Financial statements as of and for the year ended December 31, 2016
BALANCE SHEETS AS OF DECEMBER 31, 2016 AND 2015 AND JANUARY 1, 2015 (Free translation into English of the original prepared by the Company in Spanish) (Note 2) Notes ASSETS Non-current Assets Property, plant and equipment 5 173,071,224 124,863,856 119,272,015 Intangible assets - - 238,691 Investments 6 496,800,497 167,450,911 156,564,032 Deferred income tax asset 18 48,078,205 38,804,805 30,857,644 Other receivables 7 753,077 638,542 232,131 Total Non-current Assets 718,703,003 331,758,114 307,164,513 Current Assets Inventories 8 1,853,987,065 1,479,190,517 491,687,317 Other receivables 7 747,068,237 710,869,639 177,296,923 Other related parties receivable 9 266,423,838 85,217,125 17,381,665 Trade accounts receivable 10 2,159,633,164 1,680,286,935 719,149,883 Investments 6 26,000,002 661,999,646 60,365,187 Cash and cash equivalents 35,408,678 135,688,437 13,862,638 Total Current Assets 5,088,520,984 4,753,252,299 1,479,743,613 Total Assets 5,807,223,987 5,085,010,413 1,786,908,126 SHAREHOLDERS EQUITY AND LIABILITIES Capital Stock and Reserves Capital stock 11 17,986,927 17,986,927 17,986,927 Reserves 12.1 781,318,899 152,865,317 254,739,268 Reserve for hedging transactions 12.3 (27,884,000) 314,574,509 - Retained earnings 12.2 1,966,197,381 1,191,228,313 364,350,455 Total Shareholders Equity 2,737,619,207 1,676,655,066 637,076,650 LIABILITIES Non-current Liabilities Loans 14-2,176,305 11,932,523 Provisions 15 2,866,653 363,295 1,622,691 Total Non-current Liabilities 2,866,653 2,539,600 13,555,214 Current Liabilities Accounts payable 13 852,290,107 3,067,037,179 826,287,453 Other related parties payable 9 548,407,339 556,282 120,767,008 Loans 14 1,421,094,089 119,224,146 108,979,376 Salaries and social security payable 43,722,546 75,558,415 30,117,567 Taxes payable 17 27,794,097 77,918,744 29,466,939 Other liabilities 16 173,429,949 65,520,981 20,657,919 Total Current Liabilities 3,066,738,127 3,405,815,747 1,136,276,262 Total Liabilities 3,069,604,780 3,408,355,347 1,149,831,476 Total Shareholders Equity and Liabilities 5,807,223,987 5,085,010,413 1,786,908,126 The accompanying notes 1 through 31 are an integral part of these financial statements. - 1 -
STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015 (Free translation into English of the original prepared by the Company in Spanish) (Note 2) Notes Dec-31-2016 Dec-31-2015 Revenues 19 8,192,000,915 7,218,772,012 Cost of sales 21 (5,619,562,601) (5,454,114,212) Gross profit 2,572,438,314 1,764,657,800 OPERATING INCOME (EXPENSES) Selling expenses 20.2 (113,462,360) (79,324,961) Administrative expenses 20.2 (173,742,214) (137,964,343) Investment results 22 75,352,306 29,947,410 Other operating income (expenses), net 23 (24,101,339) (653,275) Income before financial results 2,336,484,707 1,576,662,631 FINANCIAL RESULTS Exchange rate differences 24 (215,807,147) (296,150,857) Financial income 24 353,227,559 165,510,994 Financial costs 24 (174,454,316) (106,451,763) Profit before tax 2,299,450,803 1,339,571,005 INCOME TAX EXPENSE Current 18 (105,087,506) (152,514,259) Deferred 18 9,059,353 7,947,161 NET INCOME 2,203,422,650 1,195,003,907 OTHER COMPREHENSIVE INCOME Cash flow hedges (342,458,509) 314,574,509 Total other comprehensive income (342,458,509) 314,574,509 TOTAL COMPREHENSIVE INCOME FOR THE YEAR 1,860,964,141 1,509,578,416 The accompanying notes 1 through 31 are an integral part of these financial statements. - 2 -
STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY FOR THE YEAR ENDED DECEMBER 31, 2016 (Free translation into English of the original prepared by the Company in Spanish) (Note 2) Complementary capital accounts Reserved earnings Capital stock Issuance premium Adjustment to capital (1) Legal reserve Special reserve Retained earnings Reserve for hedging transactions Equity attributable to owners of the Company Balance as of December 31, 2015 7,500,000 560 10,486,367 1,943,422 150,921,895 1,191,228,313 314,574,509 1,676,655,066 Decision made by the Shareholders Meeting held on March 21, 2016 - Special reserve increase 1,428,453,582 (1,428,453,582) - Decision made by the Shareholders Meeting held on August 16, 2016 - Cash dividends (800,000,000) (800,000,000) Other comprehensive income (342,458,509) (342,458,509) Net income 2,203,422,650 2,203,422,650 Balance as of December 31, 2016 7,500,000 560 10,486,367 1,943,422 779,375,477 1,966,197,381 (27,884,000 ) 2,737,619,207 (1) Corresponds to the difference between the capital adjusted for inflation and its historical value, according to the Argentine Commercial Corporations Law N 19,550 The accompanying notes 1 through 31 are an integral part of these financial statements. - 3 -
STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY FOR THE YEAR ENDED DECEMBER 31, 2015 (Free translation into English of the original prepared by the Company in Spanish) (Note 2) Complementary capital accounts Reserved earnings Capital stock Issuance premium Adjustment to capital (1) Legal reserve Special reserve Retained earnings Reserve for hedging transactions Equity attributable to owners of the Company Balance as of January 1, 2015 7,500,000 560 10,486,367 1,943,422 252,795,846 364,350,455-637,076,650 Decision made by the Shareholders Meeting held on April 27, 2015 - Special reserve increase 368,126,049 (368,126,049) - Cash dividends (145,000,000) (145,000,000) Decision made by the Shareholders Meeting held on October 16, 2015: - Cash dividends (325,000,000) (325,000,000) Other comprehensive income 314,574,509 314,574,509 Net income 1,195,003,907 1,195,003,907 Balance as of December 31, 2015 7,500,000 560 10,486,367 1,943,422 150,921,895 1,191,228,313 314,574,509 1,676,655,066 (1) Corresponds to the difference between the capital adjusted for inflation and its historical value, according to the Argentine Commercial Corporations Law N 19,550 The accompanying notes 1 through 31 are an integral part of these financial statements.. - 4 -
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2016 and 2015 (Free translation into English of the original prepared by the Company in Spanish) (Note 2) Notes Dec-31-2016 Dec-31-2015 CASH FLOWS FROM OPERATING ACTIVITIES Net income for the year 2,203,422,650 1,195,003,907 Income tax 96,028,153 144,567,098 Interest (178,773,243) (59,059,231) Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation of property, plant and equipment 33,558,225 19,469,936 Results on equity investments (75,352,306) (29,947,410) Increase in provisions (2,397,319) (4,847,888) Exchange rate differences 215,807,147 296,150,857 Disposal of property, plant and equipment 18,697,097 692,439 Changes in operating assets and liabilities: Other receivables (860,117,595) (686,493,386) Inventories (358,692,341) (661,350,170) Other related parties receivables 258,161,887 (67,835,460) Trade accounts receivable (37,626,636) (553,389,232) Other liabilities 107,908,968 44,863,062 Accounts payable (2,777,513,199) 1,537,662,245 Other related parties payable 8,693,718 (120,210,726) Salaries and social security taxes payable (31,835,869) 45,440,848 Taxes payable (50,124,647) 48,451,805 Provisions (11,203,530) (7,990,029) Net cash and cash equivalents (used in) provided by operating activities (1,441,358,840) 1,141,178,665 CASH FLOWS FROM INVESTING ACTIVITIES Sale of financial investments - 146,543,705 Contribution Guarantee Trust (241,840,042) (127,483,174) Acquisition of property, plant and equipment (100,462,690) (25,515,525) Net cash and cash equivalents used in investing activities (342,302,732) (6,454,994) CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid (260,842,661) (470,000,000) New loans 3,218,815,098 435,611,744 Interest paid (174,454,316) (75,074,222) Interest collected 353,206,766 112,143,466 Repayment of loans (2,089,342,718) (413,944,401) Net cash and cash equivalents provided by (used in) financing activities 1,047,382,169 (411,263,413) Net decrease in cash and cash equivalents (736,279,403) 723,460,258 Cash and cash equivalents at beginning of year 26 797,688,083 74,227,825 Cash and cash equivalents at end of year 26 61,408,680 797,688,083 The accompanying notes 1 through 31 are an integral part of these financial statements.. - 5 -
NOTES TO THE FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2016 AND 2015 (Free translation into English of the original prepared by the Company in Spanish) (in pesos) 1. GENERAL INFORMATION Electronic System S.A. ( Electronic System or the Company ) is a corporation registered in Argentina on April 16., 1991 in accordance with the provisions of Business Companies Act. The Company is set to expire in 99 years, and it was registered with the Inspección General de Justicia (Corporate Inspection Bureau) on April 23, 1991 under number 2032, Book 109, Volume A Corporations. Pursuant to section 3 of its bylaws, its corporate purpose includes manufacturing, assemblying, technical service marketing, imports and exports of any type of manufactured products including, but not limited to, any type of food and / or grains or seafood, their derivatives and those arising from industrialization or fractionation of the products, electric products, electronic and household appliances, telephones and computing equipment. As of December 31, 2016, and following a series of share transfers, the capital stock of the Company is composed of 7,500,000 nominative, non-endorseable shares, 8% owned by Rubén Cherñajovsky, 2% owned by León Gabriel Friedmann and the remaining 90% is held by Lucia Cherñajovsky, María Cherñajovsky, Nicolás Benjamín Cherñajovsky and Florencia Cherñajovsky, divided equally among them. The last four mentioned holders have given the usufruct rights and their political rights to Rubén Cherñajovsky, for their total belongings. Electronic System, sells in Argentina a broad range of products, manufacturing 80% of such products in its factory and others in its related company Newsan S.A. (Hereinafter referred to as "Newsan" or "Related Company") located in Ushuaia, Province of Tierra del Fuego, a 12% at its plant located in the city of Campana, Province of Buenos Aires and the remaining 9% corresponds to imported products. In addition, the Company and Newsan manufacture under its own and licensed brands such as Atma, Noblex, Siam and Pioneer. Also, both Companies manufacture under third party brands based on industrial agreements with international Companies such as Motorola, Huawei, LG, Alcatel, Karcher and Lenovo. During 2016, the food exports segment, mainly fish and peanuts, became relevant. On December 22, 2015, the Newsan shareholder s meeting, decided to approve a business restructuring among Newsan and Noblex Argentina S.A (Hereinafter referred to as Noblex or "Related Company") and Electronic System. In recent years, Newsan, Noblex Argentina S.A. and Electronic System S.A., had been engaged in manufacturing and selling electronic products. Particularly in the last four years, Newsan, Noblex and Electronic System (the Companies ) had been significantly increasing their businesses, both in terms of volume and diversification of operations. In order to optimize the administrative and financial structures of each of these companies, Newsan would be focused on manufacturing TVs, tablets, microwave ovens, set- top boxes, notebooks, monitors, cameras, video cameras and air conditioning units, while Electronic System would be focused on manufacturing cell phones and gadgets. On the other hand, Noblex would be engaged in developing the new businesses and strategic opportunities, while also maintaining the projects granted under Law 19,640. This proposal was approved by the Federal Department of Industry - the enforcement authority of Law No. 19,640 with the projects having been adjusted as described above to enlarge the previously authorized production capacities, so that each company could go ahead with the manufacturing of the abovementioned products. - 6 -
On January 8, 2016, the enforcement authority extended the benefits under the industry promotion regime in favor of Noblex to manufacture cell phones until March 31, 2016. Noblex also intended to apply for an additional three-month extension, which would involve completing the necessary purchases to meet commitments already undertaken, which finally did not occur. The shareholders also decided to transfer personnel and certain movable, real and intangible property allocated to the production and manufacturing of the above-described products in order to complete the business restructuring referred to in the above paragraph. In January 2016, Noblex transferred to Electronic System the proceeds from the financial derivatives used to hedge purchases denominated in foreign currency originally projected by Noblex but finally completed by Electronic System, as a result of the reallocation of businesses referred to above. During the year 2016, personnel and certain movable property affected to the production and manufacture of the detailed products were transferred. 2. BASIS OF PREPARATION 2.1 Adoption of International Financial Reporting Standards (IFRS) - Compliance status The financial statements for the year ended December 31, 2016 are the first that the Company issues on the basis of the International Financial Reporting Standards ("IFRS"). The present financial statements have been prepared in accordance with the International Financial Reporting Standards as established in Technical Resolution No. 26 of the F.A.C.P.C.E. (and amendments), and by the National Securities Exchange Commission (Comisión Nacional de Valores - CNV ). The effects of the changes resulting from the application of the IFRS are presented in note 4. The figures and other information for the fiscal years ended December 31, 2015 and as of January 1, 2015 (the latter being the date of transition to IFRS) are an integral part of these financial statements and are intended to be read only in relation to those financial statements. The financial statements have been prepared on a historic cost basis, except for the revaluation of certain non-current assets and financial instruments. In general, the historic cost is calculated based on the fair value of the consideration paid in exchange for those assets. The principal accounting policies are described below. Information attached is stated in Pesos ($), Argentine s legal currency, prepared on the basis of the Company s accounting records. The preparation of financial information, which is a responsibility of the Board of Directors, requires that the Board makes accounting estimates and use their judgment in applying the accounting standards. The more complex areas which frequently require the use of judgment, or those where assumptions or estimates are significant are detailed in Note 3 on accounting estimates and judgments. These financial statements have been approved by the Board of Directors in the meeting held on March 10, 2017. - 7 -
2.1.1 Inflation IAS 29 Financial reporting in hyperinflationary economies, requires the financial statements of an entity whose functional currency belongs to a hyperinflationary economy to be stated in terms of the measuring current unit at the end of the fiscal year. For such purpose, in general, inflation is to be computed in non-monetary items from the acquisition or revaluation date, as applicable. The standard lists a set of quantitative and qualitative factors to be taken into account in order to determine whether an economy is to be considered hyperinflationary. Considering inflation s decreasing trend, the absence of qualitative factors that may lead to a certain conclusion, and the anomalies detected in information about inflation published by INDEC, the Company s Board of Directors has concluded there is no sufficient evidence to consider Argentina as a country having a hyperinflationary economy as of December 2016, according to guidelines established by IAS 29. Therefore, restatement principles established in the mentioned standard have not been applied in this fiscal year. Over the last years, certain macroeconomic variables affecting Company s business, such as payroll costs, the main raw materials and inputs prices, borrowing and exchange rates have experienced significant changes. In case that the restatement of the financial statements becomes applicable, the corresponding adjustment should be resumed, and calculated from the last date the Company had restated its financial statements in order to reflect inflation effects, as established by applicable regulation. Both circumstances should be taken into consideration by these financial statements users. 2.2 Standards and interpretations not yet adopted The Company did not adopt the following IFRS or revised IFRS as per the application of the mentioned pronouncements are not required as of December 31, 2016: Changes to IFRS (annual cycle 2012-2014) Several (1) Changes to IFRS (annual cycle 2014-2016) Several (6) IAS 7 (reissued in 2016) Statement of Cash Flows (2) IAS 12 (reissued in 2016) Income Taxes (2) IFRS 15 (reissued in 2015) Revenue from Contracts with Customers (3) IFRS 9 (reissued in 2014) Financial Instruments (4) IFRS 2 (reissued in 2016) Share-based Payment (4) IFRS 16 (issued in 2016) Leases (5) IFRIC 22 Foreign Currency Transactions and Advance Consideration (3) (1) Amendments applicable for annual periods beginning on or after July 1, 2016. (2) Amendments applicable for annual periods beginning on or after July 1, 2017. (3) New standards and improvements applicable for annual periods beginning on or after January 2018. (4) Amendments applicable for annual periods beginning on or after July 1, 2018. (5) New standards applicable for annual periods beginning on or after January 2019. (6) Amendments to IFRS 1 and IAS 40 are effective for periods beginning on 1 January 2018. Amendments to IFRS 12 is effective for periods beginning on 1 January 2017. Annual Improvements to IFRS (cycle 2014-2014) introduce amendments to several rules: IFRS 5 (Non-current Assets Held for sale and Discontinued Operations), IFRS 7 (Financial Instruments: Disclosures), IAS 19 (Employee Benefits), IAS 34 (Interim Financial Reporting). The amendments introduced to IFRS are applicable for the financial years beginning after July 1, 2016. It is probably, that the changes will not significantly affect the amounts set out in relation to financial assets and liabilities of the Company. However, it is not possible to reasonably determine the impact of potential effect until a detailed analysis. - 8 -
On January 29, 2016, amendments were introduced to IAS 7 indicating guidelines improving the information provided to users of the financial statements on the financing activities of entities The amendments introduced to IAS are applicable for the financial years beginning after January 1, 2017 It is probably, that the changes will not significantly affect the amounts set out in relation to financial assets and liabilities of the Company. However, it is not possible to reasonably determine the impact of potential effect until a detailed analysis. On January 19, 2016, the IASB has published amendments to IAS 12 "Income Tax". The IASB has concluded that the diverse practices applied to the recognition of deferred tax assets related to debt securities measured at fair value are mainly attributable to the uncertainty around the application of certain principles embraced by IAS 12. Therefore, the changes to the standard consist of some explanatory paragraphs and an illustrative example.the amendments introduced to IAS 12 are applicable for the financial years beginning after January 1, 2017 It is probably, that the changes will not significantly affect the amounts set out in relation to financial assets and liabilities of the Company. However, it is not possible to reasonably determine the impact of potential effect until a detailed analysis. Annual Improvements to IFRS (cycle 2014-2016) introduce amendments to following rules: IFRS 1 (First-time Adoption of IFRS).(the short-term exemptions set forth in paragraphs E3-E7 were eliminated for they have already served their purpose); IFRS 12 (Disclosure of Interests in Other Entities) clarifies the scope of the standard by specifying that the disclosure requirements in IFRS 12, except for the ones in paragraphs B10 B16, apply to interests in entities included in paragraph 5 that are classified as held for sale, held for distribution or discontinued operations in accordance with IFRS 5 Non-Current Assets classified as held for sale or discontinued operations; and IAS 28 (investments in associates and joint ventures) clarifies that the choice to measure investments in associates or joint ventures at fair value through profit or loss when held by an entity that is a venture capital organization or other type of qualified entity, is available for each investment in an associate or a joint venture on an investment-by-investment basis, upon initial recognition. Amendments to IFRS 1 and IAS 40 are effective for periods beginning on 1 January 2018. Amendments to IFRS 12 are effective for periods beginning on 1 January 2017. The Board of Directors has to evaluate the effects of them and anticipates that them will be adopted in the Company s Financial Statements for the year beginning on January 1, 2017 or 2018, as applicable. IFRS 9, Financial Instruments, issued in November 2009 and amended in October 2010, November 2013 and July 2014, introduces new requirements for the classification, measurement and derecognition of financial assets and liabilities IFRS 9 requires all recognized financial assets that are within the scope of IAS 39 Financial Instruments - Recognition and measurement, to be subsequently measured at amortized cost or fair value. Specifically, debt investments that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal, are generally measured at amortized cost at the end of subsequent accounting periods. All other debt investments and equity investments are measured at their fair value at the end of subsequent accounting periods. - 9 -
The most significant effect of IFRS 9 with regard to classification and measurement of financial liabilities refers to the registration of changes in their fair value (designated as at fair value through profit or loss), attributable to changes in the credit risk of that liability. Specifically, in accordance with IFRS 9, for financial liabilities designated as at fair value through profit or loss, the amount of change in the fair value of the financial liability, that is attributable to changes in the credit risk of that liability, is presented in other comprehensive income, unless the recognition of the effects of changes in the liability's credit risk in other comprehensive income would create or enlarge an accounting mismatch in profit or loss. Changes in fair value attributable to a financial liability's credit risk are not subsequently reclassified to profit or loss. Previously, under IAS 39, the entire amount of the change in the fair value of the financial liability designated as fair value through profit or loss was presented in profit or loss. IFRS 9 is applicable for annual periods beginning on or after January 1, 2018. Probably, changes may have a non-significant impact on amounts reported in respect of the Company's financial assets and financial liabilities. However, it is not practicable to provide a reasonable estimate of the potential effect until a detailed review has been completed. On June 20, 2016, the IASB introduce amendments to IFRS 2 share-based payment, to clarify the classification and measurement of share-based payment transactions. The amendments address several requests that the IASB and the IFRS Interpretations Committee have received. The amendments introduced to IFRS 2, are applicable for annual periods beginning after January 1, 2018. Probably, changes may have a non-significant impact on amounts reported in respect of the Company's financial assets and financial liabilities. However, it is not practicable to provide a reasonable estimate of the potential effect until a detailed review has been completed. IFRS 15, Revenue from contracts with customers issued in May 2014 and amended in September 2015, establishes principles that an entity should apply for the purposes of disclosing information that is useful to users of financial statements regarding the nature, amount, timing and uncertainty of revenues and cash flows resulting from the agreements with clients. IFRS 15 is applicable for annual periods beginning after January 1, 2018. The Board of Directors anticipates that probably, these changes do not significantly affect the Company. However, it is not possible to reasonably determine the impact of potential effect until a detailed analysis. IFRS 16 issued in January 2016 states how issuers will recognize, measure and disclose leases in the financial statements. The rule takes most leases in the accounts of lessees to a single model, eliminating the distinction between operating and finance leases. Lessors accounting, however, remains virtually unchanged, preserving the distinction between operating and finance leases. IFRS 16 will take effect from the year beginning on January 1, 2019 and may be adopted earlier. However, the Company cannot adopt IFRS 16 before adopting IFRS 15, Revenue from contracts with customers. Probably, changes may have a non-significant impact on amounts reported in respect of the Company's financial assets and financial liabilities. However, it is not practicable to provide a reasonable estimate of the potential effect until a detailed review has been completed. - 10 -
The IFRIC 22 (Foreign currency transactions and advance payments) clarifies the accounting for transactions that include the receipt or payment of advance consideration in a foreign currency when the entity recognizes a non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration before the entity recognizes the related asset, expense or income. The date of the transaction, for the purpose of determining the exchange rate, is the date of initial recognition of the non-monetary prepayment asset or deferred income liability. If there are multiple payments or receipts in advance, a date of transaction is established for each payment or receipt. IFRIC 22 is applicable for annual periods beginning on or after January 1, 2018. Earlier application is permitted. The Board of Directors has to evaluate the effects of IFRIC 22 and anticipate that it will be adopted in the Company s financial statements for the year beginning on January 1, 2018. The amendments to IAS 40 (Investment Property) are: a) Paragraph 57 has been amended to state that an entity shall transfer a property to, or from, investment property when, and only when, there is evidence of a change in use. A change of use occurs if property meets, or ceases to meet, the definition of investment property. A change in management s intentions for the use of a property by itself does not constitute evidence of a change in use. b) The list of evidence in paragraph 57(a) (d) was designated as non-exhaustive list of examples instead of the previous exhaustive list. The amendments to IAS 40 are effective for periods beginning on or after 1 January 2018. Earlier application is permitted. The Board of Directors has to evaluate the effects of IAS 40 and anticipate that it will be adopted in the Company s financial statements for the year beginning on January 1, 2018. 2.3 Sales of goods Revenues from the sale of goods are recognized at time all the following conditions are satisfied: the entity has transferred to the buyer the significant risks and rewards of ownership of the goods; the entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; the amount of revenue can be measured reliably; it is probable that the economic benefits associated with the transaction will flow to the entity; and the costs incurred or to be incurred in respect of the transaction can be measured reliably. 2.4 Services rendered Revenues from service arrangements are recognized based on the progress of the contract. 2.5 Non-current investments 2.5.1 Investments in others Companies As of December 31, 2016, December 31 and January 1, 2015, the Company holds interest on Top & Best S.A. according to the following detail: - 11 -
% of direct and indirect interest as of (1) Name Main activity Country Dec-31-2016 Dec-31-2015 Dec-31-2014 Top & Best S.A. (2) Marketing of household goods Argentina 95 95 95 (1) Percentage on capital stock and votes. (2) A provision has been set up against the total value of the equity interest in Top & Best S.A. because such company has no activity. 2.5.2 Jointly controlled entities A joint venture is a contractual arrangement whereby the Company and other parties undertake an economic activity that is subject to joint control, that is, when the financial strategy and operational decisions related to the business activities require the unanimous consent of the parties sharing control. According to the provisions of IFRS 11 Joint Arrangements and IAS 28 Investments in associates and joint ventures, investments where two or more parties have joint control (defined as Joint Arrangement ) must be classified in each case as a Joint Operation (when the parties have joint control they have rights on the assets and obligations regarding the Joint Arrangement liabilities) or Joint Venture (when the parties exercising joint control have rights on the Joint Arrangement s net assets). Taking into consideration this classification, Joint Operations should be consolidated proportionally, while Joint Ventures are accounted for through the equity method. As of December 31, 2016, December 31 and January 1, 2015, the Company exercises joint control over the following entities: % of direct and indirect participation as of (1) Name Main Activity Country Compañía Inversora Argentina para la Exportación S.A. Financial and investment activities on its own benefit or on behalf third parties Argentina 4,64 4,64 1,51 Sociedad Administradora de Proyectos de Inversión S.A. Advice, administration and management of investment projects. Argentina 46,25 46,25 46,25 (1) Percentage on capital stock and votes. According to the analysis of the joint arrangement in which the Company participates, management has determined that participation in Compañía Inversora Argentina para la Exportación S.A is classified in accordance with IFRS as a joint business. 2.5.3 Participation in a trust As explained in Note 30, the Company participates in a Guarantee Trust ( Fideicomiso de Garantía ). The participation in such trust has been valued at cost (nominal value of the contributions made) net of utilizations and plus others financial results accrued at year end. - 12 -
2.6 Leasing Leases from operating leases agreements are recognized in the statement of comprehensive income on a straight-line basis over the term of the relevant lease. 2.7 Foreign currency and functional currency The financial statements of the Company are stated in pesos (legal currency of Argentina), which is the functional currency (currency of the main economic environment in which a company operates) for the Company, which is also the presentation currency of these financial statements. Transactions in currencies other than the entity's functional currency (foreign currencies) are recognized at the rates of exchange prevailing at the dates of the transactions. At the end of each reporting year, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences on monetary items are recognized in profit or loss in the year. In the financial statements, the assets and liabilities denominated in foreign currency are translated into Argentine pesos using exchange rates prevailing at the end of the reporting year. 2.8 Borrowing costs Borrowing costs are recognized in the statement of comprehensive income when they are incurred. 2.9 Taxation Income tax expense represents the amount of the tax currently payable and deferred tax. 2.9.1 Current tax The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit before tax as reported in the statement of comprehensive income because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The Company's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting year. 2.9.2 Deferred tax Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred tax assets are generally recognized for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilized. Such deferred tax assets and liabilities are not recognized if the temporary difference arises from goodwill or from the initial recognition of other assets and liabilities in a transaction that affected neither the taxable profit nor the accounting profit. - 13 -
The carrying amount of deferred tax assets is reviewed at the end of each reporting year and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year in which the liability is settled or the asset realized, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting year. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Company expects, at the end of the reporting year, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are offset only if a) there is a legally enforceable right to offset by the tax authority and b) deferred tax assets and liabilities relate to income taxes levied by the same tax authority, having the Group the intention of settle assets and liabilities on a net basis. 2.9.3 Current and deferred tax Los impuestos corrientes y diferidos se reconocieron como ingreso o gasto y se incluyeron en el resultado integral. Current and deferred tax are recognized in profit or loss, and included in comprehensive income. 2.10 Property, plant and equipment For the purposes of the preparation of these financial statements, the Company has used the exception of IFRS 1, First-time Adoption of International Financial Reporting Standards, related to deemed cost of property, plant and equipment. Accordingly, the Company has elected to measure, as of its transition date (January 1, 2015), the cost of items of property, plant and equipment at the book amounts (restated), according to previous generally accepted standards, at transition date as deemed cost, adjusted to reflect changes in a general price index. This value was determined considering the effects of changes in the purchasing power of the Argentine peso up to February 28, 2003, under the restatement-in-constant-pesos method required by RT No. 6 of the F.A.C.P.C.E. As from the transition date, and according to IFRS, the Company has elected to measure these assets and acquisitions at cost less depreciations and subsequent accumulated impairment losses, which not exceed the recoverable value. Properties under construction for administrative, production, procurement or other purposes are carried at cost, less any recognized impairment loss. Depreciation of these assets, on the same basis as other property assets, commences when the assets are ready for their intended use. Depreciation is recognized so as to write off the cost of assets, other than land (that is not depreciated) and properties under construction, over their useful lives, using the straight-line method. The estimated useful lives, residual values and depreciation method are reviewed at the end of each year, with the effect of any changes in estimates being accounted for on a prospective basis. Gain or loss derived of the sale or disposal of an item of Property, plant and equipment is determined as the difference between the obtained sale value and the book value and it is included in the statement of comprehensive income. - 14 -
2.11 Intangible assets Intangible assets include costs for the installation of software. The accounting policies for the recognition and measurement of these intangible assets are described below. Intangible assets with finite useful lives that are acquired separately are carried at cost less accumulated amortization and accumulated impairment losses. Amortization is recognized on a straight-line basis over their estimated useful lives. The estimated useful life and amortization method are reviewed at the end of each year, with the effect of any changes in estimate being accounted for on a prospective basis. 2.12 Impairment of tangible and intangible assets At the end of each reporting year, the Company reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. As of December 31, 2016 such indication does not exist for property, plant and equipment. For intangible assets, the Company estimates the recoverable amount of the cash-generating unit to which the asset belongs. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments at year-ends of the time value of money considering the specific risks of the asset. 2.13 Inventories Inventories are stated at the lower of acquisition cost or net realizable value. Costs of inventories are determined using the cost absorption method. The net realizable value is the estimated price of sale less estimated costs to conclude such sale. 2.14 Provisions and contingent liabilities Provisions are recognized when the Company have a present obligation (legal or implicit) as a result of a past event and it is probable that the Company will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting year, taking into account the risks and uncertainties surrounding the obligation. When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognized as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably. The Company has based its estimates on the opinion of its legal counsels for the estimation of the obligations. Contingent liabilities are obligations arising from past events which confirmation is subject to the occurrence of events beyond the Company s control, or otherwise from current obligations arising from past events, the amount of which may not be estimated reliably or which settlement is unlikely to require an outlay. The Company does not have any contingent liabilities other than those covered by the provision. - 15 -
2.15 Financial assets All financial assets have been recognized and derecognized as of the trade date provided a financial asset has been purchased or sold under a contract which requires delivery of an asset during a period generally governed by a relevant market, and they have been initially measured at fair value, plus transaction costs, except for financial assets recorded at fair value through profit or loss, which have been initially measured at fair value. Recognized financial assets are subsequently measured at amortized cost or at fair value. The Company assesses on each balance sheet date whether there is objective evidence of impairment losses on a financial asset or group of financial assets. 2.15.1 Breakdown of financial assets In order to classify financial assets, an instrument is considered to be a financial instrument if it is not a derivative instrument and it meets the definition of equity of the issuer except for some nonderivative instruments with put options that are presented under equity by issuer. All other nonderivative financial assets are classified as debt instruments. i) Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss are financial assets held for trading. Financial assets are included in this category whether acquired primarily to be sold in the immediate future. ii) Accounts receivable Accounts receivable are non-derivative financial assets with fixed or determinable payments which are not quoted in an active market, are classified as current assets, except when they mature more than 12 months from the balance sheet date, in which case they are classified under non-current assets. Trade receivables and other receivables are included in this category. The assets under accounts receivable are recorded at their amortized cost by applying the effective interest method, net of any allowance for impairment, if applicable. iii) Financial assets kept until maturity These are non-derivative financial assets whose payments have a fixed or determinable amount and with a set maturity date and the entity have both the effective intention and the capacity to hold them until maturity. If the Company sells a significant amount of financial assets held to maturity, the whole account should be reclassified as available for sale. iv) Financial assets held for sale Financial assets held for sale are non-derivative financial assets that the Company intends to sell. Such financial assets are measured at fair value, with any gain or loss recognized under other comprehensive income. Upon sale or impairment of the asset, the accumulated gain or loss previously recognized in other comprehensive income is reclassified under income for the year. These financial assets are classified as other non-current financial assets, except those with a maturity of less than 12 months from the balance sheet date, which are classified as current assets. The Company does not hold financial assets available for sale. - 16 -
v) Financial assets denominated in foreign currency The fair value of financial assets denominated in foreign currency is determined in that foreign currency and then translated at the exchange rate prevailing at the end of each reporting period. The foreign currency component forms part of its profit or loss at fair value. As regards financial assets measured at fair value with changes to fair value recognized in profit or loss, the foreign currency component is recognized in profit and loss. In the case of debt instruments denominated in foreign currency classified at amortized cost, determination of exchange differences is based on the asset amortized cost and recognized under Financial results (note 24) to the Statement of Comprehensive Income. vi) Impairment of financial assets Financial assets other than those valued at fair value with changes to profit or loss are assessed on each balance sheet date to ascertain if impairment indicators are present. Financial instruments are impaired where there is objective evidence that, as a result of one or more events occurred after the initial recognition, the future estimated cash flows of the investment have been adversely affected. Financial assets measured at amortized cost are tested for impairment at the end of each reporting period. A financial asset is considered impaired if, and only if, there is objective evidence of impairment as a result of one or more events occurred after the initial recognition of the assets, and provided this event or events causing the loss have an impact on the future estimated cash flows of the financial asset. The objective impairment evidence should include: Significant financial difficulties of the issuer or debtor; or Default on contract clauses, such as non-payment or late payment of interest or principal; or The borrower is likely to file for bankruptcy or any other form of financial reorganization. For certain categories of financial assets, such as trade receivables, where the impairment test on the asset has been assessed on an individual basis and found that the asset is not individually impaired, such asset is to be included in the collective impairment test. The objective evidence of an accounts receivable portfolio being impaired includes the past experience of the Company regarding receivables collection, as well as any changes that are evident in the local and national economic conditions related to payment default. The carrying value of the financial assets is directly written down by the impairment loss, except for trade receivables where the book value is written down through an allowance for bad debts. Where a trade receivable is considered a bad debt, it is written off against the allowance. The changes in the carrying value of the allowance for bad debts is recognized in the statement of comprehensive income. - 17 -
vii) Derecognition of a financial asset The Company shall derecognize a financial asset only when the contractual rights on the financial asset cash flows expire and the substantial risks and advantages inherent to ownership of the financial asset are substantially transferred. If the Company does not transfer or retain substantially all the risks and advantages inherent to the ownership and retains the control over the asset transferred, the Company shall recognize its interest in the asset and the associated obligation at the amounts payable. If the Company retains substantially all the risks and advantages inherent to property on the transferred financial asset, the Company shall continue to recognize the financial asset and shall also recognize a collateral loan for the receipts. 2.16 Financial liabilities i) Classification as liability or equity Classification as a financial liability or as equity depends on the substance of the contractual agreement. ii) Financial liabilities Financial liabilities at fair value through profit or loss A financial liability at fair value with changes through profit or loss is a financial liability classified either as held for trading or at fair value with changes through profit or loss. A financial liability is classified as held for trading if: a) It is acquired or incurred principally for the purpose of selling or repurchasing it in the near term; or b) It is part of a portfolio of identified financial instruments that are managed together and for which there exists evidence of a recent actual pattern of short-term profit taking; or c) It is a derivative which has not been designated as an effective hedging instrument. Other financial liabilities Other financial liabilities, including loans, are initially recognized at fair value, net of costs directly attributable to their acquisition. Subsequently initial recognition, other financial liabilities are measured at amortized cost using the effective interest method, with interest expense recognized based on the effective yield. The effective interest method is a method of calculating the amortized cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts the expected future cash payments or receipts through the expected life of the financial instrument (or when appropriate, a shorter term) to the net carrying amount of the financial liability. Financial liabilities are classified as current liabilities unless the Company has an unconditional right to defer its settlement for more than 12 months from the financial statements date. - 18 -
iii) Trade accounts payable and other payables Trade payables and other payables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method. iv) Financial liabilities in foreign currency The fair value of financial liabilities denominated in foreign currency is determined in that foreign currency and then translated at the exchange rate prevailing at the end of each reporting period. The foreign currency component forms part of its profit or loss at fair value. As regards financial assets classified at fair value with changes through profit or loss, the foreign currency component is recognized in profit and loss. In the case of debt instruments denominated in foreign currency classified at amortized cost, determination of exchange differences is based on the asset amortized cost and recognized under Exchange differences (note 24), Financial results to the Statement of Comprehensive Income. v) Derecognition of a financial liability The Company shall derecognize a financial liability if, and only if, the Company s liabilities expire, are discharged or satisfied. 2.17 Derivative financial instruments The Company entered into a variety of derivative financial instruments to manage its exposure to foreign exchange rate risks. Derivatives had been initially recognized at fair value at the date the derivative contracts are entered into and were subsequently remeasured at their fair value at the end of each reporting year. The resulting gain or loss has been recognized in profit or loss immediately, except in cases where the derivative was appointed and was effective as a hedging instrument, in which event the timing of the recognition in profit or loss depended on the nature of the hedge relationship. As of December 31, 2016, the Company had agreements to purchase foreign currency forwards designated as cash flow hedges. The resulting gain or loss from contracts in force determined as effective hedging during the year has been recognized directly in other comprehensive income. 2.18 Equity accounts Shareholders equity items were presented in accordance with the accounting standards in force as of the transition date. Movements of such items were accounted for in accordance with the resolutions of the corresponding shareholders meetings, regulatory and statutory rules (capital adjustments and reserves), even if such items would not have existed or would have had a different balance if IFRS had been applied in the past. i) Capital stock It is composed by contributions made by the shareholders, represented by shares and includes outstanding shares at their nominal value. - 19 -