vivitr3q18_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, 2018

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

 

 

 

 

 

 

 

 

 

 

 

 

 

TELEFÔNICA BRASIL S.A.

 

 

QUARTERLY INFORMATION

 

SEPTEMBER 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 
 

(A free translation of the original in Portuguese)

 

Independent auditor's report

 

 

Report on review of quarterly information

 

To the Board of Directors and Shareholders of

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, 2018, 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 the statements of 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 and consolidated interim accounting information in accordance with the accounting standard CPC 21, Interim Financial Reporting, of the Brazilian Accounting Pronouncements Committee (CPC) 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 accounting 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 does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

 

Conclusion on the interim information

 

Based on our review, nothing has come to our attention that causes us to believe that the accompanying parent company and 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

 

Statements of value added

 

We have also reviewed the parent company and consolidated statements of value added for the nine-month period ended September 30, 2018. 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.

 

São Paulo, October 26, 2018

 

 

 

PricewaterhouseCoopers

Auditores Independentes

CRC 2SP000160/O-5

 

 

 

Estela Maris Vieira de Souza

Contadora CRC 1RS046957/O-3

 


 
 

 

TELEFÔNICA BRASIL S.A.

Balance Sheets

At September 30, 2018 and December 31, 2017

(In thousands of reais)

 

(A free translation of the original in Portuguese)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

Consolidated

 

 

 

 

Company

 

Consolidated

ASSETS

Note

 

09.30.18

 

12.31.17

 

09.30.18

 

12.31.17

 

LIABILITIES AND EQUITY

Note

 

09.30.18

 

12.31.17

 

09.30.18

 

12.31.17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

17,410,063

 

16,668,039

 

17,850,019

 

16,731,666

 

Current liabilities

 

 

20,346,340

 

18,819,861

 

19,713,183

 

17,862,531

Cash and cash equivalents

3

 

   3,349,692

 

   3,681,173

 

   3,713,754

 

   4,050,338

 

Personnel, social charges and benefits

14

 

   687,651

 

   648,957

 

   769,869

 

   723,380

Trade accounts receivable

4

 

   8,566,785

 

   8,413,403

 

   8,670,107

 

   8,588,466

 

Trade accounts payable

15

 

   9,054,673

 

   8,560,844

 

   8,109,680

 

   7,447,100

Inventories

5

 

   421,936

 

   324,711

 

   459,313

 

   348,755

 

Income and social contribution taxes payable

6

 

-

 

-

 

82,462

 

   4,479

Income and social contribution taxes recoverable

6

 

   272,849

 

   401,259

 

   273,564

 

   505,535

 

Taxes, charges and contributions payable

16

 

   1,649,084

 

   1,669,741

 

   1,779,952

 

   1,726,836

Taxes, charges and contributions recoverable

7

 

   3,244,830

 

  1,984,999

 

   3,257,501

 

   2,058,455

 

Dividends and interest on equity

17

 

   5,230,594

 

   2,396,116

 

   5,230,594

 

   2,396,116

Judicial deposits and garnishments

8

 

   317,266

 

   324,465

 

   317,612

 

   324,638

 

Provisions

18

 

   1,270,846

 

   1,434,911

 

   1,270,863

 

   1,434,911

Prepaid expenses

9

 

   698,575

 

   425,298

 

   714,710

 

   446,439

 

Deferred revenue

19

 

   514,919

 

   370,493

 

   516,081

 

   372,561

Dividends and interest on equity

17

 

-

 

   323,206

 

-

 

-

 

Loans and financing

20

 

   1,441,799

 

   1,620,955

 

   1,441,799

 

   1,620,955

Derivative financial instruments

30

 

   105,168

 

87,643

 

   105,785

 

87,643

 

Debentures

20

 

68,348

 

   1,412,486

 

68,348

 

   1,412,486

Other assets

10

 

   432,962

 

   701,882

 

   337,673

 

   321,397

 

Derivative financial instruments

30

 

   3,005

 

   5,107

 

   3,005

 

   5,239

 

 

 

 

 

 

 

 

 

 

 

Other liabilities

21

 

   425,421

 

  700,251

 

   440,530

 

   718,468

Non-current assets

 

 

87,373,288

 

85,495,114

 

86,484,303

 

84,651,169

 

 

 

 

 

 

 

 

 

 

 

   Long-term assets

 

 

 

 

 

 

 

 

 

 

Non-current liabilities

 

 

12,975,515

 

13,881,934

 

13,159,643

 

14,058,946

   Short-term investments pledged as collateral

 

 

79,686

 

81,472

 

79,953

 

81,486

 

Personnel, social charges and benefits

14

 

14,758

 

21,648

 

16,656

 

23,284

   Trade accounts receivable

4

 

   173,796

 

   167,682

 

   331,481

 

   273,888

 

Taxes, charges and contributions payable

16

 

16,712

 

18,463

 

36,307

 

49,448

   Deferred taxes

6

 

-

 

-

 

   387,640

 

   371,408

 

Deferred taxes

6

 

   2,149,386

 

   709,325

 

   2,149,386

 

   709,325

   Taxes, charges and contributions recoverable

7

 

   5,139,881

 

   740,104

 

   5,139,881

 

   743,285

 

Provisions

18

 

   4,826,948

 

   6,566,056

 

   4,979,534

 

   6,709,839

   Judicial deposits and garnishments

8

 

   3,506,048

 

   6,155,821

 

   3,691,435

 

   6,339,167

 

Deferred revenue

19

 

   344,716

 

   350,637

 

   344,716

 

   350,637

   Prepaid expenses

9

 

   118,787

 

21,684

 

   122,802

 

23,116

 

Loans and financing

20

 

   1,705,192

 

   2,320,147

 

   1,705,192

 

   2,320,147

   Derivative financial instruments

30

 

27,045

 

    76,762

 

27,045

 

76,762

 

Debentures

20

 

   3,090,298

 

   3,108,253

 

   3,090,298

 

   3,108,253

   Other assets

10

 

46,338

 

86,345

 

    47,166

 

88,935

 

Derivative financial instruments

30

 

18,622

 

15,412

 

18,622

 

15,412

Investments

11

 

   2,060,945

 

   1,949,276

 

   107,015

 

98,902

 

Other liabilities

21

 

   808,883

 

   771,993

 

   818,932

 

   772,601

Property, plant and equipment

12

 

34,037,280

 

33,112,532

 

34,135,398

 

33,222,316

 

 

 

 

 

 

 

 

 

 

 

Intangible assets

13

 

42,183,482

 

43,103,436

 

42,414,487

 

43,331,904

 

TOTAL LIABILITIES

 

 

33,321,855

 

32,701,795

 

32,872,826

 

31,921,477

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

71,461,496

 

69,461,358

 

71,461,496

 

69,461,358

 

 

 

 

 

 

 

 

 

 

 

Capital

22

 

63,571,416

 

63,571,416

 

63,571,416

 

63,571,416

 

 

 

 

 

 

 

 

 

 

 

Capital reserves

22

 

   1,213,522

 

   1,213,522

 

   1,213,522

 

   1,213,522

 

 

 

 

 

 

 

 

 

 

 

Income reserves

22

 

   2,471,637

 

   2,463,228

 

   2,471,637

 

   2,463,228

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income

22

 

33,893

 

21,328

 

33,893

 

21,328

 

 

 

 

 

 

 

 

 

 

 

Retained earnings

22

 

   4,171,028

 

-

 

   4,171,028

 

-

 

 

 

 

 

 

 

 

 

 

 

Additional proposed dividends

22

 

-

 

   2,191,864

 

-

 

   2,191,864

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

 

  104,783,351

 

  102,163,153

 

  104,334,322

 

  101,382,835

 

TOTAL LIABILITIES AND EQUITY

 

 

  104,783,351

 

  102,163,153

 

  104,334,322

 

  101,382,835

 

 


 
 

 

TELEFÔNICA BRASIL S.A.

Income Statements

Three and nine-month periods ended September 30, 2018 and 2017

(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

 

09.30.18

 

09.30.17

 

09.30.18

 

09.30.17

 

09.30.18

 

09.30.17

 

09.30.18

 

09.30.17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net operating revenue

23

 

   9,582,079

 

   9,631,494

 

27,744,368

 

29,765,720

 

10,764,902

 

10,885,949

 

32,377,261

 

32,173,292

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales and services

24

 

  (4,786,097)

 

  (4,751,844)

 

   (14,439,206)

 

   (14,327,557)

 

  (5,102,307)

 

  (5,095,718)

 

   (15,426,953)

 

   (15,172,547)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

   4,795,982

 

   4,879,650

 

13,305,162

 

15,438,163

 

   5,662,595

 

  5,790,231

 

16,950,308

 

17,000,745

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (expenses)

 

 

  (2,404,190)

 

  (3,922,622)

 

  (7,614,988)

 

   (11,946,475)

 

  (2,916,666)

 

  (4,075,283)

 

  (9,217,666)

 

   (12,144,321)

Selling expenses

24

 

  (2,916,086)

 

  (3,199,016)

 

  (8,992,970)

 

  (9,643,209)

 

  (3,162,840)

 

  (3,324,498)

 

  (9,653,228)

 

  (9,812,347)

General and administrative expenses

24

 

  (603,334)

 

  (601,412)

 

  (1,816,451)

 

  (1,805,889)

 

  (624,738)

 

  (626,039)

 

  (1,896,390)

 

  (1,834,996)

Other operating income

25

 

   1,643,421

 

87,729

 

   4,338,824

 

   267,286

 

   1,554,155

 

88,450

 

   3,780,383

 

   270,572

Other operating expenses

25

 

  (528,191)

 

  (209,923)

 

  (1,144,391)

 

  (764,663)

 

  (683,243)

 

  (213,196)

 

  (1,448,431)

 

  (767,550)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating profit

 

 

   2,391,792

 

   957,028

 

   5,690,174

 

   3,491,688

 

   2,745,929

 

   1,714,948

 

   7,732,642

 

   4,856,424

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial income

26

 

   1,343,614

 

   451,807

 

   3,591,085

 

   1,428,874

 

   1,371,964

 

   478,441

 

   3,699,511

 

   1,513,353

Financial expenses

26

 

  (709,216)

 

  (651,613)

 

  (1,723,061)

 

  (2,223,033)

 

  (718,257)

 

  (648,953)

 

  (1,747,420)

 

  (2,238,523)

Equity in results of investees

11

 

  237,599

 

   654,357

 

   1,384,419

 

   1,079,141

 

  (5,541)

 

  13

 

  (4,914)

 

   1,362

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before taxes

 

 

   3,263,789

 

   1,411,579

 

   8,942,617

 

   3,776,670

 

   3,394,095

 

   1,544,449

 

   9,679,819

 

   4,132,616

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income and social contribution taxes

6

 

   (86,525)

 

  (188,863)

 

  (1,501,037)

 

  (684,835)

 

  (216,831)

 

  (321,733)

 

  (2,238,239)

 

  (1,040,781)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income for the period

 

 

   3,177,264

 

   1,222,716

 

   7,441,580

 

   3,091,835

 

   3,177,264

 

   1,222,716

 

   7,441,580

 

   3,091,835

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

22

 

1.76

 

  0.68

 

4.13

 

  1.72

 

 

 

 

 

 

 

 

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

22

 

1.94

 

  0.75

 

4.55

 

  1.89

 

 

 

 

 

 

 

 

 


 
 

 

TELEFÔNICA BRASIL S.A.

Statements of Changes in Equity

Nine-month periods ended September 30, 2018 and 2017

(In thousands of reais)

 

(A free translation of the original in Portuguese)

 

 

 

Capital reserves

 

Income reserves

 

 

 

 

 

 

 

 

 

Capital

 

Special goodwill reserve

 

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, 2016

  63,571,416

 

   63,074

 

1,297,297

 

  (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)

Unclaimed dividends and interest on equity

  -

 

  -

 

  -

 

  -

 

  -

 

  -

 

  -

 

   72,840

 

  -

 

  -

 

   72,840

Repurchase of preferred shares

  -

 

 -

 

  -

 

  (32)

 

  -

 

  -

 

  -

 

  -

 

  -

 

  -

 

  (32)

Preferred shares delivered referring to the judicial process of expansion plan

  -

 

  -

 

  -

 

  2

 

  -

 

  -

 

  -

 

  -

 

  -

 

  -

 

  2

Transfer of tax incentives - DIPJ adjustment

  -

 

  -

 

  -

 

  -

 

  -

 

8,057

 

  -

 

   (8,057)

 

  -

 

  -

 

   -  

Other comprehensive income

  -

 

  -

 

  -

 

  -

 

  -

 

  -

 

  -

 

  -

 

  -

 

    6,034

 

6,034

Equity transactions (Note 1 c)

  -

 

  -

 

  (59,029)

 

  -

 

  -

 

  -

 

  -

 

  -

 

  -

 

  -

 

  (59,029)

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

 

   63,074

 

1,238,268

 

  (87,820)

 

1,907,905

 

   25,126

 

550,000

 

2,226,618

 

   -  

 

  17,495

 

  69,512,082

Unclaimed dividends and interest on equity

  -

 

  -

 

  -

 

  -

 

  -

 

  -

 

  -

 

   28,938

 

  -

 

  -

 

   28,938

Repurchase of preferred shares

  -

 

  -

 

  -

 

  -

 

  -

 

  -

 

  -

 

  -

 

  -

 

  -

 

   -  

Transfer of tax incentives - DIPJ adjustment

  -

 

  -

 

  -

 

  -

 

  -

 

2,758

 

  -

 

   (2,758)

 

  -

 

  -

 

   -  

Other comprehensive income

  -

 

 -

 

  -

 

  -

 

  -

 

  -

 

  -

 

   (113,811)

 

  -

 

3,833

 

   (109,978)

Net income for the period

  -

 

     -

 

  -

 

  -

 

  -

 

  -

 

  -

 

1,516,955

 

  -

 

  -

 

1,516,955

Allocation of income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Legal reserve

  -

 

  -

 

  -

 

  -

 

230,439

 

  -

 

  -

 

   (230,439)

 

  -

 

  -

 

   -  

  Interim interest on equity

  -

 

  -

 

  -

 

  -

 

  -

 

  -

 

  -

 

   (1,486,639)

 

  -

 

  -

 

   (1,486,639)

  Reversal of expansion and Modernization Reserve

  -

 

  -

 

  -

 

  -

 

  -

 

  -

 

   (550,000)

 

550,000

 

  -

 

  -

 

   -  

  Expansion and Modernization Reserve

  -

 

  -

 

  -

 

  -

 

  -

 

  -

 

297,000

 

   (297,000)

 

  -

 

  -

 

   -  

  Additional proposed dividends

  -

 

     -

 

  -

 

  -

 

  -

 

  -

 

  -

 

   (2,191,864)

 

2,191,864

 

  -

 

   -  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2017

  63,571,416

 

   63,074

 

1,238,268

 

  (87,820)

 

2,138,344

 

   27,884

 

297,000

 

   -  

 

2,191,864

 

  21,328

 

  69,461,358

Effects of the initial adoption of IFRS 9 and 15, net of taxes

  -

 

  -

 

  -

 

  -

 

  -

 

  -

 

  -

 

   (138,663)

 

  -

 

  -

 

   (138,663)

Payment of additional dividend for 2017

  -

 

  -

 

  -

 

  -

 

  -

 

  -

 

  -

 

  -

 

   (2,191,864)

 

  -

 

   (2,191,864)

Unclaimed dividends and interest on equity

  -

 

  -

 

  -

 

  -

 

  -

 

  -

 

  -

 

   76,520

 

  -

 

  -

 

   76,520

Transfer of tax incentives - DIPJ adjustment

  -

 

  -

 

  -

 

  -

 

  -

 

8,409

 

  -

 

   (8,409)

 

  -

 

  -

 

   -  

Other comprehensive income

  -

 

  -

 

  -

 

  -

 

  -

 

  -

 

  -

 

  -

 

  -

 

  12,565

 

   12,565

Net income for the period

  -

 

     -

 

  -

 

  -

 

  -

 

  -

 

  -

 

7,441,580

 

  -

 

  -

 

7,441,580

Interim interest on equity

  -

 

 -

 

  -

 

  -

 

  -

 

  -

 

  -

 

   (3,200,000)

 

  -

 

  -

 

   (3,200,000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at September 30, 2018

  63,571,416

 

  63,074

 

1,238,268

 

  (87,820)

 

2,138,344

 

   36,293

 

297,000

 

4,171,028

 

   -  

 

  33,893

 

  71,461,496

 


 
 

 

 

TELEFÔNICA BRASIL S.A.

Statements of Other Comprehensive Income

Three and nine-month periods ended September 30, 2018 and 2017

(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

 

09.30.18

 

09.30.17

 

09.30.18

 

09.30.17

 

09.30.18

 

09.30.17

 

09.30.18

 

09.30.17

Net income for the period

 

 

3,177,264

 

    1,222,716

 

7,441,580

 

3,091,835

 

3,177,264

 

1,222,716

 

7,441,580

 

3,091,835

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

2,702

 

   (3,979)

 

  12,834

 

5,770

 

2,702

 

   (3,979)

 

  12,834

 

5,770

Gains (losses) on derivative financial instruments

30

 

   (490)

 

   (5,063)

 

   (1,972)

 

   (1,095)

 

   (490)

 

   (5,063)

 

   (1,972)

 

   (1,095)

Taxes

 

 

166

 

1,721

 

670

 

372

 

166

 

1,721

 

670

 

372

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative Translation Adjustments (CTA) on transactions in foreign currency

11

 

3,049

 

  (637)

 

  14,136

 

6,493

 

3,049

 

   (637)

 

  14,136

 

6,493

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest in comprehensive income of subsidiaries

11

 

  (23)

 

  -

 

  -

 

  -

 

  (23)

 

  -

 

  -

 

  -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (losses) that can not be reclassified into income (losses) in subsequent periods

 

 

   (169)

 

   44

 

   (269)

 

264

 

   (169)

 

   44

 

   (269)

 

264

Unrealized gains on investments available for sale

11

 

   (257)

 

   66

 

   (408)

 

400

 

   (257)

 

   66

 

   (408)

 

400

Taxes

 

 

   88

 

  (22)

 

139

 

   (136)

 

   88

 

  (22)

 

139

 

   (136)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

 

2,533

 

   (3,935)

 

  12,565

 

    6,034

 

2,533

 

   (3,935)

 

  12,565

 

6,034

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income for the period - net of taxes

 

 

3,179,797

 

1,218,781

 

7,454,145

 

3,097,869

 

3,179,797

 

1,218,781

 

7,454,145

 

3,097,869

 

 


 
 

 

TELEFÔNICA BRASIL S.A.

Consolidated Statements of Cash Flows

Nine-month periods ended September 30, 2018 and 2017

(In thousands in reais)

 

(A free translation of the original in Portuguese)

 

 

 

 

 

 

 

 

 

 

 

Company

 

Consolidated

 

 

09.30.18

 

09.30.17

 

09.30.18

 

09.30.17

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before taxes

 

8,942,617

 

3,776,670

 

9,679,819

 

4,132,616

Ajustement for:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

6,019,692

 

5,842,396

 

6,045,916

 

5,862,808

Foreign exchange on loans and derivative financial instruments

 

  37,579

 

  46,670

 

  39,176

 

  43,719

Monetary assets and liabilities

 

614,751

 

476,343

 

614,356

 

478,973

Equity pickup

 

   (1,384,419)

 

   (1,079,141)

 

4,914

 

   (1,362)

Loss on write-off/sale of assets

 

4,453

 

  17,512

 

4,777

 

  12,654

Provision for impairment - accounts receivable

 

1,011,896

 

1,037,677

 

1,168,936

 

1,108,925

Change in liability provisions

 

   (272,570)

 

176,907

 

   (235,954)

 

121,490

Write-off and reversals for impairment - inventories

 

(31,461)

 

(45,899)

 

(33,402)

 

(43,184)

Pension plans and other post-retirement benefits

 

  35,593

 

  23,117

 

  36,860

 

  23,700

Provisions for tax, civil, labor and regulatory contingencies

 

983,676

 

640,383

 

995,695

 

650,654

Interest expense

 

380,371

 

770,991

 

380,371

 

770,991

Others

 

   (3,210)

 

  10,383

 

   (3,464)

 

  10,383

 

 

 

 

 

 

 

 

 

Changes in assets and liabilities

 

 

 

 

 

 

 

 

Trade accounts receivable

 

   (1,340,124)

 

   (805,214)

 

   (1,509,231)

 

   (1,122,090)

Inventories

 

(65,764)

 

  63,800

 

(77,156)

 

  72,987

Taxes recoverable

 

   (5,985,851)

 

   (269,874)

 

   (5,863,914)

 

   (240,862)

Prepaid expenses

 

(83,143)

 

(62,142)

 

(80,719)

 

(68,456)

Other assets

 

270,279

 

(79,749)

 

(14,304)

 

  89,238

Personnel, social charges and benefits

 

  31,804

 

  43,226

 

  39,861

 

  56,841

Trade accounts payable

 

652,129

 

298,318

 

987,401

 

(12,126)

Taxes, charges and contributions

 

(33,764)

 

494,612

 

(74,001)

 

509,268

Provisions for tax, civil, labor and regulatory contingencies

 

   (3,639,390)

 

   (804,743)

 

   (3,651,633)

 

   (828,958)

Other liabilities

 

   (172,733)

 

   (892,876)

 

   (164,089)

 

   (860,529)

 

 

   (2,970,206)

 

5,902,697

 

   (1,389,604)

 

6,635,064

 

 

 

 

 

 

 

 

 

Cash generated from operations

 

5,972,411

 

9,679,367

 

8,290,215

 

  10,767,680

 

 

 

 

 

 

 

 

 

Interest paid

 

   (410,585)

 

   (695,802)

 

   (410,585)

 

   (695,802)

Income and social contribution taxes paid

 

(11,841)

 

  -

 

   (529,039)

 

   (394,075)

 

 

 

 

 

 

 

 

 

Net cash (used in) generated by operating activities

 

5,549,985

 

8,983,565

 

7,350,591

 

9,677,803

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Additions to PP&E and intangible assets and others

 

   (5,673,471)

 

   (6,105,205)

 

   (5,894,024)

 

   (6,207,699)

Cash received from sale of PP&E items

 

3,883

 

  18,267

 

3,883

 

  23,825

Cash paid for acquisition of companies

 

  -

 

  -

 

  -

 

   (250,000)

Redemption of judicial deposits

 

2,701,127

 

  49,816

 

2,704,974

 

  49,762

Dividends and interest on equity received

 

1,586,709

 

384,588

 

  -

 

  -

Cash and cash equivalents by incorporation

 

  -

 

  -

 

  -

 

  43,351

Others

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash (used in) generated by investing activities

 

   (1,381,752)

 

   (5,652,534)

 

   (3,185,167)

 

   (6,340,761)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Payment of loans, financing and debentures

 

   (2,524,301)

 

   (3,551,465)

 

   (2,524,301)

 

   (3,551,465)

Loans and financing obtained

 

  -

 

2,039,878

 

  -

 

2,039,878

Received of derivative financial instruments

 

  96,108

 

  81,525

 

  96,726

 

  85,159

Payment of derivative financial instruments

 

(68,297)

 

   (140,470)

 

(71,209)

 

   (140,475)

Dividend and interest on equity paid

 

   (2,003,224)

 

   (1,304,161)

 

   (2,003,224)

 

   (1,304,161)

Treasury shares

 

  -

 

  (32)

 

  -

 

  (32)

 

 

 

 

 

 

 

 

 

Net cash (used in) generated by financing activities

 

   (4,499,714)

 

   (2,874,725)

 

   (4,502,008)

 

   (2,871,096)

 

 

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

   (331,481)

 

456,306

 

   (336,584)

 

465,946

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at the beginning of the year

 

3,681,173

 

4,675,627

 

4,050,338

 

5,105,110

Cash and cash equivalents at the end of the  year

 

3,349,692

 

5,131,933

 

3,713,754

 

5,571,056

 


 
 

 

TELEFÔNICA BRASIL S.A.

Statements of Value Added

Nine-month periods ended September 30, 2018 and 2017

(In thousands in reais)

 

(A free translation of the original in Portuguese)

 

 

 

 

 

 

 

 

 

 

 

Company

 

Consolidated

 

 

09.30.18

 

09.30.17

 

09.30.18

 

09.30.17

 

 

 

 

 

 

 

 

 

Revenues

 

  42,171,479

 

  41,620,108

 

  46,400,252

 

  44,297,292

Sale of goods and services

 

  38,064,521

 

  41,795,634

 

  43,312,730

 

  44,515,392

Other revenues

 

5,118,854

 

862,151

 

4,256,458

 

890,825

Impairment losses of trade accounts receivable

 

   (1,011,896)

 

   (1,037,677)

 

   (1,168,936)

 

   (1,108,925)

 

 

 

 

 

 

 

 

 

Inputs acquired from third parties

 

(13,755,316)

 

(14,180,624)

 

(15,034,545)

 

(15,039,541)

Cost of goods and products sold and services rendered

 

   (7,224,505)

 

   (7,066,689)

 

   (8,265,479)

 

   (7,913,642)

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

 

   (6,557,818)

 

   (7,111,989)

 

   (6,797,691)

 

   (7,120,995)

Loss/recovery of assets

 

  27,007

 

   (1,946)

 

  28,625

 

   (4,904)

 

 

 

 

 

 

 

 

 

Gross value added

 

  28,416,163

 

  27,439,484

 

  31,365,707

 

  29,257,751

 

 

 

 

 

 

 

 

 

Withholdings

 

   (6,019,692)

 

   (5,842,396)

 

   (6,045,916)

 

   (5,862,808)

Depreciation and amortization

 

   (6,019,692)

 

   (5,842,396)

 

   (6,045,916)

 

   (5,862,808)

 

 

 

 

 

 

 

 

 

Net value added produced

 

  22,396,471

 

  21,597,088

 

  25,319,791

 

  23,394,943

 

 

 

 

 

 

 

 

 

Value added received in transfer

 

4,975,504

 

2,508,015

 

3,694,597

 

1,514,715

Equity pickup

 

1,384,419

 

1,079,141

 

   (4,914)

 

1,362

Financial income

 

3,591,085

 

1,428,874

 

3,699,511

 

1,513,353

 

 

 

 

 

 

 

 

 

Total undistributed value added

 

  27,371,975

 

  24,105,103

 

  29,014,388

 

  24,909,658

 

 

 

 

 

 

 

 

 

Distribution of value added

 

(27,371,975)

 

(24,105,103)

 

(29,014,388)

 

(24,909,658)

 

 

 

 

 

 

 

 

 

Personnel,social charges and benefits

 

   (3,008,584)

 

   (2,880,051)

 

   (3,397,590)

 

   (3,043,893)

Direct compensation

 

   (2,110,497)

 

   (1,944,017)

 

   (2,348,845)

 

   (2,048,350)

Benefits  

 

   (773,405)

 

   (788,846)

 

   (903,007)

 

   (840,043)

Government Severance Indemnity Fund for Employees (FGTS)

 

   (124,682)

 

   (147,188)

 

   (145,738)

 

   (155,500)

Taxes, charges and contributions

 

(13,038,418)

 

(13,827,152)

 

(14,250,182)

 

(14,447,799)

Federal 

 

   (5,187,002)

 

   (3,857,898)

 

   (6,292,373)

 

   (4,447,204)

State 

 

   (7,730,243)

 

   (9,905,574)

 

   (7,748,615)

 

   (9,917,500)

Local

 

   (121,173)

 

(63,680)

 

   (209,194)

 

(83,095)

Debt remuneration

 

   (3,883,393)

 

   (4,306,065)

 

   (3,925,036)

 

   (4,326,131)

Interest

 

   (1,565,295)

 

   (2,174,890)

 

   (1,585,883)

 

   (2,187,663)

Rental

 

   (2,318,098)

 

   (2,131,175)

 

   (2,339,153)

 

   (2,138,468)

Equity remuneration

 

   (7,441,580)

 

   (3,091,835)

 

   (7,441,580)

 

   (3,091,835)

Retained profit

 

   (7,441,580)

 

   (3,091,835)

 

   (7,441,580)

 

  (3,091,835)

 

 


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

1)   OPERATIONS

 

a) Background information

 

Telefônica Brasil S.A. (“Company” or “Telefônica Brasil”) is a publicly held corporation operating in telecommunication services and in the performance of activities that are necessary or useful in the rendering of such services, in conformity with the concessions and authorizations it has been 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 the Telefónica Group (“Group”), with headquarters in Spain and present in several countries of Europe and Latin America.

 

At September 30, 2018 and December 31, 2017, Telefónica S.A. (“Telefónica”), the Group holding company, held total direct and indirect interest in the Company of 73.58% (Note 22).

 

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 – Central Custody and Settlement of Securities). 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"); and (iv) Conditioned Access Service ("SEAC" - Pay TV), throughout Brazil, through concessions and authorizations, as established in the General Plan of Concessions ("PGO").

 

Service concessions and authorizations are granted by 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.

 

In accordance with the STFC service concession agreement, 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 21). The Company's current STFC concession agreement is valid until December 31, 2025.

 

In accordance with the authorization terms for the usage of radio frequencies associated with SMP, 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 21), 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.

The information on a summary of the authorizations for the use of radiofrequency bands for SMP granted to the Company is the same as in Note 1b) Operations, as disclosed in the financial statements for the year ended December 31, 2017.

c) Acquisition of a Wholly-Owned Subsidiary - 2017

 

The information on the acquisition process of Terra Networks Brasil SA ("Terra Networks") by Telefônica Data SA ("TData"), a wholly owned subsidiary of the Company, occurred on July 3, 2017, is the same as in Note 1.c .1) Acquisition of Company by Integral Subsidiary - 2017, disclosed in the financial statements for the year ended December 31, 2017.

Page 10


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

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

 

 

a) Statement of compliance

 

The condensed individual and consolidated interim financial information has been prepared and is being presented in accordance with technical pronouncement CPC 21 (R1) Interim Statement and with the international standard IAS 34 Interim Financial Reporting.

 

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

 

b) Basis of preparation and presentation

 

The Company’s quarterly financial statements for the nine-month period ended September 30, 2018 are presented in thousands of Reais (unless otherwise stated), which is the functional currency of the Company.

 

These quarterly financial statements compare the quarters ended September 30, 2018 and 2017, except for the balance sheets, that compare the positions as at September 30, 2018 and December 31, 2017.

 

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

 

The Board of Directors authorized the issue of these individual and consolidated financial statements at the meeting held on October 26, 2018.

 

Business segments are defined as components of a company for which separate financial information is available and regularly assessed by the operational decision making professional 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, the Company and subsidiaries operate in a single operating segment, namely the provision of telecommunications services.

 

The information in the notes to the financial statements that did not significantly change or present irrelevant disclosures as compared to December 31, 2017 were not fully repeated in these quarterly financial statements. However, the Company selected and included information to explain the main events and transactions occurring during the nine-month period ended September 30, 2018, so that the changes in the Company's financial position and performance can be understood.

 

In this context, the Company indicates below the reference to the notes disclosed in the annual financial statements as at December 31, 2017 and not fully repeated in these quarterly financial statements:

 

·   Note 1 -   Operations

·   Note 2 -   Basis of Preparation and Presentation of Financial Statements

·   Note 3 -   Summary of Significant Accounting Practices

·   Note 13 - Intangible Assets, Net

·   Note 22 - Equity

·   Note 29 - Share-Based Payment Plans

·   Note 30 – Pension Plans and Other Post-Employment Benefits

Page 11


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

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 fiscal year ended December 31, 2017 (Note 3) Summary of Significant Accounting Practices) and should be analyzed in conjunction with these Financial statements, except for the changes required by the new pronouncements, interpretations and amendments, which came into effect as of January 1, 2018, as described below:

 

Standards and amendments

IFRS 9

Financial Instruments

IFRS15

Revenue from Contracts with Customers

Clarifications to IFRS 15

Revenue from Contracts with Customers , issued on April 12, 2016

Amendments to IFRS 2

Classication and Valuation of Share Based Transactions

Amendments to IFRS 4

Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts

Amendments to IAS 40

Transfers of Investiment Property

IFRIC 22

Foreign Currency Transactions and Advance Consideration

Improvements to IFRS Standards

2014-2016 Cycle

 

The adoption of many of these standards, changes and interpretations did not have a significant impact on the financial position of the Company and its subsidiaries in the initial period of application. However, for the IFRS 9 and IFRS 15, there was a significant impact on the consolidated financial position at the time of its adoption and prospectively.

IFRS 9 Financial Instruments

IFRS 9 simplified the current measurement model for financial assets and established 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 were not significant changes from current criteria except for the recognition of changes in own credit risk in OCI for those liabilities designated at fair value through profit or loss.

IFRS 9 introduced a new model for impairment losses on financial assets, i.e. the expected credit loss model. The Company applied the simplified approach and recorded lifetime expected losses on all trade receivables. Consequently, the application of the new requirements led to an acceleration in the recognition of impairment losses on its financial assets, mainly trade receivables.

IFRS 9 introduced a new and less restrictive hedge accounting model, requiring an economic relationship between the hedged item and the hedging instrument and that the hedge ratio be the same as that applied by the entity for risk management, criteria for documenting hedge relationships.

The main changes are related to the documentation of policies and hedging strategies, as well as the estimation and timing of recognition of expected losses on receivables from customers. The Company has decided to apply the option that allows not to restate comparative periods to be presented in the year of initial application.

From the analysis performed on the transactions of the 2017 financial year, the Company recognized on January 1, 2018, a decrease of 364 million reais in retained earnings, before deferred taxes, as a result of the increase in the bad debt provision balance on receivables from customers. 

In addition to the effects on provisions for customer receivables defaults mentioned above, the adoption of IFRS 9 had impacts on the classification and measurement of financial assets and liabilities, as presented in the table below.

Page 12


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

 

 

Classification by category

 

 

Classification in accordance with IAS 39

 

Classification in accordance with IFRS 9

Financial Assets 

 

 

 

 

Short-term investments (Cash equivalents)

 

 Amortized cost 

 

 Measured at fair value through profit or loss  

Trade accounts receivable

 

 Loans and receivables 

 

 Amortized cost 

Derivative transactions

 

 Hedges (economic)

 

 Measured at fair value through comprehensive income

Short-term investments pledged as collateral

 

 Amortized cost 

 

 Measured at fair value through profit or loss  

 

 

 

 

 

Financial Liabilities

 

 

 

 

Derivative transactions

 

 Hedges (economic)

 

 Measured at fair value through comprehensive income

 

The complete information on the Company's financial assets and financial liabilities is disclosed in note 30 of these ITRs.

IFRS 15 Revenues from Contracts with Customers

 

With the adoption of IFRS 15, for bundled packages that combine multiple wireline, wireless, data, internet or television goods or services, the total revenue is now allocated to each performance obligation based on their standalone selling prices in relation to the total consideration of the package and will be recognized when (or as) the obligation is satisfied, regardless of whether there are undelivered items. Consequently, when bundles include a discount on equipment, there is an increase in revenues recognized from the sale of handsets and other equipment, in detriment of ongoing service revenue over subsequent periods. To the extent that the packages are marketed at a discount, the difference between the revenue from the sale of equipment and the consideration received from the customer upfront is recognised as a contract asset in the statement of financial position.

All incremental costs to obtain a contract (sales commissions and other acquisition costs of third parties) are accounted for as prepaid expenses (assets) and amortized over the same period as the revenue associated with that asset. Similarly, certain contract fulfillment costs are also deferred to the extent that they relate to performance obligations that are satisfied over time.

Revenue from the sale of handsets to dealers is accounted for at the time of delivery and not at the time of sale to the final customer.

Certain changes of the contract have been accounted for as a retrospective change (i.e. as a continuation of the original contract), while other modifications are to be considered prospectively as separate contracts, such as the original contract end and the creation of a new one.

The Company adopted the retrospective method modified with the cumulative effect of the initial application recognized as an adjustment to the opening balance of retained earnings on the date of the initial adoption. Therefore, comparative amounts of previous periods will not be restated. To facilitate the understanding and comparability of information, the Company discloses in Note 33 the consolidated income statement for the nine-month period ended September 30, 2018, excluding the effects of adopting IFRS 15.

The main practical expedients adopted by the Company were: (i) completed contracts: the standard was not retrospectively applied to those contracts that are completed at January 1, 2018; (ii) portfolio approach: the requirements of the standard have been applied for groups of contracts with similar characteristics, since, for the clusters identified, the effects do not differ significantly from an application on a contract by contract basis; (iii) financial component: it was not considered significant when the period between the moment when the promised product or service is transferred to a customer and the moment when the customer pays for that product or service is one year or less.; and (iv) costs to obtain a contract: these costs will be recognised as an expense when incurred if the amortisation period of the asset that the entity would otherwise recognise is one year or less.

 

 

Page 13


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

The process of implementing the new requirements involved 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 in the Company. This process of implementation in the Company entailed a high degree of complexity due to factors such as a large number of contracts, numerous data source systems, as well as the need to make complex estimates.

From the analysis performed on the transactions of the 2017 financial year, considering commercial offers as well as the volume of contracts affected, the Company recognized on January 1, 2018 an increase in retained earnings of 156 million reais, before deferred taxes, referring to first-time recognition of contract assets that lead to the early recognition of revenue from the sale of goods and the activation and deferral of incremental costs related to obtaining contracts and contract fulfilment costs that result in the subsequent recognition of customer acquisition costs and other sales.

The following table shows the changes in contractual assets and liabilities and incremental costs of the Company (excluding the effects of sales and income taxes)  for the nine-month period ended September 30, 2018.

 

Contract assets  (1)

 

Contractual liabilities (3)

 

 

 

Contract assets, gross

 

Provision for losses

 

Contract assets, net

 

Contractual liabilities

 

Reclassification (Note 19)

 

Contractual liabilities

 

Incremental costs (2)

Initial adoption on 01.01.18

               193,675

 

                (33,196)

 

               160,479

 

              (178,897)

 

                          -

 

              (178,897)

 

               183,645

Reclassification on 01.01.18

                          -

 

                          -

 

                          -

 

                          -

 

              (383,688)

 

              (383,688)

 

                          -

   Additions

               460,903

 

                  (7,523)

 

               453,380

 

              (162,138)

 

           (5,353,375)

 

           (5,515,513)

 

               186,361

   Write-offs, net

              (417,941)

 

                          -

 

              (417,941)

 

               152,059

 

            5,388,551

 

            5,540,610

 

              (138,440)

Balances as of 09.30.18

               236,637

 

                (40,719)

 

               195,918

 

              (188,976)

 

              (348,512)

 

              (537,488)

 

               231,566

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

               236,637

 

                (40,719)

 

               195,918

 

                (27,211)

 

              (332,764)

 

              (359,975)

 

                 73,267

Non-current

                          -

 

                          -

 

                          -

 

              (161,765)

 

                (15,748)

 

              (177,513)

 

               158,299

 

The amounts in the above table are classified in the balance sheets as follows: (1) Accounts receivable (Note 4); (2) Prepaid expenses (Note 9); and (3) Deferred income (Note 19).

New IFRS pronouncements, issues, amendments and interpretations of the IASB, applicable to the CPC

 

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 anticipate the early adoption of any pronouncement, interpretation or amendment that has been issued, before application is mandatory.

 

Standards and amendments

 

Mandatory application: annual periods beginning on or after

Improvements to IFRS Standards

 

2015-2017 Cycle

 

January 1, 2019

IFRS 16

 

Leases

 

January 1, 2019

IFRIC23

 

Uncertainty over Income Tax Treatments

 

January 1, 2019

Amendments to IFRS 9

 

Prepayment Features with Negative Compensation

 

January 1, 2019

Amendments to IAS 28

 

Long-term Interest in associates and Joint Ventures

 

January 1, 2019

Amendments to IFRS 10 and IAS 28

 

Sale or Contribuition of Assets between na Investidor and its Associate or Joint Venture

 

January 1, 2019

IFRS 17

 

Insurance Contracts

 

January 1, 2021

 

Based on the analyses made to date, the Company estimates that the adoption of these standards, amendments and interpretations will not have a significant impact on the consolidated quarterly financial statements in the initial period of adoption. However, for IFRS 16 - Leases are expected to have a significant impact on the consolidated quarterly financial statements at the time of their adoption and prospectively.

Page 14


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

IFRS 16 Leases

IFRS 16 requires lessees to recognise assets and liabilities arising from all leases (except for short-term leases and leases of low-value assets) in the financial statement.

The Company acts as a lessee on a very significant number of lease agreements over different assets, such as third-party towers, circuits, office buildings, stores and land where the towers are located, mainly. A significant portion of these contracts is accounted for as operating lease under the current lease standard, with lease payments being recognised generally on the 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. This analysis includes the estimation of the lease term, based on the non-cancellable period and the periods covered by options to extend the lease, when the exercise depends only on Telefônica and where such exercise is reasonably certain. This will depend, to a large extent, on the specific facts and circumstances by class of assets in the telecom industry (technology, regulation, competition, business model, among others).  In addition to this, the Company will make assumptions to calculate the discount rate, which will mainly be based on the incremental borrowing rate of interest for the estimated term. On the other hand, 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.

In addition to the mentioned estimations, the standard allows for two transition methods: retrospectively for all periods presented, or 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 latter transition method; therefore, the Company 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 not reassessing 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, together with the complexity of the estimations and the significant number of lease contracts, the Company has not yet completed the implementation process, so at present it is not possible to make a reasonable estimation of the impact of initial application of the new requirements. However, based on the volume of contracts affected, as well as the magnitude of the future lease commitments, as disclosed in Note 31 herein, the Company expects that the changes introduced by IFRS 16 will 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. Classification of lease payments in the statement of cash flows will also be affected by the requirements of the new lease standard. On the other hand, the Company's Financial Statements will include broader disclosures with relevant information regarding lease contracts.

c) Basis of consolidation

 

Interest held in subsidiaries or joint ventures is measured under the equity method in the individual financial statements. In the consolidated financial statements, investments and all asset and liability balances, revenues and expenses arising from transactions and interest held in subsidiaries are fully eliminated. Investments in joint venture are measured under the equity method in the consolidated financial statements.

Page 15


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

 

At September 30, 2018 and December 31, 2017, the Company held the following equity interests on the respective dates:

 

Investees

 

Type of investment

 

Equity interests

 

Country (Headquarters)

 

Core activity

Telefônica Data S.A. ("TData") (1)

 

Wholly-owned subsidiary

 

100.00%

 

Brazil

 

Telecommunications

POP Internet Ltda ("POP") (2)

 

Wholly-owned subsidiary

 

100.00%

 

Brazil

 

Internet

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

 

Joint venture

 

50.00%

 

Holland

 

Holding of the telecommunications sector

Companhia AIX de Participações ("AIX")

 

Joint venture

 

50.00%

 

Brazil

 

Operation of underground telecommunications networks

Companhia ACT de Participações ("ACT")

 

Joint venture

 

50.00%

 

Brazil

 

Technical assistance in telecommunication networks

(1) TData is the parent of the wholly-owned subsidiaries Terra Networks and Telefônica Transportes e Logística Ltda. ("TGLog").


(2) POP is the parent of the wholly-owned subsidiary Innoweb Ltda. ("Innoweb").

 

On September 10, 2018, the Company informed the market that studies will be initiated regarding a possible merger of its wholly-owned subsidiary TData ("Merger"). If implemented, the Merger will not affect the Company's shareholding structure, since TData's shareholders' equity is already reflected in the Company's equity. The studies of the possible Merger will consider the necessary simplification of the corporate structure and concentration of the Company's services, as part of an ongoing process of simplification and promotion of an environment of convergence in the Company's relationship with its clients.


As soon as the studies are completed, they will be presented to the Board of Directors and, in the event of a decision regarding the effectiveness of the Merger, a Material Fact will be disclosed containing the details regarding the terms and conditions of the Merger (pursuant to CVM Instruction 565/15), as well as convening the relevant extraordinary shareholders' meeting of the Company to resolve on the Merger.

 

d) Reclassification of comparative amounts


The Company reclassified the amount of R$655,084 in the statements of cash flows for the nine-month period ended September 30, 2017, referring to the principal amount of the payment made on January 31, 2017 to the “Entidade Administradora do Processo de Redistribuição e Digitalização de Canais de TV e RTV” ("EAD") of the 2nd and 3rd installments of the auction of 700 MHz frequency bands for the provision of SMP. This reclassification was made between "Cash flow from operating activities - Other liabilities" and "Cash flow from investing activities - Acquisitions of property, plant and equipment and intangible assets".

 

3)  CASH AND CASH EQUIVALENTS

 

 

Company

 

Consolidated

 

09/30/18

 

12/31/17

 

09/30/18

 

12/31/17

Cash and banks

            113,099

 

            114,556

 

            113,070

 

            117,799

Short-term investments

         3,236,593

 

         3,566,617

 

         3,600,684

 

         3,932,539

Total

         3,349,692

 

         3,681,173

 

         3,713,754

 

         4,050,338

 

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.

 

 

 

 

 

Page 16


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

 

 

 

4) TRADE ACCOUNTS RECEIVABLE

 

 

Company

 

Consolidated

 

09/30/18

 

12/31/17

 

09/30/18

 

12/31/17

Billed amounts

         6,234,751

 

         6,033,164

 

         6,993,486

 

         6,753,621

Unbilled amounts

         2,209,809

 

         2,117,422

 

         2,456,142

 

         2,481,364

Interconnection amounts

            877,302

 

            835,085

 

            898,661

 

            859,819

Amounts from related parties (Note 27)

            670,871

 

            804,783

 

            209,355

 

            201,021

Gross accounts receivable

         9,992,733

 

         9,790,454

 

       10,557,644

 

       10,295,825

Estimated impairment losses

        (1,252,152)

 

        (1,209,369)

 

        (1,556,056)

 

        (1,433,471)

Total

         8,740,581

 

         8,581,085

 

         9,001,588

 

         8,862,354

 

 

 

 

 

 

 

 

Current

         8,566,785

 

         8,413,403

 

         8,670,107

 

         8,588,466

Non-current

            173,796

 

            167,682

 

            331,481

 

            273,888

 

Consolidated balances of non-current trade accounts receivable include:

 

·       R$126,319 at September 30, 2018 (R$122,651 at December 31, 2017), relating to the business model of resale of goods to legal entities, receivable within 24 months. At September 30, 2018, the impact of the present-value adjustment was R$15,236 (R$16,011 at December 31, 2017).

 

·       R$47,477, at September 30, 2018 (R$45,031, at December 31, 2017), 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, 2018, the impact of the present-value adjustment was R$13,088 (R$15,535 at December 31, 2017).

 

·       R$157,685, at September 30, 2018 (R$106,206, at December 31, 2017), 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, 2018, the impact of the present-value adjustment was R$48,229 (R$33,614 at December 31, 2017).

 

The balances of current and non-current trade accounts receivable, relating to finance lease of “Soluciona TI” product, comprise the following effects:

 

 

Consolidated

 

09/30/18

 

12/31/17

Nominal amount receivable

            533,796

   

            434,743

Deferred financial income

            (48,229)

 

            (33,614)

Present value of accounts receivable

            485,567

 

            401,129

Estimated impairment losses

           (169,784)

 

           (154,666)

Net amount receivable

            315,783

 

            246,463

 

 

 

 

Current

            158,098

 

            140,257

Non-current

            157,685

 

            106,206

 

 

 

 

 

 

Page 17


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

 

At September 30, 2018, the aging list of gross trade accounts receivable relating to “Soluciona TI” product is as follows:

 

 

 

 

 

 

Consolidated

 

 

 

 

 

Nominal amount receivable

 

Present value of accounts receivable

Falling due within one year

 

 

 

 

            266,227

 

            254,949

Falling due between one year and six years

 

 

 

 

            267,569

 

            230,618

Total

 

 

 

 

            533,796

 

            485,567

 

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

 

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

 

 

Company

 

Consolidated

 

09/30/18

 

12/31/17

 

09/30/18

 

12/31/17

Falling due

         6,171,022

 

         6,557,992

 

         6,523,835

 

         6,635,125

Overdue – 1 to 30 days

         1,285,440

 

         1,016,172

 

         1,187,273

 

         1,132,008

Overdue – 31 to 60 days

            410,904

 

            342,779

 

            317,881

 

            375,176

Overdue – 61 to 90 days

            177,166

 

            224,597

 

            207,804

 

            232,648

Overdue – 91 to 120 days

            204,926

 

             96,586

 

            215,371

 

            105,342

Overdue – over 120 days

            491,123

 

            342,959

 

            549,424

 

            382,055

Total

         8,740,581

 

         8,581,085

 

         9,001,588

 

         8,862,354

 

At September 30, 2018 and December 31, 2017, 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 12/31/16

 

 

 

        (1,004,512)

 

        (1,399,895)

Supplement to estimated losses, net of resersal (Note 24)

 

 

 

        (1,037,677)

 

        (1,108,925)

Write-off due to use

 

 

 

            865,843

 

            895,128

Business combinations (Note 1.c)

 

 

 

                      -

 

              (8,719)

Balance at 09/30/17

 

 

 

        (1,176,346)

 

        (1,622,411)

Supplement to estimated losses, net of resersal

 

 

 

           (367,408)

 

           (372,090)

Write-off due to use

 

 

 

            334,385

 

            561,030

Balance at 12/31/17

 

 

 

        (1,209,369)

 

        (1,433,471)

Initial adoption IFRS 9 on 01.01.18

 

 

 

           (332,127)

 

           (364,456)

Supplement to estimated losses, net of resersal (Note 24)

 

 

 

        (1,011,896)

 

        (1,168,936)

Write-off due to use

 

 

 

         1,301,240

 

         1,410,807

Balance at 09/30/18

 

 

 

        (1,252,152)

 

        (1,556,056)

 

 

 

Page 18


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

 

5)  INVENTORIES

 

 

Company

 

Consolidated

 

09/30/18

 

12/31/17

 

09/30/18

 

12/31/17

Materials for resale (1)

            366,785

 

            302,235

 

            404,040

 

            325,850

Materials for consumption

             88,107

 

             55,448

 

             89,411

 

             57,740

Other inventories

               7,911

 

               7,822

 

               7,911

 

               7,822

Gross total

            462,803

 

            365,505

 

            501,362

 

            391,412

Estimated losses from impairment or obsolescence (2)

            (40,867)

 

            (40,794)

 

            (42,049)

 

            (42,657)

Total

            421,936

 

            324,711

 

            459,313

 

            348,755

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

 

(2)  Additions and reversals of estimated impairment losses and inventory obsolescence are included in cost of goods sold (Note 24).

 

 

6)   INCOME AND SOCIAL CONTRIBUTION TAXES

 

a)   Income and Social Contribution taxes recoverable

 

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

 

 

Company

 

Consolidated

 

09/30/18

 

12/31/17

 

09/30/18

 

12/31/17

Income taxes recoverable

            244,408

 

            348,113

 

            244,943

 

            428,524

Social contribution taxes recoverable

             28,441

 

             53,146

 

             28,621

 

             77,011

Total

            272,849

 

            401,259

 

            273,564

 

            505,535

 

 

b) Income and Social Contribution taxes payable

 

 

 

 

Consolidated

 

 

 

 

 

09/30/18

 

12/31/17

Income taxes payable

 

 

 

 

             59,828

 

               3,267

Social contribution taxes payable

 

 

 

 

             22,634

 

               1,212

Total

 

 

 

 

             82,462

 

               4,479

 

 

c) Deferred taxes

 

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

 

 

 

 

 

Page 19


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

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

Company

 

Balances at 12/31/16

 

Income statement

 

Comprehensive income

 

Balances at 09/30/17

 

Income statement

 

Comprehensive income

 

Balances at 12/31/17

 

Income statement

 

Comprehensive income (4)

 

Balances at 09/30/18

Deferred tax assets  (liabilities)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income and social contribution taxes on tax losses (1)

   1,376

 

   176,306

 

   -

 

177,682

 

   411,068

 

-

 

   588,750

 

   436,544

 

-

 

   1,025,294

Income and social contribution taxes on temporary differences (2)

  (90,071)

 

(907,363)

 

236

 

  (997,198)

 

(356,828)

 

  55,951

 

(1,298,075)

 

(1,937,372)

 

  60,767

 

(3,174,680)

Provisions for legal, labor, tax civil and regulatory contingencies

2,221,055

 

   (6,770)

 

   -

 

2,214,285

 

  40,802

 

-

 

   2,255,087

 

(327,562)

 

-

 

   1,927,525

Trade accounts payable and other provisions

608,158

 

  60,148

 

   -

 

668,306

 

   (80,012)

 

-

 

   588,294

 

   (92,674)

 

-

 

   495,620

Customer portfolio and trademarks

313,091

 

   (41,220)

 

   -

 

271,871

 

   (17,454)

 

-

 

   254,417

 

   (52,360)

 

-

 

   202,057

Estimated losses on impairment of accounts receivable

341,535

 

  58,424

 

   -

 

399,959

 

  11,228

 

-

 

   411,187

 

   (98,378)

 

   112,923

 

   425,732

Estimated losses from modems and other P&E items

282,267

 

   (73,195)

 

   -

 

209,072

 

   (9,638)

 

-

 

   199,434

 

   (5,537)

 

-

 

   193,897

Pension plans and other post-employment benefits

108,403

 

  10,407

 

   -

 

118,810

 

91

 

  55,480

 

   174,381

 

  14,440

 

-

 

   188,821

Profit sharing

123,911

 

   (33,565)

 

   -

 

   90,346

 

  10,297

 

-

 

   100,643

 

   (29,449)

 

-

 

   71,194

Licenses

  (1,420,556)

 

(162,247)

 

   -

 

  (1,582,803)

 

   (54,083)

 

-

 

(1,636,886)

 

(162,246)

 

-

 

(1,799,132)

Effects of goodwill generated in the merger of Vivo Part.

  (864,320)

 

   (5,461)

 

   -

 

  (869,781)

 

-

 

-

 

  (869,781)

 

-

 

-

 

  (869,781)

Goodwill from Spanish and Navytree

  (337,535)

 

-

 

   -

 

  (337,535)

 

-

 

-

 

  (337,535)

 

-

 

-

 

  (337,535)

Goodwill from Vivo Part.

  (1,005,120)

 

(125,402)

 

   -

 

  (1,130,522)

 

   (41,801)

 

-

 

(1,172,323)

 

(125,402)

 

-

 

(1,297,725)

Goodwill from GVT Part.

  (522,228)

 

(522,228)

 

   -

 

  (1,044,456)

 

(174,077)

 

-

 

(1,218,533)

 

(591,859)

 

-

 

(1,810,392)

Technological Innovation Law

  (140,940)

 

  30,612

 

   -

 

  (110,328)

 

  12,795

 

-

 

(97,533)

 

  40,558

 

-

 

(56,975)

Property, plant and equipment of small value

   -

 

-

 

   -

 

   -

 

-

 

-

 

  -

 

(461,765)

 

-

 

  (461,765)

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

202,208

 

   (96,866)

 

236

 

105,578

 

   (54,976)

 

  471

 

   51,073

 

   (45,138)

 

   (52,156)

 

(46,221)

Total deferred tax assets (liabilities), non current

  (88,695)

 

(731,057)

 

236

 

  (819,516)

 

  54,240

 

  55,951

 

  (709,325)

 

(1,500,828)

 

  60,767

 

(2,149,386)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred tax assets

4,425,658

 

 

 

 

 

4,530,418

 

 

 

 

 

   4,916,768

 

 

 

 

 

   4,924,634

Deferred tax liabilities

  (4,514,353)

 

 

 

 

 

  (5,349,934)

 

 

 

 

 

(5,626,093)

 

 

 

 

 

(7,074,020)

Deferred tax assets  (liabilities), net

  (88,695)

 

 

 

 

 

  (819,516)

 

 

 

 

 

  (709,325)

 

 

 

 

 

(2,149,386)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Represented in the balance sheet as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Deferred tax assets

   -

 

 

 

 

 

   -

 

 

 

 

 

  -

 

 

 

 

 

  -

   Deferred tax liabilities

  (88,695)

 

 

 

 

 

  (819,516)

 

 

 

 

 

  (709,325)

 

 

 

 

 

(2,149,386)

 

Consolidated

 

Balances at 12/31/16

 

Income statement

 

Comprehensive income

 

Business combination (Note 1 c)

 

Other

 

Balances at 09/30/17

 

Income statement

 

Comprehensive income

 

Other

 

Balances at 12/31/17

 

Income statement

 

Comprehensive income (4)

 

Balances at 09/30/18

Deferred tax assets  (liabilities)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income and social contribution taxes on tax losses (1)

   14,071

 

   303,726

 

-

 

  69,451

 

   -

 

387,248

 

   406,685

 

   -

 

   -

 

793,933

 

   404,177

 

   -

 

1,198,110

Income and social contribution taxes on temporary differences (2)

   13,426

 

    (904,422)

 

236

 

  48,434

 

(87)

 

  (842,413)

 

(347,394)

 

   57,956

 

  1

 

  (1,131,850)

 

(1,898,827)

 

   70,821

 

  (2,959,856)

Provisions for legal, labor, tax civil and regulatory contingencies

   2,230,336

 

  32,805

 

-

 

-

 

   -

 

2,263,141

 

  35,594

 

   -

 

   -

 

2,298,735

 

(322,609)

 

   -

 

1,976,126

Trade accounts payable and other provisions

   677,123

 

  51,661

 

-

 

-

 

   -

 

728,784

 

   (77,367)

 

   -

 

   -

 

651,417

 

   (70,123)

 

   -

 

581,294

Estimated losses on impairment of accounts receivable

   358,805

 

  64,601

 

-

 

-

 

   -

 

423,406

 

  11,554

 

   -

 

   -

 

434,960

 

   (87,592)

 

122,977

 

470,345

Customer portfolio and trademarks

   313,092

 

(41,220)

 

-

 

-

 

   -

 

271,872

 

   (17,454)

 

   -

 

   -

 

254,418

 

   (52,361)

 

   -

 

202,057

Estimated losses from modems and other P&E items

   284,677

 

(73,835)

 

-

 

-

 

   -

 

210,842

 

   (9,901)

 

   -

 

   -

 

200,941

 

   (7,014)

 

   -

 

193,927

Pension plans and other post-employment benefits

   108,419

 

  10,407

 

-

 

-

 

   -

 

118,826

 

   (1,777)

 

   57,485

 

   -

 

174,534

 

  17,529

 

   -

 

192,063

Profit sharing

   125,256

 

(32,391)

 

-

 

-

 

   -

 

   92,865

 

  17,181

 

   -

 

   -

 

110,046

 

   (30,858)

 

   -

 

   79,188

Licenses

(1,420,556)

 

(162,247)

 

-

 

-

 

   -

 

  (1,582,803)

 

   (54,083)

 

   -

 

   -

 

  (1,636,886)

 

(162,246)

 

   -

 

  (1,799,132)

Effects of goodwill generated in the acquisition of Vivo Part.

  (864,320)

 

   (5,461)

 

-

 

    -

 

   -

 

  (869,781)

 

-

 

   -

 

   -

 

  (869,781)

 

-

 

   -

 

  (869,781)

Goodwill from Spanish and Navytree

  (337,535)

 

  -

 

-

 

-

 

   -

 

  (337,535)

 

-

 

   -

 

   -

 

  (337,535)

 

-

 

   -

 

  (337,535)

Goodwill from Vivo Part.

(1,005,120)

 

(125,402)

 

    -

 

-

 

   -

 

  (1,130,522)

 

   (41,801)

 

   -

 

   -

 

  (1,172,323)

 

(125,402)

 

   -

 

  (1,297,725)

Goodwill from GVTPart.

  (522,228)

 

(522,228)

 

-

 

-

 

   -

 

  (1,044,456)

 

(174,077)

 

   -

 

   -

 

  (1,218,533)

 

(591,859)

 

   -

 

  (1,810,392)

Technological Innovation Law

  (140,940)

 

  30,612

 

-

 

    -

 

   -

 

  (110,328)

 

  12,795

 

   -

 

   -

 

  (97,533)

 

  40,558

 

   -

 

  (56,975)

Property, plant and equipment of small value

  -

 

  -

 

-

 

-

 

   -

 

   -

 

-

 

   -

 

   -

 

   -

 

(461,765)

 

   -

 

  (461,765)

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

   206,417

 

(131,724)

 

236

 

  48,434

 

(87)

 

123,276

 

   (48,058)

 

   471

 

  1

 

   75,690

 

   (45,085)

 

  (52,156)

 

  (21,551)

Total deferred tax assets (liabilities), non current

   27,497

 

(600,696)

 

236

 

  117,885

 

(87)

 

  (455,165)

 

  59,291

 

   57,956

 

  1

 

  (337,917)

 

(1,494,650)

 

   70,821

 

  (1,761,746)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred tax assets

   4,541,952

 

 

 

 

 

 

 

 

 

4,894,879

 

 

 

 

 

 

 

5,288,176

 

 

 

 

 

5,312,274

Deferred tax liabilities

(4,514,455)

 

 

 

 

 

 

 

 

 

  (5,350,044)

 

 

 

 

 

 

 

  (5,626,093)

 

 

 

 

 

  (7,074,020)

Deferred tax assets  (liabilities), net

   27,497

 

 

 

 

 

 

 

 

 

  (455,165)

 

 

 

 

 

 

 

  (337,917)

 

 

 

 

 

  (1,761,746)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Represented in the balance sheet as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Deferred tax assets

   27,497

 

 

 

 

 

 

 

 

 

364,351

 

 

 

 

 

 

 

371,408

 

 

 

 

 

387,640

   Deferred tax liabilities

  -

 

 

 

 

 

 

 

 

 

  (819,516)

 

 

 

 

 

 

 

  (709,325)

 

 

 

 

 

  (2,149,386)

(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. In 2017, there were increases of R$587,374 in the Company and R$779,862 in the consolidated, consisting of R$587,374 of the Company and R$192,488 of Terra Networks and POP.

(2)  This refers to amounts that will be realized upon payment of provisions, occurance of 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 provision for loyalty program, accelerated accounting depreciation, estimated impairment losses on inventories, derivative financial instruments, deferred income, renewal of licenses subsidy on the sale of mobile phones, among others.

(4)  Includes deferred social contribution tax amounts on the adoption of IFRS 9 and 15.

 

Page 20


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

At September 30, 2018, deferred tax credits (income and social contribution tax losses) were not recognized in indirect subsidiaries' (Innoweb and TGLog) accounting records, in the amount of R$12,715 (R$11,938 at December 31, 2017), as it is not probable that future taxable profits will be available for these subsidiaries to benefit from such tax credits.

 

d) Reconciliation of income tax and social contribution expense

 

The Company and its subsidiaries recognize income and social contribution taxes on a monthly basis, on an 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 tax of 9%) is shown in the table below for the nine-month periods ended September 30, 2018 and 2017.

 

Company

 

Three-month periods ended

 

Nine-month periods ended

 

09.30.18

 

09.30.17

 

09.30.18

 

09.30.17

Income before taxes

3,263,789

 

1,411,579

 

8,942,617

 

3,776,670

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

   (1,109,688)

 

   (479,937)

 

   (3,040,490)

 

   (1,284,068)

Permanent differences

 

 

 

 

 

 

 

Equity pickup, net of effects from interest on equity received  (Note 11)

  80,784

 

222,481

 

470,703

 

366,908

Unclaimed  interest on equity

  -

 

  -

 

(14,426)

 

(10,319)

Non-deductible expenses, gifts, incentives

(10,565)

 

(32,527)

 

(31,972)

 

(70,761)

Tax benefit related to interest on equity allocated

952,000

 

103,700

 

1,088,000

 

316,200

Other (additions) exclusions

944

 

   (2,580)

 

  27,148

 

   (2,795)

Total

(86,525)

 

   (188,863)

 

   (1,501,037)

 

   (684,835)

 

 

 

 

 

 

 

 

Effective rate

2.7%

 

13.4%

 

16.8%

 

18.1%

Current income and social contribution taxes

  32,978

 

  48,385

 

   (209)

 

  46,222

Deferred income and social contribution taxes

   (119,503)

 

   (237,248)

 

   (1,500,828)

 

   (731,057)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

Three-month periods ended

 

Nine-month periods ended

 

09.30.18

 

09.30.17

 

09.30.18

 

09.30.17

Income before taxes

3,394,095

 

1,544,449

 

9,679,819

 

4,132,616

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

   (1,153,992)

 

   (525,112)

 

   (3,291,138)

 

   (1,405,089)

Permanent differences

 

 

 

 

 

 

 

Equity pickup, net of effects from interest on equity received  (Note 11)

   (1,884)

 

4

 

   (1,671)

 

463

Unclaimed  interest on equity

  -

 

  -

 

(14,426)

 

(10,319)

Temporary differences in subsidiaries

   (8)

 

1,999

 

   (8)

 

1,999

Non-deductible expenses, gifts, incentives

(12,904)

 

(32,527)

 

(50,958)

 

(72,695)

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

  -

 

132,080

 

  -

 

132,080

Tax benefit related to interest on equity allocated

952,000

 

103,700

 

1,088,000

 

316,200

Other (additions) exclusions

  (43)

 

   (1,877)

 

  31,962

 

   (3,420)

Total

   (216,831)

 

   (321,733)

 

   (2,238,239)

 

   (1,040,781)

 

 

 

 

 

 

 

 

Effective rate

6.4%

 

20.8%

 

23.1%

 

25.2%

Current income and social contribution taxes

(80,176)

 

   (196,389)

 

   (743,589)

 

   (440,085)

Deferred income and social contribution taxes

   (136,655)

 

   (125,344)

 

   (1,494,650)

 

   (600,696)

 

 

Page 21


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

 

7) TAXES, CHARGES AND CONTRIBUTIONS RECOVERABLE

 

Company

 

Consolidated

 

09/30/18

 

12/31/17

 

09/30/18

 

12/31/17

State VAT (ICMS) (1)

         2,523,808

 

         2,438,272

 

         2,526,053

 

         2,450,856

Withholding taxes and contributions (2)

             91,997

 

            212,264

 

             97,937

 

            238,355

PIS and COFINS

         5,748,114

 

             66,335

 

         5,751,633

 

             85,098

INSS, ISS and other taxes

             20,792

 

               8,232

 

             21,759

 

             27,431

Total

         8,384,711

 

         2,725,103

 

         8,397,382

 

         2,801,740

 

 

 

 

 

 

 

 

Current

         3,244,830

 

         1,984,999

 

         3,257,501

 

         2,058,455

Non-current

         5,139,881

 

            740,104

 

         5,139,881

 

            743,285

(1)     This includes credits of ICMS 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$478,555 and R$423,588 on September 30, 2018 and December 31, 2017, respectively.

 

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

 

The balances of September 30, 2018 include the tax credits of PIS and COFINS monetarily restated by SELIC, in the amounts of R$5,618,679, arising from the final judicial process on May 17, 2018 and August 28, 2018, in favor of the Company and its subsidiary TData, which recognized the right to deduct ICMS from the basis of calculation of PIS and COFINS contributions for the periods from September 2003 to June 2017 and July 2004 to July 2013, respectively (see notes 25 and 26).

 

The Internal Revenue Service filed a review, pursuant to Law 13,670/18, with the purpose of approving the PIS and COFINS credits resulting from the dispute that dealt with the exclusion of ICMS from the bases of these contributions.


The Company has made every effort to meet in a timely manner the requests of this audit procedure and thus continue compensating its referred tax credits.

The Company has other three lawsuits of the same nature in progress (including lawsuits of companies that have already been merged - GVT and Telemig), which are considered as contingent assets, which cover several periods between December 2001 and June 2017, whose ranges of values we estimate between R$1,700 million to R$2,200 million.

 

 8)  JUDICIAL DEPOSITS AND GARNISHMENTS

 

In some situations, in connection with a legal requirement or to suspension of tax liability, 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.

 

Page 22


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

 

 

Company

 

Consolidated

 

09/30/18

 

12/31/17

 

09/30/18

 

12/31/17

Judicial deposits

 

 

 

 

 

 

 

   Tax

         1,821,260

 

         4,074,517

 

         1,982,144

 

         4,230,917

   Labor

            520,802

 

            864,022

 

            538,542

 

            885,338

   Civil

         1,173,907

 

         1,203,297

 

         1,175,900

 

         1,205,807

   Regulatory

            206,487

 

            200,627

 

            208,711

 

            200,627

Total

         3,722,456

 

         6,342,463

 

         3,905,297

 

         6,522,689

Garnishments

            100,858

 

            137,823

 

            103,750

 

            141,116

Total

         3,823,314

 

         6,480,286

 

         4,009,047

 

         6,663,805

 

 

 

 

 

 

 

 

Current

            317,266

 

            324,465

 

            317,612

 

            324,638

Non-current

         3,506,048

 

         6,155,821

 

         3,691,435

 

         6,339,167

 

 

On June 30, 2018, the Company recorded a write-off as loss of income for the period of R$232 million resulting from the conclusion of a judicial deposit reconciliation process, with the support of a specialized company, in which information was obtained from banks and the judiciary and reconciled with the accounting records of the Company.

 

On September 30, 2018, the Company and its subsidiaries had a number of tax-related judicial deposits in the consolidated amount of R$1,982,144 (R$4,230,917 at December 31, 2017). In Note 18, we provide further details on issues arising from the most significant judicial deposits.

 

The table below presents the composition of the balances as at September 30, 2018 and December 31, 2107 of the tax judicial deposits (segregated and summarized by tribute).

 

 

 

 

Consolidated

 

 

 

 

 

09/30/18

 

12/31/17

Contribution to Empresa Brasil de Comunicação (EBC)

 

                      -

 

         1,238,068

Telecommunications Inspection Fund (FISTEL)

 

             44,417

 

         1,161,061

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

 

            546,839

 

            518,474

Universal Telecommunication Services Fund (FUST)

 

            496,781

 

            484,649

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

 

            276,760

 

            270,612

State Value-Added Tax (ICMS)

 

            303,165

 

            273,264

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

 

            141,118

 

            134,688

Withholding Income Tax (IRRF)

 

             47,044

 

             45,846

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

 

             43,713

 

             37,965

Other taxes, charges and contributions

 

             82,307

 

             66,290

Total

 

 

 

 

         1,982,144

 

         4,230,917

 

A brief description of the main tax-related judicial deposits is as follows:

 

·         Contribution to Empresa Brasil de Comunicação (EBC)

 

On behalf of its members, Sinditelebrasil (Union of Telephony, and Mobile and Personal Services) is challenging in court payment of the Contribution to Foster Public Radio Broadcasting to EBC, introduced by Law No. 11.652/2008. The Company and TData, as union members, made court deposits relating to that contribution.

 

Page 23


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

In the third quarter of 2018, the Company and TData had their accepted requests for conversion into income of the amounts deposited in court in the amount of R$1,378,170, with the maintenance of the discussion in progress. As a result, the Company and TData made the write-off of judicial deposits against the provisioned amounts (note 19).

 

·         Telecommunications Inspection Fund (FISTEL)

 

The Company has legal proceedings involving the collection by ANATEL of the Installation Inspection Fee ("TFI") on the renewal of the licenses.

 

In the second quarter of 2018, the judicial discussion regarding the exclusion of the calculation basis of the Installation Inspection Fee ("TFI") and Inspection and Operation Fee ("TFF") of mobile (cellular) stations that are not owned by the Company was unfavorable to the Company after it withdrew its appeal. Consequently, the amounts of R$1,126,810 deposited judicially were handed over to ANATEL.

 

9)   PREPAID EXPENSES

 

 

Company

 

Consolidated

 

09/30/18

 

12/31/17

 

09/30/18

 

12/31/17

Fistel Fee (1)

            268,295

 

                      -

 

            268,295

 

                      -

Advertising and publicity

            100,732

 

            335,700

 

            100,732

 

            336,295

Insurance

             33,991

 

             36,672

 

             34,265

 

             36,941

Rental

             42,728

 

             29,713

 

             42,728

 

             29,713

Software and networks maintenance

             42,729

 

               7,422

 

             47,001

 

             12,375

Incremental costs - IFRS 15 (2)

            231,566

 

                      -

 

            231,566

 

                      -

Taxes, financial charges, personal and other

             97,321

 

             37,475

 

            112,925

 

             54,231

Total

            817,362

 

            446,982

 

            837,512

 

            469,555

 

 

 

 

 

 

 

 

Current

            698,575

 

            425,298

 

            714,710

 

            446,439

Non-current

            118,787

 

             21,684

 

            122,802

 

             23,116

(1)    Refers to the remaining portion of the Inspection and Operation Fee amounts paid in March and April of 2018, based on the 2017 fiscal year, which will be amortized to the result until the end of the year.

 

(2)    Refers to the incremental costs arising from the adoption of IFRS 15 (Note 2.b).

 

10)  OTHER ASSETS

 

 

Company

 

Consolidated

 

09/30/18

 

12/31/17

 

09/30/18

 

12/31/17

Advances to employees and suppliers

             88,087

 

             53,103

 

             97,466

 

             58,456

Related-party receivables (Note 27)

            245,569

 

            557,211

 

            140,268

 

            166,733

Receivables from suppliers

             93,832

 

            114,015

 

             93,837

 

            114,015

Surplus from post-employment benefit plans (Note 29)

             10,007

 

               9,616

 

             10,242

 

               9,833

Other amounts receivable

             41,805

 

             54,282

 

             43,026

 

             61,295

Total

            479,300

 

            788,227

 

            384,839

 

            410,332

 

 

 

 

 

 

 

 

Current

            432,962

 

            701,882

 

            337,673

 

            321,397

Non-current

             46,338

 

             86,345

 

             47,166

 

             88,935

 

 

 

 

Page 24


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

11) INVESTMENTS

 

a)   Information on investees

 

The information related to subsidiaries and joint ventures entities is the same as in Note 11) Investments, as disclosed in the financial statements for the fiscal year ended December 31, 2017.

 

The following is a summary of the relevant financial data of the investees in which the Company has a direct interest.

 

 

09/30/18

 

12/31/17

 

Consolidated wholly-owned subsidiaries

 

Joint ventures

 

Consolidated wholly-owned subsidiaries

 

Joint ventures

 

TData

 

POP

 

Aliança

 

Cia AIX

 

Cia ACT

 

TData

 

POP

 

Aliança

 

Cia AIX

 

Cia ACT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity interest

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

  2,494,140

 

47,542

 

  195,758

 

26,742

 

20

 

  2,928,721

 

33,566

 

  167,540

 

22,431

 

17

Non-current assets

  800,838

 

52,481

 

-

 

12,171

 

-

 

  749,694

 

52,761

 

-

 

13,410

 

-

Total assets

  3,294,978

 

  100,023

 

  195,758

 

38,913

 

20

 

  3,678,415

 

86,327

 

  167,540

 

35,841

 

17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

  1,418,765

 

49,586

 

  106

 

   6,303

 

   4

 

  1,893,271

 

47,337

 

58

 

   4,084

 

   1

Non-current liabilities

  184,778

 

-

 

-

 

15,390

 

-

 

  185,794

 

24

 

-

 

   4,811

 

-

Equity

  1,691,435

 

50,437

 

  195,652

 

17,220

 

16

 

  1,599,350

 

38,966

 

  167,482

 

26,946

 

16

Total liabilities and equity

  3,294,978

 

  100,023

 

  195,758

 

38,913

 

20

 

  3,678,415

 

86,327

 

  167,540

 

35,841

 

17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment book value

  1,691,435

 

50,437

 

97,826

 

   8,610

 

   8

 

  1,599,350

 

38,966

 

83,741

 

13,473

 

   8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine-month periods ended

 

09.30.18

 

09.30.17

 

Consolidated wholly-owned subsidiaries

 

Joint ventures

 

Consolidated wholly-owned subsidiaries

Joint ventures

Summary of Income Statements:

TData

 

POP

 

Aliança

 

Cia AIX

 

Cia ACT

 

TData

 

POP

 

Aliança

 

Cia AIX

 

Cia ACT

Net operating income

  4,846,284

 

23,243

 

-

 

34,175

 

62

 

  2,515,027

 

22,014

 

-

 

34,146

 

62

Operating costs and expenses

(2,821,107)

 

  (5,951)

 

(129)

 

   (44,434)

 

   (62)

 

(1,160,069)

 

   (12,236)

 

   (14)

 

   (31,886)

 

   (62)

Financial income (expenses), net

83,377

 

  690

 

27

 

  819

 

-

 

67,862

 

   1,127

 

18

 

   1,019

 

-

Income and social contribution taxes

(730,787)

 

  (6,416)

 

-

 

(286)

 

-

 

(351,749)

 

  (4,197)

 

-

 

(559)

 

-

Net income (loss) for the period

  1,377,767

 

11,566

 

(102)

 

  (9,726)

 

-

 

  1,071,071

 

   6,708

 

   4

 

   2,720

 

-

Equity pickup

  1,377,767

 

11,566

 

   (51)

 

  (4,863)

 

-

 

  1,071,071

 

   6,708

 

   2

 

   1,360

 

-

 

 

b)   Changes in investments 

 

 

   TData Consolidated

 

   POP  Consolidated

 

Aliança

 

AIX

 

ACT

 

Goodwill (1)

 

   Other investments (2)

 

Total investments - Company

 

Eliminations

 

Total  investments - Consolidated

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

Equity transactions

(59,029)

 

  -

 

  -

 

  -

 

  -

 

  -

 

  -

 

(59,029)

 

   59,029

 

  -

Dividends and interest on equity

  (384,588)

 

  -

 

  -

 

  -

 

  -

 

  -

 

  -

 

  (384,588)

 

   384,588

 

  -

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

Equity pick-up

   221,755

 

  2,370

 

   (10)

 

  227

 

1

 

  -

 

  -

 

   224,343

 

  (224,125)

 

  218

Dividends and interest on equity

  (323,206)

 

  -

 

  -

 

  -

 

  -

 

  -

 

  -

 

  (323,206)

 

   323,206

 

  -

Other comprehensive  income

   (6,117)

 

  -

 

  4,746

 

  -

 

  -

 

  -

 

   (62)

 

   (1,433)

 

  6,117

 

  4,684

Balances at 12/31/17

   1,599,350

 

   38,966

 

   83,741

 

   13,473

 

8

 

   212,058

 

  1,680

 

   1,949,276

 

(1,850,374)

 

   98,902

Equity pick-up

   1,377,767

 

   11,566

 

   (51)

 

   (4,863)

 

  -

 

  -

 

  -

 

   1,384,419

 

(1,389,333)

 

   (4,914)

Dividends and interest on equity

(1,263,503)

 

  -

 

 -

 

  -

 

  -

 

  -

 

  -

 

(1,263,503)

 

   1,263,503

 

  -

Other comprehensive  income

(22,179)

 

   (95)

 

   14,136

 

  -

 

  -

 

  -

 

(408)

 

   (8,546)

 

   22,274

 

   13,728

Provision for losses on investments

  -

 

  -

 

  -

 

  -

 

  -

 

  -

 

(701)

 

(701)

 

  -

 

(701)

Balances at 09/30/18

   1,691,435

 

   50,437

 

   97,826

 

  8,610

 

8

 

   212,058

 

  571

 

   2,060,945

 

(1,953,930)

 

   107,015

(1)  Goodwillfrom 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.

 

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

 

 

 

Page 25


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

12)  PROPERTY, PLANT AND EQUIPMENT

 

a) Breakdown, changes and depreciation rates

 

 

Company

 

   Switching and transmission equipment

 

Terminal equipment / modems

 

   Infrastructure

 

   Land

 

   Other P&E

 

Estimated losses (1)

 

   Assets and facilities under construction

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Annual depreciation rate (%)

2.50 to 25.00

 

6.67 to 66.67

 

2.50 to 66.67

 

 

 

10.00 to 25.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances and changes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Balance at 12/31/16

   22,231,625

 

  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

   (71,969)

 

   (5,740)

 

   (6,481)

 

   (1,914)

 

   (1,842)

 

  63,880

 

   (12,832)

 

   (36,898)

   Net transfers

  2,532,112

 

  1,003,391

 

   398,917

 

-

 

3,834

 

   132,579

 

(4,063,776)

 

7,057

   Depreciation (Note 24)

(2,231,790)

 

(1,049,402)

 

(407,043)

 

-

 

(236,992)

 

-

 

-

 

(3,925,227)

   Balance at 09/30/17

   22,486,952

 

  2,623,168

 

  3,760,851

 

   314,355

 

   700,540

 

(319,244)

 

  2,765,503

 

   32,332,125

   Additions

  16,023

 

  47,392

 

  31,196

 

-

 

  81,497

 

   (6,961)

 

 1,921,411

 

  2,090,558

   Write-offs, net

   (16,795)

 

   (1,862)

 

   (210)

 

  (2)

 

   (729)

 

  98,344

 

   (4,695)

 

  74,051

   Net transfers

  1,102,181

 

   468,040

 

   220,091

 

-

 

  11,619

 

  (1)

 

(1,828,196)

 

   (26,266)

   Depreciation

(779,388)

 

(417,057)

 

(134,246)

 

-

 

   (27,245)

 

-

 

    -

 

(1,357,936)

   Balance at 12/31/17

   22,808,973

 

  2,719,681

 

  3,877,682

 

   314,353

 

   765,682

 

(227,862)

 

  2,854,023

 

   33,112,532

   Additions

  10,092

 

   110,362

 

  58,795

 

  550

 

   100,931

 

   (8,565)

 

  4,863,234

 

  5,135,399

   Write-offs, net

   (16,941)

 

  (236)

 

   (7,385)

 

-

 

   (1,639)

 

  18,352

 

   (21,582)

 

   (29,431)

   Net transfers

  3,866,505

 

   402,320

 

   293,151

 

-

 

  92,639

 

-

 

    (4,703,145)

 

   (48,530)

   Depreciation (Note 24)

(2,426,082)

 

(1,047,136)

 

(430,341)

 

-

 

(229,131)

 

-

 

-

 

(4,132,690)

   Balance at 09/30/18

   24,242,547

 

  2,184,991

 

  3,791,902

 

   314,903

 

   728,482

 

(218,075)

 

  2,992,530

 

   34,037,280

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 12/31/17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Cost

   74,092,109

 

   16,797,604

 

   15,628,384

 

   314,353

 

  4,404,945

 

(227,862)

 

  2,854,023

 

113,863,556

   Accumulated depreciation

(51,283,136)

 

(14,077,923)

 

(11,750,702)

 

-

 

(3,639,263)

 

-

 

    -

 

(80,751,024)

   Total

   22,808,973

 

  2,719,681

 

  3,877,682

 

   314,353

 

   765,682

 

(227,862)

 

  2,854,023

 

   33,112,532

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 09/30/18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Cost

   77,827,871

 

   17,139,414

 

   15,876,668

 

   314,903

 

  4,590,915

 

(218,075)

 

  2,992,530

 

118,524,226

   Accumulated depreciation

(53,585,324)

 

(14,954,423)

 

(12,084,766)

 

-

 

(3,862,433)

 

-

 

-

 

(84,486,946)

   Total

   24,242,547

 

  2,184,991

 

  3,791,902

 

   314,903

 

   728,482

 

(218,075)

 

  2,992,530

 

   34,037,280

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Page 26


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

 

 

Consolidated

 

   Switching and transmission equipment

 

Terminal equipment / modems

 

   Infrastructure

 

   Land

 

   Other P&E

 

Estimated losses (1)

 

   Assets and facilities under construction

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Annual depreciation rate (%)

2.50 to 25.00

 

6.67 to 66.67

 

2.50 to 66.67

 

 

 

10.00 to 25.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances and changes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Balance at 12/31/16

   22,231,874

 

  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

   (71,969)

 

   (5,740)

 

   (6,757)

 

   (1,914)

 

   (1,793)

 

  63,961

 

  (13,386)

 

   (37,598)

   Net transfers

  2,532,112

 

  1,003,391

 

   398,917

 

-

 

  22,470

 

   132,579

 

(4,082,412)

 

7,057

   Depreciation (Note 24)

(2,231,876)

 

(1,051,483)

 

(409,354)

 

-

 

(252,353)

 

-

 

-

 

(3,945,066)

   Business Combination (Note 1.c)

-

 

-

 

1,342

 

-

 

4,888

 

-

 

  817

 

7,047

   Balance at 09/30/17

   22,487,115

 

  2,628,215

 

  3,769,319

 

   314,355

 

   760,595

 

(319,434)

 

  2,776,874

 

   32,417,039

   Additions

  16,025

 

  47,392

 

  31,196

 

-

 

  91,593

 

   (6,975)

 

  1,943,662

 

  2,122,893

   Write-offs, net

   (16,797)

 

   (1,862)

 

   (209)

 

     (2)

 

   (729)

 

  98,358

 

   (5,511)

 

  73,248

   Net transfers

  1,102,181

 

   468,040

 

   220,091

 

-

 

  11,623

 

  (1)

 

(1,828,200)

 

   (26,266)

   Depreciation

(779,415)

 

(417,453)

 

(135,100)

 

-

 

   (32,630)

 

-

 

-

 

(1,364,598)

   Balance at 12/31/17

   22,809,109

 

  2,724,332

 

  3,885,297

 

   314,353

 

   830,452

 

(228,052)

 

  2,886,825

 

   33,222,316

   Additions

  10,092

 

   110,852

 

  58,795

 

  550

 

   126,015

 

   (8,565)

 

  4,849,348

 

  5,147,087

   Write-offs, net

   (16,939)

 

   (236)

 

   (7,513)

 

-

 

   (1,938)

 

  18,455

 

   (21,582)

 

   (29,753)

   Net transfers

  3,866,505

 

   402,320

 

   293,890

 

-

 

  91,838

 

-

 

(4,703,157)

 

   (48,604)

   Depreciation (Note 24)

(2,426,138)

 

(1,047,754)

 

(432,850)

 

-

 

(248,906)

 

-

 

-

 

(4,155,648)

   Balance at 09/30/18

   24,242,629

 

  2,189,514

 

  3,797,619

 

   314,903

 

   797,461

 

(218,162)

 

  3,011,434

 

   34,135,398

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 12.31.17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Cost

   74,100,056

 

   16,845,903

 

   15,728,808

 

   314,353

 

  4,687,395

 

(228,052)

 

  2,886,825

 

114,335,288

   Accumulated depreciation

(51,290,947)

 

(14,121,571)

 

(11,843,511)

 

-

 

(3,856,943)

 

-

 

-

 

(81,112,972)

   Total

   22,809,109

 

  2,724,332

 

  3,885,297

 

   314,353

 

   830,452

 

    (228,052)

 

  2,886,825

 

   33,222,316

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 09.30.18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Cost

   77,835,758

 

   17,187,711

 

   15,976,791

 

   314,903

 

  4,896,051

 

(218,162)

 

  3,011,434

 

119,004,486

   Accumulated depreciation

(53,593,129)

 

(14,998,197)

 

(12,179,172)

 

-

 

(4,098,590)

 

-

 

 -

 

(84,869,088)

   Total

   24,242,629

 

  2,189,514

 

  3,797,619

 

   314,903

 

   797,461

 

(218,162)

 

  3,011,434

 

   34,135,398

(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.

 

b) Property and equipment items pledged in guarantee

 

At September 30, 2018, the Company had consolidated amounts of property and equipment items pledged in guarantee for lawsuits, amounting to R$156,375 (R$176,591 at December 31, 2017).

 

c) 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, 2018, estimated residual value of reversible assets was R$8,685,750 (R$8,763,355 at December 31, 2017), which comprised switching and transmission equipment and public use terminals, external network equipment, energy, system and operational support equipment.

 

d) Finance lease

 

At September 30, 2018, classes of switching and transmission equipment, infrastructure and other assets included the net residual amounts of R$271,418 (R$280,103 as at December 31, 2017), in which the Company is a lessee of financial leasing operations.

 

 

 

 

 

Page 27


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

13) INTANGIBLE ASSETS

 

a) Breakdown, changes and amortization rates

 

  

Company

 

Indefinite useful life

 

Finite useful life

 

 

 

Goodwill (1)

 

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 12/31/16

   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 24)

-

 

(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

   Additions

-

 

  74,186

 

-

 

-

 

-

 

28

 

-

 

   445,773

 

   519,987

   Write-offs, net

-

 

   3

 

-

 

    -

 

-

 

-

 

  (1)

 

-

 

   2

   Net transfers

-

 

   246,721

 

-

 

-

 

-

 

  (32)

 

-

 

(220,423)

 

  26,266

   Amortization

-

 

(234,018)

 

(137,397)

 

   (21,051)

 

(232,090)

 

   (1,296)

 

-

 

-

 

(625,852)

   Balance at 12/31/17

   22,850,363

 

  2,704,400

 

  1,978,863

 

  1,073,615

 

   13,969,606

 

  20,948

 

   (499)

 

   506,140

 

   43,103,436

   Additions

-

 

   249,825

 

-

 

-

 

-

 

-

 

-

 

   668,707

 

   918,532

   Write-offs, net

-

 

  (14)

 

-

 

-

 

-

 

-

 

-

 

-

 

  (14)

   Net transfers

-

 

   357,981

 

-

 

-

 

-

 

-

 

-

 

(309,451)

 

  48,530

   Amortization (Note 24)

-

 

(718,507)

 

(412,191)

 

   (63,154)

 

(690,058)

 

   (3,092)

 

-

 

-

 

(1,887,002)

   Balance at 09/30/18

   22,850,363

 

  2,593,685

 

  1,566,672

 

  1,010,461

 

   13,279,548

 

  17,856

 

   (499)

 

   865,396

 

   42,183,482

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 12/31/17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Cost

   22,850,363

 

   14,966,763

 

  4,513,278

 

  1,658,897

 

   20,237,572

 

   238,193

 

   (499)

 

   506,140

 

   64,970,707

   Accumulated amortization

    -

 

(12,262,363)

 

(2,534,415)

 

(585,282)

 

(6,267,966)

 

(217,245)

 

-

 

-

 

(21,867,271)

   Total

   22,850,363

 

  2,704,400

 

  1,978,863

 

  1,073,615

 

   13,969,606

 

  20,948

 

   (499)

 

   506,140

 

   43,103,436

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 09/30/18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Cost

   22,850,363

 

   15,565,460

 

  4,513,278

 

  1,658,897

 

   20,237,572

 

   238,193

 

   (499)

 

   865,396

 

   65,928,660

   Accumulated amortization

-

 

(12,971,775)

 

(2,946,606)

 

(648,436)

 

(6,958,024)

 

(220,337)

 

-

 

-

 

(23,745,178)

   Total

   22,850,363

 

  2,593,685

 

  1,566,672

 

  1,010,461

 

   13,279,548

 

  17,856

 

   (499)

 

   865,396

 

   42,183,482

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Page 28


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

 

 

Consolidated

 

Indefinite useful life

 

Finite useful life

 

 

 

Goodwill (1)

 

Software

 

Customer portfolio

 

Trademarks

 

Licenses

 

   Other intangible assets

 

Estimated losses for software

 

Software under development

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Annual amortization rate (%)

 

 

20.00 to 50.00

 

11.76 to 12.85

 

5.13 to 66.67

 

3.60 to 6.67

 

6.67 to 20.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances and changes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   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 24)

-

 

(710,256)

 

(444,960)

 

   (63,154)

 

(696,272)

 

   (4,367)

 

-

 

-

 

(1,919,009)

   Business Combination (Note 1.c)

-

 

  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

   Additions

-

 

  89,022

 

-

 

-

 

-

 

28

 

-

 

   445,773

 

   534,823

   Write-offs, net

-

 

   1

 

-

 

-

 

-

 

-

 

  (1)

 

-

 

-

   Net transfers

-

 

   246,721

 

-

 

-

 

-

 

  (32)

 

-

 

(220,423)

 

  26,266

   Amortization

-

 

(234,497)

 

(137,397)

 

   (21,051)

 

(232,090)

 

   (1,293)

 

-

 

-

 

(626,328)

   Balance at 12/31/17

   23,062,421

 

  2,720,806

 

  1,978,863

 

  1,073,615

 

   13,969,606

 

  20,952

 

   (499)

 

   506,140

 

   43,331,904

   Additions

-

 

   255,554

 

-

 

-

 

    -

 

-

 

-

 

   668,707

 

   924,261

   Write-offs, net

-

 

  (14)

 

-

 

-

 

-

 

-

 

-

 

-

 

  (14)

   Net transfers

-

 

   357,981

 

-

 

    -

 

-

 

74

 

-

 

(309,451)

 

  48,604

   Amortization (Note 24)

-

 

(721,773)

 

(412,191)

 

   (63,154)

 

(690,058)

 

   (3,092)

 

-

 

-

 

(1,890,268)

   Balance at 09/30/18

   23,062,421

 

  2,612,554

 

  1,566,672

 

  1,010,461

 

   13,279,548

 

  17,934

 

   (499)

 

   865,396

 

   42,414,487

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 12/31/17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Cost

   23,062,421

 

   15,125,532

 

  4,513,278

 

  1,658,897

 

   20,237,572

 

   238,201

 

   (499)

 

   506,140

 

   65,341,542

   Accumulated amortization

-

 

(12,404,726)

 

(2,534,415)

 

(585,282)

 

(6,267,966)

 

(217,249)

 

-

 

-

 

(22,009,638)

   Total

   23,062,421

 

  2,720,806

 

  1,978,863

 

  1,073,615

 

   13,969,606

 

  20,952

 

   (499)

 

   506,140

 

   43,331,904

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 09/30/18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Cost

   23,062,421

 

   15,729,880

 

  4,513,278

 

  1,658,897

 

   20,237,572

 

   238,275

 

   (499)

 

   865,396

 

   66,305,220

   Accumulated amortization

-

 

(13,117,326)

 

(2,946,606)

 

(648,436)

 

(6,958,024)

 

(220,341)

 

-

 

-

 

(23,890,733)

   Total

   23,062,421

 

  2,612,554

 

  1,566,672

 

  1,010,461

 

   13,279,548

 

  17,934

 

   (499)

 

   865,396

 

   42,414,487

(1)  Information on goodwill in the above tables is the same as in Note 13.b) Intangible - Goodwill, disclosed in the financial statements for the year ended December 31, 2017.

 

14)  PERSONNEL, SOCIAL CHARGES AND BENEFITS

 

 

Company

 

Consolidated

 

09/30/18

 

12/31/17

 

09/30/18

 

12/31/17

Salaries and wages

             35,496

 

             37,070

 

             38,149

 

             40,171

Social charges and benefits

            470,367

 

            354,467

 

            529,078

 

            399,229

Profit sharing

            164,753

 

            247,501

 

            184,314

 

            273,384

Share-based payment plans (Note 28)

             31,793

 

             31,567

 

             34,984

 

             33,880

Total

            702,409

 

            670,605

 

            786,525

 

            746,664

 

 

 

 

 

 

 

 

Current

            687,651

 

            648,957

 

            769,869

 

            723,380

Non-current

             14,758

 

             21,648

 

             16,656

 

             23,284

 

 

15)  TRADE ACCOUNTS PAYABLE

 

 

Company

 

Consolidated

 

09/30/18

 

12/31/17

 

09/30/18

 

12/31/17

Sundry suppliers (Opex, Capex, Services e Material)

         6,757,267

 

         6,380,614

 

         7,185,505

 

         6,683,503

Amounts payable (operators, cobilling)

            656,369

 

            183,250

 

            221,563

 

            187,976

Interconnection / interlink

            295,884

 

            224,777

 

            295,884

 

            224,777

Related parties (Note 27)

         1,345,153

 

         1,772,203

 

            406,728

 

            350,844

Total

         9,054,673

 

         8,560,844

 

         8,109,680

 

         7,447,100

 

 

 

Page 29


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

16) TAXES, CHARGES AND CONTRIBUTIONS PAYABLE

 

Company

 

Consolidated

 

09/30/18

 

12/31/17

 

09/30/18

 

12/31/17

ICMS

         1,078,183

 

         1,106,507

 

         1,126,694

 

         1,149,137

PIS and COFINS

            411,086

 

            385,501

 

            485,166

 

            419,589

Fust and Funttel

             88,890

 

             93,869

 

             88,890

 

             93,869

Fistel, ISS, CIDE and other taxes

             87,637

 

            102,327

 

            115,509

 

            113,689

Total

         1,665,796

 

         1,688,204

 

         1,816,259

 

         1,776,284

 

 

 

 

 

 

 

 

Current

         1,649,084

 

         1,669,741

 

         1,779,952

 

         1,726,836

Non-current

             16,712

 

             18,463

 

             36,307

 

             49,448

 

17)  DIVIDENDS AND INTEREST ON EQUITY (IOE)

 

a)   Dividends and interest on equity receivable

 

At December 31, 2017, the Company had R$323,206 to be received from TData.

 

 

 

 

 

Company

Balance at 12/31/17

 

 

 

            323,206

Supplementary dividends for 2017 of TData

 

 

 

            963,503

Interim dividends for 2018 of TData

 

 

 

            300,000

Receipt of dividends of TData

 

 

 

        (1,586,709)

Balance at 09/30/18

 

 

 

                      -

 

For the cash flow statement, interest on equity and dividends received from the subsidiary are allocated to “Investing Activities” group of accounts.

 

b)   Dividends and interest on equity payable

 

b.1) Breakdown:

 

 

 

 

 

Company / Consolidated

 

 

 

 

09/30/18

 

12/31/17

Telefónica Latinoamérica Holding S.L.

 

 

 

         1,209,350

 

            505,750

Telefónica

 

 

 

         1,456,247

 

            609,003

SP Telecomunicações Participações

 

 

 

            918,060

 

            383,933

Telefónica Chile

 

 

 

               2,559

 

               1,070

Non-controlling interest

 

 

 

         1,644,378

 

            896,360

Total

 

 

 

         5,230,594

 

         2,396,116

 

 

 

 

 

 

 

Page 30


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

b.2) Changes:

 

 

 

 

 

 

 

Company/ Consolidated

Balance at 12/31/17

 

 

 

 

 

         2,396,116

Supplementary dividends for 2017

 

 

 

 

 

         2,191,864

Interim interest on equity (net of IRRF)

 

 

 

 

 

         2,720,000

Unclaimed dividends and interest on equity

 

 

 

 

 

            (76,520)

Payment of dividends and interest on equity

 

 

 

 

 

        (2,003,224)

IRRF on shareholders exempt/immune from interest on equity

 

 

 

 

 

               2,358

Balance at 09/30/18

 

 

 

 

 

         5,230,594

 

On April 12, 2018, the Company's Ordinary General Meeting unanimously approved the proposal for the allocation of interest on  equity and dividends for the year ended December 31, 2017. On April 23, 2018, the Company's Board of Executive Officers informed shareholders the dates for the payment of these interest on shareholders' equity and dividends, as follows:

 

(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.

 

18) 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:

 

Page 31


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

 

Company

 

Provisions for contingencies

 

 

 

 

 

Labor

 

Tax

 

Civil

 

Regulatory

 

Contingent liabilities (PPA) (1)

 

Provision for decommissioning (2)

 

Total

Balances at 12/31/16

   1,374,570

 

   3,109,806

 

   1,038,230

 

   828,934

 

   881,745

 

  541,831

 

   7,775,116

Additions (reversal), net (Note 25)

   209,282

 

   144,776

 

   353,563

 

20,216

 

   (87,454)

 

-

 

   640,383

Other additions (reversal) (4)

-

 

   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 due to 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

Additions (reversal), net

87,394

 

   1,954

 

84,687

 

   178,128

 

  (1,776)

 

-

 

   350,387

Other additions (reversal) (4)

-

 

-

 

  31

 

-

 

-

 

   5,853

 

   5,884

Write-offs due to payment

  (196,435)

 

   (12,689)

 

  (129,709)

 

  (2,317)

 

-

 

-

 

  (341,150)

Monetary restatement

27,623

 

35,500

 

25,809

 

   4,549

 

   7,934

 

  798

 

   102,213

Balances at 12/31/17

   954,319

 

   3,474,900

 

   1,047,435

 

   1,103,792

 

   845,796

 

  574,725

 

   8,000,967

Additions (reversal), net (Note 25)

   262,226

 

   450,035

 

   341,099

 

   (45,555)

 

   (24,129)

 

  (7,497)

 

   976,179

Other additions (reversal) (4)

  (104,504)

 

  (2,402,509)

 

   (11,554)

 

-

 

-

 

11,843

 

  (2,506,724)

Write-offs due to payment

  (429,076)

 

   (31,393)

 

  (442,665)

 

  (117,000)

 

-

 

-

 

  (1,020,134)

Monetary restatement

99,812

 

   398,366

 

   109,280

 

31,273

 

  (4,727)

 

13,502

 

   647,506

Balances at 09/30/18

   782,777

 

   1,889,399

 

   1,043,595

 

   972,510

 

   816,940

 

  592,573

 

   6,097,794

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 12/31/17

 

 

 

 

 

 

 

 

 

 

 

 

 

   Current

   239,229

 

-

 

   201,673

 

   994,009

 

-

 

-

 

   1,434,911

   Non-current

   715,090

 

   3,474,900

 

   845,762

 

   109,783

 

   845,796

 

  574,725

 

   6,566,056

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 09/30/18

 

 

 

 

 

 

 

 

 

 

 

 

 

   Current

   265,149

 

-

 

   143,526

 

   862,171

 

-

 

-

 

   1,270,846

   Non-current

   517,628

 

   1,889,399

 

   900,069

 

   110,339

 

   816,940

 

  592,573

 

   4,826,948

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

Provisions for contingencies

 

 

 

 

 

Labor

 

Tax

 

Civil

 

Regulatory

 

Contingent liabilities (PPA) (1)

 

Provision for decommissioning (2)

 

Total

Balances at 12/31/16

   1,382,957

 

   3,129,681

 

   1,039,357

 

   828,934

 

   881,745

 

  546,587

 

   7,809,261

Additions (reversal), net (Note 25)

   210,238

 

   152,768

 

   354,886

 

20,216

 

   (87,454)

 

-

 

   650,654

Other additions (reversal) (4)

  (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 due to 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 1 c)

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

Additions (reversal), net

86,933

 

   1,673

 

83,807

 

   178,128

 

  (1,776)

 

-

 

   348,765

Other additions (reversal) (4)

  (376)

 

  (6,656)

 

   1,336

 

-

 

-

 

   5,853

 

   157

Write-offs due to payment

  (199,392)

 

   (12,657)

 

  (132,362)

 

  (2,317)

 

-

 

-

 

  (346,728)

Monetary restatement

30,294

 

36,446

 

28,414

 

   4,549

 

   7,934

 

  798

 

   108,435

Balances at 12/31/17

   980,596

 

   3,579,208

 

   1,055,877

 

   1,103,792

 

   845,796

 

  579,481

 

   8,144,750

Additions (reversal), net (Note 25)

   270,786

 

   450,298

 

   344,295

 

   (45,555)

 

   (24,129)

 

  (7,497)

 

   988,198

Other additions (reversal) (4)

   (99,582)

 

  (2,402,612)

 

   (13,099)

 

-

 

-

 

11,843

 

  (2,503,450)

Write-offs due to payment

  (438,559)

 

   (31,941)

 

  (444,774)

 

  (117,000)

 

-

 

-

 

  (1,032,274)

Monetary restatement

   102,294

 

   400,735

 

   110,096

 

31,273

 

  (4,727)

 

13,502

 

   653,173

Balances at 09/30/18

   815,535

 

   1,995,688

 

   1,052,395

 

   972,510

 

   816,940

 

  597,329

 

   6,250,397

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 12/31/17

 

 

 

 

 

 

 

 

 

 

 

 

 

   Current

   239,229

 

-

 

   201,673

 

   994,009

 

-

 

-

 

   1,434,911

   Non-current

   741,367

 

   3,579,208

 

   854,204

 

   109,783

 

   845,796

 

  579,481

 

   6,709,839

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 09/30/18

 

 

 

 

 

 

 

 

 

 

 

 

 

   Current

   265,149

 

-

 

   143,543

 

   862,171

 

-

 

-

 

   1,270,863

   Non-current

   550,386

 

   1,995,688

 

   908,852

 

   110,339

 

   816,940

 

  597,329

 

   4,979,534

(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.

(2) These refer to costs to be incurred when returning to the owners 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).

(4)  Refers mainly to the amounts of inflows and losses carried out against judicial deposits (Note 8).

 

Page 32


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

 

a) Labor provisions and contingencies

 

 

  Amounts involved 

 

Company

 

Consolidated

Nature/Degree of Risk

09/30/18

 

12/31/17

 

09/30/18

 

12/31/17

Provisions - probable losses

            782,777

 

            954,319

 

            815,535

 

            980,596

Possible losses

            162,057

 

            210,211

 

            198,832

 

            261,876

 

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 finalized an improvement work in calculating the estimate of the labor provision value for cases of solidarity with third parties, evolving from a calculation based on the historical average of payments to an assessment of the expected loss in an individualized way for each process, resulting in an increase in the provision of R$116 million.

 

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 a party to Public Civil Actions filed by the Labor Public Prosecutor's Office, whose objects relate essentially to determining the Company to cease hiring an interposed company to carry out the company's activities. In August 2018, most of the STF Ministers judged the legality of unrestricted outsourcing, including the end activity, safeguarding the subsidiary's responsibility of the service provider. However, it is expected that this decision will be published and possible foreclosure of a declaration to clarify the scope of the decision, including for cases that have already been settled, when the application of that decision will be assessed in each case where the subject is discussed. In view of these considerations, there are still no conditions to estimate amounts or possible losses for the Company.

 

b) Tax provisions and contingencies

 

 

  Amounts involved 

 

Company

 

Consolidated

Nature/Degree of Risk

09/30/18

 

12/31/17

 

09/30/18

 

12/31/17

Provisions - probable losses

         1,889,399

 

         3,474,900

 

         1,995,688

 

         3,579,208

   Federal

            433,077

 

            420,128

 

            516,886

 

            502,153

   State

            968,612

 

            231,667

 

            968,612

 

            231,998

   Municipal

             33,549

 

             32,054

 

             33,549

 

             32,054

   FUST, FISTEL and EBC

            454,161

 

         2,791,051

 

            476,641

 

         2,813,003

Possible losses

       30,386,893

 

       34,029,094

 

       31,736,983

 

       35,388,910

   Federal

         7,808,156

 

         7,936,925

 

         8,139,237

 

         8,226,374

   State

       14,504,520

 

       18,015,683

 

       15,339,533

 

       18,968,349

   Municipal

            601,816

 

            542,084

 

            608,289

 

            548,014

   FUST, FUNTTEL and FISTEL

         7,472,401

 

         7,534,402

 

         7,649,924

 

         7,646,173

 

 

 

 

 

Page 33


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

 

b.1) Probable tax contingencies

 

Management and its legal counsel understand that losses are probable in the following federal, state, municipal and regulatory are described below:

 

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) withholding income tax on interest on equity; (iv) Social Investment Fund (Finsocial) offset amounts; and (v) additional charges to the PIS and COFINS tax base, as well as additional charges to COFINS required by Law No. 9,718/98.

 

At September 30, 2018, consolidated provisions totaled R$516,886 (R$502,153 at December 31, 2017).

 

State taxes

 

The Company and/or its subsidiaries are parties to administrative and judicial proceedings relating to: (i) disallowance of ICMS (VAT) credits; (ii) telecommunications services not subject; (iii) tax credit for challenges / disputes over telecommunication services not provided or wrongly charged (Agreement 39/01); (iv) rate difference; (v) rent of infrastructure necessary for internet (data) services; (vi) outflows of goods with prices lower than those of acquisition; and (vii) non-taxation of amounts granted as discounts to customers.

 

At September 30, 2018, consolidated provisions totaled R$968,612 (R$231,998 at December 31, 2017).

 

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: (a) equipment leasing services, non-core activities and supplementary activities; and (b) withholding on contractors' services.

 

At September 30, 2018, consolidated provisions totaled R$33,549 (R$32,054 at December 31, 2017).

 

FUST, FISTEL and EBC


The Company and/or subsidiaries have administrative and judicial discussions related to the non-inclusion of interconnection expenses and industrial exploitation of a dedicated line in the calculation basis of FUST.

 

In the second quarter of 2018, the discussion regarding the exclusion of the calculation basis of the Installation Inspection Fee ("TFI") and Inspection and Operation Fee ("TFF") of mobile (cellular) stations that are not owned by the Company was closed unfavorably to the Company and the amounts deposited judicially (Note 8) were handed over to ANATEL.

 

In the third quarter of 2018, the Company and TData had their accepted requests for conversion into income of the amounts deposited in court, relating to EBC rates, with the maintenance of the discussion in progress. As a result, the Company and TData made the write-downs of the amounts provisioned against the amounts deposited in court. (note 8).

 

At September 30, 2018, consolidated provisions totaled R$476,641 (R$2,813,003 at December 31, 2017).

 

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 and FISTEL), described below:

Page 34


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

 

 

 

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.

 

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 (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); (c) supply of meals to employees, withholding of 11% (assignment of workforce); and (d) Stock Options - requirement of social security contributions on amounts paid to employees under the stock option plan; (iii) withholding income tax and CIDE on the funds remitted abroad related to technical services and to administrative support and similar services, etc., and royalties; (iv) income and social contribution taxes: (a) disallowance of costs and sundry expenses not evidenced; and (b) 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.; (v) deduction of COFINS on swap operation losses; (vi) PIS and COFINS: (a) accrual basis versus cash basis; (b) levied on value-added services; and (c) monthly subscription services; (vii) income tax-related incentive investments FINOR, FINAN or FUNRES; (viii) ex-tariff, cancellation of the benefits under CAMEX Resolution No. 6, increase in the import duty from 4% to 28%; (ix) IPI levied on shipment of fixed access units from the Company's establishment; (x) Financial transaction tax (IOF) - required on loan transactions, intercompany loans and credit transactions; and (xi) operating expenses allegedly non-deductible and related to estimated losses on the recoverable value of accounts receivable.

 

At September 30, 2018, consolidated amounts involved totaled R$8,139,237 (R$8,226,374 at December 31, 2017).

 

State taxes

 

The Company and/or its subsidiaries are parties to various administrative and judicial proceedings, at the state level, related to ICMS, which are awaiting decisions in different court levels: (i) rental of movable property; (ii) international calls (DDI); (iii) reversal credit related to the acquisition of items of property, plant and equipment and payment in interstate transfers of property, plant and equipment between branches; (iv) reversal of previously unused credits; (v) service provided outside São Paulo state 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) deferred collection of interconnection (DETRAF - Traffic and Service Provision Document); (xii) credits derived from tax benefits granted by other states; (xiii) disallowance of tax incentives related to cultural projects; (xiv) transfers of assets among business units owned by the Company; (xv) communications service tax credits used in provision of services of the same nature; (xvi) card donation for prepaid service activation; (xvii) reversal of credit from return and free lease in connection with assignment of networks (used by the Company itself and exemption of public bodies); (xviii) DETRAF fine; (xix) own consumption; (xx) exemption of public bodies; (xxi) amounts given by way of discounts; (xxii) new tax register bookkeeping without prior authorization by tax authorities; (xxiii) advertising services; (xxiv) unmeasured services; and (xxv) monthly subscription, which is in the Federal Supreme Court ("STF") with declaration liens and the Company awaits the judgment of the STF on the request for modulation.

 

At September 30, 2018, consolidated amounts involved totaled R$15,339,533 (R$18,968,349 at December 31, 2017).

 

Municipal taxes

 

Page 35


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

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) service tax (ISS) on: (a) non-core activity, value-added and supplementary services; (b) withholding at source; (c) call identification and mobile phone licensing services; (d) full-time services, provisions, returns and cancelled tax receipts; (e) data processing and antivirus congeners; (f) charge for use of mobile network and lease of infrastructure; (g) advertising services; (h) services provided by third parties; and (i) advisory services in corporate management provided by Telefónica Latino América Holding; (ii) property tax (IPTU); (iii) land use tax; and (iv) various municipal charges.

 

At September 30, 2018, consolidated amounts involved totaled R$608,289 (R$548,014 at December 31, 2017).

 

FUST, FUNTTEL and FISTEL

 

Universal Telecommunications Services Fund ("FUST")

 

Writs of mandamus were filed seeking the right to not include revenues 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, 2018, consolidated amounts involved totaled R$4,487,812 (R$4,316,571 at December 31, 2017).

 

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, 2018, consolidated amounts involved totaled R$569,623 (R$493,867 at December 31, 2017).

 

Telecommunications Inspection Fund ("FISTEL")

 

Judicial actions for the collection of TFI on: (i) 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 (ii) 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, 2018, consolidated amounts involved totaled R$2,592,489 (R$2,835,735 at December 31, 2017).

 

c) Civil provisions and contingencies

 

Page 36


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

 

  Amounts involved 

 

Company

 

Consolidated

Nature/Degree of Risk

09/30/18

 

12/31/17

 

09/30/18

 

12/31/17

Provisions - probable losses

         1,043,595

 

         1,047,435

 

         1,052,395

 

         1,055,877

Possible losses

         3,513,127

 

         2,840,894

 

         3,529,070

 

         2,858,796

 

c.1) Provisions for probable civil losses

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

 

·       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, 2018, consolidated provisions totaled R$322,855 (R$324,232 at December 31, 2017).

 

·       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, 2018, consolidated provisions totaled R$372,976 (R$296,169 at December 31, 2017).

 

·       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, 2018, consolidated provisions totaled R$356,564 (R$435,476 at December 31, 2017).

 

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, 2018, the consolidated amount totaled R$3,499,218 (R$2,827,071 at December 31, 2017).

Page 37


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

 

 

 

 

 

 

·       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, 2018, the amount was R$15,645 (R$17,518 at December 31, 2017).

 

·       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, 2018 and December 31, 2017, the amount was R$14,207.

 

·       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 on 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. We brought a Special Appeal against the aforementioned judgment in order to recognize the active illegitimacy of Lune and determined the termination of the proceedings, and such appeal is awaiting judgment before the Superior Court of Justice ("STJ"). There is no way to determine at this time 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) Regulatory provisions and contingencies

 

  Amounts involved 

 

Company

 

Consolidated

Nature/Degree of Risk

09/30/18

 

12/31/17

 

09/30/18

 

12/31/17

Provisions - probable losses

            972,510

 

         1,103,792

 

            972,510

 

         1,103,792

Possible losses

         5,469,580

 

         5,065,907

 

         5,469,580

 

         5,065,907

 

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

Page 38


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

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

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, 2018, consolidated provisions totaled R$972,510 (R$1,103,792 at December 31, 2017).

 

 

 

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 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, 2018, the consolidated amount was R$5,469.580 (R$5,065,907 at December 31, 2017).

 

·       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.

 

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.

 

e) Guarantees

 

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

 

  Consolidated 

 

09/30/18

 

12/31/17

 

Property and equipment

 

Judicial deposits and garnishments

 

Letters of guarantee

 

Property and equipment

 

Judicial deposits and garnishments

 

Letters of guarantee

Civil, labor and tax

   156,375

 

   4,009,047

 

   1,512,486

 

   176,591

 

   6,663,805

 

   1,669,476

Total

   156,375

 

   4,009,047

 

   1,512,486

 

   176,591

 

   6,663,805

 

   1,669,476

 

At September 30, 2018, 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$67,668 (R$69,764 at December 31, 2017).

 

Page 39


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

 

 

 

 

 

 

 

 

 

 

 

19)  DEFERRED REVENUE

 

 

Company

 

Consolidated

 

09/30/18

 

12/31/17

 

09/30/18

 

12/31/17

Services and goods (1)

                      -

 

            301,292

 

                      -

 

            301,292

Disposal of PP&E (2)

            164,874

 

            165,162

 

            164,874

 

            165,162

Activation revenue (3)

                      -

 

               7,477

 

                      -

 

               7,959

Customer loyalty program (4)

                      -

 

             50,354

 

                      -

 

             50,354

Government grants (5)

             99,566

 

            115,379

 

             99,566

 

            115,379

Contractual Liabilities - IFRS 15 (6)

            536,326

 

                      -

 

            537,488

 

                      -

Other (7)

             58,869

 

             81,466

 

             58,869

 

             83,052

Total

            859,635

 

            721,130

 

            860,797

 

            723,198

 

 

 

 

 

 

 

 

Current

            514,919

 

            370,493

 

            516,081

 

            372,561

Non-current

            344,716

 

            350,637

 

            344,716

 

            350,637

(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.

(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)  Refers to the balance of contractual liabilities arising from the adoption of IFRS 15 (Note 2.b) and amounts related to customer contracts (services and goods, activation revenue and customer loyalty program) were reclassified to the line of "Contractual Liabilities - IFRS 15".The amounts on September 30, 2018 were R$348,512, of which: (i) services and goods R$294,008; (ii) activation revenue R$2,351 and (iii) customer loyalty program R$52,153.

(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).

 

20) LOANS, FINANCING AND DEBENTURES

 

a) Breakdown

 

On September 30, 2018, the contractual terms of the loans and financing are the same as in Note 20) Loans, Financing and Debentures, disclosed in the financial statements for the fiscal year ended December 31, 2017.

 

Page 40


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

 

Company / Consolidated

 

Information as of September 30, 2018

 

09/30/18

 

12/31/17

 

Currency

 

Annual interest rate

 

Maturity

 

Garantees

 

Current

 

Non-current

 

Total

 

Current

 

Non-current

 

Total

Local currency

 

 

 

 

 

 

 

 

1,299,168

 

1,705,192

 

3,004,360

 

1,478,656

 

2,237,192

 

3,715,848

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Institutions (a.1)

 

 

 

 

 

 

 

 

   756,965

 

   925,889

 

1,682,854

 

   820,468

 

1,456,624

 

2,277,092

   BNDES FINEM

URTJLP

 

TJLP+ 0 to 4.08%

 

7/15/2019

 

(1)

 

   306,020

 

  -

 

   306,020

 

   371,946

 

   213,958

 

   585,904

   BNDES FINEM

URTJLP

 

TJLP+ 0 to 3.38%

 

8/15/2020

 

(3)

 

   183,324

 

   169,283

 

   352,607

 

   184,007

 

   303,560

 

   487,567

   BNDES FINEM

R$

 

5.00%

 

11/15/2019

 

(3)

 

  14,624

 

2,432

 

  17,056

 

  14,654

 

  13,377

 

  28,031

   BNDES FINEM

URTJLP

 

TJLP+ 0 to 3.12%

 

1/15/2023

 

(3)

 

   103,080

 

   339,139

 

   442,219

 

   101,879

 

   413,552

 

   515,431

   BNDES FINEM

R$

 

4.00% to 6.00%

 

1/15/2023

 

(3)

 

  37,835

 

   103,910

 

   141,745

 

  37,061

 

   132,092

 

   169,153

   BNDES FINEM

R$

 

Selic Acum. D-2 + 2.32%

 

1/15/2023

 

(3)

 

  78,818

 

   261,797

 

   340,615

 

  70,426

 

   305,952

 

   376,378

   BNDES PSI

R$

 

2.5% to 5.5%

 

1/15/2023

 

(2)

 

  18,212

 

5,801

 

  24,013

 

  25,405

 

  19,413

 

  44,818

   BNB

R$

 

7.06% to 10%

 

8/18/2022

 

(4)

 

  15,052

 

  43,527

 

  58,579

 

  15,090

 

  54,720

 

  69,810

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Suppliers (a.2)

R$

 

103.3% to 111.3 % of CDI

 

9/30/2019

 

 

 

   483,961

 

  -

 

   483,961

 

   607,152

 

  -

 

   607,152

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Finance lease (a.3)

R$

 

IPCA and IGP-M

 

8/31/2033

 

 

 

  58,242

 

   318,277

 

   376,519

 

  51,036

 

   334,424

 

   385,460

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent Consideration (a.4)

R$

 

Selic

 

 

 

 

 

  -

 

   461,026

 

   461,026

 

  -

 

   446,144

 

   446,144

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign Currency

 

 

 

 

 

 

 

 

   142,631

 

  -

 

   142,631

 

   142,299

 

  82,955

 

   225,254

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Institutions (a.1)

 

 

 

 

 

 

 

 

   142,631

 

  -

 

   142,631

 

   142,299

 

  82,955

 

   225,254

   BNDES FINEM

UMBND

 

ECM + 2.38%

 

7/15/2019

 

(1)

 

   142,631

 

  -

 

   142,631

 

   142,299

 

  82,955

 

   225,254

Total

 

 

 

 

 

 

 

 

1,441,799

 

1,705,192

 

3,146,991

 

1,620,955

 

2,320,147

 

3,941,102

 

Guarantees:

 

(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 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. On September 30, 2018, balances were R$12,285 and R$11,722 at September 30, 2018 and December 31, 2017, respectively.

 

a.1) Loans and financing

 

Some financing agreements with the BNDES described above, have lower interest rates than those prevailing on the market. These operations fall within the scope of IAS 20 / CPC 7 and thus the subsidies granted by BNDES were adjusted to present value and deferred in accordance with the useful lives of the financed assets, resulting in a balance as at September 30, 2018 of R$24,070 (R$32,155 at December 31, 2017), Note 19.

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 103.3% to 111.3% of CDI (101.4% to 109.4% of CDI at December 31, 2017).

 

a.3) Finance lease

 

The Company has agreements classified as finance lease agreements in the condition of lessee relate 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 associated with the power transmission network. 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.

 

Page 41


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

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 aforementioned transactions comprises the following effects:

 

 

 

 

Company / Consolidated

 

 

 

 

 

09/30/18

 

12/31/17

Nominal value payable

 

 

 

 

            766,076

 

            787,147

Unrealized financial expenses

 

 

 

 

           (389,557)

 

           (401,687)

Present value payable

 

 

 

 

            376,519

 

            385,460

 

 

 

 

 

 

 

 

Current

 

 

 

 

             58,242

 

             51,036

Non-current

 

 

 

 

            318,277

 

            334,424

 

Aging list of finance lease payable at September 30, 2018 is as follows:

 

 

 

 

Company / Consolidated

 

 

 

 

 

Nominal value payable

 

Present value payable

Up to 1 year

 

 

 

 

             65,789

 

             58,242

From 1 to 5 years

 

 

 

 

            206,290

 

            144,663

Over five years

 

 

 

 

            493,997

 

            173,614

Total

 

 

 

 

            766,076

 

            376,519

 

There are no unsecured residual values resulting in benefits to the lessor or contingent payments recognized as revenue at September 30, 2018 and December 31, 2017.

 

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., 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

 

The contractual terms of the debentures are the same as in Note 20) Loans, Financing and Debentures, disclosed in the financial statements for the fiscal year ended December 31, 2017.

 

On April 25, 2018, the debentures of the 4th issue were fully settled. The amount paid in settlement amounted to R$1,347,257.

 

On July 5, 2018, the 1st issue debentures (Telemig origin) were amortized. The amount paid in settlement amounted to R$25,805, of which R$3,012 corresponds to the 1st series, R$8,285 to the 2nd series and R$14,508 to the 3rd series.

 

Information on the debentures at September 30, 2018 and December 31, 2017:

 

Page 42


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

Company / Consolidated

 

 

Information as of September 30, 2018

 

09/30/18

 

12/31/17

Issue

 

Issue date

 

Maturity

Remuneration p.a.

 

Current

 

Non-current

 

Total

 

Current

 

Non-current

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4th issue – Series 3

 

10/15/2009

 

10/15/2019

IPCA+4.00%

 

  1,537

 

   40,699

 

   42,236

 

  312

 

  40,010

 

   40,322

1st issue – Minas Comunica

 

12/17/2007

 

7/5/2021

IPCA+0.50%

 

   26,250

 

   52,499

 

   78,749

 

   24,088

 

   72,264

 

   96,352

4th issue

 

4/25/2013

 

4/25/2018

100% of CDI + 0.68%

 

 -

 

 -

 

-  

 

  1,317,513

 

   -

 

  1,317,513

5th issue

 

2/8/2017

 

2/8/2022

108.25% of CDI

 

   18,142

 

  1,997,417

 

  2,015,559

 

   64,397

 

  1,996,517

 

  2,060,914

6th issue

 

11/27/2017

 

11/27/2020

100% of CDI + 0.24%

 

   22,419

 

  999,683

 

  1,022,102

 

  6,176

 

  999,462

 

  1,005,638

Total

 

 

 

 

 

 

   68,348

 

  3,090,298

 

  3,158,646

 

  1,412,486

 

  3,108,253

 

  4,520,739

 

Transaction costs in connection with the 4th, 5th and 6th issues, totaling R$4,301 at September 30, 2018 (R$5,422 at December 31, 2017, 4th, 5th and 6th issues), 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, 2018, breakdown of non-current loans, financing, finance lease, debentures and contingent consideration by year of maturity is as follows:

 

 

Company / Consolidated

Year

Loans and financing

 

Debentures

 

Finance lease

 

Contingent Consideration

 

Total

2019

110,850

 

   40,699

 

   42,757

 

-

 

194,306

2020

    358,218

 

1,026,250

 

   35,634

 

-

 

1,420,102

2021

230,319

 

1,026,250

 

   33,951

 

-

 

1,290,520

2022

    208,503

 

997,099

 

   32,322

 

-

 

1,237,924

2023 onwards

   17,999

 

  -

 

173,613

 

   461,026

 

652,638

Total

    925,889

 

3,090,298

 

318,277

 

   461,026

 

4,795,490

 

d)  Covenants

 

There are loans and financing with BNDES and debentures 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, 2018 and December 31, 2017 all economic and financial indexes established in existing contracts have been achieved.

 

e)  Changes

 

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

Page 43


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

 

 

Company / Consolidated

 

 

Loans and financing

 

Debentures

 

Finance lease

 

Financing - Suppliers

 

Contingent Consideration

 

Total

Balance at 12.31.16

 

4,158,015

 

  3,554,307

 

  374,428

 

722,591

 

   414,733

 

  9,224,074

Additions

 

   39,878

 

  2,000,000

 

   9,061

 

280,019

 

-

 

  2,328,958

Financial charges (Note 26)

 

241,654

 

  418,536

 

41,355

 

   48,226

 

25,663

 

  775,434

Issue costs

 

  -

 

  (4,443)

 

-

 

  -

 

-

 

  (4,443)

Foreign exchange variation (Note 26)

 

  (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

Additions

 

   15,998

 

  1,000,000

 

   4,401

 

291,425

 

-

 

  1,311,824

Government grants (Note 19)

 

   (1,581)

 

-

 

-

 

  -

 

-

 

  (1,581)

Financial charges

 

   58,499

 

66,759

 

   3,910

 

   22,377

 

   5,748

 

  157,293

Issue costs

 

  -

 

(483)

 

-

 

  -

 

-

 

(483)

Foreign exchange variation

 

   35,979

 

-

 

-

 

  -

 

-

 

35,979

Write-offs (payments)

 

   (872,810)

 

   (67,628)

 

   (11,043)

 

   (146,333)

 

-

 

(1,097,814)

Balance at 12.31.17

 

2,502,346

 

  4,520,739

 

  385,460

 

607,152

 

   446,144

 

  8,461,841

Additions

 

  -

 

-

 

13,453

 

349,715

 

-

 

  363,168

Government grants (Note 19)

 

  (40)

 

-

 

-

 

  -

 

-

 

   (40)

Financial charges (Note 26)

 

132,257

 

  193,211

 

15,255

 

   24,766

 

14,882

 

  380,371

Issue costs

 

  -

 

   1,121

 

-

 

  -

 

-

 

   1,121

Foreign exchange variation (Note 26)

 

   34,062

 

-

 

-

 

  -

 

-

 

34,062

Write-offs (payments)

 

   (843,140)

 

(1,556,425)

 

   (37,649)

 

   (497,672)

 

-

 

(2,934,886)

Balance at 09.30.18

 

1,825,485

 

  3,158,646

 

  376,519

 

483,961

 

   461,026

 

  6,305,637

 

The following is a summary of funding and payments made during the year ended September 30, 2018.

 

Additions

 

Write-offs (payments)

 

 

 

Principal

 

Financial charges

 

Total

Loans and financing

                      -

 

           (716,414)

 

           (126,726)

 

           (843,140)

  BNDES

                      -

 

           (705,221)

 

           (123,472)

 

           (828,693)

  BNB

                      -

 

            (11,193)

 

              (3,254)

 

            (14,447)

Debentures

                      -

 

        (1,324,723)

 

           (231,702)

 

        (1,556,425)

   1st issue – Minas Comunica

                      -

 

            (24,723)

 

              (1,082)

 

            (25,805)

   4th issue

                      -

 

        (1,300,000)

 

            (47,257)

 

        (1,347,257)

   5th issue

                      -

 

                      -

 

           (149,795)

 

           (149,795)

   6th issue

                      -

 

                      -

 

            (33,568)

 

            (33,568)

Suppliers

            349,715

 

           (455,940)

 

            (41,732)

 

           (497,672)

Finance lease

             13,453

 

            (27,224)

 

            (10,425)

 

            (37,649)

Total

            363,168

 

        (2,524,301)

 

           (410,585)

 

        (2,934,886)

 

Page 44


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

21) OTHER LIABILITIES

 

 Company

 

Consolidated

 

09/30/18

 

12/31/17

 

09/30/18

 

12/31/17

Authorization licenses (1)

            123,007

 

            258,742

 

            123,007

 

            258,742

Liabilities with related parties (Note 27)

            115,788

 

            139,173

 

            142,642

 

            125,987

Payment for license renewal (2)

            205,370

 

            167,536

 

            205,370

 

            167,536

Third-party withholdings (3)

             91,827

 

            126,361

 

            102,557

 

            144,593

Surplus from post-employment benefit plans (Note 29)

            558,482

 

            522,498

 

            569,207

 

            531,938

Amounts to be refunded to subscribers

             43,763

 

            187,826

 

             44,854

 

            189,380

Other liabilities

             96,067

 

             70,108

 

             71,825

 

             72,893

Total

         1,234,304

 

         1,472,244

 

         1,259,462

 

         1,491,069

 

 

 

 

 

 

 

 

Current

            425,421

 

            700,251

 

            440,530

 

            718,468

Non-current

            808,883

 

            771,993

 

            818,932

 

            772,601

(1)  As December 31, 2017, 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 licenses 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, 2018, the Company paid R$142,862 to EAD, referring to the 4th 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.

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

 

22)  EQUITY

 

a) Capital

 

According to its Articles of Incorporation, the Company is authorized to increase its share capital up to 1,850,000,000 common and preferred 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. 6404/76, 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 increase limit has been reached.

 

Capital increases do not necessarily observe 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. 6404/76.

 

Preferred shares are also entitled to 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 be kept until payment of said dividend.

 

Page 45


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

Subscribed and paid-in capital at September 30, 2018 and December 31, 2017 amounted to R$63,571,416, divided into shares without par value, held as follows:

 

Common Shares

 

Preferred Shares

 

Grand Total

Shareholders

Number

 

%

 

Number

 

%

 

Number

 

%

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

198,207,608

 

34.67%

 

305,122,195

 

27.26%

 

503,329,803

 

29.76%

   SP Telecomunicações Participações

294,158,155

 

51.46%

 

38,537,435

 

3.44%

 

332,695,590

 

19.67%

   Telefónica Chile

920,866

 

0.16%

 

15,647

 

0.00%

 

936,513

 

0.06%

Other shareholders

29,320,789

 

5.13%

 

415,131,868

 

37.09%

 

444,452,657

 

26.28%

Treasury Shares

2,290,164

 

0.40%

 

983

 

0.00%

 

2,291,147

 

0.14%

Total shares

571,644,217

 

100.00%

 

1,119,340,706

 

100.00%

 

1,690,984,923

 

100.00%

   Treasury Shares

(2,290,164)

 

 

 

(983)

 

 

 

(2,291,147)

 

 

Total shares outstanding

569,354,053

 

 

 

1,119,339,723

 

 

 

1,688,693,776

 

 

 

b) Capital reserves

 

b.1) Special goodwill reserve

 

This represents the tax benefit generated by the merger of Telefonica Data do Brasil Ltda. which will be capitalized in favor of the controlling shareholders (SPTE Participações Ltda.) after the tax credits are realized under the terms of CVM Ruling No. 319/99.

 

b.2) Other capital reserves

 

The detail information of the other capital reserves is the same as in note 22) Shareholders' equity, item b.2 - Other Capital Reserves, as disclosed in the financial statements for the year ended December 31, 2017.

 

b.3) Treasury shares

 

The Company's shares held in treasury whose balance is resulting: (i) from the exercise of the right to withdraw from the Company's common and preferred shareholders, who expressed their dissent regarding the acquisition of GVTPart.; (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 22.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.

 

c) Income reserves

 

c.1) Legal reserve

 

This reserve is set up by allocation of 5% of the net income for the year, up to the limit of 20% of the paid-up capital. The legal reserve will only be used to increase capital and offset accumulated losses.

 

c.2) Special Reserve for Expansion and Modernization

 

Pursuant to article 196 of Law 6,404/76, and based on a capital budget, submitted and approved at the Annual General Meeting ("AGO") of April 12, 2018, the Company reversed the special reserve for expansion and modernization constituted for the 2017 fiscal year in the amount of R$550,000 and constituted a new special reserve for expansion and modernization in the amount of R$297,000, which will be used for the partial funding of the capital budget for 2018.

Page 46


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

 

 

c.3) Tax Incentives Reserve

 

The Company has State VAT (ICMS) tax benefits in the States of Minas Gerais and Espírito Santo, relating to tax credits approved by the relevant bodies of said states, in connection with investments in the installation of SMP support equipment, fully operational, in accordance with the rules in force, ensuring that the localities listed in the call for bid be included in the SMP coverage area. The portion of profit subject to the incentive was excluded from the dividend calculation, and may be used only in the event of capital increase or loss absorption.

 

d) Dividend and interest on equity

 

d.1) Interim interest on equity for 2018

 

At meetings of the Company's Board of Directors, the directors approved the allocations of interest on shareholders' equity, related to the 2018 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 2018, 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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

06/18/18

 

06/29/18

 

Until 31/12/19

 

   126,479

 

   273,521

 

   400,000

 

   107,507

 

   232,493

 

   340,000

 

 0.18882303703

 

 0.20770534073

09/05/18

 

09/17/18

 

Until 31/12/19

 

   885,353

 

1,914,647

 

2,800,000

 

   752,550

 

1,627,450

 

2,380,000

 

 1.32176125923

 

 1.45393738515

Total

 

1,011,832

 

2,188,168

 

3,200,000

 

   860,057

 

1,859,943

 

2,720,000

 

 

 

 

(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.2) Unclaimed dividends and interest on equity

 

Pursuant to Article 287, paragraph II, item “a” of Law No. 6404, of December 15, 1976, the dividends and interest on equity unclaimed by shareholders are subject to the statute of limitation 3 (three) years, as from the initial payment date. The Company reverses the amount of unclaimed dividends and IOE to equity once the statute of limitation occurred.

In the nine-month period ended September 30, 2018, the Company reversed dividends subject to the statute of limitation in the amount of R$76,520.

 

e) Other comprehensive income, net

 

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 (joint venture).

 

Changes in other comprehensive income are as follows:

Page 47


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

 

Consolidated

 

Financial instruments available for sale

 

Derivative transactions

 

Currency translation effects - foreign investments

 

Total

Balances at 12/31/16

              (8,881)

 

               3,549

 

             16,793

 

             11,461

    Translation gains

                      -

 

                      -

 

               6,493

 

               6,493

    Losses from future contracts

                      -

 

                 (723)

 

                      -

 

                 (723)

    Gains on financial assets available for sale

                  264

 

                      -

 

                      -

 

                  264

Balances at 09/30/17

              (8,617)

 

               2,826

 

             23,286

 

             17,495

    Translation gains

                      -

 

                      -

 

               4,746

 

               4,746

    Losses from future contracts

                      -

 

                 (872)

 

                      -

 

                 (872)

    Gains on financial assets available for sale

                   (41)

 

                      -

 

                      -

 

                   (41)

Balances at 12/31/17

              (8,658)

 

               1,954

 

             28,032

 

             21,328

    Translation gains

                      -

 

                      -

 

             14,136

 

             14,136

    Losses from future contracts

                      -

 

              (1,302)

 

                      -

 

              (1,302)

    Losses on financial assets available for sale

                 (269)

 

                      -

 

                      -

 

                 (269)

Balances at 09/30/18

              (8,927)

 

                  652

 

             42,168

 

             33,893

 

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 will be made through the use of the capital reserve balance included in the balance sheet as at 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 June 1, 2017 and July 5, 2017, the Company acquired 45 and 661 preferred shares issued by the Company at an average unit price of R$47.31 and R$45.26, respectively, totaling R$32.

 

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 year.

 

The following table shows the calculation of earnings per share for the three-month and nine-month periods ended September 30, 2018 and 2017:

Page 48


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

 

Company

 

Three-month periods ended

 

Nine-month periods ended

 

09.30.18

 

09.30.17

 

09.30.18

 

09.30.17

Net income for the period attributable to shareholders:

            3,177,264

 

            1,222,716

 

            7,441,580

 

            3,091,835

   Common shares

            1,004,643

 

               386,619

 

            2,353,009

 

               977,630

   Preferred shares

            2,172,621

 

               836,097

 

            5,088,571

 

            2,114,205

 

 

 

 

 

 

 

 

Number of shares, in thousands:

            1,688,694

 

            1,688,694

 

            1,688,694

 

            1,688,694

    Weighted average number of outstanding common shares

               569,354

 

               569,354

 

               569,354

 

               569,354

    Weighted average number of outstanding preferred shares

            1,119,340

 

            1,119,340

 

            1,119,340

 

            1,119,340

 

 

 

 

 

 

 

 

Basic and diluted earnings per share:

 

 

 

 

 

 

 

   Common shares (R$)

                    1.76

 

                    0.68

 

                    4.13

 

                    1.72

   Preferred shares (R$)

                    1.94

 

                    0.75

 

                    4.55

 

                    1.89

 

23)  NET OPERATING REVENUE

 

 

Company

 

Three-month periods ended

 

Nine-month periods ended

 

09.30.18

 

09.30.17

 

09.30.18

 

09.30.17

Gross operating revenue (1)

              14,982,372

 

              15,174,130

 

              43,753,520

 

              46,978,442

 

 

 

 

 

 

 

 

Deductions from gross operating revenue

               (5,400,293)

 

               (5,542,636)

 

             (16,009,152)

 

             (17,212,722)

   Taxes

               (3,377,629)

 

               (3,829,002)

 

             (10,320,152)

 

             (12,029,914)

   Discounts granted and return of goods

               (2,022,664)

 

               (1,713,634)

 

               (5,689,000)

 

               (5,182,808)

 

 

 

 

 

 

 

 

Net operating revenue

                9,582,079

 

                9,631,494

 

              27,744,368

 

              29,765,720

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

Three-month periods ended

 

Nine-month periods ended

 

09.30.18

 

09.30.17

 

09.30.18

 

09.30.17

Gross operating revenue (1)

              16,328,913

 

              16,582,845

 

              49,007,165

 

              49,706,431

 

 

 

 

 

 

 

 

Deductions from gross operating revenue

               (5,564,011)

 

               (5,696,896)

 

             (16,629,904)

 

             (17,533,139)

   Taxes

               (3,539,756)

 

               (3,979,585)

 

             (10,935,469)

 

             (12,342,050)

   Discounts granted and return of goods

               (2,024,255)

 

               (1,717,311)

 

               (5,694,435)

 

               (5,191,089)

 

 

 

 

 

 

 

 

Net operating revenue

              10,764,902

 

              10,885,949

 

              32,377,261

 

              32,173,292

(1)  These include telephone services, use of interconnection network, data and SVA services, cable TV, other services and sale of goods (handsets, simcards and accessories).

No one customer accounted for more than 10% of gross operating revenues in the quarters ended September 30, 2018 and 2017.

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

 

The information for the nine-month period ended September 30, 2018 includes the effects of the adoption of IFRS 15.To facilitate the understanding and comparability of information, the Company discloses in Note 33 the consolidated income statement for the nine-month period ended September 30, 2018, excluding the effects of adopting IFRS 15.

 

 

Page 49


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

24) OPERATING COSTS AND EXPENSES

 

 

Company

 

Three-month periods ended

 

09.30.18

 

09.30.17

 

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

   (180,682)

 

  (540,965)

 

  (86,196)

 

   (807,843)

 

  (169,596)

 

  (494,849)

 

   (123,948)

 

   (788,393)

Third-party services

   (1,144,550)

 

  (1,417,688)

 

   (329,947)

 

   (2,892,185)

 

   (1,208,455)

 

  (1,620,191)

 

   (301,535)

 

  (3,130,181)

Interconnection and network use

   (317,734)

 

-

 

  -

 

   (317,734)

 

   (351,916)

 

-

 

  -

 

   (351,916)

Advertising and publicity

  -

 

  (214,480)

 

  -

 

   (214,480)

 

  -

 

  (274,061)

 

  -

 

   (274,061)

Rental, insurance, condominium and connection means

   (695,513)

 

   (30,743)

 

  (43,013)

 

   (769,269)

 

   (665,136)

 

   (34,433)

 

  (44,803)

 

   (744,372)

Taxes, charges and contributions

   (363,293)

 

  (7,206)

 

   (7,873)

 

   (378,372)

 

   (442,724)

 

  (9,233)

 

  (13,901)

 

   (465,858)

Estimated impairment losses on accounts receivable (Note 4)

     -

 

  (347,161)

 

  -

 

   (347,161)

 

  -

 

  (354,877)

 

  -

 

   (354,877)

Depreciation and amortization (1)

   (1,555,085)

 

  (337,906)

 

   (132,854)

 

   (2,025,845)

 

   (1,481,349)

 

  (360,434)

 

   (113,507)

 

   (1,955,290)

Cost of goods sold

   (527,903)

 

-

 

  -

 

   (527,903)

 

   (420,877)

 

-

 

  -

 

   (420,877)

Materials and other operating costs and expenses

   (1,337)

 

   (19,937)

 

   (3,451)

 

  (24,725)

 

  (11,791)

 

   (50,938)

 

   (3,718)

 

  (66,447)

Total

   (4,786,097)

 

  (2,916,086)

 

   (603,334)

 

   (8,305,517)

 

   (4,751,844)

 

  (3,199,016)

 

   (601,412)

 

   (8,552,272)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

Nine-month periods ended

 

09.30.18

 

09.30.17

 

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

   (565,082)

 

  (1,664,521)

 

   (305,595)

 

   (2,535,198)

 

   (565,844)

 

  (1,655,559)

 

   (368,901)

 

   (2,590,304)

Third-party services

   (3,416,105)

 

  (4,406,268)

 

   (959,720)

 

   (8,782,093)

 

   (3,628,775)

 

  (4,863,846)

 

   (914,417)

 

   (9,407,038)

Interconnection and network use

   (992,971)

 

-

 

  -

 

   (992,971)

 

   (1,069,564)

 

-

 

  -

 

   (1,069,564)

Advertising and publicity

  -

 

  (629,974)

 

     -

 

   (629,974)

 

  -

 

  (732,023)

 

  -

 

   (732,023)

Rental, insurance, condominium and connection means

   (2,150,009)

 

  (105,241)

 

   (135,227)

 

   (2,390,477)

 

   (1,957,270)

 

  (110,806)

 

   (135,438)

 

   (2,203,514)

Taxes, charges and contributions

   (1,185,447)

 

   (22,015)

 

  (27,542)

 

   (1,235,004)

 

   (1,329,280)

 

   (30,141)

 

  (34,574)

 

   (1,393,995)

Estimated impairment losses on accounts receivable (Note 4)

  -

 

  (1,011,896)

 

  -

 

   (1,011,896)

 

  -

 

  (1,037,677)

 

  -

 

   (1,037,677)

Depreciation and amortization (1)

   (4,635,480)

 

  (1,008,345)

 

   (375,867)

 

   (6,019,692)

 

   (4,423,556)

 

  (1,080,655)

 

   (338,185)

 

   (5,842,396)

Cost of goods sold

   (1,465,443)

 

-

 

  -

 

   (1,465,443)

 

   (1,296,470)

 

-

 

  -

 

   (1,296,470)

Materials and other operating costs and expenses

  (28,669)

 

  (144,710)

 

     (12,500)

 

   (185,879)

 

  (56,798)

 

  (132,502)

 

  (14,374)

 

   (203,674)

Total

(14,439,206)

 

  (8,992,970)

 

   (1,816,451)

 

(25,248,627)

 

(14,327,557)

 

  (9,643,209)

 

   (1,805,889)

 

(25,776,655)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

Three-month periods ended

 

09.30.18

 

09.30.17

 

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

   (211,665)

 

  (622,594)

 

   (103,965)

 

   (938,224)

 

   (217,235)

 

  (597,099)

 

   (134,091)

 

   (948,425)

Third-party services

   (1,346,307)

 

  (1,517,128)

 

   (320,139)

 

   (3,183,574)

 

   (1,426,850)

 

  (1,614,254)

 

   (315,096)

 

  (3,356,200)

Interconnection and network use

   (317,734)

 

-

 

  -

 

   (317,734)

 

   (351,916)

 

-

 

  -

 

   (351,916)

Advertising and publicity

  -

 

  (224,670)

 

  -

 

   (224,670)

 

  -

 

  (276,337)

 

  -

 

   (276,337)

Rental, insurance, condominium and connection means

   (696,897)

 

   (30,791)

 

  (48,202)

 

   (775,890)

 

   (667,173)

 

   (34,491)

 

  (45,117)

 

   (746,781)

Taxes, charges and contributions

   (372,828)

 

  (7,158)

 

   (7,911)

 

   (387,897)

 

   (448,191)

 

  (9,235)

 

  (14,101)

 

   (471,527)

Estimated impairment losses on accounts receivable (Note 4)

     -

 

  (402,214)

 

  -

 

   (402,214)

 

  -

 

  (380,400)

 

  -

 

   (380,400)

Depreciation and amortization (1)

   (1,559,900)

 

  (338,214)

 

   (136,652)

 

   (2,034,766)

 

   (1,487,827)

 

  (360,443)

 

   (113,704)

 

   (1,961,974)

Cost of goods sold

   (595,329)

 

-

 

  -

 

   (595,329)

 

   (483,882)

 

-

 

  -

 

   (483,882)

Materials and other operating costs and expenses

   (1,647)

 

   (20,071)

 

   (7,869)

 

  (29,587)

 

  (12,644)

 

   (52,239)

 

   (3,930)

 

  (68,813)

Total

   (5,102,307)

 

  (3,162,840)

 

   (624,738)

 

   (8,889,885)

 

   (5,095,718)

 

  (3,324,498)

 

   (626,039)

 

   (9,046,255)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Page 50


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

 

 

Consolidated

 

Nine-month periods ended

 

09.30.18

 

09.30.17

 

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

   (669,227)

 

  (1,922,923)

 

   (369,584)

 

   (2,961,734)

 

   (628,791)

 

  (1,762,514)

 

   (385,099)

 

   (2,776,404)

Third-party services

   (4,042,634)

 

  (4,616,066)

 

   (936,303)

 

   (9,595,003)

 

   (4,230,763)

 

  (4,846,822)

 

   (923,959)

 

(10,001,544)

Interconnection and network use

   (992,971)

 

-

 

  -

 

   (992,971)

 

   (1,069,564)

 

-

 

  -

 

   (1,069,564)

Advertising and publicity

  -

 

  (661,776)

 

     -

 

   (661,776)

 

  -

 

  (734,299)

 

  -

 

   (734,299)

Rental, insurance, condominium and connection means

   (2,152,727)

 

  (106,479)

 

   (154,447)

 

   (2,413,653)

 

   (1,964,316)

 

  (111,494)

 

   (135,857)

 

   (2,211,667)

Taxes, charges and contributions

   (1,214,808)

 

   (22,051)

 

  (27,663)

 

   (1,264,522)

 

   (1,355,184)

 

   (30,143)

 

  (35,758)

 

   (1,421,085)

Estimated impairment losses on accounts receivable (Note 4)

  -

 

  (1,168,936)

 

  -

 

   (1,168,936)

 

  -

 

  (1,108,925)

 

  -

 

   (1,108,925)

Depreciation and amortization (1)

   (4,652,088)

 

  (1,008,771)

 

   (385,057)

 

   (6,045,916)

 

   (4,442,631)

 

  (1,080,683)

 

   (339,494)

 

   (5,862,808)

Cost of goods sold

   (1,670,801)

 

-

 

  -

 

   (1,670,801)

 

   (1,421,308)

 

-

 

  -

 

   (1,421,308)

Materials and other operating costs and expenses

  (31,697)

 

  (146,226)

 

  (23,336)

 

   (201,259)

 

  (59,990)

 

  (137,467)

 

  (14,829)

 

   (212,286)

Total

(15,426,953)

 

  (9,653,228)

 

   (1,896,390)

 

(26,976,571)

 

(15,172,547)

 

  (9,812,347)

 

   (1,834,996)

 

(26,819,890)

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

 

25)  OTHER OPERATING INCOME (EXPENSES)

 

 

Company

 

Three-month periods ended

 

Nine-month periods ended

 

09.30.18

 

09.30.17

 

09.30.18

 

09.30.17

Recovered expenses and fines (1)

            1,498,993

 

                 87,729

 

            3,682,924

 

               267,286

Provisions for labor, tax, civil, regulatory and contingent liabilities (Note 18) (2)

              (528,191)

 

              (191,878)

 

           (1,144,391)

 

              (640,383)

Net gain (loss) on asset disposal/loss

                 39,764

 

                  (2,373)

 

                 31,163

 

                (19,310)

Other operating income (expenses)

               104,664

 

                (15,672)

 

               624,737

 

              (104,970)

Total

            1,115,230

 

              (122,194)

 

            3,194,433

 

              (497,377)

 

 

 

 

 

 

 

 

Other operating income

            1,643,421

 

                 87,729

 

            4,338,824

 

               267,286

Other operating expenses

              (528,191)

 

              (209,923)

 

           (1,144,391)

 

              (764,663)

Total

            1,115,230

 

              (122,194)

 

            3,194,433

 

              (497,377)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

Three-month periods ended

 

Nine-month periods ended

 

09.30.18

 

09.30.17

 

09.30.18

 

09.30.17

Recovered expenses and fines (1)

            1,513,503

 

                 88,450

 

            3,748,283

 

               270,572

Provisions for labor, tax, civil, regulatory and contingent liabilities (Note 18) (2)

              (532,523)

 

              (190,160)

 

           (1,156,410)

 

              (650,654)

Net gain (loss) on asset disposal/loss

                 40,652

 

                  (3,331)

 

                 32,100

 

                (22,921)

Other operating income (expenses)

              (150,720)

 

                (19,705)

 

              (292,021)

 

                (93,975)

Total

               870,912

 

              (124,746)

 

            2,331,952

 

              (496,978)

 

 

 

 

 

 

 

 

Other operating income

            1,554,155

 

                 88,450

 

            3,780,383

 

               270,572

Other operating expenses

              (683,243)

 

              (213,196)

 

           (1,448,431)

 

              (767,550)

Total

               870,912

 

              (124,746)

 

            2,331,952

 

              (496,978)

(1)     For the nine-month period ended September 30, 2018, includes tax credits amount to R$3,356,687  (Company) and R$3,386,433 (Consolidated), arising from the final court proceeding in favor of the Company and its subsidiary TData, which recognized the right to exclude ICMS (VAT) from the basis of calculation of PIS and COFINS contributions for the periods from September 2003 to June 2017 and July 2004 to June 2013 (notes 7 and 26).

 

(2)     The amounts of provisions for labor, tax, civil, regulatory and contingent liabilities, for the nine-month period ended September 30, 2018, include write-offs of judicial deposits in the amount of R$160,715.

 

 

 

 

Page 51


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

26) FINANCIAL INCOME (EXPENSES)

 

 

Company

 

Three-month periods ended

 

Nine-month periods ended

 

09.30.18

 

09.30.17

 

09.30.18

 

09.30.17

Financial Income

 

 

 

 

 

 

 

Interest income

                    52,154

 

                   160,306

 

                   161,154

 

                   491,371

Interest receivable (customers, taxes and other)

                    22,615

 

                    30,865

 

                    85,646

 

                   102,226

Gain on derivative transactions (Note 30)

                    88,676

 

                    85,437

 

                   212,435

 

                   294,446

Foreign exchange variations on loans and financing (Note 20)

                    12,294

 

                    46,026

 

                    21,753

 

                   108,950

Other revenues from foreign exchange and monetary variation (1)

                1,167,816

 

                    96,958

 

                3,111,753

 

                   323,932

Other financial income

                           59

 

                    32,215

 

                     (1,656)

 

                   107,949

Total

                1,343,614

 

                   451,807

 

                3,591,085

 

                1,428,874

 

 

 

 

 

 

 

 

Financial Expenses

 

 

 

 

 

 

 

Loan, financing, debenture, finance lease charges and contingent consideration (Note 20)

                  (115,268)

 

                  (240,733)

 

                  (380,371)

 

                  (775,434)

Foreign exchange variation on loans and financing (Note 20)

                   (18,867)

 

                     (8,839)

 

                   (55,815)

 

                   (88,817)

Loss on derivative transactions (Note 30)

                   (88,197)

 

                  (115,008)

 

                  (215,953)

 

                  (361,249)

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

                   (47,586)

 

                   (34,684)

 

                  (109,775)

 

                  (110,720)

Other expenses with foreign exchange and monetary variation

                  (354,885)

 

                  (210,365)

 

                  (731,536)

 

                  (747,096)

IOF, Pis, Cofins and other financial expenses (2)

                   (84,413)

 

                   (41,984)

 

                  (229,611)

 

                  (139,717)

Total

                  (709,216)

 

                  (651,613)

 

               (1,723,061)

 

               (2,223,033)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

Three-month periods ended

 

Nine-month periods ended

 

09.30.18

 

09.30.17

 

09.30.18

 

09.30.17

Financial Income

 

 

 

 

 

 

 

Interest income

                    59,225

 

                   173,724

 

                   189,024

 

                   543,878

Interest receivable (customers, taxes and other)

                    25,480

 

                    32,356

 

                    96,998

 

                   104,396

Gain on derivative transactions (Note 30)

                    90,240

 

                    88,789

 

                   215,128

 

                   297,798

Foreign exchange variations on loans and financing (Note 20)

                    12,294

 

                    46,026

 

                    21,753

 

                   108,950

Other revenues from foreign exchange and monetary variation (1)

                1,177,052

 

                    98,243

 

                3,155,692

 

                   329,579

Other financial income

                      7,673

 

                    39,303

 

                    20,916

 

                   128,752

Total

                1,371,964

 

                   478,441

 

                3,699,511

 

                1,513,353

 

 

 

 

 

 

 

 

Financial Expenses

 

 

 

 

 

 

 

Loan, financing, debenture, finance lease charges and indemnification liability (Note 20)

                  (115,268)

 

                  (240,733)

 

                  (380,371)

 

                  (775,434)

Foreign exchange variation on loans and financing (Note 20)

                   (18,867)

 

                     (8,839)

 

                   (55,815)

 

                   (88,817)

Loss on derivative transactions (Note 30)

                   (89,920)

 

                  (115,409)

 

                  (220,241)

 

                  (361,650)

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

                   (48,147)

 

                   (35,382)

 

                  (111,986)

 

                  (112,799)

Other expenses with foreign exchange and monetary variation

                  (360,705)

 

                  (205,363)

 

                  (744,019)

 

                  (756,626)

IOF, Pis, Cofins and other financial expenses (2)

                   (85,350)

 

                   (43,227)

 

                  (234,988)

 

                  (143,197)

Total

                  (718,257)

 

                  (648,953)

 

               (1,747,420)

 

               (2,238,523)

(1)     For the nine-month period ended September 30, 2018, includes monetary restatements, in the amount of R$2,856,198 (Company) and R$2,885,432 (Consolidated), on the tax credits arising from the final court proceeding in favor of the Company and its subsidiary TData, which recognized the right to exclude ICMS (VAT) from the basis of calculation of PIS and COFINS contributions for the periods from September 2003 to June 2017 and July 2004 to June 2013 (notes 7 and 25).

 

(2)     For the ine-month period ended September 30, 2018, includes the amount of R$134,173 of PIS and COFINS on the monetary restatement credits described in item (1) above.

 

Page 52


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

27) BALANCES AND TRANSACTIONS WITH RELATED PARTIES

 

a)   Balances and transactions with related parties

 

The main balances of assets and liabilities with related parties arises 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, Telefónica International Wholesale Services Espanha, Telefónica USA; and Media Net Br;

 

g)   Operations relating to the purchase of internet content, advertising and auditing services by Telefónica Group companies;

 

h)   Marketing services provided by Group companies;

 

i)    Information access services through the electronic communications network, provided by Telefonica de Espanha;

 

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 Digital;

 

p)   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;

 

Page 53


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

r)    Integrated e-learning, online education and training solutions provided by Telefônica Serviços de Ensino (former Telefônica Learning Services Brasil);

 

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

 

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;

 

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

 

x)   Tower operations of the Company's towers and customer portfolio to Telxius Torres Brasil.

 

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

 

 

Page 54


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

 

The following table summarizes the consolidated balances with related parties:

 

 

 

 

Balance Sheet - Assets

 

 

 

09/30/18

12/31/17

Companies

Type of transaction

 

Cash and cash equivalents

 

Accounts receivable, net

 

Other assets

 

Cash and cash equivalents

 

Accounts receivable, net

 

Other assets

Parent Companies

 

 

 

 

 

 

 

 

 

 

 

 

 

SP Telecomunicações  Participações

d) / l)

 

-

 

   -

 

   9,584

 

-

 

  531

 

46

Telefónica LatinoAmerica Holding 

l)

 

-

 

   -

 

58,271

 

-

 

-

 

  135,486

Telefónica

l)

 

-

 

   -

 

30,488

 

-

 

  492

 

  158

 

 

 

-

 

   -

 

98,343

 

-

 

   1,023

 

  135,690

Other Group companies

 

 

 

 

 

 

 

 

 

 

 

 

 

Colombia Telecomunicaciones ESP

k)

 

-

 

  1,232

 

   5,786

 

-

 

   1,210

 

   4,505

Media Networks Brasil Soluções Digitais

a) / d)

 

-

 

  1,345

 

  169

 

-

 

   1,017

 

   2,106

T.O2 Germany GMBH CO. OHG

k)

 

-

 

20,868

 

-

 

-

 

22,315

 

-

Telefónica Venezolana (former Telcel Telecom. Celulares C. A.)

k)

 

-

 

  5,899

 

   2,196

 

-

 

   6,067

 

-

Telefônica Digital España

g) / h) / l)

 

-

 

  198

 

   2,851

 

-

 

   1,929

 

-

Telefônica Factoring do Brasil

a) / d) / l)

 

-

 

  5,135

 

  111

 

-

 

12,337

 

93

Telefónica Global Technology

l)

 

-

 

   -

 

15,136

 

-

 

-

 

13,600

Telefônica Inteligência e Segurança Brasil

a) / d) / l)

 

-

 

  806

 

   1,030

 

-

 

  271

 

   1,013

Telefónica International Wholesale Services Espanha

  j)  / k)

 

-

 

73,107

 

-

 

-

 

69,087

 

-

Telefônica Serviços de Ensino (former Telefônica Learning Services Brasil)

a)

 

-

 

  368

 

-

 

-

 

  175

 

-

Telefónica Moviles Argentina

k)

 

-

 

  4,386

 

-

 

-

 

   7,194

 

-

Telefónica Moviles Del Espanha

k)

 

-

 

  9,529

 

-

 

-

 

   8,918

 

-

Telefónica USA

j)

 

-

 

  8,908

 

-

 

-

 

   6,248

 

-

Telfisa Global BV

q)

 

14,787

 

   -

 

-

 

   9,523

 

-

 

-

Telxius Cable Brasil

a) / d) / l) / p)

 

-

 

51,736

 

   5,326

 

-

 

28,981

 

  819

Telxius Torres Brasil

d) / p) / x)

 

-

 

10,358

 

   5,406

 

-

 

14,666

 

   5,106

Terra Networks Chile, Terra Networks México, Terra Networks Perú and Terra Networks Operation

g) / h)

 

-

 

  4,691

 

-

 

-

 

   8,159

 

-

Other

a) / d) / g) / h) / k) / l) / p)

 

-

 

10,789

 

   3,914

 

-

 

11,424

 

   3,801

 

 

 

14,787

 

  209,355

 

41,925

 

   9,523

 

  199,998

 

31,043

Total

 

 

14,787

 

  209,355

 

  140,268

 

   9,523

 

  201,021

 

  166,733

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

14,787

 

  209,355

 

  138,993

 

   9,523

 

  201,021

 

  164,249

Non-current

 

 

    -

 

   -

 

   1,275

 

-

 

-

 

   2,484

 

 

 

Page 55


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

 

 

 

 

Balance Sheet - Liabilities

 

 

 

 

09.30.18

 

12.31.17

Companies

 

Type of transaction

 

Trade  accounts payable and other payables

 

Other liabilities

 

Trade  accounts payable and other payables

 

Other liabilities

Parent Companies

 

 

 

 

 

 

 

 

 

 

SP Telecomunicações  Participações

 

 l)

 

-

 

21,978

 

   6,656

 

15,000

Telefónica LatinoAmerica Holding 

 

l)

 

  100

 

-

 

86

 

-

Telefónica

 

l) / m) / n)

 

  450

 

  109,925

 

   1,205

 

99,950

 

 

 

 

  550

 

  131,903

 

   7,947

 

  114,950

Other Group companies

 

 

 

 

 

 

 

 

 

 

Colombia Telecomunicaciones S.A. ESP

 

k)

 

   1,107

 

-

 

  471

 

-

Fundação Telefônica

 

t)

 

-

 

  141

 

-

 

  137

Media Networks Latina America SAC

 

b)

 

10,047

 

-

 

   4,248

 

-

Media Networks Brasil Soluções Digitais

 

f)

 

38,635

 

  318

 

33,751

 

  318

T.O2 Germany GMBH CO. OHG

 

k)

 

   6,117

 

-

 

   5,477

 

-

Telefónica Venezolana (former Telcel Telecom. Celulares C. A.)

 

k)

 

   5,397

 

-

 

   5,240

 

-

Telefónica Compras Electrónicas

 

v)

 

24,913

 

-

 

24,311

 

-

Telefônica Digital España

 

g) / h) / l) / o)

 

54,812

 

-

 

46,645

 

-

Telefônica Factoring do Brasil

 

l) / s)

 

-

 

  468

 

-

 

  146

Telefónica Global Technology

 

e) / l)

 

19,177

 

-

 

15,671

 

-

Telefônica Inteligência e Segurança Brasil

 

c) / l)

 

14,360

 

27

 

15,336

 

27

Telefónica International Wholesale Services Espanha

 

f) / k)

 

46,405

 

-

 

44,240

 

   8

Telefônica Serviços de Ensino (former Telefônica Learning Services Brasil)

 

r)

 

18,286

 

-

 

37,931

 

-

Telefónica Moviles Argentina

 

k)

 

   4,434

 

-

 

   3,865

 

-

Telefónica Moviles Del Espanha

 

k)

 

   7,032

 

-

 

   3,589

 

-

Telefónica USA

 

f)

 

16,585

 

  207

 

-

 

  171

Telxius Cable Brasil

 

f) / l)

 

80,428

 

   2,067

 

44,037

 

   2,068

Telxius Torres Brasil

 

l) / x)

 

34,294

 

   6,337

 

37,718

 

   7,757

Terra Networks México, Terra Networks Perú and Terra Networks Operation

 

h)

 

   1,060

 

-

 

   7,633

 

-

Other

 

 g) / h) / i) / k) / l) / u) / w)

 

23,089

 

   1,174

 

12,734

 

  405

 

 

 

 

  406,178

 

10,739

 

  342,897

 

11,037

Total

 

 

 

  406,728

 

  142,642

 

  350,844

 

  125,987

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

  406,728

 

  130,702

 

  350,844

 

  124,749

Non-current

 

 

 

-

 

11,940

 

-

 

   1,238

 

 

Page 56


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

 

 

 

Income statement

 

 

 

Nine-month periods ended

 

 

 

09.30.18

 

09.30.17

Companies

Type of transaction

 

Operating revenues

 

Cost, despesas and other expenses (revenues) operating

 

Financial result

 

Operating revenues

 

Cost, despesas and other expenses (revenues) operating

 

Financial result

Parent Companies

 

 

 

 

 

 

 

 

 

 

 

 

 

SP Telecomunicações  Participações

d) / l)

 

-

 

  253

 

-

 

-

 

  201

 

-

Telefónica LatinoAmerica Holding 

l)

 

-

 

12,583

 

10,964

 

-

 

29,664

 

   5,477

Telefónica

l) / m) / n)

 

-

 

(263,997)

 

   (18,321)

 

  (4)

 

(254,973)

 

   4,436

 

 

 

-

 

(251,161)

 

  (7,357)

 

  (4)

 

(225,108)

 

   9,913

Other Group companies

 

 

 

 

 

 

 

 

 

 

 

 

 

Colombia Telecomunicaciones S.A. ESP

k)

 

  110

 

(471)

 

  761

 

  463

 

  253

 

  349

Companhia AIX de Participações

a) / u)

 

-

 

   -

 

-

 

23

 

   (16,994)

 

-

Fundação Telefônica

l) / t)

 

-

 

(9,778)

 

-

 

-

 

  (9,514)

 

-

Media Networks Brasil Soluções Digitais

a) / d) / f)

 

   1,588

 

   (81,290)

 

-

 

  252

 

   (37,176)

 

-

Media Networks Latina America SAC

b)

 

-

 

   (24,523)

 

  (1,250)

 

-

 

   (23,663)

 

   (79)

Telefônica Serviços de Ensino (former Telefônica Learning Services Brasil)

a) / r)

 

  947

 

   (38,418)

 

-

 

  224

 

   (35,382)

 

-

T.O2 Germany GMBH CO. OHG

k)

 

  137

 

(1,948)

 

-

 

   (39)

 

(198)

 

-

Telefónica Compras Electrónicas

v)

 

-

 

   (25,094)

 

-

 

-

 

   (19,722)

 

-

Telefônica Digital España

g) / h) / l) / o)

 

-

 

   (92,229)

 

  512

 

-

 

   (54,467)

 

  (1,098)

Telefônica Factoring do Brasil

a) / d) / l) / s)

 

   4,244

 

  159

 

64

 

56

 

  776

 

39

Telefónica Global Technology, S.A.U.

 e) / l)

 

   4

 

   (37,746)

 

  (1,368)

 

-

 

   (23,208)

 

  (9)

Telefônica Inteligência e Segurança Brasil 

a) / c) / d) / l)

 

   1,188

 

   (23,817)

 

-

 

  563

 

   (23,106)

 

-

Telefónica International Wholesale Services Espanha

 f) / j)  / k)

 

41,397

 

   (42,686)

 

   6,696

 

48,723

 

   (22,428)

 

  (3,775)

Telefónica Moviles Argentina

k)

 

   5,360

 

(2,975)

 

-

 

   2,980

 

   6,616

 

-

Telefónica Moviles Del Espanha

k)

 

(249)

 

(4,898)

 

-

 

  675

 

  (1,657)

 

-

Telefónica USA

f) / j)

 

   1,299

 

(4,431)

 

  281

 

   2,104

 

   (11,918)

 

  (2,126)

Telxius Cable Brasil

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

 

46,702

 

(150,227)

 

  (7,453)

 

11,088

 

(154,767)

 

  787

Telxius Torres Brasil

d) / l) / p) / x)

 

   2,450

 

   (88,062)

 

-

 

-

 

   (78,398)

 

-

Terra Networks Chile, Terra Networks México, Terra Networks Perú and Terra Networks Operation

g) / h)

 

-

 

(3,259)

 

  786

 

-

 

  (4,747)

 

(290)

Other

a) / d) / g) / h) / i) / k) / l) / p) / u) / w)

 

   3,315

 

   (42,037)

 

   1,083

 

   7,643

 

   (28,636)

 

71

 

 

 

  108,492

 

(673,730)

 

  112

 

74,755

 

(538,336)

 

  (6,131)

Total

 

 

  108,492

 

(924,891)

 

  (7,245)

 

74,751

 

(763,444)

 

   3,782

 

 

b)   Management compensation

 

Consolidated key management personnel compensation paid by the Company to its Board of Directors and Statutory Officers were R$17,954 and R$16,101 for the nine-month ended September 30, 2018 and 2017 respectively. Of this amount, R$12,570 (R$10,455 at September 30, 2017) corresponds to salaries, benefits and social charges and R$5,384 (R$5,646 at September 30, 2017) to variable compensation.

 

These amounts were recorded as expenses with personnel under the General and administrative expenses group of accounts (Note 24).

 

For the nine-month ended September 30, 2018 and 2017, 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 their shares, which were also offered to management and employees of its subsidiaries, including Telefônica Brasil and its 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.

 

Page 57


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(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 details of these plans are the same as in Note 29) Share-Based Payment Plans, as disclosed in the financial statements for the fiscal year ended December 31, 2017.

 

The main plans in force at September 30, 2018 were:

 

·       Performance & Investment Plan (“PIP”) to reward senior management's global commitment: cycle 2015-2018 (October 1, 2015 to September 30, 2018): finalized in September 2018 and, since the TSR was not reached, there was no delivery of shares of Telefónica to the Company's executives.

 

·       Talent for the Future Share Plan (“TFSP”) to reward the global commitment: cycle 2015-2018 cycle (October 1, 2015 to September 30, 2018): finalized in September 2018 and, since the TSR was not reached, there was no delivery of shares of Telefónica to the Company's executives.

 

Cycle 2018-2020 (January 1, 2018 to December 31, 2020): having the potential right to receive 123,250 shares of Telefónica (includes initial amounts). The delivery of the shares is subject to: (i) maintaining an active working relationship with the Telefónica Group on the date of consolidation of the cycle; and (ii) the achievement of results that represent the fulfillment of the objectives established for the plan.

 

·       Performance Share Plan ("PSP") to reward the global commitment: 2018-2020 cycle (January 1, 2018 to December 31, 2020): with 116 active executives (including 3 executives appointed under the Telefónica, having the potential right to receive 990,660 shares of Telefónica. The delivery of the shares is subject to: (i) maintaining an active working relationship with the Telefónica Group on the date of consolidation of the cycle; and (ii) the achievement of results that represent the fulfillment of the objectives established for the plan.

 

At September 28, 2018, the value of Telefónica’ share price was Eur 6.8180.

 

The expenses of the Company and its subsidiaries with the share-based compensation plans described above, where applicable, are recorded as personnel expenses, divided into the groups Cost of Services, Selling expenses and General and Administrative Expenses (Note 24), corresponding to R$11,196 and R$5,540 for the nine-month periods ended September 30, 2018 and 2017.

 

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, TData, Terra Networks and TGLog

CTB

 

Defined benefit (DB)

 

Telefônica Brasil

 

Telefônica Brasil

Telefônica BD

 

Defined benefit (DB)

 

VisãoPrev

 

Telefônica Brasil

TCOPREV

 

Hybrid

 

VisãoPrev

 

Telefônica Brasil

VISÃO

 

Defined contribution (DC) / Hybrid

 

VisãoPrev

 

Telefônica Brasil, TData, Terra Networks and TGLog

 

 

The details of these plans are the same as in Note 30) Pension Plans and Other Post-Employment Benefits, as disclosed in the financial statements for the fiscal year ended December 31, 2017.

 

Page 58


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

 

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

 

 

Consolidated

 

Plans with surplus

 

Plans with deficit

 

Total

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 combinations (Note 1.c)

                     13

 

                   (680)

 

                   (667)

Balances at 09/30/17

                 9,672

 

            (352,668)

 

            (342,996)

   Current service cost

                   (295)

 

                (2,239)

 

                (2,534)

   Net interest on net defined benefit liabilities/assets

                    259

 

                (8,921)

 

                (8,662)

   Contributions and benefits paid by the employers

                   (358)

 

                 3,741

 

                 3,383

   Effects on comprehensive income

                    555

 

            (171,851)

 

            (171,296)

Balances at 12/31/17

                 9,833

 

            (531,938)

 

            (522,105)

   Current service cost

                (1,834)

 

              (10,656)

 

              (12,490)

   Net interest on net defined benefit liabilities/assets

                    767

 

              (39,741)

 

              (38,974)

   Contributions and benefits paid by the employers

                 1,476

 

               13,128

 

               14,604

Balances at 09/30/18

               10,242

 

            (569,207)

 

            (558,965)

 

Of the surplus amounts shown in the table above, the Company recognized consolidated amounts of R$10,242 and R$9,833 at September 30, 2018 and December 31, 2017, respectively (Note 10).

 

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.

As long as these derivatives contracts qualify for hedge accounting, the hedged 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, 2018 and December 31, 2017, 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 anticipated liquidation of the contract.

 

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.

Page 59


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

 

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.

 

 

 

Consolidated

 

 

 

 

 

 

Accumulated effects from fair value

 

 

Notional Value

 

Amount receivable (payable)

Description

 

09.30.18

 

12.31.17

 

09.30.18

 

12.31.17

Long position

 

           1,140,593

 

           1,181,056

 

             132,830

 

             164,405

 

 

 

 

 

 

 

 

 

Foreign Currency

 

             300,991

 

             326,149

 

               84,164

 

             102,876

US$  (1) (2)

 

             188,953

 

             201,445

 

               38,534

 

               49,110

EUR  (2)

 

               52,194

 

               11,000

 

                 6,219

 

                    449

LIBOR US$  (1)

 

               59,844

 

             113,704

 

               39,411

 

               53,317

 

 

 

 

 

 

 

 

 

Floating rate

 

             686,135

 

             657,868

 

               20,394

 

               28,263

CDI (1) (2)

 

             478,603

 

             263,518

 

                 9,029

 

                     82

TJLP (4)

 

             207,532

 

             394,350

 

               11,365

 

               28,181

 

 

 

 

 

 

 

 

 

Inflation rates

 

             153,467

 

             197,039

 

               28,272

 

               33,266

IPCA (3) (5)

 

             153,467

 

             166,775

 

               28,272

 

               33,266

IGPM (6)

 

                        -

 

               30,264

 

                        -

 

                        -

 

 

 

 

 

 

 

 

 

Short position

 

          (1,140,593)

 

          (1,181,056)

 

              (21,627)

 

              (20,651)

 

 

 

 

 

 

 

 

 

Floating rate

 

            (632,068)

 

            (860,686)

 

              (21,627)

 

              (20,651)

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

 

            (632,068)

 

            (860,686)

 

              (21,627)

 

              (20,651)

 

 

 

 

 

 

 

 

 

Foreign Currency

 

            (508,525)

 

            (320,370)

 

                        -

 

                        -

US$  (2)

 

            (352,097)

 

            (183,824)

 

                        -

 

                        -

EUR  (1) (2)

 

            (126,506)

 

              (79,694)

 

                        -

 

                        -

LIBOR US$  (1)

 

              (29,922)

 

              (56,852)

 

                        -

 

                        -

 

 

 

 

 

 

 

 

 

 

 

  Long position

 

 

 

             132,830

 

             164,405

 

 

     Current

 

 

 

             105,785

 

               87,643

 

 

     Non-current

 

 

 

               27,045

 

               76,762

 

 

 

 

 

 

 

 

 

 

 

  Short position

 

 

 

              (21,627)

 

              (20,651)

 

 

     Current

 

 

 

                (3,005)

 

                (5,239)

 

 

     Non-current

 

 

 

              (18,622)

 

              (15,412)

 

 

  Amounts receivable, net 

 

             111,203

 

             143,754

(1) Foreign currency swaps (US$ and LIBOR) x CDI (R$145,968) - swap transactions for varying debt repayment dates held to hedge currency risk affecting the Company's loans in US$ (carrying amount R$142,631).

Page 60


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

(2) Foreign currency swaps (Euro and CDI x Euro) (R$67,940) and (US$ and CDI x US$) (R$194,189) - maturing through November 13, 2018 to hedge currency risk affecting net amounts payable (carrying amount R$67,964 in euros) and receivables (carrying amount R$194,173 in US$).

 

(3) IPCA x CDI rate swaps (R$41,745) - maturing through 2019 to hedge the same flow as the debentures (4th issue - 3rd series) indexed to the IPCA (carrying amount R$42,236).

 

(4) TJLP x CDI swaps (R$217,915) - maturing through 2019 to hedge the risk of TJLP variation on loan with BNDES (carrying amount R$228,605).

 

(5) IPCA x CDI swaps (R$226,421) - maturing in 2033 to hedge risk of change in finance lease rate pegged to IPCA (carrying amount R$227,154).

 

(6) The information of December 31, 2017 refers to the IGPM swap x CDI , swap operations contracted with the purpose of protecting the risk of IGPDI variation in regulatory commitments linked to a 4G license. The commitment of the 4G license was withdrawn from the EAD on January 31, 2018 for the R$42,842 (note 21) and the respective swap operations were finalized on the same date.

 

The table below shows the breakdown of swaps maturing after September 30, 2018:

 

 

 

Company / Consolidated

 

 

Maturing in

 

 

Swap contract

 

2018

 

2019

 

2020

 

2021 onwards

 

Amount receivable (payable) at 09.30.18

Foreign currency x CDI

 

23,330

 

53,576

 

 -

 

-

 

76,906

CDI x Foreign Currency

 

13,511

 

  (223)

 

-

 

-

 

13,288

TJLP x CDI

 

   4,317

 

   7,048

 

-

 

-

 

11,365

IPCA x CDI

 

   232

 

10,574

 

   1,457

 

  (2,619)

 

   9,644

Total

 

41,390

 

70,975

 

   1,457

 

  (2,619)

 

   111,203

 

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 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, 2018 was R$955 (R$1,289 at December 31, 2017).

 

At September 30, 2018 and 2017, the transactions with derivatives generated consolidated negative (net) result of R$5,113 and R$63,852, respectively (Note 26).

 

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

CVM Resolution 604/09 requires listed companies to comply with CPC 40 (R1) 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, 2018.

Page 61


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

 

Consolidated

Transaction

Risk

 

Probable

 

25% depreciation

 

50% depreciation

Hedge (long position)

Derivatives (depreciation risk EUR)

 

  (67,940)

 

  (84,925)

 

   (101,909)

Payables in EUR

Debt (appreciation risk EUR)

 

  (26,266)

 

  (32,833)

 

  (39,399)

Receivables in EUR

Debt (depreciation risk EUR)

 

   94,250

 

117,812

 

141,375

 

Net Exposure

 

   44

 

   54

 

   67

 

 

 

 

 

 

 

 

Hedge (short position)

Derivatives (depreciation risk US$)

 

   (194,189)

 

   (242,736)

 

   (291,284)

Payables in US$

Debt (appreciation risk US$)

 

   (210,130)

 

   (262,662)

 

   (315,195)

Receivables in US$

Debt (depreciation risk US$)

 

404,303

 

505,378

 

606,454

 

Net Exposure

 

  (16)

 

  (20)

 

  (25)

 

 

 

 

 

 

 

 

Hedge (long position)

Derivatives (risk of decrease in IPCA)

 

268,168

 

248,125

 

230,790

Debt in IPCA

Debt (risk of increase in IPCA)

 

   (348,141)

 

   (328,098)

 

   (310,763)

 

Net Exposure

 

  (79,973)

 

  (79,973)

 

  (79,973)

 

 

 

 

 

 

 

 

Hedge (long position)

Derivatives (risk of decrease in UMBND)

 

145,968

 

181,977

 

217,802

Debt in UMBND

Debt (risk of increase in UMBND)

 

   (142,631)

 

   (178,431)

 

   (213,742)

 

Net Exposure

 

  3,337

 

  3,546

 

  4,060

 

 

 

 

 

 

 

 

Hedge (long position)

Derivatives (risk of decrease in TJLP)

 

217,915

 

216,622

 

215,358

Debt in TJLP

Debt (risk of increase in TJLP)

 

(1,098,823)

 

(1,097,469)

 

(1,096,146)

 

Net Exposure

 

   (880,908)

 

   (880,847)

 

   (880,788)

 

 

 

 

 

 

 

 

Hedge (CDI position)

 

 

 

 

 

 

 

   Hedge US$ and EUR (short and long position)

Derivatives (risk of decrease in CDI)

 

   (274,096)

 

   (273,787)

 

   (273,483)

   Hedge IPCA (short position)

Derivatives (risk of increase in CDI)

 

   (268,168)

 

   (248,125)

 

   (230,790)

   Hedge UMBND (short position)

Derivatives (risk of increase in CDI)

 

   (145,968)

 

   (181,977)

 

   (217,802)

   Hedge TJLP (short position)

Derivatives (risk of increase in CDI)

 

   (217,915)

 

   (216,622)

 

   (215,358)

 

Net Exposure

 

   (906,147)

 

   (920,511)

 

   (937,433)

 

 

 

 

 

 

 

 

Total net exposure in each scenario

 

 

(1,863,663)

 

(1,877,751)

 

(1,894,092)

 

 

 

 

 

 

 

 

Net effect on changes in current fair value

 

 

   -

 

  (14,088)

 

  (30,429)

 

 

 

 

Page 62


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

The assumptions used by the Company for the sensitivity analysis at September 30, 2018 were as follows:

 

Risk Variable

 

Probable

 

25% depreciation

 

50% depreciation

US$

 

4.0039

 

5.0049

 

6.0059

EUR

 

4.6375

 

5.7969

 

6.9563

JPY

 

0.0353

 

0.0441

 

0.0529

IPCA

 

4.44%

 

5.55%

 

6.66%

IGPM

 

10.04%

 

12.54%

 

15.05%

IGP-DI

 

10.04%

 

12.55%

 

15.07%

UMBND

 

0.0782

 

0.0977

 

0.1172

TJLP

 

0.0656

 

0.0820

 

0.0984

CDI

 

6.39%

 

7.99%

 

9.59%

 

For calculation of the net exposure for the sensitivity analysis, all derivatives were considered at market value and hedged items designated for hedge for 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, 2018, 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, 2018 and December 31, 2017, 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 lowest 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 for which significant lower level of information to measure the fair value directly or indirectly observable; and


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

 

The following tables show the composition and classification of financial assets and liabilities at September 30, 2018 and December 31, 2017, considering the assumptions of IFRS 9. During the periods shown in the tables below, there were no transfers between fair value measurements of Level 3 and levels 1 and 2.

 

 

 

 

Page 63


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

Company

 

 

 

 

Fair value hierarchy

 

Book value

 

Fair value

 

 

Classification by category

 

 

09.30.18

 

12.31.17

 

09.30.18

 

12.31.17

Financial Assets 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents - Cash and banks (Note 3)

 

  Amortized cost 

 

 

 

   113,099

 

   114,556

 

   113,099

 

   114,556

Cash and cash equivalents - Short-term investments (Note 3)

 

  Measured at fair value through profit or loss  

 

  Level 2 

 

3,236,593

 

3,566,617

 

3,236,593

 

3,566,617

Trade accounts receivable (Note 4)

 

  Amortized cost 

 

 

 

8,566,785

 

8,413,403

 

8,566,785

 

8,413,403

Derivative transactions (Note 30)

 

  Measured at fair value through profit or loss  

 

  Level 2 

 

  15,470

 

2,480

 

  15,470

 

2,480

Derivative transactions (Note 30)

 

  Measured at fair value through OCI

 

  Level 2 

 

  89,698

 

  85,163

 

  89,698

 

  85,163

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-current

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments pledged as collateral

 

  Measured at fair value through profit or loss  

 

  Level 2 

 

  79,686

 

  81,472

 

  79,686

 

  81,472

Trade accounts receivable (Note 4)

 

  Amortized cost 

 

 

 

   173,797

 

   167,682

 

   173,797

 

   167,682

Derivative transactions (Note 30)

 

  Measured at fair value through OCI

 

  Level 2 

 

  27,045

 

  76,762

 

  27,045

 

  76,762

Total financial assets

 

 

 

 

 

  12,302,173

 

  12,508,135

 

  12,302,173

 

  12,508,135

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities  

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

 

 

 

 

 

Trade accounts payable, net (Note 15)

 

  Amortized cost 

 

 

 

9,054,673

 

8,560,844

 

9,054,673

 

8,560,844

Loans, financing and finance lease (Note 20)

 

  Amortized cost 

 

 

 

1,079,900

 

1,316,034

 

1,203,861

 

1,463,609

Loans, financing and finance lease (Note 20)

 

  Measured at fair value through profit or loss  

 

  Level 2 

 

   361,899

 

   304,921

 

   302,068

 

   317,231

Debentures (Note 20)

 

  Amortized cost 

 

 

 

  66,811

 

1,412,174

 

   247,288

 

1,532,427

Debentures (Note 20)

 

  Measured at fair value through profit or loss  

 

  Level 2 

 

1,537

 

312

 

1,576

 

1,490

Derivative transactions (Note 30)

 

  Measured at fair value through profit or loss  

 

  Level 2 

 

2,632

 

4,372

 

2,632

 

4,372

Derivative transactions (Note 30)

 

  Measured at fair value through OCI

 

  Level 2 

 

373

 

735

 

373

 

735

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-current

 

 

 

 

 

 

 

 

 

 

 

 

Loans, financing and finance lease (Note 20)

 

  Amortized cost 

 

 

 

   924,017

 

1,353,582

 

   870,909

 

1,291,974

Loans, financing and finance lease (Note 20)

 

  Measured at fair value through profit or loss  

 

  Level 2 

 

   320,149

 

   520,421

 

   318,276

 

   505,422

Contingent consideration (Note 20)

 

  Measured at fair value through profit or loss  

 

  Level 2 

 

   461,026

 

   446,144

 

   461,026

 

   446,144

Debentures (Note 20)

 

  Amortized cost 

 

 

 

3,049,599

 

3,068,243

 

2,878,927

 

2,866,372

Debentures (Note 20)

 

  Measured at fair value through profit or loss  

 

  Level 2 

 

  40,699

 

  40,010

 

  39,980

 

  37,717

Derivative transactions (Note 30)

 

  Measured at fair value through OCI

 

  Level 2 

 

  18,622

 

  15,412

 

  18,622

 

  15,412

Total financial liabilities

 

 

 

 

 

  15,381,937

 

  17,043,204

 

  15,400,211

 

  17,043,749

 

 

Page 64


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

Consolidated

 

 

 

 

Fair value hierarchy

 

Book value

 

Fair value

 

 

Classification by category

 

 

09.30.18

 

12.31.17

 

09.30.18

 

12.31.17

Financial Assets 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents - Cash and banks (Note 3)

 

  Amortized cost 

 

 

 

   113,070

 

   117,799

 

   113,070

 

   117,799

Cash and cash equivalents - Short-term investments (Note 3)

 

  Measured at fair value through profit or loss  

 

  Level 2 

 

3,600,684

 

3,932,539

 

3,600,684

 

3,932,539

Trade accounts receivable (Note 4)

 

  Amortized cost 

 

 

 

8,670,107

 

8,588,466

 

8,670,107

 

8,588,466

Derivative transactions (Note 30)

 

  Measured at fair value through profit or loss  

 

  Level 2 

 

  16,087

 

2,480

 

  16,087

 

2,480

Derivative transactions (Note 30)

 

  Measured at fair value through OCI

 

  Level 2 

 

  89,698

 

  85,163

 

  89,698

 

  85,163

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-current

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments pledged as collateral

 

  Measured at fair value through profit or loss  

 

  Level 2 

 

  79,953

 

  81,486

 

  79,953

 

  81,486

Trade accounts receivable (Note 4)

 

  Amortized cost 

 

 

 

   331,481

 

   273,888

 

   331,481

 

   273,888

Derivative transactions (Note 30)

 

  Measured at fair value through OCI

 

  Level 2 

 

  27,045

 

  76,762

 

  27,045

 

  76,762

Total financial assets

 

 

 

 

 

  12,928,125

 

  13,158,583

 

  12,928,125

 

  13,158,583

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

 

 

 

 

 

Trade accounts payable (Note 15)

 

  Amortized cost 

 

 

 

8,109,680

 

7,447,100

 

8,109,680

 

7,447,100

Loans, financing and finance lease (Note 20)

 

  Amortized cost 

 

 

 

1,079,900

 

1,316,034

 

1,203,861

 

1,463,609

Loans, financing and finance lease (Note 20)

 

  Measured at fair value through profit or loss  

 

  Level 2 

 

   361,899

 

   304,921

 

   302,068

 

   317,231

Debentures (Note 20)

 

  Amortized cost 

 

 

 

  66,811

 

1,412,174

 

   247,288

 

1,532,427

Debentures (Note 20)

 

  Measured at fair value through profit or loss  

 

  Level 2 

 

1,537

 

312

 

1,576

 

1,490

Derivative transactions (Note 30)

 

  Measured at fair value through profit or loss  

 

  Level 2 

 

2,632

 

4,504

 

2,632

 

    4,504

Derivative transactions (Note 30)

 

  Measured at fair value through OCI

 

  Level 2 

 

373

 

735

 

373

 

735

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-current

 

 

 

 

 

 

 

 

 

 

 

 

Loans, financing and finance lease (Note 20)

 

  Amortized cost 

 

 

 

   924,017

 

1,353,582

 

   870,909

 

1,291,974

Loans, financing and finance lease (Note 20)

 

  Measured at fair value through profit or loss  

 

  Level 2 

 

   320,149

 

   520,421

 

   318,276

 

   505,422

Debentures (Note 20)

 

  Amortized cost 

 

 

 

3,049,599

 

3,068,243

 

2,878,927

 

2,866,372

Debentures (Note 20)

 

  Measured at fair value through profit or loss  

 

  Level 2 

 

  40,699

 

  40,010

 

  39,980

 

  37,717

Contingent consideration (Note 20)

 

  Measured at fair value through profit or loss  

 

  Level 2 

 

   461,026

 

   446,144

 

   461,026

 

   446,144

Derivative transactions (Note 30)

 

  Measured at fair value through OCI

 

  Level 2 

 

  18,622

 

  15,412

 

  18,622

 

  15,412

Total financial liabilities

 

 

 

 

 

  14,436,944

 

  15,929,592

 

  14,455,218

 

  15,930,137

 

c) Capital management

The purpose of the Company's capital management is to ensure maintenance of a high credit rating before 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, obtain new loans, issue debentures and contract derivatives. For the quarter ended September 30, 2018, 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.

 

The Company’s ratio of consolidated debt to shareholders’ equity consists of the following:

 

 

Page 65


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

 

  Consolidated 

 

09.30.18

 

12.31.17

Cash and cash equivalents

3,713,754

 

4,050,338

Loans, financing, debentures, financial lease and contingent consideration

(6,305,637)

 

(8,461,841)

Derivative transactions, net

111,203

 

143,754

Short-term investment pledged as collateral

12,285

 

11,722

Asset guarantor of contingent consideration

461,026

 

446,144

Net debt

2,007,369

 

3,809,883

Net equity

71,461,496

 

69,461,358

Net debt-to-equity ratio

2.81%

 

5.48%

 

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

 

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

 

At September 30, 2018, 2.3% of financial debt was foreign-currency denominated (2.7% at December 31, 2017). 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$142,631 and R$225,254 at September 30, 2018 and December 31, 2017, 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$48,496 thousand and €14,660 thousand receivable at September 30, 2018 and US$16,953 thousand and €17,535 thousand receivable at December 31, 2017) 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. In the first quarter of 2017, the TJLP was 7.5%. As of the second quarter of 2017, the TJLP remained at 7.0% up to the end of the year. In the first quarter of 2018, the TJLP was 6.75%, declining to 6.60% in the second quarter of 2018, declining to 6.56% in the third quarter of 2018.

 

Page 66


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

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$3,600,684 at September 30, 2018 (R$3,932,539 at December 31, 2017), mostly in short-term CDI-based financial investments (Bank Deposit Certificates). The carrying amounts of these instruments approximate their fair values, as they may be redeemed in the short term.

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 structures the maturity dates of non-derivative financial contracts, as shown in Note 20, 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 are managed on a daily basis by the departments in charge to ensure 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 loan agreements:

 

At 09.30.18

 

Less than one year

 

From 1 to 2 years

 

From 2 to 5 years

 

Over 5 years

 

Total

Trade accounts payable (Note 15)

 

  8,109,680

 

   -

 

   -

 

   -

 

  8,109,680

Loans, financing and finance lease (Note 20)

 

  1,441,799

 

454,743

 

613,938

 

175,485

 

  2,685,965

Contingent consideration (Note 20)

 

   -

 

   -

 

   -

 

461,026

 

461,026

Debentures (Note 20)

 

   68,348

 

   66,948

 

  3,023,350

 

   -

 

  3,158,646

Derivative transactions (Note 30)

 

  3,005

 

   -

 

   -

 

   18,622

 

   21,627

Total

 

 9,622,832

 

521,691

 

  3,637,288

 

655,133

 

   14,436,944

 

 

 

 

 

 

 

 

 

 

 

At 12.31.17

 

Less than one year

 

From 1 to 2 years

 

From 2 to 5 years

 

Over 5 years

 

Total

Trade accounts payable (Note 15)

 

  7,447,100

 

   -

 

   -

 

   -

 

  7,447,100

Loans, financing and finance lease (Note 20)

 

  1,620,955

 

780,904

 

885,411

 

207,688

 

  3,494,958

Contingent consideration (Note 20)

 

   -

 

   -

 

   -

 

446,144

 

446,144

Debentures (Note 20)

 

  1,412,486

 

   66,252

 

  3,042,001

 

   -

 

  4,520,739

Derivative transactions (Note 30)

 

  5,239

 

   93

 

   -

 

   15,319

 

   20,651

Total

 

   10,485,780

 

847,249

 

  3,927,412

 

669,151

 

   15,929,592

 

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 emergency services that must be maintained for security or national defense reasons.

 

Page 67


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

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 counterpart and diversify this exposure across first tier financial institutions as per current credit policies of financial counterparties.

 

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 in significant costs, which include cleaning 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 identified, 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. 9605 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 foresees the hiring of outsourced service providers. These potential liabilities may involve labor claims by employees of the service providers who, in suits against the service provider and Company, request the conviction of the Company in a subsidiary manner, that is, we may be compelled to pay in the case the provider does not settle these obligations. There is also a more remote possibility that these employees will be treated as direct employees by the Company, which would generate the risk of a joint and several conviction. The demands that are known to Telefónica are already provided.

 

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, 2018, 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$850,000 for operational risks (including business interrupotion) 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. 12.846/2013 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.

Page 68


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

 

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.

 

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 several non-cancellable operating agreements maturing on different dates, with monthly payments.

 

At September 30, 2018, the total amounts corresponding to the full period of the contracts were as follows:  

 

 

 

Company

 

Consolidated

Up to 1 year

 

         2,517,801

 

         2,518,350

From 1 to 5 years

 

         7,535,620

 

         7,537,853

Over five years

 

         4,091,974

 

         4,092,705

Total

 

       14,145,395

 

       14,148,908

 

32) ADDITIONAL INFORMATION ON CASH FLOWS

 

a)   Reconciliation of cash flow financing activities

 

The following is a reconciliation of the consolidated cash flow financing activities for the nine-month periods ended September 30, 2018 and 2017.

 

 

 

 

 

Cash flows from financing activities

 

Cash flows from operating activities

 

Financing activities not involving cash and cash equivalents

 

 

 

 

At 12/31/16

 

Addtions

 

Write-offs (payments)

 

Write-offs (payments)

 

Financial charges and foreign exchange variation

 

Additions of financial lease and supplier financing

 

Interim and unclaimed dividends and interest on equity

 

At 09/30/17

Interim dividends and interest on equity

 

   2,195,031

 

-

 

  (1,304,161)

 

   -

 

   -

 

-

 

   2,634,585

 

   3,525,455

Loans and financing

 

   4,880,606

 

39,878

 

  (1,523,798)

 

   (240,508)

 

269,747

 

   280,019

 

-

 

   3,705,944

Finance lease

 

   374,428

 

-

 

   (27,667)

 

(8,985)

 

   41,355

 

   9,061

 

-

 

   388,192

Debentures

 

   3,554,307

 

   2,000,000

 

  (2,000,000)

 

   (446,309)

 

414,093

 

-

 

-

 

   3,522,091

Derivative financial instruments

 

   (28,377)

 

-

 

   (55,316)

 

  980

 

   63,876

 

-

 

-

 

   (18,837)

Contingent Consideration

 

   414,733

 

-

 

-

 

   -

 

   25,663

 

-

 

-

 

   440,396

Total

 

11,390,728

 

   2,039,878

 

  (4,910,942)

 

   (694,822)

 

814,734

 

   289,080

 

   2,634,585

 

11,563,241

 

 

 

Page 69


 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2018

(In thousands of Reais, unless otherwise stated)

 

 

 

 

 

Cash flows from financing activities

 

Cash flows from operating activities

 

Financing activities not involving cash and cash equivalents

 

 

 

 

 At 12/31/17

 

Addtions

 

Write-offs (payments)

 

Write-offs (payments)

 

Financial charges and foreign exchange variation

 

Additions of financial lease and supplier financing

 

Interim and unclaimed dividends and interest on equity

 

At 09/30/18

Interim dividends and interest on equity

 

   2,396,116

 

-

 

  (2,003,224)

 

   -

 

   -

 

-

 

   4,837,702

 

   5,230,594

Loans and financing

 

   3,109,498

 

-

 

  (1,172,354)

 

   (168,458)

 

191,045

 

   349,715

 

-

 

   2,309,446

Finance lease

 

   385,460

 

-

 

   (27,224)

 

  (10,425)

 

   15,255

 

13,453

 

-

 

   376,519

Debentures

 

   4,520,739

 

-

 

  (1,324,723)

 

   (231,702)

 

194,332

 

-

 

-

 

   3,158,646

Derivative financial instruments

 

  (143,754)

 

-

 

25,517

 

   -

 

 7,034

 

-

 

-

 

  (111,203)

Contingent Consideration

 

   446,144

 

-

 

-

 

   -

 

   14,882

 

-

 

-

 

   461,026

Total

 

10,714,203

 

-

 

  (4,502,008)

 

   (410,585)

 

422,548

 

   363,168

 

   4,837,702

 

11,425,028

 

b)   Financing transactions that do not involve cash

 

The main transactions that do not involve cash of the Company refer to the acquisition of assets through financial leases and income from financing with suppliers, as follows:

 

 

 

 

Company / Consolidated

 

 

 

 

 

Nine-month periods ended

 

 

 

 

 

09.30.18

 

09.30.17

Financing transactions with suppliers

 

 

 

 

349,715

 

280,019

Acquisition of assets through financial leases

 

 

 

 

13,453

 

9,061

Total

 

 

 

 

363,168

 

289,080

 

33) ADDITIONAL INFORMATION ON THE CONSOLIDATED INCOME STATEMENT - IFRS 15

 

The information for the nine-month of 2018 of net operating revenues includes the effects of the adoption of IFRS 15. To facilitate the understanding and comparability of information, we present below the consolidated income statement for the nine-month periods ended September 30, 2018 and 2017, excluding the effects of adopting IFRS 15 in 2018.

 

 

Nine-month period ended 09.30.18

 

Nine-month period ended 09.30.17

 

Income Statements  (IFRS 15)

 

IFRS adjustments 15

 

Income Statements  (IAS 18)

 

Income Statements  (IAS 18)

Net operating revenue

  32,377,261

 

(23,077)

 

  32,354,184

 

  32,173,292

   Cost of sales and services

(15,426,953)

 

  -

 

(15,426,953)

 

(15,172,547)

Gross profit

  16,950,308

 

(23,077)

 

  16,927,231

 

  17,000,745

 

 

 

 

 

 

 

 

Operating income (expenses)

   (9,217,666)

 

(40,399)

 

   (9,258,065)

 

(12,144,321)

   Selling expenses

   (9,653,228)

 

(40,399)

 

   (9,693,627)

 

   (9,812,347)

   General and administrative expenses

   (1,896,390)

 

  -

 

   (1,896,390)

 

   (1,834,996)

   Other operating income

3,780,383

 

  -

 

3,780,383

 

270,572

   Other operating expenses

   (1,448,431)

 

  -

 

   (1,448,431)

 

   (767,550)

Operating income

7,732,642

 

(63,476)

 

7,669,166

 

4,856,424

 

 

 

 

 

 

 

 

   Financial income

3,699,511

 

  -

 

3,699,511

 

1,513,353

   Financial expenses

   (1,747,420)

 

  -

 

   (1,747,420)

 

   (2,238,523)

   Equity pickup

   (4,914)

 

  -

 

   (4,914)

 

1,362

Income before taxes

9,679,819

 

(63,476)

 

9,616,343

 

4,132,616

   Income and social contribution taxes

   (2,238,239)

 

  21,582

 

   (2,216,657)

 

   (1,040,781)

 

 

 

 

 

 

 

 

Net income for the period

7,441,580

 

(41,894)

 

7,399,686

 

3,091,835

 

Page 70

 

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 1, 2018

 

By:

/s/ Luis Carlos da Costa Plaster

 

 

 

 

Name:

Luis Carlos da Costa Plaster

 

 

 

 

Title:

Investor Relations Director