Docoh
Loading...

VIV Telefonica Brasil S.A., - ADR

Filed: 6 Nov 20, 4:18pm

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K

REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 UNDER THE SECURITIES EXCHANGE ACT OF 1934

 

For the month of November, 2020

Commission File Number: 001-14475



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

 

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

 

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


 

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

Form 20-F

X

 

Form 40-F

 

 

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

Yes

 

 

No

 

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

Yes

 

 

No

 

 

 

 

 
 

 

 

 

 

 

 

 

 

TELEFÔNICA BRASIL S.A.

 

 

QUARTERLY INFORMATION

 

SEPTEMBER 30, 2020

 
 

(A free translation of the original in Portuguese)

 

 

Report on review of quarterly information

To the Board of Directors and Stockholders

Telefônica Brasil S.A.

 

Introduction

We have reviewed the accompanying parent company and consolidated interim accounting information of Telefônica Brasil S.A. ("Parent company" or "Company"), included in the Quarterly Information Form (ITR) for the quarter ended September 30, 2020, comprising the balance sheet at that date and the statements of income and comprehensive income for the quarter and nine-month period then ended, and the statements of changes in equity and cash flows for the nine-month period then ended, as well as a summary of significant accounting policies and other explanatory information.

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

 

Scope of review

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

 

Conclusion on the interim information

Based on our review, nothing has come to our attention that causes us to believe that the accompanying parent company and consolidated interim accounting information included in the quarterly information referred to above has not been prepared, in all material respects, in accordance with CPC 21 and IAS 34 applicable to the preparation of the Quarterly Information, and presented in accordance with the standards issued by the CVM.

 
 

(A free translation of the original in Portuguese)

 

 

Other matters

 

Statements of value added

 

The Quarterly Information referred to above include the parent company and consolidated statements of value added for the nine-month period ended September 30, 2020. These statements are the responsibility of the Company's management and are presented as supplementary information for IAS 34 purposes. These statements have been subjected to review procedures performed together with the review of the quarterly information for the purpose of concluding whether they are reconciled with the interim accounting information and accounting records, as applicable, and if their form and content are in accordance with the criteria defined in the accounting standard CPC 09 - "Statement of Value Added". Based on our review, nothing has come to our attention that causes us to believe that these statements of value added have not been properly prepared, in all material respects, in accordance with the criteria defined in this accounting standard, and in a consistent manner in relation to the parent company and consolidated interim accounting information taken as a whole.

 

São Paulo, October 23, 2020

 

 

 

PricewaterhouseCoopers

Auditores Independentes

CRC 2SP000160/O-5

 

 

 

Sérgio Eduardo Zamora

Contador CRC 1SP168728/O-4

 
 
TELEFÔNICA BRASIL S.A. 
Balance Sheets
On September 30, 2020 and December 31, 2019
(In thousands of reais) (A free translation of the original in Portuguese)
   Company Consolidated    Company Consolidated
ASSETSNote 09.30.20 12.31.19 09.30.20 12.31.19 LIABILITIES AND EQUITYNote 09.30.20 12.31.19 09.30.20 12.31.19
                     
Current assets   22,059,550  18,371,347  22,281,188  18,644,678 Current liabilities   20,066,055  17,698,033  20,102,013  17,732,088
Cash and cash equivalents3 7,829,915 3,106,269 8,356,255 3,393,377 Personnel, social charges and benefits14 955,820 724,194 990,208 752,246
Trade accounts receivable4 8,360,145 8,675,720 8,369,728 8,719,497 Trade accounts payable15 6,920,573 6,917,252 6,869,828 6,871,799
Inventories5 515,992 573,483 520,563 578,003 Income and social contribution taxes payable7  -  - 5,779 6,585
Prepaid expenses6 937,157 684,972 938,819 686,503 Taxes, charges and contributions payable16 1,651,281 1,116,229 1,677,993 1,139,812
Income and social contribution taxes recoverable7 527,828 408,405 532,867 411,595 Dividends and interest on equity17 4,306,651 3,587,417 4,306,651 3,587,417
Taxes, charges and contributions recoverable8 2,927,668 4,170,350 2,933,316 4,176,362 Provisions and contingencies18 393,102 365,278 398,456 374,445
Judicial deposits and garnishments9 203,361 277,007 204,246 277,468 Loans, financing, debentures and leases19 4,799,618 4,125,926 4,800,481 4,126,490
Dividends and interest on equity17 292,297   72,900  -  - Deferred revenue20 549,738 506,181 549,738 506,181
Derivative financial instruments30 7,081   19,282 7,081   19,282 Derivative financial instruments30 173 1,921 173 1,921
Other assets10 458,106 382,959 418,313 382,591 Other liabilities21 489,099 353,635 502,706 365,192
                     
Non-current assets   86,968,192  89,709,031  86,956,210  89,645,044           
Long-term assets  4,299,696 5,090,417 4,603,429 5,418,577 Non-current liabilities   19,114,394  19,926,767  19,288,092  20,102,056
Short-term investments pledged as collateral    65,686   63,558   65,914   63,766 Personnel, social charges and benefits14   64,938   35,958   65,038��  36,028
Trade accounts receivable4 387,666 440,453 387,666 440,453 Income and social contribution taxes payable7   96,074   86,512   96,074   86,512
Prepaid expenses6 159,750 220,077 159,750 220,082 Taxes, charges and contributions payable16 264,338 239,074 312,284 285,055
Deferred taxes7  -  - 144,509 171,042 Deferred taxes7 3,919,985 3,146,453 3,919,985 3,146,453
Taxes, charges and contributions recoverable8 835,406 841,196 835,408 841,198 Provisions and contingencies18 5,104,002 5,039,695 5,222,419 5,160,973
Judicial deposits and garnishments9 2,611,772 3,236,840 2,770,400 3,393,417 Loans, financing, debentures and leases19 7,831,516 9,698,041 7,832,527 9,698,183
Derivative financial instruments30   34,599   52,881   34,599   52,881 Deferred revenue20 284,474 208,229 285,720 211,901
Other assets10 204,817 235,412 205,183 235,738 Derivative financial instruments30   59,677   54,212   59,677   54,212
Investments11 485,881 516,513 149,510 104,251 Other liabilities21 1,489,390 1,418,593 1,494,368 1,422,739
Property, plant and equipment12  41,713,103  42,831,369  41,728,273  42,847,264           
Intangible assets13  40,469,512  41,270,732  40,474,998  41,274,952 TOTAL LIABILITIES   39,180,449  37,624,800  39,390,105  37,834,144
                     
           Equity22  69,847,293  70,455,578  69,847,293  70,455,578
           Capital   63,571,416  63,571,416  63,571,416  63,571,416
           Capital reserves  1,165,459 1,165,463 1,165,459 1,165,463
            Income reserves  3,506,442 3,492,387 3,506,442 3,492,387
           Other comprehensive income acumulated    74,832   30,737   74,832   30,737
           Retained earnings  1,529,144  - 1,529,144  -
           Additional proposed dividends   - 2,195,575  - 2,195,575
                     
TOTAL ASSETS    109,027,742   108,080,378   109,237,398   108,289,722 TOTAL LIABILITIES AND EQUITY    109,027,742   108,080,378   109,237,398   108,289,722
 
 
TELEFÔNICA BRASIL S.A. 
Statements of Income
Three and nine-month periods ended September 30, 2020 and 2019
(In thousands of reais, except earnings per share) (A free translation of the original in Portuguese)
                  
                  
   Company Consolidated
   Three-month periods ended Nine-month periods ended Three-month periods ended Nine-month periods ended
 Note 09.30.20 09.30.19 09.30.20 09.30.19 09.30.20 09.30.19 09.30.20 09.30.19
                  
Net operating revenue23  10,649,812  10,855,208  31,506,160  32,291,195  10,791,538  11,046,748  31,933,652  32,891,316
                  
Cost of sales and services24   (5,826,682)   (5,460,509) (16,643,196) (16,275,649)   (5,858,242)   (5,488,873) (16,751,721) (16,351,888)
                  
Gross profit  4,823,130 5,394,699  14,862,964  16,015,546 4,933,296 5,557,875  15,181,931  16,539,428
                  
Operating income (expenses)    (3,370,985)   (3,677,433) (10,460,088) (11,150,948)   (3,394,461)   (3,721,549) (10,555,235) (11,303,356)
Selling expenses24   (2,924,938)   (3,167,033)   (8,973,376)   (9,541,329)   (2,931,882)   (3,182,328)   (8,996,320)   (9,597,927)
General and administrative expenses24  (588,499)  (640,207)   (1,826,209)   (1,791,260)  (597,666)  (645,402)   (1,859,436)   (1,803,194)
Other operating income25 368,412 301,775 999,588 655,210 369,144 302,961 1,001,912 619,592
Other operating expenses25  (225,960)  (171,968)  (660,091)  (473,569)  (234,057)  (196,780)  (701,391)  (521,827)
                  
Operating profit  1,452,145 1,717,266 4,402,876 4,864,598 1,538,835 1,836,326 4,626,696 5,236,072
                  
Financial income26 432,955 332,363 1,136,142 899,817 437,342 340,234 1,153,862 918,398
Financial expenses26  (451,491)  (642,287)   (1,425,955)   (1,542,545)  (453,852)  (646,133)   (1,439,731)   (1,554,863)
Equity in results of investees11   59,416   80,481 142,417 249,722   (277)   (774) 1,053   (714)
                  
Income before taxes  1,493,025 1,487,823 4,255,480 4,471,592 1,522,048 1,529,653 4,341,880 4,598,893
                  
Income and social contribution taxes7  (281,538)  (522,710)  (777,743)  (744,832)  (310,561)  (564,540)  (864,143)  (872,133)
                  
Net income for the period  1,211,487 965,113 3,477,737 3,726,760 1,211,487 965,113 3,477,737 3,726,760
                  
                  
Basic and diluted earnings per common share (in R$)22 0.67 0.54 1.93 2.07        
Basic and diluted earnings per preferred share (in R$) 22 0.74 0.59 2.12 2.28        
 
 
TELEFÔNICA BRASIL S.A. 
Statements of Changes in Equity
Nine-month periods ended September 30, 2020 and 2019
(In thousands of reais)   (A free translation of the original in Portuguese)
                        
     Capital reserves Income reserves        
 Note Capital Special goodwill reserve Other capital reserves Treasury shares Legal reserve Tax incentive reserve Expansion and modernization reserve Retained earnings  Proposed additional dividends Other comprehensive income acumulated Total equity
Balances at December 31, 2018    63,571,416 63,074   1,238,278 (87,820)   2,584,757  39,413  1,700,000   -   2,468,684   29,225   71,607,027
Payment of additional dividend for 201817  - -   -   -   -   - -  -  (2,468,684) -   (2,468,684)
Unclaimed dividends and interest on equity   - -   -   -   -   - -   31,335   - - 31,335
DIPJ adjustment - Tax incentives   - -   -   -   -  13,482 -  (13,482)   - -   -
Other comprehensive income 22  - -   -   -   -   - -  -   -  1,893   1,893
Equity transactions (Note 1.c)   - - (48,135)   -   -   - -  -   - -  (48,135)
Other   - -   66   -   -   - -  -   - -  66
Net income for the period   - -   -   -   -   - -   3,726,760   - -  3,726,760
Interim interest on equity 17  - -   -   -   -   - - (2,238,000)   - -   (2,238,000)
Balances at September 30, 2019    63,571,416 63,074   1,190,209 (87,820)   2,584,757  52,895  1,700,000   1,506,613 -   31,118   70,612,262
Unclaimed dividends and interest on equity17  - -   -   -   -   - -  51,563   - - 51,563
DIPJ adjustment - Tax incentives   - -   -   -   - 4,684 -  (4,684)   - -   -
Other comprehensive income 22  - -   -   -   -   - - (132,120)   -   (381)   (132,501)
Net income for the period   - -   -   -   -   - -   1,274,254   - -  1,274,254
Allocation of income:                       
  Legal reserve   - -   -   -   250,051   - - (250,051)   - -   -
  Interim interest on equity 17  - -   -   -   -   - - (1,350,000)   - -   (1,350,000)
  Reversal of Expansion and modernization reserve   - -   -   -   -   -   (1,700,000)   1,700,000   - -   -
  Expansion and Modernization Reserve   - -   -   -   -   -  600,000 (600,000)   - -   -
  Additional proposed dividends   - -   -   -   -   - - (2,195,575)   2,195,575 -   -
Balances at December 31, 2019    63,571,416 63,074   1,190,209 (87,820)   2,834,808  57,579  600,000   -   2,195,575   30,737   70,455,578
Payment of additional dividend for 201917  - -   -   -   -   - -  -  (2,195,575) -   (2,195,575)
Unclaimed dividends and interest on equity17  - -   -   -   -   - -  35,462   - - 35,462
DIPJ adjustment - Tax incentives   - -   -   -   -  14,055 -   (14,055)   - -   -
Effect of capital transactions (parent and subsidiary), net of taxes1.c  - - (4)   -   -   - -  -   - -  (4)
Other comprehensive income 22  - -   -   -   -   - -  -   -   44,095 44,095
Net income for the period   - -   -   -   -   - -   3,477,737   - -  3,477,737
Interim interest on equity 17  - -   -   -   -   - - (1,970,000)   - -   (1,970,000)
Balances at September 30, 2020    63,571,416 63,074   1,190,205 (87,820)   2,834,808  71,634  600,000   1,529,144 -   74,832   69,847,293
 
 
TELEFÔNICA BRASIL S.A. 
Statements of Other Comprehensive Income 
Three and nine-month periods ended September 30, 2020 and 2019
(In thousands of reais) (A free translation of the original in Portuguese)
                  
   Company Consolidated
   Three-month periods ended Nine-month periods ended Three-month periods ended Nine-month periods ended
 Note 09.30.20 09.30.19 09.30.20 09.30.19 09.30.20 09.30.19 09.30.20 09.30.19
Net income for the period   1,211,487  965,113  3,477,737  3,726,760  1,211,487  965,113  3,477,737  3,726,760
                  
Other comprehensive income (losses) that may be reclassified into income (losses) in subsequent periods    8,022 (2,194) 43,880   1,869   8,022 (2,194) 43,880   1,869
Losses on derivative financial instruments22 (2,969) (9,241) - (509) (2,969) (9,241) - (509)
Taxes7   1,009   3,142 -  173   1,009   3,142 -  173
                  
Cumulative Translation Adjustments (CTA) on transactions in foreign currency22   9,982   3,905 43,880   2,205   9,982   3,905 43,880   2,205
                  
Other comprehensive income (losses) not to be reclassified into income (losses) in subsequent periods   164   (48)  215 24  164   (48)  215 24
Unrealized gains (losses) on financial assets at fair value through other comprehensive income22  249   (72)  326 36  249   (72)  326 36
Taxes7   (85) 24 (111)   (12)   (85) 24 (111)   (12)
                  
Other comprehensive income    8,186 (2,242) 44,095   1,893   8,186 (2,242) 44,095   1,893
                  
Comprehensive income for the period - net of taxes   1,219,673  962,871  3,521,832  3,728,653  1,219,673  962,871  3,521,832  3,728,653

 
 
TELEFÔNICA BRASIL S.A. 
Statements of Value Added
Nine-month periods ended September 30, 2020 and 2019
(In thousands in reais) (A free translation of the original in Portuguese)
   Company Consolidated
   Nine-month periods ended 
 Note 09.30.20 09.30.19 09.30.20 09.30.19
          
          
Revenues    41,299,779   42,524,748   41,741,568   43,113,965
Sale of goods and services    41,095,433   42,640,171   41,588,083   43,326,014
Other revenues   1,553,934  1,128,137  1,514,226  1,053,554
Provision for impairment of trade accounts receivable24 (1,349,588) (1,243,560) (1,360,741) (1,265,603)
          
Inputs acquired from third parties   (14,352,646)  (14,781,618)  (14,441,753)  (14,868,727)
Cost of goods and products sold and services rendered  (8,797,173) (8,592,824) (8,875,588) (8,658,494)
Materials, electric energy, third-party services and other expenses  (5,834,531) (6,426,082) (5,843,503) (6,446,507)
Loss/recovery of assets   279,058  237,288  277,338  236,274
          
Gross value added    26,947,133   27,743,130   27,299,815   28,245,238
          
Withholdings  (8,300,694) (7,928,484) (8,305,149) (7,930,536)
Depreciation and amortization24 (8,300,694) (7,928,484) (8,305,149) (7,930,536)
          
Net value added produced    18,646,439   19,814,646   18,994,666   20,314,702
          
Value added received in transfer   1,278,559  1,149,539  1,154,915  917,684
Equity in results of investees11  142,417  249,722   1,053 (714)
Financial income26  1,136,142  899,817  1,153,862  918,398
          
Total undistributed value added    19,924,998   20,964,185   20,149,581   21,232,386
          
Distribution of value added    19,924,998   20,964,185   20,149,581   21,232,386
          
Personnel, social charges and benefits   3,217,281  3,041,441  3,287,385  3,083,153
Direct compensation    2,150,793  2,031,723  2,198,771  2,059,004
Benefits   930,055  867,373  947,627  879,286
Government Severance Indemnity Fund for Employees (FGTS)   136,433  142,345  140,987  144,863
Taxes, charges and contributions    10,808,250   11,595,825   10,944,664   11,809,295
Federal     3,522,505  3,877,439  3,647,078  4,073,653
State     7,116,266  7,508,117  7,117,833  7,510,074
Local   169,479  210,269  179,753  225,568
Debt remuneration   2,421,730  2,600,159  2,439,795  2,613,178
Interest    1,388,178  1,520,780  1,401,022  1,531,739
Rental   1,033,552  1,079,379  1,038,773  1,081,439
Equity remuneration   3,477,737  3,726,760  3,477,737  3,726,760
Interest on equity17  1,970,000  2,238,000  1,970,000  2,238,000
Retained earnings   1,507,737  1,488,760  1,507,737  1,488,760

 
 

TELEFÔNICA BRASIL S.A. 
Statements of Value Added
Nine-month periods ended September 30, 2020 and 2019
(In thousands in reais) (A free translation of the original in Portuguese)
   Company Consolidated
   Nine-month periods ended 
 Note 09.30.20 09.30.19 09.30.20 09.30.19
          
          
Revenues    41,299,779   42,524,748   41,741,568   43,113,965
Sale of goods and services    41,095,433   42,640,171   41,588,083   43,326,014
Other revenues   1,553,934  1,128,137  1,514,226  1,053,554
Provision for impairment of trade accounts receivable24 (1,349,588) (1,243,560) (1,360,741) (1,265,603)
          
Inputs acquired from third parties   (14,352,646)  (14,781,618)  (14,441,753)  (14,868,727)
Cost of goods and products sold and services rendered  (8,797,173) (8,592,824) (8,875,588) (8,658,494)
Materials, electric energy, third-party services and other expenses  (5,834,531) (6,426,082) (5,843,503) (6,446,507)
Loss/recovery of assets   279,058  237,288  277,338  236,274
          
Gross value added    26,947,133   27,743,130   27,299,815   28,245,238
          
Withholdings  (8,300,694) (7,928,484) (8,305,149) (7,930,536)
Depreciation and amortization24 (8,300,694) (7,928,484) (8,305,149) (7,930,536)
          
Net value added produced    18,646,439   19,814,646   18,994,666   20,314,702
          
Value added received in transfer   1,278,559  1,149,539  1,154,915  917,684
Equity in results of investees11  142,417  249,722   1,053 (714)
Financial income26  1,136,142  899,817�� 1,153,862  918,398
          
Total undistributed value added    19,924,998   20,964,185   20,149,581   21,232,386
          
Distribution of value added    19,924,998   20,964,185   20,149,581   21,232,386
          
Personnel, social charges and benefits   3,217,281  3,041,441  3,287,385  3,083,153
Direct compensation    2,150,793  2,031,723  2,198,771  2,059,004
Benefits   930,055  867,373  947,627  879,286
Government Severance Indemnity Fund for Employees (FGTS)   136,433  142,345  140,987  144,863
Taxes, charges and contributions    10,808,250   11,595,825   10,944,664   11,809,295
Federal     3,522,505  3,877,439  3,647,078  4,073,653
State     7,116,266  7,508,117  7,117,833  7,510,074
Local   169,479  210,269  179,753  225,568
Debt remuneration   2,421,730  2,600,159  2,439,795  2,613,178
Interest    1,388,178  1,520,780  1,401,022  1,531,739
Rental   1,033,552  1,079,379  1,038,773  1,081,439
Equity remuneration   3,477,737  3,726,760  3,477,737  3,726,760
Interest on equity17  1,970,000  2,238,000  1,970,000  2,238,000
Retained earnings   1,507,737  1,488,760  1,507,737  1,488,760

 
 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

1)OPERATIONS

 

a) Background information

 

Telefônica Brasil S.A. (the “Company” or “Telefônica Brasil”) is a publicly-held corporation whose corporate purpose includes operating telecommunications services; development of activities necessary or complementary to the execution of such services, in accordance with the concessions, authorizations and permissions granted; exploration of value-added services; offering of integrated solutions, management and provision of services related to: (i) data centers, including hosting and co-location; (ii) storage, processing and management of data, information, texts, images, videos, applications and information systems and similar; (iii) information technology; (iv) information and communication security; (v) telecommunications; and (vi) electronic security systems; licensing and sublicensing of software of any nature, among others.

 

The Company’s principal offices are located at 1376, Engenheiro Luis Carlos Berrini Avenue, in the city and state of São Paulo, Brazil. It is a member of the Telefónica Group (“Group”), based in Spain which operates in several countries across Europe and Latin America.

 

On September 30, 2020 and December 31, 2019, Telefónica S.A. (“Telefónica”), the Group holding company, held a total direct and indirect interest in the Company of 73.58% (Note 22).

 

The Company is registered with the Brazilian Securities Commission ("CVM") as a publicly held company under Category A (issuers authorized to trade any marketable securities). Its shares are traded on the B3 Brazilian stock exchange. The Company is also registered with the U.S. Securities and Exchange Commission ("SEC") and its American Depositary Shares ("ADSs") Level II, backed preferred shares are traded on the New York Stock Exchange ("NYSE").

 

b) Operations

 

The Company renders services for: (i) Fixed Switched Telephone Service Concession Arrangement ("STFC"); (ii) Multimedia Communication Service ("SCM", data communication, including broadband internet); (iii) Personal Mobile Service ("SMP"); and (iv) Conditioned Access Service ("SEAC" - Pay TV), throughout Brazil, through concessions and authorizations, in addition to other activities.

 

Service concessions and authorizations are granted by Brazil's Telecommunications Regulatory Agency ("ANATEL"), the agency responsible for the regulation of the Brazilian telecommunications sector under the terms of Law No. 9472 of July 16, 1997 - General Telecommunications Law ("Lei Geral das Telecomunicações" - LGT).

 

In accordance with the STFC service concession agreement, every two years, during the agreement's 20-year term ending on December 31, 2025, the Company will pay a fee equivalent to 2% of its prior-year STFC revenue, net of applicable taxes and social contribution taxes (Note 21).

 

Before the publication of Law No. 13,879 / 2019, spectrum authorizations were valid for 15 years (in general) and could be renewed only once, for the same period. Following the normative revision, under the same Law, successive grants renewals were allowed, though the application was unclear. This was clarified by Decree No. 10,402 / 2020, which detailed the requirements for successive renewals and confirmed that the current authorizations are covered.

 

The Decree also defines the conditions to be considered by ANATEL in the scope of renewal requests, such as ensuring the efficient use of spectrum, competitive aspects, meeting the public interest and fulfilling the obligations already assumed with ANATEL.

 

 

 

 

Page 10 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

Currently, every two years after the first renewal of these agreements, the Company will pay a fee equivalent to 2% of its prior-year SMP revenue, net of applicable taxes and social contribution taxes (Note 21), and for certain terms, in the 15th year, the Company will pay 1% of its prior-year revenue. The calculation will consider the net revenue from Basic and Alternative Services Plans. In July 2018, ANATEL published Resolution No. 695 with a new public spectrum price regulation. This Resolution sets new criteria for the costs of renewing licenses. The formula considers factors such as authorization time, regional revenue and the amount of spectrum used by the provider. Part of the payment can be converted into investment commitments.

 

When deciding on the extension of the 850 MHz band authorizations, ANATEL determined, through Judgment No. 510, of September 30, 2020, that (i) the Superintendence of Granting and Provisioning Resources (“SOR”) deal with requests for extension of the current authorizations for the use of radio frequencies in sub-bands A and B, proposing their approval, on a primary basis, until November 29, 2028, if the legal and regulatory requirements are met; and that (ii) the amount due for the extension must be calculated based on net present value parameters, in order to reflect the real economic value (market value) of the bands. Therefore, after the necessary procedures with SOR have been overcome, the Authorization Term No. 001/2006 / PVCP / SPV-ANATEL, held by the Company and which expires on November 29, 2020, should be extended to 29 November 2028. The extension for a period lower than the maximum limit established by Law (20 years) was, according to ANATEL, due to the need to promote reorganization and resizing of the channel's channeling. The calculation of the value by method other than those previously mentioned (biannual charges and Resolution No. 695/2018, which approved the Public Price Regulation for the Right to Use Radio Frequencies (“PPDUR”) was decided on the grounds that the current regulatory instruments have no provision for applicability in cases of a second extension of authorizations.

 

c) Corporate events in 2020 and 2019

 

In 2020

 

Structuring of Vivo Money Credit Rights Investment Fund

 

In August 2020, the Vivo Money Credit Rights Investment Fund (“FIDC” or “Vivo Money”) was structured, in the form of a closed condominium, for an indefinite term. The FIDC may be liquidated by resolution of the General Assembly in accordance with its regulations.

 

The objective of the FIDC is to provide its quotaholders an equity return on their shares by investing in the acquisition of: (i) eligible credit rights, with supporting documents, which meet the eligibility criteria and the conditions of assignment, and (ii) financial assets, observing all indexes of composition and diversification of the fund's portfolio.

 

The acquisition of eligible credit rights and other financial assets will originate in credit transactions carried out electronically by the Company's customers, within the scope of the Vivo Money program, exclusively through an electronic platform provided by the Company.

 

The FIDC began operations on September 14, 2020, having been granted automatic registration under article 8 of CVM Instruction 356/01, issuing 2,000 junior subordinated quotas with an initial unit face value of R$1,000.00 (one thousand reais), with no defined remuneration parameter and subordinated to senior shares and subordinated mezzanine shares, in that order of priority, for the purpose of amortization and redemption.

 

The FIDC is managed and held in custody by Brl Trust Distribuidora de Títulos e Valores Mobiliários S.A., a financial institution, based in the city of São Paulo - SP, accredited by the CVM for the exercise of portfolio management activity under declaratory act no. 11,784, of June 30, 2011.

 

Acquisition of control of Telefônica Cibersegurança e Tecnologia do Brasil Ltda.

 

In September 2020, the Company acquired control of Telefônica Cibersegurança e Tecnologia do Brasil Ltda (“Cibersegurança”), for R$10,000.00 (ten thousand reais), with a net worth of R$500.00 (five hundred reais) . The difference between the amounts paid and shareholders' equity was accounted for as "Capital Transactions", in the Company's shareholders' equity.

 

Page 11 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

Cibersegurança was controlled by Terra Networks Brasil S.A. (“Terra Networks”), a wholly-owned subsidiary of the Company and its corporate purpose is to develop integrated solutions, management, consulting, outsourcing, and the provision of services related to information and communication security; provision of research, technological development, consultancy, design, implementation and installation of projects related to the areas of information technology, information security and intelligence; management and provision of repair, maintenance, technical assistance and technical support in information technology, among other services.

 

In 2019

 

The information on the acquisition of Telefônica Infraestrutura e Segurança Ltda. ("TIS") by wholly-owned subsidiary Terra Networks Brasil S.A. ("Terra Networks") on September 26, 2019 which became operational as from September 1, 2019, is the same as presented in Note 1.c .1) Acquisition of TIS by Wholly Owned Subsidiary - 2019, to the financial statements for the year ended December 31, 2019.

 

2)BASIS OF PREPARATION AND PRESENTATION OF THE QUARTERLY FINANCIAL STATEMENTS 

 

a) Statement of compliance

 

The individual (Company) and consolidated quarterly financial statements were prepared and are presented in accordance with International Standard IAS 34 - Interim Financial Reporting, issued by the International Accounting Standards Board ("IASB") consistent with CVM deliberations, applicable to the preparation of the quarterly financial statements.

 

b) Basis of preparation and presentation

 

The quarterly financial statements were prepared on a historical cost basis (except where different criteria are required) and adjusted to reflect the valuation of assets and liabilities measured at fair value.

 

All significant information is disclosed in the quarterly financial statements and is consistent with that used by Company management in the performance of its duties.

 

The Statement of Cash Flows was prepared in accordance with IAS 7 - Statement of Cash Flows and reflects the changes in cash that occurred in the periods presented using the indirect method.

 

The accounting standards adopted in Brazil require the presentation of the Statement of Value Added ("SVA"), individual and consolidated, while IFRS does not require this presentation. As a result, under IFRS standards, the SVA is being presented as supplementary information, without prejudice to the overall quarterly financial statements.

 

Assets and liabilities are classified as current when it is probable that their realization or settlement will occur in the next 12 months. Otherwise, they are classified and shown as non-current. The only exception relates to the balances of deferred tax assets and liabilities, which are all classified as non-current.

 

The quarterly financial statements compare the three and nine-month periods ended September 30, 2020 and 2019, except for the balance sheets that compare positions on September 30, 2020 with December 31, 2019.

 

The Board of Directors authorized the issue of these individual and consolidated quarterly financial statements at the meeting held on October 23, 2020.

 

c) Functional and reporting currency

 

The Company’s quarterly financial statements are presented in thousands of Real/Reais (R$), unless otherwise stated.

 

Page 12 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

The Company’s functional and reporting currency is the Brazilian Real. Transactions in foreign currency are translated into Brazilian Reais as follows: (i) assets, liabilities and shareholders' equity (excluding capital stock and capital reserves) are translated at the closing exchange rate on the balance sheet date; (ii) expenses and revenues are translated at the average exchange rate, except for specific transactions that are converted by the transaction date rate; and (iii) the capital stock and capital reserves are translated at the transaction date rate.

 

Gains and losses from the conversion of investments abroad are recognized in the statement of comprehensive income. Gains and losses from the translation of monetary assets and liabilities between the exchange rate prevailing at the date of the transaction and the year-end closing (except for the conversion of investments abroad) are recognized in the statement of income.

 

d) Basis of consolidation

 

Interests held in subsidiaries or joint ventures are measured under the equity method in the individual quarterly financial statements. In the consolidated quarterly financial statements, investments and all asset and liability balances, revenues and expenses arising from transactions and interest held in subsidiaries are fully eliminated. Investments in joint ventures are measured under the equity method in the quarterly financial statements.

 

On September 30, 2020 and December 31, 2019, the Company held direct equity interests in subsidiaries and joint ventures. Summarized information on the Company's investees is as below:

 

    Equity interests    
Investees Type of investment 09.30.20 12.31.19 Country (Headquarters) Core activity
Terra Networks Brasil S.A. ("Terra Networks")  Subsidiary 100.00% 100.00% Brazil Telecommunications
Telefônica Transportes e Logística Ltda ("TGLog")  Subsidiary 99.99% 99.99% Brazil Transports and logistics
POP Internet Ltda ("POP")  Subsidiary 99.99% 99.99% Brazil Internet
Vivo Money Credit Rights Investment Fund ("Vivo Money") (Note 1.c) Subsidiary 100.00% - Brazil Credit Rights Investment Fund
Telefônica Cibersegurança e Tecnologia do Brasil Ltda ("Cibersegurança") (Note 1.c) Subsidiary 100.00% - Brazil Information and communication security
Aliança Atlântica Holding B.V. ("Aliança") Joint venture 50.00% 50.00% Brazil Telecommunications sector holdings
Companhia AIX de Participações ("AIX") Joint venture 50.00% 50.00% Holland Operation of underground telecommunications networks
Companhia ACT de Participações ("ACT") Joint venture 50.00% 50.00% Brazil Technical assistance in telecommunication networks

 

The information on the direct subsidiaries and joint ventures, is the same as presented in Note 2.d) Basis of consolidation, to the financial statements for the year ended December 31, 2019, except for investments in Vivo Money and Cibersegurança (Note 1.c).

 

e) Segment reporting

 

Business segments are defined as components of a company for which separate financial information is available and regularly assessed by the chief operational decision-maker in allocating funds to an individual segment and in the assessment of segment performance. Considering that: (i) all officers and managers' decisions are based on consolidated reports; (ii) the Company and its subsidiaries’ mission is to provide their customers with quality telecommunications services; and (iii) all decisions related to strategic planning, finance, purchases, short- and long-term investments are made on a consolidated basis, the Company and its subsidiaries operate in a single operating segment, namely the provision of telecommunications services.

 

f) Significant accounting practices

 

As the information for the notes to the financial statements is not significantly different from the disclosures as at December 31, 2019, this has not been repeated in detail in these quarterly financial statements.

 

 

 

 

Page 13 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

The accounting policies adopted in the preparation of the quarterly financial statements in the nine-month period ended September 30, 2020 are consistent with those used in the preparation of the consolidated annual financial statements for the year ended December 31, 2019, except for any new accounting standards, interpretations and amendments approved for the IASB which came into effect as of or after January 1, 2020, as follows:

 

Standards and amendments Mandatory application: annual periods beginning on or after
Amendments to References to the Conceptual Framework in IFRS Standards January 1, 2020
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Amendments to IFRS 3 Definition of a Business January 1, 2020
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Amendments to IAS 1 and IAS 8 Definition of Material January 1, 2020
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
IFRS 17 Insurance Contracts January 1, 2021
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

 

The adoption of these standards, amendments and interpretations did not have a significant impact on the consolidated quarterly financial statements in the initial period of adoption.

The Company does not anticipate the early adoption of any issued pronouncement, interpretation or amendment before the mandatory adoption date.

 

g) Significant accounting judgments estimates and assumptions

 

The preparation of the quarterly financial statements requires the use of certain critical accounting estimates and the exercise of judgment by the Company's management in applying its accounting policies. These estimates are based on experience, knowledge, information available at the end of the year, and other factors, including expectations of future events that are believed to be reasonable in the circumstances. Actual results involving these estimates could differ from those recorded in the quarterly financial statements due to the criteria inherent in the estimation process. The Company and its subsidiaries review its estimates at least annually.

 

The significant and relevant estimates and judgments applied by the Company and its subsidiaries in the preparation of these quarterly financial statements are the same as presented in the following notes: trade accounts receivable (Note 4); income and social contribution taxes (Note 7); property, plant and equipment (Note 12); intangible assets (Note 13); provision and contingencies (Note 19); net operating income (Note 24); pension plans and other post-employment benefits (Note 30); and financial instruments and risk and capital management (Note 31), disclosed in the financial statements for the year ended December 31, 2019.

 

3) CASH AND CASH EQUIVALENTS

 

 Company Consolidated
 09.30.20 12.31.19 09.30.20 12.31.19
Cash and banks (1)            122,578             247,260             124,513             250,168
Short-term investments (2)         7,707,337          2,859,009          8,231,742          3,143,209
Total         7,829,915          3,106,269          8,356,255          3,393,377

 

(1)On September 30, 2020 and December 31, 2019, the Company and Consolidated balances included R$42,776 and R$59,657, respectively, related to the Financial Clearing House, with a Telefónica Group company (note 27).

 

(2)Highly liquid short-term investments basically comprise Bank Deposit Certificates (“CDB”) and Repurchase Agreements with first tier rated financial institutions, indexed to the Interbank Deposit Certificate (“CDI”) rate, with original maturities of up to three months, and with immaterial risk of change in value. Income from these investments are recorded as financial income.

 

Page 14 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

4) TRADE ACCOUNTS RECEIVABLE

 

 Company Consolidated
 09.30.20 12.31.19 09.30.20 12.31.19
Billed amounts         7,588,243          7,010,556          7,578,427          7,018,601
Unbilled amounts         2,264,761          2,810,033          2,302,045          2,866,196
Interconnection amounts            724,704             790,051             724,702             790,046
Amounts from related parties (Note 27)            111,536             122,231             122,159             129,904
Gross accounts receivable       10,689,244        10,732,871        10,727,333        10,804,747
Estimated impairment losses        (1,941,433)         (1,616,698)         (1,969,939)         (1,644,797)
Total         8,747,811          9,116,173          8,757,394          9,159,950
        
Current          8,360,145          8,675,720          8,369,728          8,719,497
Non-current             387,666             440,453             387,666             440,453

 

On September 30, 2020 and December 31, 2019, the consolidated balances of the contractual assets, net of estimated losses for impairment were R$137,095 and R$223,314, respectively.

 

Consolidated balances of non-current trade accounts receivable include:

 

Company / Consolidated
     09.30.20 12.31.19
Portion resale of goods to legal entities, receivable within 24 months              164,657             182,286
Portion of accounts receivable from the OI group - Bankruptcy process of companies               59,813              89,647
Vivo TECH (former Soluciona IT product) (1)                337,055             317,988
Nominal amount receivable                561,525                589,921
Deferred financial income                (36,917)             (48,086)
Present value of accounts receivable                524,608             541,835
Estimated impairment losses              (136,942)            (101,382)
Net amount receivable                 387,666             440,453

 

(1)The maturity schedule of the nominal amounts and the present value of the Vivo TECH product is up to five years.

 

There are no unsecured residual values resulting in benefits to the lessor nor contingent payments recognized as revenue for the periods.

 

The following are amounts receivable, net of estimated losses for impairment of accounts receivable, by maturity:

 

 Company Consolidated
 09.30.20 12.31.19 09.30.20 12.31.19
Falling due         6,808,124          6,800,581          6,848,565          6,862,054
Overdue – 1 to 30 days            897,917             963,846             897,417             966,986
Overdue – 31 to 60 days            240,006             310,686             235,952             306,956
Overdue – 61 to 90 days            155,814             199,066             158,822             192,622
Overdue – 91 to 120 days            208,315             248,035             209,507             250,029
Overdue – over 120 days            437,635             593,959             407,131             581,303
Total         8,747,811          9,116,173          8,757,394          9,159,950

 

On September 30, 2020 and December 31, 2019, no customer represented more than 10% of trade accounts receivable, net.

 

The following table shows the changes in estimated losses for impairment of accounts receivable.

 

Page 15 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

 

     Company Consolidated
Balance at 12.31.18            (1,483,726)         (1,498,134)
Supplement to estimated losses, net of reversal (Note 24)            (1,243,560)         (1,265,603)
Write-off             1,151,603          1,167,362
Business combinations (Note 1 c)                          -             (11,892)
Balance at 09.30.19            (1,575,683)         (1,608,267)
Supplement to estimated losses, net of reversal               (414,859)            (416,745)
Write-off                373,844             380,215
Balance at 12.31.19            (1,616,698)         (1,644,797)
Supplement to estimated losses, net of reversal (Note 24)            (1,349,588)         (1,360,741)
Write-off             1,024,853          1,035,599
Balance at 09.30.20            (1,941,433)         (1,969,939)

 

5)INVENTORIES

 

 Company Consolidated
 09.30.20 12.31.19 09.30.20 12.31.19
Materials for resale (1)            490,781             535,459             495,886             539,822
Materials for consumption             49,744              40,652              50,780              41,584
Other inventories               4,553              23,899                4,764              24,115
Gross inventories            545,078             600,010             551,430             605,521
Estimated losses from impairment or obsolescence (2)            (29,086)             (26,527)             (30,867)             (27,518)
Total            515,992             573,483             520,563             578,003

 

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

 

(2)Additions and reversals of estimated impairment losses and inventory obsolescence are included in cost of sales and services (Note 24).

 

6)PREPAID EXPENSES

 

 Company Consolidated
 09.30.20 12.31.19 09.30.20 12.31.19
Fistel Fee (1)            272,996                       -             272,996                       -
Incremental costs - customer contracts            376,480             330,919             376,480             330,919
Advertising and publicity             97,064             249,433              97,064             249,433
Rental (2)            137,630             184,221             137,738             184,248
Software and networks maintenance (2)            108,783              33,797             109,084              33,863
Personal             29,550              29,684              29,894              30,135
Financial charges              20,124              30,521              20,124              30,521
Insurance             24,785              20,383              24,947              20,459
Taxes and other              29,495              26,091              30,242              27,007
Total          1,096,907             905,049          1,098,569             906,585
        
Current             937,157             684,972             938,819             686,503
Non-current             159,750             220,077             159,750             220,082

 

(1)Refers to the remaining portion of the Inspection and Operation Fee amounts, which will be amortized to the result until the end of the year 2020.

 

(2)On September 30, 2020 and December 31, 2019, the consolidated balances include R$6,450 and R$3,738, respectively, for software rentals and maintenance with companies of the Telefónica Group (Note 27). The variation reflects new contracts in the period.

 

 

Page 16 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 
7)INCOME AND SOCIAL CONTRIBUTION TAXES

 

a) Income and Social Contribution taxes recoverable

 

 Company Consolidated
 09.30.20 12.31.19 09.30.20 12.31.19
Income taxes             494,305             377,878             497,917             380,314
Social contribution taxes              33,523              30,527              34,950              31,281
Total            527,828             408,405             532,867             411,595
        
Current             527,828             408,405             532,867             411,595
Non-current                       -                       -                       -                       -

 

b) Income and Social Contribution taxes payable

 

 Company Consolidated
 09.30.20 12.31.19 09.30.20 12.31.19
Income taxes              72,844              71,692              77,062              76,483
Social contribution taxes             23,230              14,820              24,791              16,614
Total             96,074              86,512             101,853              93,097
        
Current                       -                       -                5,779                6,585
Non-current              96,074              86,512              96,074              86,512

 

c) Deferred taxes

 

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

Company
 Balance on 12.31.18 Income statement Comprehensive income Balance on 09.30.19 Income statement Comprehensive income Balance on 12.31.19 Income statement Comprehensive income Balance on 09.30.20
Deferred tax assets  (liabilities)                   
Income and social contribution taxes on tax losses (1)      1,273,484             340,814                             -       1,614,298           (245,701)                             -       1,368,597                     281                             -       1,368,878
Income and social contribution taxes on temporary differences (2)    (3,256,436)        (1,084,465)                        161     (4,340,740)           (243,839)                  69,529     (4,515,050)           (773,702)                      (111)     (5,288,863)
Provisions for legal, labor, tax civil and regulatory contingencies      1,926,682           (100,982)                             -       1,825,700           (174,394)                             -       1,651,306             106,069                             -       1,757,375
Trade accounts payable and other provisions          541,893                 6,224                             -          548,117             (30,606)                             -          517,511             285,342                             -          802,853
Customer portfolio and trademarks         184,603             (52,361)                             -          132,242             (34,164)                             -             98,078             (99,737)                             -             (1,659)
Estimated losses on impairment of accounts receivable         437,679               27,023                             -          464,702                 8,707                             -          473,409               86,704                             -          560,113
Estimated losses from modems and other P&E items         176,130                 7,078                             -          183,208                   (209)                             -          182,999                 3,728                             -          186,727
Pension plans and other post-employment benefits          226,080               14,769                             -          240,849               76,931                  69,511          387,291               22,231                             -          409,522
Profit sharing         128,755             (50,247)                             -             78,508               40,651                             -          119,159               12,275                             -          131,434
Licenses    (1,853,214)           (162,247)                             -     (2,015,461)             (54,083)                             -     (2,069,544)           (162,247)                             -     (2,231,791)
Goodwill (Spanish and Navytree, Vivo Part. and GVT Part.)    (4,600,940)           (752,076)                             -     (5,353,016)           (250,692)                             -     (5,603,708)           (752,076)                             -     (6,355,784)
Property, plant and equipment of small value        (395,606)               33,277                             -         (362,329)               73,878                             -         (288,451)           (424,868)                             -         (713,319)
Technological Innovation Law          (50,127)               19,359                             -           (30,768)                 6,203                             -           (24,565)               10,177                             -           (14,388)
On other temporary differences (3)            21,629             (74,282)                        161           (52,492)               93,939                          18             41,465             138,700                      (111)          180,054
Total deferred tax liabilities    (1,982,952)           (743,651)                        161     (2,726,442)           (489,540)                  69,529     (3,146,453)           (773,421)                      (111)     (3,919,985)
                    
Deferred tax assets      5,339,788           5,522,833           5,377,539           5,980,243
Deferred tax liabilities    (7,322,740)         (8,249,275)         (8,523,992)         (9,900,228)
Deferred tax liabilities, net    (1,982,952)         (2,726,442)         (3,146,453)         (3,919,985)
                    
Represented in the balance sheet as follows:                   
   Deferred tax liabilities    (1,982,952)         (2,726,442)         (3,146,453)         (3,919,985)

 

Page 17 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

 

Consolidated
 Balance on 12.31.18 Income statement Comprehensive income Balance on 09.30.19 Income statement Comprehensive income Balance on 12.31.19 Income statement Comprehensive income Balance on 09.30.20
Deferred tax assets  (liabilities)                   
Income and social contribution taxes on tax losses (1)    1,428,476             304,176                            -     1,732,652           (252,816)                            -     1,479,836             (25,280)                            -     1,454,556
Income and social contribution taxes on temporary differences (2)  (3,181,331)        (1,091,209)                      161   (4,272,379)           (252,426)                69,558   (4,455,247)           (774,674)                    (111)   (5,230,032)
Provisions for legal, labor, tax civil and regulatory contingencies    1,965,700             (99,178)                            -     1,866,522           (175,931)                            -     1,690,591             105,936                            -     1,796,527
Trade accounts payable and other provisions        571,734                (7,258)                            -        564,476             (33,135)                            -        531,341             285,072                            -        816,413
Customer portfolio and trademarks       184,603             (52,361)                            -        132,242             (34,164)                            -          98,078             (99,737)                            -           (1,659)
Estimated losses on impairment of accounts receivable       442,276               29,217                            -        471,493                 7,137                            -        478,630               86,311                            -        564,941
Estimated losses from modems and other P&E items       176,130                 7,078                            -        183,208                   (209)                            -        182,999                 3,728                            -        186,727
Pension plans and other post-employment benefits        226,221               14,806                            -        241,027               76,940                69,540        387,507               22,253                            -        409,760
Profit sharing       129,689             (50,522)                            -          79,167               40,827                            -        119,994               12,257                            -        132,251
Licenses  (1,853,214)           (162,247)                            -   (2,015,461)             (54,083)                            -   (2,069,544)           (162,247)                            -   (2,231,791)
Goodwill (Spanish and Navytree, Vivo Part. and GVT Part.)  (4,600,940)           (752,076)                            -   (5,353,016)           (250,692)                            -   (5,603,708)           (752,076)                            -   (6,355,784)
Property, plant and equipment of small value     (395,606)               33,277                            -      (362,329)               73,878                            -      (288,451)           (424,868)                            -      (713,319)
Technological Innovation Law        (50,127)               19,359                            -         (30,768)                 6,203                            -         (24,565)               10,177                            -         (14,388)
On other temporary differences (3)         22,203             (71,304)                      161         (48,940)               90,803                        18          41,881             138,520                    (111)        180,290
Total deferred tax iabilities  (1,752,855)           (787,033)                      161   (2,539,727)           (505,242)                69,558   (2,975,411)           (799,954)                    (111)   (3,775,476)
                    
Deferred tax assets    5,569,885         5,709,548         5,548,581         6,124,752
Deferred tax liabilities  (7,322,740)       (8,249,275)       (8,523,992)       (9,900,228)
Deferred tax liabilities, net  (1,752,855)       (2,539,727)       (2,975,411)       (3,775,476)
                    
Represented in the balance sheet as follows:                   
   Deferred tax assets of subsidiaries       230,097            186,715            171,042            144,509
   Deferred tax liabilities  (1,982,952)       (2,726,442)       (3,146,453)       (3,919,985)

 

(1)Under Brazilian tax legislation these may be used to offset up to 30% of annual taxable income but otherwise have no expiry date.

 

(2)Amounts that will be realized upon use of the provision, upon impairment losses for trade accounts receivable, or realization of inventories, as well as reversal of other provisions.

 

(3)Deferred taxes from other temporary differences, such as deferred income, renewal of licenses, disposal of structures (towers and rooftops), among others.

 

On September 30, 2020, deferred tax assets (income and social contribution tax losses) were not recognized in the subsidiaries' (Innoweb, TGLog, TIS, Vivo Money and Cibersegurança) accounting records, in the amount of R$63,718 (R$54,570 on December 31, 2019), as it is not probable that future taxable profits will be sufficient for offset for these subsidiaries to benefit from such tax credits.

 

d) Reconciliation of income tax and social contribution expense

 

The Company and its subsidiaries recognize income and social contribution taxes on an accrual basis, and pay taxes based on estimates in the tax auxiliary trial balance. Taxes calculated on profits up to the date of the quarterly financial statements are recorded in liabilities or assets, as applicable.

 

Reconciliation of the reported tax expense and the amounts calculated by applying the statutory tax rate of 34% (income tax of 25% and social contribution tax of 9%) is shown in the table below for the periods of three and nine month ended September 30, 2020 and 2019.

 

Page 18 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

 

 Company
 Three-month periods ended Nine-month periods ended
 09.30.20 09.30.19 09.30.20 09.30.19
Income before taxes                1,493,025                 1,487,823                 4,255,480                 4,471,592
Income and social contribution tax expenses, at the tax rate of 34%                  (507,629)                   (505,860)                (1,446,863)                (1,520,341)
Permanent differences       
Equity pickup  (Note 11)                    20,202                     27,363                     48,422                     84,905
Unclaimed  interest on equity                   (12,057)                      (7,882)                    (12,057)                      (7,882)
Non-deductible expenses, gifts, incentives                   (17,010)                    (18,209)                    (50,358)                    (46,527)
Tax benefit of interest on equity allocated                   221,000                              -                    669,800                    760,920
Other (additions) exclusions                    13,956                    (18,122)                     13,313                    (15,907)
Total                  (281,538)                   (522,710)                   (777,743)                   (744,832)
        
Effective rate18.9% 35.1% 18.3% 16.7%
Current income and social contribution taxes                        (455)                             4                      (4,322)                      (1,181)
Deferred income and social contribution taxes                  (281,083)                   (522,714)                   (773,421)                   (743,651)

 

 Consolidated
 Three-month periods ended Nine-month periods ended
 09.30.20 09.30.19 09.30.20 09.30.19
Income before taxes                1,522,048                 1,529,653                 4,341,880                 4,598,893
Income and social contribution tax expenses, at the tax rate of 34%                  (517,496)                   (520,082)                (1,476,239)                (1,563,624)
Permanent differences       
Equity pickup  (Note 11)                          (94)                         (263)                          358                         (243)
Unclaimed  interest on equity                   (12,057)                      (7,882)                    (12,057)                      (7,882)
Non-deductible expenses, gifts, incentives                   (18,012)                    (18,257)                    (51,962)                    (46,621)
Tax benefit of interest on equity allocated                   221,000                              -                    669,800                    760,920
Other (additions) exclusions                    16,098                    (18,056)                       5,957                    (14,683)
Total                  (310,561)                   (564,540)                   (864,143)                   (872,133)
        
Effective rate20.4% 36.9% 19.9% 19.0%
Current income and social contribution taxes                   (17,590)                    (31,335)                    (64,189)                    (85,100)
Deferred income and social contribution taxes                  (292,971)                   (533,205)                   (799,954)                   (787,033)

 

e) Treatment of uncertain income tax positions

 

The Company and its subsidiaries are defending several assessments filed by the Federal Revenue of Brazil (“RFB”) for allegedly incorrect deductions of expenses, mainly related to the amortization of goodwill, at various administrative and judicial levels, in the amount of R$9,997,829 on September 30, 2020 (R$9,895,728 on December 31, 2019). Management, supported by the position of its legal advisors, believes that a large part of these deductions will likely be accepted in decisions of higher courts of last resort (acceptance probability greater than 50%).

 

For tax treatments in which the Company and its subsidiaries believes that the probability of acceptance by the tax authority is less than 50%, an income tax and social contribution liability was recognized in the amount of R$96,074 on September 30, 2020 (R$86,512 on December 13, 2019), in relation to these actions (Note 7.b).

 

 

 

Page 19 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

 

 

8) TAXES, CHARGES AND CONTRIBUTIONS RECOVERABLE

 Company Consolidated
 09.30.20 12.31.19 09.30.20 12.31.19
State VAT (ICMS) (1)         2,852,901          2,663,658          2,853,556          2,664,499
PIS and COFINS (2)            754,013          2,122,746             756,350          2,125,186
Withholding taxes and contributions (3)             94,099             140,885              95,890             142,940
Fistel, ISS and other taxes              62,061              84,257              62,928              84,935
Total         3,763,074          5,011,546          3,768,724          5,017,560
        
Current          2,927,668          4,170,350          2,933,316          4,176,362
Non-current             835,406             841,196             835,408             841,198

 

(1)Includes ICMS credits from the acquisition of property and equipment, available for offset over 48 months; requests for refund of ICMS paid on invoices that were subsequently cancelled; for the rendering of services; tax substitution; and tax rate difference; among others. Non-current consolidated amounts include credits arising from the acquisition of property and equipment of R$548,352 and R$537,209 on September 30, 2020 and December 31, 2019, respectively.

 

(2)The current balances on September 30, 2020 and December 31, 2019 include tax credits for PIS and COFINS plus interest accruals based on the SELIC, in the amounts of R$676,099 and R$2,046,274, respectively, arising from the final judicial processes on May 17, 2018, August 28, 2018 and May 5, 2020 in favor of the Company and its subsidiary, which recognized the right to deduct ICMS from the basis of the calculation of PIS and COFINS contributions for the periods from July 2002 to June 2017, July 2004 to June 2013 and November 2001 to March 2016, respectively.

 

The Company has two other lawsuits of the same nature in progress (including lawsuit of company that have already been merged - Telemig), treated as contingent assets, which cover several periods between February 2002 and June 2017, with estimated amounts between R$1,762 million and R$1,938 million.

 

(3)Withholding income tax (“IRRF”) credits on short-term investments, interest on equity and others, which are retained in operations for the period and social contribution tax withheld at source on services provided to public agencies.

 

9)JUDICIAL DEPOSITS AND GARNISHMENTS

 

When granted suspension of tax liability, judicial deposits, are required to be made by law to enable claims discussions to proceed.

 

Judicial deposits are recorded at historical cost-plus legal indexation/interest accruals.

 

Page 20 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

 

 Company Consolidated
 09.30.20 12.31.19 09.30.20 12.31.19
Judicial deposits       
   Tax         1,311,891          1,861,387          1,460,985          2,007,074
   Civil             973,080          1,047,404             975,938          1,049,922
   Labor            233,262             307,934             239,933             316,009
   Regulatory             265,260             261,005             265,260             261,005
Total          2,783,493          3,477,730          2,942,116          3,634,010
Garnishments             31,640              36,117              32,530              36,875
Total          2,815,133          3,513,847          2,974,646          3,670,885
        
Current             203,361             277,007             204,246             277,468
Non-current          2,611,772          3,236,840          2,770,400          3,393,417

 

The table below presents the classified balances on September 30, 2020 and December 31, 2019 of the tax judicial deposits (classified by tax).

 

     09.30.20 12.31.19
Corporate Income Tax (IRPJ) and Social Contribution Tax (CSLL) (1)              92,638             575,426
Universal Telecommunication Services Fund (FUST)             524,360             518,372
State Value-Added Tax (ICMS)             323,780             269,483
Social Contribution Tax for Intervention in the Economic Order (CIDE)             289,321             286,270
Social Security, work accident insurance (SAT) and funds to third parties (INSS)              35,975             140,186
Withholding Income Tax (IRRF)              58,163              57,142
Telecommunications Inspection Fund (FISTEL)              46,719              46,167
Contribution tax on gross revenue for Social Integration Program (PIS) and for Social Security Financing (COFINS)              33,345              34,983
Other taxes, charges and contributions              56,684              79,045
Total             1,460,985          2,007,074

(1) On July 13, 2020, the 2nd Federal Court of Maringá - PR issued an order determining the transfer to the Company of the judicial deposit made by the former GVT, referring to the tax use of goodwill generated in operations to incorporate subsidiaries, in the updated amount of R$490,604, which was deposited in favor of the Company on July 20, 2020.

 

10)OTHER ASSETS

 

 Company Consolidated
 09.30.20 12.31.19 09.30.20 12.31.19
Surplus from post-employment benefit plans (Note 29) (1)            181,065             220,858             181,156             220,939
Advances to employees and suppliers            235,813              71,330             194,369              73,849
Receivables from suppliers            152,661             167,540             152,661             167,540
Related-party receivables (Note 27)             58,558              63,020              73,438              64,966
Goods for sale (2)                      -              76,912                       -              76,912
Other amounts receivable (3)             34,826              18,711              21,872              14,123
Total             662,923             618,371             623,496             618,329
        
Current             458,106             382,959             418,313             382,591
Non-current             204,817             235,412             205,183             235,738

 

(1)On September 30, 2020 and December 31, 2019, includes R$169,832 and R$209,347, respectively, referring to the distribution of the PBS-A surplus (Note 29).

 

(2)Refers to the balance of property, plant and equipment available for sale, resulting from the contract entered into by the Company on November 28, 2019, for the sale of 1,909 structures (rooftops and towers) owned by the Company to Telxius Torres Brasil Ltda. (note 12). On February 7, 2020, this transaction was concluded for a total amount of R$641 million, after the fulfillment of all suspensive conditions common to this type of transaction, including the approval of the Transaction by the Administrative Council for Economic Defense (“CADE”).

 

(3)On September 30, 2020 and December 31, 2019, includes R$12,142 and R$10,226, respectively, from a subletting agreement in the Curitiba Data Center, for a period of 22 years and of structures (towers and rooftops) for a period of 10 years (this occurred in the 1st quarter of 2020). There are no unsecured residual amounts that result in lessor benefits and no contingent payments recognized as income during the period (Note 12).

 

Page 21 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

 

11) INVESTMENTS

 

a)Information on investees

 

The information related to subsidiaries and jointly-controlled entities is unchanged from Note 11) Investments, to the December 31, 2019 financial statements, except for investments in Vivo Money and Cibersegurança (Note 1.c).

 

The following is a summary of the significant financial information on the investees in which the Company holds a stake including changes as described in Note 2 d).

 

 09.30.20 12.31.19
 Subsidiaries Joint ventures Subsidiaries Joint ventures
 Terra Networks Consolidated Vivo Money (Note 1.c) TGLog Cibersegurança  (Note 1.c) POP Consolidated Aliança / AIX / ACT Terra Networks Consolidated TGLog POP Consolidated Aliança / AIX / ACT
                    
Equity interest100.00% 100.00% 99.99% 100.00% 99.99% 50.00% 100.00% 99.99% 99.99% 50.00%
                    
Summary of balance sheets:                   
Current assets        622,761             1,980           29,884                 166           73,261         312,936         444,611           37,178           65,935         221,183
Non-current assets        262,329                    -             7,974                      -           54,342             9,322         288,953             6,217           53,303           10,556
Total assets        885,090             1,980           37,858                 166         127,603         322,258         733,564           43,395         119,238         231,739
                    
Current liabilities        515,962                   3           17,189                 301             8,791             6,945         275,878           24,572             7,842             7,140
Non-current liabilities        118,204                    -             8,225                      -           47,786           17,621         123,084             6,871           45,688           16,773
Equity        250,924             1,977           12,444                (135)           71,026         297,692         334,602           11,952           65,708         207,826
Total liabilities and equity        885,090             1,980           37,858                 166         127,603         322,258         733,564           43,395         119,238         231,739
                    
Investment Book value        250,924             1,977           12,444                (135)           71,026         148,846         334,602           11,952           65,708         103,913

 

Nine-month periods ended
 09.30.20 09.30.19
 Subsidiaries ��Joint ventures SubsidiariesJoint ventures
Summary of Income Statements:Terra Networks Consolidated Vivo Money (Note 1.c) TGLog  Cibersegurança  (Note 1.c) POP Consolidated Aliança / AIX / ACT Terra Networks Consolidated TGLog POP Consolidated Aliança / AIX / ACT
Net operating income        459,638                    -           41,352                      -           15,036           34,534         584,877           44,728           20,481           33,604
Operating costs and expenses       (243,435)                  (7)          (40,512)                 (134)            (8,119)          (32,396)        (221,823)          (44,450)          (12,339)          (35,704)
Financial income (expenses), net            3,035                (16)              (348)                    (1)             1,276               470             4,613              (572)             2,222               672
Income and social contribution taxes         (83,526)                    -                    -                      -            (2,875)              (503)        (123,701)                    -            (3,600)                    -
Net income (loss) for the period        135,712                (23)               492                 (135)             5,318             2,105         243,966              (294)             6,764            (1,428)
                    
Equity pickup, according to interest held        135,712                (23)               492                 (135)             5,318             1,053         243,966              (294)             6,764              (714)

 

Page 22 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 
b)Changes in investments

 

 Subsidiaries Joint ventures        
 Terra Networks Consolidated Vivo Money (Note 2.d) TGLog Cibersegurança (Note 2.d) (1)    POP  Consolidated Aliança / AIX / ACT    Other investments  Total investments - Company Eliminations Total  investments - Consolidated
Balance on 12.31.18         316,911                        -               9,712                             -             55,828            101,302                  355          484,108         (382,451)          101,657
Equity pick-up         243,966                        -                 (294)                             -               6,764                  (714)                        -          249,722         (250,436)                 (714)
Dividends and interest on equity  (Note 17)        (153,875)                        -                        -                             -                        -                         -                        -         (153,875)          153,875                        -
Equity transactions (Note 1.c)          (48,135)                        -                        -                             -                        -                         -                        -           (48,135)             48,135                        -
Other                    66                        -                        -                             -                        -                         -                        -                     66                   (66)                        -
Other comprehensive  income (Note 22)                       -                        -                        -                             -                        -                2,205                     36               2,241                        -               2,241
Balance on 09.30.19         358,933                        -               9,418                             -             62,592            102,793                  391          534,127         (430,943)          103,184
Equity pick-up            47,874                        -                  417                             -               3,116                1,466                        -             52,873           (51,407)               1,466
Dividends and interest on equity  (Note 17)          (72,900)                        -                        -                             -                        -                         -                        -           (72,900)             72,900                        -
Other comprehensive  income (Note 22)                 695                        -               2,117                             -                        -                  (346)                   (53)               2,413             (2,812)                 (399)
Balance on 12.31.19         334,602                        -             11,952                             -             65,708            103,913                  338          516,513         (412,262)          104,251
Investment acquisition - capital contribution                       -               2,000                        -                             -                        -                         -                        -               2,000             (2,000)                        -
Equity transactions (Note 1.c)                      7                        -                        -                             -                        -                         -                        -                       7                     (7)                        -
Equity pick-up         135,712                   (23)                  492                     (135)               5,318                1,053                        -          142,417         (141,364)               1,053
Dividends and interest on equity  (Note 17)        (219,397)                        -                        -                             -                        -                         -                        -         (219,397)          219,397                        -
Other comprehensive  income (Note 22)                       -                        -                        -                             -                        -              43,880                  326             44,206                        -             44,206
Balance on 09.30.20         250,924               1,977             12,444                     (135)             71,026            148,846                  664          485,746         (336,236)          149,510

 

(1)The amount of R$135 referring to equity accounting on Cibersegurança, was recognized in the parent company as “unsecured liability” and eliminated on consolidation.

 

 

 

 

 

Page 23 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 
12)PROPERTY, PLANT AND EQUIPMENT

 

a) Breakdown, changes and depreciation rates

 

Company
    Switching and transmission equipment     Terminal equipment / modems    Infrastructure    Land    Other P&E  Estimated losses (1)    Assets and facilities under construction  Total
Annual depreciation rate (%)2,50% a 92,31% 6,67% a 66,67% 2,50% a 92,31%   10,00% a 25,00%      
Balances and changes:               
   Balance on 12.31.18          24,668,209             2,571,019             3,766,984                 314,832                   832,898               (156,892)             2,112,089           34,109,139
   Initial adoption IFRS 16 effects                  91,836                              -             8,525,095                              -                                 -                              -                              -             8,616,931
   Additions                  71,276                 112,472             1,454,523                              -                   156,265                 (12,227)             4,742,967             6,525,276
   Write-offs, net (2)                   (7,954)                       (198)                 (21,747)                    (2,650)                      (1,032)                     2,820                 (11,750)                 (42,511)
   Net transfers            3,168,698                 846,995                 385,445                              -                     85,777                              -            (4,552,336)                 (65,421)
   Transfers of goods destined for sale (3)                      (306)                              -               (172,480)                 (30,585)                    (67,143)                              -                              -               (270,514)
   Subletting (4)                             -                              -                 (10,310)                              -                                 -                              -                              -                 (10,310)
   Depreciation (Note 24)           (2,702,523)            (1,056,077)            (1,841,555)                              -                 (218,402)                              -                              -            (5,818,557)
   Balance on 09.30.19          25,289,236             2,474,211           12,085,955                 281,597                   788,363               (166,299)             2,290,970           43,044,033
   Additions                  43,241                   30,398                 335,561                              -                   100,797                    (8,238)             1,832,846             2,334,605
   Write-offs, net (2)                   (9,114)                         (70)               (117,115)                    (3,085)                      (1,111)                         720                 (10,000)               (139,775)
   Net transfers            1,096,875                 452,336                 118,381                              -                        2,368                              -            (1,689,808)                 (19,848)
   Transfers of goods destined for sale (3)                      (877)                              -                 (75,695)                              -                                 -                              -                       (340)                 (76,912)
   Depreciation            (1,234,050)               (370,786)               (628,930)                              -                    (76,968)                              -                              -            (2,310,734)
   Balance on 12.31.19          25,185,311             2,586,089           11,718,157                 278,512                   813,449               (173,817)             2,423,668           42,831,369
   Additions                123,307                   64,684             1,078,840                              -                   109,502                       (272)             3,998,469             5,374,530
   Write-offs, net (2)                   (5,186)                       (150)                 (49,773)                    (3,702)                      (2,091)                     2,454                 (11,094)                 (69,542)
   Net transfers            2,873,086                 988,298                 280,299                              -                        6,783                              -            (4,293,677)               (145,211)
   Subletting (4)                             -                              -                    (1,379)                              -                                 -                              -                              -                    (1,379)
   Depreciation (Note 24)           (2,996,488)            (1,125,312)            (1,945,249)                              -                 (209,615)                              -                              -            (6,276,664)
   Balance on 09.30.20          25,180,030             2,513,609           11,080,895                 274,810                   718,028               (171,635)             2,117,366           41,713,103
                
   Balance on 12.31.19               
   Cost          83,028,052           19,328,623           26,247,199                 278,512                5,057,004               (173,817)             2,423,668         136,189,241
   Accumulated depreciation        (57,842,741)         (16,742,534)         (14,529,042)                              -              (4,243,555)                              -                              -         (93,357,872)
   Total          25,185,311             2,586,089           11,718,157                 278,512                   813,449               (173,817)             2,423,668           42,831,369
                
   Balance on 09.30.20               
   Cost          85,866,505           20,323,383           27,344,270                 274,810                5,157,332               (171,635)             2,117,366         140,912,031
   Accumulated depreciation        (60,686,475)         (17,809,774)         (16,263,375)                              -              (4,439,304)                              -                              -         (99,198,928)
   Total          25,180,030             2,513,609           11,080,895                 274,810                   718,028               (171,635)             2,117,366           41,713,103

 

Page 24 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

 

Consolidated
 Switching and transmission equipment  Terminal equipment / modems Infrastructure Land Other P&E  Estimated losses (1) Assets and facilities under construction  Total
Annual depreciation rate (%)2.50% to 92.31% 6.67% to 66.67% 2.50% to 92.31%   10.00% to 25.00%      
Balances and changes:               
Balance on 12.31.1824,668,212   2,571,084   3,769,088   314,832  836,107 (156,892)   2,112,896 34,115,327
Initial adoption IFRS 16 effects 91,836   -   8,526,236   -  -   -   -   8,618,072
Additions 71,276   112,526   1,454,623   -  156,376   (12,227)   4,743,082   6,525,656
Write-offs, net (2)  (7,954)  (198)   (22,741)  (2,650)  (1,072) 2,820   (11,767)   (43,562)
Net transfers  3,168,698   847,031   385,631   - 85,777   - (4,552,742)   (65,605)
Transfers of goods destined for sale (3) (306)   - (172,480)   (30,585)   (67,143)   -   - (270,514)
Subletting (4)  -   -   (10,310)   -  -   -   -   (10,310)
Depreciation (Note 24)(2,702,523) (1,056,094) (1,842,259)   - (219,402)   -   - (5,820,278)
Business combinations (Note 1 c)  -  9 343   - 10,551  (691)   -  10,212
Balance on 09.30.1925,289,239   2,474,358 12,088,131   281,597  801,194 (166,990)   2,291,469 43,058,998
Additions 43,241  30,449   335,562   -  102,478  (8,238)   1,833,214   2,336,706
Write-offs, net (2)  (9,115) (70) (117,116)  (3,085)  (1,110) 720  (9,983) (139,759)
Net transfers  1,096,875   452,337   118,379   -   2,323   - (1,689,809)   (19,895)
Transfers of goods destined for sale (3) (877)   -   (75,695)   -  -   -  (340)   (76,912)
Depreciation(1,234,049) (370,796) (629,197)   -   (77,832)   -   - (2,311,874)
Balance on 12.31.1925,185,314   2,586,278 11,720,064   278,512  827,053 (174,508)   2,424,551 42,847,264
Additions  123,307  64,715   1,078,843   -  112,627  (272)   3,998,085   5,377,305
Write-offs, net (2) (5,186)  (150)   (49,772)  (3,702)  (2,128) 2,454   (11,094)   (69,578)
Net transfers  2,873,086   988,298   280,299   -   6,783   - (4,293,677) (145,211)
Subletting (4)  -   -  (1,379)   -  -   -   -  (1,379)
Depreciation (Note 24)(2,996,488) (1,125,346) (1,946,055)   - (212,239)   -   - (6,280,128)
Balance on 09.30.2025,180,033   2,513,795 11,082,000   274,810  732,096 (172,326)   2,117,865 41,728,273
                
Balance on 12.31.19               
Cost83,028,079 19,329,470 26,269,769   278,512  5,218,153 (174,508)   2,424,551  136,374,026
Accumulated depreciation (57,842,765)  (16,743,192)  (14,549,705)   - (4,391,100)   -   -  (93,526,762)
Total25,185,314   2,586,278 11,720,064   278,512  827,053 (174,508)   2,424,551 42,847,264
                
Balance on 09.30.20               
Cost85,866,533 20,324,260 27,366,839   274,810  5,321,567 (172,326)   2,117,865  141,099,548
Accumulated depreciation (60,686,500)  (17,810,465)  (16,284,839)   - (4,589,471)   -   -  (99,371,275)
Total25,180,033   2,513,795 11,082,000   274,810  732,096 (172,326)   2,117,865 41,728,273

  

(1)The Company and its subsidiaries recognized estimated losses and write-offs (when applicable) for potential obsolescence of materials used for property and equipment maintenance, based on historical experience and expected future use.

 

(2)Infrastructure, includes R$44,362 in 2020 and R$105,952 in 2019, for cancellation of lease agreements (Note 19).

 

(3)Refers to assets sold from the Tamboré and Curitiba (CIC) data centers to a company controlled by Asterion Industrial Partners SGEIC, SA, pursuant to an agreement entered into by the Company on May 8, 2019 with the settlement on July 24, 2019.

 

It also includes property, plant and equipment intended for sale, resulting from the contract entered into by the Company on November 28, 2019, for the sale of 1,909 structures (rooftops and towers) owned by the Company to Telxius Torres Brasil Ltda. (Note 10). On February 7, 2020, this transaction was concluded.

 

(4)Refers to the lease for structures (towers and rooftops) in 2020 and for areas in the Curitiba data center in 2019.

 

There were no changes in useful lives or depreciation rates for September 30, 2020 and December 31, 2019.

 

b)Additional information on leases

 


Changes in leases, after the adoption of IFRS 16, incorporated
in the asset tables (Note 12.a), are as follows.

Page 25 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

 

Consolidated
     Switching and transmission equipment    Infrastructure  Other Total
         
Annual depreciation rate (%) 5.00 to 92.31 3.05 to 92.31 20.00  
         
Balances and changes:        
   Balance on 12.31.18 (1)              186,554              189,455                10,950              386,959
   Initial Adoption in 01.01.19                91,836            8,526,236                         -            8,618,072
   Additions                18,315            1,402,742                         -            1,421,057
   Subletting (Note 12.a)                         -               (10,310)                         -               (10,310)
   Depreciation and write-offs, net (IAS 17)               (10,155)               (28,797)                 (5,797)               (44,749)
   Depreciation (IFRS 16)               (14,723)           (1,376,049)                         -           (1,390,772)
   Cancellation of contracts                         -               (12,065)                         -               (12,065)
   Balance on 09.30.19              271,827            8,691,212                  5,153            8,968,192
   Additions                88,793              294,091                         -              382,884
   Depreciation (IAS 17)                 (3,385)                 (8,482)                 (1,933)               (13,800)
   Depreciation (IFRS 16)               (10,929)             (481,249)                         -             (492,178)
   Cancellation of contracts                         -               (93,887)                         -               (93,887)
   Balance on 12.31.19              346,306            8,401,685                  3,220            8,751,211
   Additions              108,817              990,686                10,672            1,110,175
   Subletting (Note 12.a)                         -                 (1,379)                         -                 (1,379)
   Depreciation (IAS 17)               (10,155)               (23,344)                 (3,221)               (36,720)
   Depreciation (IFRS 16)               (20,595)           (1,513,429)                     (45)           (1,534,069)
   Cancellation of contracts                    (420)               (44,362)                         -               (44,782)
   Balance on 09.30.20              423,953            7,809,857                10,626            8,244,436

(1) Includes lease under IAS 17 and provision for dismantling at conclusion of leases.

 

c) Property and equipment items pledged in guarantee

 

On September 30, 2020, the Company had property and equipment pledged in guarantee for lawsuits, of R$81,318 (R$81,416 on December 31, 2019).

 

d) Reversible assets

 

The STFC service concession arrangement establishes that all assets owned by the Company and that are indispensable to the provision of the services described in the arrangement are considered “reversible” (returnable to the concession authority). On September 30, 2020, estimated value of reversible assets was R$7,007,273 (R$7,364,456 on December 31, 2019), which comprised switching and transmission equipment and public use terminals, external network equipment, energy, system and operational support equipment.

 

 

Page 26 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

13) INTANGIBLE ASSETS

 

a) Breakdown, changes and amortization rates

 

Company
 Indefinite useful life Finite useful life  
 Goodwill Software Customer portfolio Trademarks Licenses    Other intangible assets Estimated losses for software Software under development Total
                  
Annual amortization rate (%)  20.00 11.76 5.13 3.60 to 6.67 20.00      
                  
Balances and changes:                 
   Balance on 12.31.18      23,062,421         3,244,525         1,429,274             989,410       13,056,137               49,447                   (499)             389,677       42,220,392
   Additions                          -             234,826                          -                          -                          -                          -                          -         1,133,064         1,367,890
   Write-offs, net (1)               (3,249)                        (9)                          -                          -                          -                          -                          -                          -                (3,258)
   Net transfers                         -         1,159,842                          -                          -                          -                     (65)                          -        (1,094,356)               65,421
   Transfers of goods destined for sale (2)                         -                (1,537)                          -                          -                          -                          -                          -                          -                (1,537)
   Amortization (Note 24)                         -           (903,520)           (412,191)             (63,154)           (728,110)                (2,952)                          -                          -        (2,109,927)
   Balance on 09.30.19      23,059,172         3,734,127         1,017,083             926,256       12,328,027               46,430                   (499)             428,385       41,538,981
   Additions                          -             137,149                          -                          -                          -                          -                          -             256,896             394,045
   Write-offs, net                         -                (5,057)                          -                          -                          -                          -                          -                          -                (5,057)
   Net transfers                         -             155,149                          -                          -                          -                         1                          -           (135,302)               19,848
   Amortization                          -           (330,801)             (88,250)             (21,051)           (236,206)                   (777)                          -                          -           (677,085)
   Balance on 12.31.19      23,059,172         3,690,567             928,833             905,205       12,091,821               45,654                   (499)             549,979       41,270,732
   Additions                          -             370,292                          -                          -                          -                          -             (12,230)             719,537         1,077,599
   Write-offs, net                         -                          -                          -                          -                          -                          -                          -                          -                          -
   Net transfers                         -         1,077,562                          -                          -                          -                          -                          -           (932,351)             145,211
   Amortization (Note 24)                         -        (1,046,836)           (228,667)             (63,154)           (683,047)                (2,326)                          -                          -        (2,024,030)
   Balance on 09.30.20      23,059,172         4,091,585             700,166             842,051       11,408,774               43,328             (12,729)             337,165       40,469,512
                  
   Balance on 12.31.19                 
   Cost      23,059,172       18,198,545         4,513,278         1,658,897       20,244,219             269,918                   (499)             549,979       68,493,509
   Accumulated amortization                         -     (14,507,978)        (3,584,445)           (753,692)        (8,152,398)           (224,264)                          -                          -     (27,222,777)
   Total      23,059,172         3,690,567             928,833             905,205       12,091,821               45,654                   (499)             549,979       41,270,732
                  
   Balance on 09.30.20                 
   Cost      23,059,172       19,644,389         4,513,278         1,658,897       20,244,219             269,557             (12,729)             337,165       69,713,948
   Accumulated amortization                         -     (15,552,804)        (3,813,112)           (816,846)        (8,835,445)           (226,229)                          -                          -     (29,244,436)
   Total      23,059,172         4,091,585             700,166             842,051       11,408,774               43,328             (12,729)             337,165       40,469,512

 

Page 27 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

 

Consolidated
 Indefinite useful life Finite useful life  
 Goodwill Software Customer portfolio Trademarks Licenses    Other intangible assets Estimated losses for software Software under development Total
                  
Annual amortization rate (%)  20.00 to 50.00 11.76 to 12.85 5.13 to 66.67 3.60 to 6.67 6.67 to 20.00      
                  
Balances and changes:                 
   Balance on 12.31.18      23,062,421         3,245,042         1,429,274             989,410       13,056,137               49,523                   (499)             389,677       42,220,985
   Additions                          -             236,385                          -                          -                          -                          -                          -         1,133,801         1,370,186
   Write-offs, net (1)               (3,249)                        (8)                          -                          -                          -                          -                          -                          -                (3,257)
   Net transfers                         -         1,159,839                          -                          -                          -                     (65)                          -        (1,094,169)               65,605
   Transfers of goods destined for sale (2)                         -                (1,537)                          -                          -                          -                          -                          -                          -                (1,537)
   Business combinations (Note 1 c)                         -                     596                          -                          -                          -                          -                          -                          -                     596
   Amortization (Note 24)                         -           (903,851)           (412,191)             (63,154)           (728,110)                (2,952)                          -                          -        (2,110,258)
   Balance on 09.30.19      23,059,172         3,736,466         1,017,083             926,256       12,328,027               46,506                   (499)             429,309       41,542,320
   Additions                          -             138,305                          -                          -                          -                          -                          -             256,930             395,235
   Write-offs, net                         -                (5,058)                          -                          -                          -                     (58)                          -                          -                (5,116)
   Net transfers                         -             155,139                          -                          -                          -                       59                          -           (135,303)               19,895
   Amortization                         -           (331,098)             (88,250)             (21,051)           (236,206)                   (777)                          -                          -           (677,382)
   Balance on 12.31.19      23,059,172         3,693,754             928,833             905,205       12,091,821               45,730                   (499)             550,936       41,274,952
   Additions                          -             372,155                          -                          -                          -                          -             (12,230)             719,931         1,079,856
   Write-offs, net                         -                          -                          -                          -                          -                          -                          -                          -                          -
   Net transfers                         -         1,077,769                          -                          -                          -                          -                          -           (932,558)             145,211
   Amortization (Note 24)                         -        (1,047,826)           (228,667)             (63,154)           (683,047)                (2,327)                          -                          -        (2,025,021)
   Balance on 09.30.20      23,059,172         4,095,852             700,166             842,051       11,408,774               43,403             (12,729)             338,309       40,474,998
                  
   Balance on 12.31.19                 
   Cost      23,059,172       18,310,812         4,513,278         1,658,897       20,244,219             270,000                   (499)             550,936       68,606,815
   Accumulated amortization                         -     (14,617,058)        (3,584,445)           (753,692)        (8,152,398)           (224,270)                          -                          -     (27,331,863)
   Total      23,059,172         3,693,754             928,833             905,205       12,091,821               45,730                   (499)             550,936       41,274,952
                  
   Balance on 09.30.20                 
   Cost      23,059,172       19,758,727         4,513,278         1,658,897       20,244,219             269,639             (12,729)             338,309       69,829,512
   Accumulated amortization                         -     (15,662,875)        (3,813,112)           (816,846)        (8,835,445)           (226,236)                          -                          -     (29,354,514)
   Total      23,059,172         4,095,852             700,166             842,051       11,408,774               43,403             (12,729)             338,309       40,474,998

 

(1)Refers to proportional write-off of R$3,249 in July 2019 from the sale of the Tamboré and Curitiba (CIC) data centers, pursuant to paragraph 86 of IAS 36. The information related to goodwill is the same as in Note 13.d) Goodwill, to the December 31, 2019 financial statements.

 

(2)Refers to assets sold from the Tamboré and Curitiba (CIC) data centers to a company controlled by Asterion Industrial Partners SGEIC, SA, pursuant to an agreement entered into by the Company on May 8, 2019 and with settlement on July 24, 2019.

 

There were no changes in useful lives or amortization rates for September 30, 2020 and December 31, 2019.

 

14)PERSONNEL, SOCIAL CHARGES AND BENEFITS

 

 Company Consolidated
 09.30.20 12.31.19 09.30.20 12.31.19
Social charges and benefits            612,675             381,935             639,467             400,470
Profit sharing            301,357             302,972             306,913             308,918
Share-based payment plans (Note 28)             75,450              39,723              76,185              40,523
Salaries and wages             31,276              35,522              32,681              38,363
Total         1,020,758             760,152          1,055,246             788,274
        
Current             955,820             724,194             990,208             752,246
Non-current              64,938              35,958              65,038              36,028

 

 

 

 

Page 28 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 
15)TRADE ACCOUNTS PAYABLE

 

 Company Consolidated
 09.30.20 12.31.19 09.30.20 12.31.19
Sundry suppliers (Opex, Capex, Services e Material)         6,060,790          5,974,484          6,059,582          5,958,280
Related parties (Note 27)            415,188             379,933             433,869             405,271
Amounts payable (operators, cobilling)            264,384             286,851             196,166             232,264
Interconnection / interlink             180,211             275,984             180,211             275,984
Total         6,920,573          6,917,252          6,869,828          6,871,799

 

16) TAXES, CHARGES AND CONTRIBUTIONS PAYABLE

 Company Consolidated
 09.30.20 12.31.19 09.30.20 12.31.19
Fistel (1)            671,145                       -             671,145                       -
ICMS             786,507             858,493             835,138             906,447
PIS and COFINS             318,888             324,261             334,050             331,863
Fust and Funttel              88,598              89,394              88,598              89,394
ISS, CIDE and other taxes              50,481              83,155              61,346              97,163
Total         1,915,619          1,355,303          1,990,277          1,424,867
        
Current          1,651,281          1,116,229          1,677,993          1,139,812
Non-current             264,338             239,074             312,284             285,055

(1) On April 15, 2020, provisional measure 952 was published in the Official Gazette (“DOU”), extending the deadline for payment of Fistel from March 31, 2020 to August 31, 2020, with no impact additional penalty or interest. On August 12, 2020, the Company made a partial payment of R$416,475. The residual balance refers to the suspended payment according to the decision of the Federal Regional Court of the First Region, published on March 18, 2020.

 

17)DIVIDENDS AND INTEREST ON EQUITY (IOE)

 

a)Dividends and interest on equity receivable

 

      Company
Balance on 12.31.18                  51,785
Terra Networks supplementary dividends for 2018                 153,875
Receipt of dividends from Terra Networks              (205,660)
Balance on 09.30.19                           -
Terra Networks mandatory minimum dividend of 2019                72,900
Balance on 12.31.19                  72,900
Terra Networks supplementary dividends for 2019                 219,397
Balance on 09.30.20                 292,297

For the cash flow statement, interest on equity and dividends received from the subsidiary are allocated to the “Investing Activities” group of accounts.

 

Page 29 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

 

b)Dividends and interest on equity payable

 

b.1) Breakdown:

 

    Company/Consolidated
    09.30.20 12.31.19
Telefónica             1,147,383             948,662
Telefónica Latinoamérica Holding               952,851             787,823
SP Telecomunicações Participações               723,343             598,064
Telefónica Chile                  2,016                1,667
Non-controlling interest            1,481,058          1,251,201
Total            4,306,651          3,587,417

 

b.2) Changes:

 

      Company/ Consolidated
Balance on 12.31.18              4,172,916
Supplementary dividends for 2018              2,468,684
Interim interest on equity (net of IRRF)               1,902,300
Unclaimed dividends and interest on equity                 (31,335)
Payment of dividends and interest on equity             (2,653,518)
IRRF on shareholders exempt/immune from interest on equity                  5,757
Balance on 09.30.19              5,864,804
Interim interest on equity (net of IRRF) and dividends              1,297,500
Unclaimed dividends and interest on equity                 (51,563)
Payment of dividends and interest on equity             (3,523,324)
Balance on 12.31.19              3,587,417
Supplementary dividends for 2019              2,195,575
Interim interest on equity (net of IRRF)              1,674,500
Unclaimed dividends and interest on equity                 (35,462)
Payment of dividends and interest on equity             (3,120,150)
IRRF on shareholders exempt/immune from interest on equity                  4,771
Balance on 09.30.20              4,306,651

 

For the cash flow statement, interest on equity and dividends paid to shareholders are recognized in “Financing Activities”.

 

The rights to receive unclaimed interest on equity and dividends prescribe after three years from the initial date available for payment. When dividends and interest on equity expire, these amounts are reversed to retained earnings.

 

Page 30 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

18) PROVISIONS AND CONTINGENCIES

 

The Company and its subsidiaries are party to administrative and judicial proceedings and labor, tax, regulatory and civil claims filed in different courts. Management, under the advice of its legal counsel, recognized provision for proceedings for which an unfavorable outcome is considered probable.

 

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

 

Company
 Provisions for contingencies    
 Labor  Tax Civil  Regulatory Contingent liabilities (PPA) Provision for dismantling Total
Balance on 12.31.18            746,752          1,867,529             995,740          1,022,216             827,275               672,621          6,132,133
Additions (reversal), net (Note 25)             99,961              80,958             218,373              90,356             (16,079)                (24,448)             449,121
Other additions (reversal)                       -                       -                  (636)                       -                       -                 44,740              44,104
Write-offs due to payment           (370,320)             (16,442)            (657,869)               (7,481)                       -                          -         (1,052,112)
Interest accruals             65,267              85,965             196,941              55,349              16,258                 35,711             455,491
Balance on 09.30.19            541,660          2,018,010             752,549          1,160,440             827,454               728,624          6,028,737
Initial adoption IFRC 23                      -             (68,945)                       -                       -                       -                          -             (68,945)
Additions (reversal), net             43,361             (48,244)             143,557                3,278                  (907)                (65,711)              75,334
Other additions (reversal)                       -                       -                  (930)                       -                       -                (48,931)             (49,861)
Write-offs due to payment           (101,039)            (348,543)            (173,089)             (35,587)                       -                          -            (658,258)
Interest accruals             29,949             (62,899)              66,256              17,605                5,175                 21,880              77,966
Balance on 12.31.19            513,931          1,489,379             788,343          1,145,736             831,722               635,862          5,404,973
Additions (reversal), net (Note 25)             99,199             119,411             282,659              79,427             (15,766)                  (4,257)             560,673
Other additions (reversal) (1)                      -                       -               (2,005)                       -                       -              (243,680)            (245,685)
Write-offs due to payment           (206,917)             (22,915)            (399,013)             (26,050)                       -                          -            (654,895)
Interest accruals             77,637             115,142             190,086              36,790                7,648                   4,735             432,038
Balance on 09.30.20            483,850          1,701,017             860,070          1,235,903             823,604               392,660          5,497,104
              
Balance on 12.31.19             
   Current             227,114                       -             113,156              25,008                       -                          -             365,278
   Non-current             286,817          1,489,379             675,187          1,120,728             831,722               635,862          5,039,695
              
Balance on 09.30.20             
   Current             185,829                       -             140,693              66,529                       -                       51             393,102
   Non-current             298,021          1,701,017             719,377          1,169,374             823,604               392,609          5,104,002

 

Page 31 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

 

Consolidated
 Provisions for contingencies    
 Labor  Tax Civil  Regulatory Contingent liabilities (PPA) Provision for dismantling Total
Balance on 12.31.18            779,686          1,951,897          1,004,803          1,022,216             827,275               673,448          6,259,325
Additions (reversal), net (Note 25)            104,644              80,963             220,031              90,356             (16,079)                (24,448)             455,467
Other additions (reversal)               (1,088)                       -               (1,278)                       -                       -                 44,740              42,374
Write-offs due to payment           (377,463)             (16,449)            (659,362)               (7,481)                       -                          -         (1,060,755)
Interest accruals             68,488              87,677             198,070              55,349              16,258                 35,711             461,553
Business combinations (Note 1 c)               7,805                       -                      7                       -                       -                          -                7,812
Balance on 09.30.19            582,072          2,104,088             762,271          1,160,440             827,454               729,451          6,165,776
Initial adoption IFRC 23                      -             (68,945)                       -                       -                       -                          -             (68,945)
Additions (reversal), net             47,461             (48,244)             143,977                3,278                  (907)                (65,711)              79,854
Other additions (reversal)               (4,621)                       -               (1,103)                       -                       -                (48,931)             (54,655)
Write-offs due to payment           (108,076)            (348,543)            (174,217)             (35,587)                       -                          -            (666,423)
Interest accruals             31,038             (62,407)              66,520              17,605                5,175                 21,880              79,811
Balance on 12.31.19            547,874          1,575,949             797,448          1,145,736             831,722               636,689          5,535,418
Additions (reversal), net (Note 25)             91,396             119,435             284,309              79,427             (15,766)                  (4,257)             554,544
Other additions (reversal) (1)               6,142                       -               (5,752)                       -                       -              (243,680)            (243,290)
Write-offs due to payment           (213,224)             (22,944)            (400,428)             (26,050)                       -                          -            (662,646)
Interest accruals             79,146             116,063             192,467              36,790                7,648                   4,735             436,849
Balance on 09.30.20            511,334          1,788,503             868,044          1,235,903             823,604               393,487          5,620,875
              
Balance on 12.31.19             
   Current             236,130                       -             113,307              25,008                       -                          -             374,445
   Non-current             311,744          1,575,949             684,141          1,120,728             831,722               636,689          5,160,973
              
Balance on 09.30.20             
   Current             189,677                       -             142,199              66,529                       -                       51             398,456
   Non-current             321,657          1,788,503             725,845          1,169,374             823,604               393,436          5,222,419

(1) Provision for dismantling: refers to the reversal resulting from the review of costs for dismantling technical sites.

 

a) Labor provision and contingencies

 

   Amounts involved  
 Company Consolidated
Nature/Degree of Risk 09.30.20 12.31.19 09.30.20 12.31.19
Provisions            483,850             513,931             511,334             547,874
Possible contingencies         1,406,306             422,826          1,436,281             452,070

 

Labor provision and contingencies involve labor claims filed by former employees and outsourced employees (the latter involving subsidiary or joint liability) claiming for, among other issues, overtime, salary equalization, post-retirement benefits, allowance for health hazard and risk premium, and matters relating to outsourcing. The variation of R$984,211 in possible contingencies was due to new actions and revaluations that occurred in the period, due to the progress of the lawsuits.

 

The Company is also a defendant in labor claims filed by retired former employees who are covered by the Retired Employees Medical Assistance Plan ("PAMA"), and, among other issues, are demanding the cancellation of amendments to this plan. There are currently five actions underway with this object. In one of them, a decision by the Superior Labor Court is awaited. The other actions are at a less advanced stage. Most of these claims await a decision by the Superior Labor Court. Based on the position of its legal counsel and recent decisions of the courts, management considers the risk of loss from these claims to be possible. No amount has been specified for these claims, since is not possible to estimate the cost to the Company in the event of loss.

 

In addition, the Company is a party to Public Civil Actions filed by the Public Prosecution Service to cause the Company to cease hiring service provider to carry out the Company's core activities. In August 2018, the majority of the Federal Supreme Court (“STF”) Ministers ruled the outsourcing to be legally valid, including core activities, enabling the subsidiary to provide services. As a result of this decision, most of the Public Civil Actions have already had decisions based on the legality of outsourcing in the analyzed contract and the consequent filing of the processes. However, awaiting judgment of the motion for clarification to clarify the scope of said decision, including for cases that have already been res judicata, an opportunity in which the application of said decision will be evaluated in each of the residual processes in which the topic is discussed. In view of these considerations, there are still no conditions to estimate amounts or possible losses for the Company.

 

Page 32 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

 

b) Tax provision and contingencies

 

The Company and its subsidiaries are defending various assessments filed by the Federal Revenue of Brazil (“RFB”) for alleged incorrect deductions of expenses, mainly related to the amortization of goodwill, at various administrative and judicial levels. Management, supported by the position of its legal advisors, believes that a large part of these deductions will probably be accepted in decisions of higher courts of last resort (acceptance probability greater than 50%).

 

For cases in which the Company and its subsidiaries believe that the probability of acceptance by the tax authority is less than 50% a provision is recognized.

 

Details of above cases are disclosed in Note 7 (e).

 

   Amounts involved  
 Company Consolidated
Nature/Degree of Risk 09.30.20 12.31.19 09.30.20 12.31.19
Provisions         1,701,017          1,489,379          1,788,503          1,575,949
   Federal            529,994             486,659             617,480             573,229
   State            626,143             466,164             626,143             466,164
   Municipal             33,400              34,915              33,400              34,915
   FUST            511,480             501,641             511,480             501,641
Possible contingencies       27,829,680        25,451,648        28,494,446        26,104,867
   Federal         3,148,966          2,206,080          3,178,102          2,233,733
   State       16,090,251        14,859,455        16,700,350        15,460,028
   Municipal            658,515             662,119             665,758             669,114
   FUST, FUNTTEL and FISTEL         7,931,948          7,723,994          7,950,236          7,741,992

 

b.1) Tax provisions

 

Management, under advice of legal counsel, believes that the following losses are probable in the federal, state, municipal and regulatory (FUST) tax proceedings:

 

Federal taxes

 

The Company and/or its subsidiaries are party to administrative and legal proceedings at the federal level relating to: (i) claims for the non-ratification of compensation and refund requests formulated; (ii) IRRF and CIDE on remittances abroad related to technical and administrative assistance and similar services, as well as royalties; (iii) withholding income tax on interest on equity; (iv) Social Investment Fund (Finsocial) offset amounts; (v) additional charges to the PIS and COFINS tax base, as well as additional charges to COFINS required by Law No. 9,718/98; and (vi) ex-tariff, cancellation of the benefits under CAMEX Resolution No. 6, increase in the import duty from 4% to 28%.

 

State taxes

 

The Company and/or its subsidiaries are party to administrative and judicial proceedings at the state level relating to ICMS, regarding: (i) disallowance credits; (ii) non-taxation of alleged telecommunications services; (iii) tax credit for challenges/disputes over telecommunication services not provided or wrongly charged (Agreement 39/01); (iv) rate differential; (v) leasing of infrastructure for internet services (data); (vi) outflows of goods with prices lower than those of acquisition; and (vii) non-taxation discounts to customers.

 

Page 33 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

Municipal taxes

 

 

The Company and/or its subsidiaries are party to municipal tax proceedings, at the judicial level, relating to: (i) Property tax (“IPTU”); (ii) Services tax (“ISS”) on equipment leasing services, non-core activities and supplementary activities; and (iii) withholding of ISS on contractors' services.

 

FUST


The Company and/or its subsidiaries have judicial proceedings related to the non-inclusion of interconnection expenses and industrial exploitation of a dedicated line in the calculation basis of FUST.

 

b.2) Possible losses - tax contingencies

 

Management, under advice of legal counsel, believes that the risk of loss from the following federal, state, municipal and regulatory (FUST, FUNTTEL and FISTEL) are possible:

 

Federal taxes

 

The Company and/or its subsidiaries are party to administrative and judicial proceedings, at the federal level, which are awaiting decision at different court levels.

 

The more significant of these proceedings are: (i) dissatisfaction from failure to approve requests for compensation submitted by the Company; (ii) INSS (a) on compensation payment for salary losses arising from the "Plano Verão" and the "Plano Bresser"; (b) SAT, social security amounts owed to third parties (INCRA and SEBRAE); (c) meals to employees, withholding of 11% (assignment of workforce); and (d) Stock Options - requirement of social security contributions on amounts paid to employees under the stock option plan; (iii) deduction of COFINS on swap operation losses; (iv) PIS and COFINS: (a) accrual basis versus cash basis; (b) levies on value-added services; and (c) monthly subscription services; (v) IPI levied on shipment of fixed access units from the Company's establishment; (vi) Financial transaction tax (IOF) - on loan transactions, intercompany loans and credit transactions; and (vii) IRRF on capital gain on the sale of the GVT Group to the Company (included in the 2020 financial year).

 

State taxes

 

The Company and/or its subsidiaries are party to administrative and judicial proceedings, at the state level, related to ICMS, which are awaiting decision in different court levels: (i) rental of movable property; (ii) international calls; (iii) reversal of previously unused credits; (iv) service provided outside São Paulo state paid to São Paulo state; (v) co-billing; (vi) tax substitution with a fictitious tax base (tax guideline); (vii) use of credits on acquisition of electric power; (viii) secondary activities, value added and supplementary services; (ix) tax credits related to claims/challenges regarding telecommunications services not provided or mistakenly charged (Agreement 39/01); (x) deferred collection of interconnection (“DETRAF” - Traffic and Service Provision Document); (xi) credits derived from tax benefits granted by other states; (xii) disallowance of tax incentives related to cultural projects; (xiii) transfers of assets among business units owned by the Company; (xiv) communications service tax credits used in provision of services of the same nature; (xv) card donation for prepaid service activation; (xvi) reversal of credit from return and free lease in connection with assignment of networks (used by the Company itself and exemption of public bodies); (xvii) DETRAF fine; (xviii) own consumption; (xix) exemption of public bodies; (xx) discounts granted; (xxi) new tax register bookkeeping without prior authorization by tax authorities; (xxii) advertising services; (xxiii) unmeasured services; and (xxiv) monthly subscription, which is in the STF with declaration liens and the Company awaits the judgment of the STF on the request for modulation.

 

Municipal taxes

 

The Company and/or its subsidiaries are party to administrative and judicial proceedings, at the municipal level, which are awaiting decision at different court levels.

 

The more significant of these proceedings are: (i) ISS on: (a) non-core activity, value-added and supplementary services; (b) withholding at source; (c) call identification and mobile phone licensing services; (d) full-time services, provision, returns and cancelled tax receipts; (e) data processing and antivirus; (f) charge for use of mobile network and lease of infrastructure; (g) advertising services; (h) services provided by third parties; and (i) advisory services in corporate management provided by Telefónica Latino América Holding; (ii) IPTU; (iii) land use tax; and (iv) various municipal charges.

 

Page 34 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

 

FUST, FUNTTEL and FISTEL

 

Universal Telecommunications Services Fund ("FUST")

 

Writs of mandamus were filed seeking the right to exclude revenues from interconnection and Industrial Use of Dedicated Line (“EILD”) in the FUST tax base, according to Abridgment No. 7 of December 15, 2005, as it does not comply with the provisions contained in the sole paragraph of Article 6 of Law No. 9,998/00, which are awaiting a decision from Higher Courts.

 

Various administrative and judicial charges by ANATEL in administrative scope for the constitution of the tax credit related to interconnection, EILD and other revenues that do not originate from the provision of telecommunication services.

 

On September 30, 2020, the consolidated amount involved totaled R$4,478,508 (R$4,411,759 on December 31, 2019).

 

 

 

 

 

Fund for Technological Development of Telecommunications ("FUNTTEL")

 

Proceedings have been filed for the right not to include interconnection revenues and any others arising from the use of resources that are party of the networks in the FUNTTEL calculation basis, as determined by Law 10,052/00 and Decree No. 3,737/01, thus avoiding improper application of Article 4, paragraph 5, of Resolution 95/13.

 

There are several notifications of charges from the Ministry of Communications in administrative actions for constitution of the tax credit related to the interconnection, network resources and other revenues that do not originate from the provision of telecommunication services.

 

On September 30, 2020, the consolidated amount involved totaled R$732,964 (R$723,105 on December 31, 2019).

 

Telecommunications Inspection Fund ("FISTEL")

 

There are judicial actions for the collection of TFI on: (i) extensions of the term of validity of the licenses for use of telephone exchanges associated with the operation of the fixed switched telephone service; and (ii) extensions of the period of validity of the right to use radiofrequency associated with the operation of the telephone service personal mobile service.

 

On September 30, 2020, the consolidated amount involved totaled R$2,738,764 (R$2,607,128 on December 31, 2019).

 

c) Civil provision civil contingencies

 

   Amounts involved  
 Company Consolidated
Nature/Degree of Risk 09.30.20 12.31.19 09.30.20 12.31.19
Provisions            860,070             788,343             868,044             797,448
Possible contingencies         3,416,771          3,478,692          3,432,980          3,494,626

 

c.1) Civil provisions

 

Management, under advice of legal counsel, believes that the following civil proceedings will result in probable losses:

 

·The Company is a party to proceedings involving rights to the supplementary amounts from shares calculated on community telephony plants and network expansion plans since 1996 (supplement of share proceedings). These proceedings are at different stages: lower courts, court of justice and high court of justice. On September 30, 2020, the consolidated amount involved totaled R$315,463 (R$297,641 on December 31, 2019).

 

Page 35 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

 

·The Company and/or its subsidiaries are party to various civil proceedings related to consumerist at the administrative and judicial level, relating to the non-provision of services and/or products sold. On September 30, 2020, the consolidated amount involved totaled R$228,569 (R$211,865 on December 31, 2019).

 

·The Company and/or its subsidiaries are party to various civil proceedings of a non-consumer nature at administrative and judicial levels, all arising in the ordinary course of business. On September 30, 2020, the consolidated amount involved totaled R$324,012 (R$287,942 on December 31, 2019).

 

c.2) Possible losses - civil contingencies

 

Management, under advice of legal counsel, believes that losses are possible from the following civil proceedings:

 

 

·Collective Action filed by SISTEL Participants' Association (“ASTEL”) in the state of São Paulo, in which SISTEL associates in the state of São Paulo challenge the changes made in the PAMA and claim for the reestablishment of the prior "status quo". This proceeding is still in the appeal phase and awaits a decision on the Interlocutory Appeal filed by the Company against the decision on possible admission of the appeal to higher and supreme courts filed in connection with the Court of Appeals' decision, which partially changed the decision rendering the matter groundless. In parallel, the parties formulated an agreement, filed though pending court approval. The amount cannot be estimated, and the claims cannot be settled due to their unenforceability because it entails the return to the prior plan conditions.

 

·Public Civil Action proposed by the National Federation of Associations of Retirees, Pensioners and Participants in Pension Funds in the Telecommunications Sector (“FENAPAS”), in which ASTEL is an assessor against Sistel, the Company and other operators, to annul the spin-off of the PBS pension plan. The action is claiming, in summary, the “dismantling of the supplementary pension system of Fundação Sistel”, which originated several specific PBS mirror plans, and corresponding allocations of resources from the technical surplus and tax contingency existing at the time of the spin-off. After upholding the lawsuit in the first degree and confirming the sentence at the appellate level, the Company filed an appeal for clarification. Concurrently, the National Superintendence of Complementary Social Security (“PREVIC”) intervened in the process, which caused the case to be sent to the Federal Court. The process is awaiting receipt at the Federal Court. No value has been determined nor orders settled due to their unenforceability as it involves a return to SITEL’s spun-off collection related to telecommunications operators of the former Telebrás System.

 

·The Company and its subsidiaries are party to other civil claims, at several levels, related to service rendering rights. Such claims have been filed by individual consumers, civil associations representing consumer rights or by the Bureau of Consumer Protection (“PROCON”), as well as by the Federal and State Public Prosecutor's Office. The Company is also party to other claims of several types related to the ordinary course of business. On September 30, 2020, the consolidated amount totaled R$3,417,082 (R$3,479,183 on December 31, 2019).

 

·Terra Networks is a party to: (i) a supplier action related to the transmission of events; (ii) PROCON fine (annulment action); (iii) indemnification action related to the use of content; (iv) ECAD action on copyright collection; and (v) claim actions filed by former subscribers regarding unrecognized collection, collection of undue value and contractual non-compliance. On September 30, 2020, the amount was R$15,898 (R$15,443 on December 31, 2019).

 

Page 36 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

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

An unfavorable decision was handed down determining that the Company should refrain from selling mobile phones with the Bina ID service, subject to a daily fine of R$10 (ten thousand reais) in the event of non-compliance. Furthermore, according to that decision, the Company must pay indemnification for royalties, to be calculated on settlement. Motions for Clarification were proposed by all parties and Lune's motions for clarification were accepted since an injunctive relief in this stage of the proceedings was deemed applicable. A bill of review appeal was filed in view of the current decision which granted a stay of execution suspending that unfavorable decision until final judgment of the review. A bill of review was filed in view of the sentence handed down on September 30, 2016, by the 4th Chamber of the Court of Justice of the Federal District, in order to annul the lower court sentence and remit the proceedings back to the lower court for a new examination. Management is unable to reasonably estimate the liability with respect to this claim as the expertise is in its early stages.

 

·The Company and other wireless carriers are currently defendants in two class actions brought by the Public Prosecutor's Office and consumer associations challenging the defined period for use of prepaid minutes. The plaintiffs allege that the prepaid minutes should not expire after a specific period. Conflicting decisions were handed down by courts on the matter, even though the Company believes that its criteria for the period determination comply with ANATEL standards. In relation to these two ongoing lawsuits, there are appeals pending judgment by the Regional Federal Court (“TRF”) and the Superior Tax Court (“STJ”) filed by the opposing parties, due to the favorable decision obtained by the Company. The other lawsuits, already closed, had decisions in favor of the interests of the Company that have been final and unappealable.

d) Regulatory provision and contingencies

       Amounts involved  
   Company / Consolidated
Nature/Degree of Risk     09.30.20 12.31.19
Provisions             1,235,903          1,145,736
Possible contingencies             5,542,933          5,645,107

 

d.1) Regulatory provisions

 

Management, under advice of legal counsel, believes the likelihood of loss of the following regulatory proceedings is probable:

 

The Company is a party to administrative proceedings initiated mainly by ANATEL on the grounds of alleged non-compliance with obligations in the sectoral regulations, as well as in lawsuits that discuss, in the great majority, sanctions applied by ANATEL at the administrative level.

 

Page 37 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

d.2) Possible losses - regulatory contingencies

Management, under advice of legal counsel believes the likelihood of loss of the following regulatory proceedings is possible:

 

The Company is a party to administrative proceedings filed by ANATEL (other agents, including other operators, also have claims against the Company) alleging non-compliance with the obligations set forth in industry regulations, as well as legal claims which discuss the mostly sanctions applied by ANATEL at the administrative level.

 

Significant cases with possible risks in the regulatory contingency portfolio include:

·Administrative and legal proceedings that discuss how ANATEL calculates the amount of the charge due to the extension of the radio frequencies associated with the SMP. In the view of the Agency, the calculation of encumbrances should consider the application of a percentage of 2% over the entire economic benefit resulting from the provision of the STFC / SMP service. In the Company's view, however, revenues that are not part of the STFC / SMP service plans, as defined by the regulations at the time of signing the authorization terms / concession contracts, should not be considered when calculating the burden. Because of differences in interpretation, the Company filed administrative claims and lawsuits to challenge ANATEL charge collections.

  

·In May 2018, the Company filed a lawsuit to annul ANATEL final decision, of March of the same year, in the records of the Procedure for Determining Noncompliance with Obligations (“PADO”) for alleged violations of the fixed telephony regulation. The principal amount of the fine imposed by ANATEL, and object of the lawsuit, totals R$211 million. On September 30, 2020, amount including interest and indexation accruals was approximately R$484 million. On December 31, 2019, this amount was approximately R$475 million. The Company believes that the fine imposed is illegal and not due based, fundamentally, on the following defense arguments: (i) ANATEL's error in determining the universe of users considered in the fine (the number of users affected is less than that considered by the ANATEL) and; (ii) the calculation of the penalty is disproportionate and without foundation. The lawsuit is in the lower court and currently awaits judgment, after the Company presents an expert report to support arguments to reduce the fine.

 

·Arbitration Procedure No. 24690 / PFF is in progress, which is being processed at the International Chamber of Commerce (“CCI”). The procedure was proposed by “Nextel Telecomunicações Ltda.” for “Telefônica Brasil S.A.”, and addresses divergence in Industrial Exploration and Network Sharing Contracts (Ran Sharing) signed between the parties. On September 30, 2020, the amount of the procedure is estimated at R$256 million.
Page 38 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

 

e) Guarantees

 

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

Consolidated
     09.30.20 12.31.19
Property and equipment                 81,318              81,416
Judicial deposits and garnishments             2,974,646          3,670,885
Letters of guarantee             2,509,089          2,608,463
Total             5,565,053          6,360,764

 

On September 30, 2020, in addition to the guarantees above, the Company and its subsidiaries had amounts under short-term investment withheld by courts (except for loan-related investments) in the consolidated of R$52,403 (R$50,554 on December 31, 2019).

 

19) LOANS, FINANCING, DEBENTURES AND LEASES

 

On September 30, 2020, the contractual terms of the loans, financing, debentures and leases are the same as presented in Note 20) Loans, Financing, Debentures and Leases, to the December 31, 2019 financial statements.

 

Consolidated
 Information on September 30, 2020 09.30.20 12.31.19
 Currency Annual interest rate Maturity Guarantees Current  Non-current  Total Current  Non-current  Total
Local currency            4,800,481     7,832,527   12,633,008     4,126,490     9,698,183   13,824,673
                    
Financial institutions (a)                15,248         13,743         28,991         23,865         24,985         48,850
   PSIR$ 2.5% to 5.5% Jan-23 (1)              262               60              322           8,847              112           8,959
   BNBR$ 7.06% to 10% Aug-22 (2)         14,986         13,683         28,669         15,018         24,873         39,891
                    
Suppliers (b)R$ 110.0% to 150.3% of CDI Jun-21         415,812         14,129       429,941       996,177               97       996,274
                    
Debentures (c)            2,041,697       999,631     3,041,328     1,077,183     2,027,167     3,104,350
   1st issue – Minas Comunica R$ IPCA+0.50% Jul-21 (3)         28,470                  -         28,470         28,366         28,366         56,732
   5th issue R$ 108.25% of CDI Feb-22 (3)     1,004,885       999,631     2,004,516         44,504     1,998,801     2,043,305
   6th issue R$ 100% of CDI + 0.24% Nov-20 (3)     1,008,342                  -     1,008,342     1,004,313                  -     1,004,313
                    
Leases (d)R$ 7.31% / IPCA         2,327,724     6,805,024     9,132,748     2,029,265     7,161,886     9,191,151
                    
Contingent consideration (e)R$ Selic                      -                  -                  -                  -       484,048       484,048
                    
Total             4,800,481     7,832,527   12,633,008     4,126,490     9,698,183   13,824,673

 

Guarantees:

 

(1)Pledge of financed assets.

 

(2)Bank guarantee provided by Banco Safra equivalent to 100% of the outstanding financing debt balance. Setting up a liquidity fund represented by financial investments in the amount equivalent to three installments of repayment referenced to the average post-grace period performance. Balances were R$13,511 and R$13,212 at September 30, 2020 and December 31, 2019, respectively.
(3)Unsecured.
Page 39 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

a) Loans and financing – Financial Institutions

 

Some financing agreements with the financial institutions bear lower interest rates than those prevailing in the market. These operations fall within the scope of IAS 20 and therefore the subsidies granted up to December 31, 2017 were adjusted to present value and deferred in accordance with the useful lives of the financed assets.

 

The grants on January 1, 2018 adjusted to present value, were recorded in property, plant and equipment and are being depreciated according to the useful lives of the financed underlying assets.

 

b) Financing - Suppliers

 

Under bilateral agreements with suppliers, the Company obtained extension of the terms for payment of trade accounts payable at a cost based on the fixed CDI rate for the corresponding periods, with the net cost equivalent to between 110.0% to 150.3% of the CDI (109.2% to 122.5% of the CDI on December 31, 2019).

 

c) Debentures

 

Transaction costs in connection with the 5th and 6th issuances, totaling R$1,500 on September 30, 2020 (R$2,550 on December 31, 2019), were treated as a reduction of liabilities as costs to be incurred and are recognized as financial expenses, according to the contractual terms of each issue.

 

d) Leases

 

The Company is a leasee under lease agreements for: (i) lease of structures (towers and rooftops) arising from sale and leaseback transactions; (ii) lease of Built to Suit ("BTS") sites to install antennae and other equipment and transmission facilities; (iii) lease of information technology equipment and; (iv) lease of infrastructure and transmission facilities associated with the power transmission network. The net carrying amount of the assets has remained unchanged until sale thereof, and a liability is recognized corresponding to the present value of mandatory minimum installments as per the agreement.

 

The amounts recorded in property, plant and equipment (Note 12.b) are depreciated over the shorter period of the estimated useful lives of the assets and the lease terms. The liability balances are as follows:

 

   Consolidated
     09.30.20 12.31.19
Nominal value payable           11,227,989        10,932,789
Unrealized financial expenses            (2,095,241)         (1,741,638)
Present value payable (1)             9,132,748          9,191,151
        
Current              2,327,724          2,029,265
Non-current              6,805,024          7,161,886

 

(1)On September 30, 2020 and December 31, 2019, the present value of balances payable, included R$1,288,466 and R$480,381, referring to lease agreements with Telefónica Group companies (Note 27).

 

The following is a schedule of the amounts payable on leases on September 30, 2020:

 

     Consolidated
1 to 12 months               2,327,724
13 to 24 months               1,957,994
25 to 36 months               1,598,976
37 to 48 months               1,097,990
49 to 60 months                  759,627
From 61 months               1,390,437
Total               9,132,748

 

Page 40 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

The weighted annual interest rate on lease contracts on September 30, 2020 is 7.31%, with an average maturity of 6.07 years.

 

The present value of lease agreements is measured by discounting future fixed payment flows, which do not include projected inflation, at market interest rates, estimated using the Company's intrinsic risk spread.

 

The discount curves used are constructed based on observable data. Market interest rates are extracted from B3 and the Company's risk spread is estimated from debt securities issued by companies with comparable risk. The final discount curve reflects the Company's incremental loan interest rate.

 

There were no unsecured residual values resulting in benefits to the lessor or contingent payments recognized as revenue on September 30, 2020 and December 31, 2019.

 

e) Contingent consideration

 

As part of the Purchase and Sale Agreement and Other Covenants executed by and between the Company and Vivendi to acquire all shares in GVTPart., a contingent consideration relating to the judicial deposit made by GVT for the monthly installments of deferred income tax and social contribution on goodwill amortization was agreed, arising from the corporate restructuring process completed by GVT in 2013.

 

If these funds are realized (being reimbursed, refunded, or via netting), it would be returned to Vivendi, as long as they are obtained in a final unappealable decision. The deadline for this return was up to 15 years and this amount was subject to monthly restatement at the SELIC rate.

 

On July 13, 2020, the 2nd Federal Court of Maringá - PR, issued an order determining the transfer to the Company of the judicial deposit made by the former GVT, corresponding to the tax benefit of goodwill from the mergers of subsidiaries.

 

As a result of this decision, the Company paid Vivendi an amount, plus interest accruals, net of costs, expenses and taxes incurred, directly attributable to the reimbursement.

 

f) Repayment schedule

 

On September 30, 2020, the breakdown of non-current loans, financing, debentures, leases and contingent consideration by year of maturity was as follows:

 

Consolidated
YearLoans and financing - financial institutions Financing - suppliers Debentures Leases Total
13 to 24 months            13,727             14,129           999,631        1,957,994        2,985,481
25 to 36 months                  16                     -                     -        1,598,976        1,598,992
37 to 48 months                    -                     -                     -        1,097,990        1,097,990
49 to 60 months                    -                     -                     -           759,627           759,627
From 61 months                    -                     -                     -        1,390,437        1,390,437
Total            13,743             14,129           999,631        6,805,024        7,832,527

 

g) Covenants

 

Loans and financing with financial institutions and debentures carry specific covenants involving a penalty in the event of breach of contract. A breach of contract as provided for in the agreements with the institutions listed above in item b), is characterized as non-compliance with covenants (analyzed on a quarterly, half-yearly or yearly basis), resulting in the early maturity of the contract.

 

On September 30, 2020 and December 31, 2019, the Company was in compliance with all economic and financial indices.

 

Page 41 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

 

h) Changes

 

Changes in loans and financing, debentures, leases agreements and contingent considerations were as follows:

Consolidated
  Loans and financing Debentures Leases Financing - suppliers Contingent consideration Total
Balance on 12.31.18        1,582,570      3,173,910         393,027           524,244             465,686      6,139,437
Initial adoption IFRS 16 (Note 12)                     -                    -      8,618,072                     -                       -      8,618,072
Additions                     -                    -      1,421,057           563,052                       -      1,984,109
Government grants (Note 21)             15,787                    -                    -                     -                       -           15,787
Financial charges (Note 26)           110,164         156,235         342,068             30,772              14,261         653,500
Issue costs                     -               934                    -                     -                       -               934
Foreign exchange variation (Note 26)             (1,111)                    -                    -                     -                       -            (1,111)
Write-offs (cancellation of contracts)                     -                    -          (12,065)                     -                       -          (12,065)
Write-offs (payments)       (1,648,982)        (194,536)     (1,470,799)          (373,922)                       -     (3,688,239)
Balance on 09.30.19             58,428      3,136,543      9,291,360           744,146             479,947     13,710,424
Additions                     -                    -         382,884           404,261                       -         787,145
Financial charges                 849           41,151         115,917             15,168                4,101         177,186
Issue costs                     -               466                    -                     -                       -               466
Foreign exchange variation                     7                    -                    -                     -                       -                   7
Write-offs (cancellation of contracts)                     -                    -          (95,148)                     -                       -          (95,148)
Write-offs (payments)            (10,434)          (73,810)        (503,862)          (167,301)                       -        (755,407)
Balance on 12.31.19             48,850      3,104,350      9,191,151           996,274             484,048     13,824,673
Additions                     -                    -      1,479,368           224,976                       -      1,704,344
Financial charges (Note 26)              1,861           72,946         297,004             23,738                6,555         402,104
Issue costs                     -             1,050                    -                     -                       -             1,050
Costs incurred                     -                    -                    -                     -             (40,708)          (40,708)
Write-offs (cancellation of contracts)                     -                    -          (56,792)                     -                       -          (56,792)
Write-offs (payments)            (21,720)        (137,018)     (1,777,983)          (815,047)            (449,895)     (3,201,663)
Balance on 09.30.20             28,991      3,041,328      9,132,748           429,941                       -     12,633,008

 

i) Additions and payments

 

The following is a summary of additions and payments made in the nine-month period ended September 30, 2020.

Page 42 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

 

Consolidated
   Write-offs (payments)
 Additions Principal Financial charges Total
Loans- Financial institutions                       -             (19,825)               (1,895)             (21,720)
  PSI                      -               (8,632)                  (108)               (8,740)
  BNB                      -             (11,193)               (1,787)             (12,980)
Debêntures                      -             (25,583)            (111,435)            (137,018)
   5th issue                       -                       -             (88,819)             (88,819)
   6th issue                       -                       -             (20,620)             (20,620)
Financing - Suppliers            224,976            (776,568)             (38,479)            (815,047)
Contingent consideration                      -            (344,217)            (105,678)            (449,895)
Leases         1,479,368         (1,465,120)            (312,863)         (1,777,983)
Total          1,704,344         (2,631,313)            (570,350)         (3,201,663)

 

20)DEFERRED REVENUE

 

 Company Consolidated
 09.30.20 12.31.19 09.30.20 12.31.19
Contractual Liabilities - Customers contracts (1)            607,650             499,035             607,650             499,035
Disposal of PP&E (2)            114,116              94,383             114,116              94,383
Government grants (3)             53,259              61,613              53,259              61,613
Other             59,187              59,379              60,433              63,051
Total             834,212             714,410             835,458             718,082
        
Current             549,738             506,181             549,738             506,181
Non-current             284,474             208,229             285,720             211,901

 

(1)Refers to the balance of contractual liabilities of customers, deferred when they relate to performance obligations satisfied over time.

 

(2)Includes the net balances of the residual values from sale of non-strategic towers and rooftops, transferred to income as the conditions for recognition are met (Note 12).

 

(3)This refers to: i) government subsidy arising from funds obtained from credit lines to be used in the acquisition of domestic equipment, which have been amortized over the useful life cycle of the equipment; and ii) subsidies arising from projects related to state taxes, which are being amortized over the contractual period.

 

The amount estimated by the Company as received by employees as emergency benefits paid directly to employees, by the Federal Government (MP No. 936), in the amount of R$24,777, for the months of May to September 2020, deducted from personnel costs and expenses (Note 24).

 

 

Page 43 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

21) OTHER LIABILITIES

  Company Consolidated
 09.30.20 12.31.19 09.30.20 12.31.19
Surplus from post-employment benefit plans (Note 29)         1,215,801          1,150,601          1,221,259          1,155,067
Liabilities with ANATEL (1)            324,552             300,119             324,552             300,119
Third-party withholdings (2)            226,522             219,323             229,364             222,056
Amounts to be refunded to subscribers             44,878              44,231              45,936              43,794
Liabilities with related parties (Note 27)            121,018              21,789             129,888              30,114
Other liabilities             45,718              36,165              46,075              36,781
Total          1,978,489          1,772,228          1,997,074          1,787,931
        
Current             489,099             353,635             502,706             365,192
Non-current          1,489,390          1,418,593          1,494,368          1,422,739

(1)Includes the cost of renewing STFC and SMP licenses.
(2)This refers to payroll withholdings and taxes withheld from pay-outs of interest on equity and on provision of services.

 

22)EQUITY

 

a) Capital

 

Pursuant to its Articles of Incorporation, the Company is authorized to increase its share capital up to 1,850,000,000 common and preferred shares. The Board of Directors is the competent body authorized to increase and consequent issue of new shares within the authorized capital limit.

 

Brazilian Corporation Law - Law nº 6404/76, Article 166, item IV establishes that capital may be increased by means of a Special Shareholders’ Meeting Resolution by modifying the Articles of Incorporation, if the authorized capital increase limit has been reached.

 

Capital increases are not necessarily in proportion to the number of shares in existing classes, however the number of non-voting or restricted-voting preferred shares cannot exceed two-thirds of total shares issued.

 

Preferred shares are non-voting, except for cases set forth in Articles 9 and 10 of the Articles of Incorporation but have priority in the event of reimbursement of capital, without premium, and are entitled to dividends 10% higher than those paid on common shares, as per Article 7 of the Company's Articles of Incorporation and item II, paragraph 1, Article 17 of Law No. 6404/76.

 

Preferred shares are also entitled to full voting rights if the Company fails to pay the minimum dividend to which they are entitled for three consecutive financial years. This right continues until payment of said dividend.

 

Subscribed and paid-in capital on September 30, 2020 and December 31, 2019 amounted to R$63,571,416, divided into shares without par value, held as follows:

 

Page 44 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 
 Common Shares Preferred Shares Grand Total
ShareholdersNumber % Number % Number %
Controlling Group540,033,264 94.47% 704,207,855 62.91% 1,244,241,119 73.58%
   Telefónica Latinoamérica Holding46,746,635 8.18% 360,532,578 32.21% 407,279,213 24.09%
   Telefónica198,207,608 34.67% 305,122,195 27.26% 503,329,803 29.76%
   SP Telecomunicações Participações294,158,155 51.46% 38,537,435 3.44% 332,695,590 19.67%
   Telefónica Chile920,866 0.16% 15,647 0.00% 936,513 0.06%
Other shareholders29,320,789 5.13% 415,131,868 37.09% 444,452,657 26.28%
Treasury Shares2,290,164 0.40% 983 0.00% 2,291,147 0.14%
Total shares571,644,217 100.00% 1,119,340,706 100.00% 1,690,984,923 100.00%
   Treasury Shares(2,290,164)   (983)   (2,291,147)  
Total shares outstanding569,354,053   1,119,339,723   1,688,693,776  

 

Proposal for Conversion of all preferred shares issued by the Company into common shares

 

The Company informed the shareholders and the general market, in the form and for the purposes of CVM Instruction 358/2002, as amended, in continuity with the Material Fact notice on March 9, 2020 and the Notice to the Market released on August 6, 2020, that, at a meeting held on August 13, 2020, the Company's Board of Directors approved (i) the proposal to convert the total of the 1,119,340,706 preferred shares issued by the Company into common, registered, book-entry and non-common shares nominal value, in the proportion of one common share for each one preferred share converted, with the extinction of the preferred shares ("Conversion"), (ii) the proposal to amend the Company's Bylaws, to reflect the Conversion; and (iii) the convening of the Extraordinary General Meetings (“AGE”) and Special of the Shareholders of Preferred Shares (“AGESP”) of the Company to resolve on the Conversion, and the consequent authorization for the Directors of the Company to perform all acts required for the implementation of the Conversion after its approval by the AGE and ratification by AGESP (Note 34).

 

ANATEL's consent to the Conversion proposal was obtained on August 6, 2020.

 

b) Capital reserves

 

The information on the capital reserves, is the same as in Note 23) Equity, item b), to the December 31, 2019 financial statements.

 

c) Income reserves

 

The information on the income reserves, is the same as in Note 23) Equity, item c), to the December 31, 2019 financial statements.

 

d) Dividend and interest on equity (‘IOE’)

 

The amounts of IOE distributions are calculated and presented net of Withholding Income Tax (IRRF). Exempt shareholders received the full IOE amount, without tax withholding deducted.

 

The gross and net values for the preferred shares are 10% higher than those attributed to each common share, as per article 7 of the Company's Articles of Incorporation.

 

d.1) Interim interest on equity for 2020

 

Meetings of the Board of Directors of the Company, ad referendum the Annual Shareholders’ Meeting, approved the allocations of interim interest on equity, for 2020, pursuant to Article 28 of the Company's Bylaws, Article 9 of Law 9249/95 and CVM Deliberation 683/12, which will be treated as an advance of the mandatory minimum dividend for the year of 2020, as follows:

 

Page 45 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 
Dates Gross Amount Net Value Amount per Share, Net
Approval Credit Beginning of Payment Common Preferred  Total Common Preferred  Total Common Preferred 
                     
02/14/20 02/28/20 Until 12/31/21         85,373       184,627       270,000         72,567       156,933       229,500  0.12745554999  0.14020110499
03/19/20 03/31/20 Until 12/31/21         47,430       102,570       150,000         40,315         87,185       127,500  0.07080863888  0.07788950277
06/17/20 06/30/20 Until 12/31/21       284,578       615,422       900,000       241,891       523,109       765,000  0.42485183332  0.46733701665
09/17/20 09/28/20 Until 12/31/21       205,528       444,472       650,000       174,699       377,801       552,500  0.30683743517  0.33752117869
Total       622,909     1,347,091     1,970,000       529,472     1,145,028     1,674,500    

 

d.2) Dividends and interest on equity for 2019

 

On May 28, 2020, the Annual General Meeting unanimously approved the proposal for the allocation of interest on equity and dividends for the year ended December 31, 2019. On that same date, the Company's Board of Executive Officers informed the shareholders of the dates for the payment of interest on equity and dividend distributions, as follows:

  Dates Gross Amount Net Value Amount per Share
Nature Approval Credit Beginning of Payment Common Preferred  Total Common Preferred  Total Common Preferred 
                       
IOE 02/15/19 02/28/19 08/18/20 221,338 478,662 700,000 188,137 406,863 595,000  0.33044031480  0.36348434628
IOE 04/17/19 04/30/19 08/18/20 180,233 389,767 570,000 153,198 331,302 484,500  0.26907282777  0.29598011054
IOE 06/17/19 06/28/19 08/18/20 306,079 661,921 968,000 260,167 562,633 822,800  0.45695174961  0.50264692458
IOE 12/19/19 12/30/19 08/18/20 110,669 239,331 350,000   94,069 203,431 297,500  0.16522015740  0.18174217314
Dividends 12/19/19 12/30/19 08/18/20 316,198 683,802  1,000,000 316,198 683,802  1,000,000  0.55536187362  0.61089806098
Dividends 05/28/20 05/28/20 12/09/20 694,235  1,501,340  2,195,575 694,235  1,501,340  2,195,575  1.21933883495  1.34127271844
Total Total  1,828,752  3,954,823  5,783,575  1,706,004  3,689,371  5,395,375    

 

d.3) Unclaimed dividends and interest on equity

 

Pursuant to Article 287, paragraph II, item “a” of Law No. 6404, of December 15, 1976, the dividends and interest on equity unclaimed by shareholders are subject to the statute of limitation up to three years, as from the initial payment date. The Company reverses the amount of unclaimed dividends and IOE to equity once the statute of limitation expires.

 

During the nine-month periods ended September 30, 2020 and 2019, the Company reversed the amount of dividends and interest on capital prescribed in the amounts of R$35,462 and R$31,335, respectively.

 

e) Other comprehensive income

 

Financial assets at fair value through Other comprehensive income: These refer to changes in fair value of financial assets available for sale.

 

Derivative financial instruments: These refer to the effective part of cash flow hedges at the balance sheet date.

 

Currency translation effects for foreign investments: This refers to currency translation differences arising from the translation of financial statements of Aliança (joint venture).

 

Changes in Other comprehensive income, net of taxes, were as follows:

 

Page 46 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

Company / Consolidated
 Financial assets at fair value through other comprehensive income Derivative transactions Currency translation effects - foreign investments Total
Balance on 12.31.18              (9,070)                   336              37,959              29,225
Translation gains                      -                       -                2,205                2,205
Losses from future contracts                      -                  (336)                       -                  (336)
Gains on financial assets at fair value through other comprehensive income                    24                       -                       -                     24
Balance on 09.30.19              (9,046)                       -              40,164              31,118
Translation losses                      -                       -                  (346)                  (346)
Losses on financial assets at fair value through other comprehensive income                   (35)                       -                       -                    (35)
Balance on 12.31.19              (9,081)                       -              39,818              30,737
Translation gains                      -                       -              43,880              43,880
Gains on financial assets at fair value through other comprehensive income                  215                       -                       -                   215
Balance on 09.30.20              (8,866)                       -              83,698              74,832

 

f) Company Share Repurchase Program

 

On July 28, 2020, the Company's Board of Directors, in accordance with article no. 17, item XV of the Bylaws and CVM Instruction no. 567, approved a new Share Repurchase Program of the Company, which has as its objective the acquisition of common and preferred shares issued by the Company for subsequent cancellation, sale or maintenance in treasury, without reducing the share capital. This is designed to increase shareholder value by efficiently investing the available cash resources and optimizing the capital allocation of the Company.

 

The repurchase will be made using the capital reserve balance included in the ITRs with base date June 30, 2020 (R$1.165 billion), except for the reserves referred to in article 7, § 1, of ICVM 567.

 

This program will run until January 27, 2022, with acquisitions made at B3, at market prices, observing the legal and regulatory limits.

 

The maximum amounts authorized for acquisition will be 583,558 common shares and 37,736,954 preferred shares. The number of outstanding shares is 31,610,941 common shares and 415,117,308 preferred shares, according to the definition given by article nº 8, § 3, item I, of ICVM 567.

 

During the nine-month period ended September 30, 2020, there were no acquisitions of shares under the Company's share repurchase program to be held in treasury for further sale and / or cancellation.

 

g) Earnings per share

 

Basic and diluted earnings per share were calculated by dividing profit attributed to the Company’s shareholders by the weighted average number of outstanding common and preferred shares.

 

The following table shows the calculation of earnings per share in the three and nine-month periods ended September 30, 2020 and 2019:

 

Page 47 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

Company
 Three-month periods ended Nine-month periods ended
 09.30.20 09.30.19 09.30.20 09.30.19
Net income for the period attributable to shareholders:            1,211,487                965,113             3,477,737             3,726,760
   Common shares               383,069                305,167             1,099,652             1,178,392
   Preferred shares               828,418                659,946             2,378,085             2,548,368
        
Number of shares, in thousands:            1,688,694             1,688,694             1,688,694             1,688,694
    Weighted average number of outstanding common shares for the period               569,354                569,354                569,354                569,354
    Weighted average number of outstanding preferred shares for the period            1,119,340             1,119,340             1,119,340             1,119,340
        
Basic and diluted earnings per share:       
   Common shares (R$)                    0.67                     0.54                     1.93                     2.07
   Preferred shares (R$)                    0.74                     0.59                     2.12                     2.28

 

23)NET OPERATING REVENUE

 

Company
 Three-month periods ended Nine-month periods ended
 09.30.20 09.30.19 09.30.20 09.30.19
Gross operating revenue              15,691,057               16,386,359               46,140,452               48,948,582
   Services (1)              14,039,370               14,789,635               42,198,057               44,559,614
   Sale of goods (2)                1,651,687                 1,596,724                 3,942,395                 4,388,968
        
Deductions from gross operating revenue                (5,041,245)                (5,531,151)              (14,634,292)              (16,657,387)
   Tax               (3,276,384)                (3,453,128)                (9,589,273)              (10,348,977)
      Services               (2,984,709)                (3,166,243)                (8,914,870)                (9,484,659)
      Sale of goods                  (291,675)                   (286,885)                   (674,403)                   (864,318)
        
   Discounts granted and return of goods               (1,764,861)                (2,078,023)                (5,045,019)                (6,308,410)
      Services               (1,185,254)                (1,501,468)                (3,660,622)                (4,934,565)
      Sale of goods                  (579,607)                   (576,555)                (1,384,397)                (1,373,845)
        
Net operating revenue              10,649,812               10,855,208               31,506,160               32,291,195
   Services                 9,869,407               10,121,924               29,622,565               30,140,390
   Sale of goods                   780,405                    733,284                 1,883,595                 2,150,805

 

Page 48 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

Consolidated
 Three-month periods ended Nine-month periods ended
 09.30.20 09.30.19 09.30.20 09.30.19
Gross operating revenue              15,855,579               16,606,138               46,633,187               49,634,478
   Services (1)              14,198,551               15,009,016               42,684,214               45,245,200
   Sale of goods (2)                1,657,028                 1,597,122                 3,948,973                 4,389,278
        
Deductions from gross operating revenue                (5,064,041)                (5,559,390)              (14,699,535)              (16,743,162)
   Tax               (3,299,045)                (3,481,365)                (9,654,431)              (10,434,697)
      Services               (3,006,087)                (3,194,390)                (8,977,991)                (9,570,289)
      Sale of goods                  (292,958)                   (286,975)                   (676,440)                   (864,408)
        
   Discounts granted and return of goods               (1,764,996)                (2,078,025)                (5,045,104)                (6,308,465)
      Services               (1,185,400)                (1,501,491)                (3,660,777)                (4,934,641)
      Sale of goods                  (579,596)                   (576,534)                (1,384,327)                (1,373,824)
        
Net operating revenue              10,791,538               11,046,748               31,933,652               32,891,316
   Services               10,007,064               10,313,135               30,045,446               30,740,270
   Sale of goods                   784,474                    733,613                 1,888,206                 2,151,046

 

(1) These include telephone services, use of interconnection network, data and SVA services, cable TV and other services.

 

(2) These include sale of goods (handsets, SIM cards and accessories) and equipment of “Soluciona TI”.

 

No single customer contributed more than 10% of gross operating revenues in the three and nine-month periods ended September 30, 2020 and 2019.

 

24) OPERATING COSTS AND EXPENSES

 

Company
 Three-month periods ended
 09.30.20 09.30.19
 Cost of sales and services Selling expenses General and administrative expenses Total Cost of sales and services Selling expenses General and administrative expenses Total
Personnel          (168,576)            (636,963)            (87,784)          (893,323)          (184,216)            (626,297)          (109,697)          (920,210)
Third-party services      (1,821,497)         (1,493,125)          (258,079)       (3,572,701)       (1,649,946)         (1,652,224)          (287,535)       (3,589,705)
Rental, insurance, condominium and connection means         (343,878)             (15,005)            (10,080)          (368,963)          (379,173)             (17,090)            (15,080)          (411,343)
Taxes, charges and contributions         (451,087)               (7,524)             (9,989)          (468,600)          (408,295)             (10,503)             (6,845)          (425,643)
Estimated impairment losses on accounts receivable                     -            (372,260)                     -          (372,260)                     -            (433,647)                     -          (433,647)
Depreciation and amortization      (2,193,001)            (374,009)          (214,504)       (2,781,514)       (2,102,989)            (389,212)          (211,938)       (2,704,139)
Cost of goods sold         (821,614)                       -                     -          (821,614)          (729,236)                       -                     -          (729,236)
Materials and other operating costs and expenses           (27,029)             (26,052)             (8,063)            (61,144)             (6,654)             (38,060)             (9,112)            (53,826)
Total      (5,826,682)         (2,924,938)          (588,499)       (9,340,119)       (5,460,509)         (3,167,033)          (640,207)       (9,267,749)

 

Page 49 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 
Company
 Nine-month periods ended
 09.30.20 09.30.19
 Cost of sales and services Selling expenses General and administrative expenses Total Cost of sales and services Selling expenses General and administrative expenses Total
Personnel          (539,814)         (1,906,025)          (292,024)       (2,737,863)          (539,409)         (1,900,171)          (278,904)       (2,718,484)
Third-party services      (5,281,855)         (4,447,012)          (786,842)     (10,515,709)       (4,998,890)         (5,069,446)          (840,333)     (10,908,669)
Rental, insurance, condominium and connection means      (1,021,776)             (44,015)            (33,199)       (1,098,990)       (1,050,512)             (59,599)            (44,365)       (1,154,476)
Taxes, charges and contributions      (1,261,979)             (24,593)            (31,751)       (1,318,323)       (1,215,650)             (32,157)            (21,109)       (1,268,916)
Estimated impairment losses on accounts receivable (Note 4)                    -         (1,349,588)                     -       (1,349,588)                     -         (1,243,560)                     -       (1,243,560)
Depreciation and amortization      (6,544,190)         (1,115,701)          (640,803)       (8,300,694)       (6,214,033)         (1,131,003)          (583,448)       (7,928,484)
Cost of goods sold      (1,938,091)                       -                     -       (1,938,091)       (2,235,203)                       -                     -       (2,235,203)
Materials and other operating costs and expenses           (55,491)             (86,442)            (41,590)          (183,523)            (21,952)            (105,393)            (23,101)          (150,446)
Total    (16,643,196)         (8,973,376)       (1,826,209)     (27,442,781)     (16,275,649)         (9,541,329)       (1,791,260)     (27,608,238)

 

Consolidated
 Three-month periods ended
 09.30.20 09.30.19
 Cost of sales and services Selling expenses General and administrative expenses Total Cost of sales and services Selling expenses General and administrative expenses Total
Personnel          (193,642)            (640,076)            (92,440)          (926,158)          (192,317)            (631,357)          (112,474)          (936,148)
Third-party services      (1,822,924)         (1,493,867)          (260,348)       (3,577,139)       (1,664,565)         (1,653,438)          (288,872)       (3,606,875)
Rental, insurance, condominium and connection means         (345,114)             (14,825)            (10,646)          (370,585)          (380,625)             (17,090)            (15,337)          (413,052)
Taxes, charges and contributions         (449,306)               (7,524)            (10,464)          (467,294)          (411,262)             (10,503)             (7,062)          (428,827)
Estimated impairment losses on accounts receivable                    -            (375,348)                     -          (375,348)                     -            (442,373)                     -          (442,373)
Depreciation and amortization      (2,193,336)            (374,186)          (215,518)       (2,783,040)       (2,103,256)            (389,424)          (212,286)       (2,704,966)
Cost of goods sold         (826,083)                       -                     -          (826,083)          (729,615)                       -                     -          (729,615)
Materials and other operating costs and expenses           (27,837)             (26,056)             (8,250)            (62,143)             (7,233)             (38,143)             (9,371)            (54,747)
Total      (5,858,242)         (2,931,882)          (597,666)       (9,387,790)       (5,488,873)         (3,182,328)          (645,402)       (9,316,603)

 

Consolidated
 Nine-month periods ended
 09.30.20 09.30.19
 Cost of sales and services Selling expenses General and administrative expenses Total Cost of sales and services Selling expenses General and administrative expenses Total
Personnel         (602,194)         (1,916,545)          (312,047)       (2,830,786)          (560,710)         (1,915,866)          (285,504)       (2,762,080)
Third-party services      (5,294,411)         (4,448,702)          (793,968)     (10,537,081)       (5,039,747)         (5,087,030)          (843,593)     (10,970,370)
Rental, insurance, condominium and connection means       (1,027,047)             (43,042)            (34,619)       (1,104,708)       (1,052,505)             (59,599)            (44,812)       (1,156,916)
Taxes, charges and contributions      (1,278,769)             (24,593)            (33,058)       (1,336,420)       (1,224,798)             (32,157)            (21,465)       (1,278,420)
Estimated impairment losses on accounts receivable (Note 4)                    -         (1,360,741)                     -       (1,360,741)                     -         (1,265,603)                     -       (1,265,603)
Depreciation and amortization (1)      (6,545,093)         (1,116,246)          (643,810)       (8,305,149)       (6,214,751)         (1,131,728)          (584,057)       (7,930,536)
Cost of goods sold      (1,944,911)                       -                     -       (1,944,911)       (2,235,582)                       -                     -       (2,235,582)
Materials and other operating costs and expenses           (59,296)             (86,451)            (41,934)          (187,681)            (23,795)            (105,944)            (23,763)          (153,502)
Total    (16,751,721)         (8,996,320)       (1,859,436)     (27,607,477)     (16,351,888)         (9,597,927)       (1,803,194)     (27,753,009)

 

(1)Includes the consolidated amount of R$1,570,789 and R$1,433,423 in the nine-month periods ended September 30, 2020 and 2019, respectively, related to the depreciation of right-of-use leased assets.

 

Page 50 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 
25)OTHER OPERATING INCOME (EXPENSES)

 

Company
 Three-month periods ended Nine-month periods ended
 09.30.20 09.30.19 09.30.20 09.30.19
Recovered expenses and fines (1)               263,709                126,247                717,772                393,407
Provisions for labor, tax, civil, regulatory and contingent liabilities (Note 18)              (153,896)               (149,614)               (564,930)               (473,569)
Net gain (loss) on asset disposal/loss (2)               104,703                175,528                281,816                223,269
Other operating income (expenses)                (72,064)                 (22,354)                 (95,161)                  38,534
Total               142,452                129,807                339,497                181,641
        
Other operating income               368,412                301,775                999,588                655,210
Other operating expenses              (225,960)               (171,968)               (660,091)               (473,569)
Total               142,452                129,807                339,497                181,641

 

Consolidated
 Three-month periods ended Nine-month periods ended
 09.30.20 09.30.19 09.30.20 09.30.19
Recovered expenses and fines (1)               264,442                127,452                720,097                397,337
Provisions for labor, tax, civil, regulatory and contingent liabilities (Note 18)              (149,053)               (150,905)               (558,801)               (479,915)
Net gain (loss) on asset disposal/loss (2)               104,702                175,509                281,815                222,255
Other operating income (expenses)                (85,004)                 (45,875)               (142,590)                 (41,912)
Total               135,087                106,181                300,521                  97,765
        
Other operating income               369,144                302,961             1,001,912                619,592
Other operating expenses              (234,057)               (196,780)               (701,391)               (521,827)
Total               135,087                106,181                300,521                  97,765

 

(1)For the nine-month period ended September 30, 2020, includes tax credits of R$435,698 from final and unappealable court case ruled in favor of the Company, which recognized the right to exclude ICMS from the calculation basis of contributions to PIS and COFINS (Note 8).

 

(2)The cumulative 2020 amount includes a net gain of R$93,257, resulting from the agreement entered into by the Company on November 28, 2019, for the sale of 1,909 structures (rooftops and towers) owned by the Company to Telxius Torres Brasil Ltda. (Note 10). On February 7, 2020, this transaction was concluded for a total amount of R$641 million, after the fulfillment of all suspensive conditions common to this type of transaction, including the approval of the transaction by CADE.

 

Following the sale of the assets, treated as a sale and leaseback transaction, a lease was executed for part of the structures sold with Telxius Torres Brasil Ltda, to continue the data transmissions necessary for provision of telephony services by the Company (Note 19).

  

Page 51 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

26) FINANCIAL INCOME (EXPENSES)

 

Company
 Three-month periods ended Nine-month periods ended
 09.30.20 09.30.19 09.30.20 09.30.19
Financial Income       
Interest income                     40,390                     80,075                    128,523                    198,502
Interest receivable (customers, taxes and other)                    21,638                     25,817                     73,792                    150,013
Gain on derivative transactions (Note 30)                    36,222                    107,343                    123,647                    265,829
Foreign exchange variations on loans and financing (Note 19)                             -                          203                              -                       5,147
Other revenues from foreign exchange and monetary variation                   329,912                     79,593                    720,898                    158,032
Other financial income                      4,793                     39,332                     89,282                    122,294
Total                   432,955                    332,363                 1,136,142                    899,817
        
Financial Expenses       
Loan, financing, debenture, leases charges and contingent consideration (Note 19)    ��             (103,341)                   (245,669)                   (402,053)                   (653,445)
Foreign exchange variation on loans and financing (Note 19)                             -                              -                              -                      (4,036)
Loss on derivative transactions (Note 30)                   (52,219)                   (105,033)                   (142,606)                   (234,112)
Interest payable (financial institutions, provisions, trade accounts payable, taxes and other)                   (45,744)                    (39,857)                   (104,766)                    (71,794)
Other expenses with foreign exchange and monetary variation                  (190,619)                   (229,099)                   (649,981)                   (510,654)
IOF, Pis, Cofins and other financial expenses                   (59,568)                    (22,629)                   (126,549)                    (68,504)
Total                  (451,491)                   (642,287)                (1,425,955)                (1,542,545)
        
Financial income (expenses), net                   (18,536)                   (309,924)                   (289,813)                   (642,728)

 

Page 52 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 
Consolidated
 Three-month periods ended Nine-month periods ended
 09.30.20 09.30.19 09.30.20 09.30.19
Financial Income       
Interest income                     42,926                     85,072                    137,112                    209,014
Interest receivable (customers, taxes and other)                    22,075                     26,218                     74,925                    151,528
Gain on derivative transactions (Note 30)                    36,222                    107,343                    123,647                    266,444
Foreign exchange variations on loans and financing (Note 19)                             -                          203                              -                       5,147
Other revenues from foreign exchange and monetary variation (1)                   331,320                     82,055                    728,868                    163,937
Other financial income                      4,799                     39,343                     89,310                    122,328
Total                   437,342                    340,234                 1,153,862                    918,398
        
Financial Expenses       
Loan, financing, debenture, finance lease charges and indemnification liability (Note 19) (2)                  (103,359)                   (245,687)                   (402,104)                   (653,500)
Foreign exchange variation on loans and financing (Note 19)                             -                              -                              -                      (4,036)
Loss on derivative transactions (Note 30)                   (52,219)                   (105,033)                   (142,606)                   (234,349)
Interest payable (financial institutions, provisions, trade accounts payable, taxes and other)                   (43,176)                    (40,182)                   (102,393)                    (72,764)
Other expenses with foreign exchange and monetary variation                  (195,187)                   (231,803)                   (664,844)                   (520,031)
IOF, Pis, Cofins and other financial expenses                   (59,911)                    (23,428)                   (127,784)                    (70,183)
Total                  (453,852)                   (646,133)                (1,439,731)                (1,554,863)
        
Financial income (expenses), net                   (16,510)                   (305,899)                   (285,869)                   (636,465)

 

(1)For the nine-month period ended September 30, 2020, it includes indexation accruals of R$495,938 on tax credits arising from the final and unappealable lawsuit at the Superior Court of Justice, in favor of the Company, which recognized the right to exclude ICMS from the basis for calculating contributions to PIS and COFINS (Note 8).

 

(2)Includes the consolidated amounts of R$297,004 and R$342,068 in the nine-month periods ended September 30, 2020 and 2019, respectively, related to leases.

 

27) BALANCES AND TRANSACTIONS WITH RELATED PARTIES

 

a)Balances and transactions with related parties

 

The main balances of assets and liabilities with related parties arises from transactions with companies related to the controlling group carried out at the prices and other commercial conditions agreed in contracts between the parties and refer to:

 

a)Fixed and mobile telephony services provided by Telefónica Group companies.

 

b)Digital TV services contracted.

 

c)Rental, maintenance of safety equipment and construction services contracted.

 

d)Corporate services passed through at the cost effectively incurred.

 

e)Right to use certain software licenses and maintenance and support contracted.

 

f)International transmission infrastructure for several data circuits and roaming services contracted.

 

g)Operations by Telefónica Group companies, relating to the purchase of internet content, advertising and auditing services.
Page 53 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

 

h)Marketing services.

 

i)Information access services through the electronic communications network.

 

j)Data communication services and integrated solutions.

 

k)Long distance call and international roaming services.

 

l)Refunds to be paid or received regarding expenses and miscellaneous expenses.

 

m)Brand fee for assignment of rights to use the brand.

 

n)Platform of health services.

 

o)Cost Sharing Agreement for digital-business.

 

p)Rentals buildings.

 

q)Financial Clearing House roaming, inflows of funds for payments and receipts arising from roaming operation.

 

r)Integrated e-learning, online education and training solutions.

 

s)Factoring transactions, credit facilities for services provided by the Group's suppliers.

 

t)Social investment. The Fundação Telefônica, innovative use of technology to enhance learning and knowledge, contributing to personal and social development.

 

u)Contracts or agreements assigning user rights for cable ducts, optical fiber duct rental services, and right-of-way related occupancy agreements with several highway concessionaires.

 

v)Adquira Sourcing platform - online solution to transact purchase and sale of various types of goods and services.

 

w)Digital media; marketing and sales, in-store and outdoor digital marketing services.

 

x)Lease transactions between the Company and Telxius Torres Brasil and AIX. The operations consist of the sale of infrastructure assets owned by the Company, together with the assignment of the sharing contracts, with the subsequent assignment of the use of space of the referred infrastructures to the Company

 

y)Amounts to be reimbursed by SPTE as a result of contractual clause of the purchase of Terra Networks equity interest.

 

z)Sale of digital products and creation of an exclusive band channel that responds to the commercial demand for these digital services and products.

 

aa)Land purchase and sale operation.

 

The Company and its subsidiaries sponsor pension plans and other post-employment benefits for its employees with Visão Prev and Sistel (Note 29).

 

Page 54 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

Telefônica Corretora de Seguros (“TCS”) acts as an intermediary in transactions between insurance companies and the Company and its subsidiaries in the acquisition of insurance for cell phones, operational risks, general liability, and guarantee insurance, among others. There are no balances arising from insurance intermediation between TCS and the Company and its subsidiaries.

 

The following table summarizes the consolidated balances with related parties:

 

Balance Sheet - Assets
   09.30.2012.31.19
CompaniesType of transaction Cash and cash equivalents Accounts receivable Other assets and prepaid expenses Cash and cash equivalents Accounts receivable Other assets and prepaid expenses
Parent Companies             
SP Telecomunicações  Participaçõesd) / l) / p)                    -                         5             9,545                    -                   6             4,924
Telefónica Latinoamerica Holdingl)                    -                         -           37,159                    -                    -           40,105
Telefónical) / z)                    -                         -             4,877                    -           10,873             2,555
                      -                         5           51,581                    -           10,879           47,584
Other Group companies             
Colombia Telecomunicacionesk) / l)                    -                     192               520                    -               159               520
Telefónica International Wholesale Services Brasila) / d) / l) / p)                    -                  3,908               277                    -             1,961             3,602
T.O2 Germany GMBH CO. OHGk)                    -                  1,246                    -                    -             1,688                    -
Telefónica Venezolanak) / l)                    -                  7,003             2,196                    -             6,498             2,196
Telefônica Digital España g) / l)                    -                  1,227                    -                    -               696               300
Telefônica Factoring do Brasil a) / d) / s)                    -                  7,732                 59                    -             2,782                 45
Telefónica Global Technologye)                    -                         -             1,790                    -                    -                    -
Telefónica International Wholesale Services II, S.L.a)/ j) / k)                    -                 53,758                    -                    -           58,490                    -
Telefônica Serviços de Ensinoa) / d) / p)                    -                     152                   5                    -               153                 14
Telefónica Moviles Argentinaj) / k)                    -                  6,284                    -                    -             5,145                    -
Telefónica Moviles España k)                    -                  1,921                    -                    -             1,536                    -
Telefónica USAj)                    -                  4,541                    -                    -             5,319                    -
Telfisa Global BVq)           42,776                         -                    -           59,657                    -                    -
Telxius Cable Brasila) / d) / l) / p)                    -                  4,368             4,935                    -           11,382             5,100
Telxius Torres Brasil a) d) / p) / x)                    -                 13,845             4,158                    -             5,429             6,611
Terra Networks Mexico, Terra Networks Peru and Terra Networks Argentinag) / h)                    -                  5,935                    -                    -             5,598                    -
Othera) / d) / g) / h) / j) / k) / l) / p) / aa)                    -                 10,042           14,367                    -           12,189             2,732
             42,776               122,154           28,307           59,657         119,025           21,120
Total            42,776               122,159           79,888           59,657         129,904           68,704
              
Current assets             
   Cash and cash equivalents (Note 3)            42,776                         -                    -           59,657                    -                    -
   Accounts receivable (Note 4)                     -               122,159                    -                    -         129,904                    -
   Prepaid expenses (Note 6)                     -                         -             1,993                    -                    -             3,738
   Other assets (Note 10)                     -                         -           72,924                    -                    -           64,471
Non-current assets             
   Prepaid expenses (Note 6)                     -                         -             4,457                    -                    -                    -
   Other assets (Note 10)                     -                         -               514                    -                    -               495

 

 

Page 55 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

 

Balance Sheet - Liabilities 
       09.30.20 12.31.19
Companies    Type of transaction Trade  accounts payable and other payables Other liabilities and  leases Trade  accounts payable and other payables Other liabilities
Parent Companies             
SP Telecomunicações  Participações     y)                    -           27,420                    -           23,524
Telefónica     l) / m)             5,327           95,435             2,907                 40
                   5,327         122,855             2,907           23,564
Other Group companies             
Colombia Telecomunicaciones    k)               148                    -               816                    -
Fundação Telefônica     l)                    -                    -                    -                 86
Media Networks Latin America S.A.C.    b)             6,780                    -             9,245                    -
Telefónica International Wholesale Services Brasil    f)           34,521               318           44,835               318
T.O2 Germany GMBH CO. OHG    k)               825                    -             5,000                    -
Telefónica Venezolana    k)             6,035                    -             6,044                    -
Telefónica Compras Electrónica    v)           21,447                    -           28,169                    -
Telefônica Digital España    o)         117,467                    -           68,015                    -
Telefônica Factoring do Brasil    s)                    -             1,186                    -             4,057
Telefónica Global Technology    e)           16,616                    -           28,854                    -
Telefónica International Wholesale Services II, S.L.    f) / k)           67,955                    -           66,976                    -
Telefônica Serviços de Ensino    r)             5,370                    -             8,373                    -
Telefónica Moviles Argentina    k)               761                    -             3,638                    -
Telefónica Moviles España     k)             1,484                    -             3,488                    -
Telefónica USA    f)             9,807               291           16,015               267
Telxius Cable Brasil     f) / l)           70,945             1,572           47,168             1,572
Telxius Torres Brasil    l) / x)           45,748      1,134,785           30,018         480,589
Terra Networks Mexico, Terra Networks Peru and Terra Networks Argentina   h)             6,566                    -             7,105                    -
AIX   u) / x)             1,736           77,122             2,060                    -
Other   e) / f) / g) / i) / k) / l) / n) / u) / w)            14,331               225           26,545                 42
               428,542      1,215,499         402,364         486,931
Total              433,869      1,338,354         405,271         510,495
              
Current liabilities             
   Trade accounts payable and other payables (Note 15)              433,869                    -         405,271                    -
   Leases (Note 19)                       -         314,038                    -           55,920
   Other liabilities (Note 21)                         -         129,278                    -           29,529
Non-current liabilities             
   Leases (Note 19)                         -         894,428                    -         424,461
   Other liabilities (Note 21)                         -               610                    -               585

 

Page 56 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

 

Statement of income
   Nine-month periods ended
   09.30.20 09.30.19
CompaniesType of transaction Operating revenues Cost, despesas and other revenues (expenses) operating Financial result Operating revenues Cost, despesas and other revenues (expenses) operating Financial result
Parent Companies             
SP Telecomunicações  Participaçõesd) / l) / p)                   7                     419                    -                    -                     345                    -
Telefónica Latinoamerica Holdingl)                    -                 15,089             8,464                    -                 13,801             1,605
Telefónical) / m)                    -              (303,387)          (24,860)                    -              (299,091)            (6,375)
                     7              (287,879)          (16,396)                    -              (284,945)            (4,770)
Other Group companies             
Colombia Telecomunicacionesk) / l)                 95                     374                    -                 17                  1,233                  (1)
Fundação Telefônica t)                    -                (10,000)                    -                    -                 (8,965)                    -
Telefónica International Wholesale Services Brasila) / d) / f) / l) / p)             3,839                (74,240)                    -               485                (81,941)                (54)
Media Networks Latin America S.A.C.b)                    -                (21,583)              (585)                    -                (31,715)              (739)
Telefônica Serviços de Ensinoa) / d)/  p) / r)               776                (19,546)                    -               651                (27,433)                    -
T.O2 Germany GMBH CO. OHGk)                 39                  3,672               267              (108)                     727             1,845
Telefónica Venezolanak)                    -                       15               668                (33)                      (37)                    -
Telefónica Compras Electrónicav)                    -                (22,068)                    -                    -                (19,398)                    -
Telefônica Digital Españal) / o)                    -              (109,189)          (33,490)                (32)                (85,363)            (6,149)
Telefônica Factoring do Brasil a) / d) / s)             6,648                     186            (1,186)             1,889                    (308)            (4,695)
Telefónica Global Technologye)                     -                (55,495)            (7,425)                    -                (44,203)                 85
Telefónica International Wholesale Services II, S.L.a) / f) / j) / k)           44,392                (67,688)             9,879           35,738                (43,475)            (3,413)
Telefónica Moviles Argentinaj) / k)             2,206                  1,532               282             3,404                 (2,818)               101
Telefónica Moviles España k)               321                  1,088                   1               316                 (1,301)                    -
Telefónica USAf) / j)                 68                (14,305)              (217)                 38                (14,755)             1,129
Telxius Cable Brasil a) / d) / f) / l) / p)             9,105              (260,969)          (31,914)           11,660              (187,075)            (3,164)
Telxius Torres Brasil a) / d) / p) / x)              5,954                  3,760          (31,755)                 54                    (541)          (17,529)
Terra Networks Mexico, Terra Networks Peru and Terra Networks Argentinah)               847                 (3,468)               289             2,381                 (4,831)               387
Othera) / c) / d) / e) / f) / k) / l) / n) / p) / q)             1,449                 (7,018)               463             4,633                (69,179)               574
             75,739              (654,942)          (94,723)           61,093              (621,378)          (31,623)
Total            75,746              (942,821)        (111,119)           61,093              (906,323)          (36,393)

 

b)Management compensation

 

Consolidated key management compensation paid by the Company to its Board of Directors and Statutory Officers in the nine-month periods ended September 30, 2020 and 2019 totaled R$21,117 and R$18,909, respectively. Of this amount, R$13,034 (R$12,231 on September 30, 2019) corresponds to salaries, benefits and social charges and R$8,083 (R$6,678 on September 30, 2019) for variable compensation.

 

These amounts were recorded as personnel expenses in General and administrative expenses (Note 24).

 

In the nine-month periods ended September 30, 2020 and 2019, Directors and Officers did not receive any pension, retirement or similar benefits.

 

28)SHARE-BASED PAYMENT PLANS

 

Telefónica as the Company´s parent has different share-based payment plans which are also offered to management and employees of its subsidiaries, including the Company and its subsidiaries.

 

The fair value of the shares is estimated at the date at which they are granted, using the binomial valuation model, that considers the terms and conditions of the instruments' concession. This fair value is charged to the statement of income over the period up to the acquisition.

 

The Company and its subsidiaries reimburse Telefónica for the fair value of the benefit delivered on the grant date to the officers and employees.

 

The details of these plans are the same as in Note 29) Share-Based Payment Plans, to the December 31, 2019 financial statements.

Page 57 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

 

The principal plans in effect on September 30, 2020 are detailed below:

·        Talent for the Future Share Plan (“TFSP”), for its Senior Managers, Managers and Experts at a global level

The 2018-2020 cycle (January 1, 2018 to December 31, 2020): includes 126 active executives with potential rights to receive 104,000 shares of Telefónica.

 

The 2019-2021 cycle (January 1, 2019 to December 31, 2021): includes 157 active executives with potential rights to receive 128,750 shares of Telefónica.

 

The 2020-2022 cycle (January 1, 2020 to December 31, 2022): includes 172 active executives with potential rights to receive 138,000 shares of Telefónica.

·Perform Share Plan (“PSP”), for its Vice-Presidents and Directors at the global level

The 2018-2020 cycle (January 1, 2018 to December 31, 2020): includes 95 active executives (including 2 executives appointed under the Company's by-laws), with the potential right to receive 738,662 shares of Telefónica.

 

The 2019-2021 cycle (January 1, 2019 to December 31, 2021): includes 95 active executives (including 3 executives appointed under the Company's by-laws), with the potential right to receive 999,283 shares of Telefónica.

 

The 2020-2022 cycle (January 1, 2020 to December 31, 2022): includes 107 active executives (including 3 executives appointed under the Company's by-laws), with the potential right to receive 600,744 shares of Telefónica.

·Global Employee Share Plan (“GESP”)

The plan cycle is effective from July 1, 2019 to June 31, 2021.

 

The granting of shares is conditional upon: (i) maintenance of an active employment relationship within the Telefónica Group on the cycle consolidation date; and (ii) achievement of results representing fulfillment of the objectives established for the plan.

 

The expenses of the Company and its subsidiaries with the share-based compensation plans described above, where applicable, are recorded as personnel expenses, divided into the groups Cost of Services, Selling expenses and General and Administrative Expenses (Note 24), to R$13,575 and R$14,805 for the nine-month periods ended September 30, 2020 and 2019.

 

On September 30, 2020, the consolidated liability balance was R$76,185 (R$40,523 as of December 31, 2019), including taxes.

 

29)PENSION PLANS AND OTHER POST-EMPLOYMENT BENEFITS

 

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

 

Plan Type Entity Sponsor
PBS-A Defined benefit (DB) Sistel Telefônica Brasil, jointly with other telecoms resulting from privatization of the Sistema Telebrás
PAMA / PCE Defined benefit (DB) Sistel Telefônica Brasil, jointly with other telecoms resulting from privatization of the Sistema Telebrás
Healthcare - Law No. 9656/98 Defined benefit (DB) Telefônica Brasil Telefônica Brasil, Terra Networks, TGLog and TIS 
CTB Defined benefit (DB) Telefônica Brasil Telefônica Brasil
Telefônica BD Defined benefit (DB) VisãoPrev Telefônica Brasil
VISÃO  Defined contribution (DC) / Hybrid VisãoPrev Telefônica Brasil, Terra Networks, TGLog and TIS 

 

Page 58 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

The details of these plans are the same as in Note 30) Pension Plans and Other Post-Employment Benefits, to the December 31, 2019 financial statements.

 

The changes in consolidated balances of the surplus and deficit plans were as follows:

Consolidated
 Plans with surplus Plans with deficit Total
Balances at 12.31.18               10,997             (679,478)             (668,481)
   Current service cost                (2,053)               (12,416)               (14,469)
   Net interest on net defined benefit liabilities/assets                    803               (47,553)               (46,750)
   Contributions and benefits paid by the employers                 1,336                15,102                16,438
   Business combinations (Note 1.c)                        -                 (1,994)                 (1,994)
Balances at 09.30.19               11,083             (726,339)             (715,256)
   Current service cost                   (685)                 (4,294)                 (4,979)
   Net interest on net defined benefit liabilities/assets                    268               (15,843)               (15,575)
   Contributions and benefits paid by the employers                    (22)                  9,345                  9,323
   Amounts recognized in OCI             216,276             (417,936)             (201,660)
   Distribution of reserves                (5,981)                         -                 (5,981)
Balances at 12.31.19             220,939           (1,155,067)             (934,128)
   Current service cost                (2,165)               (20,044)               (22,209)
   Net interest on net defined benefit liabilities/assets               17,612               (65,723)               (48,111)
   Contributions and benefits paid by the employers                 1,270                19,575                20,845
   Distribution of reserves              (56,500)                         -               (56,500)
Balances at 09.30.20             181,156           (1,221,259)           (1,040,103)
      
Balances at 12.31.19     
   Current assets               71,776                         -                71,776
   Non-current assets             149,163                         -              149,163
   Current liabilities                        -               (25,557)               (25,557)
   Non-current liabilities                        -           (1,129,510)           (1,129,510)
      
Balances at 09.30.20     
   Current assets               78,384                         -                78,384
   Non-current assets             102,772                         -              102,772
   Current liabilities                        -               (25,557)               (25,557)
   Non-current liabilities                        -           (1,195,702)           (1,195,702)

 

 

30)FINANCIAL INSTRUMENTS AND RISK AND CAPITAL MANAGEMENT

 

a) Derivative transactions

The derivative financial instruments contracted by the Company are mainly used for hedging against foreign exchange risk from assets and liabilities in foreign currency and the effects of inflation on leases indexed to the IPCA. There are no derivative financial instruments held for speculative purposes; possible currency risks are hedged.

 

Page 59 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

 

Management believes that the Company's internal controls over its derivatives are sufficient to control risks associated with each strategy for the market. Gains/losses obtained or sustained by the Company in relation to its derivatives reflect this risk management.

 

When derivative contracts qualify for hedge accounting, the hedged item is adjusted to fair value, offsetting the result of the derivatives, pursuant to the rules of hedge accounting. Hedge accounting applies both to financial liabilities and probable cash flows in foreign currency.

 

The derivative financial instrument contracts have specific penalty clauses for breach of contract. A breach of contract as per the agreements with financial institutions is specified by breach of contractual clauses, resulting in the early settlement of the contract.

 

On September 30, 2020 and December 31, 2019, the Company held no embedded derivatives contracts.

 

a.1) Fair value of derivative financial instruments

 

The valuation method used to calculate the fair value of financial liabilities (if applicable) and derivative financial instruments was the discounted cash flow method, based on expected settlements or realization of liabilities and assets at market rates prevailing at the balance sheet date.

 

The fair values of positions in Reais are calculated by projecting future inflows from transactions using B3 yield curves and discounting these flows to present value using market DI rates for swaps announced by B3.

 

The market values of foreign exchange derivatives were obtained using the market exchange rates in effect at the balance sheet date and projected market rates obtained from currency coupon-rate yield curves. The linear convention of 360 calendar days was used to determine coupon rates of positions indexed in foreign currencies, while the exponential convention of 252 business days was used to determine coupon rates for positions indexed to CDI rates.

 

Consolidated derivatives financial instruments shown below are registered with B3 and classified as swaps, usually, that do not require margin deposits.

 

Page 60 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

Company / Consolidated
      Accumulated effects from fair value
  Notional Value Amount receivable (payable)
Description 09.30.20 12.31.19 09.30.20 12.31.19
Long position              206,706              515,261                41,680                72,163
         
Foreign Currency              143,512                72,790                  5,276                         -
US$  (1)                96,664                72,790                  3,584                         -
EUR  (1)                46,848                         -                  1,692                         -
         
Floating rate                  3,374              369,491                         -                  1,818
CDI (1)                  3,374              369,491                         -                  1,818
         
Inflation rates                59,820                72,980                36,404                70,345
IPCA (2)                59,820                72,980                36,404                70,345
         
Short position             (206,706)             (515,261)               (59,850)               (56,133)
Floating rate             (203,332)             (145,770)               (59,677)               (56,133)
CDI (1) (2)             (203,332)             (145,770)               (59,677)               (56,133)
         
Foreign Currency                 (3,374)             (369,491)                    (173)                         -
US$  (1)                 (3,374)             (365,161)                    (173)                         -
EUR  (1)                         -                 (4,330)                         -                         -
         
    Long position                   41,680                72,163
       Current                     7,081                19,282
       Non-current                   34,599                52,881
         
    Short position                  (59,850)               (56,133)
       Current                       (173)                 (1,921)
       Non-current                  (59,677)               (54,212)
    Amounts receivable  (payable), net                (18,170)                16,030

 

(1)

Foreign currency swaps (Euro and CDI x Euro) (R$48,685) and (US$ and CDI x US$) (R$96,925) - maturing through November 20, 2020 to hedge currency risk affecting net amounts payable (carrying amount R$48,728 in Euros and LIBOR) and receivables (carrying amount R$96,925 in US$).

 

(2)IPCA x CDI swaps (R$219,625) - maturing in 2033 to hedge risk of change pegged to IPCA (carrying amount R$248,096).

 

The table below shows the breakdown of swaps maturing after September 30, 2020:

 

Company / Consolidated
  Maturing in  
Swap contract 1 to 12 months 13 to 24 months 25 to 36 months 37 to 48 months 49 to 60 months From 61 months Amount receivable (payable) on 09.30.20
Foreign currency x CDI                5,276                       -                       -                       -                       -                       -                5,276
CDI x Foreign Currency                  (173)                       -                       -                       -                       -                       -                  (173)
IPCA x CDI                1,805                3,818                3,619                3,336                2,900             (38,751)             (23,273)
Total                6,908                3,818                3,619                3,336                2,900             (38,751)             (18,170)

 

For the purposes of preparing its financial statements, the Company adopted the fair value hedge accounting methodology for its foreign currency swaps x CDI and IPCA x CDI for hedging or financial debt. Under this arrangement, both derivatives and hedged risk are recognized at fair value.

 

Page 61 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

In the nine-month periods ended September 30, 2020 and 2019, the transactions with derivatives generated a negative consolidated net result of R$18,959 and positive result of R$32,095, respectively (Note 26).

 

a.2) Sensitivity analysis to the Company’s risk variables

CVM Resolution 475/08 requires listed companies to disclose sensitivity analyses for each type of market risk that management believes to be significant when originated by financial instruments to which the entity is exposed at the end of each period, including all derivative financial instrument transactions.

 

In making the above analysis, each of the transactions with derivative financial instruments was assessed and assumptions included a probable scenario and two others that could adversely impact the Company.

 

In the probable scenario assumption used, on the maturity dates of each of the transactions, were the market rates for the B3 yield curves (currencies and interest rates), and data from the IBGE, Central Bank, FGV, among others. In the probable (base) scenario, there is no impact on the fair value of the above-mentioned derivatives. However, for Scenarios II and III, as per CVM ruling, risk variables were stressed by 25% and 50% respectively.

 

Since the Company only holds derivatives to hedge its foreign currency assets and liabilities, changing scenarios are tracked by the corresponding hedged items the effects are almost non-existent. For these transactions, the Company reported the consolidated net exposure in each of the above-mentioned three scenarios on September 30, 2020.

 

Company / Consolidated
Transaction Risk Probable 25% depreciation 50% depreciation
Hedge (long position)Derivatives (depreciation risk EUR)                48,685                60,857                73,028
Payables in EURDebt (appreciation risk EUR)               (72,568)               (90,711)             (108,853)
Receivables in EURDebt (depreciation risk EUR)                23,840                29,800                35,761
 Net Exposure                     (43)                     (54)                     (64)
        
Hedge (long position)Derivatives (depreciation risk US$)                96,925              121,156              145,387
Payables in US$Debt (appreciation risk US$)             (351,907)             (439,884)             (527,861)
Receivables in US$Debt (depreciation risk US$)              254,982              318,728              382,474
 Net Exposure    ��                    -                         -                         -
        
Hedge (long position)Derivatives (risk of decrease in IPCA)              219,625              202,847              188,146
Debt in IPCADebt (risk of increase in IPCA)             (248,095)             (231,317)             (216,616)
 Net Exposure               (28,470)               (28,470)               (28,470)
        
Hedge (long position)Derivatives (depreciation risk US$)                96,788              120,985              145,182
OpEX in US$OpEX (risk of increase in US$)               (97,768)             (122,210)             (146,652)
 Net Exposure                    (980)                 (1,225)                 (1,470)
        
Hedge (CDI position)       
   Hedge US$ and EUR (short position)Derivatives (risk of decrease in CDI)              140,184              140,168              140,152
   Hedge IPCA (short position)Derivatives (risk of increase in CDI)             (219,625)             (202,847)             (188,146)
 Net Exposure               (79,441)               (62,679)               (47,994)
        
Total net exposure in each scenario              (108,934)               (92,428)               (77,998)
        
Net effect on changes in current fair value                          -                16,506                30,936

 

The assumptions used by the Company for the sensitivity analysis on September 30, 2020 were as follows:

Page 62 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

 

Risk Variable Probable 25% depreciation 50% depreciation
US$ 5.6407 7.0509 8.4611
EUR 6.6041 8.2551 9.9062
IPCA 2.44% 3.05% 3.66%
IGPM 17.94% 22.43% 26.91%
CDI 1.90% 2.38% 2.85%

 

For calculation of the net exposure for the sensitivity analysis, all derivatives were considered at market value and hedged items designated for hedges for accounting purposes were also considered at fair value.

 

The fair values shown in the table above are based on the portfolio position on September 30, 2020, but do not reflect an estimate for realization due to the dynamism of the market, which is constantly monitored by the Company. The use of different assumptions could significantly affect the estimates.

 

b) Fair value

 

The Company and its subsidiaries assessed their financial assets and liabilities in relation to market values using available information and appropriate valuation methodologies. However, both the interpretation of market data and the selection of valuation methods require considerable judgment and reasonable estimates to produce the most adequate realization value. As a result, the estimates shown do not necessarily indicate amounts that could be realized in the current market. The use of different assumptions for the market and/or methodologies may have a material effect on estimated realization values.

 

The fair values of all assets and liabilities are classified within the fair value hierarchy described below, based on the lowest level of information that is significant to the fair value measurement as a whole:

 

Level 1: quoted market prices (unadjusted) in active markets for identical assets or liabilities;

 

Level 2: valuation techniques for which there is a significantly lower level of information to measure the fair value directly or indirectly observable; and


Level 3: valuation techniques for which the lowest and significant level of information to measure the fair value is not available.

 

During the periods shown in the tables below, there were no transfers of fair value assessments between the levels mentioned above.

 

The tables below present the composition and classification of financial assets and liabilities on September 30, 2020 and December 31, 2019.

 

Page 63 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

 

Company
    Fair value hierarchy Book value Fair value
  Classification by category  09.30.20 12.31.19 09.30.20 12.31.19
Financial Assets              
Current             
Cash and cash equivalents  (Note 3)   Amortized cost         7,829,915     3,106,269     7,829,915     3,106,269
Trade accounts receivable (Note 4)   Amortized cost         8,360,145     8,675,720     8,360,145     8,675,720
Derivative transactions (Note 30)   Measured at fair value through OCI    Level 2             7,081         19,282           7,081         19,282
             
Non-current             
Investments pledged as collateral   Amortized cost             65,686         63,558         65,686         63,558
Trade accounts receivable (Note 4)   Amortized cost           387,666       440,453       387,666       440,453
Derivative transactions (Note 30)   Measured at fair value through OCI    Level 2           34,599         52,881         34,599         52,881
Total financial assets       16,685,092   12,358,163   16,685,092   12,358,163
             
Financial Liabilities               
Current             
Trade accounts payable, net (Note 15)   Amortized cost         6,920,573     6,917,252     6,920,573     6,917,252
Loans, financing and leases (Note 19)   Amortized cost           430,196     1,019,497       431,407     1,021,245
Loans, financing and leases (Note 19)   Measured at fair value through profit or loss      Level 2       2,327,725     2,029,246     2,327,725     2,029,246
Debentures (Note 19)   Amortized cost         2,041,697     1,077,183     2,038,712     1,104,539
Derivative transactions (Note 30)   Measured at fair value through profit or loss      Level 2                173           1,921              173           1,921
Derivative transactions (Note 30)   Measured at fair value through OCI    Level 2                    -                  -                  -                  -
             
Non-current             
Loans, financing and leases (Note 19)   Amortized cost             26,855         24,951         26,569         23,966
Loans, financing and leases (Note 19)   Measured at fair value through profit or loss      Level 2       6,805,030     7,161,875     6,805,030     7,161,875
Contingent consideration (Note 19)   Measured at fair value through profit or loss      Level 2                    -       484,048                  -       484,048
Debentures (Note 19)   Amortized cost           999,631     2,027,167       977,033     1,948,705
Debentures (Note 19)   Measured at fair value through profit or loss      Level 2                    -                  -                  -                  -
Derivative transactions (Note 30)   Measured at fair value through OCI    Level 2           59,677         54,212         59,677         54,212
Total financial liabilities       19,611,557   20,797,352   19,586,899   20,747,009

 

Consolidated
    Fair value hierarchy Book value Fair value
  Classification by category  09.30.20 12.31.19 09.30.20 12.31.19
Financial Assets              
Current             
Cash and cash equivalents  (Note 3)   Amortized cost         8,356,255     3,393,377     8,356,255     3,393,377
Trade accounts receivable (Note 4)   Amortized cost     Level 2       8,369,728     8,719,497     8,369,728     8,719,497
Derivative transactions (Note 30)   Measured at fair value through OCI    Level 2             7,081         19,282           7,081         19,282
             
Non-current             
Investments pledged as collateral   Amortized cost             65,914         63,766         65,914         63,766
Trade accounts receivable (Note 4)   Amortized cost           387,666       440,453       387,666       440,453
Derivative transactions (Note 30)   Measured at fair value through OCI    Level 2           34,599         52,881         34,599         52,881
Total financial assets       17,221,243   12,689,256   17,221,243   12,689,256
             
         
Financial Liabilities           
Current             
Trade accounts payable, net (Note 15)   Amortized cost         6,869,828     6,871,799     6,869,828     6,871,799
Loans, financing and leases (Note 19)   Amortized cost           431,059     1,020,061       432,269     1,021,810
Loans, financing and leases (Note 19)   Measured at fair value through profit or loss      Level 2       2,327,725     2,029,246     2,327,725     2,029,246
Debentures (Note 19)   Amortized cost         2,041,697     1,077,183     2,038,712     1,104,539
Derivative transactions (Note 30)   Measured at fair value through profit or loss      Level 2                173           1,921              173           1,921
             
Non-current             
Loans, financing and leases (Note 19)   Amortized cost             27,866         25,093         27,579         24,106
Loans, financing and leases (Note 19)   Measured at fair value through profit or loss      Level 2       6,805,030     7,161,875     6,805,030     7,161,875
Contingent consideration (Note 19)   Measured at fair value through profit or loss      Level 2                    -       484,048                  -       484,048
Debentures (Note 19)   Amortized cost           999,631     2,027,167       977,033     1,948,705
Derivative transactions (Note 30)   Measured at fair value through OCI    Level 2           59,677         54,212         59,677         54,212
Total financial liabilities       19,562,686   20,752,605   19,538,026   20,702,261

 

Page 64 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

c) Capital management

 

The purpose of the Company's capital management is to ensure maintenance of a high credit rating and an optimal capital ratio to support the Company's business and maximize shareholder value.

 

The Company manages its capital structure by making adjustments and adapting to current economic conditions. For this purpose, the Company may pay dividends, obtain new loans, issue debentures and contract derivatives. In the nine-month period ended September 30, 2020, there were no changes in capital structure objectives, policies or processes.

 

The Company’s debt structure includes loans, financing, debentures, leases, contingent consideration and transactions with derivatives, less cash and cash equivalents and short-term investments to secure BNB financing.

 

d) Risk management policy

 

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

 

d.1) Currency Risk

 

Risk arising from foreign exchange rate volatility, affecting loans denominated in foreign currencies.

 

There is also foreign exchange risk for financial assets and liabilities denominated in foreign currencies, which may generate a smaller amount receivable or larger amount payable depending on the exchange rate in the period.

 

Hedging transactions were executed to minimize the risks associated with exchange rate on financial assets and liabilities in foreign currencies. This balance is subject to daily changes due to the dynamics of the business. However, the Company intends to cover the net balance of these assets and obligations (US$17,183 thousand, €7,305 thousand and £66 thousand paid by September 30, 2020 and US$72,530 thousand receivable, €974 thousand and £110 thousand paid by December 31, 2019) to mitigate its foreign exchange risks.

 

d.2) Interest and Inflation Risk

 

This risk may arise from an unfavorable change in the domestic interest rate, which may adversely affect financial expenses from the portion of debentures referenced to the CDI and liability positions in derivatives (currency hedge and IPCA) pegged to floating interest rates (CDI).

To reduce exposure to the floating interest rate (CDI), the Company and its subsidiaries invested cash equivalents of R$8,231,742 and R$3,143,209 on September 30, 2020 and December 31, 2019, respectively, mostly in short-term CDI-based financial investments (CDBs). The carrying amounts of these instruments approximate their fair values, as they may be redeemed in the short term.

d.3) Liquidity Risk

 

Liquidity risk may arise from having insufficient funds to meet commitments in different currencies and dates of realization of rights and settlement of obligations.

 

Page 65 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

The Company structures the maturity dates of non-derivative financial contracts (Note 19), and their respective derivatives, as shown in the schedule of payments disclosed in this note, to avoid affecting their liquidity.

 

The Company’s cash flow and liquidity are managed on a daily basis by the operating departments to ensure that cash flows and contracted funding, when necessary, it is sufficient to meet scheduled commitments in to avoid liquidity risk.

 

The maturity profile of consolidated financial liabilities includes the amounts of principal and future interest up to the maturity date. For fixed-rate liabilities, interest was calculated based on the indices established in each contract. For variable rate liabilities, interest was calculated based on the market forecast for each period.

 

d.4) Credit Risk

 

The risk arises from the possibility of the Company and its subsidiaries incurring losses due to difficulty in receiving amounts billed to their customers and sales of prepaid handsets and cards that have been pre-activated for the distribution network.

 

The credit risk on accounts receivable is diversified and mitigated by strict control of the customer base. The Company constantly monitors the level of accounts receivable from postpaid services and limits bad credit risk by cutting off access to telephone lines if bills are past due. The mobile customer base predominantly uses the prepaid system, which requires purchase of credits beforehand and therefore does not pose credit risk. Exceptions are made for emergency services that must be maintained for security or national defense reasons.

 

Credit risk on sales of pre-activated prepaid handsets and cards is managed by a conservative policy for granting credit, using modern credit scoring methods, analyzing financial statements and consultations to commercial databases, in addition to requesting guarantees.

 

The Company and its subsidiaries are also subject to credit risk arising from their investments, letters of guarantee received as collateral for certain transactions and receivables from derivative transactions. The Company and its subsidiaries control the credit limits granted to each counterpart and diversify this exposure across first-tier financial institutions as per current credit policies of financial counterparts.

 

d.5) Social and Environmental Risks

 

The Company's operations and properties are subject to various environmental laws and regulations that, among others, govern environmental licenses and records, protection of fauna and flora, air emissions, waste management and remediation of contaminated sites. If the Company fails to meet present and future requirements, or to identify and manage new or existing contamination, it will incur significant costs, which include cleaning costs, damages, compensation, fines, activities suspension and other penalties, investments to improve its facilities or change its processes, or interruption of operations. The identification of environmental conditions not currently identified, more stringent inspections by regulatory agencies, the entry into force of more stringent laws and regulations or other unanticipated events may occur and, ultimately, result in significant environmental liabilities and their costs. The occurrence of any of the above factors could have a material adverse effect on the Company's business, results of operations and financial position. According to Article 75 of Law No. 9605 of 1998, the maximum fine per breach of environmental law is R$50,000 (fifty million Reais).

 

From a social point of view, the Company is exposed to contingencies from outsourced service providers. These potential liabilities may involve labor claims by employees of the service providers filing claims against the service provider and Company, requesting inclusion the Company as an assessor, that is, the Company may be compelled to pay in the case the provider does not settle these obligations. There is also a more remote possibility that these employees will be treated as direct employees by the Company, which would generate the risk of joint and several convictions. The demands that are known to Telefónica are already provided.

 

Page 66 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

d.6) Insurance Coverage

 

The policy of the Company and its subsidiaries, as well as the Telefónica Group, includes contracting insurance coverage for all assets and liabilities involving significant and high-risk amounts, based on management's judgment and following Telefónica corporate program guidelines.

 

 

On September 30, 2020, maximum limits of claims (established pursuant to the agreements of each entity consolidated by the Company) for significant assets, liabilities or interests covered by insurance and their respective amounts were R$900,000 for operational risks (including business interruption) and R$75,000 for general civil liability.

 

d.7) Compliance

The Company complies with Brazilian anti-corruption laws and regulations where it has its securities traded. In particular, the Company is subject, in Brazil, to the Law n 12.846/2013 and, in the United States, to the U.S. Foreign Corrupt Practices Act of 1977.

Although the Company has internal policies and procedures designed to ensure compliance with the these anti-corruption laws and regulations, there can be no assurance that such policies and procedures will be sufficient or that the Company’s employees, directors, officers, partners, agents and service providers will not take actions in violation of the Company’s policies and procedures (or otherwise in violation of the relevant anti-corruption laws and regulations) for which the Company or they may be ultimately held responsible. Violations of anti-corruption laws and regulations could lead to financial penalties, damage to the Company’s reputation or other legal consequences that could have a material adverse effect on the Company’s business, results of operations and financial condition. 

The Company was administratively sanctioned by the General Comptroller's Office (“CGU”), for the delivery of tickets for the games of the 2014 Men's Soccer World Cup to public agents, one of which took place in the context of marketing actions and institutional promotion of the Company held in 2014, but considered by CGU as incompatible with the terms of article 5, item I, of Law 12.846/2013, due to objective legal responsibility.

Considering the elements analyzed by CGU in the administrative process, including, among others, the absence of damage to the public administration, the non-identification of advantages obtained or intended by the Company due to the tickets offered, its degree of cooperation and high degree of maturity of its compliance program, the sanction stablished by CGU stood at the minimum legal level provided for in article 6, item I, of Law 12.846/2013, that is, in an amount equivalent to 0.1% (one tenth percent) of the Company's gross revenue in the year prior to the initiation of the administrative proceeding, which totals R$45,747.

The Company develops and implements initiatives to ensure the continuous improvement of its compliance program, through an organizational and governance structure that guarantees a performance based on ethics, transparency and respect for applicable laws and standards.

d.8) Impacts of the Coronavirus pandemic (COVID-19)

In March 2020, the World Health Organization (“WHO”) declared that the outbreak of Coronavirus (COVID-19) was a pandemic. COVID-19 has negatively impacted the global economy, disrupted supply chains, created significant volatility and impacted financial markets resulting in an economic slowdown. The outbreak and rapid spread of COVID-19 has resulted in a substantial reduction in commercial activities worldwide and is causing the weakening of economic conditions, both in Brazil and abroad.

 

As part of efforts to curb the spread of COVID-19, federal, state and municipal governments at times imposed various restrictions on the conduct of business and travel. Government restrictions, such as requests to stay at home, quarantine and worker absenteeism, have led to a significant number of businesses closings slowdowns. Such restrictions had an adverse impact on the Company and some of its customers and suppliers, had operated during a period with a fraction of their capacities or completely paralyzed their operations, which adversely affected the Company's sales.

Page 67 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

 

 

 

As the events surrounding the COVID-19 pandemic continued to occur during the second and third quarters of 2020, the Company's main focus was and will continue to be the health, safety and well-being of its employees, customers and suppliers. To continue its operations, as permitted by the respective federal, state and municipal governments, the Company has adopted numerous security measures in order to protect its employees, customers and suppliers. These measures include, among others, adhering to social distance protocols, allowing the majority of its employees to work from home, suspending non-essential travel, disinfecting facilities and work spaces extensively and frequently, suspending non-essential visitors and requiring the use of facial masks for employees who need to be present at the Company's facilities. The Company expects to continue with these security measures and will be able to take other actions or adapt its policies, according to the requirements and guidelines of government authorities or according to the best interest of its employees, customers and suppliers.

 

The measures imposed by federal, state and municipal governments, resulting in a substantial reduction in commercial activities, except for essential companies and services, such as telecommunications services. This allowed the Company to continue providing its main services on an uninterrupted basis. Although government measures have been modified, the Company expects its facilities to continue operating, even with reduced capacity, for the remainder of 2020. However, this expectation depends on future government actions and demand for the Company's products and services, stability of its supply chain and the ability of carriers to deliver supplies to their facilities and products for their customers.

 

As a result of the global economic slowdown caused by the COVID-19 pandemic, the Company began to experience reduced demand and, consequently, has experienced some impacts on business and results. The prolongation of this situation may have a significant adverse effect on the economies and global financial markets, as well as on the Company's business, results of operations and financial situation.

 

The possible effects on the Company's business will depend on the extent of the COVID-19 pandemic. Thus, the Company may not be able to accurately predict the impacts on the business, as it will depend on the evolution of the following factors:

 

• The duration and scope of the pandemic;

 

• Government, business and individual actions that were and continue to be taken in response to the pandemic;

 

• The impact of the pandemic on economic activity and actions taken in response;

 

• The time it will take for economic activity to return to previous levels;

 

• The effect on the Company's customers and the demand for its products and services;

 

• The Company's ability to continue selling its products and services, including to those working from home;

 

• Ability of the Company's customers to pay for its products and services; and

 

• Any closings of the Company's facilities and those of its customers and suppliers.

 

Among the main impacts resulting from COVID-19, of note, are:

 

• Total closure of retail stores at the end of March 2020, with a gradual reopening. Currently, all stores have returned to activities;

 

Page 68 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

• The Company offered its customers the possibility of making installments with payments in up to 10 installments, free of fines and interest;

 

• The Company prepaid receivables from suppliers in the second and third quarters of 2020, of approximately R$2 billion, as a way of supporting the cash flow of these companies to maintain their productive activities;

• Provisional Measure 927/2020 (MP nº 927) and to Ordinances nº 139/2020 and nº 245/2020 (issued by the Ministry of Economy), in the second quarter, established extended deadlines for the payment of the Guarantee Fund for Time of Work Service (“FGTS”) and Employer's Social Security Contributions, respectively, which can be paid, without incurring penalties (indexation, fine and interest), in the amount of R$143.5 million. On September 30, 2020, R$47.0 million is still payable;

 

• Under Provisional Measure 936/2020 (MP No. 936), during the months of May to September 2020, the Company's employees received, directly from the Federal Government, an emergency benefit payment estimated at R$24.8 million;

 

• Evaluation of the matrix of provisions for estimated losses to reduce the recoverable value of accounts receivable and inventories;

 

• Under Provisional Measure 952/2020 (MP nº 952), the deadline for payment of the Fistel fee, which was due in March 2020. In August 2020, the Company paid R$416.5MM; and

 

• The Company updated its impairment tests of assets (IAS36 and IAS12) on the date of these quarterly financial statements.

 

31) ADDITIONAL INFORMATION ON CASH FLOWS

 

a)Reconciliation of cash flow financing activities

 

The following is a reconciliation of the consolidated cash flow financing activities in the nine-month periods ended September 30, 2020 and 2019.

 

Consolidated
    Cash flows from financing activities Cash flows from operating activities Financing activities not involving cash and cash equivalents  
  Balance on 12.31.19 Write-offs (payments) Write-offs (payments) Financial charges and foreign exchange variation Costs and expenses incurred Additions of leases and supplier financing Interim and unclaimed dividends and interest on equity  Balance on 09.30.20
Interim dividends and interest on equity           3,587,417 (3,120,150)                         -                         -                       -                       -          3,839,384          4,306,651
Loans and financing          1,045,124 (796,393) (40,374)                25,599                       -             224,976                       -             458,932
Leases          9,191,151 (1,465,120) (312,863)              240,212                       - 1,479,368                       -          9,132,748
Debentures           3,104,350 (25,583) (111,435)                73,996                       -                       -                       -          3,041,328
Derivative financial instruments (16,030)              13,699                         -                20,501                       -                       -                       - 18,170
Contingent Consideration             484,048 (344,217) (105,678)                  6,555 (40,708)                       -                       -                       -
Total        17,396,060 (5,737,764) (570,350) 366,863 (40,708) 1,704,344 3,839,384        16,957,829

 

Consolidated
    Cash flows from financing activities Cash flows from operating activities Financing activities not involving cash and cash equivalents  
  Balance on 12.31.18 Write-offs (payments) Write-offs (payments) Financial charges and foreign exchange variation Additions of leases and supplier financing Cancellation of lease contracts Initial adoption IFRS 16 in 01.01.19 Interim and unclaimed dividends and interest on equity  Balance on 09.30.19
Interim dividends and interest on equity           4,172,916 (2,653,518)                         -                         -                       -                       -                       - 4,345,406          5,864,804
Loans and financing          2,106,814 (1,904,404) (118,500)              155,612             563,052                       -                       -                       -             802,574
Leases             393,027 (1,164,609) (306,190)              342,068          1,421,057 (12,065)          8,618,072                       -          9,291,360
Debentures           3,173,910 (25,583) (168,953)              157,169                       -                       -                       -                       -          3,136,543
Derivative financial instruments (56,150) 71,217                26,268 (57,922)                       -                       -                       -                       - (16,587)
Contingent Consideration             465,686                       -                         -                14,261                       -                       -                       -                       -             479,947
Total        10,256,203 (5,676,897) (567,375) 611,188 1,984,109 (12,065) 8,618,072 4,345,406        19,558,641

 

Page 69 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

 

b)Financing transactions that do not involve cash

 

The main transactions that do not involve cash of the Company refer to the acquisition of assets through leases and income from financing with suppliers, as follows:

 

Consolidated
     09.30.20 09.30.19
Initial adoption IFRS 16 on 01.01.19    0 8,618,072
Financing transactions with suppliers    224,976 563,052
Acquisition of assets through leases    1,479,368 1,421,057
Total     1,704,344 10,602,181

 

32) CONTRACTUAL COMMITMENTS

 

The Company and its subsidiaries have unrecognized contractual commitments arising from the purchase of goods and services, which mature on several dates, with monthly payments.

 

On September 30, 2020, the total nominal values equivalent to the full contract period were:

 

Consolidated
1 to 12 months            1,384,278
13 to 24 months            1,226,194
25 to 36 months            1,009,107
37 to 48 months               512,059
49 to 60 months               230,642
From 61 months               624,668
Total            4,986,948

 

33) BINDING OFFER FOR THE ACQUISITION OF THE OI GROUP’S MOBILE BUSINESS

 

On September 7, 2020, the Company informed its shareholders and the market in general, pursuant to and for the purposes of CVM Instruction 358/2002 (“ICVM 358”), as amended, in continuity with the Material Facts disclosed on March 10, 2020, July 18, 2020, July 27, 2020 and August 7, 2020, the substitution of the revised binding offer submitted to Grupo Oi on July 27, 2020 (“Revised Offer”), together with TIM SA (“TIM”) and Claro SA (“Claro” and, jointly with the Company and TIM, the “Offerors”). Due to the new proposal submitted by the Offerors, on September 7, 2020, through which they ratified the amount of R$16.5 billion (of which R$756 million refer to transition services to be provided within up to 12 months by the Oi Group to the Offerors), plus a commitment to enter into long-term contracts term for the provision of transmission capacity services, and adjustments in certain terms of the Revised Offer, the Offering were qualified by the Oi Group to participate in the competitive process of disposal of UPI Ativos Móveis, as a “stalking horse”, which was reflected in the proposal to add to the Oi Group's Judicial Reorganization Plan, deliberated and approved at its General Meeting of Creditors held on September 8, 2020.

 

As a stalking horse, the Offerors will also have the right, at their sole discretion, to cover the highest value offer that may be presented in the said competitive process (“right to top”).

 

The Company reaffirms that the transaction, if completed, will benefit to its shareholders through the acceleration of growth and generation of efficiencies, its customers, through improvement in the experience of use and quality of the service provided, and to the sector, as a whole through reinforcement in investment capacity, technological innovation and competitiveness.

 

The Company will keep its shareholders and the general market duly informed of the progress of the competitive process for the sale of Oi Group's mobile assets, pursuant to ICVM 358 and applicable law.

 

Page 70 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

 

33) SUBSEQUENT EVENTS

 

a) Approval of the conversion of preferred shares to common shares of the Company

 

The Company communicated to its shareholders and the market in general, in compliance with the provisions of article 157, paragraph four, of Law No. 6,404, of December 15, 1976, as amended (“Lei das SA”) and CVM Instruction No. 358, of January 3 2002, as amended, in continuity with the information disclosed by means of the Material Facts dated March 9, 2020, August 13, 2020 and October 1, 2020, as well as the Notice to the Market released on August 6, 2020, that the EGM approved, on October 1, 2020: (i) the conversion of 1,119,340,706 preferred shares issued by the Company in common, registered, book-entry shares with no par value, in the proportion of one common share for each one preferred share converted, with extinction of the preferred shares ("Conversion"); (ii) the amendment and / or exclusion of article 4, caput and paragraphs, article 5, caput, article 7, caput and single paragraph, article 9, caput and single paragraph, article 10, caput and items (i), (ii ) and (iii) and article 14, caput, of the Company's Bylaws; and (iii) the consolidation of the Company's Bylaws.

 

Also, on October 1, 2020, AGESP ratified: (i) the Conversion; and (ii) the amendment to article 9, caput and sole paragraph, of the Company's Bylaws, pursuant to article 136, first paragraph, of Law 6,404/76.

 

Pursuant to articles 136, items II and 137, item I, of the Brazilian Corporation Law, in view of the ratification of the Conversion by AGESP, the shareholders holding preferred shares issued by the Company who: (i) dissented from the resolution taken at AGESP; (ii) abstained from voting on the resolution taken at AGESP; or (iii) did not attend AGESP, they will have the right to withdraw from the Company, through the reimbursement of the value, of all or of the portion of their shares, except for the provisions of article 137, third paragraph, of the Corporation Law. that the publication of the minutes took place on October 2, 2020, and that the next subsequent business day is October 5, 2020, the period of 30 (thirty) days for the exercise of the right to withdraw started on October 5, 2020 (inclusive) and will end on November 3, 2020 (inclusive).

 

Shareholders who have proven themselves to be holders of shares issued by the Company since March 9, 2020 (inclusive), the date of disclosure of the Material Fact that initially dealt with the Conversion, may exercise the right of withdrawal exercise of the effective right. Therefore, just for the sake of clarity, investors who have acquired preferred shares issued by the Company as of March 10, 2020 (inclusive) are not entitled to withdraw from the Conversion.

 

The reimbursement amount per preferred share to be paid due to the exercise of the right to withdraw, calculated based on (i) the Company's shareholders' equity contained in the financial statements for the fiscal year ended on December 31, 2019, duly approved by the Meeting Annual General Meeting of the Company held on May 28, 2020 (“AGM”); and (ii) the number of common and preferred shares, excluding treasury shares, corresponds to R$41.72 (forty-one Reais and seventy-two cents) per share. The amount equivalent to the amount of complementary dividends declared by the Company at the AGM will be deducted from the reimbursement amount per share, since the amount of declared dividends comprised the profit account and, therefore, the book value per share on December 31, 2019 Considering that the Company's share capital was divided into 1,688,693,776 shares (including common and preferred shares and excluding treasury shares), the reimbursement amount to be paid to dissenting shareholders, corresponding to the adjusted equity value, is R$40.38 (forty Reais and thirty-eight cents) per preferred share. Regarding the reimbursement amount, any type of indexation or adjustment on this amount will not be applicable, as well as any fractions of cents will be disregarded.

 

Once the term for exercising the withdrawal right has ended, the Company will issue a Notice to Shareholders informing the date of payment of the reimbursement amount and the date of implementation of the conversion of preferred shares into common shares, with the consequent discontinuity of trading of preferred shares of issued by the Company.

 

Page 71 

(A free translation of the original in Portuguese)

 

Telefônica Brasil S. A.

NOTES TO THE QUARTERLY FINANCIAL STATEMENTS

Three and nine-month periods ended September 30, 2020

(In thousands of Reais, unless otherwise stated)

 

 

The Company also informed that, for the effective implementation of the Conversion, a voting agreement was signed between the shareholders Telefónica S.A., Telefónica Latinoamérica Holding, S.L., SP Telecomunicações Participações Ltda. and, as intervening party, Telefônica Brasil, in order to comply with the provisions of items a.1 and a.2 of ANATEL Judgment No. 430, of August 11, 2020. 

The Company also informed that the Conversion approved on October 1, 2020 has immediate effects and, for this reason, all shares issued by it started, from that date, to have the same treatment, regardless of the ticker symbol under the which will be traded until the Conversion is formalized.

 

b) Share Repurchase Program

 

In continuity with the Company's Own Share Repurchase Program, approved on July 28, 2020 by the Company's Board of Directors (Note 22), 232,000 preferred shares (“VIVT4”) issued by the Company were acquired, for the amount of R$10,119.

 

 

Page 72 
 

SIGNATURE

 

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

 

 

 

TELEFÔNICA BRASIL S.A.

Date:

November 5, 2020

 

By:

/s/ Luis Carlos da Costa Plaster

 

 

 

 

Name:

Luis Carlos da Costa Plaster

 

 

 

 

Title:

Investor Relations Director