized gains on transactions between Group companies are eliminated. Unrealized profits or losses are also eliminated unless the operation provides evidence of impairment to the transferred asset. The accounting policies of the subsidiaries are changed, when necessary, in order to ensure consistency with the policies adopted by the Group. (b) Loss of control in subsidiaries When the Group ceases to have control, any interest retained in the entity is remeasured at its fair value, and the change in book value is recognized in profit or loss. The amounts previously recognized in other comprehensive income are reclassified to income. (c) Joint agreements Joint agreements are all entities over which the Group has shared control with one or more parties. Investments in joint agreements are classified as joint operations or joint ventures, depending on the rights and contractual obligations of each investor.

6 The joint operations are accounted for in the financial statements to represent the Group s contractual rights and obligations. Accordingly, the assets, liabilities, revenues and expenses related to their interests in joint operations are accounted for individually in the financial statements. The Company, together with its subsidiary B2W, holds a stake in the Fundo Fênix de Investimento em Direito Creditório (FIDC), a special purpose company incorporated in 2011 for the exclusive purpose of conducting the securitization of receivables of the Company and its subsidiary B2W and, since the creation of the fund, fully consolidates its operations. Considering the joint operation of FIDC between the Company and its subsidiary B2W, as described in note 7 (a), in line with CPC 19 (R2), the subsidiary B2W recognizes its share of any assets and liabilities held or assumed and its share of FIDC s revenues and expenses. The balance of securities securitized by the subsidiary B2W, through FIDC, was 27.40% of the fund s operations as of December 31st, 2017 (42.54% as of December 31st, 2016), with the rest of the transaction being carried out by the Company. 2.3 Presentation of information by segments The operating segments are disclosed in a manner consistent with the internal report provided to the Company s Management that allocates resources and evaluates the performance by reviewing results and other information related to the operating segments. The Company s Management defined its operating segments as follows: Physical commerce - retail trade, through Lojas Americanas stores in traditional and express formats. Electronic commerce - trade in products and provision of services through various non-presence means, in particular the Internet through the subsidiary B2W. Others - FIDC and other activities that did not meet the minimum quantitative and qualitative parameters for presentation separately. These segments are identified based on the legal formalization of the Company s business and are disclosed in note Exchange for foreign currency (a) Functional currency and presentation currency The functional and presentation currency of the Group s financial statements is the Brazilian Real. (b) Transactions and balances Transactions in foreign currency, that is, all those that are not carried out in the functional currency are converted by the exchange rate of the dates of each transaction. Monetary assets and liabilities denominated in foreign currency are translated into the functional currency at the exchange rate on the closing date. Gains and losses on changes in exchange rates on monetary assets and liabilities are recognized in the income statement. Non-monetary assets and liabilities acquired or contracted in foreign currency when applicable are translated based on the exchange rates of the transaction dates or the valuation dates at fair value when used. The foreign currency translation differences arising from the translation of the financial statements of subsidiaries, whose functional currency is not the Brazilian Real ( BRL ), are recognized in other comprehensive income. 2.5 Cash and cash equivalents

7 Cash and cash equivalents include cash, bank deposits and other highly liquid short-term securities with the intent and possibility of being redeemed in the short term and with insignificant risk of change in value. 2.6 Financial assets The Company s financial assets consist mainly of the balance of cash and cash equivalents, securities, trade accounts receivable and other accounts receivable. The Company s cash is invested in the largest financial institutions in Brazil - all first-tier institutions with low credit risk. The receivables of the Company and its subsidiaries are essentially with the main credit card companies that have low levels of credit risk Ranking The Group classifies its financial assets into initial recognition under the following categories: measured at fair value through profit or loss and loans and receivables. The classification depends on the purpose for which the financial assets were acquired. (a) Financial assets at fair value by means of the result Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category if it is acquired primarily for sale in the short term. Assets in this category are classified as current assets. Derivatives are also categorized as held for trading, unless they have been designated as hedging instruments. (b) Loans and receivables Loans and receivables are non-derivative financial assets and liabilities with fixed or determinable payments that are not quoted in an active market. They are presented as current assets, except those with a maturity of more than 12 months after the balance sheet date (these are classified as non-current assets). The loans and receivables of the Group comprise Cash and cash equivalents (cash and banks resources) and Trade accounts receivable and other accounts receivable (notes 2.5 and 2.8) Recognition and measurement Investments are initially recognized at fair value, plus transaction costs for all financial assets not classified as at fair value through profit or loss. Financial assets at fair value through profit or loss are initially recognized at fair value and transaction costs are charged to the statement of income. Financial assets are written off when rights to receive cash flows have expired or have been transferred; in the latter case, provided that the Group has significantly transferred all the risks and benefits of ownership. Available-for-sale financial assets and financial assets measured at fair value through profit or loss are subsequently accounted for at fair value. Loans and receivables are recorded at amortized cost using the effective interest rate method. Profits or losses arising from changes in the fair value of financial assets measured at fair value through profit or loss are presented in the income statement under Financial income in the year in which they occur.

8 Foreign exchange variations on monetary securities are recognized in income. Changes in the fair value of monetary and non-monetary securities classified as available for sale are recognized in shareholders equity Compensation of financial instruments Financial assets and liabilities are offset and the net amount is presented in the balance sheet when there is a legal right to offset the amounts and when the Company intends to liquidate them on a net basis or to realize the asset and liquidate the liability simultaneously. The legal right shall not be contingent on future events and should be applicable in the normal course of business and in the event of default, insolvency or bankruptcy of the company or the counterparty Impairment of financial assets (a) Assets measured at amortized cost The Group assesses at the date of each balance sheet if there is an objective evidence that a financial asset or group of financial assets is impaired. An asset or group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events occurring after the initial recognition of the assets (a "loss event") and that event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be estimated reliably. The criteria that the Group uses to determine whether there is objective evidence of an impairment loss include: (i) financial difficulty of the issuer or debtor; (ii) a breach of contract, such as default or delays in the payment of interest or principal; (iii) the Group, for economic or legal reasons relating to the financial difficulty of the borrower, extends to the borrower a concession that a creditor would not normally consider; (iv) the borrower is likely to declare bankruptcy or other financial reorganization. The amount for impairment is measured as the difference between the book value of the assets and the present value of the estimated future cash flows (excluding future credit losses that were not incurred) discounted at the original interest rate of the financial assets. The book value of the asset shall be reduced and the amount of the loss shall be recognized in the statement of income. As a practical expedient, the Company may measure the impairment based on the fair value of an instrument using an observable market price. 2.7 Derivative financial instruments - hedge activities Derivatives are recognized at fair value at the date of conclusion of the contract and are subsequently remeasured at fair value. For more details, see note Accounts Receivable from Clients The accounts receivable from credit card companies are presented net of the adjustment to present value, calculated on the portion of sales and the allowance for doubtful accounts. Also recorded under this heading are sales made through corporate operations, loyalty projects and commercial agreements, highlighted as Other accounts receivable (note 8).

9 Customer accounts receivable are initially recognized at fair value and subsequently measured at amortized cost using the effective interest rate method less the allowance for doubtful accounts ( PCLD or impairment ). 2.9 Inventories Inventories are stated at thw lowest between the average acquisition cost or realizable value. The average acquisition cost is presented net of the adjustment to present value of suppliers (forward purchases) and bonuses agreed with suppliers, when applicable. The net realizable value is the estimated selling price in the ordinary course of business, less estimated completion costs and the estimated costs required for the sale Intangible Asset (a) Premium Premium results from the acquisition of subsidiaries and represents the excess of (i) the consideration transferred, (ii) of the value of the noncontrolling interest in the acquiree and (iii) the fair value on the date of acquisition of any previous equity interest in the acquiree in relation to the fair value of the identifiable net assets acquired. If the total of the consideration transferred, the noncontrolling interest recognized and the holding previously measured at the fair value is less than the fair value of the net assets of the subsidiary acquired, in the case of an advantageous purchase, the difference is recognized directly in the statement of the result. In the consolidated financial statements, goodwill on acquisition of subsidiaries is recorded as an intangible asset. (b) Trademarks and licenses Trademarks and licenses acquired separately are initially stated at historical cost. Trademarks and licenses acquired in a business combination are recognized at fair value at the date of acquisition. Subsequently, the brands and licenses, evaluated with a defined useful life, are accounted for at their cost less accumulated amortization. The amortization is calculated by the straight-line method to allocate the cost of trademarks and licenses during their estimated useful life of 15 to 20 years. (c) Softwares/Website Expenditures related to web site development (B2W s main sales channel), such as development of operational applications and technological infrastructure (purchase and in-house development of software and application installation on websites), software use rights, and as a graphic development, are recorded in intangible assets, as provided for in Technical Pronouncement CPC 04 (IAS 38), and are amortized on a straight-line basis considering the stipulated period of their use and benefits to be earned (note 15). Software licenses are capitalized based on the costs incurred to acquire the software and make it ready for use. The costs associated with the maintenance of software are recognized as an expense, as incurred. Development costs that are directly attributable to the design and testing of new identifiable and unique software and websites controlled by the Group are recognized as intangible assets when the following criteria are met: It is technically feasible to complete the software / website so that it is available for use. Management intends to complete the software / website and use or sell it. The software / website may be sold or used.

10 It can be shown that it is likely that the software / website will generate future economic benefits. Adequate technical, financial, and other resources are available to complete the development and to use or sell the software. The expense attributable to the software during its development can be measured reliably. Directly attributable costs, which are capitalized as part of the software / website product, include the costs of employees allocated to the development of software / websites and an appropriate portion of the applicable indirect costs. Costs also include borrowing costs incurred during the software / website development period. The amount of charges on capitalized loans is obtained by applying the weighted average rate of the loans that were in force during the period on investments made in obtaining the asset and does not exceed the amount of borrowing costs incurred during the year. Other development expenses that do not meet these criteria are recognized as an expense, as incurred. Development costs previously recognized as expenses shall not be recognized as an asset in a subsequent period Property, plant and equipment The property, plant and equipment are measured according to its history less the accrued depreciation. Historical cost includes expenses directly attributable to the acquisition of items and financing costs related to the acquisition of qualifying assets. The subsequent costs are included in the accounting value of the asset or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item and the cost of the item may be measured reliably. All other repairs and maintenance are entered in the income statement as incurred. The land is not depreciated. Depreciation of other property, plant and equipment is calculated using the straight-line method considering its costs and its residual values over the estimated useful life, as shown in note 14. The residual values and the useful lives of the assets are reviewed at the end of each year and, if appropriate, adjusted. The impacts of accounting for borrowing costs taken for the purpose of acquiring and/or constructing qualifying fixed assets are not relevant due to the short time spent in assembling the stores (their main qualifying asset) and therefore were not accounted for. Gains and losses on disposals are determined by comparing the results with their carrying amount and are recognized in Other net operating expenses and revenues in the income statement Operational and financial leasing The operating lease is represented by cases where there is no transfer of ownership of the assets to the Company. They are recognized in the income statement for payments made on a straight-line basis over the term of the contract, according to the accrual basis of accounting. The financial lease, in accordance with CPC 06, is recorded as property, plant and equipment as a contra entry to a liability. Such liability is settled in accordance with the provisions of the agreement entered into with the supplier. The Asset is depreciated over the economic useful life of the asset, if the Company holds its property or, otherwise, for the term established in the agreement Impairment of non-financial assets

11 Assets that have an indefinite useful life, with premium, are not subject to amortization and are tested annually to identify any need for impairment. Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized when the carrying amount of the asset exceeds its recoverable amount, which represents the greater of the fair value of an asset less its sales costs and its value in use. For the purpose of impairment assessment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (Cash Generating Units - CGU). Non-financial assets, except fot premium, that have been adjusted for impairment are subsequently reviewed for the analysis of a possible reversal of impairment at the balance sheet date. The premium calculated by the Company and its subsidiaries in the acquisition of investments up to 31 December 2008 was amortized at the rate of 10% p.a. and, as of fiscal year 2009, only subject to impairment assessment. The adjusted premium, the result of the year, through impairment, is no longer reversed Accounts payable to suppliers Accounts payable to suppliers are obligations contracted for goods or services acquired in the ordinary course of business. These obligations may be deducted from receivables when there are commercial agreements entered into with suppliers for the promotion or promotion of certain products. They are classified as current liabilities if payment is due in up to one year. Otherwise, these accounts payable are presented as non-current liabilities. They are initially recognized at fair value and subsequently measured at amortized cost using the effective interest rate method Adjustment to present value The purchase and sale transactions were carried at their present value considering the terms of said transactions using the following rates: Parent Company Minimum December 31st, 2017 December 31st, 2016 Average Average Grade Maximum Minimum Grade Maximum Suppliers (*) 8.58% 12.02% 15.38% 15.76% 15.96% 16.15% Accounts Receivable from Clients (**) 7.56% 11.38% 14.63% 15.03% 15.55% 15.65% (*) Counterpart in suppliers (note 16) and inventories (note 9) and reversal in financial expenses (note 25). (**) Counterpart of clients accounts receivable (note 8) and reversal of financial income (note 25). The sales tax rates on the respective dates were applied to the amounts identified Loans and financing The borrowings and fundings are initially recognized at fair value, net of transaction costs incurred and are subsequently stated according to the amortized cost. Any difference between proceeds (net of transaction costs) and the total payable value shall be recognized in the income statement during the period in which the loans are pending, using the method of effective interest rate. Loans subject to swap for purposes of protection against exchange rate fluctuations are recorded at fair value, as shown in note 4.1 (a). Borrowings are classified as current liabilities unless the Group has unconditional right to defer the settlement of the liability for at least 12 months after the balance sheet date.

12 2.17 Provisions Provisions and lawsuits (labor, civil and tax) are recognized when: (i) the Group has a present or nonformalized obligation as a result of events that have already occurred; (ii) it is probable that an outflow of resources will be required to settle the obligation; and (iii) the value can be estimated safely. When there is a series of similar obligations, the probability of liquidation shall be determined considering the class of the obligation as a whole. A provision is recognized even if there is a low probability of liquidation related to any individual item included in the same class of obligations. Provisions are measured at the present value of the expenses that must be required to settle the obligation, using a pre-tax rate, which reflects current market assessments of the time value of money and the specific risks of the obligation. The increase of the obligation as a result of the time shall be recognized as a financial expense. The Company evaluates, at least once a year, the sufficiency of its provisions for probable events occurring during the next fiscal year and, when these events are not performed, the Company reverses the balance in the next evaluation and constitutes a new provision for following year Current and deferred tax return and social contribution Income and social contribution taxes for the year comprise current and deferred taxes and are recognized in the income statement. The current and deferred income tax liability is calculated based on the tax laws enacted, or substantially enacted, at the balance sheet date. Management periodically evaluates the positions taken by the Group in assessing income taxes in relation to situations in which the applicable tax regulations give rise to interpretations; and establishes provisions, where appropriate, based on the estimated amounts of payment to the tax authorities. Current income tax and social contribution are presented net, by taxpayer, in liabilities when amounts are payable, or in assets when amounts paid in advance exceed the total due at the reporting date. However, deferred tax assets and liabilities are presented separately in the note 11(a). Deferred income tax and social contribution assets are recognized only in proportion to the probability that future taxable income is available and against which temporary differences may be used. Deferred income tax assets and liabilities are presented by the net balance in the balance sheet when there is the legal right and the intention to compensate them when calculating current taxes, generally related to the same legal entity and same tax authority Employee Benefits (a) Share-based compensation The Company and subsidiary B2W operate a share-based compensation plan, settled with shares, under which the entities receive the services of the employees as consideration for the Group s equity instruments (BTOW3 shares in B2W and LAME4 shares in the Company). The total amount to be recognized as an expense over the life and vesting period is determined by the fair value of the instruments granted, calculated on the date of the granting of the in the average quotation of the closing of the shares on the stock exchange where they are traded, and this total value is appropriate to the result, with corresponding adjustment in equity, by the linear method during the vesting period, considering the expected withdrawal.

13 At the balance sheet date, the Group reviews the vesting period estimates based on historical data and recognizes the impact of the revision of the estimates, if any, in the income statement with an adjustment corresponding amount in equity. At the date of granting of the plan, the amounts received from employees, net of any directly attributable transaction costs, are credited to the share capital (nominal value). The shares issued at the end of the vesting period are also credited to the share capital, but based on the capitalization of the reserves that were constituted during the vesting period. (b) Profit sharing When applicable, the Group recognizes a profit sharing liability and expense based on a methodology that takes into account the net income attributable to the Company s shareholders. (c) Other benefits The Company and its subsidiaries do not grant other post-employment benefits, termination benefits or other long-term benefits to Management and its employees, in addition to those provided for in labor legislation Share capital The common and preferred shares are classified in shareholders equity (note 22). The incremental costs, directly attributable to the issuance of new shares or options, are shown in shareholders equity as a deduction from the amount collected, net of taxes. When the Company purchases shares of its own capital (treasury shares), the amount paid, including any directly attributable additional costs (net of income tax), is deducted from stockholders equity until the shares are canceled or traded. When such shares are subsequently traded, any amount received, net of any directly attributable transaction costs and the related income tax and social contribution effects, is included in the shareholders equity attributable to the Company s shareholders Collection of Revenue Revenue comprises the fair value of the consideration received or receivable for the sale of products and services in the ordinary course of business of the Group. Revenue is presented net of taxes, discards, rebates and rebates, as well as sales eliminations between Group companies. The Group recognizes revenue when its value can be measured reliably, when it is probable that future economic benefits will flow to the entity and when specific criteria have been met for each of the Group s activities, as described below. The Company bases its estimates on historical results, taking into account the type of customer, the type of transaction and the specifications of each sale. (a) Sale of goods and services Revenues from sales of goods and services that include freight collected from customers are recognized when transferring property and risks to third parties at their gross values and deducted from unconditional discounts, returns, adjustment to present value calculated on forward sales and sales taxes. Sales orders approved by credit card companies whose products have not yet been invoiced or delivered to customers and sales of gift cards held by customers that will be used in the future are recorded as other obligations classified in current liabilities.

14 b) Financial revenue Financial income is recognized according to the period elapsed on the accrual basis, using the effective interest rate method Distribution of dividends and interest on capital When applicable, the distribution of dividends and interest on shareholders equity to the Company s shareholders is recognized as a liability in the Group s financial statements at the end of the year based on the Company s by-laws. Any amount above the mandatory minimum is recorded in equity until the date of approval. The tax benefit of interest on shareholders equity is recognized in the statement of income for tax purposes and in shareholders equity for corporate purposes. 3. Critical accounting estimates and judgments Accounting estimates and judgments are continuously evaluated and are based on historical experience and other factors, including expectations of future events, which are considered reasonable for the circumstances. 3.1 Critical accounting estimates and assumptions By definition, the resulting accounting estimates shall be rarely equivalent to their actual results. Estimates and assumptions that present a significant risk, which are likely to cause a material adjustment in the carrying amounts of assets and liabilities for the next year, are contemplated below. (a) Impairment of premium The Group annually tests any impairment losses in premium in accordance with the accounting policy presented in Note For the subsidiary B2W (publicly-held company), the premium calculated on the acquisition of the investment was assessed for impairment, based on market price information, and did not identify a need to record a provision for losses, according to the calculation shown in Note 15(a). For the other direct and indirect subsidiaries, premium impairment was assessed based on future profitability projections and expectations for a period of 10 years, using a nominal IPCA rate plus 2% pa. and a 1% growth rate for perpetuity. The discount rate on future cash flows was estimated at 10.3% p.a. No impairment losses were recognized in the financial statements for the years ended December 31st, 2017 and (b) Recovery of income tax and deferred social contribution Significant management judgment is required to determine the amount of deferred tax assets that can be recognized based on the expected maturity and level of future taxable income, together with future tax planning strategies and profit-generating market assumptions. The criteria for determining the need for provision for realization of deferred income tax and social contribution assets are described in Note 11. (c) Fair value of derivative and others financial instruments

15 The fair value of the financial instruments presented in note 4.1 is based on market prices quoted at the balance sheet date or, if they do not exist, in other instruments that allow them to be measured. 3.2 Critical judgments in the application of the Company s accounting policies (a) Provision for doubtful liquidation credits This provision has a mitigated risk due to the accounts receivable being backed by operations carried out with the main credit card operators. Management monitors losses based on historical analysis. The provision is recorded in an amount considered sufficient to cover probable losses on the realization of accounts receivable. (b) Provision for losses in inventories The Company conducts cyclical inventories in the distribution centers and stores and provides for the differences established during the year. At the end of each fiscal year, the provision is offset against the losses recorded in the inventories. The remaining balance of the provision at the end of the fiscal year is estimated based on the history of losses of goods in stores not inventoried in the last months of the year. This provision is considered sufficient by Management to cover probable losses in the realization of its inventories. (c) Useful lives of property, plant and equipment and intangible assets The depreciation or amortization of property and equipment and intangible assets, based on an appraisal report issued by independent experts, considers the best estimate of the use of these assets throughout their operations. Management periodically assesses whether changes in the economic scenario and/or in the consumer market may require revision of these estimates of useful life. (d) Impairment of non-financial assets Impairment tests are carried out considering the projections of future results, calculated based on internal and market assumptions, discounted to present value. These projections are calculated considering Management s best estimates that are reviewed when there is a change in the economic scenario or in the consumer market. (e) Contingent assets and liabilities The Company recorded provisions, which involve a considerable judgment by Management, for tax, labor and civil risks that, as a result of a past event, it is probable that an outflow of resources involving economic benefits will be required to settle the obligation and an estimate amount of that obligation. The Company is subject to legal, civil and labor claims covering matters arising from the normal course of its business activities. The assessment of the probability of loss includes the valuation of available evidence, the hierarchy of laws, available case law, the most recent court decisions and its relevance to the legal system, as well as the valuation from independent lawyers. Provisions are reviewed and adjusted taking into account changes in circumstances, such as the applicable limitation period, conclusions of tax inspections or additional exposures identified on the basis of new matters or court decisions. Actual results may differ from estimates.

16 Contingent assets are events that give rise to the possibility of entry of economic benefits to the Company. When practically certain, based on legal opinions that support its realization, are recognized in profit or loss (Note 10). 4 Financial Risk Management 4.1 Financial risk factors In the normal course of its business, the Company and its subsidiaries are exposed to market risks related to fluctuations in interest rates and exchange rate variations, as well as credit risk in its term sales and liquidity risk. The Company and its subsidiaries use hedging instruments to minimize their exposure to these risks, based on their monitoring under the management of their directors and supervised by the Board of Directors. This management determines the strategies to be adopted and the Administration contracts protection instruments appropriate to each circumstance and inherent risks. The Company and its subsidiaries do not have options, swaptions, repurchase swaps, flexible options, derivatives embedded in other products, structured transactions with derivatives and exotic derivatives. The Company and its subsidiaries do not operate with derivative financial instruments for the purpose of speculation, thus reaffirming their commitment to the conservative cash management policy, both in relation to their financial liabilities and to their cash position. (a) Market risk (i) Exchange risk This risk arises from exchange rate fluctuations on the foreign currency loan portfolio (note 17) and on accounts payable for the importation of resale goods. The Company and its subsidiaries use traditional swaps for the purpose of eliminating exchange losses arising from sharp devaluations of the Brazilian Real currency (BRL) against these funds in foreign currencies. Traditional swaps (recorded in the loans and financing account) The counterpart of these traditional swaps is the financial institution that provides loans in foreign currency (US dollars). These CDI-denominated swap operations aim to offset exchange rate risk by transforming the cost of debt (note 17) to local currency and local interest rates, varying from 115.7% to 141.0% of the CDI. These agreements have a reference value of BRL 540,489 in the parent company and BRL 1,542,813 in the consolidated (BRL 540,489 and BRL 1,406,813 on December 31st, 2016, respectively) as of December 31st, These transactions are matched in terms of value, terms and interest rates. The Company and its subsidiaries intend to settle such contracts simultaneously with the respective loans. In this type of operation there are no contractual terms of margin call. Parent Company Hedge object 667, ,206 1,632,204 1,417,196 Swap passive position (% CDI) (657,638) (634,767) (1,686,020) (1,536,176) Adjustable swap accounting balance (Note 17 (a)) 9,556 (16,561) (53,816) (118,980) Parent Company

17 Ammortized Cost 683, ,495 1,667,251 1,434,925 Object of the hedge (debt) Fair Market Value 667, ,206 1,632,204 1,417,196 Swaps Active position (Dollar + Pre) (16,137) (30,289) (35,047) (17,729) Ammortized Cost (683,331) (648,495) (1,667,251) (1,434,925) (1,669,376 Fair Market Value (688,301) (614,803) 7) (1,404,162) 4,970 (33,692) 2,125 (30,763) Passive position (% CDI) Ammortized Cost (678,746) (631,364) (1,723,193) (1,523,142) Fair Market Value (657,638) (634,767) (1,686,020) (1,536,176) (21,108) 3,403 (37,173) 13,034 16,137 30,289 35,047 17,729 Considering that the Company s exposure to the risk of exchange rate fluctuations is mitigated by the traditional swap operations contracted for exchange protection, and therefore simultaneously with the respective foreign currency loans, the variation of the US Dollar against the Brazilian Real, in due to the current market condition, has no material effects on the Company s financial statements. (i) Interest rate risk The Company and its subsidiaries use resources generated by operating activities to manage their operations, as well as to guarantee their investments and growth. In order to complement its cash requirements for growth, the Company and its subsidiaries obtain loans and financing from the country s main financial institutions, substantially indexed to the CDI variation (Around 85%). The inherent risk arises from the possibility of significant fluctuations in the CDI (sensitivity analysis in item (d) below). The CDI indexed financial investments policy partially mitigates this effect. (b) Credit risk Credit risk is managed corporately. Credit risk arises from cash and cash equivalents, derivative financial instruments, deposits with banks and other financial institutions, as well as from credit exposures to customers. For banks and other financial institutions, individual risk limits are determined based on internal or external classifications in accordance with the limits determined by the Board of Directors. The use of credit limits is monitored regularly. Sales to retail customers are settled in cash or through the major credit cards on the market. Credit risk is minimized as the receivables of the Company and its subsidiaries are essentially with the main credit card companies that have excellent levels of risk classification. Approximately 55% (42% in ) of the Company's sales are made in cash and the remainder through credit cards managed by third parties. (c) Liquidity risk