vivitr3q17_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, 2017

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

X

 

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

 

 

No

 

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

 

 

No

 

 

 

 

 
 

(A free translation of the original in Portuguese)

 

 

 

 

Telefônica Brasil S.A.

Quarterly Information (ITR)

at September 30, 2017

and report on review of quarterly and nine months-period information

 

 

 

 

 

 

 


 
 

(A free translation of the original in Portuguese)

 

Report on review of quarterly information

 

 

To the Board of Directors and Stockholders

Telefônica Brasil S.A.

 

 

 

 

Introduction

 

We have reviewed the accompanying parent company and consolidated interim accounting information of Telefônica Brasil S.A. ("Company"), included in the Quarterly Information Form (ITR) for the quarter ended September 30, 2017, comprising the balance sheet at that date and the statements of income and comprehensive income for the quarter and nine-month periods then ended, and changes in equity and cash flows for the nine-month period then ended, and a summary of significant accounting policies and other explanatory information.

 

Management is responsible for the preparation of the parent company interim accounting information in accordance with the accounting standard CPC 21 - "Interim Financial Reporting", of the Brazilian Accounting Pronouncements Committee (CPC), and of the consolidated interim accounting information in accordance with CPC 21 and International Accounting Standard (IAS) 34 - "Interim Financial Reporting" issued by the International Accounting Standards Board (IASB), as well as the presentation of this information in accordance 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 Reviews of Interim Financial Information (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 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 Brazilian and International Standards on Auditing and consequently did 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 parent company interim information

 

Based on our review, nothing has come to our attention that causes us to believe that the accompanying parent company interim accounting information included in the Quarterly Information referred to above has not been prepared, in all material respects, in accordance with CPC 21 applicable to the preparation of the Quarterly Information, and presented in accordance with the standards issued by the CVM.

 


 
 

(A free translation of the original in Portuguese)

 

Conclusion on the consolidated interim information

 

Based on our review, nothing has come to our attention that causes us to believe that the accompanying consolidated interim accounting information included in the Quarterly Information referred to above has not been prepared, in all material respects, in accordance with CPC 21 and IAS 34 applicable to the preparation of the Quarterly Information, and presented in accordance with the standards issued by the CVM.

 

Other matters

 

Statement of value added

 

We have also reviewed the parent company and consolidated statements of value added for the
nine-month period ended September 30, 2017. These statements are the responsibility of the Company's management and are required to be presented in accordance with standards issued by the CVM applicable to the preparation of Quarterly Information (ITR) and are considered supplementary information under IFRS, which do not require the presentation of the statement of value added. These statements have been 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 have not been prepared, in all material respects, in a manner consistent with the parent company and consolidated interim accounting information taken as a whole.

 

Audit and review of prior-year information

 

The Quarterly Information Form (ITR) mentioned in the first paragraph includes accounting information, presented for comparison purposes, related to the statements of income and comprehensive income for the quarter and nine-month periods ended September 30,2016, and the statements of changes in equity, cash flows and value added for the nine-month period then ended, obtained from the Quarterly Information Form (ITR) for that quarter, and also to the balance sheet as at December 31, 2016, obtained from the financial statements at December 31, 2016. The review of the Quarterly Information (ITR) for the quarter ended September 30, 2016 and the audit of the financial statements for the year ended December 31, 2016 were conducted by other independent auditors, whose unqualified review and audit reports were dated October 25, 2016 and February 17, 2017, respectively.

 

São Paulo, October 24, 2017

 

 

 

PricewaterhouseCoopers

Auditores Independentes

CRC 2SP000160/O-5

 

 

 

Estela Maris Vieira de Souza

Contadora CRC 1RS046957/O-3 "S" SP

 


 
 

(A free translation of the original in Portuguese)

 

TELEFÔNICA BRASIL S.A.

Balance Sheets

At September 30, 2017 and December 31, 2016

(In thousands of reais)

 

(A free translation of the original in Portuguese)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

Consolidated

 

 

 

 

Company

 

Consolidated

ASSETS

Note

 

09.30.17

 

12.31.16

 

09.30.17

 

12.31.16

 

LIABILITIES AND EQUITY

Note

 

09.30.17

 

12.31.16

 

09.30.17

 

12.31.16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

       17,593,165

 

       17,482,265

 

       18,669,238

 

       18,398,995

 

Current liabilities

 

 

       19,565,054

 

       20,280,286

 

       19,473,630

 

       20,438,575

Cash and cash equivalents

3

 

         5,131,933

 

         4,675,627

 

         5,571,056

 

         5,105,110

 

Personnel, social charges and benefits

13

 

            780,589

 

            746,798

 

            825,290

 

            760,643

Trade accounts receivable, net

4

 

         8,072,174

 

         8,282,685

 

         8,791,035

 

         8,701,688

 

Trade accounts payable

14

 

         7,622,860

 

         7,539,395

 

         7,290,613

 

         7,611,246

Inventories, net

5

 

            350,250

 

            368,151

 

            380,610

 

            410,413

 

Taxes, charges and contributions

15

 

         1,677,801

 

         1,698,334

 

         1,866,994

 

         1,770,731

Taxes recoverable

6.a

 

         2,599,093

 

         2,952,622

 

         2,662,630

 

         3,027,230

 

Dividends and interest on equity

16

 

         3,525,455

 

         2,195,031

 

         3,525,455

 

         2,195,031

Judicial deposits and garnishments

7

 

            305,386

 

            302,349

 

            305,525

 

            302,424

 

Provisions

17

 

         1,288,657

 

         1,183,623

 

         1,288,657

 

         1,183,623

Prepaid expenses

8

 

            509,746

 

            336,508

 

            521,540

 

            343,092

 

Deferred revenue

18

 

            414,555

 

            428,488

 

            415,037

 

            429,853

Derivative financial instruments

30

 

             80,493

 

             68,943

 

             80,496

 

             68,943

 

Loans and financing

19

 

         1,993,408

 

         2,542,975

 

         1,993,408

 

         2,542,975

Other assets

9

 

            544,090

 

            495,380

 

            356,346

 

            440,095

 

Debentures

19

 

         1,414,838

 

         2,120,504

 

         1,414,838

 

         2,120,504

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

30

 

            142,609

 

            183,212

 

            142,902

 

            183,212

Non-current assets

 

 

       84,609,594

 

       84,475,240

 

       83,617,799

 

       83,667,264

 

Other liabilities

20

 

            704,282

 

         1,641,926

 

            710,436

 

         1,640,757

Short-term investments pledged as collateral

 

 

             85,282

 

             78,153

 

             85,295

 

             78,166

 

 

 

 

 

 

 

 

 

 

 

Trade accounts receivable, net

4

 

            178,585

 

            200,537

 

            290,505

 

            305,411

 

Non-current liabilities

 

 

       13,125,623

 

       12,432,800

 

       13,301,325

 

       12,383,265

Taxes recoverable

6.a

 

            425,448

 

            474,240

 

            428,408

 

            476,844

 

Personnel, social charges and benefits

13

 

             20,451

 

             11,016

 

             21,045

 

             11,016

Deferred taxes

6.b

 

                      -

 

                      -

 

            364,351

 

             27,497

 

Trade accounts payable

14

 

                      -

 

             71,907

 

                      -

 

             71,907

Judicial deposits and garnishments

7

 

         6,155,015

 

         5,974,733

 

         6,334,882

 

         6,049,142

 

Taxes, charges and contributions

15

 

             19,046

 

             20,996

 

             47,697

 

             49,131

Prepaid expenses

8

 

             24,753

 

             35,340

 

             27,779

 

             36,430

 

Deferred taxes

6.b

 

            819,516

 

             88,695

 

            819,516

 

                      -

Derivative financial instruments

30

 

             96,535

 

            144,050

 

             96,535

 

            144,050

 

Provisions

17

 

         6,594,976

 

         6,591,493

 

         6,745,464

 

         6,625,638

Other assets

9

 

             79,246

 

             53,363

 

             81,862

 

             55,565

 

Deferred revenue

18

 

            407,772

 

            511,786

 

            407,772

 

            511,786

Investments

10

 

         2,049,572

 

         1,407,155

 

             94,000

 

             85,745

 

Loans and financing

19

 

         2,541,124

 

         3,126,792

 

         2,541,124

 

         3,126,792

Property, plant and equipment, net

11

 

       32,332,125

 

       31,837,549

 

       32,417,039

 

       31,924,918

 

Debentures

19

 

         2,107,253

 

         1,433,803

 

         2,107,253

 

         1,433,803

Intangible assets, net

12

 

       43,183,033

 

       44,270,120

 

       43,397,143

 

       44,483,496

 

Derivative financial instruments

30

 

             15,292

 

               1,404

 

             15,292

 

               1,404

 

 

 

 

 

 

 

 

 

 

 

Other liabilities

20

 

            600,193

 

            574,908

 

            596,162

 

            551,788

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

       69,512,082

 

       69,244,419

 

       69,512,082

 

       69,244,419

 

 

 

 

 

 

 

 

 

 

 

Capital

21

 

       63,571,416

 

       63,571,416

 

       63,571,416

 

       63,571,416

 

 

 

 

 

 

 

 

 

 

 

Capital reserves

21

 

         1,213,522

 

         1,272,581

 

         1,213,522

 

         1,272,581

 

 

 

 

 

 

 

 

 

 

 

Revenue reserves

21

 

         2,483,031

 

         2,474,974

 

         2,483,031

 

         2,474,974

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income

21

 

             17,495

 

             11,461

 

             17,495

 

             11,461

 

 

 

 

 

 

 

 

 

 

 

Retained earnings

21

 

         2,226,618

 

                      -

 

         2,226,618

 

                      -

 

 

 

 

 

 

 

 

 

 

 

Additional proposed dividends

21

 

                      -

 

         1,913,987

 

                      -

 

         1,913,987

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

 

     102,202,759

 

     101,957,505

 

     102,287,037

 

     102,066,259

 

TOTAL LIABILITIES AND EQUITY

 

 

     102,202,759

 

     101,957,505

 

     102,287,037

 

     102,066,259

 


 
 

(A free translation of the original in Portuguese)

 

 

TELEFÔNICA BRASIL S.A.

Income Statemaents

Three and nine-month periods ended September 30, 2017 and 2016

(In thousands of reais, except earnings per share)

(A free translation of the original in Portuguese)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

Consolidated

 

 

 

Three-month periods ended

 

Nine-month periods ended

 

Three-month periods ended

 

Nine-month periods ended

 

Note

 

09.30.17

 

09.30.16

 

09.30.17

 

09.30.16

 

09.30.17

 

09.30.16

 

09.30.17

 

09.30.16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net operating revenue

22

 

       9,631,494

 

10,111,110

 

   29,765,720

 

 28,381,864

 

 10,885,949

 

 10,693,365

 

  32,173,292

 

   31,634,810

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales and services

23

 

   (4,751,844)

 

  (4,965,161)

 

(14,327,557)

 

 (14,129,562)

 

  (5,095,718)

 

   (5,272,970)

 

(15,172,547)

 

      (15,929,873)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

  4,879,650

 

     5,145,949

 

  15,438,163

 

   14,252,302

 

     5,790,231

 

     5,420,395

 

   17,000,745

 

 15,704,937

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (expenses)

 

 

 (3,922,622)

 

 (3,950,088)

 

 (11,946,475)

 

  0,606,356)

 

(4,075,283)

 

 (3,982,667)

 

(12,144,321)

 

      (11,144,966)

Selling expenses

23

 

 (3,199,016)

 

  (3,124,939)

 

  (9,643,209)

 

  (8,800,115)

 

  (3,324,498)

 

  (3,156,618)

 

 (9,812,347)

 

        (9,247,283)

General and administrative expenses

23

 

(601,412)

 

(677,987)

 

(1,805,889)

 

(1,896,866)

 

(626,039)

 

(676,739)

 

(1,834,996)

 

        (1,991,193)

Other operating income

24

 

        87,729

 

       109,163

 

      267,286

 

       806,809

 

       88,450

 

      109,979

 

      270,572

 

837,999

Other operating expenses

24

 

           (209,923)

 

           (256,325)

 

           (764,663)

 

           (716,184)

 

           (213,196)

 

           (259,289)

 

           (767,550)

 

           (744,489)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating profit

 

 

            957,028

 

         1,195,861

 

         3,491,688

 

         3,645,946

 

         1,714,948

 

         1,437,728

 

         4,856,424

 

         4,559,971

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial income

25

 

            451,807

 

            553,041

 

         1,428,874

 

         1,999,751

 

            478,441

 

            579,518

 

         1,513,353

 

         2,100,151

Financial expenses

25

 

           (651,613)

 

           (872,304)

 

        (2,223,033)

 

        (2,943,720)

 

           (648,953)

 

           (875,856)

 

        (2,238,523)

 

        (3,019,341)

Equity in results of investees

10

 

            654,357

 

            172,790

 

         1,079,141

 

            623,170

 

                    13

 

                  273

 

               1,362

 

                  997

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before taxes

 

 

         1,411,579

 

         1,049,388

 

         3,776,670

 

         3,325,147

 

         1,544,449

 

         1,141,663

 

         4,132,616

 

         3,641,778

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax and social contribution

26

 

           (188,863)

 

            (96,698)

 

           (684,835)

 

           (454,731)

 

           (321,733)

 

           (188,973)

 

        (1,040,781)

 

           (771,362)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income for the period

 

 

         1,222,716

 

            952,690

 

         3,091,835

 

         2,870,416

 

         1,222,716

 

            952,690

 

         3,091,835

 

         2,870,416

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted earnings per common share (in R$)

21

 

                 0.68

 

                 0.53

 

                 1.72

 

                 1.59

 

 

 

 

 

 

 

 

Basic and diluted earnings per preferred share (in R$)

21

 

                 0.75

 

                 0.58

 

                 1.89

 

                 1.75

 

 

 

 

 

 

 

 

 


 
 

(A free translation of the original in Portuguese)

 

 

TELEFÔNICA BRASIL S.A.

Statements of Changes in Equity

Nine-month periods ended September 30, 2017 and 2016

(In thousands of reais)

(A free translation of the original in Portuguese)

 

 

 

 

 

Capital reserves

 

Revenue reserves

 

 

 

 

 

 

 

 

 

Capital

 

Premium on acquisition of interest

 

Other capital reserves

 

Treasury shares

 

Legal reserve

 

Tax incentive reserve

 

Expansion and modernization reserve

 

Retained earnings

 

 Proposed additional dividends

 

Other comprehensive income

 

Total equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2015

     63,571,416

 

           (75,388)

 

       1,435,757

 

           (87,805)

 

       1,703,643

 

             6,928

 

            700,000

 

                  -  

 

       1,287,223

 

                25,468

 

     68,567,242

Payment of additional dividend for 2015

                    -

 

                    -

 

                    -

 

                    -

 

                    -

 

                    -

 

                      -

 

                    -

 

      (1,287,223)

 

                         -

 

      (1,287,223)

Prescribed equity instruments

                    -

 

                    -

 

                    -

 

                    -

 

                    -

 

                    -

 

                      -

 

            98,148

 

                    -

 

                         -

 

            98,148

DIPJ adjustment - Tax incentives

                    -

 

                    -

 

                    -

 

                    -

 

                    -

 

             7,504

 

                      -

 

            (7,504)

 

                    -

 

                         -

 

                  -  

Other comprehensive income

                    -

 

                    -

 

                    -

 

                    -

 

                    -

 

                    -

 

                      -

 

                    -

 

                    -

 

               (16,872)

 

           (16,872)

Net income for the period

                    -

 

                    -

 

                    -

 

                    -

 

                    -

 

                    -

 

                      -

 

       2,870,416

 

                    -

 

                         -

 

       2,870,416

Interim interest on equity

                    -

 

                    -

 

                    -

 

                    -

 

                    -

 

                    -

 

                      -

 

      (1,568,000)

 

                    -

 

                         -

 

      (1,568,000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at September 30, 2016

     63,571,416

 

           (75,388)

 

       1,435,757

 

           (87,805)

 

       1,703,643

 

            14,432

 

            700,000

 

       1,393,060

 

                  -  

 

                  8,596

 

     68,663,711

Prescribed equity instruments

                    -

 

                    -

 

                    -

 

                    -

 

                    -

 

                    -

 

                      -

 

          123,411

 

                    -

 

                         -

 

          123,411

Reclassification of premium on acquisition of equity interest by TData

                    -

 

            75,388

 

           (75,388)

 

                    -

 

                    -

 

                    -

 

                      -

 

                    -

 

                    -

 

                         -

 

                  -  

Preferred shares given referring to the judicial process of expansion plan

                    -

 

                    -

 

                    2

 

                  15

 

                    -

 

                    -

 

                      -

 

                    -

 

                    -

 

                         -

 

                  17

DIPJ adjustment - Tax incentives

                    -

 

                    -

 

                    -

 

                    -

 

                    -

 

             2,637

 

                      -

 

            (2,637)

 

                    -

 

                         -

 

                  -  

Other comprehensive income

                    -

 

                    -

 

                    -

 

                    -

 

                    -

 

                    -

 

                      -

 

         (156,266)

 

                    -

 

                  2,865

 

         (153,401)

Net income for the period

                    -

 

                    -

 

                    -

 

                    -

 

                    -

 

                    -

 

                      -

 

       1,214,826

 

                    -

 

                         -

 

       1,214,826

Allocation of income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Legal reserve

                    -

 

                    -

 

                    -

 

                    -

 

          204,262

 

                    -

 

                      -

 

         (204,262)

 

                    -

 

                         -

 

                  -  

     Interim interest on equity

                    -

 

                    -

 

                    -

 

                    -

 

                    -

 

                    -

 

                      -

 

         (604,145)

 

                    -

 

                         -

 

         (604,145)

     Reversal of Expansion and Modernization Reserve

                    -

 

                    -

 

                    -

 

                    -

 

                    -

 

                    -

 

           (700,000)

 

          700,000

 

                    -

 

                         -

 

                  -  

     Expansion and Modernization Reserve

                    -

 

                    -

 

                    -

 

                    -

 

                    -

 

                    -

 

            550,000

 

         (550,000)

 

                    -

 

                         -

 

                  -  

     Additional proposed dividends

                    -

 

                    -

 

                    -

 

                    -

 

                    -

 

                    -

 

                      -

 

      (1,913,987)

 

       1,913,987

 

                         -

 

                  -  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2016

     63,571,416

 

                  -  

 

       1,360,371

 

           (87,790)

 

       1,907,905

 

            17,069

 

            550,000

 

                  -  

 

       1,913,987

 

                11,461

 

     69,244,419

Payment of additional dividend for 2016

                    -

 

                    -

 

                    -

 

                    -

 

                    -

 

                    -

 

                      -

 

                    -

 

      (1,913,987)

 

                         -

 

      (1,913,987)

Prescribed equity instruments

                    -

 

                    -

 

                    -

 

                    -

 

                    -

 

                    -

 

                      -

 

            72,840

 

                    -

 

                         -

 

            72,840

Repurchase of preferred shares

                    -

 

                    -

 

                    -

 

                 (32)

 

                    -

 

                    -

 

                      -

 

                    -

 

                    -

 

                         -

 

                 (32)

Preferred shares delivered referring to the judicial process of expansion plan

                    -

 

                    -

 

                    -

 

                    2

 

                    -

 

                    -

 

                      -

 

                    -

 

                    -

 

                         -

 

                    2

Effects of the acquisition of Terra Networks Brasil by Tdata (Note 1 e)

                    -

 

                    -

 

           (59,029)

 

                    -

 

                    -

 

                    -

 

                      -

 

                    -

 

                    -

 

                         -

 

           (59,029)

DIPJ adjustment - Tax incentives

                    -

 

                    -

 

                    -

 

                    -

 

                    -

 

             8,057

 

                      -

 

            (8,057)

 

                    -

 

                         -

 

                  -  

Other comprehensive income

                    -

 

                    -

 

                    -

 

                    -

 

                    -

 

                    -

 

                      -

 

                    -

 

                    -

 

                  6,034

 

             6,034

Net income for the period

                    -

 

                    -

 

                    -

 

                    -

 

                    -

 

                    -

 

                      -

 

       3,091,835

 

                    -

 

                         -

 

       3,091,835

Interim interest on equity

                    -

 

                    -

 

                    -

 

                    -

 

                    -

 

                    -

 

                      -

 

         (930,000)

 

                    -

 

                         -

 

         (930,000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at September 30, 2017

     63,571,416

 

                  -  

 

       1,301,342

 

           (87,820)

 

       1,907,905

 

            25,126

 

            550,000

 

       2,226,618

 

                  -  

 

                17,495

 

     69,512,082

 

 


 
 

(A free translation of the original in Portuguese)

 

 

 

TELEFÔNICA BRASIL S.A.

Statements of Comprehensive Income

Three and nine-month periods ended September 30, 2017 and 2016

(In thousands of reais)

(A free translation of the original in Portuguese)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

Consolidated

 

 

 

Three-month periods ended

 

Nine-month periods ended

 

Three-month periods ended

 

Nine-month periods ended

 

Note

 

09.30.17

 

09.30.16

 

09.30.17

 

09.30.16

 

09.30.17

 

09.30.16

 

09.30.17

 

09.30.16

Net income for the period

 

 

         1,222,716

 

            952,690

 

         3,091,835

 

         2,870,416

 

         1,222,716

 

            952,690

 

         3,091,835

 

         2,870,416

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on investments available for sale

10

 

                    66

 

                  442

 

                  400

 

                  270

 

                    66

 

                  442

 

                  400

 

                  270

Taxes

 

 

                   (22)

 

                 (150)

 

                 (136)

 

                   (92)

 

                   (22)

 

                 (150)

 

                 (136)

 

                   (92)

 

 

 

                    44

 

                  292

 

                  264

 

                  178

 

                    44

 

                  292

 

                  264

 

                  178

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains (losses) on derivative financial instruments

30

 

              (5,063)

 

             11,519

 

              (1,095)

 

              (5,758)

 

              (5,063)

 

             11,519

 

              (1,095)

 

              (5,758)

Taxes

 

 

               1,721

 

              (3,916)

 

                  372

 

               1,958

 

               1,721

 

              (3,916)

 

                  372

 

               1,958

 

 

 

              (3,342)

 

               7,603

 

                 (723)

 

              (3,800)

 

              (3,342)

 

               7,603

 

                 (723)

 

              (3,800)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative Translation Adjustments (CTA) on transactions in foreign currency

10

 

                 (637)

 

               1,272

 

               6,493

 

            (13,250)

 

                 (637)

 

               1,272

 

               6,493

 

            (13,250)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (losses) to be reclassified into income (losses) in subsequent periods

 

 

              (3,935)

 

               9,167

 

               6,034

 

            (16,872)

 

              (3,935)

 

               9,167

 

               6,034

 

            (16,872)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income for the period, net of taxes

 

 

         1,218,781

 

            961,857

 

         3,097,869

 

         2,853,544

 

         1,218,781

 

            961,857

 

         3,097,869

 

         2,853,544

 

 

 


 
 

(A free translation of the original in Portuguese)

 

 

 

TELEFÔNICA BRASIL S.A.

Statements of Cash Flow

Nine-month periods ended September 30, 2017 and 2016

(In thousands of Reais)

(A free translation of the original in Portuguese)

 

 

 

 

 

 

 

 

 

 

 

 Company

 

 Consolidated

 

 

09.30.17

 

09.30.16

 

09.30.17

 

09.30.16

Operating activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses (revenues) not representing changes in cash:

 

 

 

 

 

 

 

 

Income before taxes

 

         3,776,670

 

         3,325,147

 

         4,132,616

 

         3,641,778

Depreciation and amortization

 

         5,842,396

 

         5,355,847

 

         5,862,808

 

         5,839,148

Foreign exchange gains on loans and derivative financial instruments

 

             46,670

 

             33,785

 

             43,719

 

             33,785

Monetary losses

 

            476,343

 

            444,315

 

            478,973

 

            436,825

Equity in results of investees

 

        (1,079,141)

 

           (623,170)

 

              (1,362)

 

                 (997)

Losses (gains) on write-off/sale of goods

 

             17,512

 

           (444,501)

 

             12,654

 

           (448,560)

Provision for impairment - accounts receivable

 

         1,037,677

 

            900,456

 

         1,108,925

 

         1,003,976

Provision of trade accounts payable

 

            176,907

 

            488,222

 

            121,490

 

            525,454

Write-off and reversals for impairment - inventories

 

            (45,899)

 

            (25,237)

 

            (43,184)

 

            (28,280)

Pension plans and other post-retirement benefits

 

             23,117

 

              (3,646)

 

             23,700

 

              (4,417)

Provisions for tax, civil, labor and regulatory contingencies

 

            640,383

 

            713,451

 

            650,654

 

            744,489

Interest expense

 

            770,991

 

            791,998

 

            770,991

 

            832,491

Other

 

             10,383

 

            (40,976)

 

             10,383

 

            (58,998)

 

 

 

 

 

 

 

 

 

Changes in assets and liabilities

 

 

 

 

 

 

 

 

Trade accounts receivable

 

           (805,214)

 

           (995,452)

 

        (1,122,090)

 

        (1,281,268)

Inventories

 

             63,800

 

            130,177

 

             72,987

 

            131,815

Taxes recoverable

 

           (269,874)

 

           (191,101)

 

           (240,862)

 

           (291,667)

Prepaid expenses

 

            (62,142)

 

            (35,009)

 

            (68,456)

 

            (43,807)

Other current assets

 

            (52,717)

 

            114,698

 

            114,177

 

             11,515

Other noncurrent assets

 

            (27,032)

 

             38,179

 

            (24,939)

 

             11,188

Personnel, social charges and benefits

 

             43,226

 

             70,105

 

             56,841

 

             92,906

Trade accounts payable

 

            298,318

 

        (1,190,760)

 

            (12,126)

 

           (894,353)

Taxes, charges and contributions

 

            494,612

 

            (43,163)

 

            509,268

 

            125,722

Other current liabilities

 

        (1,292,664)

 

           (385,542)

 

        (1,289,931)

 

           (393,965)

Other non-current liabilities

 

        (1,060,039)

 

           (619,652)

 

        (1,054,640)

 

           (633,862)

 

 

         9,024,283

 

         7,808,171

 

       10,112,596

 

         9,350,918

 

 

 

 

 

 

 

 

 

Interest paid

 

           (695,802)

 

           (703,415)

 

           (695,802)

 

           (743,482)

Income tax and social contribution paid

 

                      -

 

           (190,670)

 

           (394,075)

 

           (484,591)

 

 

 

 

 

 

 

 

 

Total cash generated by operating activities

 

         8,328,481

 

         6,914,086

 

         9,022,719

 

         8,122,845

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

 

Additions to PP&E, intangible assets

 

        (5,450,121)

 

        (4,930,661)

 

        (5,552,615)

 

        (5,526,491)

Acquisition of company

 

                      -

 

                      -

 

           (250,000)

 

                      -

Cash received from sale of PP&E items

 

             18,267

 

            771,757

 

             23,825

 

            772,332

Redemption of (increase in) judicial deposits

 

             49,816

 

           (148,895)

 

             49,762

 

           (167,964)

Dividends and interest on equity received

 

            384,588

 

            767,551

 

                      -

 

                      -

Cash and cash equivalents merged

 

                      -

 

            358,579

 

                      -

 

                      -

Cash and cash equivalents by company acquisition

 

                      -

 

                      -

 

             43,351

 

                      -

 

 

 

 

 

 

 

 

 

Total cash used in investing activities

 

        (4,997,450)

 

        (3,181,669)

 

        (5,685,677)

 

        (4,922,123)

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

 

Payment of loans, financing and debentures

 

        (3,551,465)

 

        (1,726,423)

 

        (3,551,465)

 

        (1,895,660)

Funding from the issuance of loans, financing and debentures

 

         2,039,878

 

            289,786

 

         2,039,878

 

            289,786

Received from derivative financial instruments

 

             81,525

 

            107,116

 

             85,159

 

            107,116

Payment of derivative financial instruments

 

           (140,470)

 

           (173,485)

 

           (140,475)

 

           (173,485)

Payment for reverse split of shares

 

                      -

 

                 (164)

 

                      -

 

                 (164)

Dividends and interest on equity paid

 

        (1,304,161)

 

        (1,070,594)

 

        (1,304,161)

 

        (1,070,594)

Repurchase of preferred shares

 

                   (32)

 

                      -

 

                   (32)

 

                      -

 

 

 

 

 

 

 

 

 

Total cash generated by (used in) financing activities

 

        (2,874,725)

 

        (2,573,764)

 

        (2,871,096)

 

        (2,743,001)

 

 

 

 

 

 

 

 

 

Increase  in cash and cash equivalents

 

            456,306

 

         1,158,653

 

            465,946

 

            457,721

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of the period

 

         4,675,627

 

         4,206,595

 

         5,105,110

 

         5,336,845

Cash and cash equivalents at end of the  period

 

         5,131,933

 

         5,365,248

 

         5,571,056

 

         5,794,566

 

 

 

 

 

 

 

 

 

Changes in cash and cash equivalents for the period

 

            456,306

 

         1,158,653

 

            465,946

 

            457,721

 

 


 
 

(A free translation of the original in Portuguese)

 

 

TELEFÔNICA BRASIL S.A.

Statements of Value Added

Nine-month periods ended September 30, 2017 and 2016

(In thousands in reais)

(A free translation of the original in Portuguese)

 

 

 

 

 

 

 

 

 

 

 

Company

 

Consolidated

 

 

09.30.17

 

09.30.16

 

09.30.17

 

09.30.16

 

 

 

 

 

 

 

 

 

Revenues

 

       41,620,108

 

       38,963,878

 

       44,297,292

 

       42,976,277

Sale of goods and services

 

       41,795,634

 

       39,127,923

 

       44,515,392

 

       43,098,784

Other revenues

 

            862,151

 

            736,411

 

            890,825

 

            881,469

Provision for impairment of trade accounts receivable

 

        (1,037,677)

 

           (900,456)

 

        (1,108,925)

 

        (1,003,976)

 

 

 

 

 

 

 

 

 

Inputs acquired from third parties

 

      (14,180,624)

 

      (13,534,013)

 

      (15,039,541)

 

      (15,120,839)

Cost of goods and products sold and services rendered

 

        (7,066,689)

 

        (7,353,579)

 

        (7,913,642)

 

        (8,715,021)

Materials, electric energy, third-party services and other expenses

 

        (7,111,989)

 

        (6,638,664)

 

        (7,120,995)

 

        (6,870,785)

Assets (loss) recovery

 

              (1,946)

 

            458,230

 

              (4,904)

 

            464,967

 

 

 

 

 

 

 

 

 

Gross value added

 

       27,439,484

 

       25,429,865

 

       29,257,751

 

       27,855,438

 

 

 

 

 

 

 

 

 

Retentions

 

        (5,842,396)

 

        (5,355,847)

 

        (5,862,808)

 

        (5,839,148)

Depreciation and amortization

 

        (5,842,396)

 

        (5,355,847)

 

        (5,862,808)

 

        (5,839,148)

 

 

 

 

 

 

 

 

 

Net value added produced

 

       21,597,088

 

       20,074,018

 

       23,394,943

 

       22,016,290

 

 

 

 

 

 

 

 

 

Value added received in transfer

 

         2,508,015

 

         2,622,921

 

         1,514,715

 

         2,101,148

Equity in results of investees

 

         1,079,141

 

            623,170

 

               1,362

 

                  997

Financial income

 

         1,428,874

 

         1,999,751

 

         1,513,353

 

         2,100,151

 

 

 

 

 

 

 

 

 

Total value added

 

       24,105,103

 

       22,696,939

 

       24,909,658

 

       24,117,438

 

 

 

 

 

 

 

 

 

Distribution of value added

 

      (24,105,103)

 

      (22,696,939)

 

      (24,909,658)

 

      (24,117,438)

 

 

 

 

 

 

 

 

 

Personnel, social charges and benefits

 

        (2,880,051)

 

        (2,873,617)

 

        (3,043,893)

 

        (3,199,906)

Direct compensation

 

        (1,944,017)

 

        (2,005,797)

 

        (2,048,350)

 

        (2,234,892)

Benefits        

 

           (788,846)

 

           (731,294)

 

           (840,043)

 

           (813,536)

FGTS (unemployment compensation fund)

 

           (147,188)

 

           (136,526)

 

           (155,500)

 

           (151,478)

Taxes, charges and contributions

 

      (13,827,152)

 

      (12,216,168)

 

      (14,447,799)

 

      (13,108,272)

Federal 

 

        (3,857,898)

 

        (3,495,188)

 

        (4,447,204)

 

        (3,981,118)

State 

 

        (9,905,574)

 

        (8,663,319)

 

        (9,917,500)

 

        (9,030,324)

Municipal

 

            (63,680)

 

            (57,661)

 

            (83,095)

 

            (96,830)

Third-party debt remuneration

 

        (4,306,065)

 

        (4,736,738)

 

        (4,326,131)

 

        (4,938,844)

Interest   

 

        (2,174,890)

 

        (2,900,586)

 

        (2,187,663)

 

        (2,971,271)

Rental

 

        (2,131,175)

 

        (1,836,152)

 

        (2,138,468)

 

        (1,967,573)

Equity remuneration

 

        (3,091,835)

 

        (2,870,416)

 

        (3,091,835)

 

        (2,870,416)

Retained profit

 

        (3,091,835)

 

        (2,870,416)

 

        (3,091,835)

 

        (2,870,416)

 

 

 

 


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 

 

1)   THE COMPANY AND ITS 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, authorizations and permissions it has been 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 ("Group"), the telecommunications industry leader in Spain, also present in various European and Latin American countries. 

 

At September 30, 2017 and December 31, 2016, Telefónica S.A.  ("Telefónica"), the Group holding company based in Spain, held total direct and indirect interest in the Company of 73.58%, including treasury shares (Note 21).

 

The Company is registered in the Brazilian Securities Commission ("CVM") as a publicly-held company under Category A (issuers authorized to trade any marketable securities) and has shares traded on the B3 (company resulting from the combination of activities between BM&FBovespa and CETIP). The Company is also listed in the Securities and Exchange Commission ("SEC"), of the United States of America, and its American Depositary Shares ("ADSs") are classified under level II, backed only by preferred shares and traded on the New York Stock Exchange ("NYSE").

 

b) Operations

 

The Company operates in the rendering of: (i) Fixed Switched Telephone Service Concession Arrangement ("STFC"); (ii) Multimedia Communication Service ("SCM", data communication, including broadband internet); (iii) Personal Mobile Service ("SMP"); (iv) Conditioned Access Service ("SEAC" - Pay TV), throughout Brazil, through concessions and authorizations, as established in the General Plan of Concessions ("PGO") and advertising services.

 

In accordance with the STFC service concession agreement, in every two years, during the agreement'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 contribution taxes (Note 20). The Company's current STFC concession agreement is valid until December 31, 2025.

 

In accordance with the authorization terms for the usage of frequencies associated with SMP, in every two years after the first renewal of these agreements, the Company shall pay a fee equivalent to 2% of its prior-year SMP revenue, net of applicable taxes and social contribution taxes (Note 20), and in the 15th year the Company will pay 1% of its prior-year revenue. The calculation will consider the net revenue from the application of Basic and Alternative Services Plans. These agreements can be extended only once for a term of 15 years.

Service concessions and authorizations are granted by the Brazil's Telecommunications Regulatory Agency ("ANATEL"), the agency responsible for the regulation of the Brazilian telecommunications sector 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. The operation of such concessions is subject to supplementary regulations and plans.

 

The information on the operation areas (regions) and due dates of the radiofrequency authorizations for SMP services is the same of Note 1b) Operations as disclosed in the financial statements for the year ended December 31, 2016.

 

c) Acquisition of GVT Participações S.A. ("GVTPart")

 

The information on the acquisition process of GVTPart, which occurred in May 2015, is the same of Note 4) Acquisition of GVT Participações S.A. ("GVTPart"), as disclosed in the financial statements for the year ended December 31, 2016.


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 

 

 

d) Corporate restructuring

 

The Shareholders' Meeting held on April 1, 2016, approved corporate restructuring in accordance with the terms and conditions proposed on March 14, 2016. The information on the Corporate Restructuring is the same as in Note 1c) Corporate Restructuring, as disclosed in the financial statements for the year ended December 31, 2016.

 

e) Acquisition of Terra Networks by Wholly-Owned Subsidiary

 

On July 3, 2017, the Company informed that its wholly-owned subsidiary Telefônica Data S.A. ("TData") has acquired all the shares representing the capital stock of Terra Networks Brasil S.A. ("Terra Networks"), owned by SP Telecomunicações Participações Ltda. ("SPTE"), one of the controlling shareholders of the Company ("Transaction").

 

Terra Networks is a provider of digital services (own and third-party value-added services ("VAS") and carrier billing, as well as mobile channels for sales and relationships) and advertising.

 

TData is a company dedicated to the exploration of VAS, as well as integrated business solutions in telecommunications, technical assistance of telecommunications equipment and networks, maintenance of equipment and networks and development of projects.

 

The total price paid for the acquisition of shares issued by Terra Networks was  R$ 250,000, in a single installment, with no need for any financing, using only the cash available of TData. Such value was calculated based on the economic value of the Terra Networks, according to the discounted cash flow criterion, with a base date of April 30, 2017,  based on an appraisal report contracted by TData Board of Directors.

 

The Transaction was subject to conditions usually applicable to this type of deal, and was preceded by a legal and financial audit in relation to Terra Networks and valuation by an independent company.

 

The Transaction was not subject to obtaining any regulatory authorizations or approvals by the Company's regulators and the way it was structured does not change the Company's shareholding structure or cause any dilution to its shareholders, generating value to them through accelerated growth of digital services and increased operational efficiency, there are no significant costs related to the Transaction.

 

The purpose of the Transaction was to expand and integrate the commercial offer of digital services that can add immediate value to the customer base of TData and of the Company; as well as generating TData service offers to Terra Networks' customer base and subscribers and, thanks to the national presence of Terra Networks' operation and expertise, generate leverage for TData advertising business. In addition, since the Company has the skills to create new digital media products for mobile and advertising and Terra Networks has know-how in selling, attending and operating digital services for specific customers, the acquisition by TData will also facilitate the synergy between the companies involved, in addition to maximize the unification of the commercial conditions maintained with suppliers.

 

Accounting Method


Considering that business combinations between entities under common control have not yet been specifically addressed by local accounting standards (Accounting Pronouncements Committee - CPC) and International Financial Reporting Standards (IFRS), an entity is required to apply the hierarchy in paragraphs 10-12 of CPC Pronouncement 23 - Accounting Policies, Change of Estimates and Error Correction (equivalent to IAS 8) to choose the accounting policy to be adopted.

 

An entity may therefore choose to account for combinations of entities under common control using the Acquisition Method based on CPC 15 (R1) / IFRS 3 (R) or the carrying amount of the net assets acquired ("Pooling of Interests" or "Predecessor Value Method"), with the guidance provided by other accounting standard-setting bodies with a Conceptual Framework similar to CPCs or IFRSs.

 

 

 


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 

 

 

This Transaction, which as previously described, involves companies under common control, was accounted for at the book value of the net assets acquired (“Predecessor Value Method”), as certain requirements for the use of the acquisition method set forth in CPC 15 ( R1) / IFRS 3 (R). Consequently, the difference between the consideration given in exchange for the equity interest obtained and the value of the net assets acquired was recorded in TData's equity.


Upon completion of the Transaction, as from July 3, 2017, Terra Networks became a direct subsidiary of TData and indirectly owned by the Company.


We present below the composition of the book value of identifiable net assets acquired in the amount of R$190,971.

 

 

 

 

 

 

Current assets

            163,579

 

Current liabilities

             86,892

   Cash and cash equivalents

             43,351

 

     Personnel, social charges and benefits 

             17,327

   Accounts receivable, net

             61,276

 

     Trade accounts payable 

             51,198

   Derivative financial instruments

                  404

 

     Taxes, charges and contributions 

             14,643

   Taxes recoverable

             22,658

 

     Derivative financial instruments

                    16

   Other assets

             35,890

 

     Other liabilities 

               3,708

 

 

 

 

 

Noncurrent assets

            228,575

 

Noncurrent liabilities

            114,291

   Deferred taxes

            117,885

 

     Personnel, social charges and benefits 

                  508

   Judicial deposits and garnishments

            102,373

 

     Taxes, charges and contributions 

                  229

   Other assets

                  740

 

     General Provisions

            112,874

   Property and equipment, net

               7,047

 

     Other liabilities 

                  680

   Intangible assets, net

                  530

 

 

 

 

 

 

 

 

 

 

 

Book value of assumed liabilities

            201,183

 

 

 

 

 

 

 

 

Book value of identifiable net assets acquired

            190,971

 

 

 

 

 

 

 

 

Total consideration

            250,000

 

 

 

 

 

Book value of assets acquired

            392,154

 

Adjustment to equity in TData and Company

             59,029

 

Provision for Probable Risks and Contingent Liabilities


The agreement for the sale and purchase of this Transaction contains terms and provisions common to this type of transaction, including indemnification of certain liabilities, contingent or materialized, arising from acts or facts occurring up to the date of the Transaction, reducing the amounts already provisioned for the respective contingencies , which were considered in the purchase price.


At the date of the Transaction, Terra Networks was involved in administrative and judicial proceedings related to tax, civil and labor matters, whose unfavorable outcomes are considered probable and possible, as the case may be.

 

 

 

 

 

 Amounts involved

Nature/Degree of Risk

 

 

 

 

Probable

 

Possible

   Labor (1)

 

 

 

 

             19,282

 

             50,104

   Civil (2)

 

 

 

 

               6,061

 

             19,623

   Tax (3)

 

 

 

 

             87,531

 

            927,309

      Federal (i)

 

 

 

 

             80,784

 

            267,089

      State (ii)

 

 

 

 

                      -

 

            655,061

      Municipal (iii)

 

 

 

 

               6,747

 

               5,159

Total

 

 

 

 

            112,874

 

            997,036

 


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
 
Probable:

 

(1)  Labor provisions: these refer to labor claims of former employees (who claim, among others, recognition of the role of journalist, payment of overtime, etc.) and outsourced employees (these claiming subsidiary or joint liability).

 

(2)  Civil provisions: refer to: action filed by supplier regarding the transmission of events; PROCON fine (annulment action); enforcement action; indemnity action related to the use of content; and claim actions filed by former subscribers regarding unrecognized collection, collection of undue value and contractual noncompliance.

 

(3)  Tax Provisions: refer to actions filed by Terra Networks questioning: (i) Federal: CIDE unconstitutionality of royalties; and (ii) Municipal: ISS exclusion from the PIS / COFINS calculation base on imports.

 

Possible:

 

(1) Labor contingencies: they refer to labor claims of former employees (who claim, among other things: recognition of the role of journalist, overtime payments, etc.) and outsourced employees (these claiming subsidiary or joint liability).

 

(2) Civil contingencies: refer to: action filed by supplier regarding the transmission of events; PROCON fine (annulment action); action indemnity relating to the use of content; ECAD action on copyright collection; and claim actions filed by former subscribers regarding unrecognized collection, collection of undue value and contractual noncompliance.

 

(3) Tax contingencies: these refer to administrative and judicial discussions, the most relevant of which are: (i) Federal: goodwill amortization expenses incurred in 2005 to 2008; manifestations of nonconformity in the face of disqualified compensation and a statement of operating expenses allegedly non-deductible and related to estimated losses for the impairment of accounts receivable; (ii) State: ICMS on advertising services; and (iii) Municipal: ISS on data processing and similar and antivirus.

 

Other information


The net book value of trade accounts receivable provided by Terra Networks totals R$61,276, which does not differ from the gross amount of R$69,995, net of estimated losses for impairment of R$8,719.

From the date of acquisition until the completion of this quarterly information, Terra Networks contributed R$76,310 of consolidated net operating revenue and R$156,822 of consolidated net income to the Company, mainly due to the recognition of R$128,298 of income tax on tax losses and negative basis of social contribution (note 6 b).

 

2)    BASIS OF PREPARATION AND PRESENTATION OF THE QUARTERLY FINANCIAL STATEMENTS

 

a) Statement of compliance

 

The individual (Company) and consolidated quarterly financial Statements were prepared and are presented in accordance with the accounting practices adopted in Brazil, which comprise CVM standards and CPC (Accounting Pronouncements Committee) pronouncements, and in compliance with the International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board (IASB).

 

All significant information in the financial statements - and solely such information - is disclosed and corresponds to that used by Company management for administration purposes.

 

The consolidated statements (Consolidated) have been prepared and are presented in accordance with CPC 21 (R1) Interim Statements and IAS 34 - Interim Financial Reporting issued by the IASB and standards established as Resolution no. 739/15 of the CVM.

 

b) Basis of preparation and presentation

 

The Company's quarterly financial statements for the three and nine-month periods ended September 30, 2017 are presented in thousands of Reais (unless otherwise stated), which is the functional currency of the Company.

 

 

 


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
 
Management has assessed the Company's ability to continue operating normally and is convinced that it has the resources to continue its business in the future. In addition, Management is not aware of any material uncertainties that could generate significant doubts about its ability to continue operating. Therefore, these quarterly financial statements were prepared based on the assumption of continuity.

 

These quarterly financial statements compare the quarters ended September 30, 2017 and 2016, except for the balance sheets, that compare the positions as of September 30, 2017 and December 31, 2016.

 

The consolidated information for the three and nine months ended September 30, 2017 includes the amounts of Terra Networks, a consolidated company as of July 3, 2017.

 

The Board of Directors authorized the issue of these individual and consolidated financial statements at the meeting held on October 23, 2017.

 

Business segments are defined as components of a company for which separate financial information is available and regularly assessed by the operational decision makers in decisions on how to allocate funds to an individual segment and in the assessment of segment performance.  Considering that: (i) all officers and managers' decisions are based on consolidated reports; (ii) the Company and subsidiaries' mission is to provide their customers with quality telecommunications services; and (iii) all decisions related to strategic planning, finance, purchases, short and long-term investments are made on a consolidated basis. Consequently, the Company and subsidiaries operate in a single operating segment, namely the provision of telecommunications services.

 

The accounting standards adopted in Brazil require the presentation of the Statement of Value Added ("SVA"), individual and consolidated, while IFRS does not require such presentation. As a result, under IFRS standards, the SVA is being presented as supplementary information, without prejudice to the overall quarterly financial statements.

 

As a result of the Corporate Restructuring process (Note 1d), which occurred on April 1, 2016, the individual quarterly financial statements for the nine-month period ended September 30, 2017 and 2016 are not comparable.

 

The quarterly financial statements were prepared in accordance with the principles, practices and accounting criteria consistent with those adopted in the preparation of the financial statements for the year ended December 31, 2016 (Note 3 Summary of Significant Accounting Practices) and should be analyzed in conjunction with these financial statements, in addition to the new pronouncements, interpretations and amendments, which came into effect as of January 1, 2017, as described below:

 

•  Improvements to IFRS 2014-2016 (amendments to IFRS 2014-2016), amendments: The amendments introduce a number of improvements to IFRS in force, mainly to eliminate inconsistencies and clarify the wording of some of these standards. The amendment to IFRS 12 clarifies the scope of the standard and will be applicable for fiscal years beginning on January 1, 2017, while other improvements will be effective in 2018.

 

     IAS 7 - Cash Flow, amendments: The changes are part of the IASB disclosure initiative and require an entity to provide disclosures that enable users of financial statements to assess changes in liabilities arising from financing activities, including both the changes affecting cash flows, and changes that do not affect cash. At the initial adoption of the amendment, entities are not required to provide comparative information for prior periods.

 

     IAS 12 - Income Taxes, amendments: The amendments clarify that an entity should consider whether tax legislation restricts sources of taxable income against which it may make deductions on the reversal of that deductible temporary difference. In addition, the amendments provide guidance on how an entity should determine future taxable income and explain the circumstances under which taxable income may include the recovery of some assets for amounts greater than their carrying amount. If an entity adopts the changes for an earlier period, it should disclose that fact.

 


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
 
These changes are effective for annual periods beginning on January 1, 2017. The Company will consider these changes in the preparation of the annual financial statements ending on December 31, 2017, although the application of these changes does not have a material impact on the financial position of the Company.

On the date of preparation of these quarterly financial statements, the following IFRS amendments had been published; however, their application was not mandatory. The Company does not adopt early any pronouncement, interpretation or amendment that has been issued, before application is mandatory.

 

Standards and Amendments to the Standards

 

Effective as of:

IFRS 9 Financial Instruments, issued

 

January 1, 2018

 

IFRS 15 Revenue from Contracts with Customers, as issued

 

January 1, 2018

 

Clarifications to IFRS 15 , issued on April 12, 2016

 

January 1, 2018

 

IFRS 2 Classication and Valuation of Share Based Transactions, as amended

 

January 1, 2018

 

IFRS 4 Insurance Contracts, as amended

 

January 1, 2018

 

IAS 40 Investment Property Transfers, as amended

 

January 1, 2018

 

IFRIC 22 Transactions in Foreign Currency and Advance Payments, as issued

 

January 1, 2018

 

Annual Improvements to IFRS, 2014-2016 Cycle, as issued

 

January 1, 2018

 

IFRS 16 Leases, as issued

 

January 1, 2019

 

IFRIC 23 Uncertaints over Income Tax Treatments

 

January 1, 2019

 

'IFRS 17 Insurance Contracts

 

January 1, 2021

 

IFRS 10, 12 and IAS 28 Investiment Entities: Applying the Consolidation Exception, as amended

 

TBD

 

 

 

Based on preliminary studies, the Company expects the implementation of many of these standards, changes and interpretations will not have a significant impact on the financial statements in the initial period of application. However, the Company expects the following standards issued, but not yet mandatory, may have significant impact on the Company's consolidated financial statements at the time of application and prospectively.

 

IFRS 9 - Financial Instruments, Issue: In July 2014, the IASB issued the final version of IFRS 9, which replaces IAS 39 and all previous versions of IFRS 9.

 

IFRS 9 sets out the requirements for recognising and measuring financial instruments. As a result from the analysis of the effects of the new criteria introduced by this standard certain expected impacts have been identified in relation with to the following aspects, among others:

·       Simplifies the current measurement model for financial assets and establishes three main categories: (i) amortised cost; (ii) fair value through profit or loss and; (iii) fair value through Other Comprehensive Income (OCI), depending on the business model and the characteristics of the contractual cash flows. Regarding recognition and measurement of financial liabilities there are not significant changes from current criteria except for the recognition of changes in own credit risk in OCI for those liabilities measured at fair value through profit or loss.

·       Introduces a new model for impairment losses on financial assets, i.e. the expected credit loss model, which replaces the current incurred loss model. Consequently, the application of the new requirements will probably lead to an acceleration in the recognition of impairment losses on financial assets.


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 

 

 

·       Under current accounting, a hedge must be highly effective both, prospective and retrospectively, while IFRS 9 introduces a new, less restrictive, accounting model for hedging, requiring an economic relationship between the hedged item and the hedging instrument and that the coverage ratio be the same as that applied by the entity for its risk management. Likewise, the new standard modifies the criteria for documentation of hedging relationships.

·       In addition, the Group's financial statements will include more detailed disclosures with relevant information regarding financial assets and liabilities.

As a result from the analysis of the new standard, the Group expects that the key changes will relate to documentation of policies and hedging strategies, as well as the estimation and timing of recognition of expected losses on financial assets. The Group has decided to apply the option that allows not to restate comparative periods to be presented in the year of initial application.

The changes introduced by IFRS 9 will affect the recognition of financial assets and derivative financial instruments held as of January 1, 2018. The Company is carrying out the process of implementing the new criteria, but due to the relevance of the potentially affected items and the complexity of the estimates that it is not reasonably possible to quantify the impacts of the application of this standard on the date of the termination of these quarterly financial statements.

 

IFRS 15 - Revenue from Contracts with Customers, Issuance: IFRS 15 establishes criteria for the accounting of revenues from customer contracts. The Company is currently in the process of estimating the impacts of this new standard on its contracts. This analysis identified a number of expected impacts related to the following aspects, among others:

 

Under the current accounting policy, the Company offers commercial packages that combine equipment and services of telephony, fixed and mobile, data, internet and television, total revenue of services is distributed among its elements identified based on their respective fair values.

 

   Under IFRS 15, amounts will be allocated to each element based on the independent selling prices of each individual component in relation to the total price of the package and will be recognized (and measured) when the obligation is satisfied. The application of the new criteria will mean an acceleration in the recognition of equipment sales revenues, which are generally recognized at the time of delivery to the final consumer. To the extent that the packages are marketed at a discount, the difference between the profit on sales of equipment and the amount received from the customer at the inception of the contract will be recognized as a contractual asset.

 

·  Under the current accounting policy, all expenses directly related with obtaining a contract (sales commissions and other third party acquisition costs) are expensed when incurred. However, IFRS 15 requires the recognition of an asset for those costs that are incremental to obtain a contract and that are expected to be recovered and its subsequent amortisation over the same period as the revenue associated with such asset.

·  Compared to the current revenue standard, IFRS 15 sets out more detailed requirements on how to account for contract modifications. Certain changes must be accounted for as a retrospective change (as a continuation of the original contract), while other modifications must be accounted for prospectively (as separate contracts, like the end of the original contract and the creation of a new one).

·  In addition, the Group's financial statements will include more qualitative and quantitative disclosure of income-related accounts.

 


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
 
The Company is progressing in the process of implementing the new requirements. This process involves the introduction of modifications to the current information systems, the implementation of new IT tools, and changes in the processes and controls of the entire revenue cycle. This process of implementation in the Company a high degree of complexity due to factors such as a large number of contracts, numerous data source systems, diversity of business models, as well as the need to make complex estimates. Thus, despite the progress in the degree of development of the new tools that support the application of the new requirements, the Company understands that at the closing date of these quarterly financial statements it can not reliably measure the impact of the application of this standard.

However, from the analysis performed on the transactions of the last financial year considering commercial offers as well as the volume of contracts affected, the Company estimates that the most significant impacts due to the changes introduced by IFRS 15 will relate to the transfer of revenues between services and sales of equipment and resultant acceleration of revenues, and the activation and deferral of the incremental costs related to the obtaining contracts.

In addition, IFRS 15 allows for two alternative transition methods: (i) retrospectively for each reporting period or (ii) retroactively with cumulative effect recognized at the date of initial application. The Company will adopt the second transition method, recognizing the accumulated effect of the new criteria as a reserve adjustment at the date of the initial application of IFRS 15.

 

IFRS 15 allows the adoption of certain practical solutions to facilitate the implementation of the new criteria.

After the analyzes carried out, the main practical solutions that the Company intends are:

 

·       Not to apply the IFRS 15 retrospectively to contracts that are completed contracts at January 1, 2018.

·       Portfolio of contracts: apply the requirements of the standard to groups of contracts with similar characteristics, since, for this cluster, the effects would not differ significantly from an application on a contract by contract basis.

·       Financing component: it will not be considered significant when the period between when the promised good or service is transferred to a customer and when the customer pays for that good or service will be one year or less.

·       Costs to obtain a contract: will be recognised as an expense when incurred if the amortisation period of the asset that the entity otherwise would have recognised is one year or less.

 

IFRS 16 - Leasing, Issuance: IFRS 16 establishes that companies acting as lessees must recognize in the balance sheet the assets and liabilities arising from all lease agreements (except for short-term lease agreements and those for low value assets).

 

The Company has a very large number of leases as a lessee of various assets, such as third-party towers, circuits, real estate and land (where the towers are primarily located). Under the current standard, significant portions of such contracts are classified as operating leases, where payments are generally recorded on a straight-line basis over the contract term.

 

 

The Company is currently in the process of estimating the impact of this new standard on such contracts. In this analysis, the estimate of the term of the lease is included, considering the non-cancellable period and the periods covered if exercised the option to extend the lease for those cases there exists reasonable certainty, which will depend, of the expected use of the Company's assets installed in the leased assets. In addition to this, will make assumptions to calculate the discount rate, which will mainly be based on the incremental borrowing rate of interest for the estimated term. The Company is considering not to separately recognise non-lease components from lease components for those classes of assets in which non-lease components are not material with respect to the total value of the lease.

 

 

 

 


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
 

In addition to the mentioned estimations, the standard allows for two transition methods: (i) retrospectively for all periods presented or; (ii) using a modified retrospective approach where the cumulative effect of adoption is recognised at the date of initial application. The Company has tentatively decided to adopt the later transition method, therefore it would recognise the cumulative effect of initial application as an adjustment to retained earnings in the year of initial application of IFRS 16. Also, certain practical expedients are available on first-time application in connection with the right of use asset measurement, discount rates, impairment, leases that finish within the twelve months subsequent to the date of first application, initial direct costs, and term of the lease. The Company is evaluating which of these practical expedients will be adopted. In this regard, the Company is considering opting for the practical expedient that allows it not to reassess whether a contract is or contains a lease on the date of initial application of IFRS 16 but to directly apply the new requirements to all those contracts which under current accounting were identified as a lease.

Due to the different alternatives available, as well as to the complexity of the estimates and the high number of contracts, the Company has not yet completed the implementation process, so that at the closing date of these quarterly financial statements it is not possible to reasonably estimate the impact that the application this standard.

 

However, based on the volume of contracts affected, as well as the magnitude of the future lease commitments, as disclosed in the Annual Financial Statements, the Company expects that the changes introduced by IFRS 16 would have a significant impact on its financial statements from the date of adoption, including the recognition on the balance sheet of right of use assets and their corresponding lease obligations in connection with the majority of contracts that are classified as operating leases under the current lease standard. Also, amortization of the right of use assets and recognition of interest costs on the lease obligation on the statements of income will replace amounts recognised as lease expense under the current lease standard. The classification of payments in the statement of cash flows will also be affected by the adoption of IFRS 16. The financial statements of the Company will include more detailed disclosures with relevant information on the lease agreements.

c) Basis of consolidation

 

At September 30, 2017 and 2016 and December 31, 2016, the Company held the following direct equity interests:

 

Investees

 

Type of investment

 

Equity interests

 

Country (Headquarters)

 

Core activity

Telefônica Data S.A. ("TData")

 

Wholly-owned subsidiary

 

100.00%

 

Brazil

 

Telecommunications

POP Internet Ltda ("POP") (note 1c)

 

Wholly-owned subsidiary

 

100.00%

 

Brazil

 

Internet

Aliança Atlântica Holding B.V. ("Aliança")

 

Jointly-controlled subsidiary

 

50.00%

 

Holland

 

Holding of the telecommunications sector

Companhia AIX de Participações ("AIX")

 

Jointly-controlled subsidiary

 

50.00%

 

Brazil

 

Operation of underground telecommunications networks

Companhia ACT de Participações ("ACT")

 

Jointly-controlled subsidiary

 

50.00%

 

Brazil

 

Technical assistance in telecommunication networks

 

In the parent company financial statements interests held in subsidiaries or jointly-controlled entities are measured under the equity method. In the consolidated investments and all asset and liability balances, revenues and expenses arising from transactions and interest held in subsidiaries are fully eliminated. Investments in jointly-controlled entities are measured under the equity method.

 

3)  CASH AND CASH EQUIVALENTS

 

 

Company

 

Consolidated

 

09/30/17

 

12/31/16

 

09/30/17

 

12/31/16

Cash and banks

             89,221

 

            189,445

 

             90,727

 

            198,369

Short-term investments

         5,042,712

 

         4,486,182

 

         5,480,329

 

         4,906,741

Total

         5,131,933

 

         4,675,627

 

         5,571,056

 

         5,105,110

 

Highly liquid short-term investments basically comprise Bank Deposit Certificates (CDB) and Repurchase Agreements kept at first-tier financial institutions, pegged to the Interbank Deposit Certificate (CDI) rate, with original maturities of up to three months, and with immaterial risk of change in value. Revenues generated by these investments are recorded as financial income.


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
 
 

4) TRADE ACCOUNTS RECEIVABLE, NET

 

 

Company

 

Consolidated

 

09/30/17

 

12/31/16

 

09/30/17

 

12/31/16

Billed amounts

         6,182,072

 

         6,077,768

 

         7,181,371

 

         6,939,909

Unbilled amounts

         1,931,661

 

         1,898,630

 

         2,172,144

 

         1,930,708

Interconnection amounts

         1,145,107

 

         1,333,595

 

         1,155,778

 

         1,345,471

Amounts from related parties (Note 27)

            168,265

 

            177,741

 

            194,658

 

            190,906

Gross accounts receivable

         9,427,105

 

         9,487,734

 

       10,703,951

 

       10,406,994

Estimated impairment losses

        (1,176,346)

 

        (1,004,512)

 

        (1,622,411)

 

        (1,399,895)

Total

         8,250,759

 

         8,483,222

 

         9,081,540

 

         9,007,099

 

 

 

 

 

 

 

 

Current

         8,072,174

 

         8,282,685

 

         8,791,035

 

         8,701,688

Non-current

            178,585

 

            200,537

 

            290,505

 

            305,411

 

Consolidated balances of non-current trade accounts receivable include:

 

·       R$123,623 at September 30, 2017 (R$143,265 at December 31, 2016), relating to the business model of resale of goods to legal entities, receivable within 24 months. At September 30, 2017, the impact of the present-value adjustment was R$16,161 (R$32,920 at December 31, 2016).

 

·       R$54,962, at September 30, 2017 (R$57,272, at December 31, 2016), net of the present value adjustment relating to the portion of accounts receivable arising from negotiations on the bankruptcy process of companies from the OI group. At September 30, 2017, the impact of the present-value adjustment was R$6,142 (R$10,268 at December 31, 2016).

 

·       R$111,920, at September 30, 2017, (R$104,874 at December 31, 2016), relating to "Soluciona TI", traded by TData, which consists of lease of IT equipment to small and medium companies and receipt of fixed installments over the contractual term. Considering the contractual terms, this product was classified as finance lease. At September 30, 2017, the impact of the present-value adjustment was R$2,625 (R$3,005 at December 31, 2016).

 

The trade accounts receivable, relating to finance lease of "Soluciona TI" product, comprise the following effects:

 

 

 

 

 

 

Consolidated

 

 

 

 

 

09/30/17

 

12/31/16

Nominal amount receivable

 

 

 

 

            617,910

   

            611,384

Deferred financial income

 

 

 

 

              (2,625)

 

              (3,005)

Present value of accounts receivable

 

 

 

 

            615,285

 

            608,379

Estimated impairment losses

 

 

 

           (374,893)

 

           (344,738)

Net amount receivable

 

 

 

 

            240,392

 

            263,641

 

 

 

 

 

 

 

 

Current

 

 

 

 

            128,472

 

            158,767

Non-current

 

 

 

 

            111,920

 

            104,874

 

At September 30, 2017, the aging of gross trade accounts receivable relating to "Soluciona TI" product is as follows:


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
 

 

 

 

 

 

 

Consolidated

 

 

 

 

 

Nominal amount receivable

 

Present value of accounts receivable

Falling due within one year

 

 

 

 

            329,746

 

            329,746

Falling due between one year and five years

 

 

 

 

            288,164

 

            285,539

Total

 

 

 

 

            617,910

 

            615,285

 

There are no unsecured residual values resulting in benefits to the lessor nor contingent payments recognized as revenue for the period.

 

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

 

 

 

Company

 

Consolidated

 

09/30/17

 

12/31/16

 

09/30/17

 

12/31/16

Falling due

         6,138,015

 

         6,392,442

 

         6,863,672

 

         6,841,752

Overdue – 1 to 30 days

         1,025,357

 

         1,025,630

 

         1,144,873

 

         1,073,568

Overdue – 31 to 60 days

            342,526

 

            309,210

 

            348,852

 

            322,485

Overdue – 61 to 90 days

            228,378

 

            225,132

 

            230,858

 

            227,010

Overdue – 91 to 120 days

            139,559

 

            110,813

 

            137,668

 

            105,048

Overdue – over 120 days

            376,924

 

            419,995

 

            355,617

 

            437,236

Total

         8,250,759

 

         8,483,222

 

         9,081,540

 

         9,007,099

 

At September 30, 2017 and December 31, 2016, no customer represented more than 10% of trade accounts receivable, net.

 

Changes in the estimated impairment losses for accounts receivable are as follows:

 

 

 

 

 

 

Company

 

Consolidated

Balance at 12/31/15

 

 

 

        (1,650,112)

 

        (2,217,926)

Increase to estimated losses (Note 23)

 

 

 

        (1,233,831)

 

        (1,378,453)

Reversal of estimated losses (Note 23)

 

 

 

            333,375

 

            374,477

Write-off due to use

 

 

 

            721,869

 

            767,326

Merger (Note 1d)

 

 

 

           (160,720)

 

                      -

Balance at 09/30/16

 

 

 

        (1,989,419)

 

        (2,454,576)

Increase to estimated losses

 

 

 

           (433,528)

 

           (465,322)

Reversal of estimated losses

 

 

 

            108,242

 

            121,077

Write-off due to use

 

 

 

         1,310,193

 

         1,398,926

Balance at 12/31/16

 

 

 

        (1,004,512)

 

        (1,399,895)

Increase to estimated losses (Note 23)

 

 

 

        (1,320,281)

 

        (1,414,918)

Reversal of estimated losses (Note 23)

 

 

 

            282,604

 

            305,993

Write-off due to use

 

 

 

            865,843

 

            895,128

Business combination (Note 1e)

 

 

 

                      -

 

              (8,719)

Balance at 09/30/17

 

 

 

        (1,176,346)

 

        (1,622,411)

 

 

 

 


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
 
 

5)  INVENTORIES, NET

 

 

Company

 

Consolidated

 

09/30/17

 

12/31/16

 

09/30/17

 

12/31/16

Materials for resale (1)

            309,492

 

            335,281

 

            338,890

 

            377,465

Materials for consumption

             65,584

 

             75,086

 

             68,411

 

             77,732

Other inventories

               7,918

 

               7,892

 

               7,918

 

               7,892

Gross total

            382,994

 

            418,259

 

            415,219

 

            463,089

Estimated losses from impairment or obsolescence

            (32,744)

 

            (50,108)

 

            (34,609)

 

            (52,676)

Total

            350,250

 

            368,151

 

            380,610

 

            410,413


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

 

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

 

 

 

 

 

 

Company

 

Consolidated

Balance at 12/31/15

 

 

 

 

            (48,390)

 

            (52,341)

Increase to estimated losses

 

 

 

 

            (11,582)

 

            (14,874)

Reversal of estimated losses

 

 

 

 

             10,196

 

             15,278

Balance at 09/30/16

 

 

 

 

            (49,776)

 

            (51,937)

Increase to estimated losses

 

 

 

 

            (13,361)

 

            (14,881)

Reversal of estimated losses

 

 

 

 

             13,029

 

             14,142

Balance at 12/31/16

 

 

 

 

            (50,108)

 

            (52,676)

Increase to estimated losses

 

 

 

 

            (16,798)

 

            (20,462)

Reversal of estimated losses

 

 

 

 

             34,162

 

             38,529

Balance at 09/30/17

 

 

 

 

            (32,744)

 

            (34,609)

 

Additions and reversals of estimated impairment losses and inventory obsolescence are included in cost of goods sold (Note 23).

 

6)   DEFERRED TAXES AND TAXES RECOVERABLE

 

a) Taxes recoverable

 

 

Company

 

Consolidated

 

09/30/17

 

12/31/16

 

09/30/17

 

12/31/16

State VAT (ICMS) (1)

         2,377,488

 

         2,317,739

 

         2,388,798

 

         2,329,159

Income and social contribution taxes recoverable (2)

            401,314

 

            829,160

 

            403,477

 

            830,549

Withholding taxes and contributions (3)

            170,290

 

            131,915

 

            198,470

 

            157,371

PIS and COFINS

             67,323

 

            125,273

 

             73,167

 

            148,759

INSS, ISS and other taxes

               8,126

 

             22,775

 

             27,126

 

             38,236

Total

         3,024,541

 

         3,426,862

 

         3,091,038

 

         3,504,074

 

 

 

 

 

 

 

 

Current

         2,599,093

 

         2,952,622

 

         2,662,630

 

         3,027,230

Non-current

            425,448

 

            474,240

 

            428,408

 

            476,844

 

(1) This includes credits arising from the acquisition of property and equipment (subject to offsetting in 48 months); requests for refund of ICMS, which was paid under invoices that were cancelled subsequently; for the rendering of services; tax substitution; and tax rate difference; among others. Non-current consolidated amounts include credits arising from the acquisition of property and equipment of R$383,263 and R$370,770 on September 30, 2017 and December 31, 2016, respectively.

 

(2) This refers to prepayments of income tax and social contribution, which will be offset against federal taxes to be determined in the future.


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
 

(3) This refers to credits on withholding income tax (IRRF) on short-term investments, interest on equity and others, which are used as deductions in operations for the period and social contribution tax withheld at source on services provided to public agencies.

 

b) Deferred taxes

 

Deferred income tax and social contribution assets are computed considering expected generation of taxable profit, which were based on a technical feasibility study, approved by the Board of Directors.  

 

Significant components of deferred income tax and social contribution are as follows:

 

 

Company

 

Balances at 12/31/15

 

Income statement

 

Comprehensive income

 

Merger        (note 1d)

 

Balances at 09/30/16

 

Income statement

 

Comprehensive income

 

Other

 

Balances at 12/31/16

 

Income statement

 

Comprehensive income

 

Balances at 09/30/17

Deferred tax assets  (liabilities)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income and social contribution taxes on tax losses (1)

                     -

 

                         -

 

                           -

 

                       -

 

                     -

 

                1,376

 

                            -

 

                       -

 

              1,376

 

            176,306

 

                            -

 

         177,682

Income and social contribution taxes on temporary differences (2)

     (155,951)

 

          (269,733)

 

                  1,866

 

         705,367

 

       281,549

 

          (447,036)

 

                 76,932

 

            (1,516)

 

          (90,071)

 

          (907,363)

 

                       236

 

        (997,198)

Provisions for legal, labor, tax civil and regulatory contingencies

    1,681,016

 

            191,462

 

                           -

 

         282,751

 

    2,155,229

 

              65,826

 

                            -

 

                       -

 

      2,221,055

 

               (6,770)

 

                            -

 

      2,214,285

Trade accounts payable and other provisions

       535,001

 

              99,932

 

                           -

 

            66,455

 

       701,388

 

            (93,230)

 

                            -

 

                       -

 

         608,158

 

              60,148

 

                            -

 

         668,306

Customer portfolio and trademarks

       256,056

 

            (47,167)

 

                           -

 

         119,695

 

       328,584

 

            (15,493)

 

                            -

 

                       -

 

         313,091

 

            (41,220)

 

                            -

 

         271,871

Estimated losses on impairment of accounts receivable

       369,174

 

              77,798

 

                           -

 

            54,645

 

       501,617

 

          (160,082)

 

                            -

 

                       -

 

         341,535

 

              58,424

 

                            -

 

         399,959

Estimated losses from modems and other P&E items

       170,132

 

               (2,966)

 

                           -

 

         122,696

 

       289,862

 

               (7,595)

 

                            -

 

                       -

 

         282,267

 

            (73,195)

 

                            -

 

         209,072

Pension plans and other post-employment benefits

         26,164

 

                4,284

 

                           -

 

                       -

 

         30,448

 

               (2,504)

 

                 80,459

 

                       -

 

         108,403

 

              10,407

 

                            -

 

         118,810

Profit sharing

         88,944

 

               (3,312)

 

                           -

 

              3,963

 

         89,595

 

              34,316

 

                            -

 

                       -

 

         123,911

 

            (33,565)

 

                            -

 

            90,346

Provision for loyalty program

         32,604

 

            (13,331)

 

                           -

 

                       -

 

         19,273

 

                  (161)

 

                            -

 

                       -

 

            19,112

 

                3,850

 

                            -

 

            22,962

Accelerated accounting depreciation

         10,865

 

               (2,021)

 

                           -

 

                       -

 

            8,844

 

              15,189

 

                            -

 

                       -

 

            24,033

 

                    (74)

 

                            -

 

            23,959

Estimated impairment losses on inventories

            9,364

 

            (13,200)

 

                           -

 

            13,620

 

            9,784

 

                1,443

 

                            -

 

                       -

 

            11,227

 

               (2,674)

 

                            -

 

              8,553

Derivative transactions

         47,911

 

              37,758

 

                  1,958

 

            10,523

 

         98,150

 

            (34,867)

 

                  (3,591)

 

                       -

 

            59,692

 

                5,679

 

                       372

 

            65,743

Licenses

  (1,204,226)

 

          (162,247)

 

                           -

 

                       -

 

  (1,366,473)

 

            (54,083)

 

                            -

 

                       -

 

    (1,420,556)

 

          (162,247)

 

                            -

 

    (1,582,803)

Effects of goodwill generated in the merger of Vivo Part.

     (809,600)

 

            (45,726)

 

                           -

 

                       -

 

     (855,326)

 

               (8,994)

 

                            -

 

                       -

 

        (864,320)

 

               (5,461)

 

                            -

 

        (869,781)

Goodwill from Spanish and Navytree

     (337,535)

 

                         -

 

                           -

 

                       -

 

     (337,535)

 

                         -

 

                            -

 

                       -

 

        (337,535)

 

                         -

 

                            -

 

        (337,535)

Goodwill from Vivo Part.

     (837,918)

 

          (125,403)

 

                           -

 

                       -

 

     (963,321)

 

            (41,799)

 

                            -

 

                       -

 

    (1,005,120)

 

          (125,402)

 

                            -

 

    (1,130,522)

Goodwill from GVT Part.

                     -

 

          (348,152)

 

                           -

 

                       -

 

     (348,152)

 

          (174,076)

 

                            -

 

                       -

 

        (522,228)

 

          (522,228)

 

                            -

 

    (1,044,456)

Technological Innovation Law

     (193,146)

 

              44,854

 

                           -

 

                       -

 

     (148,292)

 

                7,352

 

                            -

 

                       -

 

        (140,940)

 

              30,612

 

                            -

 

        (110,328)

Income and social contribution taxes on other temporary differences (3)

             (757)

 

              37,704

 

                      (92)

 

            31,019

 

         67,874

 

              21,722

 

                         64

 

            (1,516)

 

            88,144

 

          (103,647)

 

                     (136)

 

          (15,639)

Total

     (155,951)

 

          (269,733)

 

                  1,866

 

         705,367

 

       281,549

 

          (445,660)

 

                 76,932

 

            (1,516)

 

          (88,695)

 

          (731,057)

 

                       236

 

        (819,516)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred tax assets

    3,535,671

 

 

 

 

 

 

 

    4,487,737

 

 

 

 

 

 

 

      4,425,658

 

 

 

 

 

      4,530,418

Deferred tax liabilities

  (3,691,622)

 

 

 

 

 

 

 

  (4,206,188)

 

 

 

 

 

 

 

    (4,514,353)

 

 

 

 

 

    (5,349,934)

Deferred tax assets  (liabilities), net

     (155,951)

 

 

 

 

 

 

 

       281,549

 

 

 

 

 

 

 

          (88,695)

 

 

 

 

 

        (819,516)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Represented in the balance sheet as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Deferred tax assets

                     -

 

 

 

 

 

 

 

       281,549

 

 

 

 

 

 

 

                       -

 

 

 

 

 

                       -

   Deferred tax liabilities

     (155,951)

 

 

 

 

 

 

 

                     -

 

 

 

 

 

 

 

          (88,695)

 

 

 

 

 

        (819,516)

 

 

Consolidated

 

Balances at 12/31/15

 

Income statement

 

Comprehensive income

 

Balances at 09/30/16

 

Income statement

 

Comprehensive income

 

Other

 

Balances at 12/31/16

 

Income statement

 

Comprehensive income

 

Business combination (Note 1e)

 

Other

 

Balances at 09/30/17

Deferred tax assets  (liabilities)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income and social contribution taxes on tax losses (1)

            26,519

 

             (13,382)

 

                            -

 

         13,137

 

                    934

 

                           -

 

                     -

 

         14,071

 

            303,726

 

                           -

 

           69,451

 

                      -

 

       387,248

Income and social contribution taxes on temporary differences (2)

         685,071

 

          (282,707)

 

                   1,866

 

       404,230

 

          (466,262)

 

               76,974

 

          (1,516)

 

         13,426

 

          (904,422)

 

                     236

 

           48,434

 

                 (87)

 

     (842,413)

Provisions for legal, labor, tax civil and regulatory contingencies

      1,954,236

 

            210,433

 

                            -

 

    2,164,669

 

              65,667

 

                           -

 

                     -

 

    2,230,336

 

              32,805

 

                           -

 

                      -

 

                      -

 

    2,263,141

Trade accounts payable and other provisions

         687,124

 

              86,376

 

                            -

 

       773,500

 

            (96,377)

 

                           -

 

                     -

 

       677,123

 

              51,661

 

                           -

 

                      -

 

                      -

 

       728,784

Estimated losses on impairment of accounts receivable

         447,018

 

              82,895

 

                            -

 

       529,913

 

          (171,108)

 

                           -

 

                     -

 

       358,805

 

              64,601

 

                           -

 

                      -

 

                      -

 

       423,406

Customer portfolio and trademarks

         343,107

 

             (14,523)

 

                            -

 

       328,584

 

            (15,492)

 

                           -

 

                     -

 

       313,092

 

            (41,220)

 

                           -

 

                      -

 

                      -

 

       271,872

Estimated losses from modems and other P&E items

         294,945

 

               (2,584)

 

                            -

 

       292,361

 

               (7,684)

 

                           -

 

                     -

 

       284,677

 

            (73,835)

 

                           -

 

                      -

 

                      -

 

       210,842

Pension plans and other post-employment benefits

            26,285

 

                 4,176

 

                            -

 

         30,461

 

               (2,543)

 

               80,501

 

                     -

 

       108,419

 

              10,407

 

                           -

 

                      -

 

                      -

 

       118,826

Profit sharing

         106,198

 

             (15,162)

 

                            -

 

         91,036

 

              34,220

 

                           -

 

                     -

 

       125,256

 

            (32,391)

 

                           -

 

                      -

 

                      -

 

         92,865

Provision for loyalty program

            32,604

 

             (13,331)

 

                            -

 

         19,273

 

                  (161)

 

                           -

 

                     -

 

         19,112

 

                3,850

 

                           -

 

                      -

 

                      -

 

         22,962

Accelerated accounting depreciation

            10,865

 

               (2,021)

 

                            -

 

            8,844

 

              15,189

 

                           -

 

                     -

 

         24,033

 

                    (74)

 

                           -

 

                      -

 

                      -

 

         23,959

Estimated impairment losses on inventories

            10,707

 

                  (188)

 

                            -

 

         10,519

 

                1,580

 

                           -

 

                     -

 

         12,099

 

               (2,914)

 

                           -

 

                      -

 

                      -

 

            9,185

Derivative transactions

            59,408

 

              36,953

 

                   1,958

 

         98,319

 

            (34,595)

 

                (3,591)

 

                     -

 

         60,133

 

                4,418

 

                     372

 

                      -

 

                      -

 

         64,923

Licenses

    (1,204,226)

 

          (162,247)

 

                            -

 

  (1,366,473)

 

            (54,083)

 

                           -

 

                     -

 

  (1,420,556)

 

          (162,247)

 

                           -

 

                      -

 

                      -

 

  (1,582,803)

Effects of goodwill generated in the acquisition of Vivo Part.

        (809,600)

 

             (45,726)

 

                            -

 

     (855,326)

 

               (8,994)

 

                           -

 

                     -

 

     (864,320)

 

               (5,461)

 

                           -

 

                      -

 

                      -

 

     (869,781)

Goodwill from Spanish and Navytree

        (337,535)

 

                          -

 

                            -

 

     (337,535)

 

                         -

 

                           -

 

                     -

 

     (337,535)

 

                         -

 

                           -

 

                      -

 

                      -

 

     (337,535)

Goodwill from Vivo Part.

        (837,918)

 

          (125,403)

 

                            -

 

     (963,321)

 

            (41,799)

 

                           -

 

                     -

 

  (1,005,120)

 

          (125,402)

 

                           -

 

                      -

 

                      -

 

  (1,130,522)

Goodwill from GVTPart.

                       -

 

          (348,152)

 

                            -

 

     (348,152)

 

          (174,076)

 

                           -

 

                     -

 

     (522,228)

 

          (522,228)

 

                           -

 

                      -

 

                      -

 

  (1,044,456)

Technological Innovation Law

        (193,146)

 

              44,854

 

                            -

 

     (148,292)

 

                7,352

 

                           -

 

                     -

 

     (140,940)

 

              30,612

 

                           -

 

                      -

 

                      -

 

     (110,328)

Income and social contribution taxes on other temporary differences (3)

            94,999

 

             (19,057)

 

                       (92)

 

         75,850

 

              16,642

 

                       64

 

          (1,516)

 

         91,040

 

          (137,004)

 

                   (136)

 

           48,434

 

                 (87)

 

            2,247

Total deferred tax assets (liabilities), noncurrent

         711,590

 

          (296,089)

 

                   1,866

 

       417,367

 

          (465,328)

 

               76,974

 

          (1,516)

 

         27,497

 

          (600,696)

 

                     236

 

        117,885

 

                 (87)

 

     (455,165)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred tax assets

      4,153,054

 

 

 

 

 

    4,616,058

 

 

 

 

 

 

 

    4,541,952

 

 

 

 

 

 

 

 

 

    4,894,879

Deferred tax liabilities

    (3,441,464)

 

 

 

 

 

  (4,198,691)

 

 

 

 

 

 

 

  (4,514,455)

 

 

 

 

 

 

 

 

 

  (5,350,044)

Deferred tax assets  (liabilities), net

         711,590

 

 

 

 

 

       417,367

 

 

 

 

 

 

 

         27,497

 

 

 

 

 

 

 

 

 

     (455,165)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Represented in the balance sheet as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Deferred tax assets

         711,590

 

 

 

 

 

       417,367

 

 

 

 

 

 

 

         27,497

 

 

 

 

 

 

 

 

 

       364,351

   Deferred tax liabilities

                       -

 

 

 

 

 

                     -

 

 

 

 

 

 

 

                     -

 

 

 

 

 

 

 

 

 

     (819,516)

 

 


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
 

(1)  This refers to the amounts recorded which, in accordance with Brazilian tax legislation, may be offset to the limit of 30% of the tax bases computed for the following years, with no expiry date. After the acquisition of Terra Networks by TData and based on the commercial and operational synergies resulting from the integration of this operation, a new strategic plan was elaborated for the next 10 years for Terra Networks, where this projection indicated a generation of taxable profits, enough to compensate the temporary differences and tax loss carryforwards in Terra Networks (note 1 e).

 

(2)  This refers to amounts that will be realized upon payment of provisions, effective impairment losses for trade accounts receivable, or realization of inventories, as well as upon reversal of other provisions.

 

(3)  These refer to deferred taxes arising from other temporary differences, such as deferred income, renewal of licenses, subsidy on the sale of mobile phones, among others.

 

At September 30, 2017, deferred tax credits (income tax and social contribution losses) were not recognized in indirect subsidiaries (Innoweb and TGLog) accounting records, in the amount of R$11,588 (R$2,993 at December 31, 2016), as it is not probable that future taxable profits will be available to use them.

 

7)   JUDICIAL DEPOSITS AND GARNISHMENTS

 

In some situations, in connection with a legal requirement or presentation of guarantees, judicial deposits are made to secure the continuance of the claims under discussion. These judicial deposits may be required for claims where the likelihood of loss was analyzed by the Company and its subsidiaries, grounded on the opinion of its legal advisors as a probable, possible or remote loss.

 

 

Company

 

Consolidated

 

09/30/17

 

12/31/16

 

09/30/17

 

12/31/16

Judicial deposits

 

 

 

 

 

 

 

   Tax

         4,017,908

 

         3,698,966

 

         4,172,267

 

         3,758,787

   Labor

            921,322

 

         1,040,635

 

            940,658

 

         1,051,430

   Civil

         1,177,078

 

         1,107,929

 

         1,180,098

 

         1,109,001

   Regulatory

            198,282

 

            276,604

 

            198,282

 

            276,604

Total

         6,314,590

 

         6,124,134

 

         6,491,305

 

         6,195,822

Garnishments

            145,811

 

            152,948

 

            149,102

 

            155,744

Total

         6,460,401

 

         6,277,082

 

         6,640,407

 

         6,351,566

 

 

 

 

 

 

 

 

Current

            305,386

 

            302,349

 

            305,525

 

            302,424

Non-current

         6,155,015

 

         5,974,733

 

         6,334,882

 

         6,049,142

 

The information related to tax-related judicial deposits is the same as in Note 9) Judicial Deposits and Garnishments, as disclosed in the financial statements for the year ended December 31, 2016.

 

On September 30, 2017, the Company and its subsidiaries had several tax-related judicial deposits in the consolidated amount of R$4,172,267 (R$3,758,787 at December 31, 2016). In Note 17, we provide further details on issues arising from the most significant judicial deposits.

 

The table below presents the composition of the balances as of September 30, 2017 and December 31, 2016 of the tax judicial deposits (segregated and summarized by tribute).

 


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
 

 

 

 

 

Consolidated

 

 

 

 

 

09/30/17

 

12/31/16

Contribution to Empresa Brasil de Comunicação (EBC)

 

         1,220,441

 

         1,053,867

Telecommunications Inspection Fund (FISTEL)

 

         1,145,195

 

         1,095,789

Corporate Income Tax (IRPJ) and Social Contribution Tax (CSLL)

 

            512,072

 

            449,988

Universal Telecommunication Services Fund (FUST)

 

            479,964

 

            456,977

Social Contribution Tax for Intervention in the Economic Order (CIDE)

 

            275,027

 

            176,557

State Value-Added Tax (ICMS)

 

            260,056

 

            212,652

Social Security, work accident insurance (SAT) and funds to third parties (INSS)

 

            121,614

 

            128,458

Withholding Income Tax (IRRF)

 

             45,375

 

             73,848

Contribution tax on gross revenue for Social Integration Program (PIS) and for Social Security Financing (COFINS)

 

             28,635

 

             35,570

Other taxes, charges and contributions

 

             83,888

 

             75,081

Total

 

 

 

 

         4,172,267

 

         3,758,787

 

8)   PREPAID EXPENSES

 

 

Company

 

Consolidated

 

09/30/17

 

12/31/16

 

09/30/17

 

12/31/16

Fistel Fee (1)

            267,536

 

                      -

 

            267,536

 

                      -

Advertising and publicity

             90,311

 

            258,212

 

             91,258

 

            258,212

Insurance

             44,383

 

             39,008

 

             44,753

 

             39,558

Rental

             31,302

 

             19,276

 

             31,302

 

             19,276

Software and networks maintenance

             35,348

 

             10,204

 

             37,666

 

             12,283

Taxes, financial charges, personal and other (2)

             65,619

 

             45,148

 

             76,804

 

             50,193

Total

            534,499

 

            371,848

 

            549,319

 

            379,522

 

 

 

 

 

 

 

 

Current

            509,746

 

            336,508

 

            521,540

 

            343,092

Non-current

             24,753

 

             35,340

 

             27,779

 

             36,430

 

(1)    Refers to the remaining portion of the Inspection and Operation Fee amounts paid in March 2017, based on the 2016 fiscal year, which will be amortized to the result until the end of the year.

 

(2)    At September 30, 2017, the consolidated amount includes R$29,021 related to IPTU and the renewal of SMP and STFC licenses, which will be amortized to the result until the end of the year.

 

9)   OTHER ASSETS

 

 

Company

 

Consolidated

 

09/30/17

 

12/31/16

 

09/30/17

 

12/31/16

Advances to employees and suppliers

             98,996

 

             81,325

 

            101,008

 

             83,634

Related-party receivables (Note 27)

            347,243

 

            311,633

 

            150,246

 

            250,679

Receivables from suppliers

            112,176

 

             96,065

 

            112,732

 

             99,166

Subsidy on handset sales

             15,742

 

             30,491

 

             15,742

 

             30,491

Surplus from post-employment benefit plans (Note 29)

               9,441

 

               8,838

 

               9,672

 

               9,041

Other amounts receivable

             39,738

 

             20,391

 

             48,808

 

             22,649

Total

            623,336

 

            548,743

 

            438,208

 

            495,660

 

 

 

 

 

 

 

 

Current

            544,090

 

            495,380

 

            356,346

 

            440,095

Non-current

             79,246

 

             53,363

 

             81,862

 

             55,565

 

 


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 

10) INVESTMENTS

 

a)   Information on investees

 

The information related to subsidiaries and jointly-controlled entities is the same as in Note 12) Investments, as disclosed in the financial statements for the year ended December 31, 2016.

 

Below is a summary of significant financial data on the Company's investees:

 

 

At 09/30/17

 

At 12/31/16

 

Consolidated wholly-owned subsidiaries

 

Jointly-controlled subsidiaries

 

Consolidated wholly-owned subsidiaries

 

Jointly-controlled subsidiaries

 

TData

 

POP

 

Cia ACT

 

Cia AIX

 

Aliança

 

TData

 

POP

 

Cia ACT

 

Cia AIX

 

Aliança

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital

100.00%

 

100.00%

 

50.00%

 

50.00%

 

50.00%

 

100.00%

 

100.00%

 

50.00%

 

50.00%

 

50.00%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Summary of balance sheets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

    2,076,464

 

        32,145

 

              16

 

        24,083

 

      158,083

 

    1,414,039

 

        27,407

 

              15

 

        20,337

 

      145,121

Non-current assets

      703,483

 

        52,396

 

                 -

 

        11,686

 

                 -

 

      362,195

 

        52,016

 

                 -

 

        12,879

 

                 -

Total assets

    2,779,947

 

        84,541

 

              16

 

        35,769

 

      158,083

 

    1,776,234

 

        79,423

 

              15

 

        33,216

 

      145,121

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

      892,045

 

        47,918

 

                2

 

          4,554

 

              73

 

      633,631

 

        49,535

 

                1

 

          4,029

 

             101

Non-current liabilities

      180,984

 

              27

 

                 -

 

          4,723

 

                 -

 

        63,139

 

                 -

 

                 -

 

          5,415

 

                 -

Equity

    1,706,918

 

        36,596

 

              14

 

        26,492

 

      158,010

 

    1,079,464

 

        29,888

 

              14

 

        23,772

 

      145,020

Total liabilities and equity

    2,779,947

 

        84,541

 

              16

 

        35,769

 

      158,083

 

    1,776,234

 

        79,423

 

              15

 

        33,216

 

      145,121

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment Book value

    1,706,918

 

        36,596

 

                7

 

        13,246

 

        79,005

 

    1,079,464

 

        29,888

 

                7

 

        11,886

 

        72,510

 

 

At 09/30/17

 

At 09/30/16

 

Consolidated wholly-owned subsidiaries

Jointly-controlled subsidiaries

 

Consolidated wholly-owned subsidiaries

 

Jointly-controlled subsidiaries

Summary of Income Statements:

TData

 

POP

 

Cia ACT

 

Cia AIX

 

Aliança

 

TData

 

POP (2)

 

GVTPart. (1)

 

Cia ACT

 

Cia AIX

 

Aliança

Net operating income

2,515,027

 

22,014

 

62

 

        34,146

 

                 -

 

    1,866,828

 

        24,485

 

    1,531,692

 

              59

 

        31,778

 

                 -

Operating costs and expenses

   (1,160,069)

 

       (12,236)

 

             (62)

 

       (31,886)

 

             (14)

 

   (1,091,086)

 

       (14,689)

 

   (1,300,347)

 

             (54)

 

       (30,597)

 

            (128)

Financial income (expenses), net

        67,862

 

          1,127

 

                 -

 

          1,019

 

              18

 

        63,800

 

          1,753

 

       (41,146)

 

                 -

 

          1,237

 

              38

Income and social contribution taxes

     (351,749)

 

         (4,197)

 

                 -

 

            (559)

 

                 -

 

     (288,651)

 

         (4,867)

 

       (57,958)

 

               (1)

 

            (338)

 

                 -

Net income (loss) for the period

    1,071,071

 

          6,708

 

                 -

 

          2,720

 

                4

 

      550,891

 

          6,682

 

      132,241

 

                4

 

          2,080

 

             (90)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity pickup, according to interest held

    1,071,071

 

          6,708

 

                 -

 

          1,360

 

                2

 

      550,891

 

          6,682

 

      132,241

 

                2

 

          1,040

 

             (45)

 

(1)  Includes the consolidated results of GVTPart. for the period from 01/01 to 03/31/16.

 

(2)  Includes the consolidated result of POP for the period from 04/01 to 06/30/16. Until 03/31/16, POP was indirectly controlled by GVTPart.

 

b)   Changes in investments 

 

 

Consolidated wholly-owned subsidiaries

 

Jointly-controlled subsidiaries

 

 

 

 

 

 

 

 

 

 

 

 

 

   TData

 

   POP

 

   GVTPart.

 

Aliança

 

AIX

 

ACT

 

Goodwill (1)

 

Surplus value of net assets acquired (note 1c)

 

   Other investments (2)

 

Total investments - Company

 

Eliminations

 

Total  investments - Consolidated

Balances at 12/31/15

        1,056,305

 

                         -

 

        7,674,444

 

            89,799

 

              10,099

 

                      4

 

       13,049,199

 

      2,461,583

 

              1,259

 

     24,342,692

 

  (24,241,531)

 

           101,161

Equity pick-up

            550,891

 

                6,682

 

            132,241

 

                  (45)

 

                1,040

 

                      2

 

                          -

 

          (67,641)

 

                       -

 

           623,170

 

        (622,173)

 

                   997

Merger (nota 1d)

                         -

 

              22,590

 

       (7,806,685)

 

                       -

 

                         -

 

                       -

 

     (12,837,141)

 

    (2,393,942)

 

                       -

 

   (23,015,178)

 

    23,015,178

 

                         -

Dividends and interest on equity

          (749,395)

 

                         -

 

                         -

 

                       -

 

                    489

 

                       -

 

                          -

 

                       -

 

                       -

 

         (748,906)

 

         749,395

 

                   489

Other comprehensive  income

                         -

 

                         -

 

                         -

 

          (13,250)

 

                         -

 

                       -

 

                          -

 

                       -

 

                 270

 

           (12,980)

 

                       -

 

            (12,980)

Balances at 09/30/16

            857,801

 

              29,272

 

                         -

 

            76,504

 

              11,628

 

                      6

 

            212,058

 

                       -

 

              1,529

 

       1,188,798

 

    (1,099,131)

 

             89,667

Equity pick-up

            221,743

 

                    616

 

                         -

 

                  (12)

 

                    258

 

                      1

 

                          -

 

                       -

 

                       -

 

           222,606

 

        (222,359)

 

                   247

Other comprehensive  income

                    (80)

 

                         -

 

                         -

 

            (3,982)

 

                         -

 

                       -

 

                          -

 

                       -

 

                (187)

 

              (4,249)

 

                    80

 

              (4,169)

Balances at 12/31/16

        1,079,464

 

              29,888

 

                         -

 

            72,510

 

              11,886

 

                      7

 

            212,058

 

                       -

 

              1,342

 

       1,407,155

 

    (1,321,410)

 

             85,745

Equity pick-up

        1,071,071

 

                6,708

 

                         -

 

                      2

 

                1,360

 

                       -

 

                          -

 

                       -

 

                       -

 

       1,079,141

 

    (1,077,779)

 

                1,362

Dividends and interest on equity

          (384,588)

 

                         -

 

                         -

 

                       -

 

                         -

 

                       -

 

                          -

 

                       -

 

                       -

 

         (384,588)

 

         384,588

 

                         -

Effects of the acquisition of Terra Networks Brasil by TData (note 1e)

            (59,029)

 

                         -

 

                         -

 

                       -

 

                         -

 

                       -

 

                          -

 

                       -

 

                       -

 

           (59,029)

 

            59,029

 

                         -

Other comprehensive  income

                         -

 

                         -

 

                         -

 

              6,493

 

                         -

 

                       -

 

                          -

 

                       -

 

                 400

 

               6,893

 

                       -

 

                6,893

Balances at 09/30/17

        1,706,918

 

              36,596

 

                         -

 

            79,005

 

              13,246

 

                      7

 

            212,058

 

                       -

 

              1,742

 

       2,049,572

 

    (1,955,572)

 

             94,000

 

(1)  Goodwill: (i) R$212,058 from partial spin-off of "Spanish and Figueira", which was reversed to the Company upon merger with Telefônica Data Brasil Holding S.A. (TDBH) in 2006; and (ii) R$12,837,141 originated from the acquisition of GVTPart. in 2015 (Note 1c).

 

(2)  Other investments (tax incentives and interest held in companies) are measured at fair value.


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
 

11)  PROPERTY, PLANT AND EQUIPMENT, NET

 

a) Breakdown and changes

 

 

 

Company

 

   Switching equipment

 

    Transmission equipment and media

 

    Terminal equipment / modems

 

   Infrastructure

 

   Land

 

   Other P&E

 

Estimated losses (1)

 

   Assets and facilities under construction

 

Total

Balances and changes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Balance at 12/31/15

     2,796,041

 

      11,680,029

 

        1,530,793

 

        3,371,532

 

            313,105

 

            711,085

 

          (155,277)

 

        1,771,768

 

      22,019,076

   Additions

             1,364

 

            224,862

 

              63,341

 

              42,062

 

                         -

 

            182,511

 

            (11,359)

 

        3,519,072

 

        4,021,853

   Write-offs, net (2)

            (1,159)

 

            (14,060)

 

                  (213)

 

            (98,700)

 

                  (201)

 

                  (391)

 

                2,994

 

            (19,141)

 

          (130,871)

   Net transfers

         473,263

 

        1,837,554

 

            525,172

 

            283,949

 

                         -

 

            (44,578)

 

                       (2)

 

       (3,133,071)

 

            (57,713)

   Depreciation (Note 23)

       (462,401)

 

       (1,577,051)

 

          (929,502)

 

          (377,717)

 

                         -

 

          (208,052)

 

                         -

 

                         -

 

       (3,554,723)

   Merger (Note 1d)

     1,039,161

 

        5,269,872

 

        1,572,567

 

            428,622

 

                2,601

 

            159,039

 

          (331,956)

 

            221,157

 

        8,361,063

   Balance at 09/30/16

     3,846,269

 

      17,421,206

 

        2,762,158

 

        3,649,748

 

            315,505

 

            799,614

 

          (495,600)

 

        2,359,785

 

      30,658,685

   Additions

                      -

 

            129,065

 

              25,312

 

            115,039

 

                    215

 

            121,665

 

               (8,499)

 

        2,002,114

 

        2,384,911

   Write-offs, net

                      -

 

               (5,228)

 

                  (254)

 

                  (179)

 

                       (1)

 

                  (360)

 

              18,714

 

            (17,347)

 

               (4,655)

   Net transfers

         169,891

 

        1,212,633

 

            168,195

 

              77,956

 

                         -

 

                6,340

 

                       (1)

 

       (1,643,682)

 

               (8,668)

   Depreciation

         (63,677)

 

          (478,534)

 

          (374,232)

 

          (127,070)

 

                         -

 

          (149,211)

 

                         -

 

                         -

 

       (1,192,724)

   Balance at 12/31/16

     3,952,483

 

      18,279,142

 

        2,581,179

 

        3,715,494

 

            315,719

 

            778,048

 

          (485,386)

 

        2,700,870

 

      31,837,549

   Additions

                      -

 

              26,974

 

              93,740

 

              59,964

 

                    550

 

            157,492

 

            (30,317)

 

        4,141,241

 

        4,449,644

   Write-offs, net

               (569)

 

            (71,400)

 

               (5,740)

 

               (6,481)

 

               (1,914)

 

               (1,842)

 

              63,880

 

            (12,832)

 

            (36,898)

   Net transfers

         633,700

 

        1,898,412

 

        1,003,391

 

            398,917

 

                         -

 

                3,834

 

            132,579

 

       (4,063,776)

 

                7,057

   Depreciation (Note 23)

       (438,869)

 

       (1,792,921)

 

       (1,049,402)

 

          (407,043)

 

                         -

 

          (236,992)

 

                         -

 

                         -

 

       (3,925,227)

   Balance at 09/30/17

     4,146,745

 

      18,340,207

 

        2,623,168

 

        3,760,851

 

            314,355

 

            700,540

 

          (319,244)

 

        2,765,503

 

      32,332,125

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 12/31/16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Cost

   20,051,571

 

      50,730,016

 

      15,246,317

 

      14,944,006

 

            315,719

 

        4,181,817

 

          (485,386)

 

        2,700,870

 

    107,684,930

   Accumulated depreciation

 (16,099,088)

 

    (32,450,874)

 

    (12,665,138)

 

    (11,228,512)

 

                         -

 

       (3,403,769)

 

                         -

 

                         -

 

    (75,847,381)

   Total

     3,952,483

 

      18,279,142

 

        2,581,179

 

        3,715,494

 

            315,719

 

            778,048

 

          (485,386)

 

        2,700,870

 

      31,837,549

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 09/30/17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Cost

   20,706,517

 

      52,370,887

 

      16,324,100

 

      15,377,759

 

            314,355

 

        4,327,198

 

          (319,244)

 

        2,765,503

 

    111,867,075

   Accumulated depreciation

(16,559,772)

 

(34,030,680)

 

    (13,700,932)

 

    (11,616,908)

 

                         -

 

       (3,626,658)

 

                         -

 

                         -

 

    (79,534,950)

   Total

     4,146,745

 

      18,340,207

 

        2,623,168

 

        3,760,851

 

            314,355

 

            700,540

 

          (319,244)

 

        2,765,503

 

      32,332,125

 

 


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
 
 

 

Consolidated

 

   Switching equipment

 

    Transmission equipment and media

 

    Terminal equipment / modems

 

   Infrastructure

 

   Land

 

   Other P&E

 

Estimated losses (1)

 

   Assets and facilities under construction

 

Total

Balances and changes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Balance at 12/31/15

     3,958,959

 

      16,977,004

 

        3,146,109

 

        3,655,951

 

            315,705

 

        1,066,452

 

          (494,149)

 

        1,850,734

 

      30,476,765

   Additions

           16,135

 

            489,397

 

            178,309

 

              43,680

 

                         -

 

            156,777

 

            (11,459)

 

        3,523,653

 

        4,396,492

   Write-offs, net (2)

            (2,793)

 

            (16,216)

 

                  (562)

 

            (99,258)

 

                  (201)

 

                3,417

 

                9,855

 

            (21,612)

 

          (127,370)

   Net transfers

         392,186

 

        1,698,621

 

            509,378

 

            446,462

 

                         -

 

          (166,358)

 

                       (2)

 

       (2,981,460)

 

          (101,173)

   Depreciation (Note 23)

       (518,084)

 

       (1,727,495)

 

       (1,062,965)

 

          (386,563)

 

                         -

 

          (227,170)

 

                         -

 

                         -

 

       (3,922,277)

   Balance at 09/30/16

     3,846,403

 

      17,421,311

 

        2,770,269

 

        3,660,272

 

            315,504

 

            833,118

 

          (495,755)

 

        2,371,315

 

      30,722,437

   Additions

                   38

 

            129,065

 

              25,466

 

            115,401

 

                    215

 

            131,889

 

               (8,503)

 

        2,019,745

 

        2,413,316

   Write-offs, net

                      -

 

               (5,227)

 

                  (254)

 

                  (179)

 

                         -

 

                  (358)

 

              18,684

 

            (17,347)

 

               (4,681)

   Net transfers

         169,892

 

        1,212,633

 

            168,194

 

              77,533

 

                         -

 

                6,656

 

                       (1)

 

       (1,643,683)

 

               (8,776)

   Depreciation

         (63,693)

 

          (478,548)

 

          (375,368)

 

          (127,820)

 

                         -

 

          (151,949)

 

                         -

 

                         -

 

       (1,197,378)

   Balance at 12/31/16

     3,952,640

 

      18,279,234

 

        2,588,307

 

        3,725,207

 

            315,719

 

            819,356

 

          (485,575)

 

        2,730,030

 

      31,924,918

   Additions

                      -

 

              26,974

 

              93,740

 

              59,964

 

                    550

 

            168,027

 

            (30,399)

 

        4,141,825

 

        4,460,681

   Write-offs, net

               (569)

 

            (71,400)

 

               (5,740)

 

               (6,757)

 

               (1,914)

 

               (1,793)

 

              63,961

 

            (13,386)

 

            (37,598)

   Net transfers

         633,700

 

        1,898,412

 

        1,003,391

 

            398,917

 

                         -

 

              22,470

 

            132,579

 

       (4,082,412)

 

                7,057

   Depreciation (Note 23)

       (438,915)

 

       (1,792,961)

 

       (1,051,483)

 

          (409,354)

 

                         -

 

          (252,353)

 

                         -

 

                         -

 

       (3,945,066)

   Business combination (Note 1e)

                      -

 

                         -

 

                         -

 

                1,342

 

                         -

 

                4,888

 

                         -

 

                    817

 

                7,047

   Balance at 09/30/17

     4,146,856

 

      18,340,259

 

        2,628,215

 

        3,769,319

 

            314,355

 

            760,595

 

          (319,434)

 

        2,776,874

 

      32,417,039

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 12.31.16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Cost

   20,058,838

 

      50,730,696

 

      15,294,619

 

      15,023,890

 

            315,719

 

        4,308,718

 

          (485,575)

 

        2,730,030

 

    107,976,935

   Accumulated depreciation

 (16,106,198)

 

    (32,451,462)

 

    (12,706,312)

 

    (11,298,683)

 

                         -

 

       (3,489,362)

 

                         -

 

                         -

 

    (76,052,017)

   Total

     3,952,640

 

      18,279,234

 

        2,588,307

 

        3,725,207

 

            315,719

 

            819,356

 

          (485,575)

 

        2,730,030

 

      31,924,918

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 09/30/17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Cost

   20,713,784

 

      52,371,567

 

      16,372,399

 

      15,478,183

 

            314,355

 

        4,599,547

 

          (319,434)

 

        2,776,874

 

    112,307,275

   Accumulated depreciation

 (16,566,928)

 

    (34,031,308)

 

    (13,744,184)

 

    (11,708,864)

 

                         -

 

       (3,838,952)

 

                         -

 

                         -

 

    (79,890,236)

   Total

     4,146,856

 

      18,340,259

 

        2,628,215

 

        3,769,319

 

            314,355

 

            760,595

 

          (319,434)

 

        2,776,874

 

      32,417,039

 

(1)  The Company and its subsidiaries recognized estimated losses for potential obsolescence of materials used in property and equipment maintenance, based on levels of historical use and expected future use.

 

(2)  Net write-offs regarding "Infrastructure and Assets and Facilities under Construction" for the period ended September 30, 2016, include the amount of R$99,210 regarding the disposal of 1,655 towers owned by the Company to Telxius Torres Brasil Ltda., a Telefónica subsidiary.

 

b) Depreciation rates

 

In the last quarter of 2016, in accordance with IAS 16 / CPC 27, the Company performed, in conjunction with a specialized company, valuations of useful lives applied to its property, plant and equipment using the direct comparative method of market data. The studies indicated the need for changes in useful life and annual depreciation rates for some items of asset classes.

 

The following table sets forth the depreciation rates of property, plant and equipment of the Company and its subsidiaries, which are depreciated on a straight-line basis at the annual rate, as follows:

 

 

 

Annual depreciation rate (%)

 

 

Company

 

Consolidated

Description

 

Previous

 

Revised  / Current

 

Previous

 

Revised  / Current

Switching equipment

 

10.00 to 14.29

 

5.00 to 14.29

 

8.33 to 20.00

 

5.00 to 20.00

Transmission equipment and media

 

5.00 to 14.29

 

2.50 to 25.00

 

2.50 to 25.00

 

2.50 to 25.00

Terminal equipment / modems

 

10.00 to 66.67

 

6.67 to 66.67

 

10.00 to 66.67

 

6.67 to 66.67

Infrastructure

 

2.50 to 66.67

 

2.50 to 66.67

 

2.50 to 66.67

 

2.50 to 66.67

Other P&E assets

 

10.00 to 25.00

 

10.00 to 25.00

 

10.00 to 66.67

 

10.00 to 25.00

 

 

 


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
 

c) Property and equipment items pledged in guarantee

 

At September 30, 2017, the Company had consolidated amounts of property and equipment items pledged in guarantee for lawsuits, amounting to R$174,803 (R$203,600 at December 31, 2016).

 

d) Capitalization of borrowing costs

 

At September 30, 2017 and December 31, 2016, the Company and its subsidiaries did not capitalize borrowing costs, as there were no qualifying assets.

 

e) Reversible assets

 

The STFC service concession arrangement establishes that all assets owned by the Company and that are indispensable to the provision of the services described in the referred to arrangement are considered “reversible” (returnable to the concession authority). At September 30, 2017, estimated residual value of reversible assets was R$8,770,432 (R$8,813,916 at December 31, 2016), which comprised switching and transmission equipment and public use terminals, external network equipment, energy, system and operational support equipment.

 

f) Finance leases

 

Below are the amounts related to finance lease arrangements, in which the Company is a lessee, segregated by type of property and equipment item.

 

 

 

 

Consolidated

 

 

 

09.30.17

 

12.31.16

 

Annual depreciation rates (%)

 

P&E Cost

 

Accumulated
depreciation

 

Net balance

 

P&E Cost

 

Accumulated
depreciation

 

Net balance

Transmission equipment and media

5.00% to 8.33%

 

        252,233

 

         (48,760)

 

        203,473

 

        223,360

 

         (34,203)

 

        189,157

Infrastructure

4.00%

 

          72,253

 

         (12,131)

 

          60,122

 

          67,386

 

           (8,822)

 

          58,564

Other assets

20.00%

 

        116,945

 

         (96,332)

 

          20,613

 

        145,818

 

         (94,935)

 

          50,883

Total

 

 

        441,431

 

       (157,223)

 

        284,208

 

        436,564

 

       (137,960)

 

        298,604

 

 

 


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 

 

12) INTANGIBLE ASSETS, NET

 

a) Breakdown, changes and amortization rates

 

 

 

Company

 

Indefinite useful life

 

Finite useful life

 

 

 

Goodwill

 

Software

 

Customer portfolio

 

Trademarks

 

Licenses

 

   Other intangible assets

 

Estimated losses for software

 

Software under development

 

Total

Annual amortization rate (%)

-

 

20.00

 

11.76

 

5.13

 

3.60 to 6.67

 

20.00

 

-

 

-

 

-

Balances and changes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Balance at 12/31/15

 10,013,222

 

        2,162,935

 

            861,310

 

        1,242,025

 

      15,635,082

 

                6,495

 

                         -

 

              76,471

 

      29,997,540

   Additions

                     -

 

            382,878

 

                         -

 

                         -

 

            185,450

 

              11,213

 

                         -

 

            374,554

 

            954,095

   Write-offs, net

                     -

 

               (4,555)

 

                         -

 

                         -

 

                         -

 

                         -

 

                         -

 

                         -

 

               (4,555)

   Net transfers

                     -

 

            469,583

 

                         -

 

                         -

 

                         -

 

            (17,110)

 

                         -

 

          (394,242)

 

              58,231

   Amortization (Note 23)

                     -

 

          (672,441)

 

          (358,782)

 

            (82,820)

 

          (690,473)

 

               (4,367)

 

                         -

 

                         -

 

       (1,808,883)

   Merger (Note 1d)

 12,837,141

 

            219,856

 

        2,207,012

 

              22,944

 

                         -

 

              56,368

 

                         -

 

                         -

 

      15,343,321

   Balance at 09/30/16

 22,850,363

 

        2,558,256

 

        2,709,540

 

        1,182,149

 

      15,130,059

 

              52,599

 

                         -

 

              56,783

 

      44,539,749

   Additions

                     -

 

            232,584

 

                         -

 

                         -

 

                         -

 

                    602

 

               (4,550)

 

            145,009

 

            373,645

   Write-offs, net

                     -

 

                4,552

 

                         -

 

                         -

 

                         -

 

                         -

 

                         -

 

                         -

 

                4,552

   Net transfers

                     -

 

            147,649

 

                         -

 

                         -

 

                         -

 

                  (583)

 

                    (31)

 

          (138,367)

 

                8,668

   Amortization

                     -

 

          (249,834)

 

          (148,320)

 

            (24,329)

 

          (232,091)

 

               (1,920)

 

                         -

 

                         -

 

          (656,494)

   Balance at 12/31/16

 22,850,363

 

        2,693,207

 

        2,561,220

 

        1,157,820

 

      14,897,968

 

              50,698

 

               (4,581)

 

              63,425

 

      44,270,120

   Additions

                     -

 

            186,591

 

                         -

 

                         -

 

                         -

 

                    179

 

                         -

 

            655,012

 

            841,782

   Write-offs, net

                     -

 

               (7,428)

 

                         -

 

                         -

 

                         -

 

                         -

 

                4,052

 

                         -

 

               (3,376)

   Net transfers

                     -

 

            454,824

 

                         -

 

                         -

 

                         -

 

            (24,265)

 

                      31

 

          (437,647)

 

               (7,057)

   Amortization (Note 23)

                     -

 

          (709,686)

 

          (444,960)

 

            (63,154)

 

          (696,272)

 

               (4,364)

 

                         -

 

                         -

 

       (1,918,436)

   Balance at 09/30/17

 22,850,363

 

        2,617,508

 

        2,116,260

 

        1,094,666

 

      14,201,696

 

              22,248

 

                  (498)

 

            280,790

 

      43,183,033

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 12/31/16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Cost

 22,850,363

 

      14,019,938

 

        4,513,278

 

        1,658,897

 

      20,237,572

 

            267,065

 

               (4,581)

 

              63,425

 

      63,605,957

   Accumulated amortization

                     -

 

    (11,326,731)

 

       (1,952,058)

 

          (501,077)

 

       (5,339,604)

 

          (216,367)

 

                         -

 

                         -

 

    (19,335,837)

   Total

 22,850,363

 

        2,693,207

 

        2,561,220

 

        1,157,820

 

      14,897,968

 

              50,698

 

               (4,581)

 

              63,425

 

      44,270,120

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 09/30/17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Cost

 22,850,363

 

      14,646,019

 

        4,513,278

 

        1,658,897

 

      20,237,572

 

            238,197

 

                  (498)

 

            280,790

 

      64,424,618

   Accumulated amortization

                     -

 

    (12,028,511)

 

       (2,397,018)

 

          (564,231)

 

       (6,035,876)

 

          (215,949)

 

                         -

 

                         -

 

    (21,241,585)

   Total

 22,850,363

 

        2,617,508

 

        2,116,260

 

        1,094,666

 

      14,201,696

 

              22,248

 

                  (498)

 

            280,790

 

      43,183,033

 

 


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
 

 

 

Consolidated

 

Indefinite useful life

 

Finite useful life

 

 

 

Goodwill

 

Software

 

Customer portfolio

 

Trademarks

 

Licenses

 

   Other intangible assets

 

Estimated losses for software

 

Software under development

 

Total

Annual amortization rate (%)

-

 

6.67 to 50.00

 

11.76 to 12.85

 

5.13 to 66.67

 

3.60 to 6.67

 

20.00

 

-

 

-

 

-

Balances and changes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Balance at 12/31/15

 23,062,421

 

        2,385,723

 

        3,154,501

 

        1,274,803

 

      15,635,082

 

              18,190

 

                         -

 

              76,471

 

      45,607,191

   Additions

                     -

 

            401,821

 

                         -

 

                         -

 

            185,450

 

              19,194

 

                         -

 

            374,554

 

            981,019

   Write-offs, net

                     -

 

               (4,558)

 

                         -

 

                         -

 

                         -

 

                    (15)

 

                         -

 

                         -

 

               (4,573)

   Net transfers

                     -

 

            468,721

 

                         -

 

                         -

 

                         -

 

              19,791

 

                         -

 

          (394,242)

 

              94,270

   Amortization (Note 23)

                     -

 

          (691,984)

 

          (444,961)

 

            (92,654)

 

          (690,473)

 

               (4,558)

 

                         -

 

                         -

 

       (1,924,630)

   Balance at 09/30/16

 23,062,421

 

        2,559,723

 

        2,709,540

 

        1,182,149

 

      15,130,059

 

              52,602

 

                         -

 

              56,783

 

      44,753,277

   Additions

                     -

 

            232,707

 

                         -

 

                         -

 

                         -

 

                    602

 

               (4,550)

 

            145,009

 

            373,768

   Write-offs, net

                     -

 

                4,582

 

                         -

 

                         -

 

                         -

 

                        4

 

                    (31)

 

                         -

 

                4,555

   Net transfers

                     -

 

            147,615

 

                         -

 

                         -

 

                         -

 

                  (584)

 

                         -

 

          (138,367)

 

                8,664

   Amortization

                     -

 

          (250,106)

 

          (148,320)

 

            (24,329)

 

          (232,091)

 

               (1,922)

 

                         -

 

                         -

 

          (656,768)

   Balance at 12/31/16

 23,062,421

 

        2,694,521

 

        2,561,220

 

        1,157,820

 

      14,897,968

 

              50,702

 

               (4,581)

 

              63,425

 

      44,483,496

   Additions

                     -

 

            187,368

 

                         -

 

                         -

 

                         -

 

                    179

 

                         -

 

            655,012

 

            842,559

   Write-offs, net

                     -

 

               (7,428)

 

                         -

 

                         -

 

                         -

 

                         -

 

                4,052

 

                         -

 

               (3,376)

   Net transfers

                     -

 

            454,824

 

                         -

 

                         -

 

                         -

 

            (24,265)

 

                      31

 

          (437,647)

 

               (7,057)

   Amortization (Note 23)

                     -

 

          (710,256)

 

          (444,960)

 

            (63,154)

 

          (696,272)

 

               (4,367)

 

                         -

 

                         -

 

       (1,919,009)

   Business combination (Note 1e)

                     -

 

                    530

 

                         -

 

                         -

 

                         -

 

                         -

 

                         -

 

                         -

 

                    530

   Balance at 09/30/17

 23,062,421

 

        2,619,559

 

        2,116,260

 

        1,094,666

 

      14,201,696

 

              22,249

 

                  (498)

 

            280,790

 

      43,397,143

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 12/31/16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Cost

 23,062,421

 

      14,062,127

 

        4,513,278

 

        1,658,897

 

      20,237,572

 

            267,074

 

               (4,581)

 

              63,425

 

      63,860,213

   Accumulated amortization

                     -

 

    (11,367,606)

 

       (1,952,058)

 

          (501,077)

 

       (5,339,604)

 

          (216,372)

 

                         -

 

                         -

 

    (19,376,717)

   Total

 23,062,421

 

        2,694,521

 

        2,561,220

 

        1,157,820

 

      14,897,968

 

              50,702

 

               (4,581)

 

              63,425

 

      44,483,496

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 09/30/17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Cost

 23,062,421

 

      14,789,955

 

        4,513,278

 

        1,658,897

 

      20,237,572

 

            238,204

 

                  (498)

 

            280,790

 

      64,780,619

   Accumulated amortization

                     -

 

    (12,170,396)

 

       (2,397,018)

 

          (564,231)

 

       (6,035,876)

 

          (215,955)

 

                         -

 

                         -

 

    (21,383,476)

   Total

 23,062,421

 

        2,619,559

 

        2,116,260

 

        1,094,666

 

      14,201,696

 

              22,249

 

                  (498)

 

            280,790

 

      43,397,143

 

b) Goodwill breakdown

 

 

 

 

 

 

At 09/30/17 and 12/31/16

 

 

 

 

 

Company

 

Consolidated

Ajato Telecomunicação Ltda.

 

 

 

 

                  149

 

                  149

Spanish e Figueira (merged with TDBH) (1)

 

 

 

 

                      -

 

            212,058

Santo Genovese Participações Ltda. (2)

 

 

 

 

             71,892

 

             71,892

Telefônica Televisão Participações S.A. (3)

 

 

 

 

            780,693

 

            780,693

Vivo Participações S. A. (4)

 

 

 

 

         9,160,488

 

         9,160,488

GVT Participações S. A. (5)

 

 

 

 

       12,837,141

 

       12,837,141

Total

 

 

 

 

       22,850,363

 

       23,062,421

 

(1) Goodwill from partial spin-off of "Spanish and Figueira", which was reversed to the Company upon merger of Telefônica Data Brasil Holding S.A.  (TDBH) in 2006.

 

(2) Goodwill generated upon acquisition of equity control of Santo Genovese Participações (parent company of Atrium Telecomunicações Ltda.), in 2004.

 

(3) Goodwill generated upon acquisition of Telefônica Televisão Participações (formerly Navytree) merged in 2008.

 

(4) Goodwill generated upon acquisition/merger of Vivo Participações in 2011.

 

(5)  Goodwill generated upon acquisition of GVT Participações in 2015 (Note 1c).

 

 


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
 

13)  PERSONNEL, SOCIAL CHARGES AND BENEFITS

 

 

Company

 

Consolidated

 

09/30/17

 

12/31/16

 

09/30/17

 

12/31/16

Salaries and wages

             31,241

 

             54,525

 

             42,796

 

             55,476

Social charges and benefits

            520,480

 

            375,249

 

            546,824

 

            384,073

Profit sharing

            200,181

 

            282,134

 

            206,800

 

            285,887

Share-based payment plans (Note 28)

             49,138

 

             45,906

 

             49,915

 

             46,223

Total

            801,040

 

            757,814

 

            846,335

 

            771,659

 

 

 

 

 

 

 

 

Current

            780,589

 

            746,798

 

            825,290

 

            760,643

Non-current

             20,451

 

             11,016

 

             21,045

 

             11,016

 

14)  TRADE ACCOUNTS PAYABLE

 

 

Company

 

Consolidated

 

09/30/17

 

12/31/16

 

09/30/17

 

12/31/16

Sundry suppliers (Opex, Capex, Services and Material)

         6,116,596

 

         6,270,535

 

         6,454,281

 

         6,617,240

Amounts payable (operators, cobilling)

            281,052

 

            314,959

 

            281,052

 

            314,958

Interconnection / interlink (1)

            218,047

 

            369,715

 

            218,047

 

            369,715

Related parties (Note 27)

         1,007,165

 

            656,093

 

            337,233

 

            381,240

Total

         7,622,860

 

         7,611,302

 

         7,290,613

 

         7,683,153

 

 

 

 

 

 

 

 

Current

         7,622,860

 

         7,539,395

 

         7,290,613

 

         7,611,246

Non-current

                      -

 

             71,907

 

                      -

 

             71,907

 

(1)  As of December 31, 2016, the amount recorded as non-current related to the judicial proceeding filed against SMP operators claiming the reduction of the VU-M amount. On October 15, 2007, an injunction was obtained to provide a judicial deposit of the difference between VC1 calls and the amount effectively charged by SMP operators. In May 2017, the updated amount of R$71,956 was raised in favor of the operators involved, after an agreement between the parties.

 

15) TAXES, CHARGES AND CONTRIBUTIONS

 

 

Company

 

Consolidated

 

09/30/17

 

12/31/16

 

09/30/17

 

12/31/16

Income and social contribution taxes payable

                      -

 

                      -

 

             89,930

 

             11,520

ICMS

         1,223,299

 

         1,187,244

 

         1,271,995

 

         1,226,172

PIS and COFINS

            313,053

 

            371,838

 

            382,619

 

            412,149

Fust and Funttel

             93,323

 

             92,828

 

             93,323

 

             92,828

ISS, CIDE and other taxes

             67,172

 

             67,420

 

             76,824

 

             77,193

Total

         1,696,847

 

         1,719,330

 

         1,914,691

 

         1,819,862

 

 

 

 

 

 

 

 

Current

         1,677,801

 

         1,698,334

 

         1,866,994

 

         1,770,731

Non-current

             19,046

 

             20,996

 

             47,697

 

             49,131

 

 

 


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
 

16)  DIVIDENDS AND INTEREST ON EQUITY (IOE)

 

a)   Dividends and interest on equity receivable

 

In August 2017, the Company received the amount of R$384,588 from TData, referring to additional dividends for the year 2016, approved at a TData's Ordinary General Meeting held on April 17, 2017.

 

b)   Dividends and interest on equity payable

 

b.1) Breakdown:

 

 

 

 

 

Company/Consolidated

 

 

 

 

09/30/17

 

12/31/16

Telefónica Latinoamérica Holding S.L.

 

 

 

            792,306

 

            454,583

Telefónica  S.A.

 

 

 

            954,061

 

            547,390

SP Telecomunicações Participações Ltda

 

 

 

            601,467

 

            345,090

Telefónica Chile S.A.

 

 

 

               1,677

 

                  962

Non-controlling interest

 

 

 

         1,175,944

 

            847,006

Total

 

 

 

         3,525,455

 

         2,195,031

 

b.2) Changes:

 

 

 

 

 

 

 

Company/ Consolidated

Balance at 12/31/16

 

 

 

 

 

         2,195,031

Supplementary dividends for 2016

 

 

 

 

 

         1,913,987

Interim interest on equity (net of IRRF)

 

 

 

 

 

            790,500

Unclaimed dividends and interest on equity

 

 

 

 

 

            (72,840)

Payment of dividends and interest on equity

 

 

 

 

 

        (1,304,161)

IRRF on shareholders exempt/immune from interest on equity

 

 

 

 

 

               2,938

Balance at 09/30/17

 

 

 

 

 

         3,525,455

 

On May 9, 2017, the Company informed the shareholders that it will pay interest on equity and dividends related to the fiscal year of 2016, as follows:

 

 

 

Dates

 

Gross Amount

 

Net Value

 

Amount per Share (1)

Nature

 

Approval

 

Credit

 

Beginning of Payment

 

Common

 

Preferred (2)

 

Total

 

Common

 

Preferred (2)

 

Total

 

Common

 

Preferred (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IOE

 

02/19/16

 

02/29/16

 

08/22/17

 

      63,239

 

           136,761

 

     200,000

 

      53,753

 

           116,247

 

     170,000

 

   0.094411

 

         0.103853

IOE

 

03/18/16

 

03/31/16

 

08/22/17

 

     106,559

 

           230,441

 

     337,000

 

      90,575

 

           195,875

 

     286,450

 

   0.159083

 

         0.174992

IOE

 

04/18/16

 

04/29/16

 

08/22/17

 

      69,563

 

           150,437

 

     220,000

 

      59,129

 

           127,871

 

     187,000

 

   0.103853

 

         0.114238

IOE

 

06/17/16

 

06/30/16

 

08/22/17

 

      50,908

 

           110,092

 

     161,000

 

      43,272

 

             93,578

 

     136,850

 

   0.076001

 

         0.083601

IOE

 

09/19/16

 

09/30/16

 

08/22/17

 

     205,528

 

           444,472

 

     650,000

 

     174,699

 

           377,801

 

     552,500

 

   0.306837

 

         0.337521

IOE

 

12/19/16

 

12/30/16

 

12/13/17

 

     191,029

 

           413,116

 

     604,145

 

     162,375

 

           351,149

 

     513,523

 

   0.285191

 

         0.313710

Dividends

 

04/26/17

 

04/26/17

 

12/13/17

 

     605,198

 

        1,308,789

 

  1,913,987

 

     514,418

 

        1,112,471

 

  1,626,889

 

   1.062955

 

         1.169250

Total

 

 

 

  1,292,024

 

        2,794,108

 

  4,086,132

 

  1,098,220

 

        2,374,992

 

  3,473,212

 

 

 

 

 

(1)  The amounts of IOE are calculated and stated net of Withholding Income Tax (IRRF). The immune shareholders received the full IOE amount, without withholding income tax at source.

 

(2)  The gross and net values for the preferred shares are 10% higher than those attributed to each common share, as per article 7 of the Company's Articles of Incorporation.

 

For the cash flow statement, interest on equity and dividends paid to shareholders are recognized in "Financing Activities".

 

Interest on equity and dividends not claimed by shareholders expire within three years from the initial payment date. Should dividends and interest on equity expire, these amounts are recorded in retained earnings for later distribution  (Note 21 d.3).

 


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
 
17) PROVISIONS AND CONTINGENCIES

 

The Company and its subsidiaries are parties to administrative and judicial proceedings and labor, tax and civil claims filed in different courts. The management of the Company and its subsidiaries, based on the opinion of its legal counsel, recognized provisions for proceedings for which an unfavorable outcome is considered probable.

 

Breakdown of changes in provisions for cases in which an unfavorable outcome is probable, in addition to contingent liabilities and provisions for decommissioning are as follows: 

 

 

Company

 

Provisions for contingencies

 

 

 

 

 

Labor

 

Tax

 

Civil

 

Regulatory

 

Contingent liabilities (PPA) (1)

 

Provision for decommissioning (2)

 

Total

Balances at 12/31/15

       1,140,492

 

       2,684,924

 

          965,730

 

          595,028

 

          286,983

 

              298,751

 

       5,971,908

Inflows (income)

          381,911

 

          120,385

 

          518,293

 

            91,124

 

             7,835

 

                         -

 

       1,119,548

Write-offs due to reversal (income)

           (64,178)

 

           (41,428)

 

         (279,742)

 

            (7,016)

 

           (13,733)

 

                 (1,766)

 

         (407,863)

Inflows (reversal), except income

                    -

 

          100,314

 

             7,360

 

                    -

 

                    -

 

                30,983

 

          138,657

Write-offs due to payment

         (289,855)

 

         (135,888)

 

         (377,020)

 

            (1,980)

 

                    -

 

                         -

 

         (804,743)

Monetary restatement

          115,190

 

          231,246

 

          184,331

 

            53,798

 

            42,068

 

                15,940

 

          642,573

Merger (note 1d)

            35,236

 

            14,597

 

            46,284

 

            51,701

 

          555,486

 

                89,541

 

          792,845

Balances at 09/30/16

       1,318,796

 

       2,974,150

 

       1,065,236

 

          782,655

 

          878,639

 

              433,449

 

       7,452,925

Inflows (income)

          206,193

 

             6,053

 

          156,440

 

            32,408

 

            (7,835)

 

                         -

 

          393,259

Write-offs due to reversal (income)

           (83,895)

 

           (10,413)

 

           (61,548)

 

            (3,535)

 

             5,684

 

               (18,785)

 

         (172,492)

Inflows (reversal), except income

                    -

 

                    -

 

                466

 

                    -

 

                    -

 

              131,645

 

          132,111

Write-offs due to payment

         (104,618)

 

           (10,740)

 

         (149,833)

 

               (581)

 

           (11,240)

 

                         -

 

         (277,012)

Monetary restatement

            38,094

 

          150,756

 

            27,469

 

            17,987

 

            16,497

 

                 (4,478)

 

          246,325

Balances at 12/31/16

       1,374,570

 

       3,109,806

 

       1,038,230

 

          828,934

 

          881,745

 

              541,831

 

       7,775,116

Inflows (income)

          669,768

 

          203,823

 

          577,066

 

            73,140

 

                    -

 

                         -

 

       1,523,797

Write-offs due to reversal (income)

         (460,486)

 

           (59,047)

 

         (223,503)

 

           (52,924)

 

           (87,454)

 

                         -

 

         (883,414)

Inflows (reversal), except income

                    -

 

          100,252

 

            (1,129)

 

                    -

 

                    -

 

                14,912

 

          114,035

Write-offs due to payment

         (664,263)

 

         (146,094)

 

         (418,812)

 

            (4,556)

 

                    -

 

                         -

 

      (1,233,725)

Write-offs for compensation of taxes  (3)

                    -

 

           (66,027)

 

                    -

 

                    -

 

                    -

 

                         -

 

           (66,027)

Monetary restatement

          116,148

 

          307,422

 

            94,765

 

            78,838

 

            45,347

 

                11,331

 

          653,851

Balances at 09/30/17

       1,035,737

 

       3,450,135

 

       1,066,617

 

          923,432

 

          839,638

 

              568,074

 

       7,883,633

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 12/31/16

 

 

 

 

 

 

 

 

 

 

 

 

 

   Current

          202,113

 

                    -

 

          205,831

 

          775,679

 

                    -

 

                         -

 

       1,183,623

   Non-current

       1,172,457

 

       3,109,806

 

          832,399

 

            53,255

 

          881,745

 

              541,831

 

       6,591,493

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 09/30/17

 

 

 

 

 

 

 

 

 

 

 

 

 

   Current

          226,092

 

                    -

 

          212,546

 

          850,019

 

                    -

 

                         -

 

       1,288,657

   Non-current

          809,645

 

       3,450,135

 

          854,071

 

            73,413

 

          839,638

 

              568,074

 

       6,594,976

 

 


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 

 

 

Consolidated

 

Provisions for contingencies

 

 

 

 

 

Labor

 

Tax

 

Civil

 

Regulatory

 

Contingent liabilities (PPA) (1)

 

Provision for decommissioning (2)

 

Total

Balances at 12/31/15

       1,166,151

 

       2,736,191

 

       1,010,356

 

          642,695

 

          843,882

 

              405,421

 

       6,804,696

Inflows (income)

          404,150

 

          120,392

 

          534,030

 

            94,107

 

            13,163

 

                         -

 

       1,165,842

Write-offs due to reversal (income)

           (69,565)

 

           (43,203)

 

         (281,468)

 

            (7,016)

 

           (20,101)

 

               (14,140)

 

         (435,493)

Inflows (reversal), except income

                    -

 

          100,314

 

             7,360

 

                    -

 

                    -

 

                30,983

 

          138,657

Write-offs due to payment

         (290,255)

 

         (148,299)

 

         (388,416)

 

            (1,988)

 

                    -

 

                         -

 

         (828,958)

Monetary restatement

          117,020

 

          228,498

 

          184,472

 

            54,858

 

            41,695

 

                15,939

 

          642,482

Balances at 09/30/16

       1,327,501

 

       2,993,893

 

       1,066,334

 

          782,656

 

          878,639

 

              438,203

 

       7,487,226

Inflows (income)

          207,626

 

             6,054

 

          156,440

 

            32,407

 

           (13,163)

 

                         -

 

          389,364

Write-offs due to reversal (income)

           (84,193)

 

           (10,413)

 

           (61,548)

 

            (3,536)

 

            11,013

 

               (18,784)

 

         (167,461)

Inflows (reversal), except income

                958

 

                    -

 

                537

 

                    -

 

                    -

 

              131,645

 

          133,140

Write-offs due to payment

         (106,639)

 

           (10,740)

 

         (149,893)

 

               (592)

 

           (11,240)

 

                         -

 

         (279,104)

Monetary restatement

            37,704

 

          150,887

 

            27,487

 

            17,999

 

            16,496

 

                 (4,477)

 

          246,096

Balances at 12/31/16

       1,382,957

 

       3,129,681

 

       1,039,357

 

          828,934

 

          881,745

 

              546,587

 

       7,809,261

Inflows (income)

          674,134

 

          214,095

 

          580,368

 

            73,140

 

                    -

 

                         -

 

       1,541,737

Write-offs due to reversal (income)

         (463,896)

 

           (61,327)

 

         (225,482)

 

           (52,924)

 

           (87,454)

 

                         -

 

         (891,083)

Inflows (reversal), except income

               (116)

 

          100,252

 

            (1,129)

 

                    -

 

                    -

 

                14,912

 

          113,919

Write-offs due to payment

         (666,264)

 

         (155,750)

 

         (419,566)

 

            (4,556)

 

                    -

 

                         -

 

      (1,246,136)

Write-offs for compensation of taxes  (3)

                    -

 

           (66,027)

 

                    -

 

                    -

 

                    -

 

                         -

 

           (66,027)

Monetary restatement

          117,040

 

          311,947

 

            95,073

 

            78,838

 

            45,347

 

                11,331

 

          659,576

Business combination (Note 1e)

            19,282

 

            87,531

 

             6,061

 

                    -

 

                    -

 

                         -

 

          112,874

Balances at 09/30/17

       1,063,137

 

       3,560,402

 

       1,074,682

 

          923,432

 

          839,638

 

              572,830

 

       8,034,121

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 12/31/16

 

 

 

 

 

 

 

 

 

 

 

 

 

   Current

          202,113

 

                    -

 

          205,831

 

          775,679

 

                    -

 

                         -

 

       1,183,623

   Non-current

       1,180,844

 

       3,129,681

 

          833,526

 

            53,255

 

          881,745

 

              546,587

 

       6,625,638

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 09/30/17

 

 

 

 

 

 

 

 

 

 

 

 

 

   Current

          226,092

 

                    -

 

          212,546

 

          850,019

 

                    -

 

                         -

 

       1,288,657

   Non-current

          837,045

 

       3,560,402

 

          862,136

 

            73,413

 

          839,638

 

              572,830

 

       6,745,464

 

 

 


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
 

(1) This refers to contingent liabilities arising from Purchase Price Allocation (PPA) generated on acquisition of the controlling interest of Vivo Participações in 2011 and GVTPart. in 2015 (Note 1c).

 

(2) These refer to costs to be incurred to return the sites (locations for installation of base radio, equipment and real estate) to their respective owners in the same conditions as at the time of execution of the initial lease agreement.

 

(3)  This refers to the amounts of tax on tax losses used to offset tax provisions arising from the Company's adherence to the Special Tax Regularization Program (PERT).

 

a) Provisions and labor contingencies

 

 

  Amounts involved 

 

Company

 

Consolidated

Nature / Level of Risk

09/30/17

 

12/31/16

 

09/30/17

 

12/31/16

Provisions - probable losses

         1,035,737

 

         1,374,570

 

         1,063,137

 

         1,382,957

Possible losses

            222,590

 

            275,483

 

            276,531

 

            293,146

 

Labor provisions and contingencies involve labor claims filed by former employees and outsourced employees (the latter alleging subsidiary or joint liability) claiming for, among other issues, overtime, salary equalization, post-retirement benefits, allowance for health hazard and risk premium, and matters relating to outsourcing.

 

The Company is also a defendant in labor claims filed by retired former employees who are covered by the Retired Employees Medical Assistance Plan ("PAMA"), who, among other issues, are demanding the cancellation of amendments to this plan. Most of these claims await a decision by the Regional Labor Court of São Paulo and the Superior Labor Court. Based on the opinion of its legal counsel and recent decisions of the courts, management considers the risk of loss in these cases as possible. No amount has been specified for these claims, since is not possible to estimate the cost to the Company in the event of loss.

 

In addition, the Company is party to Public Civil Actions filed by the Labor Public Prosecutor's Office, mainly in relation to the determination that the Company must cease the engagement of intermediaries to carry out its core activities. No amounts were allocated to the possible degree of risk in these Public Civil Actions in the above table, since at this stage of the proceedings it is not possible to estimate the cost to the Company in the event of loss.

 

b) Provisions and tax contingencies

 

 

  Amounts involved 

 

Company

 

Consolidated

Nature / Level of Risk

09/30/17

 

12/31/16

 

09/30/17

 

12/31/16

Provisions - probable losses

         3,450,135

 

         3,109,806

 

         3,560,402

 

         3,129,681

   Federal

            416,990

 

            343,353

 

            504,981

 

            343,353

   State

            246,236

 

            226,571

 

            246,824

 

            226,571

   Municipal

             31,623

 

             30,519

 

             31,623

 

             30,519

   FUST, FISTEL and EBC

         2,755,286

 

         2,509,363

 

         2,776,974

 

         2,529,238

Possible losses

       30,466,240

 

       29,539,669

 

       31,826,351

 

       30,050,578

   Federal

         6,266,429

 

         5,917,148

 

         6,570,187

 

         5,931,022

   State

       16,196,302

 

       14,999,333

 

       17,135,554

 

       15,389,802

   Municipal

            544,270

 

            852,926

 

            550,170

 

            853,244

   FUST, FUNTTEL, FISTEL and EBC

         7,459,239

 

         7,770,262

 

         7,570,440

 

         7,876,510

 

b.1) Probable tax contingencies

 

Management and its legal counsel understand that losses are probable in the following federal, state, municipal and other tax proceedings (FUST, FISTEL and EBC) are described below:

 

 


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
 

Federal Taxes

 

The Company and/or its subsidiaries are parties to administrative and legal proceedings relating to: (i) claims resulting from the non-ratification of compensation and refund requests formulated; (ii) CIDE levied on the remittance of amounts abroad related to technical and administrative assistance and similar services, as well as royalties; (iii) IRRF on interest on equity; (iv) Social Investment Fund (Finsocial) offset amounts; (v) additional charges to the PIS and COFINS tax base, as well as additional charges to COFINS required by Law No. 9,718/98; and (vi) exclusion of the ISS from the PIS and COFINS calculation base on imports.

 

At September 30, 2017, consolidated provisions totaled R$504,981 (R$343,353 at December 31, 2016).

 

State taxes

 

The Company and/or its subsidiaries are parties to administrative and judicial proceedings relating to: (i) disallowance of ICMS credits; (ii) telecommunications services not subject to ICMS; (iii) tax credit for challenges / disputes over telecommunication services not provided or wrongly charged (Agreement 39/01); (iv) rate difference of ICMS; and (v) ICMS on rent of infrastructure necessary for internet (data) services.

 

At September 30, 2017, consolidated provisions totaled R$246,824 (R$226,571 at December 31, 2016).

 

Municipal taxes

 

The Company and/or its subsidiaries are parties to various municipal tax proceedings, at the judicial level, relating to: (i) Property tax (IPTU); (ii) Services tax (ISS) on equipment leasing services, non-core activities and supplementary activities; and (iii) withholding of ISS on contractors' services.

 

At September 30, 2017, consolidated provisions totaled R$31,623 (R$30,519 at December 31, 2016).

 

FUST, FISTEL and EBC


The Company and/or subsidiaries have administrative and judicial discussions related to: (i) the non-inclusion of interconnection expenses and industrial exploitation of a dedicated line in the calculation basis of FUST; (ii) exclusion of the calculation basis of the Installation Inspection Fee ("TFI") and Inspection and Operation Fee ("TFF") of the mobile stations that are not owned by it; and (iii) Contribution to the Promotion of Public Broadcasting of EBC.

 

At September 30, 2017, consolidated provisions totaled R$2,776,974 (R$2,529,238 at December 31, 2016).

 

b.2) Possible tax contingencies

 

Management and its legal counsel understand that losses are possible in the following federal, state, municipal and other tax proceedings (FUST, FUNTTEL, FISTEL and EBC) are described below:

 

Federal taxes

 

The Company and/or its subsidiaries are parties to various administrative and judicial proceedings, at the federal level, which are awaiting decisions in different court levels.


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
 

The most important of these proceedings are: (i) statements of dissatisfaction resulting from failure to approve requests for compensation submitted by the Company; (ii) INSS (social security contribution) (a) on compensation payment for salary losses arising from the "Plano Verão" and the "Plano Bresser"; (b) SAT, social security amounts owed to third parties (INCRA and SEBRAE) and (c) supply of meals to employees, withholding of 11% (assignment of workforce); (iii) IRRF/CIDE on the funds remitted abroad related to technical services and to administrative support and similar services, etc., and royalties; (iv) IRPJ and CSLL - disallowance of costs and sundry expenses not evidenced; (v) deduction of COFINS on swap operation losses; (vi) PIS and COFINS accrual basis versus cash basis; (vii) IRPJ FINOR, FINAN or FUNRES; (viii) IRPJ and CSLL, disallowance of expenses on goodwill of the corporate restructuring of Terra Networks and Vivo S.A., and for the takeovers of Navytree, TDBH, VivoPart. and GVTPart.; (ix) ex-tariff, cancellation of the benefits under CAMEX Resolution No. 6, increase in the import duty from 4% to 28%; (x) IPI levied on shipment of fixed access units from the Company's establishment; (xi) PIS and COFINS levied on value-added services and monthly subscription services; (xii) INSS on Stock Options - requirement of social security contributions on amounts paid to employees under the stock option plan; (xiii) IOF - required on loan transactions, intercompany loans and credit transactions; and (xiv) operating expenses allegedly non-deductible and related to estimated losses on the recoverable value of accounts receivable.

 

At September 30, 2017, consolidated amounts involved totaled R$6,570,187 (R$5,931,022 at December 31, 2016).

 

State taxes

 

The Company and/or its subsidiaries are parties to various administrative and judicial proceedings, at the state level, which are awaiting decisions in different court levels.

 

Among these lawsuits, the following are highlighted: (i) provision of facility, utility and convenience services and rental of movable property; (ii) international calls (DDI); (iii) reversal of ICMS credit related to the acquisition of items of property, plant and equipment and payment of ICMS in interstate transfers of property, plant and equipment between branches; (iv) reversal of previously unused ICMS credits; (v) service provided outside São Paulo state with ICMS paid to São Paulo State; (vi) co-billing; (vii) tax substitution with a fictitious tax base (tax guideline); (viii) use of credits related to acquisition of electric power; (ix) secondary activities, value added and supplementary services; (x) tax credits related to opposition/challenges regarding telecommunications services not provided or mistakenly charged (Agreement 39/01); (xi) shipment of goods with prices lower than acquisition prices (unconditional discounts); (xii) deferred collection of ICMS - interconnection (DETRAF - Traffic and Service Provision Document); (xiii) credits derived from tax benefits granted by other states; (xiv) disallowance of tax incentives related to cultural projects; (xv) transfers of assets among business units owned by the Company; (xvi) communications service tax credits used in provision of services of the same nature; (xvii) card donation for prepaid service activation; (xviii) reversal of credit from return and free lease in connection with assignment of networks (used by the Company itself and exemption of public bodies); (xix) DETRAF fine; (xx) ICMS on own consumption; (xxi) ICMS on exemption of public bodies; (xxii) ICMS on amounts given by way of discounts; (xxiii) new tax register bookkeeping without prior authorization by tax authorities; (xxiv) ICMS on monthly subscription; (xxv) tax on unmeasured services; and (xxvi) ICMS on advertising services.

 

At September 30, 2017, consolidated amounts involved totaled R$17,135,554 (R$15,389,802 at December 31, 2016).

 

Municipal taxes

 

The Company and/or its subsidiaries are parties to various administrative and judicial proceedings, at the municipal level, which are awaiting decisions in different court levels.

 

The most important of these proceedings are: (i) ISS on non-core activity, value-added and supplementary services; (ii) ISS withholding at source; (iii) IPTU; (iv) land use tax; (v) various municipal charges; (vi) charge for use of mobile network and lease of infrastructure; (vii) advertising services; (viii) services provided by third parties; (ix) advisory services in corporate management provided by Telefónica Latino América Holding; (x) ISS on call identification and mobile phone licensing services; (xi) ISS on full-time services, provisions, returns and cancelled tax receipts; and (xii) ISS on data processing and antivirus congeners.

 


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
 

At September 30, 2017, consolidated amounts involved totaled R$550,170 (R$853,244 at December 31, 2016).

 

FUST, FUNTTEL, FISTEL and EBC

 

Universal Telecommunications Services Fund ("FUST")

 

Writs of mandamus were filed seeking the right to not include expenses with interconnection and Industrial Use of Dedicated Line (EILD) in FUST tax base, according to Abridgment No. 7 of December 15, 2005, as it does not comply with the provisions contained in sole paragraph of article 6 of Law No. 9,998/00, which are awaiting a decision from Higher Courts.

 

Various delinquency notices were issued by ANATEL in the administrative level to collect charges on interconnections, EILD and other revenues not earned from the provision of telecommunication services.

 

At September 30, 2017, consolidated amounts involved totaled R$4,274,654 (R$4,089,065 at December 31, 2016).

 

Fund for Technological Development of Telecommunications ("FUNTTEL")

 

Proceedings filed for recognition of the right not to include interconnection revenues and any others arising from the use of resources that are part of the networks in FUNTTEL calculation basis, as determined by Law 10,052/00 and Decree No. 3,737/01, thus avoiding the improper application of Article 4, paragraph 5, of Resolution 95/13.


Several notifications of debits drawn up by the Ministry of Communications in administrative actions for constitution of the tax credit related to the interconnection, network resources and other revenues that do not originate from the provision of telecommunication services.

 

At September 30, 2017, consolidated amounts involved totaled R$488,603 (R$1,190,637 at December 31, 2016).

 

Telecommunications Inspection Fund ("FISTEL")

 

Judicial actions for the collection of TFI on: (a) extensions of the term of validity of the licenses for use of telephone exchanges associated with the operation of the fixed switched telephone service; and (b) extensions of the period of validity of the right to use radiofrequency associated with the operation of the telephone service personal mobile service.

 

At September 30, 2017, consolidated amounts involved totaled R$2,529,372 (R$2,352,000 at December 31, 2016).

 

Contribution to Empresa Brasil de Comunicação (EBC)

 

The Union of Telephony and Cellular and Personal Mobile Service Companies ("Sinditelebrasil") judicially discusses, on behalf of the associates, the Contribution to the Promotion of Public Broadcasting to EBC, created by Law 11,652/08.

 

At September 30, 2017, consolidated amounts involved totaled R$277,811 (R$244,808 at December 31, 2016).

 

c) Provisions and civil contingencies

 

 

 

  Amounts involved 

 

Company

 

Consolidated

Nature / Level of Risk

09/30/17

 

12/31/16

 

09/30/17

 

12/31/16

Provisions - probable losses

         1,066,617

 

         1,038,230

 

         1,074,682

 

         1,039,357

Possible losses

         2,795,691

 

         2,573,459

 

         2,815,000

 

         2,574,836

 

 

c.1) Provisions for probable civil losses

 

Management and its legal counsel understand that losses are probable in the following civil proceedings:


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
 

·       The Company and/or its subsidiaries are parties to proceedings involving rights to the supplementary amounts from shares calculated on network expansion plans since 1996 (supplement of share proceedings). These proceedings are at different stages: lower courts, court of justice and high court of justice. At September 30, 2017, consolidated provisions totaled R$319,952 (R$256,276 at December 31, 2016).

 

·       The Company and/or its subsidiaries are parties to various civil proceedings related to consumers at the administrative and judicial level, relating to the non-provision of services and/or products sold. At September 30, 2017, consolidated provisions totaled R$328,155 (R$386,699 at December 31, 2016).

 

·       The Company and/or its subsidiaries are parties to various civil proceedings of a non-consumer nature at administrative and judicial levels, all arising in the ordinary course of business. At September 30, 2017, consolidated provisions totaled R$426,575 (R$396,382 at December 31, 2016).

 

c.2) Civil contingencies assessed as possible losses

 

Management and its legal counsel understand that losses are possible in the following civil proceedings:

 

·       Collective Action filed by SISTEL Participants' Association (ASTEL) in the state of São Paulo, in which SISTEL associates in the state of São Paulo challenge the changes made in the health insurance plan for retired employees ("PAMA") and claim for the reestablishment of the prior "status quo".  This proceeding is still in the appeal phase, and awaits a decision on the Interlocutory Appeal filed by the Company against the decision on possible admission of the appeal to higher and supreme courts filed in connection with the Court of Appeals' decision, which changed the decision rendering the matter groundless. The amount cannot be estimated, and the claims cannot be settled due to their unenforceability because it entails the return to the prior plan conditions.

 

·       Civil Class Actions filed by ASTEL, in the state of São Paulo, and by the Brazilian National Federation of Associations of Retirees, Pensioners and Pension Fund Members of the Telecommunications Industry (FENAPAS), both against SISTEL, the Company and other carriers, in order to annul the spin-off of the PBS private pension plan, alleging, in short, the "windup of the supplementary private pension plan of the SISTEL Foundation", which led to various specific mirror PBS plans, and corresponding allocation of funds from technical surplus and tax contingencies existing at the time of the spin-off.  The amount cannot be estimated, and the claims cannot be settled due to their unenforceability because this involves the return of the spun-off assets of SISTEL relating to telecommunication carriers of the former Telebrás System.

 

·       The Company is party to other civil claims, at several levels, related to service rendering rights. Such claims have been filed by individual consumers, civil associations representing consumer rights or by the Bureau of Consumer Protection (PROCON), as well as by the Federal and State Public Prosecutor's Office. The Company is also party to other claims of several types related to the ordinary course of business. At September 30, 2017, the consolidated amount totaled R$2,781,941 (R$2,559,252 at December 31, 2016).

 

·       TGLog (company controlled by TData) is a party to the civil enforcement action process in the 3rd Civil Court of Barueri - SP for the allegation of contractual noncompliance with the transportation of goods. At September 30, 2017, the amount was R$172 (R$1,377 at December 31, 2016).

 

·       Terra Networks (company controlled by TData) is a party to: (i) supplier action related to the transmission of events; (ii) PROCON fine (annulment action); (iii) indemnification action related to the use of content; (iv) ECAD action on copyright collection; and (v) claim actions filed by former subscribers regarding unrecognized collection, collection of undue value and contractual noncompliance. At September 30, 2017, the amount was R$18,680.

 

·       The Company has received notices regarding noncompliance with the Customer Service (SAC) Decree. The Company is currently party to various lawsuits (administrative and legal proceedings). At September 30, 2017 and at December 31, 2016 , the amount was R$14,207.

 

 


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
 

 

·       Intelectual Property: Lune Projetos Especiais Telecomunicação Comércio e Ind. Ltda. (Lune), a Brazilian company, filed an action on November 20, 2001 against 23 wireless carriers claiming to own the patent for caller ID and the trademark "Bina".  The purpose of that lawsuit was to interrupt provision of such service by carriers and to seek indemnification equivalent to the amount paid by consumers for using the service.

 

An unfavorable decision was handed down determining that the Company should refrain from selling mobile phones with Caller ID service ("Bina"), subject to a daily fine of R$10,000.00 (Ten thousand reais) in case of noncompliance. Furthermore, according to that decision, the Company must pay indemnification for royalties, to be calculated in settlement. Motions for Clarification were proposed by all parties and Lune's motions for clarification were accepted since an injunctive relief in this stage of the proceedings was deemed applicable. A bill of review appeal was filed in view of the current decision which granted a stay of execution suspending that unfavorable decision until final judgment of the review. A bill of review was filed in view of the sentence handed down on June 30, 2016, by the 4th Chamber of the Court of Justice of the Federal District, in order to annul the lower court sentence and remit the proceedings back to the lower court for a new examination. At the present time, we await the judgment of the regimental grievance filed against a decision prior to the judgment, which rejected the application of the former lawyers of Lune as assistants of the author.  There is no way to determine the extent of potential liabilities with respect to this claim.

 

·       The Company and other wireless carriers figure as defendants in several lawsuits filed by the Public Prosecutor's Office and consumer associations to challenge imposition of a period to use prepaid minutes. The plaintiffs allege that the prepaid minutes should not expire after a specific period. Conflicting decisions were handed down by courts on the matter, even though the Company understands that its criteria for the period determination comply with ANATEL standards.

d) Provisions and regulatory contingencies

 

 

  Amounts involved 

 

Company

 

Consolidated

Nature / Level of Risk

09/30/17

 

12/31/16

 

09/30/17

 

12/31/16

Provisions - probable losses

            923,432

 

            828,934

 

            923,432

 

            828,934

Possible losses

         5,168,733

 

         5,018,205

 

         5,168,733

 

         5,018,205

 

d.1) Provisions for regulatory contingencies assessed as probable losses

 

The Company is party to administrative proceedings against ANATEL, filed based on an alleged failure to meet sector regulations, and to judicial proceedings to contest sanctions applied by ANATEL at the administrative level. At September 30, 2017, consolidated provisions totaled R$923,432 (R$828,934 at December 31, 2016).

 

d.2) Regulatory contingencies assessed as possible losses

 

According to the Company's management and legal counsel, the likelihood of loss of the following regulatory civil proceedings is possible:

 

·       The Company is party to administrative proceedings filed by ANATEL alleging noncompliance with the obligations set forth in industry regulations, as well as legal claims which discuss the sanctions applied by ANATEL at the administrative level. At September 30, 2017, the consolidated amount was R$5,168,733 (R$5,018,205 at December 31, 2016).

 

·       Administrative and judicial proceedings discussing payment of a 2% charge on interconnection services revenue arising from the extension of right of use of SMP related radio frequencies. Under clause 1.7 of the authorization term that grants right of use of SMP related radio frequencies, the extension of right of use of such frequencies entails payment every two years, during the extension period (15 years) of a 2% charge calculated on net revenues from the service provider's Basic and Alternative Plans of the service company, determined in the year before that of payment.

 


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
 
However, ANATEL determined that in addition to revenues from Service Plans, the charge corresponding to 2% should also be levied on interconnection revenues and other operating revenues, which is not stipulated in clause 1.7 of referred Authorization Term.

 

Considering, based on the provisions of the Authorization Terms, that revenue from interconnection services should not be included in the calculation of the 2% charge for radiofrequency use right extension, the Company filed administrative and legal proceedings challenging these charges, based on ANATEL's position.

 

d.3) Term of Conduct Adjustment ("TAC")

 

The Board of Directors of ANATEL approved, on October 27, 2016, the Company's TAC. On September 27, 2017, this instrument was judged by the Brazilian Court of Audit ("TCU"), with the determination of fulfillment of conditions for the continuation of the analysis of the instrument.

 

e) Guarantees

 

The Company and its subsidiaries granted guarantees for tax, civil and labor proceedings, as follows: 

 

 

  Consolidated 

 

09/30/17

 

12/31/16

 

Property and equipment

 

Judicial deposits and garnishments

 

Letters of guarantee

 

Property and equipment

 

Judicial deposits and garnishments

 

Letters of guarantee

Civil, labor and tax

            174,803

 

         6,640,407

 

         1,754,950

 

            203,600

 

         6,351,566

 

         1,948,088

Total

            174,803

 

         6,640,407

 

         1,754,950

 

            203,600

 

         6,351,566

 

         1,948,088

 

 

At September 30, 2017, in addition to the guarantees presented above, the Company and its subsidiaries had amounts under short-term investment frozen by courts (except for loan-related investments) in the consolidated amount of R$73,664 (R$67,393 at December 31, 2016).

 

18)  DEFERRED REVENUE

 

 

Company

 

Consolidated

 

09/30/17

 

12/31/16

 

09/30/17

 

12/31/16

Services (1)

            321,862

 

            389,706

 

            321,862

 

            389,706

Disposal of PP&E (2)

            219,136

 

            227,397

 

            219,136

 

            227,397

Activation revenue (3)

               9,733

 

             44,117

 

             10,215

 

             44,914

Customer loyalty program (4)

             67,533

 

             56,210

 

             67,533

 

             56,210

Government grants (5)

            119,144

 

            133,300

 

            119,144

 

            133,300

Donations of equipment (6)

               8,343

 

               8,044

 

               8,343

 

               8,044

Other revenues (7)

             76,576

 

             81,500

 

             76,576

 

             82,068

Total

            822,327

 

            940,274

 

            822,809

 

            941,639

 

 

 

 

 

 

 

 

Current

            414,555

 

            428,488

 

            415,037

 

            429,853

Non-current

            407,772

 

            511,786

 

            407,772

 

            511,786

 

 

(1)  This refers mainly to the balances of revenues from recharging prepaid services, which are recognized in income as services are provided to customers. It includes the amount of the agreement the Company entered into for industrial use of its mobile network by a different SMP operator in Regions I, II and III of the general authorizations plan, which is intended solely for the rendering of SMP services by the operator for its customers.

 

(2)  Includes the net balances of the residual values from sale of non-strategic towers and rooftops, which are transferred to income as the conditions for recognition are fulfilled.

 

(3)  This refers to the deferred activation revenue (fixed) recognized in income over the estimated period in which a customer remains in the base.


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
 
(4)  This refers to points earned under the Company's loyalty program, which enables customers to accumulate points by paying bills relating to use of services offered. The balance represents the Company's estimate of customers exchanging points for goods and / or services in the future.

 

(5)  This refers to: i) government subsidy arising from funds obtained from BNDES credit lines to be used in the acquisition of domestic equipment, which  have been amortized over the useful life cycle of the equipment; and ii) subsidies arising from projects related to state taxes, which are being amortized over the contractual period.

 

(6)  This refers to the balances of network equipment donated by suppliers, which are amortized over their useful life cycles

 

(7)  Includes amounts of the reimbursement for costs for leaving radio frequency sub-bands 2,500MHz to 2,690MHz due to cancellation of the Multichannel Multipoint Distribution Service (MMDS).

 

19) LOANS, FINANCING AND DEBENTURES

 

a) Breakdown

 

On September 30, 2017, the contractual terms of the loans and financing are the same as in Note 21) Loans, Financing and Debentures, as disclosed in the financial statements for the year ended December 31, 2016, except for funding obtained in the nine-month period ended September 30, 2017, described in item a.1).

 

 

 

Company / Consolidated

 

Information as of September 30, 2017

 

09/30/17

 

12/31/16

 

Currency

 

Annual interest rate

 

Maturity

 

Garantees

 

Current

 

Non-current

 

Total

 

Current

 

Non-current

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Local currency

 

 

 

 

 

 

 

 

    1,267,651

 

    2,427,199

 

    3,694,850

 

    1,480,382

 

    2,901,521

 

    4,381,903

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Institutions (a.1)

 

 

 

 

 

 

 

 

      787,863

 

    1,638,716

 

    2,426,579

 

      711,848

 

    2,158,303

 

    2,870,151

   BNDES FINEM - Contract 11.2.0814.1

URTJLP

 

TJLP+ 0 to 4,08%

 

7/15/2019

 

(1)

 

      372,458

 

      305,185

 

      677,643

 

      363,734

 

      567,110

 

      930,844

   BNDES FINEM - Contract 08.2.1073.1

URTJLP

 

TJLP+ 2,05% to 2,95%

 

6/15/2017

 

(3)

 

                 -

 

                 -

 

                 -

 

        29,319

 

                 -

 

        29,319

   BNDES FINEM - Contract 11.2.0963.1

URTJLP

 

TJLP+ 0 to 3,38%

 

8/15/2020

 

(3)

 

      183,613

 

      348,256

 

      531,869

 

      182,737

 

      480,510

 

      663,247

   BNDES FINEM - Contract 11.2.0963.1

R$

 

5.00%

 

11/15/2019

 

(3)

 

        14,658

 

        17,026

 

        31,684

 

        14,686

 

        27,971

 

        42,657

   BNDES FINEM - Contract 14.2.1192.1

URTJLP

 

TJLP+ 0 to 3,12%

 

1/15/2023

 

(3)

 

        76,045

 

      436,482

 

      512,527

 

          7,596

 

      499,442

 

      507,038

   BNDES FINEM - Contract 14.2.1192.1

R$

 

4,00% to 6,00%

 

1/15/2023

 

(3)

 

        31,001

 

      130,329

 

      161,330

 

        12,320

 

      163,222

 

      175,542

   BNDES FINEM - Contract 14.2.1192.1

R$

 

Selic Acum. D-2 + 2,32%

 

1/15/2023

 

(3)

 

        50,863

 

      319,037

 

      369,900

 

          1,408

 

      340,600

 

      342,008

   BNDES PSI

R$

 

2,5% to 5,5%

 

1/15/2023

 

(2)

 

        44,140

 

        23,951

 

        68,091

 

        92,508

 

        44,698

 

      137,206

   BNB

R$

 

7,06% to 10%

 

8/18/2022

 

(4)

 

        15,085

 

        58,450

 

        73,535

 

          7,540

 

        34,750

 

        42,290

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Suppliers (a.2)

R$

 

109,1% to 117,1% of CDI

 

4/30/2018

 

 

 

      439,683

 

                 -

 

      439,683

 

      722,591

 

                 -

 

      722,591

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Finance lease (a.3)

R$

 

IPCA and IGP-M

 

8/31/2033

 

 

 

        40,105

 

      348,087

 

      388,192

 

        45,943

 

      328,485

 

      374,428

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent Consideration (a.4)

R$

 

Selic

 

 

 

 

 

                 -

 

      440,396

 

      440,396

 

                 -

 

      414,733

 

      414,733

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign Currency

 

 

 

 

 

 

 

 

      725,757

 

      113,925

 

      839,682

 

    1,062,593

 

      225,271

 

    1,287,864

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Institutions (a.1)

 

 

 

 

 

 

 

 

      725,757

 

      113,925

 

      839,682

 

    1,062,593

 

      225,271

 

    1,287,864

   BNDES FINEM - Contract 11.2.0814.1

UMBND

 

ECM + 2,38%

 

7/15/2019

 

(1)

 

      136,386

 

      113,925

 

      250,311

 

      136,850

 

      225,271

 

      362,121

   Resolution 4131 - Scotiabank and Bank of America

US$

 

2,05%  and  Libor + 2,00%

 

12/18/2017

 

 

 

      589,371

 

                 -

 

      589,371

 

      925,743

 

                 -

 

      925,743

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

    1,993,408

 

    2,541,124

 

    4,534,532

 

    2,542,975

 

    3,126,792

 

    5,669,767

 

Garantees

 

(1)  Guarantee in receivables relating to 15% of the outstanding debt balance or four times the largest installment, whichever is higher.

 

(2)  Pledge of financed assets.

 

(3)  Assignment of receivables corresponding to 20% of outstanding debt balance or 1 time the last installment of sub-credit facility "A" (UMIPCA) plus 5 times the last installment of each of the other sub-credit facilities, whichever is greater.

 

(4)  Bank guarantee provided by Banco Safra in an amount equivalent to 100% of the outstanding financing debt balance. Setting up a liquidity fund represented by financial investments in the amount equivalent to three installments of repayment referenced to the average post-grace period performance. Balances were R$11,631 and R$10,773 at September 30, 2017 and December 31, 2016, respectively.

 


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
a.1)  Financial Insituitions

 

Banco do Nordeste ("BNB")

 

On May 12, 2017, draw-downs were made related to the agreement signed on August 18, 2014 in the total amount of R$39,878. The rates of this contract are 7.06% p.a. to 10.0% p.a., total term of 8 years, with interest payments and principal repayments in 72 monthly and successive installments. These resources were destined to investment and expansion projects for the Brazil's Northeast region.

 

a.2) Financing - Suppliers

 

Under bilateral agreements with suppliers, the Company obtained extension of the terms for payment of trade accounts payable at a cost based on fixed CDI rate for the corresponding periods, with the net cost equivalent to between 109.1% and 117.1% of CDI (108.4% of CDI as of December 31, 2016).

 

a.3) Finance leasing

 

The Company is lessee in contracts classified as financial leasing, related to: (i) lease of towers and rooftops arising from sale and finance leaseback transactions; (ii) lease of Built to Suit ("BTS") sites to install antennas and other equipment and transmission facilities; (iii) lease of information technology equipment and; (iv) lease of infrastructure and transmission facilities. The net carrying amount of the assets has remained unchanged until sale thereof, and a liability is recognized corresponding to the present value of mandatory minimum installments of the agreement.

 

The amounts recorded in property, plant and equipment are depreciated over the estimated useful lives of the assets or the lease term, whichever is shorter.

 

The balance of amounts payable relating to those transactions comprises the following:

 

 

 

 

Company / Consolidated

 

 

 

 

 

09/30/17

 

12/31/16

Nominal value payable

 

 

 

 

            792,875

 

            831,479

Unrealized financial expenses

 

 

 

 

           (404,683)

 

           (457,051)

Present value payable

 

 

 

 

            388,192

 

            374,428

 

 

 

 

 

 

 

 

Current

 

 

 

 

             40,105

 

             45,943

Non-current

 

 

 

 

            348,087

 

            328,485

 

 

Aging of finance lease payables at September 30, 2017 is as follows:

 

 

 

 

Company / Consolidated

 

 

 

 

 

Nominal value payable

 

Present value payable

Up to 1 year

 

 

 

 

             46,764

 

             40,105

From 1 to 5 years

 

 

 

 

            199,709

 

            145,175

Over five years

 

 

 

 

            546,402

 

            202,912

Total

 

 

 

 

            792,875

 

            388,192

 

There are no unsecured residual values resulting in benefits to the lessor nor in contingent payments recognized as revenue at September 30, 2017 and December 31, 2016.

 

 

 

 


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
a.4) Contingent Consideration

 

As part of the Purchase and Sale Agreement and Other Covenants executed by and between the Company and Vivendi to acquire all shares in GVTPart  (Note 1c), a contingent consideration relating to the judicial deposit made by GVT for the monthly installments of deferred income tax and social contribution on goodwill amortization was agreed, arising from the corporate restructuring process completed by GVT in 2013. If these funds are realized (being reimbursed, refunded, or via netting), they will be returned to Vivendi, as long as they are obtained in a final unappeasable decision. Reimbursement will be made within 15 years and this amount is subject to monthly restatement at the SELIC rate.

 

b)  Debentures

 

On September 30, 2017, the contractual terms of the debentures are the same as in Note 21) Loans, Financing and Debentures, as disclosed in the financial statements for the year ended December 31, 2016, except for the new issue described below.

 

5th Issue

 

At a meeting held on January 26, 2017, the Company's Board of Directors approved the 5th issue of simple debentures, non-convertible into shares of the Company, in a single series, unsecured, in the total amount of R$2,000,000, which were subject to public placement with restricted efforts, under a firm guarantee regime, in the terms of ICVM 476/09.

 

On February 8, 2017, the Company issued 200,000 debentures, with a par value equivalent to R$10,000 (Ten thousand reais). The debentures have a maturity of five years and the nominal unit value of each of the debentures will not be monetarily restated.

 

Remuneration interest corresponds to 108.25% of the accumulated variation of the average daily rates of one-day Interbank Deposits ("DI").

 

The net proceeds obtained by the Company with this issuance will be fully used for reprofiling the Company's financial liabilities, taking into consideration the Company's ongoing operations.

 

3th Issue

 

On September 10, 2017, the debentures contemplated in this indenture were fully settled. The amount paid in settlement amounted to R$2,110,358, of which R$2,000,000 corresponded to the principal and R$110,358 corresponded to interest

 

The following discloses some information on the debentures in effect on September 30, 2017 and December 31, 2016.

 

 

 

Company / Consolidated

 

 

Information as of September 30, 2017

 

09/30/17

 

12/31/16

 

 

Issue date

 

 

Amounts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issue

 

 

Maturity

Issued

 

Outstanding

 

Issue value

Remuneration p.a.

 

Current

 

Non-current

 

Total

 

Current

 

Non-current

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4th issue – Series 3

 

10/15/2009

 

10/15/2019

810,000

 

23,557

 

810,000

IPCA+4,00%

 

        1,461

 

      39,644

 

      41,105

 

           307

 

      36,990

 

      37,297

1st issue – Minas Comunica

 

12/17/2007

 

7/5/2021

5,550

 

5,550

 

55,500

IPCA+0,50%

 

      28,296

 

      71,439

 

      99,735

 

               -

 

      97,308

 

      97,308

3rd issue

 

9/10/2012

 

9/10/2017

200,000

 

200,000

 

2,000,000

100%  of CDI + 0,75%

 

               -

 

               -

 

             -  

 

  2,086,763

 

               -

 

  2,086,763

4th issue

 

4/25/2013

 

4/25/2018

130,000

 

130,000

 

1,300,000

100%  of CDI + 0,68%

 

  1,358,714

 

               -

 

  1,358,714

 

      33,434

 

  1,299,505

 

  1,332,939

5th issue

 

2/8/2017

 

2/8/2022

200,000

 

200,000

 

2,000,000

108,25% of CDI

 

      26,367

 

  1,996,170

 

  2,022,537

 

               -

 

               -

 

             -  

Total

 

 

 

 

 

 

 

 

 

 

 

  1,414,838

 

  2,107,253

 

  3,522,091

 

  2,120,504

 

  1,433,803

 

  3,554,307

 

Transaction costs in connection with the 4th and 5th issues, totaling R$4,937 at September 30, 2017 (R$495 at December 31, 2016), were allocated as a reduction of liabilities as costs to be incurred and are recognized as financial expenses, according to the contractual terms of each issue.

 

c) Repayment schedule

 

At September 30, 2017, breakdown of non-current loans, financing, finance leasing, debentures and contingent consideration by year of maturity is as follows:


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
 
 

 

Company / Consolidated

Year

Loans and financing

 

Debentures

 

Finance lease

 

Contingent consideration

 

Total

2018

          235,105

 

                    -

 

            43,282

 

                      -

 

          278,387

2019

          729,415

 

            63,457

 

            38,606

 

                      -

 

          831,478

2020

          348,866

 

            23,813

 

            32,307

 

                      -

 

          404,986

2021

          221,814

 

       1,023,813

 

            30,980

 

                      -

 

       1,276,607

2022 onwards

          217,441

 

          996,170

 

          202,912

 

            440,396

 

       1,856,919

Total

       1,752,641

 

       2,107,253

 

          348,087

 

            440,396

 

       4,648,377

d)  Covenants

 

There are loans and financing with BNDES (Note 19.a) and debentures (Note 19.b) with specific covenants involving a penalty in the event of breach of contract. A breach of contract provided for in the agreements with the institutions listed above is characterized as noncompliance with covenants (analyzed on a quarterly, half-yearly or yearly basis), being a breach of a contractual clause, resulting in the early maturity of the contract.

 

At September 30, 2017 and December 31, 2016 all economic and financial ratios established in existing contracts have been achieved.

 

e)  Changes

 

Changes in loans and financing, debentures, finance lease agreements and contingent consideration are as follows: 

 

 

 

Company

 

 

Loans and financing - Financial Institutions

 

Debentures

 

Finance lease

 

Financing - Suppliers

 

Contingent consideration

 

Total

Balance at 12/31/15

 

       3,190,529

 

     3,544,714

 

        271,530

 

       1,113,244

 

            377,721

 

     8,497,738

Inflows

 

          289,786

 

                   -

 

            2,675

 

          293,064

 

                      -

 

        585,525

Government grants (Note 18)

 

            (8,681)

 

                   -

 

                   -

 

                    -

 

                      -

 

           (8,681)

Financial charges (Note 25)

 

          319,734

 

        369,565

 

          52,323

 

            31,616

 

             27,070

 

        800,308

Issue costs

 

                    -

 

              371

 

                   -

 

                    -

 

                      -

 

              371

Foreign exchange variation (Note 25)

 

         (281,020)

 

                   -

 

                   -

 

                    -

 

                      -

 

       (281,020)

Write-offs (payments)

 

         (842,962)

 

       (380,559)

 

         (26,352)

 

      (1,054,910)

 

                      -

 

    (2,304,783)

Merger (note 1d)

 

       1,532,666

 

                   -

 

          22,075

 

                    -

 

                      -

 

     1,554,741

Balance at 09/30/16

 

       4,200,052

 

     3,534,091

 

        322,251

 

          383,014

 

            404,791

 

     8,844,199

Inflows

 

          176,843

 

                   -

 

          59,191

 

          373,021

 

                      -

 

        609,055

Government grants (Note 18)

 

            (3,359)

 

                   -

 

                   -

 

                    -

 

                      -

 

           (3,359)

Financial charges

 

            65,506

 

        116,613

 

            9,919

 

            18,317

 

               9,942

 

        220,297

Issue costs

 

                    -

 

              124

 

                   -

 

                    -

 

                      -

 

              124

Foreign exchange variation

 

             8,225

 

                   -

 

                   -

 

                    -

 

                      -

 

            8,225

Write-offs (payments)

 

         (289,252)

 

         (96,521)

 

         (16,933)

 

           (51,761)

 

                      -

 

       (454,467)

Balance at 12/31/16

 

       4,158,015

 

     3,554,307

 

        374,428

 

          722,591

 

            414,733

 

     9,224,074

Inflows

 

            39,878

 

     2,000,000

 

            9,061

 

          280,019

 

                      -

 

     2,328,958

Financial charges (Note 25)

 

          241,654

 

        418,536

 

          41,355

 

            48,226

 

             25,663

 

        775,434

Issue costs

 

                    -

 

           (4,443)

 

                   -

 

                    -

 

                      -

 

           (4,443)

Foreign exchange variation (Note 25)

 

           (20,133)

 

                   -

 

                   -

 

                    -

 

                      -

 

         (20,133)

Write-offs (payments)

 

      (1,153,153)

 

    (2,446,309)

 

         (36,652)

 

         (611,153)

 

                      -

 

    (4,247,267)

Balance at 09/30/17

 

       3,266,261

 

     3,522,091

 

        388,192

 

          439,683

 

            440,396

 

     8,056,623

 


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 

 

 

 

 

Consolidated

 

 

Loans and financing - Financial Institutions

 

Debentures

 

Finance lease

 

Financing - Suppliers

 

Contingent consideration

 

Total

Balance at 12.31.15

 

       4,773,489

 

     3,544,714

 

        296,684

 

       1,228,682

 

            377,721

 

    10,221,290

Inflows

 

          289,786

 

                   -

 

            2,675

 

          293,064

 

                      -

 

        585,525

Government grants (Note 18)

 

            (8,681)

 

                   -

 

                   -

 

                    -

 

                      -

 

           (8,681)

Financial charges (Note 25)

 

          359,361

 

        369,565

 

          53,084

 

            31,721

 

             27,070

 

        840,801

Issue costs

 

                    -

 

              371

 

                   -

 

                    -

 

                      -

 

              371

Foreign exchange variation (Note 25)

 

         (281,020)

 

                   -

 

                   -

 

                    -

 

                      -

 

       (281,020)

Write-offs (payments)

 

         (932,883)

 

       (380,559)

 

         (30,192)

 

      (1,170,453)

 

                      -

 

    (2,514,087)

Balance at 09/30/16

 

       4,200,052

 

     3,534,091

 

        322,251

 

          383,014

 

            404,791

 

     8,844,199

Inflows

 

          176,843

 

                   -

 

          59,191

 

          373,021

 

                      -

 

        609,055

Government grants (Note 18)

 

            (3,359)

 

                   -

 

                   -

 

                    -

 

                      -

 

           (3,359)

Financial charges

 

            65,506

 

        116,613

 

            9,919

 

            18,317

 

               9,942

 

        220,297

Issue costs

 

                    -

 

              124

 

                   -

 

                    -

 

                      -

 

              124

Foreign exchange variation

 

             8,225

 

                   -

 

                   -

 

                    -

 

                      -

 

            8,225

Write-offs (payments)

 

         (289,252)

 

         (96,521)

 

         (16,933)

 

           (51,761)

 

                      -

 

       (454,467)

Balance at 12.31.16

 

       4,158,015

 

     3,554,307

 

        374,428

 

          722,591

 

            414,733

 

     9,224,074

Inflows

 

            39,878

 

     2,000,000

 

            9,061

 

          280,019

 

                      -

 

     2,328,958

Financial charges (Note 25)

 

          241,654

 

        418,536

 

          41,355

 

            48,226

 

             25,663

 

        775,434

Issue costs

 

                    -

 

           (4,443)

 

                   -

 

                    -

 

                      -

 

           (4,443)

Foreign exchange variation (Note 25)

 

           (20,133)

 

                   -

 

                   -

 

                    -

 

                      -

 

         (20,133)

Write-offs (payments)

 

      (1,153,153)

 

    (2,446,309)

 

         (36,652)

 

         (611,153)

 

                      -

 

    (4,247,267)

Balance at 09/30/17

 

       3,266,261

 

     3,522,091

 

        388,192

 

          439,683

 

            440,396

 

     8,056,623

 

20) OTHER LIABILITIES

 

 

 

 Company

 

Consolidated

 

09/30/17

 

12/31/16

 

09/30/17

 

12/31/16

Authorization licenses (1)

            252,287

 

         1,048,523

 

            252,287

 

         1,048,523

Liabilities with related parties (Note 27)

            114,728

 

            145,332

 

            104,566

 

            112,358

Payment for license renewal (2)

            163,365

 

            215,154

 

            163,365

 

            215,154

Third-party withholdings (3)

            160,687

 

            222,696

 

            167,501

 

            227,685

Surplus from post-employment benefit plans (Note 29)

            351,390

 

            327,670

 

            352,668

 

            327,670

Amounts to be refunded to subscribers

            167,478

 

            166,644

 

            169,076

 

            168,708

Other liabilities

             94,540

 

             90,815

 

             97,135

 

             92,447

Total

         1,304,475

 

         2,216,834

 

         1,306,598

 

         2,192,545

 

 

 

 

 

 

 

 

Current

            704,282

 

         1,641,926

 

            710,436

 

         1,640,757

Non-current

            600,193

 

            574,908

 

            596,162

 

            551,788

 

 

(1)  Includes a portion of the Company's liability arising from an agreement entered into with ANATEL, whereby the operators that won the auction of the 4G licences organized Entidade Administradora do Processo de Redistribuição e Digitalização de Canais de TV e RTV ("EAD"), which will be responsible for equally performing all TV and RTV channel redistribution procedures and solutions to harmful interference in radio communication systems, in addition to other operations in which the winning operators have obligations, as defined in the agreement. On January 31, 2017, the Company paid R$858,991 to EAD, referring to the 2nd and 3rd installments of the auction of 700 MHz national frequency bands for the provision of SMP, performed by ANATEL on September 30, 2014.

(2)  This refers to the cost of renewing STFC and SMP licenses. See Note 1.b).

(3)  This refers to payroll withholdings and taxes withheld from pay-outs of interest on equity and on provision of services.

 

 

 


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
21)  EQUITY

 

a) Capital

 

According to its Articles of Incorporation, the Company is authorized to increase its share capital up to 1,850,000,000 shares. The Board of Directors is the competent body to decide on any increase and consequent issue of new shares within the authorized capital limit.

 

Nevertheless, Brazil's Corporation Law (Law no. 6,404/76, Article 166, item IV) establishes that capital may be increased by means of a Special Shareholders' Meeting resolution to decide about amendments to the Articles of Incorporation, if the authorized capital limit has been reached.

 

Capital increases do not necessarily require the proportion between the number of shares of each class to be maintained, however the number of non-voting or restricted-voting preferred shares must not exceed 2/3 of total shares issued.

 

Preferred shares are non-voting, except for cases set forth in Articles 9 and 10 of the Articles of Incorporation, but have priority in the event of reimbursement of capital, without premium, and are entitled to dividends 10% higher than those paid on common shares, as per article 7 of the Company's Articles of Incorporation and item II, paragraph 1, article 17 of Law No. 6,404/76.

 

Preferred shares also acquire full voting rights if the Company fails to pay the minimum dividend to which they are entitled for three consecutive financial years and this right will continue until payment of said dividend.

 

Paid-in capital at September 30, 2017 and December 31, 2016 amounted to R$63,571,416. After all the events described above, subscribed and paid-in capital is divided into shares without par value, held as follows:

 

At 09/30/17  

 

 

Common Shares

 

Preferred Shares

 

Grand Total

Shareholders

Number

 

%

 

Number

 

%

 

Number

 

%, including treasury shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Controlling Group

540,033,264

 

94.47%

 

704,207,855

 

62.91%

 

1,244,241,119

 

73.58%

 

   Telefónica Latinoamérica Holding, S.L.

46,746,635

 

8.18%

 

360,532,578

 

32.21%

 

407,279,213

 

24.09%

 

   Telefónica  S.A.

198,207,608

 

34.67%

 

305,122,195

 

27.26%

 

503,329,803

 

29.76%

 

   SP Telecomunicações Participações Ltda

294,158,155

 

51.46%

 

38,537,435

 

3.44%

 

332,695,590

 

19.67%

 

   Telefónica Chile S.A.

920,866

 

0.16%

 

15,647

 

0.00%

 

936,513

 

0.06%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-controlling shareholders

29,320,789

 

5.13%

 

415,131,851

 

37.09%

 

444,452,640

 

26.28%

 

   Other shareholders

29,320,789

 

5.13%

 

415,131,851

 

37.09%

 

444,452,640

 

26.28%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total shares (not including outstanding shares)

569,354,053

 

99.60%

 

1,119,339,706

 

100.00%

 

1,688,693,759

 

99.86%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury Shares

2,290,164

 

0.40%

 

1,000

 

0.00%

 

2,291,164

 

0.14%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total shares

571,644,217

 

100.00%

 

1,119,340,706

 

100.00%

 

1,690,984,923

 

100.00%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Book value per share (not including outstanding shares) at 09/30/17 (in R$):

 

 

 

 

 

 

 

 R$          41.16

 

 

 

 


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 

 

At 12/31/16

 

 

 

Common Shares

 

Preferred Shares

 

Grand Total

Shareholders

Number

 

%

 

Number

 

%

 

Number

 

%, including treasury shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Controlling Group

540,033,264

 

94.47%

 

704,207,855

 

62.91%

 

1,244,241,119

 

73.58%

 

   Telefónica Latinoamérica Holding, S.L.

46,746,635

 

8.18%

 

360,532,578

 

32.21%

 

407,279,213

 

24.09%

 

   Telefónica  S.A.

198,207,608

 

34.67%

 

305,122,195

 

27.26%

 

503,329,803

 

29.76%

 

   SP Telecomunicações Participações Ltda

294,158,155

 

51.46%

 

38,537,435

 

3.44%

 

332,695,590

 

19.67%

 

   Telefónica Chile S.A.

920,866

 

0.16%

 

15,647

 

0.00%

 

936,513

 

0.06%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-controlling shareholders

29,320,789

 

5.13%

 

415,132,512

 

37.09%

 

444,453,301

 

26.28%

 

   Other shareholders

29,320,789

 

5.13%

 

415,132,512

 

37.09%

 

444,453,301

 

26.28%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total shares (not including outstanding shares)

569,354,053

 

99.60%

 

1,119,340,367

 

100.00%

 

1,688,694,420

 

99.86%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury Shares

2,290,164

 

0.40%

 

339

 

0.00%

 

2,290,503

 

0.14%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total shares

571,644,217

 

100.00%

 

1,119,340,706

 

100.00%

 

1,690,984,923

 

100.00%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Book value per share (not including outstanding shares) at 12/31/16 (in R$):

 

 

 

 

 

 

 

 R$          41.00

 

 

 

b) Capital reserves

 

b.1) Treasury shares

 

The Company's shares held in treasury whose balance is resulting: (i) of the exercise of the right to withdraw from the Company's common and preferred shareholders, who expressed their dissent regarding the acquisition of GVTPart (see Note 1.c); (ii) the acquisition of preferred shares in the financial market in accordance with the share buyback program in effect at the time of the transaction (see Note 21.f); and (iii) transfers of preferred shares, related to compliance with court decisions in which the Company is involved, which deals with rights to the complementary receipt of shares calculated in relation to network expansion plans after 1996 (see note 17.c).

 

The table below shows the changes for the nine-month period ended September 30, 2017.

 

 

 

 

Shares

 

In thousands of reais

Treasury stock

 

Common shares

 

Preferred shares

 

Total

 

At 12.31.16

 

           2,290,164

 

                    339

 

           2,290,503

 

              (87,790)

Acquisition of shares in the financial market  (1)

 

                        -

 

                    706

 

                    706

 

                    (32)

Transfer of lawsuits concerning judicial proceedings  (2)

 

                        -

 

                    (45)

 

                    (45)

 

                       2

At 09.30.17

 

           2,290,164

 

                 1,000

 

           2,291,164

 

              (87,820)

 

1)     The Company acquired preferred shares issued by the Company in the financial market, of which: (i) On June 1, 2017, the Company acquired 45 preferred shares issued by the Company in the financial market, at a unit price of R$47.31, totaling R$2; and (ii) on July 5, 2017, 661 shares at a unit price of R $ 45.26, totaling R$30.

 

2)   On June 8, 2017, the Company transferred the 45 preferred shares acquired on June 1, 2017, in order to comply with the judicial process decisions in which the Company is involved in rights to the complementary receipt of shares calculated in relation to network expansion plans after 1996, occurred in December 2016 (see Note 17.c), at an average price of R$46.62, totaling R$2.

 

b.2) Other capital reserves

 

The breakdown as of September 30, 2017 and December 31, 2016 is as follows.

 


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
 
 

 

 

 

 

 

 

Consolidated

 

 

 

 

 

 

09/30/17

 

12/31/16

Excess of the value in the issue or capitalization, in relation to the basic value of the share on the issue date (1)

           2,799,004

 

           2,799,004

Cancelation of treasury shares according to the Special Shareholders' Meeting  (SGM) of 3/12/15 (2)

 

            (112,107)

 

            (112,107)

Direct costs of capital increases (3)

 

 

 

 

 

              (62,433)

 

              (62,433)

Incorporation of shares of GVTPart. (4)

 

 

 

 

 

          (1,188,707)

 

          (1,188,707)

Reclassification premium in the acquisition of equity interest in TData (5)

 

 

 

              (75,388)

 

              (75,388)

Preferred shares delivered referring to the judicial process of expansion plan (6)

 

                       2

 

                       2

Effects of the acquisition of Terra Networks Brasil by TData (7)

 

 

 

 

 

              (59,029)

 

                        -

Total

 

 

 

 

 

           1,301,342

 

           1,360,371

(1)  Includes (i) R$63,074 in tax benefit arising from the absorption of Telefônica Data do Brasil Ltda., which will be capitalized in favor of the controlling shareholder (SP Telecomunicações Participações Ltda.) once the tax credit has been recognized in accordance with CVM Instruction 319/99; and (ii) R$2,735,930 related to the excess of the value in the issue or capitalization, in relation to the basic value of the share on the issue date.

 

(2)  The cancellation of 2,332,686 shares issued by the Company, held in treasury, approved at the Special Shareholders' Meeting held on March 12, 2015.

 

(3)  Refers to direct costs (net of taxes) of Company capital increases on April 28, 2015 and April 30, 2015, arising from the Primary Offering of Shares.

 

(4)  Refers to the difference between the economic values of the merger of shares of GVTPart. and market value of shares, issued on the transaction closing date.

 

(5)  Regarding the effects of the acquisition of shares of non-controlling shareholders that, with the adoption of IFRS 10 / CPCs 35 and 36, would be recorded in equity when there is no change in the shareholding control.

 

(6)  Refers to the effects of stock prices on acquisition in the financial market and write-offs due to the transfer of 395 preferred shares in treasury to outstanding shares, equivalent to the amount of R$15, for compliance with judicial process decisions in which the Company is involved regarding rights to the complementary receipt of shares calculated in relation to network expansion plans after 1996, occurred in December 2016 (see note 17.c).

 

(7)  Refers to the effects of TData's acquisition of Terra Networks, related to the difference between the consideration given in exchange for the equity interest obtained and the value of the net assets acquired (note 1 e).

 

c) Revenue reserves

 

c.1) Legal reserve

 

This reserve is constituted by allocation of 5% of the year's net income within a maximum of 20% of paid-up capital. The legal reserve may only be used to increase capital and offset accumulated losses.

 

The balance of this item was R$1,907,905 at September 30, 2017 and December 31, 2016.

 

c.2) Special Reserve for Expansion and Modernization

 

In accordance with Article 196 of Law 6,404/76, based on the capital budget submitted to and approved by the General Meeting of Shareholders of April 26, 2017, the Company established a special reserve of R$550,000 for expansion and modernization, which will be used to partially fund capital expenditure for the 2017 financial year.

 

The balance of this item at September 30, 2017 and December 31, 2016 was R$550,000.

 

c.3) Tax Incentives Reserve

 

In relation to ICMS tax paid in the states of Minas Gerais and Espírito Santo, the Company has tax benefits in the form of credits granted by the applicable bodies for investments it made to install supporting equipment for SMP services, which is fully functioning and operating in accordance with current regulations, thus ensuring that the localities listed in the procurement notice will be included in the SMP coverage area.

 

These tax benefits was excluded from calculations of dividends and may be used only in cases of capital increase or absorption of losses.

 


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
 
The balance of this caption at September 30, 2017 and December 31, 2016 was R$25,126 and R$17,069, respectively.

 

d) Dividends and interest on equity

 

d.1) Additional dividends proposed for 2016

 

On April 26, 2017, the Company's Ordinary General Meeting approved the allocation of proposed additional dividends for 2016, not yet distributed, amounting of R$1,913,987, equivalent to R$1.06295487664 and R$1.16925036430 for common and preferred shares, respectively, to the holders of common and preferred shares that were registered in the Company's records at the end of the day of the Ordinary General Meeting. The amount will be paid as of December 13, 2017 (Note 16).

 

The balance of this item was R$1,913,987 at December 31, 2016.

 

d.2) Interim payments of interest on equity for 2017

 

At meetings of the Company's Board of Directors, the directors approved the allocations of interest on shareholders' equity, related to the 2017 fiscal year, pursuant to Article 28 of the Company's Bylaws, Article 9 of Law 9,249/95 and CVM Deliberation 638/12, which will be allocated to the mandatory minimum dividend for the fiscal year of 2017, as follows:

 

 

Dates

 

Gross Amount

 

Net Value

 

Amount per Share (1)

Approval

 

Credit

 

Beginning of Payment

 

Common

 

Preferred (2)

 

Total

 

Common

 

Preferred (2)

 

Total

 

Common

 

Preferred (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

02/13/17

 

02/24/17

 

Until 12/31/18

 

        56,916

 

      123,084

 

      180,000

 

        48,379

 

      104,621

 

      153,000

 

        0.084970

 

        0.093467

03/20/17

 

03/31/17

 

Until 12/31/18

 

      110,669

 

      239,331

 

      350,000

 

        94,069

 

      203,431

 

      297,500

 

        0.165220

 

        0.181742

06/19/17

 

06/30/17

 

Until 12/31/18

 

        30,039

 

        64,961

 

        95,000

 

        25,533

 

        55,217

 

        80,750

 

        0.044845

 

        0.049330

09/18/17

 

09/29/17

 

Until 12/31/18

 

        96,440

 

      208,560

 

      305,000

 

        81,974

 

      177,276

 

      259,250

 

        0.143978

 

        0.158375

Total

 

      294,064

 

      635,936

 

      930,000

 

      249,954

 

      540,546

 

      790,500

 

 

 

 

 

(1)    The amounts of IOE are calculated and stated net of Withholding Income Tax (IRRF). The immune shareholders received the full IOE amount, without withholding income tax at source.

 

(2)    The gross and net values for the preferred shares are 10% higher than those attributed to each common share, as per article 7 of the Company's Articles of Incorporation.

 

d.3) Unclaimed dividends and interest on equity

 

Pursuant to article 287, paragraph II, item "a" of Law No. 6,404, of December 15, 1976, the dividends and interest on equity unclaimed by shareholders expire in 3 (three) years, as from the initial payment date. The Company reverses the amount of unclaimed dividends and IOE to equity upon expiry.

 

In the nine-month period ended September 30, 2017, the Company reversed expired dividends in the amount of R$72,840  (Note 16).

 

e) Other comprehensive income

 

Financial instruments available for sale: These refer to changes in fair value of financial assets available for sale.

 

Derivative financial instruments: These refer to the effective part of cash flow hedges up to the balance sheet date.

 

Currency translation effects for foreign investments: This refers to currency translation differences arising from the translation of financial statements of Aliança (jointly-controlled entity).

 

Changes in other comprehensive income are as follows:

 


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
 

 

Consolidated

 

Financial instruments available for sale

 

Derivative transactions

 

Currency translation effects - foreign investments

 

Total

Balances at 12/31/15

              (8,936)

 

                  379

 

             34,025

 

             25,468

    Exchange variation

                      -

 

                      -

 

            (13,250)

 

            (13,250)

    Losses from future contracts

                      -

 

              (3,800)

 

                      -

 

              (3,800)

    Losses on financial assets available for sale

                  178

 

                      -

 

                      -

 

                  178

Balances at 09/30/16

              (8,758)

 

              (3,421)

 

             20,775

 

               8,596

    Exchange variation

                      -

 

                      -

 

              (3,982)

 

              (3,982)

    Gains from future contracts

                      -

 

               3,842

 

                      -

 

               3,842

    Reclassification of gains cash flow hedge for capex

                      -

 

               3,128

 

                      -

 

               3,128

    Gains on financial assets available for sale

                 (123)

 

                      -

 

                      -

 

                 (123)

Balances at 12/31/16

              (8,881)

 

               3,549

 

             16,793

 

             11,461

    Exchange variation

                      -

 

                      -

 

               6,493

 

               6,493

    Gains from future contracts

                      -

 

                 (723)

 

                      -

 

                 (723)

    Losses on financial assets available for sale

                  264

 

                      -

 

                      -

 

                  264

Balances at 09/30/17

              (8,617)

 

               2,826

 

             23,286

 

             17,495

 

f) Company Share Repurchase Program

 

In a meeting held on June 9, 2017, the Company's Board of Directors, in accordance with article 17, item XV, of the Articles of Incorporation, approved the repurchase of common and preferred shares issued by the Company, under CVM Ruling No. 567, of September 17, 2015, for acquisition of common and preferred shares issued by the Company for subsequent cancellation, disposal or to be held in treasury, without decreasing capital, to increase shareholder value through the efficient application of available cash resources and optimize the Company's capital allocation.

 

The repurchase shall be made through the use of the capital reserve balance included in the balance sheet as of March 31, 2017, excluding the reserves referred to in article 7, paragraph 1, of CVM Instruction 567, of September 17, 2015.


This program is effective until December 8, 2018, with the acquisitions made at B3, at market prices, observing the legal and regulatory limits, being the maximum amounts to be acquired of 870,781 common shares and 41,510,761 preferred shares.

 

On July 5, 2017, the Company acquired 661 preferred shares issued by the Company at an average unit price of R$45.26, totaling R$30. With this acquisition, the Company's total treasury shares total 2,291,164, of which 2,290,164 are common shares and 1,000 are preferred shares (Note 21 b.1).

 

g) Earnings per share

 

Basic and diluted earnings per share were calculated by dividing profit attributed to the Company's shareholders by the weighted average number of outstanding common and preferred shares for the period.

 

The following table shows the calculation of earnings per share in the nine-month ended September 30, 2017 and 2016:


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
 

 

Company

 

Three-month periods ended

 

Nine-month periods ended

 

09.30.17

 

09.30.16

 

09.30.17

 

09.30.16

Net income for the year attributable to shareholders:

            1,222,716

 

               952,690

 

            3,091,835

 

            2,870,416

   Common shares

               386,619

 

               301,238

 

               977,630

 

               907,618

   Preferred shares

               836,097

 

               651,452

 

            2,114,205

 

            1,962,798

 

 

 

 

 

 

 

 

Number of shares:

            1,688,694

 

            1,688,694

 

            1,688,694

 

            1,688,694

    Weighted average number of outstanding common shares for the year

               569,354

 

               569,354

 

               569,354

 

               569,354

    Weighted average number of outstanding preferred shares for the year

            1,119,340

 

            1,119,340

 

            1,119,340

 

            1,119,340

 

 

 

 

 

 

 

 

Basic and diluted earnings per share:

 

 

 

 

 

 

 

   Common shares (R$)

                    0.68

 

                    0.53

 

                    1.72

 

                    1.59

   Preferred shares (R$)

                    0.75

 

                    0.58

 

                    1.89

 

                    1.75

22)  NET OPERATING REVENUE

 

 

 

Company

 

Three-month periods ended

 

Nine-month periods ended

 

09.30.17

 

09.30.16

 

09.30.17

 

09.30.16

Gross operating revenue (1)

              15,174,130

 

              15,592,940

 

              46,978,442

 

              43,639,922

 

 

 

 

 

 

 

 

Deductions from gross operating revenue

               (5,542,636)

 

               (5,481,830)

 

             (17,212,722)

 

             (15,258,058)

   Taxes

               (3,829,002)

 

               (3,725,242)

 

             (12,029,914)

 

             (10,746,059)

   Discounts granted and return of goods

               (1,713,634)

 

               (1,756,588)

 

               (5,182,808)

 

               (4,511,999)

 

 

 

 

 

 

 

 

Net operating revenue

                9,631,494

 

              10,111,110

 

              29,765,720

 

              28,381,864

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

Three-month periods ended

 

Nine-month periods ended

 

09.30.17

 

09.30.16

 

09.30.17

 

09.30.16

Gross operating revenue (1)

              16,582,845

 

              16,259,140

 

              49,706,431

 

              48,294,193

 

 

 

 

 

 

 

 

Deductions from gross operating revenue

               (5,696,896)

 

               (5,565,775)

 

             (17,533,139)

 

             (16,659,383)

   Taxes

               (3,979,585)

 

               (3,803,844)

 

             (12,342,050)

 

             (11,463,699)

   Discounts granted and return of goods

               (1,717,311)

 

               (1,761,931)

 

               (5,191,089)

 

               (5,195,684)

 

 

 

 

 

 

 

 

Net operating revenue

              10,885,949

 

              10,693,365

 

              32,173,292

 

              31,634,810

 

(1)  These include telephone services, use of interconnection network, data and SVA services, cable TV and other services. For the quarters ended September 30, 2017 and 2016 respectively, the amounts relating to infrastructure-related swap contracts, for which the Company acts as an agent under IAS 18, totaled R$325,139 and R$246,758, respectively (Note 23).

 

No one customer accounted for more than 10% of gross operating revenues in the nine-month ended September 30, 2017 and 2016.

 

All amounts in net income are included in the income tax and social contribution bases.

 

 


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 

 

23) OPERATING COSTS AND EXPENSES

 

 

 

Company

 

Three-month periods ended

 

09.30.17

 

09.30.16

 

Cost of sales and services

 

Selling expenses

 

General and administrative expenses

 

Total

 

Cost of sales and services

 

Selling expenses

 

General and administrative expenses

 

Total

Personnel

         (169,596)

 

           (494,849)

 

         (123,948)

 

         (788,393)

 

         (207,349)

 

           (529,510)

 

         (186,985)

 

         (923,844)

Third-party services

      (1,208,455)

 

        (1,620,191)

 

         (301,535)

 

      (3,130,181)

 

      (1,221,255)

 

        (1,567,357)

 

         (297,322)

 

      (3,085,934)

Interconnection and network use

         (351,916)

 

                      -

 

                    -

 

         (351,916)

 

         (450,249)

 

                      -

 

                    -

 

         (450,249)

Advertising and publicity

                    -

 

           (274,061)

 

                    -

 

         (274,061)

 

                    -

 

           (264,102)

 

                    -

 

         (264,102)

Rental, insurance, condominium and connection means (1)

         (665,136)

 

            (34,433)

 

           (44,803)

 

         (744,372)

 

         (611,167)

 

            (23,285)

 

           (46,813)

 

         (681,265)

Taxes, charges and contributions

         (442,724)

 

              (9,233)

 

           (13,901)

 

         (465,858)

 

         (489,119)

 

                 (789)

 

           (24,520)

 

         (514,428)

Estimated impairment losses on accounts receivable (Note 4)

                    -

 

           (354,877)

 

                    -

 

         (354,877)

 

                    -

 

           (322,828)

 

                    -

 

         (322,828)

Depreciation and amortization (2)

      (1,481,349)

 

           (360,434)

 

         (113,507)

 

      (1,955,290)

 

      (1,485,866)

 

           (367,057)

 

         (113,332)

 

      (1,966,255)

Cost of goods sold

         (420,877)

 

                      -

 

                    -

 

         (420,877)

 

         (476,150)

 

                      -

 

                    -

 

         (476,150)

Materials and other operating costs and expenses

           (11,791)

 

            (50,938)

 

            (3,718)

 

           (66,447)

 

           (24,006)

 

            (50,011)

 

            (9,015)

 

           (83,032)

Total

      (4,751,844)

 

        (3,199,016)

 

         (601,412)

 

      (8,552,272)

 

      (4,965,161)

 

        (3,124,939)

 

         (677,987)

 

      (8,768,087)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

Nine-month periods ended

 

09.30.17

 

09.30.16

 

Cost of sales and services

 

Selling expenses

 

General and administrative expenses

 

Total

 

Cost of sales and services

 

Selling expenses

 

General and administrative expenses

 

Total

Personnel

         (565,844)

 

        (1,655,559)

 

         (368,901)

 

      (2,590,304)

 

         (602,351)

 

        (1,487,944)

 

         (492,888)

 

      (2,583,183)

Third-party services

      (3,628,775)

 

        (4,863,846)

 

         (914,417)

 

      (9,407,038)

 

      (3,432,067)

 

        (4,505,722)

 

         (862,240)

 

      (8,800,029)

Interconnection and network use

      (1,069,564)

 

                      -

 

                    -

 

      (1,069,564)

 

      (1,426,763)

 

                      -

 

                    -

 

      (1,426,763)

Advertising and publicity

                    -

 

           (732,023)

 

                    -

 

         (732,023)

 

                    -

 

           (723,656)

 

                    -

 

         (723,656)

Rental, insurance, condominium and connection means (1)

      (1,957,270)

 

           (110,806)

 

         (135,438)

 

      (2,203,514)

 

      (1,665,013)

 

            (92,698)

 

         (138,953)

 

      (1,896,664)

Taxes, charges and contributions

      (1,329,280)

 

            (30,141)

 

           (34,574)

 

      (1,393,995)

 

      (1,382,006)

 

              (3,480)

 

           (56,251)

 

      (1,441,737)

Estimated impairment losses on accounts receivable (Note 4)

                    -

 

        (1,037,677)

 

                    -

 

      (1,037,677)

 

                    -

 

           (900,456)

 

                    -

 

         (900,456)

Depreciation and amortization (2)

      (4,423,556)

 

        (1,080,655)

 

         (338,185)

 

      (5,842,396)

 

      (4,082,646)

 

           (956,027)

 

         (317,174)

 

      (5,355,847)

Cost of goods sold

      (1,296,470)

 

                      -

 

                    -

 

      (1,296,470)

 

      (1,475,816)

 

                      -

 

                    -

 

      (1,475,816)

Materials and other operating costs and expenses

           (56,798)

 

           (132,502)

 

           (14,374)

 

         (203,674)

 

           (62,900)

 

           (130,132)

 

           (29,360)

 

         (222,392)

Total

    (14,327,557)

 

        (9,643,209)

 

      (1,805,889)

 

    (25,776,655)

 

    (14,129,562)

 

        (8,800,115)

 

      (1,896,866)

 

    (24,826,543)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

Three-month periods ended

 

09.30.17

 

09.30.16

 

Cost of sales and services

 

Selling expenses

 

General and administrative expenses

 

Total

 

Cost of sales and services

 

Selling expenses

 

General and administrative expenses

 

Total

Personnel

         (217,235)

 

           (597,099)

 

         (134,091)

 

         (948,425)

 

         (216,849)

 

           (531,770)

 

         (190,331)

 

         (938,950)

Third-party services

      (1,426,850)

 

        (1,614,254)

 

         (315,096)

 

      (3,356,200)

 

      (1,463,876)

 

        (1,576,829)

 

         (292,231)

 

      (3,332,936)

Interconnection and network use

         (351,916)

 

                      -

 

                    -

 

         (351,916)

 

         (453,651)

 

                      -

 

                    -

 

         (453,651)

Advertising and publicity

                    -

 

           (276,337)

 

                    -

 

         (276,337)

 

                    -

 

           (264,102)

 

                    -

 

         (264,102)

Rental, insurance, condominium and connection means (1)

         (667,173)

 

            (34,491)

 

           (45,117)

 

         (746,781)

 

         (612,978)

 

            (23,471)

 

           (46,874)

 

         (683,323)

Taxes, charges and contributions

         (448,191)

 

              (9,235)

 

           (14,101)

 

         (471,527)

 

         (496,284)

 

                 (789)

 

           (24,916)

 

         (521,989)

Estimated impairment losses on accounts receivable (Note 4)

                    -

 

           (380,400)

 

                    -

 

         (380,400)

 

                    -

 

           (342,543)

 

                    -

 

         (342,543)

Depreciation and amortization (2)

      (1,487,827)

 

           (360,443)

 

         (113,704)

 

      (1,961,974)

 

      (1,491,917)

 

           (367,066)

 

         (113,559)

 

      (1,972,542)

Cost of goods sold

         (483,882)

 

                      -

 

                    -

 

         (483,882)

 

         (513,550)

 

                      -

 

                    -

 

         (513,550)

Materials and other operating costs and expenses

           (12,644)

 

            (52,239)

 

            (3,930)

 

           (68,813)

 

           (23,865)

 

            (50,048)

 

            (8,828)

 

           (82,741)

Total

      (5,095,718)

 

        (3,324,498)

 

         (626,039)

 

      (9,046,255)

 

      (5,272,970)

 

        (3,156,618)

 

         (676,739)

 

      (9,106,327)

 


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 

 

 

 

Consolidated

 

Nine-month periods ended

 

09.30.17

 

09.30.16

 

Cost of sales and services

 

Selling expenses

 

General and administrative expenses

 

Total

 

Cost of sales and services

 

Selling expenses

 

General and administrative expenses

 

Total

Personnel

         (628,791)

 

        (1,762,514)

 

         (385,099)

 

      (2,776,404)

 

         (770,880)

 

        (1,575,431)

 

         (525,266)

 

      (2,871,577)

Third-party services

      (4,230,763)

 

        (4,846,822)

 

         (923,959)

 

    (10,001,544)

 

      (4,384,522)

 

        (4,595,885)

 

         (908,648)

 

      (9,889,055)

Interconnection and network use

      (1,069,564)

 

                      -

 

                    -

 

      (1,069,564)

 

      (1,461,279)

 

                      -

 

                    -

 

      (1,461,279)

Advertising and publicity

                    -

 

           (734,299)

 

                    -

 

         (734,299)

 

                    -

 

           (775,418)

 

                    -

 

         (775,418)

Rental, insurance, condominium and connection means (1)

      (1,964,316)

 

           (111,494)

 

         (135,857)

 

      (2,211,667)

 

      (1,768,588)

 

           (102,354)

 

         (139,785)

 

      (2,010,727)

Taxes, charges and contributions

      (1,355,184)

 

            (30,143)

 

           (35,758)

 

      (1,421,085)

 

      (1,430,395)

 

              (4,713)

 

           (61,295)

 

      (1,496,403)

Estimated impairment losses on accounts receivable (Note 4)

                    -

 

        (1,108,925)

 

                    -

 

      (1,108,925)

 

                    -

 

        (1,003,976)

 

                    -

 

      (1,003,976)

Depreciation and amortization (2)

      (4,442,631)

 

        (1,080,683)

 

         (339,494)

 

      (5,862,808)

 

      (4,469,743)

 

        (1,052,066)

 

         (317,339)

 

      (5,839,148)

Cost of goods sold

      (1,421,308)

 

                      -

 

                    -

 

      (1,421,308)

 

      (1,565,118)

 

                      -

 

                    -

 

      (1,565,118)

Materials and other operating costs and expenses

           (59,990)

 

           (137,467)

 

           (14,829)

 

         (212,286)

 

           (79,348)

 

           (137,440)

 

           (38,860)

 

         (255,648)

Total

    (15,172,547)

 

        (9,812,347)

 

      (1,834,996)

 

    (26,819,890)

 

    (15,929,873)

 

        (9,247,283)

 

      (1,991,193)

 

    (27,168,349)

 

(1)  The amounts relating to infrastructure-related swap contracts, under the concept of agent under CPC 30/IAS 18, which were not recognized as costs and revenues in the nine-month ended September 30, 2017 and 2016 respectively, totaled R$325,139 and R$246,758, respectively (Note 22).

 

(2) Includes R$1,267 and R$5,774, related to non-cumulative PIS and COFINS tax credits in the nine-month ended September 30, 2017 and 2016, respectively.

 

24)  OTHER OPERATING INCOME (EXPENSES), NET

 

 

Company

 

Three-month periods ended

 

Nine-month periods ended

 

09.30.17

 

09.30.16

 

09.30.17

 

09.30.16

Recovered expenses and fines

                 87,729

 

               109,163

 

               267,286

 

               348,429

Provisions for labor, tax, civil, regulatory and contingent liabilities (Note 17)

              (191,878)

 

              (229,301)

 

              (640,383)

 

              (713,451)

Net gain (loss) on asset disposal/loss (1)

                  (2,373)

 

                  (7,267)

 

                (19,310)

 

               458,380

Other operating income (expenses) (2)

                (15,672)

 

                (19,757)

 

              (104,970)

 

                  (2,733)

Total

              (122,194)

 

              (147,162)

 

              (497,377)

 

                 90,625

 

 

 

 

 

 

 

 

Other operating income

                 87,729

 

               109,163

 

               267,286

 

               806,809

Other operating expenses

              (209,923)

 

              (256,325)

 

              (764,663)

 

              (716,184)

Total

              (122,194)

 

              (147,162)

 

              (497,377)

 

                 90,625

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

Three-month periods ended

 

Nine-month periods ended

 

09.30.17

 

09.30.16

 

09.30.17

 

09.30.16

Recovered expenses and fines

                 88,450

 

               109,979

 

               270,572

 

               369,832

Provisions for labor, tax, civil, regulatory and PPA (Note 17)

              (190,160)

 

              (232,539)

 

              (650,654)

 

              (744,489)

Net gain (loss) on asset disposal/loss (1)

                  (3,331)

 

                  (5,880)

 

                (22,921)

 

               465,391

Other operating income (expenses) (2)

                (19,705)

 

                (20,870)

 

                (93,975)

 

                   2,776

Total

              (124,746)

 

              (149,310)

 

              (496,978)

 

                 93,510

 

 

 

 

 

 

 

 

Other operating income

                 88,450

 

               109,979

 

               270,572

 

               837,999

Other operating expenses

              (213,196)

 

              (259,289)

 

              (767,550)

 

              (744,489)

Total

              (124,746)

 

              (149,310)

 

              (496,978)

 

                 93,510

 

(1)  The amount shown for 2016 includes R$476,371 (net of residual values) from the Company's sale of 1,655 transmission towers to Telxius Torres Brasil (company of the Telefónica Group). After the sale of these assets, a lease agreement for part of the towers sold was entered into, thus ensuring continued transmission of data for mobile services.

 

The transaction was recognized as sale and leaseback as provided under IAS 17. Management analyzed each asset leased back and classified them as operating or finance leases in accordance with IAS 17 qualitative and quantitative criteria.

 


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
 
Risks and benefits relating to these towers have been transferred to their purchasers, with the exception of several towers for which transfer of risks and benefits was not possible. For these items, the amount was recognized as deferred revenue (Note 18).

 

(2)  In the same transaction described in item (1), the Company transferred assignment of current lease agreements for sites and sold sharing agreements (customer portfolio) for R$40,899.

 

25) FINANCIAL INCOME (EXPENSES)

 

 

Company

 

Three-month periods ended

 

Nine-month periods ended

 

09.30.17

 

09.30.16

 

09.30.17

 

09.30.16

Financial Income

 

 

 

 

 

 

 

Interest income

                   160,306

 

                   194,740

 

                   491,371

 

                   452,154

Interest receivable (customers, taxes and other)

                    30,865

 

                         376

 

                   102,226

 

                    35,383

Gain on derivative transactions (Note 30)

                    85,437

 

                   204,116

 

                   294,446

 

                   822,813

Foreign exchange variations on loans and financing (Note 19)

                    46,026

 

                      4,327

 

                   108,950

 

                   408,242

Other revenues from foreign exchange and monetary variation

                    96,958

 

                   130,657

 

                   323,932

 

                   254,677

Other financial income

                    32,215

 

                    18,825

 

                   107,949

 

                    26,482

Total

                   451,807

 

                   553,041

 

                1,428,874

 

                1,999,751

 

 

 

 

 

 

 

 

Financial Expenses

 

 

 

 

 

 

 

Loan, financing, debenture, finance lease charges and contingent consideration (Note 19)

                  (240,733)

 

                  (292,903)

 

                  (775,434)

 

                  (800,308)

Foreign exchange variation on loans and financing (Note 19)

                     (8,839)

 

                   (12,316)

 

                   (88,817)

 

                  (127,222)

Loss on derivative transactions (Note 30)

                  (115,008)

 

                  (216,435)

 

                  (361,249)

 

               (1,137,877)

Interest payable (financial institutions, provisions, trade accounts payable, taxes and other)

                   (34,684)

 

                   (38,182)

 

                  (110,720)

 

                  (202,396)

Other expenses with foreign exchange and monetary variation

                  (210,365)

 

                  (267,327)

 

                  (747,096)

 

                  (563,873)

IOF, Pis, Cofins and other financial expenses

                   (41,984)

 

                   (45,141)

 

                  (139,717)

 

                  (112,044)

Total

                  (651,613)

 

                  (872,304)

 

               (2,223,033)

 

               (2,943,720)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

Three-month periods ended

 

Nine-month periods ended

 

09.30.17

 

09.30.16

 

09.30.17

 

09.30.16

Financial Income

 

 

 

 

 

 

 

Interest income

                   173,724

 

                   211,671

 

                   543,878

 

                   509,301

Interest receivable (customers, taxes and other)

                    32,356

 

                      3,199

 

                   104,396

 

                    60,298

Gain on derivative transactions (Note 30)

                    88,789

 

                   204,116

 

                   297,798

 

                   822,813

Foreign exchange variations on loans and financing (Note 19)

                    46,026

 

                      4,327

 

                   108,950

 

                   408,242

Other revenues from foreign exchange and monetary variation

                    98,243

 

                   130,722

 

                   329,579

 

                   253,185

Other financial income

                    39,303

 

                    25,483

 

                   128,752

 

                    46,312

Total

                   478,441

 

                   579,518

 

                1,513,353

 

                2,100,151

 

 

 

 

 

 

 

 

Financial Expenses

 

 

 

 

 

 

 

Loan, financing, debenture, finance lease charges and indemnification liability (Note 19)

                  (240,733)

 

                  (292,903)

 

                  (775,434)

 

                  (840,801)

Foreign exchange variation on loans and financing (Note 19)

                     (8,839)

 

                   (12,316)

 

                   (88,817)

 

                  (127,222)

Loss on derivative transactions (Note 30)

                  (115,409)

 

                  (216,435)

 

                  (361,650)

 

               (1,137,877)

Interest payable (financial institutions, provisions, trade accounts payable, taxes and other)

                   (35,382)

 

                   (40,649)

 

                  (112,799)

 

                  (210,339)

Other expenses with foreign exchange and monetary variation

                  (205,363)

 

                  (268,125)

 

                  (756,626)

 

                  (562,979)

IOF, Pis, Cofins and other financial expenses

                   (43,227)

 

                   (45,428)

 

                  (143,197)

 

                  (140,123)

Total

                  (648,953)

 

                  (875,856)

 

               (2,238,523)

 

               (3,019,341)

 


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
 
26) INCOME TAX AND SOCIAL CONTRIBUTION

 

The Company and its subsidiaries recognize income tax and social contribution on a monthly accrual basis, and pay the taxes based on estimates, in accordance with the trial balances for tax-reduction/tax-suspension purposes. Taxes calculated on profits until the month of the financial statements are recorded in liabilities or assets, as applicable.

 

Reconciliation of the reported tax expense and the amounts calculated by applying the statutory tax rate of 34% (income tax of 25% and social contribution of 9%).

 

 

 

Company

 

Three-month periods ended

 

Nine-month periods ended

 

09.30.17

 

09.30.16

 

09.30.17

 

09.30.16

Income before taxes

                1,411,579

 

                1,049,388

 

                3,776,670

 

                3,325,147

Income and social contribution tax expenses, at the tax rate of 34%

                  (479,937)

 

                  (356,792)

 

               (1,284,068)

 

               (1,130,550)

Permanent and temporary differences

 

 

 

 

 

 

 

Equity pickup, net of effects from interest on equity received and surplus value of the assets purchased attributed to the Company (Note 10)

                   222,481

 

                    58,749

 

                   366,908

 

                   211,878

Unclaimed  interest on equity

                             -

 

                             -

 

                   (10,319)

 

                             -

Non-deductible expenses, gifts, incentives

                   (32,527)

 

                   (20,881)

 

                   (70,761)

 

                   (80,563)

Tax benefit related to interest on equity allocated

                   103,700

 

                   221,000

 

                   316,200

 

                   533,120

Other (additions) exclusions

                     (2,580)

 

                      1,226

 

                     (2,795)

 

                    11,384

Tax debits

                  (188,863)

 

                   (96,698)

 

                  (684,835)

 

                  (454,731)

 

 

 

 

 

 

 

 

Effective rate

13.4%

 

9.2%

 

18.1%

 

13.7%

Current income and social contribution taxes

                    48,385

 

                    75,059

 

                    46,222

 

                  (184,998)

Deferred income and social contribution taxes

                  (237,248)

 

                  (171,757)

 

                  (731,057)

 

                  (269,733)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

Three-month periods ended

 

Nine-month periods ended

 

09.30.17

 

09.30.16

 

09.30.17

 

09.30.16

Income before taxes

                1,544,449

 

                1,141,663

 

                4,132,616

 

                3,641,778

Income and social contribution tax expenses, at the tax rate of 34%

                  (525,112)

 

                  (388,165)

 

               (1,405,089)

 

               (1,238,205)

Permanent and temporary differences

 

 

 

 

 

 

 

Equity pickup, net of effects from interest on equity received and surplus value of the assets purchased attributed to the Company (Note 10)

                            4

 

                           92

 

                         463

 

                         339

Unclaimed  interest on equity

                             -

 

                             -

 

                   (10,319)

 

                             -

Temporary differences in subsidiaries

                      1,999

 

                             -

 

                      1,999

 

                             -

Non-deductible expenses, gifts, incentives

                   (32,527)

 

                   (22,522)

 

                   (72,695)

 

                   (84,077)

Tax benefit related to interest on equity allocated

                   103,700

 

                   221,000

 

                   316,200

 

                   533,120

Deferred taxes recognized in subsidiaries on tax loss carryforwards, negative basis and temporary differences referring to prior years

                   132,080

 

                             -

 

                   132,080

 

                             -

Other (additions) exclusions

                     (1,877)

 

                         622

 

                     (3,420)

 

                    17,461

Tax debits

                  (321,733)

 

                  (188,973)

 

               (1,040,781)

 

                  (771,362)

 

 

 

 

 

 

 

 

Effective rate

20.8%

 

16.6%

 

25.2%

 

21.2%

Current income and social contribution taxes

                  (196,389)

 

                        (818)

 

                  (440,085)

 

                  (475,273)

Deferred income and social contribution taxes

                  (125,344)

 

                  (188,155)

 

                  (600,696)

 

                  (296,089)

 

 

 


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
 
Breakdown of gains and losses of deferred income tax and social contribution on temporary differences is shown in Note 6.b).

 

27) BALANCES AND TRANSACTIONS WITH RELATED PARTIES

 

Balances and transactions with related parties

 

The main balances of assets and liabilities with related parties arise from transactions with companies related to the controlling group carried out at the prices and other commercial conditions agreed in contracts between the parties as follows:

 

a)   Fixed and mobile telephony services provided by Telefónica Group companies;

 

b)   Digital TV services provided by Media Networks Latino America;

 

c)   Lease and maintenance of safety equipment provided by Telefônica Inteligência e Segurança Brasil;

 

d)   Corporate services passed through at the cost effectively incurred for these services;

 

e)   Right to use certain software licenses, including maintenance and support provided by Telefónica Global Technology;

 

f)    International transmission infrastructure for several data circuits and roaming services provided by Telxius Cable Brasil (former Telefónica International Wholesale Brasil), Telefónica International Wholesale Services Espanha, Telefónica USA; and Media Net Br;

 

g)   Digital media; marketing and sales, in-store and outdoor digital marketing services provided by Telefônica On The Spot Soluções Digitais Brasil;

 

h)   Tower operations between the Company and Telxius Torres Brasil (sale and leaseback operation, Note 24);

 

i)    Content-related services provided by Terra Networks Brasil. On July 3, 2017, TData (a wholly-owned subsidiary of the Company) acquired the controlling interest in Terra Networks Brasil (note 1e). The balance presented in the result table refers to the period from January to June 2017;

 

j)    Data communication services and integrated solutions provided by Telefónica International Wholesale Services Espanha and Telefónica USA;

 

k)   Long distance call and international roaming services provided by companies of Telefónica Group;

 

l)    Sundry expenses and costs to be reimbursed by companies of Telefónica Group;

 

m)  Brand Fee for assignment of rights to use the brand paid to Telefónica;

 

n)   Stock option plan for employees of the Company and its subsidiaries related to acquisition of Telefónica shares;

 

o)   Cost Sharing Agreement (CSA) for digital-business related expenses reimbursed to Telefónica Latino América Holding S.L. (former Telefónica Internacional) and Telefónica Digital;

 

p)   Leases/rentals of Telefónica Group companies' buildings;

 

q)   Financial Clearing House roaming, inflows of funds for payments and receipts arising from roaming operation between group companies operated by Telfisa;

 

r)    Integrated e-learning, online education and training solutions provided by T.learning Services Brasil;

 

s)   Factoring transactions, credit facilities for services provided by the Group's suppliers;


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 

 

 

t)    Social investment in Fundação Telefônica, innovative use of technology to enhance learning and knowledge, contributing to personal and social development;

 

u)   Contracts or agreements assigning user rights for cable ducts, optical fiber duct rental services, and right-of-way related occupancy agreements with several highway concessionaires provided by Companhia AIX;

 

v)   Adquira Sourcing platform - online solution provided by Telefónica Compras Electrónicas to transact purchase and sale of all types of goods and services; and

 

w)  Operations with Terra Group companies headquartered abroad, related to the apportionment of corporate expenses, purchase of internet content, advertising and auditing services. The balance presented in the income statement refers to the period beginning on July 3, 2017, the date of Terra Brasil Networks' acquisition of TData (Note 1e).

 

As described in Note 29, the Company and its subsidiaries sponsor pension plans and other post-employment benefits to its employees with Visão Prev and Sistel.

 

The following table summarizes the consolidated balances with related parties:

 

 

 

 

 

Balance Sheet - Assets

 

 

 

At 09/30/17

 

At 12/31/16

 

 

 

Current assets

 

Non-current assets

 

Current assets

 

Non-current assets

Companies

Type of transaction

 

Cash and cash equivalents

 

Accounts receivable, net

 

Other assets

 

Other assets

 

Cash and cash equivalents

 

Accounts receivable, net

 

Other assets

 

Other assets

Parent Companies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SP Telecomunicações  Participações

d) / l)

 

                   -

 

                   -

 

                    4,571

 

                  2

 

                   -

 

                94

 

            9,607

 

                11

Telefónica LatinoAmerica Holding

l)

 

                   -

 

                   -

 

                 123,069

 

                   -

 

                   -

 

                   -

 

        206,619

 

                   -

Telefónica

l)

 

                   -

 

              466

 

                       149

 

                   -

 

                   -

 

                   -

 

              633

 

                   -

 

 

 

                   -

 

              466

 

                 127,789

 

                  2

 

                   -

 

                94

 

        216,859

 

                11

Other Group companies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Colombia Telecomunicaciones ESP

k)

 

                   -

 

            2,864

 

                    4,249

 

                   -

 

                   -

 

            2,641

 

            3,900

 

                   -

Companhia AIX de Participações

a)

 

                   -

 

                23

 

                           -

 

                   -

 

                   -

 

                37

 

                   -

 

                   -

Media Networks Brasil Soluções Digitais

a) / d)

 

                   -

 

            1,512

 

                         72

 

                40

 

                   -

 

                81

 

                19

 

                40

Pegaso PCS

k)

 

                   -

 

            2,701

 

                           -

 

                   -

 

                   -

 

            6,163

 

                   -

 

                   -

T.O2 Germany GMBH CO. OHG

k)

 

                   -

 

          18,868

 

                           -

 

                   -

 

                   -

 

            9,849

 

                   -

 

                   -

Telcel Telecom. Celulares C. A.

k)

 

                   -

 

            6,069

 

                           -

 

                   -

 

                   -

 

            6,180

 

                   -

 

                   -

Telefônica Factoring do Brasil

a) / d)  / l)

 

                   -

 

            7,468

 

                         21

 

                15

 

                   -

 

            4,927

 

                  6

 

                16

Telefónica Global Technology

l)

 

                   -

 

                   -

 

                  12,976

 

                   -

 

                   -

 

            1,614

 

          11,244

 

                   -

Telefônica Inteligência e Segurança Brasil 

a) / d) / l)

 

                   -

 

              296

 

                       615

 

              350

 

                   -

 

              868

 

              595

 

              350

Telefónica International Wholesale Services Espanha

  j) / k)

 

                   -

 

          70,941

 

                           -

 

                   -

 

                   -

 

          82,613

 

                   -

 

                   -

Telefônica Learning Services Brasil

a)

 

                   -

 

              223

 

                           -

 

                   -

 

                   -

 

                64

 

                   -

 

                   -

Telefónica Moviles Argentina

k)

 

                   -

 

            6,623

 

                           -

 

                   -

 

                   -

 

            6,288

 

                   -

 

                   -

Telefónica Moviles Del Chile

k)

 

                   -

 

              394

 

                       365

 

                   -

 

                   -

 

          10,207

 

              337

 

                   -

Telefónica Moviles Del Espanha

k)

 

                   -

 

            8,777

 

                           -

 

                   -

 

                   -

 

            9,220

 

                   -

 

                   -

Telefónica Moviles Del Uruguay

k)

 

                   -

 

              521

 

                           -

 

                   -

 

                   -

 

              761

 

                   -

 

                   -

Telefónica Moviles Panama

k)

 

                   -

 

              281

 

                           -

 

                   -

 

                   -

 

            1,260

 

                   -

 

                   -

Telefônica On The Spot Soluções Digitais Brasil

a) / d)

 

                   -

 

              413

 

                          9

 

                   -

 

                   -

 

              370

 

                  6

 

                   -

Telefônica Serviços Empresariais do Brasil

a) / d) / l) / p)

 

                   -

 

            2,858

 

                         64

 

            1,686

 

                   -

 

            2,518

 

              343

 

            2,067

Telefonica UK LTD.(O2 UK LTD)

k)

 

                   -

 

            8,431

 

                           -

 

                   -

 

                   -

 

            8,809

 

                   -

 

                   -

Telefónica USA

j)

 

                   -

 

            5,739

 

                           -

 

                   -

 

                   -

 

            3,550

 

                   -

 

                   -

Telfisa

q)

 

          11,537

 

                   -

 

                           -

 

                   -

 

          78,070

 

                   -

 

                   -

 

                   -

Telxius Cable Brasil 

a) / d) / k / l) / p)

 

                   -

 

          23,679

 

                       754

 

                76

 

                   -

 

          11,513

 

            2,602

 

                76

Telxius Torres Brasil

d) / l) p) / h)

 

                   -

 

          12,350

 

                       140

 

                   -

 

                   -

 

          13,842

 

            3,709

 

                   -

Terra Networks Brasil

a) / d) / l)

 

                   -

 

                   -

 

                           -

 

                   -

 

                   -

 

            5,499

 

            7,550

 

                46

Outras

a) / d) / k) / l) / p) / w)

 

                   -

 

          13,161

 

                       897

 

              126

 

                   -

 

            1,938

 

              693

 

              210

 

 

 

          11,537

 

        194,192

 

                  20,162

 

            2,293

 

          78,070

 

        190,812

 

          31,004

 

            2,805

Total

 

 

          11,537

 

        194,658

 

                 147,951

 

            2,295

 

          78,070

 

        190,906

 

        247,863

 

            2,816

 

 


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
 

 

 

 

Balance Sheet - Liabilities

 

 

 

At 09/30/17

 

At 12//31/16

 

 

 

Current liabilities

 

Non-current liabilities

 

Current liabilities

 

Non-current liabilities

Companies

Type of transaction

 

Trade  accounts payable and other payables

 

Other liabilities

 

Other liabilities

 

Trade  accounts payable and other payables

 

Other liabilities

 

Other liabilities

Parent Companies

 

 

 

 

 

 

 

 

 

 

 

 

 

SP Telecomunicações  Participações

 l)

 

                   -

 

          15,000

 

                           -

 

                   -

 

              533

 

                   -

Telefónica LatinoAmerica Holding

l)

 

                81

 

                   -

 

                           -

 

              109

 

                   -

 

                   -

Telefónica

l) m) / n)

 

            3,973

 

          80,612

 

                           -

 

            2,236

 

          84,759

 

                   -

 

 

 

            4,054

 

          95,612

 

                           -

 

            2,345

 

          85,292

 

                   -

Other Group companies

 

 

 

 

 

 

 

 

 

 

 

 

 

Colombia Telecomunicaciones S.A. ESP

k)

 

            1,375

 

                   -

 

                           -

 

            2,675

 

                   -

 

                   -

Companhia AIX de Participações

u)

 

            1,915

 

                   -

 

                           -

 

            1,835

 

                   -

 

                   -

Fundação Telefônica

t)

 

                   -

 

                   -

 

                           -

 

                   -

 

                52

 

                   -

Media Networks Brasil Soluções Digitais

f)

 

          23,850

 

                   -

 

                       318

 

          11,821

 

                   -

 

              318

Media Networks Latina America SAC

b)

 

          27,918

 

                   -

 

                           -

 

          32,398

 

                   -

 

                   -

Pegaso PCS

k)

 

              319

 

                   -

 

                           -

 

            2,452

 

                   -

 

                   -

T.O2 Germany GMBH CO. OHG

k)

 

            5,309

 

                   -

 

                           -

 

            4,409

 

                   -

 

                   -

Telcel Telecom. Celulares C. A.

k)

 

            5,226

 

                   -

 

                           -

 

            4,721

 

                   -

 

                   -

Telefónica Compras Electrónicas

v)

 

          23,109

 

                   -

 

                           -

 

          24,196

 

                   -

 

                   -

Telefônica Digital España

o)

 

          56,725

 

                   -

 

                           -

 

          35,347

 

                   -

 

                   -

Telefônica Factoring do Brasil

s)

 

                   -

 

              146

 

                           -

 

                   -

 

            6,154

 

                   -

Telefonica Global Roaming

k)

 

            1,796

 

                   -

 

                           -

 

            1,009

 

                   -

 

                   -

Telefónica Global Technology

e)

 

            3,363

 

                   -

 

                           -

 

          15,169

 

                   -

 

                   -

Telefônica Inteligência e Segurança Brasil

c)

 

          15,324

 

                19

 

                          8

 

          26,516

 

                19

 

                  8

Telefónica International Wholesale Services Espanha

f) / k)

 

          24,898

 

                  8

 

                           -

 

          50,121

 

                  8

 

                   -

Telefônica Learning Services Brasil

r)

 

          20,538

 

                   -

 

                           -

 

          16,328

 

                   -

 

                   -

Telefónica Moviles Argentina

k)

 

            3,920

 

                   -

 

                           -

 

          13,997

 

                   -

 

                   -

Telefónica Moviles Del Chile

k)

 

            1,021

 

                   -

 

                           -

 

          10,673

 

                   -

 

                   -

Telefónica Moviles Del Espanha

k)

 

            3,619

 

                   -

 

                           -

 

            4,671

 

                   -

 

                   -

Telefónica Moviles Del Uruguay

k)

 

              397

 

                   -

 

                           -

 

            2,059

 

                   -

 

                   -

Telefónica Moviles Panama

k)

 

              172

 

                   -

 

                           -

 

              737

 

                   -

 

                   -

Telefônica On The Spot Soluções Digitais Brasil

g)

 

            3,125

 

                   -

 

                           -

 

            2,950

 

                   -

 

                   -

Telefônica Serviços Empresariais do Brasil

l)

 

                   -

 

                42

 

                       434

 

              112

 

              803

 

              239

Telefonica UK LTD.(O2 UK LTD)

k)

 

            2,764

 

                   -

 

                           -

 

            3,868

 

                   -

 

                   -

Telefónica USA

f)

 

            5,287

 

                   -

 

                       164

 

          14,283

 

                   -

 

              168

Telxius Cable Brasil 

d) / f) / l)

 

          57,047

 

            1,874

 

                       378

 

          52,210

 

            1,690

 

              378

Telxius Torres Brasil

d ) h)

 

          33,777

 

            5,534

 

                           -

 

          33,178

 

          15,991

 

                   -

Terra Networks Brasil

i)

 

                   -

 

                   -

 

                           -

 

            3,360

 

              440

 

              769

Outras

l) / k) / w)

 

          10,385

 

                   -

 

                         29

 

            7,800

 

                   -

 

                29

 

 

 

        333,179

 

            7,623

 

                    1,331

 

        378,895

 

          25,157

 

            1,909

Total

 

 

        337,233

 

        103,235

 

                    1,331

 

        381,240

 

        110,449

 

            1,909

 


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
 
 

 

 

 

 

 

 

 

 

 

Income statement

Companies

 

 

 

 

 

 

Type of transaction

 

09/30/17

 

09/30/16

Parent Companies

 

 

 

 

 

 

 

 

 

 

 

   SP Telecomunicações Participações

 

 

 

 

d) / l)

 

              201

 

                47

   Telefónica LatinoAmerica Holding 

 

 

 

 

 l) / o)

 

          35,141

 

          71,860

   Telefónica

 

 

 

 

l) / m)  / n)

 

       (250,541)

 

       (240,588)

 

 

 

 

 

 

 

 

 

       (215,199)

 

       (168,681)

Other Group companies

 

 

 

 

 

 

 

 

 

 

 

Colombia Telecomunicaciones S.A. ESP

 

 

 

 

k)

 

            1,065

 

           (3,082)

Companhia AIX de Participações

 

 

 

 

a) / u)

 

         (16,971)

 

         (15,755)

Fundação Telefônica

 

 

 

 

a) / d) / l) t)

 

           (9,514)

 

           (8,950)

Media Networks Brasil Soluções Digitais

 

 

 

 

a) / d) / f)

 

         (36,924)

 

           (4,059)

Media Networks Latina America SAC

 

 

 

 

b)

 

         (23,742)

 

           (5,017)

Pegaso PCS

 

 

 

 

k)

 

            1,025

 

           (5,167)

T. Learning Services Brasil

 

 

 

 

a) / r)

 

         (35,158)

 

         (32,872)

T.O2 Germany GMBH CO. OHG

 

 

 

 

k)

 

             (237)

 

           (4,301)

Telcel Telecom. Celulares C. A.

 

 

 

 

k)

 

           (5,712)

 

             (451)

Telefónica Compras Electrónicas

 

 

 

 

v)

 

         (19,722)

 

         (35,874)

Telefônica Digital España

 

 

 

 

l) / o)

 

         (55,565)

 

         (29,787)

Telefônica Factoring do Brasil

 

 

 

 

a) / d) / l) / s)

 

              871

 

              557

Telefonica Global Roaming

 

 

 

 

k)

 

           (2,580)

 

           (6,074)

Telefónica Global Technology, S.A.U.

 

 

 

 

 e) / l)

 

         (23,217)

 

         (22,463)

Telefônica Inteligência e Segurança Brasil

 

 

 

 

a) / c) / d) / l)

 

         (22,543)

 

         (25,394)

Telefónica International Wholesale Services Espanha

 

 

 

 

 f) / j) / k)

 

          22,520

 

           (3,608)

Telefónica Moviles Argentina

 

 

 

 

k)

 

            9,596

 

           (5,659)

Telefónica Moviles Del Chile

 

 

 

 

k)

 

             (899)

 

              259

Telefónica Moviles Del Espanha

 

 

 

 

k)

 

             (982)

 

           (2,838)

Telefónica Moviles Del Uruguay

 

 

 

 

k)

 

              422

 

           (1,602)

Telefónica Moviles Panama

 

 

 

 

k)

 

               (85)

 

             (911)

Telefônica On The Spot Soluções Digitais Brasil

 

 

 

 

a) / d) / g)

 

           (4,917)

 

           (2,137)

Telefônica Serviços Empresariais do Brasil

 

 

 

 

a) / d) / l) / p)

 

           (1,035)

 

            1,038

Telefonica UK LTD.(O2 UK LTD)

 

 

 

 

k)

 

              684

 

             (863)

Telefónica USA

 

 

 

 

f) / j)

 

         (11,940)

 

           (8,199)

Telxius Cable Brasil 

 

 

 

 

a) / d) / f) / k / l) / p)

 

       (142,892)

 

       (189,430)

Telxius Torres Brasil

 

 

 

 

d) / l) / p) / h)

 

         (78,398)

 

         (46,595)

Terra Networks Brasil

 

 

 

 

a) / d) / i) / l)

 

           (8,234)

 

           (2,879)

Outras

 

 

 

 

a) / d) / k) / l) / p) w)

 

           (4,628)

 

           (1,211)

Total

 

 

 

 

 

 

 

 

       (469,712)

 

       (463,324)

 

 

 

 

 

 

 

 

 

       (684,911)

 

       (632,005)

 

Management compensation

 

Consolidated key management personnel compensation paid by the Company to its Board of Directors and Statutory Officers were R$16,101 and R$45,235 for the quarters ended September 30, 2017 and 2016 respectively. Of this amount, R$10,455 (R$19,445 on September 30, 2016) corresponds to salaries, benefits and social charges and R$5,646 (R$25,790 on September 30, 2016) to variable compensation.

 

These amounts were recorded as expenses with personnel under the General and administrative expenses group of accounts (Note 23).

 

For the quarters ended September 30, 2017 and 2016, our Directors and Officers did not receive any pension, retirement or similar benefits.

 

28)  SHARE-BASED PAYMENT PLANS

 

Telefónica, as the Company's parent company, has different share-based payment plans based on the share quotes, which were also offered to management and employees of its subsidiaries, including Telefônica Brasil and the latter's subsidiaries.

 

The fair value of these options is estimated on the grant date, based on a binomial pricing model reflecting terms and conditions of instruments granted.


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
 
The Company and its subsidiaries reimburse Telefónica for the amount of the fair value of the benefits granted to management and employees on the grant date.

 

The main plans in force on September 30, 2017 and December 31, 2016 were: (i) Performance & Investment Plan ("PIP") to reward senior management's global commitment; and (ii) Talent for the Future Share Plan ("TFSP") to reward the global commitment.

 

The details of these plans are the same as in Note 31) Share-Based Payment Plans, as disclosed in the financial statements for the year ended December 31, 2016.

 

The 2014-2017 cycle of PIP and TFSP were finalized in September 2017 and no Total Shareholder Return (TSR) was achieved, thus, no Telefónica shares were delivered to the Company's executives.

 

At September 30, 2017, the share price of Telefónica shares was 9.1920 euros and the plans were positioned as follows:

 

Plans

 

Cycles

 

Number of shares (1)

 

Final Date

PIP

 

5th cycle - October 1, 2015 (2)

 

                          485,589

 

  September 30, 2018 

TFSP

 

2nd cycle - October 1, 2015

 

                           83,500

 

  September 30, 2018 

 

(1)   For the PIP, it includes the initial quantities and co-investment and for the TFSP only the initial quantities.

 

(2) With 88 active executives (including 3 executives appointed under the Company's Bylaws).

 

On July 31, 2017 the cycle of the Global Employee Share Plan ("GESP") was finalized, with the delivery of the shares to employees who fulfilled the conditions established by the plan.

 

The expenses of the Company and its subsidiaries with the compensation plans based on actions described above, where applicable, are recorded as personnel expenses, divided between Cost of Services, Selling and General and Administrative Expenses (Note 23), corresponding to R$5,540 and R$10,928 for the quarters ended September 30, 2017 and 2016 respectively.

 

29)  PENSION PLANS AND OTHER POST-EMPLOYMENT BENEFITS

 

The plans sponsored by the Company and related benefit types are as follows:

 

Plan

 

Type

 

Entity

 

Sponsor

PBS-A

 

Defined benefit (DB)

 

Sistel

 

Telefônica Brasil, jointly with other telecoms resulting from privatization of the Sistema Telebrás

PAMA / PCE

 

Defined benefit (DB)

 

Sistel

 

Telefônica Brasil, jointly with other telecoms resulting from privatization of the Sistema Telebrás

Healthcare - Law No. 9656/98

 

Defined benefit (DB)

 

Telefônica Brasil

 

Telefônica Brasil

CTB

 

Defined benefit (DB)

 

Telefônica Brasil

 

Telefônica Brasil

Telefônica BD

 

Defined benefit (DB)

 

VisãoPrev

 

Telefônica Brasil

PREV

 

Hybrid

 

VisãoPrev

 

Telefônica Brasil

VISÃO

 

Defined contribution (DC) / Hybrid

 

VisãoPrev

 

Telefônica Brasil, TData and TGLog

 

The details of these plans are the same as in Note 32) Pension Plans and Other Post-Employment Benefits, as disclosed in the financial statements for the year ended December 31, 2016, except for the plans Vivo Prev, Visão TGestiona and Visão Telefônica, as described below.

 

On December 9, 2016, Visão Prev obtained approvals from the National Supplementary Pension Authority ("PREVIC") for the incorporation of Vivo Prev and Visão TGestiona plans to the Visão Telefônica plan. In this way, as of January 1, 2017, all participants in Vivo Prev and Visão TGestiona plans became participants in the Visão Telefônica plan. This unification preserves all vested rights, and gives participants of the incorporated plans access to the benefits of the Visão Telefônica plan.

 

 


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 

The main purpose of the mergers is to create greater synergy of the benefits offered to the participants, as well as to reduce administrative and operational costs of the plans, as well as to improve administrative efficiency.

 

Consolidated balances of both underfunded and surplus plans are shown below:

 

 

Consolidated

 

Plans with surplus

 

Plans with deficit

 

Total

Balances at 12/31/15

                 8,724

 

              (85,343)

 

              (76,619)

   Current service cost

                (2,155)

 

                (2,024)

 

                (4,179)

   Net interest on net defined benefit liabilities/assets

                    977

 

                (7,174)

 

                (6,197)

   Contributions and benefits paid by the employers

                 2,178

 

               12,616

 

               14,794

Balances at 09/30/16

                 9,724

 

              (81,925)

 

              (72,201)

   Current service cost

                   (719)

 

                   (674)

 

                (1,393)

   Net interest on net defined benefit liabilities/assets

                    325

 

                (2,392)

 

                (2,067)

   Contributions and benefits paid by the employers

                   (120)

 

                (6,081)

 

                (6,201)

   Effects on comprehensive income

                   (169)

 

            (236,598)

 

            (236,767)

Balances at 12/31/16

                 9,041

 

            (327,670)

 

            (318,629)

   Current service cost

                (2,362)

 

                (5,754)

 

                (8,116)

   Net interest on net defined benefit liabilities/assets

                    884

 

              (26,805)

 

              (25,921)

   Contributions and benefits paid by the employers

                 2,096

 

                 8,241

 

               10,337

   Business combination (Note 1e)

                     13

 

                   (680)

 

                   (667)

Balances at 09/30/17

                 9,672

 

            (352,668)

 

            (342,996)

 

Of the surplus amounts shown in the table above, the Company recognized consolidated amounts of R$9,441 and R$8,838 at September 30, 2017 and December 31, 2016, respectively (Note 9).

 

30)  FINANCIAL INSTRUMENTS AND RISK AND CAPITAL MANAGEMENT

 

a) Derivative transactions

 

The derivative financial instruments contracted by the Company are mainly intended to hedge against foreign exchange risk arising from assets and liabilities in foreign currency, risk of inflation on its debentures and leases indexed to the IPCA and against the risk of changes in TJLP of a portion of debt with BNDES. There are no, derivative financial instruments for speculative purposes and possible currency risks are hedged.

 

Management understands that the Company's internal controls for its derivatives are adequate to control risks associated with each strategy for the market. Gains/losses obtained or sustained by the Company in relation to its derivatives show that its risk management has been appropriate.

The Company calculates the effectiveness of the derivative contracts to hedge its financial liabilities and cash flows in foreign currency at the beginning of the operation and on an ongoing basis. At September 30, 2017 and December 31, 2016, the derivative instruments were effective for the hedged items.

As long as these derivatives contracts qualify for hedge accounting, the heged item may also be adjusted to fair value, offsetting the result of the derivatives, according to the rules of hedge accounting. This hedge accounting applies both to financial liabilities and probable cash flows in foreign currency.

At September 30, 2017 and December 31, 2016, the Company held no embedded derivatives contracts.

 

Derivatives contracts include specific penalties for breach of contract. Breach of contract provided for in agreements made with financial institutions leads to the early maturity thereof.

 

 

 

 


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 

a.1) Fair value of derivative financial instruments

The valuation method used to calculate the fair value of financial liabilities (if applicable) and derivative financial instruments was the discounted cash flow method, based on expected settlements or realization of liabilities and assets at market rates prevailing at the balance sheet date.

 

The fair values of positions in Reais are calculated by projecting future inflows from transactions using B3 yield curves discounting these flows to present value using market DI rates for swaps announced by B3.

 

The market values of foreign-exchange derivatives were obtained using the market exchange rates in effect at the balance sheet date and projected market rates obtained from the currency's coupon-rate yield curves. The linear convention of 360 calendar days was used to determine coupon rates of positions indexed in foreign currencies, while the exponential convention of 252 business days was used to determine coupon rates for positions indexed to CDI rates.

 

Consolidated derivatives financial instruments shown below are registered with B3 and classified as swaps, usually, that do not require margin deposits.

 


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
 

 

Consolidated

 

 

 

 

 

 

 

 

 

Accumulated effects from fair value

 

Notional Value

 

Net position at fair value

 

Amount receivable (payable)

Description

09/30/17

 

12/31/16

 

09/30/17

 

12/31/16

 

09/30/17

 

12/31/16

Long position

     1,852,339

 

     2,739,524

 

     2,004,568

 

     2,836,207

 

        177,031

 

        212,993

 

 

 

 

 

 

 

 

 

 

 

 

Foreign Currency

     1,021,604

 

     1,522,598

 

     1,025,127

 

     1,599,378

 

        106,805

 

        158,762

US$  (1) (2)

        518,965

 

        742,137

 

        508,338

 

        730,490

 

          49,543

 

          73,833

EUR  (2)

                   -

 

          70,064

 

                   -

 

          66,959

 

                   -

 

                   -

LIBOR US$  (1)

        462,138

 

        710,397

 

        516,770

 

        801,929

 

          57,243

 

          84,929

Options US$ (7)

          40,501

 

                   -

 

                19

 

                   -

 

                19

 

                   -

 

 

 

 

 

 

 

 

 

 

 

 

Floating rate

        631,190

 

        898,324

 

        659,103

 

        800,097

 

          32,897

 

          31,987

CDI (1) (2)

        174,567

 

        254,883

 

        174,669

 

        138,710

 

                76

 

            3,979

TJLP (4)

        456,623

 

        643,441

 

        484,434

 

        661,387

 

          32,821

 

          28,008

 

 

 

 

 

 

 

 

 

 

 

 

Inflation rates

        199,545

 

        318,602

 

        320,338

 

        436,732

 

          37,329

 

          22,244

IPCA (3) (5)

        169,281

 

        192,318

 

        279,027

 

        269,817

 

          37,329

 

          17,998

IGPM (6)

          30,264

 

        126,284

 

          41,311

 

        166,915

 

                   -

 

            4,246

 

 

 

 

 

 

 

 

 

 

 

 

Short position

    (2,059,951)

 

    (2,573,351)

 

    (1,985,731)

 

    (2,807,830)

 

       (158,194)

 

       (184,616)

 

 

 

 

 

 

 

 

 

 

 

 

Floating rate

         (40,501)

 

                   -

 

                   -

 

                   -

 

                   -

 

                   -

Options US$ (7)

         (40,501)

 

                   -

 

                   -

 

                   -

 

                   -

 

                   -

 

 

 

 

 

 

 

 

 

 

 

 

Floating rate

    (1,663,039)

 

    (2,391,882)

 

    (1,752,754)

 

    (2,541,822)

 

       (154,929)

 

       (184,545)

CDI (1) (2) (3) (4) (5) (6)

    (1,663,039)

 

    (2,391,882)

 

    (1,752,754)

 

    (2,541,822)

 

       (154,929)

 

       (184,545)

 

 

 

 

 

 

 

 

 

 

 

 

Foreign Currency

       (356,411)

 

       (181,469)

 

       (232,977)

 

       (266,008)

 

           (3,265)

 

               (71)

US$  (2)

       (290,582)

 

         (88,710)

 

       (109,476)

 

         (85,356)

 

           (3,265)

 

               (71)

LIBOR US$  (1)

         (65,829)

 

         (92,759)

 

       (123,501)

 

       (180,652)

 

                   -

 

                   -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Long position

 

 

 

 

        177,031

 

        212,993

 

 

 

     Current

 

 

 

 

 

          80,496

 

          68,943

 

 

 

     Non Current

 

 

 

 

          96,535

 

        144,050

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Short position

 

 

 

       (158,194)

 

       (184,616)

 

 

 

     Current

 

 

 

 

 

       (142,902)

 

       (183,212)

 

 

 

     Non Current

 

 

 

 

         (15,292)

 

           (1,404)

 

 

 

  Amounts receivable, net 

 

 

 

          18,837

 

          28,377

 

(1) Foreign currency swaps (US$ and LIBOR) x CDI (R$877,665) - swap transactions for varying debt repayment dates held to hedge currency risk affecting the Company's loans in US$ (carrying amount R$879,710).

(2) Foreign currency swaps (Euro and CDI x Euro) (R$68,446) and (US$ and CDI x US$) (R$56,580) - maturing through November 14, 2017 to hedge currency risk affecting net amounts payable (carrying amount R$68,044 in euros) and receivables (carrying amount R$56,675 in US$).

 

(3) IPCA x CDI rate swaps (R$38,500) - maturing through 2019 to hedge the same flow as the debentures (4th issue - 3rd series) indexed to the IPCA (carrying amount R$40,179).

 

(4) TJLP x CDI swaps (R$457,869) - maturing through 2019 to hedge the risk of TJLP variation on loan with BNDES (carrying amount R$484,434).

 

(5) IPCA x CDI swaps (R$225,438) - maturing in 2033 to hedge risk of change in finance lease rate pegged to IPCA (carrying amount R$238,847).

 

(6) IGPM x CDI swaps (R$42,113) - maturing 2016 through 2018 to hedge IGP-DI variation risk affecting regulatory commitments related to 4G license.


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
 
(7)  Options US$ - term transactions and options contracted with the purpose of protecting the US$ exposure of service contracts.

 

The table below shows the breakdown of swaps maturing after September 30, 2017:

 

 

 

Consolidated

 

 

Maturing in

 

 

Swap contract

 

2018

 

2019

 

2020

 

2021 onwards

 

Amount receivable (payable) at 09/30/17

Foreign currency x CDI

 

           (120,923)

 

             58,135

 

             33,975

 

                      -

 

            (28,813)

CDI x Foreign Currency

 

              (4,725)

 

                 (194)

 

                   (64)

 

                      -

 

              (4,983)

TJLP x CDI

 

               5,499

 

             19,859

 

               7,464

 

                      -

 

             32,822

IPCA x CDI

 

              (1,425)

 

                  618

 

               9,382

 

             12,019

 

             20,594

IGPM x CDI

 

                      -

 

                 (802)

 

                      -

 

                      -

 

                 (802)

Options

 

                    19

 

                      -

 

                      -

 

                      -

 

                    19

Total

 

           (121,555)

 

             77,616

 

             50,757

 

             12,019

 

             18,837

 

For the purposes of preparing its financial statements, the Company adopted the fair value hedge accounting methodology for its foreign currency swaps x CDI, IPCA x CDI, IGPM x CDI and TJLP x CDI for hedging or financial debt. Under this arrangement, both derivatives and hedged risk are recognized at fair value.

 

The ineffective portion at September 30, 2017 was R$1,404 (R$2,091 at December 31, 2016).

 

At September 30, 2017 and 2016, the transactions with derivatives generated consolidated negative (net) result of R$66,803 and R$315,064, respectively (Note 25).

 

a.2) Sensitivity analysis to the Company's risk variables

CVM Resolution 604/09 requires listed companies to comply with CPC 40 Financial Instruments: Disclosures (IFRS 7) by disclosing sensitivity analyses for each type of market risk that management understands to be significant when originated by financial instruments to which the entity is exposed at the end of each period, including all derivatives financial instrument transactions.

 

In making the above analysis, each of the transactions with derivative financial instruments was assessed and assumptions included a probable scenario and two others that could adversely impact the Company.

 

In the probable scenario the assumption is to use, on the maturity dates of each of the transactions, what the market had been showing through B3 yield curves (currencies and interest rates), as well as data available at IBGE, Central Bank, FGV, among others. In the probable scenario, there is no impact on the fair value of the above-mentioned derivatives. However, for scenarios II and III, as per CVM ruling, risk variables were considered to deteriorate by 25% and 50% respectively.

 

Since the Company only holds derivatives to hedge its foreign-currency assets and liabilities, changing scenarios are tracked by the corresponding hedged items, thus showing that effects are almost non-existent. For these transactions, the Company reported the consolidated net exposure in each of the above-mentioned three scenarios at September 30, 2017.


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
 
Sensitivity analysis - net exposure
 

Consolidated

Transaction

Risk

 

Probable

 

25% depreciation

 

50% depreciation

Hedge (long position)

Derivatives (depreciation risk US$)

 

             589,371

 

             735,716

 

             881,674

Debt in US$

Debt (appreciation risk US$)

 

            (589,371)

 

            (735,716)

 

            (881,674)

 

Net Exposure

 

                        -

 

                        -

 

                        -

 

 

 

 

 

 

 

 

Hedge (short position)

Derivatives (depreciation risk EUR)

 

              (68,446)

 

              (85,558)

 

            (102,669)

Payables in EUR

Debt (appreciation risk EUR)

 

              (41,679)

 

              (52,099)

 

              (62,519)

Receivables in EUR

Debt (depreciation risk EUR)

 

             109,724

 

             137,155

 

             164,586

 

Net Exposure

 

                   (401)

 

                   (502)

 

                   (602)

 

 

 

 

 

 

 

 

Hedge (short position)

Derivatives (depreciation risk US$)

 

              (56,580)

 

              (70,726)

 

              (84,871)

Payables in US$

Debt (appreciation risk US$)

 

             164,029

 

             205,037

 

             246,044

Receivables in US$

Debt (depreciation risk US$)

 

            (107,355)

 

            (134,193)

 

            (161,032)

 

Net Exposure

 

                     94

 

                    118

 

                    141

 

 

 

 

 

 

 

 

Hedge (long position)

Derivatives (risk of decrease in IPCA)

 

             284,760

 

             265,019

 

             247,626

Debt in IPCA

Debt (risk of increase in IPCA)

 

            (386,199)

 

            (366,451)

 

            (349,051)

 

Net Exposure

 

            (101,439)

 

            (101,432)

 

            (101,425)

 

 

 

 

 

 

 

 

Hedge (long position)

Derivatives (risk of decrease in IGP-DI)

 

               41,311

 

               41,211

 

               41,112

Debt in IGP-DI

Debt (risk of increase in IGP-DI)

 

            (136,173)

 

            (136,173)

 

            (136,173)

 

Net Exposure

 

              (94,862)

 

              (94,962)

 

              (95,061)

 

 

 

 

 

 

 

 

Hedge (long position)

Derivatives (risk of decrease in UMBND)

 

             246,760

 

             307,266

 

             367,317

Debt in UMBND

Debt (risk of increase in UMBND)

 

            (250,556)

 

            (312,481)

 

            (374,066)

 

Net Exposure

 

                (3,796)

 

                (5,215)

 

                (6,749)

 

 

 

 

 

 

 

 

Hedge (long position)

Derivatives (risk of decrease in TJLP)

 

             484,434

 

             478,585

 

             472,910

Debt in TJLP

Debt (risk of increase in TJLP)

 

          (1,720,346)

 

          (1,714,189)

 

          (1,708,215)

 

Net Exposure

 

          (1,235,912)

 

          (1,235,604)

 

          (1,235,305)

 

 

 

 

 

 

 

 

Hedge (long position)

Derivatives (risk of decrease in US$)

 

               40,501

 

               48,580

 

               48,580

OPex in US$

OPex (risk of increase in US$)

 

              (40,501)

 

              (50,626)

 

              (60,751)

 

Net Exposure

 

                        -

 

                (2,046)

 

              (12,171)

 

 

 

 

 

 

 

 

Hedge (CDI position)

 

 

 

 

 

 

 

   Hedge US$ and EUR (short and long position)

Derivatives (risk of decrease in CDI)

 

            (124,623)

 

            (169,007)

 

            (213,343)

   Hedge IPCA (short position)

Derivatives (risk of increase in CDI)

 

            (284,760)

 

            (265,019)

 

            (247,626)

   Hedge IGPM (short position)

Derivatives (risk of increase in CDI)

 

              (41,311)

 

              (41,211)

 

              (41,112)

   Hedge UMBND (short position)

Derivatives (risk of increase in CDI)

 

            (246,760)

 

            (307,266)

 

            (367,317)

   Hedge TJLP (short position)

Derivatives (risk of increase in CDI)

 

            (484,434)

 

            (478,585)

 

            (472,910)

   Hedge US$ (short position)

Derivatives (risk of increase in CDI)

 

            (589,371)

 

            (735,716)

 

            (881,674)

   Hedge US$ (short position) - Opex

Derivatives (risk of increase in CDI)

 

              (40,501)

 

              (48,580)

 

              (48,580)

 

Net Exposure

 

          (1,811,760)

 

          (2,045,384)

 

          (2,272,562)

 

 

 

 

 

 

 

 

Total net exposure in each scenario

 

 

          (3,248,076)

 

          (3,485,027)

 

          (3,723,734)

 

 

 

 

 

 

 

 

Net effect on changes in current fair value

 

 

                        -

 

            (236,951)

 

            (475,658)

 

The assumptions used by the Company for the sensitivity analysis at September 30, 2017 were as follows:

 


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
 
Sensitivity analysis assumptions

 

 

Risk Variable

 

Probable

 

25% depreciation

 

50% depreciation

US$

 

3.1680

 

3.9600

 

4.7520

EUR

 

3.7427

 

4.6783

 

5.6140

JPY

 

0.0281

 

0.0352

 

0.0422

IPCA

 

2.47%

 

3.08%

 

3.70%

IGPM

 

-1.45%

 

-1.81%

 

-2.17%

IGP-DI

 

-1.18%

 

-1.48%

 

-1.78%

UMBND

 

0.0618

 

0.0773

 

0.0928

URTJLP

 

2.0265

 

2.5331

 

3.0397

CDI

 

8.14%

 

10.18%

 

12.21%

 

 

For calculation of the net exposure for the sensitivity analysis, all derivatives were considered at market value and hedged items designated for hedge accounting purposes were also considered at fair value.

 

The fair values shown in the table above are based on the portfolio position at September 30, 2017, but do not reflect an estimate for realization due to the dynamism of the market, which is constantly monitored by the Company. The use of different assumptions could significantly affect the estimates.

 

b) Fair value

 

The Company and its subsidiaries assessed their financial assets and liabilities in relation to market values using available information and appropriate valuation methodologies. However, both the interpretation of market data and the selection of valuation methods require considerable judgment and reasonable estimates to produce the most adequate realization value. As a result, the estimates shown do not necessarily indicate amounts that could be realized in the current market. The use of different assumptions for the market and/or methodologies may have a material effect on estimated realization values. At September 30, 2017 and December 31, 2016, neither the Company not its subsidiaries detected any significant and enduring impairment of their financial instruments.

 

The fair value of all assets and liabilities are classified within the fair value hierarchy described below, based on the level of information that is significant to the fair value measurement as a whole:


Level 1: quoted market prices (unadjusted) in active markets for identical assets or liabilities;


Level 2: valuation techniques where the significant lowest level of information available to measure the fair value is directly or indirectly observable; and


Level 3: valuation techniques where the lowest and significant level of information to measure the fair value is not available.

 

The following tables show the composition of financial assets and liabilities at September 30, 2017 and December 31, 2016. During the periods shown in the tables below, there were no transfers between fair value measurements of level 3 and level 1 and 2.


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
 
 

Company

 

 

 

 

Fair value hierarchy

 

Book value

 

Fair value

 

 

Classification by category

 

 

09/30/17

 

12/31/16

 

09/30/17

 

12/31/16

Financial Assets 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents (Note 3)

 

  Amortized cost 

 

 

 

    5,131,933

 

    4,675,627

 

    5,131,933

 

    4,675,627

Trade accounts receivable, net (Note 4)

 

  Loans and receivables 

 

 

 

    8,072,174

 

    8,282,685

 

    8,072,174

 

    8,282,685

Derivative transactions (Note 30)

 

  Measured at fair value through profit or loss  

 

  Level 2 

 

          8,798

 

          3,979

 

          8,798

 

          3,979

Derivative transactions (Note 30)

 

  Hedges (economic)

 

  Level 2 

 

        71,695

 

        64,964

 

        71,695

 

        64,964

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-current

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments pledged as collateral

 

  Amortized cost 

 

 

 

        85,282

 

        78,153

 

        85,282

 

        78,153

Trade accounts receivable, net (Note 4)

 

  Loans and receivables 

 

 

 

      178,585

 

      200,537

 

      178,585

 

      200,537

Derivative transactions (Note 30)

 

  Hedges (economic)

 

  Level 2 

 

        96,535

 

      144,050

 

        96,535

 

      144,050

Total financial assets

 

 

 

 

 

  13,645,002

 

  13,449,995

 

  13,645,002

 

  13,449,995

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities  

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

 

 

 

 

 

Trade accounts payable, net (Note 14)

 

  Amortized cost 

 

 

 

    7,622,860

 

    7,539,395

 

    7,622,860

 

    7,539,395

Loans, financing and finance lease (Note 19)

 

  Amortized cost 

 

 

 

    1,123,488

 

    1,256,147

 

    1,227,765

 

    1,363,539

Loans, financing and finance lease (Note 19)

 

  Measured at fair value through profit or loss  

 

  Level 2 

 

      869,920

 

    1,286,828

 

      402,427

 

    1,307,310

Debentures (Note 19)

 

  Amortized cost 

 

 

 

    1,413,377

 

    2,120,197

 

    1,360,845

 

    2,242,291

Debentures (Note 19)

 

  Measured at fair value through profit or loss  

 

  Level 2 

 

          1,461

 

             307

 

          1,514

 

          1,412

Derivative transactions (Note 30)

 

  Measured at fair value through profit or loss  

 

  Level 2 

 

          3,429

 

          4,111

 

          3,429

 

          4,111

Derivative transactions (Note 30)

 

  Hedges (economic)

 

  Level 2 

 

      139,180

 

      179,101

 

      139,180

 

      179,101

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-current

 

 

 

 

 

 

 

 

 

 

 

 

Trade accounts payable, net (Note 14)

 

  Amortized cost 

 

 

 

                 -

 

        71,907

 

                 -

 

        71,907

Loans, financing and finance lease (Note 19)

 

  Amortized cost 

 

 

 

    1,462,716

 

    1,837,077

 

    1,400,063

 

    1,668,524

Loans, financing and finance lease (Note 19)

 

  Measured at fair value through profit or loss  

 

  Level 2 

 

      638,012

 

      874,982

 

      616,965

 

      822,818

Contingent consideration (Note 19)

 

  Measured at fair value through profit or loss  

 

  Level 2 

 

      440,396

 

      414,733

 

      440,396

 

      414,733

Debentures (Note 19)

 

  Amortized cost 

 

 

 

    2,067,609

 

    1,396,813

 

    1,893,315

 

    1,260,814

Debentures (Note 19)

 

  Measured at fair value through profit or loss  

 

  Level 2 

 

        39,644

 

        36,990

 

        38,343

 

        34,124

Derivative transactions (Note 30)

 

  Hedges (economic)

 

  Level 2 

 

        15,292

 

          1,404

 

        15,292

 

          1,404

Total financial liabilities

 

 

 

 

 

  15,837,384

 

  17,019,992

 

  15,162,394

 

  16,911,483

 

 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
 

Consolidated

 

 

 

 

Fair value hierarchy

 

Book value

 

Fair value

 

 

Classification by category

 

 

09/30/17

 

12/31/16

 

09/30/17

 

12/31/16

Financial Assets 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents (Note 3)

 

  Amortized cost 

 

 

 

    5,571,056

 

    5,105,110

 

    5,571,056

 

    5,105,110

Trade accounts receivable, net (Note 4)

 

  Loans and receivables 

 

 

 

    8,791,035

 

    8,701,688

 

    8,791,035

 

    8,701,688

Derivative transactions (Note 30)

 

  Measured at fair value through profit or loss  

 

  Level 2 

 

          8,797

 

          3,979

 

          8,797

 

          3,979

Derivative transactions (Note 30)

 

  Hedges (economic)

 

  Level 2 

 

        71,699

 

        64,964

 

        71,699

 

        64,964

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-current

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments pledged as collateral

 

  Amortized cost 

 

 

 

        85,295

 

        78,166

 

        85,295

 

        78,166

Trade accounts receivable, net (Note 4)

 

  Loans and receivables 

 

 

 

      290,505

 

      305,411

 

      290,505

 

      305,411

Derivative transactions (Note 30)

 

  Hedges (economic)

 

  Level 2 

 

        96,535

 

      144,050

 

        96,535

 

      144,050

Total financial assets

 

 

 

 

 

  14,914,922

 

  14,403,368

 

  14,914,922

 

  14,403,368

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

 

 

 

 

 

Trade accounts payable (Note 14)

 

  Amortized cost 

 

 

 

    7,290,613

 

    7,611,246

 

    7,290,613

 

    7,611,246

Loans, financing and finance lease (Note 19)

 

  Amortized cost 

 

 

 

    1,123,488

 

    1,256,147

 

    1,227,765

 

    1,363,539

Loans, financing and finance lease (Note 19)

 

  Measured at fair value through profit or loss  

 

  Level 2 

 

      869,920

 

    1,286,828

 

      402,427

 

    1,307,310

Debentures (Note 19)

 

  Amortized cost 

 

 

 

    1,413,377

 

    2,120,197

 

    1,360,845

 

    2,242,291

Debentures (Note 19)

 

  Measured at fair value through profit or loss  

 

  Level 2 

 

          1,461

 

             307

 

          1,514

 

          1,412

Derivative transactions (Note 30)

 

  Measured at fair value through profit or loss  

 

  Level 2 

 

          3,430

 

          4,111

 

          3,430

 

          4,111

Derivative transactions (Note 30)

 

  Hedges (economic)

 

  Level 2 

 

      139,472

 

      179,101

 

      139,472

 

      179,101

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-current

 

 

 

 

 

 

 

 

 

 

 

 

Trade accounts payable (Note 14)

 

  Amortized cost 

 

 

 

                 -

 

        71,907

 

                 -

 

        71,907

Loans, financing and finance lease (Note 19)

 

  Amortized cost 

 

 

 

    1,462,716

 

    1,837,077

 

    1,400,063

 

    1,668,524

Loans, financing and finance lease (Note 19)

 

  Measured at fair value through profit or loss  

 

  Level 2 

 

      638,012

 

      874,982

 

      616,965

 

      822,818

Debentures (Note 19)

 

  Amortized cost 

 

 

 

    2,067,609

 

    1,396,813

 

    1,893,315

 

    1,260,814

Debentures (Note 19)

 

  Measured at fair value through profit or loss  

 

  Level 2 

 

        39,644

 

        36,990

 

        38,343

 

        34,124

Contingent consideration (Note 19)

 

  Measured at fair value through profit or loss  

 

  Level 2 

 

      440,396

 

      414,733

 

      440,396

 

      414,733

Derivative transactions (Note 30)

 

  Hedges (economic)

 

  Level 2 

 

        15,292

 

          1,404

 

        15,292

 

          1,404

 

 

 

 

 

 

  15,505,430

 

  17,091,843

 

  14,830,440

 

  16,983,334

 

c) Capital management

 

The purpose of the Company's capital management is to ensure maintenance of a high credit rating with institutions and an optimal capital ratio in order to support the Company's business and maximize shareholder value.

 

The Company manages its capital structure by making adjustments and adapting to current economic conditions. For this purpose, the Company may pay dividends, raise new loans, issue debentures and contract derivatives. For the quarter ended September 30, 2017, there were no changes in capital structure objectives, policies or processes.

 

In its net debt structure, the Company includes balances referring to loans, financing, debentures, finance leasing, contingent consideration and transactions with derivatives, less cash and cash equivalents, short-term investments to secure BNB financing and guarantor of the contingent consideration liability.

 

 


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
 
The Company's ratio of consolidated debt to shareholders' equity consists of the following:
 

 

  Consolidated 

 

09.30.17

 

12.31.16

Cash and cash equivalents

5,571,056

 

5,105,110

Loans, financing, debentures, financial lease and contingent consideration

(8,056,623)

 

(9,224,074)

Derivative transactions, net

18,837

 

28,377

Short-term investment pledged as collateral

11,631

 

10,773

Asset guarantor of contingent consideration

440,396

 

414,733

Net debt

2,014,703

 

3,665,081

Net equity

69,512,082

 

69,244,419

Net debt-to-equity ratio

2.90%

 

5.29%

 

 

d) Risk management policy

 

The Company and its subsidiaries are exposed to several market risks as a result of its commercial operations, debts contracted to finance its activities and debt-related financial instruments.

 

d.1) Currency Risk

 

This is risk arising from the possibility that the Company may incur losses due to fluctuating exchange rates, which increase the costs arising from loans denominated in foreign currencies.

 

At September 30, 2017, 10.4% of financial debt was foreign-currency denominated (14.0% at December 31, 2016). The Company enters into derivative transactions (currency hedge) with financial institutions to hedge against exchange rate variation affecting its total indebtedness in foreign currency (R$839,682 and R$1,287,864 at September 30, 2017 and December 31, 2016, respectively). Its total debt on these dates was covered by asset positions in currency-exchange hedge transactions with CDI-rate swaps.

 

There is also foreign exchange risk for non-financial assets and liabilities denominated in foreign currencies, which may generate a smaller amount receivable or larger amount payable depending on the exchange rate in the period.

 

Hedging transactions were contracted to minimize the risks associated with exchange-rate variation of non-financial assets and liabilities in foreign currencies. This balance is subject to daily changes due to the dynamics of the business. However, the Company intends to cover the net balance of these rights and obligations (US$18,181 thousand receivable and €14,035 thousand receivable at September 30, 2017 and US$17,293 thousand and €5,695 thousand payable at December 31, 2016) to mitigate its foreign exchange risks.

 

d.2) Interest and Inflation Risk

 

This risk arises because the Company may incur losses in the event of an unfavorable change in the domestic interest rate, which may adversely affect financial expenses resulting from the portion of debentures referenced to the CDI and liability positions in derivatives (currency hedge, IPCA and TJLP) pegged to floating interest rates (CDI).

 

The debt with BNDES is indexed to the Long-Term Interest Rate (TJLP) which is set on a quarterly basis by the National Monetary Council. During the year 2016 and for the quarter ended March 30, 2017, the TJLP was 7.5%. In the third quarter of 2017, the TJLP remained at 7.0%.

 

Inflation risk arises from the Minas Comunica debentures of the 1st issue, which are tied to the IPCA and thus may adversely affect financial expenses in the event of an unfavorable change in this index.

 

To reduce exposure to the variable interest rate (CDI), the Company and its subsidiaries invested their cash equivalents of R$5,480,329 at September 30, 2017 (R$4,906,741 at December 31, 2016), mostly in short-term CDI-based financial investments (Bank Deposit Certificates). The carrying amounts of these instruments approximate their fair values, since they may be redeemed in the short term.

 


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
 
d.3) Liquidity Risk

 

Liquidity risk is the possibility of the Company or its subsidiaries not holding sufficient funds to meet their commitments due to different currencies and dates of realization of rights and settlement of obligations.

 

The Company and its subsidiaries structure the maturity dates of non-derivative financial contracts, as shown in Note 19, and their respective derivatives, as shown in the schedule of payments disclosed in this note, to avoid affecting their liquidity.

 

The Company's cash flow and liquidity and those of its subsidiaries are managed on a daily basis by the departments in charge of ensuring that operating cash flows and prior funding, when necessary, will be sufficient to meet their schedule of commitments in order to avoid liquidity risk.

 

Below, we summarize the maturity profile of our consolidated financial liabilities as set forth in the related agreements:

 

At 09.30.17

 

Less than one year

 

From 1 to 2 years

 

From 2 to 5 years

 

Over 5 years

 

Total

Trade accounts payable (Note 14)

 

           7,290,613

 

                        -

 

                        -

 

                        -

 

           7,290,613

Loans, financing and finance lease (Note 19)

 

           1,993,408

 

             938,001

 

             895,289

 

             267,438

 

           4,094,136

Contingent consideration (Note 19)

 

                        -

 

                        -

 

                        -

 

             440,396

 

             440,396

Debentures (Note 19)

 

           1,414,838

 

               23,813

 

           2,083,440

 

                        -

 

           3,522,091

Derivative transactions (Note 30)

 

             142,902

 

                    234

 

                        -

 

               15,058

 

             158,194

Total

 

         10,841,761

 

             962,048

 

           2,978,729

 

             722,892

 

         15,505,430

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 12.31.16

 

Less than one year

 

From 1 to 2 years

 

From 2 to 5 years

 

Over 5 years

 

Total

Trade accounts payable (Note 14)

 

           7,611,246

 

                        -

 

                        -

 

               71,907

 

           7,683,153

Loans, financing and finance lease (Note 19)

 

           2,542,975

 

           1,129,939

 

           1,326,269

 

             255,851

 

           5,255,034

Contingent consideration (Note 19)

 

                        -

 

                        -

 

                        -

 

             414,733

 

             414,733

Debentures (Note 19)

 

           2,120,504

 

           1,355,683

 

               78,120

 

                        -

 

           3,554,307

Derivative transactions (Note 30)

 

             183,212

 

                 1,185

 

                     97

 

                    122

 

             184,616

Total

 

         12,457,937

 

           2,486,807

 

           1,404,486

 

             742,613

 

         17,091,843

 

d.4) Credit Risk

 

The risk arises from the possibility of the Company and its subsidiaries incurring losses due to difficulty in receiving amounts billed to their customers and sales of prepaid handsets and cards that have been pre-activated for the distribution network.

 

The credit risk on accounts receivable is diversified and mitigated by strict control of the customer base. The Company constantly monitors the level of accounts receivable from postpaid services, and limits bad-debt risk by cutting off access to telephone lines if bills are past due. The mobile customer base predominantly uses the prepaid system, which requires purchase of credits beforehand and therefore does not pose credit risk. Exceptions are made for telecommunications services that must be maintained for security or national defense reasons.

 

Credit risk on sales of pre-activated prepaid handsets and cards is managed by a conservative policy for granting credit, using modern credit scoring methods, analyzing financial statements and consultations to commercial databases, in addition to requesting guarantees.

 

The Company and its subsidiaries are also subject to credit risk arising from their investments, letters of guarantee received as collateral for certain transactions and receivables from derivative transactions. The Company and its subsidiaries control the credit limits granted to each counterparty and diversify this exposure across first tier financial institutions in accordance with the current credit policies of financial counterparties.


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
 
d.5) Social and Environmental Risks

 

Our operations and properties are subject to various environmental laws and regulations that, among others, govern environmental licenses and records, protection of fauna and flora, air emissions, waste management and remediation of contaminated sites. If we fail to meet present and future requirements, or to identify and manage new or existing contamination, we will incur significant costs, which include clean-up costs, damages, compensation, fines, activities suspension and other penalties, investments to improve our facilities or change our processes, or interruption of operations. The identification of environmental conditions not currently known, more stringent inspections by regulatory agencies, the entry into force of more stringent laws and regulations or other unanticipated events may occur and, ultimately, result in significant environmental liabilities and their costs. The occurrence of any of the above factors could have a material adverse effect on our business, results of operations and financial position. According to Article 75 of Law No. 9,605 of 1998, the maximum fine per breach of environmental law is R$50,000.

 

From the social point of view, we are exposed to contingent liabilities due to the fact that our structure provides for the hiring of outsourced service providers. These potential liabilities may involve labor claims by service providers which are treated as direct employees and claim joint liability resulting from overtime and occupational accidents. If we obtain unfavorable decisions with respect to a significant portion of these contingencies and if we have not recognized a provision for these risks, our financial position and results of operations may be adversely affected. In addition, if the labor authorities consider that outsourcing services involves core activities of the Company, this may be considered an employment relationship, which would significantly increase our costs and therefore subject the Company administrative and judicial proceedings and payment of fines to third parties.

 

d.6) Insurance Coverage

 

The policy of the Company and its subsidiaries, as well as the Telefónica Group, includes contracting insurance coverage for all assets and liabilities involving significant and high-risk amounts, based on management's judgment and following Telefónica corporate program guidelines.

 

At September 30, 2017, maximum limits of claims (established pursuant to the agreements of each entity consolidated by the Company) for significant assets, liabilities or interests covered by insurance and their respective amounts were R$1,033,944 for operational risks (with loss of profit) and R$75,000 for general civil liability.

 

d.7) Other Risks

 

The Company is required to comply with Brazilian anti-corruption laws and regulations, as well as laws and regulations on the same subject in jurisdictions where it has its securities traded. In particular, the Company is subject, in Brazil, to the Law no. 12846 and, in the United States, to the U.S. Foreign Corrupt Practices Act of 1977.

 

Although the Company has internal policies and procedures designed to ensure compliance with the aforementioned anti-corruption laws and regulations, there can be no assurance that such policies and procedures will be sufficient or that the Company's employees, directors, officers, partners, agents and service providers will not take actions in violation of the Company's policies and procedures (or otherwise in violation of the relevant anti-corruption laws and regulations) for which the Company or they may be ultimately held responsible. Violations of anti-corruption laws and regulations could lead to financial penalties, damage to the Company's reputation or other legal consequences that could have a material adverse effect on the Company's business, results of operations and financial condition.

 

In connection with the above-mentioned policies, the Company is currently conducting an internal investigation - which is part of a broader investigation being conducted by the controlling shareholder of the Company (Telefónica, S.A.) - regarding possible violations of the abovementioned laws and regulations.  The Company is in contact with governmental authorities about this matter and intends to cooperate with those authorities as the investigation continues.  It is not possible at this time to predict the scope or duration of this matter or its likely outcome.


 
Telefônica Brasil S. A. 
NOTES TO THE QUARTERLY FINANCIAL STATEMENTS 
Three and nine-month period ended September 30, 2017 
(In thousands of Reais, unless otherwise stated) 
 
31)  COMMITMENTS AND GUARANTEES (RENTALS)

 

The Company and its subsidiaries lease equipment, facilities, and several stores, administrative buildings, and sites (containing radio-base stations and towers), through various non-cancellable operating agreements maturing on different dates, with monthly payments.

 

At September 30, 2017, the total amounts corresponding to the full period of the contracts were as follows:  

 

 

 

 

Company

 

Consolidated

Up to 1 year

 

         2,172,950

 

         2,173,510

From 1 to 5 years

 

         7,128,857

 

         7,131,736

Over five years

 

         5,173,915

 

         5,174,117

Total

 

       14,475,722

 

       14,479,363

 

 

32) ADDITIONAL INFORMATION ON CASH FLOWS

 

The main financing transactions that do not involve cash of the Company refer to the acquisition of assets through finance leases. At September 30, 2017 and 2016, these transactions totaled R$9,061 and R$2,675, respectively.

 

 

 

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

TELEFÔNICA BRASIL S.A.

Date:

November 3, 2017

 

By:

/s/ Luis Carlos da Costa Plaster

 

 

 

 

Name:

Luis Carlos da Costa Plaster

 

 

 

 

Title:

Investor Relations Director