Edgar Filing: TELEFONICA BRASIL S.A.

vivoitr3q14_6k.htm - Generated by SEC Publisher for SEC Filing

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K

REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 UNDER THE SECURITIES EXCHANGE ACT OF 1934

For the month of November, 2014

Commission File Number: 001-14475

TELEFÔNICA BRASIL S.A.
(Exact name of registrant as specified in its charter)

TELEFONICA BRAZIL S.A.
(Translation of registrant’s name into English)

Av. Eng° Luís Carlos Berrini, 1376 - 28º andar
São Paulo, S.P.
Federative Republic of Brazil
(Address of principal executive office)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:

Form 20-F

Form 40-F

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):

Yes

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):

Yes

Shareholders, Advisors and Board of Directors of

Telefônica Brasil S.A.

São Paulo – SP

Introduction

We have reviewed the individual and consolidated interim financial information, of Telefônica Brasil S.A. and subsidiaries, contained in the Quarterly Information (ITR) Form for the quarter ended September 30, 2014, comprising the balance sheet as of September 30, 2014 and the related statements of income, of comprehensive income for the three and nine-month periods then ended, and of changes in shareholders’ equity and of cash flows for the nine-month period then ended, and the explanatory notes.

Management is responsible for the preparation of (i) the individual interim financial information in accordance with CPC 21 (R1) – Interim Financial Reporting, and of (ii) the consolidated interim financial information in accordance with CPC 21(R1) and IAS 34 – Interim Financial Reporting, issued by the International Accounting Standards Board (IASB), as well as for the fair presentation of this information in conformity with the standards issued by the Brazilian Securities Commission (CVM), applicable to the preparation of the Quarterly Information (ITR). Our responsibility is to express a conclusion on this interim financial information based on our review.

Scope of review

We conducted our review in accordance with Brazilian and International Standards on Review Engagements (NBC TR 2410 “Review of interim financial information performed by the independent auditor of the entity” and ISRE 2410 “Review of interim financial information performed by the independent auditor of the entity”, respectively). A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.

A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion on the individual interim financial information

Based on our review, nothing has come to our attention that causes us to believe that the individual interim financial information included in the quarterly information referred to above is not prepared, in all material respects, in accordance with CPC 21 (R1) applicable to the preparation of Quarterly Information (ITR), and presented consistently with the standards issued by the Brazilian Securities Commission (CVM).

Conclusion on the consolidated interim financial information

Based on our review, nothing has come to our attention that causes us to believe that the consolidated interim financial information included in the quarterly information referred to above is not prepared, in all material respects, in accordance with CPC 21 (R1) and IAS 34 applicable to the preparation of Quarterly Information (ITR), and presented consistently with the standards issued by the Brazilian Securities Commission (CVM).

Other matters

Interim financial information of value added

We have also reviewed the individual and consolidated Statements of Value Added (SVA) referring to the nine-month period ended September 30, 2014, prepared by Company’s Management. The presentation of these Statements of Value Added, in the interim financial information, is required by the standards issued by the Brazilian Securities Commission (CVM) that are applicable to the preparation of Quarterly Information (ITR) and is considered as supplementary information under IFRS, which do not require the presentation of the SVA. Such statements were submitted to the same review procedures described above and, based on our review, nothing has come to our attention that causes us to believe that they were not prepared, in all material respects, in accordance with the individual and consolidated interim financial information taken as a whole.

Audit and review of the comparative prior year figures

The Quarterly Information (ITR), individual and consolidated, referred to in the first subparagraph include the financial information corresponding to the income, comprehensive income, changes in shareholders’ equity, cash flows, and added value for the quarter ended September 30, 2013, obtained from the Quarterly Information (ITR) of that quarter and the financial information regarding the balance sheet as of December 31, 2013, obtained from the financial statements of December 31, 2013, which were presented for comparison purposes. The review of the Quarterly Information (ITR) of the quarter ended September 30, 2013 and the examination of the financial statements for the year ended December 31, 2013 were conducted under the responsibility of other independent auditors, who issued unmodified review and audit reports dated November 6, 2013 and February 25, 2014.

São Paulo, the 10th of November of 2014.

Clóvis Ailton Madeira

Assurance Partner

Grant Thornton

Auditores Independentes

TELEFÔNICA BRASIL S. A.
Balance sheets
At September 30, 2014 and December 31, 2013
(In thousands of reais)

		Company		Consolidated				Company		Consolidated
ASSETS	Note	09.30.14	12.31.13	09.30.14	12.31.13	LIABILITIES AND EQUITY	Note	09.30.14	12.31.13	09.30.14	12.31.13

CURRENT ASSETS		15,702,655	15,595,493	16,431,792	15,899,396	CURRENT LIABILITIES		14,071,075	13,825,053	14,031,000	13,731,007
Cash and cash equivalents	3	5,055,057	6,311,299	6,377,342	6,543,936	Personnel, social charges and benefits	13	514,986	427,067	519,151	431,403
Trade accounts receivable, net	4	6,135,068	5,541,023	6,380,422	5,802,859	Trade accounts payable	14	6,639,480	6,948,957	6,673,948	6,914,009
Inventories	5	498,925	469,586	519,445	505,615	Taxes, charges and contributions	15	1,199,313	1,269,105	1,255,007	1,315,164
Taxes recoverable	6.1	1,865,334	2,168,797	1,899,570	2,191,962	Loans, financing and finance lease	16.1	1,783,816	1,236,784	1,783,816	1,236,784
Judicial deposits and garnishments	7	187,421	166,928	187,421	166,928	Debentures	16.2	309,501	286,929	309,501	286,929
Derivative transactions	32	325,043	89,499	325,043	89,499	Dividend and interest on equity	17	1,226,481	1,187,556	1,226,481	1,187,556
Prepaid expenses	8	458,016	254,743	459,401	257,286	Provisions	18	621,160	561,403	621,160	561,403
Dividend and interest on equity	17	245,306	60,346	-	1,140	Derivative transactions	32	16,740	44,463	16,740	44,463
Other assets	9	932,485	533,272	283,148	340,171	Deferred income	19	750,142	812,843	752,342	817,551
						Share fraction grouping		389,022	389,220	389,022	389,220
NONCURRENT ASSETS		54,990,770	53,982,379	54,215,371	53,604,442	Authorization license		58,531	58,531	58,531	58,531
Short-term investments pledged as collateral	3	120,087	106,239	120,097	106,455	Other liabilities	20	561,903	602,195	425,301	487,994
Trade accounts receivable, net	4	195,423	160,478	296,589	257,086
Taxes recoverable	6.1	331,923	368,388	331,923	368,388	NONCURRENT LIABILITIES		11,941,376	12,858,377	11,935,189	12,878,389
Deferred taxes	6.2	295,526	-	436,731	210,294	Personnel, social charges and benefits	13	16,740	18,698	16,740	18,698
Judicial deposits and garnishments	7	4,447,223	4,123,584	4,474,805	4,148,355	Taxes, charges and contributions	15	189,240	52,252	213,461	75,074
Derivative transactions	32	167,777	329,652	167,777	329,652	Deferred taxes	6.2	-	722,634	-	722,634
Prepaid expenses	8	27,271	24,879	28,235	25,364	Loans, financing and finance lease	16.1	2,233,493	3,215,156	2,233,493	3,215,156
Other assets	9	145,720	127,567	144,944	127,793	Debentures	16.2	4,019,030	4,014,686	4,019,030	4,014,686
Investments	10	1,407,646	1,076,696	84,148	86,349	Provisions	18	4,363,261	4,042,789	4,383,832	4,062,410
Property, plant and equipment, net	11	19,406,664	18,377,905	19,469,512	18,441,647	Derivative transactions	32	16,747	24,807	16,747	24,807
Intangible assets, net	12	28,445,510	29,286,991	28,660,610	29,503,059	Deferred income	19	477,694	252,351	478,857	253,661
						Post-employment benefit plan obligations	31	396,156	370,351	396,156	370,351
						Other liabilities	20	229,015	144,653	176,873	120,912

						EQUITY		44,680,974	42,894,442	44,680,974	42,894,442
						Capital	21	37,798,110	37,798,110	37,798,110	37,798,110
						Capital reserves	21	2,686,897	2,686,897	2,686,897	2,686,897
						Income reserves	21	1,287,496	1,287,496	1,287,496	1,287,496
						Premium on acquisition of noncontrolling interests	21	(70,448)	(70,448)	(70,448)	(70,448)
						Other comprehensive income	21	41,205	16,849	41,205	16,849
						Retained earnings	21	2,937,714	-	2,937,714	-
						Additional dividend proposed	21	-	1,175,538	-	1,175,538

TOTAL ASSETS		70,693,425	69,577,872	70,647,163	69,503,838	TOTAL LIABILITIES AND EQUITY		70,693,425	69,577,872	70,647,163	69,503,838

TELEFÔNICA BRASIL S. A.
Income statements
Three and nine-month periods ended September 30, 2014 and 2013
(In thousands of reais)

		Company				Consolidated
		Three-month periods ended		Nine-month periods ended		Three-month periods ended		Nine-month periods ended
	Note	09.30.14	09.30.13	09.30.14	09.30.13	09.30.14	09.30.13	09.30.14	09.30.13

OPERATING REVENUE, NET	22	8,190,690	8,278,437	24,508,982	14,562,788	8,723,915	8,618,206	25,952,439	25,665,195

Cost of sales and services	23	(4,041,900)	(4,233,726)	(12,123,661)	(8,323,056)	(4,293,624)	(4,460,468)	(12,806,037)	(13,240,560)

GROSS PROFIT		4,148,790	4,044,711	12,385,321	6,239,732	4,430,291	4,157,738	13,146,402	12,424,635

OPERATING INCOME (EXPENSES)		(2,973,377)	(3,072,649)	(8,857,315)	(3,263,237)	(3,188,254)	(3,148,063)	(9,426,997)	(8,939,194)
Selling expenses	23	(2,587,396)	(2,413,414)	(7,625,313)	(3,955,800)	(2,608,272)	(2,445,622)	(7,685,284)	(7,001,870)
General and administrative expenses	23	(464,403)	(540,949)	(1,393,564)	(864,445)	(470,815)	(546,522)	(1,414,337)	(1,708,184)
Equity pickup	10	202,400	30,027	525,753	1,831,343	5,043	(2,729)	6,502	(4,790)
Other operating income	24	122,890	85,053	347,722	237,183	127,417	83,892	375,279	430,817
Other operating expenses	24	(246,868)	(233,366)	(711,913)	(511,518)	(241,627)	(237,082)	(709,157)	(655,167)

OPERATING INCOME BEFORE FINANCIAL INCOME (EXPENSES)		1,175,413	972,062	3,528,006	2,976,495	1,242,037	1,009,675	3,719,405	3,485,441

Financial income	25	503,474	593,646	1,353,987	856,722	540,004	600,685	1,432,528	1,349,681
Financial expenses	25	(614,805)	(641,027)	(1,706,549)	(1,030,529)	(616,396)	(641,640)	(1,709,298)	(1,480,699)

INCOME BEFORE TAXES		1,064,082	924,681	3,175,444	2,802,688	1,165,645	968,720	3,442,635	3,354,423

Income and social contribution taxes	26	(41,757)	(164,482)	500,304	(318,059)	(143,320)	(208,521)	233,113	(869,794)

NET INCOME FOR THE PERIOD		1,022,325	760,199	3,675,748	2,484,629	1,022,325	760,199	3,675,748	2,484,629


Basic and diluted earnings per share – common (R$)		0.85	0.63	3.07	2.07
Basic and diluted earnings per share – preferred (R$)		0.94	0.70	3.38	2.28

TELEFÔNICA BRASIL S. A.
Statements of changes in equity
Nine-month periods ended September 30, 2014 and 2013
(In thousands of reais)
			Capital reserves			Income reserves
	Capital	Premium paid on acquisition of interest from non-controlling shareholders	Special goodwill reserve	Other capital reserves	Treasury stock	Legal reserve	Tax incentive reserve	Retained earnings	Additional dividend proposed	Other comprehensive income	Total equity

Balances at December 31, 2012	37,798,110	(70,448)	63,074	2,735,930	(112,107)	1,100,000	-	-	3,148,769	17,792	44,681,120

Additional dividend proposed for 2012	-	-	-	-	-	-	-	-	(3,148,769)	-	(3,148,769)
Unclaimed dividend and interest on equity	-	-	-	-	-	-	-	59,045	-	-	59,045
Income tax return adjustment – government grants	-	-	-	-	-	-	1,699	(1,699)	-	-	-
Other comprehensive income	-	-	-	-	-	-	-	(430)	-	(4,520)	(4,950)
Net income for the period	-	-	-	-	-	-	-	2,484,629	-	-	2,484,629
Interim interest on equity	-	-	-	-	-	-	-	(440,000)	-	-	(440,000)

Balance at September 30, 2013	37,798,110	(70,448)	63,074	2,735,930	(112,107)	1,100,000	1,699	2,101,545	-	13,272	43,631,075

Unclaimed dividend and interest on equity	-	-	-	-	-	-	-	57,780	-	-	57,780
Other comprehensive income	-	-	-	-	-	-	-	14,694	-	3,577	18,271
Net income for the year	-	-	-	-	-	-	-	1,231,316	-	-	1,231,316
Allocation of income:
Legal reserve	-	-	-	-	-	185,797	-	(185,797)	-	-	-
Interim interest on equity	-	-	-	-	-	-	-	(1,298,000)	-	-	(1,298,000)
Interim dividend	-	-	-	-	-	-	-	(746,000)	-	-	(746,000)
Additional dividend proposed	-	-	-	-	-	-	-	(1,175,538)	1,175,538	-	-

Balances at December 31, 2013	37,798,110	(70,448)	63,074	2,735,930	(112,107)	1,285,797	1,699	-	1,175,538	16,849	42,894,442

Additional dividend proposed for 2013	-	-	-	-	-	-	-	-	(1,175,538)	-	(1,175,538)
Unclaimed dividend and interest on equity	-	-	-	-	-	-	-	109,518	-	-	109,518
Other comprehensive income	-	-	-	-	-	-	-	-	-	24,356	24,356
Net income for the period	-	-	-	-	-	-	-	3,675,748	-	-	3,675,748
Interim interest on equity	-	-	-	-	-	-	-	(847,552)	-	-	(847,552)

Balance at September 30, 2014	37,798,110	(70,448)	63,074	2,735,930	(112,107)	1,285,797	1,699	2,937,714	-	41,205	44,680,974

Outstanding shares (in thousands)											1,123,269
VPA – Equity value of shares											39.78

TELEFÔNICA BRASIL S. A.
Statements of comprehensive income
Three and nine-month periods ended September 30, 2014 and 2013
(In thousands of reais)

	Company				Consolidated
	Three-month periods ended		Nine-month periods ended		Three-month periods ended		Nine-month periods ended
	09.30.14	09.30.13	09.30.14	09.30.13	09.30.14	09.30.13	09.30.14	09.30.13

Net income for the period	1,022,325	760,199	3,675,748	2,484,629	1,022,325	760,199	3,675,748	2,484,629

Unrealized gains (losses) with investments available for sale	(607)	951	(5,178)	(11,476)	(607)	951	(5,178)	(11,476)
Taxes	206	(323)	1,760	3,902	206	(323)	1,760	3,902
	(401)	628	(3,418)	(7,574)	(401)	628	(3,418)	(7,574)

Cumulative translation adjustments – operations in foreign currency	1,604	2,450	(3,525)	6,843	1,604	2,450	(3,525)	6,843

Other net comprehensive income to be reclassified to P&L in subsequent years	1,203	3,078	(6,943)	(731)	1,203	3,078	(6,943)	(731)


Actuarial losses and limitation effect of the assets of surplus plans	-	(55)	-	(55)	-	-	-	(651)
Taxes	-	19	-	19	-	-	-	221
	-	(36)	-	(36)	-	-	-	(430)

Gains (losses) – derivative transactions	45,829	(5,741)	47,423	(5,741)	45,829	(4,153)	47,423	(5,741)
Taxes	(15,582)	1,952	(16,124)	1,952	(15,582)	1,412	(16,124)	1,952
	30,247	(3,789)	31,299	(3,789)	30,247	(2,741)	31,299	(3,789)

Interest in comprehensive income of subsidiaries	-	1,084	-	(394)	-	-	-	-

Other net comprehensive income that will not be reclassified to P&L in subsequent years	30,247	(2,741)	31,299	(4,219)	30,247	(2,741)	31,299	(4,219)

Comprehensive income for the period, net of taxes	1,053,775	760,536	3,700,104	2,479,679	1,053,775	760,536	3,700,104	2,479,679


Basic and diluted earnings per share – common (R$)	0.88	0.64	3.09	2.07
Basic and diluted earnings per share – preferred (R$)	0.97	0.70	3.40	2.28

TELEFÔNICA BRASIL S. A.
Statements of cash flows
Nine-month periods ended September 30, 2014 and 2013
(In thousands of reais)

	Company		Consolidated
	09.30.14	09.30.13	09.30.14	09.30.13

Net cash from operating activities	5,345,267	4,139,335	6,425,719	7,021,262

Cash generated by operations	8,277,110	5,254,248	9,048,020	9,676,494
Income before taxes	3,175,444	2,802,688	3,442,635	3,354,423
Depreciation and amortization	3,926,696	2,709,578	3,942,954	4,214,142
Foreign exchange variation on loans	63,930	33,701	63,930	61,193
Monetary variation	21,979	42,847	(9,191)	49,703
Equity pickup	(525,753)	(1,831,343)	(6,502)	4,790
Losses (gains) on write-off/disposal of goods	42,782	(47,192)	41,329	(130,967)
Estimated impairment losses of trade accounts receivable	613,146	313,128	658,832	569,342
Provision (reversal) of accounts payable	26,311	559,022	(14,968)	578,365
Estimated losses (write-offs and reversals) for impairment of inventory items	(12,641)	(9,381)	(16,218)	908
Pension plans and other post-employment benefits	23,643	19,881	23,633	19,737
Provisions for tax, labor, civil and regulatory contingencies	376,990	320,076	377,003	486,879
Interest expenses	530,937	335,885	530,937	443,033
Provision for demobilization	13,409	855	13,409	17,107
Provisions for customer loyalty program	237	1,064	237	7,834
Investment losses	-	3,439	-	5

Changes in operating assets and liabilities:	(2,931,843)	(1,114,913)	(2,622,301)	(2,655,232)
Trade accounts receivable	(1,242,136)	(618,183)	(1,275,898)	(894,007)
Inventories	(16,698)	(134,273)	2,388	(253,703)
Taxes recoverable	86,748	(47,488)	75,677	(375,759)
Prepaid expenses	(99,078)	300,916	(98,399)	(195,316)
Other current assets	(407,548)	(4,342)	48,688	108,710
Other noncurrent assets	(12,539)	(101,368)	(14,979)	1,395
Personnel, social charges and benefits	85,961	25,391	85,790	29,736
Trade accounts payable	(231,809)	(492,473)	(110,299)	(360,404)
Taxes, charges and contributions	313,258	439,147	312,747	703,028
Interest paid	(607,079)	(307,443)	(607,079)	(431,732)
Income and social contribution taxes paid	(520,740)	-	(705,397)	(807,878)
Other current liabilities	(337,686)	(200,473)	(362,595)	(155,621)
Other noncurrent liabilities	57,503	25,676	27,055	(23,681)

Net cash from investing activities	(4,340,756)	1,772,546	(4,331,560)	(4,822,456)
Future capital contribution in subsidiaries	-	(65,250)	-	-
Additions to property, plant and equipment and intangible assets (net of donations)	(4,217,506)	(2,644,160)	(4,238,807)	(4,657,961)
Cash received from sale of property, plant and equipment items	12,065	41,268	13,060	430,085
Redemption of (short-term) investments in guarantee	-	(143,195)	-	(386,401)
Redemption of (deposits made as) judicial deposits	(136,455)	(107,744)	(106,953)	(208,179)
Dividend and interest on equity received	1,140	1,320,449	1,140	-
Effect of cash and cash equivalents per merger/split-off	-	3,371,178	-	-

Net cash from financing activities	(2,260,753)	(486,126)	(2,260,753)	(702,083)
Payment of loans, financing and debentures	(714,493)	(444,903)	(714,493)	(669,566)
Loans and debentures raised	262,320	1,551,019	262,320	1,569,015
Net payment of derivative agreements	(55,770)	(7,498)	(55,770)	(16,788)
Payments referring to grouping of shares	(198)	(237)	(198)	(237)
Dividend and interest on equity paid	(1,752,612)	(1,584,507)	(1,752,612)	(1,584,507)

Increase (decrease) in cash and cash equivalents	(1,256,242)	5,425,755	(166,594)	1,496,723

Cash and cash equivalents at beginning of period	6,311,299	3,079,282	6,543,936	7,133,485
Cash and cash equivalents at end of period	5,055,057	8,505,037	6,377,342	8,630,208

Changes in cash and cash equivalents for the period	(1,256,242)	5,425,755	(166,594)	1,496,723

TELEFÔNICA BRASIL S. A.
Statements of value added
Nine-month periods ended September 30, 2014 and 2013
(In thousands of reais)
	Company		Consolidated
	09.30.14	09.30.13	09.30.14	09.30.13

Revenues	33,336,096	19,459,216	35,074,174	34,863,705
Sale of products and services	33,465,912	19,524,329	35,222,119	34,999,282
Other revenues	483,330	248,015	510,887	433,765
Provision for impairment of trade accounts receivable	(613,146)	(313,128)	(658,832)	(569,342)

Inputs acquired from third parties	(13,085,628)	(8,269,607)	(13,857,312)	(13,544,299)
Cost of goods and products sold and services rendered	(7,359,441)	(5,352,987)	(8,106,795)	(8,300,699)
Materials, energy, third-party services and other expenses	(5,700,631)	(2,957,917)	(5,729,992)	(5,348,325)
Loss/recovery of asset values	(25,556)	41,297	(20,525)	104,725

Gross value added	20,250,468	11,189,609	21,216,862	21,319,406

Retentions	(3,926,696)	(2,709,578)	(3,942,954)	(4,214,142)
Depreciation and amortization	(3,926,696)	(2,709,578)	(3,942,954)	(4,214,142)

Net value added generated	16,323,772	8,480,031	17,273,908	17,105,264

Value added received in transfer	1,879,844	2,688,065	1,439,134	1,344,891
Equity pickup	525,753	1,831,343	6,502	(4,790)
Financial income	1,354,091	856,722	1,432,632	1,349,681

Total value added to be distributed	18,203,616	11,168,096	18,713,042	18,450,155

Distribution of value added	(18,203,616)	(11,168,096)	(18,713,042)	(18,450,155)

Personnel, social charges and benefits	(1,720,507)	(978,297)	(1,737,003)	(1,734,518)
Direct compensation	(1,121,205)	(655,804)	(1,132,278)	(1,121,573)
Benefits	(501,541)	(257,377)	(505,999)	(515,006)
FGTS	(97,761)	(65,116)	(98,726)	(97,939)
Taxes, charges and contributions	(9,190,365)	(5,560,792)	(9,675,417)	(10,945,385)
Federal	(2,233,527)	(1,742,310)	(2,635,553)	(3,795,742)
State	(6,910,784)	(3,774,646)	(6,919,291)	(7,062,702)
Local	(46,054)	(43,836)	(120,573)	(86,941)
Debt remuneration	(3,028,442)	(1,677,767)	(3,034,949)	(2,708,279)
Interest	(1,703,022)	(1,007,805)	(1,705,370)	(1,455,729)
Rental	(1,325,420)	(669,962)	(1,329,579)	(1,252,550)
Equity remuneration	(3,675,748)	(2,484,629)	(3,675,748)	(2,484,629)
Interest on equity	(847,552)	(440,000)	(847,552)	(440,000)
Retained profit	(2,828,196)	(2,044,629)	(2,828,196)	(2,044,629)
Other	(588,554)	(466,611)	(589,925)	(577,344)
Provisions for labor, civil, tax and regulatory contingencies, net	(588,554)	(466,611)	(589,925)	(577,344)

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Nine-month period ended September 30, 2014

(In thousands of reais, except when indicated otherwise)

1. OPERATIONS

a. Background information

Telefônica Brasil S.A. (Company or Telefônica Brasil) is a publicly-traded corporation operating in telecommunication services and in the performance of activities that are necessary or useful in the rendering of such services, in conformity with the concessions and authorizations it has been or granted. The Company, headquartered at Avenida Engenheiro Luiz Carlos Berrini, nº 1376, in the city and State of São Paulo, Brazil, is a member of Telefónica Group, the telecommunications industry leader in Spain, also being present in various European and Latin American countries.

At September 30, 2014 and December 31, 2013, Telefónica S.A., holding company of the Group, held a total of 73.81% direct and indirect interest in the Company, being 91.76% of common shares and 64.60% of preferred shares (See Note 21).

b. Operations

The Company is primarily engaged in the rendering of land-line telephone and data services in the state of São Paulo, under Fixed Switched Telephone Service Concession Arrangement (STFC) and Multimedia Communication Service (SCM) authorization, respectively. Also, the Company is authorized to render STFC services in Regions I and II of the General Service Concession Plan (PGO) and other telecommunications services, such as SCM (data communication, including broadband internet), SMP (Personal Communication Services) and SEAC (Conditional Access Audiovisual Services) (especially by means of DTH and cable technologies).

Service concessions and authorizations are granted by Brazil’s Telecommunications Regulatory Agency (ANATEL), under the terms of Law No. 9472 of July 16, 1997 - General Telecommunications Law (“Lei Geral das Telecomunicações” - LGT), amended by Laws No. 9986 of July 18, 2000 and No. 12485 of September 12, 2011. Operation of such concessions and authorizations is subject to supplementary regulations and plans issued.

STFC service concession arrangement

The Company is the grantee on an STFC concession to render land-line services in the local network and national long distance calls originated in sector 31 of Region III, which comprises the state of São Paulo (except for cities within sector 33), as established in the General Service Concession Plan (PGO).

The Company’s current STFC service concession arrangement is effective until December 31, 2025, and may be subject to reviews on December 31, 2015 and December 31, 2020.

In accordance with the service concession arrangement, every two years, during the arrangement’s 20-year term, the Company shall pay a fee equivalent to 2% of its prior-year STFC revenue, net of applicable taxes and social contributions.

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Nine-month period ended September 30, 2014

(In thousands of reais, except when indicated otherwise)

Authorizations and frequencies to SMP

Frequency authorizations granted by ANATEL for mobile telephone services may be renewed only once, over a 15-year period, through payment, every two years after the first renewal, of fees equivalent to 2% of the Company’s prior-year revenue, net of taxes and social contributions, related to the application of the Basic and Alternative Plans of Service. The Company operates SMP services, in accordance with the authorizations it has been given.

In the auction for sale of national 700MHz frequency, held by ANATEL at September 30, 2014, in compliance with Bidding No. 2/2014‐SOR/SPR/CD‐ANATEL, the Company won lot 3 among the others offered lots. The amount offered for this frequency range was the minimum price of R$ 1.928 billion, in addition to R$ 903.9 million referring to amount referring to payment of costs of redistribution of TV and RTV channels and solutions to interference issues, which adversely affect radio-communication systems.

Accordingly, the Company will increase its capacity to provide services with fourth generation (4G) technology throughout the Brazilian territory, and will operate in the frequency range of 700MHz, with band of 10+10 MHz, in addition to 2.5 GHz frequency, with band of 20+20MHz acquired in bidding of year 2012.

The amount payable and use terms shall observe the rules provided in the bidding notice and as defined by ANATEL.

c. Corporate restructuring

In order to streamline the Company’s organizational structure, to rationalize the services provided by its subsidiaries and to concentrate service provision in two operating entities, namely the Company and its wholly-owned subsidiary Telefônica Data S.A. (TData or Subsidiary), the Company carried out a corporate restructuring approved by ANATEL, under the terms of Act No. 3043 of May 27, 2013, as published in the Federal Official Gazette (DOU) of May 29, 2013, subject to the conditions thereunder.

The Board of Directors’ meeting held on June 11, 2013 approved the terms and conditions of the corporate restructuring process involving the Company’s wholly-owned subsidiaries and subsidiaries.

Company Annual General Meeting held on July 1, 2013 approved the aforementioned corporate restructuring, which included spin-offs and mergers of subsidiaries and of companies directly or indirectly controlled by the Company, so that the economic activities other than telecommunications services, including the provision of Value Added Services as defined in article 61 of the General Telecommunications Law (LGT) (with such activities being jointly and generally referred to as SVAs), provided by the various wholly-owned subsidiaries/subsidiaries were concentrated in TData and the telecommunication services were consolidated by the Company.

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Nine-month period ended September 30, 2014

(In thousands of reais, except when indicated otherwise)

All of the spin-offs or split-ups, as the case may be, and the merger of the net assets of the companies involved in the restructuring process took place on the same date and had the same reporting date (April 30, 2013), as follows: the Company merged (i) the net assets of TData, arising from its spin-off, corresponding to the activities related to the provision of service of Multimedia Communication Service (SCM); (ii) the net assets of Vivo S.A. (Vivo), arising from its split-up, corresponding to the use of Personal Communication Services (SMP), Multimedia Communication Services (SCM) and STFC in local, domestic and international long distance calls in regions I and II of the General Service Concession Plan (PGO), and the net assets of SVAs and other services other than telecommunications services were merged into TData and Vivo’s operations were ceased; (iii) the net assets of ATelecom S.A. (ATelecom), arising from its split-up, corresponding to the activities related to the provision of Conditional Access Audiovisual Services (SEAC) (through DTH technology) and SCM, and the net assets of SVAs and other services other than telecommunications services were merged into TData, thus ATelecom's operations were ceased; and (iv) Telefônica Sistema de Televisão S.A. (TST), which concentrated the activities related to the provision of SEAC and SCM services before its merger into the Company, due to the full merger of Lemontree Participações S.A. (Lemontree), GTR-T Participações e Empreendimentos S.A. (GTR-T), Ajato Telecomunicações Ltda (Ajato), Comercial Cabo TV São Paulo S.A. (CaTV) e TVA Sul Paraná S.A. (Sul Paraná), thus TST, Lemontree, GTR-T, Ajato, CaTV and Sul Paraná had its operations ceased.

The merger of companies and net assets previously described did not result in any capital increase or issue of new Company shares; accordingly, the corporate restructuring did not result in any changes in ownership interest currently held by Company shareholders.

There is no question of replacing shares of non-controlling shareholders of the spun-off companies with shares of the merging company, since the Company was, upon the merger of net assets and/or companies, as the case may be, the sole shareholder of the companies spun off/ merged. Accordingly, an equity valuation report at market price was not prepared for calculating the non-controlling share replacement ratio as defined in article 264 of Law No. 6404/76, and article 2, paragraph 1, item VI of CVM Rule No. 319/99, based on recent understandings expressed by the Brazilian Securities and Exchange Commission (CVM) regarding consultations in connection with similar restructuring processes and based on CVM Rule No. 559 of November 18, 2008.

The corporate restructuring was described in detail in Note 1b) - “Corporate restructuring” disclosed in the financial statements as at December 31, 2013.

d. Acquisition of GVT Participações S.A.

On September 18, 2014, the Company released a material fact as provided for by CVM Rule No. 358/02, disclosing that, on said date, the Company (Buyer) and Vivendi S.A. (Vivendi) and its subsidiaries (Sellers), entered into a Purchase and Sale Agreement and Other Covenants (Agreement) in which all shares issued by GVT Participações S.A. (GVTPar), controller of Global Village Telecom S.A. (provided that GVTPar together with GVT Operadora are hereinafter referred to as GVT), shall be acquired by the Company. The execution of the Agreement and other documentation related thereto were duly approved by the Company's Board of Directors in a meeting held on the aforementioned date.

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Nine-month period ended September 30, 2014

(In thousands of reais, except when indicated otherwise)

Payment for acquisition of GVT shares shall be made by the Company and Sellers as follows:

· €4,663,000,000.00 payable in cash after contractual adjustments at execution date.

The Company may finance the payment of this installment with capital increase through public offering, whose terms and conditions shall be timely determined by the Board of Directors under the terms of the Company's bylaws; additionally a proposal for increase in the authorized capital shall be sent to shareholders, in accordance with Article No. 168 of Law No. 6404/76 in order to enable the capital increase by determination of the Board of Directors in order to speed up this operation (Note 34).

· A portion of shares issued by the Company, equivalent to 12% of the Company's common shares and 12% of preferred shares after merger of GVTPar shares.

Payment of this installment shall be made through merger of shares issued by GVTPar by the Company, with the corresponding delivery of common and preferred shares issued by the Company to GVTPar shareholders in place of the merged GVTPar's shares, observing the number of shares referring to the portion to be granted to Sellers as negotiated between the parties and determined in the Agreement, provided that Management shall manage and disclose other terms and conditions of this merger of shares on a timely fashion, after approval of this transaction by ANATEL and CADE.

Vivendi accepted the public offer made by Telefónica S.A. for acquisition of interest in Telecom Itália S.p.A., specifically the acquisition of 1,110 billion common shares of Telecom Itália S.p.A., which currently represents an 8.3% interest in the voting capital of Telecom Itália S.p.A. (equivalent to 5.7% of its capital), in exchange of 4.5% of the Company's capital which Vivendi shall receive due to the combination of the Company and GVT and that represent all common shares and a portion of the preferred shares (representing 0.7% of preferred shares).

Considering that the acquisition of GVT shares by the Company represents significant investment under the terms of Article No. 256 of Law No. 6404/76, this shall be submitted to the Company's shareholders and a Special General Meeting shall be held for this purpose as provided for by applicable law.

Determinations referring to transaction described above shall grant the dissident Company's shareholders the right of recess. Accordingly, dissident shareholders holding Company common and/or preferred shares shall have withdrawal right upon receipt of the respective amount of net earnings per share. The amount per share to be paid upon exercise of the recess right shall be disclosed when the date of the Special Meeting for discussion of issues related to this transaction is determined.

The implementation of this transaction is subject to obtainment of the applicable corporate and regulatory authorizations, including CADE and ANATEL, in addition to other conditions among those usually applicable to this kind of operation.

e. Agreement between Telefónica S.A. and Telecom Italia, S.p.A.

TELCO S.p.A. (in which Telefónica S.A. holds a 46.18% interest) has a 22.4% interest with voting rights in Telecom Italia, S.p.A., and is the majority shareholder of this company.

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Nine-month period ended September 30, 2014

(In thousands of reais, except when indicated otherwise)

Telefónica S.A holds indirect control in Telefónica Brasil, and Telecom Italia holds an indirect interest in TIM S.A. (TIM), a Brazilian telecommunications company. Neither Telefónica S.A., nor Telefônica Brasil or any other affiliate of Telefónica S.A. interfere in, are involved with or have decision-making powers over TIM operations in Brazil, also being lawfully and contractually forbidden to exercise any type of political power derived from indirect interest held as concerns operations in Brazil, directly related to TIM operations. TIM (Brazil) and Telefônica Brasil compete in all markets in which they operate in Brazil under permanent competitive stress and, in this context, as well as in relation to the other economic players in the telecommunications industry, maintain usual and customary contractual relations with one another (many of which are regulated and inspected by ANATEL) and/or which, as applicable, are informed to ANATEL and Brazil’s Administrative Council for Economic Defense (CADE), concerning the commitments assumed before these agencies so as to ensure total independence of their operations.

On September 24, 2013, Telefónica S.A., entered into an agreement with the other shareholders of the Italian company TELCO S.p.A. whereby Telefónica S.A. subscribed and paid up capital in TELCO, S.p.A. through a contribution of 324 million euros, receiving shares without voting rights of TELCO, S.p.A as consideration. As a result of this capital increase, the share capital of Telefónica S.A. voting in TELCO, S.p.A. remaining unchanged (remaining at 46.18%), although their economic participation rose to 66%. Thus, the governance of TELCO S.p.A., as well as the obligations of Telefónica S.A. to abstain from participating in or influencing the decisions that impact the industries where they both operate, remained unchanged.

In the same document, Italian shareholders of TELCO S.p.A. granted Telefónica S.A. an option to purchase all of their shares in TELCO S.p.A. Exercising this call option was subject to obtaining the required previous approvals from antitrust authorities and telecommunications regulatory agencies as applicable (including Brazil and Argentina), beginning eligible after January 1, 2014, whenever the Shareholders’ Agreement remains in full force and effect, except (i) between June 1 and June 30, 2014 and between January 15 and February 15, 2015; and (ii) during certain periods in case the Italian shareholders of TELCO, S.p.A. request the entity’s spin-off.

On December 4, 2013, the CADE announced the following decisions:

1) Approve, subject to the limitations described below, the acquisition, by Telefónica S.A., of the total interest held by Portugal Telecom, SGPS SA and PT Móveis – Serviços de Telecomunicações, SGPS, SA (PT) in Brasilcel NV, which controlled Brazilian mobile telecommunications operator Vivo Participações S.A. (Vivo Part.), company merged into Telefonica Brasil S.A.

The transaction has been approved by ANATEL and its completion (requiring no prior approval from CADE at the time) took place immediately after approval from ANATEL, on September 27, 2010.

The limitations imposed by CADE on its decision are as follow:

a) A new shareholder share control over Vivo Part. with Telefónica S.A., adopting the same conditions applied to PT when it held an interest in Brasilcel NV.; or

b) Telefónica S.A. shall cease to have, either directly or indirectly, an equity interest in TIM Participações S.A.

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Nine-month period ended September 30, 2014

(In thousands of reais, except when indicated otherwise)

2) Impose a R$15 million fine on Telefónica S.A. for violating the will and purpose of the agreement executed by and between Telefónica S.A. and CADE, as a requirement to approve the initial purchase transaction of Telecom Italia in 2007, due to the subscription and payment, by Telefónica S.A., of TELCO S.p.A. nonvoting shares in the context of its recent capital increase. This decision also requires Telefónica S.A. to dispose of its nonvoting shares held in TELCO S.p.A.

The deadline for compliance with the conditions and obligations imposed by CADE in both decisions were classified as confidential by CADE.

At December 13, 2013, Telefónica S.A. published a material news release regarding the decisions made by CADE in the meeting held on December 4, 2013, stating that it considered the measures imposed by that agency to be unreasonable, and started applicable legal proceedings in July 2014.

In this context, and in order to strengthen its firm commitment to the obligations previously assumed by Telefónica S.A. to keep away from Telecom Italia's business in Brazil, Telefónica S.A. pointed out, in a material news release that Mr. César Alierta Izuel and Mr. Julio Linares López had decided to resign with immediate effect, from the position of Directors at Telecom Itália S.p.A. Additionally, Mr. Julio Linares López decided to resign, with immediate effect, from his position on the list presented by TELCO S.p.A. for a potential re-election to the Board of Directors of Telecom Itália, S.p.A.

Likewise, Telefónica S.A., notwithstanding the rights defined in the Shareholders’ Agreement of TELCO S.p.A, stated in a material news release it decided not to exercise, for now, its right to appoint or suggest two Directors at Telecom Itália, S.p.A.

On June 16, 2014, the Italian shareholders of TELCO, S.p.A. decided to exercise their rights to request spin-off ensured by the Shareholders' Agreement of company. The implementation of this spin-off was approved at the Annual General Meeting of TELCO, S.p.A. held on July 9, 2014, and is subject to the previous authorization by competent authorities, including CADE and ANATEL in Brazil. Whenever authorized, the spin-off will be implemented through the transfer of all current interest held by TELCO, S.p.A. in the capital of Telecom Itália, S.p.A., for four (4) new companies, which are wholly owned by one of the current shareholders of TELCO, S.p.A., and which were designed to hold interest in the capital of Telecom Itália, S.p.A., proportionally to the current economic interest of their respective future controlling shareholder in the capital of TELCO, S.p.A.

Regulatory approvals in Brazil referring to spin-off of TELCO, S.p.A., as referred to above, are being required to the competent bodies. The spin-off will result in Telefónica S.A. holding, by means of a special purpose entity, 14.77% of the voting shares of Telecom Itália, S.p.A., of which 8.3% of the shares shall be exchanged with Vivendi as mentioned above, and 6.47% of the shares, pegged to debentures issued by Telefónica S.A. in July 2014, convertible at maturity date into shares of Telecom Itália, S.p.A.

f. Share trading on stock exchanges

The Company is listed in the Brazilian Securities and Exchange Commission (CVM) as a publicly-held company under Category A (issuers authorized to trade any marketable securities) and has shares traded on the São Paulo Stock Exchange (BM&FBovespa). It is also listed in the US Securities and Exchange Commission (SEC), and its level II American Depositary Shares (ADS), backed by preferred shares only, are traded on the New York Stock Exchange (NYSE).

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Nine-month period ended September 30, 2014

(In thousands of reais, except when indicated otherwise)

2. BASIS OF PREPARATION AND PRESENTATION OF QUARTERLY INFORMATION

2.a) Basis of presentation

The Company’s Quarterly Information (ITR) for the nine-month period ended September 30, 2014 is presented in thousands of reais (unless otherwise stated) and was prepared under a going concern assumption.

This quarterly information compares the nine-month period ended September 30, 2014 and 2013, except for balance sheets that compare the positions at September 30, 2014 with December 31, 2013.

In order to better present and compare the figures of the consolidated income statements for the nine-month period ended September 30, 2014 and 2013, certain reclassifications were made among the groups of “Cost of sales and services”, “Selling expenses”, “General and administrative expenses” and “Other operating income (expenses)” for the nine-month period ended September 30, 2013, as follows:

	Income statements at 09.30.13, disclosed at 09.30.13	Restatements	Income statements at 09.30.13, disclosed at 09.30.14
Net operating income	25,665,195	-	25,665,195
Cost of services rendered and goods sold	(13,203,611)	(36,949)	(13,240,560)
Gross profit	12,461,584	(36,949)	12,424,635
Selling expenses	(7,039,241)	37,371	(7,001,870)
General and administrative expenses	(1,680,193)	(27,991)	(1,708,184)
Other operating income	430,817	-	430,817
Other operating expenses	(682,736)	27,569	(655,167)
Equity pickup	(4,790)	-	(4,790)
Income before financial income (expenses)	3,485,441	-	3,485,441
Financial income	1,349,681	-	1,349,681
Financial expenses	(1,480,699)	-	(1,480,699)
Income before taxes	3,354,423	-	3,354,423
Income and social contributions taxes	(869,794)	-	(869,794)
Net income for the year	2,484,629	-	2,484,629

On account of the net assets received in the corporate restructuring process occurred on July 1, 2013, described in Note 1c), the individual information (Company) of the income statements as at September 30, 2014 and 2013 is not comparable.

The individual quarterly information (Company) was prepared and is presented in accordance with accounting practices adopted in Brazil, which comprise the rules issued by the Brazilian Securities and Exchange Commission (CVM) and CPC 21 - Interim Financial Reporting, issued by the Brazilian FASB (CPC), which are in accordance with the International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board (IASB), except for investments in subsidiaries, which are measured by the equity method, while for IFRS purposes it would be measured at cost or fair value.

The consolidated quarterly information (Consolidated) was prepared and is presented in accordance with CPC 21 and IAS 34 - Interim Financial Reporting, issued by the IASB, and CVM rules.

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Nine-month period ended September 30, 2014

(In thousands of reais, except when indicated otherwise)

At the meeting held on November 3, 2014, the Executive Board authorized the issue of this quarterly information, which was ratified by the Board of Directors at a meeting held on November 10, 2014.

This Quarterly Information (ITR) was prepared in accordance with accounting principles, practices and criteria consistent with those adopted in the preparation of the financial statements for the financial year ended December 31, 2013, in addition to the new pronouncements, interpretations and amendments that became effective as from 2014, as follows:

· IFRS 10, IFRS 12 and IAS 27 Investment Entities: These amendments became effective for annual periods beginning on or after January 1, 2014, providing an exception to the consolidation requirements for a reporting entity that meets the definition of an investment entity under IFRS 10. This exception requires an investment entity to account for its investments in subsidiaries at fair value in P&L. The application of these amendments does not entail impacts on the Company’s financial position, given that its subsidiary is not qualified as an investment entity.

· IAS 32 Offsetting Financial Assets and Financial Liabilities: This amendment became effective for annual periods beginning on or after January 1, 2014 and clarifies the meaning of “currently has a legally enforceable right to set off the recognized amounts” and the criteria that would qualify for settlement the settlement mechanisms of clearing house systems that are not simultaneous. The application of this amendment does not entail significant impacts on the Company’s financial position.

· IAS 36 Impairment of Assets: This amendment became effective for annual periods beginning on or after January 1, 2014 and eliminates unintended consequences of IFRS 13 Fair Value Measurement on disclosures required by IAS 36. In addition, these amendments require the disclosure of recoverable amounts of assets or Cash Generating Units (CGU) for which a provision for impairment has been recognized over the period. The application of this amendment does not impact the Company’s disclosures.

· IAS 39 Novation of Derivatives and Continuation of Hedge Accounting: This amendment became effective for annual periods beginning on or after January 1, 2014 and introduces a relief regarding discontinuance of hedge accounting where a derivative, which is designated as hedging instrument, is renovated if specific conditions are met. The application of this amendment does not entail significant impacts on the Company’s financial position.

· IFRIC 21 Levies: This amendment became effective for annual periods beginning on or after January 1, 2014 and provides guidance on when to recognize a liability for a tax or levy when the obligating event occurs. For a levy that is triggered upon reaching a minimum threshold, the interpretation clarifies that no liability is recognized before the specified minimum threshold is reached. The application of this standard does not entail significant impacts on the Company’s financial position.

· IFRS 2 Share Based Payments: These amendments changed the settings relating to the purchase conditions and its implementation is effective beginning on or after July 1, 2014. The Company does not believe that these amendments may significantly impact its financial position.

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Nine-month period ended September 30, 2014

(In thousands of reais, except when indicated otherwise)

· IFRS 3 Business Combination: The amendments changed the accounting for contingent consideration in a business combination. Contingent consideration on acquisition of a business that is not classified as equity is subsequently measured at fair value through profit or loss, whether or not included in the scope of IFRS 9 Financial Instruments. These changes are effective for new business combinations after July 1, 2014. The Company consider the application of these changes to any business combinations that occur beginning on or after 1 July 2014.

· IFRS 8 Operating Segments: These amendments are related to the aggregation of operating segments, which can be combined / aggregated whether they are in accordance with the criteria of the rule, in other words, if the segments have similar economic characteristics and are similar in other qualitative aspects. If they are combined, the entity shall disclose the economic characteristics used to assess whether the segments are similar. These amendments became effective as from July 1, 2014. Considering the fact that the Company and its subsidiary operate in a sole operating segment, this standard does not significantly impact the Company's financial position.

· IFRS 13 Fair Value Measurement: This amendment is related to the application of the exception to financial assets portfolio, financial liabilities and other contracts. The amendment is prospective as from July 1, 2014. The application of this standard does not entail significant impacts on the Company’s financial position.

· IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets: The amendments to IAS 16.35 (a) and IAS 38.80 (a) clarifies that a revaluation can be made as follows: i) adjust the recorded gross amount of asset to market value or, ii) determine the market value and proportionally adjust the recorded gross amount so that the resulting recorded amount is equal to the market value. IASB also clarifies that the accumulated depreciation/amortization is the difference between the recorded gross amount and the asset's book value (i.e., the recorded gross amount – accumulated depreciation/amortization = book value). The amendment to IAS 16.35 (b) and IAS 38.80 (b) clarifies that the accumulated depreciation/amortization is eliminated so that the recorded gross amount and the book value is equal to the market value. Amendments become effective as from July 1, 2014 on a retrospective basis. Application of these amendments does not lead to significant impacts on the Company’s financial position. Considering that the revaluation of fixed or intangible assets is not allowed in Brazil, the application of the amendments to this standard do not have any significant impact on the Company's financial position.

· IAS 24 Related Party Disclosures: The amendment to this standard clarifies that a management entity of other entity that provides key personnel for provision of management services is a subject related to related party disclosures. Additionally, an entity that used a management entity shall disclose the expenses incurred with management services. Amendments become effective as from July 1, 2014 on a retrospective basis. The application of these amendments does not entail significant impacts on the Company’s financial position.

· IAS 40 Investments Property: Amendment to this standards clarifies the relationship between IFRS 3 and IAS 40 for classification of property as investment property or property occupied by owner. The description of ancillary services determined in IAS 40, which provides a difference between investment property and owner of occupied property (IFRS 3) is used to determine whether the operation refers to the purchase of an asset or a business combination. This amendment entered in force as from July 1, 2014 on a prospective basis. The application of these amendments does not entail significant impacts on the Company’s financial position.

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Nine-month period ended September 30, 2014

(In thousands of reais, except when indicated otherwise)

On the preparation date of these quarterly information, the following IFRS amendments had been published; however, their application was not compulsory:

· IFRS 9 Financial Instruments: IFRS 9, as issued, is the first step in IASB’s project to replace IAS 39 and applies to classification and measurement of financial assets and liabilities as defined by IAS 39. Initially, the pronouncement would become effective for annual periods beginning on or after January 1, 2013, but Amendments to IFRS 9: Mandatory Effective Date of IFRS 9 and Transition Disclosures, issued in December 2011, postponed the effective date of IFRS 9 to January 1, 2018. In the subsequent steps, IASB will tackle issues such as hedge accounting and provision for impairment of financial assets. Adoption of the first step of IFRS 9 will affect the classification and measurement of the Company’s financial assets, but will have no impact on the classification and measurement of its financial liabilities. The Company will quantify such effects together with the effects from other phases of IASB’s project once the final consolidated standard is issued.

· IFRS 15 Revenue from Contracts with Customers: IASB disclosed IFRS 15 – Revenue from Contracts with Customers, which requires that an entity should recognize the amount of income, reflecting the amount expected to be received in exchange of the control of these goods or services. When adopted, this standard shall replace most part of the detailed guidance on income recognition currently existing (standards IAS 11, IAS 18, IFRIC 13, IFRC 15 and IFRIC 18). This standard is applicable as from years starting on January 1, 2017, and can be adopted on a retrospective basis, using a cumulative effect approach. The Company is evaluating the impacts on its financial statements and disclosures and have neither defined the transition method nor determined the impacts on its current financial reports yet.

The Company does not early adopt any pronouncement, interpretation or amendment which has been issued but whose application is not mandatory.

2.b) Subsidiaries (wholly-owned and jointly-controlled subsidiaries)

Information on investees at September 30, 2014 and December 31, 2013 is described below.

Telefônica Data S.A. (TData): Wholly-owned subsidiary of the Company and headquartered in Brazil, this entity is engaged in the rendering and operation telecommunications services; provide value added services (SVAs); provide integrated business solutions in telecommunications and related activities; manage the provision of technical assistance and maintenance services of telecommunications equipment and network, consulting services regarding telecommunications solutions and related activities, and design, implementation and installation of telecommunication-related projects; sell and lease telecommunications equipment, products and services, value-added services or any other related services, provided or supplied by third parties; provide third parties with telecommunications infrastructure; manage and/or develop activities that are necessary or useful for performing such services in accordance with applicable law; provide business trading services in general and provide technical support services in IT, including consulting, installation and maintenance of goods, applications and services, licensing or sub licensing of any kind of software, and storage and management of data and information.

Aliança Atlântica Holding B.V. (Aliança): Jointly-controlled subsidiary, headquartered in Amsterdam, Netherlands, this entity has a 50% interest held by Telefônica Brasil and cash generated from sale of Portugal Telecom shares in June 2010.

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Nine-month period ended September 30, 2014

(In thousands of reais, except when indicated otherwise)

Companhia AIX de Participações (AIX): Jointly-controlled subsidiary, with 50% interest held by Telefônica Brasil, this entity is engaged in holding interest in Refibra Consortium, and in performing activities related to the direct and indirect operation of activities related to the construction, completion and operation of underground networks or optical fiber ducts.

Companhia ACT de Participações (ACT): Jointly-controlled subsidiary, with 50% interest held by Telefônica Brasil, this entity is engaged in holding interest in Refibra Consortium, and in performing activities related to the rendering of technical support services for the preparation of projects and completion of networks, by means of studies required to make them economically feasible, and monitor the progress of Consortium-related activities.

Upon consolidation, all asset and liability balances, revenues and expenses arising from transactions and interest held in equity between the Company and its Subsidiary were eliminated.

3. CASH AND CASH EQUIVALENTS

	Company		Consolidated
	09.30.14	12.31.13	09.30.14	12.31.13
Cash and bank accounts	56,061	101,094	56,115	101,921
Short-term investments	4,998,996	6,210,205	6,321,227	6,442,015
Total	5,055,057	6,311,299	6,377,342	6,543,936

Highly liquid short-term investments basically correspond to Bank Deposit Certificates (CDB), pegged to the Interbank Deposit Certificate (CDI) rate variation, and are kept at first-tier financial institutions.

In addition, the Company had short-term investments pledged as collateral for loans and legal proceedings in the consolidated amounts of R$ 120,097 at September 30, 2014 (R$ 106,455 at December 31, 2013) recorded in noncurrent assets.

4. TRADE ACCOUNTS RECEIVABLE, NET

	Company		Consolidated
	09.30.14	12.31.13	09.30.14	12.31.13
Billed amounts	4,693,753	4,084,617	5,190,904	4,581,188
Unbilled amounts	1,851,006	1,777,871	1,989,162	1,890,485
Interconnection amounts	1,018,792	872,678	1,018,792	859,894
Trade accounts receivable – gross	7,563,551	6,735,166	8,198,858	7,331,567
Estimated impairment losses	(1,233,060)	(1,033,665)	(1,521,847)	(1,271,622)
Total	6,330,491	5,701,501	6,677,011	6,059,945

Current	6,135,068	5,541,023	6,380,422	5,802,859
Noncurrent	195,423	160,478	296,589	257,086

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Nine-month period ended September 30, 2014

(In thousands of reais, except when indicated otherwise)

The aging list of trade accounts receivable, net of estimated impairment losses, is as follows:

	Company		Consolidated
	09.30.14	12.31.13	09.30.14	12.31.13
Falling due	4,473,767	4,131,549	4,775,254	4,398,791
Overdue from 1 to 30 days	893,219	756,787	920,660	795,389
Overdue from 31 to 60 days	313,050	266,192	325,323	289,783
Overdue from 61 to 90 dias	188,329	162,436	193,280	166,105
Overdue from 91 to 120 days	136,535	59,244	139,930	62,122
Overdue for more than 120 days	325,591	325,293	322,564	347,755
Total	6,330,491	5,701,501	6,677,011	6,059,945

At September 30, 2014 and December 31, 2013, no customer represented more than 10% of trade accounts receivable, net.

Changes in estimated impairment losses on accounts receivable are as follows:

	Company	Consolidated
Balance at 12.31.2013	(1,033,665)	(1,271,622)
Receivables, net (Note 23)	(613,146)	(658,832)
Write-offs	413,751	408,607
Balance at 09.30.2014	(1,233,060)	(1,521,847)

Consolidated balances of noncurrent trade accounts receivable include:

· At September 30, 2014, R$ 195,423 (R$ 160,478 at December 31, 2013) referring to the business model of resale of gods to legal entity, receivable within 24 months. At September 30, 2014, the impact of the adjustment to present value was R$ 22,746 (R$ 18,174 at December 31, 2013).

· At September 30, 2014, R$ 101,166 (R$ 96,608 at December 31, 2013) referring to "Soluciona TI", traded by TData, which consists in lease of IT equipment to small and medium enterprises and receipt of fixed installments over the contractual term. Considering the contractual terms, this product was classified as finance lease:

The consolidated balance of current and noncurrent trade accounts receivable, relating to finance lease of “Soluciona TI” product, comprises the following effects:

	Consolidated
	09.30.14	12.31.13
Present amount receivable	359,579	335,376
Unrealized financial income	5,936	7,058
Nominal amount receivable	365,515	342,434
Estimated impairment losses	(118,184)	(99,791)
Net amount receivable	247,331	242,643

Current	146,165	146,035
Noncurrent	101,166	96,608

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Nine-month period ended September 30, 2014

(In thousands of reais, except when indicated otherwise)

At September 30, 2014, the aging list of trade accounts receivable referring to “Soluciona TI” product is as follows:

	Consolidated
	Nominal amount receivable	Present amount receivable
Falling due within 1 year	258,413	258,413
Falling due within 5 years	107,102	101,166
Total	365,515	359,579

There are no unsecured residual values resulting in benefits to the lessor or contingent payments recognized as revenue for the period.

5. INVENTORIES

	Company		Consolidated
	09.30.14	12.31.13	09.30.14	12.31.13
Consumption material	65,299	55,431	66,272	58,492
Materials for resale (a)	479,862	459,949	501,956	498,803
Other inventories	8,338	6,481	8,338	6,481
Gross total	553,499	521,861	576,566	563,776
Estimated impairment and obsolescence losses	(54,574)	(52,275)	(57,121)	(58,161)
Total	498,925	469,586	519,445	505,615

(a) This includes, among others, mobile telephones, simcards (chip) and IT equipment in stock.

Changes in estimated impairment losses and inventory obsolescence are as follows:

	Company	Consolidated
Balance at 12.31.2013	(52,275)	(58,161)
Additions	(19,929)	(22,874)
Reversals	17,630	23,914
Balance at 09.30.2014	(54,574)	(57,121)

The cost of sales includes additions/reversals of estimated impairment losses and inventory obsolescence, and are included in the cost of goods sold (Note 23).

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Nine-month period ended September 30, 2014

(In thousands of reais, except when indicated otherwise)

6. DEFERRED TAXES AND TAXES RECOVERABLE

6.1 Taxes recoverable

	Company		Consolidated
	09.30.14	12.31.13	09.30.14	12.31.13
ICMS (a)	1,702,795	1,908,754	1,710,900	1,911,703
Income and social contribution taxes recoverable (b)