Edgar Filing: TELEFONICA BRASIL S.A.

vivfs2012_6k.htm - Generated by SEC Publisher for SEC Filing

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 6-K

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

For the month of March, 2013

Commission File Number: 001-14475

TELEFÔNICA BRASIL S.A.

(Exact name of registrant as specified in its charter)

TELEFONICA BRAZIL S.A.

(Translation of registrant’s name into English)

Rua Martiniano de Carvalho, 851 – 21^o andar

São Paulo, S.P.

Federative Republic of Brazil

(Address of principal executive office)

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

Form 20-F

Form 40-F

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

Yes

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

Yes

Directa Auditores

Rua Vergueiro, 2016, 8 e 9 andares - Vila Mariana

04102-000 - São Paulo - SP

Tel.: 11 2141-6300 - Fax: 11 2141-6323

www.directapkf.com.br

INDEPENDENT AUDITORS’ REPORT

ON THE FINANCIAL STATEMENTS

To the Shareholders and Management of

TELEFÔNICA BRASIL S.A.

São Paulo - SP

CE0086-13 ING

We have examined the individual and consolidated financial statements of TELEFÔNICA BRASIL S.A., identified as Parent Company and Consolidated, respectively, which comprises the balance sheet as at December 31, 2012 and the respective statement of income, of comprehensive income, of changes in shareholders’ equity and of cash flows for the period then ended, as well as a summary of the main accounting practices and other notes.

Management’s responsibility on the financial statements

The Entity’s management is responsible for the preparation and adequate presentation of the individual financial statements in accordance with the accounting practices adopted in Brazil and the consolidated financial statements in accordance with the International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board – IASB, and in accordance with the accounting practices adopted in Brazil, as well as for the internal controls it has determined as necessary to allow the preparation of financial statements free of material misstatements caused by fraud or error.

Responsibility of the Independent Auditors

Our responsibility is to issue an opinion on these financial statements based on our audit, conducted in accordance with Brazilian and international accounting standards. Those standards require that ethical demands are met and that the audit be planned and executed to obtain reasonable assurance that the financial statements are free of material misstatement.

An audit involves the execution of selected procedures to obtain evidence related to the amounts and disclosures presented in the financial statements. The selected procedures depend on the auditor’s professional judgment, including the assessment of risks of material misstatement in the financial statement caused by fraud or error. In this risk assessment, the auditor considers the internal controls which are relevant to the preparation and adequate presentation of the financial statements of the Association to plan the audit procedures appropriate to the circumstances, but not to express an opinion on the effectiveness of the Association’s internal controls. An audit also includes the assessment of adequacy of the accounting practices used and the reasonableness of the accounting estimates made by the management, as well as the evaluation of the presentation of the financial statements made as a group.

We believe that the audit evidence obtained is sufficient and appropriate to base our opinion.

Opinion on the individual financial statements

In our opinion, the individual financial statements referred to above adequately present, in all relevant aspects, the financial position of TELEFÔNICA BRASIL S.A. as at December 31, 2012, the performance of its operations and cash flows for the year then ended, in accordance with the accounting practices adopted in Brazil.

Opinion on the consolidated financial statements

Directa Auditores

Rua Vergueiro, 2016, 8 e 9 andares - Vila Mariana

04102-000 - São Paulo - SP

Tel.: 11 2141-6300 - Fax: 11 2141-6323

www.directapkf.com.br

In our opinion, the consolidated financial statements referred to above adequately present, in all relevant aspects, the consolidated financial position of TELEFÔNICA BRASIL S.A. as at December 31, 2012, the consolidated performance of its operations and cash flows for the year then ended, in accordance with the international financial reporting standards (IFRS) issued by the International Accounting Standards Board – IASB and accounting practices adopted in Brazil.

Emphasis

According to note 2, the individual financial statements were prepared according to the Accounting practices adopted in Brazil. In the case of TELEFÔNICA BRASIL S.A., these practice differ from IFRSs, applicable to the separate financial statements, solely referring to the evaluation of investments in subsidiaries and joint subsidiaries by the equity method, and for IFRS purposes, it would be evaluated at cost or fair value. Our opinion is not with exception due to this matter.

Other Matters

Statement of Value Added

We have also examined the individual and consolidated statement of value added (SVA), referring to the period ended December 31, 2012, prepared under the Company’s management responsibility, the presentation of which is required according to the Brazilian corporate law for listed companies, and, as supplementary information by the IFRSs, which do not require the presentation of the SVA. These statements were submitted to the same audit procedures previously described and, in our opinion, they are adequately presented, in all material aspects, in relation to the financial statements as a whole.

Audit of comparative amounts of previous year

The exam of the financial statements of the year ended December 31, 2011 was conducted under the responsibility of other independent auditors, who issued an audit report dated February 14, 2012, with no changes.

São Paulo, February 21, 2013.

CRC Nº 2SP013002/O-3

Clóvis Ailton Madeira

CTCRC Nº 1SP106895/O-1 "S"

TELEFÔNICA BRASIL S. A.

Balance Sheets

At December 31, 2012 and 2011

( In thousands of reais )


		Company		Consolidated				Company		Consolidated
ASSETS	Note	12/31/12	12/31/11	12/31/12	12/31/11	LIABILITIES AND EQUITY	Note	12/31/12	12/31/11	12/31/12	12/31/11

CURRENT ASSETS		6,515,094	4,775,480	16,271,942	11,810,118	CURRENT LIABILITIES		5,910,070	6,398,178	13,537,471	12,740,263
Cash and cash equivalents	5	3,079,282	826,902	7,196,079	2,940,342	Personnel, social charges and benefits	15	205,780	244,438	416,355	495,624
Trade accounts receivable, net	6	2,150,724	2,286,636	5,513,436	5,105,860	Trade accounts payable	16	2,191,047	2,396,987	5,889,377	6,037,315
Inventories	7	24,403	31,836	387,809	471,721	Taxes, charges and contributions	17	529,055	700,187	1,781,480	1,691,991
Taxes recoverable	8.1	602,328	1,130,761	2,052,423	2,495,066	Loans and financing	18.1	743,941	510,899	1,255,323	988,413
Judicial deposits and frozen assets	9	-	-	126,625	116,421	Debentures	18.2	702,215	468,624	702,215	468,624
Derivative transactions	36	39,197	674	41,109	1,840	Dividends and interest on shareholders´ equity	19	467,831	972,986	467,831	972,986
Prepaid expenses	10	26,610	37,705	248,337	255,056	Provisions	20	334,852	287,137	496,790	416,313
Dividends and interest on equity	19	394,105	172,679	-	-	Derivative transactions	36	8,747	10,960	29,586	51,162
Other assets	11	198,445	288,287	706,124	423,812	Deferred income	21	69,743	84,956	734,573	761,268
						Reverse split of fractional shares		345,953	346,396	389,510	389,953
NONCURRENT ASSETS		51,067,347	50,269,267	53,982,725	53,679,855	Licenses	1	-	-	994,977	-
Long-term investments pledged as collateral		23,920	25,244	109,708	124,668	Other liabilities	22	310,906	374,608	379,454	466,614
Trade accounts receivable, net	6	-	-	93,378	84,855
Taxes recoverable	8.1	549,225	787,852	738,965	1,014,959	NONCURRENT LIABILITIES		6,991,251	5,320,852	12,036,076	9,418,925
Deferred taxes	8.2	-	-	1,029,598	1,428,878	Taxes, charges and contributions	17	30,057	32,390	488,749	433,071
Judicial deposits and frozen assets	9	3,068,256	2,790,720	3,909,474	3,374,690	Deferred taxes	8.2	1,216,651	788,954	1,216,651	788,954
Derivative transactions	36	21,465	35,142	286,278	225,935	Loans and financing	18.1	582,422	1,277,783	3,756,001	3,959,115
Prepaid expenses	10	16,720	18,290	31,396	32,138	Debentures	18.2	2,253,690	787,807	2,253,690	787,807
Other assets	11	75,587	109,221	140,105	148,293	Provisions	20	2,830,000	2,336,981	3,846,899	3,147,085
						Derivative transactions	36	3,733	13,382	26,545	78,369
INVESTMENTS	12	21,561,061	20,245,883	23,683	37,835	Deferred income	21	39,022	38,616	303,362	156,266
						Other liabilities	22	35,676	44,939	144,179	68,258
PROPERTY, PLANT AND EQUIPMENT, NET	13	10,020,263	9,691,517	17,610,851	17,153,920
						TOTAL EQUITY		44,681,120	43,325,717	44,681,120	43,325,717
INTANGIBLE ASSETS, NET	14	15,730,850	16,565,398	30,009,289	30,053,684
						EQUITY		44,681,120	43,325,717	44,681,120	43,325,717
						Capital	23	37,798,110	37,798,110	37,798,110	37,798,110
						Capital reserves	23	2,686,897	2,719,665	2,686,897	2,719,665
						Income reserves	23	1,100,000	877,322	1,100,000	877,322
						Premium on acquisition of non-controlling interest	23	(70,448)	(29,929)	(70,448)	(29,929)
						Other comprehensive income	23	17,792	7,520	17,792	7,520
						Proposed additional dividend	23	3,148,769	1,953,029	3,148,769	1,953,029

						NON-CONTROLLING INTEREST		-	-	-	5,068


TOTAL ASSETS		57,582,441	55,044,747	70,254,667	65,489,973	TOTAL LIABILITIES AND EQUITY		57,582,441	55,044,747	70,254,667	65,489,973

TELEFÔNICA BRASIL S. A.
Income statements
Years ended December 31, 2012 and 2011
( In thousands of reais )

		Company		Consolidated
	Note	2012	2011	2012	2011

OPERATING REVENUE, NET	24	12,883,541	14,869,327	33,931,422	29,128,740

Cost of services rendered and goods sold	25	(7,716,553)	(8,882,822)	(16,564,464)	(15,039,663)

GROSS PROFIT		5,166,988	5,986,505	17,366,958	14,089,077

OPERATING INCOME (EXPENSES)		(122,127)	(1,332,017)	(10,154,669)	(8,291,711)
Selling expenses	26	(3,094,834)	(3,003,663)	(8,693,696)	(6,948,211)
General and administrative expenses	27	(695,824)	(669,762)	(2,148,476)	(1,785,658)
Equity pickup	12	3,995,228	2,308,650	-	-
Other operating income (expenses), net	28	(326,697)	32,758	687,503	442,158

OPERATING INCOME BEFORE FINANCIAL INCOME AND EXPENSES		5,044,861	4,654,488	7,212,289	5,797,366

Financial income	29	534,786	549,517	1,281,554	1,103,359
Financial expenses	29	(677,478)	(634,580)	(1,572,369)	(1,243,051)

INCOME BEFORE TAXES		4,902,169	4,569,425	6,921,474	5,657,674

Income and social contribution taxes	30	(448,596)	(214,107)	(2,469,293)	(1,295,475)

NET INCOME FOR THE YEAR		4,453,573	4,355,318	4,452,181	4,362,199


Attributable to:
Net income attributed to non-controlling shareholders		-	-	(1,392)	6,881
Net income attributed to controlling shareholders		4,453,573	4,355,318	4,453,573	4,355,318

Basic and diluted earnings per common share		3.72	4.40	3.72	4.40
Basic and diluted earnings per preferred share		4.09	4.84	4.09	4.84

TELEFÔNICA BRASIL S. A.

Statements of changes in equity

Years ended December 31, 2012 and 2011

( In thousands of reais )


			Capital reserves			Income reserves			Other comprehensive income
	Capital	Premium on acquisition of non-controlling interest	Special goodwill reserve	Capital reserve	Treasury stock	Legal reserve	Retained earnings	Additional dividend proposed	Financial instruments available for sale	Derivative transactions	Translation difference of investments abroad	Company’s equity	Non-controlling interest	Total equity

Balances at December 31, 2010	6,575,480	-	63,074	2,688,207	(17,719)	659,556	-	1,694,099	13,296	-	(8,879)	11,667,114	-	11,667,114

Proposed additional dividend for 2010	-	-	-	-	-	-	-	(1,694,099)	-	-	-	(1,694,099)	-	(1,694,099)
Expired dividends and interest on equity	-	-	-	-	-	-	107,874	-	-	-	-	107,874	-	107,874
Capital increase due to merger of Vivo Part. Shares	31,222,630	-	-	47,723	-	-	-	-	-	-	-	31,270,353	-	31,270,353
Withdrawal rights to shareholders due to the Vivo merger	-	-	-	-	(3)	-	-	-	-	-	-	(3)	-	(3)
Repurchase of shares	-	-	-	-	(61,617)	-	-	-	-	-	-	(61,617)	(1,813)	(63,430)
Non-controlling interest	-	(29,929)	-	-	-	-	-	-	-	-	-	(29,929)	-	(29,929)
Other comprehensive income	-	-	-	-	-	-	(42,997)		(3,412)	1,995	4,520	(39,894)	6,881	(33,013)
Net income for the period	-	-	-	-	-	-	4,355,318	-	-	-	-	4,355,318	-	4,355,318
Profit sharing:
Legal reserve	-	-	-	-	-	217,766	(217,766)	-	-	-	-	-	-	-
Dividends	-	-	-	-	-	-	(382,400)	-	-	-	-	(382,400)	-	(382,400)
Interest on equity	-	-	-	-	-	-	(1,867,000)	-	-	-	-	(1,867,000)	-	(1,867,000)
Proposed additional dividend	-	-	-	-	-	-	(1,953,029)	1,953,029	-	-	-	-	-	-

Balances at December 31, 2011	37,798,110	(29,929)	63,074	2,735,930	(79,339)	877,322	-	1,953,029	9,884	1,995	(4,359)	43,325,717	5,068	43,330,785

Proposed additional dividend for 2011	-	-	-	-	-	-	-	(1,953,029)	-	-	-	(1,953,029)	-	(1,953,029)
Expired dividends and interest on equity	-	-	-	-	-	-	89,692	-	-	-	-	89,692	-	89,692
Other changes in equity	-	-	-	-	-	-	(3,240)	-	-	-	-	(3,240)	(23)	(3,263)
Repurchase of shares	-	-	-	-	(32,768)	-	-	-	-	-	-	(32,768)	-	(32,768)
Non-controlling interest	-	(40,519)	-	-	-	-	-	-	-	-	-	(40,519)	(3,653)	(44,172)
Other comprehensive income	-	-	-	-	-	-	(46,056)	-	(3,654)	8,195	5,731	(35,784)	-	(35,784)
Net income for the year	-	-	-	-	-	-	4,453,573	-	-	-	-	4,453,573	-	4,453,573
Profit sharing:
Legal reserve	-	-	-	-	-	222,678	(222,678)	-	-	-	-	-	(1,392)	(1,392)
Dividends	-	-	-	-	-	-	(1,122,522)	-	-	-	-	(1,122,522)	-	(1,122,522)
Proposed additional dividend	-	-	-	-	-	-	(3,148,769)	3,148,769	-	-	-	-	-	-

Balances at December 31, 2012	37,798,110	(70,448)	63,074	2,735,930	(112,107)	1,100,000	-	3,148,769	6,230	10,190	1,372	44,681,120	-	44,681,120


Outstanding shares (in thousands)														1,123,269

VPA – equity value of Company’s shares														39.78

TELEFÔNICA BRASIL S. A.
Statements of comprehensive income
Years ended December 31, 2012 and 2011
( In thousands of reais )


	Company		Consolidated
	2012	2011	2012	2011
Net income for the year	4,453,573	4,355,318	4,452,181	4,362,199

Unrealized losses on investments available for sale	(5,536)	(5,170)	(5,536)	(5,170)
Taxes on unrealized losses on investments available for sale	1,882	1,758	1,882	1,758

Unrealized actuarial losses and effect of limitation of surplus plan assets	(83,309)	(57,598)	(69,782)	(65,176)
Taxes on unrealized actuarial losses and effect of limitation of surplus plan assets	28,325	19,584	23,726	22,179

Gains – derivative transactions	-	-	12,416	3,022
Taxes on gains – derivative transactions	-	-	(4,221)	(1,027)

Cumulative translation adjustments – operations in foreign currency	5,731	4,520	5,731	4,520

Interest in comprehensive income of subsidiaries	17,123	(2,988)	-	-

Net losses recognized in equity	(35,784)	(39,894)	(35,784)	(39,894)


Comprehensive income for the year	4,417,789	4,315,424	4,416,397	4,322,305


Attributable to:
Net income attributed to non-controlling shareholders	-	-	(1,392)	-
Net income attributed to controlling shareholders	4,417,789	4,315,424	4,417,789	4,322,305

Basic and diluted earnings per common share	3.69	4.36	3.69	4.36
Basic and diluted earnings per preferred share	4.06	4.80	4.06	4.80

TELEFÔNICA BRASIL S. A.
Statements of value added
Years ended December 31, 2012 and 2011
( In thousands of reais )



	Company		Consolidated
	2012	2011	2012	2011

Revenues	17,204,211	20,470,838	46,047,359	40,486,930
Sale of goods and services	17,146,952	20,302,208	46,080,645	39,755,569
Other revenues	324,712	469,535	620,987	1,237,942
Provision for impairment of accounts receivable	(267,453)	(300,905)	(654,273)	(506,581)

Inputs acquired from third parties	(7,815,070)	(9,247,074)	(16,460,735)	(15,548,284)
Cost of goods, products and services sold	(5,584,108)	(6,237,109)	(10,722,909)	(8,070,174)
Materials, electric energy, outsourced services and other	(2,297,993)	(2,956,452)	(6,838,525)	(7,349,345)
Loss/recovery of asset values	67,031	(53,513)	1,100,699	(128,765)

Gross value added	9,389,141	11,223,764	29,586,624	24,938,646

Retentions	(2,634,616)	(2,110,275)	(5,493,159)	(4,585,994)
Depreciation and amortization	(2,634,616)	(2,110,275)	(5,493,159)	(4,585,994)

Net value added produced by entity	6,754,525	9,113,489	24,093,465	20,352,652

Transferred value added received	4,530,014	2,858,168	1,281,553	1,103,359
Equity pickup	3,995,228	2,308,650	-	-
Financial income	534,786	549,518	1,281,553	1,103,359

Total value added to be distributed	11,284,539	11,971,657	25,375,018	21,456,011

Distribution of value added	(11,284,539)	(11,971,657)	(25,375,018)	(21,456,011)

Personnel, social charges and benefits	(860,657)	(702,475)	(2,041,280)	(1,435,014)
Direct compensation	(588,540)	(534,423)	(1,323,940)	(1,100,079)
Benefits	(203,092)	(116,906)	(589,541)	(226,342)
Unemployment compensation fund contribution tax (FGTS)	(69,025)	(51,146)	(127,799)	(108,593)
Taxes, charges and contributions	(4,595,394)	(5,593,304)	(15,140,024)	(12,679,126)
Federal	(1,560,059)	(1,324,605)	(6,405,965)	(4,471,035)
State	(2,976,933)	(4,223,367)	(8,636,458)	(8,124,977)
Local	(58,402)	(45,332)	(97,601)	(83,114)
Debt remuneration	(811,014)	(1,052,410)	(2,982,393)	(2,582,303)
Interest	(633,515)	(631,413)	(1,527,077)	(1,236,974)
Rent	(177,499)	(420,997)	(1,455,316)	(1,345,329)
Equity remuneration	(4,453,573)	(4,355,318)	(4,452,181)	(4,362,199)
Interest on equity	-	(1,867,000)	-	(1,867,000)
Dividends	(1,122,522)	(382,400)	(1,122,522)	(382,400)
Retained earnings	(3,331,051)	(2,105,918)	(3,331,051)	(2,105,918)
Non-controlling interest	-	-	1,392	(6,881)
Other	(563,901)	(268,150)	(759,140)	(397,369)
Provisions for labor and civil contingencies, net	(563,901)	(268,150)	(759,140)	(397,369)

TELEFÔNICA BRASIL S. A.
TELEFÔNICA BRASIL S. A.
Cash flow statements
Years ended December 31, 2012 and 2011
( In thousands of reais )



	Company		Consolidated
	2012	2011	2012	2011
Cash from operating activities

Income before taxes	4,902,169	4,569,425	6,921,474	5,657,674

Items not affecting cash

Expenses (income) not representing changes in cash	(657,308)	435,946	6,139,975	5,683,221
Depreciation and amortization	2,634,616	2,110,275	5,493,159	4,585,994
Foreign exchange variation on loans	6,815	63,315	(1,254)	89,549
Monetary variation	(12,493)	(33,317)	51,860	(30,323)
Equity pickup	(3,995,228)	(2,308,650)	-	-
Income on assets written off	(10,747)	(74,304)	(1,049,692)	(482,115)
Provision for impairment of accounts receivable	267,453	300,905	654,273	506,581
Provision for (reversal of) trade accounts payable	(148,914)	53,278	(73,645)	365,415
Provision for (write-offs and reversals of) impairment of inventories	(4,351)	(11,482)	791	(8,966)
Pension and other post-retirement benefits	9,906	6,960	(3,244)	(1,163)
Provisions for tax, labor, regulatory and civil contingencies	336,677	126,652	514,840	255,420
Interest expenses	264,765	192,729	551,580	416,426
Provision for (reversal of) demobilization	(195)	796	(7,854)	(33,138)
Provisions for customer loyalty programs	-	-	14,026	9,861
Other	(5,612)	8,789	(4,865)	9,680

(Increase) decrease in operating assets:	675,812	(235,008)	(557,118)	(479,896)
Trade accounts receivable, net	(131,541)	(231,527)	(1,070,370)	(933,558)
Inventories	11,784	14,748	83,122	(47,355)
Other current assets	634,164	168,188	339,327	601,573
Other noncurrent assets	161,405	(186,417)	90,803	(100,556)

Increase (decrease) in operating liabilities:
	(786,369)	(1,389,056)	(2,771,162)	(2,719,624)
Personnel, social charges and benefits	(38,658)	(55,439)	(79,270)	(56,908)
Trade accounts payable	(166,024)	(106,428)	(613,004)	(279,721)
Taxes, charges and contributions	(87,935)	(33,153)	132,911	130,058
Other current liabilities	(225,758)	(338,690)	(216,292)	(521,056)
Other noncurrent liabilities	(46,184)	(44,019)	(76,893)	(97,655)
Interest paid	(212,327)	(233,255)	(438,409)	(496,103)
Income and social contribution taxes paid	(9,483)	(578,072)	(1,480,205)	(1,398,239)
Total cash generated by operating activities	4,134,304	3,381,307	9,733,169	8,141,375


Cash generated by (used in) investing activities

Increase in capital of affiliates and subsidiaries	(96,607)	(114,000)	-	-
Additions to PP&E and intangible assets, net of donations	(2,051,106)	(2,231,643)	(4,549,100)	(4,653,708)
Cash received from sale of PP&E items	40,628	127,817	1,136,649	610,880
Cash received from divestitures	7,551	-	10,069	-
Dividends and interest on equity received	2,647,353	1,040,211	5,129	-
Cash and cash equivalents through entity consolidation	-	-	-	31,095
Cash and cash equivalents through business combination	-	698,837	-	1,982,898
Total cash generated by (used in) investing activities	547,819	(478,778)	(3,397,253)	(2,028,835)

Cash generated by (used in) financing activities

Payment of loans, financing and debentures	(849,562)	(1,148,003)	(1,279,654)	(1,426,334)
Loans and debentures raised	2,000,000	2,276,774	2,815,825	2,123,727
Payment net of derivative agreements	(9,244)	64,712	(45,413)	56,765
Dividends and interest on equity paid	(3,493,997)	(4,262,729)	(3,493,997)	(5,387,601)
Acquisition of non-controlling interest	(44,172)	(33,850)	(44,172)	(33,850)
Repurchase of treasury stock	(32,768)	(61,620)	(32,768)	(61,620)
Total cash used in financing activities	(2,429,743)	(3,164,716)	(2,080,179)	(4,728,913)


Increase (decrease) in cash and cash equivalents	2,252,380	(262,187)	4,255,737	1,383,627

Cash and cash equivalents at beginning of year	826,902	1,089,089	2,940,342	1,556,715
Cash and cash equivalents at end of year	3,079,282	826,902	7,196,079	2,940,342

Changes in cash and cash equivalents for the year	2,252,380	(262,187)	4,255,737	1,383,627

Telefônica Brasil S. A.

NOTES TO FINANCIAL STATEMENTS

Years ended December 31, 2012 and 2011

(In thousands of reais)

1. THE COMPANY AND ITS OPERATIONS

a. Shareholding controlling interest

Telefônica Brasil S.A. (“Company” or Telefônica Brasil) is headquartered at Avenida Engenheiro Luiz Carlos Berrini, 1.376, in the capital city of the state of São Paulo, Brazil. The Company is a member of Telefónica Group (Group), the telecommunications industry leader in Spain which is also present in several European and Latin American countries. At December 31, 2012 and 2011, Telefónica S.A., holding company of the Group, held total direct and indirect interest of 73.81%, excluding treasury shares, represented by 91.76% common shares and 64.60% of preferred shares outstanding.

b. Operations

The Company’s main business purposes is the rendering of fixed line services and data services in the state of São Paulo, under Fixed Switched Telephone Service Concession Arrangement (STFC) and authorizations, respectively. The Company and its subsidiaries are also authorized to render other telecommunications services, such as: data communication, including broadband internet, mobile telephone services (Personal Mobile Services – SMP) and pay TV services, being (i) by satellite all over the country; (ii) MMDS technology in the cities of São Paulo, Rio de Janeiro, Curitiba and Porto Alegre, until December 2013, due to a waiver signed by the Company to go into effect within 18 months as from June 5, 2012, as a condition to take part in the 4G auction held on June 12 and 13, 2012 (Note 1b.2); cable in the cities of São Paulo, Curitiba, Foz do Iguaçu and Florianópolis.

Service concessions and authorizations are granted by Brazil's Telecommunications Regulatory Agency (ANATEL), under the terms of Law No. 9472, of July 16, 1997 – General Law of Telecommunications (“Lei Geral das Telecomunicações” - LGT), amended by Laws No. 9986, of July 18, 2000 and No. 12485, of September 12, 2011 (Notes 1.b.1 and 1.b.2). It operates under regulations and supplementary plans issued.

b.1. Fixed Switch Telephone Service Concession Arrangement (STFC)

The Company is a concessionaire of the STFC to render fixed line services in the local network and national long distance calls originated in sector 31 of region 3, which comprises the state of São Paulo (except for cities comprising sector 33), established in the General Service Concession Plan (PGO/2008).

The Company’s current STFC was executed on June 30, 2011, is effective from July 1, 2011 to December 31, 2025, and was granted for valuable consideration. This arrangement provides for the possibility of amendments on December 31, 2015 and December 31, 2020. This condition allows ANATEL to set up new requirements and goals for universal and quality of telecommunication services, considering the conditions in place at the time.

The service concession arrangement establishes that all assets owned by the Company and that are indispensable to the provision of the services described in the referred to arrangement are considered reversible assets and are deemed to be part of the service concession assets. These assets will be automatically returned to ANATEL upon termination of the service concession arrangement, according to the regulation in force. At December 31, 2012, estimated residual value of reversible assets was R$6,911,508 (R$6,698,899 at December 31, 2011), which comprised switching and transmission equipment and public use terminals, external network equipment, energy equipment and system and operation support equipment.

Telefônica Brasil S. A.

NOTES TO FINANCIAL STATEMENTS

Years ended December 31, 2012 and 2011

(In thousands of reais)

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

b.2. SMP-related authorizations and frequencies

The business of Vivo S.A. (Vivo), fully-controlled by the Company, including the services it can provide, which are also regulated by ANATEL. It operates under regulations and supplementary plans issued.

Frequency authorizations granted by ANATEL for mobile telephone services may be renewed only once, for a 15-year period, and is subject to payment of fees equivalent to 2% (two percent), in every two years, of the Company’s prior-year revenue, net of taxes and social contributions, related to the application of the Basic and Alternative Plans of Service.

Acquisition of frequencies of 900 and 1800 MHz

In ANATEL auctions held on December 14 and 15, 2010, Vivo won 23 lots offered for sale of sub-ranges of remainders in frequencies of 900 and 1800 MHz, pursuant to call for bid on range H and remainders Nº 002/2010/PVCP/SPV-ANATEL.

On April 28, 2011, in its 604th meeting, ANATEL’s board of directors decided to approve lots 41, 42, 44, 45, 76 to 84, 92, 101, 105, 107, 115, 119, 122, 124, 128 and 163 to Vivo and other winning operators the lots in the aforesaid auction.

On May 30, 2011 the decision was published in the Federal Official Gazette (DOU), and the Terms of Authorization were signed with ANATEL. Accordingly, the actual awarding of such lots allowed Vivo to increase its spectrum, operating now at frequencies of 900 and 1800 MHz on a comprehensive basis.

On the date the Terms of Authorization were signed, R$81,175 was paid, equivalent to 10% of the total amount, and the remaining 90% was paid in December 2011, equivalent to R$730,579. The total amount of R$811,754 was adjusted in June 2011 in accordance with the remaining term of licenses and recorded as intangible assets (Note 14).

STFC Authorization for Vivo

On August 18, 2011 Act Nº 7012 was published in the Federal Official Gazette, authorizing Vivo to provide STFC for the public use in general. Vivo is acting nationwide concerning this authorization, except in the State of São Paulo, where the Company operates.

Acquisition of frequencies of 2.5 GHz

In the auctions for sale of national frequencies of 2.5 GHz pegged to the range of 450 MHz conducted by ANATEL on June 12 and 13, 2012, Vivo won lot 3 among those offered, in accordance with public notice No. 004/2012/PVCP/SPV-Anatel.

The amount offered for lot 3 was R$1.05 billion.

Telefônica Brasil S. A.

NOTES TO FINANCIAL STATEMENTS

Years ended December 31, 2012 and 2011

(In thousands of reais)

On October 11, 2012, through Act Nº 5907 of ANATEL’s Board decided to approve use of radiofrequency blocks, without exclusivity, on a primary basis, in sub-bands 2550 through 2570 MHz / 2670 through 2690 MHz, in connection with the authorizations to engage Personal Mobile Service (SMP) granted to Vivo, as well as of other radiofrequencies in the 2.5 GHz band by the respective winning bids for the lots mentioned in the bid. The authorization terms of the above-mentioned radiofrequency bands were executed on October 16, 2012 and published by the Federal Official Gazette (DOU) on October 18, 2012.

Accordingly, upon the actual awarding of such lot, Vivo increased its service provision capacity powered by 4G technology nationwide and has since then operated in frequency range of 2.5GHz, with band of 20+20 MHz. Besides the range of 2.5GHz, the acquired lot includes the range of 450 MHz for rural areas in the interior of the Brazilian states of Alagoas, Ceará, Minas Gerais, Paraíba, Pernambuco, Piauí, Rio Grande do Norte, São Paulo and Sergipe.

On October 16, 2012, Vivo paid R$105,000, an amount equivalent to 10% (ten per cent) of the total concession amount. The remaining amount of R$994,977 (updated on December 31, 2012), shall be paid in up to 12 months, updated by the IGP-DI rate (General Price Index – Domestic Supply issued by the Fundação Getulio Vargas -), or in 6 equal annual installments maturing between October 2015 and October 2020, updated by the IGP-DI rate plus interest of 1% (one per cent) per month on the adjusted amount.

In the fourth quarter of 2012, the total amount of R$1,050,000 was adjusted in accordance with the remaining life of licenses and recorded in intangible assets (Note 14).

Vivo explores SMP, in accordance with the authorizations given as follows:

Telefônica Brasil S. A.

NOTES TO FINANCIAL STATEMENTS

Years ended December 31, 2012 and 2011

(In thousands of reais)

Operations Areas	Authorization Maturity

First Area
Rio de Janeiro
800/900/1800/1900/2100 MHz and 2.5 GHz radio frequencies	11/29/20 (A band), 11/30/20 (L band), 4/30/23 (J band) and 10/18/27 (X band)

Espírito Santo
800/900/1800/1900/2100 MHz and 2.5 GHz radio frequencies	4/30/23 (J band), 11/30/23 (A and L band) and 10/18/27 (X band)

Amazonas, Roraima, Amapá, Pará and Maranhão
800/900/1800/2100 MHz and 2.5 GHz radio frequencies	11/29/13 (B band), 4/30/23 (J band) and 10/18/27 (X band)

Minas Gerais (except Triângulo Mineiro)
450/800/900/1800/1900/2100 MHz and 2.5 GHz radio frequencies	4/29/23 (A band), 4/30/23 (J band) and 10/18/27 (X band)

Minas Gerais (Triângulo Mineiro)
450/800/900/1800/1900/2100 MHz and 2.5 GHz radio frequencies	4/28/20 (E band), 4/29/23 (J band) and 10/18/27 (X band)

Bahia
800/900/1800/1900/2100 MHz and 2.5 GHz radio frequencies	4/30/23 (J band), 6/29/23 (A and L band) and 10/18/27 (X band)

Sergipe
450/800/900/1800/1900/2100 MHz and 2.5 GHz radio frequencies	4/30/23 (J band), 12/15/23 (A and L band) and 10/18/27 (X band)

Alagoas, Ceará, Paraíba, Pernambuco, Piauí and Rio Grande do Norte
450/1800/1900/2100 MHz and 2.5 GHz radio frequencies	12/7/22 (L band), 4/30/23 (E and J band) and 10/18/27 (X band)

Second Area
Paraná and Santa Catarina
800/900/1800/1900/2100 MHz and 2.5 GHz radio frequencies	4/8/13 (B and L band), 4/30/23 (J and M band) and 10/18/27 (X band)

Rio Grande do Sul
800/900/1800/1900/2100 MHz and 2.5 GHz radio frequencies	12/17/22 (A and L band), 4/30/23 (J and M band) and 10/18/27 (X band)

Federal District
800/900/1800/1900/2100 MHz and 2.5 GHz radio frequencies	7/24/21 (A and L band), 4/30/23 (J and M band) and 10/18/27 (X band)

Goiás and Tocantins
800/900/1800/1900/2100 MHz and 2.5 GHz radio frequencies	4/30/23 (J and M band), 10/29/23 (A and L band) and 10/18/27 (X band)

Mato Grosso
800/900/1800/1900/2100 MHz and 2.5 GHz radio frequencies	4/30/23 (J and M band), 3/30/24 (A and L band) and 10/18/27 (X band)

Mato Grosso do Sul
800/900/1800/1900/2100 MHz and 2.5 GHz radio frequencies	4/30/23 (J and M band), 9/28/24 (A and L band) and 10/18/27 (X band)

Rondônia
800/900/1800/1900/2100 MHz and 2.5 GHz radio frequencies	4/30/23 (J and M band), 7/21/24 (A and L band) and 10/18/27 (X band)

Acre
800/900/1800/1900/2100 MHz and 2.5 GHz radio frequencies	4/30/23 (J and M band), 7/15/24 (A and L band) and 10/18/27 (X band)

Rio Grande do Sul (Pelotas, Morro Redondo, Capão do Leão and Turuçu), Mato Grosso do Sul (CTBC area) and Goiás (CTBC area)
1800/1900/2100 MHz and 2.5 GHz radio frequencies	12/7/22 (L band), 4/30/23 (D, J and M band) and 10/18/27 (X band)

Third Area
São Paulo
450/800/1800/1900/2100 MHz and 2.5 GHz radio frequencies	4/30/23 (J band), 8/5/23 (A and L band) and 10/18/27 (X band)

São Paulo (Ribeirão Preto, Guatapará and Bonfim Paulista)
450/800/1800/1900/2100 MHz and 2.5 GHz radio frequencies	4/30/23 (J band), 1/20/24 (A and L band) and 10/18/27 (X band)

São Paulo (Franca and area)
450/1800/1900/2100 MHz and 2.5 GHz radio frequencies	12/7/22 (L band), 4/30/23 (J band) and 10/18/27 (X band)

Telefônica Brasil S. A.

NOTES TO FINANCIAL STATEMENTS

Years ended December 31, 2012 and 2011

(In thousands of reais)

c. Subsidiaries

Vivo S.A. (Vivo): Engages in the SMP exploration, including activities necessary or useful to the completion of such services, in accordance with authorizations granted.

A. Telecom S.A. (ATelecom): Engages in the provision of the following services: (i) telecommunications management services and installation, operation and maintenance solutions for internet, intranet and extranet, (ii) commercial representation, agency, brokerage and distribution of goods, (iii ) marketing, representation, leasing and maintenance of systems, equipment and telecommunications devices and computers in general, (v) consulting services and technical support for the specification, implementation and maintenance of new voice systems, data and image (vi) import and export of goods and services useful to the attainment of the corporate, and (vii) the share capital of other companies, domestic or foreign, as a partner or shareholder

Telefônica Data S.A. (TData): Engages in the provision and exploration of telecommunication services, as well as preparation, implementation and installation of projects involving the exploration of integrated business solutions, consulting services on telecommunications, activities related to technical assistance service provision, sale, rent and maintenance of telecommunication equipment and network.

Telefônica Sistema de Televisão S.A. (TSTV): Engages in the provision of pay TV services under the Multichannel Multipoint Distribution of Signals (MMDS), besides the provision of telecommunication services in general and Internet.

Ajato Telecomunicações Ltda. (Ajato): Engages in the provision of telecommunication and IT services, access to the telecommunication network, Internet, via radio, encompassing the image and data services of telemarketing, sale of rent, import, export, maintenance and repair of these equipment sets.

GTR Participações e Empreendimentos S.A. (GTR): Engages in holding equity interest in other companies whose purpose is to provide cable and pay TV services, telecommunications in general, production, acquisition, licensing, import and distribution of own or third party TV programs, spare parts and equipment, management and exploration of platforms of pay TV and telecommunication services.

TVA Sul Paraná S.A. (TVA Sul): Engages in cable and pay TV services provision, telecommunications in general, production, acquisition, licensing, import and distribution of own or third party TV programs, spare parts and equipment, management, updating and exploration of pay TV platform and telecommunications and editing of journals.

Lemontree Participações S.A. (Lemontree): Engages in holding equity interest in other companies whose purpose is to provide cable and pay TV services, telecommunications in general, production, acquisition, licensing, import and distribution of own or third party TV programs, spare parts and equipment, management and exploration of platforms of pay TV and telecommunication services and sale of data.

Comercial Cabo TV São Paulo S.A. (Comercial Cabo): Engages in cable and pay TV services, assistance and consulting on telecommunications in general, production, acquisition, licensing, import and distribution of own or third party TV programs, spare parts and equipment, management and exploration of platforms of pay TV and telecommunication services and exploration of full range of advertising and promotion.

Telefônica Brasil S. A.

NOTES TO FINANCIAL STATEMENTS

Years ended December 31, 2012 and 2011

(In thousands of reais)

Aliança Atlântica Holding B.V. (Aliança): Headquartered in Amsterdam, The Netherlands, with 50% interest by Telefônica Brasil, its revenues from the sale of shares of Portugal Telecom in June 2010. Until May 8, 2012 the Company held shares in Zon Multimédia, a company of Portugal Telecom group engaged in pay TV service provision, Internet, distribution of audiovisual contents, movies and telecommunications. Such shares were sold on May 8, 2012.

Companhia AIX de Participações (AIX): Engages in holding equity interest in the Refibra Consortium as a leader, as well as activities involving direct and indirect exploration of execution, completion and exploration of underground duct lines for fiber optics.

Companhia ACT de Participações (ACT): Engages in holding equity interest in the Refibra Consortium as a leader, as well as activities involving the provision of technical assistance for design of network completion projects, running the studies required to make it economically feasible, as well as inspecting the progress of Consortium-related activities.

The table below lists the Company’s direct and indirect subsidiaries and equity held in total capital:

Subsidiaries	12/31/12	12/31/11
Vivo S.A (a)	100%	100%
Telefônica Data S.A.	100%	100%
A.Telecom S.A.	100%	100%
Telefônica Sistema de Televisão S.A.	100%	100%
Ajato Telecomunicações Ltda.	100%	100%
GTR Participações e Empreend. S.A. (b)	100%	66.67%
TVA Sul Paraná S.A. (b)	100%	91.50%
Lemontree S.A. (b)	100%	83.00%
Comercial Cabo TV São Paulo S.A. (b)	100%	93.19%
Aliança Atlântica Holding B.V.(c)	50%	50%
Companhia AIX de Participações (c)	50%	50%
Companhia ACT de Participações (c)	50%	50%

(a) Wholly consolidated as from April 2011 (Notes 1 and 4).

(b) Wholly consolidated as from January 2011 and wholly-owned subsidiaries as from June 2012.

d. Share trading on stock exchanges

The Company is registered with the Brazilian Securities and Exchange Commission (CVM) as a publicly-held under category A (issuers authorized to trade any kind of securities), its shares being traded on the São Paulo Stock Exchange (BM&FBovespa). It is also registered with the Securities and Exchange Commission (SEC) in the USA, with its American Depositary Shares (ADSs) level II, listed only in preferred shares, being traded on the New York Stock Exchange (NYSE).

d.1) Shares traded on the São Paulo Stock Exchange (BM&F Bovespa)

On September 21, 1998, the Company started trading its shares on the São Paulo Stock Exchange (BM&F Bovespa), under tickers TLPP3 and TLPP4, for common and preferred shares.

Telefônica Brasil S. A.

NOTES TO FINANCIAL STATEMENTS

Years ended December 31, 2012 and 2011

(In thousands of reais)

In the Special Shareholders' Meeting of Vivo Participações S.A. (Vivo Part.) and Telecomunicações de São Paulo S. A. (Telesp) held on October 3, 2011, merger of Vivo Part. into Telesp was approved. On the same date, its corporate name changed to Telefonica Brasil S.A., and on October 6, 2011 the Company changed its ticker codes to VIVT3 and VIVT4 for common and preferred shares, respectively, and the stock exchange code to Telefonica Brasil (see Note 4).

d.2) Shares traded on the New York Stock Exchange (NYSE)

On November 16, 1998, the Company started the ADR trading process on the New York Stock Exchange (NYSE), which currently has the following characteristics:

· Type of share: preferred.

· Each ADR represents 1 (one) preferred share.

· Shares are traded as ADR through code “VIV” on the NYSE.

· Foreign depositary bank: The Bank of New York.

· Custodian bank in Brazil: Banco Itaú S.A.

e. Corporate events

e.1) Corporate restructuring – merger of Vivo Part. shares by Telefônica Brasil

In a meeting held on March 24, 2011, ANATEL granted previous consent for the corporate restructuring between the Company and Vivo Part. Act Nº 1970, of April 1, 2011, was published in the Federal Official Gazette (DOU) on April 11, 2011.

In the Company’s Extraordinary Shareholders’ Meeting held on April 27, 2011, unanimous voting approved the Protocol of Merger of Shares and Instrument of Justification agreed between the Company and Vivo Part., each Vivo Part.’s share being replaced with 1.55 Company’ shares. The Company’s common and preferred shareholders and Vivo Part.’s common shareholders deadline to exercise their withdrawal rights was May 30, 2011. The shareholders opting for the withdrawal right were repaid the shares demonstrably held by the companies on December 27, 2010, when the material news release was published. The amounts repaid to the Company’s common and preferred shareholders and to the Vivo Part.’s common shareholders reached R$23.06 and R$25.30 by share, respectively, calculated at their related net equity values disclosed in the balance sheet as of December 31, 2010.

e.2) Corporate restructuring – Concentration of SMP Authorizations and Simplification of the Corporate Structure

Vivo Part. Board of Director’s Meeting held on. on June 14, 2011 approved the proposal for concentration of authorizations for SMP service provision (until then held by Vivo Part. in the State of Minas Gerais and by Vivo in other Brazilian states), thus consolidating the operations and the Terms of Authorization for SMP exploration at Vivo.

As a proposal for making feasible this corporate restructuring, on October 1, 2011 Vivo Part. assigned Vivo (the group’s mobile operator holding the SMP authorizations in the other Brazilian states) the commercial establishments (including the assets, rights and obligations) regarding the SMP services in the State of Minas Gerais, with Vivo Part. thus becoming the ultimate holding.

In accordance with the provisions of Law Nº 6404/76, an specialized company was engaged to prepare a valuation report on a portion of Vivo Part.’s net assets (as of August 31, 2011) consisting of SMP operations in the State of Minas Gerais assigned to Vivo’s assets and of Vivo Part.’s assets to be merged by the Company.

Telefônica Brasil S. A.

NOTES TO FINANCIAL STATEMENTS

Years ended December 31, 2012 and 2011

(In thousands of reais)

Due to the fact that Vivo Part. is the Company’s wholly-owned subsidiary since April 27, 2011, whose equity already comprised the investment in Vivo shares, the merger: i) did not lead to capital increase at the Company; ii) did not bring along the replacement of shares held by noncontrolling shareholders of Vivo Part. with Company shares; and iii) did not require a valuation report on net assets at market prices for calculation of the ratio of shares replaced, in the absence of noncontrolling shareholders to be protected.

Accordingly, under the terms of article 226, paragraphs I and II of Law Nº 6404/76, shares held by the Company in the net equity value of Vivo Part.’s were cancelled. On conclusion of the corporate restructuring, Vivo Part. was incorporated by the Company on October 3, 2011, and Vivo became the wholly-owned subsidiary, simplifying and rationalizing the structure of costs of companies involved.

f. Agreement between Telefônica S.A. and Telecom Itália (Act Nº3,804, of July 7, 2009, and Act No. 68,276, of October 31, 2007, both from ANATEL Board)

In October 2007, TELCO S.p.A. (in which Telefónica S.A. holds 42.3% interest) completed the acquisition of 23.6% of Telecom Italia. Vivo is an indirect subsidiary of Telefónica S.A. Telecom Italia holds interest in TIM Participações S.A. (TIM), a mobile telephone service company in Brazil. As a result of the acquisition of its interest in Telecom Itália, Telefónica S.A. is not directly involved in TIM operations. Furthermore, any transactions between the Company, Vivo and TIM are ordinary mobile telephone transactions regulated by ANATEL.

BASIS FOR PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS

2.1 - Basis for Preparation and Presentation

The Company’s financial statements for years ended December 31, 2012 and 2011 are presented in thousands of reais (except where otherwise indicated) and is presented considering the Company’s ability to continue as a going concern.

The consolidated financial statements were prepared and are presented in accordance with the International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB), which are not different from accounting practices adopted in Brazil, which comprise CVM rules and CPC pronouncements.

In a meeting held on February 21, 2013, the Company’s Board of Directors authorized these financial statements to be issued.

Some items of the balance sheet and income statement for the year ending December 31, 2011 were reclassified to allow comparability with the information of December 31, 2012.

The Company states that the consolidated financial statements are in compliance with International Financial Reporting Standards (IFRS) issued by the IASB and with the pronouncements, interpretations and guidelines issued by CPC ruling on December 31, 2012, which include the new pronouncements, interpretations and revisions of the following standards, amendments and interpretations published by IASB and by the International Financial Reporting Interpretations Committee (IFRIC) which went into effect on January 1, 2012:

Telefônica Brasil S. A.

NOTES TO FINANCIAL STATEMENTS

Years ended December 31, 2012 and 2011

(In thousands of reais)

Amendments to IAS 12, Income Tax – Recovery of Underlying Assets: This amendment provided clarification on how to calculate deferred taxes on investment properties measured at fair value. It introduced the rebuttable presumption that deferred taxes on investment properties measured at fair value under IAS 40 should be defined considering that their book value will be recovered through sale.

Amendments to IFRS 7, Financial Instruments: Disclosures – Enhanced Derecognition Disclosure Requirements: This amendment requires additional disclosure on financial assets transferred, yet not derecognized, so as to enable the financial information users to understand the relation with those assets not derecognized and related liabilities. Furthermore, this amendment requires disclosures as to the ongoing involvement in the derecognized financial assets so that the user can evaluate the nature of the entity’s ongoing involvement in these derecognized assets and related risks. This amendment became effective for annual periods beginning on or after July 1, 2011; in Brazil, it will become effective after CPC approval and CVM ruling for publicly-held companies.

Worth noting is that this amendment only affects disclosures – however , it is not currently applicable to the Company, and has no impact on the Company’s and its subsidiaries’ financial position or performance.

New IFRS and interpretations of the International Financial Reporting Interpretations Committee (IFRIC) not yet effective as of December 31, 2012

At the date these financial statements were prepared, the following IFRS, amendments and IFRIC interpretations had been issued, but their application was not mandatory:

IAS 1 Presentation of Other Comprehensive Income Account: IAS 1 revisions affected the grouping of items presented in other comprehensive income. Items which might be reclassified (or “recycled”) to profit or loss at a future point in time (e.g. net gains on hedged net investments, exchange variation differences from translation of operations abroad, net movements of hedge of cash flows or gains on sale of assets classified as available for sale) should be presented separately from items which will never be reclassified (e.g. actuarial gains or losses on defined benefit plans). The revisions affect only the presentation, with no impacts on the financial position or performance of the Company and its subsidiaries. These revisions go into effect for years beginning July 1, 2012 or thereafter and will be applied to the Company’s financial statements when effective.

IAS 19 Employee Benefits (Revised): The IASB issued various revisions to IAS 19, which comprises fundamental amendments, such as the removal of the corridor method and the concept of returns expected on the plan assets, and simple clarifications on valuation and devaluation and reformulation. The Company does not expect significant impacts on its consolidated financial statements. This revised IAS will go into effect for annual periods beginning January 1, 2013 or thereafter.

IAS 28 Investments in Associates and Joint Ventures (Revised in 2011): In connection with the issuance of IFRS 11 and IFRS 12 (see below), IAS 28 is now IAS 28 - Investments in Associates and Joint Ventures and describes the application of the equity method for investments in joint ventures, besides the investment in associates. The Company does not anticipate any significant impacts on its consolidated financial statements. This revision will go into effect for annual periods beginning January 1, 2013 or thereafter.

Telefônica Brasil S. A.

NOTES TO FINANCIAL STATEMENTS

Years ended December 31, 2012 and 2011

(In thousands of reais)

IAS 32 Offsetting Financial Assets and Financial Liabilities – Revisions of IAS 32: These revisions shed light on the meaning of the phrase “currently has the legal right to set off”. These revisions also clarify the adoption of offsetting criteria set forth by IAS 32 for the clearing systems (like the clearing house systems), which apply non-simultaneous gross mechanisms for clearing. These revisions are not expected to affect the Company’s and its subsidiaries’ financial position, performance or disclosures effective for annual periods beginning January 1, 2014 or thereafter.

IFRS 1 Government Loans – IFRS 1 Revisions: These revisions set the first-time application of the requirements of IAS 20 - Accounting for Government Grants and Disclosure of Government Assistance, prospectively governmental loans existing on the date of transition to IFRS. The entities may opt for applying the IFRS 9 requirements (or IAS 39, as the case may be) and IAS 20 to governmental loans, retrospectively, had the necessary information been obtained upon the initial recording of loans. The exception would give relief to the entities adopting the standard for the first time from retrospectively measuring government loans at an interest rate below market rate. The review will go into effect for annual periods beginning January 1, 2013 or thereafter. The revision will not affect the Company and its subsidiaries.

IFRS 7 Disclosures – Offset Between Financial Assets and Financial Liabilities – Revisions of IFRS 7: These revisions require an entity to disclose information about the rights to offset and related agreements (e.g. agreement for guarantee). The disclosures provide users with useful information for them to assess the effect of the offsetting agreements on the financial position of an entity. The new disclosures are necessary for all financial instruments recognized and offset in accordance with IAS 32 Financial Instruments - Presentation. The disclosures also apply to financial instruments recognized which are subject to a master agreement for offsetting or alike, irrespective of being or not offset in accordance with IAS 32. The revision will go into effect for annual periods beginning January 1, 2013 or thereafter.

IFRS 9 Financial Instruments: Classification and Measurement: IFRS 9, as issued, reflects the first phase of IASB work regarding the replacement of IAS 39 and applies to the classification and measurement of financial assets and financial liabilities, as set forth by IAS 39. The standard initially was effective for annual periods beginning January 1, 2013, however the standard Amendments to IFRS 9, Effective Date of IFRS 9 and Disclosures for Transition, issued in December 2011, changed the mandatory effective date to January 1, 2015. Later on, the IASB will address the recording of hedging instruments and impairment of financial assets. The adoption of the first phase of IFRS 9 will go into effect for the classification and measurement of the Company’s and its subsidiaries’ financial assets, but will not affect the classification and measurement of financial liabilities. The Company will quantify the effect together with other phases, when the final standard is issued, comprising all the phases.

IFRS 10 Consolidated Financial Statements, IAS 27 Separate Financial Statements: IFRS 10 replaces the portion of IAS 27 – Consolidated and Separate Financial Statements which deals with the recording of consolidated financial statements. It also addresses issues raised by SIC-12 Consolidation – Special-purpose Entities. IFRS 10 establishes a single control model applied to all entities, including special-purpose entities. The amendments introduced by IFRS 10 will require management’s significant judgmental analysis to determine which entities are subsidiaries and therefore required to be consolidated by a parent company.

Telefônica Brasil S. A.

NOTES TO FINANCIAL STATEMENTS

Years ended December 31, 2012 and 2011

(In thousands of reais)

Based on preliminary analyses, IFRS 10 is not expected to have impacts on the investments currently held by the Company. This standard will go into effect for annual periods beginning January 1, 2013.

IFRS 11 Joint Ventures: IFRS 11 replaces IAS 31 – Interests in Joint Ventures SIC-13 –Jointly-controlled Entities – Non-monetary Contributions by Venturers. IFRS 11 eliminates the option to record jointly-controlled companies (JCC) based on a proportional consolidation. Instead, the JCC falling into the joint venture definition shall be recorded using the equity method. The application of new standard will affect the Company’s financial position, eliminating the proportional consolidation of Aliança, AIX and ACT (Note 12). By applying the new standard, the investments in the aforesaid companies will be recorded using the equity method. This standard will go into effect for annual periods beginning January 1, 2013 and shall be applied retrospectively to joint ventures held on the initial application date. It is estimated that the IFRS 11 impact on the current period (which will correspond to the comparative period of the financial statements at December 31, 2013), considering certain items, consists of decrease in revenues by R$28,308 and a decrease in operating income by R$1,370, since joint venture income will be presented below operating income. Current assets and current liabilities will decrease by R$64,873 and R$2,791, respectively, while noncurrent assets will be increased by R$60,012, and noncurrent liabilities will be decreased by R$2,896.

IFRS 12 Disclosure of Interests in Other Entities: IFRS 12 includes all disclosures previously contained in IAS 27 regarding the consolidated financial statements, as well as all disclosures previously contained in IAS 31 and IAS 28. These disclosures regard interest held by an entity in subsidiaries, joint ventures, associates and structured entities. A number of new disclosures are also necessary, but there will be no impact on the Company’s financial position or performance. This standard will go into effect for annual periods beginning January 1, 2013 or thereafter.

IFRS 13 Fair Value Measurement: IFRS 13 sets a single source of guideline in IFRS for all fair value measurements. IFRS 13 does not change the time an entity is required to use fair value, but provides guidance on how to measure fair value in accordance with IFRS, whenever fair value is required or allowed. This standard will go into effect for annual periods beginning January 1, 2013 or thereafter. The application of this standard will have no effect on the company.

Annual improvements – May 2012

The following improvements will not affect the Company and its subsidiaries:

IFRS 1 First-time Adoption of the International Financial Reporting Standards (IFRS): This improvement explains why an entity which discontinued the use of IFRS in the past and opted or was compelled to adopt IFRS may re-adopt IFRS 1. Should IFRS 1 not be re-adopted, the entity should retrospectively restate its financial statements as if it had never discontinued the use of IFRS.

IAS 1 Presentation of Financial Statements: This improvement clarifies the difference between additional voluntary comparative information and necessary minimum comparative information. Generally, the necessary minimum comparative information relates to the prior period.

IAS 16 Fixed Assets: This improvement explains that the main spare parts and equipment for service provision which comply with the definition of fixed assets are not inventories.

Telefônica Brasil S. A.

NOTES TO FINANCIAL STATEMENTS

Years ended December 31, 2012 and 2011

(In thousands of reais)

IAS 32 Financial Instruments: Presentation: This improvement clarifies that income taxes arising from distribution to shareholders are recorded in accordance with IAS 12 Income Taxes.

IAS 34 Interim Financial Statements: This revision presents an alignment with the requirements for disclosure of total assets of the segment with total liabilities of the segment in the interim financial statements. This clarification also ensures that the interim disclosures are in line with annual disclosures.

These improvements will go into effect for annual periods beginning January 1, 2013 or thereafter.

2.2 - Bases for consolidation and significant changes at consolidation level

In the consolidation, all balances of assets, liabilities, revenues and expenses from transactions and interest in net equity between the Company and its subsidiaries were eliminated.

The main events and changes in the consolidation environment that, due to their significance, should be taken into consideration when analyzing the consolidated information for the years ended December 31, 2012 and 2011, as follows:

Acquisition of Vivo Part. by the Company

In the Company’s Extraordinary Shareholders’ Meeting held on April 27, 2011, unanimous voting approved the Protocol of Merger of Shares and Instrument of Justification agreed between the Company and Vivo Part., each Vivo Part.’s share being replaced with 1.55 Company’ shares. Given this merger of shares, Company’s capital increased by R$31,222,630. The Company’s consolidated financial statements include the results of Vivo Part. (merged by the Company on October 3, 2011) and Vivo since April 1, 2011. Vivo Part. and Vivo were included in the Company’s consolidated financial statements under the full consolidation method.

Consolidation of TVA companies

As from January 1, 2011, the Company included companies GTR, TVA Sul, Lemontree and Comercial Cabo in its consolidated financial statements under the full consolidation method.

Acquisition of Lemontree and GTR shares

On September 29, 2011, the Company acquired 68,533,233 common shares, which represented 49% of this type of shares of Lemontree, which is the holder of 80.1% common shares of Comercial Cabo. Thus, the Company became holder of 83% interest in Lemontree and 93.19% in Comercial Cabo.

On June 6, 2012, the Company exercised its call option in relation to (a) 71,330,508 remaining common shares, corresponding to 51% of the voting capital of Lemontree, which controls Comercial Cabo, a company that provides cable television services in the state of São Paulo; and (ii) 923,778 remaining common shares of GTR, holder of 50.9% of TVA Sul common shares, a company that provides cable television services outside the state of São Paulo, given that these shares were previously held by Abril Group. The call option was exercised in this date, and concludes the acquisition of Lemontree and GTR remaining shares, which started with the partial exercise of the call option implemented on September 29, 2011, with the acquisition of Lemontree common shares, representing 49% of its capital. Amounts corresponding to the acquisition of the remaining common shares of Lemontree and GTR, as described above, totaled R$37,737 and R$6,434, respectively.

Telefônica Brasil S. A.

NOTES TO FINANCIAL STATEMENTS

Years ended December 31, 2012 and 2011

(In thousands of reais)

These transactions were accounted for as acquisition of a non-controlling shareholders’ interest for the purpose of disclosure and measurement in these financial statements, the effect of which is recognized in the statement of equity.

Upon exercising this option, the Company became holder of 100% of the shares representing the voting and total capital of Lemontree and GTR and, indirectly, of the companies operating cable TV services located in the cities of São Paulo and Curitiba, Foz do Iguaçu and Florianópolis.

Disposal of shares of Zon Multimédia – Serviços de Telecomunicações e Multimédia, SGPS, S.A.

On May 8, 2012, the Company disposed of 1,618,652 (1,196,395 directly and 422,257 indirectly through Aliança Atlântica) common shares representing 0.52% of Zon Multimédia – Serviços de Telecomunicações e Multimédia, SGPS, S.A. (ZON) voting capital. Consolidated net income (amount obtained from disposal of shares held and divestiture of investments) of this transaction amounted to R$1,486.

Corporate Restructuring

Aiming to simplify the current organizational structure of the Company, as well as assisting the integration of business and generating synergies from a effectiveness providing services perspective, the Company filed with ANATEL on March 15, 2012 request for prior approval of corporate restructuring, which became legally viable because of legislative changes applicable to concessionaires STFC through Law No. 12,485.

The restructuring proposal could be implemented only after prior approval by ANATEL, who is currently analyzing the case.

3. SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES

a) Cash and cash equivalents

These are held to meet short-term cash commitments, and not for investment or other purposes. Cash and cash equivalents include cash, positive balances in current accounts and short-term investments redeemable within no longer than 90 days as from the date of contracts and with insignificant risk of change in market value (Note 5).

b) Trade accounts receivable, net

These are determined at the value of services provided according to the contracted conditions, net of the provision for impairment. It includes the services provided to customers who have not been billed up to the balance sheet date, as well as accounts receivable regarding sales of cell phones, simcards and accessories. The provision for impairment is set up in order to cover eventual losses, if any, and takes into consideration mainly the expected default (Note 6).

Telefônica Brasil S. A.

NOTES TO FINANCIAL STATEMENTS

Years ended December 31, 2012 and 2011

(In thousands of reais)

c) Inventories

These are stated at average acquisition cost, net of allowance for reduction to realizable value. It includes cell phones, simcards, prepaid cards, accessories, consumables and maintenance. The net realizable value consists of the sale in the ordinary course of business, less estimated necessary costs for sale (Note 7).

The provision for impairment is set up for materials and devices deemed to be obsolete or whose quantities are greater than those usually sold by the Company in a reasonable length of time.

d) Prepaid expenses

These are measured at the values actually disbursed on services engaged and not yet incurred. Prepaid expenses are allocated to profit or loss as services are provided and economic benefits are received (Note 10).

e) Investments

Equity interest in subsidiaries (individual or joint) is valued under the equity method in the individual financial statements. In the consolidated financial statements, investments in controlled companies are fully consolidated, and investments in jointly-controlled companies are consolidated in a proportional way.

Under the equity method, the investment in a controlled company is accounted for in the balance sheet at cost, plus the variations after acquisition of equity interest in the controlled company.

The statement of income reflects the portion of results from operations of controlled companies. Whenever a change is directly recognized in net equity of controlled companies, the Company will recognize its portion in the variations occurred and will disclose this fact, whenever applicable in the statement of changes in equity. Unrealized gains and losses from transactions between the Company and its subsidiaries are eliminated in accordance with the interest held in the subsidiary.

The equity interest in controlled companies will be measured in the Income Statement as equity pickup, representing income attributable to shareholders of controlled companies.

The financial statements of subsidiaries are prepared for the same period of disclosure as that of the Company. When necessary, adjustments are made for the accounting policies to be in accordance with those adopted by the Company.

After applying the equity method, the Company determines whether it is necessary to recognize and additional impairment on the Company’s and its subsidiaries’ investment. The Company determines, at each year end, if there is objective evidence that the investment in subsidiaries has been impaired. If so, the Company calculates the amount of impairment as the difference between the value recoverable from the affiliate and the book value, and accounts for the amount in the statement of income.

In case of significant influence over subsidiaries, the Company then values and recognizes the investment at fair value. In the statement of income will be accounted for any difference between the book value of subsidiaries upon loss of significant influence and the fair value of the remaining investment and results of sale.

Telefônica Brasil S. A.

NOTES TO FINANCIAL STATEMENTS

Years ended December 31, 2012 and 2011

(In thousands of reais)

In consolidation, all balances of assets and liabilities, revenues and expenses from transactions and equity interest between the Company and its subsidiaries were eliminated.

The effects on the financial statements translation of Aliança (jointly controlled) are recognized in Company’s equity as “Cumulative translation adjustments”.

f) Property, Plant and equipment, net

These are stated at acquisition and/or construction cost, net of accumulated depreciation and provision for impairment, if applicable. Such cost includes the borrowing costs for long-term construction projects, whenever the recognition criteria are met, net of credits of State VAT (ICMS), which were recorded as taxes recoverable.

The costs of assets are capitalized until they are in condition expected for them to become operational.

Expenses subsequent to the entry of asset into operation are recognized immediately in profit or loss, in line with the accrual method. Expenses incurred for improvements in assets (increase in installed capacity or useful life) are capitalized.

The estimated costs to be incurred in the dismantling of towers and equipment at rented properties are capitalized in contrast with the provision for asset retirement (Note 20) and depreciated over the useful life of the equipment, which is not longer than the rental period.

The depreciation is calculated on a straight-line basis over the useful life of assets, at rates which take into consideration the estimated useful life of assets based on technical studies. The net book value and useful life of assets and depreciation methods are annually revised and prospectively adjusted, as the case may be.

A fixed asset is written off when sold or no future economic benefit is expected to arise from its use or sale. Any gain or loss from disposal of asset (calculated as the difference between net value of sale and net book value of asset) are recognized in profit or loss for the year the asset is written off.

g) Intangible Assets (including goodwill)

These are stated at acquisition and/or construction cost, net of accumulated amortization and provision for impairment, if applicable.

They include rights of use of software acquired from third parties, licenses for concession and authorization acquired from ANATEL, customer portfolio, trademarks and other intangible assets.

The useful life of an intangible asset is determined as definite or indefinite, namely:

(a) Intangible assets with definite life are amortized over the economic useful life under the straight-line method and assessed to determine impairment whenever there is evidence of loss of economic value of the asset. The amortization period and method for an intangible asset with definite life are revised once a year. Changes in the estimated useful life or in the expected consumption of future economic benefits from these assets are accounted for in light of changes in the amortization period or method, as the case may be, being treated as changes in accounting estimates.

Telefônica Brasil S. A.

NOTES TO FINANCIAL STATEMENTS

Years ended December 31, 2012 and 2011

(In thousands of reais)

(b) Indefinite life intangible assets are not amortized, and a recoverability test is performed annually or when there are indications that the book value cannot be recovered. The assessment of indefinite life is annually revised to determine whether this assessment continues to be justifiable. Otherwise, the change in useful life from indefinite to definite is made on a prospective basis.

Gains and losses from write-off of an intangible asset are measured as the difference between net value from sale and the asset book value and recognized in the statement of income for the year the asset is written off.

Goodwill on acquisition of investments and supported by future profitability is treated as an indefinite life intangible asset.

h) Leasing

The agreements containing clauses on use of specific assets and rights to use assets are assessed to identify the accounting treatment to be given from a leasing viewpoint.

Finance lease in which the Company or its subsidiaries obtain the risks and benefits relating to the ownership of the leased item is capitalized at the inception of the lease at the fair value of the leased asset or, if lower, at the present value of minimum payments of leasing. Costs are increased, where applicable, by the initial direct costs incurred in the transaction. The payments of finance lease are allocated to financial charges and reduction in leasing liability so as to obtain constant interest rates on the remaining balance of the liability.

The amounts recorded in fixed assets are depreciated for the shorter between the estimated economic useful life of assets and the stated term set in the lease agreement.

Implicit interest in liabilities accounted for is allocated to profit or loss in accordance with the length of the agreement under the effective interest rate method.

The agreements in which the lessor keeps a significant portion of risks and benefits are considered as operating lease and its effects are recognized in profit or lossfor the year throughout the life of the contract.

The Company’s subsidiaries have agreements classified as finance lease both as a lessor or a lessee. As a lessor, A.Telecom has equipment lease agreements (Solutions IT Product) for which it recognizes, on the date of installation, revenues at present value of the amounts of the agreement as a contra-entry to accounts receivable. As a lessee, Vivo holds agreements for rental of towers and rooftops in connection with a sale and leaseback financial transaction whose residual value remained unchanged at the time of the sale. As a result, a liability for the present value of the minimum mandatory installments and deferred revenue based on the difference between the sales price and the present value mentioned, were recognized in the current year.

The difference between the nominal value of the installments and accounts receivable/payable is recognized as financial income/expense under the effective interest rate method throughout the term of the agreement (Note 29).

Telefônica Brasil S. A.

NOTES TO FINANCIAL STATEMENTS

Years ended December 31, 2012 and 2011

(In thousands of reais)

i) Analysis of the recoverability of assets

In compliance with IAS 36/CPC1 (R1), the Company and its subsidiaries revise, as so required, the net book value of assets to assess events or changes in the economic, operating or technological circumstances which may indicate deterioration or impairment.

If such evidence is identified and net book value exceeds value recoverable, a provision for impairment is set up by adjusting net book value to the recoverable amount.

The value recoverable is defined as the greater between value-in-use and net selling price.

In the estimate of value-in-use of asset, the estimated future cash flows are discounted at present value, using a discount rate based on the capital cost rate “The Capital Asset Pricing Model” (CAPM) before taxes, which reflects the weighted average capital cost and specific risks of the asset.

The net selling price is determined, whenever possible, based on a firm sale contract in an arm’s length transaction between knowledgeable and interested parties, adjusted by expenses attributable to the sale of the asset or, in the absence of a firm sale contract, based on the market price of an active market or on the price of the most recent transaction with similar assets.

Losses on continuing operations, including impairment of inventories, are recognized in the statement of income as expenses compatible with the function of assets.

For assets, excluding goodwill, a valuation is made at each year end to determine whether indications of impairment previously recognized may no longer exist or have been reduced.

An impairment previously recognized is reversed only in case of change in the assumptions used to determine the recoverable value of the asset as from the most recent recognition of impairment.

The reversal is limited for the book value of the asset not to exceed its value recoverable nor the book value which would have been determined, net of depreciation, had any impairment not been recognized in assets in prior years. This reversal is recognized in the income statement.

The following criteria are applied to the assessment of impairment on the following assets:

i.1) Goodwill: The impairment test is performed annually, at the end of the fiscal year or when circumstances indicate impairment loss of book value.

Whenever the value recoverable is lower than book value, an impairment is recognized. Goodwill impairment cannot be reversed in future fiscal years.

i.2) Intangible assets: indefinite life intangible assets are tested for impairment once a year, whether individually or at cash generating unit level, as the case may be, or when the circumstances indicate impairment of book value.

i.3) Determination of value in use: The main assumptions used to estimate the value in use are as follows:

Telefônica Brasil S. A.

NOTES TO FINANCIAL STATEMENTS

Years ended December 31, 2012 and 2011

(In thousands of reais)

a) Revenues: Revenues are projected considering the growth of the customers base, the evolution of market revenues in view of GDP and the equity interest held by the Company and its subsidiaries in this market;

b) Operating costs and expenses: Variable costs and expenses are projected in accordance with the dynamics of the customers base, and fixed costs are projected in line with the historical performance of the Company and its subsidiaries, as well as the historical growth of revenues; and

c) Capital investments: Investments in capital goods are estimated in view of the technological infrastructure necessary to make feasible service offer.

Key assumptions are based on the historical performance of the Company and its subsidiaries and on reasonable macroeconomic assumptions based on financial market projections, documented and approved by Company management.

The recovery test of fixed and intangible assets of the Company and its subsidiaries did not lead to recognition of losses for the years ended December 31, 2012 and 2011, since the estimated market value exceeds net book value on the assessment date.

j) Business combination and goodwill

Business combinations are accounted for under the acquisition method. The acquisition cost is measured at fair value of assets, equity instruments and liabilities incurred or assumed on the acquisition date. Identifiable assets acquired, liabilities and contingencies assumed upon business combination are initially measured at fair value on the acquisition date, regardless of the interest held by non-controlling shareholders.

Initially, goodwill is the excess acquisition cost over net fair value of assets acquired, liabilities assumed and identifiable contingent liabilities of an acquired on the date of acquisition. If the acquisition cost is lower than fair value of the acquired net asset, the difference is recognized directly in the income statement.

After the initial recognition, goodwill is measured at cost, net of any accumulated impairment. For impairment test purposes, goodwill acquired on a business combination is, as from the date of acquisition, allocated to the cash generating unit expected to be benefited by combination synergies, regardless of other acquired assets or liabilities being attributed to such unit.

Whenever goodwill is an integral part of a cash generating unit and a portion of such unit is disposed of, the goodwill associated with the operation disposed of is included in the operating cost when determining gain or loss on disposal. Goodwill disposed of in these circumstances is determined based on the proportional values of the portion d