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FORM 6-K

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934

For the month of February, 2019

           Brazilian Distribution Company           
(Translation of Registrant’s Name Into English)

Av. Brigadeiro Luiz Antonio,
3142 São Paulo, SP 01402-901
     Brazil     
(Address of Principal Executive Offices)

        (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   X  

(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   X  

        (Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.)

Yes ___ No   X  

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Companhia Brasileira de Distribuição

 

Consolidated Financial Statements

                                  

Years ended December 31, 2018 and 2017

 

 

Index
Independent auditor’s report on individual and consolidated financial statements	3
Message from management	9
Report of audit committee	11
Management statement on the financial statements	14
Management statement on the independent auditor’s report	15
Financial statements
Consolidated Balance Sheet	16
Consolidated Statement of operations	18
Consolidated Statement of comprehensive income	19
Consolidated Statement of changes in shareholders’ equity	20
Consolidated Statement of cash flows	21
Consolidated Statement of value added	24
Notes to the consolidated financial statements	25

 

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INDEPENDENT AUDITOR’S REPORT ON INDIVIDUAL AND CONSOLIDATED FINANCIAL STATEMENTS

 

To the Shareholders of

Companhia Brasileira de Distribuição

São Paulo - SP

 

Opinion

 

We have audited the individual and consolidated financial statements of Companhia Brasileira de Distribuição (the “Company”), identified as Parent Company and Consolidated, respectively, which comprise the statement of financial position as at December 31, 2018 and the statements of profit or loss, of comprehensive income, of changes in equity and cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies.

 

In our opinion, the accompanying financial statements present fairly, in all material respects, the individual and consolidated financial position of Companhia Brasileira de Distribuição as at December 31, 2018, and its individual and consolidated financial performance and cash flows for the year then ended in accordance with the accounting practices adopted in Brazil and with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB).

 

Basis for opinion

 

We conducted our audit in accordance with Brazilian and International Standards on Auditing. Our responsibilities under those standards are further described in the “Auditor’s responsibilities for the audit of the individual and consolidated financial statements” section of our report. We are independent of the Company and its subsidiaries in accordance with the relevant ethical principles set forth in the Code of Professional Ethics for Accountants, the professional standards issued by Brazil’s National Association of State Boards of Accountancy (CFC) and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

 

Emphasis on restatement of corresponding figures

 

As mentioned in Note 5, as a result of the adoption of accounting pronouncements CPC 47 - Contract Revenue with Customer and CPC 49 - Financial Instruments, the corresponding figures referring to the year ended December 31, 2017 presented for comparison purposes were adjusted and are restated as provided in CPC 23 - Accounting Estimates, Changes in Estimates and Errors. Our opinion does not contain any modification in respect of this matter.

 

 

Key audit matters

 

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the individual and consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter, including any commentary on the findings or outcome of our procedures, is provided in that context.

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We have fulfilled the responsibilities described in the “Auditor’s responsibilities for the audit of the individual and consolidated financial statements” section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying financial statements.

 

Tax credit realization – State value-added tax (ICMS)   

                                                                                           

At December 31, 2018, ICMS tax credits totaled R$ 1,326 million in Parent Company and R$ 2,335 million in Consolidated. As disclosed in Note 11 to the financial statements at December 31, 2018, management assesses the risk of tax credit recovery, which depends on the generation of future ICMS debts on the Company’s operations. Such assessment is conducted based on an annual study on the Company’s tax credit recoverability. Preparation of this study involves a significant level of judgment and estimate by Company management in determining sales projections of its stores and other assumptions. It also includes non-observable data that is subject to and rely on factors that are beyond the Company’s control.

 

How our audit has addressed this matter:

 

Our audit procedures included, among others: i) understanding of the process implemented by management to prepare the annual study on tax credit recoverability, including an assessment of the design and operational effectiveness of the internal controls implemented by the Company on this annual process and on the preparation of the projections used by management; ii) assessment of the assumptions and criteria discussed above and whether the data used in the preparation of the annual study on tax credit recoverability was reasonable; iii) comparing the most significant assumptions used by Company management with industry and economic trends, and with our expectations, which were established based on our knowledge of the Company's operations and the economic environment where it operates; iv) assessing the accuracy of management’ historical estimates, and conducting a sensitivity analysis of the most significant assumptions to determine the impact of a reasonable change in such assumptions in the annual study on tax credit recoverability and v) assessment of the mathematical accuracy of the calculations included in the annual study on tax credit recoverability.

 

In addition, we have assessed the adequacy of disclosures in Note 11 to the financial statements at December 31, 2018.

 

Based on the results of the audit procedures we conducted on the annual study on tax credit recoverability, which is in line with management’s assessment, we consider that the criteria and assumptions related to the ICMS tax credit recoverability adopted by management, and respective disclosures in Note 11, are appropriate, in the context of the overall financial statements.

 

 

 

Tax contingencies with likelihood of loss rated as possible

 

As disclosed in Note 21.6 to the financial statements at December 31, 2018, the Company is a party to administrative and legal proceedings arising from various tax contingencies that total R$ 10,671 million, for which no provision was recorded at December 31, 2018, as the likelihood of loss was assessed as possible based on the information available as of this date. 

 

 

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Determining the likelihood of loss and the recognition of a provision for tax contingencies, if any, involves a significant level of judgment by management in determining whether the Company will be awarded a favorable court decision on said proceedings and whether an outflow of resources is expected, considering the complexity of the Brazilian tax environment and lack of case law on certain tax matters. In this assessment, management relies on the assistance of outside legal advisors. In addition, changes in the assessment of the likelihood of loss in tax proceedings resulting from case law or new understandings of the respective courts may not be detected by Company management.

 

How our audit has addressed this matter:

 

Our audit procedures included, among others: i) understanding of the process implemented by management to estimate the likelihood of loss of tax proceedings, including an assessment of the design and operational effectiveness of the internal controls implemented by the Company to detect, monitor and assess those tax proceedings, ii) obtaining confirmation letter replies directly from the Company’s outside legal advisors, and comparing their assessments on the tax proceedings with those made by management; and iii) involving tax specialists to assess whether management’s judgment, made together with the Company’s outside legal advisors, was reasonable for a sample of tax themes assessed as possible loss, based on an understanding of the arguments considered critical by management to prevail in the legal discussion; and iv) reviewing the legal opinions obtained by Company management for the most significant tax matters, and assessing whether the legal grounds were supported by the case law and trends observed in recent court rulings.

 

In addition, we assessed whether the disclosures made by the Company, for the most significant tax contingencies, were appropriately included in Note 21.6 to the financial statements at December 31, 2018.

 

Based on the results of the audit procedures over the judgments and assessments of likelihood of loss on the tax proceedings assessed as possible loss, which is in line with management’s assessment, we consider that the criteria and assumptions adopted by management to determine the estimated loss in such proceedings, and respective disclosures in Note 21.6, are appropriate, in the context of the overall financial statements.

 

 

 

Assets held for sale and discontinued operations

 

At December 31, 2018, assets held for sale totaled R$ 24,443 million, liabilities related to assets held for sale totaled R$ 19,412 million, and loss after tax from discontinued operations totaled R$ 74 million. As disclosed in Note 32 to the financial statements, the process to sell equity interest held by the Company in Via Varejo S.A. and subsidiaries (“Via Varejo”) started in 2016 but had not been completed at December 31, 2018. Company management continues committed to the sale plan. Via Varejo operations are still presented as discontinued operations, as required by accounting pronouncement CPC 31– Ativo Não Circulante Mantido para Venda e Operação Descontinuada  (equivalent to IFRS 5 – Non-Current Assets Held for Sale and Discontinued Operations).

 

Measurement of assets held for sale for the lower of their carrying amount and fair value less costs to sell, required by the accounting pronouncement referred to above, involves significant judgments and estimates by Company management to determine the recoverable amount of those assets, including an assessment of the assumptions supported by professional judgment, which considers non-observable data that is subject to and relies on factors beyond the Company’s control. Presentation of Via Varejo operations as discontinued operations had a significant impact on the Company’s financial statements, including detailed disclosures in notes on the statements of financial position, of profit or loss and of cash flows of Via Varejo. Such process also involved judgment by Company management to support that Via Varejo operations should still be presented as discontinued operations at December 31, 2018, even though the sale had not been completed one year after the sale plan started.

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·         Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

 

·         Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s and its subsidiaries’ ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the individual and consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company and its subsidiaries to cease to continue as a going concern.

 

·         Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the individual and consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

 

·         Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

 

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

 

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements, including applicable independence requirements, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

 

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

 

São Paulo, February 20, 2019

 

ERNST & YOUNG   

Auditores Independentes S.S.

CRC-2SP034519/O-6

 

 

 

 

Antonio Humberto Barros dos Santos

Accountant CRC-1SP161745/O-3

 

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MESSAGE FROM MANAGEMENT

 

 

The year 2018 brought excellent results for GPA. We delivered sequential important market share gains and solid results for the Group’s businesses. The accelerated store expansion at Assaí over recent years supported strong sales and substantial net income growth. At Multivarejo, sales improved sequentially, accompanied by higher profitability. Our multi-channel, multi-format and multi-region portfolio, combined with the optimization of our store portfolio through conversions, renovations and new concepts, has ensured a better offering of products and services for our customers, further strengthening their power of choice. We also advanced in the digital transformation of our businesses, reinforcing GPA’s pioneering efforts on fronts such as food e-commerce and loyalty programs, which supported efficiency gains in our search for new revenue streams.

Despite a macroeconomic scenario still marked by recovery, we maintained a high level of investment in the year of over R$1.7 billion, or 28.8% more than in 2017, which reinforces our confidence in the execution of our business strategy and in the recovery of the Brazilian economy. We posted gross sales of R$53.6 billion, 10.7% higher than in 2017, and market share gains at both Multivarejo and Assaí, with sequential improvements in our results, which led net income to more than double to R$1.3 billion in the year.

At Assaí, 2018 was marked by solid and strong sales growth, which was leveraged by the banner’s nationwide footprint. Assaí, which ended the year with 144 stores, maintained its accelerated pace of store openings: 18 new units. The highly effective strategy for determining the sites of these stores supported above-expectation performance and the best result in sales per square meter of the last five years. This year, Assaí also was included on the list of Brazil’s Most Valuable Brands compiled by Interbrand.

Meanwhile, Multivarejo delivered important revenue growth, reflecting the more dynamic commercial actions, the better positioning of banners and the higher penetration of loyalty tools and customization of the “My Discount” app and “My Rewards” initiative. Over the year, the Extra Super and Proximity formats posted significant improvement in their performances, while the Pão de Açúcar banner maintained its high profitability.

We made important adjustments in the portfolio, with improvements within the formats: 15 Pão de Açúcar stores, totaling 20 stores renovated to the new model, which focuses entirely on the shopping experience and on strengthening the banner’s value proposition. Another 23 Extra Super stores were remodeled under the Mercado Extra concept and 13 stores were converted into Compre Bem, which since their conversion already have been delivering strong growth.

Another important action was the repositioning of our Private-Label portfolio with a priority on improving quality and price competitiveness, which has led to an increase in the share of these products in the Super, Hyper and Proximity formats. Additionally, it has strengthened our competitiveness in regional markets and our loyalty-building efforts. In 2018, we launched 500 new products, supported by a new communication model and promotional campaigns.

We also created the Digital Transformation department and began working more closely with foodtech startups. We prospected over 350 companies in the industry, which resulted in a partnership with Cheftime, online subscription service and sales of gastronomic kits, and in the acquisition of James Delivery, a multiservice delivery platform for various products. We also inaugurated Pão de Açúcar Adega, a platform formed by an exclusive online wine shop with nationwide delivery, an application and a brick-and-mortar store (in São Paulo city) to give consumers a truly omnichannel experience.

Looking to the future also means having our management integrated with sustainability principles, assessing risks and identifying opportunities to create value for all our stakeholders. As a transformational agent and a link in a chain, we adopt responsible sourcing management that include aspects such as preserving species, animal welfare, combating deforestation and verifying adequate work conditions.

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We have a highly motivated and diverse team of more than 100,000 employees across Brazil. We were able to surpass the mark of 30% women in leadership positions (managerial level and higher) and increased to 21% the percentage of persons with disabilities on our team.

Consistent with our commitment to diversity, we launched the Manifesto of Senior Male Leaders for Gender Equality and created two other Affinity Groups, for Racial Equality and LGBTI+, which complement the activities of the Gender Equality Committee created in 2013. All these actions, combined with others to value our people, promote conscientious consumerism, protect the links of the production chain, preserve the environment and engage society reinforce the pillars that guide our business strategy.

We ended 2018 with very positive progress and solid and sustainable results in our businesses, which are accomplishments that reflect the engagement and capacity of our entire team. We continue working to ensure a store portfolio that meets consumers’ needs, products and initiatives that offer the best options to our shareholders, suppliers, employees and, most importantly, a permanent focus on our customers.

 

Peter Estermann

Chief Executive Officer

 

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Audit Committee Report – Fiscal Year 2018

 

Initial information

The Audit Committee (“Committee”) of Companhia Brasileira de Distribuição (“Company”) is an advisory statutory body linked directly to Board of Directors.

The current configuration of the Committee is composed of 4 (four) members, all elected at a meeting of the Company's Board of Directors held on April 27, 2018, with a unified term of office of two years, with the possibility of re-election. All members are independent, and two of the members serve as members of the Company´s Board of Directors, one of which has the responsibility of coordinating the Committee.

The responsibilities and functions of the corporate governance bodies interacting with the Audit Committee are disposed in the Investor Relations portal of Companhia Brasileira de Distribuição, accessible through the following electronic address: http://www.gpari.com.br/conteudo_pt.asp?idioma=0&conta=28&tipo=29901

 

Activities of the Audit Committee in 2018

The Audit Committee held 10 (ten) ordinary meetings, being all of them with the presence of members of the Company´s Executive Board, internal audit members and other members of the Company´s management. Further, 8 (eight) of the meetings had the presence of representatives of the independent auditors.

The Audit Committee, jointly or through its members individually, also held meetings with the Directors responsible for the Company's Business Units for detailed knowledge of the operations of each respective area. The Coordinator of the Audit Committee periodically reported the main topics discussed at these meetings to the other members of the Board of Directors at their regular meetings.

The GPA / CBD Audit Committee Coordinator periodically interacts also with members of the Internal Audit area of the Casino Group, based in France, aiming at the exchange of experiences and best practices of Governance.

Meetings with the Executive Board

The Committee met in 2018 with the Executive Board and their respective teams in order to obtain information about the structures and operations of the areas, their work processes, possible deficiencies identified in the control systems, mitigating mechanisms in force and plans for improvements.

 

Among the matters that demanded more attention from the Committee, the following stand out:

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·         Contingencies and provisions

The Audit Committee continued the monitoring, as in previous years, together with the Legal Department, the progress of the implementation of a new system (including software) for the management of the Company's administrative and judicial procedures, which allows the closest control of provisions and the review of the basis of the cases in dispute, with the potential to obtain improvements.

During the year of 2018, the Committee kept paying close attention to the progress in the tax claims and further risks involved in the lease by the Company of third-party owned goodwill.

·         Transactions with related parties

In accordance with the procedures and guidelines set forth in the Related Party Transactions Policy, the Audit Committee evaluated specific cases of compliance with the procedures set forth in the Policy in the formalization of the processes subsequently submitted for deliberation by the Board of Directors.

            Technology and Information Security Issues

The Committee continued to prioritize the progress of processes and controls involving information technology issues in order to be informed about the long- and medium-term action plans for improving IT management.

Based on the analysis of the Internal Auditors and of the Independent Auditors, the Committee continued to monitor the process of auditing the internal controls related to the topic of Information Security.

            Accounting

Together with the Accounting Department, the Committee analyzed and discussed the information contained in the Financial Statements and the Explanatory Notes, always with the participation of the Independent Auditors, prior to the disclosure of the quarterly results and the results for the year ended 12/31/2018.

In addition, the Committee continued to monitor during 2018 the implementation of a system developed to consolidate the Company's financial information.

            Tax Issues

During the year 2018, the Committee continued to monitor the development of the system for controlling taxes on purchases, transfers and sales, which includes an action plan that aims to implement systemic solutions and revise / create processes to standardize and organize the generation of information related to tax rules, product costing, tax calculation, inventory management and basic records.

In addition, during the year 2018, members of the Committee held discussions with the Company on the methodology for monetizing tax credits, as well as continuing to monitor quarterly the compliance with the credit consumption schedule.

            Compliance

During the year 2018, the Committee maintained the supervision of the Compliance area of the Company (from the end of 2018 under the responsibility of the Compliance Management area).

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The process of implementing the Company's Integrity Program (as provided for in Law No. 12,846, Anti-Corruption Law) conducted by the Company, with the follow-up of the Audit and Corporate Governance Committees, was completed and analyzed and discussed all the procedures to be followed.

            Intern Control and Risks

The Committee kept constant supervision of the work carried out by the area responsible for internal controls during the year 2018.

            Complaint Channel

The Audit Committee regularly monitors the most relevant complaints received through the internal communication channel (Ombudsman) in a confidential manner and without the identification of the complainant.

Performance Evaluation

The Audit Committee annually evaluates its own performance and evaluates the performance of the Internal and of the Independent Auditors. These evaluations identify improvement points and corresponding action plans and are reported to the Board of Directors.

Suggestions of the Audit Committee

Suggestions for improvements in processes and procedures have been presented by the Committee and addressed by the Company.

Conclusions

The Audit Committee understands that all relevant matters made known to it by the work performed and described in this Report are adequately disclosed in the Management Report and in the Audited Financial Statements related to December 31, 2018, recommending their approval by the Board of Directors.

 

São Paulo, February 20th, 2019.

 

Luiz Nelson Guedes de Carvalho, Coordinator of the Audit Committee and Accounting, Financial and Audit Specialist and Representative of the Board of Directors on the Audit Committee.

Eleazar de Carvalho Filho, Representative of the Board of Directors on the Audit Committee.

Renan Bergmann

Gisélia Oliveira

 

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Management statement on the financial statements

 

In accordance with the item V of article 25 of Instruction CVM no. 480, of December 7, 2009,  as amended, the Directors stated that have reviewed, discussed and agreed with the Company´s Financial Statement related to the year ended 2018, authorizing the conclusion on this date.

 

São Paulo, February 20, 2019.

 

Directors

 

Peter Estermann

President

 

Christophe José Hidalgo

Vice President of Finance

 

Daniela Sabbag

Investor’s relationship Director

 

 

 

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Management statement on the independent auditor’s report

 

In accordance with the item V of article 25 of Instruction CVM no. 480, of December 7, 2009, as amended,  the Directors stated that have reviewed, discussed and agreed with to the Independent Registered Public Accounting Firm Report over the Company´s Financial Statements for the year ended 2018, issued on this date.

 

 

São Paulo, February 20, 2019.

 

Directors

 

Peter Estermann

President

 

Christophe José Hidalgo

Vice President of Finance

 

Daniela Sabbag

Investor’s relationship Director

 

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Companhia Brasileira de Distribuição

 

Balance Sheets

December 31, 2018 and 2017

 (In millions of Reais)

 

 

The accompanying notes are integral part of these financial statements.

 

 

 

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Companhia Brasileira de Distribuição

 

Balance Sheets

December 31, 2018 and 2017

(In millions of Reais)

 

 

 

The accompanying notes are integral part of these financial statements.

 

 

 

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Companhia Brasileira de Distribuição

 

Statements of Operations

Years ended December 31, 2018 and 2017

 (In millions of Reais)

 

 

The accompanying notes are integral part of these financial statements.

 

 

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Companhia Brasileira de Distribuição

 

Statements of Comprehensive Income

Years ended December 31, 2018 and 2017

 (In millions of Reais)

 

 

 

The accompanying notes are integral part of these financial statements.

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Companhia Brasileira de Distribuição

 

Statements of Changes in Shareholders' Equity

Years ended December 31, 2018 and 2017

 (In millions of Reais)

 

 

 

The accompanying notes are integral part of these financial statements.

 

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Companhia Brasileira de Distribuição

 

Statements of Changes in Shareholders' Equity

Years ended December 31, 2018 and 2017

 (In millions of Reais)

 

 

The accompanying notes are integral part of these financial statements.

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Companhia Brasileira de Distribuição

 

Statement of Cash Flows

Years ended December 31, 2018 and 2017

(In millions of Reais)

 

 

 

 

The accompanying notes are integral part of these financial statements.

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Companhia Brasileira de Distribuição

 

Statement of Cash Flows

Years ended December 31, 2018 and 2017

(In millions of Reais)

 

 

 

                                                                      

 

The main non-cash transactions are disclosed in note 31.

 

The accompanying notes are integral part of these financial statements.

 

 

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Companhia Brasileira de Distribuição

 

Statement of Value Added

Years ended December 31, 2018 and 2017

(In millions of Reais)

 

 

The accompanying notes are integral part of these financial statements.

 

 

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3.      Basis of consolidation

3.1.   Interest in subsidiaries and associates:

 

 

(*) Companies which balance are classified in “held for sale and discontinued operations” (see note n°32)

(**) Companies merged in 2018

(***) Companies acquired during 2018 (see note 13.2)

(****) Companies acquired in 2018 by Cnova N.V.

 

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3.      Basis of consolidation – Continued

3.3.   Associates – Continued

The summarized financial statements are as follows:

 

For the purposes of measurement of the investment in this associate, the special goodwill reserve recorded by FIC shall be deducted from its shareholders’ equity, since it is Itaú Unibanco’s exclusive right.

 

 

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4.       Significant accounting policies - Continued

4.1  Financial instruments – Continued

(ii)    Impairment of financial assets – Continued

For financial instruments measured at FVOCI, the provision for losses is recognized in OCI, instead of deducting the book value of the asset.

Impairment losses related to trade accounts receivable and other receivables, including contractual assets, are presented separately in the statement of income and OCI. Impairment of other financial assets is reported under “selling expenses”.

Accounts receivable and contractual assets – The Company considers the model and some of the assumptions used in the calculation of these expected credit losses as the main sources of uncertainty in the estimate.

The positions within each group were segmented based on common credit risk characteristics, such as:

·         Credit risk level and historical losses – for wholesale clients and property rental; and

·         Delinquency status, default risk and historical losses – for credit card operators and other clients.

 

(iii)   Derecognition of financial assets and liabilities

A financial asset (or, as applicable, a part of a financial asset or a part of a group of similar financial assets) is derecognized when:

·       Its right to receive cash flows has expired.

·       The Company and its subsidiaries have transferred their rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full to a third party under an onlending agreement; and (a) the Company has transferred substantially all the risks and rewards related to the asset, or (b) the Company has neither transferred nor retained substantially all the risks and rewards related to the assets, but has transferred its control.

When the Company and its subsidiaries have transferred their rights to receive cash flows from an asset or have entered into an onlending agreement, and have neither transferred nor retained substantially all the risks and rewards related to the asset or transferred control of the asset, the asset is maintained and an associated liability is recognized. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations retained by the Company and their subsidiaries.

A financial liability is derecognized when the underlying obligation is settled, cancelled or expired.

 

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4.      Significant accounting policies - Continued

4.1.   Financial instruments – Continued

(iii)    Derecognition of financial assets and liabilities - Continued

When an existing financial liability is replaced by another from the same lender, on substantially different terms, or the terms of an existing liability are substantially modified, this replacement or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized as financial income.

(iv)    Offsetting of financial instruments

Financial assets and liabilities are offset and stated net in the financial statements only if there is a currently enforceable legal right to offset the recognized amounts and there is an intention of settling them on a net basis or realizing the assets and settling the liabilities simultaneously.

The note 18 contains additional information about financial instruments and details on that how are measured.

4.2.   Foreign currency transactions

Foreign currency transactions are initially recognized at market value of the corresponding currencies on the date the transaction is qualified for recognition.

Monetary assets and liabilities denominated in foreign currencies are converted to Real according to their market price at the end of the reporting periods. Gains or losses on exchange variation are recognized as financial income or expense.

4.3.   Derivative financial instruments

The Company uses derivative financial instruments to limit the exposure to variation not related to the local market such as interest rate and exchange rate swaps. These derivative financial instruments are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently re-measured at fair value at the end of each reporting period. Derivatives are accounted for as financial assets when their fair value is positive and as financial liabilities when their fair value is negative. Any gains or losses arising from changes in the fair value of derivatives are recognized as financial income or expenses.

At the inception of a hedge relationship, the Company formally designates and documents the hedge relationship to which it intends to apply hedge accounting and its objective and risk management strategy for contracting the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the Company will assess the effectiveness of the changes in the hedging instrument’s fair value in offsetting the exposure to changes in the fair value of the hedged item or cash flow attributable to the hedged risk. These hedges are expected to be highly effective in offsetting changes in the fair value or cash flow and are assessed on an ongoing basis to determine if they actually have been highly effective throughout the periods for which they were designated.

The following are recognized as fair value hedges, in accordance with the procedures below:

·       The change in the fair value of a derivative financial instrument classified as fair value hedging is recognized as financial result. The change in the fair value of the hedged item is recorded as a part of the carrying amount of the hedged item and is recognized in the statement of operations;

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4.3.   Derivative financial instruments - Continued

·       In order to calculate the fair value, debts and swaps are measured through rates disclosed in the financial market and projected up to their maturity date. The discount rate used in the calculation by the interpolation method for borrowings denominated in foreign currency is developed through DDI curves, free coupon and DI, indexes disclosed by the B3 (the Brazilian Securities, Commodities and Futures Exchange), whereas for borrowings denominated in reais, the Company uses the DI curve, an index published by the CETIP and calculated through the exponential interpolation method.

4.4.   Cash and cash equivalents

Cash and cash equivalents consist of cash, bank accounts and highly liquid investments that are readily convertible into a known cash amount, and are subject to an insignificant risk of change in value, with intention and possibility to be redeemed in the short term, up to 90 days.

4.5.   Trade accounts receivable

Trade receivables balances are initially recorded at the transaction amount, wich corresponds to the sale value, and are subsequently measured according to the portfolio: (i) fair value through other comprehensive income (FVOCI), in the case of receivables from credit card to continued operators and (ii) amortized cost, mainly a customer portfolio of discontinued operations.

For all portfolios there is a consideration of estimated credit losses, which are based on quantitative and qualitative analysis, historical rates observed in the last 24 months, in the credit assessment and information about projection of macroeconomic events premises such as unemployment rates and the consumer confidence index, as the volume of past due receivables in the portfolio. The Company chose to measure credit losses for the full lifetime expected credit loss, applying the practical expedient by adopting a credit loss matrix for each maturity range.

Credit losses on financial assets are measured at amortized cost deducted by the gross assets carrying amount.

For financial instruments measured at FVOCI, estimated losses are recorded in OCI instead of reduce the carrying amount of the asset.

At each reporting date, the Company evaluates if the financial assets recorded at amortized cost or FVOCI show any indication of impairment. A financial asset shows indication of impairment loss when there is one or more events with adverse impact on the estimated future cash flows of the financial asset.

Receivables are considered irrecoverable and therefore written off from the accounts receivable portfolio, when the payment is not made after 360 days from the due date. At each annual closing of the balance sheets, the Company and its subsidiaries assess whether the assets or groups of financial assets have impairment.

 

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4.   Significant accounting policies – Continued

4.10.Property and equipment

Property and equipment is stated at cost, net of accumulated depreciation and/or impairment losses, if any. This cost includes the cost of acquisition of equipment and financing costs for long-term construction projects, if the recognition criteria are met. When significant components of property and equipment are replaced, they are recognized as individual assets with specific useful lives and depreciation. Likewise, when a major replacement is performed, its cost is recognized at the carrying amount of the equipment as a replacement, if the recognition criteria are met. All other repair and maintenance costs are recognized in the statement of operations for the year as incurred.

Property and equipment items and eventual significant parts are written off when sold or when no future economic benefits are expected from its use or sale. Any eventual gains or losses arising from the write off of the assets are included in the statement of operations for the year.

The residual value, the useful life of assets and the depreciation methods are reviewed at the end of each reporting period and adjusted prospectively, if applicable. The Company reviewed the useful lives of fixed assets for fiscal year 2018 and no significant changes were necessary.

4.11.             Capitalization of interest

Interest on borrowings and financing directly attributable to the acquisition, construction of an asset that requires a substantial period of time to be completed for its intended use or sale (qualifying asset) are capitalized as part of the cost of the respective assets during its construction phase. From the date that the asset is placed in operation, capitalized costs are depreciated over the estimated useful life of the asset.

4.12.Investment properties

Investment properties are measured at historical cost, including transaction costs. After the initial recognition, they are stated at cost, net of accumulated depreciation and or impairment loss, if is applicable.

Investment properties are written off when they are sold or when they are no longer used and no future economic benefit is expected from the sale. An investment property is also classified as held for sale when there is an intention to sell. The difference between the net amount obtained from the sale and the carrying amount of the asset is recognized in the statement of operations for the period in which the asset is written off.

 

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4.      Significant accounting policies – Continued

4.16.Leases – Continued

Company and its subsidiaries as lessors

Lease agreements where the Company does not transfer substantially all the risks and benefits incidental to ownership of the asset are classified as operating leases. Initial direct costs incurred in negotiating an operating lease are added to the carrying amount of the leased asset and recognized over the agreement term on the same basis as rental income.

Contingent rentals are recognized as revenue in the periods in which they are earned.

4.17.Provisions

Provisions are recognized when the Company and its subsidiaries have present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation and the obligation can be reliably estimated. Where the Company and its subsidiaries expect a provision to be fully or partially reimbursed, for example under an insurance contract, the reimbursement is recognized as a separate asset but only when the reimbursement is virtually certain. The expense relating to the eventual provision is recognized in statement of operations for the year, net of any reimbursement. In cases of attorney’s fees in favorable court decisions, the Company and its subsidiaries’ policy are to make a provision when fees are incurred, i.e., upon final judgment on lawsuits, as well as disclose in notes the amounts involved in lawsuits in progress.

4.18.Dividend and interest on own capital distribution

Dividend distribution to the Company’s shareholders is recognized as a liability at the year-end, based on the minimum mandatory dividends established by the Bylaws. Additional dividends are only recorded when approved by the Company’s shareholders.

The Company may pay interest as remuneration of its own capital calculated over the shareholders' equity accounts, observing the rate and limits determined by law.

4.19.Deferred Revenue

The Company records deferred revenue related to amounts received in advance from business partners for the exclusivity in the intermediation of services of additional or extended warranties, recognized in profit by evidence of the service rendered in the sale of these warranties jointly with the business partners.

4.20.Equity

Common and preferred shares are classified as equity.

When the Company purchases its own shares (treasury shares), the remuneration paid, including any directly attributable incremental costs, is deducted from equity, and are recorded as treasury shares until the shares are cancelled or reissued to the market. When these shares are subsequently reissued, any remuneration received, net of any directly attributable incremental transaction costs, is included in equity. No gain or loss is recognized on the purchase, sale, issue or cancellation of the Company’s own equity instruments.

 

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4.      Significant accounting policies – Continued

4.21.Share-based payment

Employees and senior executives of the Company (including ours subsidiaries) receive compensation in the form of share-based payment, whereby employees render services in exchange for equity instruments (“equity-settled transactions”).

Equity-settled transactions

The cost of equity-settled transactions is recognized as an expense in the year, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are met. Cumulative expenses recognized for equity instruments at each reporting date until the vesting date reflect the extent to which the vesting period has expired and the Company’s best estimate of the number of equity instruments that will ultimately vest.

Each year’s expenses or expenses reversals represents the change in the cumulative expenses recognized at the beginning and the end of that year. No expense is recognized for services that has not completed the vesting period, except for equity-settled transactions where vesting is conditional upon a market or non-vesting condition, which are treated as vested irrespective of whether or not the market or non-vesting condition is met, provided that all other performance and/or service conditions are met.

When an equity instrument is modified, the minimum expense recognized is the expense that would have been incurred if the terms had not been modified, an additional expense is recognized for any modification that increases the total fair value of the share-based payment transaction or is otherwise beneficial to the employee, as measured at the date of modification.

When an equity instrument is cancelled, it is treated as fully vested on the date of cancellation, and any expense not yet recognized related to the premium are immediately recognized in profit or loss for the year, this includes any premium whose non-vesting conditions within the control of either the Company or the employee are not met. However, if the cancelled plan is replaced by another plan and designated as a replacement grants on the grant date, the cancelled grant and the new plan are treated as if they were a modification of the original grant, as described in the previous paragraph. All cancellations of equity-settled transactions are treated equally.

The dilutive effect of outstanding options is reflected as an additional share dilution in the calculation of diluted earnings per share (see note 29).

4.22.Earnings per share

       Basic earnings per share are calculated based on the weighted average number of outstanding shares of each category during the year.

Diluted earnings per share are calculated as follows:

·       Numerator: profit for the year adjusted by dilutive effects from stock options granted by subsidiaries.

·       Denominator: the number of shares of each category adjusted to include potential shares corresponding to dilutive instruments (stock options), less the number of shares that could be bought back at market, if applicable.

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4.22.Earnings per share - Continued

Equity instruments that will or may be settled with the Company and its subsidiaries’ shares are only included in the calculation when its settlement has a dilutive impact on earnings per share.

4.23.Determination of net income

(i)      Revenue

CPC 47 / IFRS 15 establishes a comprehensive framework to determine if, when and for how long revenue is recognized.

a)  Sale of goods

       Revenue from sale of goods are recognized at their fair value and, when control over the products is transferred to the buyer, the Company and its subsidiaries cease to hold control or responsibility for the goods sold and the economic benefits generated to the Company and its subsidiaries are probable, which occurs substantially at the moment of delivery of the products to the customers in the stores. No revenue is recognized if their realization is uncertain.

b)  Service revenue

Since the Company and its subsidiaries’ are holders of policies on extended sale, financial protection insurance, personal accident insurance, sales agents in technical assistance and mobile phone recharge, revenues earned are presented net of related costs and recognized in profit or loss when probable that the economic benefits will flow to the Company and their values can be measured reliably.

c) Finance service revenue

Since customer financing is an essential part of the Company and its subsidiaries’ business, for all financial instruments measured at amortized cost financial, revenue is recorded using the effective interest rate method, which discounts exactly the estimated future cash receipts through the expected life of the financial instrument, or a shorter period of time, where applicable, to the net carrying amount of the asset. Interest income is included under financial services, composing the Company's gross profit in the income statement for the year. This practice is substantially related to discontinue activities.

d)  Interest income

       For all financial instruments measured at amortized cost, interest income is recorded using the effective interest method, which is the rate of the estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, as applicable, from the carrying amount of the financial asset or liability. Interest income is included in the financial result in the statement of operations for the year.

 

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4.      Significant accounting policies – Continued

4.26. Accounting for equity investments at cost deriving from corporate restructuring and performed with related parties

Company accounts at historical cost the interest deriving from corporate restructuring performed with related parties. Difference between the acquiring value and historical cost is recorded in shareholders’ equity, when the interest acquired is from companies under common control. Such transactions do not qualify as business combination in the terms of CPC 15(R1)/ IFRS 3.

4.27.Foreign subsidiaries and associates in other countries

The financial statements are presented in Reais, the functional currency of the Group’s Parent Company. Each entity determines its own functional currency and all their financial transactions are measured in that currency.

The financial statements of foreign subsidiaries that use a different functional currency from the Parent Company are translated into Reais, at closing date according to the following:

·       Assets and liabilities, including goodwill and fair value adjustments, are translated into Real at the closing rate.

·       Statement of operations and cash flow items are translated into reais using the average rate unless significant variances occurs, when is used the rate of the transaction date.

·       Equity is recorded into Reais at historical cost and the exchange rate variation is recorded in equity valuation adjustments as other comprehensive income.

Exchange differences are recognized within a separate component of equity. When a foreign operation is sold, the accumulated value of exchange differences on the equity is reclassified to profit or loss.

The resulting exchange differences are recognized directly within a separate component of equity. When a foreign operation is disposed of, the cumulative amount of the exchange differences in equity relating to that operation is reclassified to profit or loss.

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4.28.Customer loyalty programs

The Company provides incentives to its customers in the sale of products or services through the of their loyalty programs.

Monthly are presented for each customer in the application and the site shopping challenges represented in a progress bar and a selection of awards for that month. Challenges are defined individually, taking into account customer's purchase history and the selection of awards may change by one customer to another. To each challenge achieved the customer will earn stars, and with the stars it is possible choose the award among the month selection, that can be redeem in the same month of the challenge or in the following month.  

The customer can redeem the awards at no cost, in the form of products, purchases voucher or partners voucher.

The Company estimates the fair value of the credits granted in the loyalty plan "Programa Mais" and "Clube Extra", according to the average cost of the reward versus average utilization of the stars, considering the two-month term of the credits . 

The Company recognizes the credit initially granted and its reversal in the Operating Revenue.

 

4.29.Statement of value added

This statement intend to evidence the wealth created by the Group and its distribution in a given year and is presented as required by Brazilian Corporation Law as part of its parent company and consolidated financial statements, as it is neither mandatory nor established by IFRS.

This statement was prepared based on information obtained from accounting records which provide the basis for the preparation of the financial statements, additional records, and in accordance with technical pronouncement CPC 09 – Statement of Value Added, The first part presents the wealth created by the Company and its subsidiaries, represented by revenue (gross sale revenue, including taxes, other revenue and the effects of the allowance for doubtful accounts), inputs acquired from third parties (cost of sales and acquisition of materials, energy and outsourced services, including taxes at the time of  acquisition, the effects of losses and the recovery of assets, and depreciation and amortization) and value added received from third parties (equity in the earnings of subsidiaries, financial income and other revenues). The second part of the statement presents the distribution of wealth among personnel, taxes, fees and contributions; and value distributed to third party creditors and shareholders.

 

 

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5.      Adoption of new procedures, amendments to and interpretations of existing standards issued by the IASB and CPC and standards issued but not yet in force

5.1.   Amendments to IFRS and new interpretations of mandatory application starting at the current year

In 2018, the Company applied amendments and new interpretations to IFRSs and CPCs issued by IASB and CPC, which were mandatorily effective for accounting periods beginning on or fater January 1, 2018. The main amendments are:

 

5.1.1.              CPC 47 / IFRS 15 Revenue from contracts with customers

CPC 47 / IFRS 15 establishes a comprehensive framework to determine if, when and for how long revenue is recognized. It substitutes CPC 30 / IAS 18 Revenue, CPC 17 / IAS 11 Construction Contracts and their respective interpretations.

The Company adopted CPC 47 / IFRS 15, with the effect of first-time adoption of the standard with retrospective effects (i.e. January 1, 2017).

The effect of the adoption of CPC 47 / IFRS 15 is related to the classification of bonuses received from suppliers as deductions from the cost of sales instead of from administrative and selling expenses (see note 5.1.4).

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5.1.   Amendments to IFRS and new interpretations of mandatory application starting at the current year - Continued

5.1.2   CPC 48 / IFRS 9 Financial Instruments

CPC 48 / IFRS 9 establishes the requirements for recognition and measurement of financial assets, financial liabilities and some contracts for purchase and sale of non-financial items.   This standard replaces CPC 38 / IAS 39 – Financial Instruments: Recognition and Measurement.

CPC 48 / IFRS 9 retains most of the current requirements of CPC 38 / IAS 39 for the classification and measurement of financial liabilities. However, it eliminates previous categories of CPC 38 / IAS 39 for financial assets: held-to-maturity, loans and receivables and available-for-sale.

The adoption of CPC 48 / IFRS 9 did not have a significant impact on the Company’s accounting policies related to financial liabilities and derivative instruments.

 

i)    Classification and measurement of Financial Assets and Liabilities

Debt instruments at FVOCI – On December 31, 2017, the amount under continuing operations was R$11 at the parent company and R$12 at the consolidated, and the amount under discontinued operation was R$64.

ii)   Impairment of financial assets

Impact of the new impairment loss model – The Company determined that the application of the requirements for impairment under CPC 48 / IFRS 9 on January 1, 2018 resulted in an additional provision of R$6 in continuing operations in December 31, 2017.

The additional Provision in discontinued operations is composed as follows:

 

 

 

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5.     Adoption of new procedures, amendments to and interpretations of existing standards issued by the IASB and CPC and standards issued but not yet in force – Continued

5.1.   Amendments to IFRS and new interpretations of mandatory application starting at the current year - Continued

5.1.4.  Presentation of the retrospective effects of the application of pronouncements

 

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5.     Adoption of new procedures, amendments to and interpretations of existing standards issued by the IASB and CPC and standards issued but not yet in force – Continued

5.1.   Amendments to IFRS and new interpretations of mandatory application starting at the current year - Continued

5.1.4.Presentation of the retrospective effects of the application of pronouncements – Continued

 

 

 

 

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5.     Adoption of new procedures, amendments to and interpretations of existing standards issued by the IASB and CPC and standards issued but not yet in force – Continued

5.1.   Amendments to IFRS and new interpretations of mandatory application starting at the current year - Continued

5.1.4. Presentation of the retrospective effects of the application of pronouncements – Continued

 

 

 

 

 

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5.     Adoption of new procedures, amendments to and interpretations of existing standards issued by the IASB and CPC and standards issued but not yet in force – Continued

5.1.   Amendments to IFRS and new interpretations of mandatory application starting at the current year - Continued

5.1.4.Presentation of the retrospective effects of the application of pronouncements – Continued

 

 

 

 

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5.     Adoption of new procedures, amendments to and interpretations of existing standards issued by the IASB and CPC and standards issued but not yet in force – Continued

5.1.   Amendments to IFRS and new interpretations of mandatory application starting at the current year - Continued

5.1.4.Presentation of the retrospective effects of the application of pronouncements – Continued

 

 

 

 

 

 

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5.1.   Amendments to IFRS and new interpretations of mandatory application starting at the current year - Continued

5.1.4.  Presentation of the retrospective effects of the application of pronouncements – Continued

 

 

(*) Effects of the application of IFRS 9 and IFRS 15 in associates.

 

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5.     Adoption of new procedures, amendments to and interpretations of existing standards issued by the IASB and CPC and standards issued but not yet in force – Continued

5.2.   New and revised standards and interpretations already issued and not yet adopted

The Company has not early adopted the following new and revised IFRSs already issued and not yet effective:

 

 

 

5.2.1   IFRS 16 - Leases

 

IFRS 16 “Leases”, which replaces IAS 17 “Leases” and the related interpretations from January 1st, 2019, eliminates the distinction between operating leases and finance leases; it requires recognition of an asset (the right to use the leased item) and of a financial liability representative of discounted future payments rentals for virtually all lease contracts. Operating lease expense is replaced with depreciation expense related to the right of use and interest expense related to the lease liability. Previously, the Company recognized mainly operating lease expense on a straight-line basis over the term of the lease and recognized assets and liabilities only to the extent that there was a timing difference between actual lease payments and the period of competence of the rent expense. Thus, performance indicators such as EBITDA and to a lesser extent current operating income will be positively impacted; conversely, the financial result will be negatively impacted. At last, consolidated net profit will also be affected because the total rental expense is generally higher at the beginning of the lease and decreases over time, unlike a straight-line charge under the current standard. Additionally, net cash from operating activities will be higher as cash payments for the principal portion of the lease liability and the related interest will be classified as cash flows from financing activities.

The Company mainly holds property leases, with approximately 1,000 real estate contracts representing an annual rent expense of R$937 million out of a total of R$982 million for the 2018 year-end. Adoption of the standard IFRS 16 will primarily impact the recognition of operating leases for the Company's stores and warehouses, particularly those associated with its Retail operations.

 

 

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5.2.   New and revised standards and interpretations already issued and not yet adopted – Continued

5.2.1   IFRS 16 – Leases - Continued

In 2018, the Company continued to collect and analyze the data required for the application of IFRS 16 as at January 1st, 2019. The Company is implementing a computer software to ensure the fully integrated operational and financial monitoring of these leases. The implementation of the software will be finalized in the first quarter of 2019.

The Company decided to adopt the full retrospective approach as a transition method on January 1, 2019, and prospectively from the start of the earliest practicable period. As a result, the comparative periods will be restated.

The Company has chosen to apply the two recognition exemptions proposed by the standard on the following contracts:

·       Leases of short-term property,

·        Leases of property relating to low value assets.

Rents not included in the initial valuation of the liability (for example, variable rents) are classified as operating expenses, as are charges related to short-term and low-value leases.

The lease term will be the legally enforceable period of the contract and will take into account the options for termination and renewal, the use of which by the Company is reasonably certain.

The discount rate used to calculate the right of use and the lease liability will be determined using some historical data directly attributable to the Company and/or directly observable from the market, such as:

·       The historical borrowing rate from the Company on comparable acquisition of assets, and Company’s indebtedness.

·       The future risk-free curve by maturity

The estimated impact on the opening balance sheet as of January 1, 2019 would lead to:

·       An increase in assets (mainly via the recognition of a right of use) of R$3.6 billion,

·       The recognition of a lease financial liability of R$4.8 billion,

·       An increase in the deferred tax asset of R$0.3 billion,

·       A decrease in equity (net of tax) of R$ 0.8 billion.

The impact on the restatement of the 2018 result would lead to:

·       A reversal of lease expenses of R$1 billion,

·       Recognize the amortization expense of the right to use of R$0.5 billion,

·       Recognize the interest expense of R$0.6 billion,

·       Recognize the net income of R$0.1 billion.

 

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5.2.1         IFRS 16 – Leases - Continued

The Company opted to disclose the right of use and the financial liability for lease in separated lines in the balance sheet.

Given the complexity of this new pronouncement, certain issue are still being discussed in the market. Accordingly, the amounts presented above may change until their initial adoption in the first quarter of 2019, since the Company's estimates may be impacted if certain assumptions are altered in discussions of market adoption.

At December 31, 2018, the Company presented an off-balance sheet commitment in respect of the expected minimum lease payments on real estate and equipment leases of R$411 in accordance with IAS 17 (note 22), which mainly corresponded to real estate, such as stores and warehouses used as a tenant in its activities. The difference between the off-balance sheet commitment and the estimated IFRS 16 rental debt on real estate is mainly due to:

·       amendment of minimum cancelable criterion under CPC 06 (R1), to be reasonably certain under CPC 06 (R2).

·       calculation of the present value of rental flows at the end of CPC 06 (R2) compared to the nominal flows of CPC 06 (R1).

Given the lack of a regulatory position for the moment on the methods for applying impairment tests, the Company has not performed any new impairment tests taking into account the effects of IFRS 16.

5.2.2   IFRIC 23 - Uncertainty over income tax treatments

The IFRIC 23 - Uncertainty over income tax treatments was issued in 2018 with the purpose of clarify the recognition when there are uncertainties of taxes on profit. This accounting pronouncement will be effective for fiscal years beginning on or after January 1, 2019. There will be no significant impact with the adoption of this standard.

 

The are no other standands and interpretations issued and not yet adopted that may have a significant impact on net income or sharesholders’ equity for the year disclosed by the company in its individual and consolidated financial statements.

 

6.       Significant accounting judgments, estimates and assumptions

The preparation of the individual and consolidated financial statements of the Company requires Management to make judgments, estimates and assumptions that impact the reported amounts of revenue, expenses, assets and liabilities, and the disclosure of contingent liabilities at the end of the year; however, uncertainty about these assumptions and estimates could result in outcomes that require material adjustments to the carrying amount of the asset or liability impacted in future periods. In the process of applying the Company’s accounting policies, Management has made the following judgments, which have the most significant impact on the amounts recognized in the parent company and consolidated financial statements:

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According to the method disclosed in note 4.9, the Company performed test to verify that the assets might not be recoverable at the year ended December 31, 2018, based on those tests, there was no need for impairment loss.

a)      Test of impairment for operating assets related stores

The procedure for verification of non-recoverability of property and equipment consisted in allocating operating assets and intangible assets (such as Commercial rights) directly attributable to the stores. The steps of the test were as follows:

·  Step 1: compared the carrying amount of stores with a multiple of sales (30% to 35%), representing transactions between retail companies. For stores with an amount lower than the carrying amount, we come to a more detailed method, described in Step 2;

·  Step 2: the Company consider the highest value among discounted cash flows using sales growth per store, averaging 4.1% (3.4% in 2017) for the next five years and discount rate of 10.1% (9,9% in 2017) or valuation reports prepared by independent experts for own stores;

b)      Test of impairment for intangibles of indefinite useful life

For the purposes of impairment test, goodwill acquired through business combinations and licenses (brands) with indefinite life was allocated to cash generating units, which are also operating segments that disclose financial information. The segments are: Retail, Cash and Carry, Home Appliances and E-commerce. The last two are available the sale (note 32).

Segments’ recoverable value is calculated using the value in use based on estimated cash from financial budgets approved by senior management for the following three years. The discount rate on cash flow projections is 10.1%, and the cash flows exceeding five years are extrapolated using a growth rate of 5.5% for retail and cash and carry (5.5% on December 31, 2017). Based on this analysis, no impairment charges were necessary.

The cash-and-carry brand refers to “ASSAÍ”, and the home appliance brands refer to “PONTO FRIO” and “CASAS BAHIA”. These brands were recorded due to the business combinations with companies that held right over them.

The consolidated Via Varejo total net assets, including Cnova Brasil, were tested as described in note 32.

6.2.   Income taxes

       Given the nature and complexity of the Group business, the differences between actual results and assumptions, or future changes to such assumptions, could result in future adjustments to already recorded tax benefit and expenses. The Company and its subsidiaries record provisions, based on reasonable estimates, for the eventual consequences of audits by the tax authorities of the respective countries in which it operates. The amount of these provisions is based on various factors, such as previous tax audits and different interpretations of tax regulations by the taxpayer and the appropriate tax authority. Such differences in interpretation may refer to a wide range of issues, depending on the conditions prevailing in the respective entity's jurisdiction.

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Company writes-off or constitutes a provision when income tax and social contribution credits fulfillment is not probable. These losses do not expire; therefore their use is limited by law to 30% of taxable income for each year. The amounts relate to the Company and its subsidiaries that have tax planning opportunities for the use of these balances. Further details on taxes are disclosed in Note 20.

6.3.   Fair value of derivatives and other financial instruments

When the fair value of financial assets and liabilities recorded in the financial statements cannot be obtained in active markets, it is determined according to the hierarchy determined by technical pronouncement CPC 46 (IFRS 13), which establishes certain valuation techniques, including the discounted cash flow model, The data for these models are obtained, whenever possible, from observable markets or from information on comparable operations and transactions in the market. The judgments include the analyses of data, such as liquidity risk, credit risk and volatility. Changes in assumptions about these factors may affect the reported fair value of financial instruments.

The fair value of financial instruments actively traded on organized markets is determined based on market quotes, at the end of the reporting periods.

For financial instruments not actively traded, the fair value is based on valuation techniques defined by the Company and compatible with usual market practices. These techniques include the use of recent market arm’s length transactions, the benchmarking of the fair value of similar financial instruments, the analysis of discounted cash flows or other valuation models.

6.4.   Share-based payments

The Company measures the costs of transactions with employees eligible to share-based remuneration based on the fair value of the equity instruments on the grant date. Estimating the fair value of share-based payment transactions requires determining the most appropriate valuation model, which depends on the terms and conditions of each grant. This estimate also requires determining the most appropriate inputs for the valuation model, including the expected useful life of the stock options, volatility and dividend yield, as well as making assumptions about them. The assumptions and models used to estimate the fair value of share-based payment transactions are disclosed in note 24.5.

 

6.5.   Provision for risks

The Company and its subsidiaries are parties to several judicial and administrative proceedings, (see note 21), Provisions for legal claims are recognized for all cases representing reasonably estimated probable losses. The assessment of the likelihood of loss takes into account available evidence, the hierarchy of laws, former court decisions and their legal significance, as well as the legal counsel’s opinion.

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6.7.   Tax recoverable

The Company and its subsidiaries have tax recoverable mainly related to ICMS, ICMS from Tax Substitution, PIS and Cofins. The utilization of its taxes is made based on the projections prepared by management, operational issues and the consumption of the credits by the companies in the group. Further details, see note 11 of credits and compensation.

6.8.   Inventories

Inventories are measured by the lowest between the acquisition cost, calculated by the average cost, and its net realizable amount. The net realizable amount is calculated by the average sales price, deducted from: (i) taxes over sales, (ii) personnel expenses directly related to inventories, (iii) purchase cost, and (iv) other costs necessary to bring the product in condition of sales. Inventories are reduced to its realizable value though the estimations of shrinkage, scrap, slow moving and obsolescence and estimation for merchandise that will be sold with negative gross margin, including for products displayed in the stores.

 

 

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7.      Cash and cash equivalents

 

(*) Refers to amounts deposited in the United States of America in US Dollars.

 

(**) Short-term investments as December 31, 2018 refer substantially to repurchase agreements, earning interest corresponding to a weighted average rate equivalent to 85.78% (98.07% on  December 31, 2017) of the Interbank deposit Certificate ("CDI") and redeemable in terms of less than 90 days as of investment date.

8.      Trade receivables

 

8.1.   Credit card companies

As part of its management strategy, the Company and its subsidiaries periodically sells a portion of its credit card receivables to financial institutions or credit card companies in order to strengthen their working capital, without recourse or related obligation.

 

 

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8.      Trade receivables – Continued

8.2.   Estimated losses on doubtful accounts

Below is the aging list of consolidated gross receivables, by maturity period:

 

 

9.      Other receivables

 

(i) R$174 is related to the amount receivable from the insurer due to the damage caused by the fire on the distribution center located in Osasco happened on December 27, 2017.

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9.1.   Accounts receivable – Paes Mendonça

The accounts receivable from Paes Mendonça was linked to the operating leases of certain stores. The balance was offset by the premium that the Company paid by the renewal in September 2018 of the exploration contractual right of these stores for a period of 30 years representing the recognition of an intangible asset with a defined useful life (see note 15). Interest not previously collected on receivables was renegotiated in the amount to R$101, recognized as financial income.

9.2.   Accounts receivable for sale of company

Accounts receivable related to the exercise of an option to buy gas stations by a third party. The original amount of this receivable was R$50, which was monetary updated since the signature of the agreement on May 28, 2012, at a rate of 110% of the CDI, with payment in 240 monthly installments. In January, 2016, 5 news gas stations were sold for the amount of R$8, in 120 installments at a rate of 110% of CDI.

10.    Inventories

 

10.1.Bonuses in inventories and storage cost

The Company and subsidiaries record supplier bonuses and the storage costs in the statement of operations as incurred the inventories that gave rise to the bonuses and the stored costs are realized. On December 31, 2018, the amount of unrealized suppliers bonuses, booked as a reduction of inventory balance, amounted to R$315 (R$244 on December 31, 2017).

 

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10.    Inventories - Continued

10.2.Estimated losses on obsolescence and breakage

 

10.3.Real estate inventories

The amount of inventories of real estate units under construction refers to the fair value of the barter of land for real estate units, based on the market value of real estate units received, as observed in comparable market transactions.

11.    Recoverable taxes

 

Company records ICMS (State VAT) credits as a reduction of cost of sales, every time sufficient evidence is obtained based on legal opinion, documental and factual evidences, including the estimate of realization, recognized as a reduction of cost of sales.

 

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11.    Recoverable taxes – Continued

11.1 ICMS (State VAT) - Continued

 

 

11.2.PIS and COFINS credit

The Company records PIS and COFINS credits, when the Company obtains evidences to conclude about the rights of the credit. Evidences include i) Interpretation of tax legislation, ii) internal and external factors as legal practices and interpretation of the market and iii) accounting evaluation about the matter. These credits are recorded as a reduction of profit and loss accounts depending on the nature of tax credits calculated and recognized.

12.    Related parties

12.1.Management and Advisory Committees compensation.

The expenses related to management compensation (officers appointed pursuant to the Bylaws including members of the Board of Directors and the related support committees) for the years ended December 31, 2018 and 2017, were as follows:

(In thousands of Brazilian reais)

 

(*) The compensation of the Board of Directors’ advisory committees (Human Resources and Compensation, Audit, Finance, Sustainable Development and Corporate Governance) is included in this line.

 

 

 

 

 

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12.    Related parties – Continued

12.2.Balances and transactions with related parties.

 

 

 

 

 

 

 

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12.    Related parties – Continued

12.2.Balances and transactions with related parties – Continued

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13.    Investments

13.1.Breakdown of investments

 

 

 

(*) Includes the effects of uncovered liabilities on the investment on Luxco of R$267 on December 31, 2018 (R$195 on December 31, 2017).

 

 

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13.    Investments – Continued

13.1.Breakdown of investments – Continued

(**) Refers substantially to the exchange variation effect of Cnova N.V.

 

13.2.   Business combination

13.2.1.            Cheftime and James Delivery

The Company has completed in the year the acquisition of the controlling interest of two entity being James Delivery a delivery company and Cheftime providing gastronomic kits. The net assets of such companies (representing around R$1) and the considerations for the acquisition were measured preliminarily and will be completed during 2019.

 

 

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14.    Property and equipment

(*) Referring to the assets transferred to the subsidiary Sendas Distribuidora and SCB as a capital increase related to the banner conversion project.

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14.    Property and equipment – Continued

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14.    Property and equipment – Continued

 

 (*) See note 32

(**) The write-offs in buildings in the amount of R$137 refers to the damage on Distribution Center located in Osasco due to a fire occurred on December 27, 2017, R$123 refers to the sale of a Distribution Center and the remaining amount refers substantially to closure of stores.

(***) In the total of transfers, R$(22) are related to the reclassification of a land to available for sale.

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14.    Property and equipment – Continued

 

14.1.Guarantees

At December 31, 2018 and 2017, the Company and its subsidiaries had collateralized property and equipment items for some legal claims, as disclosed in note 21.8.

14.2.Capitalized borrowing costs

The consolidated borrowing costs for the year ended December 31, 2018 were R$23 (R$16 for the year ended December 31, 2017). The rate used to determine the borrowing costs eligible for capitalization was 101.78% of the CDI (101.66 % of the CDI for the period ended December 31, 2017), corresponding to the effective interest rate on the Company’s borrowings.

14.3.Additions to property and equipment for cash flow presentation purposes:

 

 

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15.    Intangible assets

 

(*) See note 13.2.1.

 

(**) Contractual law of stores from Paes Mendonça, see note 9.1.

 

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15.    Intangible assets - Continued

 

 

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15.    Intangible assets – Continued

(*) See note 32.

(**) See note 13.2.1 .

 

(***) Contractual law of stores from Paes Mendonça, see note 9.1.

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15.    Intangible assets – Continued

15.1. Impairment testing of goodwill, brands and intangible assets with indefinite useful life

On December 31, 2018, for impairment testing purposes, the goodwill acquired through business combinations and tradenames with indefinite useful lives was allocated to two cash generating units, which are also operating segments: retail and cash and carry.

The recoverable amount of the segments was defined by means of the value in use based on cash projections arising from the financial budgets approved by senior management for the next three years. Based on this analysis, no impairment was necessary. See further details in note 6.1 (b).

15.2. Commercial rights

Commercial rights are the right to operate the stores under to acquired rights, or allocated on business combinations.

Management understands that commercial rights are considered recoverable, considering its recovery by cash flows return or the possibility of negotiating with third parties.

Goodwill with a defined useful life is tested using the same assumptions used in the Company's other recoverability tests (note 6.1 (b)), following the term of use of these assets.

15.3. Additions to intangible assets for cash flow presentation purposes:

 

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16.    Trade payables, net

16.1.Agreement between suppliers, the Company and banks

The Company and its subsidiaries have certain agreements with financial institutions in order to allow their suppliers to use the Company's lines of credit for prepayment of receivables arising from the sale of goods and services, allowing suppliers to anticipate receivables in the normal course of purchases made by the Company.

These transactions were evaluated by the management concluding that has commercial characteristics, since there are no changes in price and / or terms previously established in the original commercial negotiations, as well as no financial charges. The anticipation is also solely the suppliers’s discretion.

The Company also has commercial transactions increasing payment terms, routinely as part of its commercial activity, without financial charges.

16.2.Accounts receivable from vendors

It includes bonuses and discounts obtained from suppliers. These amounts are established in agreements and include amounts for discounts on purchase volumes, joint marketing programs, freight reimbursements, and other similar programs. The collection of these receivables is by offsetting the amounts payable to suppliers, according to supply agreements conditions so that the settlement occurs by the net amount.

 

 

 

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17.    Borrowings and financing

17.1.     Debt breakdown

 

 

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17.    Borrowings and financing – Continued

17.2.Changes in borrowings

 

17.3.Maturity schedule of borrowings and financing recorded in noncurrent liabilities

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17.    Borrowings and financing – Continued

17.4.Debentures, Promissory Note and Certificate of Agribusiness Receivables 

 

 

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18.    Financial instruments

The Company uses financial instruments only for protecting identified risks, limited to 100% of the risks. Derivative transactions have the sole purpose of reducing the exposure to the interest rate and foreign currency fluctuations and maintaining a balanced capital structure.

 

The main financial instruments and their carrying amounts, by category, are as follows:

The fair value of other financial instruments detailed in table above approximates the carrying amount based on the existing terms and conditions. The financial instruments measured at amortized cost, the related fair values of which differ from the carrying amounts, are disclosed in note 18.3.

18.1.Considerations on risk factors that may affect the business of the Company and its subsidiaries

(i)      Credit risk

·       Cash and cash equivalents: in order to minimize credit risk, the Company adopts investment policies at financial institutions approved by the Company’s Financial Committee, also taking into consideration monetary limits and financial institution evaluations, which are regularly updated.

·       Accounts receivable: credit risk related to accounts receivable is minimized by the fact that large portion of the sales are paid with credit cards, and the Company sells these receivables to banks and credit card companies, aiming to strengthen working capital. The sales of receivables result in derecognition of the accounts receivable due to the transfer of the credit risk, benefits and control of such assets. Additionally, mainly to the accounts receivable paid in installments, the Company monitor the risk through the credit concession to customers and by periodic analysis of the provision for losses.

·       The Company also has counterparty risk related to the derivative instruments; such risk is mitigated by the Company’s carrying out transactions, according to policies approved by governance boards.

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18.    Financial instruments - Continued

18.1.Considerations on risk factors that may affect the business of the Company and its subsidiaries – Continued

(i) Credit risk - Continued

·       There are no amounts receivable that are individually, higher than 5% of accounts receivable or sales, respectively.

(ii)     Interest rate risk

The Company and its subsidiaries raise loans and financing with major financial institutions for cash needs for investments. As a result, the Company and its subsidiaries are, mainly, exposed to relevant interest rates fluctuation risk, especially in view of derivatives liabilities (foreign currency exposure hedge) and CDI indexed debt. The balance of cash and cash equivalents, indexed to CDI, partially offsets the interest rate risk.

(iii)    Exchange rate risk

The Company and its subsidiaries are exposed to exchange rate fluctuations, which may increase outstanding balances of foreign currency-denominated borrowings. The Company and its subsidiaries use derivatives, such as swaps, aiming to mitigate the exchange exposure risk, converting the cost of debt into domestic currency andinterest rates.

(iv)    Capital risk management

The main objective of the Company’s capital management is to ensure if the Company sustains its credit rating and a well-defined equity ratio, in order to support businesses and maximize shareholder value. The Company manages the capital structure and makes adjustments taking into account changes in the economic conditions.

The capital structure is presented as follows:

(*) Represents amount payable to Greenyellow related to the equipments purchase.

 

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18.    Financial instruments – Continued

18.1.   Considerations on risk factors that may affect the business of the Company and its subsidiaries – Continued

a.      Liquidity risk management

The Company manages liquidity risk through the daily analysis of cash flows and control of maturities of financial assets and liabilities.

The table below summarizes the aging profile of the Company’s financial liabilities as of December 31, 2018.

a)      Parent company

b)      Consolidated

b.      Derivative financial instruments

Certain swap operations are classified as fair value hedge, whose objective is to hedge against foreign exchange exposure (U.S. dollars) and fixed interest rates, converting the debt into domestic interest rates and currency.

At December 31, 2018 the reference value of these contracts were R$883 (R$ R$1,039 at December 31, 2017. These operations are usually contracted under the same terms of amounts, maturities and fees, and carried out with the financial institution of the same economic group, observing the limits set by Management.

According to the Company’s treasury policies, swaps cannot be contracted with restrictions (“caps”), margins, as well as return clauses, double index, flexible options or any other types of transactions different from traditional “swap” operations to hedge against debts.

The Company’s internal controls were designed to ensure that transactions are conducted in compliance with this treasury policy.

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18.    Financial instruments – Continued

18.1.Considerations on risk factors that may affect the business of the Company and its subsidiaries – Continued

b.      Derivative financial instruments - Continued

The Company calculates the effectiveness of hedge transactions atinception date and on continuing basis. Hedge transactions contracted in the year ended December 31, 2018 were effective in relation to the covered risk. For derivative transactions qualified as hedge accounting, according to technical pronouncement CPC 48 (IFRS 39), the debt, which is the hedge object, is also adjusted at fair value.

 

Realized and unrealized gains and losses on these contracts during the year ended December 31, 2018 are recorded as financial expenses, net and the balance payable at fair value is R$87 (payable R$36 as of December 31, 2017), the asset is recorded in line item “Derivative financial instrument - fair value hedge” and the liability in “Borrowings and financing”.

The effects of the fair value hedge recorded in the statement of operations for the year ended December 31, 2018 resulted in a gain of R$128 (gain of R$129 as of December 31, 2017).

f)       Fair values of derivative financial instruments

Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.

Fair values are calculated by projecting the future cash flows of transactions, using the curves of CDI and discounting them to present value, using CDI market rates for swaps both disclosed by B3.

The market value of exchange coupon swaps versus CDI rate was obtained applying market exchange rates effective on the date of financial statements are prepared and rates are projected by the market calculated based on currency coupon curves.

In order to calculate the coupon of foreign currency indexed-positions, the straight-line convention - 360 consecutive days was adopted and to calculate the coupon of CDI indexed-positions, the exponential convention - 252 business days was adopted.

 

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18.    Financial instruments – Continued

18.2.Sensitivity analysis of financial instruments 

According to the Management’s assessment, the most probable scenario is what the market has been estimating through market curves (currency and interest rates) of B3, on the maturity dates of each transaction.

 

Therefore, in the probable scenario (I), there is no impact on the fair value of financial instruments. For scenarios (II) and (III), for the sensitivity analysis effect, according to CVM rules, a deterioration of 25% and 50% was taken into account, respectively, on risk variables, up to one year of the financial instruments.

 

For the probable scenario, weighted exchange rate was R$3.99 on the due date, and the weighted interest rate weighted was 6.66% per year.

 

In case of derivative financial instruments (aiming at hedging the financial debt), changes in scenarios are accompanied by respective hedges, indicating effects are not significant, see note 18.2 (i).

 

The Company disclosed the net exposure of the derivatives financial instruments, corresponding to financial instruments and certain financial instruments in the sensitivity analysis table below, to each of the scenarios mentioned.

(i)      Other financial instruments

 

 

(*) Weighted average

 

 

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18.    Financial instruments – Continued

18.3.Fair value measurements

The Company discloses the fair value of financial instruments measured at fair value and of financial instruments measured at amortized cost, the fair value of which differ from the carrying amount, in accordance with CPC 46 (“IFRS13”), which refer to the requirements of measurement and disclosure. The fair value hierarchy levels are defined below:

Level 1: Measurement of fair value at the balance sheet date based on quoted (unadjusted) prices in active markets for assets or liabilities that the entity may have access to at the measurement date.

Level 2: Measurement of fair value at the balance sheet date using other significant observable assumptions for the asset or liability, either directly or indirectly, other than quoted prices included in Level 1.

Level 3: Measurement of fair value at the balance sheet date using unobservable inputs for the asset or liability.

The fair values of cash and cash equivalents, trade receivables and trade payables are equivalent to their carrying amounts.

The table below presents the fair value hierarchy of financial assets and liabilities measured at fair value and of financial instruments measured at amortized cost, the fair value of which is disclosed in the financial statements:

 

There were no changes between the fair value measurements levels in the year ended December 31, 2018.

Cross-currency and interest rate swaps and borrowings and financing are classified in level 2 since the fair value of such financial instruments was determined based on readily observable market inputs, such as expected interest rate and current and future foreign exchange rate.

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18.    Financial instruments – Continued

18.4.Consolidated position of derivative transactions

The consolidated position of outstanding derivative financial instruments are presented in the table below:

 

 

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19.     Taxes and contributions payable and taxes payable in installments

19.1.Taxes and contributions payable and taxes payable in installments

 

(i)             The Company decided to include certain federal tax debts in the Special Program on Tax Settlements – PERT (“PERT Program”), as per the conditions stablished in Law no. 13.496, enacted on October 24, 2017. The program allows the payment in monthly installments, and granted discounts on interest and penalties. The Company included tax debts related to (i) tax assessments over purchase transactions, manufacturing and exports sales of soil beans (PIS/COFINS), (ii) non-validation of tax offsets (IRPJ, PIS/COFINS); and other tax debts previously classified as possible risks related mainly to CPMF and other claims - (See note 21.1). The PERT liability is being settled integrally in cash in monthly installments in 12 years. The Company is in compliance with the obligations assumed in this installment plan.

(ii)    Federal tax installment payment, Law 11,941/09 – The Law 11,941, was enacted on May 27, 2009, a special federal tax and social security debt installment program, for debts overdue until November 2008, and gave several benefits to its participants, such as reduction of fines, interest rates and penalties, the possibility of utilization of accumulated tax losses to settle penalties and interest and payment in 180 months, use of restricted deposits linked to the claim to reduce the balance, besides of the fact that such reduction gains are not subject to IRPJ/CSLL/PIS/COFINS. The Company is in compliance with terms and conditions of obligations of this tax installment payment program.

19.2.Maturity schedule of taxes payable in installments in noncurrent liabilities:

 

The net impact in the statement of operations of the continued operations related to the decision to apply to PERT program resulted in an expense of R$183 on 2017.

 

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20.    Income tax and social contribution

 

20.1.Income tax and social contribution expense reconciliation

CBD does not pay social contribution based on a final favorable court decision in the past; therefore its nominal rate is 25%.

(*) Effect of income tax on interest on own capital.

 

20.2. Breakdown of deferred income tax and social contribution

 

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20.    Income tax and social contribution - Continued

20.2. Breakdown of deferred income tax and social contribution

 

Management has prepared a technical feasibility study on the future realization of deferred tax assets, considering the probable capacity to generate taxable income in the context of the main variables of the Company’s business. This study was prepared based on information extracted from the strategic planning report previously approved by the Company’s Board of Directors.

The Company estimates to recover these deferred tax assets as follows:

 

 

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20.    Income tax and social contribution – Continued

20.3.Movement in deferred income tax and social contribution

 

21.    Provision for risks

The provision for risks is estimated by the Company’s management, supported by its legal counsel. The provision was recognized in an amount considered sufficient to cover probable losses.

21.1.Parent Company

 

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21.  Provision for risks - Continued

21.2.Consolidated

21.3.   Tax

As per prevailing legislation, tax claims are subject to monetary indexation, which refers to an adjustment to the provision for tax risks according to the indexation rates used by each tax jurisdiction. In all cases, both the interest charges and fines, when applicable, were computed and fully provisioned with respect to unpaid amounts.

The main provisioned tax claims are as follows:

21.3.1.  PIS and COFINS

Since the adoption of the non cumulative regime to calculate PIS and COFINS, Company and its subsidiaries have challenged the right to deduct ICMS from the calculation basis for both contributions. On March 15, 2017, STF ruled that ICMS should be excluded from the calculation basis of PIS/Cofins, in accordance to the thesis pleaded by the Company. In 2017, the Company reversed a provision of R$117 based on its legal information and its respective legal counsel.

Since the decision of the STF on March 15, 2017, the procedural steps were within the anticipated by our legal advisors without any change in the management's judgment regarding, however without there being a final decision expected on the subject, related to the judgment of the appeal filed by the prosecution. The Company and its external legal counsel estimate that the decision related to the application of the effects will not limit the right of the judicial claim proposed by the Company, nevertheless, the elements of the process still pending of decision do not allow the recognition of the asset related to the credits to be measured since the Company started the claim in 2003. The Company estimates the potential of its tax credits for the retail activity to be R$1,400.

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21.    Provision for risks – Continued

21.5.Civil and others - Continued

Total civil lawsuits and others as of December 31, 2018 amount to R$244, being R$116 for continued operations and R$128 for discontinued operations (R$314 as of December 31, 2017, being R$ 139 for continued operations and R$175 for discontinued operations).

21.6.Non-accrued contingent liabilities

The Company has other litigations which have been analyzed by the legal counsel and considered as possible loss and, therefore, have not been accrued. The possible litigations updated balance without indemnization from shareholders is of R$12,292, being R$10,671 for continued operations and R$1,621 for discontinued operations at December 31, 2018 (R$11,778 in December 31, 2017, being R$10,159 for continued operations and R$1,619 for discontinued operations), and are mainly related to:

·       INSS (Social Security Contribution) – GPA was assessed for non-levy of payroll charges on benefits granted to its employees, among other matters, for which possible loss amounts to R$453, being R$420 for continued operations and R$33 for discontinued operations as December 31, 2018 (R$474 as of December 31, 2017, being R$443 for continued operations and R$31 for discontinued operations). The lawsuits are under administrative and court discussions.

·       IRPJ, withholding income tax - IRRF, CSLL, tax on financial transactions - IOF, withholding income tax on net income – GPA has several assessment notices regarding offsetting proceedings, rules on the deductibility of provisions, payment divergences and overpayments; fine for failure to comply with accessory obligations, among other less significant taxes. Among those claims, there are one tax assessment related to the tax deduction of goodwill in the years of 2012 and 2013, originated by the acquisition of Ponto Frio (goodwill Mandala) accrued in the year of 2009. The restated amount of the assessment notice correspond to R$89 of income tax and social contribution (R$85 at December 31, 2017). The lawsuits await administrative and court ruling. The amount involved is R$1,177, being R$1,021 for continued operations and R$156 for discontinued operations as December 31, 2018 (R$964 as of December 31, 2017, being R$826 for continued operations and R$138 for discontinued operations).

·       COFINS, PIS and IPI – the Company has been challenged about offsets, fine for failure to comply with accessory obligations, disallowance of COFINS and PIS credits on one-phase products (“produtos monofásicos”), among others less significant taxes. These lawsuits await decision at the administrative and court levels. The amount involved in these assessments is R$2,430, being R$1,985 for continued operations and R$445 for discontinued operations as December 31, 2018 (R$2,124 as of December 31, 2017, being R$1,705 for continued operations and R$419 for discontinued operations).

 

 

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21.    Provision for risks – Continued

21.7.Judicial deposits

The Company is challenging the payment of certain taxes, contributions and labor-related obligations and has made judicial deposits in the corresponding amounts, as well as escrow deposits related to the provision for legal proceedings.

The Company has recorded judicial deposits as follows.

21.8.Guarantees

 

The cost of letter of guarantees is approximately 0.67% per year of the amount of the lawsuits and is recorded as expense.

21.9.Cnova N.V. litigation

Our subsidiary Cnova N.V., a Dutch public limited company, certain of its current and former officers and directors, and the underwriters of Cnova’s initial public offering, or IPO, were named as defendants in a securities class action lawsuit in the United States Federal District Court for the Southern District of New York, related to the assumption of internal investigation, concluded on July 22, 2016, conducted by Cnova N.V., Cnova Brasil e its advisors. In October 11, 2017 the Court for the Southern District of New York approved preliminarily an agreement with the plaintiffs’ shareholders.

 

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21.  Provision for risks – Continued

21.9.Cnova N.V. litigation - Continued

Subject to the settlement agreement’s terms, a fund of $28.5 million will become available by Cnova N.V. for distribution amongst the former Cnova shareholders as well as to the plaintiffs’ lawyers. A portion of this amount will be used to cover the settlement fund’s administrative costs. In addition, subject to the terms of the settlement, all defendants are acquitted of all liability emanating from the allegations made in the class action suit. Following the March 15, 2018 hearing, the court entered on March 19, 2018 the final order giving the definitive approval to the settlement, closing the judicial proceedings with the United States District Court for the Southern District of New York and releasing defendants of the claims alleged against them accordingly. In the coming period, notices will be sent by the plaintiffs’ lawyer with more information concerning the settlement. The vast majority of this settlement amount was funded by Cnova N.V. insurers. The remainder as well as all expected related costs were covered by Cnova’s provision recorded in 2016 representing insurance deductible and total legal costs. Accordingly, the settlement has no material impact on Cnova N.V. net results.

 

Regarding the SEC investigation, on December 14, 2018, the Cnova N.V. received written notification from the SEC staff that they have closed their investigation related to inventory management and accounting issues at Cnova’s former Brazilian subsidiary, as first reported in December 2015, and that they will not initiate any enforcement action against Cnova in connection with these issues. Therefore, no penalty, fine or other sanction will be applied in this matter.

22.  Leasing transactions

22.1.Operating lease

(i)   Minimum rental payment on termination of lease agreements

The Company analyzed and concluded that the rental agreements are cancelable over their term. In case of termination, minimum payments will be due as a termination fee, which can vary from 1 to 12 months of monthly rent over the total amount of rent remaining until the end of the agreements, as demonstrated in the table below:

 

(ii)   Contingent payments

Management considers the payment of additional rents as contingent payments, which vary between 0.1% and 4.5% of sales.

(*) Refers, mainly to lease agreements receivable from commercial shopping malls.

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22.  Leasing transactions – Continued

 

22.2.Finance lease

Finance lease agreements amounted to R$152 as of December 31, 2018 (R$195 as of December 31, 2017), as shown in the table below:

23.    Deferred revenue

The Company received amounts from business partners on exclusivity in the intermediation of additional or extended warranty services, and the subsidiary Sendas received amounts for the rental of back lights for exhibition of products from its suppliers.

24.    Shareholders’ equity

24.1.Capital stock

The subscribed and paid-up capital as of December 31, 2018 is represented by 266,845 (266,579 as of December 31, 2017) in thousands of registered shares with no par value, of which 99,680 in thousands of common shares (99,680 as of December 31, 2017) and 167,165 in thousands of preferred shares (166,899 as of December 31, 2017).

The Company is authorized to increase its capital stock up to the limit of 400,000 (in thousands of shares), regardless of any amendment to the Company’s Bylaws, upon resolution of the Board of Directors, which will establish the issue conditions.

 

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24.    Shareholders’ equity – Continued

24.5.Stock option plan for preferred shares – Continued

Consolidated information of share-based payment plans – GPA

Company implemented two new share-based plans in 2018, B5 and C5 series.

According to the terms of the plans, each option offers to the beneficiary the right to acquire a preferred share. On both plans, there is a vesting period of 36 months from the date the Board of Directors approved the issuance of the series. The plans will be exercisable in until 6 months after the end of the vesting period. The condition to exercise the options is the beneficiary to stay as an employee. The series are different, exclusive, in the exercise price of the options and in the existence or not of a restriction of selling after vesting.

According to the plans, the options granted in each of the series may represent maximum 0.7% of the total shares issued by the Company. For these new series 1,188 thousands options of shares were granted.

At December 31, 2018 there were 233 thousands treasury-preferred shares which may be used as guarantee for the options granted in the plan. The preferred share price at B3 was R$80.98 per share.

The table below shows the maximum percentage of dilution to which current shareholders eventually being subject to in the event that all options granted are exercised until 2018:

 

The fair value of each option granted is estimated on the grant date, by using the options pricing model “Black&Scholes” taking into account the following assumptions for the series B1 and C1: (a) expectation of dividends of 0.96%, (b) expectation of volatility of nearly 22.09% and (c) the weighted average interest rate of 11.70%.

The fair value of each option granted is estimated in the grant date using the Black & Scholes model, considering the following assumptions in series B2 and C2: (a) Dividends expectations of 1.37%; (b) volatility expectation of 24.34% and (c) the weighted average interest rate of 12.72%.

The fair value of each option granted is estimated in the grant date using the Black & Scholes model, considering the following assumptions in series B3 and C3: (a) Dividends expectations of 2.50%; (b) volatility expectation of 30.20% and (c) the weighted average interest rate of 13.25%.

The fair value of each option granted is estimated on the grant date, by using the options pricing model “Black&Scholes” taking into account the following assumptions for the series B4 and C4: (a) expectation of dividends of 0.57%, (b) expectation of volatility nearly 35.19% and (c) the weighted average interest rate without risk of 9.28% and 10.07%; (d) vesting period of 18 to 36 months.

 

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24.    Shareholders’ equity – Continued

24.5.Stock option plan for preferred shares – Continued

The fair value of each option granted is estimated at the grant date using the option pricing model Black & Scholes, taking into account the following assumptions for the B5 and C5 series: (a) dividend expectation of 0.41%, (b) volatility expectation of nearly 36.52% and (c) the weighted average interest rate of 9.29%.

The expectation of remaining average life of the series outstanding at December 31, 2018 is 1.25 year (1.53 year at December 31, 2017). The weighted average fair value of options granted at December 31, 2018 was R$45.24 (R$39.07 at December 31, 2017).

The amounts recorded in the Parent Company and Consolidated statement of operations, for the year ended December 31, 2018 were R$20 (R$16 as of December 31, 2017).

24.6.Foreign exchange variation of investment abroad

Cumulative effect of exchange gains and losses on the translation of assets, liabilities and profit (loss) of Euros to Brazilian reais, corresponding to the investment in subsidiary Cnova N.V. The effect in the Parent Company was R$24 (R$20 on December 31, 2017).

24.7.   Tax incentive reserve 

On June 29, 2018, was approved in extraordinary shareholders’ meeting the proposal the management to reallocate the amount R$48 arising from tax incentives treated as subsidies for investments granted to the Company in the years of 2013 to 2017, initially destined to the expansion reserve. In December 2018 the company allocated an additional R$10 reserve tax incentives to be approved at an Extraordinary General Meeting.

 

 

 

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24.    Shareholders’ equity – Continued

24.8.Dividends                  

In 2018 the Board of Directors approved the prepayment of interest on own capital total gross value of R$261, as detailed below:

On April 26, 2018 approved the value of R$75 being R$0.2910893309 per preferred share and R$0.2646266644 per common share, paid on June 12, 2018.

On September 27, 2018 approved the value of R$115 being R$0.446593630 per preferred share and R$0.405994209 per common share, paid on November 29, 2018.

On November 29, 2018 approved the value of R$71 being R$0.277404648 per preferred share and R$0. 252186044 per common share, paid on December 14, 2018.

Company’s management proposed dividends, calculated according to the table below, considering the interest on own capital paid to its shareholders the net amount of R$69, realized in 2018.

 

Company’s bylaw establishes a minimum dividend of 25% of profit for the year, with the calculation of the result for the year, may be higher as decided by the Board.

25.    Net operating revenue     

 

 

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26.    Expenses by nature         

27.    Other operating expenses, net

(a) Amount composed mainly of the sale of three properties in the amount of R$418, at the cost of R$222. The remaining balance consists of write-offs in the normal course of the transaction.

28.      Financial income (expenses), net

The hedge effects are recorded as cost of debt and disclosed in Note 18.

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29.    Earnings per share

The table below presents the determination of net income available to holders of common and preferred shares and the weighted average number of common and preferred shares outstanding used to calculate basic and diluted earnings per share in each reporting exercise:

           

     

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30.    Segment information – Continued

(*) Food retail includes GPA Malls & Properties.

(**) See note 32.

(***) The eliminations consist of intercompany balances. In the management’s view, the net earnings eliminations are made inside of own segment, besides, the equity pickup of the Company in Luxco.

 

  

  

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30.    Segment information – Continued

Company general information

The Company and its subsidiaries operate primarily as a retailer of food, clothing, home appliances and other products. Total revenues are composed of the following brands:

31.    Non cash transactions

During 2018 and 2017 the Company had transactions that was not represent disbursement of cash and therefore was not presented at the statement of cash flow, as presented below:

·       Purchase of fixed assets not paid yet as note 14.3;

·       Purchase of intangible assets not paid yet as per note 15.3;

·       Deferred income tax  as per note 20;

·       Additions/reversals to provisions for risk as per note 21;

·       Capital increase at Sendas and Comprebem with property and equipment as per note 13;

·       Recognition of ICMS tax credits, according to note 11.

32.    Non current assets held for sale and discontinued operations

The Company entered into a contract for the purchase of a land on September 29, 2018 for R$115, the sale of which was not recognized under IFRS 15 due to the contractual characteristics of long-term payment and transfer of legal title at a date to be defined by the buyer.

32.1.   Ongoing transaction to dispose of Via Varejo subsidiary

The Board of Directors held on November 23, 2016 approved a process to dispose of the Company’s interest in Via Varejo’s capital stock, in line with its long-term strategy of focusing on the development of the food activity.

Throughout 2018 the Company actively sought to sell to potential strategic investors that were not completed until December 31, 2018 due to external factors beyond the Company's control, among others, the macroeconomic scenario. The Board of Directors increased the sale alternatives by determining the conclusion until December 31, 2019, including the possibility of selling the interest through operations in the capital market.

 

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32.    Non current assets held for sale and discontinued operations – Continued

32.1.   Ongoing transaction to dispose of Via Varejo subsidiary - Continued

Balance sheet (*):

 

 

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32.    Non current assets held for sale and discontinued operations – Continued

32.1.   Ongoing transaction to dispose of Via Varejo subsidiary - Continued

Balance sheet (*):

(*) Before intercompany eliminations with GPA in the amount R$144 of assets and R$47 of liabilities. In the total balance held for sale of the balance sheet as of December 31, 2018, R$30 refers to the reclassification of a CBD land available for sale.

(i) Includes financed sales through CDCI, whose value on December 31, 2018 is R$ 2,297 in assets (R$ 2,382 at December 31, 2017) and R$ 3,400 in liabilities (R$ 3,466 on December 31, 2017).

(ii) Includes balance of R$2,006 on December 31, 2018 (R$1,374 on December 31, 2017) of deferred revenue related to the advance received from Zurich Seguros (extended warranty and insurance) and from Bradesco (cards transactions and banking correspondent).

 

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  32.    Non current assets held for sale and discontinued operations – Continued

32.1     Ongoing transaction to dispose of Via Varejo subsidiary – Continued

(*) Before eliminations of amounts of related parties with GPA.

Additionally a reclassification was made of incurred costs on Parent Company basically related to indemnity costs of contingences form prior periods to acquisition, paid to Via Varejo. According to IFRS 5, these costs were reclassified to discontinued operations in the amount of R$(29) in 2018 (R$(32) in 2017).

 

 

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32.    Non current assets held for sale and discontinued operations – Continued

32.1     Ongoing transaction to dispose of Via Varejo subsidiary – Continued

 

 

32.2     Fair Value Via Varejo

Also according to CPC 31 (IFRS 5) the Via Varejo investment should be recognized considering the lower of the book value of the net assets and the fair value less cost of sale.

The Company determined that the fair value less cost of selling the Via Varejo is higher than the book value of the net assets held for sale, considering the recent average price of the Via Varejo in the date and date subsequent of the financial statements.

33.    Insurance coverage

 

     The insurance coverage as of December 31, 2018 is summarized as follows:

 

The Company maintains specific policies for general civil liability of R$100 and civil responsibility of R$134, coverage against fraud and risk (Criminal) in the amount of R$33 and risk of damage protection and Cybersecurity responsibility (Cyber) of R$41. Totaling the coverage of R$308.

      (*)           The value reported above does not include coverage of the hulls, which are insured by the value of 100% of the Foundation Institute of Economic Research – FIPE table.

34.    Subsequent events

34.1.   Issuance of promissory note

On December 17, 2018, the Board of Directors approved the 4th issuance of commercial promissory notes in single serie. On January 10, 800 promissory notes were issued with a unitary value of R$1 and a total value of R$800. The debentures will have a term in January 9, 2022, except for the early redemption hypotheses.

 

 

 

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34.    Subsequent events - Continued

34.2.Foreign currency loan agreement

 

On January 3, 2019 Sendas entered into a foreign currency loan agreement with Scotiabank in the amount of US$ 50, which corresponds to R$197. The contract matures on December 27, 2019 and semi-annual interest payment. On the same date, Sendas signed a swap agreement, exchanging the exchange rate risk of CDI.

 

34.3.TRS (Total Return Swap)

The Board of Directors approved on February 20, 2019, the signing of a new TRS agreement (“TRS”), authorizing the sale of 40.000.000 (forty millions) ordinary shares of Via Varejo held by the Company, corresponding to 3.09% of the share capital of Via Varejo.

 

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