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Financial Statements of the Prudential Conglomerate and Independent Auditor’s Report

 

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Financial Statements of the Prudential Conglomerate and Independent Auditor’s Report

 

 

The accompanying Notes are an integral part of these Financial Statements.

 

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The accompanying Notes are an integral part of these Financial Statements.

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Financial Statements of the Prudential Conglomerate and Independent Auditor’s Report

 

 

 

The accompanying Notes are an integral part of these Financial Statements.

 

8      December 2015

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The accompanying Notes are an integral part of these  Financial Statements. 

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Financial Statements of the Prudential Conglomerate and Independent Auditor’s Report

 

Notes to Bradesco’s Financial Statements of the Prudential Conglomerate of Bradesco are as follows:

 

		Page
1)	OPERATIONS	11
2)	PRESENTATION OF THE FINANCIAL STATEMENTS	11
3)	SIGNIFICANT ACCOUNTING PRACTICES	13
4)	CASH AND CASH EQUIVALENTS	19
5)	INTERBANK INVESTMENTS	20
6)	SECURITIES AND DERIVATIVE FINANCIAL INSTRUMENTS	21
7)	INTERBANK ACCOUNTS – RESERVE REQUIREMENT	29
8)	LOANS	30
9)	OTHER RECEIVABLES	41
10)	OTHER ASSETS	43
11)	INVESTMENTS	44
12)	PREMISES AND EQUIPMENT AND LEASED ASSETS	45
13)	DEFERRED	45
14)	INTANGIBLE ASSETS	46
15)	DEPOSITS, SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND FUNDS FROM ISSUANCE OF SECURITIES	47
16)	BORROWING AND ON-LENDING	49
17)	PROVISIONS, CONTINGENT ASSETS AND LIABILITIES AND LEGAL LIABILITIES – TAX AND SOCIAL SECURITY	50
18)	SUBORDINATED DEBT	53
19)	OTHER LIABILITIES	54
20)	NON-CONTROLLING INTERESTS IN SUBSIDIARIES	54
21)	SHAREHOLDERS’ EQUITY (PARENT COMPANY)	54
22)	FEE AND COMMISSION INCOME	57
23)	PAYROLL AND RELATED BENEFITS	57
24)	OTHER ADMINISTRATIVE EXPENSES	57
25)	TAX EXPENSES	58
26)	OTHER OPERATING INCOME	58
27)	OTHER OPERATING EXPENSES	58
28)	NON-OPERATING INCOME (LOSS)	58
29)	RELATED-PARTY TRANSACTIONS (DIRECT AND INDIRECT)	59
30)	FINANCIAL INSTRUMENTS	61
31)	EMPLOYEE BENEFITS	63
32)	INCOME TAX AND SOCIAL CONTRIBUTION	65
33)	OTHER INFORMATION	67

 

 

10   December 2015

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1)      OPERATIONS

 

Banco Bradesco S.A. (Bradesco) is a private-sector, publicly traded company and universal bank that through its commercial, foreign exchange, consumer financing and housing loan portfolios carries out all types of banking activities which it is authorised to. The Bank is involved in a number of other activities, either directly or indirectly, through its subsidiaries, specifically leasing, investment banking, brokerage, consortium management, credit cards, real estate projects, insurance, pension plans and capitalization bonds. All these activities are undertaken by the various companies in the Organização Bradesco, working together in an integrated fashion in the market.

 

2)      PRESENTATION OF THE FINANCIAL STATEMENTS

 

The Financial Statements of the Prudential Conglomerate were prepared to comply with the requirements of Resolution No. 4,280/13, of the National Monetary Council (CMN) and additional rules of the Brazilian Central Bank (Bacen). Thus, specific requirements in the consolidation and/or combination of the entities listed in Resolution No. 4,280/13 determined by the CMN and Bacen were observed, which are not necessarily the same established by the corporate law and by the CMN or Bacen for other types of consolidation. In this sense, they cover the financial statements of Bradesco, and foreign branches, subsidiaries and investment funds, as requested in Resolution No. 4,280/13.

 

In the preparation of these Financial Statements of the Prudential Conglomerate intercompany transactions, including investments, assets and liabilities, revenue, expenses and unrealized profit were eliminated and net income and shareholders’ equity attributable to the non-controlling interests were accounted for in a separate line. For jointly controlled investments with other shareholders, assets, liabilities and income and loss were included in the consolidated financial statements of the Prudential Conglomerate according to the interest held in the shareholders’ equity of each investee. Goodwill on the acquisition of investments in subsidiary/associate companies or jointly controlled entities is presented in the investments and intangible assets lines (Note 14a).

 

The financial statements include estimates and assumptions, such as: the calculation of estimated loan losses; fair market value estimates of certain financial instruments; civil, tax and labor provisions; impairment losses of securities classified as available-for-sale and held-to-maturity securities and non-financial assets; and the determination of the useful life of specific assets. Actual results may differ from those based on estimates and assumptions.

 

Bradesco’s financial statements of the Prudential Conglomerate were approved by the Board of Executive Officers and by the Disclosure Committee on March 7, 2016.

 

We highlight the societies and the major investment funds, with direct and indirect participation, included in the financial statements of the Prudential Conglomerate:

 

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Financial Statements of the Prudential Conglomerate and Independent Auditor’s Report

 

 

(1)  The special purpose entity International Diversified Payment Rights Company is being consolidated. The company is part of a structure set up for the securitization of the future flow of payment orders received overseas;

(2)  Increase in equity interest through share acquisition in February and March 2015;

(3)  Company proportionally consolidated, pursuant to CMN Rule No. 4,280/13;

(4)  They have been part of the Prudential Conglomerate since January 2015; and

(5)  The investment funds in which Bradesco assumes or retains substantially the risks and benefits were consolidated.

 

 

12     December 2015

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3)   SIGNIFICANT ACCOUNTING PRACTICES

 

a)   Functional and presentation currencies

 

Financial statements of Prudential Conglomerate are presented in Brazilian reais, which is also Bradesco’s functional currency. Foreign branches and subsidiaries are mainly a continuation of activities in Brazil, and, therefore, assets, liabilities and profit or loss are converted into Brazilian reais using the appropriate currency exchange rate to comply with accounting practices adopted in Brazil. Foreign currency conversion gains and losses arising are recognized in the period’s income statement in the lines “Derivative Financial Instruments” and “Borrowing and On-lending”.

 

b)   Income and expense recognition

 

The result is calculated according to the regime of competence, which establishes that the revenues and expenses should be included in the calculation of the results for the periods in which they occur, always simultaneously to when they are correlated, regardless of being a receipt or payment.

 

Fixed rate contracts are recorded at their redemption value with the income or expense relating to future periods being recorded as a deduction from the corresponding asset or liability. Finance income and costs are recognized daily on a pro-rata basis and calculated using the compounding method, except when they relate to discounted notes or to foreign transactions, which are calculated using the straight-line method.

 

Floating rate and foreign-currency-indexed contracts are adjusted to the interest and foreign exchange rates applicable at the end of the reporting period.

 

c)   Cash and cash equivalents

 

Cash and cash equivalents include: funds available in currency, investments in gold, securities sold under agreements to repurchase and interest-earning deposits in other banks, maturing in 90 days or less, which are exposed to insignificant risk of change in fair market value. These funds are used by Bradesco to manage its short-term commitments.

 

Cash and cash equivalents detailed balances are presented in Note 4.

 

d)   Interbank investments

 

Unrestricted repurchase and reverse repurchase agreements are stated at their fair market value. All other interbank investments are stated at cost, plus income earned up to the end of the reporting period, net of any devaluation allowance, if applicable.

 

The breakdown, terms and proceeds relating to interbank investments are presented in Note 5.

 

e)   Securities – Classification

 

·       Trading securities – securities acquired for the purpose of being actively and frequently traded. They are recorded at cost, plus income earned and adjusted to fair market value with movements recognized in the Income Statement for the period;

 

·       Available-for-sale securities – securities that are not specifically intended for trading purposes or to be held to maturity. They are recorded at cost, plus income earned, which is recorded in profit or loss in the period and adjusted to fair market value with movements recognized in shareholders’ equity, net of tax, which will be transferred to the Income Statement only when effectively realized; and

 

·       Held-to-maturity securities – securities for which there is positive intent and financial capacity to hold to maturity. They are recorded at cost, plus income earned recognized in the Income Statement for the period.

 

Securities classified as trading and available-for-sale, as well as derivative financial instruments, are recognized in the consolidated statement of financial position at their fair market value. Fair market value is generally based on quoted market prices or quotations for assets or liabilities with similar characteristics. If market prices are not available, fair market values are based on traders’ quotations, pricing models, discounted cash flows or similar techniques to determine the fair market value and may require judgment or significant estimates by Management.

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Financial Statements of the Prudential Conglomerate and Independent Auditor’s Report

 

 

Classification, breakdown and segmentation of securities are presented in Note 6 (a to c).

 

f)    Derivative financial instruments (assets and liabilities)

 

Derivate instruments are classified based on the objective for which the underlying instrument was acquired at the date of purchase, taking into consideration its use for possible hedging purposes.

 

Operations involving derivative financial instruments are designed to meet the Bank’s own needs in order to manage overall exposure, as well as to meet customer requests to manage their positions. The gains or losses are recorded in profit-and-loss and shareholders’ equity accounts.

 

Derivative financial instruments used to mitigate risk deriving from exposure to variations in the fair market value of financial assets and liabilities are designated as hedges when they meet the criteria for hedge accounting and are classified according to their nature:

 

·       Market risk hedge: the gains and losses, realized or not, of the financial instruments classified in this category as well as the financial assets and liabilities, that are the object of the hedge, are recorded in the Income Statement; and

 

·       Cash flow hedge: the effective portion of valuation or devaluation of the financial instruments classified in this category is recorded, net of taxes, in a specific account in shareholders’ equity. The ineffective portion of the hedge is recognized directly in the Income Statement.

 

A breakdown of amounts included as derivative financial instruments, in the balance sheet and off-balance-sheet accounts, is disclosed in Note 6 (d to g).

 

g)   Loans and leasing, advances on foreign exchange contracts, other receivables with credit characteristics and allowance for loan losses

 

Loans and leasing, advances on foreign exchange contracts and other receivables with credit characteristics are classified by risk level, based on: (i) the parameters established by CMN Resolution No. 2,682/99, which requires risk ratings to have nine levels, from “AA” (minimum risk) to “H” (maximum risk); and (ii) Management’s assessment of the risk level. This assessment, which is carried out regularly, considers current economic conditions and past experience with loan losses, as well as specific and general risks relating to operations, debtors and guarantors. Moreover, the days past due are also considered in the rating of customer risk as per CMN Resolution No. 2,682/99, as follows:

 

 

(1)  For transactions with terms of more than 36 months, past-due periods are doubled, as permitted by CMN Resolution No. 2,682/99.

 

Interest and inflation adjustments on past due transactions are only recognized on the Income Statement up to 59 days past the due date. As from the 60^th day, they are recognized on off-balance sheet accounts and are only recognized when the Income Statement has been received.

 

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H-rated past due transactions remain at this level for six months, after which they are written-off against the existing allowance and controlled in off-balance-sheet accounts for at least five years.

 

Renegotiated transactions are held at the same rating as on the date of the renegotiation or classified in a higher risk rating. Renegotiations which have already been written-off against the allowance and that were recorded in off-balance-sheet accounts, are rated as level “H” and any possible gains derived from their renegotiation are recognized only when they are effectively received. When there is a significant repayment on the operation or when new material facts justify a change in the level of risk, the operation may be reclassified to a lower risk category.

 

The estimated allowance for loan losses is calculated to sufficiently cover probable losses, considering CMN and Bacen standards and instructions, together with the Management’s assessment of the credit risk.

 

Type, values, terms, levels of risk, concentration, economic sector of client’s activity, renegotiation and income from loans, as well as the breakdown of expenses and statement of financial position accounts for the allowance for loan losses are presented in Note 8.

 

Leasing

 

The portfolio of leasing operations consists of contracts firmed with the support of Decree No. 140/84, of the Ministry of Finance, which contains clauses of: (a) non-cancellation; (b) purchase option; and c) post-fixed or fixed restatement and are accounted for in accordance with the standards established by Bacen, as follows:

 

I-      Leases receivable

 

Reflect the balance of installments receivable, restated according to the indexes and criteria established by contractual agreement.

 

II-    Unearned income from leasing and Guaranteed Residual Value (GRV)

 

Recorded at the contractual amount, conversely to adjusted accounts of unearned revenues from leasing and Residual value to balance, both submitted through negotiated conditions. The GRV received in advance is recorded in Other Liabilities – Creditors by Anticipation of the Residual Value until the date of contractual termination. The adjustment at present value of the lease payments and the GRV receivable from the financial leasing operations is recognized as excessive/insufficient depreciation on leased assets, in order to reconcile the accounting practices. In operations whose delays are equal to or greater than 60 days, the appropriation to the result occurs upon receipt of contractual installments, in accordance with CMN Resolution No. 2,682/99.

 

III-  Leased fixed assets

 

It is recorded at acquisition cost, minus the accrued depreciations. The depreciation is calculated using the linear method, with the benefit of a 30% reduction in the normal life cycle of the asset, provisioned in the current legislation. The main annual rates of depreciation used, as base for this reduction, are the following: vehicles and the like, 20%; furniture and utensils, 10%; machinery and equipment, 10%; and other assets, 10% and 20%.

 

IV-  Losses on leases

 

The losses recorded in the sale of leased assets are deferred and amortized over the remaining normal life cycle of assets, and are shown along with the Leased Fixed Assets (Note 8k).

 

V-    Excessive (insufficient) depreciation

 

The accounting records of leasing operations are maintained as legal requirements, specific for this type of operation. The procedures adopted and summarized in items "II" to "IV" above differ from the accounting practices provisioned in Brazilian corporate law, especially concerning the regime of competence in the record of revenues and expenses related to lease contracts. As a result, in accordance with Bacen Circular No. 1,429/89, the present value of outstanding leasing installments was calculated, using the internal rate of return of each contract, recording a leasing revenue or expenditure, conversely to the entries of excessive or insufficient depreciation, respectively, recorded in Permanent Assets, with the objective of adapting the leasing operations to the regime of competence (Note 8k).

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Financial Statements of the Prudential Conglomerate and Independent Auditor’s Report

 

 

h)   Income tax and social contribution (assets and liabilities)

 

Income tax and social contribution deferred tax assets, calculated on income tax losses, social contribution losses and temporary differences, are recorded in “Other Receivables - Sundry” and the deferred tax liabilities on tax differences in leasing depreciation (applicable only for income tax),
mark-to-market adjustments on securities, restatement of judicial deposits, among others, are recorded in “Other Liabilities - Tax and Social Security”.

 

Deferred tax assets on temporary differences are realized when the difference between the accounting treatment and the income tax treatment reverses. Deferred tax assets on income tax and social contribution losses are realizable when taxable income is generated, up to the 30% limit of the taxable profit for the period. Deferred tax assets are recorded based on current expectations of realization considering technical studies and analyses carried out by Management.

 

The provision for income tax is calculated at 15% of taxable income plus a 10% surcharge. For financial companies, equated and of the insurance industry, the social contribution on the profit was calculated until August 2015, considering the rate of 15%. For the period between September 2015 and December 2018, the rate was changed to 20%, according to Law No. 13,169/15, returning to the rate of 15% as from January 2019. For the other companies, the social contribution is calculated considering the rate of 9%.

 

Due to the amendment of the rate, the Organização Bradesco constituted, in September 2015, a supplement to the tax credit of social contribution, considering the annual expectations of achievement and their respective rates in force in each period, according to the technical study conducted.

 

Provisions were recorded for other income tax and social contribution in accordance with specific applicable legislation.

 

Changes in the criteria to recognize revenue, costs and expenses included in the net profit for the period, enacted by Law No. 11,638/07 and subsequent amendments were made fiscally by the new regime of the taxation in force instituted by Law No. 12,973/14.

 

The breakdown of income tax and social contribution, showing the calculations, the origin and expected use of deferred tax assets, as well as unrecorded deferred tax assets, are presented in Note 32.

 

i)    Prepaid expenses

 

Prepaid expenses consist of funds already disbursed for future benefits or services, which are recognized in the profit or loss on an accrual basis.

 

Incurred costs relating to assets that will generate revenue in subsequent periods are recorded in the Income Statement according to the terms and the amount of expected benefits and directly written-off in the Income Statement when the corresponding assets or rights are no longer part of the institution’s assets or when future benefits are no longer expected.

 

In the case of the remuneration paid by the origination of credit operations to the banking correspondents related to credit operations originated during 2015, Bradesco opted to recognize 2/3 of the total value of compensation, pursuant to the provisions of Bacen Circular No. 3,738/14.

 

Prepaid expenses are shown in detail in Note 10b.

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j)    Investments

 

Investments in unconsolidated and jointly subsidiaries, where Bradesco has significant influence over the investee or holds at least 20% of the voting rights, are accounted for using the equity method.

 

Tax incentives and other investments are stated at cost, less allowance for losses/impairment, where applicable.

 

Subsidiaries entities are consolidated – the composition of the main companies can be found in Note 2. The composition of unconsolidated and jointly subsidiaries, as well as other investments, can be found in Note11.

 

k)   Premises and equipment

 

Relates to the tangible assets used by the Bank in its activities, including those resulting from transactions that transfer risks, benefits and control of the assets to the Bank.

 

Premises and equipment are stated at acquisition cost, net of accumulated depreciation, calculated by the straight-line method based on the assets’ estimated economic useful life, using the following rates: real estate – 4% per annum; installations, furniture, equipment for use, security systems and communications – 10% per annum; transport systems – 20% per annum; and data-processing systems – 20% to 50% per annum, and adjusted for impairment, when applicable.

 

The breakdown of asset costs and their corresponding depreciation, as well as the unrecorded surplus value for real estate and the fixed asset ratios, are presented in Note 12.

 

l)    Deferred assets

 

It is recorded at cost of acquisition or composition, net of their accrued depreciation of 20% per annum, calculated using the linear method. Since December 2008, the new operations have been recorded in intangible assets, in accordance with Circular Letter No. 3,357/08 of Bacen.

 

The composition of deferred assets is shown in Note 13.

 

m) Intangible assets

 

Corresponds to the acquired rights whose subjects are intangible assets intended for the maintenance of the company or exercised for this purpose.

 

Intangible assets comprise of:

 

·       Future profitability/acquired client portfolio and acquisition of right to provide banking services: they are recorded and amortized over the period in which the asset will directly and indirectly contribute to future cash flows and adjusted for impairment, where applicable; and

 

·       Software: stated at cost, less amortization calculated on a straight-line basis over the estimated useful life (20% to 50% p.a.), from the date it is available for use and adjusted for impairment, where applicable. Internal software development costs are recognized as an intangible asset when it is possible to show the intent and ability to complete and use the software, as well as to reliably measure costs directly attributable to the intangible asset. These costs are amortized during the software’s estimated useful life, considering the expected future economic benefits.

 

Intangible assets and the movement in these balances by class, are presented in Note 14.

 

n)   Impairment

 

Financial and non-financial assets are tested for impairment.

 

Impairment evidence may comprise the non-payment or payment delay by the debtor, possible bankruptcy process or the significant or extended dec line in an asset value.

 

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Financial Statements of the Prudential Conglomerate and Independent Auditor’s Report

 

An impairment loss of a financial or non-financial asset is recognized in the profit or loss for the period if the book value of an asset or cash-generating unit exceeds its recoverable value.

 

Impairment losses are presented in Note 6c⁽¹⁰⁾,12 e 14.

 

o)   Securities sold under agreements to repurchase

 

These are recognized at the value of the liabilities and include, when applicable, related charges up to the end of the reporting period, calculated on a daily pro-rata basis.

 

A breakdown of the contracts recorded in deposits and securities sold under agreements to repurchase, as well as terms and amounts recognized in the statement of financial position and income statement, is presented in Note 15.

 

p)   Provisions, contingent assets and liabilities and legal obligations – tax and social security

 

Provisions, contingent assets and liabilities, and legal obligations, as defined below, are recognized, measured and disclosed in accordance with the criteria set out in CPC 25, approved by
CMN Resolution No. 3,823/09 and CVM Resolution No. 594/09:

 

·       Contingent Assets: these are not recognized in the financial statements, except to the extent that there are real guarantees or favorable judicial decisions, to which no further appeals are applicable, and confirmation of the capacity of the counterparty to pay or the ability of Bradesco to realize the asset via compensation against another liability upon which the gain is considered practically certain. Contingent assets with a chance of probable success are disclosed in the notes to the financial statements;

 

·       Provisions: these are recorded taking into consideration the opinion of legal counsel, the nature of the lawsuits, similarity with previous lawsuits, complexity and positioning of the courts, whenever the loss is deemed probable, it requires a probable outflow of funds to settle the obligation and when the amount can be reliably measured;

 

·       Contingent Liabilities: according to CPC 25, the term “contingent” is used for liabilities that are not recognized because their existence will only be confirmed by the occurrence of one or more uncertain future events beyond Management’s control. Contingent liabilities do not meet the criteria for recognition because they are considered possible losses and should only be disclosed in the notes when relevant. Obligations deemed remote are not recorded as a provision nor are they disclosed; and

 

·       Legal Obligations – Provision for Tax Risks: results from judicial proceedings, which contest the applicability of tax laws on the grounds of legality or constitutionality, which, regardless of the assessment of the probability of success, are fully provided for in the financial statements.

 

Details on lawsuits, as well as segregation and changes in amounts recorded, by type, are presented in Note 17.

 

q)   Other assets and liabilities

 

Assets are stated at their realizable amounts, including, when applicable, related income and inflation and exchange variations (on a daily prorated basis), less provision for losses, when deemed appropriate. Liabilities include known or measurable amounts, including related charges and inflation and exchange variations (on a daily prorated basis).

 

r)    Subsequent events

 

These refer to events occurring between the reporting date and the date the financial statements are authorized to be issued.

 

They comprise the following:

 

·       Events resulting in adjustments: events relating to conditions already existing at the end of the reporting period; and

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·       Events not resulting in adjustments: events relating to conditions not existing at the end of the reporting period.

 

Subsequent events, if any, are described in Note 33.

 

                                                             

4)     CASH AND CASH EQUIVALENTS

(1)  Refers to operations that mature in 90 days or less from the date they were effectively invested and with insignificant risk of change in fair market value.

 

 

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Financial Statements of the Prudential Conglomerate and Independent Auditor’s Report

 

5)      INTERBANK INVESTMENTS

 

a)    Breakdown and maturity

 

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b)   Income from interbank investments

 

Classified in the income statement as income from operations with securities.

 

 

6)     SECURITIES AND DERIVATIVE FINANCIAL INSTRUMENTS

 

Information on securities and derivative financial instruments is as follows:

 

a)    Summary of the consolidated classification of securities by operating segment and issuer

 

 

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Financial Statements of the Prudential Conglomerate and Independent Auditor’s Report

 

b)      Consolidated classification by category, maturity and operating segment

 

I)    Trading securities

 

 

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II)   Available-for-sale securities

III) Held-to-maturity securities

 

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Financial Statements of the Prudential Conglomerate and Independent Auditor’s Report

 

c)      Breakdown of the portfolios by financial statement classification

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(1)    Consistent with the criteria in Bacen Circular Letter No. 3,068/01 and due to the characteristics of the securities, we are classifying the derivative financial instruments, except those considered as cash flow hedges in the category Trading Securities;

(2)    These refer to investment fund and managed portfolio resources invested  in  purchase contracts with a commitment to re-sell with Bradesco, whose owners are consolidated subsidiaries, included in the financial statements of the Prudential Conglomerate;

(3)    The investment fund quotas are presented based on the instruments comprising their portfolios and maintaining the classification used in the fund;

(4)    In compliance with Article 8 of Bacen Circular Letter No. 3,068/01, Bradesco declares that it has the financial capacity and intention to maintain held-to-maturity securities until their maturity dates.  The mark-to-market of securities, which were transferred from the category "Securities Available for Sale" to the category of "Securities Held to Maturity", in June 2015 and in December 2013, was maintained in the shareholders’ equity and will be recognized in the results for the remaining term of these securities, according to Bacen Circular No. 3,068/01;

(5)    The number of days to maturity was based on the contractual maturity of the instruments, regardless of their accounting classification;

(6)    This column reflects book value after mark-to-market accounting in accordance with item (7), except for securities classified as securities held to maturity, which fair value is less than the original amortized cost by R$1,328,973 thousand (higher than amortized cost value to the amount of R$5,402 thousand in 2014);

(7)    The fair value of securities is determined based on the market price available at the end of the reporting period. If no market price quotation is available at the end of the reporting period, amounts are estimated based on the prices quoted by dealers, pricing models, quotation models or price quotations for instruments with similar characteristics. For investment funds, the original amortized cost reflects the fair value of the respective quotas;

(8)    Includes hedge for protection of assets and liabilities, denominated in or indexed to foreign currency, primarily, arising from foreign investments, eliminating the effects of exchange variation of these assets and liabilities. For a better analysis of these items, consider the net exposure (Note 6d II);

(9)    In March 2015, there was a  modification in the calculation method of the market capitalization of debentures, using  market parameters (Brazilian Association of Entities of the Financial and Capital Markets – Anbima); and

(10)  In the period ended December 31, 2015, there were losses through impairment in the amount of R$135,850 thousand, related to the heading 'Variable Income Securities", classified in the category "Securities Available for Sale" (R$598,087 thousand on December 31, 2014).

 

d)      Derivative financial instruments

 

Bradesco carries out transactions involving derivative financial instruments, which are recorded in the statement of financial position or in off-balance-sheet accounts, to meet its own needs in managing its global exposure, as well as to meet its customer’s requests, in order to manage their exposure, These operations involve a range of derivatives, including interest rate swaps, currency swaps, futures and options, Bradesco’s risk management policy is based on the utilization of derivative financial instruments mainly to mitigate the risks from operations carried out by the Bank and its subsidiaries.

 

Securities classified as trading and available-for-sale, as well as derivative financial instruments, are recognized in the consolidated statement of financial position at their fair market value, Fair market value is generally based on quoted market prices or quotations for assets or liabilities with similar characteristics, Should market prices not be available, fair market values are based on dealer quotations, pricing models, discounted cash flows or similar techniques for which the determination of fair market value may require judgment or significant estimates by Management.

 

Quoted market prices are used to determine the fair market value of derivative financial instruments, The fair market value of swaps is determined by using discounted cash flow modeling techniques that use yield curves, reflecting adequate risk factors, The information to build yield curves is mainly obtained from the Securities, Commodities and Futures Exchange (BM&FBOVESPA) and the domestic and international secondary market, These yield curves are used to determine the fair market value of currency swaps, interest rate and other risk factor swaps.

 

The fair market value of forward and futures contracts is also determined based on market price quotations for derivatives traded at the exchange or using methodologies similar to those outlined for swaps, The fair market values of credit derivative instruments are determined based on market price quotations or from specialized entities, The fair market value of options is determined based on mathematical models, such as Black & Scholes, using yield curves, implied volatilities and the fair market value of corresponding assets, Current market prices are used to calculate volatility.

 

Derivative financial instruments in Brazil mainly refer to swaps and futures and are registered at the OTC Clearing House (Cetip) and BM&FBOVESPA.

 

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Financial Statements of the Prudential Conglomerate and Independent Auditor’s Report

 

Operations involving forward contracts of interest rates, indexes and currencies are contracted by Management to hedge Bradesco’s overall exposures and to meet customer needs.

Foreign derivative financial instruments refer to swap, forward, options, credit and futures operations and are mainly carried out at the stock exchanges in Chicago and New York, as well as the over-the-counter (OTC) markets.

 

I)   Amount of derivative financial instruments recorded in off-balance-sheet accounts

 

 

Derivatives include operations maturing in D+1.

 

(1)  Includes, on December 31, 2015, the hedging of the firm commitment concerning the purchase and sale of shares agreement, to the sum of R$20,250,293 thousand (Note 33e);

(2)  Includes cash flow hedges to protect CDI-related funding, totaling R$20,038,119 thousand (R$21,107,308 thousand in 2014) (Note 6f); and

(3)  Includes specific hedges to protect assets and liabilities, arising from foreign investments, totaling R$56,280,814 thousand (R$37,598,682 thousand in 2014).

 

26     Dezembro 2015

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II)  Breakdown of derivative financial instruments (assets and liabilities) shown at original amortized cost and fair market value

 

 

(1)  Includes receivable adjustments relating to hedge of assets and liabilities, designated and/or indexed in foreign currency, primarily, arising from foreign investments, eliminating the effects of exchange variation of these assets and liabilities.

 

III)    Futures, options, forward and swap contracts – (Notional)

 

 

(1)  Includes contracts relating to hedges for the protection of assets and liabilities, designated and/or indexed in foreign currency, primarily, arising from foreign investments, eliminating the effects of exchange variation of these assets and liabilities; and

(2)  Includes, on December 31, 2015, contract related to the hedge of the firm commitment, concerning the purchase and sale of shares agreement (Note 33e).

 

IV) Types of margin offered in guarantee of derivative financial instruments, mainly futures contracts

 

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Financial Statements of the Prudential Conglomerate and Independent Auditor’s Report

 

V)  Revenues and expenses, net

 

 

(1)  Includes the gain (loss) and the respective adjustment to the market capitalization of the hedge for protection of the assets and liabilities, designated and/or indexed in foreign currency, primarily, arising from foreign investments; and

(2)  Includes, on December 31, 2015, the results and respective adjustment to the market value of the hedge of the firm commitment, concerning the purchase and sale of shares agreement, which was offset, completely, by the adjustment of the market value of the hedge object (Nota 33e).

 

VI) Total value of derivative financial instruments, by trading location and counterparties

 

(1)  Comprised of operations carried out on the Chicago and New York Stock Exchanges and over-the-counter markets,

 

e)      Credit Default Swaps (CDS)

 

On December 31, 2015, Bradesco had credit default swaps (CDS) with the following characteristics: the risk received in credit swaps whose underlying assets are “derivative with companies” is R$136,668 thousand (2014 – (i) the amount of risk transferred under credit swaps whose underlying assets are “securities – securities of foreign government debt” is negative R$1,326,900 thousand; and (ii) the risk received in credit swaps whose underlying assets are “derivative with companies” is R$13,281 thousand, amounting to a total net credit risk value of negative R$1,313,619 thousand), with an effect on the calculation of required shareholders’ equity of negative R$15,033 thousand (R$71,519 thousand in 2014). The contracts related to credit derivatives transactions described above are due in 2020. The mark-to-market of the protection rates that remunerates the counterparty that received the risk totaled R$42 thousand. There were no credit events, as defined in the agreements, during the period.

 

f)       Cash flow hedge

 

Bradesco uses cash flow hedges to protect its cash flows from payment of interest rates on funds, which have a floating interest rate - the Interbank Deposit Rate (DI Cetip), thus converting them to fixed cash flows.

Bradesco has traded DI Future contracts on BM&FBOVESPA since 2009, using them as cash flow hedges totaling R$20,038,119 thousand (R$21,107,308 thousand in 2014), having as object of hedge captures linked to DI, totaling R$20,334,375 thousand (R$19,969,423 thousand in 2014). The adjustment to market value of these operations recorded in the net worth is R$4,552 thousand (R$311,683 thousand in 2014), net of tax effects is R$2,731 thousand (R$187,010 thousand in 2014).

The effectiveness of the hedge portfolio was assessed in accordance with Bacen Circular Letter No. 3,082/02.

 

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g)      Hedge against market risk

 

Bradesco constituted a hedge against market risk, using futures contracts, which generated R$1,406,154 thousand, for protection against the effects of the exchange rate variation of the firm commitment concerning the purchase and sale of shares agreement (Note 33e), which produced an adjustment to the market value of (R$1,761,964 thousand). The effect of these operations recorded a revenue of (R$355,810 thousand).

The effectiveness of the hedge portfolio was assessed in accordance with Bacen Circular Letter No. 3,082/02.

h)      Income from securities and derivative financial instruments

 

 

(1)  In the accrued of December 31, 2015, it includes the losses through impairment to the sum of R$135,850 thousand (December 31, 2014 - R$598,087 thousand).

 

7)      INTERBANK ACCOUNTS – RESERVE REQUIREMENT

 

a)       Reserve requirement

 

 

b)       Revenue from reserve requirement

 

 

 

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Financial Statements of the Prudential Conglomerate and Independent Auditor’s Report

 

8)      LOANS

 

Information relating to loans, including advances on foreign exchange contracts, leasing and other receivables with credit characteristics is shown below:

 

a)   By type and maturity

 

 

30      Dezembro 2015

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Financial Statements of the Prudential Conglomerate and Independent Auditor’s Report

 

 

(1)  Including credit card loans and advances on credit card receivables of R$16,868,308 thousand (R$17,422,034 thousand in 2014);

(2)  Advances on foreign exchange contracts are classified as a deduction from “Other Liabilities”;

(3)  The item “Other Receivables” comprises receivables on sureties and guarantees honored, receivables on sale of assets, securities and credits receivable, income receivable from foreign exchange contracts and export contracts and credit card receivables (cash and installment purchases at merchants) totaling R$20,745,581 thousand (R$19,594,184 thousand in 2014);

(4)  Recorded in off-balance sheet accounts; and

(5)  Percentage of each type in relation to the total loan portfolio, including sureties and guarantee, loan assignment and acquisition of receivables.

 

32       Dezembro 2015

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b) By type and levels of risk

 

 

(1)  Percentage of each type in relation to the total loan portfolio, excluding sureties and guarantees, loan assignments, acquisition of receivables and co-obligation in rural loan assignments; and

(2)  See Note 9a.

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Financial Statements of the Prudential Conglomerate and Independent Auditor’s Report

 

c)     Maturity ranges and levels of risk

 

(1)  Percentage of maturities by type of installment; and

(2)  For transactions with terms of more than 36 months, past-due periods are doubled, as permitted by CMN Resolution No, 2,682/99.

34      December 2015

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(1)   Percentage of maturities by type of installment;
(2)   The grand total includes performing loans of R$339,721,003thousand (R$324,003,756 thousand in 2014) and non-performing loans of R$27,268,473thousand (R$22,435,590 thousand in 2014); and
(3)   On December 31, 2015, it includes a provision for guarantees provided, comprising sureties, letters of credit and standby letter of credit, which is presented here within the balance for  the excess provision, and totals R$694,184 thousand (R$421,596 thousand in 2014) (Note 19b).

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Financial Statements of the Prudential Conglomerate and Independent Auditor’s Report

 

 

d)    Concentration of loans

 

(1)  Percentage on total portfolio (as defined by Bacen).

 

e)     By economic sector

 

36      December 2015

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Bradesco     37         

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Financial Statements of the Prudential Conglomerate and Independent Auditor’s Report

 

f)   Breakdown of loans and allowance for loan losses

 

(1)  Percentage of level of risk in relation to the total portfolio; and

(2)  Cumulative percentage of level of risk on total portfolio.

 

38      December 2015

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(1)  Percentage of existing provision in relation to total portfolio, by level of risk; and

(2)  On December 31, 2015, it includes a provision for guarantees provided, comprising sureties, letters of credit and standby letter of credit, which is presented here within the balance for excess provision, and totals R$694,184 thousand (R$421,596 thousand in 2014) (Note 19b).

 

Bradesco     39         

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Financial Statements of the Prudential Conglomerate and Independent Auditor’s Report

 

g)    Changes in allowance for loan losses

 

 

(1)  For contracts with installments past due for more than 14 days;

(2)  Recorded based on the customer/transaction classification and therefore not included in the preceding item;

(3)  The additional provision is recorded based on Management’s experience and the expectation in relation to the loan portfolio, to determine the total provision deemed sufficient to cover specific and general credit risk, when considered together with the provision calculated based on levels of risk and the corresponding minimum percentage in the provision established by Resolution No. 2,682/99. The excess provision per customer was classified according to the level of risk in Note 8f; and

(4)  On December 31, 2015, it includes the provision for guarantees provided, comprising sureties, letters of credit and standby letter of credit, which is presented here within the balance for excess provision, and totals R$694,184 thousand (R$421,596 thousand in 2014) (Note 19b).

 

h)      Allowance for Loan Losses expense net of amounts recovered

 

Expenses with the allowance for loan losses, net of credit write-offs recovered, are as follows,

 

               

(1)  In the year ended December 31, 2015 includes amount recorded of the provision of guarantees offered, comprising sureties, guarantees, letters of credit and standby letter of credit, which are presented in the “excess” provision, totaling R$272,588 thousand (R$83,973 thousand in 2014); and

(2)  Classified in income from loans (Note 8j).

 

i)       Changes in the renegotiated portfolio

 

40      December 2015

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j)      Income from loans and leasing

 

 

k)     Conciliation of the composition of the portfolio of financial leasing, at present value, with the accounting balances (Notes 3g and 8b):

 

 

9)      OTHER RECEIVABLES

 

a)      Foreign exchange portfolio

 

Balances

 

 

Bradesco     41         

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Financial Statements of the Prudential Conglomerate and Independent Auditor’s Report

 

Foreign exchange results

 

Adjusted foreign exchange results for presentation purposes

 

 

(1)  Recognized in “Income from loans”;

(2)  Recognized in “Income from security transactions”;

(3)  Related to funds for financing of advances on foreign exchange contracts and import financing, recognized in “Borrowing and on-lending expenses”; and

(4)  Refers to funding expenses of investments in foreign exchange.

 

b)   Sundry

 

 

(1)  Primarily includes receivables from the acquisition of loans without substantial transfer of risks and benefits.

 

 

 

42      December 2015

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10)    OTHER ASSETS

 

a)     Foreclosed assets/other

 

 

b)    Prepaid expenses

 

 

(1)  Commissions paid to storeowners, car dealers and correspondent banks – payroll-deductible loans;

(2)  Prepaid expenses of future advertising and marketing campaigns on media; and

(3)  It includes, basically, (i) anticipation of commissions concerning the operational agreement to offer credit cards and other products and (ii) card issue costs.

 

 

Bradesco     43         

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Financial Statements of the Prudential Conglomerate and Independent Auditor’s Report

 

11)    INVESTMENTS

 

a)      The income/expense from the equity method accounting of investments was recorded in the income statement, under “Equity in the Earnings (Losses) of Affiliates and Subsidiaries”, and correspond in the year of 2015 to R$23,662,901 thousand (R$9,202,443 thousand in 2014) and the investments under the entry "Earnings of Affiliates and Subsidiaries" and correspond to R$28,707,872 thousand (R$33,927,450 thousand in 2014).

 

 

(1)  Data related to December 31, 2015;

(2)  The adjustment considers income calculated periodically by the companies and includes equity variations recorded by the investees not recognized in profit or loss, as well as alignment of accounting practice adjustments, where applicable;

(3)  New corporate name of BES Investimento do Brasil S.A.; and

(4)  Basically, investments in the enterprises: Serel Participações em Imóveis S,A,, Bankpar Consultoria e Serviços Ltda,, Caetê Holdings Ltda,, Ganant Corretora de Seguros Ltda,, Miramar Holdings S,A,, Neon Holdings S,A, and Imagra Imobiliária e Agrícola Ltda.

 

 

44      December 2015

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12)    PREMISES AND EQUIPMENT AND LEASED ASSETS

 

 

The fixed assets to net worth ratio is 35.2% when considering only the companies and payment institutions within the economic group (the “Prudential Consolidation”), where the maximum limit of 50.0%.

 

In the financial year of 2015, losses were recorded following impairment under the heading "Use of assets", in the amount of R$18,186 thousand, basically, in "Security Systems and Communications" (2014 – R$802 thousand, basically in Installations, Furniture and Premises and Equipment).

 

13)    DEFERRED

 

 

 

Bradesco     45         

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Financial Statements of the Prudential Conglomerate and Independent Auditor’s Report

 

14)    INTANGIBLE ASSETS

 

a)   Intangible assets

 

Acquired intangible assets consist of:

 

 

(1)  Intangible assets are amortized over an estimated period of economic benefit and recognized in “other administrative expenses” and “other operating expenses”, where applicable;

(2)  Software acquired and/or developed by specialized companies;

(3)  Composed of goodwill on the acquisition of equity interest in Banco Bradescard - R$718,441 thousand, Cielo/Investees - R$1,114,660 thousand and Banco Bradesco BBI S,A, - R$145,351 thousand;

(4)  Based on the pay-back of each agreement; and

(5)  Includes the operational agreement between Cielo, our jointly-controlled subsidiary and Banco do Brasil, which created an association, to manage the transactions originating from credit card operations, which will be amortized within up to 30 years.

 

b)   Changes in intangible assets by type

 

 

(1)  Under the heading “Future profitability/client portfolio/market value” includes the intangible asset generated by the acquisition of shares of Cielo;

(2)  Under the heading “Others” includes: (i) the operational agreement between Cielo, our jointly-controlled subsidiary, which created an association, to manage the transactions originating from credit card operations, which will be amortized within up to 30 years, and (ii) expenditure by analysis of recoverability of assets – impairment, to the value of R$207,880 thousand (R$84,806 thousand in 2014).

 

 

46      December 2015

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15)    DEPOSITS, SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND FUNDS FROM ISSUANCE OF SECURITIES

 

a)   Deposits

 

 

(1)  Classified as “1 to 30 days”, not considering average historical turnover; and

(2)  Considers the actual maturities of investments.

 

b)   Securities sold under agreements to repurchase

 

 

(1)  Represented by government securities.

Bradesco     47         

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Financial Statements of the Prudential Conglomerate and Independent Auditor’s Report

 

c)   Funds from issuance of securities

 

 

(1)  Issuance of securities on the international market to invest in foreign exchange transactions, pre-export financing, import financing and working capital financing, predominately in the medium and long terms.

 

48      December 2015

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d)   Cost for market funding and inflation

 

 

16)    BORROWING AND ON-LENDING

 

a)  Borrowing

 

 

b)  On-lending

 

 

Bradesco     49         

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Financial Statements of the Prudential Conglomerate and Independent Auditor’s Report

 

c)     Borrowing and on-lending expenses

 

 

17)    PROVISIONS, CONTINGENT ASSETS AND LIABILITIES AND LEGAL LIABILITIES – TAX AND SOCIAL SECURITY

 

a)   Contingent assets

 

Contingent assets are not recognized in the financial statements. However, there are ongoing proceedings where the chance of success is considered probable, such as: a) Social Integration Program (PIS), claiming to offset PIS against Gross Operating Income, paid under
Decree-Laws No. 2,445/88 and No. 2,449/88, regarding the payment that exceeded the amount due under Supplementary Law No. 07/70 (PIS Repique); and b) other taxes, the legality and/or constitutionality of which is being challenged, where the decision may lead to reimbursement of amounts paid.

 

b)   Provisions classified as probable losses and legal obligations – tax and social security

 

Organização Bradesco is a party to a number of labor, civil and tax lawsuits, arising from the normal course of business.

 

Management recorded provisions where, based on their opinion and that of their legal counsel, the nature of the lawsuit, similarity to previous lawsuits, complexity and the courts standing, the loss is deemed probable.

 

Management considers that the provision is sufficient to cover the future losses generated by the respective lawsuits.

 

Provisions related to legal obligations are maintained until the conclusion of the lawsuit, represented by judicial decisions with no further appeals or due to the statute of limitation.

 

               I -   Labor claims

 

These are claims brought by former employees and outsourced employees seeking indemnifications, most significantly for unpaid “overtime”, pursuant to Article 224 of the Consolidation of Labor Laws (CLT). In proceedings in which a judicial deposit is used to guarantee the execution of the judgment, the labor provision is made considering the estimated loss of these deposits. For proceedings with similar characteristics and not judged, the provision is recorded based on the average calculated value of payments made for labor complaints settled in the past 12 months; and for proceedings originating from acquired banks, with unique characteristics, the calculation and assessment of the required balance is conducted periodically, based on the updated recent loss history.

50      December 2015

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Overtime is monitored by using electronic time cards and paid regularly during the employment contract and, accordingly, the claims filed by former employees do not represent significant amounts.

 

              II -   Civil claims

 

These are claims for pain and suffering and property damages, mainly relating to protests, returned checks, the inclusion of information about debtors in the credit restriction registry and the replacement of inflation adjustments excluded as a result of government economic plans. These lawsuits are individually controlled using a computer-based system and provisioned whenever the loss is deemed as probable, considering the opinion of Management and their legal counsel, the nature of the lawsuits, similarity with previous lawsuits, complexity and positioning of the courts.

 

Most of these lawsuits are brought to the Special Civil Court (JEC), in which the claims are limited to 40 times the minimum wage and do not have a significant impact on Organização Bradesco’s financial position.

 

There are a significant number of legal claims pleading alleged differences in adjustment for inflation on savings account balances due to the implementation of economic plans that were part of the federal government’s economic policy to reduce inflation in the ‘80s and ‘90s.

 

Although Bradesco complied with the law and regulation in force at the time, these lawsuits have been recorded in provisions, taking into consideration the claims where the Bank is the defendant and the perspective of loss, which is considered after the analysis of each demand, based on the current decision of the Superior Court of Justice (STJ).

 

Note that, regarding disputes relating to economic plans, the Federal Supreme Court (STF) suspended the prosecution of all lawsuits at the cognizance stage, until the Court issues a final decision on the right under litigation.

 

             III -   Legal obligations – provision for tax risks

 

The Organização Bradesco is disputing the legality and constitutionality of certain taxes and contributions in court, for which provisions have been recorded in full, although there is a good chance of a favorable outcome, based on the opinion of Management and their legal counsel, The processing of these legal obligations and the provisions for cases for which the risk of loss is deemed as probable is regularly monitored in the legal court, During or after the conclusion of each case, a favorable outcome may arise for the Organization, resulting in the reversal of the related provisions.

 

The main cases are:

 

-          PIS and Cofins – R$2,088,742 thousand (R$1,792,621 thousand in 2014): a request for authorization to calculate and pay PIS and Cofins based on effective billing, as set forth in Article 2 of Supplementary Law No, 70/91, removing from the calculation base the unconstitutional inclusion of other revenues other than those billed;

 

-          IRPJ/CSLL on losses of credits – R$1,880,905 thousand (R$2,059,542 thousand in 2014): we are requesting to deduct from income tax and social contributions payable (IRPJ and CSLL, respectively) amounts of actual and definite loan losses related to unconditional discounts granted during collections, regardless of compliance with the terms and conditions provided for in Articles 9 to 14 of Law No, 9,430/96 that only apply to temporary losses;

 

-          PIS – EC 17/97 - R$233,597 thousand (R$321,748 thousand in 2014): for the period from July 1997 to February 1998, request to calculate and pay Pis contributions as established by LC 07/70 (Pis Repique) and not as established by EC 17/97 (Pis on Gross Operating Income);

Bradesco     51         

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Financial Statements of the Prudential Conglomerate and Independent Auditor’s Report

 

-          PIS – R$325,932 thousand (R$320,067 thousand in 2014): we are requesting the authorization to offset overpaid amounts in 1994 and 1995 as Pis contribution, corresponding to the surplus paid over that calculated on the tax base established in the Constitution, i,e,, gross operating income, as defined in the income tax legislation (set out in Article 44 of Law No, 4,506/64), which excludes interest income; and

 

-          Pension Contributions – R$995,380 thousand (R$463,071 thousand in 2014): official notifications related to the pension contributions on financial contributions in private pension plans, considered by the audit as compensatory sums subject to the incidence of such financial contributions and isolated fine for not withholding tax of the IRRF on the related financial contributions.

 

            IV -   Provisions by nature

 

 

(1)   Note 19b; and

(2)   Classified under “Other liabilities - tax and social security” (Note 19a).

 

              V -   Changes in provisions

 

 

(1)  Includes, the constitution of labor provisions, concerning the improvement of the calculation methodology, totaling R$267,253 thousand;

(2)  Includes constitution of tax provision: (i) related to the incidence of pension contributions on financial contributions in private pension plans, in the amount of R$387,560 thousand; and (ii) IRPJ/CSLL on losses of credits, totaling R$47,545 thousand; and

(3)  Mainly include legal liabilities.

 

c)   Contingent liabilities classified as possible losses

 

The Organização Bradesco maintains a system to monitor all administrative and judicial proceedings in which the institution is plaintiff or defendant and, based on the opinion of legal counsel, classifies the lawsuits according to the expectation of loss. Case law trends are periodically analyzed and, if necessary, the related risk is reclassified. In this respect, contingent lawsuits deemed to have a possible risk of loss are not recorded as a liability in the financial statements. The main proceedings in this category are the following: a) leasing companies’ Tax on Services of any Nature (ISSQN), total lawsuits correspond to R$1,910,629 thousand (R$1,840,272 thousand in 2014) which relates to the municipal tax demands from municipalities other than those in which the company is located and where, under law, tax is collected; b) 2006-2010 income tax and social contribution, relating to goodwill amortization being disallowed on the acquisition of investments, for the amount of R$1,777,707 thousand (R$991,924 thousand in 2014); c) IRPJ and CSLL deficiency notice relating to the disallowance of loan loss deductions, for the amount of R$1,200,403 thousand (R$1,034,018 thousand in 2014); and d) IRPJ and CSLL deficiency note relating to disallowance of exclusions of revenues from the mark-to-market of securities from 2007 to 2010, and differences in depreciation and operating expenses and income, amounting to R$908,915 thousand (R$1,226,665 thousand in 2014).

52      December 2015

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18)    SUBORDINATED DEBT

 

 

(1)  Subordinated debt transactions that matured in 2015;

(2)  New issuing of financial bills in 2015; and

(3)  It includes the amount of R$11,444,939 thousand, referring to subordinate debts recorded in “Eligible Debt Capital Instruments”.

 

Bradesco     53         

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Financial Statements of the Prudential Conglomerate and Independent Auditor’s Report

 

19)    OTHER LIABILITIES

 

a)   Tax and social security

 

 

b)   Sundry

 

 

(1)  Includes provision for guarantees provided, comprising sureties, letters of credit and standby letter of credit, which is registered in this account but also presented within the excess provision, totaling R$694,184 thousand (R$421,596 thousand in 2014) (Note 8g).

 

20)    NON-CONTROLLING INTERESTS IN SUBSIDIARIES

 

 

21)    SHAREHOLDERS’ EQUITY (PARENT COMPANY)

 

a)   Capital stock in number of shares

 

Fully subscribed and paid-in capital stock comprises non-par, registered, book-entry shares.

 

 

In the Extraordinary General Meeting of March 10, 2015, a deliberation was taken to increase the Capital Stock by R$5,000,000 thousand, increasing it from R$38,100,000 thousand to R$43,100,000 thousand. This was effected through the capitalization of part of the balance of the account “Profit Reserves - Statutory Reserve”, in compliance with the provisions in Article 169 of Law No. 6,404/76, with a stock-split of 20% in shares, by issuing 841,454,808 new nominative-book entry shares, with no nominal value, of which 420,727,426 were common shares and 420,727,382 were preferred shares. These were attributed free-of-charge to the shareholders registered on March 26, 2015 as bonus, in the ratio of two (2) new shares for every ten (10) shares of the same type that they own.

54      December 2015

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In the Extraordinary General Meeting of December 17, 2015, decision was made to increase the share capital in the amount of R$3,000,000 thousand, raising it from R$43,100,000 thousand to R$46,100,000 thousand, in the proportion of 3.275740457% on the shareholder position that each shareholder possessed on December 17, 2015 – base date of subscription rights, through the issue of 164,769,488 new, book-entry nominative shares, with no par value, in which 82,571,414 are common shares and 82,198,074 are preferred shares, at the price of R$19.20 per common share and R$17.21 per preferred share, for private subscription by the shareholders, in the period from January 4, 2016 to February 5, 2016, and pay in of the value corresponding to 100% of the shares subscribed on March 1, 2016, irrespective of the date of delivery of the subscription bulletin.

 

In a meeting held on February 3, 2016, the Board of Directors resolved to cancel the capital stock increase by means of private subscription of shares, approved in the Special Shareholders’ Meeting held on December 17, 2015, at the amount of R$3,000,000 thousand, by the issuance of 164,769,488 new book-entry, registered shares, with no par value, of which 82,571,414 are common shares at the unit price of R$19.20 and 82,198,074 are preferred shares at the unit price of R$17.21. The decision derived from the volatility of the national and international stock markets, with impacts on the share price in the Stock Exchange. Mentioned cancellation will be submitted to shareholders’ approval in general shareholders’ meeting.

 

b)   Interest on shareholders’ equity/dividends

 

Bradesco’s capital remuneration policy aims to distribute interest on shareholders’ equity at the maximum amount calculated under current legislation, and this is included, net of Withholding Income Tax, in the calculation for mandatory dividends for the year under the Company’s Bylaws.

 

The Board of Directors’ Meeting held on December 22, 2014 approved the Board of Executive Officers’ proposal to pay shareholders supplementary interest on shareholders’ equity for 2014, for the amount of R$2,600,300 thousand, at R$0.590325800 (net of 15% withholding income tax - R$0.501776930) per common share and R$0.649358380 (net of 15% withholding income tax - R$0.551954623) per preferred share, which was paid on March 6, 2015.

 

The Board of Directors’ Meeting held on February 9, 2015 approved the Board of Executive Officers’ proposal to pay shareholders’ supplementary interest on shareholders’ equity and dividends for the year of 2014, totaling R$630,572 thousand, at R$0.143153921 per common share and R$0.157469313 per preferred share, which was paid on March 6, 2015.

 

The Board of Directors’ Meeting held on June 22, 2015 approved the Board of Executive Officers’ proposal to pay shareholders’ supplementary interest on shareholders’ equity and dividends for the first semester of 2015, totaling R$912,000 thousand, at R$0.172629101 per common share and R$0.189892011 per preferred share, which was paid on July 17, 2015.

 

The Board of Directors’ Meeting held on December 17, 2015 approved the Board of Executive Officers’ proposal to pay shareholders’ supplementary interest on shareholders’ equity totaling R$4,054,200 thousand, at R$0.767706865 per common share and R$0.844477552 per preferred share, which will be paid on March 1, 2016.

 

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Financial Statements of the Prudential Conglomerate and Independent Auditor’s Report

 

Interest on shareholders’ equity and dividends for the year ended December 31, 2015, is calculated as follows:

 

 

(1)  Percentage of interest on shareholders’ equity/dividends after adjustments; and

(2)  Paid on July 17, 2015.

 

Interest on shareholders’ equity and dividends were paid or recorded in provisions, as follows:

 

 

(1)    It considers the bonus of 20% of shares occurring in March 2015; and

(2)    To be paid on March 1, 2016.

 

c)   Treasury shares

 

A total of 3,669,932 common shares and 15,583,262 preferred shares had been acquired with the effect of the 20% share split, totaling R$431,048 thousand until December 31, 2015, and remain in treasury. The minimum, average and maximum cost per common share is R$23.62221, R$25.46012 and R$27.14350, and per preferred share is R$19.37456, R$26.98306 and R$33.12855, respectively. The fair value was R$20.50 per common share and R$19.28 per preferred share on December 31, 2015.

 

56      December 2015

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22)    FEE AND COMMISSION INCOME

 

 

23)    PAYROLL AND RELATED BENEFITS

 

 

(1)    Includes constitution of labor provisions concerning the improvement of the calculation methodology  to the sum of R$267,253 thousand (R$488,300 thousand in 2014).

 

24)    OTHER ADMINISTRATIVE EXPENSES

 

 

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Financial Statements of the Prudential Conglomerate and Independent Auditor’s Report

 

25)    TAX EXPENSES

 

 

26)    OTHER OPERATING INCOME

 

 

(1)  In the year ended December 31, 2014, the reversal of tax provision on the Cofins process, the matter had its closure in favor of the Organization in the amount of R $ 1,378,103 thousand.

 

27)    OTHER OPERATING EXPENSES

 

 

(1)  In the year ended December 31, 2015, it basically includes: (i) provision for the tax contingency, to the sum of R$419,603 thousand (Note 17b (v)); (ii) constitution for guarantees provided, encompassing guarantees, sureties, letters of credit and standby letter of credit, which was highlighted from the provision surplus, to the sum of R$272,588 thousand (R$83,973 thousand in 2014) (Note 8h); and (iii) expenses by analysis of the recoverability of assets – impairment of R$210,481 thousand (R$85,608 thousand in 2014).

 

28)    NON-OPERATING INCOME (LOSS)

 

 

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29)    RELATED-PARTY TRANSACTIONS (DIRECT AND INDIRECT)

 

a)   Related party transactions (direct and indirect) are carried out under conditions and at rates consistent with those entered into with third parties, when applicable, and effective on the dates of the operations, The transactions are as follows:

 

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Financial Statements of the Prudential Conglomerate and Independent Auditor’s Report

 

 

b)  Compensation for Key Management Personnel

 

Each year, the Annual Shareholders’ Meeting approves:

 

·     The annual grand total amount of Management compensation, set forth at the Board of Directors Meetings, to be paid to board members and members of the Board of Executive Officers, as determined by the Company’s Bylaws; and

 

·     The amount allocated to finance Management pension plans, within the Employee and Management pension plan of the Organização Bradesco.

 

For 2015, the maximum amount of R$349,900 thousand was set for Management compensation and R$353,050 thousand to finance defined contribution pension plans.

 

The current policy on Management compensation sets forth that 50% of net variable compensation, if any, must be allocated to the acquisition of preferred shares of Banco Bradesco S.A., which vest in three equal, annual and successive installments, the first of which is in the year following the payment date. This procedure complies with CMN Resolution No. 3,921/10, which sets forth a management compensation policy for financial institutions.

 

Short-term Management benefits

 

 

Post-employment benefits

 

 

(1)  Considers all the key management personnel, regardless of member companies of the Prudential Conglomerate.

 

Bradesco does not offer its Key Management Personnel long-term benefits related to severance pay or share-based compensation, pursuant to CPC 10 – Share-Based Payment, approved by CMN Resolution No. 3,989/11.

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Shareholding

 

Together, members of the Board of Directors and Board of Executive Officers had the following shareholding in Bradesco:

 

 

(1)  On December 31, 2015, direct and indirect shareholding of the members of Bradesco’s Board of Directors and Board of Executive Officers amounted to 2.65% of common shares, 1.10% of preferred shares and 1.87% of all shares; and

(2)  Considers all the key management personnel, regardless of member companies of the Prudential Conglomerate.

 

30)    FINANCIAL INSTRUMENTS

 

Below is the statement of financial position by currency

 

 

(1)  Amounts originally recorded and/or indexed mainly in USD;

(2)  Excluding operations maturing in D+1, to be settled at the rate on the last day of the month; and

(3)  Other commitments recorded in off-balance-sheet accounts.

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Financial Statements of the Prudential Conglomerate and Independent Auditor’s Report

 

The statement of financial position by maturity is as follows:

 

 

(1)  Investments in investment funds are classified as 1 to 30 days;

(2)  Repurchase agreements are classified according to the maturity of the transactions; and

(3)  Demand and savings deposits are classified as 1 to 30 days, without considering average historical turnover.

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Below is the Basel Ratio:

 

 

(1)  As per January 2015, the Basel Ratio started to be calculated based on the "Prudential Consolidated", in accordance with CMN Resolution No. 4,192/13; and

(2)  As per January 2015, the factor applied to prudential adjustments went from 20% to 40%, according to the timeline for application of deductions of prudential adjustments, defined in Article11 of CMN Resolution No. 4,192/13.

 

a)      Capital Management

 

The primary objective of the Capital Management structure is to provide the necessary conditions for a continuous process of capital assessment, monitoring and control, contributing to the achievement of the Organization’s strategic objectives. It considers the current business environment and a prospective and consistent vision for capital adequacy planning. This structure is composed of the Statutory, Non-Statutory and Executive Committees that assist the Board of Directors and the Board of Executive Officers in decision making.

 

The internal process of assessing capital adequacy is carried out so as to ensure that the Organization has a Reference Equity base composition to support the development of activities and provide sufficient protection against risks, whether in normal or in extreme market conditions, as well as meeting managerial and regulatory requirements in relation to capital management.

 

31)    EMPLOYEE BENEFITS

 

Bradesco and its subsidiaries sponsor a private defined contribution pension for employees and directors, that allows financial resources to be accumulated by participants throughout their careers by means of employee and employer contributions and invested in an Exclusive Investment Fund (FIE). The Plan is managed by Bradesco Vida e Previdência S.A. and BRAM – Bradesco Asset Management S.A. DTVM is responsible for the financial management of the FIEs funds.

 

The Supplementary Pension Plan counts on contributions from employees and administrators of Bradesco and its subsidiaries equivalent to at least 4% of the salary by employees and 5% of the salary, plus the percentage allocated to covers of risk benefits (invalidity and death), by the company. Actuarial obligations of the defined contribution plan are fully covered by the plan assets of the corresponding FIE. In addition to the plan, in 2001, participants who chose to migrate from the defined benefit plan are guaranteed a proportional deferred benefit, corresponding to their accumulated rights in that plan. For the active participants, retirees and pensioners of the defined benefit plan, in extinction, the present value of the actuarial obligations of the plan is completely secured by collateral assets.

 

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Financial Statements of the Prudential Conglomerate and Independent Auditor’s Report

 

Banco Alvorada S.A. (successor from the spin-off of Banco Baneb S.A.) maintains defined contribution and defined benefit retirement plans, through Fundação Baneb de Seguridade Social - Bases (related to the former employees of Baneb).

 

Banco Bradesco’s sponsors both defined benefit and defined contribution retirement plans, through Caixa de Assistência e Aposentadoria dos Funcionários do Banco do Estado do Maranhão (Capof), especially to employees originating from Banco BEM S.A.

 

Bradesco sponsors a defined benefit plan through Caixa de Previdência Privada do Banco do Estado do Ceará (Cabec), exclusively for former employees of Banco BEC S.A.

 

In accordance with CPC 33 (R1) – Benefits to Employees, approved by CVM Resolution No. 600/09, Bradesco and its subsidiaries, as sponsors of these plans, considering the economic and actuarial study, have calculated their actuarial commitments using real interest rate and recognize in their financial statements the obligation due. The resources guaranteeing the pension plans are invested in accordance with the relevant legislation (public and private securities, shares of listed companies and properties). Follow the main assumptions used by the independent actuary in the actuarial assessment of our plans, based on CPC 33 (R1):

 

 

Considering the above assumptions, in accordance with CPC 33 (R1), the present value of the actuarial obligations of the benefit plans and of its assets to cover these obligations, on December 31, 2015, represented: (i) Net assets of the plan – R$1,047,782 thousand (2014 – R$1,070,636 thousand); (ii) Actuarial liabilities – R$1,162,005 thousand (2014 – R$1,182,761 thousand); and (iii) Insufficiency of R$114,223 thousand (2014 – insufficiency of R$112,125 thousand).

 

The table below, of sensitivity analysis of the obligations of the benefit plans, demonstrates the impact on the actuarial exposure (12.73% p.a.) by the amendment of the premise in the discount rate in 1 p.p.:

 

 

Bradesco, in its offices abroad, provides pension plans for its employees and administrators, in accordance with the standards established by the local authorities, which allows the accrual of financial resources during the professional career of the participant.

 

Expenses related to contributions made in the year ended December 31, 2015, totaled R$529,343 thousand (R$537,071 thousand in 2014).

 

In addition to this benefit, Bradesco and its subsidiaries offer other benefits to their employees and administrators, including health insurance, dental care, life and personal accident insurance, and professional training. These expenses, including the aforementioned contributions, totaled R$2,874,316 thousand in the year ended December 31, 2015 (R$2,570,215 thousand in 2014).

 

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32)    INCOME TAX AND SOCIAL CONTRIBUTION

 

a)  Calculation of income tax and social contribution charges

 

 

(1)  Current rates: (i) 25% for income tax; and (ii) of 15% for the social contribution to financial and equated companies, and of 20%, from September 2015 to December 2018, in accordance with Law No. 13,169/15; and (iii) of 9% for the other companies (Note 3h);

(2)  Constitution of tax credit, net of deferred liabilities, related to the increase in the social contribution tax rate, according to Law No. 13,169/15; and

(3)  Basically, includes, (i) the exchange rate variation of assets and liabilities, derived from investments abroad; (ii) the equalization of the effective rate of social contribution in relation to the rate (45%) shown; and (iii) the deduction incentives.

 

b)   Breakdown of income tax and social contribution in the income statement

 

 

 

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Financial Statements of the Prudential Conglomerate and Independent Auditor’s Report

 

c)   Deferred income tax and social contribution

 

 

(1)  Includes the sum of R$2,448,018 thousand, concerning the increase of the rate of the social contribution on the temporary additions and negative basis provisioned for completion by December 2018, based on technical studies and analyses carried out by the Management, according to Law No. 13,169/15;

(2)  By being framed in the condition established by art. 1, subparagraph I of CMN Resolution No. 3,059/02, with amendments introduced by CMN Resolution No. 4,441/15, Banco Bradesco registered with the Bacen, an authorization request for maintenance of inventory and constitution of new tax credits; and

(3)  Deferred tax assets from financial companies and similar companies, were established considering the increase in the social contribution rate, determined by Law No. 11,727/08 and Law No. 13,169/15 (Note 3h).

 

d)   Expected realization of deferred tax assets on temporary differences, tax loss and negative basis of social contribution and deferred social contribution – Provisional Measure No. 2,158-35

 

                      

The projected realization of deferred tax assets is an estimate and it is not directly related to the expected accounting income.

 

The present value of deferred tax assets, calculated based on the average funding interest rate, net of tax effects, amounts to R$39,468,147 thousand (R$26,204,472 thousand in 2014), of which R$34,146,305 thousand (R$22,136,676 thousand in 2014) relates to temporary differences, R$5,217,852 thousand (R$3,964,887 thousand in 2014) to tax losses and negative basis of social contribution and R$103,990 thousand (R$102,909 thousand in 2014) to deferred social contribution, Provisional Measure No. 2,158-35.

 

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e)   Unrecognized deferred tax assets

 

On December 31, 2015, deferred tax assets of R$8,442 thousand, were not recognized, and will only be registered when they meet the regulatory requirements and/or present prospects of realization according to technical studies and analyses prepared by the Management and in accordance with Bacen regulations.

 

f)    Deferred tax liabilities

 

 

(1)  Includes, in 2015, the sum of R$132,681 thousand, related to the increase of the CSLL rate, in accordance with Law No. 13,169/15.

 

The deferred tax liabilities of companies in the financial sector were established considering the increased social contribution rate, established by Law No. 11,727/08 and Law No. 13,169/15 (Note 3h).

 

33)    OTHER INFORMATION

 

a)   The Organização Bradesco manages investment funds and portfolios with net assets which, on December 31, 2015, amounted to R$550,283,806 thousand (R$488,730,084 thousand in 2014).

 

b)   Consortium funds

 

 

 

c)   As part of the convergence process with international accounting standards, the Brazilian Accounting Pronouncements Committee (CPC) issued several accounting pronouncements, as well as their interpretations and guidelines, which are applicable to financial institutions only after approval by CMN. The accounting standards which have been approved by CMN include the following:

 

·     Resolution No. 3,566/08 – Impairment of Assets (CPC 01);

·     Resolution No. 3,604/08 – Statement of Cash Flows (CPC 03);

·     Resolution No. 3,750/09 – Related Party Disclosures (CPC 05);

·     Resolution No. 3,823/09 – Provisions, Contingent Liabilities and Contingent Assets (CPC 25);

·     Resolution No. 3,973/11 – Subsequent Event (CPC 24);

·     Resolution No. 3,989/11 – Share-based Payment (CPC 10);

·     Resolution No. 4,007/11 – Accounting Policies, Changes in Estimates and Error Correction (CPC 23);

·     Resolution No. 4,144/12 – Conceptual Framework for Preparing and Presenting Financial Statements; and

·     Resolution No. 4,424/15 – Employee Benefits (CPC 33 – shall take effect as from January 1, 2016).

 

Presently, it is not possible to estimate when the CMN will approve the other CPC pronouncements or if they will be applied prospectively or retrospectively.

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Financial Statements of the Prudential Conglomerate and Independent Auditor’s Report

 

 

CMN Resolution No. 3,786/09 and Bacen Circular Letters No. 3,472/09 and No. 3,516/10 establish that financial institutions and other entities authorized by Bacen to operate, which are publicly-held companies or which are required to establish an Audit Committee shall, since December 31, 2010, annually prepare and publish in up to 90 days after the reference date of December 31 their consolidated financial statements, prepared under the International Financial Reporting Standards (IFRS), in compliance with standards issued by the International Accounting Standards Board (IASB).

 

As required by CMN Resolution, on March 31, 2015, Bradesco published its consolidated financial statements for December 31, 2013 and 2014 on its website, in accordance with IFRS standards. The net profit and shareholders’ equity of the financial statements disclosed in IFRS were not substantially different from those presented in the financial statements prepared in accordance with the accounting practices adopted in Brazil and applicable to institutions authorized to operate by the Brazilian Central Bank (Bacen). The financial statements in IFRS are being prepared and will be disclosed in  March 7,  2016.

 

d)   In the fourth quarter of 2015, the Bacen has changed some rules of compulsory collection on resources at sight, in installments and of savings. These are the main changes:

 

 

e)     On August, 2015, Bradesco informed the market that it had signed the Purchase and Sale of Shares Agreement with HSBC Latin America Holdings Limited for the acquisition of 100% of the share capital of HSBC Bank Brasil S.A. - Banco Múltiplo and HSBC Serviços e Participações Ltda. ("HSBC"), for the value of US$5.2 billion. The price shall be adjusted by the equity variation of HSBC as per 12.31.2014 and will be paid on the date of completion of the operation. With the acquisition, Bradesco will assume all operations of HSBC in Brazil, including retail, insurance and asset management, as well as all the branches and clients. In January 2016, Bradesco communicated to the market that the Central Bank approved the acquisition of 100% of the capital share of HSBC Bank Brasil S.A. – Banco Múltiplo and of HSBC Serviços e Participações Ltda (“HSBC”). The conclusion of the operation is subject to approval by the other competent regulatory agencies and fulfillment of the legal formalities.

 

f)      In January 2016, Bradesco signed a non-binding Memorandum of Understanding with Banco do Brasil S.A., Banco Santander (Brasil) S.A., Caixa Econômica Federal and Itaú Unibanco S.A., in order to create a holding company of credit intelligence ("GIC"), which will develop a database with the goal of adding, reconciling and handling database and credit-related information, of individuals and legal entities, which expressly authorize their inclusion in the database, as required by the applicable rules.

 

g)    There were no other subsequent events that need to be adjusted or disclosed in the individual financial statements as of December 31, 2015.

 

 

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Financial Statements of the Prudential Conglomerate and Independent Auditor’s Report

 

 

 

To

The Board of Directors and Management

Banco Bradesco S.A.

Osasco – SP

 

We have audited the accompanying Prudential Conglomerate consolidated financial statements of Banco Bradesco S.A. (“Bradesco”), which comprise the consolidated statement of financial position of the Prudential Conglomerate as at December 31, 2015, and the respective income statement, statement of changes in equity and cash flow statement for the six-month period and year then ended, and a summary of significant accounting policies and other explanatory information. These special purpose financial statements have been prepared by Bradesco´s management as required by Resolution no 4,280, dated October 31, 2013, of the National Monetary Council (CMN) and supplementary regulations of the Central Bank of Brazil (BACEN), described in the note no 2 to the financial statements.

 

Management’s Responsibility for the Financial Statements

 

Bradesco´s Management is responsible for the preparation and fair presentation of these Prudential Conglomerate consolidated financial statements in accordance with the Resolution no 4,280/13 of CMN, and supplementary regulations of BACEN, which main criteria and accounting practices are described in note no 2 to the financial statements, and for such internal control as management determines is necessary to enable the preparation of the Prudential Conglomerate consolidated financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditor’s Responsibility

 

Our responsibility is to express an opinion on these Prudential Conglomerate consolidated financial statements prepared by Bradesco´s Management in accordance with the Resolution no 4,280/13, of CMN, and supplementary regulations of BACEN, based on our audit in accordance with Brazilian and International Standards on Auditing, taking into account the NBC TA 800 (ISA 800) - “Special Considerations - Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks”.

 

Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the Prudential Conglomerate consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal controls relevant to the preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Bradesco’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

Opinion

 

 

70       December 2015

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This press release may contain forward-looking statements. These statements are statements that are not historical facts, and are based on management's current view and estimates of future economic circumstances, industry conditions, company performance and financial results. The words "anticipates", "believes", "estimates", "expects", "plans" and similar expressions, as they relate to the company, are intended to identify forward-looking statements. Statements regarding the declaration or payment of dividends, the implementation of principal operating and financing strategies and capital expenditure plans, the direction of future operations and the factors or trends affecting financial condition, liquidity or results of operations are examples of forward-looking statements. Such statements reflect the current views of management and are subject to a number of risks and uncertainties. There is no guarantee that the expected events, trends or results will actually occur. The statements are based on many assumptions and factors, including general economic and market conditions, industry conditions, and operating factors. Any changes in such assumptions or factors could cause actual results to differ materially from current expectations.

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