Financial statements Vicunha Têxtil S.A.

Transcription

1 Financial statements Vicunha Têxtil S.A. and 2011 with Independent Auditor s Report

2 Financial statements and 2011 Contents Independent auditor s report on financial statements... 1 Audited financial statements Balance sheets... 4 Income statements... 6 Statements of comprehensive income... 7 Statements of changes in equity... 8 Cash flow statements - indirect method... 9 Statements of value added Notes to financial statements... 11

3 Management report Vicunha Têxtil, Latin America s leader in the production and sale of denim and twill fabrics, submits to the analysis of its Shareholders, Clients, Suppliers and Financial Institutions its Individual and Consolidated Financial Statements for the year ended, and Independent Auditor s Report. Management comments 2012 was a year marked by worldwide economic instability, especially as a result of the financial crisis in Europe, the growth slowdown in China and the timid recovery of the United States. In Brazil, the performance of the manufacture segment was negatively impacted by the low levels of investments and the higher offer of imported products. Despite the measures taken for increasing consumption and the fall in interest rates, the Brazilian economy faced a decrease in growth rate and in 2012 the estimated Gross Domestic Product (GDP) was under 1.0%, below the 2.7% recorded in In this context, Vicunha Têxtil proved to be well-prepared for turning challenges into opportunities, and presented a good performance level in 2012, a year when the results of Brazilian textile industry were impacted by the international downturn and the competition of imported manufactured products. In 2012, the Company had an increase by 15% in gross sales and registered a net income record of R$126 million. The sales increase and growth in profitability consolidated management s successful strategy implemented over the past years, which was mainly focused on Company most significant activities (denim and twill fabrics), globalization and revamping of all its manufacturing units. Worth stressing, in 2012, the Company was recognized as the fifth largest company in the State of Ceará, according to the Delmiro Gouveia Award, which evaluates financial, social and environmental aspects, as well as transparency over disclosure of financial information to the market. This public recognition is a reason for pride of the Company s employees and management. Comments on performance The Company s focus on continuous development, innovation and presence in the international market resulted in a significant improvement in its financial indexes in 2012, among which we highlight: Consolidated net revenue reached R$1,170 million, a 13% increase as compared to 2011 (R$1,036 million);

4 Consolidated gross profit reached R$305 million, which represents a 11% increase as compared to the prior year, when said profit totaled R$275 million; Consolidated EBITDA totaled R$167 million (a 14% margin), which allowed the Company to maintain own cash generation as its major source of investment funds. The 2012 EBITDA margin was impacted by the increase in the allowance for doubtful accounts by R$ 15 million as compared to This is explained by prior years sales arrangements. Should this amount be considered nonrecurring, the Company would present a R$ 182 million EBITDA (16% margin); Record net income in 2012 totaled R$126 million (R$80 million in 2011), which represents 11% of consolidated net revenue and 15% of return on consolidated equity. Debt Consolidated net debt totaled R$356 million in 2012, which is 2.1 times the EBITDA for the period (in 2011, net debt amounted to R$463 million, up 2.7 times the EBITDA). In 2012, as a debt reduction strategy, the Company implemented several actions for decreasing the working capital used in its operations, especially as concerns inventories, and aims at maintaining working capital at the lowest level possible. Investments The Company has been making significant investments in the past few years, among which we highlight: Brazil: a project for modernizing the units located in the Northeast, with total investments estimated at R$430 million, R$257 million of which were invested in the last three years and R$148 million of which will be invested in 2013; Ecuador: a project for doubling the denim production capacity, with total investments of US$ 45 million, completed in 2011; Argentina: acquisition of Ullum Group manufacturing plants and a project for modernizing and expanding denim production, with investments estimated at US$ 60 million and completion planned for 2013/2014. The investments made in Brazil reinforce the important role played by the Company in the Brazilian market of denim and twill fabric production. Internationally, with the strengthening of the operations of the Ecuador subsidiary and the recent acquisition in Argentina, the Company is preparing to consolidate its production and presence in Latin America. Payment of dividends In 2012, management recorded a provision in the amount of R$20 million as mandatory minimum dividends, corresponding to R$ for each registered common share and R$ for each registered preferred share, to be paid in 2013.

5 Expectations Vicunha Têxtil will continue increasing its activity both in the countries where it already operates and internationally, by maintaining its leading position and supporting the development of its clients. Additionally, the Company will maintain its policies as concerns investments and employee development, which, in conjunction with more favorable market conditions and the improvement in the international economic environment, allow us to forecast a positive year for business. Relationship with independent external auditor In compliance with Brazilian SEC (CVM) Ruling No. 381/2003, Company and subsidiaries did not retain non-audit services. The Company s policy is to comply with and meet the regulations which define the restrictions to the services provided by independent auditors. Management representation EBITDA represents earnings (loss) before interest income/(expenses), income and social contribution taxes and depreciation and amortization. EBITDA should not be considered an alternative for net income (loss), an indicator of the Company s operating performance, or an alternative for cash flow as a liquidity indicator. Management is of the opinion that EBITDA is a practical measure for determining the Company s operating performance and to allow comparing its performance with that of other companies. However, it should be noted that EBITDA is a non-brgaap measure and may be defined and calculated in a different manner by other companies. In accordance with the provisions set out in CVM Rulings, Company Executive Board represents that it has discussed, revised and agreed with the opinions expressed in the independent auditor s report on the financial statements for the years ended December 31, 2012 and 2011, authorizing their disclosure. Acknowledgements We wish to thank our shareholders, clients, suppliers, financial institutions and other entities for their trust, preference, support and encouragement. Also, we thank Company Executive Board and employees for their involvement, integrity and commitment, factors which make Vicunha Têxtil a leading company, nationally and internationally recognized for innovation, quality, client service, and for its social and environmental responsibility. Maracanaú, March 27, The Management

6 Condomínio São Luiz Av. Pres. Juscelino Kubitschek, 1830 Torre I - 8º Andar - Itaim Bibi São Paulo, SP, Brasil Tel: (5511) Fax: (5511) A free translation from Portuguese into English of Independent Auditor's Report on individual financial statements prepared in accordance with accounting practices adopted in Brazil and on consolidated financial statements prepared in accordance with IFRS and also with accounting practices adopted in Brazil Independent auditor s report on Financial Statements The Shareholders, Board of Directors and Officers Vicunha Têxtil S.A. We have audited the accompanying individual and consolidated financial statements of Vicunha Têxtil S.A. (Company), identified as Company and Consolidated, respectively, which comprise the balance sheet as at and the related income statements, statements of comprehensive income, statements of changes in equity and cash flow statements for the year then ended, and a summary of significant accounting practices and other explanatory information. Management's responsibility for the financial statements Management is responsible for the preparation and fair presentation of the individual financial statements in accordance with accounting practices adopted in Brazil and for the consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB), and in accordance with accounting practices adopted in Brazil, 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. Auditor s responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Brazilian and International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. 1 Uma empresa-membro da Ernst & Young Global Limited

7 An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company's preparation and fair presentation of the Company s financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. An audit also includes evaluating the appropriateness of accounting practices used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion on individual financial statements In our opinion, the aforesaid individual financial statements present fairly, in all material respects, the equity and financial position of Vicunha Têxtil S.A. at, its operating performance and cash flows for the year then ended, in accordance with accounting practices adopted in Brazil. Opinion on consolidated financial statements In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Vicunha Têxtil S.A. as at, its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with international financial reporting standards (IFRS) issued by the International Accounting Standards Board (IASB) and accounting practices adopted in Brazil. Emphasis of a matter As mentioned in Note 2, the individual financial statements were prepared in accordance with accounting practices adopted in Brazil. In the case of Vicunha Têxtil S.A., these practices differ from IFRS applicable to separate financial statements solely with respect to the measurement of investments in subsidiaries, affiliates and jointly-controlled subsidiaries under the equity method, while such investments would be measured at cost or fair value for IFRS purposes. Our opinion is not qualified in respect of this matter. 2

8 Other matters Statements of value added We have also audited the individual and consolidated statements of value added (SVA), for the year ended, whose presentation is required by Brazilian corporation law for publicly-held companies and as supplementary information under IFRS, which do not require SVA presentation. These statements were submitted to the same audit procedures previously described and, in our opinion, are fairly presented in all material respects, in relation to the overall financial statements. São Paulo, March 27, ERNST & YOUNG TERCO Auditores Independentes S.S. CRC-2SP015199/O-6 Waldyr Passetto Junior Accountant CRC-1SP173518/O-8 S-CE 3

9 A free translation from Portuguese into English of individual financial statements prepared in accordance with accounting practices adopted in Brazil and of consolidated financial statements prepared in accordance with IFRS and also with accounting practices adopted in Brazil Vicunha Têxtil S.A. Balance sheets and 2011 Company Consolidated Note 12/31/12 12/31/11 12/31/12 12/31/11 Assets Current Cash and cash equivalents 4 60,123 7,384 96, Short-term investments 5 231, , , Trade accounts receivable 6 316, , , Inventories 7 171, , , Dividends receivable 10 1,909 1, Taxes recoverable 8 38,355 25,552 56, Receivables 9 12,710 30,287 6, Operations with derivatives 21 16,682 8,394 16, Other accounts receivable 7,427 5,698 12, Total current assets ,806 1,013, ,060 Noncurrent Short-term investments 5 4, , Taxes recoverable 8 6,279 5,778 10, Deferred taxes, net Judicial deposits 15,165 14,410 15, Related parties Receivables 9 64, ,748 45, Operations with derivatives - 2, Other accounts receivable 16,870 9,070 17, Investments , ,375 18, Investment properties 11 7,577 7,577 7, Property, plant and equipment , , , Intangible assets 13 7,119 8,244 8, Total noncurrent assets , , ,200 Total assets ,718,819 2,002,573 1,839,260 See accompanying notes. 4

10 Company Consolidated Liabilities Note 12/31/12 12/31/11 12/31/12 12/31/11 Current Trade accounts payable 15 30,032 41, Loans and financing , , Salaries, provisions and social contributions 17,235 18, Taxes payable 5,023 3, Dividends payable 20 19,902 4, Taxes in installments 19 55,135 51, Sundry provisions 10,850 12, Other liabilities 22,441 19, Total current liabilities , ,896 Noncurrent Trade accounts payable 15 2,504 3, Loans and financing , , Taxes payable 8,183 7, Taxes in installments 17 53,863 57, Deferred income and social contribution taxes, net 18 20,947 66, Provision for tax, civil and labor risks 19 22,138 19, Other liabilities 276 3, Total noncurrent liabilities , ,402 Equity Capital , , Capital reserve 20 1,700 5, Income reserve 187,010 91, Equity valuation adjustment 115, , Cumulative translation adjustments 20 4,825 1, Controlling interest 978, , Noncontrolling interest Total equity , ,962 Total liabilities and equity ,002,573 1,839,260 See accompanying notes. 5

11 Income statements Years ended and 2011 (In thousands of reais, except earnings per share) Company Consolidated Note 12/31/12 12/31/11 12/31/12 12/31/11 Restated Restated Net revenue , ,552 1,170,243 1,036,218 Cost of products sold 24 (713,763) (697,628) (865,113) (761,402) Gross profit 239, , , ,816 Operating income (expenses) Selling expenses 24 (98,694) (77,211) (130,493) (107,914) General and administrative expenses 24 (64,992) (64,821) (89,345) (81,334) Management fees 10 (7,812) (5,260) (7,812) (5,260) Other operating income, net 26 22,199 33,861 22,585 33,149 Income before net financial income (expenses), equity pickup and taxes continuing operations 89, , , ,457 Financial income , , , ,556 Financial expenses 25 (146,496) (168,147) (157,933) (181,631) Financial expenses, net (9,674) (23,835) (17,949) (29,075) Equity pick-up 14 5,078 1, Income before income taxes 85,352 83,807 82,116 84,382 Income and social contribution taxes Current 18 (5,247) (4,510) (5,343) (4,164) Deferred 18 45, , ,556 (3,543) 44,711 (3,786) Net income for the year 125,908 80, ,827 80,596 Attributed to controlling shareholders ,908 80,264 Attributed to noncontrolling shareholders Basic and diluted earnings per share R$ Common shares (ON) Preferred Shares (PN) See accompanying notes. 6

12 Statements of comprehensive income Years ended and 2011 Company Consolidated 12/31/12 12/31/11 12/31/12 12/31/11 Net income for the year 125,908 80, ,827 80,596 Other comprehensive income components Other comprehensive income - subsidiaries 1,042 3,473 1,177 2,047 Foreign exchange on investments abroad 3,795 6,756 4,158 7,269 Income tax incentive CPC 07 (7,343) (9,620) (7,343) (9,620) Total comprehensive income for the period 123,402 80, ,819 80,292 Attributed to controlling shareholders ,402 80,873 Attributed to noncontrolling shareholders - - 1,417 (581) See accompanying notes. 7

13 Statements of changes in equity Years ended and 2011 Capital reserve Proposed additional dividends Income reserve Statutory reserve for investments Equity valuation adjustment Cumulative translation adjustments Retained earnings/(accumulated losses) Note Capital Future capital contribution Tax incentives Legal reserve Tax incentives Equity Noncontrolling interest Consolidated equity Balances at January 1, ,809 3,754 2,295 30,000 3,475 21, ,681 (5,726) - 830,744 8, ,123 Capital increase 3,754 (3,754) Future capital contribution - 5, ,450 5,450 Capital loss on change of interest in Vicunha Ecuador S.A (1,093) (1,093) Acquisition of shares held by noncontrolling shareholders (769) (769) Total comprehensive income ,473 6,756 70,644 80,873 (581) 80,292 Net income for the period ,264 80, ,596 Other comprehensive income ,473 6,756 (9,620) 609 (913) (304) Translation adjustments for the period ,756-6, ,269 Other comprehensive income - subsidiaries , ,473 (1,426) 2,047 Income tax incentive CPC (9,620) (9,620) - (9,620) Realization of revaluation reserve (1,996) - 1, Taxes on realization of revaluation reserve (679) Transfer of tax incentives income tax - - (2,295) , Tax incentives income tax , ,620-9,620 Legal reserve , (3,532) Statutory reserve for investments , (37,829) Proposed additional dividends , (12,939) Dividends paid (30,000) (17,661) (47,661) - (47,661) Balances at December 31, ,563 5,450-12,939 7,007 59,285 11, ,837 1, ,026 5, ,962 Capital increase 20 5,450 (5,450) Future capital contribution 20-1, ,700-1,700 Dividends (12,939) (19,814) (32,753) - (32,753) Capital loss on sale of shares from noncontrolling shareholders (185) (185) Acquisition of shares from noncontrolling shareholders (145) (145) - - Total comprehensive income ,042 3, , ,402 1, ,819 Net income for the period , , ,827 Other comprehensive income ,042 3,795 (7,343) (2,506) 498 (2,008) Translation adjustments for the period ,795-3, ,158 Other comprehensive income - subsidiaries , , ,177 Income tax incentive CPC (7,343) (7,343) - (7,343) Realization of revaluation reserve (4,105) - 4, Taxes on realization of revaluation reserve ,396 - (1,396) Investment grant State VAT (ICMS) , (35,137) Tax incentives income tax , ,343-7,343 Legal reserve , (4,172) Statutory reserve for investments , (62,151) Balances at 670,013 1, , ,436 54, ,170 4, ,718 7, ,741 See accompanying notes. 8

14 Cash flow statements - indirect method Years ended and 2011 Company Consolidated 12/31/12 12/31/11 12/31/12 12/31/11 Income before taxes 85,352 83,807 81,197 84,050 Noncontrolling interests Equity pick-up (5,078) (1,149) - - Disposal of assets 5,334 2,931 6,944 5,991 Write-off of investments Provision for investment loss 4,359 2,434 4,359 2,795 Reversal of provision for investment loss - (2,460) - (2,460) Interest gain capital payment (3,894) (3,882) - - Interest loss capital payment 2, Provision for/reversal of allowance for doubtful accounts 25,891 13,962 28,740 12,511 Provision for/reversal of inventory loss (757) 166 (691) 116 Depreciation and amortization 41,187 37,694 54,155 47,851 Interest, exchange and monetary variation, net (37,515) (683) (40,835) 27,820 Interest and monetary variation on loans and financing 42,924 27,820 42,924 (4,182) Provision for civil and labor contingencies 3,071 (9,163) 3,071 (9,163) Dividends and interest on equity received , , , ,678 Short-term investments (117,883) (59,120) (113,588) (38,681) Trade accounts receivable (10,136) (62,726) (46,255) (114,043) Inventories 73,375 (60,081) 68,200 (92,538) Taxes recoverable (7,533) (2,969) (14,949) (16,158) Receivables 92,085 34, ,352 35,346 Operations with derivatives (6,152) (10,530) (6,152) (10,530) Judicial deposits (748) 3,103 (1,067) 3,103 Other assets (8,273) 6,321 (8,676) 7,743 14,735 (151,482) (5,135) (225,758) Trade accounts payable (17,833) 7,402 (5,213) 63,084 Dividends 1 - (212) 22 Salaries and social charges (1,198) 1,694 (317) 4,105 Taxes payable (6,134) (24,720) (4,201) (24,627) Advances from customers 596 (3,179) 7,914 (2,725) Sundry provisions (1,336) (3,658) (129) (941) Income and social contribution taxes paid (1,280) (5,604) (1,280) (5,604) Other accounts payable 337 5,085 1,984 4,105 (26,847) (22,980) (1,454) 37, ,623 (22,912) 174,194 (22,661) Financing activities Loans and financing raised 291, , , ,744 Payment of loans, financing and swap (277,742) (207,484) (277,742) (207,484) Changes in intercompany loans , ,452 Dividends paid (17,484) (43,056) (17,484) (43,056) Future capital contribution 1,700 5,450 1,700 5,450 Monetary variation on loans and financing 13,206 32,907 13,206 32,907 Acquisition of subsidiaries (575) 11, ,361 41, ,438 Investing activities PP&E (88,730) (115,166) (140,633) (148,107) Intangible assets (316) - (316) - Investment (21,309) (8,037) (572) (5,429) (110,355) (123,203) (141,521) (153,536) Net changes in cash and cash equivalents 52,739 4,246 74,245 8,241 Increase in cash and cash equivalents At beginning of year 7,384 3,138 22,010 13,769 At end of year 60,123 7,384 96,255 22,010 52,739 4,246 74,245 8,241 See accompanying notes. 9

15 Statements of value added Years ended and 2011 Company Consolidated 12/31/12 12/31/11 12/31/12 12/31/11 Revenues (expenses) Goods and products sold and services rendered (less returns and rebates) 1,175,341 1,116,198 1,444,253 1,265,048 Provision for/reversal of allowance for doubtful accounts (2,898) (9,145) (5,977) (10,780) Other revenues 39,684 6,923 42,839 6,334 1,212,127 1,113,976 1,481, Inputs acquired from third parties Cost of goods and products sold and services rendered 536, , , ,400 Materials, electric energy, outsourced services and other 228, , , ,388 Loss/recovery of asset values 23,300 5,500 23,720 5, , , , Gross value added 423, , , ,014 Retentions Depreciation and amortization (41,187) (37,694) (54,155) (47,851) Net value added generated by Company and subsidiaries 381, , , ,163 Value added received in transfer Equity pick-up 5,078 1, Financial income 136, , , , , , , Total value added to be distributed 523, , , ,719 Distribution of value added Employees Payroll and charges 169, , , ,288 Taxes, charges and contributions Federal 61,403 53, , State 9,926 8,170 9, Municipal 1, ,307 1,116 Debt remuneration Interest including exchange variation 145, , , ,326 Rent 9,862 8,874 13, Equity remuneration Dividends paid 19,814 17,661 19,814 17,661 Proposed dividends - 12,939-12,939 Retained earnings 106,094 49, ,094 49,664 Noncontrolling interest in retained earnings , , , ,719 (*) The statement of value added in not part of the consolidated financial statements under IFRS. See accompanying notes. 10

16 Notes to financial statements 1. Operations Vicunha Têxtil S.A. ( Company ) is a publicly-held corporation with its head office at Rodovia Dr. Mendel Steinbruch, s/nº, bloco 1 KM 9, in the city of Maracanaú, state of Ceará. Its operations are focused on manufacturing denim, twill, yarns, synthetic and artificial textile fibers and textile articles manufactured with cotton for sale in the domestic and foreign markets. The Company and its subsidiaries Vicunha Ecuador S.A., Tintoreria Ullum S.A., Tejeduria Galícia S.A., Tejeduria Panamá S.A. and Vicunha Argentina S.A. have plants located in Brazil (Rio Grande do Norte and Ceará states), Ecuador and Argentina. Shares are traded on Brazilian Securities, Commodities and Futures Exchange (BM&FBovespa), under codes VINE3, VINE5 and VINE6. Projects related to construction and installation of plants, located in the Northeast region, were approved by the Superintendency for the Development of the Northeast (SUDENE) and enjoy tax benefits to reduce income tax base approved by the Brazilian IRS through 2019 (Pacajus unit State of Ceará); through 2021 (Maracanaú unit State of Ceará) and through 2017(São Gonçalo do Amarantes unit State of Rio Grande do Norte). Corporate events 2012 In March 2012, subsidiary Vicunha Argentina S.A. paid capital of Tejeduria Galícia S.A. amounting to 10,000, pesos, through issue of 10,000,000 new shares, and became direct holder of 83.37% of its capital. This capital payment generated a capital decrease by 3,772,199 pesos through cancellation of 3,772,199 shares. In June 2012, subsidiary Vicunha Argentina S.A. paid capital to Tintoreria Ullum S.A. amounting to 5,560, pesos, through issue of 1,049,120 new shares, and became direct holder of 32.01% of its capital. Concurrently, capital was increased through reserves by 7,406, pesos upon issue of 7,406,729 shares, and subsequently decreased by 6,218, pesos upon cancellation of 6,218,440 shares. In June 2012, subsidiary Vicunha Argentina S.A. paid capital to Tejuderia Panamá S.A. amounting to 6,615, pesos, through issue of 6,615,363 new shares, and became direct holder of 66.13% of its capital. Concurrently, capital was increased through reserves by 2,968, pesos upon issue of 2,968,835 shares, and subsequently decreased by 8,140, pesos upon cancellation of 8,140,721 shares. 11

17 1. Operations (Continued) In July 2012, subsidiary La Internacional S.A. had its corporate name changed to Vicunha Ecuador S.A. In September and October 2012, Vicunha Têxtil S.A. acquired 87,719 shares of its subsidiary Vicunha Ecuador S.A. from noncontrolling shareholders, and became the holder of 89% of its capital. In November 2012, the Company paid capital of Vicunha Argentina S.A. amounting to 20,980, through issue of 3,000,000 new shares, and became direct holder of 82.73% of its capital. 2. Summary of significant accounting practices The financial statements were prepared in accordance with several measurement bases used in accounting estimates. Accounting estimates involved in the preparation of the financial statements were based on both objective and subjective factors and use of professional judgment by Management to determine the adequate value to be recorded in the financial statements. Significant items subject to these estimates and assumptions include the selection of property and equipment useful lives and impairment, assessment of financial assets at fair value and under the present value adjustment method, credit risk analysis to determine an allowance for doubtful accounts, as well as other risk analyses to determine other provisions, including for tax, civil and labor claims. Book values of recognized assets and liabilities representing hedged items at fair value, which would otherwise be recorded at amortized cost, are adjusted so as to state changes in fair values attributable to hedged risks. Settlement of transactions involving these estimates may result in amounts significantly different from those recorded in the financial statements due to the probabilistic treatment inherent in their estimate process. The Company reviews its estimates at least on a quarterly basis. The consolidated financial statements were prepared and presented in accordance with accounting practices adopted in Brazil, which comprise rules established by the Brazilian SEC (CVM) and Brazilian Financial Accounting Standards Board (CPC) pronouncements, which are in line with the IFRS issued by the IASB. 12

18 2. Summary of significant accounting practices (Continued) The Company is reclassifying balances related to the individual and consolidated financial statements as of December 31, 2011 so as to enable comparison with balances as of. Issue of these financial statements was authorized by the Company s officers on March 27, Basis of consolidation The consolidated financial statements comprise the financial statements of Vicunha Têxtil S.A. and its subsidiaries as of and 2011, as follows: Equity interest Home country Direct Indirect Direct Indirect Company name Vicunha Europe S.à r.l. Switzerland Nova Marajó S.A. Uruguay Asaki Participações Ltda. Brazil Vicunha Ecuador S.A. Ecuador Vicunha Distribuidora de Produtos Têxteis Ltda. Brasil Vicunha Argentina S.A. Argentina Tintoreria Ullum S.A. Argentina Tejuderia Galicia S.A. Argentina Tejuderia Panamá S.A. Argentina Nova Marajó Trading Intermediary LLC United States The subsidiaries are fully consolidated as from their organization or acquisition date, which is the date when Vicunha Têxtil S.A. obtains control thereover, and continue being consolidated through the date on which such control ceases to exist. The financial statements of the subsidiaries are prepared for the same reporting period of the Company, using consistent accounting practices. All intra-group balances, revenues and expenses as well as unrealized gains and losses arising from intra-group transactions are fully eliminated. Profit and loss for the year and each component of other comprehensive income (posted directly to equity) are attributed to Company s controlling and noncontrolling shareholders. Losses are attributed to non-controlling interest, even if this results in a deficit balance. 13

19 2. Summary of significant accounting practices (Continued) 2.2. Foreign currency translation These financial statements are presented in Brazilian Reais, which is the Company s functional currency. Each entity determines its own functional currency, and in those in which functional currency is different from Real, the financial statements are translated into Real as of closing date Transactions and balances Foreign currency transactions are initially recorded at the exchange rate of the functional currency in effect at the date of transaction. Monetary assets and liabilities stated in foreign currency are then retranslated at the functional currency exchange rate in force as of balance sheet date. All currency translation differences are recognized in the income statement. Non-monetary items that are measured at historical cost are translated using the exchange rates as at the dates of the initial transactions. Nonmonetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined Group companies Assets and liabilities of foreign subsidiaries abroad are translated into reais at the exchange rate as of balance sheet date, and the corresponding income statements are translated at the exchange rate in force on transaction date. Exchange gains and losses arising from such translation are recorded separately in equity. When a foreign subsidiary is sold, accumulated deferred charges posted to equity, regarding this foreign subsidiary, are recognized in profit and loss. Any goodwill on purchase of a foreign subsidiary after January 1, 2009, and any book value of assets and liabilities resulting from acquisition adjusted to fair value, will be treated as assets and liabilities of the foreign subsidiary and translated as of closing date. 14

20 2. Summary of significant accounting practices (Continued) 2.3. Cash and cash equivalents Cash and cash equivalents are held so as to meet short-term cash commitments, and not for investment or other purposes. Cash equivalents are construed by the Company as short-term investments immediately convertible into a known cash amount, posing low risk of any change in market value. As such, an investment normally qualifies as cash equivalent when redeemable in the short-term, for instance, within three months from transaction date Trade accounts receivable Trade accounts receivable are recorded at billed amount, adjusted to present value, including the corresponding direct taxes applicable to Company and subsidiaries. Allowance for doubtful accounts was set up at an amount considered sufficient by management to cover any credit realization losses, based on the criterion of individual balance analysis of customers with default risk Inventories Inventories are measured at the lower of cost or net realizable value. Costs incurred to transport each product to its current location and condition are recorded as follows: Raw materials acquisition cost according to average cost. Finished and in-progress products cost of direct materials and workforce and a proportional portion of general indirect manufacturing expenses based on normal operating capacity. Net realizable value corresponds to the selling price in the normal course of business, less estimated costs of completion and estimated costs necessary for the realization of the sale and inventory reserve, where applicable. 15

21 2. Summary of significant accounting practices (Continued) 2.5. Inventories (Continued) Fluctuation of cotton prices, Company s main input: cotton, an international commodity that may have significant price changes, accounts for a significant portion of cost for Company and subsidiaries Investments in subsidiaries Investments of Company and subsidiaries are recorded under the equity method in the individual financial statements. In the consolidated financial statements, investments in subsidiaries are fully consolidated. Based on the equity method, investments in subsidiaries are accounted for in the balance sheet of the Company at cost, plus changes after the acquisition of ownership interest in the subsidiaries. The income statement reflects the Company s interest in P&L and operations of its subsidiaries. When a change is directly recognized in subsidiaries equity, the Company shall recognize its portion in the changes occurred and disclose this fact, when applicable, in the statement of changes in equity. Unrealized gains and losses, resulting from intercompany transactions, are eliminated according to the interest held by the Company in such subsidiaries. The financial statements of the subsidiaries are prepared for the same reporting period of the Company. Adjustments are performed when necessary in order to align accounting policies to those adopted by the Company. 16

22 2. Summary of significant accounting practices (Continued) 2.7. Property, plant and equipment (PP&E) PP&E items are stated at acquisition or construction cost and partial revaluation recorded by the Company in 2006, net of accumulated depreciation and/or accumulated impairment losses, as the case may be. Referred to cost includes replacement cost of part of PP&E and loan costs related to long-term construction projects, when recognition criteria are met. When significant parts of PP&E are replaced, Company and subsidiaries recognize such parts as an individual asset item, with specific depreciation and useful life. Accordingly, when significant maintenance is carried out, cost thereof is recognized in property, plant and equipment book value if recognition criteria are met. All other repair and maintenance costs are posted to profit and loss, when incurred. Present value of expected cost of asset decommissioning after its use is included in the cost of the corresponding asset if the recognition criteria for a provision are met. Depreciation is calculated by the straight line method over the useful life of assets, at rates that take into consideration their estimated useful life. A property, plant and equipment item is written off when it is sold or when no future economic benefit is expected from its use or sale. Any gains or losses arising from the asset write-off (calculated as the difference between asset net sales and book value) are included in profit and loss for the year when the asset is written off. Assets net book value and useful lives, as well as depreciation methods, are reviewed at each year end, and adjusted on a prospective basis, as the case may be. 2.8 Intangible assets Intangible assets acquired separately are measured at cost of acquisition upon their initial recognition. Cost of intangible assets acquired in a business combination corresponds to fair value on acquisition date. After initial recognition, intangible assets are recorded at cost, less accumulated amortization and impairment losses. Internally generated intangible assets, excluding capitalized development costs, are not capitalized and expenditure is reflected in the income statement in the year they are incurred. 17

23 2. Summary of significant accounting practices (Continued) 2.8. Intangible assets (Continued) Intangible assets are assessed as having a finite or indefinite useful life. Intangible assets that have a finite useful life are amortized over their economic useful life and are submitted to impairment tests whenever there are indications of impairment loss. The amortization period and the method for an intangible asset with a finite useful life are reviewed at least at each financial year-end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in these assets are recorded by changing the amortization period or method, as appropriate, and treated as changes in accounting estimates. The amortization charges on intangible assets with finite lives are recognized in the income statement in the expense category consistent with the use of the intangible asset. Indefinite-lived intangible assets are not amortized, but are submitted to annual impairment tests, either individually or based on the relevant cash generating unit. The useful life of an intangible asset having indefinite life is reviewed annually to determine whether indefinite life assessment remains supportable. Otherwise, the change in the useful life assessment from indefinite to finite is made on a prospective basis. Gains and losses arising from write-off of an intangible asset are measured as the difference between the net sale price and the book value of the asset, recognized in the income statement at the write-off of the asset Impairment of nonfinancial assets Management annually reviews the net book value of assets in order to determine whether there are any events or changes in economic, operating, or technological circumstances that may indicate impairment. When such evidence is found and the net book value exceeds the recoverable amount, a provision for impairment is set up to adjust the net book value to the recoverable amount. Recoverable amount of an asset item or of a cash-generating unit is defined as the higher of value in use and net sales. 18

24 2. Summary of significant accounting practices (Continued) 2.9. Impairment of nonfinancial assets (Continued) In estimating value in use of an asset item, estimated future cash flows are discounted to present value at a pretax discount rate reflecting the weighted average capital cost for the industry in which the cash-generating unit operates. The net sale price is determined, whenever possible, for firm sale contracts on an arm s length basis, between knowledgeable, willing parties, adjusted by costs to sell the asset, or, in the absence of firm sale contracts, based on the observable market price in an active market, or on the most recent transaction price involving similar assets. Impairment tests are carried out annually (at December 31) or whenever the circumstances indicate impairment loss Investment properties and discontinued operations Investment properties are initially measured at cost, including transaction costs. Book value includes replacement cost of an investment property existing at the time the cost is incurred if the recognition criteria are met; this excludes daily service costs of investment properties. The Company opted for the cost method to measure investment properties after their initial recognition. Investment properties are written off when sold or when no longer permanently used, and no future economic benefit is expected from their sale. The difference between net value obtained from sale and book value of the asset is recognized in P&L for the period when such investment properties are written off. In the consolidated income statement, revenues and expenses from discontinued operations, when they exist, are reported separately from other revenues and expense, after the Income After Taxes account, even when the Company holds non-controlling interest after the sale. Resulting income or loss (after taxes) is separately reported in the income statement. Once they are classified as held for sale, assets are not subject to depreciation or amortization. 19

25 2. Summary of significant accounting practices (Continued) Provisions Provisions are recorded when the Company has a present (legal or constructive) obligation arising from past events, the settlement of which is expected to result in an outflow of economic benefits, in an amount that can be reliably estimated Provisions for tax, civil and labor claims The Company and its subsidiaries are party to various legal and administrative proceedings. Provisions are recorded for all litigation contingencies, the settlement of which is expected to result in an outflow of economic benefits, in an amount that can reliably estimated. Assessment of the likelihood of loss includes an evaluation of available evidence, the hierarchy of laws, available case law, recent court decisions and their relevance in the legal system, as well as the opinion of outside legal advisors. Provisions are reviewed and adjusted to take into consideration changes in circumstances, such as applicable statute barring period, conclusion from tax audits or additional; exposures identified based on new matter or court decisions Contingent liabilities recognized in a business combinations A contingent liability recognized in business combination is initially measured at fair value. It is subsequently measured for the higher of: the amount that would be recognized in accordance with the accounting practice addressing the provisions above (CPC 25); or amount initially recognized, less, as the case may be, accumulated amortization recognized in accordance with the revenue recognition practice (CPC 30). 20

26 2. Summary of significant accounting practices (Continued) Payment of dividends Dividend payment to shareholders is recognized as a liability in the year-end financial statements, according to Company articles of incorporation. Any amount above mandatory minimum dividend is accrued on the date of its approval by the shareholders in the Board of Directors Meeting and confirmed in the Minutes of the General Shareholders Meeting Present value adjustment of assets and liabilities Current and noncurrent monetary assets and liabilities are adjusted to present value when the effect is considered significant in relation to the overall financial statements. Present value adjustment is calculated considering contractual cash flows and the explicit, sometimes implicit, interest rates of the corresponding assets and liabilities. Therefore, interest rates accrued on revenues, expenses and costs associated with these assets and liabilities are discounted with a view to recognizing them on an accrual basis. This interest is subsequently reallocated to financial income and expenses in profit and loss by using the effective interest rate method in relation to contractual cash flows. The Company adopts the Weighted Average Cost of Capital (WACC) as the discount rate Financial instruments Financial assets Initial recognition and measurement Financial assets are classified as financial assets at fair value through profit or loss, loans and receivables, investments held to maturity, financial assets available for sale or as derivatives designated as hedging instruments in an effective hedge, as the case may be. The Company determines the classification of its financial assets at the time of inception, when it becomes party to the contractual provisions of the instrument. 21

27 2. Summary of significant accounting practices (Continued) Financial instruments (Continued) Financial assets (Continued) Initial recognition and measurement (Continued) Financial assets are initially recognized at fair value plus, in the case of investments not designated at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of financial assets. Purchases and sales of financial assets that require delivery within the time frame established by regulation or market convention (regular way purchases) are recognized on the trade date, which is the date when Company and subsidiaries commit to purchase or sell the asset. Financial assets of Company and subsidiaries include cash and cash equivalents, short-term investments, trade accounts receivable, relatedparty receivables, amounts receivable and derivative financial instruments. Subsequent measurement Subsequent measurement of financial assets depends on their classification, which may be as follows: Financial assets at fair value through profit or loss These include financial assets held for trading and financial assets designated upon initial recognition at fair value through profit or loss. Financial assets are classified as held for trading if acquired to be sold within short term. This category includes derivative financial instruments taken out by Group companies that do not meet the hedge accounting criteria, defined by CPC 38. Financial assets at fair value through profit or loss are presented in the balance sheet at fair value, with the related gains and losses recognized in profit and loss. 22

28 2. Summary of significant accounting practices (Continued) Financial instruments (Continued) Financial assets (Continued) Financial assets measured at fair value through profit or loss (Continued) Company and subsidiaries evaluated their financial assets at fair value through profit or loss, as they intend to sell them in the short term. When Company and subsidiaries are under unfavorable conditions to sell these financial assets due to inactive markets and the Company s intention to sell them in the near future changes significantly, Company and subsidiaries may elect to reclassify such financial assets under certain circumstances. The reclassification to loans and accounts receivable available for sale or held to maturity depends on the nature of the asset. Such valuation does not affect any financial assets designated at fair value through profit and loss using the fair value option at the time of presentation. Loans and receivables Loans and receivables are nonderivative financial assets with fixed or determinable payments which, however, are not traded in an active market. After initial measurement, these financial assets are carried at amortized cost using the effective interest rate method (effective interest rate), less impairment. Amortized cost is calculated by taking into consideration any discount or premium on acquisition and fees or costs incurred. Amortization of the effective interest rate method is included in financial income in the income statement. The losses arising from impairment are recognized in profit and loss as financial expenses. 23