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19. LEASING TRANSACTIONS | 12 Months Ended
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Dec. 31, 2020
Leasing Transactions |
LEASING TRANSACTIONS |
19. | LEASING TRANSACTIONS
The Company recognized a right to use and a lease liability for the following contracts which contain a lease in accordance with IFRS 16:
| • | Leasing of commercial real estate used for serving customers;
| • | Leasing of buildings used as administrative headquarters;
| • | Leasing of commercial vehicles used in operations.
The Company has elected to use the recognition exemptions for lease contracts that, at the commencement date, have a lease term of 12 months or less and do not contain a purchase option (short-term leases), and lease contracts for which the underlying asset is of low value (low-value assets). Thus, these leasing agreements are recognized as an expense in the income statement on the straight-line basis, over the period of the leasing. Their effects on net income from January to December 2020 were immaterial. The discount rates were obtained by reference to the Company’s incremental borrowing rate, based on the debts contracted by the Company and through quotations with potential financial institutions and reflect the Company’s credit risk and the market conditions at the lease agreement date, as follows:
Marginal rate |  | Annual rate (%) |  | Monthly rate (%)
Initial application |  |  |  |
Up to two years |  |  | 7.96 |  |  |  | 0.64 |
Three to five years |  |  | 10.64 |  |  |  | 0.85 |
Six to twenty years |  |  | 13.17 |  |  |  | 1.04 |
Contracts entered – 2019 and 2020 |  |  |  |  |  |  |  |
Up to three years |  |  | 6.87 |  |  |  | 0.56 |
Three to four years |  |  | 7.33 |  |  |  | 0.59 |
Four to twenty years |  |  | 8.08 |  |  |  | 0.65 |
a) | Right-of-use assets
The right-of-use assets were valued at cost, corresponding to the amount of the initial measurement of the lease liabilities, adjusted by its remeasurements, and amortized on a straight-line basis over the shorter of the lease term and the estimated useful lives of the assets. Changes in the right-of-use assets are as follows:
|  | Real estate property |  | Vehicles |  | Total
Balances at December 31, 2018 |  | - |  | - |  | -
Adoption on January 1, 2019 |  |  | 238 |  |  |  | 104 |  |  |  | 342 |
Disposals (contracts terminated) |  |  |  |  |  |  |  |  |  |  |  |
Addition |  |  | 28 |  |  |  | 4 |  |  |  | 32 |
Disposals (contracts terminated) |  |  | (13 | ) |  |  | — |  |  |  | (13 | )
Amortization (1) |  |  | (37 | ) |  |  | (39 | ) |  |  | (76 | )
Remeasurement (2) |  |  | (10 | ) |  |  | 2 |  |  |  | (8 | )
Balances at December 31, 2019 |  |  | 206 |  |  |  | 71 |  |  |  | 277 |
Disposals (contracts terminated) |  |  | (9 | ) |  |  | — |  |  |  | (9 | )
Amortization (1) |  |  | (25 | ) |  |  | (40 | ) |  |  | (65 | )
Addition |  |  | 6 |  |  |  | — |  |  |  | 6 |
Remeasurement (2) |  |  | 7 |  |  |  | (4 | ) |  |  | 3 |
Balances at December 31, 2020 |  |  | 185 |  |  |  | 27 |  |  |  | 212 |
(1) | Amortization of the right-of-use assets is recognized in the Income Statement is net of use of the credits of PIS, Pasep and Cofins taxes on leasing payments of R$2.
(2) | The Company has identified events giving rise to modifications of their principal contracts. When occurred, the lease liabilities adjustments are recognized in counterpart of the right-of-use assets.
b) | Lease liabilities
The liability for leasing agreements is measured at the present value of lease payments to be made over the lease term, discounted at the Company’s incremental borrowing rate. The liability carring amount is remeasured to reflect leases modifications as specified in IFRS 16. The changes in the lease liabilities are as follows:
|  | 2019
Balances at December 31, 2018 |  |
January 1, 2019 (1) |  |  | 342 |
Addition |  |  | 32 |
Disposals (contracts terminated) |  |  | (13 | )
Accrued interest (2) |  |  | 36 |
Payment of principal portion of lease liability |  |  | (96 | )
Payment of interest |  |  | (5 | )
Remeasurement (3) |  |  | (8 | )
Balances at December 31, 2019 |  |  | 288 |
Addition |  |  | 6 |
Disposals (contracts terminated) |  |  | (10 | )
Accrued interest (2) |  |  | 29 |
Payment of principal portion of lease liability |  |  | (84 | )
Payment of interest |  |  | (3 | )
Remeasurement (3) |  |  | 2 |
Balances at December 31, 2020 |  |  | 227 |
Current liabilities |  |  | 48 |
Non-current liabilities |  |  | 179 |
(1) | Financial expenses recognized in the income statement are net of PIS/Pasep and Cofins taxes credits on lease payments in the amounts of R$2 (R$2 on December 31, 2019).
(2) | The Company identified events that give rise to modifications of their principal contracts. When occurred, the lease liabilities adjustments are recognized in counterpart of the right-of-use assets.
The potential right to recovery of PIS/Pasep and Cofins taxes embedded in the leasing consideration, according to the periods specified for payment, is as follows:
Cash flow |  | Nominal |  | Adjusted to present value
Consideration for the leasing |  |  | 644 |  |  |  | 227 |
Potential PIS/Pasep and Cofins (9.25%) |  |  | 55 |  |  |  | 18 |
The cash flows of the contracts containing a lease are, in their majority, indexed to the IPCA inflation index on an annual basis. Below is an analysis of maturity of lease contracts:
| 2021 |  |  |  | 56 |
| 2022 |  |  |  | 27 |
| 2023 |  |  |  | 26 |
| 2024 |  |  |  | 26 |
| 2025 |  |  |  | 26 |
| 2026 at 2045 |  |  |  | 483 |
| Undiscounted values |  |  |  | 644 |
| Embedded interest |  |  |  | (417 | )
| Lease liabilities |  |  |  | 227 |

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