6-K 1 ambevsaitr2q14_6k.htm INTERIM CONSOLIDATED FINANCIAL STATEMENTS ambevsaitr2q14_6k.htm - Generated by SEC Publisher for SEC Filing
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 6-K
 
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of the
Securities Exchange Act of 1934
 
For the month of August, 2014

Commission File Number 1565025
 
 

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

AMBEV S.A.
(Translation of Registrant's name into English)
 

Rua Dr. Renato Paes de Barros, 1017 - 3rd Floor
04530-000 São Paulo, SP
Federative Republic of Brazil
(Address of principal executive office)
 

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


Form 20-F ___X___ Form 40-F _______

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

Yes _______ No ___X____

 
 

 

 

INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

Interim Consolidated Balance Sheets

As of June 30, 2014, December 31, 2013 and January 1st, 2013

(Expressed in thousands of Brazilian Reais)

 

Assets

Note

06/30/2014

12/31/2013

01/01/2013

       

Restated

         

Cash and cash equivalents

  

6,273,862

11,538,241

9,259,265

Investment securities

5

379,938

288,604

476,607

Trade and other receivables

  

5,433,010

5,490,233

4,264,188

Inventories

6

3,120,458

2,835,643

2,505,463

Taxes receivable

  

566,001

656,361

116,498

Assets held for sale

  

-

-

4,086

Current assets

  

15,773,269

20,809,082

16,626,107

         
         

Investment securities

5

70,323

63,796

249,380

Trade and other receivables

  

2,139,456

2,260,209

1,855,013

Deferred tax assets

7

1,560,626

1,647,765

1,428,662

Taxes receivable

  

10,910

11,123

12,316

Employee benefits

  

15,346

23,456

25,480

Investments in associates

  

45,764

26,451

24,011

Property, plant and equipment

8

13,913,460

14,005,561

12,413,679

Intangible assets

  

3,237,907

3,213,994

2,936,404

Goodwill

9

26,221,982

27,023,743

26,647,524

Non-current assets

  

47,215,774

48,276,098

45,592,469

         

Total assets

  

62,989,043

69,085,180

62,218,576


The accompanying notes are an integral part of the interim consolidated financial statements.

 

 

 
 

 

Interim Consolidated Balance Sheets (continued)

As of June 30, 2014, December 31, 2013 and January 1st, 2013

(Expressed in thousands of Brazilian Reais)

 

 

Equity and Liabilities

Note

06/30/2014

12/31/2013

01/01/2013

       

Restated

         

Trade and other payables

  

12,071,523

15,270,018

13,693,126

Interest-bearing loans and borrowings

10

869,694

1,040,603

837,772

Bank overdrafts

  

248,272

-

123

Income tax and social contribution payable

  

1,112,158

897,076

980,398

Provisions

11

155,055

144,958

137,452

Current liabilities

  

14,456,702

17,352,655

15,648,871

         

Trade and other payables

  

1,271,835

1,556,948

3,063,989

Interest-bearing loans and borrowings

10

1,787,039

1,865,242

2,316,242

Deferred tax liabilities

7

1,720,917

2,095,686

1,367,601

Provisions

11

446,674

431,693

518,076

Employee benefits

  

1,357,273

1,558,261

1,780,908

Non-current liabilities

  

6,583,738

7,507,830

9,046,816

         

Total liabilities

  

21,040,440

24,860,485

24,695,687

         

Equity

12

      

Issued capital

  

57,131,286

57,000,790

249,061

Reserves

  

57,163,645

61,220,284

51,649

Carrying value adjustments

  

(77,073,282)

(75,228,617)

25,097,150

Retained earnings

  

3,592,811

-

-

Equity attributable to equity holders of Ambev

  

40,814,460

42,992,457

25,397,860

         

Non-controlling interests

  

1,134,143

1,232,238

12,125,029

         

Total Equity

  

41,948,603

44,224,695

37,522,889

         

Total equity and liabilities

  

62,989,043

69,085,180

62,218,576

 

The accompanying notes are an integral part of the interim consolidated financial statements.

 

 

 

 
 

 

Interim Consolidated Income Statements

For the six and three-month periods ended June 30, 2014 and 2013

(Expressed in thousands of Brazilian Reais)

 

 

   

Six-month period ended:

  

Three-month period ended:

 

Note

06/30/2014

06/30/2013

  

06/30/2014

06/30/2013

             

Net sales

14

17,222,505

15,402,220

  

8,177,433

7,570,220

Cost of sales

  

(6,048,980)

(5,364,803)

  

(3,040,666)

(2,667,024)

Gross profit

  

11,173,525

10,037,417

  

5,136,767

4,903,196

             

Sales and marketing expenses

  

(4,662,655)

(4,086,204)

  

(2,347,222)

(2,092,677)

Administrative expenses

  

(798,368)

(756,832)

  

(354,940)

(403,748)

Other operating income/(expenses)

15

578,091

624,304

  

339,813

300,187

Income from operations before special items

  

6,290,593

5,818,685

  

2,774,418

2,706,958

             

Special items

  

(13,706)

(6,245)

  

(7,139)

(5,269)

Income from operations

  

6,276,887

5,812,440

  

2,767,279

2,701,689

             

Finance cost

16

(1,150,259)

(794,136)

  

(573,871)

(393,609)

Finance income

16

483,436

289,040

  

275,869

126,271

Net finance cost

  

(666,823)

(505,096)

  

(298,002)

(267,338)

             

Share of results of associates

  

10,170

1,785

  

2,300

97

Income before income tax

  

5,620,234

5,309,129

  

2,471,577

2,434,448

             

Income tax expense

17

(807,827)

(1,024,555)

  

(255,971)

(523,109)

Net income

  

4,812,407

4,284,574

  

2,215,606

1,911,339

             

Attributable to:

            

Equity holders of Ambev

  

4,713,521

2,589,708

  

2,166,882

1,147,409

Non-controlling interests

  

98,886

1,694,866

  

48,724

763,930

Basic earnings per share – common

  

0.30

0.27

  

0.14

0.12

Diluted earnings per share– common

  

0.30

0.26

  

0.14

0.12


The accompanying notes are an integral part of the interim consolidated financial statements.

 

 

 

 
 

 

Interim Consolidated Statements of Comprehensive Income

For the six and three-month periods ended June 30, 2014 and 2013

(Expressed in thousands of Brazilian Reais)

 

 

Six-month period ended:

  

Three-month period ended:

 

06/30/2014

06/30/2013

  

06/30/2014

06/30/2014

 

 

 

 

 

 

Net income

4,812,407

4,284,574

  

2,215,606

1,911,339

 

          

Items that will not be reclassified to profit or loss:

          

Remeasurement of postemployment benefits

(12,069)

463

  

10,084

463

 

          

Items that may be reclassified subsequently to profit or loss:

          

Exchange differences on translation of foreign operations (gains/(losses)

(1,359,208)

208,867

  

(307,053)

66,463

Cash flow hedges – gains/(losses)

          

Recognized in Equity (Cash flow hedge)

(179,337)

-

  

(240,288)

-

Removed from Equity and included in profit or loss

(177,415)

-

  

(21,617)

-

Deferred income tax variance in Equity

121,925

7,807

  

103,203

7,807

Total cash flow hedges 

(234,827)

7,807

  

(158,702)

7,807

Other comprehensive income

(1,606,104)

217,137

  

(455,671)

74,733

           

Total comprehensive income

3,206,303

4,501,711

  

1,759,935

1,986,072

           

Attributable to

          

Equity holders of Ambev

3,284,836

2,774,082

  

1,813,919

1,189,379

Non-controlling interest

(78,533)

1,727,629

  

(53,984)

796,693


The accompanying notes are an integral part of the interim consolidated financial statements.

 

 

 
 

 

Interim Consolidated Statements of Changes in Equity

For the six-month periods ended June 30, 2014 and 2013

(Expressed in thousands of Brazilian Reais)

 

 

 

Attributable to equity holders of Ambev

   
 

Capital

Capital reserves

Net income reserve

Retained earnings

Carrying value adjustments

Total

 

Non-controlling interests

Total equity

At January 1, 2014 - originally issued

57,000,790

55,362,431

5,857,853

-

(75,382,296)

42,838,778

  

1,158,620

43,997,398

Effects of changes in accounting standards (Note 1) (i)

-

-

-

-

153,679

153,679

  

73,618

227,297

At January 1, 2014 - Adjustment

57,000,790

55,362,431

5,857,853

-

(75,228,617)

42,992,457

  

1,232,238

44,224,695

                   

Net income

-

-

-

4,713,521

-

4,713,521

  

98,886

4,812,407

                   

Other comprehensive income

                 

Translation reserves - gains / (losses)

-

-

-

-

(1,181,456)

(1,181,456)

  

(177,752)

(1,359,208)

Cash flow hedges - gains / (losses)

-

-

-

-

(234,859)

(234,859)

  

32

(234,827)

Actuarial gain / (losses)

-

-

-

-

(12,370)

(12,370)

  

301

(12,069)

Total Comprehensive income

-

-

-

4,713,521

(1,428,685)

3,284,836

  

(78,533)

3,206,303

Adjustment for changes in accounting standards related to joint ventures (ii)

-

-

-

(24,094)

89,367

65,273

  

-

65,273

Capital increase

130,496

(120,491)

-

-

-

10,005

  

-

10,005

Effects of adoption predecessor basis of accounting to acquire Cerbuco Brewing Inc.

-

-

-

-

(505,347)

(505,347)

  

19,543

(485,804)

Dividends distributed

-

-

(1,591,164)

(1,096,616)

-

(2,687,780)

  

(39,105)

(2,726,885)

Interest on shareholder´s equity

-

-

(2,412,165)

-

-

(2,412,165)

  

-

(2,412,165)

Acquiree shares and result on treasury shares

-

(6,838)

-

-

-

(6,838)

  

-

(6,838)

Share-based payment

-

74,019

-

-

-

74,019

  

-

74,019

At June 30, 2014

57,131,286

55,309,121

1,854,524

3,592,811

(77,073,282)

40,814,460

  

1,134,143

41,948,603

 

  

(i) The Company has applied the predecessor basis of accounting to acquire the control of Cerbuco Brewing Inc. (“Cerbuco”), the holding company that owns controlling interest in Bucanero S.A. (“Bucanero”), consistent with the accounting practices adopted in Ambev’s corporate restructuring in 2013.

  

(ii) The Company reviewed the consolidation accounting treatment related to its distributors in Canada. In line with IFRS 11 (R) we have applied the equity method. For these distributors, the type of legal entity limits the investor responsibility to the amount invested, thereby the investment was limited to zero and the impact of the negative equity reversal of these companies on December 31, 2013 was booked with counterpart in equity.

 

 

The accompanying notes are an integral part of the interim consolidated financial statements.

 

 
 

 

Interim Consolidated Statements of Changes in Equity (continued):

For the six-month periods ended June 30, 2014 and 2013

(Expressed in thousands of Brazilian Reais)

 

 

 

Attributable to equity holders of Ambev

   
 

Capital

Capital reserves

Net income reserve

Retained earnings

Carrying value adjustments

Total

 

Non-controlling interests

Total equity

                   

At January 1, 2013

249.061

-

51.649

-

24.905.890

25.206.600

  

12.062.398

37.268.998

Effects of changes in accounting standards (Note 1) (i)

-

-

-

-

191.260

191.260

  

62.631

253.891

At January 1, 2013 - Adjustment

249.061

-

51.649

-

25.097.150

25.397.860

  

12.125.029

37.522.889

                   

Net income

-

-

-

367.654

2.222.054

2.589.708

  

1.694.866

4.284.574

                   

Other comprehensive income

                 

Translation reserves - gains / (losses)

-

-

-

-

177.676

177.676

  

31.191

208.867

Cash flow hedges - gains / (losses)

-

-

-

-

6.251

6.251

  

1.556

7.807

Actuarial gain / (losses)

-

-

-

-

447

447

  

16

463

Total Comprehensive income

-

-

-

367.654

2.406.428

2.774.082

  

1.727.629

4.501.711

Capital increase

8.206.879

6.774.951

1.431.928

-

(16.413.758)

-

  

-

-

Put option to acquire interest in a subsidiary

-

-

-

-

(20.850)

(20.850)

  

-

(20.850)

Gains/(losses) of controlling interest´s share

-

-

-

-

(53.145)

(53.145)

  

-

(53.145)

Dividends

-

-

(13.063)

-

-

(13.063)

  

(51.740)

(64.803)

Share-based payment

-

13.989

-

-

-

13.989

  

-

13.989

Others capital movements of subsidiary

-

-

-

-

(1.268.100)

(1.268.100)

  

(801.018)

(2.069.118)

At June 30, 2013

8.455.940

6.788.940

1.470.514

367.654

9.747.725

26.830.773

  

12.999.900

39.830.673

                   

   

(i) The Company has applied the predecessor basis of accounting to acquire the control of Cerbuco Brewing Inc., the holding company that owns controlling interest in Bucanero S.A. (“Bucanero”), consistent with the accounting practices adopted in Ambev’s corporate restructuring in 2013, as described in Note 1 (c)  consolidated financial statements of December 31, 2013. 

 

(ii) Refers to capital increase through the contribution of shares, as described in Note 1 (c) consolidated financial statements of December 31, 2013. This increase was performed at cost value, without measuring any capital gain or loss.

 

(iii) Mainly refers to the reflex effects of distribution of results from subsidiary until April, 2013, as result of adoption of the predecessor basis of accounting, as described in Note 1 (c) consolidated financial statements of December 31, 2013. 

 

 

The accompanying notes are an integral part of the interim consolidated financial statements.

 

 
 

 

Interim Consolidated Cash Flow Statements

For the six and three-month periods ended June 30, 2014 and 2013

(Expressed in thousands of Brazilian Reais)

 

   

Six-month period ended:

  

Three-month period ended:

 

Note

06/30/2014

06/30/2013

  

06/30/2014

06/30/2013

             

Net income

  

4,812,407

4,284,574

  

2,215,606

1,911,339

Depreciation, amortization and impairment

  

1,087,757

1,044,006

  

552,930

531,663

Impairment losses on receivables and inventories

  

34,002

72,641

  

14,443

32,294

Additions in provisions and employee benefits

  

80,828

74,378

  

41,547

25,799

Net finance cost

16

666,823

505,096

  

298,002

267,338

Loss/(gain) on sale of property, plant and equipment and intangible assets

  

6,476

(2,599)

  

(1,345)

(7,233)

Equity-settled share-based payment expense

18

80,655

80,763

  

36,177

37,837

Income tax expense

17

807,827

1,024,555

  

255,971

523,109

Share of result of associates

  

(10,170)

(1,785)

  

(2,300)

(97)

Other non-cash items included in the profit

  

(190,807)

(74,227)

  

(23,201)

(24,640)

Cash flow from operating activities before changes in working capital and use of provisions

  

7,375,798

7,007,402

  

3,387,830

3,297,409

             

Decrease/(increase) in trade and other receivables

  

(35,319)

(45,993)

  

(217,786)

(225,901)

Decrease/(increase) in inventories

  

(406,289)

(291,573)

  

(71,046)

160,026

Increase/(decrease) in trade and other payables

  

(1,311,377)

(2,332,305)

  

(116,430)

(654,366)

Cash generated from operations

  

5,622,813

4,337,531

  

2,982,568

2,577,168

             

Interest paid

  

(510,274)

(161,815)

  

(247,901)

(2,893)

Interest received

  

381,500

187,095

  

188,831

(35,347)

Dividends received

  

43,814

110,736

  

30,177

45,185

Income tax paid

  

(1,348,272)

(1,909,497)

  

(362,354)

(841,192)

Cash flow from operating activities

  

4,189,581

2,564,050

  

2,591,321

1,742,921

             

Proceeds from sale of property, plant and equipment and intangible assets

  

59,105

27,209

  

19,550

19,806

Acquisition of property, plant and equipment and intangible assets

8

(1,996,393)

(1,300,955)

  

(1,120,566)

(756,594)

Acquisition of subsidiaries, net of cash acquired

  

-

(169,436)

  

-

(106,806)

Investment in short term debt securities and net proceeds/(acquisition) of debt securities

  

(98,665)

(35,000)

  

34,558

(113,758)

Net proceeds/(acquisition) of other assets

  

4,737

(1)

  

(155)

-

Repayments of loans granted

  

(2,031,216)

(1,478,183)

  

(1,066,613)

(957,352)

Cash flow from investing activities

            
             

Capital increase and advance for future capital increase

12

132,100

-

  

130,856

-

Share Premium

12

-

-

  

1,631

-

Capital increase of non-controlling interests

  

-

152,873

  

-

687

Proceeds/repurchase of treasury shares

12

(12,973)

(8,920)

  

(9,218)

(16,603)

Proceeds from borrowings

  

467,344

287,279

  

214,677

593,595

Repayment of borrowings

  

(1,078,354)

(648,494)

  

(519,589)

(438,927)

Cash net of finance costs other than interests

  

(778,604)

(262,515)

  

(470,734)

(261,696)

Payment of finance lease liabilities

  

(822)

(757)

  

(512)

(757)

Dividends paid

  

(5,991,961)

(5,089,009)

  

(2,075,880)

(58,513)

Cash flow from financing activities

  

(7,263,270)

(5,569,543)

  

(2,728,769)

(182,214)

             

Net increase/(decrease) in cash and cash equivalents

  

(5,104,905)

(4,483,676)

  

(1,204,061)

603,355

Cash and cash equivalents (i) at beginning of period

  

11,538,241

9,259,265

  

7,295,687

4,031,136

Effect of exchange rate fluctuations

 

(407,746)

30,511

  

(66,036)

171,609

Cash and cash equivalents (i) at end of period

  

6,025,590

4,806,100

  

6,025,590

4,806,100


(i) Net of bank overdrafts.

 

The accompanying notes are an integral part of the interim consolidated financial statements.

 

 
 

 

Notes to the interim consolidated financial statements:

1.

Corporate information

2.

Statement of compliance

3.

Summary of significant accounting policies

4.

Use of estimates and judgments

5.

Investment securities

6.

Inventories

7.

Deferred income tax and social contribution

8.

Property, plant and equipment

9.

Goodwill

10.

Interest-bearing loans and borrowings

11.

Provisions

12.

Changes in equity

13.

Segment reporting

14.

Net Sales

15.

Other operating income/(expenses)

16.

Finance cost and income

17.

Income tax and social contribution

18.

Share-based payments

19.

Financial instruments and risks

20.

Collateral and contractual commitments, advances from customers and others

21.

Contingencies

22.

Related parties

23.

Events after the balance sheet date

 

 

 
 

 

1. CORPORATE INFORMATION

 

(a)     Description of business

 

Ambev S.A. (referred to as the “Company” or “Ambev S.A.”), headquartered in São Paulo, Brazil, produces and sells beer, draft beer, soft drinks, other non-alcoholic beverages, malt and food in general, by participating either directly or indirectly in other Brazilian-domiciled companies and elsewhere in the Americas.

 

The Company’s direct controlling shareholders are Interbrew International B.V. (“IIBV”) and AmBrew S.A. (“Ambrew”), both subsidiaries of Anheuser-Busch InBev N.V/S.A. (“ABI”).

 

The interim consolidated financial statements were approved by the Board of Directors on July 30, 2014.

 

(b) Major events in 2014:

 

On January 2, 2014, BSA Bebidas Ltda. was merged into Ambev Brasil Bebidas S.A. and, immediately after, the upstream mergers of Old Ambev and Ambev Brasil Bebidas S.A. into Ambev S.A. was approved by the shareholders of each company in Extraordinary General Meeting (EGM) held on such date. As a result, Ambev S.A. received Old Ambev and Ambev Brasil Bebidas S.A.’s assets, rights and liabilities for their book value. Such companies were extinguished, had their shares cancelled, and Ambev S.A. became their successor, according to the law.

  

The net assets incorporated by the Company is as follow:

 

Companhia de Bebidas das Américas S.A.

Ambev Brasil Bebidas S.A.

BSA Bebidas Ltda.

 

01/01/2014

01/01/2014

01/01/2014

Assets

      

Current assets

11,027,626

1,133,510

61,324

Non-current assets

47,220,178

4,906,087

2,700

Total assets

58,247,804

6,039,597

64,024

       

liabilities

      

Current liabilities

10,258,087

3,059,124

24,737

Non-current liabilities

12,630,565

912,667

5,755

Total liabilities

22,888,652

3,971,791

30,492

       

Net assets

35,359,152

2,067,806

33,532

 

Old Ambev merger was concluded with no increase or decrease in Ambev S.A.’s equity or capital stock because Old Ambev was a wholly-owned subsidiary of Ambev S.A. As a result of Ambev Brasil Bebidas S.A.’s merger, after the merger of BSA Bebidas Ltda., Ambev S.A’s capital stock was increased in R$156, equivalent to Ambev Brasil Bebidas S.A.’s equity held by non-controlling shareholders. Ambev S.A.’s capital stock amounted to R$57,001, which also includes the capital increase approved and ratified by the Board of Directors on October 17, 2013 and December 19, 2013, according to section 8 of Ambev S.A. bylaws and section 168 of Law n. 6,404/76 due to the exercise of call options by the beneficiaries of Ambev S.A. stock option plan.

 

 
 

 

On January, 2014, Ambev Luxembourg, a wholly-owned subsidiary of the Company, acquired ABI’s equity interest in Cerbuco Brewing Inc. (“Cerbuco”), who owns interest in  Bucanero S.A. (“Bucanero”), leader company in Cuba business beer.

 

With this acquisition, the Company aims to strengthen its leadership in the Caribbean.

 

Consistent with accounting practices adopted in corporate restructuring in 2013, the Company applied the predecessor basis of accounting for this transaction with its parent.

 

As a result of the items above explained, the entries by the adoption of the predecessor basis of accounting are well detailed in the separate balance sheet of the Company:

 

2013

2012

Cerbuco's equity

153,679

191,260

Acquisition of subsidiary

100%

100%

Adjustment for adoption of the accounting practice of the previous cost

153,679

191,260

     

Assigned in the Statement of Shareholders' Equity:

    

Accounting adjustments for transactions between shareholders

153,679

191,260

 

The impacts of accounting presented above in the income statement of the Company are as follows:  

 

Six-month period ended:

Three-month period ended:

 

06/30/2013

06/30/2013

Cerbuco's net income

9,907

5,669

Participação acionária após aquisição

100%

100%

Adjustment for adoption of the accounting practice of the previous cost

9,907

5,669

 

On March 1, 2014, ABI and the Company entered, through its subsidiaries, into licensing agreements by which the Company's subsidiaries related to Canada’s operations acquired the exclusive right to import, sell, distribute and market branded products Corona  and related brands, including but not limited Corona Extra, Corona Light, Coronita, Pacifico  e Negra Modelo as well as the exclusive license to use the brands related to these products in Canada.

The Company recorded intangible assets in the amount of R$150,899 in counterpart of the amount disbursed.

 

 
 

 

2. STATEMENT OF COMPLIANCE

 

The interim consolidated financial statements have been prepared in accordance with IAS 34 - Interim Financial Reporting as issued by the International Accounting Standards Board (“IASB”).

 

The information does not meet all disclosure requirements for the presentation of full annual financial statements and thus should be read in conjunction with the consolidated financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”) for the year ended December 31, 2013. To avoid duplication of disclosures which are included in the annual financial statements, the following notes were not subject to full filling:

 

(a) Summary of significant accounting policies (Note 3);

(b) Special items (Note 8);

(c) Payroll and related benefits (Note 9);

(d) Additional information on operating expenses by nature (Note 10);

(e) Intangible assets (Note 15);

(f) Trade and other receivables (Note 19);

(g) Cash and cash equivalents (Note 20);

(h) Interest-bearing loans and borrowings (Note 22);

(i) Employee benefits (Note 23);

(j) Trade and other payables (Note 25);

(k) Operating leases (Note 28);

(l) Contingencies (Note 30);

(m) Group Companies (Note 32);

(n) Insurance (Note 33).

 

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

There were no significant changes in accounting policies and calculation methods used for the interim financial statements as of June 30, 2014 in relation to those presented in the financial statements for the year ended December 31, 2013.

 

(a)   Basis of preparation and measurement

 

The interim consolidated financial statements are presented in thousands of Brazilian Reais (R$), rounded to the nearest thousand indicated. Depending on the applicable IFRS requirement, the measurement basis used in preparing the financial statements is historical cost, net realizable value, fair value or recoverable amount. Whenever IFRS provides an option between cost of acquisition and another measurement basis (e.g., systematic re-measurement), the cost of acquisition approach is applied.

 

 

 
 

 

(b)   Recently issued IFRS

 

The reporting standards below were published and are mandatory for annual reporting periods after January 1, 2017. There was no early adoption of standards and amendments to standards by the Company.

 

IFRS 9 Financial Instruments:

 

IFRS 9 is the standard issued as part of a wider project to replace IAS 39. IFRS 9 retains but simplifies the mixed measurement model and established two primary measurement categories for financial assets: amortized cost and fair value. The basis of classification depends on the entity’s business model and the contractual cash flow characteristics of the financial asset. IFRS 9 also introduces a new hedge accounting model, together with corresponding disclosures about risk management for those companies applying hedge accounting. Because the impairment phase of the IFRS 9 project has not yet been completed, the IASB decided that the mandatory effective date should be decided upon when the entire IFRS 9 project is closer to completion. In June 2014 IASB issued IFRS 9, which will be effective for annual periods beginning on or after January 1, 2018, with the possibility of early adoption.

 

IFRS 15 Revenue from Contracts with Customers:

 

The core principle of the new standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration (that is, payment) to which the company expects to be entitled in exchange for those goods or services. The new standard will also result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modifications) and improve guidance for multiple-element arrangements.  In May 2014 IASB issued IFRS 15, which will be effective for annual periods beginning on or after January 1, 2017.

 

Other standards, interpretations and amendments to standards

 

Other new standards and amendments and interpretations mandatory to the financial statements for annual periods beginning after January 1, 2014 were not listed above due to its non-applicability or none of them is expected to have a significant effect on the financial statement of the Company.

 

4. USE OF ESTIMATES AND JUDGMENTS

 

The preparation of financial statements in conformity with IFRS requires Management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on past experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for decision making regarding the judgments about carrying amounts of assets and liabilities that are not readily evident from other sources. Actual results may differ from these estimates.

 

 
 

 

The estimates and assumptions are reviewed on a regular basis. Changes in accounting estimates may affect the period in which they are realized, or future periods.

Although each of its significant accounting policies reflects judgments, assessments or estimates, the Company believes that the following accounting policies reflect the most critical judgments, estimates and assumptions that are important to its business operations and the understanding of its results:

(i) predecessor basis of accounting (Note 1 (c) described in consolidated financial statements of December 31, 2013); 

(ii) business combinations;

(iii) impairment;

(iv) provisions;

(v) share-based payments;

(vi) employee benefits;

(vii) current and deferred tax;

(viii) joint arrangements;

(ix) measurement of financial instruments, including derivatives.

 

Judgments made by Management in the application of IFRS that have a significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are further discussed in the relevant notes hereafter.

 

5. INVESTMENT SECURITIES

 

06/30/2014

12/31/2013

     

Financial asset at fair value through profit or loss-held for trading

379,938

288,604

Current investments

379,938

288,604

     

Debt held-to-maturity

70,323

63,796

Non-current investments

70,323

63,796

 

 

 

Total

450,261

352,400

 

 

 

 
 

 

6. INVENTORIES

 

06/30/2014

12/31/2013

     

Finished goods

1,246,468

878,980

Work in progress

265,778

248,083

Raw material

1,176,818

1,310,664

Consumables

46,363

36,979

Spare parts and other

310,492

286,625

Prepayments

137,705

122,153

Impairment losses

(63,166)

(47,841)

 

3,120,458

2,835,643

 

Losses on inventories recognized in the income statement amounted to R$12,268  as of June 30, 2014 (R$45,793 in June 30, 2013).

7. DEFERRED INCOME TAX AND SOCIAL CONTRIBUTION

Deferred taxes for income tax and social contribution are calculated on tax losses, the negative tax basis of social contributions and the temporary differences between the tax bases and the carrying amount in the financial statement of assets and liabilities. The rates of these taxes in Brazil, currently set for the determination of deferred taxes, are 25% for income tax and 9% for social contribution. For the other regions, applied rates, are as follow:

 

 

HILA-ex

from 23% to 31%

Latin America - South

from 14% to 35%

Canada

26%

 

Deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available to be used to offset temporary differences / loss carry-forwards based on projections of future results prepared and based on internal assumptions and future economic scenarios which may therefore change.

 

 

 
 

 

The amount of deferred income tax and social contribution by type of temporary difference is detailed as follows:

 

06/30/2014

  

12/31/2013

 

Assets

Liabilities

Net

  

Assets

Liabilities

Net

Trade and other receivables

49,159

-

49,159

  

47,944

-

47,944

Derivatives

54,166

(28,709)

25,457

  

50,801

(20,938)

29,863

Inventories

130,562

-

130,562

  

138,820

(1,654)

137,166

Loss carryforwards

470,108

-

470,108

  

293,330

-

293,330

Employee benefits

364,190

-

364,190

  

477,182

-

477,182

Property, plant and equipment

-

(634,756)

(634,756)

  

26,559

(667,386)

(640,827)

Intangible assets

4,285

(526,684)

(522,399)

  

5,741

(605,011)

(599,270)

Trade and other payables

-

(252,657)

(252,657)

  

-

(239,324)

(239,324)

Interest-bearing loans and borrowings

-

(11,743)

(11,743)

  

7,520

-

7,520

Provisions

265,614

(28,358)

237,256

  

235,103

(21,503)

213,600

Share-based payment

684,365

-

684,365

  

824,501

-

824,501

Interest on capital

61,999

-

61,999

  

-

(247,750)

(247,750)

Partnership profit

-

(644,876)

(644,876)

  

-

(655,011)

(655,011)

Other items

-

(116,956)

(116,956)

  

-

(96,845)

(96,845)

Gross deferred tax assets / (liabilities)

2,084,448

(2,244,739)

(160,291)

  

2,107,501

(2,555,422)

(447,921)

Netting by taxable entity

(523,822)

523,822

-

  

(459,736)

459,736

-

Net deferred tax assets / (liabilities)

1,560,626

(1,720,917)

(160,291)

  

1,647,765

(2,095,686)

(447,921)

 

The Company only offsets the balances of deferred income tax and social contribution assets against liabilities when they are within the same entity and are expected to be realized in the same period.

Tax losses and negative bases of social contribution and temporary deductible differences in Brazil, on which the deferred income tax and social contribution were calculated, have no expiry date.

 

At June 30, 2014 the net assets and liabilities deferred taxes related to combined tax losses has an expected utilization/settlement as follows:

 

06/30/2014

12/31/2013

Deferred taxes not related to tax losses

    
     

to be recovered within 12 months

2,472,614

1,336,041

to be recovered beyond 12 months

(3,103,013)

(2,077,292)

 

(630,399)

(741,251)

Deferred tax related to tax losses

    
     

2014

326,199

93,659

2015

74,540

67,991

2016

51,737

107,226

Beyond 2017 (i)

17,632

24,454

 

470,108

293,330

     

Total

(160,291)

(447,921)


(i) There is no expected realization that exceeds the period of 10 years.

 

 

 
 

 

The net change in deferred income tax and social contribution is detailed as follows:

 

Balance at December 31, 2013

(447,921)

Recognized in Net Income

434,149

Recognized in equity

(146,519)

Balance at June 30, 2014

(160,291)

 

As at June 30, 2014, deferred tax assets in the amount of R$226,348 (R$253,850 as at December 31, 2013) related to tax losses from previous periods and temporary differences of subsidiaries abroad were not recorded as the realization is not probable.

 

The expiration term of these assets is on average five years and the tax losses carried forward in relation to them are equivalent to R$917,165 in June 30, 2014 (R$1,014,369 in December 31, 2013).

 

The income tax and social contribution recognized directly as other comprehensive income were as follows:

  

 

06/30/2014

12/31/2013

Items that will not be reclassified to profit or loss:

    

Remeasurement of postemployment benefits

-

(91,825)

     

Items that may be reclassified subsequently to profit or loss:

    

Cash flow hedges - gains / (losses)

122,375

(37,951)

Net Investment hedges - gains / (losses)

(69,328)

119,258

 

53,047

81,307

 

 

 

 
 

 

8. PROPERTY, PLANT AND EQUIPMENT

 

 

06/30/2014

  

12/31/2013

 

Land and buildings

Plant and equipment

Fixtures and fittings

Under construction

Total

  

Total

Acquisition cost

              

Balance at end of previous year

5,699,253

16,423,499

2,993,907

2,051,043

27,167,702

  

25,303,003

Effect of movements in foreign exchange

(179,142)

(533,997)

(105,174)

(50,268)

(868,581)

  

246,928

Acquisitions through business combinations

-

-

-

-

-

  

76

Acquisitions

1,001

413,344

116,271

1,130,878

1,661,494

  

3,648,558

Disposals

(180)

(274,757)

(57,870)

(28)

(332,835)

  

(1,863,812)

Transfer to other asset categories

596,293

1,191,387

232,628

(2,034,489)

(14,181)

  

(167,210)

Others

(124,101)

(84,314)

(91,613)

-

(300,028)

  

159

Balance at end of period/year

5,993,124

17,135,162

3,088,149

1,097,136

27,313,571

  

27,167,702

               

Depreciation and Impairment

              

Balance at end of previous year

(1,749,784)

(9,429,199)

(1,983,158)

-

(13,162,141)

  

(12,889,325)

Effect of movements in foreign exchange

33,965

280,284

63,122

-

377,371

  

(169,997)

Depreciation

(90,119)

(716,739)

(180,556)

-

(987,414)

  

(1,870,692)

Impairment losses

-

(36,558)

(2)

-

(36,560)

  

(73,273)

Disposals

-

215,755

51,490

-

267,245

  

1,780,034

Transfer to other asset categories

1,502

(43,315)

23,136

-

(18,677)

  

60,152

Others

53,175

52,672

54,218

-

160,065

  

960

Balance at end

(1,751,261)

(9,677,100)

(1,971,750)

-

(13,400,111)

  

(13,162,141)

Carrying amount:

              

December 31, 2013

3,949,469

6,994,300

1,010,749

2,051,043

14,005,561

  

14,005,561

June 30, 2014

4,241,863

7,458,062

1,116,399

1,097,136

13,913,460

    

 

Acquisitions in the period refer substantially to modernization, refurbishment, the extension of production lines and construction of new plants in order to increase capacity.

 

The transfers mainly relates to transfers from assets under construction to their final asset categories.

 

Capitalized interest is made on loans directly attributable to the acquisition and construction of qualifying assets. The amount of interest on loans capitalized during the period was R$33,346 (R$31,249 as of June 30, 2013). The interest capitalization rate used in 2014 is 6.36% (in 2013 ranged between 6.36% and 11.29%).

The Company leases plant, equipment, fixtures and fittings, which are accounted for as financial leases. The carrying amount of the leased assets was R$26,022 as of June 30, 2014 (R$22,011 as of December 31, 2013).

Contractual commitments to purchase property, plant and equipment amounted to R$260,084 as at June 30, 2014 (R$196,416 as at December 31, 2013).

 

 

 
 

 

9. GOODWILL

 

06/30/2014

12/31/2013

     

Goodwill

112,266,376

111,890,157

Provision for losses

(85,242,633)

(85,242,633)

Balance at end of previous year

27,023,743

26,647,524

     

Effect of movements in foreign exchange

(794,589)

502,241

Acquisitions through business combinations

-

132,685

Others

(7,172)

(258,707)

Balance at the end of period/year

26,221,982

27,023,743

  

(i) Refers to provision amount related to goodwill paid in shareholders transaction, as described in Note 12 (d.5).

 

(ii) Refers to goodwill merged of subsidiaries as described in Note 1(b). This goodwill arisen from transactions before the application of IFRS in the Company.

 

The carrying amount of goodwill was allocated to the different cash-generating units levels as follows: 

 

 

Functional Currency

06/30/2014

12/31/2013

LAN:

      

Brazil

BRL

17,329,289

17,329,026

Dominican Republic

DOP

2,229,645

2,435,529

Cuba

USD

2,456

2,612

       

LAS:

      

Argentina

ARS

682,163

905,299

Bolivia

BOB

779,582

828,631

Ecuador

USD

3,730

3,918

Chile

CLP

34,982

39,103

Paraguay

PYG

672,059

679,044

Peru

PEN

43,603

46,437

Uruguay

UYU

142,457

162,166

       

NA:

      

Canada Holding

BRL

35,850

35,850

Canada Operational

CAD

4,266,166

4,556,128

   

26,221,982

27,023,743

 

Annual impairment testing

The cash-generating unit to which the goodwill by expectation of future profitability (goodwill) has been allocated must be tested to check the need for reduction to the recoverable amount. The test is made comparing its book value (including the goodwill) with its recoverable value and must be made at least annually or always that there is indication that the unit can be devalued.

 

The impairment test will be performed during the last quarter of the current year.

 

 

 
 

 

10. INTEREST-BEARING LOANS AND BORROWINGS

 

This note discloses the position of loans and financing of the Company. The Note 19 - Financial instruments and risks discloses additional information with respect to exposure of the Company to the risks of interest rate and currency.

 

06/30/2014

12/31/2013

     

Secured bank loans

183,894

203,019

Unsecured bank loans

651,099

808,962

Other unsecured loans

33,622

26,854

Financial leasing

1,079

1,768

Current liabilities

869,694

1,040,603

     

Secured bank loans

451,563

449,915

Unsecured bank loans

860,420

884,119

Debentures and unsecured bond issues

286,084

336,641

Other unsecured loans

171,075

175,171

Financial leasing

17,897

19,396

Non-current liabilities

1,787,039

1,865,242

 

 

The Company’s debt was structured in a manner to avoid significant concentration of maturities in each year and tied to different interest rates. The most representative rates are: (i) flat rate for the Bond 2017 (9.5% per year) and debts of Banco Nacional de Desenvolvimento Economico e Social (BNDES) (7.23% per year); (ii) mix of currencies (UMBNDES) (1.75% per year); and Interest Rate (TJLP) (7.21% per year) to loans from BNDES (7.06% per year) and variable rates for loans in U.S. dollar (1.81% per year).

Contract clauses (covenants)

During the period there were no significant changes in contract clauses of loans and borrowings contracted by the Company.

As of June  30, 2014 the Company was in compliance with all its contractual obligations for its loans and financings.

 

 

 

 
 

 

11. PROVISIONS

(a) Provision changes

 

Balance as of December 31, 2013

Effect of changes in foreign exchange rates

Provisions made

Provisions used and reversed

Balance as of June 30, 2014

           

Restructuring

6,070

(386)

-

(1,600)

4,084

           

Lawsuits tax, labor, civil and others

          

Civil

9,512

(588)

16,820

(13,617)

12,127

Taxes on sales

141,563

-

15,275

(8,463)

148,375

Income tax

149,859

(3,433)

10,424

1,260

158,110

Labor

174,367

(553)

78,388

(88,340)

163,862

Others

95,280

(3,882)

31,443

(7,670)

115,171

Total

570,581

(8,456)

152,350

(116,830)

597,645

           

Total provisions

576,651

(8,842)

152,350

(118,430)

601,729

 

 (b) Disbursement expectative

 

Total

1 year or less

1-2 years

2-5 years

Over 5 years

 

 

 

 

 

 

Restructuring

4,084

3,676

408

-

-

 

 

 

 

 

 

Lawsuits tax, labor, civil and others

 

 

 

 

 

Civil

12,127

2,216

4,082

5,484

345

Taxes on sales

148,375

45,799

42,249

56,754

3,573

Income tax

158,110

33,365

51,380

69,020

4,345

Labor

163,862

48,309

47,594

63,934

4,025

Others

115,171

21,690

38,503

51,722

3,256

Total

597,645

151,379

183,808

246,914

15,544

 

 

 

 

 

 

Total provisions

601,729

155,055

184,216

246,914

15,544

 

 

The expected settlement of provisions was based on management’s best estimate at the interim consolidated financial statements date.

Main lawsuits with probable likelihood of loss:

(a) Sales taxes

In Brazil, the Company and its subsidiaries are involved in several administrative and judicial proceedings related to ICMS, IPI, PIS and Cofins taxes. Such proceedings include, among others, tax offsets, credits and judicial injunctions exempting tax payment.

 

 

 
 

 

(b) Labor

At June 30, 2014, the Company and its subsidiaries are involved in 4,198 (4,108 as of December 31, 2013) labor proceedings with former employees or former employees of service providers. The main issues involve overtime and related effects and respective charges.

(c) Other lawsuits

The Company is involved in several lawsuits brought by former distributors which are mainly claiming damages resulting from the termination of their contracts.

The processes with possible probabilities are disclosed in Note 21.

 

12. CHANGES IN EQUITY

(a) Capital stock  

 

 

06/30/2014

  

 06/30/2013

 

Million of commom shares

Million of Real

  

Million of commom shares

Million of Real

Beginning balance as per statutory books

15,664,280

57,000,790

  

249,061

249,061

Contribution shares

-

-

  

9,444,537

8,206,879

Changes during the period

6,603

130,496

  

-

-

 

15,670,883

57,131,286

  

9,693,598

8,455,940

 

(b) Capital reserves

 

 

Treasury shares

Share Premium

Others capital reserve

Share-based payments

Results on treasury shares

Capital reserves

At January 1, 2014

(22,955)

53,663,683

1,012,723

714,825

(5,845)

55,362,431

             

Other comprehensive income

           

Capital increase

(9,070)

-

(93,547)

(17,874)

-

(120,491)

Acquiree shares and result on treasury shares

22,729

-

-

-

(29,567)

(6,838)

Share-based payment

-

-

-

74,019

-

74,019

At June 30, 2014

(9,296)

53,663,683

919,176

770,970

(35,412)

55,309,121

 

 

Treasury shares

Share Premium

Others capital reserve

Share-based payments

Results on treasury shares

Capital reserves

             

At January 1, 2013

-

-

-

-

-

-

             

Net income

-

-

-

-

-

-

             

Other comprehensive income

           

Total Comprehensive income

-

-

-

-

-

-

Dividends

-

5.163.148

1.012.723

599.080

-

6.774.951

Share-based payment

-

-

-

13.989

-

13.989

At June 30, 2013

-

5.163.148

1.012.723

613.069

-

6.788.940

 

 

 
 

 

(i) As described in Note 1 (c) of consolidated financial statements of December 31, 2013, the Company adopted the predecessor basis of accounting for the contribution of shares. Thus, the equivalent value contributed participation is already reflected in equity of Ambev SA since January 1, 2012 and at the time of the capital increase, was reclassified from “Carrying value adjustments” to other accounts in equity in accordance with the corporate minutes.

 

(b.1) Treasury shares

The treasury shares include own issued shares reacquired by the Company under the Company’s Stock Option Plan for its employees.

 

The changes of treasury shares are as follows:

 

Acquiree shares

 

Result on Treasure Shares

  

Total Treasure Shares

 

Million shares

  

Million Brazilian Real

  

Million shares

  

Million Brazilian Real

       

Beginning balance as per statutory books

1,354

  

(22,955)

  

(5,845)

  

(28,800)

Changes during the period

(789)

  

13,659

  

(29,567)

  

(15,908)

At the end of the period

565

  

(9,296)

  

(35,412)

  

(44,708)

  

(b.2) Share premium

 

The share premium refers to the difference between subscription prices that the shareholders paid for the shares and theirs nominal value. Since this is a capital reserve, it can only be used to increase capital, offset losses, redeem, reimburse or repurchase shares.

(b.3) Share-based payment

There are different share-based payment programs and stock option plans which allow the senior management acquires shares of the Company.

The share-based payment reserve recorded a charge of R$80,652 at June 30, 2014 (R$80,764 at June 30, 2013) (Note 18).

(c) Net income reserve

 

Net income reserve

 
 

Investments reserve

Statutory reserve

Fiscal incentive

Additional dividends

Net income reserve

At January 1, 2014

940,132

4,456

1,849,893

3,063,372

5,857,853

           

Other comprehensive income

         

Dividends distributed

(939,957)

-

-

(651,207)

(1,591,164)

Interest on shareholder´s equity

-

-

-

(2,412,165)

(2,412,165)

At June 30, 2014

175

4,456

1,849,893

-

1,854,524

 

 

 

 
 

 

 

Net income reserve

 
 

Investments reserve

Statutory reserve

Fiscal incentive

Additional dividends

Net income reserve

           

At January 1, 2013

-

4,456

-

47,193

51,649

           

Other comprehensive income

         

Capital increase

-

-

1,431,928

-

1,431,928

Dividends

34,130

-

-

(47,193)

(13,063)

At June 30, 2013

34,130

4,456

1,431,928

-

1,470,514

 

In order to maximize the return to shareholders, the additional dividends may be paid as dividends or interest on shareholders’ equity.

(c.1) Investments reserve

The investment reserve refers to the allocation of part of the profits in order to support future investment needs.

(c.2) Statutory reserve

From net income, 5% will be applied before any other allocation, to the statutory reserve, which cannot exceed 20% of capital stock. The Company is not required to supplement the statutory reserve in the year when the balance of this reserve, plus the amount of capital reserves, exceeds 30% of the capital stock.

The statutory reserve is to preserve capital resources and can only be used to offset losses or increase capital.

(c.3) Tax incentives

In addition to the participation in tax incentive programs related to income tax, the Company participates in ICMS (VAT) tax benefit programs offered by various States in order to attract investments to their region, in the form of financing, VAT deferral or partial reductions of amounts due. These State programs aim to promote employment, regional decentralization, complementation and diversification of the State’s industrial framework. In these States, the grace and enjoyment periods, reductions and other conditions are provided by the tax legislation.

The portion of the expected income for the period relating to tax incentives, which will be used for the net income reserve at the close of the period ended December 31, 2014, and are therefore not available as a basis for distribution of dividends, is composed of:

 

06/30/2014

06/30/2013

ICMS (Brazilian State value added)

510,722

340,902

Income tax

18,588

21,693

 

529,310

362,595

 

 

 
 

 

(c.4) Interest on shareholders’ equity / Dividends

Brazilian companies are permitted to distribute interest attributed to shareholders’ equity calculated based on the long-term interest rate (TJLP), such interest being tax-deductible and, when distributed, may be considered part of the mandatory dividends.

As determined by its By-laws, the Company is required to distribute to its shareholders, as a mandatory dividend in respect of each fiscal year ending on December 31, an amount not less than 40% of its net income determined under Brazilian law, as adjusted in accordance with applicable law, unless payment of such amount would be incompatible with Ambev S.A.’s financial situation. The mandatory dividend includes amounts paid as interest on shareholders’ equity.

Events during 2014:

Event

Approval

Type

Date of payment

Year

Type of share

Ammount per share

Total amount

  
                 

Board of Directors Meeting

01/06/2014

Interest on shareholder´s equity

01/23/2014

2013

Common

0.1540

2,412,165

(i)

Board of Directors Meeting

01/06/2014

Dividends

01/23/2014

2013

Common

0.1000

1,566,341

(i)

Board of Directors Meeting

03/23/2014

Dividends

04/25/2014

2013

Common

0.0600

939,957

(ii)

Board of Directors Meeting

03/23/2014

Dividends

04/25/2014

2014

Common

0.0700

1,096,616

  
             

6,015,079

  


(i) These dividends and interest on shareholders’ equity refer to the total amount approved for distribution in the period and were accrued in fiscal year of 2013.

 

(ii) These dividends refer to the total amount approved for distribution in the period and were deducted of investments reserve.

 

Events during 2013:

Event

Approval

Type

Date of payment

Year

Type of share

Ammount per share

Total amount

  
                 

Ordinary General Meeting

03/01/2013

Interest on shareholder´s equity

03/11/2013

2012

Common

0.0524

13,063

(i)

Ordinary General Meeting

03/01/2013

Dividends

03/11/2013

2012

Common

0.0443

11,037

(i)

             

24,100

  


(i) These dividends refer to the total amount approved for distribution in the period, and were accrued in fiscal year of 2012.

 

Interest on shareholders’ equity and dividends not claimed within three years revert back to the Company.

 

 

 
 

 

 

(c.5) Proposed dividends and additional dividends

The reserves for proposed dividends and additional dividends proposed are designed to record the dividends to be distributed during the following fiscal year, approved in accordance with Brazilian Corporate Law.

 

 

 
 

 

(d)   Carrying value adjustments

 

 

Carrying value adjustments

 
 

Translation reserves

Cash flow hedge

Actuarial gains/ losses

Put option of a subsidiary interest

Gains/losses of non-controlling interest´s share

Business combination

Accounting adjustments for transactions between shareholders

Carrying value adjustments

At January 1, 2014 - originally issued

(72.266)

132.296

(1.003.122)

(2.057.281)

2.114.305

156.091

(74.652.319)

(75.382.296)

Effects of changes in accounting standards (Note 1)

-

-

-

-

-

-

153.679

153.679

At January 1, 2014 - Adjustment

(72.266)

132.296

(1.003.122)

(2.057.281)

2.114.305

156.091

(74.498.640)

(75.228.617)

                 

Other comprehensive income

               

Translation reserves - gains / (losses)

(1.174.281)

-

-

-

-

-

(7.175)

(1.181.456)

Cash flow hedges - gains / (losses)

-

(234.859)

-

-

-

-

-

(234.859)

Actuarial gain / (losses)

-

-

(12.370)

-

-

-

-

(12.370)

Total Comprehensive income

(1.174.281)

(234.859)

(12.370)

-

-

-

(7.175)

(1.428.685)

Adjustment for changes in accounting standards related to joint ventures

29.737

-

59.630

-

-

-

-

89.367

Reversal of Cerbuco's Net Assets recognized as predecessor basis of accounting to acquire Cerbuco

-

-

-

-

-

-

(505.347)

(505.347)

At June 30, 2014

(1.216.810)

(102.563)

(955.862)

(2.057.281)

2.114.305

156.091

(75.011.162)

(77.073.282)

 

 

 

Carrying value adjustments

 
 

Translation reserves

Cash flow hedge

Actuarial gains/ losses

Put option of a subsidiary interest

Gains/losses of non-controlling interest´s share

Business combination

Accounting adjustments for transactions between shareholders

Carrying value adjustments

                 

At January 1, 2013

-

-

-

-

-

-

24.905.890

24.905.890

Effects of changes in accounting standards (Note 1)

-

-

-

-

-

-

191.260

191.260

At January 1, 2013 - Adjustment

-

-

-

-

-

-

25.097.150

25.097.150

                 

Net income

-

-

-

-

-

-

2.222.054

2.222.054

                 

Translation reserves - gains / (losses)

28.192

-

-

-

-

-

149.484

177.676

Cash flow hedges - gains / (losses)

-

6.251

-

-

-

-

-

6.251

Actuarial gain / (losses)

-

-

447

-

-

-

-

447

Total Comprehensive income

28.192

6.251

447

-

-

-

2.371.538

2.406.428

Capital increase

(3.697)

69.830

(1.205.172)

(2.003.216)

(263.890)

156.091

(13.163.704)

(16.413.758)

Put option to acquire interest in a subsidiary

-

-

-

(20.850)

-

-

-

(20.850)

Gains/(losses) of non-controlling interest´s share

-

-

-

-

(53.145)

-

-

(53.145)

Others capital movements of subsidiary

-

-

-

-

-

-

(1.268.100)

(1.268.100)

At June 30, 2013

24.495

76.081

(1.204.725)

(2.024.066)

(317.035)

156.091

13.036.884

9.747.725

 

 

 
 

 

 

(d.1) Translation reserves

 

The translation reserves comprise all foreign currency exchange differences arising from the translation of the financial statements with a functional currency different from the Real.

The translation reserves also comprise the portion of the gain or loss on the foreign currency liabilities and on the derivative financial instruments determined to be effective net investment hedges, in conformity with IAS 39 Financial Instruments: Recognition and Measurement hedge accounting rules.

 

(d.2) Cash flow hedging reserves

 

The hedging reserves comprise the effective portion of the cumulative net change in the fair value of cash flow hedges to the extent the hedged risk has not yet impacted profit or loss (Note 19 - Financial instruments and risks). 

 

(d.3) Actuarial gains and losses

The actuarial gains and losses include expectations with regards to the future pension plans obligations. Consequently, the results of actuarial gains and losses are recognized on a timely basis considering best estimate obtained by Management. Accordingly, the Company recognizes on a quarterly basis the results of these estimated actuarial gains and losses according to the expectations presented based on an independent actuarial report.

(d.4) Put option of a subsidiary interest

As part of the CND acquisition agreement, a sell option (“put”) was issued by the Company and a purchase option (“call”) was issued by E. León Jimenes S.A. (“ELJ”), which may result in an acquisition by the Company of the remaining shares of CND, for a value based on EBITDA multiples, being “put” exercisable annually until 2019 and the “call” in 2019. On June 30, 2014 the put option held by ELJ is valued at R$2,459,236 and the liability was recorded against equity in accordance with the IFRS 3 and categorized as “Level 3”. No value has been assigned to the call option held by the Company. The fair value of this consideration deferred was calculated by using standard valuation techniques (present value of the principal amount and future interest rates, discounted by the market rate). The criteria used are based on market information and from reliable sources and they are revaluated on an annual basis at the same moment that the Company applies the impairment test. The changes of this option are presented as Note 19 - Financial instruments and risks.

 

(d.5) Accounting for acquisition of non-controlling interests

As determined by IAS 27 – Consolidated and Separate Financial Statements, in paragraph 30 and 31, any difference between the amount paid (fair value) for the acquisition of non-controlling interests and the related book value of such non-controlling interest shall be recognized directly in controlling shareholders’ equity. For the acquisition of non-controlling interest related to Old Ambev, the abovementioned adjustment was recognized in the carrying value adjustments.

 

 
 

 

13. SEGMENT REPORTING

 

The information is presented in thousands of Brazilian Reais, except for volumes, which are presented in thousands of hectoliters. 

(a) Reportable segments – periods ended in:

 

Latin America - north (i)

Latin America - south (ii)

Canada

Consolidated

 

06/30/2014

06/30/2013

06/30/2014

06/30/2013

06/30/2014

06/30/2013

06/30/2014

06/30/2013

                 

Volume

60,366

55,798

17,424

17,373

4,505

4,350

82,295

77,521

                 

Net sales

12,044,346

10,384,583

3,026,662

3,082,748

2,151,497

1,934,889

17,222,505

15,402,220

Cost of sales

(4,217,175)

(3,579,641)

(1,178,078)

(1,221,302)

(653,727)

(563,860)

(6,048,980)

(5,364,803)

Gross profit

7,827,171

6,804,942

1,848,584

1,861,446

1,497,770

1,371,029

11,173,525

10,037,417

Sales and marketing expenses

(3,189,818)

(2,791,992)

(704,964)

(671,083)

(767,873)

(623,129)

(4,662,655)

(4,086,204)

Administrative expenses

(579,706)

(553,134)

(120,383)

(119,701)

(98,279)

(83,997)

(798,368)

(756,832)

Other operating income/(expenses)

593,986

644,524

(14,909)

(20,065)

(986)

(155)

578,091

624,304

Normalized income from operations (normalized EBIT)

4,651,633

4,104,340

1,008,328

1,050,597

630,632

663,748

6,290,593

5,818,685

Special items

(2,100)

(2,163)

(5,495)

(4,082)

(6,111)

-

(13,706)

(6,245)

Income from operations (EBIT)

4,649,533

4,102,177

1,002,833

1,046,515

624,521

663,748

6,276,887

5,812,440

Net finance cost

(400,428)

(488,037)

(286,710)

(29,084)

20,315

12,025

(666,823)

(505,096)

Share of result of associates

5,003

968

-

-

5,167

817

10,170

1,785

Income before income tax

4,254,108

3,615,108

716,123

1,017,431

650,003

676,590

5,620,234

5,309,129

Income tax expense

(343,320)

(541,887)

(283,513)

(330,969)

(180,994)

(151,699)

(807,827)

(1,024,555)

Net income

3,910,788

3,073,221

432,610

686,462

469,009

524,891

4,812,407

4,284,574

                 

Normalized EBITDA

5,473,074

4,887,573

1,202,657

1,241,534

702,619

733,584

7,378,350

6,862,691

Special items

(2,100)

(2,163)

(5,495)

(4,082)

(6,111)

-

(13,706)

(6,245)

Depreciation, amortization and impairment excluding special items

(821,441)

(783,233)

(194,329)

(190,937)

(71,987)

(69,836)

(1,087,757)

(1,044,006)

Net finance costs

(400,428)

(488,037)

(286,710)

(29,084)

20,315

12,025

(666,823)

(505,096)

Share of results of associates

5,003

968

-

-

5,167

817

10,170

1,785

Income tax expense

(343,320)

(541,887)

(283,513)

(330,969)

(180,994)

(151,699)

(807,827)

(1,024,555)

Net income

3,910,788

3,073,221

432,610

686,462

469,009

524,891

4,812,407

4,284,574

                 

Normalized EBITDA margin in %

45.4%

47.1%

39.7%

40.3%

32.7%

37.9%

42.8%

44.6%

                 

Acquisition of property, plant and equipment

1,358,535

1,060,930

464,150

185,846

58,713

84,774

1,881,398

1,331,550

Additions to / (reversals of) provisions

114,022

110,089

6,034

1,508

-

-

120,056

111,597

Full time employee

38,591

35,954

10,081

9,881

2,959

2,981

51,630

48,816

                 
 

06/30/2014

12/31/2013

06/30/2014

12/31/2013

06/30/2014

12/31/2013

06/30/2014

12/31/2013

Segment assets

40,469,422

40,217,782

7,800,527

8,135,681

6,517,877

6,611,172

54,787,826

54,964,635

Intersegment elimination

           

(1,537,180)

(927,371)

Non-segmented assets

           

9,738,397

15,047,916

Total assets

           

62,989,043

69,085,180

                 

Segment liabilities

11,790,989

14,336,057

2,697,222

2,873,146

2,301,855

2,450,957

16,790,066

19,660,160

Intersegment elimination

           

(1,537,180)

(927,371)

Non-segmented liabilities

           

47,736,157

50,352,391

Total liabilities

           

62,989,043

69,085,180


(i) Latin America – North: includes operations in Brazil and HILA-ex (Cuba, Guatemala and Dominican Republic).

(ii) Latin America – South: includes operations in Argentina, Bolivia, Chile, Paraguay, Uruguay, Ecuador and Peru.

 

 
 

 

 (b) Additional information – by Business unit – periods ended in:

 

 

Latin America - north

 

Beer

Soft drink

Total

 

06/30/2014

06/30/2013

06/30/2014

06/30/2013

06/30/2014

06/30/2013

             

Volume

44,984

41,335

15,382

14,463

60,366

55,798

             

Net sales

10,094,004

8,638,791

1,950,342

1,745,793

12,044,346

10,384,583

Cost of sales

(3,230,261)

(2,708,285)

(986,914)

(871,356)

(4,217,175)

(3,579,641)

Gross profit

6,863,743

5,930,506

963,428

874,436

7,827,171

6,804,942

Sales and marketing expenses

(2,723,342)

(2,375,280)

(466,476)

(416,712)

(3,189,818)

(2,791,992)

Administrative expenses

(539,379)

(501,240)

(40,327)

(51,894)

(579,706)

(553,134)

Other operating income/(expenses)

509,818

521,152

84,168

123,372

593,986

644,524

Normalized income from operations (normalized EBIT)

4,110,840

3,575,137

540,793

529,203

4,651,633

4,104,340

Special items

(1,454)

(1,603)

(646)

(560)

(2,100)

(2,163)

Income from operations (EBIT)

4,109,386

3,573,534

540,147

528,643

4,649,533

4,102,177

Net finance cost

(400,428)

(488,037)

-

-

(400,428)

(488,037)

Share of result of associates

5,003

968

-

-

5,003

968

Income before income tax

3,713,961

3,086,465

540,147

528,643

4,254,108

3,615,108

Income tax expense

(343,175)

(541,887)

(145)

-

(343,320)

(541,887)

Net income

3,370,786

2,544,578

540,002

528,643

3,910,788

3,073,221

             

Normalized EBITDA

4,782,856

4,218,124

690,218

669,449

5,473,074

4,887,573

Special items

(1,454)

(1,603)

(646)

(560)

(2,100)

(2,163)

Depreciation, amortization and impairment excluding special items

(672,016)

(642,987)

(149,425)

(140,246)

(821,441)

(783,233)

Net finance costs

(400,428)

(488,037)

-

-

(400,428)

(488,037)

Share of results of associates

5,003

968

-

-

5,003

968

Income tax expense

(343,175)

(541,887)

(145)

-

(343,320)

(541,887)

Net income

3,370,786

2,544,578

540,002

528,643

3,910,788

3,073,221

             

Normalized EBITDA margin in %

47.4%

48.8%

35.4%

38.3%

45.4%

47.1%

 

 

Brazil

 

Beer

Soft drink

Total

 

06/30/2014

06/30/2013

06/30/2014

06/30/2013

06/30/2014

06/30/2013

             

Volume

42,219

38,693

14,625

13,882

56,844

52,575

             

Net sales

9,376,573

8,063,547

1,770,930

1,606,763

11,147,503

9,670,310

Cost of sales

(2,927,776)

(2,470,397)

(851,949)

(756,869)

(3,779,725)

(3,227,266)

Gross profit

6,448,797

5,593,150

918,981

849,894

7,367,778

6,443,044

Sales and marketing expenses

(2,524,889)

(2,230,568)

(417,397)

(376,735)

(2,942,286)

(2,607,303)

Administrative expenses

(503,447)

(462,045)

(27,036)

(39,989)

(530,483)

(502,034)

Other operating income/(expenses)

512,212

529,368

84,422

117,338

596,634

646,706

Income from operations (EBIT)

3,932,673

3,429,905

558,970

550,508

4,491,643

3,980,413

Net finance cost

(405,374)

(479,523)

-

-

(405,374)

(479,523)

Share of result of associates

5,003

968

-

-

5,003

968

Income before income tax

3,532,302

2,951,350

558,970

550,508

4,091,272

3,501,858

Income tax expense

(298,565)

(498,819)

-

-

(298,565)

(498,819)

Net income

3,233,737

2,452,531

558,970

550,508

3,792,707

3,003,039

             

Normalized EBITDA

4,539,699

4,016,307

686,794

673,699

5,226,493

4,690,006

Depreciation, amortization and impairment excluding special items

(607,026)

(586,402)

(127,824)

(123,191)

(734,850)

(709,593)

Net finance costs

(405,374)

(479,523)

-

-

(405,374)

(479,523)

Share of results of associates

5,003

968

-

-

5,003

968

Income tax expense

(298,565)

(498,819)

-

-

(298,565)

(498,819)

Net income

3,233,737

2,452,531

558,970

550,508

3,792,707

3,003,039

             

Normalized EBITDA margin in %

48.4%

49.8%

38.8%

41.9%

46.9%

48.5%

 

 
 

 

 

 

HILA-ex

 

Beer

Soft drink

Total

 

06/30/2014

06/30/2013

06/30/2014

06/30/2013

06/30/2014

06/30/2013

             

Volume

2,765

2,643

757

581

3,522

3,223

             

Net sales

717,431

575,244

179,412

139,030

896,843

714,273

Cost of sales

(302,485)

(237,888)

(134,965)

(114,487)

(437,450)

(352,375)

Gross profit

414,946

337,356

44,447

24,542

459,393

361,898

Sales and marketing expenses

(198,453)

(144,712)

(49,079)

(39,977)

(247,532)

(184,689)

Administrative expenses

(35,932)

(39,195)

(13,291)

(11,905)

(49,223)

(51,100)

Other operating income/(expenses)

(2,394)

(8,216)

(254)

6,034

(2,648)

(2,182)

Normalized income from operations (normalized EBIT)

178,167

145,232

(18,177)

(21,305)

159,990

123,927

Special items

(1,454)

(1,603)

(646)

(560)

(2,100)

(2,163)

Income from operations (EBIT)

176,713

143,629

(18,823)

(21,865)

157,890

121,764

Net finance cost

4,946

(8,514)

-

-

4,946

(8,514)

Income before income tax

181,659

135,115

(18,823)

(21,865)

162,836

113,250

Income tax expense

(44,610)

(43,068)

(145)

-

(44,755)

(43,068)

Net income

137,049

92,047

(18,968)

(21,865)

118,081

70,182

             

Normalized EBITDA

243,157

201,817

3,424

(4,250)

246,581

197,567

Special items

(1,454)

(1,603)

(646)

(560)

(2,100)

(2,163)

Depreciation, amortization and impairment excluding special items

(64,990)

(56,585)

(21,601)

(17,055)

(86,591)

(73,640)

Net finance costs

4,946

(8,514)

-

-

4,946

(8,514)

Income tax expense

(44,610)

(43,068)

(145)

-

(44,755)

(43,068)

Net income

137,049

92,047

(18,968)

(21,865)

118,081

70,182

             

Normalized EBITDA margin in %

33.9%

35.1%

1.9%

-3.1%

27.5%

27.7%

 

 

Latin America - south

 

Beer

Soft drink

Total

 

06/30/2014

06/30/2013

06/30/2014

06/30/2013

06/30/2014

06/30/2013

             

Volume

10,297

10,262

7,127

7,111

17,424

17,373

             

Net sales

2,245,431

2,221,311

781,231

861,437

3,026,662

3,082,748

Cost of sales

(735,204)

(698,813)

(442,874)

(522,489)

(1,178,078)

(1,221,302)

Gross profit

1,510,227

1,522,498

338,357

338,948

1,848,584

1,861,446

Sales and marketing expenses

(489,302)

(440,933)

(215,662)

(230,150)

(704,964)

(671,083)

Administrative expenses

(91,522)

(88,943)

(28,861)

(30,758)

(120,383)

(119,701)

Other operating income/(expenses)

(11,396)

(16,902)

(3,513)

(3,163)

(14,909)

(20,065)

Normalized income from operations (normalized EBIT)

918,006

975,720

90,322

74,877

1,008,328

1,050,597

Special items

(5,495)

(4,082)

-

-

(5,495)

(4,082)

Income from operations (EBIT)

912,511

971,638

90,322

74,877

1,002,833

1,046,515

Net finance cost

(274,059)

(21,232)

(12,651)

(7,852)

(286,710)

(29,084)

Income before income tax

638,452

950,406

77,671

67,025

716,123

1,017,431

Income tax expense

(252,858)

(329,969)

(30,655)

(1,000)

(283,513)

(330,969)

Net income

385,594

620,437

47,016

66,025

432,610

686,462

             

Normalized EBITDA

1,077,973

1,123,139

124,684

118,395

1,202,657

1,241,534

Special items

(5,495)

(4,082)

-

-

(5,495)

(4,082)

Depreciation, amortization and impairment excluding special items

(159,967)

(147,419)

(34,362)

(43,518)

(194,329)

(190,937)

Net finance costs

(274,059)

(21,232)

(12,651)

(7,852)

(286,710)

(29,084)

Income tax expense

(252,858)

(329,969)

(30,655)

(1,000)

(283,513)

(330,969)

Net income

385,594

620,437

47,016

66,025

432,610

686,462

             

Normalized EBITDA margin in %

48.0%

50.6%

16.0%

13.7%

39.7%

40.3%

 

 
 

 

 

 

Canada

 

06/30/2014

  

06/30/2013

 

Beer

 

Total

  

Beer

 

Total

               

Volume

4,505

  

4,505

  

4,350

  

4,350

               

Net sales

2,151,497

  

2,151,497

  

1,934,889

  

1,934,889

Cost of sales

(653,727)

  

(653,727)

  

(563,860)

  

(563,860)

Gross profit

1,497,770

  

1,497,770

  

1,371,029

  

1,371,029

Sales and marketing expenses

(767,873)

  

(767,873)

  

(623,129)

  

(623,129)

Administrative expenses

(98,279)

  

(98,279)

  

(83,997)

  

(83,997)

Other operating income/(expenses)

(986)

  

(986)

  

(155)

  

(155)

Normalized income from operations (normalized EBIT)

630,632

  

630,632

  

663,748

  

663,748

Special items

(6,111)

  

(6,111)

  

-

  

-

Income from operations (EBIT)

624,521

  

624,521

  

663,748

  

663,748

Net finance cost

20,315

  

20,315

  

12,025

  

12,025

Share of result of associates

5,167

  

5,167

  

817

  

817

Income before income tax

650,003

  

650,003

  

676,590

  

676,590

Income tax expense

(180,994)

  

(180,994)

  

(151,699)

  

(151,699)

Net income

469,009

  

469,009

  

524,891

  

524,891

               

Normalized EBITDA

702,619

  

702,619

  

733,584

  

733,584

Special items

(6,111)

  

(6,111)

  

-

  

-

Depreciation, amortization and impairment excluding special items

(71,987)

  

(71,987)

  

(69,836)

  

(69,836)

Net finance costs

20,315

  

20,315

  

12,025

  

12,025

Share of results of associates

5,167

  

5,167

  

817

  

817

Income tax expense

(180,994)

  

(180,994)

  

(151,699)

  

(151,699)

Net income

469,009

  

469,009

  

524,891

  

524,891

               

Normalized EBITDA margin in %

32.7%

  

32.7%

  

37.9%

  

37.9%

    

 

 

 

 
 

 

(c) Reportable segments - Three-month period ended:

 

 

Latin America - north (i)

Latin America - south (ii)

Canada

Consolidated

 

06/30/2014

06/30/2013

06/30/2014

06/30/2013

06/30/2014

06/30/2013

06/30/2014

06/30/2013

                 

Volume

29,387

27,225

7,214

7,547

2,710

2,531

39,311

37,303

                 

Net sales

5,735,851

5,100,064

1,152,583

1,337,482

1,288,999

1,132,674

8,177,433

7,570,220

Cost of sales

(2,130,032)

(1,755,434)

(520,039)

(585,327)

(390,595)

(326,263)

(3,040,666)

(2,667,024)

Gross profit

3,605,819

3,344,630

632,544

752,155

898,404

806,411

5,136,767

4,903,196

Sales and marketing expenses

(1,632,491)

(1,461,606)

(320,831)

(312,523)

(393,900)

(318,548)

(2,347,222)

(2,092,677)

Administrative expenses

(250,172)

(296,907)

(54,240)

(69,946)

(50,528)

(36,895)

(354,940)

(403,748)

Other operating income/(expenses)

340,240

312,152

(989)

(11,463)

562

(502)

339,813

300,187

Normalized income from operations (normalized EBIT)

2,063,396

1,898,269

256,484

358,223

454,538

450,466

2,774,418

2,706,958

Special items

(2,100)

(1,187)

(5,180)

(4,082)

141

-

(7,139)

(5,269)

Income from operations (EBIT)

2,061,296

1,897,082

251,304

354,141

454,679

450,466

2,767,279

2,701,689

Net finance cost

(203,719)

(303,486)

(104,933)

12,129

10,650

24,019

(298,002)

(267,338)

Share of result of associates

2,352

(325)

-

-

(52)

422

2,300

97

Income before income tax

1,859,929

1,593,271

146,371

366,270

465,277

474,907

2,471,577

2,434,448

Income tax expense

(54,256)

(278,414)

(67,457)

(120,503)

(134,258)

(124,192)

(255,971)

(523,109)

Net income

1,805,673

1,314,857

78,914

245,767

331,019

350,715

2,215,606

1,911,339

                 

Normalized EBITDA

2,480,506

2,294,777

354,910

456,604

491,932

487,240

3,327,348

3,238,621

Special items

(2,100)

(1,187)

(5,180)

(4,082)

141

-

(7,139)

(5,269)

Depreciation, amortization and impairment

(417,110)

(396,508)

(98,426)

(98,381)

(37,394)

(36,774)

(552,930)

(531,663)

Net finance costs

(203,719)

(303,486)

(104,933)

12,129

10,650

24,019

(298,002)

(267,338)

Share of results of associates

2,352

(325)

-

-

(52)

422

2,300

97

Income tax expense

(54,256)

(278,414)

(67,457)

(120,503)

(134,258)

(124,192)

(255,971)

(523,109)

Net income

1,805,673

1,314,857

78,914

245,767

331,019

350,715

2,215,606

1,911,339

                 

Normalized EBITDA margin in %

43.25%

45.00%

30.79%

34.14%

38.16%

43.02%

40.69%

42.78%

                 

Acquisition of property, plant and equipment

798,769

592,786

302,572

114,029

36,235

62,259

1,137,576

769,074

Additions to / (reversals of) provisions

65,467

60,451

1,787

1,106

-

-

67,254

61,557

Full time employee

(171)

(679)

(513)

(740)

123

240

(561)

(1,178)

 

 

 

 

 
 

 

(d)   Additional information – by business unit – Three-month period ended:

 

Latin America - north

 

Beer

Soft drink

Total

 

06/30/2014

06/30/2013

06/30/2014

06/30/2013

06/30/2014

6/30/2013

             

Volume

21,735

20,261

7,652

6,964

29,387

27,225

             

Net sales

4,764,374

4,245,426

971,477

854,639

5,735,851

5,100,064

Cost of sales

(1,630,726)

(1,336,884)

(499,306)

(418,550)

(2,130,032)

(1,755,434)

Gross profit

3,133,648

2,908,541

472,171

436,089

3,605,819

3,344,630

Sales and marketing expenses

(1,396,963)

(1,235,883)

(235,528)

(225,723)

(1,632,491)

(1,461,606)

Administrative expenses

(236,815)

(270,558)

(13,357)

(26,349)

(250,172)

(296,907)

Other operating income/(expenses)

286,992

245,475

53,248

66,677

340,240

312,152

Normalized income from operations (normalized EBIT)

1,786,862

1,647,575

276,534

250,694

2,063,396

1,898,269

Special items

(1,454)

(876)

(646)

(311)

(2,100)

(1,187)

Income from operations (EBIT)

1,785,408

1,646,699

275,888

250,383

2,061,296

1,897,082

Net finance cost

(203,719)

(303,486)

-

-

(203,719)

(303,486)

Share of result of associates

2,352

(325)

-

-

2,352

(325)

Income before income tax

1,584,041

1,342,888

275,888

250,383

1,859,929

1,593,271

Income tax expense

(54,148)

(278,414)

(108)

-

(54,256)

(278,414)

Net income

1,529,893

1,064,474

275,780

250,383

1,805,673

1,314,857

             

Normalized EBITDA

2,134,778

1,974,163

345,728

320,614

2,480,506

2,294,777

Special items

(1,454)

(876)

(646)

(311)

(2,100)

(1,187)

Depreciation, amortization and impairment

(347,916)

(326,588)

(69,194)

(69,920)

(417,110)

(396,508)

Net finance costs

(203,719)

(303,486)

-

-

(203,719)

(303,486)

Share of results of associates

2,352

(325)

-

-

2,352

(325)

Income tax expense

(54,148)

(278,414)

(108)

-

(54,256)

(278,414)

Net income

1,529,893

1,064,474

275,780

250,383

1,805,673

1,314,857

             

Normalized EBITDA margin in %

44.8%

46.5%

35.6%

37.5%

43.2%

45.0%

 

 

Brazil

 

Beer

Soft drink

Total

 

06/30/2014

06/30/2013

06/30/2014

06/30/2013

06/30/2014

06/30/2013

             

Volume

20,234

18,875

7,249

6,661

27,484

25,536

             

Net sales

4,382,966

3,940,412

875,659

784,081

5,258,625

4,724,493

Cost of sales

(1,470,422)

(1,212,041)

(428,184)

(359,226)

(1,898,606)

(1,571,267)

Gross profit

2,912,544

2,728,371

447,475

424,855

3,360,019

3,153,226

Sales and marketing expenses

(1,298,400)

(1,164,342)

(213,112)

(206,631)

(1,511,512)

(1,370,973)

Administrative expenses

(219,167)

(247,545)

(6,738)

(20,119)

(225,905)

(267,664)

Other operating income/(expenses)

288,851

246,290

53,521

62,785

342,372

309,075

Income from operations (EBIT)

1,683,828

1,562,774

281,146

260,890

1,964,974

1,823,664

Net finance cost

(200,740)

(304,210)

-

-

(200,740)

(304,210)

Share of result of associates

2,352

(325)

-

-

2,352

(325)

Income before income tax

1,485,440

1,258,239

281,146

260,890

1,766,586

1,519,129

Income tax expense

(25,851)

(249,422)

-

-

(25,851)

(249,422)

Net income

1,459,589

1,008,817

281,146

260,890

1,740,735

1,269,707

             

Normalized EBITDA

1,999,685

1,859,621

339,709

322,339

2,339,394

2,181,960

Depreciation, amortization and impairment

(315,857)

(296,847)

(58,563)

(61,449)

(374,420)

(358,296)

Net finance costs

(200,740)

(304,210)

-

-

(200,740)

(304,210)

Share of results of associates

2,352

(325)

-

-

2,352

(325)

Income tax expense

(25,851)

(249,422)

-

-

(25,851)

(249,422)

Net income

1,459,589

1,008,817

281,146

260,890

1,740,735

1,269,707

             

Normalized EBITDA margin in %

45.6%

47.2%

38.8%

41.1%

44.5%

46.2%

 

HILA-ex

 

Beer

Soft drink

Total

 

06/30/2014

06/30/2013

06/30/2014

06/30/2013

06/30/2014

06/30/2013

             

Volume

1,501

1,385

402

303

1,903

1,689

             

Net sales

381,408

305,014

95,818

70,558

477,226

375,571

Cost of sales

(160,304)

(124,843)

(71,122)

(59,324)

(231,426)

(184,167)

Gross profit

221,104

180,170

24,696

11,234

245,800

191,404

Sales and marketing expenses

(98,563)

(71,541)

(22,416)

(19,092)

(120,979)

(90,633)

Administrative expenses

(17,648)

(23,013)

(6,619)

(6,230)

(24,267)

(29,243)

Other operating income/(expenses)

(1,859)

(815)

(273)

3,892

(2,132)

3,077

Normalized income from operations (normalized EBIT)

103,034

84,801

(4,612)

(10,196)

98,422

74,605

Special items

(1,454)

(876)

(646)

(311)

(2,100)

(1,187)

Income from operations (EBIT)

101,580

83,925

(5,258)

(10,507)

96,322

73,418

Net finance cost

(2,979)

724

-

-

(2,979)

724

Income before income tax

98,601

84,649

(5,258)

(10,507)

93,343

74,142

Income tax expense

(28,297)

(28,992)

(108)

-

(28,405)

(28,992)

Net income

70,304

55,657

(5,366)

(10,507)

64,938

45,150

             

Normalized EBITDA

135,093

114,542

6,019

(1,725)

141,112

112,817

Special items

(1,454)

(876)

(646)

(311)

(2,100)

(1,187)

Depreciation, amortization and impairment

(32,059)

(29,741)

(10,631)

(8,471)

(42,690)

(38,212)

Net finance costs

(2,979)

724

-

-

(2,979)

724

Income tax expense

(28,297)

(28,992)

(108)

-

(28,405)

(28,992)

Net income

70,304

55,657

(5,366)

(10,507)

64,938

45,150

             

Normalized EBITDA margin in %

35,4%

37,6%

6,3%

-2,4%

29,6%

30,0%

             

 

 
 

 

 

 

Latin America - south

 

Beer

Soft drink

Total

 

06/30/2014

6/30/2013

06/30/2014

06/30/2013

06/30/2014

06/30/2013

             

Volume

4,135

4,371

3,078

3,176

7,214

7,547

             

Net sales

832,666

958,913

319,917

378,569

1,152,583

1,337,482

Cost of sales

(321,058)

(346,884)

(198,981)

(238,443)

(520,039)

(585,327)

Gross profit

511,608

612,029

120,936

140,126

632,544

752,155

Sales and marketing expenses

(226,585)

(208,335)

(94,246)

(104,188)

(320,831)

(312,523)

Administrative expenses

(41,733)

(53,694)

(12,507)

(16,252)

(54,240)

(69,946)

Other operating income/(expenses)

(1,084)

(10,130)

95

(1,333)

(989)

(11,463)

Normalized income from operations (normalized EBIT)

242,207

339,869

14,277

18,354

256,484

358,223

Special items

(5,180)

(4,082)

-

-

(5,180)

(4,082)

Income from operations (EBIT)

237,027

335,787

14,277

18,354

251,304

354,141

Net finance cost

(94,170)

19,480

(10,763)

(7,351)

(104,933)

12,129

Income before income tax

142,857

355,267

3,514

11,003

146,371

366,270

Income tax expense

(57,166)

(120,017)

(10,291)

(486)

(67,457)

(120,503)

Net income

85,691

235,250

(6,777)

10,517

78,914

245,767

             

Normalized EBITDA

324,441

416,488

30,469

40,116

354,910

456,604

Special items

(5,180)

(4,082)

-

-

(5,180)

(4,082)

Depreciation, amortization and impairment

(82,234)

(76,619)

(16,192)

(21,762)

(98,426)

(98,381)

Net finance costs

(94,170)

19,480

(10,763)

(7,351)

(104,933)

12,129

Income tax expense

(57,166)

(120,017)

(10,291)

(486)

(67,457)

(120,503)

Net income

85,691

235,250

(6,777)

10,517

78,914

245,767

             

Normalized EBITDA margin in %

39,0%

43,4%

9,5%

10,6%

30,8%

34,1%

 

 

 
 

 

 

Canada

 

06/30/2014

  

06/30/2013

 

Beer

  

Total

  

Beer

  

Total

               

Volume

2,710

  

2,710

  

2,531

  

2,531

               

Net sales

1,288,999

  

1,288,999

  

1,132,674

  

1,132,674

Cost of sales

(390,595)

  

(390,595)

  

(326,263)

  

(326,263)

Gross profit

898,404

  

898,404

  

806,411

  

806,411

Sales and marketing expenses

(393,900)

  

(393,900)

  

(318,548)

  

(318,548)

Administrative expenses

(50,528)

  

(50,528)

  

(36,895)

  

(36,895)

Other operating income/(expenses)

562

  

562

  

(502)

  

(502)

Normalized income from operations (normalized EBIT)

454,538

  

454,538

  

450,466

  

450,466

Special items

141

  

141

  

-

  

-

Income from operations (EBIT)

454,679

  

454,679

  

450,466

  

450,466

Net finance cost

10,650

  

10,650

  

24,019

  

24,019

Share of result of associates

(52)

  

(52)

  

422

  

422

Income before income tax

465,277

  

465,277

  

474,907

  

474,907

Income tax expense

(134,258)

  

(134,258)

  

(124,192)

  

(124,192)

Net income

331,019

  

331,019

  

350,715

  

350,715

               

Normalized EBITDA

491,932

  

491,932

  

487,240

  

487,240

Special items

141

  

141

  

-

  

-

Depreciation, amortization and impairment

(37,394)

  

(37,394)

  

(36,774)

  

(36,774)

Net finance costs

10,650

  

10,650

  

24,019

  

24,019

Share of results of associates

(52)

  

(52)

  

422

  

422

Income tax expense

(134,258)

  

(134,258)

  

(124,192)

  

(124,192)

Net income

331,019

  

331,019

  

350,715

  

350,715

               

Normalized EBITDA margin in %

38,2%

  

38,2%

  

43,0%

  

43,0%

 

14. NET SALES

 

The reconciliation from gross sales to net sales is as follows:

 

 

Six-month period ended:

  

Three-month period ended:

 

06/30/2014

06/30/2013

  

06/30/2014

06/30/2013

Gross sales

37,195,365

30,352,812

  

17,904,457

14,942,555

Deductions from gross revenue

(19,972,860)

(14,950,592)

  

(9,727,024)

(7,372,335)

 

17,222,505

15,402,220

  

8,177,433

7,570,220

 

15. OTHER OPERATING INCOME / (EXPENSES)

 

Six-month period ended:

  

Three-month period ended:

 

06/30/2014

06/30/2013

  

06/30/2014

06/30/2013

Government grants/NPV of long term fiscal incentives

617,324

553,787

  

324,957

228,848

(Additions to )/reversal of provisions

(13,798)

(1,310)

  

(7,864)

(1,275)

Net gain on disposal of property, plant and equipment and intangible assets

(6,475)

2,599

  

1,346

7,233

Net rental income

72

1,801

  

35

694

Net other operating income/(expense)

(19,032)

67,427

  

21,339

64,687

 

578,091

624,304

  

339,813

300,187

 

Annually, the Company reassesses the discount rate used to measure the subsidy in government loans in accordance with their cost of external funding.

 

 
 

 

 

16. FINANCE COST AND INCOME

 

(a)     Finance costs

 

 

Six-month period ended:

  

Three-month period ended:

Finance costs

06/30/2014

06/30/2013

  

06/30/2014

06/30/2013

           

Interest expense

(367,885)

(281,036)

  

(210,035)

(143,974)

Capitalized borrowings

33,346

31,249

  

13,336

12,426

Net Interest on Pension Plans

(25,495)

(42,815)

  

(12,534)

(21,306)

Losses on hedging instruments that are not part of a hedge accounting relationship

(423,505)

(232,592)

  

(172,464)

(144,304)

Hedge ineffectiveness losses

(13,382)

(9,625)

  

(1,576)

(4,206)

Interest on tax contingencies

(62,203)

(56,133)

  

(36,734)

(38,375)

Exchange variation

(187,545)

(54,398)

  

(95,859)

5,990

Tax on financial transactions

(43,824)

(42,416)

  

(25,392)

(15,007)

Bank guarantee expenses

(32,095)

(38,188)

  

(16,015)

(18,907)

Other financial costs, including bank fees

(27,671)

(68,182)

  

(16,598)

(25,946)

 

(1,150,259)

(794,136)

  

(573,871)

(393,609)

  

Interest expenses are presented net of the effect of interest rate derivative instruments which mitigate Ambev S.A. interest rate risk (Note 19).

The interest expense is as follows:

 

Six-month period ended:

  

Three-month period ended:

Interest expense

06/30/2014

06/30/2013

  

06/30/2014

06/30/2013

           

Financial liabilities measured at amortized cost

(201,950)

(139,218)

  

(127,547)

(69,578)

Liabilities at fair value through profit or loss

(151,184)

(130,330)

  

(74,915)

(68,174)

Fair value hedge - hedged items

(21,303)

10,558

  

(14,171)

7,512

Fair value hedge - hedging instruments

6,552

(22,046)

  

6,598

(13,734)

 

(367,885)

(281,036)

  

(210,035)

(143,974)

           

(b)     Finance income

 

 

Six-month period ended:

  

Three-month period ended:

Finance income

06/30/2014

06/30/2013

  

06/30/2014

06/30/2013

           

Interest income

162,151

142,756

  

56,047

61,982

Net gains on hedging instruments that are not part of a hedge accounting relationship

281,640

88,501

  

192,489

31,583

Gains on no derivative instrument at fair value through profit or loss

25,934

44,353

  

16,740

22,745

Dividend income, non-consolidated companies

7,368

-

  

7,368

-

Others

6,343

13,430

  

3,225

9,961

 

483,436

289,040

  

275,869

126,271

 

 

 

 
 

 

Interest income arises from the following financial assets:

 

Six-month period ended:

  

Three-month period ended:

Interest income

06/30/2014

06/30/2013

  

06/30/2014

06/30/2013

           

Cash and cash equivalents

126,853

108,382

  

38,174

44,417

Investment securities held for trading

35,298

34,374

  

17,873

17,565

 

162,151

142,756

  

56,047

61,982

 

(c)      Hedge result

 

The net income from the cash flow hedge and net income hedges recognized directly as comprehensive income is shown below: 

 

Six-month period ended:

  

Three-month period ended:

Hedging reserve

06/30/2014

06/30/2013

  

06/30/2014

06/30/2013

Recognized in Equity (cash flow hedge)

(179,337)

-

  

(240,288)

-

Removed from Equity and included in profit or loss

(177,415)

-

  

(21,617)

-

Deferred income tax variance in Equity and other changes

121,925

7,807

  

103,203

7,807

 

(234,827)

7,807

  

(158,702)

7,807

           

Exchange differences on translation of foreign operations (gains/ (losses))

          

Effective portion of changes in fair value of net investment hedges

333,040

(144,842)

  

89,028

(114,240)

 

17. INCOME TAX AND SOCIAL CONTRIBUTION

Income taxes reported in the income statement are analyzed as follows:

 

 

Six-month period ended:

  

Three-month period ended:

 

06/30/2014

06/30/2013

  

06/30/2014

06/30/2013

           

Income tax expense - current

(1,241,976)

(1,400,624)

  

(286,887)

(637,176)

           

Deferred tax (expense)/income on temporary differences

257,371

170,971

  

187,660

30,096

Deferred tax on taxes losses

176,778

205,098

  

(156,744)

83,971

Total deferred tax (expense)/income

434,149

376,069

  

30,916

114,067

           

Total income tax expenses

(807,827)

(1,024,555)

  

(255,971)

(523,109)

 

  

 
 

 

The reconciliation from the weighted nominal to the effective tax rate is summarized as follows:

 

Six-month period ended:

  

Three-month period ended:

 

06/30/2014

06/30/2013

  

06/30/2014

06/30/2013

Profit before tax

5,620,234

5,309,129

  

2,471,577

2,434,448

Adjustment on taxable basis

          

Net financial income and other non-taxable income

(261,941)

(192,320)

  

(132,581)

(92,457)

Government grants related to sales taxes

(510,722)

(340,902)

  

(295,112)

(184,421)

Share of results of associates

(10,170)

(1,785)

  

(2,300)

(97)

Expenses not deductible for tax purposes

240,734

138,022

  

66,261

118,058

5,078,135

5,014,856

  

2,282,318

2,398,207

Aggregated weighted nominal tax rate

32.24%

32.33%

  

31.46%

32.03%

Taxes – nominal rate

(1,636,946)

(1,588,301)

  

(663,129)

(728,926)

Adjustment on tax expense

          

Regional incentives - income taxes

18,588

21,693

  

11,684

(10,357)

Deductible interest on shareholders equity

680,000

128,606

  

340,000

3,996

Tax savings from goodwill amortization on tax books

107,708

125,215

  

56,244

62,608

Withholding tax on dividends and other income

(64,621)

(51,444)

  

(42,111)

(41,957)

Income tax provision

(754)

457

  

(634)

457

Others with reduced taxation

88,198

339,219

  

41,975

191,070

Income tax and social contribution expense

(807,827)

(1,024,555)

  

(255,971)

(523,109)

Effective tax rate

14.37%

19.30%

  

10.36%

21.49%

 

The main events occurring in the period that impacted the effective tax rate were:

(a) increase of government grants related to sales taxes; and (b) increase of impact of interest on shareholders’ equity.

The Company has been granted income tax incentives by the Brazilian Government in order to promote economic and social development in certain areas of the North and Northeast. These incentives are recorded as income on an accrual basis and allocated at year-end to the tax incentive reserve account.

On May 13, 2014, it was published Law No. 12,973/14, which is the result of conversion into law of Provisional Measure nº 627. Among its provisions, the highlights are:

(a) adapt the fiscal regulations to the new accounting rules introduced by Law nº 11,638/07 (end of “RTT”, with the approach of Brazilian accounting standards to international accounting standards IFRS - International Financial Reporting Standards);

(b) introduction of new rules related to tax on profits earned abroad, from subsidiaries and affiliates located abroad.

The new legislation has brought the option of early adoption for the year 2014, or the mandatory adoption after January 1, 2015. The Company may also adopt in advance the provisions related to RTT, and maintain the mandatory effective date in 2015 to the section of profits earned abroad, and vice versa.

 

 
 

 

The Company performed a diagnosis of possible impacts of Law 12,973/14 dispositions, both in its financial statements as in its internal control structure. The early adoption may eliminate some risks of tax contingencies, especially regarding to exemption from income tax on dividends paid based on corporate profits for the year 2014, when this exceeds the income determined based on the Brazilian accounting practices in 2007 (“fiscal profit”). As the result of the diagnosis has not presented material effects, the Company decided to already adopt in 2014 the provisions related to RTT. 

18. SHARE-BASED PAYMENTS

 

There are different share-based payment programs and stock option plans which allow the senior management from economic group to receive or acquire shares of the Company. For all option plans, the fair value is estimated at grant date, using the Hull binomial pricing model, modified to reflect the IFRS 2 Share‑based Payment requirement that assumptions about forfeiture before the end of the vesting period cannot impact the fair value of the option.  

 

This current model of share based payment includes two types of grants: (i) for the first type of grant, the beneficiary may choose to allocate 30%, 40%, 60%, 70% or 100% of the amount related to the profit share he received in the year, at the immediate exercise of options, thus acquiring the corresponding shares of the Company, and the delivery of a substantial part of the acquired shares is conditioned to the permanency in the Company for a period of five-years from the date of exercise (“Grant 1”) and; (ii) for the second type of grant, the beneficiary may exercise the options after a period of five years (“Grant 2”).

Additionally, to encourage managers’ mobility, some options granted were modified, where the dividend protection features of such options were canceled in exchange for issuing 221 thousand options in 2014 (222 thousand options in 2013), representing the economic value of the dividend protection feature eliminated. As there was no change to the fair value of the original award immediately prior to the modification and the fair value of the modified award immediately after the change, no additional expense was recorded as a result of this change. 

 

The EGM occurred on July 30, 2013 approved the Stock Swap Merger, through which each Old Ambev common and preferred share, not owned by Ambev S.A., was exchanged for five new Ambev S.A. common shares. The holders of ADRs representing Common or Preferred shares of Old Ambev, received five Ambev S.A. ADRs for each Old Ambev ADR exchanged. This development was also considered for the comparative calculations shown below.

 

 

 
 

 

The weighted average fair value of the options and assumptions used in applying the Ambev S.A. option pricing model for the 2014 and 2013 grants are as follows:

 

In R$, except when mentioned

06/30/2014

(i)

12/31/2013

(i)

         

Fair value of options granted

11.61

  

6.11

  

Share price

16.61

  

17.09

  

Exercise price

16.61

  

17.09

  

Expected volatility

32.6%

  

32.8%

  

Vesting year

5

  

5

  

Expected dividends

5%

  

De 0% a 5%

  

Risk-free interest rate

2,7% a 12,3%

(ii)

1,9% a 12,6%

(ii)

 

(i)      Information based on weighted average plans granted, except for the expected dividends and risk-free interest rate.

(ii) The percentages include the grants of stock options and ADRs during the period, in which the risk-free interest rate of ADRs are calculated in U.S. dollar.

 

The total number of outstanding options developed as follows:

Thousand options

06/30/2014

  

12/31/2013

       

Options outstanding at January 1st

147,718

  

143,915

Options issued during the period

221

  

13,056

Options exercised during the period

(6,924)

  

(7,219)

Options forfeited during the period

(2,237)

  

(2,034)

Options outstanding at ended period/year

138,778

  

147,718

 

The range of exercise prices of the outstanding options is between R$1.44  (R$1.83 as of December 31, 2013) and R$18.82  (R$17.84 as of December 31, 2013) and the weighted average remaining contractual life is approximately 9.45 years (8.51 years as of December 31, 2013).

Of the 138,788 thousand outstanding options (147,718 thousand as of December 31, 2013), 38,372 thousand options are vested as at June 30, 2014 (34,570 thousand as of December 31, 2013).

 

The weighted average exercise price of the options is as follows:

In R$ per share

06/30/2014

  

12/31/2013

       

Options outstanding at January 1

6.30

  

7.23

Options issued during the period

16.22

  

17.03

Options forfeited during the period

12.71

  

8.11

Options exercised during the period

3.01

  

2.70

Options outstanding at ended period

8.19

  

6.30

Options exercisable at ended period

3.37

  

3.32

 

 

 
 

 

For the options exercised during the period of 2014, the weighted average market price on the exercise date was R$16.65.

 

To settle stock options, the Company may use treasury shares. The current limit of authorized capital is considered sufficient to meet all stock option plans.

During the period, Ambev S.A. issued 4,744 thousand (4,270 in 2013) deferred stock units related to exercise of the options in the model “Grant 1”. These deferred stock units are valued at the share price of the day of grant, representing a fair value of approximately R$77,879 (R$76,487 in 2013), and cliff vest after five years.

The total number of shares purchased under the plan of shares by employees, whose grant is deferred to a future time under certain conditions (deferred stock), is shown below:

 

Thousand deferred shares

06/30/2014

  

12/31/2013

       

Deferred shares outstanding at January 1

15,588

  

11,530

New deferred shares during the period

4,744

  

4,270

Deferred shares forfeited during the period

(582)

  

(212)

Deferred shares outstanding at ended period/year

19,750

  

15,588

 

 

Additionally, certain employees and directors of the Company received options to acquire ABI shares, the compensation cost of which is recognized in the income statement against equity in Ambev S.A.’s interim consolidated financial statements as of June 30, 2014. 

These share-based payments generated an expense of R$83,416 in the period ended June 30, 2014 (R$82,134 for the period ended June 30, 2013), recorded as Administrative expenses.

19. FINANCIAL INSTRUMENTS AND RISKS

 

19.1) Risk factors

 

The Company is exposed to foreign currency, interest rate, commodity price, liquidity and credit risk in the ordinary course of business. The Company analyzes each of these risks both individually and as a whole to define strategies to manage the economic impact on the Company’s performance consistent with its Financial Risk Management Policy.

 

The Company’s use of derivatives strictly follows its Financial Risk Management Policy approved by the Board of Directors. The purpose of the policy is to provide guidelines for the management of financial risks inherent to the capital markets in which Ambev S.A. carries out its operations. The policy comprises four main aspects: (i) capital structure, financing and liquidity, (ii) transactional risks related to the business, (iii) financial statements translation risks and (iv) credit risks of financial counterparties.

 

 
 

 

The policy establishes that all the financial assets and liabilities in each country where Ambev S.A. operates must be denominated in their respective local currencies. The policy also sets forth the procedures and controls needed for identifying, measuring and minimizing market risks, such as variations in foreign exchange rates, interest rates and commodities (mainly aluminum, wheat, corn and sugar) that may affect Ambev S.A.’s revenues, costs and/or investment amounts. The policy states that all the currently known risks (e.g. foreign currency and interest) shall be mitigated by contracting derivative instruments. Existing risks not yet evident (e.g. future contracts for the purchase of raw material or property, plant and equipment) shall be mitigated using projections for the period necessary for the Company to adapt to the new costs scenario that may vary from ten to fourteen months, also through the use of derivative instruments. Most of the balance sheet translation risks are not mitigated. Any exception to the policy must be approved by the Board of Directors.

 

The Company’s operations are subject to the risk factors described below:

 

(a) Market risk

 

a.1) Foreign currency risk

 

The Company incurs foreign currency risk on borrowings, investments, purchases, dividends and/or interest expense/income whenever they are denominated in a currency other than the functional currency of the subsidiary. The main derivatives financial instruments used to manage foreign currency risk are futures contracts, swaps, options, non-deliverable forwards and full deliverable forwards.

 

Foreign currency risk on operational activities

As far as foreign currency risk on firm commitments and forecasted transactions is concerned, the Company’s policy is to apply cash flow hedge in transactions which are reasonably expected to occur. The Company maintains controls in order to identify all exposure and once identified, it contracts derivatives for hedge.

 

The table below shows the main net foreign currency positions on June 30, 2014, and the exposure may vary from ten to fourteen months, according to the Company’s Financial Risk Management Policy. Positive values indicate that the Company is long (net future cash inflows) while negative values indicate that the Company is short (net future cash outflows).

 

 

 

 
 

 

 

06/30/2014

  

12/31/2013

 

Total exposed

Derivatives total

Open position

  

Total exposed

Derivatives total

Open position

Dollar

(5,938,494)

5,938,494

-

  

(5,605,798)

5,605,798

-

Euro

(302,028)

302,028

-

  

(394,054)

394,054

-

 

(6,240,522)

6,240,522

-

  

(5,999,852)

5,999,852

-

 

 

Foreign currency on operating activities sensitivity analysis

 

As shown in the table above, the Company’s operational activities in foreign currency are protected by hedge derivative instruments, and thus the Company considers it is protected in relation to the risk of variations regarding this risk is nil. Therefore, any variation in the prices of foreign currencies to which the Company's operations are linked, have no impact on income statement.

 

The estimated impact on equity from the calculation of Probable Scenario (parametric VaR) would be R$454,053; Adverse scenario (25% fluctuation) would be R$1,576,233; and Remote scenario (50% fluctuation) would be R$3,123,056 in the prices of foreign currencies as of June 30, 2014.

 

a.2) Interest rate risk

 

The Company applies a dynamic interest rate hedging approach whereby the target mix between fixed and floating rate debt is reviewed periodically. The purpose of the Company’s policy is to achieve an optimal balance between cost of funding and volatility of financial results, taking into account market conditions as well as the Company’s overall business strategy.

 
Interest rate risk on borrowings in Brazilian Real

 

In July 2007, Ambev International Finance Co. (Ambev S.A.’s wholly-subsidiary) issued a Brazilian Real bond (Bond 2017), of R$300,000, which bears interest at 9.5% per year, with interest repayable semi-annually with final maturity in July 2017.

 

The Company entered into a fixed/floating interest rate swap to hedge the interest rate risk on the Bond 2017. These operations have been designated in a fair value hedge.

  

Interest rate on debt securities in Brazilian Real

 

During the period of 2014, Ambev S.A. invested in government (fixed income) bonds. These instruments are categorized financial asset at fair value through profit as held for trading. The Company also purchased interest rate futures contracts to compensate for exposure to real interest rate on the government bonds. Both instruments are measured at fair value, with the respective variations recorded in the income statement.

 

 
 

 

 

The table below shows the Company’s exposure related to debts, before and after applying hedge accounting, segregated by the currency in which the debt is denominated, as well as the interest rates of the respective transactions.

 

 

06/30/2014

 

Pre - Hedge

 

Post - Hedge

 

Interest rate

Amount

Interest rate

Amount

Brazilian Real

7.2%

1,168,762

  

8.0%

1,865,323

American Dollar

1.9%

552,713

  

2.0%

299,438

Dominican Peso

9.1%

9,858

  

9.1%

9,858

Interest rate postfixed

  

1,731,333

    

2,174,619

           

Brazilian Real

6.5%

768,734

  

4.9%

396,191

Argentinean Peso

32.4%

248,272

  

32.4%

248,272

Dominican Peso

10.4%

50,552

  

10.4%

50,552

American Dollar

1.5%

99,525

  

5.3%

28,782

Guatemala´s Quetzal

8.0%

6,589

  

8.0%

6,589

Interest rate pre-set

  

1,173,672

    

730,386

 

 

 

12/31/2013

 

Pre - Hedge

 

Post - Hedge

 

Interest rate

Amount

 

Interest rate

Amount

Brazilian Real

6.8%

1,254,048

  

6.9%

2,019,903

American Dollar

2.5%

732,832

  

3.4%

390,233

Dominican Peso

10.6%

28,952

  

10.6%

28,952

Interest rate postfixed

  

2,015,832

    

2,439,088

           

Brazilian Real

5.9%

682,658

  

3.5%

403,626

Dominican Peso

13.0%

47,116

  

13.0%

47,116

American Dollar

0.5%

160,240

  

5.5%

16,015

Interest rate pre-set

  

890,014

    

466,757

 

Interest rate sensitivity analysis

 

To perform the sensitivity analysis, the Company took into account that the greatest possible impact on income / interest expense in the case of a short position in an interest rate futures contract is where the Referential Rate (“TR”) rises. Ambev S.A. estimated the possible loss, considering a scenario of variable interest rates.

 

·         Base scenario: fluctuation of interest rates, with all other variables remaining constant, based on the annual volatility using a horizon of observations of the last 250 days on June 30, 2014;

  

·         Adverse scenario: 25% fluctuation of interest rates, with all other variables remaining constant;

·         Remote scenario: 50% fluctuation of interest rates, with all other variables remaining constant.

 

 

 
 

 

 

06/30/2014

 

Probable scenario

Adverse scenario

Remote scenario

Interest expense impact

6,389

19,470

38,940

Interest income impact

23,928

36,504

73,008

  

 a.3) Commodity Risk

 

A significant portion of the Company inputs comprises commodities, which historically have experienced substantial price fluctuations. The Company therefore uses both fixed price purchasing contracts and derivative instruments to minimize its exposure to commodity price volatility. The Company has important exposures to the following commodities: aluminum, sugar, wheat and corn. These derivative instruments have been designated as cash flow hedges.

 

The table below shows the major commodities net positions on June 30, 2014.

 

 

 

06/30/2014

  

12/31/2013

 

Total Exposure

Total de Derivatives

Open Position

  

Total Exposure

Total de Derivatives

Open Position

Aluminum

(692,563)

692,563

-

  

(875,521)

875,521

-

Sugar

(333,464)

333,464

-

  

(342,936)

342,936

-

Wheat

(376,959)

376,959

-

  

(445,438)

445,438

-

Heating oil

(27,554)

27,554

-

  

(28,204)

28,204

-

Crude oil

(17,775)

17,775

-

  

(24,168)

24,168

-

Natural Gas

(7,988)

7,988

-

  

(5,581)

5,581

-

Paraxylene

(142,827)

142,827

-

  

-

-

-

Corn

(296,626)

296,626

-

  

(233,390)

233,390

-

Total

(1,895,756)

1,895,756

-

  

(1,955,238)

1,955,238

-

 

 

 Commodities sensitivity analysis

The table below shows the estimated impact on equity from the calculation of parametric VaR (Probable Scenario), 25% fluctuation (Adverse scenario) and 50% (Remote scenario) in commodities prices. As they are cash flow hedge operations, the impact in equity will generate results inversely proportional to the impact on the acquisition cost of commodities.

 

 

Impact on Equity

 

06/30/2014

  

 

12/31/2013

 

Probable scenario

Adverse scenario

Remote scenario

  

Probable scenario

Adverse scenario

Remote scenario

               

Aluminum

(59,930)

(173,141)

(346,281)

  

(90,261)

(218,880)

(437,760)

Sugar

(52,504)

(83,366)

(166,732)

  

(35,768)

(85,734)

(171,468)

Wheat

(8,352)

(94,240)

(188,480)

  

(50,303)

(111,359)

(222,719)

Heating oil

(4,252)

(6,888)

(13,777)

  

(2,806)

(7,051)

(14,102)

Crude oil

(3,722)

(4,444)

(8,888)

  

(2,584)

(6,042)

(12,084)

Natural Gas

(3,571)

(1,997)

(3,994)

  

(1,119)

(1,395)

(2,791)

Paraxylene

(19,478)

(35,707)

(71,413)

  

-

-

-

Corn

(14,538)

(74,156)

(148,313)

  

(51,269)

(58,347)

(116,695)

 

(166,347)

(473,939)

(947,878)

  

(234,110)

(488,808)

(977,619)

 

 

 
 

 

(b) Credit Risk

 

Concentration of credit risk on trade receivables

 

A substantial part of the Company’s sales is made to distributors, supermarkets and retailers, within a broad distribution network. Credit risk is reduced because of the widespread number of customers and control procedures used to monitor risk. Historically, the Company has not experienced significant losses on receivables from customers.

Concentration of credit risk on counterpart

 

In order to minimize the credit risk of its investments, the Company has adopted procedures for the allocation of cash and investments, taking into consideration limits and credit analysis of financial institutions, avoiding credit concentration, i.e., the credit risk is monitored and minimized to the extent that negotiations are carried out only with a select group of highly rated counterparties.

 

The selection process of financial institutions authorized to operate as the Company’s counterparties is set forth in our Credit Risk Policy. This Credit Risk Policy establishes maximum limits of exposure to each counterparty based on the risk rating and on each counterparty's capitalization.

 

In order to minimize the risk of credit with its counterparties on significant derivative transactions, the Company has adopted bilateral “trigger” clauses. According to these clauses, where the fair value of an operation exceeds a percentage of its notional value (generally between 10% and 15%), the debtor settles the difference in favor of the creditor.

 

As of June 30, 2014, the Company held its main short-term investments with the following financial institutions: Banco do Brasil, Caixa Econômica Federal, Bradesco, Merrill Lynch, Morgan Stanley, Deutsche Bank, Itaú-Unibanco, Citibank, Toronto Dominion Bank, ING, JP Morgan Chase, Santander and Banco Safra. The Company had derivatives agreements with the following financial institutions: Barclays, Citibank, Merril Lynch, Morgan Stanley, Deutsche Bank, Itaú-Unibanco, JP Morgan Chase, Santander, ScotiaBank, Société Générale, Banco Bisa, Banco de Crédito do Peru, BNB, BNP Paribas, Macquarie and TD Securities.

The carrying amount ​​of cash and cash equivalents, investment securities, trade and other receivables excluding prepaid expenses, taxes receivable and derivative financial instruments are disclosed net of provisions for impairment and represents the maximum exposure of credit risk as of June 30, 2014. There was no concentration of credit risk with any counterparties as of June 30, 2014.

 

 

 

 
 

 

(c) Liquidity risk

 

The Company believes that cash flows from operating activities, cash and cash equivalents and short-term investments, together with the derivative instruments and access to loan facilities are sufficient to finance capital expenditures, financial liabilities and dividend payments in the future.

 

(d) Capital management

 

Ambev S.A. is continuously optimizing its capital structure targeting to maximize shareholder value while keeping the desired financial flexibility to execute the strategic projects. Besides the statutory minimum equity funding requirements that apply to the Company’s subsidiaries in the different countries, Ambev S.A. is not subject to any externally imposed capital requirements.  When analyzing its capital structure, the Company uses the same debt ratings and capital classifications as applied in the Company’s financial statements.

 

19.2) Financial instruments

 

(a) Financial instruments categories

 

Management of these financial instruments held by the Company is effected through operational strategies and internal controls to assure liquidity, profitability and transaction security. Financial instruments transactions are regularly reviewed for the effectiveness of the risk exposure that management intends to cover (foreign exchange, interest rate, etc.).

The table below shows all financial instruments recognized in the financial statements, segregated by category:

 

 

06/30/2014

 

Loans and receivables

Held for trading

Avaiable for sale

Financial assets/liabilities at fair value through profit or loss

Derivatives hedge

Financial liabilities through amortized cost

Total

Financial assets

              

Cash and cash equivalents

6,273,862

-

-

-

-

-

6,273,862

Investment securities

-

70,323

-

379,938

-

-

450,261

Trade and other receivables excluding prepaid expenses and taxes receivable

4,694,788

-

-

-

-

-

4,694,788

Financial instruments derivatives

-

-

-

582,146.0

209,075

-

791,221

Total

10,968,650

70,323

-

962,084

209,075

-

12,210,132

Financial liabilities

              

Trade and other payables excluding tax payables

-

-

-

2,459,236

-

8,561,623

11,020,859

Financial instruments derivatives

-

-

-

243,757

236,186

-

479,943

Interest-bearning loans and borrowings

-

-

-

-

-

2,656,733

2,656,733

Total

-

-

-

2,702,993

236,186

11,218,356

14,157,535

 

 
 

 

 

12/31/2013

 

Loans and receivables

Held for trading

Avaiable for sale

Financial assets/liabilities at fair value through profit or loss

Derivatives hedge

Financial liabilities through amortized cost

Total

Financial assets

              

Cash and cash equivalents

11,538,241

-

-

-

-

-

11,538,241

Investment securities

-

63,796

-

288,604

-

-

352,400

Trade and other receivables excluding prepaid expenses and taxes receivable

4,953,223

-

-

-

-

-

4,953,223

Financial instruments derivatives

-

-

-

249,993

361,311

-

611,304

Total

16,491,464

63,796

-

538,597

361,311

-

17,455,168

Financial liabilities

              

Trade and other payables excluding tax payables

-

-

-

2,520,747

-

10,623,075

13,143,822

Financial instruments derivatives

-

-

-

653,632

324,427

-

978,059

Interest-bearning loans and borrowings

-

-

-

-

-

2,905,845

2,905,845

Total

-

-

-

3,174,379

324,427

13,528,920

17,027,726

 

(b) Classification of financial instruments by type of fair value measurement

 

IFRS 13 Fair Value Measurement defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

 

Also pursuant to IFRS 13, financial instruments measured at fair value shall be classified within the following categories: 

 

Level 1 – quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date valuation;

 

Level 2 – inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and

 

 
 

 

 

Level 3 – unobservable inputs for the asset or liability.

 

 

06/30/2014

 

Level 1

Level 2

Level 3

Total

Financial assets

        

Financial asset at fair value through profit or loss

379,938

-

-

379,938

Derivatives assets at fair value through profit or loss

28,287

553,859

-

582,146

Derivatives - cash flow hedge

86,334

30,729

-

117,063

Derivatives - investment hedge

609

91,402

-

92,011

 

495,168

675,990

-

1,171,158

         

Financial liabilities

        

Financial liabilities at fair value through profit and loss (i)

-

-

2,459,236

2,459,236

Derivatives liabilities at fair value through profit or loss

12,227

231,530

-

243,757

Derivatives - cash flow hedge

146,310

63,363

-

209,673

Derivatives - fair value hedge

-

12,098

-

12,098

Derivatives - investment hedge

13,114

1,301

-

14,415

 

171,650

308,293

2,459,236

2,939,179

 

 

12/31/2013

 

Level 1

Level 2

Level 3

Total

Financial assets

        

Financial asset at fair value through profit or loss

288,604

-

-

288,604

Derivatives assets at fair value through profit or loss

62,269

187,722

-

249,991

Derivatives - cash flow hedge

154,318

131,132

-

285,450

Derivatives - investment hedge

698

75,165

-

75,863

 

505,889

394,019

-

899,908

         

Financial liabilities

        

Financial liabilities at fair value through profit and loss (i)

-

-

2,520,747

2,520,747

Derivatives liabilities at fair value through profit or loss

38,424

615,208

-

653,632

Derivatives - cash flow hedge

160,878

80,548

-

241,426

Derivatives - fair value hedge

-

17,446

-

17,446

Derivatives - investment hedge

31,010

34,545

-

65,555

 

230,312

747,747

2,520,747

3,498,806


(i) As part of the CNDacquisition agreement, a sell option  (“put”) was issued by the Company and a purchase option (“call”) was issued by E. León Jimenes S.A. (“ELJ”), which may result in an acquisition by the Company of the remaining shares of CND, for a value based on EBITDA multiples, being “put” exercisable annually until 2019 and the “call” in 2019. On June 30, 2014 the put option held by ELJ is valued at R$2,459,236 and the liability was recorded against equity in accordance with the IFRS 3 and categorized as “Level 3”. No value has been assigned to the call option held by the Company. The fair value of this consideration deferred was calculated by using standard valuation techniques (present value of the principal amount and future interest rates, discounted by the market rate). The criteria used are based on market information and from reliable sources and they are revaluated on an annual basis at the same moment that the Company applies the impairment test. The changes of this option are presented as follows:

 

Reconciliation of changes in the categorization of Level 3

 

Financial liabilities at December 31, 2013

2,520,747

Total income/loss in the period

(61,511)

Losses recognized in net income

151,184

Losses recognized in equity

(212,696)

Financial liabilities at June 30, 2014

2,459,236

 

 

 

 
 

 

(c) Fair value of financial liabilities measured at amortized cost

 

The Company’s liabilities, interest-bearing loans and borrowings, trade and other payables excluding tax payables, are recorded at amortized cost according to the effective rate method, plus indexation and foreign exchange gains/losses, based on closing indices for each period.

 

Had the Company recognized its financial liabilities measured at amortized at cost, at market value, it would have recorded an additional loss, before income tax and social contribution, of approximately R$(4,301) on June 30, 2014 (R$(11,593) on December, 31 2013), as presented below:

 

 

06/30/2014

  

12/31/2013

Financial liabilities

Book

Market

Difference

  

Book

Market

Difference

International financing (other currencies)

446.984

446.984

-

  

605.562

605.562

-

FINEP

86.459

86.459

-

  

86.415

86.415

-

BNDES/CCB

1.628.414

1.628.414

-

  

1.723.437

1.723.437

-

Bond 2017

286.084

290.385

(4.301)

  

279.032

290.625

(11.593)

Fiscal incentives

189.816

189.816

-

  

190.235

190.235

-

Finance leasing

18.976

18.976

-

  

21.164

21.164

-

Trade and other paylables

8.561.623

8.561.623

-

  

10.623.075

10.623.075

-

 

11.218.356

11.222.657

(4.301)

  

13.528.920

13.540.513

(11.593)

 

The criterion used to determine the market value of the debt securities was based on quotations of investment brokers, on quotations of banks which provide services to Ambev S.A. and on the secondary market value of bonds as of June 30, 2014, being approximately 96.80% for Bond 2017 (96.88% on December 31, 2013).  

 

(d) Derivate financial instruments

To meet its objectives, the Company and its subsidiaries use currency, interest, and commodity derivative instruments. Derivative instruments authorized by the Financial Risk Management Policy are futures contracts traded on exchanges, full deliverable forwards, non-deliverable forwards, swaps and options. At June 30, 2014, the Company and its subsidiaries had no target forward, swaps with currency verification or any other derivative operations representing a risk level above the nominal value of their contracts. The derivative operations are classified by strategies according to their purposes, as follows:

 

i) Cash flow hedge derivative instruments – The highly probable forecast transactions contracted in order to minimize the Company's exposure to fluctuations of exchange rates and prices of raw materials, investments, equipment and services to be procured, protected by cash flow hedges that shall occur at various different dates during the next fourteen months. Gains and losses classified as hedging reserve in equity are recognized in the income statement in the period or periods when the forecast and hedged transaction affects the income statement. This occurs in the period of up to fourteen months from the balance sheet date in accordance with the Company’s Financial Risk Management Policy.

 

 
 

 

ii) Fair value hedge derivative instruments – operations contracted with the purpose of mitigating the Company’s net indebtedness against foreign exchange and interest rate risk. Cash net positions and foreign currency debts are continually assessed for identification of new exposures.

 

The results of these operations, measured according to their fair value, are recognized in financial results.

 

iii) Net investment hedge derivative instruments – transactions entered into in order to minimize exposure of the exchange differences arising from translation of net investment in the Company's subsidiaries located abroad for translation account balance. The effective part of the hedge is allocated to equity and the ineffectiveness part is recorded directly in financial results.

 

iv) Derivatives measured at fair value though profit or loss – operations contracted with the purpose of protect the Company against fluctuations on income statement, but do not meet the hedge accounting requirements set out in IAS 39 Financial Instruments: Recognition and Measurement. They refer to derivative instruments contracted in order to minimize the volatility of income tax and social contribution related to the foreign exchange gains/losses on loan agreements between the Company and its subsidiaries abroad. Such derivatives are measured at fair value with gains and losses recognized on an accrual basis within income tax expense, on income statement.

 

 

 

 
 

 

As of June 30, 2014 the contracted amounts of these instruments and their respective fair values, as well as the cumulative effects in the period, are detailed in the table below:

 

 

Risk factor

Financial instruments

06/30/2014

Six-month period ended:
06/30/2014

  

Three-month period ended:
06/30/2014

Notional Value(i)

  

Fair Value

  

Gains/(Losses)(iii)

  

Gains/(Losses)(iii)

 

Asset

Liability

    

Foreign currency

Future contracts (ii)

4,172,333

  

23,373

(210)

  

(303,630)

  

(120,961)

Foreign currency

Option to acquire

-

  

-

-

  

(19,091)

  

(3,590)

Foreign currency

Non Deliverable Forwards

1,443,627

  

6,131

(38,313)

  

114,686

  

(6,192)

Foreign currency

Deliverable Forwards

624,561

  

9,124

(14,811)

  

2,537

  

(16,992)

Commodity

Future contracts (ii)

1,175,639

  

65,572

(138,414)

  

18,603

  

(117,310)

Commodity

Swaps

720,117

  

14,143

(17,925)

  

7,558

  

24,757

Cash flow hedge

8,136,277

  

118,343

(209,673)

  

(179,337)

  

(240,288)

Foreign currency

Future contracts (ii)

2,631,158

  

25,937

(11,266)

  

(131,406)

  

1,800

Foreign currency

Option to acquire

-

  

-

-

  

(22,044)

  

(1,695)

Foreign currency

Swaps

251,986

  

8,011

(651)

  

-

  

-

Foreign currency

Non Deliverable Forwards

(1,199,991)

  

73,050

-

  

(166,423)

  

(36,118)

Interest rates

Future contracts (ii)

(570,000)

  

367

(169)

  

(1,691)

  

(1,018)

Interest rates

Swaps

397,393

  

5,117

(12,098)

  

6,552

  

6,598

Fair value hedge

1,510,546

  

112,482

(24,184)

  

(315,012)

  

(30,433)

Foreign currency

Future contracts (ii)

(2,321,880)

  

609

(13,114)

  

257,644

  

48,832

Foreign currency

Swaps / Non Deliverable Forwards

(1,018,426)

  

91,402

(1,301)

  

75,396

  

40,196

Net Investment hedge

(3,340,306)

  

92,011

(14,415)

  

333,040

  

89,028

Foreign currency

Future contracts (ii)

32,795

  

703

(792)

  

23,636

  

31,117

Foreign currency

Swaps / Non Deliverable Forwards

(4,272,682)

  

467,681

(230,879)

  

97,492

  

28,102

Derivatives at fair value through profit or loss

(4,239,887)

  

468,384

(231,671)

  

121,128

  

59,219

Total Derivatives

2,066,630

  

791,220

(479,943)

  

(40,181)

  

(122,474)

 

 

 

 
 

 

 

Risk factor

Financial instruments

12/31/2013

Six-month period ended:
06/30/2013

  

Three-month period ended:
06/30/2013

Notional Value (i)

  

Fair Value

  

Gains/(Losses)(iii)

  

Gains/(Losses)(iii)

 

Asset

Liability

    

Foreign currency

Future contracts (ii)

3,406,401

  

26,918

(694)

  

120,715

  

170,471

Foreign currency

Option to acquire

972,179

  

119,131

-

  

42,842

  

42,842

Foreign currency

Non Deliverable Forwards

1,081,099

  

96,164

(3,747)

  

148,203

  

112,442

Foreign currency

Deliverable Forwards

540,173

  

19,048

1,395

  

7,744

  

8,062

Commodity

Future contracts (ii)

1,051,513

  

14,033

(161,061)

  

(140,628)

  

(61,995)

Commodity

Swaps

903,724

  

15,186

(79,823)

  

(112,928)

  

(56,057)

Cash flow hedge

7,955,090

  

290,480

(243,930)

  

65,948

  

215,765

Foreign currency

Future contracts (ii)

2,958,378

  

33,909

(13,781)

  

90,799

  

106,874

Foreign currency

Option to acquire

-

  

-

-

  

(7,601)

  

(7,601)

Foreign currency

Swaps

251,986

  

643

(25,926)

  

(6,385)

  

(2,706)

Foreign currency

Non Deliverable Forwards

(1,276,967)

  

587

(45,950)

  

(37,326)

  

(27,522)

Foreign currency

Deliverable Forwards

-

  

-

-

  

(10,703)

  

(10,703)

Interest rates

Future contracts (ii)

(350,000)

  

477

(646)

  

(5,761)

  

8,328

Interest rates

Swaps

300,000

  

-

(17,449)

  

(22,046)

  

(13,734)

Fair value hedge

1,883,397

  

35,616

(103,752)

  

977

  

52,936

Foreign currency

Future contracts (ii)

(4,141,365)

  

698

(31,010)

  

(41,582)

  

(73,766)

Foreign currency

Swaps / Non Deliverable Forwards

931,394

  

75,165

(34,545)

  

(103,260)

  

(40,474)

Net Investment hedge

(3,209,971)

  

75,863

(65,555)

  

(144,842)

  

(114,240)

Foreign currency

Future contracts (ii)

(52,591)

  

22,853

(23,543)

  

(154,899)

  

(209,262)

Foreign currency

Swaps / Non Deliverable Forwards

(4,206,697)

  

186,492

(541,279)

  

(32,944)

  

(32,944)

Derivatives at fair value through profit or loss

(4,259,288)

  

209,345

(564,822)

  

(187,843)

  

(242,206)

Total Derivatives

2,369,228

  

611,304

(978,059)

  

(265,760)

  

(87,745)

 

(i) The positive positions refer to long positions and the negative positions refer to short positions.

 

(ii) The future contracts are traded on organized futures exchanges, while other derivative financial instruments are negotiated directly with financial institutions.

 

(iii) The result of R$(179,337) (R$(65,948) as of June 30, 2013) related to cash flow hedge was recognized in equity (hedge reserves) as the result of net investment hedge in an amount of R$333,040 (R$(144,842) as of June 30, 2013) which was allocated as income (losses) on translation of subsidiaries operations as presented in Other comprehensive income.

 

The result of the fair value hedges of R$(315,012) (R$977 as of June 30, 2013), as the result of derivatives measured at fair value though profit or loss, in the amount of R$121,128 (R$(187,843) as of June 30, 2013) were recognized in income statement.

 

 

 
 

 

As of June 30, 2014 the Notional and Fair Value amounts per instrument/ maturity were as follows:

 

Purpose / Risk / Instruments

Notional

   

2014

2015

2016

2017

Total

             

Foreign currency

Future contracts (i)

4,172,333

-

-

-

4,172,333

Foreign currency

Option to acquire

-

-

-

-

-

Foreign currency

Non Deliverable Forwards

862,282

581,345

-

-

1,443,627

Foreign currency

Deliverable Forwards

269,586

354,975

-

-

624,561

Commodity

Future contracts (i)

773,812

401,827

-

-

1,175,639

Commodity

Swaps

409,079

311,038

-

-

720,117

Cash flow hedge

  

6,487,092

1,649,185

-

-

8,136,277

Foreign currency

Future contracts (i)

2,631,158

-

-

-

2,631,158

Foreign currency

Swaps

-

251,986

-

-

251,986

Foreign currency

Non Deliverable Forwards

(1,199,991)

-

-

-

(1,199,991)

Interest rates

Future contracts (i)

-

(100,000)

(370,000)

(100,000)

(570,000)

Interest rates

Swaps

-

-

-

397,393

397,393

Fair value hedge

  

1,431,167

151,986

(370,000)

297,393

1,510,546

Foreign currency

Future contracts (i)

(2,321,880)

-

-

-

(2,321,880)

Foreign currency

Non Deliverable Forwards

(1,018,426)

-

-

-

(1,018,426)

Net Investment hedge

(3,340,306)

-

-

-

(3,340,306)

Foreign currency

Future contracts (i)

32,795

-

-

-

32,795

Foreign currency

Swaps / Non Deliverable Forwards

(4,272,682)

-

-

-

(4,272,682)

Derivatives at fair value through profit or loss

(4,239,887)

-

-

-

(4,239,887)

Total Derivatives

  

338,066

1,801,171

(370,000)

297,393

2,066,630

 

(i)       The positive positions refer to long positions and the negative positions refer to short positions.

 

Purpose / Risk / Instruments

Fair Value

   

2014

2015

2016

2017

Total

             

Foreign currency

Future contracts (i)

23,163

-

-

-

23,163

Foreign currency

Option to acquire

-

-

-

-

-

Foreign currency

Non Deliverable Forwards

(14,701)

(17,481)

-

-

(32,182)

Foreign currency

Deliverable Forwards

6,459

(12,146)

-

-

(5,687)

Commodity

Future contracts (i)

(77,967)

5,125

-

-

(72,842)

Commodity

Swaps

(10,437)

6,655

-

-

(3,782)

Cash flow hedge

  

(73,483)

(17,847)

-

-

(91,330)

Foreign currency

Future contracts (i)

14,671

-

-

-

14,671

Foreign currency

Swaps

-

7,360

-

-

7,360

Foreign currency

Non Deliverable Forwards

73,050

-

-

-

73,050

Interest rates

Future contracts (i)

-

(9)

141

66

198

Interest rates

Swaps

-

-

-

(6,981)

(6,981)

Fair value hedge

  

87,721

7,351

141

(6,915)

88,298

Foreign currency

Future contracts (i)

(12,505)

-

-

-

(12,505)

Foreign currency

Non Deliverable Forwards

90,101

-

-

-

90,101

Net Investment hedge

77,596

-

-

-

77,596

Foreign currency

Future contracts (i)

(89)

-

-

-

(89)

Foreign currency

Swaps / Non Deliverable Forwards

236,802

-

-

-

236,802

Derivatives at fair value through profit or loss

236,713

-

-

-

236,713

Total Derivatives

  

328,547

(10,496)

141

(6,915)

311,277

 

  

 

 

 
 

 

Sensitivity analysis

 

The Company mitigates risks arising from non-derivative financial assets and liabilities substantially, through derivative instruments. In this context, the Company has identified the main risk factors that may generate losses from these derivative financial instruments and has developed a sensitivity analysis based on three scenarios, which may impact the Company’s future results, as described below:

 

1 – Base scenario: stable foreign exchange rate, interest rates and commodity prices at the same levels observed on June 30, 2014.

 

2 – Probable scenario: Management expectations of deterioration in each transaction’s main risk factor. To measure the possible effects on the results of derivative transactions, the Company uses parametric Value at Risk – VaR. is a statistical measure developed through estimates of standard deviation and correlation between the returns of several risk factors. This model results in the loss limit expected for an asset over a certain time period and confidence interval. Under this methodology, we used the potential exposure of each financial instrument, a range of 95% and horizon of 21 days for the calculation, which are presented in the module.

 

3 – Adverse scenario: 25% deterioration in each transaction’s main risk factor as compared to the level observed on June 30, 2014.

 

4 – Remote scenario: 50% deterioration in each transaction’s main risk factor as compared to the level observed on June 30, 2014.  

 

Risk factor

Financial instruments

Base scenario

Probable scenario

Adverse scenario

Remote
scenario

Foreign currency decrease

Future contracts

23,163

(323,822)

(1,019,920)

(2,063,003)

Foreign currency decrease

Option to acquire

-

-

-

-

Foreign currency decrease

Non Deliverable Forwards

(32,182)

(94,230)

(393,088)

(753,995)

Foreign currency decrease

Deliverable Forwards

(5,687)

(21,296)

(148,520)

(291,353)

Commodity decrease

Future contracts

(72,842)

(175,006)

(366,752)

(660,661)

Commodity decrease

Swaps

(3,782)

(67,965)

(183,812)

(363,841)

Cash flow hedge

  

(91,330)

(682,319)

(2,112,092)

(4,132,853)

Foreign currency decrease

Future contracts

14,671

(204,301)

(643,119)

(1,300,909)

Dollar decrease

Swaps

7,360

(19,516)

(55,637)

(118,633)

Dollar and Euro decrease

Non Deliverable Forwards

73,050

(93,317)

(373,048)

(673,046)

Increase in tax interest

Future contracts

198

-

148

102

Increase in tax interest

Swaps

(6,981)

(23,235)

(21,076)

(38,373)

Fair value hedge

  

88,298

(340,369)

(1,092,732)

(2,130,859)

Foreign currency increase

Future contracts

(12,505)

(179,824)

(567,965)

(1,148,435)

Foreign currency increase

Non Deliverable Forwards

90,101

(120,341)

(344,707)

(599,314)

Net Investment hedge

  

77,596

(300,165)

(912,672)

(1,747,749)

Foreign currency increase

Future contracts

(89)

(2,666)

(8,289)

(16,487)

Foreign currency increase

Swaps / Non Deliverable Forwards

236,802

(356,437)

(1,304,973)

(2,373,144)

Derivatives at fair value through profit or loss

236,713

(359,103)

(1,313,262)

(2,389,631)

 

 

 

 
 

 

 

Transaction

Risk

Base scenario

Probable scenario

Adverse scenario

Remote
scenario

Foreign exchange hedge

Dollar and Euro decrease

(7,437)

(418,044)

(1,487,516)

(2,967,597)

Input purchase

7,437

418,044

1,487,516

2,967,597

Commodities hedge

Decrease on commodities price

(76,624)

(242,971)

(550,564)

(1,024,502)

Input purchase

76,624

242,971

550,564

1,024,502

Foreign exchange hedge

Dollar and Euro decrease

(7,269)

(21,304)

(74,012)

(140,754)

Capex purchase

7,269

21,304

74,012

140,754

Cash flow hedge

  

(91,330)

(682,319)

(2,112,092)

(4,132,853)

Operational purchase

  

91,330

682,319

2,112,092

4,132,853

Net effect

  

-

-

-

-

           

Foreign exchange hedge

Foreign currency increase

95,081

(317,134)

(1,071,804)

(2,092,588)

Net debt

(95,081)

309,450

991,499

1,931,978

Interest rate hedge

Increase in tax interest

(6,783)

(23,235)

(20,928)

(38,271)

Interest expense

6,783

23,235

20,928

38,271

Fair value hedge

  

88,298

(340,369)

(1,092,732)

(2,130,859)

Net debt and interest

  

(88,298)

332,685

1,012,427

1,970,249

Net effect

  

-

(7,684)

(80,305)

(160,610)

           

Investment hedge

Dollar increase

77,596

(300,165)

(912,672)

(1,747,749)

Fiscal expense

(77,596)

300,165

912,672

1,747,749

Net Investment hedge

  

77,596

(300,165)

(912,672)

(1,747,749)

Fiscal expense

  

(77,596)

300,165

912,672

1,747,749

Net effect

  

-

-

-

-

           

Foreign exchange hedge

Dollar increase

236,713

(359,103)

(1,313,262)

(2,389,631)

Fiscal expense

(236,713)

359,103

1,313,262

2,389,631

Derivatives at fair value through profit or loss

236,713

(359,103)

(1,313,262)

(2,389,631)

Fiscal expense

  

(236,713)

359,103

1,313,262

2,389,631

Net effect

  

-

-

-

-

 

 Calculation of fair value of derivatives

The Company measures derivative financial instruments by calculating their present value, through the use of market curves that impact the instrument on the computation dates. In the case of swaps, both the asset and the liability positions are estimated independently and brought to present value, where the difference between the result of the asset and liability amount generates the swaps market value. For the traded derivative financial instruments, the fair value is calculated according to the adjusted exchange-listed price.

 

Margins given in guarantee

 

In order to comply with the guarantee requirements of the derivative exchanges and/or counterparties in certain operations with derivative instruments, as of June 30, 2014 the Company held R$698,418 in investments securities or cash investments available on demand, classified as cash and cash equivalents (R$647,847 on December 31, 2013).

 

 

 

 
 

 

Offsetting financial assets and liabilities

 

The following financial assets and liabilities are subject to offsetting, enforceable master netting agreements and similar agreements:

 

 

06/30/2014

 

Amounts offset

  

Amounts not offset

 

Assets

Liabilities

Net amounts presented

  

Financial instruments

Cash collateral

Net

Derivatives assets

775,605

-

775,604

  

(287,664)

-

487,940

Derivatives liabilities

-

(447,018)

(447,014)

  

287,664

46,500

(112,850)

Total Derivatives

775,605

(447,018)

328,590

  

-

46,500

375,090

 

 

12/31/2013

 

Amounts offset

  

Amounts not offset

 

Assets

Liabilities

Net amounts presented

  

Financial instruments

Cash collateral

Net

Derivatives assets

611,304

-

611,304

  

(314,782)

-

296,522

Derivatives liabilities

-

(978,059)

(978,059)

  

314,782

49,443

(613,834)

Total Derivatives

611,304

(978,059)

(366,755)

  

-

49,443

(317,312)

 

For the financial assets and liabilities subject to enforceable master netting agreements or similar agreements above, each agreement between the Company and the counterparty allows for net settlement of the relevant financial assets and liabilities when both elect to settle on a net basis. In the absence of such election, financial assets and liabilities will be settled on a gross basis, however, each party to the master net agreement will have the option to settle all such amounts on a net basis in the event of default of the other part.

 

20. COLLATERAL AND CONTRACTUAL COMMITMENTS WITH SUPLLIERS, ADVANCES FROM CUSTOMERS AND OTHER

 

06/30/2014

12/31/2013

Collateral given for own liabilities

1,272,705

1,193,932

Other commitments

433,551

447,246

 

1,706,256

1,641,178

     

Commitments with suppliers

10,034,758

11,918,718

Commitments - Bond 2017

300,000

300,000

 

10,334,758

12,218,718

 

As of on June 30, 2014 the collateral provided for liabilities totaled approximately R$1,706,256, including R$574,494 of cash guarantees. To meet the guarantees required by derivative exchanges and/or counterparties contracted in certain derivative financial instrument transactions, Ambev S.A. maintained as at June 30, 2014, R$698,418 in highly liquid financial investments or in cash (Note 19).

Most of the balance relates to commitments with suppliers of packaging.

 

 
 

 

The Company is guarantor of the Bond 2017.

Future contractual commitments as of June 30, 2014 and December 31, 2013 are as follows:

 

 

06/30/2014

12/31/2013

Less than 1 year

3,784,182

3,438,320

Between 1 and 2 years

2,376,804

2,379,406

More than 2 years

4,173,772

6,400,992

 

10,334,758

12,218,718

   

21. CONTINGENCIES

 

The Company has contingent liabilities arising from lawsuits in the normal course of its business.

Contingent liabilities with a probable likelihood of loss are fully recorded as liabilities (Note 11).

 

The Company also has lawsuits related to tax, civil and labor, for which the likelihood of loss classified by management as possible and for which there are no provisions. Estimates of amounts of possible losses are as follows:

 

 

06/30/2014

12/31/2013

     

PIS and COFINS

302,075

363,919

ICMS and IPI

4,305,602

3,807,350

IRPJ and CSLL

11,184,971

10,196,153

Labor

182,415

135,736

Civil

399,530

161,613

Others

1,488,671

1,386,559

 

17,863,263

16,051,330

 

 New lawsuits with a likelihood of possible loss

On March 4, 2014, the Company received two tax assessments related to Income Tax, which amount as of June 30, 2014 are R$491,476 and R$123,217, respectively. The object of these tax assessments is the disallowance of the income tax paid by overseas subsidiaries of the Company. The payments overseas were considered for the composition of a credit in Brazil regarding the year of 2009, as the legislation authorizes it, and after were the subject of compensation for payment of other federal taxes.

The Company filed a defense for the two cases and is awaiting decision.

There were no other changes in the other main processes with possible likelihood of loss classification as of June 30, 2014, compared to those presented in the financial statements as of December 31, 2013.

 

 

 
 

 

Contingent assets

According to IAS 37, contingent assets are not recorded, except when there are real guarantees or favorable legal decisions.

 

22. RELATED PARTIES

Policies and practices regarding the realization of transactions with related parties

The Company adopts corporate governance practices and those recommended and/or required by the applicable law.

Under the Company’s bylaws the Board of Directors is responsible for approving any transaction or agreements between the Company and/or any of its subsidiaries, directors and/or shareholders (including shareholders, direct or indirect shareholders of the Company). The Compliance Committee of the Company is required to advise the Board of Directors of the Company in matters related to transactions with related parties.

Management is prohibited from interfering in any transaction in which conflict exists, even in theory, with the Company interests. It is also not permitted to interfere in decisions of any other management member, requiring documentation in the Minutes of Board’s Meeting any decision to abstain from the specific deliberation.

The Company’s guidelines with related parties follow reasonable or commutative terms, similar to those prevailing in the market or under which the Company would contract similar transactions with third parties. These are clearly disclosed in the financial statements as reflected in written contracts.

Transactions with management members:

In addition to short-term benefits (primarily salaries), the management members are entitled to post-employment benefits, such as retirement benefits and health and dental care. Moreover, management members are entitled to participate in Stock Option Plan (Note 18).

Total expenses related to the Company’s management members in key functions are as follows:

 

Six-month period ended:

  

Three-month period ended:

 

06/30/2014

06/30/2013

  

06/30/2014

06/30/2013

           

Short-term benefits (i)

12,180

9,546

  

(2,860)

4,407

Share-based payments (ii)

15,255

19,615

  

7,226

10,937

Total key management remuneration

27,435

29,161

  

4,366

15,344

 

(i) These correspond substantially to salaries and profit sharing (including performance bonuses). 

 

(ii) These correspond to the compensation cost of stock options granted to management. These amounts exclude remuneration paid to members of the Fiscal Council. 

 

 

 
 

 

Excluding the abovementioned plan (Note 18) and the stock option plans, the Company no longer has any type of transaction with the Management members or pending balances receivable or payable in its balance sheet.

Transactions with the Company's shareholders:

a) Medical, dental and other benefits

The Fundação Zerrenner is one of Ambev S.A.’s shareholders, and at June 30, 2014 held 9.62% of total share capital. Fundação Zerrenner is also an independent legal entity whose main goal is to provide Ambev S.A.’s employees, both active and retirees, with health care and dental assistance, technical and superior education courses, facilities for assisting elderly people, through direct initiatives or through financial assistance agreements with other entities. On June 30, 2014 and December 31, 2013, actuarial responsibilities related to the benefits provided directly by Fundação Zerrenner are fully funded by plan assets, held for that purpose, which significantly exceeds the liabilities at that date. Ambev S.A. recognizes the assets (prepaid expenses) of this plan to the extent of amounts from economic benefits available to the Company, arising from reimbursements or future contributions reduction.

The expenses incurred by Fundação Zerrenner in providing these benefits totaled R$93,661  in the period ended  June 30, 2014 (R$83,189 as of June 30, 2013), of which R$83,378  (R$73,790 as of June 30, 2013) related to active employees and R$10,283  (R$9,399 as of June 30, 2013) related to retirees.

b) Special Goodwill Reserve

 

As a result of the merger of InBev Holding Brazil S.A. by the Company in 2005, the Company benefits, each year, from the amortization of tax deductible goodwill pursuant to CVM Instruction 319/99. The balance of the special goodwill reserve as of June 30, 2014 was R$220,325  (R$313,872 as of December 31, 2013) which may be used for future capital increases.

c) Leasing – Ambev S.A. head office

Ambev S.A. has a leasing agreement of two commercial sets with Fundação Zerrenner, which is under negotiation between the parties, to determine the trade terms to be applied until the end of the contract on January 31, 2018.

 

d) Licensing agreement

 

The Company maintains a licensing agreement with Anheuser-Busch, Inc., to produce, bottle, sell and distribute Budweiser products in Brazil, Canada, Ecuador, Guatemala, Dominican Republic and Paraguay. In addition, the Company produces and distributes Stella Artois products under license to ABI in Brazil, Canada, Argentina, and other countries and, by means of a license granted to ABI, it also distributes Brahma’s product in parts of Europe, Asia and Africa. The amount recorded was R$748 (R$7,304 as of June 30, 2013) and R$134,887 (R$112,104 as of June 30, 2013) as licensing income and expense, respectively.

 

 
 

 

 

On October 29, 2013, the Company entered into an agreement with the company B2W - Companhia Digital S.A. to manage the platform of e-commerce company named “Partner Ambev”. The contract is for two years, and the object of it is to trade Ambev S.A. products through websites. Both parties have the same equity holders.


23. EVENTS AFTER THE BALANCE SHEET DATE

 

In the Board of Directors’ Meeting held on July 14, 2014, the members of the Company’s Board of Directors, (i) after verification of the subscription and payment by the shareholders of the Company of 21,919,490 newly issued Common shares, issued pursuant to the General Extraordinary Shareholders Meeting held on April 28, 2014, ratified the capital increase of R$352,685 and allocated  R$126 to the Gain on shares issued capital reserve; e (ii) approved,  the distribution of (a) dividends to be deducted from the results of the 2014 fiscal year and attributed to the minimum mandatory dividends for the same year, in the amount of R$ 0.06 for each share of the Company. The distribution of dividends will be made without withholding income tax, pursuant to applicable law; and (b) interest on own capital (“IOC”) to be deducted from the results of the 2014 fiscal year and attributed to the minimum mandatory dividends for the same year of R$0.10 per share of the Company. The distribution of IOC shall be taxed pursuant to applicable law, which shall result in a net distribution of IOC of R$ 0.085 per share of the Company.

The aforementioned payments shall be made as from August 28, 2014, (ad referendum of the Annual Shareholders’ Meeting), considering the shareholding on and including July 28, 2014, with respect to BM&FBovespa, and July 31, 2014, with respect to the New York Stock Exchange, without any monetary adjustment.

 
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.
 
Date: August 14, 2014
     
 
AMBEV S.A.
     
 
By: 
/s/ Nelson José Jamel
 
Nelson Jose Jamel
Chief Financial and Investor Relations Officer