(A free translation of the original in Portuguese) Abril S.A. Abril S.A. and subsidiaries FINANCIAL STATEMENTS at December 31, 2012 and Independent Auditor's Report
(A free translation of the original in Portuguese) Abril S.A. Abril S.A. and subsidiaries FINANCIAL STATEMENTS at December 31, 2012 and Independent Auditor's Report CONTENTS Page Management report 1 Balance sheets 2 3 Statements of income 4 Statements of changes in equity 5 Statements of cash flow 6 7 Notes to the financial statements 8 80 Board of directors and executive board 81 Independent auditor's report on the financial statements 82-83
(A free translation of the original in Portuguese) Abril S.A. Management Report Dear Stockholders, In compliance with statutory requirements, we submit for your consideration the Financial Statements of Abril S.A. for the year ended December 31, 2012. 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, April 24, 2013 The Management 1
(A free translation of the original in Portuguese) Abril S.A. BALANCE SHEETS (All amounts in thousands of reais) A S S E T S Parent 12/31/2012 12/31/2011 12/31/2012 12/31/2011 CURRENT ASSETS: Cash and cash equivalents (Note 6) 10,611 5 430,898 369,160 Trade receivables (Note 7) 2,118 870 535,504 643,623 Inventory (Note 8) - - 125,552 111,039 Taxes to be offset (Note 9) 23,708 20,047 73,736 98,811 Dividends and interest on capital receivable (Note 28) 125,246 86,127 - - Advances to suppliers and others (Note 10) 212 216 59,016 44,947 Total current assets 161,895 107,265 1,224,706 1,267,580 NON-CURRENT ASSETS: LONG-TERM RECEIVABLES Loans and other credits with related parties (Note 28) 9,975 3,563 11,019 72,083 Trade receivables (Note 7) - - 14,801 17,437 Taxes to be offset (Note 9) - - 3,128 2,831 Deferred income tax and social contribution (Note 17) - - 274,357 97,222 Judicial deposits (Note 18) 2 1 56,043 77,269 Advances to suppliers and others (Note 10) - - 16,730 8,972 9,977 3,564 376,078 275,814 INVESTMENTS (note 11) 722,130 766,654 995 945 INTANGIBLE ASSETS (note 12) - - 595,785 570,924 PROPERTY, PLANT AND EQUIPMENT (note 13) - - 446,031 434,853 Total non-current assets 732,107 770,218 1,418,889 1,282,536 Total assets 894,002 877,483 2,643,595 2,550,116 The accompanying Notes are an integral part of these financial statements. 2
(A free translation of the original in Portuguese) Abril S.A. CURRENT LIABILITIES: BALANCE SHEETS (All amounts in thousands of reais) LIABILITIES AND EQUITY 3 Parent 12/31/2012 12/31/2011 12/31/2012 12/31/2011 Trade and other payables (Note 14) 2,647 28,323 576,862 729,264 Loans, financing and debentures (Note 15) - - 56,783 123,731 Income tax and social contribution payable - - 1,645 14,961 Taxes and contributions payable (Note 16) 3,105 2,839 88,277 113,627 Dividends payable (Note 20.4) 16,013 45,757 16,396 49,996 Magazine subscriptions - - 323,031 295,736 Total current liabilities 21,765 76,919 1,062,994 1,327,315 NON-CURRENT LIABILITIES: Loans and other debts with related parties (Note 28) 783,034 520,391 49,321 45,516 Loans, financing and debentures (Note 15) - - 921,630 471,587 Taxes and contributions payable (Note 16) 236 551 36,989 73,165 Deferred income tax and social contribution (Note 17) - 10,974 320,502 269,244 Provision for contingencies (Note 18) - - 93,532 106,991 Long-term partnership program (Note 28) - 1,566-1,566 Provision for losses on operations of subsidiaries (Note 11) 1,593 77,685 - - Trade and other payables (Note 14) - - 68,635 58,977 Total non-current liabilities 784,863 611,167 1,490,609 1,027,046 Total liabilities 806,628 688,086 2,553,603 2,354,361 EQUITY (note 20): Share capital 32,778 32,778 32,778 32,778 Revaluation reserves - 12,790-12,790 Revenue reserves 54,596 143,829 54,596 143,829 Total equity 87,374 189,397 87,374 189,397 Non-controlling interests - - 2,618 6,358 87,374 189,397 89,992 195,755 Total liabilities and equity 894,002 877,483 2,643,595 2,550,116 The accompanying Notes are an integral part of these financial statements.
(A free translation of the original in Portuguese) STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31 (All amounts in thousands of reais, except earnings per share) Abril S.A. Parent 2012 2011 2012 2011 Revenue (Note 22) 7 2 2,975,469 3,151,707 Cost of sales (Note 23) - - (1,579,394) (1,446,805) Gross profit 7 2 1,396,075 1,704,902 Selling expenses (Note 23) - - (785,806) (858,160) Administrative expenses (Note 23) (803) (4,025) (509,187) (471,496) Other income, net (Note 24) 154 11,930 (663) 4,829 Share of profits (losses) of subsidiaries and associates (Note 11) 112,055 228,537 - - Operating profit 111,413 236,444 100,419 380,075 FINANCE INCOME AND COSTS (note 25): Finance income 1,339 3,995 48,682 69,607 Finance costs (51,732) (57,278) (164,947) (136,755) Foreign exchange gains (losses), net - - (8,676) (9,123) Profit (loss) before income tax and social contribution 61,020 183,161 (24,522) 303,804 INCOME TAX AND SOCIAL CONTRIBUTION (Note 26) Current - - (40,779) (124,340) Deferred 3,872-129,474 6,418 Profit for the year 64,892 183,161 64,173 185,882 PROFIT ATTRIBUTABLE TO Owners of the Company 64,892 183,161 Non-controlling interests (719) 2,721 64,173 185,882 Basic and diluted earnings per share - in R$ (Note 20.6) 2.9042 8.1973 The accompanying notes are an integral part of these financial statements. There was no other comprehensive income. Accordingly, the Company is not presenting the statement of comprehensive income. 4
(A free translation of the original in Portuguese) Abril S.A. STATEMENTS OF CHANGES IN EQUITY PARENT AND CONSOLIDATED (All amounts in thousands of reais) Attributable to owners of the parent Revenue reserves Additional Share Revaluation Legal dividend Retained Non-controlling Total capital reserves reserve proposed earnings Total interests equity BALANCES AT DECEMBER 31, 2010 32,778 12,660 6,555 146,504-198,497 15,904 214,401 Dividends paid in accordance with the AGM of April 29, 2011 (Note 20.4) (146,504) (146,504) - (146,504) Realization of revalution reserve 197 (197) - - Income tax on realization of revaluation reserve (67) 67 - Profit for the year 183,161 183,161 2,721 185,882 Other movements in non-controlling interests (Note 20.7) - (12,267) (12,267) Allocation of profit for the year: - Minimum mandatory dividend (Note 20.4) (45,757) (45,757) (45,757) - Additional dividend proposed (Note 20.4) 137,274 (137,274) - - BALANCES AT DECEMBER 31, 2011 32,778 12,790 6,555 137,274-189,397 6,358 195,755 Dividends paid in accordance with the AGM of January 31, 2012 (Note 20.4) (114,242) (114,242) - (114,242) Dividends paid in accordance with the AGM of April 16, 2012 (Note 20.4) (23,032) (23,032) - (23,032) Acquisition of additional non-controlling interest on August 2, 2012 (Note 11.5.b) (13,628) (13,628) (13,628) Realization of revalution reserve (Note 2.20) (16,554) 16,554 - - Income tax on realization of revaluation reserve (Note 2.20) 3,764 (3,764) - - Profit for the year 64,892 64,892 (719) 64,173 Other movements in non-controlling interests (Note 20.7) - (3,021) (3,021) Allocation of profit for the year: - Minimum mandatory dividend (Note 20.4) (16,013) (16,013) (16,013) - Additional dividend proposed (Note 20.4) 48,041 (48,041) - - BALANCES AT DECEMBER 31, 2012 32,778-6,555 48,041-87,374 2,618 89,992 The accompanying Notes are an integral part of these financial statements. 5
(A free translation of the original in Portuguese) STATEMENTS OF CASH FLOW FOR THE YEARS ENDED DECEMBER 31 (All amounts in thousands of reais) Abril S.A. Parent 2012 2011 2012 2011 CASH FLOWS FROM OPERATING ACTIVITIES Profit for the year 64,892 183,161 64,173 185,882 Adjustments for: Depreciation and amortization - - 96,735 69,352 Share of profits (losses) of subsidiaries (112,055) (226,964) - - Net disposals of permanent assets - - 8,967 10,165 Net disposals of investments - 477 944 - Realization of deferred income tax (10,974) - (125,877) (4,577) Bad debt allowance - - 18,358 986 Long-term partnership program (1,566) (17,139) (1,566) (17,139) Interest and exchange variations 42,215 45,135 160,003 133,918 Capital gains in subsidiaries (432) (10,608) - (10,108) Non-controlling interests - - (3,965) - Disposals due to impairment - - 12,310 - Interest paid (1,960) (1,496) (62,134) (134,224) Income tax and social contribution paid - - (9,924) (115,954) Changes in working capital Trade receivables (1,248) (371) 110,314 (88,615) Inventory - - (14,513) (7,965) Taxes to be offset (1,295) (5,810) 24,778 (18,556) Advances to suppliers and others 4 1,568 (21,827) (12,796) Judicial deposits (1) (1) 21,226 (5,328) Trade and other payables (25,676) 356 (142,744) 97,433 Income tax and social contribution payable - - (3,392) - Taxes and contributions payable 202 2,013 (18,970) 122,072 Provision for contingencies - - (13,459) (442) Magazine subscriptions - - 27,295 56,603 NET CASH USED IN (PROVIDED BY) OPERATING ACTIVITIES (47,894) (29,679) 126,732 260,707 CASH FLOW FROM INVESTING ACTIVITIES: Purchases of: Intangible assets - - (81,822) (69,465) Property, plant and equipment - - (75,621) (130,817) Investments - - (636) Review of purchase price allocation 3,840 - - - Acquisition of non-controlling interests (13,629) - (13,628) - Loan repayments received from (made to) related parties, net 78,025 47,187 (12,597) 167,684 Capital increase in subsidiaries (12,732) (3,219) - - Dividends received 186,340 152,460 - - Acquisition of subsidiary, net of cash received - (20,000) - (113,121) Spin-off (13) - 2,791 - Assets held for sale - - 551 - NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES 241,831 176,428 (180,326) (146,355) 6
(continued) STATEMENTS OF CASH FLOW FOR THE YEARS ENDED DECEMBER 31 (All amounts in thousands of reais) Abril S.A. Parent 2012 2011 2012 2011 CASH FLOW FROM FINANCING ACTIVITIES: New loans and financing - - 845,642 121,836 Repayment of loans and financing - - (492,208) (13,730) Dividends paid (183,032) (146,504) (186,887) (146,504) Payment of taxes and contributions - PAES, REFIS IV and taxes in installments (300) (250) (51,215) (64,151) NET CASH (USED IN) GENERATED BY FINANCING ACTIVITIES (183,332) (146,754) 115,332 (102,549) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 10,606 (5) 61,738 11,803 (+) Cash and cash equivalents at the beginning of the year 5 10 369,160 357,357 (=) Cash and cash equivalents at the end of the year 10,611 5 430,898 369,160 NET CHANGE IN CASH AND CASH EQUIVALENTS 10,606 (5) 61,738 11,803 The accompanying notes are an integral part of these financial statements. 7
(A free translation of the original in Portuguese) NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2012 (All amounts in thousands of reais unless otherwise stated) Abril S.A. 1. GENERAL INFORMATION Abril S.A. (the "Company") is a corporation headquartered in São Paulo, State of São Paulo, controlled by Ativic S.A. The Company and its subsidiaries (the "Group") share their corporate, managerial and operating structures and costs. The Company's activities include the holding of equity interests in companies, mainly those operating in the communications industry, operating in publishing and printing activities, including the editing, printing, distribution and sale of magazines, yearbooks, guides and technical publications, operating on the Internet as providers of content, access and sales of advertising space and products, operating subsidiaries that engage in the production, acquisition, licensing, distribution, import and export of its own or third party television programs, and the provision of other services related to systems for the transmission, reception and distribution of TV signals and programs, and operating as service providers for the organization and promotion of exhibitions and trade shows, and for sales of advertising and publicity. The issue of these financial statements was authorized by the Company's Board of Directors on April 24, 2013. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies applied in the preparation of these parent company and consolidated financial statements are set out below. These policies have been consistently applied to the years presented. 2.1. Basis of preparation The financial statements have been prepared under the historical costs convention, as 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 3. 8
2.1.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). 2.1.b Parent company financial statements 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 are recorded based on the equity accounting method. 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 Abril S.A., the accounting practices adopted in Brazil applicable to the parent company financial statements differ from the IFRS applicable to separate financial statements only in relation to the evaluation of investments in subsidiaries and jointly-controlled subsidiaries based on the equity accounting method, instead of at cost or fair value in accordance with IFRS. 2.1.c Changes in accounting policies and disclosures 2.2. Consolidation There are no new CPCs/IFRS pronouncements or interpretations effective from 2012 that would be expected to have a material impact on the Company's financial statements. The following accounting policies are applied during the preparation of the consolidated financial statements. Subsidiaries Subsidiaries include all entities over which the Company has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Company controls another 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. 9
The Company applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary represents the fair value of the assets transferred, the liabilities incurred and the equity interests issued by the Company. 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 Company 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 the consideration transferred, plus the acquisition-date fair value of any previous equity interest in the acquiree, over the fair value of the Company's share of the identifiable net assets acquired is recorded as goodwill. Transactions, balances and unrealized gains and losses on transactions between Group entities are eliminated. The accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Company. Associates Associates include all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Jointly-controlled subsidiaries are all entities over which the Group shares control with one or more parties. Investments in associates and jointlycontrolled subsidiaries are accounted for using the equity method and are initially recognized at cost. The Group's share of the profit or loss of its associates and jointly-controlled subsidiaries is recognized in the statement of income. The accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group. 2.3. Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker responsible for allocating resources and assessing the performance of the operating segments. This chief operating decision maker has been identified as the Board of Directors, which makes the Company's strategic decisions. 10
2.4. Foreign currency translation (a) Functional and presentation currency Items included in the financial statements of the Group are measured using the currency of the primary economic environment in which the 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. 2.5. 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 changes in value. 2.6. Financial assets 2.6.1 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 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. 11
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. 2.6.2 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. 2.6.3 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. 2.7. Impairment of financial assets Assets carried at amortized cost 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 12
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, 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 becomes probable that the borrower will enter bankruptcy or other financial reorganization (v) The 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 discounted at the financial asset's original effective interest rate. The carrying amount of the asset is reduced and the loss 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. 2.8. Trade receivables Trade receivables refer mainly to the sale of advertising, printing services, subscriptions and products. 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 (Note 7). 2.9. 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 (Note 8). Imports in transit are stated at the accumulated cost of each import. 13
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 perspective of utilization, even if they have been subject to an accounting provision. 2.10. Judicial deposits Judicial deposits are monetarily restated and presented as a deduction from the corresponding liability, when applicable. 2.11. 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 14
. 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 how 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 12. iii) 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 12. iv) Non-competition agreements Non-competition clauses, agreed with the sellers during business combinations, are carried at fair value as at the acquisition date. These agreements 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 agreement. v) Trademarks and licenses Acquired trademarks and licenses are initially stated at historical cost. Trademarks and licenses acquired in a business combination are carried at their fair value as at the acquisition date. Trademarks and licenses are not amortized. 15
2.12. Property, plant and equipment Property, plant and equipment are stated at their historical acquisition cost plus the effects of revaluations carried out on December 31, 2005 by the subsidiaries Editora Abril S.A. and 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 their costs and residual values over their estimated useful lives, in accordance with the rates disclosed in Note 13. Land and buildings mainly represent buildings, sheds and offices. Land is not depreciated. Machinery and industrial equipment mainly represents the industrial printing plant used for printing magazines and periodicals. 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. 2.13. Impairment of non-financial assets Assets that have an indefinite useful life, for example goodwill, 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. 2.14. Advances from customers Advances are received for future advertising and are recorded as revenue when the related advertising is published. 16
2.15. 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. 2.16. Loans, financing and debentures Loans, financing 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 Company and its subsidiaries have an unconditional right to defer settlement of the related liability for at least 12 months after the reporting period. 2.17. 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. 2.18. Magazine subscriptions The balance of the "magazine subscriptions" account refers to advances for subscriptions and is realized upon production and delivery of future publications. 2.19. 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. 17
The current income tax and social contribution expenses are presented net, separated by taxpaying entity, 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 on income tax and social contribution losses and temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. 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. 2.20. Employee benefits (i) Pension obligations The pension plan sponsored by the Company and its subsidiaries 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. (ii) Profit sharing The Group offers its employees a profit sharing program named "Superação", linked to the accomplishment of pre-established goals. This benefits 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. (iii) Long-term incentives The long-term partnership program is intended to increase the retention of the Group's key management, and it is based on the achievement of overall results and individual targets previously established and defined in the contracts with the respective employees. As consideration for this long-term partnership, the parent company issues and sells warrants which appreciate in value consistent with the value of the Company, and subsequently repurchases them. The liability relating to the program obligations is recorded in the financial statements as the value of the warrants appreciates and as the likelihood of their exercise by the officers increases. 18
During the year ended December 31, 2012, the Company repurchased all of the shares issued by the direct subsidiary Beigetree Participações S.A. which were held by its main officers, as established in the "Incentive Program" introduced in 2002. Following the repurchase of these shares, the program was redesigned, replacing the option model with a bonus and warrant model. 2.21. Equity Share capital Common and preferred shares are classified as equity. Dividends and interest on capital The distribution of minimum mandatory dividends is subject to a provision in the financial statements and the excess of the adjusted profit for the year is recognized in equity as an additional dividend proposed, and is submitted to the General Meeting of Stockholders for approval. From the year beginning on January 1, 2011, the Company and its subsidiaries started accruing interest on capital, when applicable, and this interest is submitted to a resolution of the General Meeting of Stockholders for approval and allocation. 2.22. 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. 19
2.23. Leases Leases in which a significant portion of the risks and rewards of ownership are 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 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 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). 2.24. New standards, amendments to and interpretations of existing standards that are not yet effective and have not been adopted early by the Company 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 2011. The early adoption of these standards, even though encouraged by IASB, has not been implemented in Brazil by the Brazilian Accounting Pronouncements Committee (CPC).. 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 2010. It replaces those 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 of which category a financial asset falls under is made upon 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 chosen for financial liabilities, the part of a fair value change due to an 20
entity's own credit risk is recorded in other comprehensive income rather than in the statement of income, unless this creates an accounting mismatch. The Group is yet to assess the full impact of IFRS 9. The standard is applicable from January 1, 2013.. IFRS 10, " financial statements" builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company. The standard provides additional guidance to assist with the determination of control. The Group is yet to assess the full impact of IFRS 10. The standard is applicable from January 1, 2013.. IFRS 11, "Joint arrangements" was issued in May 2011. The standard provides for a more realistic reflection of joint arrangements by focusing on the rights and obligations of the arrangement, rather than its legal form. There are two types of joint arrangements: (i) joint operations - where a joint operator has rights to the assets and obligations relating to the arrangement and hence accounts for its interest in assets, liabilities, revenue and expenses, and (ii) joint ventures - where the joint operator has rights to the net assets of the arrangement and hence accounts for its interest in equity. The proportional consolidation method will no longer be permitted for joint ventures. The standard is applicable from January 1, 2013.. IFRS 12, "Disclosures of interests in other entities" includes the disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, special purpose vehicles and other off balance sheet vehicles. The Group is yet to assess the full impact of IFRS 12. The standard is applicable as from January 1, 2013.. IFRS 13, "Fair value measurement" was issued in May 2011. IFRS 13 aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRS. The requirements, which are largely aligned between IFRS and US GAAP, do not extend the use of fair value accounting but provide guidance as to how it should be applied where its use is already required or permitted by other standards within IFRS or US GAAP. The Group is yet to assess the full impact of IFRS 13. The standard is applicable from January 1, 2013. 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. 3. CRITICAL ACCOUNTING 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. Areas in which estimates and judgments are significant are described below. 21
a) Estimated impairment of goodwill The Company tests annually whether goodwill has suffered any impairment, in accordance with the accounting policy stated in Note 2.13. The recoverable amounts of cash-generating units (CGUs) have been determined based on value-in-use calculations. These calculations require the use of estimates (Note 12). b) Revenues from barter and advertising As mentioned in Note 2.22, some subsidiaries of the Company 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) Provision for contingencies As mentioned in Note 18, some subsidiaries of the Company are parties 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. d) Deferred taxes As mentioned in Note 17, the Group recognizes deferred income tax and social contribution expenses on income tax and social contribution losses, respectively, as well as on temporary differences, in cases where it believes that there is future recoverability. 4. FINANCIAL RISK MANAGEMENT 4.1. General considerations and policies The Group has a risk management policy, which provides guidelines on transactions and requires the diversification of transactions and counterparties. According to this policy, the nature and general positions of financial risks are monitored and managed on a regular basis in order to evaluate their outcomes and their financial impact on cash flow. The credit limits of counterparties are also periodically reviewed. The Risk Management Committee assists management in examining and reviewing information related to risk management, including the significant policies, procedures and practices used in risk management. 22
4.2. Financial risk factors The activities of the Group exposes it to several areas of financial risk: market (including currency and interest rate), credit and liquidity risk. The Company's global risk management program is focused on the uncertainty of financial markets and seeks to minimize any possible adverse effects on financial performance. The risk management policy was issued by the Board of Directors and establishes the existence of a Risk Management Committee. In accordance with this policy, market risks are protected against when this is deemed necessary to support the corporate strategy or maintain the level of financial flexibility. The Corporate Treasury function identifies, assesses and may contract financial instruments for the purpose of hedging the Company against potential financial risks, mainly those arising from interest and foreign exchange rates. a) Market risk The Group is subject to market risks arising from its business activities. These market risks mainly involve the possibility of fluctuations in exchange rates and variations in interest rates. i) Exchange rate risk Some subsidiaries of the Company have borrowing and contracts with suppliers denominated in foreign currency. The risk related to these transactions arises from possible fluctuations in exchange rates, which may increase the balances of the related liabilities. The consolidated liabilities subject to this risk represent approximately 3.4% of total borrowing and trade payables at December 31, 2012 (1.18% in 2011). The Group has entered into derivative agreements (swaps) to hedge against this type of risk only for borrowing obtained under BACEN Resolution 2,770/00. Additionally, for liabilities denominated in foreign currency, there is a continuous monitoring of market rates in order to evaluate the requirement for derivatives to hedge against the risk of volatility in these rates. The market values of these transactions do not substantially differ from the amounts recorded in the financial statements at December 31, 2012 and 2011. ii) Interest rate risk Some subsidiaries of the Company have loans, financing and debentures in local currency, which are subject to interest rates linked to indices (mainly the Interbank Deposit Rate "CDI"). The risk related to these liabilities arises from possible fluctuations in these rates. 23