Abril Comunicações S.A.

Transcription

1 (A free translation of the original in Portuguese) Abril Comunicações S.A. and subsidiaries FINANCIAL STATEMENTS at December 31, 2013 and Independent Auditor's Report

2 (A free translation of the original in Portuguese) Abril Comunicações S.A. and subsidiaries FINANCIAL STATEMENTS at December 31, 2013 and Independent Auditor's Report CONTENTS Page Management report 1 Independent auditor's report 2-3 Balance sheets 4-5 Statements of operations 6 Statements of changes in equity 7 Statements of cash flows 8-9 Notes to the financial statements Board of Directors and Executive Board 88

3 (A free translation of the original in Portuguese) Abril Comunicações S.A. Management report Dear Stockholders, In compliance with statutory requirements, we submit for your consideration the Financial Statements of Abril Comunicações S.A. for the year ended December 31, Acknowledgements: We would like to thank our customers for the trust placed in us, and our stockholders, suppliers and employees for their commitment and excellence, which are indispensable to the Abril Group's success. We are at your disposal for any clarifications deemed necessary. São Paulo, March 31, 2014 Management 1

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6 (A free translation of the original in Portuguese) CURRENT ASSETS: BALANCE SHEETS (All amounts in thousands of reais) ASSETS Parent 12/31/ /31/ /31/ /31/2012 R estated R estated Cash and cash equivalents (note 5) 185, , , ,900 Trade receivables (note 6) 268, , , ,213 Inventories (note 7) 83, , , ,703 Taxes to be offset (note 8) 54,012 37,149 68,881 37,870 Dividends receivable (note 26) - 1, Advances to suppliers and others (note 9) 58,176 47,598 66,246 48,312 Total current assets 650, , , ,683 NON-CURRENT ASSETS: LONG-TERM RECEIVABLES Loans and other credits with related parties (note 26) 854,617 1,576,149 54,179 1,040,144 Trade receivables (note 6) 16,714 7,828 20,768 3,095 Taxes to be offset (note 8) 11, ,222 1,519 Judicial deposits (note 17) 64,211 41,119 79,290 42,970 Deferred income tax and social contribution (note 16) 135, , , ,609 Dividends receivable (note 26) 970, , Advances to suppliers and others (note 9) 94 15, ,032 2,053,540 2,766, ,924 1,258,369 INVESTMENTS (note 10) 643, , ,708 INTANGIBLE ASSETS (note 11) 324, , , ,112 PROPERTY, PLANT AND EQUIPMENT (note 12) 236, , , ,192 Total non-current assets 3,258,469 3,715,405 1,440,252 2,006,381 Total assets 3,908,773 4,582,775 2,375,961 2,885,064 The accompanying notes are an integral part of these financial statements. 4

7 (continued) BALANCE SHEETS (All amounts in thousands of reais) LIABILITIES AND EQUITY Parent 12/31/ /31/ /31/ /31/2012 R estated R estated CURRENT LIABILITIES: Trade and other payables (note 13) 507, , , ,735 Borrowings and debentures (note 14) 229,333 34, ,855 34,124 Income tax and social contribution payable - 1, ,543 Taxes and contributions payable (note 15) 57,173 64,385 68,586 66,920 Dividends and interest on capital payable (note 26) - 123, ,303 Magazine subscriptions 246, , , ,031 Total current liabilities 1,040,459 1,068,780 1,114, ,656 NON-CURRENT LIABILITIES: Trade and other payables (note 13) 46,333 62,934 45,637 63,699 Loans and other debts with related parties (note 26) 32,015 64,483 3,585 16,348 Borrowings and debentures (note 14) 2,420,175 2,178, , ,226 Provision for contingencies (note 17) 30,516 57,204 74,766 57,347 Provision for losses on operations of subsidiary (note 10) 221, ,809 31,096 - Taxes and contributions payable (note 15) 10,096 17,986 21,951 21,193 Deferred income tax and social contribution (note 16) 233, , , ,798 Total non-current liabilities 2,993,756 2,947,798 1,383,114 1,367,611 Total liabilities 4,034,215 4,016,578 2,497,274 2,316,267 EQUITY (note 19): Share capital 17, ,627 17, ,627 Revenue reserves - 59,647-59,647 Accumulated deficit (142,804) 47,923 (142,804) 47,923 Total equity (125,442) 566,197 (125,442) 566,197 Non-controlling interests - - 4,129 2,600 (125,442) 566,197 (121,313) 568,797 Total liabilities and equity 3,908,773 4,582,775 2,375,961 2,885,064 The accompanying notes are an integral part of these financial statements. 5

8 (A free translation of the original in Portuguese) STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31 (All amounts in thousands of reais, except for earnings per share) Parent Restated Restated Continuing operations Revenue (note 21) 1,830, ,585 2,570, ,259 Cost of sales (note 22) (820,632) (204,212) (1,474,911) (285,773) Gross profit 1,009, ,373 1,095, ,486 Selling expenses (note 22) (602,153) (145,082) (685,742) (208,691) Administrative expenses (note 22) (329,769) (104,338) (419,044) (143,097) Other income (expenses), net (note 23) 8,166 (5,901) 9,295 (6,172) Share of profits of subsidiaries (note 10) (58,038) 73,312 (2,225) 656 Operating profit (loss) 27, ,364 (2,328) 81,182 Finance income and costs (NOTE 24): Income 105,494 85,314 51,551 70,479 Costs (170,602) (78,733) (148,449) (69,764) Exchange variations, net (135,755) (100,227) (12,531) (27,850) Profit (loss) before income tax and social contribution (172,872) 47,718 (111,757) 54,047 INCOME TAX AND SOCIAL CONTRIBUTION (note 25) Current (133) (15,548) (8,470) (18,619) Deferred 45,347 59,277 (9,195) 56,621 Profit (loss) for the year from continuing operations (127,658) 91,447 (129,422) 92,049 Discontinued operations Loss for the year from discontinued operations (note 10.5.j) (39,015) - (39,015) - Profit (loss) for the year (166,673) 91,447 (168,437) 92,049 ATTRIBUTABLE TO Owners of the Company (166,673) 91,447 Non-controlling interests (1,764) 602 (168,437) 92,049 Earnings (loss) per share from continuing and discontinued operations attributable to owners of the Company during the year - R$ (note 19.6) Continuing operations (4.5106) Discontinued operations (1.3785) - (5.8891) There was no other comprehensive income. Accordingly, the Company is not presenting a statement of comprehensive income. The accompanying notes are an integral part of these financial statements. 6

9 (A free translation of the original in Portuguese) STATEMENTS OF CHANGES IN EQUITY - PARENT COMPANY AND CONSOLIDATED (All amounts in thousands of reais) Attributable to owners of the parent Capital Revenue reserves reserves Additional Non- Share Subvention for Legal dividend Accumulated controlling Total investments capital reserve proposed deficit Total interests equity AT DECEMBER 31, 2011 (unaudited) 398,583 25, (266,153) 158,103 2, ,477 Capital reduction to absorb losses as per AGE of (240,480) 240, Capital increase with investment of Editora Abril as per AGE of , , ,524 Change in accounting policies (note 3.2.b) 41,559 41,559 41,559 Absorption of losses as per AGE of (25,673) 25, Interest on capital (14,462) (14,462) (14,462) Transactions with non-controlling interests 7,491 7,491 7,491 Profit for the year 91,447 91, ,049 Other movements in non-controlling interests - (376) (376) Allocation of profit: - Legal reserve (note 19.2) 4,254 (4,254) Proposed dividends (note 19.4) (18,465) (18,465) (18,465) - Additional dividend proposed (note 19.2) 55,393 (55,393) - - AT DECEMBER 31, 2012 (restated) 458,627-4,254 55,393 47, ,197 2, ,797 Loss from January to March 2013 (29,606) (29,606) - (29,606) Merger of Abril S.A. as per AGE of (note 10.5.c) (441,265) (4,254) (55,393) 29,606 (471,306) - (471,306) Loss from April to December 2013 (137,067) (137,067) (1,764) (138,831) Acquisition of non-controlling interests (note 10.5.i) (18,791) (18,791) (18,791) Corporate restructuring of subsidiaries (note 10.5.d) (34,869) (34,869) (34,869) Other movements in non-controlling interests - 3,293 3,293 AT DECEMBER 31, , (142,804) (125,442) 4,129 (121,313) The accompanying notes are an integral part of these financial statements. 7

10 CASH FLOWS FROM OPERATING ACTIVITIES Abril Comunicações S.A. (A free translation of the original in Portuguese) STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31 (All amounts in thousands of reais) Parent R estated Restated Profit (loss) for the year (166,673) 91,447 (168,437) 92,049 Adjustments for: Depreciation and amortization 140,670 22, ,223 29,686 Write-off through impairment of intangible assets 5,945 5,204 5,945 Share of profits of subsidiaries (73,312) - (656) from continuing operations 58,038 2,225 Share of profits of subsidiaries from discontinued operations 39,015 39,015 Effect of deferral of subscritions from prior years 41,559 41,559 Net disposals of permanent assets 1, , Realization of deferred income tax (43,719) (37,866) 5,492 (35,212) Deferred income tax on surplus (1,628) Provision for impairment of trade receivables 199 (321) 5, Provision for contingencies - payments (25,159) 8,486 (495) 11,842 Capital gains in subsidiaries Non-controlling interests 3,268 (877) Interest and exchange variations 187,454 85,545 99,762 76,280 Interest received 15,866 6,053 Changes in working capital Trade receivables 40,765 49,690 27,397 (6,281) Inventories 19,606 6,785 24,839 11,273 Taxes to be offset (5,322) 36,888 (5,647) 35,147 Advances to suppliers and others 4,572 16,965 3,182 19,861 Judicial deposits (23,087) 22,994 (24,602) 24,072 Trade and other payables (32,962) (34,748) 36,858 (103,734) Taxes and contributions payable (3,135) (16,886) 8,151 (16,364) Provision for contingencies - payments (1,530) (5,125) (21,691) (9,100) Magazine subscriptions (76,789) 12,419 (76,834) 8,785 Interest paid (95,355) (93,116) Income tax and social contribution paid (7,988) CASH PROVIDED BY OPERATING ACTIVITIES 17, ,404 44, ,203 The accompanying notes are an integral part of these financial statements. 8

11 (continued) STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31 (All amounts in thousands of reais) Parent Restated Restated CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of: Intangible assets (109,107) (95,606) (126,569) (106,545) Property, plant and equipment (30,988) (17,248) (49,828) (23,295) Investments (1,700) - (4,424) - Goodwill - - (38,855) - Acquisition of non-controlling interests - - (18,791) - Capital increase of subsidiary (21,476) Capital reduction of subsidiaries 29, Assets for sale (1,466) Related parties (199,309) (156,021) (77,543) (164,921) Dividends received 3,964 2, Cash received in business combination 6,411-32,187 - Cash written-off in disposal of investments - 250, ,725 NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (322,277) (15,700) (283,635) 49,498 CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings 217, , Repayment of borrowings (10,645) (3,503) (36,873) (3,959) Dividends paid (60,000) (8,227) (60,000) (8,935) Reversal of mandatory dividends - - (132) - Payment of taxes and contributions - PAES, REFIS IV and taxes in installments (18,339) (11,447) (30,514) (13,392) NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 128,660 (22,797) 96,478 (25,653) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (176,073) 211,907 (142,621) 216,048 (+) At the beginning of the year 361, , , ,852 (=) At the end of the year 185, , , ,900 NET CHANGES IN CASH AND CASH EQUIVALENTS (176,073) 211,907 (142,621) 216,048 The accompanying notes are an integral part of these financial statements. 9

12 (A free translation of the original in Portuguese) NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2013 (All amounts in thousands of reais unless otherwise stated) 1. GENERAL INFORMATION Abril Comunicações S.A. (the "Company") is a Corporation headquartered in São Paulo, state of São Paulo, controlled by Ativic S.A. (formerly Abril S.A. until March 31, 2013). The Company and its subsidiaries (the "Group") share their corporate, managerial and operating structures and costs Relevant corporate changes Prior to September 30, 2012, the main activities of the Company were the holding of equity interests in companies, mainly those operating in the industries of communication, transmission, reception and distribution of TV signals and programs. On August 31, 2012, with the capital increase from the investment of Editora Abril S.A., the Group started to engage in publishing and printing activities, which comprise the editing, printing and sale of magazines, yearbooks, guides and technical publications, the selling of advertising and publicity, and database marketing, as detailed in note 10.6.b. On March 31, 2013, the Company merged its parent company Abril S.A. and started to operate in the distribution of its editorial products, e-commerce, courier services to deliver small packages, out-of-home advertising, and organization and promotion of fairs and events, as detailed in note 10.5.c. As a result of the merger, all Abril S.A.'s direct subsidiaries are now the Company's direct subsidiaries, as shown below: Subsidiaries Equity interest A.R. & T. Ltda. 100% Abril Marcas Ltda. 100% Abril Musiclub Ltda. 100% Abril Radiodifusão S.A. 100% Beigetree Participações Ltda. 100% Canais Abril de Televisão Ltda. 100% Casa Cor Promoções e Comercial Ltda. 100% Elemidia Consultoria e Serviços de Marketing Ltda. 100% Redtree Participações S.A. 100% Usina do Som Brasil Ltda. 100% Webco Internet S.A. 100% Nimbuzz Brasil S.A. (joint control) 49% 10

13 1.2. Company's economic and financial recovery Abril Comunicações S.A. During the year ended December 31, 2013, management intensified its efforts to seek operational and economic alternatives in order to rebalance its financial position. Management is committed to accomplishing these goals and has focused on priority businesses, and on cost reduction by reviewing and thoroughly simplifying processes, eliminating unnecessary activities, streamlining the corporate structure, reviewing its business portfolio, disposing of non-strategic assets, seeking new financing, renegotiating short-term debt and, ultimately, capitalizing the Company. It is worth noting that management has successfully renegotiated and lengthened a portion of its short-term lines with creditor banks in early In late 2013, financial ratios under debt covenants were also renegotiated to match the Company's cash-generating ability and its indebtedness level. These actions were included and considered in the operational planning for Management has formally undertaken to monitor and correct any deviations. The Group's Board of Directors authorized these consolidated financial statements for issuance on March 31, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The main accounting policies applied in the preparation of these parent company and consolidated financial statements are set out below. Such policies were consistently applied in all years presented, unless otherwise stated Basis of preparation The financial statements have been prepared under the historical cost convention, modified by financial assets and financial liabilities (including derivative instruments, when applicable) measured at fair value. The preparation of financial statements requires the use of certain critical accounting estimates. It also requires management to exercise judgment in the process of applying the Group's accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the parent company and consolidated financial statements are disclosed in Note a financial statements The consolidated financial statements have been prepared and are being presented in accordance with the accounting practices adopted in Brazil, including the pronouncements issued by the Brazilian Accounting Pronouncements Committee (CPC), as well as according to the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). The financial statements follow international standards (IFRS) because of the noncontrolling shareholder MIH Brazil Holdings BV. 11

14 2.1.b Parent company financial statements 2.2. Consolidation The parent company financial statements have been prepared in accordance with the accounting practices adopted in Brazil issued by the CPC and are disclosed together with the consolidated financial statements. In the parent company financial statements, subsidiaries and jointly-controlled entities are recorded on the equity accounting method, adjusted for the proportion held in the Group's contractual rights and obligations. The same adjustments are made in the parent company and consolidated financial statements in order to reach the same profit or loss and equity attributable to the owners of the parent entity. In the case of the Company, the accounting practices adopted in Brazil applicable to parent company financial statements differ from IFRS applicable to separate financial statements only in relation to the evaluation of investments in subsidiaries and jointlycontrolled entities, which under Brazilian standards are based on the equity accounting method, instead of at cost or fair value in accordance with IFRS. The following accounting policies have been applied in the preparation of the consolidated financial statements. Subsidiaries Subsidiaries include all entities (including structured entities) over which the Company has control. The Group controls an entity when it is exposed to or has the right to variable returns arising from its involvement with the entity and has the ability to influence such returns due to the power it has over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Company. They are deconsolidated from the date that control ceases. The Group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary represents the fair value of assets transferred, liabilities incurred and equity interests issued by the Group. The consideration transferred includes the fair value of assets or liabilities resulting from a contingent consideration arrangement, when applicable. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values as at the acquisition date. The Group recognizes any non-controlling interest in the acquiree either at fair value or at the non-controlling interest's proportionate share of the fair value of the acquiree's net assets. The measurement of the non-controlling interests to be recognized is determined upon each acquisition. The excess of: (i) the consideration transferred; (ii) the value of non-controlling interests in the acquiree; and (iii) the acquisition-date fair value of any previous equity interest in the acquiree, over the fair value of the Group's share of the identifiable net assets acquired is recorded as goodwill. When the total of consideration transferred, non-controlling interests recognized and measurement of previous equity interest is lower than the fair value of the net assets of the acquired subsidiary, the difference is recorded directly in the statement of income for the year. Transactions, balances and unrealized gains and losses on transactions between consolidated entities are eliminated. The accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Company. 12

15 Jointly-controlled entities Abril Comunicações S.A. As provided by CPC 19/IFRS 11, interests in jointly-controlled companies are not recognized on the equity method. Accordingly, their assets and liabilities are not included in the consolidated financial statements. At December 31, 2012, the jointly-controlled entity was not included in the financial statements, as the Company's interest in this company dates from the restructuring of March 31, 2013 (note 10.5 (c)). Transactions with non-controlling interests The Group considers transactions with non-controlling interests as transactions with owners of the Group's assets. For purchases of non-controlling interests, the difference between any consideration paid and the acquired portion of the book value of the subsidiary's net assets is recorded in equity. Similarly, gains or losses on disposals of non-controlling interests are recorded directly in equity Foreign currency translation (a) Functional and presentation currency Items included in the financial statements of the Group companies are measured using the currency of the primary economic environment in which each entity operates (the "functional currency"). The consolidated financial statements are presented in Brazilian Reais (R$), which is the Company's functional currency, and also the Group's presentation currency. (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or the dates of valuation when items are remeasured. Foreign exchange gains and losses resulting from the settlement of these transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currency are recognized in the statement of income. Foreign exchange gains and losses that relate to borrowing, cash and cash equivalents and other accounts subject to foreign exchange variations are presented in the statement of income as "Foreign exchange variations, net", in the finance income or costs accounts Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less, with an immaterial risk of change in value Financial assets Classification The Company classifies its financial assets at initial recognition in the following categories: At fair value through profit or loss, and Loans and receivables. In these 13

16 financial statements there are no held-to-maturity assets or available-for-sale assets. The classification depends on the purpose for which the financial assets were acquired. a) Financial assets at fair value through profit or loss 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 was acquired principally for realization in the short term. All financial assets in this category are classified as current assets. Derivatives as, for example, swap contracts, are also measured at fair value through profit or loss b) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the end of the reporting period, which are classified as non-current assets. The Company's loans and receivables include loans to subsidiaries, trade receivables, other receivables and cash and cash equivalents Recognition and measurement Normal purchases and sales of financial assets are recognized on the trade date. Investments are initially recognized at fair value plus transaction costs for all financial assets not carried 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 expensed in the statement of income. Financial assets are derecognized when the right to receive cash flow from the investments has expired or been transferred, and the Company has transferred substantially all of the risks and rewards of ownership. Financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables are carried at amortized cost using the effective interest method. The fair values of quoted investments are based on current bid prices. If the market for a financial asset is not active or the asset has no publicly available quotations, the Company establishes these fair values by using valuation techniques. These include the use of recent arm's length transactions, reference to other instruments that are substantially similar, discounted cash flow analysis, and option pricing models making maximum use of market inputs and relying as little as possible on entity-specific inputs Offsetting financial instruments Financial assets and liabilities are offset and the net amount is reported in the balance sheet when there is a legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. 14

17 2.6. Impairment of financial assets Assets carried at amortized cost Abril Comunicações S.A. The Company assesses at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial 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 that occurred after the initial recognition of the asset (a loss event), and that loss event (or events) has an impact on the estimated future cash flow from the financial asset or group of financial assets that can be reliably estimated. The criteria that the Group uses to determine that there is objective evidence of an impairment loss include: (i) significant financial difficulty on the part of the issuer or debtor; (ii) a breach of contract, such as a default or delinquency in interest or principal payments; (iii) the Company and its subsidiaries, for economic or legal reasons relating to the borrower's financial difficulty, granting to the borrower a concession that it would not otherwise consider; (iv) it becoming probable that the borrower will enter bankruptcy or other financial reorganization; (v) disappearance of an active market for that financial asset due to financial difficulties of the issuer. The amount of any impairment loss is measured as the difference between the asset's carrying amount and the present value of the estimated future cash flow from the financial asset. The carrying amount of the asset is reduced and the loss amount is recognized in the statement of income. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor's credit rating), the reversal of the previously recognized impairment loss is recognized in the statement of income Trade receivables Trade receivables refer mainly to the sale of advertising, printing services, magazine subscriptions and distribution services. If collection is expected in one year or less, they are classified as current assets. If not, they are presented as non-current assets. The provision for the impairment of trade receivables is established based on the level of historical losses, and on the background and monitoring of the current situations of customers, and is deemed to be sufficient to cover possible losses on the realization of the receivables. During the year, the amount of trade receivables under judicial recovery was fully recorded in the provision for impairment of trade receivables. 15

18 2.8. Inventory Inventory is stated at the average cost of purchase or production, which is lower than the replacement cost or net realizable value. When applicable, this cost is reduced by the provision for obsolescence and/or for a write-down to market value. Imports in transit are stated at the accumulated cost of each import. The Group recognizes a provision for losses on slow-moving finished products and raw materials. This provision is constituted based on a percentage relating to the time when the items remain in stock, up to a maximum limit of three years. After this period, a full provision is recorded for probable losses. Spare parts for machinery and equipment can remain physically in stock while there is probability of utilization, even if they have been subject to an accounting provision Judicial deposits Judicial deposits are monetarily restated and presented as a deduction from the corresponding liability, when applicable Intangible assets (i) Goodwill Goodwill represents the excess of the cost of an acquisition over the net fair value of the assets and liabilities of the acquired entity. Goodwill on acquisitions of subsidiaries is recorded within "Intangible assets" in the consolidated financial statements, while in the parent company financial statements it is recorded as "Investments", unless the acquired entity has been merged into the Company. If negative goodwill is determined, the amount is recorded as a gain in the profit for the period on the date of acquisition. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units (CGUs) for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of CGUs that are expected to benefit from the business combination in which the goodwill arose, identified by operating segment. (ii) Computer software Computer software licenses are capitalized on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortized over the estimated useful life of the software. Costs associated with maintaining computer software programs are recognized as expenses as incurred. Development costs that are directly attributable to the design and testing of identifiable and unique software products controlled by the Group are recognized as intangible assets when the following criteria are met:. It is technically feasible to complete the software product so that it will be available for use. 16

19 . Management intends to complete the software product and use or sell it.. There is an ability to use or sell the software product.. It can be demonstrated that the software product will generate probable future economic benefits.. Adequate technical, financial and other resources to complete the development and to use or sell the software product are available.. The expenditure attributable to the software product during its development can be reliably measured. Directly attributable costs that are capitalized as part of the value of the software product include the software development employee costs and an appropriate portion of applicable overheads. Costs also include finance costs related to the development of the software product. Other development expenditure that does not meet these criteria is recognized as expenses as incurred. Development costs previously recognized as expenses are not recognized as an asset in a subsequent period. Computer software development costs recognized as assets are amortized using the straight-line method over their estimated useful lives, at the rates disclosed in note 11. (iii) Trademarks and licenses Acquired trademarks and licenses are initially stated at historical cost. Trademarks and licenses are not amortized. (iv) Portfolio of customers The contractual customer relationships acquired in a business combination are recognized at their fair value as at the acquisition date. The contractual customer relationships have a finite useful life and are carried at cost less accumulated amortization. Amortization is calculated using the straight line method over the expected life of the customer relationship, at the rates stated in note Property, plant and equipment Property, plant and equipment is stated at historical acquisition cost plus the effects of revaluations carried out on December 31, 2005 by subsidiary Abril Gráfica Ltda., based on an appraisal prepared by a specialized company, covering only the printing plant, buildings and land. Depreciation is calculated on the straight line method considering the costs and residual values over the estimated useful lives of the assets, in accordance with the rates disclosed in note 12. Land and buildings mainly represents buildings, sheds and offices. Land is not depreciated. Machinery and industrial equipment mainly represents the industrial printing plant used for printing magazines and periodicals. 17

20 Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognized within "Other income, net" in the statement of income. When revalued assets are sold, the respective amounts included in the revaluation reserve are transferred to retained earnings. The costs of borrowing used to finance the construction of property, plant and equipment are capitalized during the period necessary to construct and prepare the asset for its intended use. Repairs and maintenance costs are allocated to profit or loss as incurred. The cost of major renovations is included in the carrying amount of the asset, when it is probable that the Company will realize future economic benefits exceeding the performance initially expected from the existing asset. Major renovations are depreciated over the remaining useful life of the related asset Impairment of non-financial assets Assets that have an indefinite useful life are not subject to amortization and are tested annually for impairment. Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. An impairment loss is recognized when the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest level for which there is separately identifiable cash flow (cash-generating unit level). Non-financial assets other than goodwill that were adjusted due to impairment are subsequently reviewed for the possible reversal of the impairment at the balance sheet date Advances from customers Prepayments from customers (classified in Trade and other payables) refer to advances received for future advertising and are recorded as revenue when the related advertisement is published Trade payables Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business. Accounts payable are classified as current liabilities if payment is due within one year or less. Otherwise they are presented as non-current liabilities. Trade payables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method. In practice, they are usually recognized at the amount of the related invoice Borrowings and debentures Borrowings and debentures are recognized initially at fair value, net of transaction costs incurred, and are subsequently carried at amortized cost. Any difference between the proceeds (net of transaction costs) and the total amount payable is recognized in the statement of income over the period of the borrowings using the effective interest method. Borrowing is classified within current liabilities unless the Group has an unconditional right to defer settlement of the related liability for at least 12 months after the reporting period. 18

21 Both general and specific borrowings costs that are directly attributable to the acquisition, construction or production or a qualifying asset - i.e., an asset which necessarily requires a substantial amount of time to be ready for its intended use or sale - are capitalized as part of the asset cost when it is probable that they will yield future economic benefits for the entity and such costs can be reliably measured. Other borrowing costs are expensed as incurred Provisions Provisions are recognized when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and the amount of this outflow can be reliably estimated. Provisions are measured at the present value of the expenditure expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to the passage of time is recognized as an interest expense Magazine subscriptions The balance of the "magazine subscriptions" account refers to advances for subscriptions and is realized upon production and delivery of future publications Current and deferred income tax and social contribution expenses The income tax and social contribution expenses for the period are comprised of current and deferred taxes and are recognized in the statement of income. The current income tax and social contribution expenses are calculated on the basis of the tax laws enacted up to the end of the reporting period. The current income tax and social contribution expenses are presented net in liabilities when there are amounts payable, or in assets when the amounts prepaid exceed the total amounts due on the reporting date. Deferred income tax and social contribution expenses are recognized in the financial statements on income tax and social contribution losses and temporary differences arising between the tax bases of assets and liabilities and their carrying amounts. The current tax rates of 25% for income tax and 9% for social contribution are used to calculate deferred taxes. Deferred tax assets are recognized to the extent that it is probable that future taxable profits will be available to offset temporary differences and/or tax losses, based on projections of future results using internal assumptions and future economic scenarios, which may, therefore, be subject to changes Employee benefits (i) Pension obligations The pension plan sponsored by the Group is a defined contribution plan administered by Sociedade de Previdência Privada - Abrilprev, to which contributions are made on a compulsory, contractual or voluntary basis. Once the contributions have been made, the Company has no obligation to make additional payments. Regular contributions cover the net costs for the period in which they are due, and thus are included in personnel costs. 19

22 (ii) Profit sharing The Group offers its employees a profit sharing program named "Superação", linked to the accomplishment of pre-established goals. This benefit is recognized on a monthly basis and adjusted at the end of the year, when the amount to be paid to employees can be accurately calculated Statements of income Revenue recognition a) Revenue from sales of products and services The Group recognizes revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will result from the transaction and when specific criteria have been met for each of the Group's activities. Revenues from advertising (net of volume bonuses), sales of products and printing services are recognized when the advertising is published, the products are delivered or the services are rendered, respectively. Sales of magazines to points of sale are recognized on the publication date, net of estimated losses. Revenue from magazine subscriptions is recognized proportionally to the copies delivered. The Company also enters into advertising barter transactions, for which the fair value concept is applied to each agreement. b) Interest income Interest income is recognized on an accruals basis, using the effective interest method. Costs Costs related to advertising are recognized when the respective advertisement is published. Production costs are determined using the specific lot method and take into consideration the average purchase or production price. Costs of services rendered are recognized when the services are rendered. Costs relating to magazine production and sales are recognized as at the date of each issue, and the costs of subscriptions and the distribution of copies are calculated when the magazines are delivered to the subscribers Dividends and interest on capital The distribution of dividends and interest on capital to the Company stockholders is recognized as a liability in the Group's financial statements at the end of each year, in accordance with the Company's bylaws. Any amount in excess of the minimum mandatory dividend is provided only on the date it is approved by the Board of Directors. The tax benefit for interest on capital is shown in the statement of income Leases Leases in which a significant portion of the risks and rewards of ownership is retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the statement of income on a straight line basis over the period of the lease. Some subsidiaries of the Company lease certain property, plant and equipment. Leases of property, plant and equipment where the subsidiaries bear substantially all of the risks and 20

23 rewards of ownership are classified as finance leases. Finance leases are capitalized at the inception of the lease at the lower of the fair value of the leased item and the present value of the minimum lease payments. Each lease payment is allocated between the outstanding liability and the finance charges so as to achieve a constant interest rate on the outstanding finance balance. The corresponding lease obligations, net of finance charges, are included in other long-term liabilities. The interest element of the finance cost is charged to the statement of income over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The property, plant and equipment items acquired under finance leases are depreciated over their respective useful lives. The indirect subsidiaries Treelog S.A. Logística e Distribuição and Tex Courrier Ltda. bear substantially all of the risks and rewards of ownership related to their fleet vehicles classified as finance leases. Finance leases are recorded in the same manner as financed purchases, recognizing at the beginning of the lease the property, plant and equipment item and the related financing liability (lease) New standards, amendments to and interpretations of existing standards that are not yet effective The following new standards, amendments to and interpretations of existing standards were issued by the International Accounting Standards Board (IASB) but are not effective for The early adoption of these standards, even though encouraged by IASB, has not been implemented in Brazil by the Brazilian Accounting Pronouncements Committee (CPC).. IFRIC 21, Levies. The interpretation clarifies when an entity should recognize a liability to pay a levy in accordance with the legislation. The recognition of the obligation is applicable only after the obligating event takes place. The standard is applicable as from January 1, IFRS 9, Financial instruments, addresses the classification, measurement and recognition of financial assets and financial liabilities. IFRS 9 was issued in November 2009 and October It replaces the parts of IAS 39 that relate to the classification and measurement of financial instruments. IFRS 9 requires financial assets to be classified into two measurement categories: those measured at fair value and those measured at amortized cost. The determination is made at initial recognition. The basis of classification depends on the entity's business model and the contractual cash flow characteristics of the financial instruments. For financial liabilities, the standard retains most of the IAS 39 requirements. The main change is that, in cases where the fair value option is taken for financial liabilities, the part of a fair value change due to an entity's own credit risk is recorded in other comprehensive income rather than the statement of income, unless this creates an accounting mismatch. The Group is yet to assess IFRS 9's full impact. The standard is applicable as from January 1, There are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Company and its subsidiaries Impacts of Provisional Measure 627 The Federal Revenue Secretary's Ruling Instruction 1,397 (IN 1397) and Provisional Measure 627 (MP 627) were published on September 17, 2013 and November 12, 2013, respectively, and: (i) revoked the Transitional Tax System (RTT) as from 2015, with the introduction of a new tax system; and (ii) changed Decree-law 1,598/77 on corporate income 21

24 tax and the legislation on social contribution on net income. The new tax system set out in MP 627 is effective as from 2014 for companies which elect to adopt it. MP 627 provisions to be highlighted include the treatment of distribution of profits and dividends, calculation basis of interest on capital, and criterion of compute the share of profit of subsidiaries and associates in the period when RTT was in effect. The preliminary conclusion of a study conducted by the Company on the potential effects of MP 627 and IN 1297 is that dividends may have been overpaid for years 2012, 2011 and This conclusion is based on the best interpretation of the current MP 627 text by both management and its legal advisors. The possible signature of MP 627 into law may change this conclusion. The Company is awaiting for the passage of any amendments to MP 627 to take a decision about whether or not to opt for the early adoption of the tax rule in fiscal year CRITICAL ACCOUTNING ESTIMATES AND JUDGMENTS Estimates and judgments are continually reassessed and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. 3.1 Critical accounting estimates and assumptions a) Estimated impairment of goodwill The Company tests annually whether goodwill has suffered any impairment, in accordance with its accounting policy. The recoverable amounts of cash-generating units (CGUs) have been determined based on value-in-use calculations. These calculations require the use of estimates. b) Revenues from barter and advertising The Company and its subsidiaries enter into advertising barter transactions, and the fair value concept is applied to each agreement. Because revenue from advertising barter transactions cannot be reliably measured using the fair value of the advertising services received, in accordance with Pronouncement CPC 30, Revenue, management uses historical experience and estimates to determine the fair value of services delivered. c) Deferred taxes The Company and its subsidiaries recognize deferred income tax and social contribution expenses on income tax and social contribution losses, respectively, as well as on temporary differences, in cases where they believe that there is future recoverability. The realization of these deferred taxes is contingent on the availability of sufficient future taxable income. d) Provision for contingencies The Group is party to lawsuits and administrative proceedings, which include labor, civil and tax lawsuits arising in the normal course of their business. When the Company's management, based on past experience and the opinion of its legal advisors, considers that a loss on these lawsuits is probable, a provision for contingencies is recognized at an amount considered sufficient to cover the eventual losses on the lawsuits. e) Joint ventures Abril Comunicações S.A. holds 49% of voting shares of Nimbuzz Brasil S.A. The arrangement was classified as joint control because the unanimous agreement of all parties is contractually required for all relevant activities. 22

25 The joint venture is structured as a limited liability entity and the parties to the agreement have rights to this entity's net assets. For this reason, the arrangement is classified as a joint venture and recorded in the financial statements on the equity method. 3.2 Changes in accounting policies Changes in accounting policies affected the parent company and consolidated financial statements. The main adjustments made and their impacts on the financial statements are described below: (a) Proportionate deconsolidation As discussed in note 3.1.e, the Group has joint control over the 49% interest in Nimbuzz Brasil S.A. As each venturer has rights to Nimbuzz s net assets, the agreement was classified as a joint venture and as such is accounted for on the equity method. The investment was previously subject to proportionate consolidation. The restatement of comparative numbers for 2012 was not required as the Company's interest in Nimbuzz dates from the corporate restructuring which took place on March 31, 2013 (note 10.5.c). (b) Deferral of costs and expenses for acquisition of new subscriptions As prescribed by CPC 23 - Accounting policies, changes in estimates and correction of errors, the Company introduced a change in its accounting practices as a result of changes in marketing conditions (increased subscription period) and commercial policies for subscriptions, considering that sales commissions expenses increased as new magazine subscribers were acquired. For better presentation of this economic fact, the Company elected to change its accounting practice so as to recognize this expenditure as new contract acquisition costs, which are amortized to the extent that revenues from the sale of each magazine subscription are recognized. The deferral of these expenses was calculated as from year 2010 in order to restate the current balances. Given the merger of Editora Abril S.A. into the Company on September 30, 2012 (note 10.6.b), the initial adjustment was recognized directly in equity, as an adjustment to merged balances, in the amount of R$ 41,559. During 2013, R$ 57,364 was amortized and recognized in the Company statement of income, while the amount recorded in intangible assets, yet to be amortized, is R$ 88,572. This change in accounting policy has not affected the balance of magazine subscriptions to be delivered, recognized in current liabilities. Changes in the amount that was recorded directly in the Company's equity with respect to prior years are stated below: 23 1/1/2012 to 10/1/2012 to 9/30/2012 (*) 12/31/2012 Opening balance 40,779 41,559 Capitalization 12,323 15,677 Amortization (11,142) (6,034) Deferred income tax and social contribution (401) (3,279) Closing balance 41,559 47,923 (*) Balances not included in the financial statements and presented for comparison purposes only.