SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 
FORM 6-K
 
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of the
Securities Exchange Act of 1934
 
For the month of May, 2018

Commission File Number 1565025
 

 

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

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

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

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


Form 20-F ___X___ Form 40-F _______

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

Yes _______ No ___X____


 
 

INTERIM CONSOLIDATED FINANCIAL STATEMENTS - AMBEV S.A.

 

Interim Consolidated Balance Sheets

As at March 31, 2018 and December 31, 2017

(Expressed in thousands of Brazilian Reais)

 

Assets

Note

03/31/2018

12/31/2017

       

Cash and cash equivalents

5

7,953,477

10,354,527

Investment securities

6

12,229

11,883

Derivative financial instruments

20

366,507

350,036

Trade receivable

 

3,537,112

4,944,831

Inventories

7

4,725,117

4,318,973

Income tax and social contributions recoverable

 

2,962,627

2,770,376

Other recoverable taxes

 

712,424

600,165

Other assets

 

1,291,059

1,367,282

Current assets

 

21,560,552

24,718,073

       
       

Investment securities

6

143,481

121,956

Derivative financial instruments

20

41,440

35,188

Income tax and social contributions recoverable

 

2,322,283

2,312,664

Other recoverable taxes

 

200,664

225,036

Deferred tax assets

8

2,348,581

2,279,339

Other assets

 

1,389,186

1,964,424

Employee benefits

 

54,116

58,443

Investments in joint ventures

 

243,813

237,961

Property, plant and equipment

9

18,276,310

18,822,327

Intangible

 

4,606,773

4,674,704

Goodwill

10

31,191,746

31,401,874

Non-current assets

 

60,818,393

62,133,916

       

Total assets

 

82,378,945

86,851,989

 

 

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

 

 

 

1

 


 
 

Interim Consolidated Balance Sheets (continued)

As at March 31, 2018 and December 31, 2017

(Expressed in thousands of Brazilian Reais)

 

Equity and liabilities

Note

03/31/2018

12/31/2017

 

 

 

 

Trade payables

 

11,000,925

11,853,928

Derivative financial instruments

20

267,738

215,090

Interest-bearing loans and borrowings

11

3,278,899

1,321,122

Bank overdrafts

5

127

1,792

Wages and salaries

 

779,945

1,047,182

Dividends and interest on shareholders’ equity payable

 

747,105

1,778,633

Income tax and social contribution payable

 

1,506,236

1,668,407

Taxes and contributions payable

 

2,390,814

3,825,440

Put option granted on subsidiary and other liabilities

 

2,709,787

6,807,925

Provisions

12

168,731

168,957

Current liabilities

 

22,850,307

28,688,476

 

 

 

 

Trade payables

 

145,514

175,054

Derivative financial instruments

20

30,407

2,434

Interest-bearing loans and borrowings

11

1,188,756

1,231,928

Deferred tax liabilities

8

2,377,971

2,329,229

Income tax and social contribution payable (i)

 

2,185,225

2,418,027

Taxes and contributions payable

 

746,145

771,619

Put option granted on subsidiary and other liabilities

 

345,715

429,102

Provisions

12

490,155

512,580

Employee benefits

 

2,250,502

2,310,685

Non-current liabilities

 

9,760,390

10,180,658

 

 

 

 

Total liabilities

 

32,610,697

38,869,134

 

 

 

 

Equity

13

 

 

Issued capital

 

57,710,202

57,614,140

Reserves

 

63,302,193

63,361,144

Carrying value adjustments

 

(74,349,103)

(74,966,470)

Retained earnings

 

2,160,529

-

Equity attributable to equity holders of Ambev

 

48,823,821

46,008,814

Non-controlling interests

 

944,427

1,974,041

Total Equity

 

49,768,248

47,982,855

 

 

 

 

Total equity and liabilities

 

82,378,945

86,851,989

 

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

 

 

2

 


 

Interim Consolidated Income Statements

For the three-month period ended March 31, 2018 and 2017

(Expressed in thousands of Brazilian Reais)

 

 

Note

03/31/2018

03/31/2017

 

 

 

 

Net sales

15

11,640,219

11,241,805

Cost of sales

 

(4,460,748)

(4,523,141)

Gross profit

 

7,179,471

6,718,664

 

 

 

 

Distribution expenses

 

(1,623,818)

(1,511,444)

Sales and marketing expenses

 

(1,471,470)

(1,413,786)

Administrative expenses

 

(572,143)

(555,659)

Other operating income/(expenses), net

16

257,560

290,826

Exceptional items

 

(8,432)

(28,694)

Income from operations

 

3,761,168

3,499,907

 

 

 

 

Finance cost

17

(919,834)

(996,258)

Finance income

17

375,541

123,663

Net finance cost

 

(544,293)

(872,595)

 

 

 

 

Share of result of joint ventures

 

617

1,032

Income before income tax

 

3,217,492

2,628,344

 

 

 

 

Income tax expense

18

(619,863)

(338,513)

Net income

 

2,597,629

2,289,831

 

 

 

 

Attributable to:

 

 

 

Equity holders of  Ambev

 

2,515,962

2,199,135

Non-controlling interests

 

81,667

90,696

 

 

 

 

Basic earnings per share – common - R$

 

0.16

0.14

Diluted earnings per share – common - R$

 

0.16

0.14

 

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

 

 

 

 

3

 


 

Interim Consolidated Statements of Comprehensive Income

For the three-month period ended March,31, 2018 and 2017

(Expressed in thousands of Brazilian Reais)

 

 

03/31/2018

03/31/2017

 

 

 

Net income

2,597,629

2,289,831

 

 

 

Items that will not be recycled to profit or loss:

 

 

Full recognition of actuarial gains/(losses)

(3,189)

159,127

 

 

 

Items that may be recycled subsequently to profit or loss:

 

 

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

 

 

Investment hedge -  put option granted on subsidiary

57,390

128,792

Gains/losses on translation of other foreign operations

(449,961)

(611,599)

Gains/losses on translation of foreign operations

(392,571)

(482,807)

 

 

 

Cash flow hedge - gains/(losses)

 

 

Recognized in Equity (Hedge reserve)

43,008

(96,114)

Removed from Equity (Hedge reserve) and included in profit or loss

(99,931)

203,341

Total cash flow hedge

(56,923)

107,227

 

 

 

Other comprehensive (loss)/income

(452,683)

(216,453)

 

 

 

Total comprehensive income

2,144,946

2,073,378

 

 

 

Attributable to:

 

 

   Equity holders of Ambev

2,064,634

2,024,718

   Non-controlling interest

80,312

48,660

 

 

 

The accompanying notes are an integral part of these interim consolidated financial statements. The consolidated statements of comprehensive income are presented net of income tax. The income tax effects of these items are disclosed in note 8 - Deferred income tax and social contribution.

 

4

 


 

Interim Consolidated Statements of Changes in Equity

For the three-month period ended March,31, 2018 and 2017

 (Expressed in thousands of Brazilian Reais)

 

 

Attributable to equity holders of Ambev

 

 

 

 

 Capital

 Capital reserves

 Net income reserves

 Retained earnings

Carrying value adjustments

 Total

 

Non-controlling interests

Total equity

At December 31, 2017

57,614,140

54,700,909

8,660,235

-

(74,966,470)

46,008,814

 

1,974,041

47,982,855

Impact of the adoption of IFRS 15 (i)

-

-

-

(355,383)

-

(355,383)

 

-

(355,383)

At January 1, 2018

57,614,140

54,700,909

8,660,235

(355,383)

(74,966,470)

45,653,431

 

1,974,041

47,627,472

 

 

 

 

 

 

 

 

 

 

 Net Income

-

-

-

2,515,962

-

2,515,962

 

81,667

2,597,629

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

Gains/(losses) on translation of foreign operations

-

-

-

-

(392,994)

(392,994)

 

423

(392,571)

Cash flow hedges

-

-

-

-

(55,743)

(55,743)

 

(1,180)

(56,923)

Actuarial gains/(losses)

-

-

-

-

(2,591)

(2,591)

 

(598)

(3,189)

Total comprehensive income

-

-

-

2,515,962

(451,328)

2,064,634

 

80,312

2,144,946

Capital increase

96,062

(89,876)

-

-

-

6,186

 

-

6,186

Gains/(losses) of controlling interest´s share (ii)

-

-

-

-

1,068,695

1,068,695

 

(1,079,050)

(10,355)

Dividends distributed

-

-

-

-

-

-

 

(30,876)

(30,876)

Purchase of shares and result on treasury shares

-

(2,548)

-

-

-

(2,548)

 

-

(2,548)

Share-based payments

-

33,473

-

-

-

33,473

 

-

33,473

Prescribed/(complement) dividends

-

-

-

(50)

-

(50)

 

-

(50)

At March 31, 2018

57,710,202

54,641,958

8,660,235

2,160,529

(74,349,103)

48,823,821

 

944,427

49,768,248

 

(i) As described in Note 3 - Summary of significant account policie.

 

(ii) As described in Note 1 - Corporate information.

 

 

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

 

 

6

 


 

Interim Consolidated Statements of Changes in Equity (continued)

For the three-month period ended March,31, 2018 and 2017

 (Expressed in thousands of Brazilian Reais)

 

 

 Attributable to equity holders of Ambev

 

 

 

 

 Capital

 Capital reserves

 Net income reserves

 Retained earnings

Carrying value adjustments

 Total

 

Non-controlling interests

Total equity

At December 31, 2016

57,614,140

54,529,780

9,700,248

-

(77,019,120)

44,825,048

 

1,826,225

46,651,273

 

 

-

-

 

 

 

 

 

 

 Net Income

-

-

-

2,199,135

-

2,199,135

 

90,696

2,289,831

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

Gains/(losses) on translation of foreign operations

-

-

-

-

(440,798)

(440,798)

 

(42,009)

(482,807)

Cash flow hedges

-

-

-

-

107,231

107,231

 

(4)

107,227

Actuarial gain/(losses)

-

-

-

-

159,150

159,150

 

(23)

159,127

Total comprehensive income

-

-

-

2,199,135

(174,417)

2,024,718

 

48,660

2,073,378

Gains/(losses) of controlling interest´s share

-

-

-

-

(2,412)

(2,412)

 

371

(2,041)

Dividends distributed

-

-

-

-

-

-

 

(39,138)

(39,138)

Acquired shares and result on treasury shares

-

2,932

-

-

-

2,932

 

-

2,932

Share-based payment

-

(5,680)

-

-

-

(5,680)

 

-

(5,680)

Prescribed dividends

-

-

-

149

-

149

 

-

149

At March 31, 2017

57,614,140

54,527,032

9,700,248

2,199,284

(77,195,949)

46,844,755

 

1,836,118

48,680,873

 

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

 

 

 

 

7

 


 
 

Interim Consolidated Cash Flow Statements

For the three-month period ended March,31, 2018 and 2017

 (Expressed in thousands of Brazilian Reais)

 

 

Note

03/31/2018

03/31/2017

 

 

 

 

Net income

 

2,597,629

2,289,831

Depreciation, amortization and impairment

 

869,095

827,570

Impairment losses on receivables and inventories

 

35,043

28,231

Additions/(reversals) in provisions and employee benefits

 

46,228

49,114

Net finance cost

17

544,293

872,595

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

 

21,928

5,376

Equity-settled share-based payment expense

19

33,855

44,950

Income tax expense

18

619,863

338,513

Share of result of joint ventures

 

(617)

(1,032)

Other non-cash items included in the profit

 

(115,626)

123,473

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

 

4.651.691

4,578,621

 

 

 

 

(Increase)/decrease in trade and other receivables

 

865,500

1,438,315

(Increase)/decrease in inventories

 

(464,714)

(199,947)

Increase/(decrease) in trade and other payables

 

(2,509,576)

(2,707,944)

Cash generated from operations

 

2,542,901

3,109,045

 

 

 

 

Interest paid

 

(101,330)

(155,152)

Interest received

 

100,239

55,294

Dividends received

 

-

3,905

Income tax paid

 

(1,749,515)

(1,028,596)

Cash flow from operating activities

 

792,295

1,984,496

 

 

 

 

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

 

1,432

10,533

Acquisition of property, plant and equipment and intangible assets

 

(472,676)

(559,499)

Acquisition of subsidiaries, net of cash acquired

 

(3,074,047)

(332,730)

Acquisition of other investments

 

(5,000)

-

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

 

(7,800)

272,555

Net proceeds/(acquisition) of other assets

 

(249)

1,558

Cash flow from investing activities

 

(3,558,340)

(607,583)

 

 

 

 

Capital increase

 

6,186

-

Proceeds/(repurchase) of treasury shares

 

(8,599)

(48,375)

Proceeds from borrowings

 

2,026,650

1,238,175

Repayment of borrowings

 

(93,437)

(1,482,810)

Cash net of finance costs other than interests

 

(307,307)

(429,861)

Payment of finance lease liabilities

 

(2,214)

(2,268)

Dividends and Interest on shareholder´s equity paid

 

(1,099,721)

(1,132,019)

Cash flow from financing activities

 

521,558

(1,857,158)

 

 

 

 

Net  increase/(decrease) in cash and cash equivalents

 

(2,244,487)

(480,245)

Cash and cash equivalents less bank overdrafts at beginning of year (i)

 

10,352,735

7,876,849

Effect of exchange rate fluctuations 

 

(154,898)

(167,461)

Cash and cash equivalents less bank overdrafts at end of year (i)

 

7,953,350

7,229,143

 

(i) Net of bank overdrafts.

 

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

8

 


 

Notes to the interim consolidated financial statements:

1.

Corporate information

2.

Statement of compliance

3.

Summary of significant accounting policies

4.

Use of estimates and judgments

5.

Cash and cash equivalents

6.

Investment securities

7.

Inventories

8.

Deferred income tax and social contribution

9.

Property, plant and equipment

10.

Goodwill

11.

Interest-bearing loans and borrowings

12.

Provisions

13.

Changes in equity

14.

Segment reporting

15.

Net Sales

16.

Other operating income/(expenses)

17.

Finance cost and income

18.

Income tax and social contribution

19.

Share-based payments

20.

Financial instruments and risks

21.

Collateral and contractual commitments, advances from customers and other

22.

Contingent liability

23.

Non-cash items

24.

Related parties

25.

Events after the reporting period

 

9

 


 
 

1.     CORPORATE INFORMATION

 

(a)      Description of business

 

Ambev S.A. ( referred to as the “Company” or “Ambev”), headquartered in São Paulo, Brazil, produces and sells beer, draft beer, soft drinks, other non-alcoholic beverages, malt and food in general, as well as the advertising of its and third party products, the sale of promotional and advertising materials and the direct or indirect exploitation of bars, restaurants, snack bars and the like, among others.

 

The Company’s shares and ADR’s (American Depositary Receipts) are listed on the B3 S.A.- Brasil, Bolsa, Balcão as “ABEV3” and on the New York Stock Exchange (NYSE) as “ABEV”.

 

The Company’s direct controlling shareholders are Interbrew International B.V. (“IIBV”), AmBrew S.A. (“Ambrew”), both subsidiaries of Anheuser-Busch InBev N.V. (“AB InBev”) and Fundação Antonio e Helena Zerrenner Instituição Nacional de Beneficência (“Fundação Zerrenner”).

 

The interim financial statements were approved by the Board of Directors on May 08, 2018.

 

(b)    Major corporate events in 2017 and 2018:

 

In January 2018, Ambev S.A., through its subsidiaries Labatt Breweries and Ambev Luxemburgo, acquired two new loans totaling approximately R$2.0 billion, maturing in up to one year.

Renegotiation of shareholders agreement CND

 

On December 1st, 2017, Ambev  informed  its  shareholders  and  the  general  market  that  the  E. León Jimenes, S.A. (“ELJ”), partner of Ambev in Tenedora CND, S.A. (“Tenedora”) – a holding company headquartered in Dominican Republic, which holds almost all shares of Cervecería Nacional Dominicana, S.A – would exercise partially, as provide for in shareholders’ agreement of Tenedora, ELJ put option of approximately 30% of capital stock by Tenedora. Due the partial put exercise option, the Company will pay to ELJ the amount of USD 926.5 million and would be the holder of approximately 85% of Tenedora, and ELJ will remain with 15% interest of CND. Considering the strategic importance of alliance with the ELJ, the  Board of Directors of Ambev approved this date the change of the call option term from 2019 to 2022. The transaction was subject to certain conditions precedent that was concluded on January 18, 2018.

 

10

 


 
 

In January 18, 2018,  Ambev S.A., informed its investors and the market in general that, as per the notice to the market issued as of December 1st, 2017, concluded the transaction with ELJ, shareholder in Tenedora, owner of almost the totality of CND. As a result of the such transaction, the Company, directly and indirectly, became the owner of approximately 85% of Tenedora, with ELJ owning the remaining 15%, as well as the term of exercise of the call option becomes from January 2019 to January 2022.

 

 

Adherence to the Special Tax Regularization Program

 

During the third quarter of 2017, the Company adhere a Special Program for Tax Regularization, fixed by Provisional Measure no. 783, from May 31, 2017, extended by the Provisional Measure no. 798 (“PERT in August, 30 2017”), undertaking to pay some tax assessments that were in dispute, including debts from its subsidiaries, for a total amount of R$3.5 billion, already considering discounts according to the program, having paid the amount of approximately R$960 million in 2017 and undertaking to pay the remaining value in 145 monthly installments, with interest, starting in January, 2018, the installments owed until moment, have been paid.

 

Perpetual licensing agreement with Quilmes

 

In September 2017, AB InBev and Quilmes, a subsidiary of Ambev, entered into an agreement whereby AB InBev will grant a perpetual license to Quilmes in Argentina for Budweiser and other North American brands upon the recovery of the distribution rights by AB InBev from CCU. The agreement also foresees the transfer of the brewery of Cerveceria Argentina Sociedad Anonima Isenbeck by AB InBev to Quilmes and the transfer of some Argentinean brands (Norte, Iguana and Baltica) and related business assets along with US$50 millions by Quilmes to CCU. The closing of the transaction was subject to the approval of the Argentinean antitrust authority and others usual closing conditions. Additional information about the closing of this transaction  are disclosed on Note 25 - Events after the reporting period .

Exchange contracts for future financial flows - Equity Swap

 

On May 16th, 2017, the Board of Directors of Ambev approved the execution, by and between the Company, or its subsidiaries, and financial institutions to be approved by the Board of Officers, of equity swaps, having as underlying asset the shares issued by the Company or American Depositary Receipts representing these shares (“ADRs”). The settlement of the equity swap will take place within a maximum period of 18 months from this date, and the agreements may cover an exposure of up to 80 million common shares, with a limit value of up to R$ 2.3 billion.

 

11

 


 
 

On December 21, 2017 Ambev's Board of Directors approved the conclusion of new equity swap contracts, without prejudice to the liquidation, within the regulatory term, of the contracts still in force. The new contracts may cover the exposure in up to 44 million common shares (of which all or part may be through ADR's), with a limit value of up to R$820 million, plus the balances of contracts executed in the context of the approval of May 16, 2017 and have not yet settled.

 

2.     STATEMENT OF COMPLIANCE

 

The consolidated financial statements have been prepared using the accounting basis of going concern and are being presented in accordance with IAS 34 - Interim Financial Reporting as issued by the International Accounting Standards Board (“IASB”).

 

The information does not meet all disclosure requirements for the presentation of full annual financial statements and thus should be read in conjunction with the consolidated financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”) for the year ended December 31, 2017. To avoid duplication of disclosures which are included in the annual financial statements, the following notes were not subject to full filling:

 

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

(b)    Exceptional items (Note 8);

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

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

(e)     Intangible assets (Note 15);

(f)     Trade receivable (Note 19);

(g)    Changes in equity (Note 21);

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

(i)      Employee benefits (Note 23);

(j)      Trade payables (Note 25);

(k)    Operating leases (Note 28);

(l)      Contingent liability (Note 30);

(m) Group Companies (Note 34);

(n)    Insurance (Note 35)

 

3.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

There were no significant changes in accounting policies and calculation methods used for the interim financial statements as of March 31, 2018 in relation to those presented in the financial statements for the year ended December 31, 2017, except for the polices described below:

 

12

 


 
 

IFRS 9 - Financial Instruments replace IAS 39 for periods beginning on after 1 January 2018), introduces a logical approach for the classification of financial assets, which is driven by cash flow characteristics and the business model in which an asset is held; defines a new expected-loss impairment model that will require more effective recognition; and introduces a substantially-reformed model for hedge accounting, with enhanced disclosures about risk management activity. The new hedge accounting model represents a significant overhaul of the policies and aligns the accounting treatment with risk management activities. IFRS 9 also removes the volatility in profit or loss that was caused by changes in the credit risk of liabilities elected to be measured at fair value.

 

The company has applied IFRS 9 Financial Instruments as of the effective date, without restatement of the comparative information for the period beginning 1 January 2017. Consequently , the disclosures for the comparative periods follow the classification and measurement requirements under IAS 39. The company performed an impact assessment and concluded that IFRS 9 Financial Instruments does not impact materially its financial position, financial performance or risk management activities.

 

IFRS 15 - Revenue from Contracts with Customers requires revenue recognition to depict the transfer of goods or services to customers in amounts that reflect the consideration to which the Company expects to be entitled in exchange for those goods or services. The new standard for periods beginning on after 1 January 2018 result in more and enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modifications) and improve guidance for multiple-element arrangements.

 

The company has applied IFRS 15 Revenue from Contracts with Customers as of the effective date in accordance with the modified retrospective application. Under this approach, the cumulative effect of initially applying IFRS 15 must be recognized as an adjustment to the opening balance of equity at the date of initial application and comparative periods are not restated. On the implementation date, the adjustment to the opening balance of equity resulted in a decrease of the Retained earning by R$355,383, to reflect the changes in accounting policies related to performance that, in accordance whit the IFRS 15, should be related of the price transaction underlying r evenue of 2017.

 

The other amendments to standards effective for annual periods beginning after 1 January 2018, have not been listed above because of either their non-applicability to or their immateriality to Ambev’s interim consolidated financial statements.

 

(a)    Basis of preparation and measurement

 

The interim financial statements are presented in thousands of Brazilian Real (“R$”), unless otherwise indicated, rounded to the nearest thousand indicated . Depending on the applicable IFRS requirement, the measurement basis used in preparing the interim financial statements is historical cost, net realizable value, fair value or recoverable amount.

13

 


 

(b)    Recently issued IFRS

 

The reporting standards below were published and are mandatory for future annual reporting periods . Although IFRSs anticipate early adoption, in Brazil, regulators have prevented this anticipation in order to preserve aspects of comparability. Accordingly, for the period ended March 31, 2018, these standards were not applied in the preparation of these financial statements:

 

IFRS 16 – Leases (effective from annual periods beginning on or after 1 January 2019) replaces the existing lease accounting requirements and represents a significant change in the accounting and reporting of leases that were previously classified as operating leases, with more assets and liabilities to be reported on the balance sheet and a different recognition of lease costs.

 

The company is in process of assessing the full impact of IFRS 16 and expects changes in the presentation of operating leases in the balance sheet.

 

Other Standards, Interpretations and Amendments to Standards

 

The other amendments to standards effective for annual periods beginning after 1 January 2018, have not been listed above because of either their non-applicability to or their immateriality to Ambev’s consolidated financial statements.

 

4.     USE OF ESTIMATES AND JUDGMENTS

 

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

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

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

14

 


 

(i) predecessor basis of accounting;

(ii) business combinations;

(iii) impairment;

(iv) provisions;

(v) share-based payments;

(vi) employee benefits;

(vii) current and deferred tax;

(viii) joint arrangements; e

(ix) measurement of financial instruments, including derivatives.

 

The fair values of acquired identifiable intangibles are based on an assessment of future cash flows. Impairment analyses of goodwill and indefinite-lived intangible assets are performed at least annually and whenever a triggering event occurs, in order to determine whether the carrying value exceeds the recoverable amount.

 

The company uses its judgment to select a variety of methods including the discounted cash flow method and option valuation models and makes assumptions about the fair value of financial instruments that are mainly based on market conditions existing at each balance sheet date.

 

Actuarial assumptions are established to anticipate future events and are used in calculating pension and other long-term employee benefit expense and liability. These factors include assumptions with respect to interest rates, rates of increase in health care costs, rates of future compensation increases, turnover rates, and life expectancy.

 

The company is subject to income tax in numerous jurisdictions. Significant judgment is required in determining the worldwide provision for income tax. There are some transactions and calculations for which the ultimate tax determination is uncertain. Some subsidiaries within the Company are involved in tax audits usually in relation to prior years. These audits are ongoing in various jurisdictions at the balance sheet date and, by their nature, these can take considerable time until its conclusion.

 

5.         CASH AND CASH EQUIVALENTS

 

 

03/31/2018

12/31/2017

 

 

 

Cash

242,861

588,900

Current bank accounts

3,939,239

5,077,083

Short term bank deposits (i)

3,771,377

4,688,544

Cash and cash equivalents

7,953,477

10,354,527

 

 

 

Bank overdrafts

(127)

(1,792)

Cash and cash equivalents less bank overdraft

7,953,350

10,352,735

 

(i) The balance refers mostly to Bank Deposit Certificates - CDB, high liquidity, which are readily convertible into known amounts of cash and which are subject to an insignificant risk of change in value.

 

15

 


 

6.         INVESTMENTS SECURITIES

 

 

 03/31/2018

 12/31/2017

 

 

 

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

12,229

11,883

Current investments securities

12,229

11,883

 

 

 

Debt held-to-maturity (i)

143,481

121,956

Non-current investments securities

143,481

121,956

 

 

 

Total

155,710

133,839

 

(i) The balance refers substantially to Bank Deposit Certificates - CDB linked to tax incentives.

 

7.         INVENTORIES

 

 

 03/31/2018

 12/31/2017

 

 

 

Finished goods

1,708,958

1,528,434

Work in progress

306,187

309,567

Raw material

2,028,556

1,816,331

Consumables

94,348

77,208

Spare parts and other

479,933

476,924

Prepayments

205,130

210,861

Impairment losses

(97,995)

(100,352)

 

4,725,117

4,318,973

 

Write-offs/losses on inventories recognized in the income statement amounted to R$22,292 in the period ended in March 31, 2018 (R$11,430 in the period ended in March 31, 2017).

 

8.         DEFERRED INCOME TAX AND SOCIAL CONTRIBUTION

 

Deferred taxes for income tax and social contribution taxes are calculated on tax losses, the negative tax basis of social contributions and the temporary differences between the tax bases and the carrying amount in the interim financial statement of assets and liabilities. The rates of these taxes in Brazil, which are expected at the realization of deferred taxes, are 25% for income tax and 9% for social contribution. For the other regions, with operational activity, expected rates, are as follow:

 

Central America and the Caribbean

from 23% to 31%

Latin America (i)

from 14% to 35%

Canada

26%

 

(i) Amendments to Argentine tax legislation approved on December 29, 2017 affect tax periods beginning in October 2018 and reduce the income tax rate in the first two years from 35% to 30% and, as a after, to 25%.

 

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

16

 


 

 

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

 

 

03/31/2018

 

12/31/2017

 

 Assets

 Liabilities

 Net

 

 Assets

 Liabilities

 Net

Investment securities

115,012

-

115,012

 

39,028

-

39,028

Intangible

-

(713,459)

(713,459)

 

-

(719,481)

(719,481)

Employee benefits

528,898

-

528,898

 

631,067

-

631,067

Trade payables

1,272,675

(297,771)

974,904

 

1,382,378

(314,154)

1,068,224

Trade receivable

47,887

-

47,887

 

52,256

-

52,256

Derivatives

708

(13,063)

(12,355)

 

6,816

(5,849)

967

Inventories

202,368

(10,265)

192,103

 

248,731

(18,123)

230,608

Property, plant and equipment

-

(928,666)

(928,666)

 

-

(920,475)

(920,475)

Withholding tax over undistributed profits and royalties

-

(770,383)

(770,383)

 

-

(788,594)

(788,594)

Investments in associates

-

(421,589)

(421,589)

 

-

(421,589)

(421,589)

Interest on shareholders' equity

299,655

-

299,655

 

-

-

-

Loss carryforwards

441,063

-

441,063

 

500,952

-

500,952

Provisions

329,850

(46,997)

282,853

 

347,337

(39,698)

307,639

Complement of income tax of foreign subsidiaries due in Brazil

-

(9,470)

(9,470)

 

-

-

-

Other items

-

(55,843)

(55,843)

 

-

(30,492)

(30,492)

Gross deferred tax assets / (liabilities)

3,238,116

(3,267,506)

(29,390)

 

3,208,565

(3,258,455)

(49,890)

Netting by taxable entity

(889,535)

889,535

-

 

(929,226)

929,226

-

Net deferred tax assets / (liabilities)

2,348,581

(2,377,971)

(29,390)

 

2,279,339

(2,329,229)

(49,890)

 

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

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

 

 

17

 


 

At March 31, 2018 the assets and liabilities deferred taxes related to combined tax losses has an expected utilization/settlement by temporary differences as follows:

 

 

03/31/2018

Deferred taxes not related to tax losses

to be realized until 12 months

to be realized after 12 months

Total

 

 

 

 

Investment securities

-

115,012

115,012

Intangible

-

(713,459)

(713,459)

Employee benefits

20,338

508,560

528,898

Trade payables

1,272,675

(297,771)

974,904

Trade receivable

40,772

7,115

47,887

Derivatives

(12,355)

-

(12,355)

Inventories

192,103

-

192,103

Property, plant and equipment

(54,308)

(874,358)

(928,666)

Withholding tax over undistributed profits and royalties

-

(770,383)

(770,383)

Investments in associates

-

(421,589)

(421,589)

Interest on shareholders' equity

299,655

-

299,655

Provisions

70,320

212,533

282,853

Complement of income tax of foreign subsidiaries due in Brazil

(9,470)

-

(9,470)

Other items

-

(55,843)

(55,843)

Total

1,819,730

(2,290,183)

(470,453)

 

Deferred tax related to tax losses

03/31/2018

2018

162,949

2019

98,332

2020

16,111

2021

10,608

Apart from 2022 (i)

153,063

Total

441,063

 

(i) There is no expectation of realization that exceeds the term of 10 years.

 

At March 31, 2018, deferred tax assets in the amount of R$441,150 (R$427,365 in December 31, 2017) related to tax losses and temporary differences of subsidiaries abroad were not recorded as the realization is not probable.

 

Major part of the deferred asset amount do not have carryforward limit for utilization and the tax losses carried forward in relation to them are equivalent to R$1,764,599 in March 31, 2018 (R$1,709,461 in December 31, 2017).

 

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

 

At December 31, 2017

(49,890)

Investment hedge - put option of a subsidiary interest

(29,565)

Cash flow hedge - gains/(losses)

29,223

Gains/(losses) on translation of other foreign operations

(88,733)

Recognized in other comprehensive income

(89,075)

Recognized in income statement

108,190

Changes directly in balance sheet

1,385

Recognized in other group of balance sheet

1,385

At March 31, 2018

(29,390)

 

18

 


 

9.         PROPERTY, PLANT AND EQUIPMENT

 

 

03/31/2018

 

12/31/2017

 

Land and buildings

Plant and equipment

Fixtures and fittings

Under construction

Total

 

Total

Acquisition cost

 

 

 

 

 

 

 

Balance at end of previous year

8,961,829

24,538,753

5,076,403

1,257,962

39,834,947

 

37,419,363

Effect of movements in foreign exchange

(29,078)

(141,055)

(50,131)

(18,531)

(238,795)

 

18,628

Business combinations

-

-

-

-

-

 

204,189

Acquisitions

598

143,755

29,740

298,550

472,643

 

3,175,486

Disposals

(510)

(171,167)

(138,021)

(39)

(309,737)

 

(706,845)

Transfer to other asset categories

52,201

139,925

95,051

(399,965)

(112,788)

 

(310,910)

Others

-

6,556

-

-

6,556

 

35,036

Balance at end

8,985,040

24,516,767

5,013,042

1,137,977

39,652,826

 

39,834,947

 

 

 

 

 

 

 

 

Depreciation and Impairment

 

 

 

 

 

 

 

Balance at end of previous year

(2,585,748)

(14,973,468)

(3,453,404)

-

(21,012,620)

 

(18,265,527)

Effect of movements in foreign exchange

5,565

61,311

32,246

-

99,122

 

(116,585)

Depreciation

(77,102)

(545,258)

(163,978)

-

(786,338)

 

(3,200,379)

Impairment losses

-

(29,578)

(36)

-

(29,614)

 

(125,185)

Disposals and write-off

183

150,381

136,061

-

286,625

 

654,320

Transfer to other asset categories

1,739

50,097

12,056

-

63,892

 

32,899

Others

-

2,417

-

-

2,417

 

7,837

Balance at end

(2,655,363)

(15,284,098)

(3,437,055)

-

(21,376,516)

 

(21,012,620)

Carrying amount:

 

 

 

 

 

 

 

December 31, 2017

6,376,081

9,565,285

1,622,999

1,257,962

18,822,327

 

18,822,327

March 31, 2018

6,329,677

9,232,669

1,575,987

1,137,977

18,276,310

 

-

 

 

Leases, capitalizes interests and fixed assets provided as security are not material.

 

10.     GOODWILL

 

 

03/31/2018

12/31/2017

 

 

 

Balance at end of previous year

31,401,874

30,511,200

Effect of movements in foreign exchange

(210,128)

489,689

Acquisition and disposal through business combinations (i)

-

400,985

Balance at the end of year

31,191,746

31,401,874

 

 

 

 

 

19

 


 

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

 

 

Functional currency

03/31/2018

12/31/2017

LAN:

 

 

 

Brazil

BRL

17,668,393

17,668,393

  Goodwill

 

102,911,026

102,911,026

  Non-controlling transactions (i)

 

(85,242,633)

(85,242,633)

Dominican Republic

DOP

3,111,127

3,163,679

Cuba (ii)

USD

2,357

2,672

Panama

PAB

1,154,821

1,149,332

 

 

 

 

LAS:

 

 

 

Argentina

ARS

415,632

443,826

Bolivia

BOB

1,175,694

1,170,108

Chile

CLP

47,987

47,007

Paraguay

PYG

800,466

786,071

Uruguay

UYU

173,847

170,675

 

 

 

 

NA:

 

 

 

Canada

CAD

6,641,422

6,800,111

 

 

31,191,746

31,401,874

 

 

(i) It refers to the exchange of shareholdings operation occurred in 2013 as a result of the adoption of the predecessor basis of accounting.

 

(ii) The functional currency of Cuba, the Cuban convertible peso (CUC), has fixed parity with the dollar (USD) at balance sheet date.

 

11.     INTEREST-BEARING LOANS AND BORROWINGS

 

 

03/31/2018

12/31/2017

 

 

 

Secured bank loans

2,860,851

879,638

Unsecured bank loans

374,127

394,267

Other unsecured loans

36,136

38,423

Financial leasing

7,785

8,794

Current liabilities

3,278,899

1,321,122

 

 

 

Secured bank loans

571,965

589,237

Unsecured bank loans

380,564

413,749

Debentures and unsecured bond issues

103,223

102,739

Other unsecured loans

109,442

101,509

Financial leasing

23,562

24,694

Non-current liabilities

1,188,756

1,231,928

 

 

Additional information regarding the exposure of the Company to the risks of interest rate and foreign currency are disclosed on Note 20 – Financial instruments and risks .

 

Contractual clauses (covenants)

As at March 31, 2018, the Company's loans had equal rights to payment without subordination clauses. Except for the credit lines due to FINAME contracted by the Company with Banco Nacional de Desenvolvimento Econômico e Social – BNDES (“BNDES”), where collateral were provided on assets acquired with the credit granted which serve as collateral; other loans and financing contracted by the Company predicted only guarantees as personal collateral or are unsecured. The most loan contracts contained financial covenants including: financial covenants, including limitation on new indebtedness; going-concern; maintenance, in use or in good condition for the business, of the Company's assets; restrictions on acquisitions, mergers, sale or disposal of its assets; disclosure of financial statements under Brazilian GAAP and IFRS; and/or no prohibition related to new real guarantees for loans contracted, except if: (i) expressly authorized under the aforementioned loan agreement, (ii) new loans contracted from financial institutions linked to the Brazilian government - including the BNDES or foreign governments; - or foreign governments, multilateral financial institutions (eg World Bank) or located in jurisdictions in which the Company operates.

20

 


 
 

As at March 31, 2018, the Company was in compliance with all its contractual obligations for its loans and financings.

 

12.     PROVISIONS

(a) Provision changes

 

Balance as of December 31, 2017

Effect of changes in foreign exchange rates

Additions

Provisions used and reversed

Balance as of March 31, 2018

 

 

 

 

 

 

Restructuring

8,099

(166)

-

(23)

7,910

 

 

 

 

 

 

Provision for disputes and litigations

 

 

 

 

-

Taxes on sales

226,268

(234)

8,481

(5,527)

228,988

Income tax

157,011

108

2,927

(10)

160,036

Labor

129,396

(945)

36,873

(53,462)

111,862

Civil

35,273

47

18,055

(8,512)

44,863

Others

125,490

(2,091)

12,440

(30,612)

105,227

Total of provision for disputes and litigations

673,438

(3,115)

78,776

(98,123)

650,976

 

 

 

 

 

 

Total provisions

681,537

(3,281)

78,776

(98,146)

658,886

 

(b)    Disbursement expectative

 

 

Balance as of March 31, 2018

1 year or less

1-2 years

2-5 years

Over 5 years

           

Restructuring

7,910

7,119

-

791

-

           

Provision for disputes and litigations

         

Taxes on sales

228,988

25,717

182,256

5,078

15,937

Income tax

160,036

33,592

103,189

23,255

-

Labor

111,862

77,278

16,726

11,703

6,155

Civil

44,863

17,105

23,593

2,443

1,722

Others

105,227

7,920

25,076

69,419

2,812

Total of provision for disputes and litigations

650,976

161,612

350,840

111,898

26,626

           

Total provisions

658,886

168,731

350,840

112,689

26,626

 

21

 


 
 

The expected settlement of provisions was based on management’s best estimate at the interim balance sheet date.

Main lawsuits with probable likelihood of loss:

(a) Income and Sales taxes

 

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

 

(b) Labor

The Company and its subsidiaries are involved in labor proceedings with former employees or former employees of service providers. The main issues involve overtime and related effects and respective charges.

 

(c) Civil

The Company is involved in civil lawsuits considered with probable likelihood of loss. The most relevant portion of these lawsuits refers to former distributors, mainly in Brazil, which are mostly claiming damages resulting from the termination of their contracts.

 

The processes with possible probabilities are disclosed in Note 22 - Contingent liability .

 

13.     CHANGES IN EQUITY

 

(a) Capital stock

 

 

 

03/31/2018

 

 

12/31/2017

 

Thousands  of common shares

Thousands  of Real

 

Thousands  of common shares

Thousands  of Real

Beginning balance as per statutory books

15,717,615

57,614,140

 

15,717,615

57,614,140

Share issued

4,532

96,062

 

-

-

 

15,722,147

57,710,202

 

15,717,615

57,614,140

 

22

 


 

(b)    Capital reserves

 

 

Capital Reserves

 

 

Treasury shares

Share Premium

Others capital reserves

 Share-based Payments

 Total

           

At December 31, 2017

(894,994)

53,662,811

700,898

1,232,194

54,700,909

Capital Increase

-

-

-

(89,876)

(89,876)

Purchase of shares and result on treasury shares

(2,548)

-

-

-

(2,548)

Share-based payments

-

-

-

33,473

33,473

At March 31, 2018

(897,542)

53,662,811

700,898

1,175,791

54,641,958

 

 

Capital Reserves

 

 

Treasury shares

Share Premium

Others capital reserves

 Share-based Payments

 Total

At December 31, 2016

(908,676)

53,662,811

700,898

1,074,747

54,529,780

Purchase of shares and result on treasury shares

2,932

-

-

-

2,932

Share-based payments

-

-

-

(5,680)

(5,680)

At March 31, 2017

(905,744)

53,662,811

700,898

1,069,067

54,527,032

 

(b.1) Treasury shares

The treasury shares comprise own issued shares reacquired by the Company and the result on treasury shares that refers to gains and losses related to share-based payments transactions and others.

Follows the changes of treasury shares:

 

 

Purchase /realization shares

 

Result on Treasure Shares

 

Total Treasure Shares

 

Thousands  shares

 

Thousands  Brazilian Real

 

Thousands  shares

 

Thousands  Brazilian Real

       

At December 31, 2017

7,394

 

(139,665)

 

(755,329)

 

(894,994)

Changes during the year

(2,596)

 

41,796

 

(44,344)

 

(2,548)

At March 31, 2018

4,798

 

(97,869)

 

(799,673)

 

(897,542)

 

 

Purchase /realization shares

 

Result on Treasure Shares

 

Total Treasure Shares

 

Thousands  shares

 

Thousands  Brazilian Real

 

Thousands  shares

 

Thousands  Brazilian Real

       
               

At December 31, 2016

16,512

 

(312,670)

 

(596,006)

 

(908,676)

Changes during the year

(1,798)

 

40,306

 

(37,374)

 

2,932

At March 31, 2017

14,714

 

(272,364)

 

(633,380)

 

(905,744)

 

(b.2) Share premium

 

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

 

23

 


 

(b.3) Share-based payment

There are different share-based payment programs and stock option plans which allow the senior management from Ambev economic group to receive or acquire shares of the Company.

The share-based payment reserve recorded a charge of R$33,855 at March 31, 2018 ( R$44,950 at March 31, 2017 ) (Note 19 – Share-based payments ).

(c)     Net income reserves

 

 

Net income reserves

 

Investments reserve

 Statutory reserve

 Fiscal incentive

Interest on capital and dividends proposed

Total

At December 31, 2017

1,267,721

4,456

7,388,058

-

8,660,235

 

 

 

 

 

 

At March 31, 2018

1,267,721

4,456

7,388,058

-

8,660,235

 

 

Net income reserves

 

Investments reserve

 Statutory reserve

 Fiscal incentive

Interest on capital and dividends proposed

Total

At December 31, 2016

3,859,995

4,456

5,835,797

-

9,700,248

 

 

 

 

 

 

At March 31, 2017

3,859,995

4,456

5,835,797

-

9,700,248

 

(c.1) Investments reserve

From net income after deductions applicable, will be aimed no more than 60% (sixty per cent) to investment reserve to support future investments.

(c.2) Statutory reserve

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

(c.3) Tax incentives

The Company has tax incentives framed in certain state and federal industrial development programs in the form of financing, deferred payment of taxes or partial reductions of the amount due. These state programs aim to promote the expansion of employment generation, regional decentralization, complement and diversify the industrial base of the States. In these states, the grace periods, enjoyment and reductions are permitted under the tax law.

24

 


 

The portion of income for the period related to tax incentives, which will be allocated to the profit reserve at the end of the fiscal year on December 31, 2018 and therefore not being used as a basis for dividend distribution, is composed of:

 

03/31/2018

03/31/2017

 ICMS (Brazilian State value added)

413,734

434,413

 Income tax

53,460

28,141

 

467,194

462,554

 

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

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

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

There was no allocation of dividends or interest on shareholders' equity in the three-month period ended March 31, 2017 and 2018.

 

 

25

 


 
(d) Carrying value adjustments

 

 

Carrying value adjustments

 

 

Translation reserves

Cash flow hedge

Actuarial gains/ (losses)

Options granted on subsidiary

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

Business combination

      Accounting adjustments for transactions between shareholders

Total

At December 31, 2017

1,639,099

368,806

(1,144,468)

(2,771,248)

2,099,921

156,091

(75,314,671)

(74,966,470)

Comprehensive income:

               

Gains/(losses) on translation of foreign operations

(392,994)

-

-

-

-

-

-

(392,994)

Cash flow hedges

-

(55,743)

-

-

-

-

-

(55,743)

Actuarial gains/(losses)

-

-

(2,591)

-

-

-

-

(2,591)

Total Comprehensive income

(392,994)

(55,743)

(2,591)

-

-

-

-

(451,328)

Gains/(losses) of controlling interest´s share (i)

460,105

787

3,540

2,650,465

(2,046,202)

-

-

1,068,695

At March 31, 2018

1,706,210

313,850

(1,143,519)

(120,783)

53,719

156,091

(75,314,671)

(74,349,103)

 

 

 

 Carrying value adjustments

 

 

Translation reserves

Cash flow hedge

Actuarial gains/ (losses)

Options granted on subsidiary

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

Business combination

      Accounting adjustments for transactions between shareholders

Total

At December 31, 2016

(289,483)

(144,568)

(1,262,170)

(2,390,843)

2,150,643

156,091

(75,238,790)

(77,019,120)

Comprehensive income:

               

Gains/ (losses) on translation of foreign operations

(440,798)

-

-

-

-

-

-

(440,798)

Cash flow hedges

-

107,231

-

-

-

-

-

107,231

Actuarial gains/(losses)

-

-

159,150

-

-

-

-

159,150

Total Comprehensive income

(440,798)

107,231

159,150

-

-

-

-

(174,417)

Gains/(losses) of controlling interest´s share

-

-

-

-

(2,412)

-

-

(2,412)

At March 31, 2017

(730,281)

(37,337)

(1,103,020)

(2,390,843)

2,148,231

156,091

(75,238,790)

(77,195,949)

 

 

(i) As described in Note 1 - Corporate information

 

26

 


 
 
(d.1) Translation reserves

 

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

The translation reserves also comprise the portion of the gain or loss on the foreign currency liabilities and on the derivative financial instruments determined to be effective net investment hedges in conformity with IAS 39.

 

(d.2) Cash flow hedge reserves

 

The hedging reserves comprise the effective portion of the cumulative net change in the fair value of cash flow hedges to the extent the hedged risk has not yet impacted profit or loss (For additional information, see Note 20 – Financial instruments and risks) .

 

(d.3) Actuarial gains and losses

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

The actuarial gain of R$158,509 in 2017 arising from the surplus reverted to the Sponsor, originating from Ambev Private Pension Institute of the defined benefits plan was fully recorded under the heading of actuarial gains and losses in equity.

(d.4) O ptions granted on subsidiary

As part of the shareholders agreement between the Ambev and ELJ, an option to sell (“put”) and to purchase (“call”) was issued, which may result in an acquisition by Ambev of the remaining shares of Tenedora CND, for a value based on EBITDA, +/- net debt, from operations. As disclosed in Note 1, on December 1st, 2017, the  E. León Jimenes, S.A. (“ELJ”) will exercise partially its put option of approximately 30% of capital stock by Tenedora. Due to the partial exercise of put option, the Company became the owner of approximately 85% of Tenedora. Additionally, was approved the change of the call option term from 2019 to 2022.

On March 31, 2018 the put option held by ELJ is valued at R$1,974,326 (R$5,520,155 on December 31, 2017) and the liability categorized as “Level 3”, as the Note 20 (b) and in accordance with the IFRS 3. No value has been assigned to the call option held by the Company, since the likelihood of exercise is remote. The fair value of this consideration deferred was calculated by using standard valuation techniques (present value of the principal amount and future interest rates, discounted by the market rate). The criteria used are based on market information and from reliable sources and the fair value is revaluated on an annual basis.

27

 


 
 

 

As part of the agreement to acquire the shares of Sucos do Bem, a put option on minority shareholders' participation determined by gross revenue of its products and exercisable from 2019 has been granted, with a few exceptions. On March 31, 2018 the option is valued at R$132,895 (R$131,980 on December 31, 2017).

 

The reconciliation of changes in these options is presented in Note 20 – Financial instruments and risks .

 

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

In transactions with non-controlling interests of the same business, even when performed at arm's length terms, that present valid economic grounds and reflect normal market conditions, will be consolidated by the applicable accounting standards as occurred within the same accounting entity.

As determined by IFRS 10, any difference between the amount paid (fair value) for the acquisition of non-controlling interests and are related to carrying amount of such non-controlling interest shall be recognized directly in controlling shareholders’ equity. The acquisition of non-controlling interest related to Old Ambev, the above mentioned adjustment was recognized in the Carrying value adjustments when applicable.

 

28

 


 
 

14.     SEGMENT REPORTING

 

 

(a)       Reportable segments – three-month periods ended in:

 

 

Latin America - north (i)

Latin America - south (ii)

Canada

Consolidated

 

03/31/2018

03/31/2017

03/31/2018

03/31/2017

03/31/2018

03/31/2017

03/31/2018

03/31/2017

                 

Net sales

7,330,154

7,352,066

3,091,535

2,763,989

1,218,530

1,125,750

11,640,219

11,241,805

Cost of sales

(2,837,794)

(3,128,417)

(1,168,877)

(1,059,907)

(454,077)

(334,817)

(4,460,748)

(4,523,141)

Gross profit

4,492,360

4,223,649

1,922,658

1,704,082

764,453

790,933

7,179,471

6,718,664

Distribution expenses

(1,076,612)

(1,032,054)

(298,474)

(258,272)

(248,732)

(221,118)

(1,623,818)

(1,511,444)

Sales and marketing expenses

(920,241)

(917,350)

(325,653)

(302,633)

(225,576)

(193,803)

(1,471,470)

(1,413,786)

Administrative expenses

(384,688)

(376,650)

(121,996)

(97,431)

(65,459)

(81,578)

(572,143)

(555,659)

Other operating income/(expenses)

277,409

288,233

(13,377)

1,438

(6,472)

1,155

257,560

290,826

Exceptional items

(2,283)

(16,159)

(6,149)

(12,535)

-

-

(8,432)

(28,694)

Income from operations (EBIT)

2,385,945

2,169,669

1,157,009

1,034,649

218,214

295,589

3,761,168

3,499,907

Net finance cost

(233,279)

(694,062)

(284,627)

(156,154)

(26,387)

(22,379)

(544,293)

(872,595)

Share of result of joint ventures

290

694

-

-

327

338

617

1,032

Income before income tax

2,152,956

1,476,301

872,382

878,495

192,154

273,548

3,217,492

2,628,344

Income tax expense

(244,293)

61,128

(285,769)

(297,033)

(89,801)

(102,608)

(619,863)

(338,513)

Net income

1,908,663

1,537,429

586,613

581,462

102,353

170,940

2,597,629

2,289,831

                 

Normalized EBITDA (iii)

3,030,676

2,832,014

1,333,007

1,203,368

275,012

320,789

4,638,695

4,356,171

Exceptional items

(2,283)

(16,159)

(6,149)

(12,535)

-

-

(8,432)

(28,694)

Depreciation. amortization and impairment

(642,448)

(646,186)

(169,849)

(156,184)

(56,798)

(25,200)

(869,095)

(827,570)

Net finance costs

(233,279)

(694,062)

(284,627)

(156,154)

(26,387)

(22,379)

(544,293)

(872,595)

Share of result of joint ventures

290

694

-

-

327

338

617

1,032

Income tax expense

(244,293)

61,128

(285,769)

(297,033)

(89,801)

(102,608)

(619,863)

(338,513)

Net income

1,908,663

1,537,429

586,613

581,462

102,353

170,940

2,597,629

2,289,831

                 

Normalized EBITDA margin in %

41.3%

38.5%

43.1%

43.5%

22.6%

28.5%

39.9%

38.7%

                 

Acquisition of property, plant and equipment

333,098

328,241

118,798

132,500

20,780

37,202

472,676

497,943

                 
 

03/31/2018

12/31/2017

03/31/2018

12/31/2017

03/31/2018

12/31/2017

03/31/2018

12/31/2017

Segment assets

47,534,077

48,811,664

10,980,054

11,558,524

10,087,181

10,204,929

68,601,312

70,575,117

Intersegment elimination

           

(2,928,341)

(3,077,679)

Non-segmented assets

           

16,705,974

19,354,551

Total assets

           

82,378,945

86,851,989

                 

Segment liabilities

16,179,726

23,031,617

5,023,030

6,015,233

3,489,045

3,700,157

24,691,801

32,747,007

Intersegment elimination

           

(2,928,323)

(3,077,693)

Non-segmented liabilities

           

60,615,467

57,182,675

Total liabilities

           

82,378,945

86,851,989

 

(i) Latin America – North: includes operations in Brazil, Luxembourg  and CAC (El Salvador, Guatemala, Nicaragua, Dominican Republic, Saint Vincent, Dominica,  Antigua, Cuba,  Barbados and Panama).

 

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

 

(iii) Normalized EBITDA is calculated excluding of the net income the following effects: (i) Income tax expense, (iii) Share of results of joint ventures (iii) Net finance result, (iv) Exceptional items, and (v) Depreciation, amortization and impairment of property, plant and equipment.

 

29

 


 
 

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

 

Latin America - north

 

CAC

Brazil

Total

 

03/31/2018

03/31/2017

03/31/2018

03/31/2017

03/31/2018

03/31/2017

             

Net sales

1,149,722

1,057,872

6,180,432

6,294,194

7,330,154

7,352,066

Cost of sales

(488,438)

(463,923)

(2,349,356)

(2,664,494)

(2,837,794)

(3,128,417)

Gross profit

661,284

593,949

3,831,076

3,629,700

4,492,360

4,223,649

Distribution expenses

(130,669)

(126,594)

(945,943)

(905,460)

(1,076,612)

(1,032,054)

Sales and marketing expenses

(131,207)

(129,128)

(789,034)

(788,222)

(920,241)

(917,350)

Administrative expenses

(56,637)

(60,393)

(328,051)

(316,257)

(384,688)

(376,650)

Other operating income/(expenses)

4,224

8,073

273,185

280,160

277,409

288,233

Exceptional items

(605)

(10,651)

(1,678)

(5,508)

(2,283)

(16,159)

Income from operations (EBIT)

346,390

275,256

2,039,555

1,894,413

2,385,945

2,169,669

Net finance cost

(19,019)

(50,091)

(214,260)

(643,971)

(233,279)

(694,062)

Share of result of joint ventures

1,907

3,764

(1,617)

(3,070)

290

694

Income before income tax

329,278

228,929

1,823,678

1,247,372

2,152,956

1,476,301

Income tax expense

(89,540)

(70,837)

(154,753)

131,965

(244,293)

61,128

Net income

239,738

158,092

1,668,925

1,379,337

1,908,663

1,537,429

             

Normalized EBITDA (i)

445,051

376,921

2,585,625

2,455,093

3,030,676

2,832,014

Exceptional items

(605)

(10,651)

(1,678)

(5,508)

(2,283)

(16,159)

Depreciation, amortization and impairment

(98,056)

(91,014)

(544,392)

(555,172)

(642,448)

(646,186)

Net finance costs

(19,019)

(50,091)

(214,260)

(643,971)

(233,279)

(694,062)

Share of result of joint ventures

1,907

3,764

(1,617)

(3,070)

290

694

Income tax expense

(89,540)

(70,837)

(154,753)

131,965

(244,293)

61,128

Net income

239,738

158,092

1,668,925

1,379,337

1,908,663

1,537,429

             

Normalized EBITDA margin in %

38.7%

35.6%

41.8%

39.0%

41.3%

38.5%

 

(i) Normalized EBITDA is calculated excluding of the net income the following effects: (i) Income tax expense , (iii) Share of results of joint ventures , (iii) Net finance result , (iv) Exceptional items, and (v) Depreciation, amortization and impairment of property, plant and equipment.

 

 

30

 


 
 
 

Brazil

 

Beer

Soft drink and
Non-alcoholic and
non-carbonated

Total

 

03/31/2018

03/31/2017

03/31/2018

03/31/2017

03/31/2018

03/31/2017

             

Net sales

5,315,588

5,370,465

864,844

923,729

6,180,432

6,294,194

Cost of sales

(1,882,718)

(2,113,911)

(466,638)

(550,583)

(2,349,356)

(2,664,494)

Gross profit

3,432,870

3,256,554

398,206

373,146

3,831,076

3,629,700

Distribution expenses

(772,304)

(732,017)

(173,639)

(173,443)

(945,943)

(905,460)

Sales and marketing expenses

(744,965)

(739,672)

(44,069)

(48,550)

(789,034)

(788,222)

Administrative expenses

(279,283)

(272,651)

(48,768)

(43,606)

(328,051)

(316,257)

Other operating income/(expenses)

216,639

222,809

56,546

57,351

273,185

280,160

Exceptional items

(1,381)

(4,661)

(297)

(847)

(1,678)

(5,508)

Income from operations (EBIT)

1,851,576

1,730,362

187,979

164,051

2,039,555

1,894,413

Net finance cost

(214,260)

(643,971)

-

-

(214,260)

(643,971)

Share of result of joint ventures

(1,617)

(3,070)

-

-

(1,617)

(3,070)

Income before income tax

1,635,699

1,083,321

187,979

164,051

1,823,678

1,247,372

Income tax expense

(154,753)

131,965

-

-

(154,753)

131,965

Net income

1,480,946

1,215,286

187,979

164,051

1,668,925

1,379,337

             

Normalized EBITDA (i)

2,330,851

2,214,933

254,774

240,160

2,585,625

2,455,093

Exceptional items

(1,381)

(4,661)

(297)

(847)

(1,678)

(5,508)

Depreciation, amortization and impairment

(477,894)

(479,910)

(66,498)

(75,262)

(544,392)

(555,172)

Net finance costs

(214,260)

(643,971)

-

-

(214,260)

(643,971)

Share of result of joint ventures

(1,617)

(3,070)

-

-

(1,617)

(3,070)

Income tax expense

(154,753)

131,965

-

-

(154,753)

131,965

Net income

1,480,946

1,215,286

187,979

164,051

1,668,925

1,379,337

             

Normalized EBITDA margin in %

43.8%

41.2%

29.5%

26.0%

41.8%

39.0%

 

(i) Normalized EBITDA is calculated excluding of the net income the following effects: (i) Income tax expense , (iii) Share of results of joint ventures , (iii) Net finance result , (iv) Exceptional items, and (v) Depreciation, amortization and impairment of property, plant and equipment.

 

 

15.     NET SALES

 

The reconciliation between gross sales and net sales is as follows:

 

 

03/31/2018

03/31/2017

     

Gross sales and/or services

                17,454,715

         17,489,216

Excise duty

                (3,732,465)

         (3,978,052)

Discounts

                (2,082,031)

         (2,269,359)

 

                11,640,219

         11,241,805

 

Services provided by distributors, such as the promotion of our brands and logistics services are considered as expense when separately identifiable.

 

 

31

 


 
 

16.     OTHER OPERATING INCOME / (EXPENSES)

 

 

03/31/2018

03/31/2017

Government grants/NPV of long term fiscal incentives

194,809

221,897

(Additions)/Reversals to provisions

(6,640)

(10,551)

Gains/(losses) on disposal of property, plant and equipment, intangible assets and operation in associates

(21,928)

(5,376)

Other operating income/(expenses), net

91,319

84,856

 

257,560

290,826

 

Government grants are not recognized until there is reasonable assurance that the Company will meet related conditions and that the grants will be received. Government grants are systematically recognized in income during the periods in which the Company recognizes as expenses the related costs that the grants are intended to offset.

 

17.     FINANCE COST AND INCOME

 

(a)      Finance costs

 

 

03/31/2018

03/31/2017

Interest expense

          (348,087)

           (402,843)

Capitalized borrowings

                    20

                    599

Net Interest on pension plans

            (24,482)

             (24,914)

Losses on hedging instruments

          (263,101)

           (248,611)

Interest on provision for disputes and litigations

            (29,137)

             (72,690)

Exchange variation

            (96,162)

             (87,142)

Tax on financial transactions

            (91,176)

             (37,969)

Bank guarantee expenses

            (24,560)

             (21,268)

Other financial results

            (43,149)

           (101,420)

 

          (919,834)

           (996,258)

 

Interest expenses are presented net of the effect of interest rate derivative financial instruments which mitigate Ambev interest rate risk (Note 20 – Financial instruments and risks ). The interest expense are as follows:

 

 

03/31/2018

03/31/2017

Financial liabilities measured at amortized cost

(144,437)

(115,108)

Liabilities at fair value through profit or loss

(203,650)

(278,416)

Fair value hedge - hedged items

-

(10,111)

Fair value hedge - hedging instruments

-

792

 

(348,087)

(402,843)

 

(b)      Finance income

 

 

03/31/2018

03/31/2017

Interest income

103,267

108,664

Gains on derivative

80,642

2,010

Financial assets at fair value through profit or loss

188,762

8,742

Other financial results

2,870

4,247

 

375,541

123,663

 

32

 


 
 

Interest income arises from the following financial assets:

 

03/31/2018

03/31/2017

Cash and cash equivalents

59,510

43,264

Investment securities held for trading

4,255

10,169

Other receivables

39,502

55,231

 

103,267

108,664

 

18.     INCOME TAX AND SOCIAL CONTRIBUTION

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

 

 

03/31/2018

03/31/2017

Income tax expense - current

(728,053)

(681,759)

     

Deferred tax expense on temporary differences

168,079

454,125

Deferred tax over taxes losses carryforwards movements  in the current period

(59,889)

(110,879)

Total deferred tax (expense)/income

108,190

343,246

     

Total income tax expenses

(619,863)

(338,513)

 

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

 

03/31/2018

03/31/2017

Profit before tax

          3,217,492

          2,628,344

Adjustment on taxable basis

   

Non-taxable income

             (78,250)

           (104,850)

Government grants related to sales taxes

           (413,734)

           (434,413)

Share of result of joint ventures

                  (617)

               (1,032)

Non-deductible expenses

               64,542

               89,995

Complement of income tax of foreign subsidiaries due in Brazil

               27,852

               22,083

Results of intercompany transactions non-taxable/not deductible in Brazil

           (116,245)

               12,716

 

          2,701,040

          2,212,843

Aggregated weighted nominal tax rate

30.34%

29.62%

Taxes payable – nominal rate

           (819,500)

           (655,548)

Adjustment on tax expense

   

Regional incentives - income taxes

               53,460

               28,141

Deductible interest on shareholders' equity

             299,655

             284,395

Tax savings from goodwill amortization on tax books

               18,274

               36,224

Withholding tax over undistributed profits

             (52,960)

             (51,238)

Recognition / write-off of deferred charges on tax losses

             (28,166)

                      -  

Others with reduced taxation

             (90,626)

               19,513

Income tax and social contribution expense

           (619,863)

           (338,513)

Effective tax rate

19.27%

12.88%

 

 

33

 


 
 

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

 

 

§

Government subsidy on sales taxes: The tax expense results from the deductibility of investment subsidies at state level. The reduction in this quarter reflects the reality of the operations with finished goods in the units that benefit from the subsidy.

 
§

Deductible interest on shareholders' equity: Under Brazilian law, companies have an option to distribute Interest on Capital (“IOC”), which is deductible for income tax purposes. Until the present time the total deductibility derived impact is R$299,655.

 
§

Results of intercompany transactions taxable/ deductible in Brazil: are a result of foreign exchange fluctuation on mutual contracts that are agreed upon a different currency with foreign subsidiaries. Taking into account the current fluctuation of the Brazilian Real (“BRL”) before other currencies, those results are taxable in Brazil.

 

 

19.     SHARE-BASED PAYMENTS

 

There are different stock option and share-based payment programs which allow the employees and senior management from the Company and its subsidiaries to acquire or receive shares of the Company . For all stock option programs, the fair value of the shares is estimated at the options grant date, using the “Hull Binomial” pricing model, adjusted to reflect the IFRS 2 requirement that assumptions about forfeiture before the end of the vesting period cannot impact the fair value of the option.

 

This current model of stock option, ruled by the Stock Option Plan of the Company ( Stock Option Plan”), includes two types of grants: (I) Grant 1- the beneficiary may allocate 30%, 40%, 60%, 70% or 100% of the amount related to the profit share he received in the year, through the immediate exercise of options, thus acquiring the corresponding shares of the Company, which transfer to third parties or the Company will only be allowed after the five-year grace period counted from the date of exercise of the options; and (II) Grant 2 -  the beneficiary may exercise the options after a five-year grace period, for a period of five years.

In addition, the Company has implemented a Share-Based Payment Plan (“ Share-Based Plan”) under which certain employees and members of the management of the Company or its subsidiaries are eligible to receive shares of the Company including in the form of ADR’s. The shares that are subject to the Share-Based Plan are designated as "restricted shares" and their reference price, when applicable, for the purposes of the Share-Based Plan will correspond to the price of the Company's shares in B3 S.A.- Brasil, Bolsa, Balcão, at the trading session immediately prior to the grant of shares.

34

 


 
 

Additionally, as a mean of a creating a long term incentive (wealth incentive) for certain senior employees and members of management considered as having “high potential,” the Company grants, under the Share-Based Plan, shares to be delivered in the future divided in two separate lots – Lot A and Lot B, which will be delivered to the participants of the relevant program, subject to maturation periods of five and ten years, respectively.

The weighted average fair value of the options and assumptions used in applying the Company’s option pricing model of 2018 and 2017 grants are as follows:

 

In R$, except when otherwise indicated

03/31/2018

(i)

12/31/2017

(i)

         

Fair value of options granted

6.98

 

6.51

 

Share price

22.35

 

19.80

 

Exercise price

22.35

 

19.80

 

Expected volatility

26.2%

 

26.7%

 

Vesting year

5

 

5

 

Expected dividends

5%

 

5%

 

Risk-free interest rate

9.6%

(ii)

10.1%

(ii)

 

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

 

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

 

The total number of outstanding options developed as follows:

Thousand options

03/31/2018

 

12/31/2017

       

Options outstanding at January 1 st

135,221

 

131,244

Options issued during the period

3,861

 

20,435

Options exercised during the period

(5,353)

 

(13,548)

Options forfeited during the period

(1,559)

 

(2,910)

Options outstanding at ended period

132,170

 

135,221

 

The range of exercise prices of the outstanding options is between R$0.001 (R$0.001 on December 31, 2017) and R$24.46 (R$26.09 on December 31, 2017) and the weighted average remaining contractual life is approximately 6.42 years (6.40 years on December 31, 2017).

 

Of the 132,170 thousand outstanding options (135,221 thousand on December 31, 2017), 35,490 thousand options are vested on March 31, 2018 (40,150 thousands on December 31, 2017).

 

 

35

 


 
 

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

 

In R$ per share

03/31/2018

 

12/31/2017

       

Options outstanding at January 1 st

15.27

 

13.87

Options issued during the period

22.35

 

19.82

Options forfeited during the period

16.96

 

17.88

Options exercised during the period

8.06

 

5.81

Options outstanding at ended period

15.74

 

15.27

Options exercisable at ended period

3.94

 

3.78

 

For the options exercised during the period ended March 31,2018, the weighted average share price on the exercise date was R$22.83 (R$18.87 as of December 31, 2017).

 

During the period, the Company granted 49 thousand (794 thousand on December 31, 2017) deferred stock units related to the exercise of stock options granted in the previous years. These deferred stock units are valued based on the share price of the trading session immediately prior to the stock option grant, representing a fair value of approximately R$1,103 on March 31, 2018 (R$15,193 on December 31, 2017). Such deferred stock units are subject to a grace period of five years counted from the options date of exercise.

During the period, the Company granted 3,422 thousand restricted shares units under the Share-Based Plan, which are valued based on the share price of the trading session immediately prior to the grant of shares, representing a fair value of approximately R$76,458 on March 31,2018. Such restricted shares units are subject to a grace period of five years counted from the date of grant.

The total number of shares purchased or granted, as the case may be,  under the Stock Option Plan and Share-Based Plan by employees, the delivery of which will be performed in the future under certain conditions (deferred stock and restricted shares), is demonstrated below:

Thousand deferred shares

03/31/2018

 

12/31/2017

       

Deferred shares outstanding at January 1 st

16,300

 

19,260

New deferred shares during the period

49

 

794

Deferred shares granted during the period

(3,358)

 

(2,874)

Deferred shares forfeited during the period

(686)

 

(880)

Deferred shares outstanding at ended period

12,305

 

16,300

 

Thousand restricted shares

03/31/2018

 

12/31/2017

       

Restricted shares outstanding at January 1st

-

 

-

New restricted shares during the period

3,422

 

-

Restricted shares outstanding at ended period

3,422

 

-

 

Additionally, certain employees and managers of the Company receive d options to acquire AB Inbev shares, the compensation cost of which is recognized in the income statement against equity .

36

 


 

The transactions with share-based payments described above generated an expense of R$46,918 (R$55,110 on March 31, 2017), recorded as administrative expenses.

 

20.     FINANCIAL INSTRUMENTS AND RISKS

 

Risk factors

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

 

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

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

 

Derivative financial Instruments

 

Derivative financial instruments authorized by the Financial Risk Management Policy are futures contracts traded on exchanges, full deliverable forwards, non-deliverable forwards, swaps and options. At March 31, 2018, the Company and its subsidiaries had no target forward, swaps with currency verification or any other derivative operations representing a risk level above the nominal value of their contracts. The derivative operations are classified by strategies according to their purposes, as follows:

 

37

 


 

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

 

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

 

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

 

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

 

The following tables summarize the exposure of the Company that were identified and protected in accordance with the Company's Risk Policy. The following denominations have been applied:

 

Operational Hedge: Refers to the exposures arising from the core business of Ambev, such as: purchase of inputs, purchase of fixed assets and service contracts linked to foreign currency, which is protected through the use of derivatives.

 

Financial Hedge: Refers to the exposures arising from cash and financing activities, such as: foreign currency cash and foreign currency debt, which is protected through the use of derivatives.

 

Investment hedge abroad: Refers mainly to exposures arising from cash hold in foreign currency in foreign subsidiaries whose functional currency is different from the consolidation currency.

 

Investment hedge - Put option granted on subsidiary : As detailed in Note 13 (d.4) the Company constituted a liability related to acquisition of Non-controlling interest in the Dominican Republic operations. This financial instrument is denominated in Dominican Pesos and is recorded in a Company which functional currency is the Real. The Company assigned this financial instrument as a hedging instrument for part of its net assets located in the Dominican Republic, in such manner the hedge result can be recorded in other comprehensive income of the group, following the result of the hedged item.

38

 


 

 

39

 


 

Transactions protected by derivative financial instruments in accordance with the Financial Risk Management Policy

 

             

 03/31/2018

 

 03/31/2018

 

 

 

 

 

 

 

 Fair Value

 

 Gain / (Losses)

Exposure

 

 Risk

 

 

 Notional

 

 Assets

 Liability

 

 Finance Result

 Operational Result

 Equity

                         

Cost

   

(9,811,070)

 

9,617,951

 

176,258

(234,583)

 

(267,540)

113,238

29,321

   

 Commodity 

(2,441,771)

 

2,248,652

 

55,238

(110,423)

 

(14,350)

18,689

(118,486)

   

 American Dollar

(6,878,785)

 

6,878,785

 

85,329

(119,818)

 

(253,951)

80,337

147,333

   

 Euro 

(106,169)

 

106,169

 

6,664

(1,316)

 

(407)

1,382

4,896

   

 Mexican Pesos 

(384,345)

 

384,345

 

29,027

(3,026)

 

1,168

12,830

(4,422)

                         

Fixed Assets

   

(629,884)

 

629,884

 

2,606

(6,230)

 

(1,534)

-

-

   

 American Dollar 

(579,959)

 

579,959

 

2,606

(5,561)

 

(2,014)

-

-

   

 Euro 

(49,925)

 

49,925

 

-

(669)

 

480

-

-

                         

Expenses

   

(226,968)

 

226,968

 

1,260

(1,520)

 

(520)

2,388

164

   

 American Dollar 

(224,648)

 

224,648

 

1,078

(1,441)

 

(602)

2,555

166

   

 Rupee

(2,320)

 

2,320

 

182

(79)

 

82

(167)

(2)

                         

Cash

   

699,188

 

(699,188)

 

-

(10,145)

 

(24,888)

-

-

   

 American Dollar 

714,188

 

(714,188)

 

-

(10,134)

 

(24,888)

-

-

   

 Interest rate 

(15,000)

 

15,000

 

-

(11)

 

-

-

-

                         

Debts

   

(2,210,139)

 

1,649,009

 

99,229

(45,667)

 

28,410

-

-

   

 American Dollar 

(1,871,920)

 

1,310,790

 

59,230

(44,469)

 

17,874

-

-

   

 Interest rate 

(338,219)

 

338,219

 

39,999

(1,198)

 

10,536

-

-

                         

Equity Instrument

   

(2,782,522)

 

748,907

 

128,594

-

 

70,106

-

-

   

 Stock exchange prices

(2,782,522)

 

748,907

 

128,594

-

 

70,106

-

-

As of March 31, 2018

   

(14,961,395)

 

12,173,531

 

407,947

(298,145)

 

(195,966)

115,626

29,485

 

 

40

 


 

 

 

 

 

 

 

 

 Fair Value

 

 Gain / (Losses)

Exposure

 

Risk

 

 

 Notional

 

 Assets

 Liability

 

 Finance Result

 Operational Result

 Equity

                         

Cost

   

(9,742,375)

 

9,318,936

 

283,692

(189,997)

 

(290,899)

(123,591)

29,637

   

 Commodity 

(2,378,747)

 

1,955,308

 

166,623

(70,709)

 

(368)

44,706

(1,860)

   

 American Dollar 

(6,879,106)

 

6,879,106

 

86,283

(93,397)

 

(282,631)

(155,930)

30,487

   

 Euro 

(82,906)

 

82,906

 

3,473

(659)

 

402

(9,935)

6,527

   

 Mexican Pesos 

(401,616)

 

401,616

 

27,313

(25,232)

 

(8,302)

(2,432)

(5,517)

                         

Fixed Assets

   

(579,426)

 

579,426

 

1,874

(10,799)

 

(1,900)

-

-

   

 American Dollar 

(531,858)

 

531,858

 

1,759

(10,799)

 

(1,335)

-

-

   

 Euro 

(47,568)

 

47,568

 

115

-

 

(565)

-

-

                         

Expenses

   

(177,721)

 

177,721

 

494

(1,786)

 

(2,433)

118

243

   

 American Dollar 

(169,199)

 

169,199

 

314

(1,617)

 

(2,408)

-

-

   

 Rupee

(8,522)

 

8,522

 

180

(169)

 

(25)

118

243

                         

Cash

   

(1,328,291)

 

1,328,291

 

-

(13,116)

 

15,225

-

-

   

 American Dollar 

(1,313,291)

 

1,313,291

 

-

(13,106)

 

15,220

-

-

   

 Interest rate 

(15,000)

 

15,000

 

-

(10)

 

5

-

-

                         

Debts

   

(919,426)

 

356,858

 

29,963

(1,791)

 

(72,301)

-

-

   

 American Dollar 

(562,568)

 

-

 

-

-

 

(75,103)

-

-

   

 Interest rate 

(356,858)

 

356,858

 

29,963

(1,791)

 

2,802

-

-

                         

Equity Instrument

   

(2,347,931)

 

677,006

 

69,201

(35)

 

-

-

-

   

 American Dollar 

(2,347,931)

 

677,006

 

69,201

(35)

 

-

-

-

Total

   

(15,095,170)

 

12,438,238

 

385,224

(217,524)

 

(352,308)

(123,473)

29,880

 

 

 

 

 

41

 


 
 

I.           Market risk

 

a.1) Foreign currency risk

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

 

a.2) Commodity Risk

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

 

a.3) Interest rate risk

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

 

The table below demonstrates the Company’s exposure related to debts, before and after interest rates hedging strategy.

 

 

03/31/2018

 

Pre - Hedge

 

Post - Hedge

 

Interest rate

 Amount

 

Interest rate

 Amount

Brazilian Real

6.6%

665,649

 

6.0%

362,260

Working capital in Argentinean peso

51.7%

5

 

51.7%

5

Dominican Peso

9.4%

185,514

 

9.4%

185,514

American Dollar

3.8%

19,718

 

3.8%

19,718

Guatemala´s Quetzal

7.8%

10,290

 

7.8%

10,290

Interest rate pre-set

 

881,176

   

577,787

           
           

Brazilian Real

9.2%

355,852

 

6.8%

1,988,761

American Dollar

2.4%

1,891,007

 

2.4%

561,487

Canadian  Dollar

2.2%

1,339,747

 

2.2%

1,339,747

Interest rate post fixed

 

3,586,606

   

3,889,995

 

 

 

 

 

42

 


 
 
 

12/31/2017

 

Pre - Hedge

 

Post - Hedge

 

Interest rate

 Amount

 

Interest rate

 Amount

Brazilian Real

6.4%

682,578

 

5.9%

370,851

Working capital in Argentinean peso

31.0%

1,792

 

31.0%

1,792

Dominican Peso

9.3%

188,791

 

9.3%

188,792

American Dollar

3.8%

22,901

 

3.8%

22,901

Guatemala´s Quetzal

7.8%

10,307

 

7.8%

10,307

Interest rate pre-set

 

906,369

   

594,643

           
           

Brazilian Real

9.2%

402,348

 

7.6%

714,073

American Dollar

2.7%

555,282

 

2.7%

555,283

Canadian  Dollar

2.0%

685,881

 

2.0%

685,881

Barbadian Dollar

2.3%

4,962

 

2.3%

4,962

Interest rate post fixed

 

1,648,473

   

1,960,199

 

 

Sensitivity analysis

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

 

1 – Probable scenario: Management expectations of deterioration in each transaction’s main risk factor. To measure the possible effects on the results of derivative transactions, the Company uses parametric Value at Risk – VaR. is a statistical measure developed through estimates of standard deviation and correlation between the returns of several risk factors. This model results in the loss limit expected for an asset over a certain time period and confidence interval. Under this methodology, we used the potential exposure of each financial instrument, a range of 95% and horizon of 21 days after March 31, 2018 for the calculation, which are presented in the module.

 

2 – Adverse scenario: 25% deterioration in each transaction’s main risk factor as compared to the level observed on March 31, 2018.

 

3 – Remote scenario: 50% deterioration in each transaction’s main risk factor as compared to the level observed on March 31, 2018.

 

 

 

43

 


 

Transaction

Risk

Fair Value

Probable scenario

Adverse scenario

Remote
 scenario

           

Commodities hedge

Decrease on commodities price

(55,185)

(241,110)

(617,348)

(1,179,511)

Input purchase

55,185

258,472

665,628

1,276,071

Foreign exchange hedge

Foreign currency decrease

(3,140)

(104,006)

(1,845,464)

(3,687,788)

Input purchase

3,140

104,006

1,845,464

3,687,788

Costs effects

 

-

17,362

48,280

96,560

           

Foreign exchange hedge

Foreign currency decrease

(3,624)

(12,041)

(161,095)

(318,566)

Capex Purchase

3,624

12,041

161,095

318,566

Fixed assets effects

 

-

-

-

-

           

Foreign exchange hedge

Foreign currency decrease

(260)

(2,948)

(57,002)

(113,744)

Expenses

260

2,948

57,002

113,744

Expenses effects

 

-

-

-

-

           

Hedge cambial

Foreign currency increase

(10,134)

(19,155)

(188,681)

(367,228)

Cash

10,134

19,155

188,681

367,228

Interest Hedge

Decrease in interest rate

(11)

(423)

(2,075)

(2,435)

Interest revenue

11

423

2,075

2,435

Cash effects

 

-

-

-

-

           

Hedge cambial

Foreign currency decrease

14,761

(7,799)

(312,937)

(640,634)

Cash

(14,761)

17,457

453,219

921,199

Interest Hedge

Increase in interest rate

38,801

29,514

(101,900)

(119,579)

Interest expenses

(38,801)

(29,514)

101,900

119,579

Debt effects

 

-

9,658

140,282

280,565

           

Equity Instrument Hedge

Stock exchange price decrease

128,594

112,238

(58,633)

(245,860)

Expenses

(128,594)

(69,757)

567,036

1,262,667

Equity effects

 

-

42,481

508,403

1,016,807

   

-

69,501

696,965

1,393,932

 

 

 

 

 

 

 

44

 


 

As of March 31, 2018 the Notional and Fair Value amounts per instrument and maturity were as follows:

 

 

 Notional Value

Exposure

Risk

2018

2019

2020

2021

 >2021

 Total

               

Cost

 

8,347,365

1,270,586

-

-

-

9,617,951

 

  Commodity 

1,675,245

573,407

-

-

-

2,248,652

 

  American Dollar 

6,316,320

562,465

-

-

-

6,878,785

 

  Euro 

88,406

17,763

-

-

-

106,169

 

  Mexican Peso 

267,394

116,951

-

-

-

384,345

               

Fixed asset

 

580,374

49,510

-

-

-

629,884

 

  American Dollar 

530,449

49,510

-

-

-

579,959

 

  Euro 

49,925

-

-

-

-

49,925

               

Expenses

 

218,055

8,913

-

-

-

226,968

 

  American Dollar 

213,681

10,967

-

-

-

224,648

 

 Rupee

4,374

(2,054)

-

-

-

2,320

               

Cash

 

(714,188)

-

15,000

-

-

(699,188)

 

  American Dollar 

(714,188)

-

-

-

-

(714,188)

 

  Interest rate

-

-

15,000

-

-

15,000

               

Debt

 

1,310,790

-

-

110,000

228,219

1,649,009

 

  American Dollar 

1,310,790

-

-

-

-

1,310,790

 

  Interest rate

-

-

-

110,000

228,219

338,219

               

Equity Instrument

 

677,946

70,961

-

-

-

748,907

 

 Stock prices

677,946

70,961

-

-

-

748,907

   

10,420,342

1,399,970

15,000

110,000

228,219

12,173,531

 

 

 

 

 Fair Value

Exposure

Risk

2018

2019

2020

2021

 >2021

 Total

               

Cost

 

(20,927)

(37,398)

-

-

-

(58,325)

 

Commodity

(41,277)

(13,908)

-

-

-

(55,185)

 

American Dollar

(6,604)

(27,885)

-

-

-

(34,489)

 

Euro

5,267

81

-

-

-

5,348

 

Mexican Peso

21,687

4,314

-

-

-

26,001

               

Fixed asset

 

(3,526)

(98)

-

-

-

(3,624)

 

American Dollar

(2,857)

(98)

-

-

-

(2,955)

 

Euro

(669)

-

-

-

-

(669)

               

Expenses

 

(348)

88

-

-

-

(260)

 

American Dollar

(459)

96

-

-

-

(363)

 

Rupee

111

(8)

-

-

-

103

               

Cash

 

(10,134)

-

(11)

-

-

(10,145)

 

American Dollar

(10,134)

-

-

-

-

(10,134)

 

Interest rate

-

-

(11)

-

-

(11)

               

Debt

 

14,761

-

-

28,890

9,911

53,562

 

American Dollar

14,761

-

-

-

-

14,761

 

Interest rate

-

-

-

28,890

9,911

38,801

               

Equity Instrument

 

126,559

2,035

-

-

-

128,594

 

 Stock prices

126,559

2,035

-

-

-

128,594

   

106,385

(35,373)

(11)

28,890

9,911

109,802

 

 

45

 


 

  II.      Credit Risk

 

Concentration of credit risk on trade receivables

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

Concentration of credit risk on counterpart

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

 

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

 

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

 

As of March 31, 2018, the Company held its main short-term investments with the following financial institutions: Banco do Brasil, Bradesco, Bank Mendes Gans, Caixa Econômica Federal, Citibank, Itaú, JP Morgan Chase, Merrill Lynch, Santander e Toronto Dominion Bank. The Company had derivative agreements with the following financial institutions: Banco Bisa, Barclays, BNB, BNP Paribas, Bradesco, Citibank, Deutsche Bank, Itaú, Goldman Sachs, JP Morgan Chase, Macquarie, Merrill Lynch, Morgan Stanley, Santander, ScotiaBank e TD Securities.

The carrying amount of cash and cash equivalents, investment securities, trade receivables excluding prepaid expenses, recoverable taxes and derivative financial instruments are disclosed net of provisions for impairment and represents the maximum exposure of credit risks of March 31, 2018. There was no concentration of credit risk with any counterparties as of March 31, 2018.

 

III.       Liquidity Risk

 

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

46

 


 

 

IV.      Equity price risk

 

Through the equity swap transaction approved on May 16 th , 2017 and December 21,2017 by the Board of Directors of Ambev (see Note 1 - Corporate information ), the Company, or its controlled entity, will receive the price variation related to its shares traded on the stock exchange or ADRs, neutralizing the possible effects of the stock prices’ oscillation in view of the share-based payment of the Company. As these derivative instruments are not characterized as hedge accounting they were not therefore designated to any hedge.

 

In March 31, 2018, an exposure equivalent to R$2.3 billion in AmBev’s shares (or ADR’s) was partially hedged, resulting in a gain in income statement of R$ 70,106.

 

  V.      Capital management

 

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

 

Financial instruments

 

(a) Financial instruments categories

 

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

 

47

 


 

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

 

 03/31/2018

 

Fair value through other comprehensive income

Amortized cost

Fair value through profit or loss

Total

Financial assets

       

Cash and cash equivalents

1,873,172

6,080,305

-

7,953,477

Trade  receivables excluding prepaid expenses

-

5,466,353

-

5,466,353

Investment securities

-

143,481

12,229

155,710

Financial instruments derivatives

-

-

227,823

227,823

Derivatives hedge

-

-

180,124

180,124

Total

1,873,172

11,690,139

420,176

13,983,487

         

Financial liabilities

       

Trade payables and put option granted on subsidiary and other liabilities

-

12,220,492

1,981,449

14,201,941

Financial instruments derivatives

-

-

58,490

58,490

Derivatives hedge

-

-

239,655

239,655

Interest-bearning loans and borrowings

-

4,467,655

-

4,467,655

Total

-

16,688,147

2,279,594

18,967,741

 

 

 12/31/2017

 

Fair value through other comprehensive income

Amortized cost

Fair value through profit or loss

Total

Financial assets

       

Cash and cash equivalents

3,081,755

7,272,772

-

10,354,527

Trade  receivables excluding prepaid expenses

-

7,505,038

-

7,505,038

Investment securities

-

121,956

11,883

133,839

Financial instruments derivatives

-

-

100,140

100,140

Derivatives hedge

-

-

285,084

285,084

Total

3,081,755

14,899,766

397,107

18,378,628

         

Financial liabilities

       

Trade payables and put option granted on subsidiary and other liabilities

-

13,501,952

5,764,057

19,266,009

Financial instruments derivatives

-

-

16,125

16,125

Derivatives hedge

-

-

201,399

201,399

Interest-bearning loans and borrowings

-

2,553,050

-

2,553,050

Total

-

16,055,002

5,981,581

22,036,583

 

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

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.

 

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

 

48

 


 

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

 

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

Level 3 – unobservable inputs for the asset or liability.

 

03/31/2018

 

12/31/2017

                   
 

Level 1

Level 2

Level 3

 Total

 

Level 1

Level 2

Level 3

Total

Financial assets

                 

 

 

 

 

 

 

 

 

 

 

Financial asset at fair value through other comprehensive income

1,873,172

-

-

1,873,172

 

3,081,755

-

-

3,081,755

Financial asset at fair value through profit or loss

12,229

-

-

12,229

 

11,883

-

-

11,883

Derivatives assets at fair value through profit or loss

-

227,823

-

227,823

 

114

100,026

-

100,140

Derivatives - operational hedge

14,727

165,397

-

180,124

 

4,795

280,289

-

285,084

 

1,900,128

393,220

-

2,293,348

 

3,098,547

380,315

-

3,478,862

Financial liabilities

                 

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

-

-

1,981,449

1,981,449

 

-

-

5,764,057

5,764,057

Derivatives liabilities at fair value through profit or loss

1,980

56,510

-

58,490

 

1,733

14,392

-

16,125

Derivatives - operational hedge

60,175

179,480

-

239,655

 

58,356

143,043

-

201,399

 

62,155

235,990

1,981,449

2,279,594

 

60,089

157,435

5,764,057

5,981,581

 

(i) Refers to the put option granted on subsidiary as described in Note 13 d(4).

 

Reconciliation of changes in the categorization of Level 3

 

Financial liabilities at December 31, 2017

5,764,057

Acquisition of investments

(3,619,186)

Total gains and losses in the period

(163,422)

Losses recognized in net income

49,096

Gain recognized in equity

(212,518)

Financial liabilities at March 31, 2018 (i)

1,981,449

 

(i) The liability was recorded under “Trade payables and put option granted on subsidiary and other liabilities” on the balance sheet.

 

 

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

 

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

 

The financial instruments recorded at amortized cost are similar to the fair value and are not material for disclosure.

 

 

49

 


 

Calculation of fair value of derivatives

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

 

Margins given in guarantee

 

In order to comply with the guarantee requirements of the derivative exchanges and/or counterparties in certain operations with derivative financial instruments, as of March 31, 2018 the Company held R$606,873 in highly liquid financial investments or in cash, classified as cash and cash equivalents and investment securities (R$608,279 on December 31, 2017).

 

Offsetting of financial assets and liabilities

 

For financial assets and liabilities subject to settlement agreements by the net or similar agreements, each agreement between the Company and the counterparty allows this type of settlement when both parties make this option. In the absence of such election, the assets and liabilities will be settled by their amounts, but each party shall have the option to settle on net, in case of default by the counterparty.

 

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

 

 

03/31/2018

12/31/2017

     

Collateral given for own liabilities

606,873

606,279

Other commitments

825,339

842,733

 

1,432,212

1,449,012

     

Commitments with suppliers

13,273,067

11,096,305

 

13,273,067

11,096,305

 

The collateral provided for liabilities totaled approximately R$1,432,212 on March 31, 2018 (R$1,449,012 on December 31, 2017), including R$558,095 (R$551,008 on December 31, 2017) of cash guarantees. The deposits in cash used as guarantees are presented as part of other assets. To meet the guarantees required by derivative exchanges and/or counterparties contracted in certain derivative financial instrument transactions, Ambev maintained on March 31, 2018, R$606,873 (R$606,279 on December 31, 2017) in highly liquid financial investments or in cash, classified as cash and cash equivalents and investment securities (Note 20 – Financial instruments and risks ).

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

50

 


 

Future contractual commitments on March 31, 2018 a nd December 31, 2017 are as follows:

 

 

03/31/2018

12/31/2017

     

Less than 1 year

3,346,038

3,812,794

Between 1 and 2 years

3,166,991

2,995,742

More than 2 years

6,760,038

4,287,769

 

13,273,067

11,096,305

 

22.     CONTINGENT LIABILITY

 

The Company has contingent liabilities related to lawsuits arising from its normal course of business. Due to their nature, such legal proceedings involve certain uncertainties including, but not limited to, court and tribunals rulings, negotiations between affected parties and governmental actions, and as a consequence the Company’s management cannot estimate the likely timing of resolution of these matters at this stage .

 

Contingent liabilities with a probable likelihood of loss are fully recorded as liabilities (Note 12 – Provisions ).

 

Additionally, the Company has lawsuits related to tax, civil and labor for which the likelihood of loss is classified as possible by management:

 

 

03/31/2018

12/31/2017

     

IRPJ and CSLL

32,765,060

31,757,317

ICMS and IPI

20,813,947

19,805,529

PIS and COFINS

3,520,660

3,485,242

Labor

296,074

287,087

Civil

4,006,361

4,071,540

Others

1,147,050

1,113,442

 

62,549,152

60,520,157

 

Principal lawsuits with a likelihood of possible loss:

 

There was no relevant changes in the main cases with possible chances of loss when compared to the period ending in 31st December 2017, except for monetary inflation and the case described below:

 

ICMS

ICMS-ST Trigger

 

Over the years, the Company received tax assessments relating to supposed ICMS differences considered due in the tax substitution system when the price of the products sold reaches levels close to or above the fixed price table basis established by certain States, cases in which the State tax authorities understand that the calculation basis should be based on a value-added percentage over the actual prices and not the fixed table price. The Company is challenging these assessments at administrative and judicial courts.

51

 


 

 

Among other similar cases, in 2016, the Company received three assessments issued by the State of Minas Gerais, in the original amount of R$1.4 billion. In the first quarter of 2018 these cases had an unfavorable final administrative decision. Ambev will now seek recourse at the judicial level.

 

In 2017, Ambev received new relevant tax assessments issued by the State of Rio de Janeiro which amounts to the original amount of R$900 million. The Company filed defenses against these charges and currently awaits decision by the Administrative Court of the State Rio de Janeiro.

 

Considering these new tax assessments and other received during 2017, Ambev management estimates the total possible losses related to this issue to be approximately R$6.6 billion (R$5.8 billion as of 31 December 2017). Ambev has recorded provisions in the total amount of R$7.6 million in relation to the proceedings for which it considers the chances of loss to be probable, due to specific procedural issues.

 

Contingent assets

 

According to IAS 37, contingent assets are not recorded in consolidated financial statements, except when the realization of income is virtually certain.

 

The Company and its subsidiaries applied for the refund of the PIS and COFINS collected with the inclusion of the ICMS in their taxable basis from 1990 onwards. The relevant amounts are still being.

 

23.     NON-CASH ITEMS

 

The Company carried out the following investment and financing activities not involving cash:

 

 

03/31/2018

03/31/2017

Cash financing cost other than interests

(74,009)

6,118

Fair value of options granted on subsidiary

129,405

-

Others

114

-

 

24.     RELATED PARTIES

Policies and practices regarding the realization of transactions with related parties

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

 

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

52

 


 
 

 

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

 

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

 

Transactions with management members:

In addition to short-term benefits (primarily salaries), the management members are entitled to participate in Stock Option Plan (Note 19 – Share-based payments ).

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

 

 

03/31/2018

03/31/2017

     

Short-term benefits (i)

5,119

5,032

Share-based payments (ii)

9,871

9,182

Total key management remuneration

14,990

14,214

 

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

 

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

 

Excluding the above mentioned plan (Note 19 – Share-based payments ), the Company no longer has any type of transaction with the Management members or pending balances receivable or payable in its balance sheet.

Transactions with the Company's shareholders:

a) Medical, dental and other benefits

The Fundação Antonio e Helena Zerrenner Instituição Nacional de Beneficiência (“Fundação Zerrenner) is one of Ambev’s shareholders, and at March 31, 2018 held 10.2% of total share capital. Fundação Zerrenner is also an independent legal entity whose main goal is to provide Ambev’s employees, both active and retirees, with health care and dental assistance, technical and superior education courses, facilities for assisting elderly people, through direct initiatives or through financial assistance agreements with other entities. On March 31, 2018 and December 31, 2017, actuarial responsibilities related to the benefits provided directly by Fundação Zerrenner are fully funded by plan assets, held for that purpose, which significantly exceeds the liabilities at these dates. Ambev recognizes the assets (prepaid expenses) of this plan to the extent of amounts from economic benefits available to the Company, arising from reimbursements or future contributions reduction.

53

 


 
 

The expenses incurred by Fundação Zerrenner in providing these benefits totaled R$76,351 (R$64,660 on March 31, 2017), of which R$66,174 and R$10,177 related to active employees and retirees respectively (R$56,052 and R$8,608 on March 31, 2017 related to active employees and retirees respectively).

b) Leasing

 

The Ambev, through its subsidiary BSA (labeling), has an asset leasing agreement with Fundação Zerrenner, for R$63,328 for ten years, maturing on March 31, 2018.

c) Leasing – Ambev head office

Ambev has a leasing agreement of two commercial sets with Fundação Zerrenner in the annual amount of R$3,255, maturing on January, 2020.

 

d) Licensing agreement

 

The Company maintains a licensing agreement with Anheuser-Busch, Inc., to produce, bottle, sell and distribute Budweiser products in Brazil, Canada, and sales and distribution agreements of Budweiser products in Guatemala, Dominican Republic, Paraguay, El Salvador, Nicaragua, Uruguay and Chile. In addition, the Company produces and distributes Stella Artois products under license to ABI in Brazil and Canada and, by means of a license granted to ABI, it also distributes Brahma’s product in the United States and several countries such as the United Kingdom, Spain, Sweden, Finland and Greece. The amount recorded was R$341 (R$358 on March 31, 2017) and R$82,174 (R$61,620 on March 31, 2017) as licensing income and expense, respectively.

Ambev has licensing agreements with the Group Modelo, subsidiaries of ABI, for to import, promote and sell products Corona ( Corona Extra, Corona Light, Coronita, Pacifico and Negra Modelo ) in countries of the Latin America and the Canada.

 

Transactions with related parties

 

 

 

 

 

03/31/2018

Current

 Trade receivables (i)

 Other Trade receivables (i)

 Trade payables (i)

 Other Trade payables  (i)

AB InBev

36,067

-

(324,133)

-

AB Procurement

342

-

-

-

AB Services

30,449

-

(4,828)

-

AB USA

46,983

5,410

(210,633)

-

Ambrew

-

-

(1)

-

Cervecería Modelo

101,471

-

(535,342)

-

Inbev

870

30,144

(35,877)

-

ITW International

-

-

(213,542)

(58,270)

Panama Holding

25,716

-

(7,768)

-

Others

24,478

482

(93,836)

-

 

266,376

36,036

(1,425,960)

(58,270)

 

(i) The amount represents the marketing operations (purchase and sale) and the reimbursement between the companies of the group.

 

54

 


 
 
 

 

 

 

 

 

12/31/2017

Current

 Trade receivables (i)

 Other Trade receivables (i)

 Trade payables (i)

 Other Trade payables (i)

Borrowings and interest payable

 Dividends payables (i)

AB InBev

 1,159

 33,639

(363,048)

(1,733)

-

-

AB Procurement

8,860

129

-

-

-

-

AB Services

802

29,100

3

(6,127)

-

-

AB USA

14,136

16,349

(375,734)

(8,732)

-

-

Ambrew

-

-

-

-

-

(89,968)

Cervecería Modelo

91,629

5,767

(589,292)

(59,710)

-

-

Inbev

101

23,779

(33,775)

-

-

-

ITW International

-

-

-

(212,527)

(48,330)

(590,937)

Panama Holding

-

20,324

-

(4,006)

-

-

Others

13,944

8,612

(73,653)

(3,029)

-

-

 

130,631

137,699

(1,435,499)

(295,864)

(48,330)

(680,905)

 

(i) The amount represents the marketing operations (purchase and sale) and the reimbursement between the companies of the group.

 

The tables below represent the transactions with related parties, recognized in the income statement: 

 

 

 

 

 

03/31/2018

Company

Buying / Service fees / Rentals

Sales

Royalties

Net Finance Cost

AB Procurement

-

4,409

-

-

AB USA

(48,386)

10,638

(62,043)

-

Ambev Peru

-

5

-

-

Cervecería Modelo

(171,573)

22

(7,030)

-

Inbev

(19,178)

-

-

-

Others

(20,482)

2,057

(12,760)

(9,346)

 

(259,619)

17,131

(81,833)

(9,346)

 

 

 

 

 

03/31/2017

Company

Buying / Service fees / Rentals

Sales

Royalties

Net Finance Cost

AB InBev

43

-

(8,553)

-

AB USA

(74,729)

12,015

(47,109)

-

Ambev Peru

(4,921)

952

-

-

Cervecería Modelo

(83,739)

28

(5,344)

-

InBev

(13,989)

-

-

-

Others

(17,290)

607

(256)

824

 

(194,625)

13,602

(61,262)

824

 

Denomination used in the tables above :

 

AB InBev Procurement GmbH (“AB Procurement”)

Ambrew S.A. (“Ambrew”)

Anheuser-Busch InBev N.V. (“AB InBev”)

Anheuser-Busch Inbev Services LLC (“AB Services”)

Anheuser-Busch Inbev USA LLC (“AB USA”)

Cervecería Modelo de Mexico S. de R.L. de C.V. (“Cervecería Modelo”)

Cerveceria Nacional - Panamá (“Panama Holding”)

Compañia Cervecera Ambev Peru S.A.C. (“Ambev Peru”)

Inbev Belgium N.V. (“Inbev”)

Interbrew International B.V. (“ITW International”)

55

 


 
 

 

25.     EVENTS AFTER THE REPORTING PERIOD

 

As disclosed in Note 1 - Corporate information in September 2017, Quilmes, a subsidiary of Ambev, entered into an agreement whereby AB InBev will grant a perpetual license to Quilmes in Argentina for Budweiser and other North American brands upon the recovery of the distribution rights by AB InBev from Compañia Cervecerías Unidas S.A. - CCU. The agreement also foresees the transfer by AB InBev to Quilmes of Cerveceria Argentina Sociedad Anonima Isenbeck and the transfer by Quilmes of some Argentinean brands (Norte, Iguana and Baltica) and related business assets along with USD 50 million. The closing of the transaction was subject to the approval of the Argentinean antitrust authority and others usual closing conditions. The approval of the Argentinean antitrust authority was granted on April 27, 2018 and the transaction closed on May 02, 2018. The company estimates positive impact of R$57 million on profit and loss as result of the accounting practice involving transactions under common control.

 

56

 

 

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
Date: May 23, 2018
     
 
AMBEV S.A.
     
 
By: 
/s/ Ricardo Rittes de Oliveira Silva
 
Ricardo Rittes de Oliveira Silva
Chief Financial and Investor Relations Officer
 
 
 
 

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