vivodf1q15_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 May, 2015

Commission File Number: 001-14475



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

 

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

 

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


 

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

Form 20-F

X

 

Form 40-F

 

 

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

Yes

 

 

No

 

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

Yes

 

 

No

 

 

 

 

 
 

Condomínio São Luiz

Av. Presidente Juscelino Kubitschek, 1830

Torre I - 8º Andar - Itaim Bibi

04543-900 - São Paulo - SP - Brasil

Tel: (5511) 2573-3000

ey.com.br

 

A free translation from Portuguese into English of Independent Auditor’s Report on quarterly financial statements prepared in Brazilian currency in accordance with accounting practices adopted in Brazil and International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB)

 

Independent auditor’s report on quarterly financial statements   

 

The Shareholders, Board of Directors and Officers

Telefônica Brasil S.A.

São Paulo - SP

 

We have reviewed the individual and consolidated interim financial information of Companhia Telefônica Brasil S.A., (“Company”), contained in the Quarterly Information Form (ITR) for the quarter ended March 31, 2015, which comprise the balance sheet as at March 31, 2015 and the related statements of income, of comprehensive income, of changes in equity and of cash flows for the three-month period then ended, including other explanatory information.

 

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

 

Scope of review

 

We conducted our review in accordance with Brazilian and International Standards on Review Engagements (NBC TR 2410 and ISRE 2410 - Review of Interim Financial Information Performed by the Independent Auditor of the Entity, respectively). A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with auditing standards and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

 

Conclusion on the individual and consolidated interim financial information

 

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

 

 

 

 


 
 

 

Condomínio São Luiz

Av. Presidente Juscelino Kubitschek, 1830

Torre I - 8º Andar - Itaim Bibi

04543-900 - São Paulo - SP - Brasil

Tel: (5511) 2573-3000

ey.com.br

 

 

Other matters

 

Statements of value added

 

We have also reviewed the individual and consolidated interim statements of value added (SVA) for the three-month period ended March 31, 2015, prepared under management’s responsibility, whose presentation in the interim financial information is required by rules issued by the Brazilian Securities and Exchange Commission (CVM) applicable to preparation of Quarterly Information (ITR), and as supplementary information under IFRS, which do not require SVA presentation. This statement has been subject to the same review procedures previously described and, based on our review, nothing has come to our attention that causes us to believe that it is not fairly presented fairly, in all material respects, in relation to the overall accompanying interim financial information.

 

Audit of the balance sheet as of December 31, 2014 and review of the interim statements of income, of changes in equity, of cash flows and of value added for the three-month period ended March 31, 2014

 

The balance sheet as of December 31, 2014, presented for comparison purposes, was previously audited by other independent auditors, who issued an unmodified report dated February 12, 2015.  In addition, the interim statements of income, of changes in equity, of cash flows and of value added for the three-month period ended March 31, 2014, presented for comparison purposes, were reviewed by other independent auditors, who issued an unmodified report dated May 7, 2014.  

 

São Paulo, April 27, 2015

 

ERNST & YOUNG

Auditores Independentes S.S.

CRC-2SP015199/O-6

 

 

 

Luiz Carlos Passetti

Accountant CRC-1SP144343/O-3

Héctor Ezequiel Rodríguez Padilla

Accountant CRC-1SP299427/O-9

 

 


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

1)   OPERATIONS

 

a) Background information

 

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

 

At March 31, 2015 and December 31, 2014, Telefónica S.A., holding company of the Group, held a total of 73.96% direct and indirect interest in the Company – 91.82% of common shares and 64.78% of preferred shares (Note 21).

 

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

 

b) Operations

 

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

 

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

 

b.1) STFC service concession arrangement

 

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

 

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

 

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

 

b.2) SMP authorization arrangement

 

The Company operates SMP services, in accordance with the authorizations it has been given. Frequency authorizations granted by ANATEL may be renewed only once, over a 15-year period, through payment, every two years after the first renewal, of fees equivalent to 2% of the Company’s prior-year revenue, net of taxes and social contribution taxes, related to the application of the Basic and Alternative Service Plans (Note 20).

Pág. 1


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

The information on the areas of operation (regions) and due dates of the radiofrequency authorizations is the same of Note 1b2) – “SMP Authorization Arrangements”, as disclosed in the financial statements at December 31, 2014.

 

c) Proposal for Acquisition of GVT Participações S.A.

 

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

 

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

 

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

 

The Company will finance the payment of this installment with capital increase through public offering, whose terms and conditions were approved by the Company’s Board of Directors in a meeting held on March 25, 2015 (Note 1e).

 

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

 

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

 

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

 

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

 

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

 

This transaction is subject to obtainment of the applicable corporate and regulatory authorizations, including Brazil’s Administrative Council for Economic Defense (“CADE”) and ANATEL, in addition to other conditions among those usually applicable to this kind of transaction.

 

 

 

 

Pág. 2


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

On December 22, 2014, ANATEL approved the acquisition of all GVT shares by the Company under certain conditions, including: (i) maintaining the current services and plans offered by both GVT and the Company for a certain period; (ii) maintaining the contracts currently held by GVT customers for a certain period; (iii) maintaining the current geographic scope of the services provided by GVT and the Company, in addition to expanding operations to at least 10 municipalities within 3 years, beginning January 26, 2015; and (iv) relinquishing the STFC license held by GVT within up to 18 months after ANATEL’s decisions. The ruling contains further details and may be referred to in the Federal Official Gazette (“DOU”) of December 26, 2014 (Ruling No. 430/2014-CD, of December 24, 2014).

 

On March 25, 2015, CADE approved the Concentration Control Agreement (“ACC”) No. 08700.009732/2014-93 (linked to ACC 08700.009731/2014-49, also approved on that date), involving the Company, GVT and CADE, which its object is the acquisition of all GVT’s shares by the Company. This ACC provides for certain conditions, including: (i) maintaining the current services, plans and contracts offered by both GVT and the Company for a certain period; (ii) maintaining the current geographic scope of the services provided by GVT and the Company, as well as expanding its operations; (iii) maintaining, for a certain period, some specific quality indicators for GVT's broadband services provided to its customers; and (iv) commitment with certain obligations referring to waiver of Vivendi’s political rights in the Company.

 

d) Agreement between Telefónica S.A. and Telecom Italia, S.p.A.

 

TELCO S.p.A. (“TELCO”) has a 22.4% interest with voting rights in Telecom Itália, and is the majority shareholder of this company.

 

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

 

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

 

In the same document, Italian shareholders of TELCO granted to Telefónica an option to purchase all of their shares in TELCO, and such option is conditioned on prior competition defense and telecommunications approvals that are required (including in Brazil and Argentina). The purchase option is available since January 1, 2014 and remain available while the Shareholders’ Agreement is in effect, except (i) between June 1 and 30, 2014 and January 15 to February 15, 2015, and (ii) in certain periods if the Italian shareholders of TELCO request the entity’s spin-off.

 

On December 4, 2013, CADE approved, subject to the conditions described below, the acquisition, by Telefónica, of the total interest held by Portugal Telecom, SGPS SA and PT Móveis – Serviços de Telecomunicações, SGPS, SA (“PT”) in Brasilcel NV, which controlled Brazilian mobile telecommunications operator Vivo Participações S.A. (“Vivo Participações”), a company merged by Telefônica Brasil S.A. The transaction has been approved by ANATEL and its completion (requiring no prior approval from CADE at the time) took place immediately after approval from ANATEL, on September 27, 2010.

 

 

 

Pág. 3


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

The conditions imposed by CADE in relation to this decision are the following:

 

·       a new shareholder of former Vivo Participações shares the control of former Vivo Participações with Telefónica, under conditions identical to those applicable to PT, when it held interest in Brasilcel NV, or Telefónica ceases to have direct or indirect interest in TIM Participações S.A.; and

 

·       a fine of R$15 million to Telefónica for violation of the intent and objective of the agreement that Telefónica entered into with CADE (as a condition for approval of the initial acquisition process of Telecom Itália in 2007), due to the subscription and payment of Telefónica shares without voting right in TELCO, in its recent capital increase. This decision also imposes to Telefónica the obligation to dispose of its nonvoting shares held in TELCO.

 

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

 

On June 16, 2014, the Italian shareholders of TELCO decided to exercise their rights to request spin-off ensured by the Shareholders' Agreement of the company. This spin-off was approved by the Annual General Meeting of TELCO held on July 9, 2014, and is subject to prior authorization by relevant authorities, including CADE and ANATEL in Brazil. After its authorization, this spin-off will be implemented by means of full assignment of TELCO’s current interest in Telecom Itália capital to four other companies, each fully held by one of the current TELCO shareholders, and each shareholder will hold Telecom Itália shares in a number proportional to the current economic participation of the respective future controlling shareholder of TELCO.

 

The spin-off will result in Telefónica holding, by means of a special purpose entity, 14.77% of the voting shares of Telecom Itália, and 8.3% of such shares will be exchanged with Vivendi as mentioned above, and 6.47% of the shares, pegged to debentures issued by Telefónica in July 2014, convertible on the maturity date into shares of Telecom Itália, since TELCO’s spin-off.

 

On December 22, 2014 and March 12, 2015, ANATEL authorized TELCO’s spin-off, in a transaction impacting the swap transaction conducted with Vivendi, allowing Telefónica to hold direct interest in Telecom Itália, through a full subsidiary. Such decision is conditioned on the suspension and waiver by Telefónica of all its political rights in Telecom Itália, and finally on the divestiture of the direct interest to be held by Telefónica in Telecom Itália The acceptance of this waiver was publicly disclosed by Telefónica by means of a material news released published on March 20, 2015 in Italy, Spain and United States.

 

In addition, on March 12, 2015, ANATEL approved the swap transaction agreed between Telefónica and Vivendi, pursuant to the terms under which Vivendi will exchange all its voting shares and part of its non-voting shares held in the Company for an indirect interest held by Telefónica in Telecom Itália, subject to certain conditions, such as prohibiting Vivendi to increase its interest in the Company.

 

On March 25, 2015, CADE approved TELCO’s spin-off, subject to the execution of three concentration control agreements. In such agreements, Telefónica and the Company undertake to comply with certain provisions, such as: (i) maintaining the current services and plans offered by both GVT and the Company for a certain period; (ii) maintaining the contracts currently held by GVT customers for a certain period; (iii) maintaining the current geographic scope of the services provided by GVT and the Company, in addition to expanding operations in accordance with the expansion plan to be submitted to ANATEL; (iv) maintaining, for a certain period, some specific quality indicators for services provided by GVT to its customers; (v) commitment with certain obligations undertaken by Vivendi, under the terms of the agreement entered into by Vivendi and CADE; (vi) waiving and suspending all political rights held by Telefónica in Telecom Itália; and (vii) divestiture of all shares held by Telefónica to Telecom Itália.

 

 

 

 

 

 

Pág. 4


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

e) Public offer of primary distribution of shares

 

The Company Board of Directors approved, in a meeting held on March 25, 2015, the public offer of primary distribution of common and preferred shares issued by the Company, all of them registered, book-entry and without par value, free and clear of any burden or lien, including ADSs, represented by American Depositary Receipts (“ADRs”), to be conducted simultaneously in Brazil and abroad (“Global Offer” or “Offer”), as well as its terms and conditions.

 

The effective capital increase, within the authorized capital limit, excluding the right of first refusal by the current Company shareholders, in conformity with the provisions of article 172, item I, of the Corporation Law, as well as the price per Common and Preferred Share, will be approved in a meeting of the Company Board of Directors to be held before CVM grants the Offer registration.

 

On March 26, 2015, the Company filed at CVM a request for automatic registration of the Offer, which will be conducted simultaneously: (i) in Brazil (“Brazilian Offer”), in a non-organized OTC, in conformity with the CVM Rule No. 400, on December 29, 2003, through a public offer of primary distribution of shares registered in the CVM; and (ii) abroad (“International Offer"), through public offer of primary distribution of preferred shares, as ADSs, represented by ADRs, jointly with the Brazilian Offer shares, to be registered in the Securities and Exchange Commission (“SEC”), in conformity with the U.S. Securities Act of 1933.

 

As reported in Note 1c), the funds from this Offer will be used mostly to acquire GVT.

 

The Company shareholders will not have the right of first refusal for the subscription of shares, under the terms of article 172 of Law No. 6404/76, but they will have priority to subscribe shares, proportionally to their ownership interest in the Company capital.

 

The complete information of this Public Offer of Primary Distribution of Shares was filed and are available in the CVM website (www.cvm.org.br) and in the Company website (www.telefonica.com.br/ri), and the information on the Company’s capital increase is described in Note 34.

 

2)    BASIS OF PREPARATION AND PRESENTATION OF QUARTERLY INFORMATION

 

2.1) Statement of Compliance

 

The individual quarterly information (Company) was prepared and is presented in accordance with accounting practices adopted in Brazil, which comprise the rules issued by CVM, and with CPC 21 - Interim Financial Reporting, issued by the Brazilian FASB (CPC), which are in accordance with the International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board (IASB).

 

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

 

At the meeting held on May6, 2015, the Executive Board authorized the issue of this quarterly information, which was ratified by the Board of Directors at a meeting held on May 12, 2015.

 

2.2) Basis of preparation and presentation

 

The Company’s quarterly information for the three-month period ended March 31, 2015 is presented in thousands of reais (unless otherwise stated) and was prepared under a going concern assumption.

 

This quarterly information compares the quarters ended March 31, 2015 and 2014, except the balance sheets, in which the positions at March 31, 2015 and December 31, 2014 are compared.

 

This quarterly information was prepared pursuant to the accounting principles, practices and criteria consistent with those adopted in preparing the financial statements for the year ended December 31, 2014 (Note 3 – “Summary of Significant Accounting Practices”) and must be analyzed jointly with the referred to financial statements.

 

Pág. 5


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

Certain accounts in the tables of these notes to quarterly information and Statements Of Value Added (“SVA”) were reclassified so as to allow comparison of information for the three-month periods ended March 31, 2015 and 2014.

 

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

 

IFRS 9 Financial Instruments, issue of final version: This standard encompasses all phases of the financial instruments project and replaces IAS 39 – Financial Instruments: Recognition and Measurement and all prior versions of IFRS 9. It introduces new requirements for classification and measurement, impairment loss and hedge accounting. This standard is applicable as from the year beginning on January 1, 2018, and its early adoption is not permitted. Its retrospective application is required; however, the presentation of comparative information is not mandatory. Early adoption of previous versions of IFRS 9 (2009, 2010 and 2013) is permitted if the initial application date falls before February 1, 2015. The adoption of IFRS 9 will impact the classification and measurement of the Company’s financial assets, but it will not impact the classification and measurement of its financial liabilities.

 

IFRS 10 and IAS 28 Sale or Contribution of Assets between an Investor and its Associate or Joint Venture, revision: This standard determines the accounting treatment for transactions involving assets between an investor and its associates or joint ventures. This standard is applicable as from the year beginning on January 1, 2016. The Company does not expect any significant impacts on its financial position.

 

IFRS 10, 12 and IAS 28 Investment Entities: Applying the Consolidation Exception, revision: This standard addresses the requirements for financial statements disclosure for an investment entity. This standard is applicable as from the year beginning on January 1, 2017. The Company does not expect any significant impacts on its financial position.

 

IFRS 11 Accounting for Acquisitions of Interests in Joint Operations, revision:  The amendments to this standard require that a joint investor, which records the acquisition of interest in a joint operation that is a business, apply the relevant IFRS 3 principles applicable to business combination. The amendments further clarify that the interest previously held in a joint operation is not remeasured upon acquisition of additional interest in the same joint operation, while the joint control is held. In addition, a scope exclusion was added to IFRS 11 in order to specify that the amendments are not applicable when the parties sharing joint control, including the reporting entity, are under the common control of the main controlling party. The amendments apply both to the acquisition of final interest in a joint operation and the acquisition of any additional interest in the same joint operation, and are effective prospectively as from the year beginning on January 1, 2016. The Company does not expect significant impacts on its financial position.

 

IFRS 14 Regulatory Deferral Accounts, issue: This standard is optional and allows a company that conducts rate-regulated activities to continue applying most part of its accounting policies on regulatory deferral account balances, upon first-time adoption of IFRS. The companies that adopt IFRS 14 must present regulatory deferral account balances as separate accounts in the balance sheets and in other comprehensive income. This standard requires disclosures on the nature and risks associated with company’s regulated rates and the effects of such regulation on the financial statements. This standard is applicable as from the year beginning on January 1, 2016. The Company does not expect any significant impacts on its financial position, since it has already been preparing its financial statements based on the effective IFRS.

 

IFRS 15 Revenue from Contracts with Customers, issue: This standard requires that an entity recognize revenue, reflecting the consideration expected to be received in exchange of the control over goods or services. When adopted, this standard will replace most part of the current guidance on revenue recognition (standards IAS 11, IAS 18, IFRIC 13, IFRC 15 and IFRIC 18). This standard is applicable as from the year beginning on January 1, 2017, and it may be adopted retrospectively, or using a cumulative effect approach. The Company is evaluating the impacts on its quarterly information and disclosures, and has neither defined the transition method nor determined the potential impacts on its financial reports yet.

 

IAS 1 Disclosure Initiative, revision:  This standard addresses changes in the overall financial statements of a company. This standard is applicable as from the year beginning on January 1, 2016. The Company does not expect any significant impacts on its financial position.

Pág. 6


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

IAS 16 and IAS 38 Clarification of Acceptable Methods of Depreciation and Amortization, revision: The amendments clarify the depreciation and amortization methods, subject to the alignment to the concept of future economic benefits expected from the use of assets over its economic useful life. This standard is applicable as from the year beginning on January 1, 2016. The Company does not expect any significant impacts on its financial position.

 

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

 

2.3) Basis of consolidation

 

At March 31, 2015 and December 31, 2014, the Company held interest in the following companies:

 

Investees

 

Type of investment

 

(%) of interest held

 



Country (head office)

 

Business activity

Telefônica Data S.A. ("TData")

 

Wholly-owned subsidiary

 

100.00%

 

Brazil

 

Telecommunications

 

 

 

 

 

 

 

 

 

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

 

Jointly-controlled subsidiary

50.00%

 

Netherlands

 

Holding, operating in the telecommunications industry

 

 

 

 

 

 

 

 

 

Companhia AIX de Participações ("AIX")

 

Jointly-controlled subsidiary

50.00%

 

Brazil

 

Underground telecommunications network

 

 

 

 

 

 

 

 

 

Companhia ACT de Participações ("ACT")

 

Jointly-controlled subsidiary

50.00%

 

Brazil

 

Technical assistance in telecommunications network

 

Interests held in subsidiary or jointly-controlled entity are measured under the equity method in the individual quarterly information. In the consolidated quarterly information, investments and all asset and liability balances, revenues and expenses arising from transactions and interest held in subsidiary are fully eliminated. Investments in jointly-controlled entities are measured under the equity method in the consolidated quarterly information.

 

3)  CASH AND CASH EQUIVALENTS

 

 

Company

 

Consolidated

 

03/31/15

 

12/31/14

 

03/31/15

 

12/31/14

Cash and bank checking accounts

71,935

 

63,136

 

74,079

 

64,010

Short-term investments

2,060,263

 

3,772,168

 

3,138,075

 

4,628,679

Total

2,132,198

 

3,835,304

 

3,212,154

 

4,692,689

 

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

 

4) TRADE ACCOUNTS RECEIVABLE, NET

 

 

Company

 

Consolidated

 

03/31/15

 

12/31/14

 

03/31/15

 

12/31/14

Billed amounts

4,989,119

 

4,957,574

 

5,575,572

 

5,538,184

Unbilled amounts

1,843,041

 

1,868,376

 

1,993,511

 

1,997,798

Interconnection amounts

1,041,918

 

991,752

 

1,041,918

 

991,752

Receivables from related parties (Note 28)

213,039

 

157,306

 

169,196

 

115,048

Gross accounts receivable

8,087,117

 

7,975,008

 

8,780,197

 

8,642,782

Estimated impairment losses

(1,491,917)

 

(1,313,956)

 

(1,818,601)

 

(1,619,316)

Total

6,595,200

 

6,661,052

 

6,961,596

 

7,023,466

 

 

 

 

 

 

 

 

Current

6,411,415

 

6,470,764

 

6,667,465

 

6,724,061

Noncurrent

183,785

 

190,288

 

294,131

 

299,405

 

Consolidated balances of noncurrent trade accounts receivable include:

 

·       At March 31, 2015, R$183,785 (R$190,288 at December 31, 2014) referring to the business model of resale of goods to legal entities, receivable within 24 months. At March 31, 2015, the impact of the present-value adjustment was R$37,183 (R$29,872 at December 31, 2014).

 

Pág. 7


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

·       At March 31, 2015, R$110,346 (R$109,117 at December 31, 2014) referring to "Soluciona TI", traded by TData, which consists in lease of IT equipment to small and medium enterprises and receipt of fixed installments over the contractual term. Considering the contractual terms, this product was classified as finance lease. At March 31, 2015, the impact of the present-value adjustment was R$7,128 (R$7,522 at December 31, 2014).

 

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

 

 

Company

 

Consolidated

 

03/31/15

 

12/31/14

 

03/31/15

 

12/31/14

Falling due

4,626,436

 

4,853,376

 

4,870,220

 

5,107,714

Overdue from 1 to 30 days

1,004,360

 

914,709

 

1,028,452

 

970,086

Overdue from 31 to 60 days

339,821

 

318,552

 

341,431

 

328,367

Overdue from 61 to 90 days

213,539

 

207,542

 

250,136

 

243,981

Overdue from 91 to 120 days

95,388

 

75,895

 

106,312

 

73,962

Overdue above 120 days

315,656

 

290,978

 

365,045

 

299,356

Total

6,595,200

 

6,661,052

 

6,961,596

 

7,023,466

 

At March 31, 2015 and December 31, 2014, no customer represented more than 10% of trade accounts receivable, net.

 

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

 

 

 

 

 

Company

 

Consolidated

Balance at 12/31/13

 

 

 

(1,033,665)

 

(1,271,622)

Complement net of estimated losses (Note 23)

 

 

 

(196,448)

 

(207,860)

Write-off due to use

 

 

 

134,532

 

133,224

Balance at 03/31/14

 

 

 

(1,095,581)

 

(1,346,258)

Complement net of estimated losses

 

 

 

(635,736)

 

(688,476)

Write-off due to use

 

 

 

417,361

 

415,418

Balance at 12/31/14

 

 

 

(1,313,956)

 

(1,619,316)

Complement net of estimated losses (Note 23)

 

 

 

(304,662)

 

(324,415)

Write-off due to use

 

 

 

126,701

 

125,130

Balance at 03/31/15

 

 

 

(1,491,917)

 

(1,818,601)

 

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

 

 

 

 

 

Consolidated

 

 

 

 

03/31/15

 

12/31/14

Present value receivable

 

 

 

510,979

497,523

Unrealized financial income

 

 

 

7,128

 

7,522

Nominal value receivable

 

 

 

518,107

 

505,045

Estimated impairment losses

 

 

 

(253,271)

 

(240,191)

Net amount receivable

 

 

 

264,836

 

264,854

 

 

 

 

 

 

 

Current

 

 

 

154,490

 

155,737

Noncurrent

 

 

 

110,346

 

109,117

 

At March 31, 2015, the aging list of gross trade accounts receivable referring to “Soluciona TI” product is as follows:

Pág. 8


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

 

 

 

 

 

Consolidated

 

 

 

 

Nominal value receivable

 

Present value receivable

Falling due within 1 year

 

 

 

277,128

 

277,128

Falling within 5 years

 

 

 

240,979

 

233,851

Total

 

 

 

518,107

 

510,979

 

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

 

5)   INVENTORIES, NET

 

 

Company

 

Consolidated

 

03/31/15

 

12/31/14

 

03/31/15

 

12/31/14

Materials for resale (a)

582,722

 

441,793

 

631,160

 

464,718

Consumer materials

62,296

 

54,847

 

63,209

 

55,820

Other inventories

7,773

 

7,749

 

7,773

 

7,749

Gross total

652,791

 

504,389

 

702,142

 

528,287

Estimated impairment losses and obsolescence

(53,230)

 

(45,901)

 

(54,722)

 

(48,486)

Total

599,561

 

458,488

 

647,420

 

479,801

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

 

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

 

 

 

Company

 

Consolidated

Balance at 12/31/13

 

(52,275)

 

(58,161)

Complement net of estimated losses

 

(5,823)

 

(7,336)

Reversal of estimated losses

 

3,724

 

3,724

Balance at 03/31/14

 

(54,374)

 

(61,773)

Complement net of estimated losses

 

(21,329)

 

(23,676)

Reversal of estimated losses

 

29,802

 

36,963

Balance at 12/31/14

 

(45,901)

 

(48,486)

Complement net of estimated losses

 

(10,244)

 

(10,258)

Reversal of estimated losses

 

2,915

 

4,022

Balance at 03/31/15

 

(53,230)

 

(54,722)

 

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

 

6)   DEFERRED TAXES AND TAXES RECOVERABLE

 

6.1) Taxes recoverable

 

 

Company

 

Consolidated

 

03/31/15

 

12/31/14

 

03/31/15

 

12/31/14

State VAT - ICMS (a)

1,660,384

 

1,686,062

 

1,672,117

 

1,696,578

Income and social contribution taxes recoverable (b)

457,981

 

597,718

 

461,186

 

601,515

Taxes and contribution withheld at source (c)

103,052

 

115,445

 

119,686

 

134,795

PIS and COFINS

72,802

 

85,662

 

73,569

 

86,447

Other

18,975

 

18,722

 

24,094

 

23,532

Total

2,313,194

 

2,503,609

 

2,350,652

 

2,542,867

               

Current

1,973,327

 

2,163,404

 

2,010,785

 

2,202,662

Noncurrent

339,867

 

340,205

 

339,867

 

340,205

 

(a) This includes credits arising from acquisition of property and equipment (subject to offsetting in 48 months), in ICMS refund request, which was paid under invoices later cancelled, for the rendering of services, tax substitution, rate difference, among others.

(b) These refer to prepayments of income and social contribution taxes, which will be offset against federal taxes to be determined in the future.

(c) These refer to credits on Withholding Income Tax (IRRF) on short-term investments, interest on equity and others, which are used as deduction in operations for the period and social contribution tax withheld at source on services provided to public agencies.

Pág. 9


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

 

6.2) Deferred taxes

 

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

 

Deferred taxes were determined considering future realization, as follows:

 

(a)    Income and social contribution tax losses: the amount recorded which, in accordance with Brazilian tax legislation, may be offset to the limit of 30% of the tax bases computed for the following years, with no expiry date.

 

(b)    Merged tax credit: represented by tax benefits arising from corporate restructuring of goodwill for expected future profitability, whose tax use follows the limit set forth in tax legislation.

 

(c)    Income and social contribution taxes on temporary differences: amounts will be realized upon payment of provisions, effective impairment loss of trade accounts receivable, or realization of inventories, as well as upon reversal of other provisions.

 

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

 

 

Company

 

Balances at 12/31/13

 

Income statement

 

Equity (comprehensive income)

 

Balances at 03/31/14

 

Income statement

 

Equity (comprehensive income)

 

Balances at 12/31/14

 

Income statement

 

Equity (comprehensive income)

 

Balances at 03/31/15

Deferred tax asset

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income and social contribution tax losses (a)

122,321

 

(90,391)

 

-

 

31,930

 

38,234

 

-

 

70,164

 

(53,036)

 

-

 

17,128

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IRPJ and CSLL on temporary differences (c)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provisions for labor, tax, civil and regulatory contingencies

1,322,244

 

73,594

 

-

 

1,395,838

 

58,511

 

-

 

1,454,349

 

92,918

 

-

 

1,547,267

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade accounts payable and other provisions

338,458

 

79,400

 

-

 

417,858

 

18,941

 

-

 

436,799

 

71,209

 

-

 

508,008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer portfolio and trademarks

-

 

-

 

-

 

-

 

311,141

 

-

 

311,141

 

-

 

-

 

311,141

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated impairment losses on accounts receivable

241,203

 

13,804

 

-

 

255,007

 

48,925

 

-

 

303,932

 

49,072

 

-

 

353,004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated losses on modem and other property and equipment items

164,518

 

9,365

 

-

 

173,883

 

(6,190)

 

-

 

167,693

 

2,627

 

-

 

170,320

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Post-employment benefits

143,537

 

2,925

 

-

 

146,462

 

9,764

 

-

 

156,226

 

3,808

 

-

 

160,034

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Profit sharing

71,287

 

(34,183)

 

-

 

37,104

 

107,955

 

-

 

145,059

 

(53,585)

 

-

 

91,474

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for loyalty program

31,199

 

(11)

 

-

 

31,188

 

320

 

-

 

31,508

 

424

 

-

 

31,932

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accelerated accounting depreciation

154,181

 

(4,472)

 

-

 

149,709

 

(134,334)

 

-

 

15,375

 

567

 

-

 

15,942

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated impairment losses on inventory

10,884

 

325

 

-

 

11,209

 

(1,195)

 

-

 

10,014

 

310

 

-

 

10,324

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IRPJ and CSLL on temporary differences

157,988

 

(2,716)

 

440

 

155,712

 

(20,864)

 

20,976

 

155,824

 

47,403

 

336

 

203,563

Total deferred tax assets

2,757,820

 

47,640

 

440

 

2,805,900

 

431,208

 

20,976

 

3,258,084

 

161,717

 

336

 

3,420,137

 

 

Pág. 10


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

 

Deferred tax liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Merged tax credit (b)

(337,535)

 

-

 

-

 

(337,535)

 

-

 

-

 

(337,535)

 

 

 

-

 

(337,535)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IRPJ and CSLL on temporary differences (c)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

License

(719,780)

 

(79,976)

 

-

 

(799,756)

 

(188,140)

 

-

 

(987,896)

 

(54,082)

 

-

 

(1,041,978)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effects of goodwill generated upon merger of Vivo Part.

(568,338)

 

(36,800)

 

-

 

(605,138)

 

(110,400)

 

-

 

(715,538)

 

(36,800)

 

-

 

(752,338)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vivo Part. goodwill

(480,366)

 

(53,574)

 

-

 

(533,940)

 

(155,137)

 

-

 

(689,077)

 

(50,982)

 

-

 

(740,059)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Technological innovation law

(308,490)

 

17,610

 

-

 

(290,880)

 

34,426

 

-

 

(256,454)

 

13,742

 

-

 

(242,712)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer portfolio

(461,870)

 

21,128

 

-

 

(440,742)

 

440,742

 

-

 

-

 

-

 

-

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks and patents

(479,548)

 

7,157

 

-

 

(472,391)

 

472,391

 

-

 

-

 

-

 

-

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IRPJ and CSLL on temporary differences

(124,527)

 

14,319

 

(691)

 

(110,899)

 

(6,714)

 

(113,267)

 

(230,880)

 

4,066

 

(205,881)

 

(432,695)

Total deferred tax liabilities

(3,480,454)

 

(110,136)

 

(691)

 

(3,591,281)

 

487,168

 

(113,267)

 

(3,217,380)

 

(124,056)

 

(205,881)

 

(3,547,317)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total noncurrent assets (liabilities), net

(722,634)

 

(62,496)

 

(251)

 

(785,381)

 

918,376

 

(92,291)

 

40,704

 

37,661

 

(205,545)

 

(127,180)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred tax assets (liabilities), net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Represented in the balance sheet as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncurrent deferred tax assets, net

-

 

 

 

 

 

-

 

 

 

 

 

40,704

 

 

 

 

 

-

Noncurrent deferred tax liabilities, net

(722,634)

 

 

 

 

 

(785,381)

 

 

 

 

 

-

 

 

 

 

 

(127,180)

 

 

 

Consolidated

 

Balances at 12/31/13

 

Income statement

 

Equity (comprehensive income)

 

Balances at 03/31/14

 

Income statement

 

Equity (comprehensive income)

 

Balances at 12/31/14

 

Income statement

 

Equity (comprehensive income)

 

Balances at 03/31/15

Deferred tax asset

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income and social contribution tax losses (a)

262,915

 

(117,072)

 

-

 

145,843

 

(52,297)

 

-

 

93,546

 

(76,418)

 

-

 

17,128

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IRPJ and CSLL on temporary differences (c)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provisions for labor, tax, civil and regulatory contingencies

1,327,288

 

73,695

 

-

 

1,400,983

 

58,855

 

-

 

1,459,838

 

93,042

 

-

 

1,552,880

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade accounts payable and other provisions

398,956

 

90,865

 

-

 

489,821

 

12,136

 

-

 

501,957

 

78,526

 

-

 

580,483

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated impairment losses on accounts receivable

245,556

 

15,054

 

-

 

260,610

 

54,462

 

-

 

315,072

 

51,875

 

-

 

366,947

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer portfolio and trademarks

-

 

-

 

-

 

-

 

311,141

 

-

 

311,141

 

-

 

-

 

311,141

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated losses on modem and other property and equipment items

166,174

 

9,624

 

-

 

175,798

 

(6,092)

 

-

 

169,706

 

2,789

 

-

 

172,495

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Post-employment benefits

143,537

 

2,925

 

-

 

146,462

 

9,763

 

-

 

156,225

 

3,809

 

-

 

160,034

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Profit sharing

71,948

 

(34,637)

 

-

 

37,311

 

108,518

 

-

 

145,829

 

(54,060)

 

-

 

91,769

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accelerated accounting depreciation

154,181

 

(4,472)

 

-

 

149,709

 

(134,334)

 

-

 

15,375

 

567

 

-

 

15,942

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated impairment losses on inventory

12,885

 

839

 

-

 

13,724

 

(2,831)

 

-

 

10,893

 

(62)

 

-

 

10,831

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for loyalty program

31,199

 

(11)

 

-

 

31,188

 

319

 

-

 

31,507

 

424

 

-

 

31,931

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IRPJ and CSLL on temporary differences

157,313

 

(2,868)

 

440

 

154,885

 

(20,346)

 

20,976

 

155,515

 

46,763

 

336

 

202,614

Total deferred tax assets

2,971,952

 

33,942

 

440

 

3,006,334

 

339,294

 

20,976

 

3,366,604

 

147,255

 

336

 

3,514,195

 

Deferred tax liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Merged tax credit (b)

(337,535)

 

-

 

-

 

(337,535)

 

-

 

-

 

(337,535)

 

-

 

-

 

(337,535)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IRPJ and CSLL on temporary differences (c)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

License

(719,780)

 

(79,976)

 

-

 

(799,756)

 

(188,140)

 

-

 

(987,896)

 

(54,082)

 

-

 

(1,041,978)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effects of goodwill generated upon merger of Vivo Part.

(568,338)

 

(36,800)

 

-

 

(605,138)

 

(110,400)

 

-

 

(715,538)

 

(50,982)

 

-

 

(766,520)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vivo Part. goodwill

(480,366)

 

(53,374)

 

-

 

(533,740)

 

(155,337)

 

-

 

(689,077)

 

(36,800)

 

-

 

(725,877)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Technological innovation law

(308,490)

 

17,610

 

-

 

(290,880)

 

34,426

 

-

 

(256,454)

 

13,742

 

-

 

(242,712)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer portfolio

(461,870)

 

21,128

 

-

 

(440,742)

 

440,742

 

-

 

-

 

-

 

-

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks and patents

(479,548)

 

7,157

 

-

 

(472,391)

 

472,391

 

-

 

-

 

-

 

-

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IRPJ and CSLL on temporary differences

(128,365)

 

15,694

 

(691)

 

(113,362)

 

(8,658)

 

(113,267)

 

(235,287)

 

5,172

 

(205,881)

 

(435,996)

Total deferred tax liabilities

(3,484,292)

 

(108,561)

 

(691)

 

(3,593,544)

 

485,024

 

(113,267)

 

(3,221,787)

 

(122,950)

 

(205,881)

 

(3,550,618)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total noncurrent assets (liabilities), net

(512,340)

 

(74,619)

 

(251)

 

(587,210)

 

824,318

 

(92,291)

 

144,817

 

24,305

 

(205,545)

 

(36,423)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred tax assets (liabilities), net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Represented in the balance sheet as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncurrent deferred tax assets, net

210,294

 

 

 

 

 

198,171

 

 

 

 

 

144,817

 

 

 

 

 

90,757

Noncurrent deferred tax liabilities, net

(722,634)

 

 

 

 

 

(785,381)

 

 

 

 

 

-

 

 

 

 

 

(127,180)

 

The following table presents deferred income and social contribution taxes for items charged or credited directly in equity, at March 31, 2015 and 2014.

 

Pág. 11


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

 

 

 

Company/Consolidated

 

 

03/31/15

 

03/31/14

Unrealized losses on investments available for sale

 

336

 

440

Gains (losses) on derivative transactions

 

(205,881)

 

(691)

Total

 

(205,545)

 

(251)

 

7)   JUDICIAL DEPOSITS AND GARNISHMENTS

 

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

 

 

Company

 

Consolidated

 

03/31/15

 

12/31/14

 

03/31/15

 

12/31/14

Judicial deposits

 

 

 

 

 

 

 

Tax

2,800,654

 

2,647,635

 

2,819,140

 

2,665,757

Labor

1,023,644

 

1,008,745

 

1,030,992

 

1,016,019

Civil and regulatory

952,103

 

935,842

 

953,031

 

936,782

Total

4,776,401

 

4,592,222

 

4,803,163

 

4,618,558

Court-restricted deposits

117,656

 

124,730

 

119,690

 

126,667

Total

4,894,057

 

4,716,952

 

4,922,853

 

4,745,225

 

 

 

 

 

 

 

 

Current

200,229

 

202,169

 

200,229

 

202,169

Noncurrent

4,693,828

 

4,514,783

 

4,722,624

 

4,543,056

 

At March 31, 2015, the Company had a number of tax-related judicial deposits, reaching the consolidated amount of R$2,819,140 (R$2,665,757 at December 31, 2014). In Note 17, we provide further details on issues arising from the main judicial deposits.

 

Below is a brief description of the main tax-related judicial deposits:

 

·         Federal contribution taxes on gross revenue for Social Integration Program (PIS) and for Social Security Financing (COFINS)

 

The Company and its subsidiary are involved in disputes related to: (i) claim filed for credits arising from overpayment of tax, not recognized by tax authorities; (ii) tax debt arising from underpayment due to differences in ancillary statements (Federal Tax Debt and Credit Return – DCTF); and (iii) disputes referring to changes in rates and increase in tax bases introduced by Law No. 9718/98.

 

At March 31, 2015, the consolidated balance of judicial deposits amounted to R$33,519 (R$33,040 at December 31, 2014).

 

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

 

The Company is involved in legal disputes for the exemption of CIDE levied on offshore remittances of funds arising from agreements for the transfer of technology, brand and software licensing, etc.

 

At March 31, 2015, the consolidated balance of judicial deposits amounted to R$156,034 (R$153,759 at December 31, 2014).

 

 

 

Pág. 12


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

·         Telecommunications Inspection Fund (FISTEL)

 

ANATEL collects Installation Inspection Fee (TFI) on extension of licenses granted and on radio base stations, mobile stations and radio links. Such collection results from the understanding of ANATEL that said extension would be a triggering event of TFI and that mobile stations, even if owned by third parties, are also subject to TFI. The Company and its subsidiary are challenging the aforesaid fee in court.

 

At March 31, 2015, the consolidated balance of judicial deposits amounted to R$947,270 (R$929,880 at December 31, 2014).

 

·         Withholding Income Tax  (IRRF)

 

The Company and its subsidiary are involved in disputes related to: (i) exemption of IRRF payment on offshore remittances for out-coming traffic; (ii) exemption of IRRF payment on interest on equity; and (iii) IRRF levied on earnings from rent and royalties, wage labor and fixed-income investments.

 

At March 31, 2015, the consolidated balance of judicial deposits amounted to R$64,343 (R$63,295 at December 31, 2014).

 

·         Corporate Income Tax (IRPJ)

 

The Company and its subsidiary are involved in disputes related to: (i) debts stemming from offsetting of IRPJ overpayments not recognized by the Brazilian IRS; (ii) requirement of IRPJ estimates and lack of payment of debts in the integrated system of economic and tax information (SIEF); and (iii) underpaid IRPJ amounts.

 

At March 31, 2015, the consolidated balance of judicial deposits amounted to R$30,845 (R$30,325 at December 31, 2014).

 

·         Contribution to Empresa Brasil de Comunicação (EBC)

 

On behalf of its members, Sinditelebrasil (Union of Telephony and Mobile and Personal Services) is challenging in court payment of the Contribution to Foster Public Radio Broadcasting to EBC, introduced by Law No. 11652/2008. The Company and its subsidiary, as union members, made judicial deposits referring to that contribution.

 

At March 31, 2015, the consolidated balance of judicial deposits amounted to R$796,047 (R$672,593 at December 31, 2014).

 

·         Social Security, Work Accident Insurance (SAT) and Funds to Third Parties (INSS)

 

The Company and its subsidiary are involved in disputes related to: (i) SAT and funds to third parties (National Institute of Colonization and Agrarian Reform - INCRA and Brazilian Micro and Small Business Support Service - SEBRAE); (ii) joint responsibility for contract labor; (iii) difference in SAT rate (from 1% to 3%); and (iv) gifts.

 

At March 31, 2015, the consolidated balance of judicial deposits amounted to R$104,147 (R$102,820 at December 31, 2014).

 

·         Unemployment Compensation Fund (FGTS)

 

The Company is discussing this matter in court in order to represent its right not to pay surtax of 0.5% and 10% for FGTS introduced by Supplementary Law No. 110/01 levied on deposits made by employers (the proceedings did not result in any reduction of FGTS deposits made by the Company on behalf of its employees).

 

Pág. 13


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

At March 31, 2015, the consolidated balance of judicial deposits amounted to R$77,986 (R$76,459 at December 31, 2014).

 

·         Tax on Net Income (ILL)

 

The Company is discussing this matter in court in order to represent its right to offset amounts unduly paid for ILL purposes against future IRPJ payments.

 

On December 19, 2013, the Company settled the debt under discussion by including it in the Federal Tax Recovery Program (REFIS), using the judicial deposit then restricted. The Company is now awaiting conversion into income by the Federal Government.

 

At March 31, 2015, the consolidated balance of judicial deposits amounted to R$55,544 (R$54,723 at December 31, 2014).

 

·         Universal Telecommunication Services Fund (FUST)

 

The Company and its subsidiary filed an injunction in order to represent their right not to include expenses with interconnection and industrial use of dedicated line in FUST tax base, according to Abridgment No. 7, of December 15, 2005, as it does not comply with the provisions contained in the sole paragraph of article 6 of Law No. 9998/00.

 

At March 31, 2015, the consolidated balance of judicial deposits amounted to R$401,377 (R$394,489 at December 31, 2014).

 

·         State Value-Added Tax (ICMS)

 

The Company is involved in disputes related to: (i) ICMS stated but not paid; (ii) ICMS not levied on communication in default; (iii) fine for late voluntary payment of ICMS; (iv) ICMS supposedly levied on access, adhesion, enabling, availability and use of services, as well as supplementary services and additional facilities; (v) right to credit from acquisition of goods intended to property and equipment and also from electric power; (vi) activation cards for pre-paid services; (vii) and disallowance of ICMS credit referring to covenant 39.

 

At March 31, 2015, the consolidated balance of judicial deposits amounted to R$93,142 (R$97,278 at December 31, 2014).

 

·       Other taxes, charges and contributions

 

The Company is involved in disputes related to: (i) Service Tax (ISS) on noncore services; (ii) Municipal Real Estate Tax (IPTU) not subject to exemption; (iii) municipal inspection, operation and publicity charges; (iv) land use fee; (v) social security contributions related to supposed failure to withhold 11% on several invoices, bills and receipts of service providers engaged for workforce assignment; and (vi) Public Price for Numbering Resource Management (PPNUM) by ANATEL.

 

 At March 31, 2015, the consolidated balance of judicial deposits amounted to R$58,886 (R$57,096 at December 31, 2014).

 

 

 

 

Pág. 14


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

8)   PREPAID EXPENSES

 

 

Company

 

Consolidated

 

03/31/15

 

12/31/14

 

03/31/15

 

12/31/14

Fistel rate (a)

822,475

 

-

 

822,475

 

-

Advertising and publicity

167,644

 

198,758

 

167,644

 

198,758

Insurance

26,697

 

33,594

 

28,407

 

35,574

Rent

23,667

 

45,318

 

23,667

 

45,318

Financial charges

14,668

 

8,426

 

14,668

 

8,426

Software maintenance, taxes and other

103,816

 

38,817

 

109,516

 

41,698

Total

1,158,967

 

324,913

 

1,166,377

 

329,774

               

Current

1,137,532

 

300,567

 

1,143,416

 

303,551

Noncurrent

21,435

 

24,346

 

22,961

 

26,223

  
(a)  This refers to Inspection and Operation Fees for 2014 which were paid in March 2015 and will be amortized until the end of the year.

 

9)   OTHER ASSETS

 

 

Company

 

Consolidated

 

03/31/15

 

12/31/14

 

03/31/15

 

12/31/14

Advances to employees and suppliers

99,911

 

49,827

 

101,536

 

50,981

Receivables from related parties (Note 28)

308,141

 

318,041

 

80,183

 

73,042

Credit with suppliers

95,857

 

114,422

 

112,047

 

121,615

Subsidy on handset sales

34,924

 

45,850

 

34,924

 

45,850

Surplus of post-employment benefit plan (Note 31)

14,918

 

14,515

 

15,060

 

14,653

Other realizable assets

29,079

 

87,068

 

45,914

 

87,280

Total

582,830

 

629,723

 

389,664

 

393,421

               

Current

490,046

 

535,020

 

296,676

 

298,496

Noncurrent

92,784

 

94,703

 

92,988

 

94,925

 

10) INVESTMENTS

 

a)   Investees Information

 

The Company holds interest in wholly-owned and jointly-controlled subsidiaries, as follows:

 

TData: Wholly-owned subsidiary of the Company and headquartered in Brazil, this entity is engaged in the rendering and operation of value added services (SVAs) in telecommunications and related activities; managing the provision of technical assistance and maintenance services related to telecommunications equipment and network, consulting services regarding telecommunications solutions and related activities, and designing, implementing and installing telecommunication-related projects; selling and leasing telecommunications equipment, products and services, among others.

 

Aliança: Jointly-controlled subsidiary (50% interest held by the Company), headquartered in Amsterdam, Netherlands, this entity is engaged in the acquisition and management of subsidiaries, and holding interest in companies of the telecommunications industry.

 

AIX: Jointly-controlled subsidiary headquartered in Brazil, with 50% interest held by the Company, this entity is engaged in holding interest in Refibra Consortium, and in performing activities related to the direct and indirect operation of activities related to the construction, completion and operation of underground networks for optical fiber ducts.

 

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

Pág. 15


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

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

 

 

At 03/31/15

 

At 12/31/14

 

Wholly-owned subsidiary

 

Jointly-controlled subsidiaries

 

Wholly-owned subsidiary

 

Jointly-controlled subsidiaries

 

TData

 

Cia ACT

 

Cia AIX

 

Aliança

 

TData

 

Cia ACT

 

Cia AIX

 

Aliança

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity interest

100.00%

 

50.00%

 

50.00%

 

50.00%

 

100.00%

 

50.00%

 

50.00%

 

50.00%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance sheet summary:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

1,966,711

 

11

 

13,882

 

145,883

 

1,749,933

 

11

 

12,728

 

136,350

Noncurrent assets

321,764

 

-

 

11,959

 

-

 

335,735

 

-

 

12,134

 

-

Total assets

2,288,475

 

11

 

25,841

 

145,883

 

2,085,668

 

11

 

24,862

 

136,350

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

882,111

 

1

 

3,482

 

57

 

883,906

 

1

 

3,232

 

92

Noncurrent liabilities

48,995

 

-

 

4,805

 

-

 

48,611

 

-

 

4,546

 

-

Equity

1,357,369

 

10

 

17,554

 

145,826

 

1,153,151

 

10

 

17,084

 

136,258

Total liabilities and equity

2,288,475

 

11

 

25,841

 

145,883

 

2,085,668

 

11

 

24,862

 

136,350

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Book value of investments

1,357,369

 

5

 

8,777

 

72,913

 

1,153,151

 

5

 

8,542

 

68,129

 

 

At 03/31/15

 

At 03/31/14

 

Wholly-owned subsidiary

 

Jointly-controlled subsidiaries

 

Wholly-owned subsidiary

 

Jointly-controlled subsidiaries

Summary of statement of comprehensive income:

TData

 

Cia ACT

 

Cia AIX

 

Aliança

 

TData

 

Cia ACT

 

Cia AIX

 

Aliança

Net operating revenue

600,324

 

15

 

9,653

 

-

 

472,811

 

15

 

7,919

 

-

Cost of sales and services

(275,817)

 

-

 

(7,718)

 

-

 

(249,027)

 

-

 

(6,858)

 

-

Selling expenses

(37,070)

 

-

 

-

 

-

 

(36,144)

 

-

 

-

 

-

General and administrative expenses

(8,783)

 

(15)

 

(1,463)

 

(24)

 

2,060

 

(15)

 

(1,070)

 

-

Other operating income (expenses), net

1,045

 

-

 

(128)

 

-

 

12,457

 

-

 

1,773

 

(44)

Financial income (expenses), net

30,104

 

-

 

255

 

18

 

16,602

 

-

 

180

 

110

Income (loss) before taxes

309,803

 

-

 

599

 

(6)

 

218,759

 

-

 

1,944

 

66

Income and social contribution taxes

(105,585)

 

-

 

(129)

 

 

 

(74,329)

 

-

 

-

 

-

Net income (loss) for the period

204,218

 

-

 

470

 

(6)

 

144,430

 

-

 

1,944

 

66

Book value of net income (loss) for the period, recognized as equity pickup

204,218

 

-

 

235

 

(3)

 

144,430

 

-

 

972

 

33

 

b)   Changes in investments

 

 

Balances at 12/31/13

 

Equity pickup

 

Other comprehensive income

 

Balances at 03/31/14

 

Equity pickup

 

Dividends and Interest on Equity (IOE)

 

Other comprehensive income

 

Balances at 12/31/14

 

Equity pickup

 

Other comprehensive income

 

Balances at 03/31/15

Interest held

853,866

 

145,435

 

(2,763)

 

996,538

 

597,193

 

(366,116)

 

2,212

 

1,229,827

 

204,450

 

4,787

 

1,439,064

Wholly-owned subsidiary

778,289

 

144,430

 

-

 

922,719

 

591,258

 

(360,826)

 

-

 

1,153,151

 

204,218

 

-

 

1,357,369

TData

778,289

 

144,430

 

-

 

922,719

 

591,258

 

(360,826)

 

-

 

1,153,151

 

204,218

 

-

 

1,357,369

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Jointly-controlled subsidiaries

75,577

 

1,005

 

(2,763)

 

73,819

 

5,935

 

(5,290)

 

2,212

 

76,676

 

232

 

4,787

 

81,695

Aliança

68,607

 

33

 

(2,763)

 

65,877

 

40

 

-

 

2,212

 

68,129

 

(3)

 

4,787

 

72,913

AIX

6,965

 

972

 

-

 

7,937

 

5,895

 

(5,290)

 

-

 

8,542

 

235

 

-

 

8,777

ACT

5

 

-

 

-

 

5

 

-

 

-

 

-

 

5

 

-

 

-

 

5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill (a)

212,058

 

-

 

-

 

212,058

 

-

 

-

 

-

 

212,058

 

-

 

-

 

212,058

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other interest held

10,772

 

-

 

(1,295)

 

9,477

 

-

 

-

 

(6,348)

 

3,129

 

-

 

(989)

 

2,140

Other investments (b)

10,772

 

-

 

(1,295)

 

9,477

 

-

 

-

 

(6,348)

 

3,129

 

-

 

(989)

 

2,140

Total investment in subsidiary

1,076,696

 

145,435

 

(4,058)

 

1,218,073

 

597,193

 

(366,116)

 

(4,136)

 

1,445,014

 

204,450

 

3,798

 

1,653,262

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aliança

68,607

 

33

 

(2,763)

 

65,877

 

40

 

-

 

2,212

 

68,129

 

(3)

 

4,787

 

72,913

AIX

6,965

 

972

 

-

 

7,937

 

5,895

 

(5,290)

 

-

 

8,542

 

235

 

-

 

8,777

ACT

5

 

-

 

-

 

5

 

-

 

-

 

-

 

5

 

-

 

-

 

5

Other investments (b)

10,772

 

-

 

(1,295)

 

9,477

 

-

 

-

 

(6,348)

 

3,129

 

-

 

(989)

 

2,140

Total investments in the consolidated

86,349

 

1,005

 

(4,058)

 

83,296

 

5,935

 

(5,290)

 

(4,136)

 

79,805

 

232

 

3,798

 

83,835

 

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

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

 

 

 

 

 

Pág. 16


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

11)  PROPERTY AND EQUIPMENT, NET

 

a) Breakdown

 

At March 31, 2015

 

 

Company

 

Consolidated

 

Cost of property and equipment

 

Accumulated depreciation

 

Net balance

 

Cost of property and equipment

 

Accumulated depreciation

 

Net balance

Switching equipment

17,396,841

 

(14,658,905)

 

2,737,936

 

17,404,071

 

(14,665,912)

 

2,738,159

Transmission equipment and media

37,910,226

 

(27,284,882)

 

10,625,344

 

37,910,878

 

(27,285,362)

 

10,625,516

Terminal equipment/modem

11,037,631

 

(9,455,160)

 

1,582,471

 

11,083,363

 

(9,484,180)

 

1,599,183

Infrastructure

13,602,089

 

(10,133,085)

 

3,469,004

 

13,612,968

 

(10,142,352)

 

3,470,616

Land

312,952

 

-

 

312,952

 

312,952

 

-

 

312,952

Other property and equipment items

3,406,846

 

(2,742,903)

 

663,943

 

3,566,299

 

(2,857,143)

 

709,156

Provisions for loss

(158,352)

 

-

 

(158,352)

 

(158,493)

 

-

 

(158,493)

Assets and construction in progress

1,295,311

 

-

 

1,295,311

 

1,300,334

 

-

 

1,300,334

Total

84,803,544

 

(64,274,935)

 

20,528,609

 

85,032,372

 

(64,434,949)

 

20,597,423

 

At December 31, 2014

 

 

Company

 

Consolidated

 

Cost of property and equipment

 

Accumulated depreciation

 

Net balance

 

Cost of property and equipment

 

Accumulated depreciation

 

Net balance

Switching equipment

17,140,731

 

(14,599,055)

 

2,541,676

 

17,147,961

 

(14,606,044)

 

2,541,917

Transmission equipment and media

37,199,508

 

(26,990,931)

 

10,208,577

 

37,200,161

 

(26,991,399)

 

10,208,762

Terminal equipment/modem

10,838,174

 

(9,227,487)

 

1,610,687

 

10,882,788

 

(9,254,451)

 

1,628,337

Infrastructure

13,486,180

 

(10,000,989)

 

3,485,191

 

13,497,058

 

(10,010,123)

 

3,486,935

Land

314,350

 

-

 

314,350

 

314,350

 

-

 

314,350

Other property and equipment items

3,394,231

 

(2,722,927)

 

671,304

 

3,549,258

 

(2,833,705)

 

715,553

Provisions for loss

(156,592)

 

-

 

(156,592)

 

(156,728)

 

-

 

(156,728)

Assets and construction in progress

1,706,538

 

-

 

1,706,538

 

1,714,738

 

-

 

1,714,738

Total

83,923,120

 

(63,541,389)

 

20,381,731

 

84,149,586

 

(63,695,722)

 

20,453,864

 

b) Changes

 

 

Company

 

Switching equipment

 

Transmission equipment and media

 

Terminal equipment/modem

 

Infrastructure

 

Land

 

Other property and equipment items

 

Provisions for loss (a)

 

Assets and construction in progress

 

Total

Balance at 12/31/13

2,364,940

 

8,432,306

 

1,455,849

 

3,466,208

 

314,558

 

598,308

 

(168,124)

 

1,913,860

 

18,377,905

Additions (Capex)

3,470

 

18,369

 

52,741

 

12,910

 

-

 

25,828

 

-

 

765,739

 

879,057

Write-offs, net

(731)

 

(13,769)

 

(287)

 

(878)

 

-

 

(625)

 

3,473

 

(4,166)

 

(16,983)

Net transfers

87,084

 

516,681

 

170,859

 

138,311

 

-

 

10,192

 

-

 

(983,514)

 

(60,387)

Depreciation (Note 23)

(141,641)

 

(400,759)

 

(213,294)

 

(169,275)

 

-

 

(50,054)

 

-

 

-

 

(975,023)

Balance at 03/31/14

2,313,122

 

8,552,828

 

1,465,868

 

3,447,276

 

314,558

 

583,649

 

(164,651)

 

1,691,919

 

18,204,569

Additions (Capex)

8,572

 

85,521

 

97,375

 

34,336

 

-

 

135,472

 

-

 

4,339,821

 

4,701,097

Write-offs, net

(39)

 

(20,665)

 

(2,500)

 

(408)

 

(208)

 

(1,592)

 

8,543

 

(14,680)

 

(31,549)

Net transfers

519,746

 

2,525,287

 

747,438

 

374,694

 

-

 

114,184

 

(484)

 

(4,310,522)

 

(29,657)

Depreciation

(299,725)

 

(934,394)

 

(697,494)

 

(370,707)

 

-

 

(160,409)

 

-

 

-

 

(2,462,729)

Balance at 12/31/14

2,541,676

 

10,208,577

 

1,610,687

 

3,485,191

 

314,350

 

671,304

 

(156,592)

 

1,706,538

 

20,381,731

Additions (Capex)

2,528

 

44,188

 

28,615

 

13,521

 

-

 

17,938

 

(2,916)

 

957,161

 

1,061,035

Write-offs, net

(824)

 

(9,849)

 

(46)

 

(254)

 

(12)

 

(911)

 

1,156

 

(6,058)

 

(16,798)

Net transfers

314,644

 

729,166

 

174,280

 

112,039

 

(1,386)

 

29,605

 

-

 

(1,362,330)

 

(3,982)

Depreciation (Note 23)

(120,088)

 

(346,738)

 

(231,065)

 

(141,493)

 

-

 

(53,993)

 

-

 

-

 

(893,377)

Balance at 03/31/15

2,737,936

 

10,625,344

 

1,582,471

 

3,469,004

 

312,952

 

663,943

 

(158,352)

 

1,295,311

 

20,528,609

 

 

Pág. 17


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

 

 

Consolidated

 

Switching equipment

 

Transmission equipment and media

 

Terminal equipment/modem

 

Infrastructure

 

Land

 

Other property and equipment items

 

Provisions for loss (a)

 

Assets and construction in progress

 

Total

Balance at 12/31/13

2,365,290

 

8,432,543

 

1,468,057

 

3,468,495

 

314,558

 

594,957

 

(169,979)

 

1,967,726

 

18,441,647

Additions (Capex)

3,470

 

18,369

 

54,075

 

12,910

 

-

 

35,620

 

-

 

755,078

 

879,522

Write-offs, net

(731)

 

(13,769)

 

(283)

 

(878)

 

-

 

(625)

 

3,325

 

(4,166)

 

(17,127)

Net transfers

87,082

 

516,682

 

170,861

 

138,312

 

-

 

38,045

 

-

 

(1,001,359)

 

(50,377)

Depreciation (Note 23)

(141,684)

 

(400,775)

 

(214,942)

 

(169,412)

 

-

 

(52,507)

 

-

 

-

 

(979,320)

Balance at 03/31/14

2,313,427

 

8,553,050

 

1,477,768

 

3,449,427

 

314,558

 

615,490

 

(166,654)

 

1,717,279

 

18,274,345

Additions (Capex)

8,572

 

85,521

 

109,353

 

34,336

 

-

 

137,196

 

-

 

4,350,482

 

4,725,460

Write-offs, net

(39)

 

(20,665)

 

(2,504)

 

(408)

 

(208)

 

(1,592)

 

10,410

 

(15,943)

 

(30,949)

Net transfers

519,748

 

2,525,286

 

747,593

 

374,693

 

-

 

134,030

 

(484)

 

(4,337,080)

 

(36,214)

Depreciation

(299,791)

 

(934,430)

 

(703,873)

 

(371,113)

 

-

 

(169,571)

 

-

 

-

 

(2,478,778)

Balance at 12/31/14

2,541,917

 

10,208,762

 

1,628,337

 

3,486,935

 

314,350

 

715,553

 

(156,728)

 

1,714,738

 

20,453,864

Additions (Capex)

2,528

 

44,188

 

29,734

 

13,521

 

-

 

22,364

 

(2,916)

 

954,285

 

1,063,704

Write-offs, net

(824)

 

(9,849)

 

(46)

 

(254)

 

(12)

 

(911)

 

1,151

 

(6,359)

 

(17,104)

Net transfers

314,644

 

729,166

 

174,280

 

112,039

 

(1,386)

 

29,605

 

-

 

(1,362,330)

 

(3,982)

Depreciation (Note 23)

(120,106)

 

(346,751)

 

(233,122)

 

(141,625)

 

-

 

(57,455)

 

-

 

-

 

(899,059)

Balance at 03/31/15

2,738,159

 

10,625,516

 

1,599,183

 

3,470,616

 

312,952

 

709,156

 

(158,493)

 

1,300,334

 

20,597,423


(a)
  The Company and its subsidiary recognized a provision for potential obsolescence of materials used in PE maintenance, based on levels of historical use and expected future use.

 

c) Depreciation rates

 

The Company’s and its subsidiary’s property and equipment are depreciated on a straight-line basis, as follows:

 

Description

 

 

 

 

Annual depreciation rates (%)

Switching equipment

 

 

 

 

10.00 to 20.00

Transmission equipment and media

 

 

 

 

5.00 to 20.00

Terminal equipment/modem

 

 

 

 

10.00 to 66.67

Infrastructure

 

 

 

 

2.50 to 66.67

Other property and equipment items

 

 

 

 

10.00 to 25.00

 

d) Property and equipment items given in guarantee

 

At March 31, 2015, the Company had consolidated amounts of property and equipment items given in guarantee for lawsuits, amounting to R$131,491 (R$130,000 at December 31, 2014).

 

e) Capitalization of borrowing costs

 

At March 31, 2015 and December 31, 2014, the Company did not capitalize borrowing costs, as there were no qualifying assets.

 

f) Reversible assets

 

The STFC service concession arrangement establishes that all assets owned by the Company and that are indispensable to the provision of the services described in the referred to arrangement are considered reversible 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 March 31, 2015, estimated residual value of reversible assets was R$7,855,377 (R$7,639,587 at December 31, 2014), which comprised switching and transmission equipment and public use terminals, external network equipment, energy equipment and system and operation support equipment.

 

g) Finance lease

 

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

 

Pág. 18


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

 

 

 

 

03/31/15

 

12/31/14

 

Annual depreciation rates (%)

 

Cost of property and equipment

 

Accumulated depreciation

 

Net balance

 

Cost of property and equipment

 

Accumulated depreciation

 

Net balance

Transmission equipment and media

5%

 

209,935

 

(14,686)

 

195,249

 

209,935

 

(12,062)

 

197,873

Infrastructure

5%

 

6,674

 

(2,093)

 

4,581

 

5,279

 

(2,032)

 

3,247

Other assets

20%

 

78,295

 

(78,295)

 

-

 

78,295

 

(78,295)

 

-

Total

 

 

294,904

 

(95,074)

 

199,830

 

293,509

 

(92,389)

 

201,120

 

12) INTANGIBLE ASSETS, NET

 

a) Breakdown

 

At March 31, 2015

 

 

Company

 

Consolidated

 

Cost of intangible assets

 

Accumulated amortization

 

Net balance

 

Cost of intangible assets

 

Accumulated amortization

 

Net balance

Indefinite useful life

 

 

 

 

 

 

 

 

 

 

 

Goodwill

10,013,222

 

-

 

10,013,222

 

10,225,280

 

-

 

10,225,280

 

 

 

 

 

 

 

 

 

 

 

 

Finite useful life

 

 

 

 

 

 

 

 

 

 

 

Software

11,470,148

 

(9,416,701)

 

2,053,447

 

11,506,895

 

(9,451,307)

 

2,055,588

Customer portfolio

1,990,278

 

(942,543)

 

1,047,735

 

1,990,278

 

(942,543)

 

1,047,735

Trademarks and patents

1,601,433

 

(296,239)

 

1,305,194

 

1,601,433

 

(296,239)

 

1,305,194

License

20,052,007

 

(3,734,039)

 

16,317,968

 

20,052,007

 

(3,734,039)

 

16,317,968

Other intangible assets

152,055

 

(151,956)

 

99

 

152,055

 

(151,956)

 

99

Software in progress

36,543

 

-

 

36,543

 

36,543

 

-

 

36,543

Total

45,315,686

 

(14,541,478)

 

30,774,208

 

45,564,491

 

(14,576,084)

 

30,988,407

 

At December 31, 2014

 

 

Company

 

Consolidated

 

Cost of intangible assets

 

Accumulated amortization

 

Net balance

 

Cost of intangible assets

 

Accumulated amortization

 

Net balance

Indefinite useful life

 

 

 

 

 

 

 

 

 

 

 

Goodwill

10,013,222

 

-

 

10,013,222

 

10,225,280

 

-

 

10,225,280

 

 

 

 

 

 

 

 

 

 

 

 

Finite useful life

 

 

 

 

 

 

 

 

 

 

 

Software

11,242,808

 

(9,232,751)

 

2,010,057

 

11,279,547

 

(9,266,911)

 

2,012,636

Customer portfolio

1,990,278

 

(880,402)

 

1,109,876

 

1,990,278

 

(880,402)

 

1,109,876

Trademarks and patents

1,601,433

 

(275,187)

 

1,326,246

 

1,601,433

 

(275,187)

 

1,326,246

License

20,052,007

 

(3,505,409)

 

16,546,598

 

20,052,007

 

(3,505,409)

 

16,546,598

Other intangible assets

152,026

 

(151,913)

 

113

 

152,026

 

(151,913)

 

113

Software in progress

66,675

 

-

 

66,675

 

66,675

 

-

 

66,675

Total

45,118,449

 

(14,045,662)

 

31,072,787

 

45,367,246

 

(14,079,822)

 

31,287,424

 

 

 

Pág. 19


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

b) Changes

 

 

Company

 

Indefinite useful life

 

Finite useful life

 

 

 

Goodwill

 

Software

 

Customer portfolio

 

Trademarks and patents

 

Licenses

 

Other intangible assets

 

Software in progress

 

Total

Cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at 12/31/13

10,013,222

 

1,983,624

 

1,358,442

 

1,410,453

 

14,474,566

 

336

 

46,348

 

29,286,991

Additions (Capex)

-

 

67,532

 

-

 

-

 

-

 

-

 

53,426

 

120,958

Write-offs, net

-

 

(124)

 

-

 

-

 

-

 

-

 

-

 

(124)

Net transfers

-

 

70,949

 

-

 

-

 

40,743

 

-

 

(61,315)

 

50,377

Amortization (Note 23)

-

 

(190,579)

 

(62,141)

 

(21,052)

 

(189,811)

 

(91)

 

-

 

(463,674)

Balance at 03/31/14

10,013,222

 

1,931,402

 

1,296,301

 

1,389,401

 

14,325,498

 

245

 

38,459

 

28,994,528

Additions (Capex)

-

 

429,642

 

-

 

-

 

2,770,320

 

-

 

213,913

 

3,413,875

Net transfers

-

 

219,762

 

-

 

-

 

2,149

 

-

 

(185,697)

 

36,214

Amortization

-

 

(570,749)

 

(186,425)

 

(63,155)

 

(551,369)

 

(132)

 

-

 

(1,371,830)

Balance at 12/31/14

10,013,222

 

2,010,057

 

1,109,876

 

1,326,246

 

16,546,598

 

113

 

66,675

 

31,072,787

Additions (Capex)

-

 

121,638

 

-

 

-

 

-

 

29

 

81,397

 

203,064

Write-offs, net

-

 

(3)

 

-

 

-

 

-

 

-

 

-

 

(3)

Net transfers

-

 

115,511

 

-

 

-

 

-

 

-

 

(111,529)

 

3,982

Amortization (Note 23)

-

 

(193,756)

 

(62,141)

 

(21,052)

 

(228,630)

 

(43)

 

-

 

(505,622)

Balance at 03/31/15

10,013,222

 

2,053,447

 

1,047,735

 

1,305,194

 

16,317,968

 

99

 

36,543

 

30,774,208

 

 

Consolidated

 

Indefinite useful life

 

Finite useful life

 

 

 

Goodwill

 

Software

 

Customer portfolio

 

Trademarks and patents

 

Licenses

 

Other intangible assets

 

Software in progress

 

Total

Cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at 12/31/13

10,225,280

 

1,987,634

 

1,358,442

 

1,410,453

 

14,474,566

 

336

 

46,348

 

29,503,059

Additions (Capex)

-

 

68,090

 

-

 

-

 

-

 

-

 

53,426

 

121,516

Write-offs, net

-

 

(125)

 

-

 

-

 

-

 

-

 

-

 

(125)

Net transfers

-

 

70,949

 

-

 

-

 

40,743

 

-

 

(61,315)

 

50,377

Amortization (Note 23)

-

 

(191,139)

 

(62,141)

 

(21,052)

 

(189,811)

 

(91)

 

-

 

(464,234)

Balance at 03/31/14

10,225,280

 

1,935,409

 

1,296,301

 

1,389,401

 

14,325,498

 

245

 

38,459

 

29,210,593

Additions (Capex)

-

 

429,640

 

-

 

-

 

2,770,320

 

-

 

213,913

 

3,413,873

Write-offs, net

-

 

1

 

-

 

-

 

-

 

-

 

-

 

1

Net transfers

-

 

219,762

 

-

 

-

 

2,149

 

-

 

(185,697)

 

36,214

Amortization

-

 

(572,176)

 

(186,425)

 

(63,155)

 

(551,369)

 

(132)

 

-

 

(1,373,257)

Balance at 12/31/14

10,225,280

 

2,012,636

 

1,109,876

 

1,326,246

 

16,546,598

 

113

 

66,675

 

31,287,424

Additions (Capex)

-

 

121,646

 

-

 

-

 

-

 

29

 

81,397

 

203,072

Write-offs, net

-

 

(3)

 

-

 

-

 

-

 

-

 

-

 

(3)

Net transfers

-

 

115,511

 

-

 

-

 

-

 

-

 

(111,529)

 

3,982

Amortization (Note 23)

-

 

(194,202)

 

(62,141)

 

(21,052)

 

(228,630)

 

(43)

 

-

 

(506,068)

Balance at 03/31/15

10,225,280

 

2,055,588

 

1,047,735

 

1,305,194

 

16,317,968

 

99

 

36,543

 

30,988,407

 

Breakdown of goodwill at March 31, 2015 and December 31, 2014 is as follows:

 

 

 

 

Company

 

Consolidated

Ajato Telecomunicação Ltda.

 

 

149

 

149

Spanish e Figueira (merged into TDBH) (a)

 

 

-

 

212,058

Santo Genovese Participações Ltda. (b)

 

 

71,892

 

71,892

Telefônica Televisão Participações S.A. (c)

 

 

780,693

 

780,693

Vivo Participações S. A. (d)

 

 

9,160,488

 

9,160,488

Total

 

 

10,013,222

 

10,225,280

 

(a) Goodwill from partial spin-off of “Spanish e Figueira”, which was reversed to the Company upon merger of Telefonica Data Brasil Holding S.A (TDBH) in 2006.

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

(c) Goodwill generated upon acquisition of Telefônica Televisão Participações (formerly Navytree) merged in 2008, economically based on a future profitability analysis.

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

 

Pág. 20


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

d) Amortization rates

 

The Company’s finite-lived intangible assets are amortized on a straight-line basis, at the following annual rates:

 

Description

 

 

 

 

Annual amortization rates (%)

Software

 

 

 

 

20.00

Customer portfolio

 

 

 

 

11.76

Trademarks and patents

 

 

 

 

5.13

Licenses

 

 

 

 

3.60 to 6.67

Other intangible assets

 

 

 

 

20.00

 

 

13)  PERSONNEL, SOCIAL CHARGES AND BENEFITS

 

 

Company

 

Consolidated

 

03/31/15

 

12/31/14

 

03/31/15

 

12/31/14

Salaries and compensations

24,971

 

27,754

 

25,504

 

27,754

Personnel and social benefits

284,208

 

267,736

 

288,510

 

271,082

Employees’ profit sharing

70,836

 

197,019

 

71,704

 

199,284

Share-based payment plans (Note 30)

21,245

 

18,793

 

21,255

 

18,793

Other indemnities

156,529

 

193,297

 

156,529

 

193,297

Total

557,789

 

704,599

 

563,502

 

710,210

               

Current

436,508

 

585,770

 

442,211

 

591,381

Noncurrent

121,281

 

118,829

 

121,291

 

118,829

 

 

14)  TRADE ACCOUNTS PAYABLE

 

 

Company

 

Consolidated

 

03/31/15

 

12/31/14

 

03/31/15

 

12/31/14

Sundry suppliers

5,641,058

 

6,521,830

 

5,921,470

 

6,794,000

Amounts to be transferred

179,721

 

103,016

 

179,620

 

102,915

Interconnection / interlink

386,934

 

445,192

 

386,934

 

445,192

Related parties (Note 28)

578,480

 

605,594

 

335,134

 

299,084

Total

6,786,193

 

7,675,632

 

6,823,158

 

7,641,191

 

15) TAXES, CHARGES AND CONTRIBUTIONS

 

 

Company

 

Consolidated

 

03/31/15

 

12/31/14

 

03/31/15

 

12/31/14

Income taxes

41,258

 

-

 

74,711

 

16,355

Income and social contribution taxes payable

41,258

 

-

 

74,711

 

16,355

Indirect taxes

1,206,968

 

1,277,709

 

1,268,023

 

1,332,444

State VAT (ICMS)

922,957

 

968,800

 

923,388

 

969,953

PIS and COFINS

189,464

 

194,627

 

235,674

 

236,556

Fust and Funttel

35,540

 

35,975

 

35,540

 

35,975

ISS, CIDE and other taxes

59,007

 

78,307

 

73,421

 

89,960

Total

1,248,226

 

1,277,709

 

1,342,734

 

1,348,799

               

Current

1,190,403

 

1,236,330

 

1,258,756

 

1,281,673

Noncurrent

57,823

 

41,379

 

83,978

 

67,126

 

 

 

Pág. 21


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

16)  DIVIDENDS AND INTEREST ON EQUITY (IOE)

 

a)   Dividends and interest on equity receivable

 

The Company had dividends receivable from TData amounting to R$ 174,726 at March 31, 2015 and December 31, 2014.

 

For the cash flow statement, interest on equity and dividends received from the subsidiary are allocated to the Investing Activity.

 

b)   Dividends and interest on equity payable

 

Breakdown:

 

 

 

 

Company/Consolidated

 

 

 

03/31/15

 

12/31/14

Telefónica Internacional S.A.

 

 

1,137,561

 

316,008

Telefónica S.A.

 

 

940,688

 

261,318

SP Telecomunicações Participações Ltda.

 

 

714,016

 

198,350

Telefónica Chile S.A.

 

 

2,254

 

626

Noncontrolling interests

 

 

1,450,461

 

719,019

Total

 

 

4,244,980

 

1,495,321

 

Changes:

 

 

 

 

 

 

Company/Consolidated

Balance at 12/31/14

 

 

 

 

1,495,321

Additional dividends for 2014

 

 

 

 

2,750,000

Payments of dividends and interest on equity

 

 

 

 

(1,759)

IRRF on shareholders exempted from interest on equity

 

 

 

 

1,418

Balance at 03/31/15

 

 

 

 

4,244,980

 

Interest on equity and dividends not claimed by shareholders expire within three years from the date payment commences. Should dividends and interest on equity expire, these amounts are recorded against equity for subsequent distribution.

 

For the cash flow statement, interest on shareholders´ equity and dividends paid to shareholders is recognized in the Financing Activity group.

 

17)  PROVISIONS AND CONTINGENCIES

 

The Company, as an entity and also as successor to the merged companies, and its subsidiaries are a party in labor, tax and civil claims filed in different courts. The management of the Company and its subsidiaries, based on the opinion of its legal counsel, recognized provisions for those cases in which an unfavorable outcome is considered probable.

 

Breakdown of and changes in provisions, whose unfavorable outcome is probable, in addition to contingent liabilities and provision for dismantling, are as follows:

 

Pág. 22


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

 

 

Company

 

Provisions for contingencies

       
 

Labor

 

Tax

 

Civil and regulatory

 

Contingent liabilities (PPA) (a)

 

Provision for decommissioning (b)

 

Total

Balances at 12/31/13

988,180

 

2,133,934

 

970,403

 

275,677

 

235,998

 

4,604,192

Additions

42,999

 

151,391

 

100,741

 

-

 

6,803

 

301,934

Write-offs due to payment

(32,769)

 

(35,636)

 

(23,440)

 

-

 

-

 

(91,845)

Write-offs due to reversal

(8,520)

 

(19,689)

 

(25,144)

 

(9,230)

 

(6,437)

 

(69,020)

Monetary restatement

9,899

 

37,759

 

33,184

 

4,565

 

-

 

85,407

Balances at 03/31/14

999,789

 

2,267,759

 

1,055,744

 

271,012

 

236,364

 

4,830,668

Additions

190,656

 

19,962

 

431,718

 

-

 

130,279

 

772,615

Write-offs due to payment

(166,899)

 

(31,996)

 

(205,901)

 

-

 

-

 

(404,796)

Write-offs due to reversal

(54,855)

 

(7,209)

 

(152,317)

 

(7,725)

 

(119,714)

 

(341,820)

Monetary restatement

44,435

 

131,382

 

68,227

 

14,321

 

-

 

258,365

Balances at 12/31/14

1,013,126

 

2,379,898

 

1,197,471

 

277,608

 

246,929

 

5,115,032

Additions

89,660

 

114,783

 

147,021

 

-

 

20,828

 

372,292

Write-offs due to payment

(45,783)

 

-

 

(43,017)

 

-

 

-

 

(88,800)

Write-offs due to reversal

(12,272)

 

-

 

(40,709)

 

(6,889)

 

(5,997)

 

(65,867)

Monetary restatement

21,327

 

45,726

 

42,732

 

2,684

 

-

 

112,469

Balances at 03/31/15

1,066,058

 

2,540,407

 

1,303,498

 

273,403

 

261,760

 

5,445,126

                 

 

   

At 03/31/15

               

 

   

Current

124,585

 

-

 

602,127

 

-

 

-

 

726,712

Noncurrent

941,473

 

2,540,407

 

701,371

 

273,403

 

261,760

 

4,718,414

                       

At 12/31/14

               

 

   

Current

124,599

 

-

 

549,677

 

-

 

-

 

674,276

Noncurrent

888,527

 

2,379,898

 

647,794

 

277,608

 

246,929

 

4,440,756

 

 

Consolidated

 

Provisions for contingencies

       
 

Labor

 

Tax

 

Civil and regulatory

 

Contingent liabilities (PPA) (a)

 

Provision for decommissioning (b)

 

Total

Balances at 12/31/13

988,180

 

2,148,800

 

970,403

 

275,677

 

240,753

 

4,623,813

Additions

42,999

 

151,404

 

100,741

 

-

 

6,803

 

301,947

Write-offs due to payment

(32,769)

 

(35,636)

 

(23,440)

 

-

 

-

 

(91,845)

Write-offs due to reversal

(8,520)

 

(19,689)

 

(25,144)

 

(9,230)

 

(6,437)

 

(69,020)

Monetary restatement

9,899

 

38,022

 

33,184

 

4,565

 

-

 

85,670

Balances at 03/31/14

999,789

 

2,282,901

 

1,055,744

 

271,012

 

241,119

 

4,850,565

Additions

190,656

 

19,962

 

431,718

 

-

 

130,279

 

772,615

Write-offs due to payment

(166,899)

 

(31,996)

 

(205,901)

 

-

 

-

 

(404,796)

Write-offs due to reversal

(54,855)

 

(7,209)

 

(152,317)

 

(7,725)

 

(119,714)

 

(341,820)

Monetary restatement

44,435

 

132,383

 

68,227

 

14,321

 

-

 

259,366

Balances at 12/31/14

1,013,126

 

2,396,041

 

1,197,471

 

277,608

 

251,684

 

5,135,930

Additions

89,660

 

114,783

 

147,021

 

-

 

20,828

 

372,292

Write-offs due to payment

(45,783)

 

-

 

(43,017)

 

-

 

-

 

(88,800)

Write-offs due to reversal

(12,272)

 

-

 

(40,709)

 

(6,889)

 

(5,997)

 

(65,867)

Monetary restatement

21,327

 

46,091

 

42,732

 

2,684

 

-

 

112,834

Balances at 03/31/15

1,066,058

 

2,556,915

 

1,303,498

 

273,403

 

266,515

 

5,466,389

                 

 

   

At 03/31/15

               

 

   

Current

124,585

 

-

 

602,127

 

-

 

-

 

726,712

Noncurrent

941,473

 

2,556,915

 

701,371

 

273,403

 

266,515

 

4,739,677

                       

At 12/31/14

               

 

   

Current

124,599

 

-

 

549,677

 

-

 

-

 

674,276

Noncurrent

888,527

 

2,396,041

 

647,794

 

277,608

 

251,684

 

4,461,654

 

(a)  Refers to contingent liabilities arising from PPA generated in acquisition of the controlling interest of Vivo Participações in 2011.

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

 

 

 

 

 

Pág. 23


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

17.1) Provisions and labor contingencies

 

 

 

Amounts involved

 

 

Company / Consolidated

Risk nature/level

 

03/31/15

 

12/31/14

Probable provisions

 

1,066,058

 

1,013,126

Possible contingencies

 

230,415

 

229,715

 

Provisions and labor contingencies involve labor claims filed by former employees and employees at outsourced companies (the later alleging joint or subsidiary liability) claiming for, among other issues, overtime, salary equalization, post-retirement salary supplements, job hazard premium, additional for unhealthy work conditions and claims related to outsourced services.

 

The Company is also defendant in labor claims filed by retired former employees regarding the Medical Care Plan for Retired Employees (PAMA), which require, among other issues, the annulment of the change occurred in such plan. The claims await decision by the Regional Labor Court of São Paulo. Based on the opinion of its legal advisors and the current jurisdictional benefits, management considers this claim as a possible risk. No amount has been allocated for these claims, since in the case of loss, it is not possible to estimate the corresponding amount payable by the Company.

 

Additionally, the Company is party to public civil actions filed by the Department of Labor, in respect to the decision to restrain the Company from continuing to hire outsourced companies to carry out the Company’s main activities. No amounts were allocated to the possible likelihood of an unfavorable outcome related to these public civil actions in the table above, since in these phases, in the event of loss, it is not possible to estimate the Company’s monetary loss.

 

17.2) Provisions and tax contingencies

 

 

Amounts involved

 

Company

 

Consolidated

Risk nature/level

03/31/15

 

12/31/14

 

03/31/15

 

12/31/14

Probable provisions

2,540,407

 

2,379,898

 

2,556,915

 

2,396,041

Federal

2,461,041

 

2,302,029

 

2,477,549

 

2,318,172

State

62,263

 

61,134

 

62,263

 

61,134

Municipal

17,103

 

16,735

 

17,103

 

16,735

 

 

 

 

 

 

 

 

Possible contingencies

21,813,057

 

21,186,885

 

22,035,543

 

21,401,796

Federal

4,765,483

 

4,973,141

 

4,774,684

 

4,981,909

State

10,211,589

 

9,805,466

 

10,338,296

 

9,930,020

Municipal

657,375

 

658,468

 

658,787

 

660,084

ANATEL

6,178,610

 

5,749,810

 

6,263,776

 

5,829,783

 

Pág. 24


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

Provisions for probable tax contingencies

 

Federal taxes

 

The Company and subsidiary were party to administrative and judicial proceedings relating to: (i) additional contributions to the FGTS on deposits made by employees (the issue does not result in the reduction of part of FGTS deposits made by the Company on behalf of its employees); (ii) claims resulting from the non-ratification of compensation and refund requests, formulated by the Company; (iii) social contributions relating to a supposed failure to pay 11% on the value of invoices, billing and receipts from service providers hired for the transfer of labor; (iv) CIDE levied on the remittance of funds abroad relating to technical services, administrative assistance and to services of similar nature, as well as royalties; (v) fixed: non-inclusion of interconnection and EILD expenses in the FUST base and Wireless carriers: non-inclusion of revenues from interconnection in the FUST tax base; (vi) contribution to Empresa Brasileira de Comunicação, created by Law No. 11652/08; (vii) TFI/TFF on mobile stations; (viii) IRRF on Interest on shareholders´ Equity; (ix) Price for Numbering Resources Management (PPNUM) by ANATEL instituted by Resolution No. 451/06; (x) IRPJ/PIS/COFINS resulting from the non-ratification of offset and refund requests made by the Company and its subsidiaries; (xi) Social Investment Fund (Finsocial) offset amounts; (xii) failure to pay withholding social contribution levied on services rendered, remuneration, salaries and other salary bases; (xiii) COFINS – Requirement resulting from non-inclusion of financial income into the tax base; (xiv) additional charges to the PIS and COFINS tax base, as well as additional charges to COFINS required by Law No. 9718/98; and (xv) Tax on Net Income (ILL).

 

At March 31, 2015, provisioned consolidated amounts totaled R$ 2,477,549 (R$ 2,318,172 at December 31, 2014).

 

State taxes

 

The Company or its subsidiary were parties to administrative and judicial proceedings in progress referring to (i) ICMS tax credits on electric power and tax credits without documentation (ii) ICMS not levied on telecommunication services; (iii) disallowance of ICMS tax incentives for cultural projects; (iv) environmental administrative fine; (v) disallowance of ICMS credit referring to Agreement 39; and (vi) co-billing.

 

At March 31, 2015, provisioned consolidated amounts totaled R$ 62,263 (R$ 61,134 at December 31, 2014).

 

Municipal taxes

 

The Company or its subsidiary is a party to various municipal tax proceedings referring to (i) IPTU; (ii) ISS levied on real estate lease services and mean and supplementary activities; and (iii) surveillance, control, and monitoring rate (TVCF).

 

At March 31, 2015, provisioned consolidated amounts totaled R$ 17,103 (R$ 16,735 at December 31, 2014).

 

Possible tax contingencies

 

According the understanding of Management and its legal counsel, there is the likelihood of loss in federal, state and municipal proceedings, in addition to the proceedings with ANATEL, as follows:

 

Federal taxes

 

The Company and its subsidiary were parties to various administrative and judicial proceedings, at the federal level, which are ongoing in various court levels.

 

 

Pág. 25


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

Among these actions, the following are highlighted: (i) protest letters due to non-ratification of compensation requests made by the Company; (ii) social security contribution (INSS) on compensation payment for salary devaluation arising from losses caused by “Plano Verão” (Summer Plan) and “Plano Bresser” (Bresser Plan), SAT (Occupational Accident Insurance), Social Security and payables to third parties (INCRA and SEBRAE), supply of meals to employees, 11% retention (labor assignment); (iii) IRRF on the funds remittance abroad related to technical services and to administrative support and similar services, as well as royalties; (iv) PIS levied on roaming; (v) CPMF levied on operations resulting from the technical cooperation agreement with the National Treasury Department (STN) (offsetting through the Integrated System of Federal Government Financial Administration - SIAFI) and on foreign-exchange contracts required by the Brazilian Central Bank; (vi) IRPJ and CSLL related to deductions on revenues from reversal of provisions; (vii) IRPJ and CSLL - disallowance of costs and sundry expenses not evidenced; (viii) deductions of COFINS from loss in swap transactions; (ix) PIS / COFINS accrual basis versus cash basis; (x) IRPJ payable in connection with allocation of excess funds to Northeast Investment Fund (FINOR), Amazon Region Investment Fund (FINAM) or Economic Recovery Fund of Espírito Santo State (FUNRES); and (xi) IRPJ on derivative operations; (xii) IRPJ and CSLL – disallowance of expenses related to the goodwill paid in the acquisition of Celular CRT S.A., goodwill arising from the privatization process and corporate restructuring of Vivo S.A. and goodwill arising from merger of Navytree and TDBH.

 

At March 31, 2015, involved consolidated amounts totaled R$ 4,774,684 (R$ 4,981,909 at December 31, 2014).

 

State taxes

 

The Company and its subsidiary were parties to various administrative and judicial proceedings related to ICMS, at the state level, which are ongoing in various court levels.

 

Among these actions, the following are highlighted: (i) provision of facility, utility and convenience services and rental of the “Speedy” service modem; (ii) international calls (DDI); (iii) undue credit related to the acquisition of items intended to property, plant and equipment and lack of proportionate credit reversal referring to the acquisition of property, plant and equipment items; (iv) amounts unduly appropriated as ICMS tax credits; (v) service provided outside São Paulo state with ICMS paid to São Paulo State; (vi) co-billing, (vii) tax substitution with a fictitious tax base (tax guideline); (viii) use of credits related to acquisition of electric power; (ix) secondary activities, value added and supplementary services (Agreement 69/98); (x) tax credits related to opposition/challenges referring to telecommunications services not provided or mistakenly charged (Agreement 39/01); (xi) shipment of goods with prices lower than acquisition prices (unconditional discounts); (xii) deferred collection of ICMS - interconnection (DETRAF – Traffic and Service Provision Document); (xiii) credits derived from tax benefits granted by other states; (xiv) disallowance of tax incentives related to cultural projects; (xv) transfers of assets among business units owned by the Company; (xvi) communications service tax credits used in provision of services of the same nature; (xvii) card donation for prepaid service activation; (xviii) reversal of credit from return and free lease in connection with assignment of networks (used by the Company itself and exemption from public bodies); (xix) DETRAF fine, (xx) ICMS on own consumption; (xxi) ICMS on exemption of public bodies; (xxii) issue of invoices with negative ICMS amounts; (xxiii) new tax register bookkeeping without previous authorization by tax authorities; (xxiv) membership; and (xxv) services not measured.

 

At March 31, 2015, involved consolidated amounts totaled R$ 10,338,296 (R$ 9,930,020 at December 31, 2014).

 

Municipal taxes

 

The Company and its subsidiary were parties to various administrative and judicial proceedings, at the municipal level, which are ongoing in various court levels.

 

Among these actions, the following are highlighted: (i) ISS – secondary activities, value added and supplementary services; (ii) withholding ISS; (iii) IPTU; (iv) Land Use Fee; (v) municipal fees; (vi) tariff for Use of Mobile Network (TUM), infrastructure lease; (vii) advertising services; (viii) services provided by third parties; (ix) business management consulting services provided by Telefónica Internacional (TISA); and (x) ISS tax levied on caller ID services and on cell phone activation and (xi) ISS on continuous rendered service, provision, reversal and cancelled invoices.

 

Pág. 26


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

At March 31, 2015, involved consolidated amounts totaled R$ 658,787 (R$ 660,084 at December 31, 2014).

 

ANATEL

 

Universal Telecommunication Services Fund (FUST)

 

Injunction was filed in order to have the right declared not to include expenses with interconnection and Industrial Use of Dedicated Line in FUST tax base for landline phone carriers and not to include revenues from ITX and EILD in FUST tax base for mobile phone carriers, according to Abridgment No. 7, of December 15, 2005, as it does not comply with the provisions contained in sole paragraph of article 6 of Law No. 9998, awaiting judgment in 2nd court level.

 

A number of delinquency notices referring to debit entry issued by ANATEL at the administrative level to set up the tax credit related to interconnection, EILD and other revenues that are not earned from the provision of telecommunications services.

 

At March 31, 2015, involved consolidated amounts totaled R$ 3,205,385 (R$ 3,139,254 at December 31, 2014).

 

Telecommunications Technology Development Fund (FUNTTEL)

 

The Company and its subsidiary are parties to administrative and judicial proceedings which are waiting to be tried at the lower administrative court and the court of appeals. Such proceedings concern the collection of contributions to FUNTTEL on other revenues (not related to telecom services), as well as on income and expenses transferred to other operators (interconnection).

 

At March 31, 2015, involved consolidated amounts totaled R$ 814,720 (R$ 716,369 at December 31, 2014).

 

Telecommunications Inspection Fund (FISTEL)

 

Upon extension of the effective license period to use telephone switches in connection with use of STFC (landline phone carriers) and extension of the right to use radiofrequency in connection with wireless service (wireless carriers), ANATEL charges the Installation Inspection Fee (TFI).

 

This collection is based on ANATEL’s understanding that such extension would represent a taxable event for TFI. The Company understands that such collection is unjustified, and separately challenged the aforesaid fee in court.

 

At March 31, 2015, involved consolidated amounts totaled R$ 2,238,349 (R$ 1,971,290 at December 31, 2014), without the respective judicial deposit.

 

Public Price for Numbering Resource Management (PPNUM)

 

The Company, along with other wireless carriers in Brazil, is challenging in court the tariff charged by ANATEL for use by such carriers of the numbering resources managed by the agency. In view of the collections, the Company made a judicial deposit referring to the amounts due. On April 23, 2009, the carriers received a favorable sentence and the lawsuit is currently waiting to be tried at the court of appeals.

 

At March 31, 2015, involved consolidated amounts totaled R$ 5,322 (R$ 2,870 at December 31, 2014).

 

 

Pág. 27


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

17.3) Provisions, civil and regulatory contingencies

 

 

 

Amounts involved

 

 

Company / Consolidated

Risk nature/level

 

03/31/15

 

12/31/14

Probable provisions

 

1,303,498

 

1,197,471

Civil

 

837,543

 

772,658

Regulatory

 

465,955

 

424,813

 

 

 

 

 

Possible contingencies

 

4,723,335

 

4,484,947

Civil

 

2,052,871

 

1,873,607

Regulatory

 

2,670,464

 

2,611,340

 

Provisions for probable civil contingencies

 

·           The Company is party to proceedings that involve right to receive supplementary amounts from shares calculated in relation to the network expansion plan after 1996 (supplement of shares proceedings). These proceedings involve various phases: 1st level, Court of Justice and Supreme Court of Justice. At March 31, 2015, considering the degree of risk involved, consolidated provision amounted to R$ 152,818 (R$ 138,654 at December 31, 2014).

 

·           The Company is party to various civil proceedings related to consumers in administrative and judicial spheres, referring to non-compliance with services and/products sold. At March 31, 2015, the consolidated provisioned amount was R$ 352,262 (R$ 325,571 at December 31, 2014).

 

·           The Company is party to various civil proceedings of non-consumer nature in administrative and judicial spheres, all related to the ordinary course of business. At March 31, 2015, provisioned consolidated amounts totaled R$ 332,463 (R$ 308,433 at December 31, 2014).

 

Provisions for probable regulatory contingencies

 

The Company is party to administrative proceedings against ANATEL, which were filed based on alleged noncompliance with obligations set forth in industry regulations, as well as in legal claims discussing sanctions by ANATEL at the administrative level.  At March 31, 2015, provisioned consolidated amounts totaled R$ 465,955 (R$ 424,813 at December 31, 2014).

 

Possible civil contingencies

 

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

 

·       Public Interest Suit in which the Company is involved referring to the Community Telephone Plan (PCT), about the right for indemnification of the acquirers of expansion plans, not receiving shares for financial investments made in the city of Mogi das Cruzes, whose total consolidated amount approximates to R$ 358,390 at March 31, 2015 (R$ 336,758 at December 31, 2014). São Paulo Court of Justice (TJSP) changed its decision, and judged this matter groundless. The carriers association of Mogi das Cruzes (plaintiff) filed a special appeal to reverse that decision, which is currently waiting for a decision.

 

·       Collective Action filed by SISTEL Participants' Association (ASTEL) in the state of São Paulo, in which SISTEL associates in the state of São Paulo challenge the changes made in the Medical Care Plan for Retired Employees (PAMA) and claim for the reestablishment of the prior status quo.  This claim is still in its appeal phase, at the upper-court-level decision that modified the prior decision whereby this claim was awarded an unfavorable decision. The amount cannot be estimated, and the claims cannot be settled due to their unenforceability, in that it entails a return to the prior plan conditions.

 

 

Pág. 28


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

·       Public Interest Suits filed by ASTEL, in the state of São Paulo, and by FENAPAS, both against SISTEL, the Company and other carriers, in order to annul spin-off of the private pension plan PBS, alleging, in short, the “windup of the supplementary private pension plan of SISTEL Foundation”, which led to various specific mirror PBS plans, corresponding to allocation of funds from technical surplus and tax contingencies existing at the time of the spin-off. The amount cannot be estimated, and the claims cannot be settled due to their unenforceability because this involves the return of the spun-off assets of SISTEL referring to telecommunication carries of the former Telebrás System.

 

·       The Public Prosecutor’s Office of São Paulo State began a public class action claiming moral and property damages suffered by all consumers of telecommunications services from 2004 to 2009 due to the bad quality of services and failures of the communications system. The Public Prosecutor’s Office suggested that the indemnification to be paid should be R$ 1 billion. The decision handed down on April 20, 2010 imposes the payment of indemnification for damages caused to all consumers who have filed a suit for such damages.

 

Conversely, in the event that the number of claiming consumers is not in line with the extent of damages, after the lapsing of one year, the judge determined that the amount of R$ 60 million should be deposited in the Special Expenses Fund to Recover Natural Rights Damages (Fundo Especial de Despesa de Reparação de Interesses Difusos Lesados). It is not possible to estimate the number of consumers who will individually file suits, or the amounts claimed thereby. The parties filed an appeal on the merits of the case. The judgment effects are in abeyance. No amount has been assigned to the possible likelihood of an unfavorable outcome in connection with this action, since, in the case of loss, estimating the corresponding amount payable by the Company is not practicable at this time. Likewise, establishing a provision for contingency equivalent to the amount sought is not possible.

 

·       The Company is party to other civil claims, at several levels, related to service rendering. Such claims have been filed by individual consumers, civil associations representing consumer rights or by the Bureau of Consumer Protection (PROCON), as well as by the Federal and State Public Prosecutor’s Office. The Company is also party to other claims of several types related to the normal course of business. At March 31, 2015, provisioned consolidated amounts totaled R$ 1,683,042 (R$ 1,525,908 at December 31, 2014).

 

·       The Company has received fines regarding the noncompliance with SAC Decree. We currently have various actions (administrative and judicial proceedings). At March 31, 2015, consolidated amounts totaled R$ 11,439 (R$ 10,941 at December 31, 2014).

 

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

 

An unfavorable sentence was passed determining that the Company should refrain from selling mobile phones with Caller ID service (Bina), subject to a daily fine of R$ 10,000 in case of noncompliance. Furthermore, according to the sentence passed, the Company must pay indemnification for royalties, to be calculated in settlement. Motions for Clarification were opposed by all parties and Lune’s motions for clarification were accepted since an injunctive relief in this stage of the proceedings was deemed applicable. Bill of review appeal in view of the current decision which granted a stay of execution suspending that unfavorable decision until final judgment of the review. Bill of review for appeal at sentence phase pending decision. There is no way to determine the extent of potential liabilities with respect to this claim.

 

·       The Company and other wireless carriers are defendants in several lawsuits filed by the Public Prosecutor’s Office and consumer associations to challenge imposition of a period to use prepaid minutes. The plaintiffs allege that the prepaid minutes should not expire after a specific period. Conflicting decisions were handed down by courts on the matter, even though we believe that our criteria for the period determination comply with ANATEL standards. Based on the legal counsel’s opinion, collective actions have a remote likelihood of loss.

Pág. 29


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

Possible regulatory contingencies

 

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

 

·       The Company is party to administrative proceedings filed by ANATEL alleging noncompliance with the obligations set forth in industry regulations, as well as legal claims which discuss the sanctions applied by ANATEL at the administrative level.  At March 31, 2015, consolidated amounts totaled R$ 2,670,464 (R$ 2,611,340 at December 31, 2014).

 

·       Administrative and legal proceedings discussing payment of 2% charge on revenue from interconnection services due to the extension of right of use of SMP-related radiofrequencies. Under clause 1.7 of the Authorization Terms that grant right of use of SMP-related radiofrequencies, the extension of right of use of such frequencies entails payment every two years, during the extension period (15 years), of a 2% charge calculated on net revenue from the basic and alternative service plans of the service company, determined in the year before that of payment.

 

However, ANATEL determined that the 2% charge should be calculated on revenue from service plans and also on revenue from interconnection services and other operating income, which is not provided for by clause 1.7 of the referred to Authorization Terms.

 

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

 

17.4) Guarantees

 

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

 

 

Consolidated

 

At 03/31/15

 

At 12/31/14

 

Properties and equipment

 

Judicial deposits and court-restricted deposits

 

Letters of guarantee

 

Properties and equipment

 

Judicial deposits and court-restricted deposits

 

Letters of guarantee

Civil, labor and tax

131,491

 

4,922,853

 

2,581,801

 

130,000

 

4,745,225

 

2,537,608

Total

131,491

 

4,922,853

 

2,581,801

 

130,000

 

4,745,225

 

2,537,608

 

At December 31, 2014, in addition to the guarantees presented above, the Company and its Subsidiary had amounts under short-term investment frozen by courts (except for loan-related investments), in the consolidated amount of R$ 70,235 (R$ 64,899 at December 31, 2014).

 

18)  DEFERRED REVENUE

 

 

Company

 

Consolidated

 

03/31/15

 

12/31/14

 

03/31/15

 

12/31/14

Services and goods (a)

688,321

 

764,791

 

688,321

 

764,791

Disposal of property and equipment items (b)

123,461

 

124,247

 

123,461

 

124,247

Activation revenue (c)

91,518

 

91,954

 

119,260

 

106,209

Loyalty program (d)

93,918

 

92,670

 

93,918

 

92,670

Government grants (e)

74,563

 

77,113

 

74,563

 

77,113

Equipment donations (f)

8,808

 

8,947

 

8,808

 

8,947

Other revenues (g)

25,071

 

25,824

 

25,071

 

25,824

Total

1,105,660

 

1,185,546

 

1,133,402

 

1,199,801

               

Circulante

656,473

 

704,589

 

682,825

 

717,019

Noncurrent

449,187

 

480,957

 

450,577

 

482,782

 

 

Pág. 30


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

(a)  Refers to the balances of agreements of prepaid services revenue and multi-element operations, which are recognized in P&L to the extent that services are provided to customers. Includes the amounts of the agreement the Company entered into for the industrial use of its mobile network by another SMP carrier in Regions I, II and III of the General Authorization Plan (PGA), which is intended solely to the rendering of SMP services by the carrier to its users.

(b)  Refers to net balance of the residual value from disposal of non-strategic towers and rooftops, to be transferred to P&L upon compliance of conditions for recognition in books.

(c)  Refers to the deferral of activation revenue (fixed) recognized in P&L over the estimated period in which the customer stays in the plant.

(d)  Refers to the loyalty point program maintained by the Company, which allows customers to accumulate points when paying their bills referring to use of services offered. The balance represents the Company’s estimate of customers’ exchanging points for goods and/or services in the future.

(e)  Refers to government grant deriving from funds raised with BNDES in a specific credit line, used in the acquisition of domestic equipment and registered at BNDES (Finame) and applied in projects to expand the network capacity, which have been amortized by the useful life of equipment and grants resulting from projects related to state taxes, which are being amortized under contractual terms.

(f)   Refers to the balances of network equipment donations from suppliers, which are amortized by the useful life of the referred to equipment.

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

 

19) LOANS, FINANCING, DEBENTURES AND LEASE

 

a) Breakdown

 

 

Company / Consolidated

 

Information at March 31, 2015

 

03/31/15

 

12/31/14

 

Currency

 

Annual interest rate

 

Maturity

 

Current

 

Noncurrent

 

Total

 

Current

 

Noncurrent

 

Total

                                   

Local currency

           

1,347,715

 

5,033,682

 

6,381,397

 

1,445,347

 

5,116,491

 

6,561,838

                                   

Loans and financing

           

568,972

 

1,402,637

 

1,971,609

 

665,848

 

1,498,983

 

2,164,831

Financing - BNDES

URTJLP

 

TJLP+ 0 to 9%

 

07/15/19

 

407,142

 

1,161,824

 

1,568,966

 

510,323

 

1,224,052

 

1,734,375

Financing - BNDES

BRL

 

2.5 to 8.7%

 

01/15/23

 

96,975

 

202,994

 

299,969

 

87,495

 

220,903

 

308,398

Financing - BNB

BRL

 

10.00%

 

10/30/16

 

64,855

 

37,819

 

102,674

 

68,030

 

54,028

 

122,058

                                   

Finance lease agreement

R$

 

 

 

08/31/33

 

20,964

 

215,094

 

236,058

 

24,452

 

205,892

 

230,344

                                   

Debentures

           

757,779

 

3,415,951

 

4,173,730

 

755,047

 

3,411,616

 

4,166,663

4th issue – series 2

R$

 

106.8% of CDI

 

10/15/15

 

675,408

 

-

 

675,408

 

655,738

 

-

 

655,738

4th issue – series 3

R$

 

IPCA+4.00%

 

10/15/19

 

597

 

31,856

 

32,453

 

270

 

30,915

 

31,185

1st issue - Minas Comunica

R$

 

IPCA+0.50%

 

07/05/21

 

-

 

85,456

 

85,456

 

-

 

82,186

 

82,186

3rd issue

R$

 

100% of CDI + 0.75%

 

09/10/17

 

15,077

 

1,999,486

 

2,014,563

 

71,825

 

1,999,433

 

2,071,258

4th issue

R$

 

100% of CDI + 0.68%

 

04/25/18

 

66,697

 

1,299,153

 

1,365,850

 

27,214

 

1,299,082

 

1,326,296

                                   

Foreign currency

           

131,214

 

470,933

 

602,147

 

819,171

 

418,251

 

1,237,422

                                   

Loans and financing

           

131,214

 

470,933

 

602,147

 

819,171

 

418,251

 

1,237,422

Loans - BEI

US$

         

-

 

-

 

-

 

716,963

 

-

 

716,963

Financing - BNDES

UMBND (b)

 

ECM (c) + 2.38%

 

07/15/19

 

131,214

 

470,933

 

602,147

 

101,933

 

418,251

 

520,184

BBVA commission

R$

         

-

 

-

 

-

 

275

 

-

 

275

                                   

Total

           

1,478,929

 

5,504,615

 

6,983,544

 

2,264,518

 

5,534,742

 

7,799,260

                                   

LOANS, FINANCING AND FINANCE LEASE AGREEMENT

 

721,150

 

2,088,664

 

2,809,814

 

1,509,471

 

2,123,126

 

3,632,597

Debentures

 

757,779

 

3,415,951

 

4,173,730

 

755,047

 

3,411,616

 

4,166,663

Total

 

1,478,929

 

5,504,615

 

6,983,544

 

2,264,518

 

5,534,742

 

7,799,260

 

(a) Long-term interest reference unit (URTJLP) used by the Brazilian Development Bank (BNDES) as the contractual currency in financing agreements.

(b) Currency unit based on a currency basket (UMBND) used by BNDES as a contractual currency in financing agreements based on funds raised in foreign currency.

(c) The Currency Basket Charge (ECM) is a rate quarterly disclosed by BNDES.

 

b)  Loans and financing

 

Brazilian Development Bank (BNDES)

 

·       On October 23, 2007, a credit facility of R$ 2,034,717 was approved, and sub-credit facility “A” amounts to R$ 1,926,309 (TJLP + 3.73% p.a.) and sub-credit facility “B” to R$ 108,408 (TJLP + 1.73% p.a.), maturing in 8 years, with principal payment in 60 monthly and successive installments, with grace period expired on May 15, 2010. All of these funds have been withdrawn and investment thereof has been proven and accepted by BNDES for the purpose of financing investment projects for goods and services produced in Brazil.

 

Pág. 31


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

The balance of this agreement at March 31, 2015 amounted to R$ 68,212 (R$ 170,536 at December 31, 2014).

 

·       On October 14, 2011, a credit facility was taken out amounting to R$ 3,031,110, restated in 2013 to R$ 2,152,098, and sub-credit facility “A” amounts to R$ 1,360,455 (TJLP + 3.38% p.a.), sub-credit facility “B” to R$ 406,206 (UMBND + 2.38% p.a.), sub-credit facility “C” to R$ 282,149 (TJLP + 1.48% p.a.), sub-credit facility “D” to R$ 80,948 (TJLP + 4.08% p.a.) and sub-credit facility “E” to R$ 22,340 (TJLP), maturing in 8 years, with grace period expired on July 15, 2014. After this period, principal interest and amortization will be paid in 60 monthly and successive installments, for new negotiations of credit facilities and modalities with the bank. All of these funds have been withdrawn by the Company and used in investments in expansion and improvement of the current network, implementation of the infrastructure required for new technologies, from 2011 to 2013, and construction of a data center in the city of Tamboré (São Paulo State) and social projects.

 

As the interest rates applied to two of the five sub-credit facilities of this financing are lower than those prevailing in the market (TJLP and TJLP + 1.48% p.a.), this operation falls within the scope of IAS 20/CPC 7. Accordingly, the government grant by BNDES, adjusted to present value and deferred over the useful life of the financed asset item, resulted in a balance amounting to R$ 12,686 (R$ 13,517 at December 31, 2014) as of March 31, 2015, Note 18.

 

The balance of this agreement at March 31, 2015 amounted to R$ 2,101,682 (R$ 2,049,346 at December 31, 2014).

 

·       On January 1, 2010, a credit facility amounting to R$ 319,927 was approved, at 4.5% and 5.5% p.a., maturing in 10 years, with principal payment in 96 monthly and successive installments from March 15, 2012, after a grace period of 2 years. These funds were obtained through the Investment Support Program (BNDES PSI) and used to improve the network capacity through acquisition of domestic equipment previously registered with BNDES (subject to Finame), and released as that investment is evidenced. Up to December 31, 2012, the amount of R$184,489 was released and the remaining balance of R$135,438 was canceled.

 

As the interest rates applied thereon are lower than those observable in the market (fixed interest rates varying from 4.5% to 5.5% p.a.), this operation falls within the scope of IAS 20/CPC 7. Accordingly, the government grant by BNDES, adjusted to present value and deferred over the useful life of the financed asset item, resulted in balance amounting to R$ 12,331 as of March 31, 2015 (R$ 13,614 as of December 31, 2014), Note 18.

 

The balance of this agreement at March 31, 2015 amounted to R$ 105,947 (R$ 110,456 at December 31, 2014).

 

·       Between November 24, 2010 and March 31, 2011, credit facilities amounting to R$ 29,066 were approved, at 5.5% p.a., TJLP + 5.7% p.a. and TJLP + 9.0% p.a., maturing in 5 years, with principal payment in 48 monthly and successive installments from January 15, 2012, after a grace period of 1 year. On December 15, 2011, R$ 11,097 were approved, at 5.0% p.a. and 8.7% p.a., maturing in 36 months, with principal payment in 30 monthly and successive installments until settlement on March 15, 2015. On December 28, 2012, R$ 9,493 were also approved, at 2.5% p.a., maturing in 36 months, with six-month grace period for principal, fully released as the investments made are proved. These credit facilities were fully withdrawn by the Company.

 

These transactions also fall within the scope of IAS 20/CPC 7 because the interest rate is lower than the observable market rates (fixed interest rates varying from 2.5% to 5.5% p.a.), and government grants by BNDES, adjusted to present value, resulted – as of March 31, 2015 – in the amount of R$ 532 (R$ 826 at December 31, 2014), Note 18.

 

Pág. 32


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

The balance of this agreement at March 31, 2015 amounted to R$ 8,998 (R$ 12,863 at December 31, 2014).

 

·       On December 1, 2010, a credit facility amounting to R$ 5,417 was approved, subsequently restated to R$ 2,262, at 5.5% p.a., maturing in 10 years, with principal payment in 96 monthly and successive installments from February 15, 2013, after a grace period of 2 years, through the Investment Support Program (BNDES PSI). This credit facility was fully withdrawn by the Company.

 

These transactions also fall within the scope of IAS 20/CPC 7 because the interest rate is lower than the observable market rates (5.5% p.a., pre-fixed), and government grants by BNDES, adjusted to present value, resulted – as of March 31, 2015 – in the amount of R$ 231 (R$ 242 at December 31, 2014), Note 18.

 

The balance of this agreement at March 31, 2015 amounted to R$ 1,422 (R$ 1,724 at December 31, 2014).

 

·       On December 28, 2012, R$21,783 and R$331,698 financing facilities were approved at the rate of 2.5% p.a., for 60 months, with a 24-month grace period for principal, and released as the investments made are proved. Through March 31, 2015, R$ 225,043 (R$ 212,887 at December 31, 2014) were released.

 

These transactions also fall within the scope of IAS 20/CPC 7 because the interest rate is lower than the observable market rates (2.5% p.a., pre-fixed), and government grants by BNDES, adjusted to present value, resulted – as of March 31, 2015 – in the amount of R$ 31,610 (R$ 31,286 at December 31, 2014), Note 18.

 

The balance of this agreement at March 31, 2015 amounted to R$ 181,482 (R$ 213,985 at December 31, 2014).

 

·       At august 1, 2013, a R$4,030 financing facility was approved at the rate of 3.5% p.a., for 60 months, with a 24-month grace period for principal, and released as the investments made are proved.  This credit facility was fully withdrawn by the Company.

 

These transactions also fall within the scope of IAS 20/CPC 7 because the interest rate is lower than the observable market rates (3.5% p.a., pre-fixed), and government grants by BNDES, adjusted to present value, resulted – as of March 31, 2015 – in the amount of R$ 708 (R$ 737 at December 31, 2014), Note 18.

 

The balance of this agreement at March 31, 2015 amounted to R$ 3,339 (R$ 4,047 at December 31, 2014).

 

Banco Europeu de Investimentos (BEI)

 

On October 31, 2007, a credit facility amounting to € 250 million (equivalent to US$ 365 million at the time) was taken out, at 4.18% and 4.47% p.a., maturing in 7 years with principal payment in two installments. The first installment of R$ 272,460 was paid on December 19, 2014 and the second on March 2, 2015. Interest was charged semi-annually based on the dates of each release. The funds were released in two installments, the first on December 19, 2007 and the second on February 28, 2008. The agreement had a swap transaction associated therewith that transformed currency risk into CDI variation percentage and that was settled in accordance with the maturity of each installment. The balance of this agreement at December 31, 2014 was R$ 716,963.

 

 

 

 

 

 

Pág. 33


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

Banco do Nordeste (BNB)

 

On January 29, 2007 and October 30, 2008, credit facilities amounting to R$ 247,240 and R$ 389,000 were taken out, respectively, at 10% p.a., maturing in 8 years, with principal payment in 78 and 72 installments, respectively, after a grace period of 2 years. On January 29, 2015, the first credit facility was settled. Funds borrowed were used to expand coverage and increase mobile network capacity in the Northeastern region of Brazil.

 

The balance of this agreement at March 31, 2015 amounted to R$ 102,674 (R$ 122,058 at December 31, 2014).

 

c)  Finance lease

 

Finance lease agreement that transfer to the Company basically all the risks and rewards related to ownership of the leased item are capitalized at lease inception at the fair value of the leased asset or, if lower, the present value of minimum payments of a lease agreement. Initial direct costs incurred in the transaction are added to cost, where applicable.

 

The Company has agreements classified as finance lease as a lessee, related to: (i) lease of towers and rooftops, arising from sales and financial leaseback transactions; (ii) lease of sites built as Built to Suit (“BTS”) for installing antennas and other equipment and means of transmission; (iii) lease of IT equipment and; (iv) lease of infrastructure and means of transmission associated with the electrical grid, connecting cities in the North and Central-West regions of Brazil. The net book value of such assets remained unchanged until sale thereof, and a liability was recognized corresponding to the present value of mandatory minimum installments of the agreement.

 

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

 

The balance of amounts payable referring to aforementioned transactions comprises the following effects:

 

 

 

Company/Consolidated

 

 

03/31/15

 

12/31/14

Nominal value payable

 

660,228

 

653,240

Unrealized financial expense

 

(424,170)

 

(422,896)

Present value payable

 

236,058

 

230,344

 

 

 

 

 

Current

 

20,964

 

24,452

Noncurrent

 

215,094

 

205,892

 

Aging list of finance lease payable at March 31, 2015 is as follows:

 

 

 

Company/Consolidated

 

 

Nominal value payable

 

Present value payable

Within 1 year

 

22,913

 

20,964

From 1 to 5 years

 

108,262

 

74,072

Above 5 years

 

529,053

 

141,022

Total

 

660,228

 

236,058

 

There are no unsecured residual values resulting in benefits to the lessor or contingent payments recognized as revenue at March 31, 2015 and December 31, 2014.

 

 

 

 

Pág. 34


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

d)  Debentures

 

Some information on the debentures in force at March 31, 2015 and December 31, 2014 is as follows:

 

1st issue debentures – Minas Comunica

 

Abiding by the SMP Service Agreement, in compliance with Public Selection No. 001/07, the state of Minas Gerais, through the State Department for Economic Development, has undertaken to subscribe debentures within the scope of the “Minas Comunica” Program, using proceeds from the Fund for Universal Access to Telecommunications Services (Fundo de Universalização do Acesso a Serviços de Telecomunicações) – FUNDOMIC. Under the terms of this program, SMP services would be available to 134 locations in the areas registered under Nos. 34, 35 and 38.

 

In consideration of the certification by the State Department of Economic Development, the following debentures were issued: (i)  621 debentures in the 1st series of the 1st issue, amounting to R$ 6,210, for the service in 15 locations; (ii) 1,739 debentures in the 2nd series of the 1st issue, amounting to R$ 17,390, for the service in 42 locations; and (iii) 3,190 debentures in the 3rd series of the 1st issue, amounting to R$ 31,900, for the service in 77 locations, thus completing the service program in 134 locations in the state of Minas Gerais. These are junior unsecured registered nonconvertible debentures, with no stock certificates issued, in up to five series.

 

The balance at March 31, 2015 totaled R$ 85,456 (R$ 82,186 at December 31, 2014).

 

4th issue debentures – Series 1, 2 and 3

 

On September 4, 2009, the Board of Directors approved the 4th public issue by that company of junior unsecured registered nonconvertible debentures, maturing over a ten-year period.

 

Total issue amounted to R$810 million, basic offering of which corresponded to R$600 million, plus R$210 million due to full exercise of the additional debentures option.

 

Funds obtained through this issue were used for payment of the full principal amount of the debt represented by the 6th issue of promissory notes and to support the working capital.

 

1st series: 98,000 debentures were issued in the 1st series. Considering the non-approval of the reset conditions by holders of 1st Series debentures, the Company, as provided for in the Indenture, exercised its right to redeem all 1st series debentures on November 14, 2014, for subsequent cancellation, amounting to R$ 93,150.

 

2nd Series: 640,000 debentures were issued in the 2nd series. On October 15, 2013, the Company reset for the first time all terms for the 2nd series as approved by the Board of Directors in a meeting held on September 19, 2013. The total amount reset was R$640 million at 106.80% CDI, and a new term was scheduled, namely, October 15, 2015.

 

3rd Series: 72,000 debentures were issued in the 3rd series. On October 15, 2014, there was the first reset of Company’s 3rd series debentures in accordance with all conditions approved by the Board of Directors in a meeting held on September 9, 2014. Total amount reset was R$ 31,489, and the Company redeemed all debentures of dissenting holders amounting to R$ 64,755, keeping them in treasury for subsequent cancellation.

 

The balance at March 31, 2015 totaled R$ 707,861 (R$ 686,923 at December 31, 2014).

 

3rd issue debentures

 

On July 24, 2012, the Company’s Board of Directors approved a proposal to raise funds from local financial market though issue of junior nonconvertible debentures of the Company, amounting up to R$2 billion, with a maximum seven-year term and firm underwriting.

 

Pág. 35


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

On September 10, 2012, total 200,000 (two hundred thousand) junior unsecured registered nonconvertible debentures were issued in a single series, with par value of R$10,000.00 (ten thousand reais), totaling R$2 billion.

 

Remuneration is 100.00% of CDI, plus a spread of 0.75% p.a., based on 252 working days. These debentures yield interest with semiannual payments, with interest accrual period of five years, maturing on September 10, 2017. The par value of the debentures will be fully repaid in a lump sum, at maturity date.

 

Debentures are not subject to scheduled reset.

 

Funds obtained through this limited offering were allocated to: (i) direct investments in 4G wireless telephony services, more specifically to settle the price of the authorization obtained in the 4G auction; and (ii) sustaining liquidity and rescheduling of other debts already assumed by the Company.

 

Transaction costs in connection with this issue, amounting to R$ 514 as of March 31, 2015 (R$ 567 as of December 31, 2014), were allocated to a contra-liabilities account as deferred cost and are recognized as financial expenses, under the contractual terms of this issue.

 

The balance, net of transaction costs, at March 31, 2015 totaled R$ 2,014,563 (R$ 2,071,258 at December 31, 2014).

 

4th issue debentures

 

On April 11, 2013, Company’s Board of Directors approved a proposal to raise funds in the local market by issuing junior nonconvertible debentures in the amount of R$ 1.3 billion.

 

The net proceeds from this issue will be fully used in amortizing future debts, in capital expenditures for the projects developed and in improving the Company’s financial liquidity.

 

Total 130,000 debentures were issued, with par value of R$ 10,000.00. The debentures have a five-year (5) maturity as from their issue date, April 25, 2013, thereby maturing at April 25, 2018. The par value of debentures will not be monetarily restated. Remuneration is 100.00% of CDI, plus a spread of 0.68% p.a., based on 252 working days.

 

The transaction costs associated with this issue at March 31, 2015 totaled R$ 847 (R$ 918 at December 31, 2014).

 

The balance, net of transaction costs, at March 31, 2015 totaled R$ 1,365,850 (R$ 1,326,296 at December 31, 2014).

 

e)  Repayment schedule

 

At March 31, 2015, breakdown of noncurrent loans, financing, finance lease and debentures by year of maturity is as follows:

 

 

 

Company / Consolidated

Year

 

Loans and financing

 

Debentures

 

Finance lease agreement

 

Total

2016

 

459,645

 

-

 

15,283

 

474,928

2017

 

578,936

 

1,998,744

 

19,255

 

2,596,935

2018

 

521,850

 

1,343,726

 

18,228

 

1,883,804

2019

 

312,112

 

45,731

 

17,217

 

375,060

2020

 

1,027

 

13,875

 

16,238

 

31,140

From 2021 onwards

 

-

 

13,875

 

128,873

 

142,748

Total

 

1,873,570

 

3,415,951

 

215,094

 

5,504,615

 

 

Pág. 36


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

f)  Covenants

 

There are loans and financing and debentures, presented in tables of Notes 19b) and 19d), respectively, which have specific clauses for penalty in case of breach of contract. A breach of contract provided for in the agreements made ​​with the institutions listed above is characterized by noncompliance with covenants, breach of a clause, resulting in the early settlement of the contract.

 

The Company has loans and financing taken out from BNDES, the balance of which as of March 31, 2015 was R$ 2,169,894 (R$ 2,252,924 as of December 31, 2014). In accordance with the agreements, there are financial and economic ratios that should be considered on a semiannual an annual basis. At this same date, all economic and financial ratios provided for under the agreements in effect were met.

 

Fourth issue debentures, series 1, 2 and 3, as of March 31, 2015 amounted to R$ 707,861 (R$ 686,923 as of December 31, 2014) and have economic and financial ratios that should be calculated on a quarterly basis. At this same date, all economic and financial ratios provided for under the agreements were met.

 

Third issue debentures, sole series, net of issue costs, as of March 31, 2015 amounted to R$ 2,014,563 (R$ 2,071,256 as of December 31, 2014) and have economic and financial ratios that should be calculated on a quarterly basis. At this same date, all economic and financial ratios provided for under the agreements were met.

 

Fourth issue debentures, sole series, net of issue costs, as of March 31, 2015 amounted to R$ 1,365,850 (R$ 1,326,296 as of December 31, 2014) and have economic and financial ratios that should be calculated on a quarterly basis. At this same date, all economic and financial ratios provided for under the agreements were met.

 

Debentures of Minas Comunica Program, amounting to R$ 85,456 as of March 31, 2015 (R$ 82,186 at December 31, 2014), includes covenants as for in-court and out-of-court reorganization, liquidation, spin-off, insolvency, voluntary bankruptcy or bankruptcy, lack of payment, noncompliance with non-fiduciary commitments and compliance with certain financial ratios. At the same date, all these covenants were met.

 

g)  Guarantees

 

At March 31, 2015, guarantees were given for part of loans and financing of the Company, as follows:

 

 

Creditors

Loans/Financial balance

Guarantees

 

BNDES

 

R$ 1,568,966 (URTJLP)

 

R$ 602,147 (UMBND)

 

R$ 299,969 (PSI)

 

·      Agreement (2011) R$ 2,101,682: Guarantee in receivables referring to 15% of debit balance or four times the amount of the highest installment, whichever is higher, and Agreement (2007) R$ 68,212: Guarantee by SP Telecomunicações Participações Ltda.

 

·       Agreement (PSI) R$ 301,188: disposal of financed assets.

 

 

BNB

 

R$ 102,674

·      Bank guarantee granted by Banco Bradesco S.A. equivalent to 100% of debit balance of the financing.

 

·       Establishment of a liquidity fund represented by short-term investments equivalent to three amortization installments, based on the average installment after the grace period. Balances of R$ 29,336 and R$ 60,454 at March 31, 2015 and December 31, 2014, respectively.

 

 

 

 

 

 

Pág. 37


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

h)  Changes

 

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

 

 

Company / Consolidated

 

Loans and financing

 

Debentures

 

Finance lease agreement

 

Total

Balance at 12/31/13

4,233,062

 

4,301,615

 

218,878

 

8,753,555

Additions

87,422

 

-

 

-

 

87,422

Government grants (Note 18)

(16,123)

 

-

 

-

 

(16,123)

Financial charges

67,944

 

110,741

 

4,222

 

182,907

Issue costs

-

 

140

 

-

 

140

Monetary restatement and exchange gains/losses

(46,346)

 

-

 

-

 

(46,346)

Write-offs (payments)

(294,737)

 

(100,150)

 

(4,024)

 

(398,911)

Balance at 03/31/14

4,031,222

 

4,312,346

 

219,076

 

8,562,644

Additions

199,662

 

31,489

 

8,269

 

239,420

Government grants (Note 18)

(16,230)

 

-

 

-

 

(16,230)

Financial charges

177,092

 

354,474

 

18,728

 

550,294

Issue costs

-

 

409

 

-

 

409

Monetary restatement and exchange gains/losses

230,501

 

-

 

-

 

230,501

Write-offs (payments)

(1,219,994)

 

(532,055)

 

(15,729)

 

(1,767,778)

Balance at 12/31/14

3,402,253

 

4,166,663

 

230,344

 

7,799,260

Additions

12,157

 

-

 

1,395

 

13,552

Government grants (Note 18)

(1,548)

 

-

 

-

 

(1,548)

Financial charges

79,250

 

124,795

 

9,850

 

213,895

Issue costs

-

 

124

 

-

 

124

Monetary restatement and exchange gains/losses

172,385

 

-

 

-

 

172,385

Write-offs (payments)

(1,090,741)

 

(117,852)

 

(5,531)

 

(1,214,124)

Balance at 03/31/15

2,573,756

 

4,173,730

 

236,058

 

6,983,544

 

 

20) OTHER LIABILITIES

 

 

Company

 

Consolidated

 

03/31/15

 

12/31/14

 

03/31/15

 

12/31/14

Authorization license (a)

1,215,520

 

1,178,978

 

1,215,520

 

1,178,978

Split and fractional shares (b)

388,934

 

388,975

 

388,934

 

388,975

Payables to related parties (Note 28)

325,149

 

296,961

 

135,263

 

119,803

License renewal charges (c)

317,971

 

275,839

 

317,971

 

275,839

Third-parties retentions

133,698

 

202,390

 

135,431

 

204,227

Amounts refundable to subscribers

47,963

 

41,260

 

50,238

 

43,445

Other liabilities

51,379

 

46,258

 

55,402

 

70,141

Total

2,480,614

 

2,430,661

 

2,298,759

 

2,281,408

 

 

 

 

 

 

 

 

Current

1,460,052

 

1,442,724

 

1,309,078

 

1,322,616

Noncurrent

1,020,562

 

987,937

 

989,681

 

958,792

 

(a)  Refers to a portion of Company’s liability arising from an agreement entered into with ANATEL, whereby the operators that won this auction shall organize, within 90 days, Entidade Administradora do Processo de Redistribuição e Digitalização de Canais de TV e RTV (“EAD”), which will be responsible for equally performing all TV and RTV channel redistribution procedures and solutions to harmful interference in radio communication systems. The funds for these procedures shall be transferred by the operators in 4 annual installments adjusted by IGP-DI.

(b)  Refers to credit provided to shareholders benefiting from remaining shares arising from grouping and splitting of the shares of the Company and merged companies.

(c)  Refers to charges for the renewal of STFC and SMP licenses (Note 1b).

 

 

 

Pág. 38


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

21)  EQUITY

 

a) Capital

 

Paid-in capital at March 31, 2015 and December 31, 2014 amounted to R$ 37,798,110. Subscribed and paid-in capital is divided into shares without par value, held as follows:

 

 

Common shares

 

Preferred shares

 

Overall total

Shareholders

Number

 

%

 

Number

 

%

 

Number

 

%

Telefónica Internacional S.A.

28,859,918

 

7.58%

 

271,707,098

 

36.63%

 

300,567,016

 

26.77%

Telefónica S.A.

97,976,194

 

25.69%

 

179,862,845

 

24.24%

 

277,839,039

 

24.73%

SP Telecomunicações Participações Ltda.

222,595,149

 

58.37%

 

29,042,853

 

3.91%

 

251,638,002

 

22.40%

Telefónica Chile S.A.

696,110

 

0.18%

 

11,792

 

0.00%

 

707,902

 

0.06%

Total Group companies

350,127,371

 

91.82%

 

480,624,588

 

64.78%

 

830,751,959

 

73.96%

Other shareholders

31,208,300

 

8.18%

 

261,308,985

 

35.22%

 

292,517,285

 

26.04%

Total outstanding shares

381,335,671

 

100.00%

 

741,933,573

 

100.00%

 

1,123,269,244

 

100.00%

                       

Book value per outstanding share:

                     

At 03/31/15

               

R$ 38.44

   

At 12/31/14

               

R$ 40.02

   

 

The Special Shareholders’ Meeting held on November 6, 2014, approved increase in the Company’s authorized capital limit by 500,000,000 (five hundred million) common or preferred shares, from 1,350,000,000 (one billion, three hundred and fifty million) shares to 1,850,000,000 (one billion, eight hundred and fifty million) shares. The Board of Directors is the relevant body to decide about increase in the number and consequent issuance of new shares, within the authorized capital limit.

 

However, the Brazilian Corporation Law – Law No. 6404/76, article 166, IV – establishes that capital may be increased by means of a Special Shareholders’ Meeting resolution held to decide about amendments to the Articles of Incorporation, if authorized capital increase limit has been reached.

 

Capital increases do not necessarily have to observe the proportion between the numbers of shares of each type. However, the number of preferred shares, nonvoting or with restricted voting, must not exceed 2/3rd of the total shares issued.

 

Preferred shares are nonvoting, except for cases set forth in articles 9 and 10 of the bylaws, but have priority in the reimbursement of capital, without premium, and are entitled to dividends 10% higher than those paid on common shares, as per article 7 of the Company’s bylaws and item II, paragraph 1, article 17, of Law No. 6404/76.

 

Holders of preferred shares are also fully entitled to vote, when the Company does not pay minimum dividends to which they are entitled, for 3 consecutive fiscal years, until payment thereof.

 

b)  Bonus paid on acquisition of interest from non-controlling shareholders

 

In accordance the with accounting practices adopted in Brazil previously to the adoption of the IFRS/CPC, goodwill was recorded when shares were acquired at a higher value than their carrying amount, generated by the difference between the carrying amount of shares acquired and the transaction’s fair value. With the adoption of IAS 27R (IFRS 10 since 2013)/CPC 35 and CPC 36, the effects of all acquisition of shares from non-controlling shareholders are recorded under equity when there is no change in the controlling shareholding. Consequently, these transactions no longer generate goodwill or income, and the goodwill previously generated from acquisition from non-controlling shareholders was adjusted matched against the Company’s equity. The balance of this account at March 31, 2015 and December 31, 2014 was R$70,448.

 

 

Pág. 39


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

c) Capital reserves

 

c.1) Special goodwill reserve

 

This represents the tax benefit generated by the merger of Telefônica Data do Brasil Ltda. which will be capitalized in favor of the controlling shareholder after tax credits are realized under the terms of CVM Ruling No. 319/99. The balance of this account at March 31, 2015 and December 31, 2014 was R$63,074.

 

c.2) Other capital reserves

 

Other capital reserves are issue or capitalization in excess, in relation to the basic share value at the issue date.

 

On March 12, 2015, the Special Shareholders’ Meeting approved the cancellation of 2,332,686 shares issued by the Company, held in treasury, of which 251,440 are common and 2,081,246 are preferred shares, in the amount of R$112,107.

 

The balance of this account at March 31, 2015 was R$2,623,823 (R$2,735,930 at December 31, 2014).

 

c.3) Treasury stock

 

These represent the Company’s treasury stock arising from: i) merger of TDBH (in 2006); ii) merger of Vivo Participações shares (in 2011), and iii) repurchase of common and preferred shares.

 

On March 12, 2015, the Special General Meeting approved the cancellation of 2,332,686 shares issued by the Company, held in treasury, of which 251,440 are common and 2,081,246 are preferred shares.

 

The balance of this account at December 31, 2014 was R$112,107.

 

d) Income reserves

 

d.1) Legal reserve

 

The legal reserve is set up by allocation of 5% of the net income for the year, up to the limit of 20% of the paid-up capital. Legal reserve will only be used to increase capital and offset accumulated losses. The balance of this account at March 31, 2015 and December 31, 2014 was R$1,532,630.

 

d.2) Tax incentive reserve

 

The Company has State VAT (ICMS) tax benefits in the states of Minas Gerais and Espírito Santo, referring to credits approved by the relevant bodies of said states, in connection with investments in the installation of SMP support equipment, fully operational, in accordance with the rules in force, ensuring that the localities listed in the call for bid be included in the SMP coverage area.

 

The portion of profit subject to the incentive was excluded from dividend calculation, and may be used only in the event of capital increase or loss absorption.

 

The balance of this account at March 31, 2015 was R$2,275 (R$1,849 at December 31, 2014).

 

e) Dividends – proposed and interim

 

e.1) Interim and proposed dividends

 

On January 30, 2015, the Company’s Board of Directors approved destination of interim dividends in the amount of R$2,750,000, based on profits posted at December 31, 2014, corresponding to R$2.296522661346 per common and R$2.526174927480 per preferred share.

 

Pág. 40


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

Such interim dividends will be paid until the end of 2015, on a date to be defined by the Executive Board, being credited to individual shareholders, following the Company’s shareholding position of record at the end of February 10, 2015, inclusive.

 

The balance of this account at March 31, 2015 was R$18,592 (R$2,768,592 at December 31, 2014).

 

e.2) Unclaimed dividends and interest on equity

 

Pursuant to article 287, item II “a” of Law No. 6404, of December 15,  1976, dividend and IOE not claimed by shareholders expire in three years as from the initial payment date. The Company reverses the expired amount of dividend and IOE to equity upon expiry.

 

f.)Other comprehensive income

 

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

 

Derivative transactions: Derivative transactions refer to the effective part of cash flow hedges until balance sheet date.

 

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

 

Changes in other comprehensive income are as follows:

 

 

Consolidated

 

Financial instruments available for sale

 

Derivative transactions

 

Currency translation difference of foreign investments

 

Total

Balances at 12/31/13

(2,658)

 

6,610

 

12,897

 

16,849

Exchange gains/losses

-

 

-

 

855

 

855

Additions to future contracts

-

 

1,341

 

-

 

1,341

Losses on financial assets available for sale

(2,763)

 

-

 

-

 

(2,763)

Balances at 03/31/14

(5,421)

 

7,951

 

13,752

 

16,282

Exchange gains/losses

-

 

-

 

(1,406)

 

(1,406)

Additions to future contracts

-

 

219,870

 

-

 

219,870

Losses on financial assets available for sale

(2,281)

 

-

 

-

 

(2,281)

Balances at 12/31/14

(7,702)

 

227,821

 

12,346

 

232,465

Exchange gains/losses

-

 

-

 

4,787

 

4,787

Additions to future contracts

-

 

399,652

 

-

 

399,652

Losses on financial assets available for sale

(653)

 

-

 

-

 

(653)

Balances at 03/31/15

(8,355)

 

627,473

 

17,133

 

636,251

 

 

Pág. 41


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

22)  NET OPERATING REVENUE

 

 

Company

 

Consolidated

 

1Q2015

 

1Q2014

 

1Q2015

 

1Q2014

Telephony services

6,382,283

 

6,558,317

 

6,382,271

 

6,558,304

Interconnection and network use

572,324

 

786,932

 

572,324

 

786,932

Dada and SVAs

4,516,783

 

3,899,967

 

5,071,917

 

4,318,705

TV services

194,491

 

157,982

 

194,491

 

157,982

Other services (a)

234,636

 

244,249

 

293,699

 

303,980

Sales of goods and devices

864,580

 

818,907

 

921,229

 

862,603

Gross operating revenue

12,765,097

 

12,466,354

 

13,435,931

 

12,988,506

 

 

 

 

 

 

 

 

Taxes

(3,127,899)

 

(2,995,997)

 

(3,235,586)

 

(3,098,334)

Discounts granted and returns of goods

(1,215,917)

 

(1,276,308)

 

(1,217,267)

 

(1,278,242)

Deductions from gross operating revenue

(4,343,816)

 

(4,272,305)

 

(4,452,853)

 

(4,376,576)

 

 

 

 

 

 

 

 

Net operating revenue

8,421,281

 

8,194,049

 

8,983,078

 

8,611,930

 

(a) The consolidated amounts referring to infrastructure-related swap contracts, under the concept of agent and principal (CPC 30 and IAS 18), which were not recognized as costs and revenues for the three-month periods ended March 31, 2015 and 2014 were R$42,605 and R$35,185, respectively (Note 23).

 

No customer contributed with more than 10% of gross operating revenue for the three-month periods ended March 31, 2015 and 2014.

 

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

 

23) OPERATING COSTS AND EXPENSES  

 

 

Company

 

1Q2015

 

1Q2014

 

Cost of sales and services

 

Selling expenses

 

General and administrative expenses

 

Total

 

Cost of sales and services

 

Selling expenses

 

General and administrative expenses

 

Total

Personnel

(116,968)

 

(417,252)

 

(99,752)

 

(633,972)

 

(107,810)

 

(370,667)

 

(124,557)

 

(603,034)

Third-party services

(922,603)

 

(1,436,396)

 

(194,620)

 

(2,553,619)

 

(815,644)

 

(1,402,172)

 

(172,887)

 

(2,390,703)

Interconnection and network use

(694,020)

 

-

 

-

 

(694,020)

 

(873,060)

 

-

 

-

 

(873,060)

Publicity and advertising

-

 

(203,066)

 

-

 

(203,066)

 

-

 

(203,035)

 

-

 

(203,035)

Rent, insurance, condominium and connection means (a)

(432,614)

 

(36,282)

 

(44,119)

 

(513,015)

 

(368,247)

 

(30,603)

 

(49,331)

 

(448,181)

Taxes, rates and contributions

(467,554)

 

(928)

 

3,363

 

(465,119)

 

(431,246)

 

(719)

 

(27,377)

 

(459,342)

Estimated impairment losses on accounts receivable

-

 

(304,662)

 

-

 

(304,662)

 

-

 

(196,448)

 

-

 

(196,448)

Depreciation and amortization

(1,085,836)

 

(227,617)

 

(85,546)

 

(1,398,999)

 

(1,100,806)

 

(234,193)

 

(103,698)

 

(1,438,697)

Cost of sales

(549,956)

 

-

 

-

 

(549,956)

 

(488,099)

 

-

 

-

 

(488,099)

Materials and other operating costs and expenses

(19,411)

 

(55,960)

 

(367)

 

(75,738)

 

(10,288)

 

(45,660)

 

(9,601)

 

(65,549)

Total

(4,288,962)

 

(2,682,163)

 

(421,041)

 

(7,392,166)

 

(4,195,200)

 

(2,483,497)

 

(487,451)

 

(7,166,148)

 

 

Consolidated

 

1Q2015

 

1Q2014

 

Cost of sales and services

 

Selling expenses

 

General and administrative expenses

 

Total

 

Cost of sales and services

 

Selling expenses

 

General and administrative expenses

 

Total

Personnel

(122,222)

 

(418,246)

 

(100,165)

 

(640,633)

 

(114,023)

 

(370,667)

 

(124,564)

 

(609,254)

Third-party services

(1,119,085)

 

(1,442,092)

 

(202,251)

 

(2,763,428)

 

(983,025)

 

(1,417,276)

 

(173,215)

 

(2,573,516)

Interconnection and network use

(695,410)

 

-

 

-

 

(695,410)

 

(864,764)

 

-

 

-

 

(864,764)

Publicity and advertising

-

 

(203,066)

 

-

 

(203,066)

 

-

 

(203,035)

 

-

 

(203,035)

Rent, insurance, condominium and connection means (a)

(434,158)

 

(36,282)

 

(44,115)

 

(514,555)

 

(369,564)

 

(30,603)

 

(49,348)

 

(449,515)

Taxes, rates and contributions

(472,654)

 

(928)

 

2,676

 

(470,906)

 

(436,215)

 

(719)

 

(27,476)

 

(464,410)

Estimated impairment losses on accounts receivable

-

 

(324,415)

 

-

 

(324,415)

 

-

 

(207,860)

 

-

 

(207,860)

Depreciation and amortization

(1,091,912)

 

(227,617)

 

(85,598)

 

(1,405,127)

 

(1,105,596)

 

(234,193)

 

(103,765)

 

(1,443,554)

Cost of sales

(580,792)

 

-

 

-

 

(580,792)

 

(511,843)

 

-

 

-

 

(511,843)

Materials and other operating costs and expenses

(20,607)

 

(56,000)

 

(367)

 

(76,974)

 

(11,314)

 

(45,660)

 

(9,601)

 

(66,575)

Total

(4,536,840)

 

(2,708,646)

 

(429,820)

 

(7,675,306)

 

(4,396,344)

 

(2,510,013)

 

(487,969)

 

(7,394,326)

 

(a) The consolidated amounts referring to infrastructure-related swap contracts, under the concept of agent and principal (CPC 30 and IAS 18), which were not recognized as costs and revenues for the three-month periods ended March 31, 2015 and 2014 were R$42,605 and R$35,185, respectively (Note 22).

 

Pág. 42


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

24)  OTHER OPERATING INCOME (EXPENSES), NET

 

 

Company

 

Consolidated

 

1Q2015

 

1Q2014

 

1Q2015

 

1Q2014

Recovered expenses and fines

85,761

 

93,694

 

86,119

 

108,816

Provisions for labor, tax and civil contingencies, net

(215,475)

 

(195,240)

 

(215,476)

 

(195,970)

Net gain (loss) on asset disposal/loss

(12,940)

 

(12,886)

 

(11,971)

 

(14,546)

Other operating income (expenses), net

(2,526)

 

3,663

 

(2,810)

 

3,385

Total

(145,180)

 

(110,769)

 

(144,138)

 

(98,315)

 

 

 

 

 

 

 

 

Other operating income

112,774

 

114,176

 

113,826

 

129,296

Other operating expenses

(257,954)

 

(224,945)

 

(257,964)

 

(227,611)

Total

(145,180)

 

(110,769)

 

(144,138)

 

(98,315)

 

25) FINANCIAL INCOME (EXPENSES), NET

 

 

Company

 

Consolidated

 

1Q2015

 

1Q2014

 

1Q2015

 

1Q2014

Short-term investment yields

92,345

 

149,708

 

117,591

 

160,431

Interest income (customers, taxes and others)

19,477

 

32,783

 

20,486

 

32,861

Charges on loans, financing, debentures and finance lease agreement

(213,895)

 

(182,907)

 

(213,895)

 

(182,907)

Monetary gains/losses on loans and financing

(172,385)

 

46,346

 

(172,385)

 

46,346

Gains (losses) on derivative transactions

157,700

 

(72,951)

 

157,700

 

(72,951)

Interest expense (financial institutions, provisions, suppliers, taxes and others)

(40,169)

 

(52,671)

 

(40,754)

 

(53,107)

Other revenues (expenses) from monetary and exchange gains/losses

(49,461)

 

(21,067)

 

(50,726)

 

(20,213)

Other financial expenses (income)

(41,568)

 

(4,173)

 

(35,869)

 

1,210

Financial income (expenses), net

(247,956)

 

(104,932)

 

(217,852)

 

(88,330)

 

 

 

 

 

 

 

 

Financial income

371,702

 

300,976

 

398,958

 

317,672

Financial expenses

(619,658)

 

(405,908)

 

(616,810)

 

(406,002)

Total

(247,956)

 

(104,932)

 

(217,852)

 

(88,330)

 

26) INCOME AND SOCIAL CONTRIBUTION TAXES

 

The Company and its subsidiary recognize income and social contribution taxes on a monthly basis, on an accrual basis, and pay the taxes based on estimates, in accordance with the tax-special or tax-reduction trial balance. Taxes calculated on profit until the month of the quarterly information are recorded in liabilities or assets, as applicable.

 

Reconciliation of tax expense to standard rate

 

Reconciliation of the reported tax expense and the amounts calculated by applying the statutory tax rate of 34% (income tax of 25% and social contribution tax of 9%) is shown in the table below for the three-month periods ended March 31, 2105 and 2014.

 

 

Company

 

Consolidated

 

1Q2015

 

1Q2014

 

1Q2015

 

1Q2014

Income before taxes

840,429

 

957,635

 

946,014

 

1,031,964

 

 

 

 

 

 

 

 

IRPJ and CSLL expense at the rate of 34%

(285,746)

 

(325,596)

 

(321,645)

 

(350,868)

Temporary and permanent differences

 

 

 

 

 

 

 

Equity pickup, net of received IOE effects

69,513

 

49,448

 

79

 

342

Nondeductible expenses, gifts, incentives and IOE received

(50,990)

 

(26,089)

 

(51,700)

 

(26,089)

Other exclusions (additions)

6,513

 

5,372

 

6,971

 

5,421

Tax expense

(260,710)

 

(296,865)

 

(366,295)

 

(371,194)

 

 

 

 

 

 

 

 

Effective rate

31%

 

31%

 

39%

 

36%

Current IRPJ and CSLL

(298,371)

 

(234,369)

 

(390,600)

 

(296,575)

Deferred IRPJ and CSLL

37,661

 

(62,496)

 

24,305

 

(74,619)

 

 

Pág. 43


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

Breakdown of gains and losses of deferred income and social contribution taxes on temporary differences is shown in Note 6.2.

 

27) EARNINGS PER SHARE  

 

Basic and diluted earnings per share were calculated by dividing income attributed to the Company’s shareholders by the weighted average of the number of outstanding common and preferred shares for the periods. No transactions were carried out that could have potential shares issued through the date of issuance of the consolidated quarterly information (ITR); therefore, there are no adjustments of diluting effects inherent in the potential issue of shares.

 

The table below sets out the calculation of earnings per share for the three-month periods ended March 31, 2015 and 2014:

 

 

Company

 

1Q2015

 

1Q2014

Net income for the year attributable to the Company’s shareholders:

579,719

 

660,770

Common Shares

184,613

 

210,424

Preferred shares

395,106

 

450,346

       

Number of shares:

1,123,269

 

1,123,269

Weighted average number of outstanding common shares for the period

381,335

 

381,335

Weighted average number of outstanding preferred shares for the period

741,934

 

741,934

       

Basic and diluted earnings per share

     

Common shares

0.48

 

0.55

Preferred shares

0.53

 

0.61

 

28) RELATED-PARTY BALANCES AND TRANSACTIONS

 

The main balances of assets and liabilities with related parties arise from transactions with companies related with the controlling group, which were performed at prices and under the conditions agreed by the parties, as follows: 

 

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

 

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

 

c) Lease and maintenance of safety equipment provided by Telefónica Engenharia e Segurança do Brasil;

 

d) Corporate services passed through at the cost effectively incurred on those services;

 

e) Systems development and maintenance services provided by Telefónica Global Technology;

 

f) International transmission infrastructure for a number of data circuit and roaming services provided by Telefónica International Wholesale Brazil, Telefónica International Wholesale Services Spain and Telefónica USA;

 

g)  Telecom projects management (Outsourcing Telecom) – Contract for Professional Services, rendered by Telefônica Serviços Empresariais do Brasil;

 

h) Logistics and courier services provided by Telefónica Transportes e Logística;

 

i) Voice portal content provider services rendered by Terra Networks Brazil;

 

j) Data communications and integrated solution services provided by Telefónica International Wholesale Services Spain and Telefónica USA;

 

Pág. 44


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

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

 

l) Refund of expenses from advisory service fees, expenses with salaries and other expenses paid by the Company to be refunded by companies of the Telefónica Group;

 

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

 

n) Stock option plan to employees of Telefônica Brasil and Telefonica Data linked to the share’s acquisition of Telefónica S.A.; and

 

o) Cost Sharing Agreement (CSA) for the reimbursement of expenses relating to digital business to Telefónica International; and

 

p) Lease of buildings where Telefónica Serviços Empresariais do Brasil and Telefónica Transportes e Logística are based.

 

A summary of significant related-party transactions and balances is as follows:

 

 

 

 

Balance Sheet - Assets

 

 

 

At 03/31/15

At 12/31/14

 

 

 

Current assets

 

Noncurrent assets

 

Current assets

 

Noncurrent assets

Company

Nature of transaction

 

Accounts receivable, net

 

Other assets

 

Other assets

 

Accounts receivable, net

 

Other assets

 

Other assets

Subsidiaries

 

 

 

 

 

 

 

 

 

 

 

 

 

SP Telecomunicações Participações

l)

 

82

 

12,826

 

4,537

 

71

 

12,798

 

4,082

Telefónica Internacional

l)

 

-

 

24,445

 

13,264

 

-

 

877

 

13,264

Telefónica

l)

 

-

 

2,344

 

-

 

-

 

2,339

 

-

 

 

 

82

 

39,615

 

17,801

 

71

 

16,014

 

17,346

Other Group companies

 

 

 

 

 

 

 

 

 

 

 

 

 

Telefónica USA

f) / j)

 

3,669

 

-

 

-

 

4,114

 

-

 

-

Telefónica Chile

k)

 

-

 

680

 

-

 

-

 

2,506

 

-

Telefónica de España

k)

 

-

 

-

 

-

 

-

 

-

 

-

Telefónica Peru

k)

 

670

 

-

 

-

 

485

 

-

 

-

Telefônica Engenharia de Segurança do Brasil

a) / d) / l)

 

657

 

569

 

350

 

602

 

608

 

350

Telefónica International Wholesale Services Brasil

a) / d)

 

9,444

 

172

 

76

 

5,633

 

476

 

76

Telefónica International Wholesale Services Espanha

j)

 

87,852

 

-

 

-

 

60,696

 

-

 

-

Telefónica Moviles Del Espanha

k)

 

12,128

 

-

 

-

 

6,464

 

-

 

-

Telefônica Serviços Empresariais do Brasil

a) / d) / l) / p)

 

3,634

 

907

 

611

 

2,889

 

517

 

743

Telefônica Transportes e Logistica

a) / d) / l) / p)

 

631

 

186

 

103

 

678

 

169

 

84

Terra Networks Brasil

a) / d) / l)

 

4,637

 

7,436

 

63

 

4,483

 

7,434

 

19

Telefónica Global Technology

l)

 

1,588

 

6,499

 

-

 

1,315

 

6,458

 

-

Telefônica Digital España

l)

 

-

 

-

 

-

 

-

 

-

 

15,921

Media Networks Latina America SAC

b)

 

-

 

-

 

-

 

-

 

-

 

-

Other

a) / d) / k) / l)

 

44,204

 

4,339

 

776

 

27,618

 

4,059

 

262

 

 

 

169,114

 

20,788

 

1,979

 

114,977

 

22,227

 

17,455

Total

 

 

169,196

 

60,403

 

19,780

 

115,048

 

38,241

 

34,801

 

 

Pág. 45


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

 

 

 

 

Balance Sheet - Liabilities

 

 

 

At 03/31/15

At 12/31/14

 

 

 

Current liabilities

 

Noncurrent liabilities

 

Current liabilities

 

Noncurrent liabilities

Company

Nature of transaction

 

Trade accounts payable and other payables

 

Other liabilities

 

Other liabilities

 

Trade accounts payable and other payables

 

Other liabilities

 

Other liabilities

Subsidiaries

 

 

 

 

 

 

 

 

 

 

 

 

 

SP Telecomunicações Participações

d) / l)

 

3,664

 

2,062

 

8,006

 

3,759

 

2,062

 

6,029

Telefónica Internacional

l) / o)

 

62,489

 

-

 

-

 

59,069

 

-

 

-

Telefónica

m) / n)

 

522

 

94,075

 

13,538

 

271

 

86,081

 

13,522

 

 

 

66,675

 

96,137

 

21,544

 

63,099

 

88,143

 

19,551

Other Group companies

 

 

 

 

 

 

 

 

 

 

 

 

 

Telefónica USA

f)

 

3,330

 

74

 

166

 

-

 

77

 

137

Telefónica Peru

k)

 

677

 

-

 

-

 

553

 

-

 

-

Telefônica Engenharia de Segurança do Brasil

c)

 

3,821

 

-

 

8

 

3,281

 

-

 

8

Telefónica International Wholesale Services Brasil

d) / f) / l)

 

84,865

 

1,521

 

378

 

67,304

 

1,470

 

378

Telefónica International Wholesale Services Espanha

f) / k)

 

13,525

 

11,700

 

-

 

46,271

 

6,638

 

-

Telefónica Moviles Del Espanha

k)

 

12,502

 

-

 

-

 

6,859

 

-

 

-

Telefônica Serviços Empresariais do Brasil

g) / l)

 

5,561

 

24

 

491

 

7,000

 

24

 

560

Telefônica Transportes e Logistica

h)

 

18,069

 

270

 

259

 

20,816

 

270

 

259

Terra Networks Brasil

i)

 

5,114

 

78

 

769

 

2,439

 

78

 

769

Telefónica Global Technology

e)

 

12,950

 

-

 

-

 

12,950

 

-

 

-

Telefônica Digital España

o)

 

38,069

 

976

 

-

 

18,570

 

590

 

-

Media Networks Latina America SAC

b)

 

26,620

 

-

 

-

 

18,128

 

-

 

-

Other

k)

 

43,356

 

254

 

614

 

31,814

 

237

 

614

 

 

 

268,459

 

14,897

 

2,685

 

235,985

 

9,384

 

2,725

Total

 

 

335,134

 

111,034

 

24,229

 

299,084

 

97,527

 

22,276

 

 

 

 

Income statement

 

 

 

1Q2015

 

1Q2014

Company

Nature of transaction

 

Revenues (costs and expenses)

 

Revenues (costs and expenses)

Subsidiaries

 

 

 

 

 

SP Telecomunicações Participações

d) / l)

 

(214)

 

(5,872)

Telefónica Internacional

l) / o)

 

18,135

 

21,094

Telefónica

l) / m) / n)

 

(101,614)

 

(83,820)

 

 

 

(83,693)

 

(68,598)

Other Group companies

 

 

 

 

 

Telefónica USA

f)

 

1,215

 

483

Telefónica Chile

k)

 

57

 

(164)

Telefónica de España

k)

 

-

 

(59)

Telefónica Peru

k)

 

(284)

 

181

Telefônica Engenharia de Segurança do Brasil

a) / c) / d) / l)

 

(1,553)

 

(1,649)

Telefónica International Wholesale Services Brasil

a) / d) / f) / l)

 

(63,194)

 

(40,988)

Telefónica International Wholesale Services Espanha

f) / j) / k)

 

17,812

 

(1,281)

Telefónica Moviles Del Espanha

k)

 

(2,425)

 

26

Telefônica Serviços Empresariais do Brasil

a) / d) / g) / l) / p)

 

(4,514)

 

(12,789)

Telefônica Transportes e Logistica

a) / d) / h) / l) / p)

 

(17,095)

 

(21,483)

Terra Networks Brasil

a) / d) / l) / i)

 

425

 

2,003

Telefónica Global Technology

e) / l)

 

(6,071)

 

(20,351)

Telefônica Digital España

l) / o)

 

(20,226)

 

(3,446)

Media Networks Latina America SAC

b)

 

(8,943)

 

(13,857)

Other

a) / d) / k) / l)

 

(14,855)

 

33,794

 

 

 

(119,651)

 

(79,580)

Total

 

 

(203,344)

 

(148,178)

 

Management compensation

 

Consolidated key management personnel compensation paid by the Company to its Board of Directors and Statutory Officers for the three-month periods ended March 31, 2015 and 2014 amounted to R$5,982 and R$5,596, respectively. Of this amount, R$4,512 (R$4,359 at March 31, 2014) corresponds to salaries, benefits and social charges and R$1,470 (R$1,237 at March 31, 2014) to variable compensation.

 

Pág. 46


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

These amounts were carried as personnel expenses, according to the function in the groups of Costs of Services Rendered, Selling Expenses and G&A Expenses (Note 23).

 

For the three-month periods ended March 31, 2015 and 2014, our Directors and Officers did not receive any pension, retirement pension or other similar benefits.

 

29)  INSURANCE

 

The policy of the Company and its subsidiary, as well as of Telefónica Group, includes maintenance of insurance coverage for all assets and liabilities involving significant and high-risk amounts, based on management’s judgment and following Telefónica S.A.’s corporate program guidelines. Risk assumptions adopted, given their nature, are not included in quarterly information audit scope and, as a result, were not reviewed by our independent auditor.

 

At March 31, 2015, maximum limits of claims (established pursuant the agreements of each company consolidated by the Company) for significant assets, liabilities or interests covered by insurance and their respective amounts were R$962,400 for operational risks (with loss of profit) and R$55,063 for general civil liability.

 

30)  SHARE-BASED COMPENSATION PLAN

 

The Company's controlling shareholder, Telefónica S.A., has different share-based payment plans, which were also offered to management and employees of its subsidiaries, among which, Telefónica Brasil and it subsidiary.

 

Fair value of options is estimated on the grant date, based on the binomial model for pricing options which considers terms and conditions of instruments granted.

 

The Company refunds Telefónica S.A. for the fair value of the benefit granted to management and employees on grant date.

 

Significant plans effective as of March 31, 2015 are detailed below:

 

a)     Performance & Investment Plan (PIP)

The General Shareholders' Meeting of Telefónica S.A., held on May 18, 2011, approved a long-term program to acknowledge the commitment, differentiated performance and high potential of its executives at global level, by granting them with Telefónica S.A. shares.

 

Participants of the plan need not pay for the shares initially granted to them and may increase the number of shares to be possible received by the end of the plan if they decide for a joint investment in their PIP. Co-investment requires that the participant buy and maintain, to the end of the cycle, a number equivalent to 25% of shares initially granted thereto by Telefónica S.A. On participant’s co-investment, Telefónica S.A. will increase initial shares by 25%.

 

Initially, the plan is expected to remain effective for three years. The cycles are independent among them.  The number of shares is reported at the beginning of the cycle and, after three years from grant date, shares are transferred to the participant if goals are achieved.

 

Granting of shares is conditional upon: (i) maintenance of active employment relationship within the Telefónica Group on the cycle consolidation date; and (ii) achievement, by Telefónica, of results representing fulfillment of the objectives established for the plan. The level of success is based on the comparison of the evolution of shareholder return considering price and dividends (Total Shareholder Return - TSR) of Telefónica share, vis-à-vis the evolution of TSRs corresponding to a number of companies quoted in the telecommunications industry, which correspond to the Comparison Group.

 

 

 

 

Pág. 47


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

In 2014, extension of this program for other 3 cycles of 3 years each was approved, beginning on October 1, 2014 until September 30, 2017. The number of shares is informed at the beginning of the cycle and after the period of 3 years from the granting date, also shares are transferred to participants if the TSR target is achieved.

 

The next launchings are scheduled as follows:

 

·       2012-2015 Cycle: in July 2015, with 122 officers (including 4 officers appointed on the terms of the by-laws) of the Company, having the potential right to receive 485,040 shares of Telefónica S.A..

 

·       2013-2016 Cycle: in July 2016, with 106 officers (including 4 officers appointed on the terms of the by-laws) of the Company, having the potential right to receive 466,890 shares of Telefónica S.A.

 

·       2014-2017 Cycle: in October 2017, with 108 officers (including 4 officers appointed on the terms of the by-laws) of the Company, having the potential right to receive 498,980 shares of Telefónica S.A.

 

The maximum number of outstanding shares attributed to cycles at March 31, 2015 is as follows:

 

Cycles

Number of initial shares

 

Unit amount in Euro

 

Finalization date

2nd cycle - July 1, 2012

485,040

 

9.65

 

June 30, 2015

3rd cycle - July 1, 2013

466,890

 

10.39

 

June 30, 2016

4th cycle - October 1, 2014

498,890

 

12.12

 

September 30, 2017

 

b)    Talent for the Future Share Plan (“TFSP”)

The General Shareholders' Meeting of Telefónica S.A., held in 2014, approved a long-term program to acknowledge the commitment, differentiated performance and high potential of its executives at global level, by granting them with Telefónica S.A. shares.

 

The participants do not have to pay for the shares initially attributed to them. Initially, the plan is expected to remain effective for three years. The cycle began on October 1, 2014 and will be effective to September 30, 2017. The number of shares is reported at the beginning of the cycle and, after three years from grant date, shares are transferred to the participant if goals are achieved.

 

Granting of shares is conditional upon: (i) maintenance of active employment relationship within the Telefónica Group on the cycle consolidation date; and (ii) achievement, by Telefónica, of results representing fulfillment of the objectives established for the plan. The level of success is based on the comparison of the evolution of shareholder return considering price and dividends (Total Shareholder Return - TSR) of Telefónica share, vis-à-vis the evolution of TSRs corresponding to a number of companies quoted in the telecommunications industry, which correspond to the Comparison Group.

 

The maximum number of outstanding shares attributed to the first cycle at March 31, 2015 is as follows:

 

Cycle

Number of initial shares

 

Unit amount in Euro

 

Finalization date

1st cycle - October 1, 2014

73,500

 

12.12

 

September 30, 2017

 

The Company records the following personnel expenses in the groups of Costs of Services Rendered, Selling, General and Administrative Expenses (Note 23), referring to the share-based payment plans:

 

 

 

Consolidated

Plans

 

1Q2015

 

1Q2014

PIP

 

3,274

 

2,467

GESP

 

-

 

603

Total

 

3,274

 

3,070

 

 

 

Pág. 48


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

31)  POST-RETIREMENT BENEFIT PLANS

 

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

 

Plan

 

Type (1)

 

Company

 

Sponsor

 

 

 

 

 

 

 

PBS-A

 

BD

 

Sistel

 

Telefônica Brasil, jointly with other telecomminications companies arising from Sistema Telebrás privatization

 

 

 

 

 

 

 

PAMA / PCE

 

Health care plan

 

Sistel

 

Telefônica Brasil, jointly with other telecommunications companies arising from Sistema Telebrás privatization

 

 

 

 

 

 

 

CTB

 

BD

 

Telefônica Brasil

 

Telefônica Brasil

 

 

 

 

 

 

 

PBS

 

BD/Hybrid

 

VisãoPrev

 

Telefônica Brasil

 

 

 

 

 

 

 

PREV

 

Hybrid

 

VisãoPrev (2)

 

Telefônica Brasil

 

 

 

 

 

 

 

VISÃO

 

CD/Hybrid

 

VisãoPrev

 

Telefônica Brasil e Telefônica Data

(1) BD = Defined benefit plan;

CD = Defined Contribution Plan;

Hybrid = Plan that offers both BD and CD-type benefits.

(2) Except the CELPREV plan, managed by Sistel.

 

The details about the aforementioned plans are the same disclosed in Note 32 – Post-Employment Benefit Plans of the Company’s financial statements at December 31, 2014.

 

The defined benefit obligation is composed of different components, based on the characteristics of each pension plan, and may comprise the actuarial liability of official pension supplementation obligations, health care subsidy to retirees and their dependents and indemnity for death and disability of the participants. This obligation is exposed to economic and demographic risks, such as: (i) restatements of medical costs that may impact the cost of health care plans; (ii) salary increase; (iii) long-term inflation rate; (iv) nominal discount rate; and (v) life expectancy of participants and retirees.

 

The fair value of plan assets is mainly composed of fixed-income investments (NTN’s, LFT’s, LTN’s, repurchase agreements, CDB’s, debentures, financial bills and FIDC shares) and variable-income investments (shares of large companies, with good reputation in the market and high liquidity, as well as in market indices-pegged investments). Due to the concentration of fixed and variable-income investments, the plan assets are mainly exposed to the risks inherent in the financial market and the economic scenario, such as: (i) market risk in economic sectors in which variable-income investments are concentrated; (ii) risk of events impacting the economic scenario and market indices in which variable-income investments are concentrated; and (iii) long-term inflation rate which may consume profitability of fixed-income investments.

 

All revenue and expenses relating to the defined benefit plan and the hybrid benefit plan as well as the employee contributions, cost of current services, interest on the net actuarial liabilities are recognized directly in the Company´s operating income and that of its subsidiary.

 

Gains and losses relating to defined benefit plans and hybrid benefit plans, in addition to recoverability limitations of surpluses for refund or reduction in future contributions, are immediately recognized in other comprehensive income, causing no impact on the operating income of the Company and its subsidiary.

 

Consolidated changes in plans that generate surplus and deficit are as follows:

 

Pág. 49


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

 

 

Consolidated

 

Surplus plans

 

Deficit plans

 

Total

Balances at 12/31/13

17,909

 

(370,351)

 

(352,442)

Current service cost

(619)

 

(22)

 

(641)

Net interest on defined benefit assets/liabilities

528

 

(9,901)

 

(9,373)

Contributions and benefits paid by employers

815

 

1,321

 

2,136

Balances at 03/31/14

18,633

 

(378,953)

 

(360,320)

Current service cost

(1,940)

 

(67)

 

(2,007)

Net interest on defined benefit assets/liabilities

1,583

 

(29,701)

 

(28,118)

Contributions and benefits paid by employers

(265)

 

4,577

 

4,312

Effects on comprehensive income

(3,358)

 

(51,985)

 

(55,343)

Balances at 12/31/14

14,653

 

(456,129)

 

(441,476)

Current service cost

(670)

 

(20)

 

(690)

Net interest on defined benefit assets/liabilities

446

 

(12,793)

 

(12,347)

Contributions and benefits paid by employers

631

 

1,613

 

2,244

Balances at 03/31/15

15,060

 

(467,329)

 

(452,269)

 

Of the amounts of plans generating surplus presented in the table above, the Company recorded R$14,918 and R$14,515 at March 31, 2015 and December 31, 2014, respectively (Note 9).

 

32)  FINANCIAL INSTRUMENTS

 

a) Derivative transactions

 

All the Company’s derivative instruments are intended to hedge against the currency risk arising from assets and liabilities in foreign currency, against inflation risk from its debenture lease indexed to IPCA (inflation rate) with shorter term, and against the risk of changes in TJLP of a debt with the BNDES. As such, any changes in risk factors generate an adverse effect on the matching entry proposed to hedge. Therefore, there are no derivative financial instruments for speculative purposes and the possible exchange risks are hedged.

 

The Company keeps internal controls over their derivative instruments which, on management’s opinion, are appropriate to control risks associated with each performance strategy in the market.  Results the Company obtained through its derivative financial instruments indicate that management has been managing risks appropriately.

The Company determines the effectiveness of the derivative instruments entered into to hedge its financial liabilities at the beginning of the operation and on an ongoing basis (quarterly). At March 31, 2015 and December 31, 2014, derivative instruments taken out were effective for the hedged debts.

As long as these derivative contracts are qualified as hedge accounting, the risk covered also may be adjusted at fair value according to hedge accounting rules.

The Company entered into swap contracts in foreign currency at different exchange rates hedging its assets and liabilities in foreign currency. In addition, the Company entered into non-deliverable forward (NDF) transactions to hedge the payment of the installment on demand, in Euros, related to a highly probable forecast transaction undertaken in the Purchase and Sale Agreement and Other Covenants, through which all of GVT's shares will be acquired by the Company, as the material fact disclosed by the Company on September 18, 2014.

 

At March 31, 2015 and December 31, 2014, the Company had no embedded derivative contracts.

 

Derivative contracts have specific provisions for penalty in case of breach of contract. A breach of contract provided for in the agreements made with financial institutions is characterized by breach of a clause, resulting in the early settlement of the contract.

 

 

Pág. 50


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

Fair value of derivative financial instruments

The valuation method used to calculate market value of financial liabilities (where applicable) and derivative instruments was the discounted cash flows method, considering expected settlement or realization of liabilities and assets at market rates in force as at the balance sheet date.  

 

The fair values are calculated by projecting the future flows from operations, using BM&FBovespa curves and discounting these flows to present value using market DI rates for swaps, disclosed by BM&FBovespa.

 

The market values of exchange rate derivatives were obtained through market currency rates in force at the balance sheet date and projected market rates were obtained from currency coupon curves. The coupon for positions indexed to foreign currencies was determined using the 360-calendar-day straight-line convention; the coupon for positions indexed by CDI was determined using the 252-workday exponential convention.

 

Derivative financial instruments consolidated below are registered with the Brazils’ OTC Clearing House (CETIP), all classified as swaps, and not requiring margin deposits.

 

Pág. 51


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

 

 

 

Company / Consolidated

 

 

 

 

 

 

 

 

 

 

Accumulated effect of fair value

 

 

Notional value

 

Net position at fair value

 

Receivable (payable)

Description

 

03/31/15

 

12/31/14

 

03/31/15

 

12/31/14

 

03/31/15

 

12/31/14

 

 

 

 

 

 

 

 

 

 

 

 

 

Swap contracts

 

 

 

 

 

 

 

 

 

 

 

 

Long position

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency

 

21,613,755

 

12,427,490

 

23,224,292

 

13,530,830

 

1,148,064

 

759,118

US$ (a) (b)

 

252,398

 

913,635

 

395,815

 

1,377,412

 

122,659

 

326,625

EUR (a) (b)

 

73,992

 

85,671

 

77,272

 

87,018

 

2,672

 

690

LIBOR US$ (a) (b)

 

311,191

 

164,572

 

605,225

 

266,687

 

139,775

 

92,424

JPY (a) (b)

 

-

 

5,065

 

-

 

4,781

 

-

 

-

EUR (f)

 

20,976,174

 

11,258,547

 

22,145,980

 

11,794,932

 

882,958

 

339,379

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed rate

 

9,630,591

 

-

 

9,502,013

 

-

 

91,359

 

-

Fixed (f)

 

9,630,591

 

-

 

9,502,013

 

-

 

91,359

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Floating rate

 

1,247,760

 

1,182,466

 

1,216,235

 

1,125,282

 

20,398

 

2,294

CDI (a) (b)

 

168,411

 

40,799

 

168,313

 

40,925

 

1,928

 

21

TJLP (d)

 

1,079,349

 

1,141,667

 

1,047,922

 

1,084,357

 

18,470

 

2,273

 

 

 

 

 

 

 

 

 

 

 

 

 

Inflation index

 

441,436

 

217,472

 

470,579

 

231,938

 

7,514

 

5,370

IPCA (c) (e)

 

213,452

 

217,472

 

237,975

 

231,938

 

7,348

 

5,370

IGPM (g)

 

227,984

 

-

 

232,604

 

-

 

166

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Short position

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed rate

 

(20,976,174)

 

(11,258,547)

 

(21,371,638)

 

(11,458,807)

 

(108,615)

 

(3,254)

Fixed NDF (f)

 

(20,976,174)

 

(11,258,547)

 

(21,371,638)

 

(11,458,807)

 

(108,615)

 

(3,254)

 

 

 

 

 

 

 

 

 

 

 

 

 

Floating rate

 

(2,002,771)

 

(2,358,445)

 

(2,038,997)

 

(2,396,771)

 

(34,010)

 

(41,714)

CDI (a) (b) (c) (d) (e) (g)

 

(2,002,771)

 

(2,358,445)

 

(2,038,997)

 

(2,396,771)

 

(34,010)

 

(41,714)

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency

 

(9,954,597)

 

(210,118)

 

(9,878,616)

 

(312,834)

 

(842)

 

(2,176)

US$ (a) (b)

 

(168,411)

 

(25,444)

 

(166,385)

 

(25,935)

 

-

 

(491)

EUR (a) (b)

 

-

 

(20,102)

 

-

 

(20,247)

 

-

 

(7)

EUR (f)

 

(9,630,591)

 

-

 

(9,410,654)

 

-

 

-

 

-

LIBOR US$ (a) (b)

 

(155,595)

 

(164,572)

 

(301,577)

 

(266,652)

 

(842)

 

(1,678)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long position (current and noncurrent)

 

1,267,335

 

766,782

 

 

 

 

Short position (current and noncurrent)

 

(143,467)

 

(47,144)

 

 

 

 

Receivables, net

 

 

 

1,123,868

 

719,638

 

a) Foreign currency swaps (Dollar) x CDI (R$638,372) - swap transactions were contracted with varied maturities until 2019, in order to hedge against exchange variation risk of the loan operation in US dollars (book value of the financial debt of R$602,147).

 

(b) Foreign currency swaps (Euro x Dollar) and (CDI x Dollar) (R$28,023) – swat transactions were contracted with maturities until May 28, 2015, in order to against foreign exchange variation risk of net amounts payable in Euro and receivable in Dollar (book value of R$105,916 in Dollar and R$77,353 in  Euro).

 

Pág. 52


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

c) Swap IPCA x CDI percentage (R$30,712) - swap transactions contracted with annual maturities until 2014, in order to hedge the flow identical to that of debentures (4th issue - 3rd series) indexed at IPCA (book balance of R$32,453).

 

d) Swaps of TJLP x CDI (R$1,047,922) – swap transactions contracted with maturity dates until 2019, to hedge against variation of TJLP for loans with the BNDES (financial debt carrying amount of R$1,123,466).

 

e) Swap of IPCA x CDI (R$207,263) – swap transactions maturing in 2033 for the purpose of hedging against IPCA variation risk of finance lease (book balance of R$208,053).

 

f) NDF EUR x R$ and R$ x EUR (R$12,735,326) – NDF operations taken out with maturity in 2015, in order to hedge against exposures to Euro variation of a firm commitment taken out in the GVT purchase operation. The exact payment amount will be based on the GVT balance sheet, as of the date relevant authorities approve it, therefore, the payment date is also uncertain.

 

(g) Swap IGPM x CDI (R$232.604) – swap transactions taken out with maturities from 2016 to 2018 in order to hedge against IGPDI variation in regulatory commitments in connection with 4G license.

 

We set out below the balances of derivative transactions at March 31, 2015 and December 31,2014.

 

 

 

Consolidated

 

 

Book value

 

Fair value

Description

 

03/31/15

 

12/31/14

 

03/31/15

 

12/31/14

 

 

 

 

 

 

 

 

 

Long position

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial instruments at fair value recognized in other comprehensive income

 

15,193,776

 

14,657,304

 

15,193,776

 

14,657,304

 

 

 

 

 

 

 

 

 

Cash flow Hedges

 

 

 

 

 

 

 

 

Non-Deliverable Forwards (NDF)

 

12,735,326

 

11,794,932

 

12,735,326

 

11,794,932

Swap

 

301,577

 

266,687

 

301,577

 

266,687

 

 

 

 

 

 

 

 

 

Fair Value Hedge

 

 

 

 

 

 

 

 

Swap

 

2,156,873

 

2,595,685

 

2,156,873

 

2,595,685

 

 

 

 

 

 

 

 

 

Financial instruments at fair value recognized in P&L

 

19,219,342

 

230,746

 

19,219,342

 

230,746

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedge

 

 

 

 

 

 

 

 

Non-Deliverable Forwards (NDF)

 

18,912,666

 

4,781

 

18,912,666

 

4,781

Swap

 

306,676

 

225,965

 

306,676

 

225,965

 

 

 

 

 

 

 

 

 

Current assets

 

32,642,742

 

13,282,083

 

32,642,742

 

13,282,083

Noncurrent assets

 

1,770,376

 

1,605,967

 

1,770,376

 

1,605,967

 

 

Pág. 53


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

 

 

 

Consolidated

 

 

Book value

 

Fair value

Description

 

03/31/15

 

12/31/14

 

03/31/15

 

12/31/14

 

 

 

 

 

 

 

 

 

Short position

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial instruments at fair value recognized in other comprehensive income

 

14,853,329

 

13,938,826

 

14,853,329

 

13,938,826

 

 

 

 

 

 

 

 

 

Cash flow Hedges

 

 

 

 

 

 

 

 

Non-Deliverable Forwards (NDF)

 

12,642,199

 

11,458,807

 

12,642,199

 

11,458,807

Swap

 

164,715

 

174,263

 

164,715

 

174,263

 

 

 

 

 

 

 

 

 

Fair Value Hedge

 

 

 

 

 

 

 

 

Swap

 

2,046,415

 

2,305,756

 

2,046,415

 

2,305,756

 

 

 

 

 

 

 

 

 

Financial instruments at fair value recognized in P&L

 

18,435,921

 

229,586

 

18,435,921

 

229,586

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedge

 

 

 

 

 

 

 

 

Non-Deliverable Forwards (NDF)

 

18,140,092

 

5,271

 

18,140,092

 

5,271

Swap

 

295,829

 

224,315

 

295,829

 

224,315

 

 

 

 

 

 

 

 

 

Current liabilities

 

31,742,784

 

12,691,155

 

31,742,784

 

12,691,155

Noncurrent liabilities

 

1,546,466

 

1,477,257

 

1,546,466

 

1,477,257

 

The maturities of swap contracts as of March 31, 2015 are as follows:

 

 

 

Maturing in

 

 

Swap contracts

 

2015

 

2016

 

2017

 

From 2018 onwards

 

Receivables (payables) at 03/31/15

 

 

 

 

 

 

 

 

 

 

 

Foreign currency x CDI

 

38,770

 

52,311

 

62,784

 

110,386

 

264,251

CDI vs. foreign currency

 

1,928

 

-

 

-

 

-

 

1,928

Foward

 

865,701

 

-

 

-

 

-

 

865,701

TJLP vs. CDI

 

(13,818)

 

(9,283)

 

2,337

 

15,524

 

(5,240)

IPCA vs. CDI

 

(1,681)

 

(1,587)

 

(2,290)

 

2,786

 

(2,772)

Total

 

890,900

 

41,441

 

62,831

 

128,696

 

1,123,868

 

For the purpose of preparing the quarterly information (ITR), the Company adopted hedge accounting for its foreign currency X CDI, IPCA x CDI and TJLP x CDI swap transactions providing financial debt hedge. According to this methodology, both derivative and covered risk are valued at their fair value.

 

The ineffective portion at March 31, 2015 amounted to R$32,341 (R$2,195 at December 31, 2014).

 

The amount recorded in other comprehensive income referring to swaps and NDF contracts designated as cash flow hedge at March 31, 2015 was positive of R$936,865  (positive of R$331,332 at December 31, 2014). These cash flow hedge transactions generated a positive result of R$9,786 at March 31, 2015 (positive of R$19,742 at December 31, 2014).

 

At March 31, 2015 and 2014, the transactions with derivatives generated positive and consolidated negative (net) result of R$157,700 and R$72,951, respectively (Note 25).

 

 

Pág. 54


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

Sensitivity analysis to the Company’s risk variables

CVM Rule No. 604/09 requires listed companies to disclose, in addition to the provisions of Technical Pronouncement CPC No. 40 - Financial Instruments: Disclosure (equivalent to IFRS 7), a table showing the sensitivity analysis of each type of market risk inherent in financial instruments considered significant by management and to which the Company is exposed at the closing date of each reporting period, including all operations involving derivative financial instruments.

 

Pursuant to the abovementioned, each transaction with derivative financial instruments was assessed, taking into consideration a probable realization scenario and two scenarios that may generate adverse results to the Company.

 

In the probable scenario the assumption considered was to keep, on the maturity dates of each transaction, what the market has been showing through BM&FBovespa market curves (currency and interest). Thus, in the probable scenario, there is no impact on the fair value of derivative financial instruments already presented above. For scenarios II and III, pursuant to the CVM Rule, a deterioration of 25% and 50%, respectively, was considered in the risk variables. 

 

Considering that the Company has derivative instruments only to cover its assets and liabilities in foreign currency, changes in scenarios are offset by changes in the related hedged items, thus indicating that the effects are nearly null. For these operations, the Company reported the value of the hedged item and of the derivative financial instrument in separate lines in the sensitivity analysis table in order to provide information on consolidated net exposure for each of the three scenarios mentioned, as follows:

 

 

 

Pág. 55


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

Sensitivity analysis - net exposure

 

Consolidated

Transaction

Risk

 

Probable

 

25% depreciation

 

50% depreciation

 

 

 

 

 

 

 

 

Hedge (long position)

Derivatives (EUR depreciation risk)

 

77,272

 

96,602

 

115,938

Payables in EUR

Debt (EUR appreciation risk)

 

(82,988)

 

(103,735)

 

(124,482)

Receivables in Euro

Debt (EUR depreciation risk)

 

5,635

 

7,043

 

8,452

 

Net exposure

 

(81)

 

(90)

 

(92)

 

 

 

 

 

 

 

 

Hedge (long position)

Derivatives (EUR depreciation risk)

 

12,770,502

 

15,963,127

 

19,155,753

EUR firm commitment

EUR Debt (EUR appreciation risk)

 

(12,770,502)

 

(15,963,127)

 

(19,155,753)

 

Net exposure

 

-

 

-

 

-

 

 

 

 

 

 

 

 

Hedge (long position)

Derivatives (US$ depreciation risk)

 

(105,294)

 

(131,642)

 

(157,902)

Payables in US$

Debt (US$ appreciation risk)

 

(334,684)

 

(418,355)

 

(502,027)

Receivables in US$

Debt (US$ depreciation risk)

 

437,806

 

547,257

 

656,709

 

Net exposure

 

(2,172)

 

(2,740)

 

(3,220)

 

 

 

 

 

 

 

 

Hedge (long position)

Derivatives (risk of decrease in IPCA)

 

237,975

 

259,807

 

285,655

Debt in IPCA

Debt (risk of increase in IPCA)

 

(238,191)

 

(260,043)

 

(285,914)

 

Net exposure

 

(216)

 

(236)

 

(259)

 

 

 

 

 

 

 

 

Hedge (long position)

Derivatives (risk of decrease in IGP-DI)

 

229,226

 

234,809

 

240,652

Debt in IGP-DI

Debt (risk of increase in IGP-DI)

 

(229,226)

 

(234,809)

 

(240,652)

 

Net exposure

 

-

 

-

 

-

 

 

 

 

 

 

 

 

Hedge (long position)

Derivatives (risk of decrease in UMBND)

 

638,372

 

810,341

 

987,709

Debt in UMBND

Debt (risk of increase in UMBND)

 

(636,663)

 

(808,130)

 

(984,964)

 

Net exposure

 

1,709

 

2,211

 

2,745

 

 

 

 

 

 

 

 

Hedge (long position)

Derivatives (risk of decrease in TJLP)

 

1,047,968

 

1,101,413

 

1,160,236

Debt in TJLP

Debt (risk of increase in TJLP)

 

(1,048,010)

 

(1,101,460)

 

(1,160,288)

 

Net exposure

 

(42)

 

(47)

 

(52)

 

 

 

 

 

 

 

 

Hedge (CDI position)

 

 

 

 

 

 

 

Hedge USD and EUR (short and long position)

Derivatives (Risk of increase in CDI)

 

(11,830,756)

 

(11,830,877)

 

(11,830,995)

Hedge IPCA (short position)

Derivatives (Risk of increase in CDI)

 

(239,579)

 

(239,656)

 

(239,726)

Hedge IGPM (short position)

Derivatives (Risk of increase in CDI)

 

(233,772)

 

(233,772)

 

(233,772)

Hedge UMBND (short position)

Derivatives (Risk of increase in CDI)

 

(383,041)

 

(388,114)

 

(392,699)

Hedge TJLP (short position)

Derivatives (Risk of increase in CDI)

 

(1,053,162)

 

(1,054,272)

 

(1,055,292)

 

Net exposure

 

(13,740,310)

 

(13,746,691)

 

(13,752,484)

 

 

 

 

 

 

 

 

Total net exposure in each scenario

 

 

(13,741,112)

 

(13,747,593)

 

(13,753,362)

 

 

 

 

 

 

 

 

Net effect on changes in current fair value

 

 

-

 

(6,481)

 

(12,250)

 

Sensitivity analysis assumptions

Risk variable

 

Probable

 

25% deterioration

 

50% deterioration

USD

 

3.2080

 

4.0100

 

4.8120

EUR

 

3.4515

 

4.3144

 

5.1772

JPY

 

0.0268

 

0.0334

 

0.0401

IPCA

 

8.13%

 

10.16%

 

12.19%

IGPM

 

3.16%

 

3.95%

 

4.74%

IGP-DI

 

3.46%

 

4.33%

 

5.19%

UMBND

 

0.0626

 

0.0782

 

0.0939

URTJLP

 

1.9741

 

2.4676

 

2.9611

CDI

 

12.60%

 

15.75%

 

18.90%

 

Pág. 56


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

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

 

The fair values stated in the chart above derives from a portfolio position at March 31, 2015; however, they do not reflect the expected realization due to the market fluctuations, which are constantly monitored by the Company. The use of different assumptions may affect significantly the estimates.

 

b) Fair Value

 

The Company assessed its financial assets and liabilities in relation to market values, based on information available and appropriate valuation methodologies. However, both interpreting market data and selecting valuation techniques require considerable judgment and reasonable estimates to calculate the most appropriate realizable value.  As such, the estimates presented do not necessarily indicate the current market values. The use of different market hypotheses and/or methodologies may have a significant impact on estimated realizable values. At March 31, 2015 and December 31, 2014, the Company detected no significant and prolonged impairment in the recoverable amount of its financial instruments.

 

The tables below present breakdown of financial assets and liabilities at March 31, 2015 and December 31, 2014.

 

Company

 

 

 

 

Fair value hierarchy

 

Book balance

 

Fair value

Financial assets

 

Classification by category

 

 

03/31/15

 

12/31/14

 

03/31/15

 

12/31/14

Current assets

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents (Note 3)

 

Loans and receivables

 

 

 

2,132,198

 

3,835,304

 

2,132,198

 

3,835,304

Accounts receivable, net (Note 4)

 

Loans and receivables

 

 

 

6,411,415

 

6,470,764

 

6,411,415

 

6,470,764

Derivative transactions (Note 32)

 

Measured at fair value through profit or loss

 

Level 2

 

11,027

 

2,218

 

11,027

 

2,218

Derivative transactions (Note 32)

 

Coverage

 

Level 2

 

1,016,534

 

611,721

 

1,016,534

 

611,721

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncurrent assets

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net (Note 4)

 

Loans and receivables

 

 

 

183,785

 

190,288

 

183,785

 

190,288

Ownership interest (Note 10)

 

Available for sale

 

Level 1

 

1,653,262

 

1,445,014

 

1,653,262

 

1,445,014

Derivative transactions (Note 32)

 

Coverage

 

Level 2

 

239,774

 

152,843

 

239,774

 

152,843

Total financial assets

 

 

 

 

 

11,647,995

 

12,708,152

 

11,647,995

 

12,708,152

 

Company

 

 

 

 

Fair value hierarchy

 

Book balance

 

Fair value

Financial liabilities

 

Classification by category

 

 

03/31/15

 

12/31/14

 

03/31/15

 

12/31/14

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Trade accounts payable (Note 14)

 

Amortized cost

 

 

 

6,786,193

 

7,675,632

 

6,786,193

 

7,675,632

Loans, financing and finance lease agreements (Note 19)

 

Amortized cost

 

 

 

721,150

 

1,509,471

 

1,209,331

 

1,646,869

Debentures (Note 19)

 

Amortized cost

 

 

 

757,779

 

755,047

 

1,089,535

 

1,053,265

Derivative transactions (Note 32)

 

Measured at fair value through profit or loss

 

Level 2

 

14

 

568

 

14

 

568

Derivative transactions (Note 32)

 

Coverage

 

Level 2

 

127,589

 

22,443

 

127,589

 

22,443

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncurrent liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Loans, financing and finance lease agreements (Note 19)

 

Amortized cost

 

 

 

2,088,664

 

2,123,126

 

1,879,973

 

1,899,755

Debentures (Note 19)

 

Amortized cost

 

 

 

3,415,951

 

3,411,616

 

3,063,296

 

3,077,269

Derivative transactions (Note 32)

 

Measured at fair value through profit or loss

 

Level 2

 

1,334

 

-

 

1,334

 

-

Derivative transactions (Note 32)

 

Coverage

 

Level 2

 

14,530

 

24,133

 

14,530

 

24,133

Total financial liabilities

 

 

 

 

 

13,913,204

 

15,522,036

 

14,171,795

 

15,399,934

                           

Pág. 57


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

 

Consolidated

 

 

 

 

Fair value hierarchy

 

Book balance

 

Fair value

Financial assets

 

Classification by category

 

 

03/31/15

 

12/31/14

 

03/31/15

 

12/31/14

Current assets

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents (Note 3)

 

Loans and receivables

 

 

 

3,212,154

 

4,692,689

 

3,212,154

 

4,692,689

Accounts receivable, net (Note 4)

 

Loans and receivables

 

 

 

6,667,465

 

6,724,061

 

6,667,465

 

6,724,061

Derivative transactions (Note 32)

 

Measured at fair value through profit or loss

 

Level 2

 

11,027

 

2,218

 

11,027

 

2,218

Derivative transactions (Note 32)

 

Coverage

 

Level 2

 

1,016,534

 

611,721

 

1,016,534

 

611,721

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncurrent assets

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net (Note 4)

 

Loans and receivables

 

 

 

294,131

 

299,405

 

294,131

 

299,405

Ownership interest (Note 10)

 

Available for sale

 

Level 1

 

83,835

 

79,805

 

83,835

 

79,805

Derivative transactions (Note 32)

 

Coverage

 

Level 2

 

239,774

 

152,843

 

239,774

 

152,843

Total financial assets

 

 

 

 

 

11,524,920

 

12,562,742

 

11,524,920

 

12,562,742

 

Consolidated

 

 

 

 

Fair value hierarchy

 

Book balance

 

Fair value

Financial liabilities

 

Classification by category

 

 

03/31/15

 

12/31/14

 

03/31/15

 

12/31/14

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Trade accounts payable (Note 14)

 

Amortized cost

 

 

 

6,823,158

 

7,641,191

 

6,823,158

 

7,641,191

Loans, financing and finance lease agreements (Note 19)

 

Amortized cost

 

 

 

721,150

 

1,509,471

 

1,209,331

 

1,646,869

Debentures (Note 19)

 

Amortized cost

 

 

 

757,779

 

755,047

 

1,089,535

 

1,053,265

Derivative transactions (Note 32)

 

Measured at fair value through profit or loss

 

Level 2

 

14

 

568

 

14

 

568

Derivative transactions (Note 32)

 

Coverage

 

Level 2

 

127,589

 

22,443

 

127,589

 

22,443

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncurrent liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Loans, financing and finance lease agreements (Note 19)

 

Amortized cost

 

 

 

2,088,664

 

2,123,126

 

1,879,973

 

1,899,755

Debentures (Note 19)

 

Amortized cost

 

 

 

3,415,951

 

3,411,616

 

3,063,296

 

3,077,269

Derivative transactions (Note 32)

 

Measured at fair value through profit or loss

 

Level 2

 

1,334

 

-

 

1,334

 

-

Derivative transactions (Note 32)

 

Coverage

 

Level 2

 

14,530

 

24,133

 

14,530

 

24,133

Total financial liabilities

 

 

 

 

 

13,950,169

 

15,487,595

 

14,208,760

 

15,365,493

 

c) Capital Management and Risk Management Policy

 

Capital management

 

The objective of the Company capital management is to maintain a solid credit rating with the institutions as well as optimal capital ratio to support the Company businesses and maximize value to shareholders.

 

The Company manages its capital structure by making adjustments and fitting into current economic conditions. For this purpose, the Company may pay dividend, raise new loans, issue promissory notes and contract derivative transactions. For the period ended March 31, 2015, there were no changes in the Company’s objectives, policies or capital structure processes.

 

The Company includes in the net debt structure the following balances: loans, financing, debentures, finance lease, and operations with derivatives (Note 19), net of cash and cash equivalents (Note 3) and short-term investments as a guarantee of the BNB financing.

 

Consolidated net indebtedness rates on Company’s equity are as follows:

 

 

Consolidated

 

03/31/15

 

12/31/14

Cash and cash equivalents

3,212,154

 

4,692,689

Loans, financing, debentures, finance lease agreement and derivative transactions (net of short-term investments given in guarantee to the debt)

(5,830,340)

 

(7,019,168)

Net debt

2,618,186

 

2,326,479

Equity

43,183,600

 

44,950,095

Net debt-to-equity ratio

6.06%

 

5.18%

 

Pág. 58


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

Risk management policy

 

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

 

The major market risk factors that affect business are as follows:

 

a)   Exchange rate risk

 

There is the risk arising from the possibility of the Company incur losses due to fluctuations in exchange rates, which increase expenses derived from its loans taken out in foreign currency.  

 

On March 31, 2015, 8.6% of the financial debt was denominated in foreign currency (15.9% at December 31, 2014). The Company takes out derivative transactions (foreign exchange hedge) from financial institutions to hedge against exchange variation on its financial debt in foreign currency (R$602,147 and R$1,237,422 at March 31, 2015 and December 31, 2014, respectively). In view of this, total debt was covered by long position on currency hedge transactions (swap for CDI) on those dates.

 

Also, there is the exchange risk associated with non-financial assets and liabilities denominated in foreign currency, which may generate a lower value receivable or a higher value payable, according to the exchange variation of the period.

 

Hedge transactions were taken out to minimize the currency risk related to these non-financial assets and liabilities in foreign currency. This balance is subject to daily changes due to business dynamics. However, the Company intends to cover the net balance of these rights and obligations (US$33,016 and €22,412 thousand payable at March 31, 2015 and US$29,676 thousand and €20,700 thousand payable at December 31, 2014) to minimize the related currency risk.

 

b)   Interest rate and inflation risk

 

This risk arises from the possibility of the Company incurring losses due to an unfavorable change in internal interest rates, which may negatively affect financial expenses connected with part of debentures pegged to CDI and derivative short position (exchange rate hedge and IPCA) taken out at floating interest rates (CDI).

 

The debt to BNDES is restated by reference to the Long-Term Interest Rate (TJLP) variation, established quarterly by the National Monetary Council, which, in March 2015, decided to increase it to 6.00% p.a. from April 1 to June 30, 2015. TJLP increase was of 0.50 percentage point in relation to the rate previously in force, namely 5.50% p.a.

 

The risk of inflation arises from the debentures of 1st Issue - Minas Comunica, indexed by the IPCA, which may adversely affect our financial expenses in the event of an unfavorable change in this index.

 

To reduce exposure to local floating interest rates (CDI), the Company invests cash surplus of R$3,138,075 (R$4,628,679 at December 31, 2014), mainly in short-term financial investments (Bank Deposit Certificates) based on CDI variation. The book values of these financial instruments approximate their market values, as they are redeemable in the short term.

 

c)   Liquidity risk

 

The liquidity risk consists in the Company’s occasionally not having sufficient funds to meet its commitments, given the different currencies and realization/settlement terms of its rights and obligations.

 

The Company structures the maturity dates of the non-derivative financial agreements, as shown in note 19, and their respective derivatives as shown in the payments schedule disclosed in the referred note, in such manner as not to affect their liquidity.

 

The control over the Company’s liquidity and cash flow is monitored daily by management, in such way as to ensure that the operating cash generation and the available lines of credit, as necessary, are sufficient to meet its schedule of commitments, not generating liquidity risks.

Pág. 59


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

We set out below a summary maturity schedule of consolidated financial liabilities contractually provided for:

 

At March 31, 2015

 

Within 1 year

 

From 1 to 2 years

 

From 2 to 5 years

 

Above 5 years

 

Total

Trade accounts payable (Note 14)

 

6,823,158

 

-

 

-

 

-

 

6,823,158

Loans, financing and finance lease agreement (Note 19)

 

721,150

 

622,943

 

1,324,700

 

141,021

 

2,809,814

Debentures (Note 19)

 

757,779

 

-

 

3,388,201

 

27,750

 

4,173,730

Derivative transactions (Note 32)

 

127,603

 

9,560

 

4,274

 

2,030

 

143,467

Total

 

8,429,690

 

632,503

 

4,717,175

 

170,801

 

13,950,169

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

Within 1 year

 

From 1 to 2 years

 

From 2 to 5 years

 

Above 5 years

 

Total

Trade accounts payable (Note 14)

 

7,641,191

 

-

 

-

 

-

 

7,641,191

Loans, financing and finance lease agreement (Note 19)

 

1,509,471

 

602,892

 

1,401,595

 

118,639

 

3,632,597

Debentures (Note 19)

 

755,047

 

-

 

3,397,741

 

13,875

 

4,166,663

Derivative transactions (Note 32)

 

23,011

 

11,617

 

8,560

 

3,956

 

47,144

Total

 

9,928,720

 

614,509

 

4,807,896

 

136,470

 

15,487,595

 

d)   Credit risk

 

This risk arises from the possibility that the Company may incur losses due to the difficulty in receiving amounts billed to its customers and sales of handsets and pre-activated pre-paid cards to the distributor’s network.

 

The credit risk from trade accounts receivable is diversified and minimized by a strict control of the customers base. The Company constantly monitors the level of accounts receivable of post-paid plans and limits the risk of past-due accounts, interrupting access to telephone lines for past due bills. The mobile customer base predominantly uses the prepaid system, which requires prior charging and consequently entails no credit risk. There are exceptions to the telephony services which must be kept for national security or defense reasons.

 

The credit risk in the sale of handsets and “pre-activated” prepaid cards is managed under a conservative credit policy, by means of modern management methods, including the application of “credit scoring” techniques, analysis of financial statements and information, and consultation to commercial data bases, in addition to request of guarantees.

 

The Company is also subject to credit risk arising from short-term investments, letters of guarantee received as collateral in connection with certain transactions and receivables from derivative transactions. The Company controls the credit limit granted to all counterparties and diversifies such exposure among first-tier financial institutions, according to credit policy of financial counterparties in force.

 

33)  COMMITMENTS AND GUARANTEES (RENTALS)

 

The Company and it subsidiary rent equipment, facilities, and several stores, administrative buildings, and sites where the radio-base stations are located, through several non-cancellable operating agreements maturing on different dates, with monthly payments.

 

At March 31, 2015, the total amounts corresponding to the full period of the contracts were as follows:   

 

 

 

Company

 

Consolidated

Within 1 year

 

980,095

 

1,401,327

From 1 to 5 years

 

3,126,430

 

4,627,621

Above 5 years

 

1,766,211

 

4,349,524

Total

 

5,872,736

 

10,378,472

 

Pág. 60


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

34) SUBSEQUENT EVENTS

 

General Shareholders’ Meeting (“AGO”) – Approval of Accounts and Allocation of Results for 2014

 

On April 9, 2015, the “AGO” approved the Annual Management Report, the Company’s and consolidated financial statements, the Independent Auditor’s reports and the Supervisory Board report, all for the year ended December 31, 2014.

 

The same “AGO” approved allocation of proposed additional dividends, not yet distributed to the Company’s common and preferred shareholders of record at the end of April 9, 2015, in the amount of R$18,592.

 

The value per share (VPA) of these dividends is of R$0.015526054047 and R$0.017078659463 for common and preferred shares, respectively.

 

Public Offering of Primary Distribution of Shares  

 

The Company’s Board of Directors’ meeting held on April 27, 2015 unanimously approved the following:

 

1.   The unit issue price of common shares  (“Common Shares”) and of preferred shares (“Preferred Shares” and, together with the Common Shares, “Shares”), both issued by the Company, all registered book-entry shares with no par value, including in the form of American Depositary Shares (“ADSs”), in which each ADS represents a Preferred Share and represented by one American Depositary Receipt (“ADR”), in the ambit of the Public Offering of Primary Distribution of Shares (“Primary Offering of Shares”), to be concurrently performed in Brazil (“Brazilian Offering”), and abroad (“International Offering” and, together with the Brazilian Offering, the “Global Offering), through the applicable registrations with the Brazilian Securities and Exchange Commission (CVM), on the terms of CVM Ruling No. 400, of 12/29/03 (“CVM Ruling No. 400”), and with SEC (USA), on the terms of the US Securities Act of 1933.

 

§  The issue price of R$47.00 per Preferred Share was determined after conclusion of the procedure of survey of institutional investors’ investment intention (“Book Building Procedure”), on the terms of article 23, paragraph 1, and of article 44 of CVM Ruling No. 400, and in accordance with  the provisions of article 170, paragraph 1, item III, of Law No. 6404/76, which was conducted by intermediate financial institutions engaged by the Company to assist it in implementing the Global Offering, having the following parameters: (a) the quotation of preferred shares issued by the Company on BM&FBOVESPA; and (b) the indicated interest, based on quality and quantity of demand (volume and price) surveyed among institutional investors during the  Book Building Procedure, therefore on a justified market price basis, since this price will not generate unjustified dilution of the remaining Company shareholders.

 

§  The issue price of R$38.47 per Common Share was established based on the price by Preferred Share established after conclusion of the Book Building Procedure, applying a 18.14% discount, which represents the average discount rate of the trading price of the Company's common shares in relation to the trading price of the Company's preferred shares in the 3  months before March 26, 2015, in order to measure, as fairly as possible, the market price of the two types of shares, adequately reflecting the related market conditions between share types due to the significantly lower liquidity of common shares compared to that of preferred shares.

 

§  In the ambit of the International Offering, the unit share price of the ADSs was established at US$16.08 per ADS. The translation of the issue price was made at the exchange rate (PTAX, “accounting quotation” option, currency – US dollar) informed by the Central Bank of Brazil (Bacen), through Bacen Information System on April 27, 2015.

 

2.   The destination of all the funds obtained by the Company with the Global Offering to the Company’s capital account.

 

 

Pág. 61


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

3.   The increase of Company capital, within the limit of its authorized capital provided for by article 4 of the Company’s bylaws and with exclusion of the right of first refusal of the current Company shareholders, on the terms of article 172 of Law No. 6404/76, in the amount of  R$15,812,000, with Company capital increase from R$37,798,110 to R$53,610,110, through issuance of 121,711,240 Common Shares, for the unit issue price of R$38.47 and 236,803,588 Preferred Shares, for the unit issue price of R$47.00. Common shares, preferred shares and ADSs issued due to this capital increase will ensure to their holders, as from the date of announcement of the Global Offering, the same rights attributed respectively to the holders of common shares, preferred shares and ADSs, currently outstanding, on the terms of the Company’s bylaws and Law No. 6404/76, fully participating in dividends and other distributions that come to be declared as from the date of announcement of beginning of the Global Offering.

 

4.   The content of the Brazilian Offering Final Prospectus, of the  Pricing Term Sheet and the Final Prospectus Supplement.

 

5.   Reiterate the authorization granted by the Company’s Executive Board to carry any and all acts necessary for conducting the Global Offering, including the execution of all contracts and documents necessary for the Global Offering. 

 

On April 28, 2015, in accordance with the terms of CVM Ruling No. 358, of 3/01/02 and in article 52 of CVM Ruling No. 400, the Company, together with several financial institutions, communicated the beginning of the Primary Offering of 121,711,240 Common Shares and 236,803,588 Preferred Shares and, together with Common Shares, “Shares”, both issued by the Company, all registered book-entry shares with no par value, free and unencumbered of any burden or lien, including in the form of ADSs, represented by ADRs, through a capital increase of the Company, which will be based on the current proportion between common and preferred shares issued by the Company, as provided for by the Company’s bylaws, to be issued by the Company within its authorized capital limit provided for in its bylaws, with subscription priority for shareholders, on the terms of the Priority Offering, to be concurrently conducted in Brazil and with the Global Offering for the price of R$38.47 per Common Share and R$47.00 per Preferred Share, totaling R$15,812,000.

 

The global offering concurrently comprises (a) the Brazilian Offering, consisting of the Primary Offering of Shares in Brazil (except in the form of ADS) ("Shares of the Brazilian Offering"), in non-organized OTC market, through registration with the CVM and in accordance with CVM Ruling No. 400, to be coordinated by the Coordinators of the Brazilian Offering, with the participation of certain financial institutions in the distribution system of securities and certain consortium institutions authorized to operate in the Brazilian capital market, registered with the BM&FBOVESPA S.A.; and (b) the Primary Offering of Preferred Shares abroad, in the form of ADSs, represented by ADRs ("Shares of the International Offering" and, together with the Shares of the Brazilian Offering, "Shares of the Global Offering"), in accordance with the provisions in the US Securities Act of 1933, under the coordination of the Coordinators of the International Offering and with the participation of certain engaged financial institutions (“International Offering”).

 

Under article 14, paragraph 2 of CVM Ruling No. 400, the number of Shares initially offered (not including the Supplementary Lot), at the Company's discretion, in agreement with the Lead Coordinator, was increased by 7.66% of the total Global Offering Shares initially offered (excluding the Supplementary Lot), i.e. 25,514,988 Shares, being 8,662,015 Common Shares and 16,852,973 Preferred Shares, including in the form of ADSs represented by ADRs, as indicated in the Final Prospectus of Primary Public Offering of Common and Preferred Shares issued by the Company ("Final Prospectus") under the same conditions and at the same price of the Shares initially offered, respecting the legal limit of 2/3rd of preferred shares issued by Company.

 

On the terms of article 24 of CVM Ruling No. 400, the number of shares of the Global Offering initially offered (not considering the additional Shares and the Shares allocated to SP Telecomunicações Participações Ltda., Telefónica S.A., Telefónica Internacional S.A. and Telefónica Chile S.A.    ("Controlling Shareholders") under the Priority Offer) may be increased by up to 10%, exclusively in preferred shares, i.e. by up to 6,282,660 Preferred Shares, including in the form of ADSs represented by ADRs under the same conditions and at the same price of the Shares of the Global Offering, initially offered ("Supplementary Shares" or "Supplementary ADSs", as applicable, and, together, "Supplementary Lot"), according to the rules defined in the Primary Offering.

 

Pág. 62


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

The Global Offering Shares allocated to the Brazilian Offering (considering the Additional Lot and without considering the Supplementary Lot) will be placed by the institutions participating in the Brazilian Offering individually and not jointly, with guarantee of liquidation to be provided by the Brazilian Offering Coordinators, with respect to the Global Offering Shares allocated to the Brazilian Offering, pursuant to the Placement Agreement.  Shares of the Brazilian Offering that are subject to sales efforts abroad by the Coordinators of the International Offering with the Foreign Investors will be mandatorily subscribed and paid in Brazil, in local currency, in accordance with article 19, paragraph 4 of Law No. 6385/76.

 

On May 6, 2015, pursuant to CVM Ruling No. 358, of 01/03/02 and article 29 of CVM Ruling No. 400, the Company, jointly with various financial institutions, communicated the closing of the Initial Public Offering of 121,711,240 common shares and 243,086,248 preferred shares (collectively referred to as “Shares”), all of which are registered, book-entry shares with no par value, free and clear of any burden or encumbrance, also in the form of ADS, represented by ADR, free and clear of any burden or encumbrance, both issued by the Company, carried out simultaneously in Brazil and abroad (Global Offer), at the price of R$38.47 per common share and R$47.00 per preferred share, totaling R$16,107,285.

 

The complete Final Prospectus information and communication of the closing of the Initial Public Offering are available for consultation on the CVM and Company sites (www.cvm.org.br and www.telefonica.com.br/ri, respectively).

 

Company capital increases

 

At a meeting held on April 28, 2015, the Board of Directors unanimously approved the subscription of 121,711,240 registered book-entry common shares with no par value for unit issue price of R$ 38.47 and 236,803,588 registered book-entry preferred shares with no par value for unit  issue price of R$ 47.00, both issued by the Company, which were issued in the ambit of the Primary Offering of Shares held simultaneously in Brazil and abroad, as described above.

 

Due to the subscription referred to above, in this same meeting, the Board of Directors approved the increase of the Company's capital, within the limits of its authorized capital provided for in article 4 of the Company's bylaws and with the exclusion of preemptive rights of the Company's current shareholders, pursuant to article 172 of Law No. 6404 / 76, by the amount of  R$15,812,000, as approved at the meeting of the Board of Directors of April 27, 2015, to R$ 53,610,110, represented by 503,046,911 common shares and 978,737,161 preferred shares.

 

The direct costs related to this Company capital increase totaled approximately R$95,170.

 

At a meeting held on April 30, 2015, the Company’s Board of Directors unanimously approved the capital increase, within the limit of its authorized capital provided for in article 4 of the Company's bylaws and with the exclusion of the right of refusal of the current shareholders of the Company pursuant to article 172 of Law No. 6404/76, by the amount of R$ 295,285, through the issuance of 6,282,660 registered book-entry preferred shares with no par value for unit issue price of R$ 47.00. Thus, the Company's capital increased from R$53,610,110 to R$53,905,395, represented by 503,046,911 common shares and 985,019,821 preferred shares.  

 

This capital increase was carried out under the Primary Offering, through the exercise of the option of distribution of a supplementary lot of shares that was granted by the Contract for Coordination, Placement and Guarantee of Liquidation of Common and Preferred Shares Issued by the Company, pursuant to article 24 of CVM Ruling No. 400, to meet the excess demand verified during the Primary Offering.  The shares were issued under the same conditions of shares initially issued by the Company in the Primary Offering, as approved at the Board of Directors' Meeting held on March 25 and April 27, 2015. The Preferred Shares and the ADSs issued as a result of this capital increase will give their respective holders, from the date of publication of the Global Offering, the same rights assigned respectively to the holders of Preferred Shares and ADSs, currently outstanding under the Company's bylaws and Law No. 6404/76.  

 

The direct costs related to this Company capital increase totaled approximately R$5,720.

 

 

 

Pág. 63


 

Telefônica Brasil S. A.

NOTES TO QUARTERLY INFORMATION

Three-month period ended March 31, 2015

(In thousands of reais, unless otherwise stated)

                                           

 

Interim dividends and interest on equity

 

At the meeting held on May 12, 2015, the Company´s Board of Directors approved the declaration of interim dividends, amounting to R$270,000, corresponding to R$0.170178573168 per common share and R$0.187196430485 per preferred share, determined based on the balance sheet as of April 30, 2015, which, as provided for in the sole paragraph, article 27 of the Company´s Articles of Incorporation, will be attributed to mandatory minimum dividends for 2015.

 

At this same meeting, following General Shareholders´ Meeting, the credit of interest on equity referring to 2015 was approved, pursuant to article 28 of the Company´s Articles of Incorporation, article 9 of Law No. 9249/95 and CVM Resolution No. 638/12, in the gross amount of R$515,000, corresponding to  R$0.324599871044 per common share and R$0.357059858148 per preferred share, resulting in net withholding income tax of R$437,750, corresponding to R$0.275909890388 per common share and R$0.303500879426 per preferred share, determined based on net income recorded in the balance sheet as of April 30, 2015.

 

Payment of dividends and interest on equity will begin by the end of fiscal year 2016, on a date to be defined by the Board of Directors and communicated to the market opportunely, individually credited to shareholders pursuant to the shareholding structure informed in the Company´s records on and including May 25, 2015, at the end of the day.

 

Pág. 64

 

 

 

SIGNATURE

 

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

 

 

 

TELEFÔNICA BRASIL S.A.

Date:

May 15, 2015

 

By:

/s/ Luis Carlos da Costa Plaster

 

 

 

 

Name:

Luis Carlos da Costa Plaster

 

 

 

 

Title:

Investor Relations Director