Financial Statements Brasil Brokers Participações S.A. December 31, 2017 With Independent Auditor s Report

Transcription

1 Financial Statements Brasil Brokers Participações S.A. December 31, 2017 With Independent Auditor s Report

2 Brasil Brokers Participações S.A. Financial Statements December 31, 2017 Table of Contents Officers statement on the Financial Statements... 2 Officers statement on the Independent Auditor s Report... 3 Independent Auditor s Report... 4 Financial Statements Statement of financial position Statement of income for the year Statement of changes in equity Statement of value added Statement of comprehensive income Statement of cash flow...19 Management Report Notes to the financial statements... 23

3 Officers Statement on the Financial Statements The executive officers of Brasil Brokers Participações S.A., inscribed in the Ministry of Finances under corporate taxpayer s ID (CNPJ) no / , with head office at Avenida Luis Carlos Prestes, nº 230, Subsolo, salas 104 a 106, Barra da Tijuca, in the city and state of Rio de Janeiro, for the purpose of Article 25 of CVM Instruction 480 of December 7, 2009, hereby declare that they reviewed, discussed and agreed with the information contained in the financial statements for the fiscal year ended December 31, Rio de Janeiro, March 28, Brasil Brokers Participações S.A Board of Executive Officers

4 Officers Statement on the Independent Auditor s Report The executive officers of Brasil Brokers Participações S.A., inscribed in the Ministry of Finances under corporate taxpayer s ID (CNPJ) no / , with head office at Avenida Luis Carlos Prestes, nº 230, Subsolo, salas 104 a 106, Barra da Tijuca, in the city and state of Rio de Janeiro, for the purpose of Article 25 of CVM Instruction 480 of December 7, 2009, hereby declare that they reviewed, discussed and agreed with the opinions expressed in the Independent Auditor s Report on the financial statements for the fiscal year ended December 31, Rio de Janeiro, March 28, Brasil Brokers Participações S.A Board of Executive Officers

5 March 23, 2018 To: Brasil Brokers Participações S.A. From: Shareholders, Board members and Management Ref.: Independent Auditor s Report no. REL-XXX/2018 Dear sirs, We hereby submit to you the Independent Auditor s Report accompanied by the Individual and Consolidated Financial Statements of Brasil Brokers Participações S.A. for the period ended December 31, Sincerely, Ana Cristina Linhares Areosa Partner

6 Brasil Brokers Participações S.A. Independent auditor s report accompanied by the Financial Statements December 31, 2017

7 Contents Page Independent auditor' report 3 Financial statements 7 Notes to the Consolidated and Individual Financial Statements for the year ended December 31,

8 Independent auditor s report on the individual and consolidated financial statements Grant Thornton Auditores Independentes Rua Voluntários da Pátria, 89 5º andar Botafogo Rio de Janeiro RJ Brasil T To Shareholders, Board members and Management of Brasil Brokers Participações S.A. Rio de Janeiro RJ Opinion We have audited the individual and consolidated financial statements of Brasil Brokers Participações S.A. ( Company ), identified as parent company and consolidated, respectively which comprise the statement of financial position as at December 31, 2017, and the respective statements of operations, comprehensive income, changes in equity and cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies. In our opinion, the aforementioned financial statements present fairly, in all material respects, the individual and consolidated financial position of Brasil Brokers Participações S.A as at December 31, 2017, the individual and consolidated performance of its operations and the respective individual and consolidated cash flows for the year then ended, in conformity with the accounting practices adopted in Brazil and International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). Basis for our opinion We conducted our audit in accordance with Brazilian and International Standards on Auditing. Our responsibilities, pursuant to these standards, are described in the section called Auditors Responsibility for the Audit of the Parent Company and Consolidated Financial Statements below. We are independent of the Company and its Subsidiary, in compliance with the relevant ethical principles set forth in the Code of Professional Ethics for Accountants and the professional standards issued by the Brazilian Federal Accounting Council, and we have also fulfilled our other ethical responsibilities in accordance with these standards. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

9 Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the parent company and consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Assessment of the recoverable value of intangible assets and goodwill in the acquisition of investments Reason why this was considered a KAM As described in Notes 11 and 13 - "Investments" and "Intangible assets, over the last few years the Company expanded its activities through the acquisition of corporate control of other companies. As a result, the Company's assets include a significant amount of intangible assets, mainly goodwill arising from excess consideration transferred in exchange for assets acquired and liabilities assumed, which represent approximately 60% of the Company s total consolidated assets. On December 31, 2017, the financial situation of the Company and its subsidiaries, affected by weak economic growth in Brazil, indicated that the book value of these assets could exceed their recoverable value and that, for that reason, the Company's Management updated the impairment test of the intangible asset performed in This topic was considered a critical area and, therefore, a risk to our audit approach, as it involves subjective judgment, which may have significant impacts on the preparation of the individual and consolidated financial statements, since the assumptions used by the Company's Management, reflect certain cash flow projections that have a high degree of uncertainty because they are affected by estimated future conditions for growth of the economy and the market as a whole. How the subject was treated in the audit of the financial statements With the help of our internal corporate finance specialists, we reviewed the methodology used to prepare the study and evaluated whether the data used in the study were the best information available and whether they were based on observable market practices. We also reviewed the main assumptions used, taking into account the general economic environment; the Company's planning, including analysts expectations; the assumptions used in the previous study and their performance compared to the actual results obtained; the historical information used; and risk associated with the cash flow and its effect related to the discount rate. We analyze the reasonableness of the discount rate applied to the Company's cash flows, taking into account its mathematical calculation and the use of the best assumptions to calculate the rate. Also, as part of one of the applied procedures, we conducted an independent study considering a more conservative scenario and compared the resulting recoverable amount with the study prepared by the Company's Management in order to test the asset for impairment in a more pessimistic scenario. Based on the audit procedures performed and the audit evidence obtained that support our tests, we believe that the impairment testing prepared by the Company's Management is acceptable, in the context of the individual and consolidated financial statements taken as a whole

10 Other matters Statements of value added The parent company and consolidated statements of value added for the year ended December 31, 2017, which are the responsibility of the Company s management and are presented as supplementary information for IFRS purposes, were subject to audit procedures performed together with the audit of the Company s financial statements. In order to form our opinion, we have verified if these statements are reconciled with the financial statements and accounting records, as applicable, and if their form and content are in compliance with the criteria set forth in the Technical Pronouncement CPC 09 - Statement of Value Added. In our opinion, these statements of value added were fairly prepared, in all material respects, in accordance with the criteria established in this Technical Pronouncement and are consistent with the parent company and consolidated financial statements taken as a whole. Other information accompanying the parent company and consolidated financial statements and the independent auditor s report The Company s Management is responsible for this and other information comprising the Management Report. Our opinion on the parent company and consolidated financial statements does not cover the Management Report. Accordingly, we do not express any form of audit conclusion on this report. In connection with the audit of the parent company and consolidated financial statements, our responsibility is to read the Management Report and, in doing so, consider whether it is materially inconsistent with the financial statements or the knowledge we obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement in the Management Report, we are required to report this fact. We have nothing to report in this regard. Responsibilities of Management and those charged with Governance for the parent company and consolidated financial statements Management is responsible for the preparation and fair presentation of the parent company and consolidated financial statements in accordance with the accounting practices adopted in Brazil and the International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board (IASB), and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the parent company and consolidated financial statements, Management is responsible for assessing the Company s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless Management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. The persons charged with governance at the Company and its subsidiary are those responsible for overseeing the process of preparation of the financial statements. Auditor s responsibility for the parent company and consolidated financial statements

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

12 We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal controls that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate all relationships and other matters that may reasonably be thought to bear on our independence, and, where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Rio de Janeiro, March 23, Ana Cristina Linhares Areosa CT CRC RJ /O-3 Grant Thornton Auditores Independentes CRC 2SP /O-1 S - RJ

13 ASSETS BRASIL BROKERS PARTICIPAÇÕES S.A. Statement of Financial Position as of December 31, 2017 and 2016 (in thousands of Reais) LIABILITIES AND EQUITY Notes Parent Company Consolidated Notes Parent Company Consolidated Dec/17 Dec/16 Dec/17 Dec/16 Dec/17 Dec/16 Dec/17 Dec/16 Current Assets: Current Liabilities: Cash and cash equivalents Trade accounts payable Securities Payroll, provisions and social contributions Accounts receivable from clients Judicial amounts paid in installments Advances to suppliers Taxes and contributions payable Recoverable taxes Advances to clients Dividends and IOE receivable Dividends payable Option contracts Payables acquisition of companies Prepaid expenses Option contracts Receivables - Resale of companies Provision for contingencies Other receivables Amounts to be transferred from lease operations Other payables Total current assets: Total current liabilities Non-current assets: Non-current liabilities: Long-term assets Other long-term liabilities Securities Trade accounts payable Accounts receivable from clients Provision for contingencies Property held for sale Payables acquisition of companies Recoverable taxes Provision for investment losses Loans with related parties Option contracts Option contracts Other payables Judicial deposits Receivables - Resale of companies Others payables Total non-current liabilities Equity: 19 Investments in subsidiaries Capital stock Property and equipment Capital reserve Intangible assets: Accumulated losses ( ) ( ) ( ) ( ) Indefinite useful life Treasury shares (23.717) (23.717) (23.717) (23.717) Identifiable useful life Stock option reserve Transactions with non-controlling interests (79.528) (75.281) (79.528) (75.281) Company's equity: Non-controlling shareholders Total non-current assets: Total equity Total assets Total liabilities and equity

14 BRASIL BROKERS PARTICIPAÇÕES S.A. Statement of operations for the period ended as December 31, 2017 e 2016 (In thousands of Reais, except for basic and diluted earnings per share) Parent Company Consolidated Notes Dec/17 Dec/16 Dec/17 Dec/16 Net revenue Cost of services rendered (6.158) (3.333) Gross result Operating costs, expenses and income: Administrative expenses 22 (27.125) (22.369) ( ) ( ) Management fees 15 (1.682) (1.077) (4.776) (2.893) Depreciation and amortization (3.897) (3.551) (9.658) (12.231) Impairment adjustment 13 (16.438) - (16.438) - Other operating income (expenses) 25 (13.755) (44.286) (77.744) Equity in the earnings of subsidiaries 11 (52.989) ( ) - - Operating loss before financial result ( ) ( ) ( ) ( ) Financial expenses 23 (993) (14.472) (1.961) (15.223) Financial income Financial result (3.082) (1.407) Profit / loss before income tax and social contribution ( ) ( ) ( ) ( ) Income tax expense (924) (2.542) Social contribution expense (387) (960) Net profit / loss for the year ( ) ( ) ( ) ( ) Net profit / loss attributed to controlling shareholders ( ) ( ) ( ) ( ) Net profit / loss attributed to non-controlling partners Basic and diluted earnings per share (in Reais) (0,42819) (0,72561) Average number of shares (outstanding) The notes are an integral part of these financial statements.

15 Brasil Brokers Participações S.A. Statement of changes in equity for the years ended December e 2016 Capital reserve (in thousands of Reais) Profit reserve Retained Acquisition of Profit Additional Total equity of Noncontrolling consolidated Total Goodwill Treasury Stock option earnings Call option of noncontrolling interest controlling non- Capital stock Legal reserve retention dividends controlling reserve shares reserve (accumulate reserve proposed shareholders shareholders equity Notes d losses) interest Balances on December 31, (23.717) - - (40.099) - (42.322) (32.811) Transactions with non-controlling interests (148) - (113) (1.953) (2.064) Dividend payment (4.403) (4.403) Result of the year ( ) ( ) ( ) Balances on December 31, (23.717) ( ) - (42.470) (32.811) Capital increase Write-off of non-controlling interest due to business combination (6.763) (6.763) Transactions with non-controlling interests (4.247) - (4.247) (443) (4.690) Dividend payment (1.964) (1.964) Stock option reserve Subsidiary's adjustment effect Result of the year ( ) ( ) 227 ( ) Balances on December 31, (23.717) ( ) - (46.717) (32.811) The notes are an integral part of these financial statements.

16 BRASIL BROKERS PARTICIPAÇÕES S.A. Statement of value added as of December 31, 2017 and 2016 (in thousands of Reais) Parent Company Consolidated Dec/17 Dec/16 Dec/17 Dec/16 REVENUE Sales of services Other revenues Allowance for doubtful accounts (13.328) - (14.018) (7.698) (11.183) Materials, energy, outsourced services and other (8.773) (15.300) (65.467) (75.530) (8.773) (15.300) (65.467) (75.530) GROSS VALUE ADDED (19.956) (7.065) Depreciation and amortization (3.898) (3.551) (9.659) (12.231) Impairment adjustment (16.438) - (16.438) - (20.336) (3.551) (26.097) (12.231) NET VALUE ADDED GENERATED BY THE COMPANY (40.292) (10.616) (1.203) Equity in the earnings of subsidiaries (52.989) ( ) - - Provision for investment losses - (139) - (139) Financial income (44.091) (97.112) TOTAL VALUE ADDED TO DISTRIBUTE (84.383) ( ) DISTRIBUTION OF VALUE ADDED Payroll and related charges (15.934) (17.069) (45.342) (48.209) Payroll and charges (11.204) (12.584) (30.282) (34.664) Management fees (1.682) (1.077) (4.776) (2.893) FGTS (735) (816) (2.037) (2.372) Benefits (2.313) (2.592) (8.247) (8.280) Taxes, fees and contributions (3.350) (3.873) (24.797) (31.526) Federal (2.764) (3.134) (8.208) (12.994) Municipal (410) (607) (15.046) (16.806) Other (176) (132) (1.543) (1.726) Value distributed to providers of capital (2.493) (5.469) (46.651) ( ) Interest (926) (2.292) (2.085) (4.725) Rental (1.018) (1.188) (12.186) (14.026) Other (549) (1.989) (32.380) (83.734) Value distributed to shareholders Non-controlling interest in retained earnings - - (227) (6.412) Net profit / loss for the year Total (10.857) (54.492) The notes are an integral part of these financial statements.

17 BRASIL BROKERS PARTICIPAÇÕES S.A. Corporate taxpayer's ID (CNPJ): / Statement of comprehensive income as December 31, 2017 e de 2016 (in thousands of Reais) Parent Company Consolidated Dec/17 Dec/16 Dec/17 Dec/16 Loss for the year ( ) ( ) ( ) ( ) Other comprehensive income Consolidated comprehensive income for the year ( ) ( ) ( ) ( ) Attributed to the Company's partners ( ) ( ) ( ) ( ) Attributed to non-controlling partners - gross result The notes are an integral part of these financial statements.

18 BRASIL BROKERS PARTICIPAÇÕES S.A. Statement of cash flows for the periods ended December 31, 2017 and 2016 (in thousands of Reais) CASH FLOW Parent Company Consolidated From operating activities Dec/17 Dec/16 Dec/17 Dec/16 Profit (loss) for the period before taxes ( ) ( ) ( ) ( ) Adjustments to reconcile profit (loss) and net cash generated by operating activities: Depreciation Amortization Equity in the earnings of subsidiaries Allowance for doubtful accounts Provision for contingencies (800) Adjustment to the market value - receivables - - (137) (359) Adjustment to the market value - payables (2.617) (2.617) Expenses from the sale of corporate interest Long-term financial expenses (1.186) (2.856) Stock option result Asset recovery adjustment Financial instrument adjustment Adjust profit loss (24.056) (13.051) (46.745) (25.273) Changes in assets and liabilities Accounts receivable from clients 14 (52) Recoverable taxes (648) Receivables from related parties (29.363) (16.991) - - Other receivables (9.343) (6.906) (2.556) Other long-term assets (2.937) (465) Trade accounts payable Payroll and social charges payable 59 (803) (318) (1.622) Taxes and contributions payable (45) (27) (2.276) (7.124) Advances to clients (1.706) (2.099) (1.804) (2.223) Litigation risks (710) - (23.905) - Option contracts (908) Other current liabilities (2.121) Prepaid expenses (247) 120 Other long-term liabilities (488) (33.364) (17.400) (15.591) (2.672) Net cash consumed by the activities (57.420) (30.451) (62.336) (27.945) From investing activities Securities Property held for sale Advances for future capital Additions to property and equipment (47) (3.759) (1.390) (5.094) Additions to property and equipment (2.360) (2.441) (2.517) (2.562) Dividend receipt Net cash used in investing activities From financing activities with third parties Payables - acquisition Companies (461) (3.359) (461) (3.359) Net cash consumed by financing activities with third parties (461) (3.359) (461) (3.359) From financing activities with shareholders

19 Capital increase Non-controlling interest - - (1.964) (4.403) Net cash generated by financing activities with shareholders (4.403) Increase (decrease) in cash and cash equivalents (5.479) Cash and cash equivalents at the end of the period Cash and cash equivalents at the end of the period TheThe notes are an integral part of these financial statements.

20 MANAGEMENT REPORT Dear Shareholders, Clients and Investors, In Brazil, the year 2017 was marked by the gradual growth of business in the real estate sector. The pace of activity during the first half of 2017 was well below that of previous years. However, the evolution of the country's economic environment contributed to better sales results in the second half of the year, especially in São Paulo. There are continuous indications of improvement in the Brazilian macroeconomic scenario with the growth of GDP, fall in inflation and in the Selic basic interest rate, followed by the improvement in consumer and business confidence levels. The speed of sale of developers inventories has not improved yet, even with the fall of the Selic rate. Still the number of inventories of the developers decreased for the second year in a row, reflecting the lower volume of cancellations. Additionally, recent launches have been more successful in sales. This movement becomes clear when we consider our VSL (Speed On Launch) indicator that reached 40% in 2017 against only 33% in Therefore, many developers are now moving in the search for land. The number of projects planned for the next 12 months has increased and it is already possible to notice a greater interest of buyers and investors in units that are in good commercial conditions. The segment of sales of large assets, such as corporate towers and shopping centers, remains strong due to the interest and foreign exchange scenario. This segment has great growth potential, since many assets offer attractive commercial conditions for long-term investors. In addition, it is also possible to notice an improvement in financing conditions for the purchase and production of real estate, given the resumption of the inflow of savings account, which is the main source of real estate credit, jointly with the Government Severance Fund for Employees (FGTS). Our platform for marketing and distribution of financial services has been growing continuously. The financial volume of real estate credit agreements originated in our partnership with Bradesco more than doubled in the annual comparison (+106%), driven not only by the

21 increase in the volume of real estate financing in the market, but mainly due to our better performance in the segment. The continuity of the improvement in the economic fundamentals and the political agenda in the country are fundamental to stimulate the resumption of the flow of capital and investments, enabling the increase in the income of the population and, consequently, a more expressive recovery of the sector. Given the uncertainties that still exist regarding a more consistent resumption of the market, the Company will intensify the operational adjustments necessary to adapt its structure in the coming months. We have invested recurrently in improvements in our systems and back-office processes to make these activities more efficient. We are reviewing our store structure in search of spaces better suited to the new market reality and once again we are renegotiating our rental agreements. We have carried out some renegotiation rounds of contracts with suppliers, mainly those related to Information Technology and Telecommunications. We also adjusted some of our legal advisory agreements, in order to seek the best cost-benefit ratio, compatible with the degree of complexity of each demand. Most of these changes will be implemented as early as the first half of 2018 and should bring about a reduction of recurring administrative expenses (ex legal and restructuring expenses), bringing us to a level of approximately R$ 100 million. It is important to emphasize that we continue to be impacted by a number of unfavorable judicial decisions in labor claims, despite the protection of Law 6,530/78, as amended by Law 13,097/2015. In order to face this challenge, a series of measures were taken both individually by Brasil Brokers and collectively by the real estate brokerage sector. The Company created a new management exclusively dedicated to labor matters, composed of professionals with broad expertise in the subject. All internal processes have been redesigned so as to ensure that the best possible defense is presented in each demand. This meant a full review of the external offices that defend the Company, which were chosen and evaluated based on specific criteria, depending on the complexity of the labor claim in question. Together with other companies in the sector and entities representing the category, we held meetings

22 with the labor judiciary to discuss the main issues, allowing judges to better understand the reality of real estate brokerage. We believe that this set of actions brought a better comprehension of the facts on the part of the courts that began to attend to the clear autonomy of the parties, without any type of subordination necessary to characterize the labor bond. In light of the foregoing, we started to achieve better results both in the first and second instances in the claims filed by realtors. In addition to the evolution of the Company's success rate, another clear sign of the improvement in the scenario is the number of new labor claims filed in The claims started in the last fiscal year represented a decrease of almost 23% when compared to If the fourth quarter of 2017 is annualized, the reduction reaches 50%. We must also mention the first effects perceived by Brasil Brokers after the advent of the Labor Reform. In addition to the decline in new lawsuits, there is an evident increase in the number of decisions condemning the claimants to the payment of judicial fees, costs and vexatious litigation. To conclude, we would like to highlight the progress made in transforming our business platform, which aims to improve the customer experience regarding the quality of services and increase our diffusion through the main real estate search portals, which are, currently, significantly digital. The main projects carried out last year were related to the implementation and development of new sales tools for the brokers, the development of new (digital) sales channels, the reformulation of our strategy for capturing, monitoring and cultivating Leads, to the launch of our new corporate website with new user features aimed at increasing organic traffic generation and improving our positioning in search engines, renewing our online learning platform for brokers. These investments are fundamental to allow a new cycle of development of our business, to consolidate Brasil Brokers as a diversified, complete and multi-channel real estate business platform, to increase the quality of our services, to bring scale gains through partnerships and, consequently, increase our market share. We are grateful for the trust placed in our Company s management and we continue to focus on generating value for our shareholders. Management

23 1. Operations Brasil Brokers Participações S.A. The Company s headquarters are located at Avenida Luiz Carlos Prestes, nº 230, salas 104, 105 e 106 do 1º subsolo, Barra da Tijuca, in the city and state of Rio de Janeiro. On December 31, 2017, the Company, through its subsidiaries, has a presence in the states of Rio de Janeiro, São Paulo, Rio Grande do Sul, Minas Gerais, Bahia, Goiás, Pará, Mato Grosso and Espírito Santo, as well as operating in other states through its subsidiaries Primaz Empreendimentos Imobiliários Ltda and Rede Morar Ltda. Real estate brokerage services cover the sale of residential units, lots, residential condominiums, shopping malls, commercial units, flats and hotels. The Company began a new model, as a service provider through associated real estate brokers. This franchise will operate in Rio Grande do Norte. The year 2017 was marked by gradual growth in the Brazilian real estate sector. The pace of activity during the first half of 2017 was well below that of previous years, but the improvement in the country's economic environment contributed to better sales results in the second half, especially in São Paulo. There is continuous evidence of improvement in the Brazilian macroeconomic scenario, including GDP growth, declining inflation, a lower benchmark interest rate and improved consumer and business confidence indices. The speed of sale of inventories of real estate developers has not improved, despite the decline in the Selic rate. Nevertheless, the real estate developers inventory volume decreased for the second consecutive year, thanks to a decline in cancellations. In addition, more recent launches have been more successful in sales. This movement becomes clear when we consider our VSL (Speed on Launches) indicator, which reached 40% in 2017 against only 33% in Significant Accounting Policies The parent company and consolidated financial statements were prepared and have been stated in accordance with the accounting practices adopted in Brazil and the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB), which, in Brazil, comprise the translations by the Brazilian Accounting Pronouncements Committee (CPC). In order to ensure their proper reporting and disclosure pursuant to the standards previously mentioned, we implemented the 1

24 internal controls necessary to guarantee that the preparation of these financial statements is free from any relevant distortion. These parent company and consolidated financial statements are presented in Brazilian reais, which is the Company s functional currency. The consolidated financial statements of Brasil Brokers and its subsidiaries, as indicated in Note 11, were prepared with the support of several evaluation bases for accounting estimates. The accounting estimates used in the preparation of the financial statements were supported by objective and subjective factors, based on Management s judgment to determine the adequate amount to be recorded. Important items subject to these estimates and assumptions include the selection of the useful life of property and equipment and its recoverability of operations, evaluation of financial assets at fair value and adjusted to present value, credit risk analysis to determine the allowance for doubtful accounts and the analysis of other risks in order to establish other provisions, including the provisions for contingent liabilities civil, labor and tax. The settlement of transactions using these estimates may result in amounts substantially different from those recorded in the financial statements due to the probabilities inherent to the use of estimates. The Company reviews its estimates and assumptions at least on an annual basis. The Company s financial statements are presented pursuant to technical guideline CPC 07, which addresses basic requirements to be met in the preparation and disclosure of financial information, especially the data contained in the notes. Management confirms that all the relevant information related to its financial statements is being disclosed and corresponds to the data used by it in its activities. The disclosure of these financial statements was approved by the Executive Board on March 23, Business combination Business combinations are recognized using the acquisition method. The acquisition cost is the sum of the transferred consideration, assessed based on the fair value at the date of acquisition, and the amount of minority interest in the acquired company. For each business combination, the acquirer shall measure the minority interest of the acquired company at fair value or based on its interest in the acquiree s net assets. Cost directly attributable to the acquisition shall be recorded as expenses when incurred. 2

25 When acquiring a business, the Company assesses the financial assets and liabilities assumed with the purpose of classifying and allocating them in accordance with the contractual terms, economic circumstances and applicable conditions at the acquisition date. This includes the separation, by the acquiree, of embedded derivatives in host contracts in the acquiree. Initially, goodwill is measured as the surplus of the payment for net assets acquired (identifiable net assets acquired or liabilities assumed). If the payment is smaller than the fair value of assets acquired, the difference shall be recognized as gain in the statement of income. After the initial recognition, goodwill is measured at cost, less impairment losses. For purposes of impairment tests, goodwill acquired in a business combination is, as of the acquisition date, allocated to each of the cash generating units expected to benefit from the combination s synergy, regardless of other assets or liabilities of the acquiree to be attributed to these units Non-controlling interests For each business combination, the Group measures any non-controlling interest in the acquiree, using one of the following criteria: - at fair value; or - at the proportionate interest in acquiree s identifiable net assets, which are generally measured at fair value. Changes in the Group s interest in a subsidiary not resulting in loss of control are recognized as transactions with non-controlling interests in their position as shareholders. Adjustments to non-controlling interest are based on a proportionate amount of the subsidiary s net assets. There is no adjustment in the goodwill for future profitability and no gain or loss is recognized in the profit for the year Investments in subsidiaries The Company s investments in its subsidiaries are evaluated based on the equity accounting method. A subsidiary is an entity over which the Company exercises significant influence. Based on the equity accounting method, investments in subsidiaries are accounted for in the Parent Company s statement of financial position at cost, plus changes after shareholding acquisition in the subsidiary. Goodwill related to the subsidiary is included in the investments book value, which is not amortized. Given that goodwill based on future yield comprise the book value of investments in subsidiaries (which is not recorded separately), it is not separately tested for impairment. 3

26 The statement of income reflects the portion of the subsidiary s operation results. When a change is directly recognized in the subsidiary s equity, the Company will recognize its portion in the variations and will disclose this fact, when applicable, in the statement of changes in equity. The unrealized gains and losses, resulting from transactions between the Parent Company and the subsidiary, are eliminated according to the interest held in the subsidiary. After applying the equity accounting method, the Company determines whether it is necessary to recognize any additional impairment on the Company s investment in its subsidiary. At each closure date of the balance sheet, the Company determines if there is clear evidence that investments in subsidiaries recorded impairment losses. If so, the Company calculates the impairment amount as the difference between the subsidiary s recoverable value and its book value and recognizes the amount in the Parent Company s statement of income Revenue recognition Revenue is recognized to the extent that economic benefits are likely to be generated for the Company and when it can be measured reliably. Revenue is measured by applying the fair value of the consideration received, excluding discounts, rebates and taxes or charges on sales. The Company has evaluated revenue transactions in accordance with specific criteria to determine whether it is acting as an agent or principal, and it ultimately concluded that it is acting as principal in all its revenue agreements Income tax and social contribution on profit These are calculated according to the Corporate Income Tax (IRPJ) and Social Contribution on Profit (CSLL) effective rates. The Company chose to use the taxable income regime, a method that considers the settlement of tax losses and negative basis of social contribution for purposes of determining liabilities. Therefore, additions of temporary undeductible expenses to book income or exclusions of temporary nontaxable revenue, considered for the calculation of current taxable income, generate tax credits or debits, pursuant to Note 17. Regarding its subsidiaries, the Company annually evaluates future projections in order to adjust each subsidiary to the most efficient tax regime: taxable income or presumed profit, as allowed by the tax legislation. Under the presumed profit regime, the income tax provision is recorded on a quarterly basis at the rate of 15%, with a 10% surplus (on the portion that exceeds R$60 of profit per quarter), applied on the 32% basis of service revenue. 4

27 CSLL is calculated using the 9% rate on the 32% basis of service revenue. Financial revenue and other revenues are fully taxed according to effective IRPJ and CSLL rates Financial Assets Financial assets are classified as financial assets at fair value through profit or loss, loans and receivables, held-for-trading investments, as applicable. The Company classifies its financial assets at their initial recognition, when they become part of the instrument s contract provisions. The Company s financial assets include cash and cash equivalents, financial investments, trade receivables and call option of non-controlling interest. Subsequent measurement The measurement of financial assets depends on their classification, which may be as follows: Financial assets at fair value through profit or loss a) Cash and cash equivalents Cash and cash equivalents are maintained to meet short-term cash commitments. The Company considers as a cash equivalent any financial investment that can be immediately translated into a known cash amount and is subject to an insignificant risk of change in value. b) Securities The Company s securities are managed on a long-term basis, plus interest, inflation adjustment, less impairment losses (when applicable), incurred up to the date of the consolidated interim financial information. The breakdown of these investments, by classification type, is presented in Note 7. c) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments not quoted in an active market. After the initial measurement, these financial assets are recorded at amortized cost, by using the effective interest method minus impairment losses. The amortized cost is calculated taking into consideration any discount or premium on the acquisition and the fees or costs, when incurred. The amortization of the effective interest method is included in the financial revenue line of the statement of income. Impairment losses are recognized as financial expense also in the statement of income. 5

28 d) Accounts receivable from clients Trade receivables are stated at the nominal value of securities, which are subject to adjustment to present value. An allowance for doubtful accounts is recorded and calculated based on estimates sufficient to cover possible losses in the realization of trade receivables, considering the history of payment of each client in relation to their situation. e) Call options of non-controlling interest Recognized for the acquisition of control of subsidiaries, which are initially and subsequently (having a corresponding entry to profit for the year) measured at fair value Adjustments of assets and liabilities to present value Monetary assets and liabilities are adjusted to their present value at the initial record of the transaction, taking into consideration the contractual cash flow, the explicit interest rate - in certain cases implicit - of the respective assets and liabilities and the rates practiced in the market for similar transactions. This interest is relocated to the financial revenues and expenses account in the income group of accounts by using the method of effective interest rate in relation to the contractual cash flows Property and equipment Property and equipment are recognized at the cost of acquisition. The depreciation of the properties is calculated by the straight-line method using rates mentioned in note 12, which takes into account the estimated economic useful life of the assets Intangible assets. Intangible assets acquired separately are measured in the initial recognition at the acquisition cost. The cost of intangible assets acquired in a business combination corresponds to the fair value at the acquisition date. After its initial recognition, intangible assets are presented at cost, less accumulated amortization and losses and recoverable value. Internally-generated intangible assets, except for capitalized development costs, are not capitalized and its expenses are recorded in the statement of income for the year they are incurred. Intangible assets are mainly represented by: software, trademark license and goodwill from future profitability and future additional revenues, pegged to business combinations of the Company and its subsidiaries. Intangible assets with identifiable useful life are accrued throughout their economic useful life and evaluated regarding impairment losses whenever there is evidence of loss in the asset s economic value. The term and method for the amortization of intangible assets with 6

29 identifiable useful life are reviewed at least at the end of each fiscal year. Changes in the identifiable useful life or in the consumption expected of future economic benefits of these assets are accounted for through changes in the amortization term or method, depending on the case, and are treated as changes in accounting estimates. The amortization of intangible assets with identifiable useful life is recorded in the statement of income as cost or expenses related to the use of intangible assets. Intangible assets with indefinite useful life are not amortized; however, they are annually tested for impairment, whether individually or at the level of cash generating unit. The indefinite useful life evaluation is annually revised to determine if this evaluation continues to be reasonable. In the contrary, changes in the useful life, from undefined to defined, are conducted prospectively Other assets and liabilities (current and non-current) Assets are recognized in the statements of financial position when it is probable that their future economic benefits will be generated in behalf of the Company and their cost or value may be measured with assurance. Liabilities are recognized in the statement of financial position when the Company has a legal or constituted obligation as result of an event in the past, for which it is probable that an economic resource be required in order to settle it. They are increased, when applicable, by the corresponding charges and inflation adjustments or translations adjustments incurred. Provisions are recorded based on the best estimates Management can make of the risks involved. The assets and liabilities are classified as current when their realization or liquidation will probably occur in the following twelve months. Otherwise, they are stated as non-current assets and liabilities Put options of non-controlling interest Recognized for the acquisition of control of subsidiaries, which are initially measured at present value of the option strike price (having a corresponding entry to non-controlling interest, under equity) and subsequently measured (having a corresponding entry to profit for the year) at adjustment to present value and/or variation of assumptions defining the option strike price Statements of cash flow and value added Statements of cash flow were prepared and are presented in compliance with CVM Resolution 641 of October 7, 2010, which approved technical pronouncement CPC 3 (R2) Statement of Cash Flow. 7