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Financial Statements

(A free translation from Portuguese into English of
individual and consolidated financial statements)

Gafisa S.A.

December 31, 2012

with Independent Auditor’s Report

on the Financial Statements

Gafisa S.A.

Financial Statements

December 31, 2012

Table of contents

Audited financial statements

Gafisa S.A.

Balance sheet

December 31, 2012

(In thousands of Brazilian Reais)

Gafisa S.A.

See accompanying notes to the financial statements.

Gafisa S.A.

Statement of operations

Year ended December 31, 2012

(In thousands of Brazilian Reais, except if stated otherwise)

See accompanying notes to the financial statements.

Gafisa S.A.

Statement of comprehensive income

Year ended December 31, 2012

 (In thousands of Brazilian Reais, except if stated otherwise)

See accompanying notes to the financial statements.

Gafisa S.A.

Statement of changes in equity

Year ended December 31, 2012

(In thousands of Brazilian Reais)

See accompanying notes to the financial statements.

Gafisa S.A.

Statement of cash flows

Year ended December 31, 2012

(In thousands of Brazilian Reais) 

See accompanying notes to the financial statements.

Gafisa S.A.

Statement of value added

Year ended December 31, 2012

(In thousands of Brazilian Reais)

See accompanying notes to the financial statements.

Dear Shareholders,

The Management of Gafisa S.A. (“Gafisa” or the “Company”) is proud to submit to your examination this Management Report and the accompanying Financial Statements, Reports of Independent Auditors and Fiscal Council, for the year ended December 31, 2012. All information is reported in millions of Reais and on consolidated basis, except when otherwise indicated, and in accordance with the accounting practices adopted in Brazil, and the consolidated financial statements were prepared in accordance with the International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board (IASB), and in accordance with the accounting practices adopted in Brazil.

The beginning of 2012 was very challenging to Gafisa. We started with a structured plan, which included several measures of strategic nature, aiming at significantly changing the Company’s positioning. At that moment, when we had just reported a negative result for 2011, the priorities that should be take were clear: attain a new strategic positioning, prioritize the operating cash generation in order to reduce net indebtedness, and have a healthier balance sheet.

The first steps included the establishment of a new operational structure organized by brand, with the appointment of the respective executive officers in charge of their results, and the redesign of operations, as follows:

§  Gafisa: concentration of operations in its key markets, São Paulo and Rio de Janeiro, regions that have delivered a good performance because of experience, accumulated knowledge and excellent supply chain, as well as the completion of ventures launched in other markets;

§  Tenda: temporary reduction in its operations until gaining full control over the entire financial, operational and construction cycle, in order to adjust the business model to new launches based on the new rationale – which depends on fulfilling the basic conditions in each strategic marketplace (São Paulo, Rio de Janeiro, Northeastern region and Minas Gerais): mastering the financial cycle (launch contracted ventures and sell units that can be immediately transferred to financial institutions), mastering the construction cycle (building using aluminum molds, with shorter cycle and higher standardization), and appropriate land bank to give continuity to operations (area for development of ventures with minimum scale); and

§  Alphaville: give priority to maximum capital allocation to the business, maintaining balance between growth and return.

§       Corporate: creation of the Gafisa Service Center (CSG, in portuguese), responsible for supporting the brands in carrying out back office activities (accounts payable, accounts receivables, accounting, collection, credit analysis, among others), thus allowing each brand to focus 100% on the operation.

Once the basic assumptions are defined, we took action and the first results of our strategy started to be shown already in the second quarter, which confirmed that our corrective measures were right, of which we highlight the following:

§  We ended 2012 with the delivery of 27.1 thousand units, 20% up on the 22.6 thousand units delivered in 2011.

§  We obtained operating cash generation of approximately R$1.02 billion and cut down our net indebtedness of approximately R$700 million.

Our sales totaled R$ 2.63 billion, 21% down on the previous year, of which 66% were launches, while inventory sales accounted for the remaining 34%. In the end of the period, consolidated inventories at market value increased 3%, reaching R$3.6 billion, as compared to R$3.5 billion in the end of 2011.

In the end of 2012, net revenue for the year rose by 34% year-on-year, totaling R$ 3.95 billion. The gross profit for the period reached R$1.01 billion, as compared to the R$262 million for 2011. Gross margin increased to 25.6%, or 30.6%, excluding the impacts of Tenda, while it stood at 8.9% and 21.7%, respectively, for the previous year.

Net income for the period, plus taxes on income, financial expenses net of financial income and depreciation, amortization and depletion totaled R$ 211.248 million, as compared to the loss of R$ 559.175 million for the previous year. 

Adjusted EBITDA reached R$ 470.14 million, as compared to the negative adjusted EBITDA of R$ 338.63 million for the previous year. Gafisa and Alphaville recorded an adjusted EBITDA of R$ 243.58 million and R$273.72 million, respectively. Tenda recorded a negative adjusted EBITDA of R$ 47.15 million for 2012. In 2012, the adjusted EBITDA margin reached 11.9%, or 18.3% without Tenda, higher than the -11.5% and 10.3%, respectively, reported for 2011.

Net income does not fully reflect these improvements, because in 2012 we also had the impact of older ventures of Gafisa out of the key markets, reduced margins in Tenda because of the deviation of costs and high financial expenses due to the indebtedness that continued high. In view of these facts, we recorded a net loss of R$ 124 million for 2012, as compared to the net loss of R$ 945 million for 2011.

Our key indicators of the balance sheet have significantly improved. The Gafisa Group ended 2012 with R$1.68 billion in cash and cash equivalents and short-term investments, higher than the R$ 984 million at the end of 2011.

The Company’s total indebtedness (excluding obligations assumed on assignment of receivables) remained stable at R$ 4.24 billion, as compared to R$ 4.17 billion at the end of 2011, while net indebtedness (excluding obligations assumed on assignment of receivables) dropped to R$ 2.56 billion as of December 31, 2012, as compared to R$ 3.24 billion for the previous year, in view of the operating cash generation of the Company.

The leverage level, calculated by the net debt-to-equity ratio, dropped to 0.95x as of December 31, 2012, as compared to 1.18x as of December 31, 2011. Excluding the venture funding, the net debt-to equity ratio stood at 15%, 31% down on the 46% recorded at the end of 2011.

While we focused on improving our balance sheet, we did not stop looking for opportunities for new businesses, which allowed us to launch nearly R$ 3 billion of Total Sales Value, of which Gafisa accounted for 54%, and Alphaville, 46%, a volume that in our understanding is adequate to the moment that the Company is going through and to its current capital structure. This amount of launches is 16% down on 2011, reflecting a slowdown in Tenda, and is in line with the guidance of the beginning of the year.

Finally, 2012 was marked by our positive response to big challenges. The financial results for the year reflect the correct implementation of adopted corrective actions, including the appointment of the executive officers responsible for the P&L of each division, positioning the Company for long-time sustainable growth.

We also highlight that Gafisa won a financial disclosure award of its industry granted by IR Global Rankings in 2012. Gafisa also ranked third in the global corporate governance category, which takes into account the quality of the participation of the board and its committees, shareholders rights and corporate and social responsibility.

OPERATIONAL PERFORMANCE BY SEGMENT

Launches for the year totaled R$1.61 billion, considering that the Gafisa segment accounted for 54% of the consolidated launches of the group for the period, and included ventures concentrated in São Paulo and Rio de Janeiro, a decrease by 25% year-on-year.

Contracted sales for the year totaled R$ 1.60 billion, 27% down on 2011. Sales of units launched over the year accounted for 52% of total, while sales of inventories accounted for the other 48%. The sale speed stood at 20.0%, as compared to 8.8% in 2011. The sale speed of the Gafisa segment launches in 2012 stood at 42%.

In 2012, Gafisa delivered 44 ventures/stages and 7,505 units. The completion of ventures under construction in markets other than São Paulo - Rio de Janeiro is scheduled to 2013.

The market value of Gafisa inventories, which account for 55% of total inventories, remained stable at R$1.98 billion at the end of 2012.

The results for 2012 show a higher share of Alphaville in the mix of products, accounting for 46% of consolidated launches for 2012, 28% up on the previous year.

Launches in 2012 totaled R$ 1.34 billion, a growth by 38% year-on-year. Contracted sales for 2012 totaled R$ 1.11 billion, 32% up on the previous year. For the first time, Alphaville sales were in excess of R$1 billion in a year.

Contracted sales totaled R$ 1.11 billion, 32% up on the previous year. In 2012, the segment of residential lots accounted for 42% of consolidated contracted sales, as compared to 25% of sales for 2011. Sales of launches in 2012 accounted for 81% of total sales, while the other 19% were sales of inventories.

The net income for the year reached R$ 158 million, 22% up on the R$129 million reported for 2011.

In 2012, Alphaville delivered 8 ventures/stages and 2,713 units.

The market value of Alphaville inventories totaled R$812 million at the end of 2012, an increase of 43% as compared to R$567 million at the end of 2011.

Reflecting the purpose of remediating problems at Tenda and focusing on construction and delivery, no venture was launched in 2012. Over 2012, the complexity of Tenda operations was reduced, by improving all of its processes, reducing the financial cycle and adoption of more efficient building standards.

In 2012, gross contracted sales totaled R$1.17 billion, 32% down on previous year. Since the first quarter of 2012, the recognition of contracted sales and the compensation of the sales team were set based on the ability of transferring the debt balance of customers to financial institutions. 

Net contracted sales for the year totaled a loss of R$74.3 million, as compared to R$330.2 million for 2011. Net contracted sales reflect the cancellations over the year with potential owners who are not eligible for financing. Despite the cancellations for 2012, a good demand for resale of these units targeted at the low-income segment was noted. Of the 9,200 units that were cancelled and returned to the inventory of the Tenda brand, 68% has already been resold to eligible clients in the same period.

Since June 2011, the volume of units contracted by financial institutions has increased, because of a new business unit of Caixa Econômica Federal that serve the major construction companies. In 2012, Tenda transferred nearly 13,000 units to financial institutions, or 108% of the average guidance for the year, which was between 10,000 and 14,000 customers, positively contributing to the operating cash generation of the Company.

Throughout 2012, Tenda delivered 87 ventures/stages and 16,889 units.

The market value of Tenda inventories totaled R$827 million at the end of 2012, 11% down on the R$932 million at the end of 2011.

Gafisa’s management is composed of a professional and committed team, with extensive experience in the Brazilian real estate sector. Some of them are in the Company since the beginning of their careers, an example of excellence in the management training program of Gafisa. People who have a differential and are unique, aligned with our vision, values and culture.

We foster our values everyday, in attitudes, decision making. We make selection, assessment and compensation based on these guidelines. We believe that they should be perceived by all in all strategic actions involving our Gafisa, Tenda and Alphaville brands.

The Company’s compensation policy for its employees, including the Board of Director’s members, the Statutory and non-Statutory Officers and Fiscal Council’s members, is in line with the best corporate governance practices. We aim at attracting and retaining the best professionals in the market. The compensation is established based on market surveys and is directly related to the alignment of the interests of the executives with those of the Company’s shareholders.

Our meritocratic model favors variable compensation. A significant percentage of total compensation is tied to the fulfillment of corporate results and individual goals. All employees have individual objective goals directly related to the Company’s strategies and our main business indicators.

In the case of Officers and Managers, besides the practice of short-term variable compensation, we adopt the long-term compensation (in the case of the second, by granting stock options), which enable sharing the risk and result of the Company with its main executives, a characteristic of a policy that is transparent and focused on the fulfillment of long-lasting results and the Company’s perpetuity.

We are a Company that believes in training our employees, in professional development. In our personnel, 70% of our leaders – Officers, Managers and Coordinators – were trained in house, through Talent development programs: Internships, Trainees and International MBA.

§        Internship: program that involves 600 civil engineers by year.

§       Trainees: about 30 recently graduates are employed every year. They are trained over a year, period in which they are prepared to be the next executives of the Company.

§        International MBA: recruiting of Brazilian International MBA graduates who want to build their career in Brazil.

We are committed to the prevention of occupational accidents. Accordingly, we have a risk prevention program aimed at maintaining and improve the health and physical condition of our employees, by anticipating, recognizing, assessing and controlling existing or potential environmental risks in the workplace.

We make significant investments in this area, offering training programs to employees at our construction sites, as well as to subcontracted workers, who are required to follow strict guidelines.

The Company currently counts on the collaboration of 4,024 own employees.

In 2012, the Company invested nearly R$26 million. Most of this fund was allocated to the development of new IT projects, followed by investments in CSG and improvements.

Gafisa, with the objective of exercising its leading role, has since 2006 an area named Operations and Technology Development (DOT, in portuguese), mainly focused on the search for technological innovation and process improvements that bring competitive market advantage in the market. In order to approve a development project it is necessary analyze if the project will:

- Enhance the quality perceived by the customer,

- Reduce the construction period,

- Cut cost.

At present, DOT is composed of ten professionals who also use the resources allocated to all areas of the company in order to implement and provide feedback to development projects. Such structure requires an investment of approximately R$ 1 million per year.

Gafisa management carried out a thorough evaluation of each of its business units, which resulted in a new organizational structure that includes the appointment of a manager to each brand, responsible for its results. The executive officers of each business unit are Sandro Gamba (Gafisa), Rodrigo Osmo (Tenda), and Marcelo Willer (Alphaville).

And to Finance and Investor Relations Officers André Bergstein was appointed. In addition, Luis Carlos Siciliano was appointed to Supply, Shared Services Area (CSG), IT and Legal Counsel Officer. The Officers Fernando Calamita and Rodrigo Pádua continue focused on Controllership and Control, and Personnel and Management, respectively.

For each project to be launched there is a different approval dynamics, and several authorizations are required by the proper authorities, including environmental ones, once each municipality follows a specific land use regulation, and in many times their own environmental legislation. In this context, AlphaVille has a fundamental role, as it contributes to the regulation of many municipalities that do not require important licenses, raising the standard and getting a closer relationship with such authorities.

At each beginning of the project, a complete research is conducted about the city’s legislation, so that the Company may operate within its own standards, always considering and abiding by the local environmental legislation in the preparation of the Environmental Impact Study.

In order to assure the performance of the commitments assumed in the licensing process and minimize the environmental impacts, AlphaVille created in 2008 the environmental management, which is, among other things, responsible for providing advisory on environmental licensing and monitoring construction works, mainly with the engineers in charge.

Giving continuity to the improvement of internal processes, the Company purchased environmental management software and started to store data of all stages of each venture, from licensing from proper authorities to the construction. Information such as hiring, agreements, costs and compliance with conditions are fed to the software. Therefore we created an easily accessible database, which will facilitate the preparation and setting of controls and goals. The objective is to implement over the next years an Environmental Management System in the Company and, in this process, the employees will be trained to use and maintain (feed with data) this system.

The Board of Directors of Gafisa is the body responsible for making decisions and formulating general guidelines and policies related to the Company’s businesses, including its long-term strategies. In addition, the Board also appoints executive officers and supervises their activities.

The Board of Directors’ decisions are taken by the majority vote of its members. In case of a tie, the Board Chairman, besides his personal vote, must cast the tie-breaking vote.

The Board is formed by nine members, elected at the Annual Shareholders’ Meeting, of which eight (89%) are independent, in compliance with the rules of the New York Stock Exchange (NYSE), which sets forth that all listed companies must have a board of directors composed of a majority of independent members, while the Company’s By-laws and the Bovespa listing rules establish a minimum of 20% of independent members. The term of office of each member is two years, with reelection permitted, and subject to removal by shareholders at a shareholders’ meeting.

The following table shows the members of the Board of Directors.

* Odair G. Senra is a member not independent of the board of directors, according to the Brazilian Law and the NYSE rules.

Gafisa’s By-laws provides for a non-permanent Fiscal Council, which can be established upon the request of the shareholders, and its members must be elected at a shareholders’ meeting in the events set forth by the Law. The Fiscal Council, when established, must be composed of three members, and an equal number of alternates.

The operation of the Fiscal Council, when established, ends at the first annual shareholders’ meeting after its establishment, and its members can be reelected. The compensation of fiscal council members is set at the shareholders’ meeting that elects them.

At the Annual Shareholders’ Meeting held on May 11, 2012, in view of the request provided for in paragraph 2 of article 161 of Law No. 6,404/76 and article 31 of the Company’s By-laws, a Fiscal Council was established, which will operate until the next Annual Shareholders’ Meeting of the Company in 2013.

The Fiscal Council is currently composed of Messrs. Olavo Fortes Campos Rodrigues Junior, Adriano Rudek de Moura and Luis Fernando Brum de Melo as effective members, and Messrs. Marcello Mascotto Iannalfo and Paulo Ricardo de Oliveira, and Ms. Laiza Fabiola Martins de Santa Rosa as alternates.

16

Gafisa’s Board of Executive Officers must be composed of a minimum of two and a maximum of eight members, including the CEO and the Financial Officer, elected by the Board of Directors for a three-year term, their reelection being permitted, as provided for by the By-laws.

In the current term of office, five members compose the Board of Executive Officers, the legal representative body of the Company and mainly responsible for the management and daily monitoring of the general policies and guidelines formulated at the Annual Shareholders’ Meeting and the Board of Directors.

The Board of Directors is supported by the following Executive Committees:

§        Nominating and Corporate Governance Committee: it has the purpose of considering and periodically reporting on matters related to the size, identification, selection and qualification of the Board of Directors, and the candidates nominated for the Board of Directors and its Committees, as well as preparing and recommending Governance principles applicable to the Company.

§        Audit Committee: it is responsible for planning and reviewing the annual and quarterly reports of the Company – which is submitted to the review and final approval of the Board of Directors –, for the involvement of the auditors in the process and put special focus on the legal provisions and accounting standards, ensuring the maintenance of an effective internal controls system.

§        Compensation Committee: it has the duty to evaluate and make recommendations to the members of the Board of Directors regarding the policies on compensation and all forms of bonus to be provided to the Executive Officers and other employees of the Company.

§        Ethics Executive Committee: it has the duty to monitor the practices adopted by the entire organization, assuring that they are compatible with the beliefs and values that represent Gafisa and the principles and instructions on conduct provided for in the Code of Ethics.

§       Investment Executive Committee: has the duty to analyze, discuss and recommend land acquisitions and new real estate developments; advise the executive officers during the negotiation of new deals and the structuring of new developments; follow-up the approval of budgets and the cash flow; and, in special cases, participate in the negotiation and structuring of new types of businesses.

§        Finance Executive Committee: it operates by evaluating and making recommendations to the members of the Board of Directors regarding risk and financial investments policies of the Company.

The members of each one of these committees can be found on the Investor Relations website of the Company: www.gafisa.com.br/ri. 

In order to protect the interest of all of its shareholders equally, the Company establishes, according to the effective legislation and the best governance practices, the following rights to the holders of Gafisa’s shares:

§       Vote at a Shareholders’ Meeting, either Annual or Extraordinary, and make recommendation and give instructions to the Board of Directors related to decision making;

§        Receive dividends and share of profit or other distribution related to shares, in proportion to their interests in capital;

§        Oversee the management of Gafisa, according to the By-Laws, and resign from the Company in the events provided for in the Brazilian Corporate Law; and

§        Receive at least 100% of the price paid for common share of the controlling block, according to the “Novo Mercado” listing rules, in case of tender offer as a result of the disposal of the Company’s control.

According the terms of Article 36, Paragraph 2 (b) of the Bylaws, the net income for the year, calculated after the deductions prescribed in the Bylaws and adjusted as provided in Article 202 of the Brazilian Corporate Law, shall have 25% of its balance allocated to the payment of mandatory dividends to all shareholders of the Company.

Because of the loss for the year ended December 31, 2012, the management proposal, to be voted on April 19, 2013, will not include the distribution of dividends for 2012.

The Company, which has diluted capital, continues to be the only Brazilian real estate development company to have its shares traded on the New York Stock Exchange, and has the most liquid share in the sector. In 2012, we reached an average daily trading volume of R$ 55.0 million at BM&FBovespa, in addition to an amount equivalent to approximately R$ 20.7 million at NYSE, totaling R$ 75.7 million in daily average volume.

In 2012, the Bovespa index recorded a 1.27% high, and the Company’s shares ended the year at a closing price of R$4.21 (GFSA3) and US$3.93 (GFA), which represents an appreciation of 2.18% and a drop of 14.57%, respectively, as compared to the closing price in 2011.

In 2012, Gafisa renewed the agreement with Banco Itaú for market maker services.

We also inform that the Company is bound upon arbitration in the market's arbitration chamber, according to the covenant included in its Bylaws.

Gafisa’s shares are included in the following indexes: IBOV - Bovespa, IBX - Bovespa, IBX50 – Bovespa.

Throughout 2012, we built the foundation to achieve solid and consistent returns to our shareholders. We adopted a conservative position, prioritized cash generation and reduced net indebtedness, restructured the profile of our financial liabilities, decreased the volume of launches, although we have produced a business volume considered adequate.

As a result of these initiatives, we currently have a confortable and sufficient cash position to finance our operations and meet our debts that are expected to fall due in 2013. With these actions, we are clearly reaching a turning point in the recent history of the.

In this sense, we estimate for 2013 a higher balance among investments and unleverage our balance sheet. We believe that we are better positioned to increase, even conservatively, the pace of our launches, getting back into launching Tenda brand products, and necessarily getting back into our investment process through acquisition of land compatible with the size of our operation.

The result of this process will be more visible from 2014, when we believe that we will be substantially operating in line with the strategy devised in the beginning of 2012.

Therefore, we are introducing a new guidance on launches for 2013, between R$ 2.7 and R$ 3.3 billion, reflecting the continuity of the regional focus on Gafisa and on strategic markets of Tenda. Gafisa and Alphaville shall account for about 88% of launches, of which Gafisa business unit shall account for 42% and the Alphaville segment, 46%, while the Tenda segment shall account for 12% of the launches for the year.  

Guidance on Launches (2013E)

The focus on cash generation led to a confortable liquidity position for Gafisa in 2013, after having restructured its debt and diversified the sources of funds and cash instruments. As of December 31, 2012, the net debt-to-equity ratio stood at 95%. We expect that this leverage level remain stable in 2013, as compared to 2012.

Leverage Guidance (2013E)

We expect an adjusted consolidated EBITDA margin between 12% - 14% in 2013, once the margins are still impacted (1) by the legacy of the older ventures of Tenda, which includes the delivery of about 7,000 units in 2013, and (2) by the delivery of ventures with lower margins launched out of the key markets of the Gafisa segment, which shall be substantially completed in 2013.

Adjusted Consolidated EBITDA Margin Guidance (2013E)

The Gafisa Group plans to deliver between 13,500 and 17,500 units in 2013, of which 27% shall be delivered by Gafisa, 45% by the Tenda segment, and the other 27% by the Alphaville segment.

Other Significant Indicators –Unit Delivery Estimate (2013E)

The policy on the Company’s conduct in contracting services unrelated to external audit from our independent auditors is based on principles that preserve the autonomy of the independent auditor.  These internationally accepted principles consist of the following:  (a) an auditor cannot audit its own work; (b) an auditor cannot serve a management function in its client; and (c) an auditor shall not promote the interests of its clients.

According to Article 2 of CVM Instruction No. 381/03, Gafisa informs that Ernest & Young Terco Auditores Independentes, the independent audit firm of the Company and its subsidiaries, did not provide services other than independent audit in 2012.

The Board of Executive Officers states, in accordance with Article 25, paragraph 1, items V and VI, of CVM Instruction 480/2009, that it revised, discussed and agrees with the Financial Statements contained in this Report and the related opinion issued in the Report of Independent Auditors.

Gafisa thanks the valuable contribution of its employees, clients, suppliers, partners, shareholders, financial institutions, governmental bodies, regulating authorities and other stakeholders for their support throughout 2012.

1.   Operations 

Gafisa S.A. ("Gafisa" or "Company") is a publicly traded company with headquarters at Avenida das Nações Unidas, 8.501, 19º andar, in the City of São Paulo, State of São Paulo, Brazil and started its operations in 1997 with the objectives of: (i) promoting and managing all forms of real estate ventures on its own behalf or for third parties, taking into consideration that in the case of the later, as construction company and proxy; (ii) selling and purchasing real estate properties in general; (iii) carrying out civil construction and civil engineering services and (iv) developing and implementing marketing strategies related to its own or third party real estate ventures; and (v) investing in other companies which have similar objectives as the Company’s.

Real estate development projects entered into by the Company with third parties are structured through specific purpose partnerships (“Sociedades de Propósito Específico” or– “SPEs”) or the formation of consortia and condominiums. Controlled entities substantially share the managerial and operating structures and the corporate, managerial and operating costs with the Company. SPEs, condominiums and consortia operate solely in the real estate industry and are linked to specific ventures.

2.   Presentation of financial statements and summary of significant accounting policies

2.1.    Basis of presentation and preparation of individual and consolidated financial statements

On March 8, 2013, the Company’s Board of Directors approved these individual and consolidated financial statements of the Company and has authorized their issuance. The Board of Directors of the Company has power to amend the individual and consolidated financial statements of the Company after they are issued.

The individual financial statements (“Company”), and consolidated financial statements for the years ended December 31, 2012 and 2011, were prepared in accordance with the accounting practices adopted in Brazil, which comprise the rules of the Brazilian Securities and Exchange Commission (“CVM”), and the pronouncements, interpretations and guidelines of the Brazilian FASB (“CPC”). The consolidated financial statements are specifically in compliance with the International Financial Reporting Standards (IFRS) applicable to real estate development entities in Brazil, including the Guideline OCPC 04 - Application of the Technical Interpretation ICPC 02 to the Brazilian Real Estate Development Entities, in relation to the treatment of the recognition of revenue from this sector and involves certain matters related to the meaning and application of the continuous transfer of the risks, benefits and control over the real estate unit sales. 

Certain matters related to the meaning and application of the continuous transfer of the risks, benefits and control over the real estate unit sales have been analyzed by the International Financial Reporting Interpretation Committee (IFRIC), at the request of some countries, including Brazil. However, in view of the project for issuing a revised standard relating to revenue recognition, IFRIC has been discussing this topic in its agenda, understanding that the concept for recognizing revenue is included in the standard that is currently under discussion. Accordingly, this issue is expected to be resolved only after the revised standard relating to revenue recognition is issued. 

2.   Presentation of financial statements and summary of significant accounting policies -- Continued

2.1.    Basis of presentation and preparation of individual and consolidated financial statements -- Continued

The individual and consolidated financial statements were prepared based on historical cost basis, except if otherwise stated in the summary of accounting policies. The historical cost is usually based on the considerations paid in exchange for assets. 

The financial statements have been prepared on a going concern basis. Management makes an assessment of the Company’s ability to continue as going concern when preparing the financial statements. The Company is in compliance with all its debt covenants at the date of issue of these Financial Statements and management have not identified any material uncertainties over the Company’s ability to continues as a going concern over the next 12 months..

All amounts reported in the accompanying financial statements are in thousands of Reais, except as otherwise stated.

The non-accounting and/or non-financial information included in the accompanying financial statements, such as sales volume, contractual data, revenue and costs not recognized in units sold, economic projections, insurance and environment, were not audited.

2.1.1.   Consolidated financial statements

The consolidated financial statements of the Company include the financial statements of the Company and its direct and indirect subsidiaries, and share of jointly-controlled investees. Control over subsidiaries is obtained when the Company has power to control their financial and operating policies, and is able to enjoy their benefits and is exposed to the risks of their activities. The subsidiaries and jointly-controlled companies are fully and proportionally consolidated, respectively, from the date the full or joint control begins until the date it ceases. As of December 31, 2012 and 2011, the Consolidated Financial Statements include the full consolidation of the following companies, respectively:

2.   Presentation of financial statements and summary of significant accounting policies --Continued 

2.1.    Basis of presentation and preparation of individual and consolidated financial statements -- Continued  

2.1.1.   Consolidated financial statements --Continued 

(*)  It does not include jointly-controlled investees, as detailed below:

(a) The acquisition of the remaining 20% interest in the capital of AUSA is going through arbitration process, as described in Note 9.

The accounting practices were uniformly adopted in all subsidiaries and jointly-controlled investees included in the consolidated financial statements and the fiscal year of these companies is the same of the Company. See further details on these subsidiaries and jointly-controlled investees in Note 9.

The Company carried out the proportionate consolidation of the financial statements of the direct jointly-controlled investees listed below. For more details in relation to significant information on these companies, see Note 9.

(*) Includes companies with investment balance below R$3,000.

2.   Presentation of financial statements and summary of significant accounting policies --Continued 

2.1.    Basis of presentation and preparation of individual and consolidated financial statements -- Continued  

2.1.2.   Functional and presentation currency

The individual (Company) and consolidated financial statements are presented in Reais (presentation currency), which is also the functional currency of the Company and its subsidiaries.

2.2.    Summary of significant accounting policies

2.2.1.   Accounting judgments, estimates and assumptions

(i)    Judgments 

The preparation of the individual and consolidated financial statements of the Company requires management to make judgments, estimates and adopt assumptions that affect the reported amounts of revenue, expenses, assets and liabilities, as well as the disclosure of contingent liabilities, at the financial statements reporting date. Assets and liabilities subject to estimates and assumptions include the useful life of property and equipment, allowance for doubtful accounts and cancelled contracts, provision for fines due to delay in construction works, impairment of assets, deferred tax assets, provision for warranty, provision for tax, labor and civil risks, and the measurement of the estimated cost of ventures and financial instruments.

(ii)   Estimates and assumptions

The main assumptions related to sources of uncertainty over future estimates and other important sources of uncertainty over estimates at the reporting date, which may result in different amounts upon settlement are discussed below:

2.   Presentation of financial statements and summary of the main accounting policies--Continued 

2.2.    Summary of the main accounting policies--Continued 

2.2.1.   Accounting judgments, estimates and assumptions--Continued 

(ii)   Estimates and assumptions --Continued

a)     Impairment of non-financial assets

Management reviews annually and/or when a specific event occurs the carrying amount of assets with the objective of evaluating events or changes in the economic, operational or technological circumstances that may indicate a decrease or loss of its recoverable amount. Should such evidences exist, and the carrying amount exceeds the recoverable amount, a provision for impairment loss is recognized by adjusting the carrying amount to the recoverable amount. These impairment losses are recorded in statement of operations when found. A test for impairment of intangible assets with indefinite useful lives and goodwill is performed at least annually or when circumstances indicate a decrease in the carrying amount.

The carrying amount of an asset or of a certain cash-generating unit is defined as the highest between the value in use and the fair value less costs to sell.

When estimating the value in use of an asset, the estimated future cash flows are discounted to present value using a discount rate before taxes that reflects the weighted average cost of capital for the industry in which the cash-generating unit operates.