EX-99.1 2 ex99112312017.htm EXHIBIT 99.1 Exhibit
Exhibit 99.1

Adecoagro S.A.
 
Consolidated Financial Statements as of December 31, 2017 and 2016 and for the years ended December 31, 2017, 2016 and 2015




Report of Independent Registered Public Accounting Firm
 
To the Shareholders of
Adecoagro S.A.
 
Opinion on the Financial Statements

We have audited the accompanying consolidated statement of financial position of Adecoagro S.A. and its subsidiaries as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, of changes in shareholders’ equity and of cash flows for each of the three years in the period ended December 31, 2017, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
 
 
Buenos Aires, Argentina.
 
 
March 13, 2018
 
 
 
 
 
/s/ PRICE WATERHOUSE & CO. S.R.L.
 
 
/s/                                      (Partner)
 
 
Jorge Frederico Zabaleta
 


We have served as the Company’s auditor since 2008.


F- 2


Legal information
 
Denomination: Adecoagro S.A.
 
Legal address: Vertigo Naos Building, 6, Rue Eugène Ruppert, L-2453, Luxembourg
 
Company activity: Agricultural and agro-industrial
Date of registration: June 11, 2010
Expiration of company charter: No term defined
Number of register (RCS Luxembourg): B153.681
Capital stock: 122,381,815 common shares (of which 4,643,396 are treasury shares)


F- 3


Adecoagro S.A.
Consolidated Statements of Income
for the years ended December 31, 2017, 2016 and 2015
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)
 
 
Note
2017
 
2016
 
2015
Sales of goods and services rendered
4
933,178

 
869,235

 
674,314

Cost of goods sold and services rendered
5
(766,727
)
 
(678,581
)
 
(557,786
)
Initial recognition and changes in fair value of biological assets and agricultural produce
15
63,220

 
125,456

 
54,528

Changes in net realizable value of agricultural produce after harvest
 
8,852

 
(5,841
)
 
14,691

Margin on manufacturing and agricultural activities before operating expenses
 
238,523

 
310,269

 
185,747

General and administrative expenses
6
(57,299
)
 
(50,750
)
 
(48,425
)
Selling expenses
6
(95,399
)
 
(80,673
)
 
(70,268
)
Other operating income, net
8
39,461

 
(8,297
)
 
31,066

Share of loss of joint venture
16
—

 
—

 
(2,685
)
Profit from operations
 
125,286

 
170,549

 
95,435

Finance income
9
11,744

 
7,957

 
9,150

Finance costs
9
(131,349
)
 
(165,380
)
 
(116,890
)
Financial results, net
9
(119,605
)
 
(157,423
)
 
(107,740
)
Profit / (Loss) before income tax
 
5,681

 
13,126

 
(12,305
)
Income tax benefit / (expense)
10
6,068

 
(9,387
)
 
7,954

Profit / (Loss) for the year
 
11,749

 
3,739

 
(4,351
)
 
 
 
 
 
 
 
Attributable to:
 
 

 
 

 
 

Equity holders of the parent
 
9,972

 
2,039

 
(5,593
)
Non-controlling interest
 
1,777

 
1,700

 
1,242

 
 
 
 
 
 
 
Earnings / (Loss) per share from operations attributable to the equity holders of the parent during the year:
 
 

 
 

 
 

Basic earnings per share
11
0.083

 
0.017

 
(0.046
)
Diluted earnings per share
11
0.082

 
0.017

 
(0.046
)
 

 

 

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

F- 4


Adecoagro S.A.
Consolidated Statements of Comprehensive Income
for the years ended December 31, 2017, 2016 and 2015
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)
 
 
2017
 
2016
 
2015
Profit / (Loss) for the year
11,749

 
3,739

 
(4,351
)
Other comprehensive income:
 
 
 
 
 

-  Items that may be reclassified subsequently to profit or loss:
 
 
 
 
 

Exchange differences on translating foreign operations
(15,264
)
 
39,496

 
(178,146
)
Cash flow hedge, net of tax (Note 2)
12,608

 
100,615

 
(94,851
)
Other comprehensive (loss) / income for the year
(2,656
)
 
140,111

 
(272,997
)
Total comprehensive income / (loss) for the year
9,093

 
143,850

 
(277,348
)
 
 
 
 
 
 
Attributable to:
 

 
 

 
 

Equity holders of the parent
8,399

 
143,603

 
(275,077
)
Non-controlling interest
694

 
247

 
(2,271
)
 

 


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

F- 5


Adecoagro S.A.
Consolidated Statements of Financial Position
as of December 31, 2017 and 2016
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)
 
Note
2017
 
2016
ASSETS
 
 

 
 

Non-Current Assets
 
 

 
 

Property, plant and equipment, net
12
820,931

 
802,608

Investment property
13
2,271

 
2,666

Intangible assets, net
14
17,192

 
17,252

Biological assets
15
11,276

 
8,516

Deferred income tax assets
10
43,437

 
38,586

Trade and other receivables, net
18
22,107

 
17,412

Other assets
 
535

 
566

Total Non-Current Assets
 
917,749

 
887,606

Current Assets
 
 

 
 

Biological assets
15
156,718

 
136,888

Inventories
19
108,919

 
111,754

Trade and other receivables, net
18
150,107

 
157,528

Derivative financial instruments
17
4,483

 
3,398

Other assets
 
30

 
24

Cash and cash equivalents
20
269,195

 
158,568

Total Current Assets
 
689,452

 
568,160

TOTAL ASSETS
 
1,607,201

 
1,455,766

SHAREHOLDERS EQUITY
 
 

 
 

Capital and reserves attributable to equity holders of the parent
 
 

 
 

Share capital
22
183,573

 
183,573

Share premium
22
908,934

 
937,250

Cumulative translation adjustment
 
(541,545
)
 
(527,364
)
Equity-settled compensation
 
17,852

 
17,218

Cash flow hedge
2
(24,691
)
 
(37,299
)
Treasury shares
 
(6,967
)
 
(1,859
)
Reserve from the sale of non-controlling interests in subsidiaries
21
41,574

 
41,574

Retained earnings
 
60,984

 
50,998

Equity attributable to equity holders of the parent
 
639,714

 
664,091

Non-controlling interest
 
5,417

 
7,582

TOTAL SHAREHOLDERS EQUITY
 
645,131

 
671,673

LIABILITIES
 
 

 
 

Non-Current Liabilities
 
 

 
 

Trade and other payables
25
827

 
1,427

Borrowings
26
663,060

 
430,304

Deferred income tax liabilities
10
10,457

 
14,689

Payroll and social liabilities
27
1,240

 
1,235

Derivatives financial instruments
17
—

 
662

Provisions for other liabilities
28
4,078

 
3,299

Total Non-Current Liabilities
 
679,662

 
451,616

Current Liabilities
 
 

 
 

Trade and other payables
25
98,423

 
92,158

Current income tax liabilities
 
503

 
1,387

Payroll and social liabilities
27
27,267

 
26,844

Borrowings
26
154,898

 
205,092

Derivative financial instruments
17
552

 
6,406

Provisions for other liabilities
28
765

 
590

Total Current Liabilities
 
282,408

 
332,477

TOTAL LIABILITIES
 
962,070

 
784,093

TOTAL SHAREHOLDERS EQUITY AND LIABILITIES
 
1,607,201

 
1,455,766

 


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

F- 6


Adecoagro S.A.
Consolidated Statements of Changes in Shareholders’ Equity
for the years ended December 31, 2017, 2016 and 2015
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)
 
 
Attributable to equity holders of the parent
 
 
 
Share capital
(Note 22)
Share
premium
(Note 22)
Cumulative
translation
adjustment
Equity-settled
compensation
Cash flow
hedge
(*)
Treasury
shares
Reserve
from the
sale of non-
controlling
interests in
subsidiaries
Retained
earnings
Subtotal
Non-
controlling
interest
Total
shareholders’
equity
Balance at January 1, 2015
183,573

933,044

(397,560
)
16,735

(43,064
)
(2,840
)
25,508

54,242

769,638

7,589

777,227

Loss for the year
—

—

—

—

—

—

—

(5,593
)
(5,593
)
1,242

(4,351
)
Other comprehensive income:
 

 

 

 

 

 

 

 

 
 
 
-    Items that may be reclassified subsequently to profit or loss:
 

 

 

 

 

 

 

 

 
 
 
Exchange differences on translating foreign operations
—

—

(174,637
)
—

—

—

—

—

(174,637
)
(3,509
)
(178,146
)
Cash flow hedge (*)
—

—

—

—

(94,847
)
—

—

—

(94,847
)
(4
)
(94,851
)
Other comprehensive income for the year
—

—

(174,637
)
—

(94,847
)
—

—

—

(269,484
)
(3,513
)
(272,997
)
Total comprehensive income for the year
—

—

(174,637
)
—

(94,847
)
—

—

(5,593
)
(275,077
)
(2,271
)
(277,348
)
 
 
 
 
 
 
 
 
 
 
 
 
Employee share options (Note 23)
 

 

 

 

 

 

 

 

 
 
 
- Exercised
—

1,786

—

(603
)
—

316

—

—

1,499

—

1,499

- Forfeited
—

—

—

(146
)
—

—

—

146

—

—

—

Restricted shares (Note 23):
 

 

 

 

 

 

 

 

 
 
 
- Value of employee services
—

—

—

4,396

—

—

—

—

4,396

—

4,396

- Vested
—

3,103

—

(3,751
)
—

648

—

—

—

—

—

Purchase of own shares (Note 22)
—

(259
)
—

—

—

(60
)
—

—

(319
)
—

(319
)
Sale of non-controlling interests in subsidiaries (Note 21)
—

—

3,881

—

—

—

16,066

—

19,947

2,017

21,964

Balance at December 31, 2015
183,573

937,674

(568,316
)
16,631

(137,911
)
(1,936
)
41,574

48,795

520,084

7,335

527,419

 
(*) Net of 49,106 of income tax.
 



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

F- 7


Adecoagro S.A.
Consolidated Statements of Changes in Shareholders’ Equity
for the years ended December 31, 2017, 2016 and 2015
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)
 
 
Attributable to equity holders of the parent
 
 
 
Share capital
(Note 22)
Share
premium
(Note 22)
Cumulative
translation
adjustment
Equity-settled
compensation
Cash flow
hedge
(*)
Treasury
shares
Reserve
from the
sale of non-
controlling
interests in
subsidiaries
Retained
earnings
Subtotal
Non-
controlling
interest
Total
shareholders’
equity
Balance at January 1, 2016
183,573

937,674

(568,316
)
16,631

(137,911
)
(1,936
)
41,574

48,795

520,084

7,335

527,419

Profit for the year
—

—

—

—

—

—

—

2,039

2,039

1,700

3,739

Other comprehensive income:
 

 

 

 

 

 

 

 

 
 
 
-    Items that may be reclassified subsequently to profit or loss:
 

 

 

 

 

 

 

 

 
 
 
Exchange differences on translating foreign operations
—

—

40,952

—

—

—

—

—

40,952

(1,456
)
39,496

Cash flow hedge (*)
—

—

—

—

100,612

—

—

—

100,612

3

100,615

Other comprehensive income for the year
—

—

40,952

—

100,612

—

—

—

141,564

(1,453
)
140,111

Total comprehensive income for the year
—

—

40,952

—

100,612

—

—

2,039

143,603

247

143,850

 
 
 
 
 
 
 
 
 
 
 
 
Employee share options (Note 23):
 

 

 

 

 

 

 

 

 
 
 
- Exercised
—

438

—

(140
)
—

82

—

—

380

—

380

- Forfeited
—

—

—

(164
)
—

—

—

164

—

—

—

Restricted shares (Note 23):
 

 

 

 

 

 

 

 

 
 
 
- Value of employee services
—

—

—

4,796

—

—

—

—

4,796

—

4,796

- Vested
—

3,225

—

(3,905
)
—

680

—

—

—

—

—

Purchase of own shares (Note 22)
—

(4,087
)
—

—

—

(685
)
—

—

(4,772
)
—

(4,772
)
Balance at December 31, 2016
183,573

937,250

(527,364
)
17,218

(37,299
)
(1,859
)
41,574

50,998

664,091

7,582

671,673

 
(*) Net of (52,282) of income tax.
 

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

F- 8


Adecoagro S.A.
Consolidated Statements of Changes in Shareholders’ Equity
for the years ended December 31, 2017, 2016 and 2015
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)
 
 
Attributable to equity holders of the parent
 
 
 
Share capital
(Note 22)
Share
premium
(Note 22)
Cumulative
translation
adjustment
Equity-settled
compensation
Cash flow
hedge
(*)
Treasury
shares
Reserve
from the
sale of non-
controlling
interests in
subsidiaries
Retained
earnings
Subtotal
Non-
controlling
interest
Total
shareholders’
equity
Balance at January 1, 2017
183,573

937,250

(527,364
)
17,218

(37,299
)
(1,859
)
41,574

50,998

664,091

7,582

671,673

Profit for the year
—

—

—

—

—

—

—

9,972

9,972

1,777

11,749

Other comprehensive income:
 

 

 

 

 

 

 

 



 


-    Items that may be reclassified subsequently to profit or loss:
 

 

 

 

 

 

 

 



 


Exchange differences on translating foreign operations
—

—

(14,181
)
—

—

—

—

—

(14,181
)
(1,083
)
(15,264
)
Cash flow hedge (*)
—

—

—

—

12,608

—

—

—

12,608

—

12,608

Other comprehensive income for the year
—

—

(14,181
)
—

12,608

—

—

—

(1,573
)
(1,083
)
(2,656
)
Total comprehensive income for the year
—

—

(14,181
)
—

12,608

—

—

9,972

8,399

694

9,093

 
 
 
 
 
 
 
 
 
 
 
 
Employee share options (Note 23):
 

 

 

 

 

 

 

 

 
 
 
- Exercised
—

50

—

(21
)
—

10

—

—

39

—

39

- Forfeited
—

—

—

(14
)
—

—

—

14

—

—

—

Restricted shares (Note 23):
 
 
 
 
 
 
 
 


 


- Value of employee services
—

—

—

5,552

—

—

—

—

5,552

—

5,552

- Vested
—

4,149

—

(4,883
)
—

734

—

—

—

—

—

Purchase of own shares (Note 22)
—

(32,515
)
—

—

—

(5,852
)
—

—

(38,367
)
—

(38,367
)
Dividends
—

—

—

—

—

—

—

—

—

(2,859
)
(2,859
)
Balance at December 31, 2017
183,573

908,934

(541,545
)
17,852

(24,691
)
(6,967
)
41,574

60,984

639,714

5,417

645,131

 
(*) Net of 8,715 of income tax.
 


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

F- 9


Adecoagro S.A.
Consolidated Statements of Cash Flows
for the years ended December 31, 2017, 2016 and 2015
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)
 
 
Note
2017
 
2016
 
2015
Cash flows from operating activities:
 
 

 
 

 
 

Profit / (Loss) for the year
 
11,749

 
3,739

 
(4,351
)
Adjustments for:
 
 
 
 
 
 

Income tax (benefit) / expense
10
(6,068
)
 
9,387

 
(7,954
)
Depreciation
12
150,071

 
126,799

 
103,816

Amortization
14
936

 
701

 
585

Gain from disposal of farmlands and other assets
8
—

 
—

 
(7,914
)
Loss/(Gain) from the disposal of other property items
8
986

 
1,255

 
(721
)
Equity settled share-based compensation granted
7
5,552

 
4,796

 
4,396

(Gain) / Loss from derivative financial instruments and forwards
8, 9
(38,679
)
 
21,745

 
(17,686
)
Interest and other financial expense, net
9
53,446

 
44,734

 
43,822

Initial recognition and changes in fair value of non harvested biological assets (unrealized)
3
(14,645
)
 
(9,811
)
 
(11,326
)
Changes in net realizable value of agricultural produce after harvest (unrealized)
3
(2,371
)
 
90

 
(4,406
)
Provision and allowances
 
825

 
341

 
(79
)
Share of loss from joint venture
16
—

 
—

 
2,685

Foreign exchange losses, net
9
38,708

 
19,062

 
23,423

Cash flow hedge – transfer from equity
9
20,758

 
85,214

 
32,700

Subtotal
 
221,268

 
308,052

 
156,990

Changes in operating assets and liabilities:
 
 

 
 

 
 

(Increase) in trade and other receivables
 
(9,476
)
 
(30,996
)
 
(2,300
)
(Increase) in inventories
 
(4,089
)
 
(22,301
)
 
(9,275
)
(Increase) in biological assets
 
(18,013
)
 
(23,677
)
 
(20,154
)
Decrease / (Increase) in other assets
 
2

 
83

 
(871
)
Decrease / (Increase) in derivative financial instruments
 
40,910

 
(17,892
)
 
25,880

Increase / (Decrease) in trade and other payables
 
6,555

 
39,054

 
(9,871
)
Increase in payroll and social security liabilities
 
1,953

 
3,052

 
4,996

Increase in provisions for other liabilities
 
855

 
1,175

 
21

Net cash generated from operating activities before taxes paid
 
239,965

 
256,550

 
145,416

Income tax paid
 
(2,860
)
 
(1,149
)
 
(230
)
Net cash generated from operating activities
 
237,105

 
255,401

 
145,186

 

 

 

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

F- 10


Adecoagro S.A.
Consolidated Statements of Cash Flows (Continued)
for the years ended December 31, 2017, 2016 and 2015
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)
 
 
Note
2017
 
2016
 
2015
Cash flows from investing activities:
 
 

 
 

 
 

Purchases of property, plant and equipment
12
(198,550
)
 
(132,392
)
 
(141,464
)
Purchase of cattle and non current biological assets
15
(1,694
)
 
(1,713
)
 
(306
)
Purchases of intangible assets
14
(2,141
)
 
(1,218
)
 
(1,203
)
Interest received
9
11,230

 
7,671

 
8,201

Proceeds from disposal of other property items
 
2,820

 
2,215

 
1,303

Proceeds from sale of farmland and other assets
21
—

 
—

 
12,610

Proceeds from disposal of subsidiaries
21
—

 
3,423

 
3,890

Loans to joint venture
 
—

 
—

 
(8,082
)
Net cash used in investing activities
 
(188,335
)
 
(122,014
)
 
(125,051
)
 
 
 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

 
 

Issuance of senior notes
26
495,678

 
—

 
—

Proceeds from long-term borrowings
26
232,433

 
167,385

 
299,343

Payments of long-term borrowings
26
(602,700
)
 
(277,913
)
 
(165,455
)
Proceeds from short-term borrowings
26
106,730

 
257,395

 
211,045

Payments of short-term borrowings
26
(64,787
)
 
(272,033
)
 
(208,309
)
Interest paid
 
(41,612
)
 
(48,400
)
 
(48,438
)
Prepayment related expenses
 
(6,080
)
 
—

 
—

Net proceeds from the sale of non-controlling interest in subsidiaries
21
—

 
—

 
21,964

Proceeds from equity settled shared-based compensation exercised
 
39

 
380

 
1,259

Payment of derivatives financial instruments
 
(9,476
)
 
(3,724
)
 
(18,676
)
Purchase of own shares
 
(38,367
)
 
(4,772
)
 
(320
)
Dividends paid to non-controlling interest
 
(1,664
)
 
—

 
—

Net cash generated/used from financing activities
 
70,194

 
(181,682
)
 
92,413

Net increase / (decrease) in cash and cash equivalents
 
118,964

 
(48,295
)
 
112,548

Cash and cash equivalents at beginning of year
20
158,568

 
198,894

 
113,795

Effect of exchange rate changes on cash and cash equivalents
 
(8,337
)
 
7,969

 
(27,449
)
Cash and cash equivalents at end of year
20
269,195

 
158,568

 
198,894

 

 

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

F- 11
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)



1.
General information

Adecoagro S.A. (the "Company" or "Adecoagro") is the Group’s ultimate parent company and is a société anonyme (stock corporation) organized under the laws of the Grand Duchy of Luxembourg. Adecoagro is a holding company primarily engaged through its operating subsidiaries in agricultural and agro-industrial activities. The Company and its operating subsidiaries are collectively referred to hereinafter as the "Group". These activities are carried out through three major lines of business, namely, Farming; Sugar, Ethanol and Energy and Land Transformation. Farming is further comprised of three reportable segments, which are described in detail in Note 3 to these consolidated financial statements.
 
Adecoagro is a Public Company listed in the New York Stock Exchange as a foreign registered company under the symbol of AGRO.
 
These consolidated financial statements have been approved for issue by the Board of Directors on March 13, 2018.
 
2.
Financial risk management

Risk management principles and processes
 
The Group’s activities are exposed to a variety of financial risks. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize the Group’s capital costs by using suitable means of financing and to manage and control the Group’s financial risks effectively. The Group uses financial instruments to hedge certain risk exposures.
 
The Group’s approach to the identification, assessment and mitigation of risk is carried out by a Risk and Commercial Committee, which focuses on timely and appropriate management of risk.
 
The principal financial risks are related to raw material price, end-product price, exchange rate, interest rate, liquidity and credit. This section provides a description of the principal risks and uncertainties that could have a material adverse effect on the Group’s strategy, performance, results of operations and financial condition. These risks do not appear in any particular order of potential materiality or probability of occurrence.
 
•
Exchange rate risk

The Group’s cash flows, statement of income and statement of financial position are presented in US dollars and may be affected by fluctuations in exchange rates. Currency risks as defined by IFRS 7 arise on account of monetary assets and liabilities being denominated in a currency that is not the functional currency.
 
A significant majority of the Group’s business activities is conducted in the respective functional currencies of the subsidiaries (primarily the Brazilian Reais and the Argentine Peso). However, the Group may transact in currencies other than the respective functional currencies, mainly the US dollars. As such, these subsidiaries may hold US dollar denominated monetary balances at each year-end as indicated in the tables below.
 
The Group’s net financial position exposure to the US dollar is managed on a case-by-case basis, partly by hedging certain expected cash flows with foreign exchange derivative contracts.
 

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

F- 12
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)

2.
Financial risk management (continued)

The following tables show the net monetary position of the respective subsidiaries within the Group categorized by functional currency. Non-US dollar amounts are presented in US dollars for purpose of these tables.
 
 
2017
 
Subsidiaries’ functional currency
Net monetary position
(Liability)/ Asset
Argentine
Peso
Brazilian
Reais
Uruguayan
Peso
US Dollar
Total
Argentine Peso
(21,958
)
—

—

—

(21,958
)
Brazilian Reais
—

(17,134
)
—

—

(17,134
)
US Dollar
(204,446
)
(461,966
)
20,451

124,125

(521,836
)
Uruguayan Peso
—

—

(1,101
)
—

(1,101
)
Total
(226,404
)
(479,100
)
19,350

124,125

(562,029
)
 
 
2016
 
Subsidiaries’ functional currency
Net monetary position
(Liability)/ Asset
Argentine
Peso
Brazilian
Reais
Uruguayan
Peso
US Dollar
Total
Argentine Peso
1,518

—

—

—

1,518

Brazilian Reais
—

(203,070
)
—

—

(203,070
)
US Dollar
(44,088
)
(307,088
)
(7,714
)
78,801

(280,089
)
Uruguayan Peso
—

—

(35
)
—

(35
)
Total
(42,570
)
(510,158
)
(7,749
)
78,801

(481,676
)
 
The Group’s analysis shown on the tables below is carried out based on the exposure of each functional currency subsidiary against the US dollar. The Group estimated that, other factors being constant, a hypothetical 10% appreciation/depreciation of the US dollar against the respective functional currencies for the years ended December 31, 2017 and 2016 would have decreased/increased the Group’s Profit before income tax for the year. A 10% depreciation of the US dollar against the functional currencies would have an equal and opposite effect on the income statement. A portion of this effect would have been recognized as other comprehensive income since a portion of the Company’s borrowings was used as cash flow hedge of the foreign exchange rate risk of a portion of its highly probable future sales in US dollars (see Hedge Accounting - Cash Flow Hedge below for details).
 
Functional currency
Net monetary position
Argentine
Peso
Brazilian
Reais
Uruguayan
Peso
Total
2017
US Dollar
(20,445
)
(46,197
)
2,045

(64,597
)
2016
US Dollar
(4,409
)
(30,709
)
(771
)
(35,889
)
 
The tables above only consider the effect of a hypothetical appreciation / depreciation of the US dollars on the Group’s net financial position. A hypothetical appreciation / depreciation of the US dollar against the functional currencies of the Group’s subsidiaries has historically had a positive / negative effect, respectively, on the fair value of the Group’s biological assets and the end prices of the Group’s agriculture produce, both of which are generally linked to the US dollar.
 
Hedge Accounting Cash Flow Hedge
 
Effective July 1, 2013, the Group formally documented and designated cash flow hedging relationships to hedge the foreign exchange rate risk of a portion of its highly probable future sales in US dollars using a portion of its borrowings denominated in US dollars, currency forwards and foreign currency floating-to-fixed interest rate swaps.
 

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

F- 13
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)

2.
Financial risk management (continued)

Principal amounts of long-term borrowings (non-derivative financial instruments) and notional values of foreign currency forward contracts (derivative financial instruments) were designated as hedging instruments. These instruments are exposed to Brazilian Reais/ US dollar foreign currency risks related to operations in Brazil and Argentine Peso/US Dollar in Argentina, respectively. As of December 31, 2017 and 2016, approximately 24.6% and 18.1%, respectively, of projected sales qualify as highly probable forecast transactions for hedge accounting purposes and were designated as hedged items.
 
The Group has prepared formal documentation in order to support the designation above, including an explanation of how the designation of the hedging relationship is aligned with the Group’s Risk Management Policy, identification of the hedging instrument, the hedged transactions, the nature of the risk being hedged and an analysis which demonstrates that the hedge is expected to be highly effective. The Group reassesses the prospective and retrospective effectiveness of the hedge on an ongoing basis comparing the foreign currency component of the carrying amount of the hedging instruments and of the highly probable future sales.
 
Under cash flow hedge accounting, effect of changes in foreign currency exchange rates on derivative and non-derivative hedging instruments not be immediately recognized in profit or loss, but be reclassified from equity to profit or loss in the periods when the future sales occur, thus allowing for a more appropriate presentation of the results for the period reflecting the strategy in the Group’s Risk Management Policy.
 
The Company expects that the cash flows will occur and affect profit or loss between 2018 and 2022.
 
For the year ended December 31, 2017, a total amount before income tax of US$ 530 gain (US$ 67,683 loss in 2016) was recognized in other comprehensive income and an amount of US$ 20,758 loss (US$ 85,214 loss in 2016) was reclassified from equity to profit or loss within “Financial results, net”.
 
•
Raw material price risk

Inflation in the costs of raw materials and goods and services from industry suppliers and manufacturers presents risks to project economics. A significant portion of the Group’s cost structure includes the cost of raw materials primarily seeds, fertilizers and agrochemicals, among others. Prices for these raw materials may vary significantly.
 
•
End-product price risk

Prices for commodities products have historically been cyclical, reflecting overall economic conditions and changes in capacity within the industry, which affect the profitability of entities engaged in the agribusiness industry. The Group combines different actions to minimize price risk. A percentage of crops are to be sold during and post harvest period. The Group manages minimum and maximum prices for each commodity as well as gross margin per each crop as to decide when and how to sell. End-product price risks are hedged if economically viable and possible by entering into forward contracts with major trading houses or by using derivative financial instruments, consisting mainly of crops and sugar future contracts, but also includes occasionally put and call options. A movement in end-product futures prices would result in a change in the fair value of the end product hedging contracts. These fair value changes, after taxes, are recorded in the statement of income.
 
Contract positions are designed to ensure that the Group would receive a defined minimum price for certain quantities of its production. The counterparties to these instruments generally are major financial institutions. In entering into these contracts, the Group has assumed the risk that might arise from the possible inability of counterparties to meet the terms of their contracts. The Group does not expect any material losses as a result of counterparty defaults. The Group is also obliged to pay margin deposits and premiums for these instruments. These estimates represent only the sensitivity of the financial instruments to market risk and not the Group exposure to end product price risks as a whole, since the crops and cattle products sales are not financial instruments within the scope of IFRS 7 disclosure requirements.
 
•
Liquidity risk

The Group is exposed to liquidity risks, including risks associated with refinancing borrowings as they mature, and that borrowing facilities are not available to meet cash requirements. Failure to manage liquidity risks could have a material impact on the Group’s cash flow and statement of financial position. 

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

F- 14
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)

2.
Financial risk management (continued)

Prudent liquidity risk management includes managing the profile of debt maturities and funding sources close oversight of cash flows projections, maintaining sufficient cash, and ensuring the availability of funding from an adequate amount of committed credit facilities and the ability to close out market positions. The Group's ability to fund its existing and prospective debt requirements is managed by maintaining diversified funding sources with adequate available funding lines from high quality lenders; and reaching to have long-term financial facilities. During 2017 the Company issued a 10 years Note, which improved the maturity of the borrowings (see Note 26).
 
As of December 31, 2017, cash and cash equivalents of the Group totaled U$S 269.2 million, which could be used for managing liquidity risk.
 
The tables below analyzes the Group’s non-derivative financial liabilities and derivative financial liabilities into relevant maturity groupings based on the remaining period at the statement of financial position to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows and as a result they do not reconcile to the amounts disclosed on the statement of financial position except for short-term payables when discounting is not applied.
 
At December 31, 2017
Less than
1 year
Between
1 and 2 years
Between 2
and 5 years
Over
5 Years
Total
Trade and other payables
85,239

557

49

221

86,066

Borrowings
197,975

96,867

56,486

797,226

1,148,554

Derivative financial instruments
552

—

—

—

552

Total
283,766

97,424

56,535

797,447

1,235,172

 
At December 31, 2016
Less than
1 year
Between
1 and 2 years
Between 2
and 5 years
Over
5 Years
Total
Trade and other payables
79,715

1,082

19

326

81,142

Borrowings
239,588

218,717

221,036

35,702

715,043

Derivative financial instruments
6,406

662

—

—

7,068

Total
325,709

220,461

221,055

36,028

803,253

 
•
Interest rate risk

The Group’s interest rate risk arises from long-term borrowings at floating rates, which expose the Group to cash flow interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk. The interest rate profile of the Group's borrowings is set out in Note 26.
 
The Group occasionally manages its cash flow interest rate risk exposure by using floating-to-fixed interest rate swaps. Such interest rate swaps have the economic effect of converting borrowings from floating rates to fixed rates.
 

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

F- 15
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)

2.
Financial risk management (continued)

The following tables show a breakdown of the Group’s fixed-rate and floating-rate borrowings per currency denomination and functional currency of the subsidiary issuing the loans (excluding finance leases). These analyses are performed after giving effect to interest rate swaps.

The analysis for the year ended December 31, 2017 and 2016 is as follows:

 
2017
 
Subsidiaries’ functional currency
Rate per currency denomination
Argentine
Peso
Brazilian
Reais
Uruguayan
Peso
US Dollar
Total
Fixed rate:
 

 

 

 
 

Argentine Peso
6,448

—

—

—

6,448

Brazilian Reais
—

96,951

—

—

96,951

US Dollar
68,963

34,675

10,010

504,004

617,652

Subtotal fixed-rate borrowings
75,411

131,626

10,010

504,004

721,051

Variable rate:
 

 

 

 


Brazilian Reais
—

27,668

—

—

27,668

US Dollar
49,599

19,535

—

—

69,134

Subtotal variable-rate borrowings
49,599

47,203

—

—

96,802

Total borrowings as per analysis
125,010

178,829

10,010

504,004

817,853

Finance leases
105

—

—

—

105

Total borrowings as per statement of financial position
125,115

178,829

10,010

504,004

817,958

  
 
2016
 
Subsidiaries’ functional currency
Rate per currency denomination
Argentine
Peso
Brazilian
Reais
Uruguayan
Peso
US Dollar
Total
Fixed rate:
 

 

 

 
 

Argentine Peso
1,005

—

—

—

1,005

Brazilian Reais
—

131,495

—

—

131,495

US Dollar
15,065

37,937

29,069

—

82,071

Subtotal fixed-rate borrowings
16,070

169,432

29,069

—

214,571

Variable rate:
 

 

 

 


Brazilian Reais
—

65,408

—

—

65,408

US Dollar
48,677

306,559

—

—

355,236

Subtotal variable-rate borrowings
48,677

371,967

—

—

420,644

Total borrowings as per analysis
64,747

541,399

29,069

—

635,215

Finance leases
181

—

—

—

181

Total borrowings as per statement of financial position
64,928

541,399

29,069

—

635,396

 
For the years ended December 31, 2017 and 2016, if interest rates on floating-rate borrowings had been 1% higher with all other variables held constant, the Group’s Profit before income tax for the years would have decreased as shown below. A 1% decrease in interest rates would have an equal and opposite effect on the income statement.

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

F- 16
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)

2.
Financial risk management (continued)

 
2017
 
Subsidiaries’ functional currency
Rate per currency denomination
Argentine
Peso
Brazilian
Reais
Uruguayan
Peso
US Dollar
Total
Variable rate:
 

 

 

 
 

Brazilian Reais
—

(277
)
—

—

(277
)
US Dollar
(496
)
(195
)
—

—

(691
)
Total effects on profit before income tax
(496
)
(472
)
—

—

(968
)
 
 
2016
 
Subsidiaries’ functional currency
Rate per currency denomination
Argentine
Peso
Brazilian
Reias
Uruguayan
Peso
US Dollar
Total
Variable rate:
 

 

 

 
 

Brazilian Reais
—

(654
)
—

—

(654
)
US Dollar
(487
)
(3,066
)
—

—

(3,553
)
Total effects on profit before income tax
(487
)
(3,720
)
—

—

(4,207
)
 
The sensitivity analysis has been determined assuming that the change in interest rates had occurred at the date of the statement of financial position and had been applied to the exposure to interest rate risk for financial instruments in existence at that date. The 100 basis point increase or decrease represents management's assessment of a reasonable possible change in those interest rates, which have the most impact on the Group, specifically the United States and Brazilian rates over the period until the next annual statement of financial position date.
 
•
Credit risk

The Group’s exposures to credit risk arise in certain agreements in relation to amounts owed for physical product sales, the use of derivative instruments, and the investment of surplus cash balances. The Group is also exposed to political and economic risk events, which may cause non-payment of foreign currency obligations to the Group.
 
The Group’s policy is to manage credit exposure to trading counterparties within defined trading limits. All of the Group’s significant counterparties are assigned internal credit limits.
 
The Group sells to a large base of customers. Type and class of customers may differ depending on the Group’s business segments. For the years ended December 31, 2017 and 2016, more than 97% and 95%, respectively, of the Group’s sales of crops were sold to 111 and 121 well-known customers (both multinational and local) with good credit history with the Group. In the Sugar, Ethanol and Energy segment, sales of ethanol were concentrated in 7 and 35 customers, which represented 100% and 96% of total sales of ethanol for the years ended December 31, 2017 and 2016, respectively. Approximately 87% and 71% of the Group’s sales of sugar were concentrated in 24 and 20 well-known traders for the years ended December 31, 2017 and 2016, respectively. The remaining 13% and 29%, which mainly relates to “crystal sugar”, were dispersed among several customers. In 2017 and 2016, energy sales are 99% and 96% concentrated in 32 major customers. In the dairy segment, 100% and 85% of the sales were concentrated in 29 and 14 well-known customers in 2017 and 2016, respectively.
 
No credit limits were exceeded during the reporting periods and management does not expect any losses from non-performance by these counterparties. If any of the Group’s customers are independently rated, these ratings are used. Otherwise, the Group assesses the credit quality of the customer taking into account its financial position, past experience and other factors (see Note 18 for details). The Group may seek cash collateral, letter of credit or parent company guarantees, as considered appropriate. Sales to customers are primarily made by credit with customary payment terms. The maximum exposure to credit risk is represented by the carrying amount of each financial asset in the statement of financial position after deducting any impairment allowance. The Group’s exposure of credit risk arising from trade receivables is set out in Note 18.

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

F- 17
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)

2.
Financial risk management (continued)

The Group is exposed to counterparty credit risk on cash and cash equivalent balances. The Group holds cash on deposit with a number of financial institutions. The Group manages its credit risk exposure by limiting individual deposits to clearly defined limits. The Group only deposits with high quality banks and financial institutions. As of December 31, 2017 and 2016, the total amount of cash and cash equivalents mainly comprise cash in banks and short-term bank deposits. The Group is authorized to transact with banks rated “BBB+” or higher. As of December 31, 2017 and 2016, 8 and 4 banks (primarily HSBC, Rabobank, Citibank and Banco do Brasil) accounted for more than 78% and 85%, respectively, of the total cash deposited. The remaining amount of cash and cash equivalents relates to cash in hand. Additionally, during the year ended December 31, 2017, the Group invested in fixed-term bank deposits with mainly two banks (Banco Itau and Santander) and also entered into derivative contracts (currency forward). The Group’s exposure of credit risk arising from cash and cash equivalents is set out in Note 20.
 
The Group’s primary objective for holding derivative financial instruments is to manage currency exchange rate risk, interest rate risk and commodity price risk. The Group generally enters into derivative transactions with high-credit-quality counterparties and, by policy, limits the amount of credit exposure to any one counterparty based on an analysis of that counterparty's relative credit standing. The amounts subject to credit risk related to derivative instruments are generally limited to the amounts, if any, by which counterparty's obligations exceed the obligations with that counterparty.
 
The Group arranged interest rate swaps with HSBC and Itau in Brazil. The Group also entered into crop commodity futures traded in the established trading markets of Argentina and Brazil through well-rated brokers. Management does not expect any counterparty to fail to meet its obligations.

•
Capital risk management

The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, it may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or by own shares or sell assets to reduce debt. Consistent with others in the industry, the Group monitors capital on the basis of the gearing ratio. This ratio is calculated as total debt (including current and non-current borrowings as shown in the consolidated statement of financial position, if applicable) divided by total capital. Total capital is calculated as equity, as shown in the consolidated statement of financial position, plus total debt. During the year ended December 31, 2017, the strategy was to maintain the gearing ratio within 0.45 to 0.60, as follows:
 
2017
 
2016
Total debt
817,958

 
635,396

Total equity
645,131

 
671,673

Total capital
1,463,089

 
1,307,069

Gearing ratio
0.56

 
0.49

 
•
Derivative financial instruments

As part of its business operations, the Group uses a variety of derivative financial instruments to manage its exposure to the financial risks discussed above. As part of this strategy, the Group may enter into derivatives of (i) interest rate to manage the composition of floating and fixed rate debt; (ii) currency to manage exchange rate risk, and (iii) crop (future contracts and put and call options) to manage its exposure to price volatility stemming from its integrated crop production activities. The Group’s policy is not to use derivatives for speculative purposes.
 
Derivative financial instruments involve, to a varying degree, elements of market and credit risk not recognized in the financial statements. The market risk associated with these instruments resulting from price movements is expected to offset the market risk of the underlying transactions, assets and liabilities, being hedged. The counterparties to the agreements relating to the Group’s contracts generally are large institutions with credit ratings equal to or higher than BBB+. The Group continually monitors the credit rating of such counterparties and seeks to limit its financial exposure to any one financial institution. While the contract or notional amounts of derivative financial instruments provide one measure of the volume of these transactions, they do not represent the amount of the Group’s exposure to credit risk. The amounts potentially subject to credit risk (arising from the possible inability of counterparties to meet the terms of their contracts) are generally limited to the amounts, if any, by which the counterparties’ obligations under the contracts exceed the Group’s obligations to the counterparties.

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

F- 18
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)

2.
Financial risk management (continued)

The following tables show the outstanding positions for each type of derivative contract as of the date of each statement of financial position:

▪
 Futures/ options

As of December 31, 2017:
 
 
2017
Type of
derivative contract
 
Quantities
(thousands)
(**)
 
Notional
amount
 
Fair
Value Asset/
(Liability)
 
(Loss)/Gain
(*)
Futures:
 
 

 
 

 
 

 
 

Sale
 
 

 
 

 
 

 
 

Corn
 
(33
)
 
(3,198
)
 
48

 
361

Soybean
 
83

 
19,195

 
670

 
(765
)
Wheat
 
(45
)
 
(7,083
)
 
(38
)
 
(38
)
Sugar
 
343,874

 
121,072

 
3,231

 
3,808

Options:
 
 

 
 

 
 

 
 

Sell put
 
 

 
 

 
 

 
 

Sugar
 
3,572

 
83

 
54

 
(30
)
Total
 
347,451

 
130,069

 
3,965

 
3,336

 
As of December 31, 2016:
 
 
2016
Type of
derivative contract
 
Quantities
(thousands)
(**)
 
Notional
amount
 
Fair
Value Asset/
(Liability)
 
(Loss)/Gain
(*)
Futures:
 
 

 
 

 
 

 
 

Sale
 
 

 
 

 
 

 
 

Corn
 
66

 
9,436

 
46

 
46

Soybean
 
120

 
42,330

 
(1,171
)
 
(1,170
)
Sugar
 
17,020

 
9,144

 
722

 
64

Ethanol
 
6,900

 
3,978

 
(40
)
 
(40
)
Options:
 
 

 
 

 
 

 
 

Buy put
 
 

 
 

 
 

 
 

Soybean
 
14

 
464

 
644

 
181

Sugar
 
70,510

 
(6,734
)
 
5,374

 
352

Sell call
 
 

 
 

 
 

 
 

Sugar
 
54,597

 
3,058

 
(3,219
)
 
(105
)
Sell put
 
 

 
 

 
 

 
 

Sugar
 
14,528

 
748

 
(763
)
 
(1,625
)
Total
 
163,755

 
62,424

 
1,593

 
(2,297
)
(*) Included in the line item “(Loss) / Gain from commodity derivative financial instruments” of Note 8.
(**) All quantities expressed in tons and m3.
Commodity future contract fair values are computed with reference to quoted market prices on future exchanges.

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

F- 19
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)

2.
Financial risk management (continued)


▪
Foreign currency floating-to-fixed interest rate swap

In July 2016 the Group's subsidiary in Brazil, Adecoagro Vale do Ivinhema entered into a Reais 90 million loan with Bradesco. The loan bears interest at a variable rate of CDI (an interbanking floating interest rate in USD) plus 2.1% per year. At same moment and with same bank, the Company entered into a swap operation, which intention is to effectively convert the  principal amount and interest rate denominated in Reais, to a principal amount an interest rate denominated in US$, plus a fixed rate of 6,55%. The swap expired on Sep 2017. As of expiration date, the group recognized a gain of US$ 3 included whitin "Financial Results, net.”

▪
Currency forward
 
During 2017 the Group did not entered into any currency forward contract in Brazil. During the year ended December 31, 2016 the Group entered into several currency forward contracts with Brazilian banks in order to hedge the fluctuation of the Brazilian Reais against the US Dollar for a total aggregate amount of US$ 57.2 million. The currency forward contracts entered in 2016 had maturity dates ranging between March 2016 and April 2017. These contracts resulted in a recognition of a loss of US$ 2.0 million and US$ 5.0 million in 2017 and 2016, respectively.

During the year ended on December 31, 2017, the Group entered into several currency forward contracts in order to hedge the fluctuation of the US Dollar against Euro for a total notional amount of US$ 10.5 million. The currency forward contracts maturity date is March 2017. The outstanding contracts resulted in the recognition of a gain amounting to US$ 0.1 million in 2017.
 
During the year ended on December 31, 2016, the Group entered into several currency forward contracts in order to hedge the fluctuation of the US Dollar against Euro for a total notional amount of US$ 10.7 million. The currency forward contracts maturity date is March 2017. The outstanding contracts resulted in the recognition of a gain amounting to US$ 0.6 million in 2016.
 
Gains and losses on currency forward contracts are included within “Financial results, net” in the statement of income.
 

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

F- 20
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)


3.
Segment information

According to IFRS 8, operating segments are identified based on the ‘management approach’. Operating segments are components of an entity about which separate financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing performance (the Management committee in the case of the Company). This classification is based on the differences in the nature of its operations, products and services. This approach stipulates external segment reporting based on the Group’s internal organizational and management structure and on internal financial reporting to the chief operating decision maker.
 
The Group operates in three major lines of business, namely, Farming; Sugar, Ethanol and Energy; and Land Transformation. The Coffee and Cattle businesses are presented within “Farming – All Other Segments” because they not meet the quantitive threshold for disclosure.
 
•
The Group’s ‘Farming’ is further comprised of five reportable segments:

▪
The Group’s ‘Crops’ Segment consists of planting, harvesting and sale of grains, oilseeds and fibers (including wheat, corn, soybeans, cotton and sunflowers, among others), and to a lesser extent the provision of grain warehousing/conditioning and handling and drying services to third parties. Each underlying crop in this segment does not represent a separate operating segment. Management seeks to maximize the use of the land through the cultivation of one or more type of crops. Types and surface amount of crops cultivated may vary from harvest year

to harvest year depending on several factors, some of them out of the Group´s control. Management is focused on the long-term performance of the productive land, and to that extent, the performance is assessed considering the aggregated combination, if any, of crops planted in the land. A single manager is responsible for the management of operating activity of all crops rather than for each individual crop.

▪
The Group’s ‘Rice’ Segment consists of planting, harvesting, processing and marketing of rice.

▪
The Group’s ‘Dairy’ Segment consists of the production and sale of raw milk and other dairy products.

▪
The Group’s ‘All Other Segments’ consists of the aggregation of the remaining non-reportable operating segments, which do not meet the quantitative thresholds for disclosure, namely, Coffee and Cattle.
 
•
The Group’s ‘Sugar, Ethanol and Energy’ Segment consists of cultivating sugarcane which is processed in owned sugar mills, transformed into ethanol, sugar and electricity and marketed;

•
The Group’s ‘Land Transformation’ Segment comprises the (i) identification and acquisition of underdeveloped and undermanaged farmland businesses; and (ii) realization of value through the strategic disposition of assets (generating profits).

The measurement principles for the Group’s segment reporting structure are based on the IFRS principles adopted in the consolidated financial statements.
 
The following table presents information with respect to the Group’s reportable segments. Certain other activities of a holding function nature not allocable to the segments are disclosed in the column ‘Corporate’.


 

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

F- 21
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)

3.
Segment information (continued)


Segment analysis for the year ended December 31, 2017
 
Farming
 
Sugar,
Ethanol and Energy
 
 Land Transformation
 
Corporate
 
 Total
 
Crops
 
Rice
 
Dairy
 
All other
segments
 
Farming
subtotal
 
 
 
 
Sales of goods and services rendered
197,222

 
86,478

 
37,523

 
1,336

 
322,559

 
610,619

 
—

 
—

 
933,178

Cost of goods sold and services rendered
(196,302
)
 
(71,087
)
 
(36,979
)
 
(853
)
 
(305,221
)
 
(461,506
)
 
—

 
—

 
(766,727
)
Initial recognition and changes in fair value of biological assets and agricultural produce
17,158

 
10,236

 
11,769

 
267

 
39,430

 
23,790

 
—

 
—

 
63,220

Changes in net realizable value of agricultural produce after harvest
8,852

 
—

 
—

 
—

 
8,852

 
—

 
—

 
—

 
8,852

Margin on manufacturing and agricultural activities before operating expenses
26,930

 
25,627

 
12,313

 
750

 
65,620

 
172,903

 
—

 
—

 
238,523

General and administrative expenses
(2,981
)
 
(4,699
)
 
(1,058
)
 
(174
)
 
(8,912
)
 
(26,806
)
 
—

 
(21,581
)
 
(57,299
)
Selling expenses
(7,501
)
 
(13,324
)
 
(711
)
 
(156
)
 
(21,692
)
 
(73,664
)
 
—

 
(43
)
 
(95,399
)
Other operating income, net
7,719

 
724

 
662

 
(23
)
 
9,082

 
30,419

 
—

 
(40
)
 
39,461

Share of loss of joint ventures
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Profit / (loss) from operations before financing and taxation
24,167

 
8,328

 
11,206

 
397

 
44,098

 
102,852

 
—

 
(21,664
)
 
125,286

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
(1,511
)
 
(3,851
)
 
(1,037
)
 
(159
)
 
(6,558
)
 
(144,449
)
 
—

 
—

 
(151,007
)
Initial recognition and changes in fair value of biological assets and agricultural produce (unrealized)
4,366

 
5,346

 
1,849

 
159

 
11,720

 
2,925

 
—

 
—

 
14,645

Initial recognition and changes in fair value of biological assets and agricultural produce (realized)
12,792

 
4,890

 
9,920

 
108

 
27,710

 
20,865

 
—

 
—

 
48,575

Changes in net realizable value of agricultural produce after harvest (unrealized)
2,371

 
—

 
—

 
—

 
2,371

 
—

 
—

 
—

 
2,371

Changes in net realizable value of agricultural produce after harvest (realized)
6,481

 
—

 
—

 
—

 
6,481

 
—

 
—

 
—

 
6,481

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Farmlands and farmland improvements, net
59,680

 
13,688

 
248

 
9,346

 
82,962

 
26,342

 
—

 
—

 
109,304

Machinery, equipment and other fixed assets, net
21,365

 
18,851

 
12,175

 
341

 
52,732

 
390,350

 
—

 
—

 
443,082

Bearer plants, net
252

 
—

 
—

 
1,832

 
2,084

 
236,826

 
—

 
—

 
238,910

Work in progress
714

 
1,940

 
5,659

 
—

 
8,313

 
21,322

 
—

 
—

 
29,635

Investment property
—

 
—

 
—

 
2,271

 
2,271

 
—

 
—

 
—

 
2,271

Goodwill
3,221

 
1,480

 
—

 
1,110

 
5,811

 
6,601

 
—

 
—

 
12,412

Biological assets
31,745

 
29,717

 
9,338

 
4,016

 
74,816

 
93,178

 
—

 
—

 
167,994

Finished goods
21,146

 
8,476

 
—

 
—

 
29,622

 
32,266

 
—

 
—

 
61,888

Raw materials, stocks held by third parties and others
17,958

 
9,927

 
1,726

 
364

 
29,975

 
17,056

 
—

 
—

 
47,031

Total segment assets
156,081

 
84,079

 
29,146

 
19,280

 
288,586

 
823,941

 
—

 
—

 
1,112,527

Borrowings
69,789

 
62,790

 
2,384

 
3,829

 
138,792

 
633,638

 
—

 
45,528

 
817,958

Total segment liabilities
69,789

 
62,790

 
2,384

 
3,829

 
138,792

 
633,638

 
—

 
45,528

 
817,958


 












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

F- 22
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)

3.
Segment information (continued)

Segment analysis for the year ended December 31, 2016
 
Farming
 
Sugar,
Ethanol and Energy
 
 Land Transformation
 
Corporate
 
 Total
 
Crops
 
Rice
 
Dairy
 
All other
segments
 
Farming
subtotal
 
 
 
 
Sales of goods and services rendered
142,124

 
96,562

 
32,897

 
960

 
272,543

 
596,692

 
—

 
—

 
869,235

Cost of goods sold and services rendered
(141,731
)
 
(83,574
)
 
(32,571
)
 
(212
)
 
(258,088
)
 
(420,493
)
 
—

 
—

 
(678,581
)
Initial recognition and changes in fair value of biological assets and agricultural produce
48,790

 
10,498

 
5,476

 
(13
)
 
64,751

 
60,705

 
—

 
—

 
125,456

Changes in net realizable value of agricultural produce after harvest
(5,841
)
 
—

 
—

 
—

 
(5,841
)
 
—

 
—

 
—

 
(5,841
)
Margin on manufacturing and agricultural activities before operating expenses
43,342

 
23,486

 
5,802

 
735

 
73,365

 
236,904

 
—

 
—

 
310,269

General and administrative expenses
(2,770
)
 
(3,373
)
 
(983
)
 
(290
)
 
(7,416
)
 
(22,648
)
 
—

 
(20,686
)
 
(50,750
)
Selling expenses
(5,692
)
 
(11,583
)
 
(752
)
 
(49
)
 
(18,076
)
 
(62,518
)
 
—

 
(79
)
 
(80,673
)
Other operating income, net
(8,787
)
 
402

 
686

 
8,497

 
798

 
(8,903
)
 
—

 
(192
)
 
(8,297
)
Share of loss of joint ventures
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Profit / (loss) from operations before financing and taxation
26,093

 
8,932

 
4,753

 
8,893

 
48,671

 
142,835

 
—

 
(20,957
)
 
170,549

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
(1,369
)
 
(2,766
)
 
(964
)
 
(192
)
 
(5,291
)
 
(122,209
)
 
—

 
—

 
(127,500
)
Initial recognition and changes in fair value of biological assets and agricultural produce (unrealized)
5,790

 
2,316

 
1,319

 
107

 
9,532

 
279

 
—

 
—

 
9,811

Initial recognition and changes in fair value of biological assets and agricultural produce (realized)
43,000

 
8,182

 
4,157

 
(120
)
 
55,219

 
60,426

 
—

 
—

 
115,645

Changes in net realizable value of agricultural produce after harvest (unrealized)
(90
)
 
—

 
—

 
—

 
(90
)
 
—

 
—

 
—

 
(90
)
Changes in net realizable value of agricultural produce after harvest (realized)
(5,751
)
 
—

 
—

 
—

 
(5,751
)
 
—

 
—

 
—

 
(5,751
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Farmlands and farmland improvements, net
68,224

 
18,868

 
168

 
5,504

 
92,764

 
26,734

 
—

 
—

 
119,498

Machinery, equipment and other fixed assets, net
3,892

 
14,949

 
7,449

 
467

 
26,757

 
418,543

 
—

 
—

 
445,300

Bearer plants, net
—

 
—

 
—

 
1,860

 
1,860

 
214,309

 
—

 
—

 
216,169

Work in progress
1,100

 
3,274

 
2,727

 
—

 
7,101

 
14,540

 
—

 
—

 
21,641

Investment property
—

 
—

 
—

 
2,666

 
2,666

 
—

 
—

 
—

 
2,666

Goodwill
3,782

 
1,737

 
—

 
1,186

 
6,705

 
6,700

 
—

 
—

 
13,405

Biological assets
28,189

 
25,575

 
6,827

 
2,433

 
63,024

 
82,380

 
—

 
—

 
145,404

Finished goods
13,415

 
5,474

 
—

 
—

 
18,889

 
49,302

 
—

 
—

 
68,191

Raw materials,Stocks held by third parties and others
16,147

 
6,628

 
2,060

 
—

 
24,835

 
18,728

 
—

 
—

 
43,563

Total segment assets
134,749

 
76,505

 
19,231

 
14,116

 
244,601

 
831,236

 
—

 
—

 
1,075,837

Borrowings
43,878

 
47,156

 
616

 
10,449

 
102,099

 
533,297

 
—

 
—

 
635,396

Total segment liabilities
43,878

 
47,156

 
616

 
10,449

 
102,099

 
533,297

 
—

 
—

 
635,396


 

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

F- 23
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)

3.
Segment information (continued)


Segment analysis for the year ended December 31, 2015
 
Farming
 
Sugar,
Ethanol and Energy
 
 Land Transformation
 
Corporate
 
 Total
 
Crops
 
Rice
 
Dairy
 
All other
segments
 
Farming
subtotal
 
 
 
 
Sales of goods and services rendered
154,741

 
84,668

 
32,981

 
1,302

 
273,692

 
400,622

 
—

 
—

 
674,314

Cost of goods sold and services rendered
(154,287
)
 
(69,075
)
 
(33,030
)
 
(603
)
 
(256,995
)
 
(300,791
)
 
—

 
—

 
(557,786
)
Initial recognition and changes in fair value of biological assets and agricultural produce
11,561

 
2,822

 
7,542

 
(181
)
 
21,744

 
32,784

 
—

 
—

 
54,528

Changes in net realizable value of agricultural produce after harvest
14,691

 
—

 
—

 
—

 
14,691

 
—

 
—

 
—

 
14,691

Margin on manufacturing and agricultural activities before operating expenses
26,706

 
18,415

 
7,493

 
518

 
53,132

 
132,615

 
—

 
—

 
185,747

General and administrative expenses
(3,987
)
 
(3,136
)
 
(1,451
)
 
(74
)
 
(8,648
)
 
(18,301
)
 
—

 
(21,476
)
 
(48,425
)
Selling expenses
(5,672
)
 
(12,592
)
 
(663
)
 
(49
)
 
(18,976
)
 
(50,729
)
 
—

 
(563
)
 
(70,268
)
Other operating income, net
16,422

 
600

 
(479
)
 
6

 
16,549

 
6,340

 
7,914

 
263

 
31,066

Share of loss of joint ventures
(2,685
)
 
—

 
—

 
—

 
(2,685
)
 
—

 
—

 
—

 
(2,685
)
Profit / (loss) from operations before financing and taxation
30,784

 
3,287

 
4,900

 
401

 
39,372

 
69,925

 
7,914

 
(21,776
)
 
95,435

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reserve from the sale of non-controlling interests in subsidiaries (see Note 21)
—

 
—

 
—

 
—

 
—

 
—

 
16,066

 
—

 
16,066

Depreciation and amortization
(2,427
)
 
(2,987
)
 
(1,456
)
 
(276
)
 
(7,146
)
 
(97,255
)
 
—

 
—

 
(104,401
)
Initial recognition and changes in fair value of biological assets and agricultural produce (unrealized)
2,234

 
587

 
—

 
207

 
3,028

 
8,298

 
—

 
—

 
11,326

Initial recognition and changes in fair value of biological assets and agricultural produce (realized)
9,327

 
2,235

 
7,542

 
(388
)
 
18,716

 
24,486

 
—

 
—

 
43,202

Changes in net realizable value of agricultural produce after harvest (unrealized)
4,406

 
—

 
—

 
—

 
4,406

 
—

 
—

 
—

 
4,406

Changes in net realizable value of agricultural produce after harvest (realized)
10,285

 
—

 
—

 
—

 
10,285

 
—

 
—

 
—

 
10,285


 Total segment assets and liabilities are measured in a manner consistent with that of the consolidated financial statements. These assets and liabilities are allocated based on the operations of the segment and the physical location of the asset. The Group’s investment in CHS Agro S.A. is allocated to the ‘Crops’ segment. Therefore, the Group’s share of profit or loss after income taxes and its carrying amount are reported in this segment.
 
Total reportable segments’ assets and liabilities are reconciled to total assets as per the statement of financial position as follows:
 
 
2017
 
2016
Total reportable assets as per segment information
1,112,527

 
1,075,837

Intangible assets (excluding goodwill)
4,780

 
3,847

Deferred income tax assets
43,437

 
38,586

Trade and other receivables
172,214

 
174,940

Other assets
565

 
590

Derivative financial instruments
4,483

 
3,398

Cash and cash equivalents
269,195

 
158,568

Total assets as per the statement of financial position
1,607,201

 
1,455,766

 




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

F- 24
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)

3.
Segment information (continued)


 
2017
 
2016
Total reportable liabilities as per segment information
817,958

 
635,396

Trade and other payables
99,250

 
93,585

Deferred income tax liabilities
10,457

 
14,689

Payroll and social liabilities
28,507

 
28,079

Provisions for other liabilities
4,843

 
3,889

Current income tax liabilities
503

 
1,387

Derivative financial instruments
552

 
7,068

Total liabilities as per the statement of financial position
962,070

 
784,093


Non-current assets and revenues and fair value gains and losses are shown by geographic region. These are the regions in which the Group is active: Argentina, Brazil and Uruguay.
 
As of and for the year ended December 31, 2017:
 
Argentina
 
Brazil
 
Uruguay
 
Total
Property, plant and equipment
103,312

 
710,523

 
7,096

 
820,931

Investment property
2,271

 
—

 
—

 
2,271

Goodwill
5,095

 
7,317

 
—

 
12,412

Non-current portion of biological assets
11,276

 
—

 
—

 
11,276

 
 
 
 
 
 
 
 
Sales of goods and services rendered
214,888

 
545,859

 
172,431

 
933,178

Initial recognition and changes in fair value of biological assets and agricultural produce
36,341

 
26,326

 
553

 
63,220

(Loss) from changes in net realizable value of agricultural produce after harvest
5,705

 
1,346

 
1,801

 
8,852

 
As of and for the year ended December 31, 2016:
 
Argentina
 
Brazil
 
Uruguay
 
Total
Property, plant and equipment
101,513

 
694,137

 
6,958

 
802,608

Investment property
2,666

 
—

 
—

 
2,666

Goodwill
5,980

 
7,425

 
—

 
13,405

Non-current portion of biological assets
8,516

 
—

 
—

 
8,516

 
 
 
 
 
 
 
 
Sales of goods and services rendered
164,264

 
432,468

 
272,503

 
869,235

Initial recognition and changes in fair value of biological assets and agricultural produce
62,970

 
62,556

 
(70
)
 
125,456

(Loss) from changes in net realizable value of agricultural produce after harvest
(4,491
)
 
(958
)
 
(392
)
 
(5,841
)

 

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

F- 25
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)

3.
Segment information (continued)

As of and for the year ended December 31, 2015:

 
Argentina
 
Brazil
 
Uruguay
 
Total
Sales of goods and services rendered
166,447

 
295,456

 
212,411

 
674,314

Initial recognition and changes in fair value of biological assets and agricultural produce
16,637

 
37,097

 
794

 
54,528

Gain / (Loss) from changes in net realizable value of agricultural produce after harvest
16,139

 
(32
)
 
(1,416
)
 
14,691


4.
Sales
 
2017
 
2016
 
2015
Manufactured products and services rendered:
 

 
 

 
 

Rice
83,849

 
94,331

 
82,797

Ethanol
241,650

 
211,451

 
176,150

Sugar
305,688

 
330,895

 
177,801

Soybean oil and meal
6,119

 
—

 
2,071

Energy
62,218

 
53,995

 
46,671

Powder milk
2,713

 
4,816

 
1,042

Services
1,144

 
1,160

 
1,545

Operating Leases
771

 
984

 
1,309

Others
5,273

 
1,423

 
1,233

 
709,425

 
699,055

 
490,619

Agricultural produce and biological assets:
 

 
 

 
 

Soybean
79,408

 
63,797

 
75,361

Cattle for dairy
3,380

 
3,059

 
3,656

Corn
82,482

 
48,502

 
41,813

Cotton
420

 
1,434

 
3,317

Milk
31,656

 
24,561

 
27,906

Wheat
14,835

 
16,951

 
16,116

Peanut
3,648

 
1,703

 
—

Sunflower
3,163

 
7,275

 
12,659

Sorghum
—

 
—

 
111

Rice
—

 
950

 
—

Barley
1,888

 
1,240

 
634

Seeds
727

 
625

 
648

Others
2,146

 
83

 
1,474

 
223,753

 
170,180

 
183,695

Total sales
933,178

 
869,235

 
674,314

 
Commitments to sell commodities at a future date
 
The Group entered into contracts to sell non-financial instruments, mainly sugar, soybean and corn through sales forward contracts. Those contracts are held for purposes of delivery the non-financial instrument in accordance with the Group’s expected sales. Accordingly, as the own use exception criteria are met; those contracts are not recorded as derivatives.
 
The notional amount of these contracts is US$ 63.3 million as of December 31, 2017 (2016: US$ 111.8 million; 2015: US$ 62.4 million) comprised primarily of 27,848 tons of sugar (US$ 9.4 million), 24,627 m3 of ethanol (US$ 6.3 million), 408,236 mwh of energy (US$ 30.1 million), 25,413 tons of soybean (U$S 7.2 million), 21,835 tons of wheat (US$ 3.6 million), and 37,391 tons of corn (US$ 5.7 million) which expire between February 2018 and December 2018.

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

F- 26
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)




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

F- 27
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)


5.
Cost of goods sold and services rendered

As of December 31, 2017:
 
2017
 
Crops
 
Rice
 
Dairy
 
All other
segments
 
Sugar,
Ethanol and
Energy
 
Total
Finished goods at the beginning of 2017 (Note 19)
13,117

 
5,473

 
—

 
—

 
49,601

 
68,191

Cost of production of manufactured products (Note 6)
5,565

 
68,969

 
—

 
237

 
378,864

 
453,635

Purchases
82,842

 
7,779

 
2,410

 
—

 
93,106

 
186,137

Agricultural produce
102,734

 
—

 
34,569

 
616

 
1,015

 
138,934

Transfer to raw material
(12,998
)
 
(1,354
)
 
—

 
—

 
—

 
(14,352
)
Direct agricultural selling expenses
22,940

 
—

 
—

 
—

 
—

 
22,940

Tax recoveries (i)
—

 
—

 
—

 
—

 
(28,478
)
 
(28,478
)
Changes in net realizable value of agricultural produce after harvest
8,852

 
—

 
—

 
—

 
—

 
8,852

Finished goods at the end of December 31, 2017 (Note 19)
(21,146
)
 
(8,476
)
 
—

 
—

 
(32,266
)
 
(61,888
)
Exchange differences
(5,604
)
 
(1,304
)
 
—

 
—

 
(336
)
 
(7,244
)
Cost of goods sold and services rendered, and direct agricultural selling expenses
196,302

 
71,087

 
36,979

 
853

 
461,506

 
766,727

 
(i) Correspond to the presumed credit of ICMS (Imposto sobre Circulação de Mercadorias e Prestação de Serviços) over the sale values.
 
As of December 31, 2016:
 
2016
 
Crops
 
Rice
 
Dairy
 
All other
segments
 
Sugar,
Ethanol and
Energy
 
Total
Finished goods at the beginning of 2016
16,034

 
6,904

 
55

 
—

 
24,631

 
47,624

Cost of production of manufactured products (Note 6)
478

 
61,254

 
371

 
206

 
376,791

 
439,100

Purchases
25,954

 
22,303

 
4,414

 
—

 
89,745

 
142,416

Agricultural produce
110,252

 
—

 
27,628

 
—

 
—

 
137,880

Transfer to raw material
(8,603
)
 
—

 
—

 
—

 
—

 
(8,603
)
Direct agricultural selling expenses
19,077

 
—

 
—

 
—

 
—

 
19,077

Tax recoveries (i)
—

 
—

 
—

 
—

 
(24,156
)
 
(24,156
)
Changes in net realizable value of agricultural produce after harvest
(5,841
)
 
—

 
—

 
—

 
—

 
(5,841
)
Finished goods at the end of December 31, 2016 (Note 19)
(13,117
)
 
(5,473
)
 
—

 
—

 
(49,601
)
 
(68,191
)
Exchange differences
(2,503
)
 
(1,414
)
 
103

 
6

 
3,083

 
(725
)
Cost of goods sold and services rendered, and direct agricultural selling expenses
141,731

 
83,574

 
32,571

 
212

 
420,493

 
678,581

 
(i) Correspond to the presumed credit of ICMS (Imposto sobre Circulação de Mercadorias e Prestação de Serviços) over the sale values.
 

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

F- 28
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)

5.
Cost of goods sold and services rendered (continued)


As of December 31, 2015:
 
2015
 
Crops
 
Rice
 
Dairy
 
All other
segments
 
Sugar,
Ethanol and
Energy
 
Total
Finished goods at the beginning of 2015
21,056

 
4,656

 
76

 
—

 
50,087

 
75,875

Cost of production of manufactured products (Note 6)
67

 
60,445

 
624

 
603

 
273,127

 
334,866

Purchases
27,625

 
13,520

 
920

 
—

 
48,610

 
90,675

Agricultural produce
93,536

 
—

 
31,563

 
—

 
—

 
125,099

Transfer to raw material
(6,237
)
 
—

 
—

 
—

 
—

 
(6,237
)
Direct agricultural selling expenses
29,179

 
—

 
—

 
—

 
—

 
29,179

Tax recoveries (i)
—

 
—

 
—

 
—

 
(16,196
)
 
(16,196
)
Changes in net realizable value of agricultural produce after harvest
14,691

 
—

 
—

 
—

 
—

 
14,691

Finished goods at the end of December 31, 2015
(16,034
)
 
(6,904
)
 
(55
)
 
—

 
(24,631
)
 
(47,624
)
Exchange differences
(9,596
)
 
(2,642
)
 
(98
)
 
—

 
(30,206
)
 
(42,542
)
Cost of goods sold and services rendered, and direct agricultural selling expenses
154,287

 
69,075

 
33,030

 
603

 
300,791

 
557,786

 
(i) Correspond to the presumed credit of ICMS (Imposto sobre Circulação de Mercadorias e Prestação de Serviços) over the sale values.


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

F- 29
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)


6.
Expenses by nature

The Group presents the statement of income under the function of expense method. Under this method, expenses are classified according to their function as part of the line items “cost of goods sold and direct agricultural selling expenses”, “general and administrative expenses” and “selling expenses”.
 
The following table provides the additional disclosure required on the nature of expenses and their relationship to the function within the Group:
 
Expenses by nature for the year ended December 31, 2017:
 
Cost of production of manufactured products (Note 5)
 
General and
Administrative
Expenses
 
Selling
Expenses
 
Total
 
Crops
 
Rice
 
Dairy
 
All other
segments
 
Sugar,
Ethanol and
Energy
 
Total
 
 
 
Salaries, social security expenses and employee benefits
—

 
7,115

 
—

 
229

 
50,243

 
57,587

 
33,969

 
6,724

 
98,280

Raw materials and consumables
695

 
3,579

 
—

 
—

 
9,343

 
13,617

 
—

 
—

 
13,617

Depreciation and amortization
—

 
836

 
—

 
8

 
119,427

 
120,271

 
6,162

 
778

 
127,211

Fuel, lubricants and others
—

 
109

 
—

 
—

 
25,272

 
25,381

 
454

 
242

 
26,077

Maintenance and repairs
—

 
1,750

 
—

 
—

 
17,005

 
18,755

 
1,189

 
469

 
20,413

Freights
—

 
6,074

 
—

 
—

 
572

 
6,646

 
—

 
33,682

 
40,328

Export taxes / selling taxes
—

 
—

 
—

 
—

 
—

 
—

 
—

 
36,808

 
36,808

Export expenses
—

 
—

 
—

 
—

 
—

 
—

 
—

 
3,511

 
3,511

Contractors and services
1,054

 
—

 
—

 
—

 
6,191

 
7,245

 
—

 
—

 
7,245

Energy transmission
—

 
—

 
—

 
—

 
—

 
—

 
—

 
3,312

 
3,312

Energy power
—

 
1,342

 
—

 
—

 
1,525

 
2,867

 
190

 
53

 
3,110

Professional fees
—

 
51

 
—

 
—

 
352

 
403

 
7,519

 
1,633

 
9,555

Other taxes
—

 
93

 
—

 
—

 
1,978

 
2,071

 
845

 
5

 
2,921

Contingencies
—

 
—

 
—

 
—

 
—

 
—

 
2,174

 
—

 
2,174

Lease expense and similar arrangements
—

 
269

 
—

 
—

 
—

 
269

 
1,334

 
56

 
1,659

Third parties raw materials
—

 
6,808

 
—

 
—

 
34,161

 
40,969

 
—

 
—

 
40,969

Others
6

 
955

 
—

 
—

 
4,261

 
5,222

 
3,463

 
8,126

 
16,811

Subtotal
1,755

 
28,981

 
—

 
237

 
270,330

 
301,303

 
57,299

 
95,399

 
454,001

Own agricultural produce consumed
3,810

 
39,988

 
—

 
—

 
108,534

 
152,332

 
—

 
—

 
152,332

Total
5,565

 
68,969

 
—

 
237

 
378,864

 
453,635

 
57,299

 
95,399

 
606,333

 

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

F- 30
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)

6.
Expenses by nature (continued)


Expenses by nature for the year ended December 31, 2016:
 
Cost of production of manufactured products (Note 5)
 
General and
Administrative
Expenses
 
Selling
Expenses
 
Total
 
Crops
 
Rice
 
Dairy
 
All other
segments
 
Sugar,
Ethanol and
Energy
 
Total
 
 
 
Salaries, social security expenses and employee benefits
—

 
5,590

 
—

 
206

 
54,225

 
60,021

 
30,935

 
5,358

 
96,314

Raw materials and consumables
468

 
3,927

 
—

 
—

 
7,025

 
11,420

 
—

 
—

 
11,420

Depreciation and amortization
—

 
856

 
—

 
—

 
102,620

 
103,476

 
5,006

 
695

 
109,177

Fuel, lubricants and others
—

 
86

 
—

 
—

 
26,307

 
26,393

 
450

 
368

 
27,211

Maintenance and repairs
—

 
1,408

 
—

 
—

 
21,641

 
23,049

 
931

 
390

 
24,370

Freights
—

 
4,901

 
14

 
—

 
330

 
5,245

 
—

 
29,976

 
35,221

Export taxes / selling taxes
—

 
—

 
—

 
—

 
—

 
—

 
—

 
29,375

 
29,375

Export expenses
—

 
—

 
—

 
—

 
—

 
—

 
—

 
3,649

 
3,649

Contractors and services
10

 
—

 
39

 
—

 
4,374

 
4,423

 
—

 
—

 
4,423

Energy transmission
—

 
—

 
—

 
—

 
—

 
—

 
—

 
2,890

 
2,890

Energy power
—

 
913

 
—

 
—

 
1,007

 
1,920

 
795

 
211

 
2,926

Professional fees
—

 
90

 
—

 
—

 
387

 
477

 
5,495

 
1,105

 
7,077

Other taxes
—

 
58

 
—

 
—

 
2,012

 
2,070

 
653

 
8

 
2,731

Contingencies
—

 
—

 
—

 
—

 
—

 
—

 
1,835

 
—

 
1,835

Lease expense and similar arrangements
—

 
145

 
—

 
—

 
—

 
145

 
1,185

 
51

 
1,381

Third parties raw materials
—

 
3,001

 
—

 
—

 
26,552

 
29,553

 
—

 
—

 
29,553

Tax recoveries
—

 
—

 
—

 
—

 
(11,527
)
 
(11,527
)
 
—

 
—

 
(11,527
)
Others
—

 
1,344

 
—

 
—

 
4,428

 
5,772

 
3,465

 
6,597

 
15,834

Subtotal
478

 
22,319

 
53

 
206

 
239,381

 
262,437

 
50,750

 
80,673

 
393,860

Own agricultural produce consumed
—

 
38,935

 
318

 
—

 
137,410

 
176,663

 
—

 
—

 
176,663

Total
478

 
61,254

 
371

 
206

 
376,791

 
439,100

 
50,750

 
80,673

 
570,523



 

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

F- 31
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)

6.
Expenses by nature (continued)


Expenses by nature for the year ended December 31, 2015:

 
Cost of production of manufactured products (Note 5)
 
General and
Administrative
Expenses
 
Selling
Expenses
 
Total
 
Crops
 
Rice
 
Dairy
 
All other
segments
 
Sugar,
Ethanol and
Energy
 
Total
 
 
 
Salaries, social security expenses and employee benefits
—

 
5,952

 
—

 
551

 
49,454

 
55,957

 
28,354

 
5,053

 
89,364

Raw materials and consumables
56

 
3,760

 
86

 
—

 
7,143

 
11,045

 
—

 
—

 
11,045

Depreciation and amortization
—

 
1,305

 
—

 
—

 
82,711

 
84,016

 
5,762

 
765

 
90,543

Fertilizers, agrochemicals and seeds
—

 
—

 
—

 
52

 
—

 
52

 
—

 
—

 
52

Fuel, lubricants and others
—

 
102

 
—

 
—

 
20,034

 
20,136

 
468

 
66

 
20,670

Maintenance and repairs
—

 
1,167

 
—

 
—

 
13,934

 
15,101

 
937

 
356

 
16,394

Freights
9

 
4,303

 
38

 
—

 
—

 
4,350

 
16

 
20,930

 
25,296

Export taxes / selling taxes
—

 
—

 
—

 
—

 
—

 
—

 
—

 
29,110

 
29,110

Export expenses
—

 
—

 
—

 
—

 
—

 
—

 
—

 
3,223

 
3,223

Contractors and services
—

 
—

 
82

 
—

 
3,297

 
3,379

 
—

 
—

 
3,379

Energy transmission
—

 
—

 
—

 
—

 
—

 
—

 
—

 
2,386

 
2,386

Energy power
—

 
622

 
—

 
—

 
1,039

 
1,661

 
793

 
27

 
2,481

Professional fees
—

 
84

 
—

 
—

 
349

 
433

 
6,008

 
1,257

 
7,698

Other taxes
—

 
85

 
—

 
—

 
1,260

 
1,345

 
716

 
—

 
2,061

Contingencies
—

 
—

 
—

 
—

 
—

 
—

 
1,482

 
—

 
1,482

Lease expense and similar arrangements
—

 
77

 
—

 
—

 
216

 
293

 
1,107

 
43

 
1,443

Third parties raw materials
—

 
9,506

 
—

 
—

 
24,182

 
33,688

 
—

 
—

 
33,688

Tax recoveries
—

 
—

 
—

 
—

 
(14,395
)
 
(14,395
)
 
—

 
—

 
(14,395
)
Others
2

 
691

 
—

 
—

 
5,087

 
5,780

 
2,782

 
7,052

 
15,614

Subtotal
67

 
27,654

 
206

 
603

 
194,311

 
222,841

 
48,425

 
70,268

 
341,534

Own agricultural produce consumed
—

 
32,791

 
418

 
—

 
78,816

 
112,025

 
—

 
—

 
112,025

Total
67

 
60,445

 
624

 
603

 
273,127

 
334,866

 
48,425

 
70,268

 
453,559





7.
Salaries and social security expenses
 
2017
 
2016
 
2015
Wages and salaries (i)
132,025

 
117,423

 
104,216

Social security costs
30,558

 
28,849

 
23,111

Equity-settled share-based compensation
5,552

 
4,796

 
4,396

 
168,135

 
151,068

 
131,723

Number of employees
7,790

 
8,326

 
8,089

(i)
Includes US$ 41,172, US$ 28,475 and US$ 16,708, capitalized in Property, Plant and Equipment for the years 2017, 2016 and 2015, respectively.


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

F- 32
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)


8.
Other operating income, net
 
2017
 
2016
 
2015
Gain from disposal of farmland and other assets (Note 21)
—

 
—

 
7,914

Gain /(Loss) from commodity derivative financial instrument
40,842

 
(16,007
)
 
22,148

(Loss) /Gain from disposal of other property items
(986
)
 
(1,255
)
 
721

Settlement agreement (Note 29)
—

 
8,489

 
—

Losses related to energy business

(3,247
)
 
—

 
—

Others
2,852

 
476

 
283

 
39,461

 
(8,297
)
 
31,066

 
9.
Financial results, net
 
2017
 
2016
 
2015
Finance income:
 

 
 

 
 

- Interest income
11,230

 
7,671

 
8,201

- Other income
514

 
286

 
949

Finance income
11,744

 
7,957

 
9,150

 
 
 
 
 
 
Finance costs:
 

 
 

 
 

- Interest expense
(52,308
)
 
(48,198
)
 
(49,491
)
- Cash flow hedge – transfer from equity (Note 2)
(20,758
)
 
(85,214
)
 
(32,700
)
- Foreign exchange losses, net
(38,708
)
 
(19,062
)
 
(23,423
)
- Taxes
(3,705
)
 
(2,719
)
 
(3,358
)
- Loss from interest rate/foreign exchange rate derivative financial instruments
(2,163
)
 
(5,694
)
 
(4,437
)
- Prepayment related expenses (Note 26 - Brazilian subsidiaries)
(10,847
)
 
—

 
—

- Other expenses
(2,860
)
 
(4,493
)
 
(3,481
)
Finance costs
(131,349
)
 
(165,380
)
 
(116,890
)
Total financial results, net
(119,605
)
 
(157,423
)
 
(107,740
)

10.
Taxation

Adecoagro is subject to the applicable general tax regulations in Luxembourg.
 
The Group’s income tax has been calculated on the estimated assessable taxable results for the year at the rates prevailing in the respective foreign tax jurisdictions. The subsidiaries of the Group are required to calculate their income taxes on a separate basis according to the rules and regulations of the jurisdictions where they operate. Therefore, the Group is not legally permitted to compensate subsidiaries’ losses against subsidiaries’ income. The details of the provision for the Group’s consolidated income tax are as follows:
 
2017
 
2016
 
2015
Current income tax
(13,425
)
 
(21,505
)
 
(2,163
)
Deferred income tax
19,493

 
12,118

 
10,117

Income tax benefit / (expense)
6,068

 
(9,387
)
 
7,954

 

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

F- 33
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)

10.
Taxation (continued)


The statutory tax rate in the countries where the Group operates for all of the years presented are:
 
Tax Jurisdiction
 
Income Tax Rate
Argentina(i)
 
35
%
Brazil
 
34
%
Uruguay
 
25
%
Spain
 
25
%
Luxembourg
 
26
%
 
(i) During 2017, the Argentine Government introduced changes in the income tax. The income tax rate will be reduced to 30% for the years 2018 and 2019, and to 25% from 2020 onwards. A new tax on dividends is created with a rate of 7% for the years 2018 and 2019, and 13% from 2020 onwards.

Deferred tax assets and liabilities of the Group as of December 31, 2017 and 2016, without taking into consideration the offsetting of balances within the same tax jurisdiction, will be recovered or settled as follows:
 
2017
 
2016
Deferred income tax asset to be recovered after more than 12 months
109,830

 
96,822

Deferred income tax asset to be recovered within 12 months
20,191

 
17,504

Deferred income tax assets
130,021

 
114,326

 
 
 
 
Deferred income tax liability to be settled after more than 12 months
(90,951
)
 
(86,573
)
Deferred income tax liability to be settled within 12 months
(6,090
)
 
(3,856
)
Deferred income tax liability
(97,041
)
 
(90,429
)
Deferred income tax assets, net
32,980

 
23,897

 
The gross movement on the deferred income tax account is as follows:
 
2017
 
2016
Beginning of year
23,897

 
53,108

Exchange differences
(1,695
)
 
10,953

Tax (charge) relating to cash flow hedge (i)
(8,715
)
 
(52,282
)
Income tax benefit
19,493

 
12,118

End of year
32,980

 
23,897

 
(i) Relates to the gain or loss before income tax of cash flow hedge recognized in other comprehensive income amounting to US$ (565) for the year ended December 31, 2017 (2016: US$ (67,683)); net of the reclassification from Equity to Income Statements of US$ (20,758) for the year ended December 31, 2017 (2016: US$ (85,214))
 

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

F- 34
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)

10.
Taxation (continued)


The movement in the deferred income tax assets and liabilities during the year, without taking into consideration the offsetting of balances within the same tax jurisdiction, is as follows:
Deferred income tax
liabilities
 
Property,
plant and
equipment
 
Biological
assets
 
Others
 
Total
At January 1, 2016
 
55,964

 
15,963

 
—

 
71,927

Charged / (credited) to the statement of income
 
3,380

 
(2,752
)
 
16,787

 
17,415

Exchange differences
 
(512
)
 
911

 
688

 
1,087

At December 31, 2016
 
58,832

 
14,122

 
17,475

 
90,429

Charged / (credited) to the statement of income
 
23,249

 
3,707

 
(15,583
)
 
11,373

Exchange differences
 
(4,437
)
 
(1,057
)
 
733

 
(4,761
)
At December 31, 2017
 
77,644

 
16,772

 
2,625

 
97,041

 
Deferred income tax
assets
 
Provisions
 
Tax loss
carry
forwards
 
Equity-settled
share-based
compensation
 
Biological
assets
 
Others
 
Total
At January 1, 2016
 
1,789

 
107,191

 
5,620

 
1,727

 
8,708

 
125,035

Charged/(credited) to the statement of income
 
353

 
31,074

 
20

 
(2,063
)
 
149

 
29,533

Tax charge relating to cash flow hedge
 
—

 
(52,282
)
 
—

 
—

 
—

 
(52,282
)
Exchange differences
 
289

 
11,135

 
 
 
336

 
280

 
12,040

At December 31, 2016
 
2,431

 
97,118

 
5,640

 
—

 
9,137

 
114,326

(Credited) / charged to the statement of income
 
(705
)
 
11,907

 
41

 
—

 
19,623

 
30,866

Tax charge relating to cash flow hedge
 
—

 
(8,715
)
 
—

 
—

 
—

 
(8,715
)
Exchange differences
 
757

 
(4,193
)
 
—

 
—

 
(3,020
)
 
(6,456
)
At December 31, 2017
 
2,483

 
96,117

 
5,681

 
—

 
25,740

 
130,021

 
Tax loss carry forwards in Argentina and Uruguay generally expire within 5 years. Tax loss carry forwards in Brazil and Luxembourg do not expire. However, in Brazil, the taxable profit for each year can only be reduced by tax loss carry forward up to a maximum of 30%.
 
In order to fully realize the deferred tax asset, the Group will need to generate future taxable income in the countries where the tax loss carry forward were incurred. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes that as at December 31, 2017, it is probable that the Group will realize some portion of the deferred tax assets in Brazil and Argentina.
 
As of December 31, 2017, the Group’s tax loss carry forwards and their corresponding jurisdictions are as follows:
Jurisdiction
 
Tax loss carry forward
 
Expiration period
Argentina
 
80,988

 
5 years
Brazil
 
195,894

 
No expiration date.
Uruguay
 
3,394

 
5 years
Luxembourg
 
29,212

 
No expiration date.
 

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

F- 35
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)

10.
Taxation (continued)


Deferred income tax assets are recognized for tax loss carry-forwards to the extent that the realization of the related tax benefit through future taxable profits is probable. The Group did not recognize deferred income tax assets of US$ 5.6 million in respect of losses amounting to US$ 18.0 million that can be carried forward against future taxable income.
 
The tax on the Group’s profit before income tax differs from the theoretical amount that would arise using the weighted average tax rate applicable to profits of the consolidated entities as follows:
 
 
2017
 
2016
 
2015
Tax calculated at the tax rates applicable to profits in the respective countries
(1,937
)
 
(3,644
)
 
3,842

Non-deductible items
(1,406
)
 
(3,304
)
 
(133
)
Non-deductible items – changes in estimates on previous year
—

 
(1,182
)
 
—

Effect of the changes in the statutory income tax rate in Argentina
1,781

 
—

 
—

Unused tax losses
(2,265
)
 
—

 
—

Tax losses where no deferred tax asset was recognized
(29
)
 
(569
)
 
(317
)
Non-taxable income
2,437

 
—

 
4,625

Previously unrecognised tax losses now recouped to reduce tax expenses
7,595

 
—

 
—

Others
(108
)
 
(688
)
 
(63
)
Income tax benefit / (expense)
6,068

 
(9,387
)
 
7,954

 
11.
Earnings per share

(a) Basic
 
Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Group by the weighted average number of shares in issue during the period excluding ordinary shares held as treasury shares (Note 22).
 
2017
 
2016
 
2015
Profit/(Loss) from operations attributable to equity holders of the Group
9,972

 
2,039

 
(5,593
)
Weighted average number of shares in issue (thousands)
120,599

 
121,421

 
120,901

Basic earnings / (loss) per share from operations
0.083

 
0.017

 
(0.046
)
 
(b) Diluted
 
Diluted earnings per share is calculated by adjusting the weighted average number of shares outstanding to assume conversion of all dilutive potential shares. The Group has two categories of dilutive potential shares: equity-settled share options and restricted units. For these instruments, a calculation is done to determine the number of shares that could have been acquired at fair value, based on the monetary value of the subscription rights attached to outstanding share options. The number of shares calculated as above is compared with the number of shares that would have been issued assuming the exercise of the equity-settled share options. As of December 31, 2017, there were 851 thousands (2016: 1,658 thousands; 2015: 1,701 thousands) share options/restricted units outstanding that could potentially have a dilutive impact in the future but were antidilutive for the periods presented.
 
2017
 
2016
 
2015
Profit / (Loss) from operations attributable to equity holders of the Group
9,972

 
2,039

 
(5,593
)
Weighted average number of shares in issue (thousands)
120,599

 
121,421

 
120,901

Adjustments for:
 
 
 
 
 
- Employee share options and restricted units (thousands)
1,604

 
1,695

 
1,445

Weighted average number of shares for diluted earnings per share (thousands)
122,203

 
123,116

 
122,346

Diluted earnings / (loss) per share from operations
0.082

 
0.017

 
(0.046
)


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

F- 36
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)


12.
Property, plant and equipment
 
Changes in the Group’s property, plant and equipment in 2017 and 2016 were as follows:
 
 
Farmlands
 
Farmland
improvements
 
Buildings and  
facilities
 
Machinery,  
equipment,  
furniture and
fittings
 
Bearer plants
 
Others
 
Work in  
progress
 
Total
At January 1, 2016
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Cost
114,527

 
14,889

 
267,473

 
548,037

 
234,322

 
13,544

 
23,113

 
1,215,905

Accumulated depreciation
—

 
(9,748
)
 
(100,005
)
 
(321,988
)
 
(77,651
)
 
(9,624
)
 
—

 
(519,016
)
Net book amount
114,527

 
5,141

 
167,468

 
226,049

 
156,671

 
3,920

 
23,113

 
696,889

At December 31, 2016
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
Opening net book amount
114,527

 
5,141

 
167,468

 
226,049

 
156,671

 
3,920

 
23,113

 
696,889

Exchange differences
(6,004
)
 
(838
)
 
26,675

 
46,053

 
33,169

 
103

 
(924
)
 
98,234

Additions
—

 
—

 
7,420

 
36,190

 
74,175

 
1,484

 
19,454

 
138,723

Reclassification from investment property (Note 13)
1,335

 
—

 
—

 
—

 
—

 
—

 
—

 
1,335

Transfers
—

 
6,856

 
6,491

 
6,608

 
—

 
8

 
(19,963
)
 
—

Disposals
—

 
—

 
(1,078
)
 
(3,125
)
 
—

 
(72
)
 
—

 
(4,275
)
Reclassification to non-income tax credits (*)
—

 
—

 
(1,233
)
 
(227
)
 
—

 
—

 
(39
)
 
(1,499
)
Depreciation
—

 
(1,519
)
 
(15,688
)
 
(60,238
)
 
(47,846
)
 
(1,508
)
 
—

 
(126,799
)
Closing net book amount
109,858

 
9,640

 
190,055

 
251,310

 
216,169

 
3,935

 
21,641

 
802,608


 
Farmlands
 
Farmland
improvements
 
Buildings and
facilities
 
Machinery,
equipment,
furniture and
fittings
 
Bearer plants
 
Others
 
Work in
progress
 
Total
At December 31, 2016
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Cost
109,858

 
20,907

 
305,748

 
633,536

 
341,666

 
15,067

 
21,641

 
1,448,423

Accumulated depreciation
—

 
(11,267
)
 
(115,693
)
 
(382,226
)
 
(125,497
)
 
(11,132
)
 
—

 
(645,815
)
Net book amount
109,858

 
9,640

 
190,055

 
251,310

 
216,169

 
3,935

 
21,641

 
802,608

Year ended December 31, 2017
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
Opening net book amount
109,858

 
9,640

 
190,055

 
251,310

 
216,169

 
3,935

 
21,641

 
802,608

Exchange differences
(9,561
)
 
(1,219
)
 
(4,473
)
 
(5,853
)
 
(4,089
)
 
(390
)
 
(2,901
)
 
(28,486
)
Additions
—

 
—

 
15,495

 
62,101

 
84,278

 
2,351

 
37,856

 
202,081

Reclassification from investment property
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Transfers
—

 
2,711

 
12,963

 
11,183

 
—

 
11

 
(26,868
)
 
—

Disposals
—

 
—

 
(162
)
 
(3,913
)
 
—

 
(40
)
 
—

 
(4,115
)
Reclassification to non-income tax credits (*)
—

 
—

 
(205
)
 
(788
)
 
—

 
—

 
(93
)
 
(1,086
)
Depreciation
—

 
(2,125
)
 
(20,829
)
 
(67,960
)
 
(57,448
)
 
(1,709
)
 
—

 
(150,071
)
Closing net book amount
100,297

 
9,007

 
192,844

 
246,080

 
238,910

 
4,158

 
29,635

 
820,931

At December 31, 2017
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
Cost
100,297

 
22,399

 
329,366

 
696,266

 
421,855

 
16,999

 
29,635

 
1,616,817

Accumulated depreciation
—

 
(13,392
)
 
(136,522
)
 
(450,186
)
 
(182,945
)
 
(12,841
)
 
—

 
(795,886
)
Net book amount
100,297

 
9,007

 
192,844

 
246,080

 
238,910

 
4,158

 
29,635

 
820,931

 
(*) Brazilian federal tax law allows entities to take a percentage of the total cost of the assets purchased as a tax credit. As of December 31, 2017 and 2016, ICMS (Imposto sobre Circulação de Mercadorias e Prestação de Serviços) tax credits were reclassified to trade and other receivables.
 

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

F- 37
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)

12.
Property, plant and equipment (continued)


Depreciation is calculated using the straight-line method to allocated their cost over the estimated usefull lives. Farmlands are not depreciated.
 
Farmland improvements
5-25 years
Buildings and facilities
20 years
Furniture and fittings
10 years
Computer equipment
3-5 years
Machinery and equipment
4-10 years
Vehicles
4-5 years
Bearer plants
6 years
 
The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each statement of financial position date.
 
Depreciation charges are included in “Cost of production of Biological Assets”, “Cost of production of manufactures products”, “General and administrative expenses”, “Selling expenses” and capitalized in “Property, plant and equipment” for the years ended December 31, 2017 and 2016.
 
During the year ended December 31, 2017, borrowing costs of US$ 3,660 (2016:US$ 4,654) were capitalized as components of the cost of acquisition or construction for qualifying assets.
 
Certain of the Group’s assets have been pledged as collateral to secure the Group’s borrowings and other payables. The net book value of the pledged assets amounts to US$ 265,099 as of December 31, 2017 (2016: US$ 575,882).
 
13.
Investment property
 
Changes in the Group’s investment property in 2017 and 2016 were as follows:
 
 
2017
 
2016
Beginning of the year
2,666

 
4,796

Reclassification to property, plant and equipment (i)
—

 
(1,335
)
Exchange difference
(395
)
 
(795
)
End of the year
2,271

 
2,666

Cost
2,271

 
2,666

Accumulated depreciation
—

 
—

Net book amount
2,271

 
2,666

 
(i)       Relates to new contracts with third parties.
 
As of December 31, 2017, the fair value (level 3) of investment property was US$ 42 million (2016: US$ 45 million).
 

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

F- 38
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)


14.
Intangible assets
 
Changes in the Group’s intangible assets in 2017 and 2016 were as follows:
 
Goodwill
 
Software
 
Others
 
Total
At January 1, 2016
 

 
 

 
 

 
 

Cost
13,510

 
4,044

 
2,636

 
20,190

Accumulated amortization
—

 
(1,844
)
 
(1,685
)
 
(3,529
)
Net book amount
13,510

 
2,200

 
951

 
16,661

Year ended December 31, 2016
 

 
 

 
 

 
 
Opening net book amount
13,510

 
2,200

 
951

 
16,661

Exchange differences
(105
)
 
186

 
(7
)
 
74

Additions
—

 
1,176

 
42

 
1,218

Amortization charge (i)
—

 
(661
)
 
(40
)
 
(701
)
Closing net book amount
13,405

 
2,901

 
946

 
17,252

At December 31, 2016
 

 
 

 
 

 
 
Cost
13,405

 
5,406

 
2,671

 
21,482

Accumulated amortization
—

 
(2,505
)
 
(1,725
)
 
(4,230
)
Net book amount
13,405

 
2,901

 
946

 
17,252

Year ended December 31, 2017
 

 
 

 
 

 
 
Opening net book amount
13,405

 
2,901

 
946

 
17,252

Exchange differences
(993
)
 
(244
)
 
(10
)
 
(1,247
)
Additions
—

 
2,089

 
34

 
2,123

Amortization charge (i)
—

 
(895
)
 
(41
)
 
(936
)
Closing net book amount
12,412

 
3,851

 
929

 
17,192

At December 31, 2017
 

 
 

 
 

 
 
Cost
12,412

 
7,251

 
2,695

 
22,358

Accumulated amortization
—

 
(3,400
)
 
(1,766
)
 
(5,166
)
Net book amount
12,412

 
3,851

 
929

 
17,192

 
(i)
Amortization charges are included in “General and administrative expenses” and “Selling expenses” for the years ended December 31, 2017 and 2016, respectively. There were no impairment charges for any of the years presented (see Note 32 (a)).


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

F- 39
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)


15.
Biological assets

Changes in the Group’s biological assets in 2017 and 2016 were as follows:
 
2017
 
Crops
(ii)
 
Rice
(ii)
 
Dairy
 
All other
segments
 
Sugarcane
(ii)
 
Total
Beginning of the year
28,189

 
25,575

 
6,827

 
2,433

 
82,380

 
145,404

Increase due to purchases
—

 
—

 
610

 
1,084

 
—

 
1,694

Initial recognition and changes in fair value of biological assets (i)
17,158

 
10,236

 
11,769

 
267

 
23,790

 
63,220

Decrease due to harvest / disposals
(102,734
)
 
(43,842
)
 
(34,569
)
 
(616
)
 
(113,184
)
 
(294,945
)
Costs incurred during the year
92,034

 
39,547

 
26,002

 
1,478

 
101,277

 
260,338

Exchange differences
(2,902
)
 
(1,799
)
 
(1,301
)
 
(630
)
 
(1,085
)
 
(7,717
)
End of the year
31,745

 
29,717

 
9,338

 
4,016

 
93,178

 
167,994


 
2016
 
Crops
(ii)
 
Rice
(ii)
 
Dairy
 
All other
segments
 
Sugarcane
(ii)
 
Total
Beginning of the year
22,536

 
23,131

 
6,786

 
288

 
59,077

 
111,818

Increase due to purchases
—

 
—

 
—

 
1,713

 
—

 
1,713

Initial recognition and changes in fair value of biological assets (i)
48,790

 
10,498

 
5,476

 
(13
)
 
60,705

 
125,456

Decrease due to harvest / disposals
(110,252
)
 
(38,508
)
 
(27,946
)
 
—

 
(141,645
)
 
(318,351
)
Costs incurred during the year
68,607

 
33,839

 
23,885

 
558

 
91,235

 
218,124

Exchange differences
(1,492
)
 
(3,385
)
 
(1,374
)
 
(113
)
 
13,008

 
6,644

End of the year
28,189

 
25,575

 
6,827

 
2,433

 
82,380

 
145,404

 
(i)       Biological asset with a production cycle of more than one year (that is dairy and cattle) generated “Initial recognition and changes in fair value of biological assets” amounting to US$ 12,036 for the year ended December 31, 2017 (2016: US$ 5,463). In 2017, an amount of US$ 2,830 (2016: US$ 1,019) was attributable to price changes, and an amount of US$ 9,206 (2016: US$ 4,444) was attributable to physical changes.
(ii)Biological assets that are measured at fair value within level 3 of the hierarchy.

 

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

F- 40
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)

15.
Biological assets (continued)


Cost of production as of December 31, 2017:
 
Crops
 
Rice
 
Dairy
 
All other
segments
 
Sugar,
Ethanol and
Energy
 
Total
Salaries, social security expenses and employee benefits
3,999

 
7,312

 
4,762

 
386

 
12,224

 
28,683

Depreciation and amortization
413

 
—

 
—

 
—

 
5,989

 
6,402

Fertilizers, agrochemicals and seeds
35,715

 
10,647

 
9

 
—

 
31,144

 
77,515

Fuel, lubricants and others
1,075

 
666

 
741

 
64

 
3,220

 
5,766

Maintenance and repairs
1,303

 
2,419

 
1,912

 
220

 
2,329

 
8,183

Freights
234

 
500

 
128

 
77

 
—

 
939

Contractors and services
29,738

 
14,706

 
—

 
30

 
4,232

 
48,706

Feeding expenses
—

 
—

 
9,585

 
174

 
—

 
9,759

Veterinary expenses
—

 
—

 
1,783

 
148

 
—

 
1,931

Energy power
123

 
1,954

 
698

 
—

 
—

 
2,775

Professional fees
180

 
173

 
220

 
19

 
84

 
676

Other taxes
1,621

 
156

 
7

 
129

 
91

 
2,004

Lease expense and similar arrangements
13,057

 
138

 
—

 
—

 
40,757

 
53,952

Others
4,576

 
876

 
368

 
122

 
1,207

 
7,149

Subtotal
92,034

 
39,547

 
20,213

 
1,369

 
101,277

 
254,440

Own agricultural produce consumed
—

 
—

 
5,789

 
109

 
—

 
5,898

Total
92,034

 
39,547

 
26,002

 
1,478

 
101,277

 
260,338

 

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

F- 41
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)

15.
Biological assets (continued)


Cost of production as of December 31, 2016:

 
Crops
 
Rice
 
Dairy
 
All other
segments
 
Sugar,
Ethanol and
Energy
 
Total
Salaries, social security expenses and employee benefits
3,786

 
5,820

 
3,849

 
214

 
12,610

 
26,279

Depreciation and amortization
395

 
—

 
—

 
—

 
5,880

 
6,275

Fertilizers, agrochemicals and seeds
24,774

 
8,047

 
80

 
—

 
24,087

 
56,988

Fuel, lubricants and others
971

 
1,527

 
772

 
17

 
3,385

 
6,672

Maintenance and repairs
1,253

 
2,811

 
1,787

 
92

 
2,519

 
8,462

Freights
1,421

 
479

 
127

 
19

 
—

 
2,046

Contractors and services
23,769

 
13,248

 
—

 
—

 
2,651

 
39,668

Feeding expenses
—

 
—

 
9,053

 
21

 
—

 
9,074

Veterinary expenses
—

 
—

 
1,624

 
69

 
—

 
1,693

Energy power
119

 
853

 
492

 
—

 
—

 
1,464

Professional fees
131

 
85

 
169

 
—

 
145

 
530

Other taxes
1,561

 
131

 
8

 
100

 
116

 
1,916

Lease expense and similar arrangements
6,965

 
97

 
8

 
—

 
38,555

 
45,625

Others
3,462

 
741

 
563

 
26

 
1,287

 
6,079

Subtotal
68,607

 
33,839

 
18,532

 
558

 
91,235

 
212,771

Own agricultural produce consumed
—

 
—

 
5,353

 
—

 
—

 
5,353

Total
68,607

 
33,839

 
23,885

 
558

 
91,235

 
218,124



 
Biological assets in December 31, 2017 and 2016 were as follows:
 
2017
 
2016
Non-current
 

 
 

Cattle for dairy production (i)
8,989

 
6,584

Breeding cattle (ii)
1,984

 
1,533

Other cattle (ii)
303

 
399

 
11,276

 
8,516

Current
 

 
 

Breeding cattle (iii)
1,729

 
501

Other cattle (iii)
349

 
243

Sown land – crops (ii)
31,745

 
28,189

Sown land – rice (ii)
29,717

 
25,575

Sown land – sugarcane (ii)
93,178

 
82,380

 
156,718

 
136,888

Total biological assets
167,994

 
145,404

 
(i)
Classified as bearer and mature biological assets.
(ii)
Classified as consumable and immature biological assets.
(iii)
Classified as consumable and mature biological assets.


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

F- 42
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)

15.
Biological assets (continued)


The fair value less estimated point of sale costs of agricultural produce at the point of harvest amounted to US$ 113,184 for the year ended December 31, 2017 (2016: US$ 141,645).
 
The following table presents the Group´s biological assets that are measured at fair value at December 31, 2017 and 2016 (see Note 17 to see the description of each fair value level):
 
2017
 
2016
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cattle for dairy production
—

 
8,989

 
—

 
8,989

 
—

 
6,584

 
—

 
6,584

Breeding cattle
3,713

 
—

 
—

 
3,713

 
2,034

 
—

 
—

 
2,034

Other cattle
—

 
652

 
—

 
652

 
—

 
642

 
—

 
642

Sown land – sugarcane
—

 
—

 
93,178

 
93,178

 
—

 
—

 
82,380

 
82,380

Sown land – crops
—

 
—

 
31,745

 
31,745

 
—

 
—

 
28,189

 
28,189

Sown land – rice
—

 
—

 
29,717

 
29,717

 
—

 
—

 
25,575

 
25,575

 
There were no transfers between any levels during the year.
 




































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

F- 43
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)

15.
Biological assets (continued)


The following significant unobservable inputs were used to measure the Group´s biological assets using the discounted cash flow valuation technique:

Description
 
Unobservable
inputs
 
Range of unobservable inputs
 
Relationship of unobservable
inputs to fair value
 
 
 
 
2017
 
2016
 
 
Sown land – sugarcane
 
Sugarcane yield – tonnes per hectare; Sugarcane TRS (kg of sugar per ton of cane) Production Costs – US$ per hectare. (Include maintenance, harvest and leasing costs)
 
 
-Sugarcane yield: 60-100 tn/ha
-Sugarcane TRS: 120-140 kg of sugar/ton of cane
-Maintenance costs: 500-700 US$/ha
-Harvest costs: 9.0 -14.0 US$/ton of cane
-Leasing costs: 11.4-14.4 tn/ha
 
-Sugarcane yield: 60-100 tn/ha
-Sugarcane TRS: 120-140 kg of sugar/ton of cane
-Maintenance costs: 500-600 US$/ha
-Harvest costs: 9.0 -14.0 US$/ton of cane
-Leasing costs: 12.0-14.4 tn/ha
 
The higher the sugarcane yield, the higher the fair value. The higher the maintenance, harvest and leasing costs per hectare, the lower the fair value. The higher the TRS of sugarcane, the higher the fair value.
 
Sown land – crops
 
Crops yield – tonnes per hectare; Commercial Costs – usd per hectare;
Production Costs – US$ per hectare.
 
 
- Crops yield: 1.5 – 5.1 tn/ha for Wheat, 4.0 – 8.0  tn/ha for Corn, 1.4 - 3.4 tn/ha for Soybean and 2.1-3.5 for Sunflower
- Commercial Costs: 50-110 US$/ha for Wheat, 107-300 US$/ha for Corn, 172-176 US$/ha for Soybean and 10-37 US$/ha for Sunflower
- Production Costs: 200-540 US$/ha for Wheat, 230-500 US$/ha for Corn, 250-350 US$/ha for Soybean and 230-350 US$/ha for Sunflower
 
- Crops yield: 2.0 – 2.8 tn/ha for Wheat, 5.4 – 7.7  tn/ha for Corn, 2.7 - 3.8 tn/ha for Soybean and 1.5-2.1 for Sunflower
- Commercial Costs: 66-97 US$/ha for Wheat, 150-225 US$/ha for Corn, 70-110 US$/ha for Soybean and 65-90 US$/ha for Sunflower
- Production Costs: 170-250 US$/ha for Wheat, 350-550 US$/ha for Corn, 270-400 US$/ha for Soybean and 200-300 US$/ha for Sunflower
 
 
The higher the crops yield, the higher the fair value. The higher the commercial and direct costs per hectare, the lower the fair value.
 
Sown land – rice
 
Rice yield – tonnes per hectare;
Commercial Costs – usd per hectare;
Production Costs – US$ per hectare.
 
-Rice yield: 5.0 -5.9 tn/ha
-Commercial Costs: 3-9 US$/ha
-Production Costs: 750-1,000 US$/ha
 
-Rice yield: 5.1 -6.1 tn/ha
-Commercial Costs: 8-15 US$/ha
-Production Costs: 750-1,000 US$/ha
 
The higher the rice yield, the higher the fair value. The higher the commercial and direct costs per hectare, the lower the fair value.
 
 
As of December 31, 2017, the impact of a reasonable 10 % increase (decrease) in estimated costs, with all other variables held constant, would result in a decrease (increase) in the fair value of the Group’s plantations less cost to sell of US$ 8.6 million for sugarcane, US$ 1.5 million for crops and US$ 3.4 million for rice.

As of December 31, 2016, the impact of a reasonable 10 % increase (decrease) in estimated costs, with all other variables held constant, would result in a decrease (increase) in the fair value of the Group’s plantations less cost to sell of US$ 10.8 million for sugarcane, US$ 1.0 million for crops and US$ 2.7 million for rice.
 



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

F- 44
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)


16.
Investments in joint ventures
 
The table below lists the Group’s investment in joint ventures for the years ended December 31, 2017, 2016 and 2015:
 
 
% of ownership interest held
Name of the entity
Country of
incorporation and operation
December 31, 2017
December 31, 2016
December 31, 2015
CHS AGRO S.A. (i)
Argentina
50
%
50
%
50
%
 
On February 26, 2013, the Group formed CHS AGRO, a joint venture with CHS Inc. CHS Inc. is a leading farmer-owned energy, grains and foods company based in the United States. The Group holds a 50% interest in CHS AGRO. On October 2014, CHS AGRO finished its sunflower processing plant in the city of Pehuajo, Province of Buenos Aires, Argentina.
 
The following amounts represent the assets (including goodwill) and liabilities, and income and expenses of the joint ventures:
 
2017
 
2016
Assets:
 

 
 

Non-current assets
7,931

 
17,185

Current assets
8,882

 
9,316

 
16,813

 
26,501

Liabilities:
 

 
 

Non-current liabilities
22,002

 
22,000

Current liabilities
19,197

 
15,273

 
41,199

 
37,273

Net assets of joint venture
(24,386
)
 
(10,772
)
 
 
2017
 
2016
 
2015
Income
14,879

 
9,390

 
14,201

Expenses
(22,657
)
 
(16,048
)
 
(22,934
)
Loss before income tax
(7,778
)
 
(6,658
)
 
(8,733
)
 
The shares in the joint ventures were not publicly traded for any of the years presented.
 
There are no contingent liabilities relating to the Group’s interest in the joint ventures, and no contingent liabilities of the ventures themselves.
 
According to the laws of certain of the countries in which the Group operates, 5% of the profit of the year is separated to constitute legal reserves until they reach legal capped amounts (20% of total capital). These legal reserves are not available for dividend distribution and can only be released to absorb losses. The Group’s joint ventures have not reached the legal capped amounts.

The Group guarantees some financial debt of CHS AGRO for an amount of $9.8 million.

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

F- 45
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)


17.
Financial instruments by category

The Group classified its financial assets in the following categories:
 
(a) Financial assets at fair value through profit or loss
 
Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short-term. Derivatives are also categorized as held for trading unless they are designated as hedges. For all years presented, the Group’s financial assets at fair value through profit or loss comprise mainly derivative financial instruments.
 
(b) Loans and receivables
 
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables comprise “trade and other receivables” and “cash and cash equivalents” in the statement of financial position.
 
The following tables show the carrying amounts of financial assets and financial liabilities by category of financial instrument and reconciliation to the corresponding line item in the statements of financial position, as appropriate. Since the line items “Trade and other receivables, net” and “Trade and other payables” contain both financial instruments and non-financial assets or liabilities (such as other tax receivables or advance payments for services to be received in the future), the reconciliation is shown in the columns headed “Non-financial assets” and “Non-financial liabilities”.
 
Loans and
receivables
 
Assets at fair
value through
profit or loss
 
Subtotal
financial
assets
 
Non-
financial
assets
 
Total
December 31, 2017
 

 
 

 
 

 
 

 
 

Assets as per statement of financial position
 

 
 

 
 

 
 

 
 

Trade and other receivables
68,869

 
—

 
68,869

 
103,345

 
172,214

Derivative financial instruments
—

 
4,483

 
4,483

 
—

 
4,483

Cash and cash equivalents
269,195

 
—

 
269,195

 
—

 
269,195

Total
338,064

 
4,483

 
342,547

 
103,345

 
445,892

 
 
Liabilities at
fair value
through profit
or loss
 
Other financial
liabilities at
amortized cost
 
Subtotal
financial
liabilities
 
Non-
financial
liabilities
 
Total
Liabilities as per statement of financial position
 

 
 

 
 

 
 

 
 

Trade and other payables
—

 
86,066

 
86,066

 
13,184

 
99,250

Borrowings (excluding finance lease liabilities)(i)
—

 
817,853

 
817,853

 
—

 
817,853

Finance leases
—

 
105

 
105

 
—

 
105

Derivative financial instruments (i)
552

 
—

 
552

 
—

 
552

Total
552

 
904,024

 
904,576

 
13,184

 
917,760

 
(i)    Effective July 1, 2013,the Group formally documented and designated cash flow hedging relationships to hedge the foreign exchange rate risk of a portion of its highly probable future sales in US dollars using a portion of its borrowings denominated in US dollars, currency forwards and foreign currency floating-to-fixed interest rate swaps (see Note 2).


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

F- 46
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)

17.
Financial instruments by category (continued)


 
 
Loans and
receivables
 
Assets at fair
value through
profit or loss
 
Subtotal
financial
assets
 
Non-
financial
assets
 
Total
December 31, 2016
 

 
 

 
 

 
 

 
 

Assets as per statement of financial position
 

 
 

 
 

 
 

 
 

Trade and other receivables
79,964

 
—

 
79,964

 
94,976

 
174,940

Derivative financial instruments
—

 
3,398

 
3,398

 
—

 
3,398

Cash and cash equivalents
158,568

 
—

 
158,568

 
—

 
158,568

Total
238,532

 
3,398

 
241,930

 
94,976

 
336,906

 
 
Liabilities at
fair value
through profit
or loss
 
Other financial
liabilities at
amortized cost
 
Subtotal
financial
liabilities
 
Non-
financial
liabilities
 
Total
Liabilities as per statement of financial position
 

 
 

 
 

 
 

 
 

Trade and other payables
—

 
81,142

 
81,142

 
12,443

 
93,585

Borrowings (excluding finance lease liabilities) (i)
—

 
635,215

 
635,215

 
—

 
635,215

Finance leases
—

 
181

 
181

 
—

 
181

Derivative financial instruments (i)
7,068

 
—

 
7,068

 
—

 
7,068

Total
7,068

 
716,538

 
723,606

 
12,443

 
736,049

 

 
(i)    Effective July 1, 2013,the Group formally documented and designated cash flow hedging relationships to hedge the foreign exchange rate risk of a portion of its highly probable future sales in US dollars using a portion of its borrowings denominated in US dollars, currency forwards and foreign currency floating-to-fixed interest rate swaps (see Note 2).
 
Liabilities carried at amortized cost also included liabilities under finance leases where the Group is the lessee and which therefore have to be measured in accordance with IAS 17. The categories disclosed are determined by reference to IAS 39. Finance leases are excluded from the scope of IFRS 7. Therefore, finance leases have been shown separately.
 
Because of the short maturities of most trade accounts receivable and payable, other receivables and liabilities, and cash and cash equivalents, their carrying amounts at the closing date do not differ significantly from their respective fair values. The fair value of long-term borrowings is disclosed in Note 26.
 
Income, expense, gains and losses on financial instruments can be assigned to the following categories:
 
Loans and
receivables
 
Assets/ liabilities
at fair value
through profit or
loss
 
Other financial
liabilities at
amortized cost
 
Total
December 31, 2017
 

 
 

 
 

 
 

Interest income (i)
11,230

 
—

 
—

 
11,230

Interest expense (i)
(41,968
)
 
—

 
(10,340
)
 
(52,308
)
Foreign exchange gains/ (losses) (i)
(15,634
)
 
(9,402
)
 
(13,672
)
 
(38,708
)
Gain from derivative financial instruments(ii)
—

 
38,679

 
—

 
38,679

Net result
(46,372
)
 
29,277

 
(24,012
)
 
(41,107
)

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

F- 47
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)

17.
Financial instruments by category (continued)


 
Loans and
receivables
 
Assets/ liabilities
at fair value
through profit or
loss
 
Other financial
liabilities at
amortized cost
 
Total
December 31, 2016
 

 
 

 
 

 
 

Interest income (i)
7,671

 
—

 
—

 
7,671

Interest expense (i)
(39,533
)
 
—

 
(8,665
)
 
(48,198
)
Foreign exchange gains/ (losses) (i)
4,737

 
(12,288
)
 
(11,511
)
 
(19,062
)
Loss from derivative financial instruments(ii)
—

 
(21,745
)
 
—

 
(21,745
)
Net result
(27,125
)
 
(34,033
)
 
(20,176
)
 
(81,334
)

 
(i)
Included in “Financial Results, net” in the statement of income.
(ii)
Included in “Other operating income, net” and “Financial Results, net” in the statement of income.
 
Determining fair values
 
IFRS 13 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. All financial instruments recognized at fair value are allocated to one of the valuation hierarchy levels of IFRS 13. This valuation hierarchy provides for three levels. The allocation reflects which of the fair values derive from transactions in the market and where valuation is based on models because market transactions are lacking. The level in the fair value hierarchy is categorized in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety.
 
As of December 31, 2017 and 2016, the financial instruments recognized at fair value on the statement of financial position comprise derivative financial instruments.
 
In the case of Level 1, valuation is based on unadjusted quoted prices in active markets for identical financial assets that the Group can refer to at the date of the statement of financial position. The financial instruments the Group has allocated to this level mainly comprise crop futures and options traded on the stock market.
 
Derivatives not traded on the stock market allocated to Level 2 are valued using models based on observable market data. The financial instruments the Group has allocated to this level mainly comprise interest-rate swaps and foreign-currency interest-rate swaps.
 
In the case of Level 3, the Group uses valuation techniques not based on inputs observable in the market. This is only permissible insofar as no observable market data are available. The Group does not have financial instruments allocated to this level for any of the years presented.
 
The following tables present the Group’s financial assets and financial liabilities that are measured at fair value as of December 31, 2017 and 2016 and their allocation to the fair value hierarchy:
 
 
 
Level 1
 
Level 2
 
Total
Assets
 
 
 

 
 

 
 

Derivative financial instruments
2017
 
4,463

 
20

 
4,483

Derivative financial instruments
2016
 
2,789

 
609

 
3,398

 
 
 
 
 
 
 
 
Liabilities
 
 
 

 
 

 
 

Derivative financial instruments
2017
 
(498
)
 
(54
)
 
(552
)
Derivative financial instruments
2016
 
(1,196
)
 
(5,872
)
 
(7,068
)
 
There were no transfers within level 1 and 2 during the years ended December 31, 2017 and 2016.

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

F- 48
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)

17.
Financial instruments by category (continued)


 
When no quoted prices in an active market are available, fair values (particularly with derivatives) are based on recognized valuation methods. The Group uses a range of valuation models for this purpose, details of which may be obtained from the following table:
Class
 
Pricing Method
 
Parameters
 
Pricing Model
 
Level
 
Total
 
 
 
 
 
 
 
 
 
 
 
Futures
 
Quoted price
 
—
 
—
 
1
 
3,911

 
 
 
 
 
 
 
 
 
 
 
Options
 
Quoted price
 
—
 
—
 
1
 
54

 
 
 
 
 
 
 
 
 
 
 
Foreign-currency interest-rate swaps
 
Theoretical price
 
Swap curve;
Money market interest-rate curve;
Foreign-exchange curve.
 
Present value method
 
2
 
(34
)
 
 
 
 
 
 
 
 
 
 
3,931


18.
Trade and other receivables, net
 
2017
 
2016
Non-current
 

 
 

Trade receivables
6,597

 
1,802

Trade receivables
6,597

 
1,802

Advances to suppliers
2,363

 
1,930

Income tax credits
6,955

 
7,472

Non-income tax credits (i)
1,863

 
1,853

Judicial deposits
3,191

 
3,280

Other receivables
1,138

 
1,075

Non-current portion
22,107

 
17,412

Current
 

 
 

Trade receivables
43,078

 
61,546

Receivables from related parties (Note 31)
10,218

 
8,114

Less: Allowance for trade receivables
(1,002
)
 
(643
)
Trade receivables – net
52,294

 
69,017

Prepaid expenses
11,565

 
8,302

Advances to suppliers
36,497

 
21,451

Income tax credits
2,046

 
7,116

Non-income tax credits (i)
38,865

 
43,572

Cash collateral
380

 
3,546

Receivables from related parties (Note 31)
176

 
172

Other receivables
8,284

 
4,352

Subtotal
97,813

 
88,511

Current portion
150,107

 
157,528

Total trade and other receivables, net
172,214

 
174,940

 
(i) Includes US$ 1,086 (2016: 1,499) reclassified from Property, plant and equipment.
 
The fair values of current trade and other receivables approximate their respective carrying amounts due to their short-term nature. The fair values of non-current trade and other receivables approximate their carrying amount, as the impact of discounting is not significant.


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

F- 49
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)

18.
Trade and other receivables, net (continued)


The carrying amounts of the Group’s trade and other receivables are denominated in the following currencies (expressed in US dollars):
 
2017
 
2016
Currency
 

 
 

US Dollar
50,400

 
54,012

Argentine Peso
48,911

 
45,641

Uruguayan Peso
415

 
762

Brazilian Reais
72,488

 
74,525

 
172,214

 
174,940

 
As of December 31, 2017 trade receivables of US$ 5,052 (2016: US$ 14,641) were past due but not impaired. The ageing analysis of these receivables indicates that 318 and 5,264 are over 6 months in December 31, 2017 and 2016, respectively.
 
The Group recognizes an allowance for trade receivables when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables.
 
Delinquency in payments is an indicator that a receivable may be impaired. However, management considers all available evidence in determining when a receivable is impaired. Generally, trade receivables, which are more than 180 days past due are fully provided for. However, certain receivables 180+ days overdue are not provided for based on a case-by-case analysis of credit quality analysis. Furthermore, receivables, which are not 180+ days overdue, may be provided for if specific analysis indicates a potential impairment.
 
Movements on the Group’s allowance for trade receivables are as follows:
 
2017
 
2016
 
2015
At January 1
643

 
481

 
527

Charge of the year
758

 
387

 
152

Unused amounts reversed
(133
)
 
(178
)
 
(27
)
Used during the year
(193
)
 
—

 
(7
)
Exchange differences
(73
)
 
(47
)
 
(164
)
At December 31
1,002

 
643

 
481

 
The creation and release of allowance for trade receivables have been included in “Selling expenses” in the statement of income. Amounts charged to the allowance account are generally written off, when there is no expectation of recovering additional cash.
 
The maximum exposure to credit risk at the reporting date is the carrying value of each class of receivable mentioned above.
 
As of December 31, 2017, approximately 89% (2016: 82%) of the outstanding unimpaired trade receivables (neither past due not impaired) relate to sales to 27 well-known multinational companies with good credit quality standing, including but not limited to Camara de Comercializacao de Energia Electrica CCEE, Louis Dreyfus Commodities Suisse S.A.T, Alimport, Czarnikow Group Limited, Establecimientos Las Marias, Mastellone Hnos.S.A., Bunge Agritrade S.A., ETG Commodities Ltd., among others. Most of these entities or their parent companies are externally credit-rated. The Group reviews these external ratings from credit agencies.
 
The remaining percentage as of December 31, 2017 and 2016 of the outstanding unimpaired trade receivables (neither past due nor impaired) relate to sales to a dispersed large quantity of customers for which external credit ratings may not be available. However, the total base of customers without an external credit rating is relatively stable.
 

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

F- 50
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)

18.
Trade and other receivables, net (continued)


New customers with less than six months of history with the Group are closely monitored. The Group has not experienced credit problems with these new customers to date. The majority of the customers for which an external credit rating is not available are existing customers with more than six months of history with the Group and with no defaults in the past. A minor percentage of customers may have experienced some non-significant defaults in the past but fully recovered.
 
19.
Inventories
 
2017
 
2016
Raw materials
46,836

 
42,108

Finished goods (Note 5) (1)
61,888

 
68,191

Stocks held by third parties
—

 
1,308

Others
195

 
147

 
108,919

 
111,754

 
(1) Finished goods of Crops reportable segment are valued at fair value.
 
20.
Cash and cash equivalents
 
2017
 
2016
Cash at bank and on hand
118,358

 
130,001

Short-term bank deposits
150,837

 
28,567

 
269,195

 
158,568

 
21.
Disposals
 
Year ended December 31, 2015
 
Sale of La Cañada Farm.
 
In November 2015, the Group completed the sale of “La Cañada”, a 3,399 hectare farm located in the province of San Luis, Argentina, for a total consideration of US$ 12.6 million fully collected as of year-end. This transaction resulted in a gain of US$ 7.9 million included within “Other operating income, net”.
 
Sale of 49% of interest in Global Acamante S.L.U. Global Calidon S.L.U., Global Carelio S.L.U. and Global Mirabilis S.L.U.
 
In December, 2015, the Group completed the sale of a 49% interest in Global Acamante S.L.U., Global Calidon S.L.U., Global Carelio S.L.U. and Global Mirabilis S.L.U., companies which main underlying assets are El Orden and La Carolina farms, for an aggregate sale price of US$ 22.0 million, which were fully collected at the time of the transaction.
 
The sale of the respective equity interests did not result in the loss of control of these companies and therefore. The difference between the net proceeds received and the recognition of the non-controlling interest was registered in Statement of Changes in Shareholders’ Equity under the line item “Reserve from the sale of non-controlling interests in subsidiaries” for an amount of US$ 19.9 million (US$ 16.1 million in the column item “Reserve from the sale of non-controlling interests in subsidiaries” and US$ 3.9 million in the column item “Cumulative Translation Adjustment”) and also an increase in non-controlling interest of US$ 2.0 million.
 

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

F- 51
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)


22.    Shareholders' contributions

The share capital of the Group is represented by common shares with a nominal value of US$ 1.5 per share and one vote each.
 
Number of shares
 
Share capital and
share premium
At January 1, 2015
122,382

 
1,116,617

Employee share options exercised (Note 23) (1)
—

 
1,786

Restricted shares and units vested (Note 23)
—

 
3,103

Purchase of own shares
—

 
(259
)
At December 31,2015
122,382

 
1,121,247

Employee share options exercised (Note 23) (1)
—

 
438

Restricted shares and units vested (Note 23)
—

 
3,225

Purchase of own shares
—

 
(4,087
)
At December 31,2016
122,382

 
1,120,823

Employee share options exercised (Note 23) (1)
—

 
50

Restricted shares units vested (Note 23)
—

 
4,149

Purchase of own shares
—

 
(32,515
)
At December 31,2017
122,382

 
1,092,507

 
(1)
Treasury shares were used to settle these options and units.

Share Repurchase Program
 
On September 24, 2013, the Board of Directors of the Company has authorized a share repurchase program for up to 5% of its outstanding shares. The repurchase program has commenced on September 24, 2013 and is reviewed by the Board of Directors after each 12-month period. On August 11, 2017, the Board of Directors approved the extension of the program for an additional twelve-month period, ending September 20, 2018.

Repurchases of shares under the program are made from time to time in open market transactions in compliance with the trading conditions of Rule 10b-18 under the U.S. Securities Exchange Act of 1934, as amended, and applicable rules and regulations. The share repurchase program does not require Adecoagro to acquire any specific number or amount of shares and may be modified, suspended, reinstated or terminated at any time in the Company’s discretion and without prior not
 
As of December 31, 2017, the Company repurchased 6,742,183 shares under this program, of which 2,101,777 have been applied to some exercise of the Company’s stock option plan and restricted stock units plan. In 2017, 2016 and 2015 the Company repurchased shares for an amount of US$ 38,367; US$ 4,772 and US$ 320, respectively. The outstanding treasury shares as of December 31, 2017 totaled 4,643,396.

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

F- 52
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)


23.
Equity-settled share-based payments

The Group has set a “2004 Incentive Option Plan” and a “2007/2008 Equity Incentive Plan” (collectively referred to as “Option Schemes”) under which the Group granted equity-settled options to senior managers and selected employees of the Group's subsidiaries. Additionally, in 2010 the Group has set a “Adecoagro Restricted Share and Restricted Stock Unit Plan” (referred to as “Restricted Share Plan”) under which the Group grants restricted stock units to senior and medium management and key employees of the Group’s subsidiaries.
 
(a)
Option Schemes

The fair value of the options under the Option Schemes was measured at the date of grant using the Black-Scholes valuation technique.
 
As of the date of these financial statements all options has already been vested and expensed.
 
The Adecoagro/ IFH 2004 Stock Incentive Option Plan was effectively established in 2004 and is administered by the Compensation Committee of the Company. Options are exercisable over a ten-year period. In May 2014 this period was extended for another ten year-period.
 
Movements in the number of equity-settled options outstanding and their related weighted average exercise prices under the Adecoagro/ IFH 2004 Stock Incentive Option Plan are as follows:
 
2017
 
2016
 
2015
 
Average
exercise
price per
share
 
Options
(thousands)
 
Average
exercise
price per 
Share
 
Options
(thousands)
 
Average
exercise
price per 
Share
 
Options
(thousands)
At January 1
6.66

 
1,641

 
6.67

 
1,696

 
6.71

 
1,916

Forfeited
—

 
—

 
—

 
—

 
5.83

 
(9
)
Exercised
5.83

 
(7
)
 
6.96

 
(55
)
 
7.11

 
(211
)
At December 31
6.66

 
1,634

 
6.66

 
1,641

 
6.67

 
1,696

 
Options outstanding at year end under this Plan have the following expiry date and exercise prices:
 
Exercise
price per share
 
Shares (in thousands)
Expiry date (i):
 
2017
 
2016
 
2015
May 1, 2024
5.83

 
496

 
495

 
495

May 1, 2025
5.83

 
452

 
452

 
461

January 1, 2026
5.83

 
142

 
150

 
174

February 16, 2026
7.11

 
103

 
103

 
103

October 1, 2026
8.62

 
441

 
441

 
463

 
(i) On May 2014, the Board of directors decided to extend the expired date of the Plan.
 
The Adecoagro/ IFH 2007/ 2008 Equity Incentive Plan was effectively established in late 2007 and is administered by the Compensation Committee of the Company. Options are exercisable over a ten-year period.
 
Movements in the number of equity-settled options outstanding and their related weighted average exercise prices under the Adecoagro/ IFH 2007/2008 Equity Incentive Plan are as follows:
 

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

F- 53
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)

23.
Equity-settled unit-based payments (continued)

 
2017
 
2016
 
2015
 
Average
exercise
price per
share
 
Options
(thousands)
 
Average
exercise
price per 
share
 
Options
(thousands)
 
Average
exercise
price per
share
 
Options
(thousands)
At January 1
13.07

 
1,658

 
13.07

 
1,701

 
13.07

 
1,729

Forfeited
13.40

 
(4
)
 
12.98

 
(43
)
 
13.01

 
(28
)
Expired
12.82

 
(803
)
 
—

 
—

 
—

 
—

At December 31
13.31

 
851

 
13.07

 
1,658

 
13.07

 
1,701

 
Options outstanding at year-end under the Adecoagro/ IFH 2007/2008 Equity Incentive Plan have the following expiry date and exercise prices:
 
Exercise price per share
 
Shares (in thousands)
Expiry date:
 
2017
 
2016
 
2015
From Nov 13, 2017 to Aug 25, 2018
12.82

 
105

 
908

 
937

January 30, 2019
13.40

 
595

 
595

 
608

June 1, 2019
12.82

 
3

 
3

 
3

November 1, 2019
13.40

 
11

 
11

 
11

From Jan 30, 2020 to Sep 1, 2020
13.40

 
106

 
110

 
110

From Jan 30, 2020 to Sep 1, 2020
12.82

 
31

 
31

 
31

 
The following table shows the exercisable shares at year end under both the Adecoagro/ IFH 2004 Incentive Option Plan and the Adecoagro/ IFH 2007/ 2008 Equity Incentive Plan:
 
 
Exercisable shares
in thousands
2017
2,485

2016
3,299

2015
3,397

 
(b)
Restricted Stock Unit Plan

The Restricted Stock Unit Plan was effectively established in 2010 and amended in November 2011. It is administered by the Compensation Committee of the Company. Restricted shares or units under these Plan vest over a 3-year period from the date of grant at 33% on each anniversary of the grant date. Participants are entitled to receive one common share of the Company for each restricted share or restricted unit granted. There are no performance requirements for the delivery of common shares, except that a participant’s employment with the Group must not have been terminated prior to the relevant vesting date. If the participant ceases to be an employee for any reason, any unvested restricted unit shall not be converted into common shares. The maximum number of ordinary shares with respect to which awards may be made under the Plan is 2,474,701. The maximum numbers of ordinary shares is revised annually.
 
At December 31, 2017, the Group recognized compensation expense US$ 5.6 million related to the restricted stock units granted under the Restricted Share Plan (2016: US$ 4.8 million).
 
The restricted shares under the Restricted Share Plan were measured at fair value at the date of grant.
 

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

F- 54
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)

23.
Equity-settled unit-based payments (continued)

Key grant-date fair value and other assumptions under the Restricted Share Plan are detailed below:
Grant Date
Apr 1, 
2015
 
May 15,
 2015
 
Apr 1,
2016
 
May 15,
2016
 
Apr 1,
2017
 
May 15,
2017
Fair value
9.45

 
8.62

 
12.63

 
12.52

 
11.88

 
12.14

Possibility of ceasing employment before vesting
5
%
 
0
%
 
5
%
 
0
%
 
0
%
 
0
%
 
Movements in the number of restricted shares outstanding under the Restricted Share Plan are as follows: 
 
Restricted
stock units
(thousands)
 
Restricted
stock units
(thousands)
 
Restricted
stock units
(thousands)
 
2017
 
2016
 
2015
At January 1
1,000

 
1,018

 
861

Granted (1)
488

 
464

 
626

Forfeited
(29
)
 
(29
)
 
(37
)
Vested
(490
)
 
(453
)
 
(432
)
At December 31
969

 
1,000

 
1,018

 
(1) Approved by the Board of Directors of March 14, 2017 and the Shareholders Meeting of April 19, 2017
 
24.
Legal and other reserves

According to the laws of certain of the countries in which the Group operates, a portion of the profit of the year (5%) is separated to constitute legal reserves until they reach legal capped amounts. These legal reserves are not available for dividend distribution and can only be released to absorb losses. The legal limit of these reserves has not been met.
 
Legal and other reserves amount to US$ 4,139 as of December 31, 2017 (2016: US$ 4,288) and are included within the balance of retained earnings in the statement of changes in shareholders’ equity.
 
The Company may make distributions in the form of dividends or otherwise to the extent that it has distributable retained earnings or available distributable reserves (including share premium) that result from the Stand Alone Financial Statements prepared in accordance with Luxembourg GAAP. No distributable retained earning result from the Stand Alone Financial Statements of the Company as of December 31, 2017, but the Company has distributable reserves in excess of US$ 922,821.
 
25.
Trade and other payables
 
2017
 
2016
Non-current
 

 
 

Payable from acquisition of property, plant and equipment (i)
521

 
1,042

Other payables
306

 
385

 
827

 
1,427

Current
 

 
 

Trade payables
82,824

 
77,325

Advances from customers
6,722

 
7,758

Amounts due to related parties (Note 31)
628

 
1,152

Taxes payable
6,462

 
4,685

Other payables
1,787

 
1,238

 
98,423

 
92,158

Total trade and other payables
99,250

 
93,585

 

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

F- 55
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)

25.
Trade and other payables (continued)


(i)
These trades payable are mainly collateralized by property, plant and equipment of the Group.


The fair values of current trade and other payables approximate their respective carrying amounts due to their short-term nature. The fair values of non-current trade and other payables approximate their carrying amounts, as the impact of discounting is not significant.
 
26.
Borrowings
 
2017
 
2016
Non-current
 

 
 

Senior Notes
495,707

 
—

Bank borrowings
167,315

 
430,202

Obligations under finance leases
38

 
102

 
663,060

 
430,304

Current
 

 
 

Senior Notes
8,250

 
—

Bank overdrafts
6,214

 
90

Bank borrowings
140,367

 
204,923

Obligations under finance leases
67

 
79

 
154,898

 
205,092

Total borrowings
817,958

 
635,396

 
As of December 31, 2017, total bank borrowings include collateralized liabilities of US$ 637,306 (2016: US$ 525,663). These loans are mainly collateralized by property, plant and equipment, sugarcane plantations, sugar export contracts and shares of certain subsidiaries of the Group.

Notes 2027

On September 21, 2017, the Company issued senior notes (the “Notes”) for US$ 500 million, at an annual nominal rate of 6%. The Notes will mature on September 21, 2027. Interest on the Notes are payable semi-annually in arrears on March 21 and September 21 of each year, beginning on March 21, 2018. The total proceeds nets of expenses was US$ 495.7 million.

The Notes are fully and unconditionally guaranteed on a senior unsecured basis by certain of our current and future subsidiaries. As of the Issue Date, Adeco Agropecuaria S.A., Adecoagro Brasil Participações S.A., Adecoagro Vale do Ivinhema S.A., Pilagá S.A. and Usina Monte Alegre Ltda. are the only Subsidiary Guarantors.

The Notes contain customary financial covenants and restrictions which require us to meet pre-defined financial ratios, among other restrictions. The Group was in compliance with the related covenants.
 

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

F- 56
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)

26.
Borrowings (continued)


The maturity of the Group's borrowings (excluding obligations under finance leases) and the Group's exposure to fixed and variable interest rates is as follows:
 
2017
 
2016
Fixed rate:
 

 
 

Less than 1 year
132,998

 
67,682

Between 1 and 2 years
35,762

 
43,630

Between 2 and 3 years
20,097

 
40,047

Between 3 and 4 years
20,130

 
21,857

Between 4 and 5 years
16,310

 
21,116

More than 5 years
495,754

 
20,239

 
721,051

 
214,571

Variable rate:
 

 
 

Less than 1 year
21,833

 
137,331

Between 1 and 2 years
22,871

 
150,517

Between 2 and 3 years
17,945

 
81,947

Between 3 and 4 years
18,215

 
18,457

Between 4 and 5 years
11,164

 
18,309

More than 5 years
4,774

 
14,083

 
96,802

 
420,644

 
817,853

 
635,215

 
Borrowings incurred by the Group’s subsidiaries in Brazil are repayable at various dates between January 2018 and September 2024 and bear either fixed interest rates ranging from 2.5% to 9.0% per annum or variable rates based on LIBOR or other specific base-rates plus spreads ranging from 4.13% to 17.52% per annum. At December 31, 2017 LIBOR (six months) was 1,84% (2016: 1.32%).
 
Borrowings incurred by the Group´s subsidiaries in Argentina are repayable at various dates between January 2018 and September 2024 and bear either fixed interest rates ranging from 6.11% and 7.00% per annum for those borrowings denominated in US dollar, and a fixed interest rate ranging from 9.90% and 28.75% per annum for those borrowings denominated in Argentine pesos.





















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

F- 57
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)

26.
Borrowings (continued)


Brazilian Subsidiaries
 
The main loans of the Group’s Brazilian Subsidiaries are:
Bank
Grant date
Nominal 
amount
Capital outstanding as of December 31
Maturity date
Annual interest rate
2017
2016
(In millions)
Millions of
Reais
Millions of 
equivalent
Dollars
Millions of
equivalent
Dollars
Banco Do Brasil (1)
October 2012
R$
130.0

R$
91.3

27.6

33.7

November 2022
2.94% with 15% of bonus performance
Itau BBA FINAME Loan (2)
December 2012
R$
45.9

R$
25.2

7.6

9.3

December 2022
2.50%
Itau BBA
March 2013
R$
75.0

R$
-

-

5.8

-
CDI + 3.20%
Banco do Brasil / Itaú BBA Finem Loan (3)
September 2013
R$
273.0

R$
176.5

53.4

67.3

January 2023
6.77%
BNDES Finem Loan (4)
November 2013
R$
215.0

R$
136.9

41.4

50.3

January 2023
3.75%
ING / Rabobank / ABN / HSBC / Credit Agricole / Caixa Geral / Galena (7)
January 2015
US$
160.0

 
-

-

98.0

-
LIBOR 3M plus 4.40%
ING / Rabobank / Bladex / Credit Agricole / Votorantim / ABN (7)
August 2015
US$
110.0

 
-

-

110.0

-
LIBOR 3M plus 4.65%
Rabobank (7)
February 2016
US$
40.0

 
-

-

40.0

-
LIBOR 3M plus 3.50%
Tokyo-Mitsubishi (5)
August 2016
US$
30.0

 
-

30.0

30.0

August 2019
6.35%
Bradesco (7)
July 2016
R$
90.0

 
-

-

27.6

-
CDI + 2.10%
Votorantim (6)
July 2016
US$
15.0

 
-

10.0

15.0

June 2019
LIBOR 3M plus 4.60%
 
(1)
Collateralized by (i) a first degree mortgage of the Carmen (Santa Agua) farm; (ii) a first degree mortgage of the Sapálio farm; (iii) a first degree mortgage of the Takuare farm; and (iv) liens over the Ivinhema mill and equipment.
(2)
Collateralized by (i) a first degree mortgage of the Carmen (Santa Agua) farm; (ii) a first degree mortgage of the Sapálio farm; (iii) a first degree mortgage of the Takuare farm; and (iv) liens over the Ivinhema mill and equipment.
(3)
Collateralized by (i) a first degree mortgage of the Carmen (Santa Agua) farm; (ii) a first degree mortgage of the Sapálio farm; (iii) a first degree mortgage of the Takuare farm; (iv) liens over the Ivinhema mill and equipment; and (v) power sales contract.
(4)
Collateralized by (i) liens over the Ivinhema mill and equipment; and (ii) power sales contracts.
(5)
Collateralized by sales contracts.
(6)
Collateralized by (i) power sales contract and (ii) sales contracts.
(7)
These loans were prepaid in 2017, with the proceeds of the Notes 2027.
 
The above mentioned loans contain certain customary financial covenants and restrictions which require us to meet pre-defined financial ratios, among other restrictions, as well as restrictions on the payment of dividends. These financial ratios are measured considering the statutory financial statements of the Brazilian Subsidiaries.
 
During 2017 and 2016 the Group was in compliance with all financial covenants.
 

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

F- 58
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)

26.
Borrowings (continued)


Argentinian Subsidiaries
 
The main loans of the Group’s Argentinian Subsidiaries are:
 
Bank
Grant date
Nominal
amount
Capital outstanding as of
December 31
Maturity date
Annual interest rate
2017
2016
(In millions)
(In millions)
(In millions)
IDB Tranche A (1)
Feb-09
USD 20
US$3.07
US$6.15
Nov-18
6.11% per annum
IFC Tranche A (2)
Dec-16
USD 25
US$24.67
US$25.00
Sep-21
4.3% plus LIBOR
IFC Tranche B (2)
Dec-16
USD 25
US$24.93
US$25.00
Sep-23
4% plus LIBOR
 
(1): Collateralized by property, plant and equipment with a net book value of US$ 24.77 million, by a mortgage over (i) Carmen and La Rosa farms which are property of Adeco Agropecuaria S.A. and (ii) El Meridiano farm which is the property of Pilagá S.A.
 
(2): Collateralized by a US$ 75 million mortgage over Carmen farm, which is property of Adeco Agropecuaria S.A.
 
The Group entered into a floating to fix interest rate forward swap, fixing LIBOR at 1.25%, effective May 2012.
 
The above mentioned loans contain certain customary financial covenants and restrictions which require us to meet pre-defined financial ratios, among other restrictions, as well as restrictions on the payment of dividends. These financial ratios are measured considering the statutory financial statements of the Argentinian Subsidiaries.
 
During 2017 and 2016 the Group was in compliance with all financial covenants.

The carrying amount of short-term borrowings is approximate its fair value due to the short-term maturity. Long term borrowings subject to variable rate approximate their fair value.The fair value of long-term borrowings, including the notes, subject to fix rate do not significant differ from their fair value.
 
The breakdown of the Group´s borrowing by currency is included in Note 2 - Interest rate risk.

Evolution of the Group's borrowings as December 31, 2017 and 2016 is as follow:

 
2017
 
2016
Amount at the beginning of the year
635,396

 
723,339

Issuance of senior notes
495,678

 
—

Proceeds from long term loans
232,433

 
167,385

Payments of long term loans
(602,700
)
 
(277,913
)
Proceeds from short term loans
106,730

 
257,395

Payments of short term loans
(64,787
)
 
(272,033
)
Payments of interest
(39,118
)
 
(45,473
)
Accrued interest
51,005

 
46,470

Exchange differences and translation, net
(4,588
)
 
32,583

Others
7,909

 
3,643

Amount at the end of the year
817,958

 
635,396



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

F- 59
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)


27.    Payroll and social security liabilities
 
2017
 
2016
Non-current
 

 
 

Social security payable
1,240

 
1,235

 
1,240

 
1,235

Current
 

 
 

Salaries payable
6,199

 
7,351

Social security payable
3,702

 
3,063

Provision for vacations
12,323

 
12,109

Provision for bonuses
5,043

 
4,321

 
27,267

 
26,844

Total payroll and social security liabilities
28,507

 
28,079

 
28.
Provisions for other liabilities

The Group is subject to several laws, regulations and business practices of the countries where it operates. In the ordinary course of business, the Group is subject to certain contingent liabilities with respect to existing or potential claims, lawsuits and other proceedings, including those involving tax, labor and social security, administrative and civil and other matters. The Group accrues liabilities when it is probable that future costs will be incurred and it can reasonably estimate them. The Group bases its accruals on up-to-date developments, estimates of the outcomes of the matters and legal counsel experience in contesting, litigating and settling matters. As the scope of the liabilities becomes better defined or more information is available, the Group may be required to change its estimates of future costs, which could have a material effect on its results of operations and financial condition or liquidity.
 
The table below shows the movements in the Group's provisions for other liabilities categorized by type of provision:
 
Labor, legal and
other claims
 
Others
 
Total
At January 1, 2016
2,293

 
20

 
2,313

Additions
3,447

 
57

 
3,504

Used during year
(2,174
)
 
(14
)
 
(2,188
)
Exchange differences
291

 
(31
)
 
260

At December 31, 2016
3,857

 
32

 
3,889

Additions
4,750

 
—

 
4,750

Used during year
(3,754
)
 
(25
)
 
(3,779
)
Exchange differences
(15
)
 
(2
)
 
(17
)
At December 31, 2017
4,838

 
5

 
4,843

 
Analysis of total provisions:
 
2017
 
2016
Non current
4,078

 
3,299

Current
765

 
590

 
4,843

 
3,889

 
The Group is engaged in several legal proceedings, including tax, labor, civil, administrative and other proceedings in Brazil, which qualified as contingent liabilities for an aggregate claimed nominal amount of US$ 21.0 million and US$ 18.2 million as of December 31, 2017 and 2016, respectively.


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

F- 60
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)


29.
Disclosure of leases and similar arrangements

The Group as lessee
 
Operating leases:
 
The Group leases land for crop cultivation in Argentina. The leases have an average term of a crop year and are renewable at the option of the lessee for additional periods. Under the lease agreements, rent accrues generally at the time of harvest. Rent is payable at several times during the crop year. Lease expense was US$ 14.0 million for the year ended December 31, 2017 (2016: US$ 6.8 million; 2015: US$ 10.8 million). Lease expense is capitalized as part of biological assets.
 
The Group also leases various offices and machinery under cancellable operating lease agreements which involve no significant amount.
 
The future aggregate minimum lease payments under cancellable operating leases are as follows:
 
 
2017
 
2016
No later than 1 year
7,841

 
5,311

Later than 1 year and no later than 5 years
1,234

 
2,294

 
9,075

 
7,605

 
Agriculture “partnerships” (parceria by its exact term in Portuguese):
 
The Group enters into contracts with landowners to cultivate sugarcane on their land. These contracts have an average term of 5 years.
 
Under these contracts, the Group makes payments based on the market value of sugarcane per hectare (in tons) used by the Group in each harvest, with the market value based on the price of sugarcane published by CONSECANA and a fixed amount of total recoverable sugar per ton. Lease expense was US$ 41.1 million for the year ended December 31, 2017 (2016: US$ 64.90 million; 2015: US$ 53.4 million). Lease expense is included in “Initial recognition and changes in fair value of biological assets and agricultural produce” in the statement of income.
 
Finance leases:
 
Most of the leased assets carried in the consolidated statement of financial position as part of a finance lease relate to long-term rental and lease agreements for vehicles, machinery and equipment. Obligations under finance leasing totals US$ 105 and US$ 181 as of December 31, 2017 and 2016, respectively.
 
The Group as lessor
 
Operating leases:
 
The Group acts as a lessor in connection with an operating lease related to leased farmland, classified as investment property. The lease payments received are recognized in profit or loss. The lease has a term of ten years.
 
The following amounts have been recognized in the statement of income in the line “Sales goods and services rendered”:
 
 
2017
 
2016
 
2015
Rental income
771

 
984

 
1,309

 

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

F- 61
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)

29.
Disclosure of leases and similar arrangements (continued)


The future minimum rental payments receivable under cancellable leases are as follows:
 
2017
 
2016
No later than 1 year
504

 
494

Later than 1 year and no later than 5 years
1,014

 
988

 
1,518

 
1,482

 
On September 2013, Marfrig Argentina S.A. (“Marfrig Argentina”), the argentine subsidiary of the Brazilian company Marfrig Alimentos S.A. (“Marfrig Alimentos"), unilaterally early terminated the lease agreements for grazing land entered into with the Group on December 2009. The termination of the lease agreements was effective in the fourth quarter of 2013, and on April 2014, the Group filed an arbitration proceeding against Marfrig Argentina and Marfrig Alimentos claiming unpaid invoices for US$ 0.5 million and indemnification for early termination. On September 2016, the Parties settled the arbitration proceedings in the amount of US$ 9 million. As of December 31, 2016 the group collected US$ 7 million and as of the date of this financial statements the group has collected the full amount.
 
This settlement, net of the unpaid invoices and other expenses resulted in an income of US$ 8.5 million reflected in the line item Other operating income.
 
Finance leases:
 
The Group does not act as a lessor in connection with finance leases.
 

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

F- 62
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)


30.    Group companies

The following table details the subsidiaries that comprised the Group as of December 31, 2017 and 2016:
 
 
 
 
 
 
2017
 
2016
 
Activities
 
Country of
incorporation
and operation
 
Ownership
percentage
held if not
100 %
 
Ownership
percentage
held if not
100 %
Details of principal subsidiary undertakings:
 
 
 
 
 

 
 

Operating companies (unless otherwise stated):
 
 
 
 
 

 
 

Adeco Agropecuaria S.A.
(a)
 
Argentina
 
—

 
—

Pilagá S.A.
(a)
 
Argentina
 
99.94
%
 
99.94
%
Cavok S.A.
(a)
 
Argentina
 
51
%
 
51
%
Establecimientos El Orden S.A.
(a)
 
Argentina
 
51
%
 
51
%
Bañado del Salado S.A.
(a)
 
Argentina
 
—

 
—

Agro Invest S.A.
(a)
 
Argentina
 
51
%
 
51
%
Forsalta S.A.
(a)
 
Argentina
 
51
%
 
51
%
Dinaluca S.A.
(a)
 
Argentina
 
—

 
—

Simoneta S.A.
(a)
 
Argentina
 
—

 
—

Compañía Agroforestal S.M.S.A.
(a)
 
Argentina
 
—

 
—

Energía Agro S.A.U.
(a)
 
Argentina
 
—

 
—

Adeco Agropecuaria Brasil Ltda.
(b)
 
Brazil
 
—

 
—

Adecoagro Vale do Ivinhema Ltda.
(b)
 
Brazil
 
—

 
—

Adecoagro Commodities Ltda.
(b)
 
Brazil
 
—

 
—

Usina Monte Alegre Ltda.
(b)
 
Brazil
 
—

 
—

Adecoagro Energia Ltda.
(b)
 
Brazil
 
—

 
—

Kelizer S.A.
(a)
 
Uruguay
 
—

 
—

Agroglobal S.A. (f.k.a. Adecoagro Uruguay S.A.)
(a)
 
Uruguay
 
—

 
—

Holdings companies:
 
 
 
 
 

 
 

Adeco Brasil Participações S.A.
—
 
Brazil
 
—

 
—

Adecoagro LP S.C.S.
(d)
 
Luxembourg
 
—

 
—

Adecoagro GP S.a.r.l.
—
 
Luxembourg
 
—

 
—

Ladelux S.C.A.
—
 
Uruguay
 
—

 
—

Spain Holding Companies
(c)
 
Spain
 
—

 
—

 
(a) Mainly crops, rice, cattle and others.
 
(b) Mainly sugarcane, ethanol and energy.
 
(c) Comprised by (1) wholly owned subsidiaries: Kadesh España S.L.U.; Leterton España S.L.U.; Global Asterion S.L.U.; Global Acasto S.L.U.; Global Laertes S.L.U.; Global Seward S.L.U.; Global Pindaro S.L.U.; Global Pileo S.L.U.; Peak Texas S.L.U.; Peak City S.L.U. and 51% controlled subsidiaries (see note 21): Global Acamante S.L.U.; Global Carelio S.L.U.; Global Calidon S.L.U.; Global Mirabilis S.L.U. Global Anceo S.L.U.Global Hisingen S.L.U.
 
(d) The continuer from the merger between Adecoagro LP and International Farmland Holdings LP.
 

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

F- 63
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)

30.    Group companies (continued)


The percentage voting right for each principal subsidiary is the same as the percentage of capital stock held. Issued share capital represents only ordinary shares/ quotas, units or their equivalent. There are no preference shares or units issued in any subsidiary undertaking.
 
According to the laws of certain of the countries in which the Group operates, 5% of the profit of the year is separated to constitute legal reserves until they reach legal capped amounts (20% of total capital). These legal reserves are not available for dividend distribution and can only be released to absorb losses. The Group’s joint ventures have not reached the legal capped amounts.
 
31.
Related-party transactions
 
The following is a summary of the balances and transactions with related parties:
Related party
 
Relationship
 
Description of transaction
 
Income (loss) included in the
statement of income
 
Balance receivable
(payable)/(equity)
2017
 
2016
 
2015
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mario Jorge de Lemos Vieira / Cia Agropecuaria Monte Alegre / Alfenas Agricola Ltda / Marcelo Weyland Barbosa Vieira / Paulo Albert Weyland Vieira
 
(i)
 
Cost of manufactured products sold and services rendered (ii)
 
—

 
(42
)
 
(2,304
)
 


 
—

 
Receivables from related parties (Note 18)
 
—

 
—

 
—

 
176

 
172

 
Payables (Note 25)
 
—

 
—

 
—

 
(367
)
 
(701
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Directors and senior management
 
Employment
 
Compensation selected employees
 
(7,040
)
 
(5,213
)
 
(7,528
)
 
(17,985
)
 
(17,355
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CHS Agro
 
Joint venture
 
Receivables from related parties (Note 18) (iii)
 
—

 
—

 
—

 
10,218

 
8,114

 
Payables (Note 25)
 
—

 
—

 
—

 
(261
)
 
(451
)
 
Sales of goods
 
2,487

 
372

 
2,201

 
—

 
—

 
Services
 
88

 
87

 
110

 
—

 
—

 
Interest income
 
308

 
326

 
74

 
—

 
—


(i)
Shareholders of the Company.
(ii)
Relates to agriculture partnership agreements (“parceria”).
(iii)
It includes US$ 8 million of a loan that accruing a 3% interest rate per year with the final maturity in 2022.

32.
Critical accounting estimates and judgments
 
Critical accounting policies are those that are most important to the portrayal of the Group’s financial condition, results of operations and cash flows, and require management to make difficult, subjective or complex judgments and estimates about matters that are inherently uncertain. Management bases its estimates on historical experience and other assumptions that it believes are reasonable. The Group’s critical accounting policies are discussed below.
 
Actual results could differ from estimates used in employing the critical accounting policies and these could have a material impact on the Group’s results of operations. The Group also has other policies that are considered key accounting policies, such as the policy for revenue recognition. However, these other policies, which are discussed in the notes to the Group’s financial statements, do not meet the definition of critical accounting estimates, because they do not generally require estimates to be made or judgments that are difficult or subjective.
 
(a)Impairment testing
 
At the date of each statement of financial position, the Group reviews the carrying amounts of its property, plant and equipment and finite lived intangible assets to determine whether there is any indication that those assets have suffered an impairment

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

F- 64
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)

32.
Critical accounting estimates and judgments (continued)


loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent, if any, of the impairment loss. Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. The Group’s property, plant and equipment items generally do not generate independent cash flows.
 
Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that the carrying amount may be impaired. The impairment review requires management to undertake certain judgments, including estimating the recoverable value of the CGU to which the goodwill relates, based on either fair value less costs-to-sell or the value-in-use, as appropriate, in order to reach a conclusion on whether it deems the goodwill is impaired or not.
 
For purposes of the impairment testing, each CGU represents the smallest identifiable group of assets that generate cash inflows that are largely independent of the cash inflows from other assets or group of assets.
 
Farmlands may be used for different activities that may generate independent cash flows. When farmlands are used for single activities (i.e. crops), these are considered as one CGU. When farmland businesses are used for more than one segment activity (i.e. crops and cattle or rental income), the farmland is further subdivided into two or more CGUs, as appropriate, for purposes of impairment testing. Generally, each separate farmland within Argentina and Uruguay are treated as single CGUs, while in Brazil, management identified a farmland together with its related mill as separate CGUs.
 
Based on these criteria, management identified a total amount of 39 CGUs as of September 30, 2017 and 39 CGUs as of September 30, 2016.
 
As of September 30, 2017 and 2016, there were no impairment indicators on the Company’s long lived assets. Therefore, the Group only tested those CGUs with allocated goodwill in Argentina, Brazil and Uruguay.
 
CGUs tested based on a fair-value-less-costs-to-sell model at September 30, 2017 and 2016:
 
As of September 30, 2017, the Group identified 11 CGUs in Argentina and Uruguay (2016: 11 CGUs) to be tested based on this model (all CGUs with allocated goodwill). Estimating the fair value less costs-to-sell is based on the best information available, and refers to the amount at which the CGU could be bought or sold in a current transaction between willing parties. In calculating the fair value less costs-to-sell, management may be assisted by the work of external advisors. When using this model, the Group applies the “sales comparison approach” as its method of valuing most properties. This method relies on results of sales of similar agricultural properties to estimate the value of the CGU. This approach is based on the theory that the fair value of a property is directly related to the selling prices of similar properties.
 
Fair values are determined by extensive analysis which includes current and potential soil productivity of the land (the ability to produce crops and maintain livestock) projected margins derived from soil use, rental value obtained for soil use, if applicable, and other factors such as climate and location. Farmland ratings are established by considering such factors as soil texture and quality, yields, topography, drainage and rain levels. Farmland may contain farm outbuildings. A farm outbuilding is any improvement or structure that is used for farming operations. Outbuildings are valued based on their size, age and design.
 
Based on the factors described above, each farm property is assigned different soil classifications for the purposes of establishing a value, Soil classifications quantify the factors that contribute to the agricultural capability of the soil. Soil classifications range from the most productive to the least productive.
 
The first step to establishing an assessment for a farm property is a sales investigation that identifies the valid farm sales in the area where the farm is located.
 
A price per hectare is assigned for each soil class within each farm property. This price per hectare is determined based on the quantitative and qualitative analysis mainly described above.
 
The results are then tested against actual sales, if any, and current market conditions to ensure the values produced are accurate, consistent and fair.
 

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

F- 65
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)

32.
Critical accounting estimates and judgments (continued)


The following table shows only the 11 CGUs (2016: 11 CGUs) where goodwill was allocated at each period end and the corresponding amount of goodwill allocated to each one:
 
CGU / Operating segment / Country
 
September 30,
2017
 
September 30,
2016
La Carolina / Crops / Argentina
 
35

 
40

La Carolina / Cattle / Argentina
 
12

 
13

El Orden/ Crops / Argentina
 
53

 
60

El Orden/ Cattle / Argentina
 
4

 
5

La Guarida / Crops / Argentina
 
358

 
405

La Guarida / Cattle / Argentina
 
292

 
330

Los Guayacanes / Crops / Argentina
 
452

 
511

Doña Marina / Rice / Argentina
 
1,595

 
1,803

Huelen / Crops / Argentina
 
1,787

 
2,020

El Colorado / Crops / Argentina
 
787

 
890

El Colorado / Cattle / Argentina
 
115

 
130

Closing net book value of goodwill allocated to CGUs tested (Note 14)
 
5,490

 
6,207

Closing net book value of PPE items and other assets allocated to CGUs tested
 
34,668

 
36,901

Total assets allocated to CGUs tested
 
40,158

 
43,108

 
Based on the testing above, the Group determined that none of the CGUs, with allocated goodwill, were impaired at September 30, 2017 and 2016.
 
CGUs tested based on a value-in-use model at September 30, 2017 and 2016:
 
As of September 30, 2017, the Group identified 3 CGUs (2016: 3 CGUs) in Brazil to be tested base on this model (all CGUs with allocated goodwill). In performing the value-in-use calculation, the Group applied pre-tax rates to discount the future pre-tax cash flows. In each case, these key assumptions have been made by management reflecting past experience and are consistent with relevant external sources of information, such as appropriate market data. In calculating value-in-use, management may be assisted by the work of external advisors.
 
The key assumptions used by management in the value-in-use calculations which are considered to be most sensitive to the calculation are:
Key Assumptions
 
September 30,
2017
 
September 30,
2016
Financial projections
 
Covers 4 years for UMA
 
Covers 4 years for UMA
 
 
Cover 7 years for AVI
 
Cover 7 years for AVI
Yield average growth rates
 
0-1%
 
0-1%
Future pricing increases
 
3% per annum
 
3% per annum
Future cost increases
 
1% per annum
 
3% per annum
Discount rates
 
7.6%
 
6.2%
Perpetuity growth rate
 
2.0%
 
2.0%
 
Discount rates are based on the risk-free rate for U. S. government bonds, adjusted for a risk premium to reflect the increased risk of investing in South America and Brazil in particular. The risk premium adjustment is assessed for factors specific to the respective CGUs and reflects the countries that the CGUs operate in.
 

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

F- 66
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)

32.
Critical accounting estimates and judgments (continued)


The following table shows only the 3 CGUs where goodwill was allocated at each period end and the corresponding amount of goodwill allocated to each one:
 
CGU/ Operating segment
 
September 30,
2017
 
September 30,
2016
AVI / Sugar, Ethanol and Energy
 
5,012

 
4,892

UMA / Sugar, Ethanol and Energy
 
2,622

 
2,564

Closing net book value of goodwill allocated to CGUs tested (Note 14)
 
7,634

 
7,456

Closing net book value of PPE items and other assets allocated to CGUs tested
 
719,558

 
689,857

Total assets allocated to 3 CGUs tested
 
727,192

 
697,313

 
Based on the testing above, the Group determined that none of the CGUs, with allocated goodwill, were impaired at September 30, 2017 and 2016.
 
Management views these assumptions as conservative and does not believe that any reasonable change in the assumptions would cause the carrying value of these CGU’s to exceed the recoverable amount.

As of December 31, 2017, the Group determined that there is no indicators of impairment.
 
(b) Biological assets
 
The nature of the Group’s biological assets and the basis of determination of their fair value are explained under Note 33.11. The discounted cash flow model requires the input of highly subjective assumptions including observable and unobservable data. Generally the estimation of the fair value of biological assets is based on models or inputs that are not observable in the market and the use of unobservable inputs is significant to the overall valuation of the assets. Unobservable inputs are determined based on the best information available, for example by reference to historical information of past practices and results, statistical and agronomical information, and other analytical techniques. Key assumptions include future market prices, estimated yields at the point of harvest, estimated production cycle, future cash flows, future costs of harvesting and other costs, and estimated discount rate.
 
Market prices are generally determined by reference to observable data in the principal market for the agricultural produce. Harvesting costs and other costs are estimated based on historical and statistical data. Yields are estimated based on several factors including the location of the farmland and soil type, environmental conditions, infrastructure and other restrictions and growth at the time of measurement. Yields are subject to a high degree of uncertainty and may be affected by several factors out of the Group’s control including but not limited to extreme or unusual weather conditions, plagues and other crop diseases, among other factors.
 
The key assumptions discussed above are highly sensitive. Reasonable shifts in assumptions including but not limited to increases or decreases in prices, costs and discount factors used would result in a significant increase or decrease to the fair value of biological assets. In addition, cash flows are projected over a number of years and based on estimated production. Estimates of production in themselves are dependent on various assumptions, in addition to those described above, including but not limited to several factors such as location, environmental conditions and other restrictions. Changes in these estimates could materially impact on estimated production, and could therefore affect estimates of future cash flows used in the assessment of fair value (see Note 15).
 
(c) Fair value of derivatives and other financial instruments
 
Fair values of derivative financial instruments are computed with reference to quoted market prices on trade exchanges, when available. The fair values of commodity options are calculated using year-end market rates together with common option pricing models. The fair value of interest rate swaps has been calculated using a discounted cash flow analysis.
 

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

F- 67
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)

32.
Critical accounting estimates and judgments (continued)


(d) Income taxes
 
The Group is subject to income taxes in numerous jurisdictions. Significant judgment is required in determining the worldwide provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain. The Group recognizes liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and deferred income tax assets and liabilities in the period in which such determination is made.
 
Deferred tax assets are reviewed each reporting date and reduced to the extent that it is no longer probable that sufficient taxable income will be available to allow all or part of the asset to be settled. Deferred tax assets and liabilities are not discounted. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment (see Note 10 for details).

33.    Summary of significant accounting policies

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

33.1
Basis of preparation and presentation

The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS) of the International Accounting Standards Board (IASB) and the Interpretations of the International Financial Reporting Interpretations Committee (IFRIC). All IFRS issued by the IASB, effective at the time of preparing these consolidated financial statements have been applied.
 
The consolidated financial statements have been prepared under the historical cost convention as modified by financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss and biological assets and agricultural produce at the point of harvest measured at fair value.
 

The preparation of consolidated financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 32.
 
(a) Standards, amendments and interpretations to existing standards effective and adopted by the Group in 2017
 
The following standard, amendments and interpretations to existing standards have been published and were mandatory for the Group as of January 1, 2017:

Disclosure inititative - amendment to IAS 7, which requires the disclosure of changes in liabilities arising from financing activities, see Note 26.

(b) Standards, amendments and interpretations to existing standards that are not yer effective

Below is a description of the standards, amendments and interpretations issued by the IASB to existing standards that have been issued and are not yet mandatory and which have not been early adopted by the Group:

In May 2014, the IASB issued IFRS 15, "Revenue from contracts with customers", which deals with revenue recognition and establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. Revenue is recognized when a customer obtains control of a good or service and thus has the ability to direct the use and obtain the benefits from the good or service. The standard replaces IAS 18 ‘Revenue’ and IAS 11 ‘Construction contracts’ and related interpretations. The standard is effective for

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

F- 68
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)



annual periods beginning on or after January 1, 2018 and earlier application is permitted. The Group has assessed the potential impact IFRS 15 will have on the financial position and results of operations of the Group, and it will not be significant. The standard will be applied prospectively.

In July 2014 the IASB published the final version of IFRS 9 Financial Instrument which replaces earlier versions of IFRS 9 and completes the IASB’s project to replace IAS 39 Financial Instruments: Recognition and Measurement. It includes requirements on the classification and measurement of financial assets and liabilities, as well as an expected credit losses model that replaces the current incurred loss impairment model. The standard is effective for accounting periods beginning on or after January 1, 2018. Early adoption is permitted. The Group has assessed the potential impact IFRS 9 will have on the financial position and results of operations of the Group, and it will not be significant.

In January 2016, the IASB finished its long-standing project on lease accounting and published IFRS 16, ‘Leases’, which replaces the current guidance in IAS 17. This will require far-reaching changes in accounting by lessees in particular. The standard applies to annual periods beginning on or after 1 January 2019, with earlier application permitted if IFRS 15, ‘Revenue from Contracts with Customers’, is also applied. The Group has not yet assessed the potential impact IFRS 16 may have on the financial position and results of operations of the Group.

There are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Group.
33.2
Scope of consolidation
 
The consolidated financial statements include the results of the Company and all of its subsidiaries from the date that control commences to the date that control ceases. They also include the Group’s share of the net income of its jointly-controlled entities on an equity-accounted basis from the point at which joint control commences, to the date that it ceases.
 
(a) Subsidiaries
 
Subsidiaries are all entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date that control commences and deconsolidated from the date that control ceases.
 
The Group uses the acquisition method of accounting to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair value of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date.
 
The Group recognizes any non-controlling interest in the acquiree on an acquisition-by-acquisition basis either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets.
 
The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets acquired is recorded as goodwill.
 
Inter-company transactions, balances and unrealized gains on transactions between group companies are eliminated. Unrealized losses are also eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.
 
(b) Changes in ownership interests in subsidiaries without change of control
 
Transactions with non-controlling interests that do not result in loss of control are accounted for as equity transactions – that is, as transactions with the owners in their capacity as owners. The difference between the fair value of any consideration paid

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

F- 69
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)

33.2
Scope of consolidation (continued)


and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity.
 
(c) Disposal of subsidiaries
 
When the Group ceases to have control any retained interest in the entity is re-measured to its fair value at the date when control is lost, with the change in carrying amount recognized in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amount previously recognized in other comprehensive income in respect of that entity is accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognized in other comprehensive income are reclassified to profit or loss.
 
(d) Joint arrangements
 
Under IFRS 11, investments in joint arrangements are classified as either joint operations or joint ventures depending on the contractual rights and obligations each investor has rather than the legal structure of the joint arrangement.
 
The Group has assessed the nature of its joint arrangements and determined them to be joint ventures and value them under the equity method.
 
Under the equity method of accounting, interests in joint ventures are initially recognized in the consolidated statement of financial position at cost and adjusted thereafter to recognize the Group’s share of the post-acquisition of profits or losses and movements in other comprehensive income, respectively. When the share of losses of an investee equals or exceeds the carrying amount of an investment the Group discontinue applying the equity method, the investment is reduced to zero and does not record additional losses. If the investee subsequently reports net income, the Group would resume applying the equity method only after its share of that net income equals the share of net losses not recognized during the period the equity method was suspended.
 
Unrealized gains on transactions between the Group and its joint ventures are eliminated to the extent of the Group’s interest in the joint ventures. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of the joint ventures have been changed where necessary to ensure consistency with the policies adopted by the Group.
 
33.3
Segment reporting
 
According to IFRS 8, operating segments are identified based on the ‘management approach’. This approach stipulates external segment reporting based on the Group’s internal organizational and management structure and on internal financial reporting to the chief operating decision maker (the Management Committee in the case of the Company)
 
33.4
Foreign currency translation
 
(a) Functional and presentation currency
 
Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated financial statements are presented in US dollars, which is the Group’s presentation currency.
 
(b) Transactions and balances
 
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are remeasured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the statement of income, in the line Item “Finance income” or “Finance cost”, as appropriate.
 
(c) Group companies

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

F- 70
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)

33.4
Foreign currency translation (continued)


 
The results and financial position of all the Group entities (none of which has the currency of a hyper-inflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows:
 
•
assets and liabilities for each statement of financial position presented are translated at the closing rate at the date of that statement of financial position;
•
income and expenses for each statement of income are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions); and
•
all resulting exchange differences are recognized as a separate component of equity.

When a foreign operation is partially disposed of or sold, exchange differences that were recorded in equity are recognized in the statement of income as part of the gain or loss on sale.
 
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.
 
33.5
Property, plant and equipment

Property, plant and equipment is recorded at cost, less accumulated depreciation and impairment losses, if any. Historical cost comprises the purchase price and any costs directly attributable to the acquisition. Under the definition of Property plant and equipment is included the bearer plants, such as sugarcane and coffe trees.
 
Where individual components of an item of property, plant and equipment have different useful lives, they are accounted for as separate items, which are depreciated separately.
 
Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognized. All other repairs and maintenance are charged to the statement of income when they are incurred.
 
The depreciation methods and periods used by the group are disclosed in Note 12.
 
Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognized within “Other operating income, net” in the statement of income.
 
33.6
Investment property
 
Investment property consists of farmland for rental or for capital appreciation and not used in production or for sale in the ordinary course of business, and it is measured at cost less accumulated depreciation and any impairment losses if any.
 
33.7
Leases
 
The Group classifies its leases at the inception as finance or operating leases. Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases and charged to the statements of income in a straight-line basis over the period of the lease. Finance leases are capitalized at the lease’s inception at the lower of the fair value of the leased property and the present value of the minimum lease payments. The corresponding rental obligations, net of finance charges, are included as “Borrowings”
 

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

F- 71
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)


33.8
Goodwill
 
Goodwill represents future economic benefits arising from assets that are not capable of being individually identified and separately recognized by the Group on an acquisition. Goodwill on acquisition is initially measured at cost. being the excess of the consideration over the fair value of the Group’s share of net assets of the acquired subsidiary undertaking at the acquisition date. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. It is allocated to those cash generating units expected to benefit from the acquisition for the purpose of impairment testing. Goodwill arising on the acquisition of subsidiaries is included within “Intangible assets” on the statement of financial position. Goodwill arising on the acquisition of foreign entities is treated as an asset of the foreign entity denominated in the local currency and translated at the closing rate.
 
Goodwill is not amortized but tested for impairment on an annual basis, or more frequently if there is an indication of impairment. Gains and losses on the disposal of a Group entity include any goodwill relating to the entity sold (see Note 33.10).
 
33.9
Other intangible assets
 
Other intangible assets that are acquired by the Group, which have finite useful lives, are measured at cost less accumulated amortization and impairment losses, if any. These intangible assets comprise trademarks and computer software and are amortized in the statement of income on a straight-line basis over their estimated useful lives estimated to be 10 to 20 years and 3 to 5 years, respectively.
 
33.10
Impairment of assets
 
Goodwill
 
For the purpose of impairment testing, assets are grouped at the lowest levels for which there are separately identifiable cash flows, known as cash-generating units. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset may in the unit. Impairment losses recognized for goodwill cannot be reversed in a subsequent period. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted (see Note 32 (a) for details).
 
Property, plant and equipment and finite lived intangible assets
 
At each statement of financial position date, the Group reviews the carrying amounts of its property, plant and equipment and other intangible assets which have finite lives to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent, if any, of the impairment loss. Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs.
 
If the recoverable amount of an asset or cash-generating unit is estimated to be less than its carrying amount, that carrying amount is reduced to its recoverable amount. An impairment loss is recognized immediately in the statement of income.
 
Where an impairment loss subsequently reverses, the carrying amount of the asset or cash-generating unit is increased to the revised estimate of its recoverable amount, not to exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset or cash-generating unit in prior years. A reversal of an impairment loss is recognized immediately in the statement of income.
 
33.11
Biological assets

Biological assets comprise growing crops (mainly corn, wheat, soybeans, sunflower and rice), sugarcane, coffee and livestock (growing herd and cattle for dairy production).
 

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

F- 72
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)

33.11
Biological assets (continued)


The Group distinguishes between consumable and bearer biological assets, and between mature and immature biological assets. “Consumable” biological assets are those assets that may be harvested as agriculture produce or sold as biological assets, for example livestock intended for dairy production. “Bearer” biological assets are those assets capable of producing more than one harvest, for example sugarcane or livestock from which raw milk is produced. “Mature” biological assets are those that have attained harvestable specifications (for consumable biological assets) or are able to sustain regular harvests (for bearer biological assets). “Immature” biological assets are those assets other than mature biological assets.
 
Costs are capitalized as biological assets if, and only if, (a) it is probable that future economic benefits will flow to the entity, and (b) the cost can be measured reliably. The Group capitalizes costs such as: planting, harvesting, weeding, seedlings, irrigation, agrochemicals, fertilizers and a systematic allocation of fixed and variable production overheads that are directly attributable to the management of biological assets, among others. Costs that are expensed as incurred include administration and other general overhead and unallocated production overhead, among others.
 
Biological assets, both at initial recognition and at each subsequent reporting date, are measured at fair value less costs to sell, except where fair value cannot be reliably measured. Cost approximates fair value when little biological transformation has taken place since the costs were originally incurred or the impact of biological transformation on price is not expected to be material.
 
Gains and losses that arise on measuring biological assets at fair value less costs to sell and measuring agricultural produce at the point of harvest at fair value less costs to sell are recognized in the statement of income in the period in which they arise in the line item “Initial recognition and changes in fair value of biological assets and agricultural produce”.
 
Where there is an active market for a biological asset or agricultural produce, quoted market prices in the most relevant market are used as a basis to determine the fair value. Otherwise, when there is no active market or market-determined prices are not available, fair value of biological assets is determined through the use of valuation techniques.
 
Therefore, the fair value of biological assets is generally derived from the expected discounted cash flows of the related agricultural produce. The fair value of the agricultural produce at the point of harvest is generally derived from market determined prices. A general description of the determination of fair values based on the Company’s business segments follow:
 
•
Growing crops:

Growing crops, for which biological growth is not significant, are measured at cost, which approximates fair value. Expenditure on growing crops includes land preparation expenses and other direct expenses incurred during the sowing period including labor, seedlings, agrochemicals and fertilizers among others.
 
Otherwise, biological assets are measured at fair value less estimated point-of-sale costs at initial recognition and at any subsequent period. Point-of-sale costs include all costs that would be necessary to sell the assets
 
The fair value of growing crops excluding sugarcane and coffee is measured based on a formula, which takes into consideration the estimated crop yields, estimated market prices and costs, and discount rates. Yields are determined based on several factors including location of farmland, environmental conditions and other restrictions and growth at the time of measurement. Yields are multiplied by sown hectares to determine the estimated tons of crops to be obtained. The tons are then multiplied by a net cash flow determined at the future crop prices less the direct costs to be incurred. This amount is discounted at a discount rate, which reflects current market assessments of the assets involved and the time value of money.
 
•
Growing herd and cattle:

Livestock are measured at fair value less estimated point-of-sale costs, with any changes therein recognized in the statement of income, on initial recognition as well as subsequently at each reporting period. The fair value of livestock is determined based on the actual selling prices less estimated point-of-sale costs in the markets where the Group operates.
 
•
Coffee:


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

F- 73
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)

33.11
Biological assets (continued)


The agricultural produce growing on the coffee trees, are biological assets, and are valued at fair value less cost to sell. Projected costs include maintenance, pruning, land leasing, harvesting and coffee treatment. These estimates are discounted at an appropriate discount rate.
 
•
Sugarcane:

Sugarcane planting costs form part of Property plant and equipment. The agricultural produce growing on sugarcane is classified as biological assets and are measured at fair value less cost to sell. The fair value of agricultural produce growing on sugarcane depends on the variety, location and maturity of the plantation.
 
Agricultural produce growing in the Sugarcane, for which biological growth is not significant, is valued at cost, which approximates fair value. Expenditure on the agricultural produce growing in the sugarcane consists mainly of labor, agrochemicals and fertilizers among others. When it has attained significant biological growth, it is measured at fair value through a discounted cash flow model. Revenues are based on estimated yearly production volume (which will be destined to sugar, ethanol, energy and raw cane production) and the price is calculated as the average of daily prices for sugar future contracts (Sugar #11 ICE-NY contracts) for a six months period. Projected costs include maintenance and land leasing among others. These estimates are discounted at an appropriate discount rate.
 
33.12
Inventories
 
Inventories comprise of raw materials, finished goods (including harvested agricultural produce and manufactured goods) and others.
 
Harvested agricultural produce (except for rice and milk) are measured at net realizable value until the point of sale because there is an active market in the produce, there is a negligible risk that the produce will not be sold and there is a well-established practice in the industry carrying the inventories at net realizable value. Changes in net realizable value are recognized in the statement of income in the period in which they arise under the line item “Changes in net realizable value of agricultural produce after harvest”.
 
All other inventories (including rice and milk) are measured at the lower of cost and net realizable value. Cost is determined using the weighted average method.
 
33.13
Financial assets
 
Financial assets are classified in the following categories: at fair value through profit or loss and loans and receivables. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition (see Note 17).
 
(a) Recognition and measurement
 
Regular purchases and sales of financial assets are recognized on the trade-date – the date on which the Group commits to purchase or sell the asset. Financial assets not carried at fair value through profit or loss are initially recognized at fair value plus transaction costs. Financial assets carried at fair value through profit or loss are initially recognized at fair value and transaction costs are expensed in the statement of income. Financial assets are derecognized when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership. Financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables are subsequently carried at amortized cost using the effective interest method.
 
Gains or losses arising from changes in the fair value of the “financial assets at fair value through profit or loss” category are presented in the statement of income within “Other operating income, net” in the period in which they arise.
 
If the market for a financial asset is not active (and for unlisted securities), the Group establishes fair value by using valuation techniques. These include the use of recent arm’s length transactions, reference to other instruments that are substantially

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

F- 74
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)

33.13
Financial assets (continued)


the same, discounted cash flow analysis, and option pricing models, making maximum use of market inputs and relying as little as possible on entity-specific inputs.
 
The Group assesses at each statement of financial position date whether there is objective evidence that a financial asset or a group of financial assets is impaired. Impairment testing of trade receivables is described in Note 33.15.
 
(b) Offsetting financial instruments
 
Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously. This right must not be contingent on future events and must be enforceable in any case.
 
33.14
Derivative financial instruments and hedging activities
 
Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. Commodity future contract fair values are computed with reference to quoted market prices on future exchanges markets. The fair values of commodity options are calculated using year-end market rates together with common option pricing models. The fair value of interest rate swaps has been calculated using a discounted cash flow analysis.
 
The Group manages exposures to financial and commodity risks using hedging instruments that provide the appropriate economic outcome. The principal hedging instruments used may include commodity future contracts, put and call options, foreign exchange forward contracts and interest rate swaps. The Group does not use derivative financial instruments for speculative purposes.
 
The Group’s policy is to apply hedge accounting to hedging relationships where it is both permissible under IAS 39, practical to do so and its application reduces volatility, but transactions that may be effective hedges in economic terms may not always qualify for hedge accounting under IAS 39. Any derivatives that the Group holds to hedge these exposures are classified as “held for trading” and are shown in a separate line on the face of the statement of financial position. The method of recognizing gains or losses on derivatives depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. Gains and losses on commodity derivatives are classified within “Other operating income, net”. Gains and losses on interest rate and foreign exchange rate derivatives are classified within ‘Financial results, net’. The Group designates certain derivatives as hedges of the foreign currency risk associated with highly probable forecast transactions (cash flow hedge).
 
The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedging transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the instruments that are used in hedging transactions are highly effective in offsetting changes in fair value or cash flows of hedged items.
 
Cash flow hedge
 
The effective portion of the gain or loss on the instruments that are designated and qualify as cash flow hedges is recognized in other comprehensive income. The gain or loss relating to the ineffective portion is recognized immediately in the statement of income within "Finance income” or “Finance cost”, as appropriate.
 
Amounts accumulated in equity are reclassified to profit or loss in the periods when the hedged item affects profit or loss. The gain or loss relating to the effective portion is recognized in the statement of income within "Finance income” or “Finance cost”, as appropriate.
 
When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognized when the forecast transaction is ultimately recognized in the statement of income. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the statement of income.
 

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

F- 75
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)


33.15
Trade and other receivables and trade and other payables
 
Trade receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method. In the case of receivables, less allowance for trade receivables.
 
An allowance for trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Such evidence includes significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization, and default or delinquency in payments. Subsequent recoveries of amounts previously written off are credited against selling expenses in the statement of income.
 
33.16
Cash and cash equivalents
 
Cash and cash equivalents includes cash in hand, deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less. In the statements of cash flows, interest paid is presented within financing cash flows and interest received is presented within investing activities.
 
33.17
Borrowings
 
Borrowings are initially recognized at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortized cost using the effective interest method. Borrowing costs are capitalized during the period of time that is required to complete and prepare the asset for its intended use.
 
33.18
Provisions
 
Provisions are recognized when (i) the Group has a present legal or constructive obligation as a result of past events; (ii) it is probable that an outflow of resources will be required to settle the obligation; and (iii) a reliable estimate of the amount of the obligation can be made. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation.
 
33.19
Onerous contracts

The Group enters into contracts, which require the Group to sell commodities in accordance with the Group's expected sales. These contracts do not qualify as derivatives. These contracts are not recognized until at least one of the parties has performed under the agreement. However, when the contracts are onerous, the Group recognizes the present obligation under the contracts as a provision included within “Provision and other liabilities” in the statement of financial position. Losses under these onerous contracts are recognized within “Other operating income, net” in the statement of income.

33.20
Current and deferred income tax
 
The Group’s tax benefit or expense for each year comprises the charge for current tax payable and deferred taxation attributable to the Group’s operating subsidiaries. Tax is recognized in the statement of income, except to the extent that it relates to items recognized directly in equity. In this case, the tax is also recognized in equity.
 
The current income tax charge is calculated on the basis of the tax laws enacted at the date of the statement of financial position in the countries where the Group’s subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.
 
Deferred income tax is recognized, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) effective in the countries where the Group’s subsidiaries operate and generate taxable income.
 

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

F- 76
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)

33.20
Current and deferred income tax (continued)


Deferred income tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized.
 
Deferred income tax is provided on temporary differences arising on investments in subsidiaries, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.
 
The Group is able to control the timing of dividends from its subsidiaries and hence does not expect to remit overseas earnings in the foreseeable future in a way that would result in a charge to taxable profit. Hence deferred tax is recognized in respect of the retained earnings of overseas subsidiaries only to the extent that, at the date of the statement of financial position, dividends have been accrued as receivable or a binding agreement to distribute past earnings in future has been entered into by the subsidiary.

33.21    Revenue Recognition
 
The Group’s primary activities comprise agricultural and agro-industrial activities.
 
The Group’s agricultural activities comprise growing and selling agricultural produce. In accordance with IAS 41 “Agriculture”, cattle are measured at fair value with changes therein recognized in the statement of income as they arise. Agricultural produce is measured at net realizable value with changes therein recognized in the statement of income as they arise. Therefore, sales of agricultural produce and cattle generally do not generate any separate gains or losses in the statement of income. See Notes 33.11 and 33.12 for additional details.
 
The Group’s agro-industrial activities comprise the selling of manufactured products (i.e. industrialized rice, milk-related products, ethanol, sugar, energy, among others). These sales are measured at the fair value of the consideration received or receivable, net of returns and allowances, trade and other discounts, and sales taxes, as applicable. Revenue is recognized when the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, and there is no continuing management involvement with the goods. Transfers of risks and rewards vary depending on the individual terms of the contract of sale.
 
The Group also provides certain agricultural-related services such as grain warehousing/conditioning and other services, e.g. handling and drying services. Revenue from services is recognized as services are provided.
 
The Group leases owned farmland property to third parties under operating lease agreements. Rental income is recognized on a straight-line basis over the period of the lease.
 
The Group is a party to a 10-year power agreement for the sale of electricity which expires in 2018. The delivery period starts in May and ends in November of each year. The Group is also a party to two 15-year power agreements which delivery period starts in March and ends in December of each year, these two agreements will expire in 2024 and 2025, respectively. Prices under all the agreements are adjusted annually for inflation. Revenue related to the sale of electricity under these two agreements is recorded based upon output delivered.
 
33.22
Farmlands sales
 
The Group’s strategy is to profit from land appreciation value generated through the transformation of its productive capabilities. Therefore, the Group may seek to realize value from the sale of farmland assets and businesses.
 
Farmland sales are not recognized until (i) the sale is completed, (ii) the Group has determined that it is probable the buyer will pay, (iii) the amount of revenue can be measured reliably, and (iv) the Group has transferred to the buyer the risk of ownership, and does not have a continuing involvement. Gains from “farmland sales” are included in the statement of income under the line item “Other operating income, net”.


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

F- 77
Adecoagro S.A.
Notes to the Consolidated Financial Statements (Continued)
(All amounts in US$ thousands, except shares and per share data and as otherwise indicated)


33.23
Assets held for sale and discontinued operations

When the Group intends to dispose of, or classify as held for sale, a business component that represents a separate major line of business or geographical area of operations, or a subsidiary acquired exclusively with a view to resale, it classifies such operations as discontinued. The post tax profit or loss of the discontinued operations is shown as a single amount on the face of the statement of income, separate from the other results of the Group. Assets and liabilities classified as held for sale are measured at the lower of carrying value and fair value less costs to sell.
 
Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered through a disposal rather than through continuing use. This condition is regarded as met only when management is committed to the sale (disposal), the sale (disposal) is highly probable and expected to be completed within one year from classification and the asset is available for immediate sale (disposal) in its present condition. The statements of income for the comparative periods are represented to show the discontinued operations separate from the continuing operations.
 
33.24
Earnings per share
 
Basic earnings per share is calculated by dividing the net income for the year attributable to equity holders of the parent by the weighted average number of ordinary shares outstanding during the year. Diluted net earnings per share is computed by dividing the net income for the period by the weighted average number of ordinary shares outstanding, and when dilutive, adjusted for the effect of all potentially dilutive shares, including share options, on an as-if converted basis.
 
33.25
Equity-settled share-based payments
 
The Group issues equity settled share-based payments to certain directors, senior management and employees. Options under the awards were measured at fair value at the date of grant. An expense is recognized to spread the fair value of each award over the vesting period on a straight-line basis, after allowing for an estimate of the awards that will eventually vest. The estimate of the level of vesting is reviewed at least annually, with any impact on the cumulative charge being recognized immediately.
 
33.26
Research and development
 
Research phase expenditure is expensed as incurred. Development expenditure is capitalized as an internally generated intangible asset only if it meets strict criteria, relating in particular to technical feasibility and generation of future economic benefits. Research expenses have been immaterial to date. The Group has not capitalized any development expenses to date.


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

F- 78