UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 6-K

 

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

 

For the month of March, 2020

Commission File Number: 001-38992

 

Afya Limited

(Exact name of registrant as specified in its charter)

 

Alameda Oscar Niemeyer, No. 119, Salas 502, 504, 1,501 and 1,503

Vila da Serra, Nova Lima, Minas Gerais

Brazil

+55 (31) 3515 7550

(Address of principal executive office)

 

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

 

Form 20-F

  Form 40-F ☐ 

 

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

 

Yes  ☐   No

 

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

 

Yes  ☐   No

         

 

 

 

 

TABLE OF CONTENTS

 

EXHIBIT  
99.1 Afya Limited – Consolidated financial statements as of December 31, 2019 and 2018 and for the three years ended December 31, 2019, 2018 and 2017

 

 

 

 

SIGNATURE

 

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

 

    Afya Limited
     
     
      By: /s/ Virgilio Deloy Capobianco Gibbon
        Name: Virgilio Deloy Capobianco Gibbon
        Title: Chief Executive Officer

 

Date: March 26, 2020

 

 

 

 

 

Exhibit 99.1

 

 

Afya Limited

 

 

Consolidated financial statements

as of December 31, 2019 and 2018 and for the three years ended December 31, 2019, 2018 and 2017

 

 

 

 

F-1

 

 

Report of Independent Registered Public Accounting Firm

 

To the Shareholders and the Board of Directors of

Afya Limited

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated statements of financial position of Afya Limited (the Company) as of December 31, 2019 and 2018, the related consolidated statements of income and comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board - IASB.

 

Adoption of IFRS 16

 

As discussed in Note 2.4 to the consolidated financial statements, the Company changed its method for recognizing leases in 2019, due to the adoption of IFRS 16 – Leases using the modified retrospective method of adoption.

 

Basis for Opinion

 

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

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ ERNST & YOUNG

Auditores Independentes S.S.

 

We have served as the Company's auditor since 2016.

 

Belo Horizonte, Brazil

March 26, 2020

 

F-2

 

Afya Limited

Consolidated statements of financial position

As of December 31, 2019 and 2018

(In thousands of Brazilian reais)

 

   Notes  2019  2018
Assets         
Current assets         
Cash and cash equivalents   6    943,209    62,260 
Restricted cash   7    14,788    —   
Trade receivables   8    125,439    58,445 
Inventories        3,932    1,115 
Recoverable taxes        6,485    2,265 
Derivatives   13.1    —      556 
Other assets        17,912    8,859 
Total current assets        1,111,765    133,500 
                
Non-current assets               
Restricted cash   7    2,053    18,810 
Trade receivables   8    9,801    5,235 
Related parties   9    —      1,598 
Derivatives   13.1    —      663 
Other assets        17,267    10,380 
Property and equipment   11    139,320    65,763 
Investment in associate   10    45,634    —   
Right-of-use assets   13.2.2    274,275    —   
Intangible assets   12    1,312,338    682,469 
Total non-current assets        1,800,688    784,918 
                
Total assets        2,912,453    918,418 

Liabilities

 

               
Current liabilities               
Trade payables        17,628    8,104 
Loans and financing   13.2.1    53,607    26,800 
Derivatives   13.2    757    —   
Lease liabilities   13.2.2    22,693    —   
Accounts payable to selling shareholders   13.2.3    131,883    88,868 
Advances from customers        36,860    13,737 
Labor and social obligations        46,770    31,973 
Taxes payable        19,442    6,468 
Income taxes payable        3,213    282 
Dividends payable        —      4,107 
Other liabilities        376    1,993 
Total current liabilities        333,229    182,332 
                
 Non-current liabilities               
Loans and financing   13.2.1    6,750    51,029 
Lease liabilities   13.2.2    261,822    —   
Accounts payable to selling shareholders   13.2.3    168,354    88,862 
Taxes payable        21,304    150 
Provision for legal proceedings   23    5,269    3,465 
Other liabilities        1,999    2,226 
Total non-current liabilities        465,498    145,732 
Total liabilities        798,727    328,064 
                
Equity               
Share capital   17    17    315,000 
Additional paid-in capital        1,931,047    125,014 
Share-based compensation reserve        18,114    2,161 
Earnings reserves        115,916    59,807 
Equity attributable to equity holders of the parent        2,065,094    501,982 
Non-controlling interests        48,632    88,372 
Total equity        2,113,726    590,354 
Total liabilities and equity        2,912,453    918,418 

 

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

 

F-3

 

 

Afya Limited

Consolidated statements of income and comprehensive income

For the years ended December 31, 2019, 2018 and 2017

(In thousands of Brazilian reais, except earnings per share)

 

   Notes  2019  2018  2017
             
Net revenue  19   750,630    333,935    216,008 
Cost of services  20   (308,853)   (168,052)   (124,065)
Gross profit      441,777    165,883    91,943​ 
                   
General and administrative expenses  20   (239,120)   (70,034)   (45,355)
Other income, net      2,594    599    2,755 
                   
Operating income      205,251    96,448    49,343 
                   
Finance income  21   51,689    10,428    5,222 
Finance expenses  21   (72,365)   (8,154)   (3,586)
Finance result      (20,676)   2,274    1,636 
                   
Share of income of associate  10   2,362    -    - 
                   
Income before income taxes      186,937    98,722    50,979 
                   
Income taxes expense  22   (14,175)   (3,988)   (2,500)
                   
Net income      172,762    94,734    48,479 
                   
 Other comprehensive income      -    -    - 
Total comprehensive income      172,762    94,734    48,479 
                   
Income attributable to                  
Equity holders of the parent      153,916    86,353    45,393 
Non-controlling interests      18,846    8,381    3,086 
       172,762    94,734    48,479 
Basic earnings per share                  
Per common share  18   2.03    1.84    1.41 
Diluted earnings per share                  
Per common share  18   2.02    1.81    1.41 

  

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

 

F-4

 

Afya Limited

Consolidated statements of changes in equity

For the years ended December 31, 2019, 2018 and 2017

(In thousands of Brazilian reais)

 

   Equity attributable to equity holders of the parent      
            Earnings reserves            
  

Share capital

 

  Additional paid-in capital  Share-based compensation reserve  Legal reserve  Retained earnings reserve  Retained earnings  Total  Non-controlling interests  Total equity
                            
Balances at January 1, 2017   66,485    (63,588)   —      636    7,966    —      11,499    71    11,570 
Net income   —      —      —      —      —      45,393    45,393    3,086    48,479 
Total comprehensive income   —      —      —      —      —      45,393    45,393    3,086    48,479 
Legal reserve   —      —      —      2,269    —      (2,269)   —      —      —   
Minimum mandatory dividends   —      —      —      —      —      (10,781)   (10,781)   (2,506)   (13,287)
Earnings retention   —      —      —      —      32,343    (32,343)   —      —      —   
Balances at December 31, 2017   66,485    (63,588)   —      2,905    40,309    —      46,111    651    46,762 
                                              
Net income   —      —      —      —      —      86,353    86,353    8,381    94,734 
Total comprehensive income   —      —      —      —      —      86,353    86,353    8,381    94,734 
Capital increase with cash   156,304    —      —      —      —      —      156,304    —      156,304 
Capital increase with reserves   80,541    —      —      —      (40,312)   (40,229)   —      —      —   
Capital increase with contribution of IPTAN and IESVAP   11,670    188,602    —      —      —      —      200,272    —      200,272 
Dividends cancelled   —      —      —      —      —      10,781    10,781    —      10,781 
Share-based compensation   —      —      2,161    —      —      —      2,161    —      2,161 
Legal reserve   —      —      —      4,318    —      (4,318)   —      —      —   
Dividends declared to non-controlling interests   —      —      —      —      —      —      —      (5,845)   (5,845)
Non controling interests arising on business combination   —      —      —      —      —      —      —      85,185    85,185 
Earnings retention   —      —           —      52,587    (52,587)   —      —      —   
Balances at December 31, 2018   315,000    125,014    2,161    7,223    52,584    —      501,982    88,372    590,354 
                                              
Net income   —      —      —      —      —      153,916    153,916    18,846    172,762 
Total comprehensive income   —      —      —      —      —      153,916    153,916    18,846    172,762 
Capital increase with cash   150,000    —      —      —      —      —      150,000    —      150,000 
Capital increase from shares contribution of shareholders   48,768    36,358    —      —      —      —      85,126    (44,774)   40,352 
Capital increase from the corporate reorganization   122,062    137,051    —      —      —      —      259,113    —      259,113 
Share-based compensation   1    17,627    18,114    —      —      —      35,742    —      35,742 
Allocation to additional paid-in capital   —      33,001    —      —      (33,001)   —      —      —      —   
Dividends declared   —      —      —      —      —      (38,000)   (38,000)   (13,812)   (51,812)
Dividends cancelled   —      —      —      —      4,107    —      4,107    —      4,107 
Corporate reorganization   (635,830)   668,904    (2,161)   (7,223)   (23,690)   —      —      —      —   
Issuance of common shares in initial public offering   16    992,762    —      —      —      —      992,778    —      992,778 
Shares issuance cost   —      (79,670)   —      —      —      —      (79,670)   —      (79,670)
Balances at December 31, 2019   17    1,931,047    18,114    —      —      115,916    2,065,094    48,632    2,113,726 
                                              

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

 

F-5

 

Afya Limited

Consolidated statements of cash flows

For the years ended December 31, 2019, 2018 and 2017

(In thousands of Brazilian reais)

 

2019   2018   2017
           
Operating activities          
  Income before income taxes 186,937   98,722   50,979
    Adjustments to reconcile income before income taxes          
      Depreciation and amortization 73,152   9,078   4,023
      Disposals of property and equipment 78   -   -
      Allowance for doubtful accounts 15,040   7,714   2,914
      Share-based compensation expense 18,114   2,161   -
      Net foreign exchange differences (13,321)   2,697   -
      Net loss (gain) on derivatives 1,780   (1,219)   -
      Accrued interest 24,002   1,856   20
      Accrued lease interest 31,469   -   -
      Share of income of associate (2,362)   -   -
      Provision for legal proceedings (2,568)   (344)   -
      Others -   (11)   (638)
Changes in assets and liabilities          
  Trade receivables (35,556)   (28,198)   (9,789)
  Inventories (236)   (593)   (140)
  Recoverable taxes (3,940)   (63)   (679)
  Other assets (7,403)   (3,304)   (314)
  Trade payables 3,029   (1,528)   (2,377)
  Taxes payables 4,940   (3,797)   (2,314)
  Advances from customers 19,324   2,073   (1,594)
  Labor and social obligations 6,124   (3,019)   5,872
  Other liabilities (10,881)   1,990   (3,323)
    307,722   84,215   42,640
  Income taxes paid (8,506)   (3,897)   (2,723)
  Net cash flows from operating activities 299,216   80,318   39,917
                 
Investing activities          
  Acquisition of property and equipment (56,964)   (18,634)   (16,778)
  Acquisition of intangibles assets (64,745)   (3,053)   (4,288)
  Acquisition of subsidiaries, net of cash acquired (241,568)   (221,298)   -
  Related parties 1,598   (594)   (1,004)
  Restricted cash 7,530   (18,810)   -
  Net cash flows used in investing activities (354,149)   (262,389)   (22,070)

Financing activities

 

         
  Payments of loans and financing (75,093)   (6,492)   (1,135)
  Proceeds from loans and financing 7,383   74,980   -
  Payments of lease liabilities (39,779)   -   -
  Related parties loans -   (106)   (484)
  Capital increase 167,628   156,304   -
  Dividends paid (51,812)   (5,845)   (2,506)
  Proceeds from inicial public offering 992,778   -   -
  Share issuance costs (79,670)   -   -
  Net cash flows from (used in) financing activities 921,435   218,841   (4,125)
  Net foreign exchange differences 14,447   -   -
  Net increase in cash and cash equivalents 880,949   36,770   13,722
  Cash and cash equivalents at the beginning of the year 62,260   25,490   11,768
  Cash and cash equivalents at the end of the year 943,209   62,260   25,490

 

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

 

F-6

 

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

1Corporate information

 

Afya Limited (“Afya” or “Afya Limited”) and its subsidiaries (collectively, the “Company”) is a holding company incorporated under the laws of the Cayman Islands on March 22, 2019. Afya Limited became the holding company of Afya Participações S.A. (hereafter referred to as “Afya Brazil”), formerly denominated NRE Participações S.A., through the completion of the corporate reorganization described below.

 

Until the contribution of Afya Brazil shares to Afya Limited, Afya Limited did not have commenced operations and had only nominal assets and liabilities and no material contingent liabilities or commitments. Accordingly, Afya Limited’s consolidated financial information substantially reflect the operations of Afya Brazil after the corporate reorganization.

 

The Company is formed by a network of higher education institutions located in nine Brazilian states forming a large educational group in the country, with emphasis on offering undergraduate and graduate courses related to medicine and health sciences and comprises the development and sale of electronically distributed educational courses on medicine science and related printed and technological educational content.

 

Corporate reorganization

 

On March 29, 2019, Afya Brazil merged (i) BR Health Participações S.A. (“BR Health”), a wholly-owned subsidiary of Bozano Educacional II Fundo de Investimento em Participações Multiestratégia (“Crescera”) that controlled Guardaya Empreendimentos and Participações S.A. (“Guardaya”) and was one of Afya Brazil’s shareholders; and (ii) Guardaya which owned 100% of Medcel Editora e Eventos S.A. (“Medcel Editora”) and CBB Web Serviços e Transmissões On Line S.A. (“CBB Web”), focused on medical residency preparation courses located in the state of São Paulo, resulting in the transfer to Afya Brazil of 100% of Medcel Editora and CBB Web and 15% of União Educacional do Planalto Central S.A. (“UEPC”), a medical school located in the Federal District. On June 18, 2019 Afya Brazil acquired an additional 15% interest in UEPC resulting in an interest of 30%.

 

On July 7, 2019, each of the Afya Brazil´s shareholders had agreed to contribute their respective shares on the Company to Afya Limited, exchanging one common share as 28 Class A or Class B common shares of Afya Limited. The holders of the Class A common shares and Class B common shares have identical rights, except that (i) the holder of Class B common shares is entitled to 10 votes per share, whereas holders of Class A common shares are entitled to one vote per share, (ii) Class B common shares have certain conversion rights and (iii) the holders of Class B common shares are entitled to maintain their proportional ownership interest in the event that common shares and/or preferred shares are proposed to be issued. The holders of Class A common shares and Class B common shares vote together as a single class on all matters (including the election of directors) submitted to a vote of shareholders, unless otherwise required by law and subject to certain exceptions.

 

F-7

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

 

Initial public offering

 

On July 18, 2019, Afya Limited priced its initial public offering (“IPO”) of 13,744,210 Class A common shares, which began trading on the Nasdaq Global Select Market (“NASDAQ”) on July 19, 2019 under the symbol “AFYA”. On July 23, 2019, the underwriters exercised the option to buy an additional 2,061,631 Class A common shares to cover over-allotments, totaling 15,805,841 Class A common shares, which 13,888,887 Class A common shares were offered by Afya Limited and 1,916,954 Class A common shares were offered by the selling shareholders at the initial public offering price. The initial offering price was US$ 19.00 per Class A common share.

 

On July 23, 2019, the share capital of Afya Limited was increased by 13,888,887 Class A shares through the proceeds received as a result of the IPO of US$ 263,888 thousand (or R$ 992,778). The net proceeds from the IPO were US$ 242,711 thousand (or R$ 913,108), after deducting US$ 15,833 thousand (or R$ 59,566) in underwriting discounts and commissions and other offering expenses totaled US$ 5,344 thousand (or R$ 20,104). The share issuance costs totaled R$ 79,670.

 

At the date of authorization for issue of these consolidated financial statements, Afya Limited transferred US$ 251,800 thousand (or R$ 961,438) of the net proceeds from the Cayman Islands to bank accounts in Brazil. These deposits are invested on first-line financial institutions in Brazil and are denominated in Brazilian reais.

 

Acquisitions

 

(i) On April 3, 2019, Afya Brazil acquired control of Instituto Educacional Santo Agostinho S.A. (“FASA”), through the acquisition of 90% of the Company´s shares, a post-secondary education institution and offers on-campus undergraduate medicine courses and a variety of other on-campus and distance learning post-secondary undergraduate and graduate education programs.

 

(ii) On May 9, 2019, Afya Brazil acquired control of Instituto de Pesquisa e Ensino Médico do Estado de Minas Gerais Ltda. (“IPEMED”), through the acquisition of 100% of IPEMED´s shares, a post-secondary education. The acquisition of IPEMED is in line with the Company’s strategy to focus on medical education, including post-graduate medical education.

 

(iii) On August 13, 2019, Afya Brazil acquired control of IPEC - Instituto Paraense de Educação e Cultura Ltda. (“IPEC”), through the acquisition of 100% of IPEC’s shares, previously a non-operational postsecondary education institution with governmental authorization to offer on-campus post-secondary undergraduate courses in medicine. On September 26, 2019, IPEC became operational in line with Company’s strategy focusing on medical education. Management assessed the aspects of such transaction and concluded that the transaction does not fall under the definition of business, but an acquisition of license with indefinite useful life recognized in intangible assets.

 

F-8

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

 

 

2Significant accounting policies

 

2.1 Basis for preparation of the consolidated financial statements

 

The Company’s consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).

 

The consolidated financial statements have been prepared on a historical cost basis, except for derivative financial instruments that have been measured at fair value.

 

The corporate reorganization described in Note 1, occurred on July 7, 2019, was accounted for as a reorganization of entities under common control whereby Afya Limited was created as a holding company of Afya Brazil. As a result, the assets and liabilities of Afya Brazil is carried at historical cost and there was no step-up in basis or goodwill, or other intangible assets recorded as a result of the corporate reorganization.

 

As a result, the consolidated financial statements prepared by the Company subsequent to the completion of the reorganization are presented “as if” Afya Brazil is the predecessor of the Company. Accordingly, these consolidated financial statements reflect: (i) the historical operating results of Afya Brazil prior to the reorganization; (ii) the consolidated results of the Company and Afya Brazil following the reorganization; (iii) the assets and liabilities of Afya Brazil at their historical cost; and (iv) the Company’s equity and earnings per share for all periods presented.

 

Afya Limited is a holding company, as such the primary source of revenue derives from its interest on the operational companies in Brazil. As result, the Brazilian Real has been assessed as the Company`s functional currency.

 

The consolidated financial statements are presented in Brazilian reais (“BRL” or “R$”), which is the Company’s functional and presentation currency. All amounts are rounded to the nearest thousand.

 

These consolidated financial statements as of and for the year ended December 31, 2019 were authorized for issue by the Board of Directors on March 26, 2020.

 

F-9

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

2.2 Basis of consolidation

 

The table below list the Company’s subsidiaries and associate:

 

       

Direct and indirect interest

 

Name Principal activities Location Investment type 2019 2018 2017
Afya Participações S.A (Afya Brazil) Holding Nova Lima – MG Subsidiary 100% 100% 100%
Instituto Tocantinense Presidente Antônio Carlos Porto S.A. - ITPAC Porto Nacional Undergraduate and graduate degree programs Porto Nacional - TO Subsidiary 100% 100% 100%

Instituto Tocantinense Presidente Antônio Carlos S.A. - ITPAC Araguaina

 

Undergraduate and graduate degree programs Araguaína - TO Subsidiary 100% 100% 100%

União Educacional do Vale do Aço S.A. – UNIVAÇO

 

Undergraduate programs Ipatinga – MG Subsidiary 100% 76% 76%
IPTAN - Instituto de Ensino Superior Presidente Trancredo de Almeida Neves S.A. (“IPTAN”) Undergraduate and graduate degree programs São João Del Rei – MG Subsidiary 100% 100% -
Instituto de Educação Superior do Vale do Parnaíba S.A. (“IESVAP”) Undergraduate and graduate degree programs Parnaíba – PI Subsidiary 80% 80% -
Centro de Ciências em Saúde de Itajubá S.A. (“CCSI”) Medicine undergraduate degree program Itajubá – MG Subsidiary 60% 60% -
Instituto de Ensino Superior do Piauí S.A. (”IESP”) * Undergraduate and graduate degree programs Teresina – PI Subsidiary 100% 80% -
RD Administração e Participações Ltda. Holding Pato Branco – PR Subsidiary 100% 100% -
FADEP - Faculdade Educacional de Pato Branco Ltda. (“FADEP”) Undergraduate and graduate degree programs Pato Branco – PR Subsidiary 100% 100% -
CBB Web Serviços e Transmissões Online S.A. (“CBBW”) ** Medical education courses and online platform São Paulo- SP Subsidiary 100% - -
Medcel Editora e Eventos S.A. (“Medcel”) ** Medical education content São Paulo- SP Subsidiary 100% - -
Instituto Educacional Santo Agostinho S.A. (“FASA”) ** Undergraduate and graduate degree programs Montes Claros – MG Subsidiary 100% - -
Instituto de Pesquisa e Ensino Médico do Estado de Minas Gerais Ltda. (“IPEMED”) ** Post-graduate Belo Horizonte – MG Subsidiary 100% - -
Instituto Paraense de Educação e Cultura Ltda. (IPEC) *** Undergraduate and graduate degree programs Marabá – PA Subsidiary 100% - -
União Educacional do Planalto Central S.A. (“UEPC”) **** Undergraduate and graduate degree programs Brasília – DF Associate 30% - -
             

*       See Note 17 for further details on the acquisition of minority interest during 2019.

**       See Note 5 for further details on the business combinations during 2019.

***       See Note 12 for further details on the acquisition of assets related to licenses with indefinite useful life in 2019.

****       See Note 10 for further details on the acquisition of associate.

 

The financial information of the acquired subsidiaries is included in the Company’s consolidated financial statements beginning on the respective acquisition dates.

 

F-10

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

 

 

The Company consolidates the financial information for all entities it controls. Control is achieved when the Company is exposed to, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and it ceases when the Company loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated financial statements from the date the Company gains control until the date the Company ceases to control the subsidiary.

 

When necessary, adjustments are made to the financial statements of subsidiaries in order to bring their accounting policies in line with the Company’s accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions are eliminated in full on consolidation.

 

A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Company loses control over a subsidiary, it derecognizes the related assets (including goodwill), liabilities, non-controlling interest and other components of equity, while any resulting gain or loss is recognized in the statement of income.

 

Non-controlling interests in the results and equity of subsidiaries are shown separately in the consolidated statements of financial position, consolidated statements of income and comprehensive income and consolidated statements of changes in equity.

 

2.3 Summary of significant accounting policies

 

This note provides a description of the significant accounting policies adopted in the preparation of these consolidated financial statements in addition to other policies that have been disclosed in other notes to these consolidated financial statements. These policies have been consistently applied to all periods presented, except for the application of the new accounting pronouncements as of January 1, 2019, as described in the note 2.4 Changes in accounting policies and disclosures.

 

The accounting policies have been consistently applied to all consolidated companies.

 

a) Business combinations and goodwill

 

Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, which is measured at acquisition date fair value, and the amount of any non-controlling interests in the acquiree. For each business combination, the Company elects whether to measure the non-controlling interests in the acquiree at fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition-related costs are expensed as incurred and included in general and administrative expenses.

 

When the Company acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as of the acquisition date.

 

F-11

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

 

Goodwill is initially measured at cost (being the excess of the aggregate of the consideration transferred and the amount recognized for non-controlling interests and any previous interest held over the net identifiable assets acquired and liabilities assumed). If the fair value of the net assets acquired is in excess of the aggregate consideration transferred, the Company re-assesses whether it has correctly identified all of the assets acquired and all of the liabilities assumed and reviews the procedures used to measure the amounts to be recognized at the acquisition date. If the reassessment still results in an excess of the fair value of net assets acquired over the aggregate consideration transferred, then the gain is recognized in the consolidated statement of income.

 

After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Company’s cash-generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquire are assigned to those units.

 

Where goodwill has been allocated to a cash-generating unit (CGU) and part of the operation within that unit is disposed of, the goodwill associated with the disposed operation is included in the carrying amount of the operation when determining the gain or loss on disposal. Goodwill disposed in these circumstances is measured based on the relative values of the disposed operation and the portion of the cash-generating unit retained.

 

b) Current versus non-current classification

 

The Company presents assets and liabilities in the statement of financial position based on current/non current classification. An asset is current when it is:

 

·Expected to be realized or intended to be sold or consumed in the normal operating cycle;

·Held primarily for the purpose of trading;

·Expected to be realized within twelve months after the reporting period; or

·Cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period.

 

All other assets are classified as non-current.

 

A liability is current when:

 

·It is expected to be settled in the normal operating cycle;

·It is held primarily for the purpose of trading;

·It is due to be settled within twelve months after the reporting period; or

·There is no unconditional right to defer the settlement of the liability for at least twelve months after the reporting period.

 

The Company classifies all other liabilities as non-current.

 

Deferred tax assets and liabilities are classified as non-current assets and liabilities.

 

F-12

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

 

c) Fair value measurement

 

The Company measures derivative financial instruments at fair value at each balance sheet date as disclosed in Note 13.3.

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: (i) in the principal market for the asset or liability; or (ii) in the absence of a principal market, in the most advantageous market for the asset or liability.

 

The principal or the most advantageous market must be accessible by the Company.

 

The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.

 

A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.

 

The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.

 

All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

 

·Level 1 — Quoted (unadjusted) market prices in active markets for identical assets or liabilities.

 

·Level 2 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable.

 

·Level 3 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable.

 

For assets and liabilities that are recognized in the financial statements at fair value on a recurring basis, the Company determines whether transfers have occurred between levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.

 

F-13

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

 

 

At each reporting date, the Company analyzes the movements in the values of assets and liabilities which are required to be remeasured or re-assessed as per the Company’s accounting policies. For this analysis, the Company verifies the major inputs applied in the latest valuation by agreeing the information in the valuation computation to contracts and other relevant documents.

 

The Company also compares the change in the fair value of each asset and liability with relevant external sources to determine whether the change is reasonable.

 

For the purpose of fair value disclosures, the Company has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy, as explained above.

 

d) Financial instruments – initial recognition and measurement

 

A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

 

i)Financial assets

 

Initial recognition and measurement

 

The classification of financial assets at initial recognition depends on the financial asset’s contractual cash flow characteristics and the Company’s business model for managing them. With the exception of trade receivables that do not contain a significant financing component or for which the Company has applied the practical expedient, the Company initially measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs. Trade receivables that do not contain a significant financing component or for which the Company has applied the practical expedient, are measured at the transaction price determined under IFRS 15.

 

In order for a financial asset to be classified and measured at amortized cost or fair value through OCI (Other Comprehensive Income), it needs to give rise to cash flows that are “solely payments of principal and interest (SPPI)” on the principal amount outstanding. This assessment is referred to as the SPPI test and is performed at an instrument level.

 

The Company’s business model for managing financial assets refers to how it manages its financial assets in order to generate cash flows. The business model determines whether cash flows will result from collecting contractual cash flows, selling the financial assets, or both.

 

Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the market place (regular way trades) are recognized on the trade date, i.e., the date that the Company commits to purchase or sell the asset.

 

F-14

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

 

Subsequent measurement

 

For purposes of subsequent measurement, financial assets are classified as: financial assets at amortized cost or financial assets at fair value through profit or loss. There is no financial assets designated as fair value through OCI.

 

Financial assets at amortized cost

 

The Company measures financial assets at amortized cost if both of the following conditions are met:

 

• The financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows, and

 

• The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

 

Financial assets at amortized cost are subsequently measured using the effective interest (EIR) method and are subject to impairment. Gains and losses are recognized in the statement of income when the asset is derecognized, modified or impaired.

 

Financial assets at fair value through profit or loss

 

Financial assets at fair value through profit or loss include financial assets held for trading, financial assets designated upon initial recognition at fair value through profit or loss, or financial assets mandatorily required to be measured at fair value. Financial assets are classified as held for trading if they are acquired for the purpose of selling or repurchasing in the near term. Derivatives, including separated embedded derivatives, are also classified as held for trading unless they are designated as effective hedging instruments. Financial assets with cash flows that are not solely payments of principal and interest are classified and measured at fair value through profit or loss, irrespective of the business model.

 

Financial assets at fair value through profit or loss are carried in the statement of financial position at fair value with net changes in fair value recognized in the statement of income. This category includes derivative instruments.

 

Derecognition

 

A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is primarily derecognized (i.e., removed from the Company’s statement of financial position) when:

 

• The rights to receive cash flows from the asset have expired; or

 

• The Company has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement; and either (a) the Company has transferred substantially all the risks and rewards of the asset, or (b) the Company has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

 

F-15

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

 

When the Company has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, it evaluates if, and to what extent, it has retained the risks and rewards of ownership. When it has neither transferred nor retained substantially all of the risks and rewards of the asset, nor transferred control of the asset, the Company continues to recognize the transferred asset to the extent of its continuing involvement. In that case, the Company also recognizes an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Company has retained.

 

Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Company could be required to repay.

 

Impairment of financial assets

 

Further disclosures relating to impairment of financial assets are also provided in the following notes:

 

• Significant accounting estimates and assumptions – Note 3

 

• Trade receivables – Note 8

 

The Company recognizes an allowance for expected credit losses (ECLs) for all debt instruments not held at fair value through profit or loss. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and the cash flows the Company expects to receive, discounted at an approximation of the original effective interest rate. The expected cash flows will include cash flows from the sale of collateral held or other credit enhancements that are integral to the contractual terms.

 

For trade receivables, the Company applies a simplified approach in calculating ECLs. Therefore, the Company does not track changes in credit risk, but instead recognizes an allowance for credit losses based on lifetime ECLs at each reporting date. The Company has established a provision matrix that is based on its historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment.

 

The Company considers a financial asset to be in default when internal or external information indicates that the Company is unlikely to receive the outstanding contractual amounts in full before taking into account any credit enhancements held by the Company. A financial asset is written off when there is no reasonable expectation of recovering the contractual cash flows.

 

F-16

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

 

ii)Financial liabilities

 

Initial recognition and measurement

 

Financial liabilities are classified, at initial recognition, as financial liabilities at fair value through profit or loss, loans and borrowings, payables, or as derivatives designated as hedging instruments in an effective hedge, as appropriate.

 

All financial liabilities are recognized initially at fair value and, in the case of loans and borrowings and payables, net of directly attributable transaction costs.

 

The Company’s financial liabilities include trade payables, loans and financing and accounts payable to selling shareholders.

 

Subsequent measurement

 

The measurement of financial liabilities depends on their classification, as described below:

 

Financial liabilities at fair value through profit or loss

 

Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss.

 

Financial liabilities are classified as held for trading if they are incurred for the purpose of repurchasing in the near term. This category also includes derivative financial instruments entered into by the Company that are not designated as hedging instruments in hedge relationships as defined by IFRS 9. Gains or losses on liabilities held for trading are recognized in the statement of income.

 

Financial liabilities designated upon initial recognition at fair value through profit or loss are designated at the initial date of recognition, and only if the criteria in IFRS 9 are satisfied.

 

Loans and borrowings

 

After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortized cost using the EIR method. Gains and losses are recognized in the statement of income when the liabilities are derecognized as well as through the EIR amortization process.

 

Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortization is included as finance expenses in the statement of income.

 

F-17

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

 

Derecognition

 

A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognized in the statement of income.

 

Offsetting of financial instruments

 

Financial assets and financial liabilities are offset and the net amount is reported in the statement of financial position if there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, to realize the assets and settle the liabilities simultaneously.

 

e) Derivative financial instruments

 

The Company has derivative financial instruments related to cross-currency interest rate swaps in connection with a loan denominated in Euros. Such derivative financial instruments are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative.

 

Any gains or losses arising from changes in the fair value of derivatives are recorded directly to finance result in the statement of income.

 

f) Cash and cash equivalents

 

Cash and cash equivalents in the statement of financial position comprise cash at banks and on hand, and short-term financial investments with an original maturity of three months or less, which are subject to an insignificant risk of changes in value.

 

For the purpose of the statement of cash flows, cash and cash equivalents consist of cash and short-term financial investments, as they are considered an integral part of the Company’s cash management.

 

g) Restricted cash

 

Restricted cash in the statement of financial position comprise of financial investments in investment funds that serve as collateral for loan agreements and other commitments.

 

F-18

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

 

h) Inventories

 

Inventories are valued at the lower of cost and net realizable value. The costs of inventories are based on the average cost method and include costs incurred in the purchase of inventories and other costs incurred in bringing them to their current location and condition. Costs of purchased inventory are determined after deducting any discounts and recoverable taxes.

 

i) Property and equipment

 

Property and equipment is stated at cost, net of accumulated depreciation and accumulated impairment losses, if any.

 

Subsequent expenditures are capitalized only if it is probable that the future economic benefits associated with the expenditure will flow to the Company.

 

Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets, as follows:

 

Machinery and equipment 10 years
Vehicles 4 years
Furniture and fixtures 10 years
IT equipment 5 years
Library books 10 years
Laboratories and clinics 10 years
Leasehold improvements 5 years
   


An item of property and equipment and any significant part initially recognized is derecognized upon disposal or when no future economic benefit is expected from its use or disposal. Any gain or loss arising on the derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the statement of income when the asset is derecognized.

 

The residual values, useful lives and methods of depreciation of property and equipment are reviewed at each financial year end and adjusted prospectively, if appropriate.

 

j) Leases

 

Prior to the adoption of IFRS 16, the determination of whether an arrangement is (or contains) a lease was based on the substance of the arrangement at the inception of the lease. The arrangement is, or contains, a lease if fulfilment of the arrangement is dependent on the use of a specific asset (or assets) and the arrangement conveys a right to use the asset (or assets), even if that asset is (or those assets are) not explicitly specified in an arrangement.

 

A lease was classified at the inception date as a finance lease or an operating lease. A lease that transfers substantially all the risks and rewards incidental to ownership to the Company was classified as a finance lease.

 

F-19

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

 

An operating lease is a lease other than a finance lease. The Company did not have leases classified as s finance lease. Operating lease payments were recognized as an operating expense in the statement of income on a straight-line basis over the lease term.

 

As from January 1, 2019, the determination of whether an arrangement is (or contains) a lease is based on the substance of the arrangement at the inception of the contract. The arrangement is, or contains, a lease if fulfilment of the arrangement is dependent on the use of a specific asset (or assets) and the arrangement conveys a right to use the asset (or assets), even if that asset is (or those assets are) not explicitly specified in an arrangement.

 

Company as a lessee

 

The Company applies a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets. The Company recognises lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets.

 

Right-of-use assets

 

The Company recognizes right-of-use assets at the commencement date of the lease (i.e., the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognized, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Unless the Company is reasonably certain to obtain ownership of the leased asset at the end of the lease term, the recognized right-of-use assets are depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term. Right-of use assets are subject to impairment.

 

Lease liabilities

 

At the commencement date of the lease, the Company recognizes lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in-substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Company and payments of penalties for terminating a lease, if the lease term reflects the Company exercising the option to terminate. The variable lease payments that do not depend on an index or a rate are recognized as expense in the period on which the event or condition that triggers the payment occurs.

 

F-20

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

 

In calculating the present value of lease payments, the Company uses the incremental borrowing rate at the lease commencement date if the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the in-substance fixed lease payments or a change in the assessment to purchase the underlying asset.

 

Short-term leases and leases of low-value assets

 

The Company applies the short-term lease recognition exemption to its short-term leases of properties (i.e., those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). It also applies the lease of low-value assets recognition exemption to leases that are considered of low value. Lease payments on short-term leases and leases of low-value assets are recognized as expense on a straight-line basis over the lease term.

 

k) Intangible assets

 

Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is their fair value at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and accumulated impairment losses. Internally generated intangibles are not capitalized and the related expenditure is reflected in the statement of income in the period in which the expenditure is incurred.

 

The useful lives of intangible assets are assessed as finite or indefinite.

 

Intangible assets with finite lives are amortized over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired.

 

The amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at the end of each reporting period. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are considered to modify the amortization period or method, as appropriate, and are treated as changes in accounting estimates. The amortization expense on intangible assets with finite lives is recognized in the statement of income in the expense category that is consistent with the function of the intangible assets.

 

Intangible assets with indefinite useful lives are not amortized, but are tested for impairment annually, either individually or at the cash-generating unit level. The assessment of indefinite life is reviewed annually to determine whether the indefinite life continues to be supportable. If not, the change in useful life from indefinite to finite is made on a prospective basis.

 

An intangible asset is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising upon derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the statement of income.

 

F-21

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

l) Impairment of non-financial assets

 

The Company assesses, at each reporting date, whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Company estimates the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or CGU’s fair value less costs of disposal and its value in use. The recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. When the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount.

 

In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs of disposal, recent market transactions are taken into account. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded companies or other available fair value indicators.

 

The Company bases its impairment calculation on detailed budgets and forecast calculations, which are prepared separately for each of the Company’s CGUs to which the individual assets are allocated. These budgets and forecast calculations generally cover a period of five years, considering the companies activities and maturation period of its graduate and undergraduate courses. A long-term growth rate is calculated and applied to project future cash flows after the last projected year.

 

For impairment testing, goodwill acquired through business combinations and licenses with indefinite useful lives are allocated to their respective CGUs. The Company has defined each of its operating subsidiaries as a CGU.

 

Impairment losses of continuing operations are recognized in the statement of income in expense categories consistent with the function of the impaired asset.

 

For assets excluding goodwill, an assessment is made at each reporting date to determine whether there is an indication that previously recognized impairment losses no longer exist or have decreased. If such indication exists, the Company estimates the asset’s or CGU’s recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognized. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the statement of income.

 

Goodwill is tested for impairment annually as at December 31 and when circumstances indicate that the carrying value may be impaired.

 

Impairment is determined for goodwill by assessing the recoverable amount of each CGU (or group of CGUs) to which the goodwill relates. When the recoverable amount of the CGU is less than its carrying amount, an impairment loss is recognized. Impairment losses relating to goodwill cannot be reversed in future periods.

 

F-22

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

 

Intangible assets with indefinite useful lives are tested for impairment annually as at December 31 at the CGU level, as appropriate, and when circumstances indicate that the carrying value may be impaired.

 

m) Investments

 

Investments in associates are initially recognized at consideration transferred and adjusted thereafter for the equity method, being increased or reduced from its interest in the investee's income after the acquisition date. An associate is an entity over which the Company has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control over those policies.

 

n) Accounts payable to selling shareholders

 

These amounts represent liabilities related to the acquisitions made by the Company wich are not yet due. Accounts payable to selling shareholders are presented as current liabilities unless payment is not due within 12 months after the reporting period. They are recognized initially at their fair value and subsequently measured at amortized cost using the effective interest method.

 

o) Provisions

 

Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The expense relating to a provision is presented in the statement of income, net of any reimbursement, when applicable.

 

p) Dividends payable

 

The Company recognizes a liability to pay a dividend when the distribution is authorized and the distribution is no longer at the discretion of the Company. The distribution is authorized when it is required to pay a minimum dividend of the net income for the year in accordance with the Brazilian Corporate Law (applicable for Afya Brazil) and the Company’s By-Laws or is approved by the shareholders. A corresponding amount is recognized directly in equity.

 

q) Labor and social obligations

 

Labor and social obligations are expensed as the related service is provided. A liability is recognized for the amount expected to be paid if the Company has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.

 

F-23

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

 

r) Share-based payments

 

Certain key executives of the Company receive remuneration in the form of share-based payments, whereby the executives render services as consideration for equity instruments (equity-settled transactions).

 

The expense of equity-settled transactions is determined by the fair value at the date when the grant is made using an appropriate valuation model.

 

That expense is recognized in general and administrative expenses, together with a corresponding increase in equity, over the period in which the service and, where applicable, the performance conditions are fulfilled (the vesting period). The cumulative expense recognized for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Company’s best estimate of the number of equity instruments that will ultimately vest. The expense or credit in the statement of income for a period represents the movement in cumulative expense recognized as at the beginning and end of that period.

 

Service and non-market performance conditions are not taken into account when determining the grant date fair value of awards, but the likelihood of the conditions being met is assessed as part of the Company’s best estimate of the number of equity instruments that will ultimately vest. Market performance conditions are reflected within the grant date fair value. Any other conditions attached to an award, but without an associated service requirement, are considered to be non-vesting conditions. Non-vesting conditions are reflected in the fair value of an award and lead to an immediate expensing of an award unless there are also service and/or performance conditions.

 

No expense is recognized for awards that do not ultimately vest because non-market performance and/or service conditions have not been met. Where awards include a market or non-vesting condition, the transactions are treated as vested irrespective of whether the market or non-vesting condition is satisfied, provided that all other performance and/or service conditions are satisfied.

 

When the terms of an equity-settled award are modified, the minimum expense recognized is the grant date fair value of the unmodified award, provided the original vesting terms of the award are met. An additional expense, measured as at the date of modification, is recognized for any modification that increases the total fair value of the share-based payment transaction, or is otherwise beneficial to the employee. Where an award is cancelled by the entity or by the counterparty, any remaining element of the fair value of the award is expensed immediately through the statement of income.

 

The dilutive effect of outstanding options is reflected as additional share dilution in the computation of diluted earnings per share.

 

F-24

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

 

s) Revenue from contracts with customers

 

Tuition fees and other revenue

 

The Company's revenue consists primarily of tuition fees charged for medical courses and other courses. The Company also generates revenue from tuition fees for other undergraduate courses, student fees and certain education-related activities.

 

Prior to the adoption of IFRS 15, revenue was recognized when the significant risks and rewards of ownership have been transferred to the customer and the collection of the consideration is probable, net of the corresponding discounts, return and taxes, and there is no continuing management involvement with the tuition fees charged for medical courses and other courses, tuition fees for other undergraduate courses, student fees and certain education-related activities and the amount of revenue can be measured reliably.

 

Upon the adoption of IFRS 15 on January 1, 2018, revenues are recognized when services are rendered to the customer and the performance obligation is satisfied.

 

Revenue from tuitions are recognized over time when services are rendered to the customer and the Company satisfies its performance obligation under the contract at an amount that reflects the consideration to which the Company expects to be entitled in exchange for those services. Revenues from tuitions are recognized net of scholarships and other discounts, refunds and taxes.

 

Other revenues are recognized at a point in time when the service is rendered to the customer at an amount that reflects the consideration to which the Company expects to be entitled in exchange for the service. Other revenues are presented net of the corresponding discounts, returns and taxes.

 

Printed books and e-books revenue transferred at point in time

 

Revenue from sale of printed books and e-books is recognised at the point in time when control of the asset is transferred to the customer, generally on delivery of the goods at the customer’s location. The Company considers whether there are other promises in the contract that are separate performance obligations to which a portion of the transaction price needs to be allocated. In determining the transaction price for the printed books and e-books, the Company considers the effects of variable consideration, financing component, noncash consideration, and consideration payable to the customer to be not significant.

 

The Company has concluded that it is the principal in its revenue arrangements.

 

The Company assesses collectibility on a portfolio basis prior to recording revenue. Generally, students cannot re-enroll for the next academic session without satisfactory resolution of any past-due amounts. If a student withdraws from an institution, the Company's obligation to issue a refund depends on the refund policy at that institution and the timing of the student's withdrawal. Generally, the refund obligations are reduced over the course of the academic term.

 

F-25

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

 

Trade receivables

 

Trade receivables represent the Company’s right to an amount of consideration that is unconditional (i.e., only the passage of time is required before payment of the consideration is due). Refer to accounting policies of financial assets in Financial instruments – initial recognition and subsequent measurement.

 

Advances from customers

 

Advances from customers (a contract liability) are the obligation to transfer services to a customer for which the Company has received consideration (or an amount of consideration is due) from the customer, as a result of pre-paid tuition received from students and is recognized separately in current liabilities, when the payment is received. Advances from customers are recognized as revenue when the Company performs all obligations related to the contract, generally in the following month.

 

t) Taxes

 

The Company’s subsidiaries joined the PROUNI (Programa Universidade para Todos – University for All Program) program, which is a federal program that exempts post-secondary institutions of some federal taxes in exchange for providing a certain number of student enrollment for low income students, and benefits from the exemption of the following federal taxes:

 

Income taxes and social contribution

 

PIS and COFINS

 

The regulation of PROUNI defines that the revenue from traditional and technological graduation activities is exempt from PIS and COFINS. For income from other teaching activities, PIS and COFINS are charged at rates of 0.65% and 3.00%, respectively, and for non-teaching activities, PIS is charged at a rate of 1.65% and to COFINS at 7.6%.

 

Current income taxes

 

Current income taxes were calculated based on the criteria established by the Normative Instruction of the Brazilian Internal Revenue Service, specifically regarding the PROUNI program, which allows exemption of these taxes from traditional and technological graduation activities.

 

Current income tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the reporting date.

 

Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate.

 

F-26

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

 

2.4 Changes in accounting policies and disclosures

 

New standards, interpretations and amendments adopted by the Company

 

The Company applied, for the first time on January 1, 2019, IFRS 16 Leases. The nature and effect of these changes are disclosed below.

 

Other amendments and interpretations were applied for the first time in 2019, but did not have a significant impact on the consolidated financial statements of the Company.

 

IFRS 16 - Leases

 

IFRS 16 supersedes IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases-Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The standard sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model.

 

The Company adopted IFRS 16 using the modified retrospective method of adoption with the date of initial application of January 1, 2019. Under this method, the standard is applied retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application. The Company elected to use the transition practical expedient allowing the standard to be applied only to contracts that were previously identified as leases applying IAS 17 and IFRIC 4 at the date of initial application. The Company also elected to use the recognition exemptions for lease contracts that, at the commencement date, have a lease term of 12 months or less and do not contain a purchase option (‘short-term leases’), and lease contracts for which the underlying asset is of low value (‘low-value assets’).

 

The effect of adoption of IFRS 16 as at January 1, 2019 is as follows:

 

Assets  
 Right-of-use assets R$ 212,360
   
Liabilities  
 Lease liabilities

R$ 212,360

 

Nature of the effect of adoption of IFRS16

 

The Company has lease contracts for properties. Before the adoption of IFRS 16, the Company classified each of its leases (as lessee) at the inception date as either a finance lease or an operating lease. The Company did not have finance leases as of December 31, 2018. In an operating lease, the leased property was not capitalized and the lease payments were recognized as rent expense in profit or loss on a straight-line basis over the lease term. Upon adoption of IFRS 16, the Company applied a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets. The standard provides specific transition requirements and practical expedients, which has been applied by the Company.

 

F-27

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

 

The Company recognized right-of-use assets and lease liabilities for those leases previously classified as operating leases, except for short-term leases and leases of low-value assets. The right-of-use assets for the leases were recognized based on the amount equal to the lease liabilities, adjusted for any related prepaid and accrued lease payments previously recognized. Lease liabilities were recognized based on the present value of the remaining lease payments, discounted using the incremental borrowing rate at the date of initial application.

 

The Company also applied the available practical expedients wherein it:

 

·Used an incremental borrowing rate, according to the characteristics for each lease;

 

·Relied on its assessment of whether leases are onerous immediately before the date of initial application;

 

·Applied the short-term leases exemptions to leases with lease term that ends within 12 months at the date of initial application;

 

·Excluded the initial direct costs from the measurement of the right-of-use asset at the date of initial application;

 

·Used hindsight in determining the lease term where the contract contains options to extend or terminate the lease.

 

 

 

The lease liabilities as at January 1, 2019 can be reconciled to the operating lease commitments as of December 31, 2018 as follows:

 

Operating lease commitments as at December 31, 2018 520,795
Weighted average incremental borrowing rate as at January 1, 2019 11.63%
Discounted operating lease commitments at January 1, 2019 212,530
Less:  
Commitments relating to leases of short-term and low-value assets (170)
Lease liabilities as at January 1, 2019 212,360

 

IFRIC 23 - Uncertainty over Income Tax Treatment

 

The Interpretation addresses the accounting for income taxes when tax treatments involve uncertainty that affects the application of IAS 12 Income Taxes. It does not apply to taxes or levies outside the scope of IAS 12, nor does it specifically include requirements relating to interest and penalties associated with uncertain tax treatments. The Interpretation specifically addresses the following:

 

·Whether an entity considers uncertain tax treatments separately

 

·The assumptions an entity makes about the examination of tax treatments by taxation authorities

 

·How an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates

 

·How an entity considers changes in facts and circumstances

 

F-28

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

 

The Company determines whether to consider each uncertain tax treatment separately or together with one or more other uncertain tax treatments and uses the approach that better predicts the resolution of the uncertainty.

 

An entity has to determine whether to consider each uncertain tax treatment separately or together with one or more other uncertain tax treatments. The approach that better predicts the resolution of the uncertainty needs to be followed. The Company applied the interpretation and did not have significant impact on the consolidated financial statements.

 

IAS 12 - Income Taxes

 

The amendments clarify that the income tax consequences of dividends are linked more directly to past transactions or events that generated distributable profits than to distributions to owners.

 

Therefore, an entity recognizes the income tax consequences of dividends in profit or loss, other comprehensive income or equity according to where it originally recognised those past transactions or events.

 

An entity applies the amendments for annual reporting periods beginning on or after January 1, 2019, with early application permitted. When the entity first applies those amendments, it applies them to the income tax consequences of dividends recognised on or after the beginning of the earliest comparative period.

 

Since the Company’s current practice is in line with these amendments, they had no impact on the consolidated financial statements of the Company.

 

3Significant accounting estimates and assumptions

 

The preparation of the Company’s consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the accompanying disclosures. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods. Accounting estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Revisions to estimates are recognized prospectively.

 

Other disclosures relating to the Company’s exposure to risks and uncertainties includes:

 

·Capital management – Note 15

 

·Financial instruments risk management objectives and policies – Note 13.4

 

·Sensitivity analyses disclosures – Note 13.4.1

 

F-29

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

 

Estimates and assumptions

 

The key assumptions about the future and other key sources of estimated uncertainty as of the reporting date that include a significant risk of a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are described below. The Company based its assumptions and estimates on parameters available when the consolidated financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances that arise and that are beyond the Company’s control. Such changes are reflected in the assumptions where they occur.

 

Leases - Estimating the incremental borrowing rate

 

The Company cannot readily determine the interest rate implicit in the lease, therefore, it uses its incremental borrowing rate (IBR) to measure lease liabilities. The IBR is the rate of interest that the Company would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of  a similar value to the right-of-use asset in a similar economic environment. The IBR therefore reflects what the Company ‘would have to pay’, which requires estimation when no observable rates are available (such as for subsidiaries that do not enter into financing transactions) or when they need to be adjusted to reflect the terms and conditions of the lease (for example, when leases are not in the subsidiary’s functional currency).

 

The Company estimates the IBR using observable inputs (such as market interest rates) when available and is required to make certain entity-specific estimates.

 

Identification and fair-value measurement of assets and liabitlies acquired in a business combination

 

Business combinations are accounted for using the acquisition method. Such method requires recognising and measuring the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree. The Company, as the acquirer, must classify or designate the identifiable assets and liabilities assumed on the basis of its own contractual terms, economic conditions, operating and accounting policies and other relevant conditions as at the acquisition date. Such assessment requires judgments from the Company on the methods used to determine the fair value of the assets acquired and liabilities assumed, including valuation techniques that may require prospective financial information inputs.

 

F-30

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

 

Impairment of non-financial assets

 

Impairment exists when the carrying value of an asset or cash generating unit (“CGU”) or group of CGUs exceeds its recoverable amount, defined as the higher of its fair value less costs of disposal and its value in use. The fair value less costs of disposal calculation is based on data available from binding sales transactions, conducted at arm’s length, for similar assets or observable market prices less incremental costs of disposing of the asset. The value in use calculation is based on a discounted cash flow model (“DCF” model). The cash flows are derived from the budget for the next five years and do not include restructuring activities to which the Company has not yet committed or significant future investments that will enhance the performance of the assets of the CGU being tested. The recoverable amount is sensitive to the discount rate used for the DCF model as well as to expected future cash-inflows and the growth rate used for extrapolation purposes.

 

These estimates are most relevant to goodwill and indefinite lived intangible assets recognized by the Company. The key assumptions used to determine the recoverable amount for each CGU, including a sensitivity analysis, are disclosed and further explained in Note 12.

 

Share-based compensation

 

Estimating fair value for share-based payment transactions requires determination of the most appropriate valuation model, which depends on the terms and conditions of the grant. This estimate also requires determination of the most appropriate inputs to the valuation model including the expected life of the share option or appreciation right, volatility and dividend yield and making assumptions about them. For the measurement of the fair value of equity-settled transactions, the Company uses the Binomial model. As discloused on Note 16 (b) the Company had stock plans that were fully exercicied on July 31, 2019, for which the Monte Carlo and Black & Scholes pricing model were used for the Afya Brazil and Guardaya plans, respectively. The assumptions and models used for estimating fair value for share-based payment transactions are disclosed in Note 16 (b).

 

F-31

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

 

4Segment information

 

As a result of the corporate reorganization described in Note 1 which occurred on March 29, 2019, the Company has two reportable segments, as follows:

 

·Education Services Segment (Business Unit 1), which provides educational services through undergraduate and graduate courses related to medicine, other health sciences and other undergraduate programs; and

 

·Residency Preparatory and Specialization Programs Segment (Business Unit 2), which provides residency preparatory courses and medical post-graduate specialization programs, delivering printed and digital content, an online medical education platform and practical medical training.

 

No operating segments have been aggregated to form the above reportable operating segments. There is only one geographic region and the results are monitored and evaluated as a single business.

 

Segment information is presented consistently with the internal reports provided to the Company's Chief Executive Officer (CEO), which is the Chief Operating Decision Maker (CODM) and is responsible for allocating resources, assessing the performance of the Company's operating segments, and making the Company's strategic decisions.

 

The following table presents assets and liabilities information for the Company's operating segments as of December 31, 2019:

 

   Business Unit 1  Business Unit 2  Total reportable segments  Elimination (inter-segment transactions) **  Total
As of December 31, 2019               
Total assets   2,714,161    199,285    2,913,446    (993)   2,912,453 
 Current assets   1,026,857    85,901    1,112,758    (993)   1,111,765 
 Non-current assets   1,687,304    113,384    1,800,688    —      1,800,688 
                          
Total liabilities and equity   2,714,161    199,285    2,913,446    (993)   2,912,453 
 Current liabilities   312,303    21,919    334,222    (993)   333,229 
 Non-current liabilities   360,005    105,493    465,498    —      465,498 
Equity   2,041,853    71,873    2,113,726    —      2,113,726 

 

   Unit 2  Total reportable segments  Elimination (inter-segment transactions)  Total
As of December 31, 2019            
Other disclosures               
Investments in associate   45,634    —      45,634    —      45,634 
Capital expenditures (*)   167,427    8,282    175,709    —      175,709 
                          

 

(*) Capital expenditures consider the acquisitions of property and equipment and intangible assets, including the acquisition of IPEC licenses in the amount of R$ 108,000 (R$ 54,000 paid and included in the acquisition of intangible assets in the cash flows used in investing activities) as described in Note 12.

 

F-32

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

 

The following table presents statements of income for the Company's operating segments for the year ended December 31, 2019:

 

   Unit 1  Unit 2  Total reportable segments  Adjustments and eliminations **  Total
External costumer   653,760    96,870    750,630    —      750,630 
Inter-segment   —      3,880    3,880    (3,880)   —   
Net revenue   653,760    100,750    754,510    (3,880)   750,630 
Cost of services   (279,066)   (33,667)   (312,733)   3,880    (308,853)
Gross profit   374,694    67,083    441,777    —      441,777 
General and administrative expenses                       (239,120)
Other income, net                       2,594 
Operating profit                       205,251 
Finance income                       51,689 
Finance expenses                       (72,365)
Share of income of associate                       2,362 
Income before income taxes                       186,937 
Income taxes expense                       (14,175)
Net income                       172,762 

 

(**) These eliminations are related to sale transactions from Medcel to other entities in Business Unit 1.

 

There were no revenues derived from the Business Unit 2 for the year ended December 31, 2018, given such segment has commenced following the business combinations occurred on March 29, 2019.

 

Seasonality of operations

 

Business Unit 1's tuition revenues do not have significant fluctuations during the year.

 

Business Unit 2's sales are concentrated in the first and last quarter of the year, as a result of enrollments at the beginning of the year. The majority of Business Unit 2's revenues is derived from printed books and e-books, which are recognized at the point in time when control is transferred to the customer. Consequently, Business Unit 2 generally has higher revenues and results of operations in the first and last quarter of the year compared to the second and third quarters of the year.

 

F-33

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

 

5Business combinations

 

5.1 Acquisitions in 2019

 

The preliminary fair values of the identifiable assets acquired and liabilities assumed as of each acquisition date were:

 

   Guardaya  FASA*  IPEMED**
Assets         
Cash and cash and equivalents   1,548    3,834    307 
Restrict cash   —      5,561    —   
Trade receivables   44,277    1,832    8,965 
Inventories   2,581    —      —   
Recoverable taxes   280    —      —   
Other assets   489    458    3,266 
Right-of-use assets   4,556    47,789    8,800 
Property and equipment   1,594    22,946    3,676 
Investment in associate   24,458    —      —   
Intangible assets   59,977    171,511    33,039 
    139,760    253,931    58,053 
                
Liabilities               
Trade payables   (454)   (1,133)   (4,908)
Loans and financing   (4,076)   (35,419)   (3,592)
Lease liabilities   (4,607)   (47,793)   (8,965)
Labor and social obligations   (1,844)   (5,254)   (1,575)
Taxes payable   (3,571)   (483)   (26,503)
Provision for legal proceedings   (680)   (1,684)   (2,008)
Advances from customers   —      (3,192)   (607)
Other liabilities   (4,709)   (460)   —   
    (19,941)   (95,418)   (48,158)
Total identifiable net assets at fair value   119,819    158,513    9,895 
Non-controlling interest   —      (15,851)   —   
Preliminary goodwill arising on acquisition   139,294    58,903    87,647 
Purchase consideration transferred   259,113    201,565    97,542 
Cash paid   —      102,330    52,239 
Capital contribution   259,113    —      —   
Payable in installments   —      99,235    45,303 

Analysis of cash flows on acquisition:

 

               
Transaction costs (included in cash flows from operating activities)   (482)   (1,887)   (180)
Cash paid net of cash acquired with the subsidiary (included in cash flows from investing activities)   1,548    (98,496)   (51,932)
Net of cash flow on acquisition   1,066    (100,383)   (52,112)

 

*During the measurement period, the purchase consideration for the acquisition of FASA was adjusted by R$3,022 as a result of purchase price adjustments. Accordingly, goodwill was updated to R$58,903.

** The Company has not yet finalized the valuation of all identifiable assets acquired and liabilities assumed in the business combination of IPEMED and therefore some of these amounts are preliminary. During the measurement period of the assets acquired and liabilities assumed at the fair value, the Company has identified R$1,320 of indemnification assets, related to the acquisition of IPEMED.

 

F-34

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

 

(a) Acquisition of Guardaya

 

In connection with the corporate reorganization, on March 29, 2019, Afya Brazil merged (i) BR Health, a wholly-owned subsidiary of Crescera that controls Guardaya and is one of Afya Brazil's shareholders; and (ii) Guardaya which owns 100% of Medcel Editora and CBB Web, resulting in the transfer to Afya Brazil of 100% of Medcel Editora and CBB Web shares. In connection with the transaction 15% of UEPC's shares were acquired. Afya Brazil issued 378,696 common shares as a consideration for the interest in BR Health and Guardaya. The fair value of the consideration given was R$ 259,113. This transaction was strategic to the Company and was accounted for under IFRS 3 – Business Combinations.

 

Transaction costs to date amount to R$ 482 and were expensed and are included in general and administrative expenses in the consolidated statement of income.

 

The goodwill recognized is primarily attributed to the expected synergies and other benefits arising from the transaction. The goodwill is not expected to be deductible for income tax purposes.

 

At the acquisition date, the fair value of the trade receivables acquired equals its carrying amount. Afya Brazil measured the acquired lease liabilities using the present value of the remaining lease payments at the date of acquisition. The right-of-use assets were measured at an amount equal to the lease liabilities and adjusted to reflect the unfavorable terms of the lease relative to market terms.

 

The valuation techniques used for measuring the fair value of separately identified intangible assets acquired were as follows:

 

Intangible assets acquired Valuation technique
Trademark

Relief-from-royalty

 

This methodology is based on the market remuneration of the use license granted to third parties. The value of the asset is restated by the savings of royalties that the owner would have to own the asset. It is necessary to determine a royalty rate that reflects the appropriate remuneration of the asset. The royalty payments, net of taxes, are discounted to present value.

 

Customer relationships

Multi-period excess earning method

 

The method considers the present value of net cash flows expected to be generated by customer relationship, by excluding any cash flows related to contributory assets.

 

Educational content

Replacement cost

 

This methodology is based on the estimate of the cost of replacing the asset with a new one (acquisition or reconstruction), adjusted to reflect the losses of value resulting from the physical deterioration and the economic functional obsolescence of the asset.

 

 

From the date of acquisition, this business combination has contributed R$ 40,554 of net revenue and R$ 5,786 as income before income taxes to the Company. If the acquisition had taken place at the beginning of the period, net revenue for 2019 would have been R$ 75,238 and income before income taxes for 2019 would have been R$ 21,924.

 

F-35

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

 

(b) Acquisition of FASA

 

On April 3, 2019, Afya Brazil acquired control of FASA, through the acquisition of 90% of its shares. The purchase price of R$ 201,565 is comprised by: i) R$ 102,330 paid in cash on the acquisition date; ii) R$ 39,695 payable in April 2020; iii) R$ 29,770 payable in April 2021; and iv) R$ 29,770 payable in April 2022, adjusted by the IPCA rate + 4.1% per year. This transaction was strategic to the Company and was accounted for under IFRS 3 – Business Combinations. There are no contingent consideration associated with the acquisition of FASA.

 

Transaction costs to date amount to R$ 1,887 and were expensed and are included in general and administrative expenses in the consolidated statement of income.

 

At the acquisition date, the fair value of the trade receivables acquired equals its carrying amount. The Company measured the acquired lease liabilities using the present value of the remaining lease payments at the date of acquisition. The right-of-use assets were measured at an amount equal to the lease liabilities and adjusted to reflect the unfavorable terms of the lease relative to market terms.

 

The goodwill recognized includes the value of expected synergies arising from the acquisition, which is not separately recognized. None of the goodwill recognized is expected to be deductible for income taxes purposes.

 

The valuation techniques used for measuring the fair value of separately identified intangible assets acquired were as follows:

 

Intangible assets acquired Valuation technique
Licenses

With-and-without method

 

The with-and-without method consists of estimating the fair value of an asset by the difference between the value of this asset in two scenarios: a scenario considering the existence of the asset in question and another considering its non-existence.

Customer relationships

Multi-period excess earning method

 

The method considers the present value of net cash flows expected to be generated by customer relationship, by excluding any cash flows related to contributory assets.

 

From the date of acquisition, FASA has contributed R$ 69,996 of net revenue and R$ 16,501 of income before income taxes to the Company. If the acquisition had taken place at the beginning of the period, net revenue for 2019 would have been R$ 90,063 and income before income taxes for 2019 would have been R$ 16,872.

 

F-36

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

 

(c) Acquisition of IPEMED

 

On May 9, 2019, Afya Brazil acquired control of IPEMED, through the acquisition of 100% of its shares. IPEMED is a post-secondary education institution with campuses located in the states of Bahia, Minas Gerais, Rio de Janeiro, São Paulo and in the Distrito Federal. It focuses on medical graduate programs. The purchase price was R$ 97,542, being: i) R$ 25,000 paid in cash as advance through April 2019; ii) R$ 27,239 paid in cash on the acquisition date; iii) R$45,303 payable in five annual installments due from February 2020 to February 2024 adjusted by the Interbank Certificates of Deposit ("CDI") rate. This transaction was strategic to the Company and was accounted for under IFRS 3 – Business Combinations. There are no contingent consideration associated with the acquisition of IPEMED.

 

Transaction costs to date amount to R$ 180 and were expensed and are included in general and administrative expenses in the consolidated statement of income.

 

The acquisition was completed recently and the valuation of property and equipment will be finalized at a later date, and the final allocation of the purchase price is dependent on a number of factors, including the final evaluation of the fair values of tangible and intangible assets acquired and liabilities assumed as of the closing date of the transaction.

 

At the acquisition date, the fair value of the trade receivables acquired equals its carrying amount. The Company measured the acquired lease liabilities using the present value of the remaining lease payments at the date of acquisition. The right-of- use assets were measured at an amount equal to the lease liabilities and adjusted to reflect the unfavorable terms of the lease relative to market terms.

 

The preliminary goodwill recognized includes the value of expected synergies arising from the acquisition, which is not separately recognized. None of the preliminary goodwill recognized is expected to be deductible for income taxes purposes.

 

The Company has not yet finalized the valuation of all identifiable assets acquired and liabilities assumed in the business combination with IPEMED and therefore some of these amounts are preliminary. These amounts may be adjusted as valuations are finalized.

 

The valuation techniques used for measuring the fair value of separately identified intangible assets acquired were as follows:

 

Intangible assets acquired Valuation technique
Trademark

Relief-from-royalty

 

This methodology is based on the market remuneration of the use license granted to third parties. The value of the asset is restated by the savings of royalties that the owner would have to own the asset. And it is necessary to determine a royalty rate that reflects the appropriate remuneration of the asset. The royalty payments, net of taxes, are discounted to present value.

 

Customer relationships

 

Multi-period excess earning method

 

The method considers the present value of net cash flows expected to be generated by customer relationship, by excluding any cash flows related to contributory assets.

F-37

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

From the date of acquisition, IPEMED has contributed R$ 43,244 of net revenue and R$ 10,735 of income before income taxes to the Company. If the acquisition had taken place at the beginning of the period, net revenue for 2019 would have been R$ 67,594 and income before income taxes for 2019 would have been R$ 6,808.

 

5.2 Acquisitions in 2018

 

The fair value of the identifiable assets and liabilities as of the date of each acquisition were:

 

   Fair value as of the acquisition date in 2018
   IPTAN  IESVAP  CCSI  IESP  FADEP
Assets               
Cash and cash and equivalents   5,414    5,075    —      12,394    653 
Trade receivables   3,507    1,197    —      4,189    3,554 
Inventories   42    —      —      —      32 
Recoverable taxes   96    112    —      385    —   
Other assets   3,026    514    —      3,205    4,708 
Property and equipment   5,621    1,868    490    6,784    3,928 
Intangible assets   75,172    82,071    56,737    216,007    79,286 
    92,878    90,837    57,227    242,964    92,161 
Liabilities                         
Trade payables   (77)   (126)   —      (747)   (227)
Loans and financing   —      —      —      —      (2,669)
Labor and social obligations   (2,130)   (917)   —      (10,854)   (2,791)
Taxes payable   (901)   (172)   —      (4,192)   (2,703)
Provision for legal proceedings   (278)   —      —      (1,811)   —   
Advances from customers   (379)   (1,225)   —      (1,489)   (321)
Other   (4,324)   (796)   —      —      (139)
    (8,089)   (3,236)   —      (19,093)   (8,850)
Total identifiable net assets at fair value   84,789    87,601    57,227    223,871    83,311 
Non-controlling interest   —      (17,520)   (22,891)   (44,774)   —   
Goodwill arising on acquisition   17,446    27,956    4,664    69,808    49,661 
Purchase consideration transferred   102,235    98,037    39,000    248,905    132,972 
Cash paid   —      —      9,200    133,800    80,126 
Capital contribution   102,235    98,037    —           —   
Payable in installments   —      —      29,800    115,105    52,846 
Analysis of cash flows on acquisition:                         
Transaction costs of the acquisition (included in cash flows from operating activities)   —      —      (1,103)   (415)   (1,875)
Cash paid net of cash acquired with the subsidiary (included in cash flows from investing activities)   5,414    5,075    (30,908)   (121,406)   (79,473)

 

(a) Acquisition of IPTAN

 

On April 26, 2018, the Esteves Family, one of Afya Brazil’s shareholders, contributed 100% of its ownership interest in IPTAN to Afya Brazil. IPTAN is a post-secondary education institution located in the city of São João Del Rei, in the state of Minas Gerais. It offers on-campus post-secondary undergraduate and graduate education courses in medicine and other academic subjects and disciplines. This transaction was strategic to Afya Brazil and was accounted for under IFRS 3 – Business Combinations.

 

F-38

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

 

Afya Brazil issued 26,523 Class A preferred shares as consideration for the 100% interest in IPTAN and 80% interest in IESVAP. These Class A preferred shares contain a conversion feature that allows for the convertion to common shares on a ratio of 1 to 17.7. The fair value of the consideration given was R$102,235.

 

The goodwill of R$ 17,446 includes the value of expectd synergies arising from the acquisition, which is not separately recognized. None of the goodwill recognized is expected to be deductible for income taxes purposes.

 

At acquisition date, the fair value of trade receivables acquired equals its carrying amount.

 

The valuation techniques used for measuring the fair value of separately identified intangible assets acquired were as follows: 

 

Intagible assets acquired Valuation technique
Licenses

With and without method

The With-and-Without method consists of estimating the fair value of an asset by the difference between the value of this asset in two scenarios: a scenario considering the existence of the asset in question and another considering its non-existence.

Customer relationships

Multi-period excess earning method

The method considers the present value of net cash flows expected to be generated by customer relationship, by excluding any cash flows related to contributory assets.

 

From the date of the acquisition, IPTAN contributed R$27,589 of net revenue and R$7,100 of income before income taxes to the Company. If the combination had taken place at the beginning of 2018, net revenue for 2018 would have been R$40,833 and income before income taxes for 2018 would have been R$12,856.

 

(b) Acquisition of IESVAP

 

On April 26, 2018, the Esteves Family, one of Afya Brazil’s shareholders, contributed 80% of its ownership interest in IESVAP to Afya Brazil. IESVAP is a post-secondary education institution located in the city of Parnaíba, in the state of Piauí. It offers on-campus post-secondary undergraduate education courses in medicine, dentistry and law. This transaction was strategic to Afya Brazil and was accounted for under IFRS 3 – Business Combinations.

 

Afya Brazil issued 26,523 Class A preferred shares as consideration for the 100% interest in IPTAN and 80% interest in IESVAP. These Class A preferred shares contain a conversion feature that allows for the convertion to common shares on a ratio of 1 to 17.7. The fair value of the consideration given was R$98,037.

 

The Company has elected to measure the non-controlling interest at the proportionate share of the acquiree’s identifiable net assets.

 

F-39

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

 

The goodwill of R$27,956 includes the value of expectd synergies arising from the acquisition, which is not separately recognized. None of the goodwill recognized is expected to be deductible for income taxes purposes.

 

At acquisition date, the fair value of trade receivables acquired equals its carrying amount.

 

The valuation techniques used for measuring the fair value of separately identified intangible assets acquired were as follows:

 

Intangible assets acquired Valuation technique
Licenses

With and without method

The With-and-Without method consists of estimating the fair value of an asset by the difference between the value of this asset in two scenarios: a scenario considering the existence of the asset in question and another considering its non-existence.

Customer relationships

Multi-period excess earning method

The method considers the present value of net cash flows expected to be generated by customer relationship, by excluding any cash flows related to contributory assets.

 

From the date of the acquisition, IESVAP contributed R$21,789 of net revenue and R$12,433 of income before income taxes to the Company. If the combination had taken place at the beginning of 2018, net revenue for 2018 would have been R$31,308 and income before income taxes for 2018 would have been R$18,734.

 

(c) Acquisition of CCSI

 

On May 30, 2018, Afya Brazil acquired control of CCSI, through the acquisition of 60% of CCSI. CCSI is a post-secondary education institution located in the city of Itajubá, in the state of Minas Gerais. It offers on-campus post-secondary undergraduate courses in medicine. This acquisition was strategic to Afya Brazil.

 

The purchase consideration transferred amounted to R$39,000, comprised by R$9,200 paid in cash on the acquisition date, and R$29,800 through several monthly installments due until May 2019, which is adjusted by the IGP-M rate.

 

The Company has elected to measure the non-controllings interest at the proportionate share of the acquiree’s identifiable net assets.

 

The goodwill of R$4,664 includes the value of expectd synergies arising from the acquisition, which is not separately recognized. None of the goodwill recognized is expected to be deductible for income taxes purposes.

 

Transaction costs of R$1,103 were expensed and are included in general and administrative expenses in the consolidated statement of income.

 

F-40

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

 

The valuation techniques used for measuring the fair value of separately identified intangible assets acquired were as follows:

 

Intangible asset acquired Valuation technique
License

With and without method

The With-and-Without method consists of estimating the fair value of an asset by the difference between the value of this asset in two scenarios: a scenario considering the existence of the asset in question and another considering its non-existence.

 

From the date of the acquisition, CCSI contributed R$19,176 of net revenue and R$2,653 of income before income taxes to the Company. CCSI did not have information available prior to the acquisition date to estimate the amounts of net revenue and income before income taxes if the combination had taken place at the beginning of 2018.

 

(d) Acquisition of IESP

 

On November 27, 2018, Afya Brazil acquired control of IESP, through the acquisition of 80.0% of IESP. IESP is a post-secondary education institution located in the city of Teresina, in the state of Piauí. It offers on-campus undergraduate medicine courses and a variety of other on-campus and distance learning post-secondary undergraduate and graduate education programs. This acquisition was strategic to Afya Brazil.

 

The purchase consideration transferred amounted to R$248,905, comprised by a cash consideration and deferred payments as follows: i) R$129,800 paid in cash on acquisition date ; ii) R$4,000 paid in December 2018; iii) R$8,906 paid in February 2019; and R$106,200 payable in three equal installments of R$35,400 due on November 27, 2019, November 27, 2020 and November 27, 2021, adjusted by the CDI rate.

 

The Company has elected to measure the non-controllings interest at the proportionate share of the acquiree’s identifiable net assets.

 

Transaction costs of R$415 were expensed and are included in general and administrative expenses in the consolidated statement of income.

 

The goodwill of R$69,808 includes the value of expectd synergies arising from the acquisition, which is not separately recognized. None of the goodwill recognized is expected to be deductible for income taxes purposes.

 

At acquisition date, the fair value of trade receivables acquired equals its carrying amount.

 

F-41

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

 

The valuation techniques used for measuring the fair value of separately identified intangible assets acquired were as follows:

 

Intangible assets acquired Valuation technique
Licenses

With and without method

The With-and-Without method consists of estimating the fair value of an asset by the difference between the value of this asset in two scenarios: a scenario considering the existence of the asset in question and another considering its non-existence.

Customer relationships

Multi-period excess earning method

The method considers the present value of net cash flows expected to be generated by customer relationship, by excluding any cash flows related to contributory assets.

 

From the date of the acquisition, IESP contributed R$8,856 of net revenue and R$1,990 of income before income taxes to the Company. If the combination had taken place at the beginning of 2018, net revenue for 2018 would have been R$105,437 and income before income taxes for 2018 would have been R$38,892.

 

(e) Acquisition of FADEP

 

On December 5, 2018, Afya Brazil acquired control of FADEP, through the acquisition of 100% of RD Administração e Participação Ltda, which has a 89% interest in FADEP and Afya Brazil also acquired 11% interest in FADEP from the selling shareholder. FADEP is a post-secondary education institution located in the city of Pato Branco, in the state of Paraná. It offers on-campus post-secondary undergraduate and graduate education courses in medicine and other academic subjects and disciplines. The acquisition of FADEP represented an opportunity for Afya Brazil to achieve greater scale and to expand its operations to the southern region of Brazil.

 

The purchase consideration transferred amounted to R$132,972, comprised by R$80,126 paid in cash on the acquisition date; and R$ 52,846 payable in three equal installments of R$ 17,615.5 payable semiannually from the acquisition date and adjusted by the SELIC rate.

 

Transaction costs of R$ 1,875 were expensed and are included in general and administrative expenses in the consolidated statement of income.

 

The goodwill of R$ 49,661 includes the value of expectd synergies arising from the acquisition, which is not separately recognized. None of the goodwill recognized is expected to be deductible for income taxes purposes.

 

At acquisition date, the fair value of trade receivables acquired equals its carrying amount.

 

F-42

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

 

The valuation techniques used for measuring the fair value of separately identified intangible assets acquired were as follows:

 


Intangible assets acquired
Valuation technique
Licenses

With and without method

The With-and-Without method consists of estimating the fair value of an asset by the difference between the value of this asset in two scenarios: a scenario considering the existence of the asset in question and another, considering its non-existence.

Customer relationships

Multi-period excess earning method

The method considers the present value of net cash flows expected to be generated by customer relationship, by excluding any cash flows related to contributory assets.

 

From the date of the acquisition, FADEP contributed R$4,681 of net revenue and R$2,488 of income before income taxes to the Company. If the combination had taken place at the beginning of 2018, net revenue for 2018 would have been R$36,279 and income before income taxes for 2018 would have been R$12,706.

 

6Cash and cash equivalents

 

   2019  2018
       
Cash and bank deposits   13,092    4,560 
Cash equivalents (a)   930,117    57,700 
    943,209    62,260 

 

Cash equivalents correspond to financial investments in Bank Certificates of Deposit (“CDB”) with highly rated financial institutions. As of December 31, 2019, the average interest on these CDB are equivalent to 99.22% of the Interbank Certificates of Deposit (“CDI”) (December 31, 2018: 99.28%). These funds are available for immediate use and have insignificant risk of changes in value.

 

7Restricted cash

 

As of December 31, 2019, the restricted cash of R$16,841 (December 31, 2018: R$ 18,810) corresponds to financial investments in investment funds managed by highly rated financial institutions that serve as collateral for the loan agreements and other commitments. In accordance with the contractual terms, the Company is not allowed to withdraw any amounts until a integral payment of the loan (see Note 13.2.1).

 

As of December 31, 2019, the average interest on these funds are equivalent to 96.96% (December 31, 2018: 98.22%) of the CDI.

 

   2019  2018
Collateral for loan in Euros with Banco Itaú   14,788    18,810 
Other   2,053    —   
Total   16,841    18,810 
Current assets   14,788    —   
Non-current assets   2,053    18,810 

F-43

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

8Trade receivables

 

   2019  2018
       
Tuition fees   86,798    57,548 
Proeducar   1,884    1,882 
FIES   17,789    4,576 
Others   6,378    7,211 
Educational content (a)   37,154    —   
    150,003    71,217 
(-) Allowance for doubtful accounts   (14,763)   (7,537)
    135,240    63,680 
Current   125,439    58,445 
Non-current   9,801    5,235 

 

(a) Related to trade receivables from sales of printed books, e-books and medical courses through digital platform from Medcel Editora and CBB Web, following the corporate reorganization on March 29, 2019.

 

As of December 31, 2019 and 2018, the aging of trade receivables was as follows:

 

   2019  2018
       
Neither past due nor impaired   71,095    18,194 
Past due          
1 to 30 days   15,042    14,433 
31 to 90 days   27,221    18,413 
91 to 180 days   20,543    15,394 
More than 180 days   16,102    4,783 
    150,003    71,217 

 

The changes in the allowance for doubtful accounts for the years ended December 31, 2019, 2018 and 2017, was as follows:

 

   2019  2018  2017
          
Balance at the beginning of the year   (7,537)   (3,794)   (1,100)
Additions   (15,040)   (7,714)   (2,914)
Write-offs   7,814    3,971    220 
Balance at the end of the year   (14,763)   (7,537)   (3,794)

F-44

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

9Related parties

 

The table below summarizes the balances and transactions with related parties:

 

   2019  2018   
Assets         
Trade receivables (a)   557    -      
Credits with shareholders (b)   -    1,598      
    557    1,598      
Current   557    -      
Non-current   -    1,598      
                
Other income  2019  2018  2017
IESVAP (c)   -    252    543 
IPTAN (c)   -    882    2,097 
UEPC (a)   557    -    - 
    557    1,134    2,640 
Lease               
RVL Esteves Gestão Imobiliária S.A.   10,417    9,655    9,264 
UNIVAÇO Patrimonial Ltda.   2,816    2,625    2,549 
IESVAP Patrimonial Ltda.   2,609    1,274    - 
    15,842    13,554    11,813 
                

 

(a)Refers to sales of educational content from Medcel to UEPC recorded in trade receivables

 

(b)Amounts to be reimbursed by the shareholders to Afya Brazil, mainly related to payments of legal cost and advisory services. Theses amounts have been paid in 2019.

 

(c)Refers to share services and corporate expenses provided by Afya Brazil to IPTAN and IESVAP for the periods prior to their acquisition on April 26, 2018 recorded in the consolidated statements of income.

 

Lease agreements with RVL Esteves Gestão Imobiliária S.A.

 

Afya Brazil has entered into lease agrements with RVL Esteves Gestão Imobiliária S.A. (“RVL”), an entity controlled by the shareholder Nicolau Carvalho Esteves and of which Mr. Renato Esteves is an executive officer, as described below:

 

On June 21, 2016, RVL entered into lease agreements (as amended on April 26, 2018) with ITPAC – Instituto Tocantinense Presidente Antônio Carlos S.A., or ITPAC, and Itpac Porto Nacional – Instituto Tocantinense Presidente Antonio Carlos Porto S.A., or ITPAC Porto Nacional, pursuant to which RVL Esteves Gestão Imobiliária S.A. agreed to lease campuses to ITPAC and ITPAC Porto Nacional in the cities of Araguaína and Porto Nacional, both located in the State of Tocantins. The lease agreements are adjustable in accordance with the provisions of each lease agreement. The lease agreements are for an initial term of 20 years, and are renewable for an additional 20 years subject to the provisions of each lease agreement.

 

F-45

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

 

On November 1, 2016, RVL entered into a lease agreement with Afya Brazil, pursuant to which RVL agreed to lease to Afya Brazil certain offices located in the city of Nova Lima, State of Minas Gerais, where Afya Brazil’s principal executive offices are located. On February 9, 2019 the agreement was amended to extend lease terms and adjust the lease amounts, subject to certain discount conditions set forth in the lease agreement and adjustable in accordance with the provisions of the lease agreement. The lease agreement is for an initial term of 5 years, and may be renewable for an additional 5 years subject to the provisions of the lease agreement.

 

On September 6, 2018, RVL entered into a lease agreement with ITPAC, a subsidiary of Afya Brazil, pursuant to which RVL agreed to lease to ITPAC the new ITPAC campus currently under construction by RVL in the city of Palmas, State of Tocantins. The lease agreement is for an amount equal to 7.5% of the monthly net revenue of ITPAC during the prior semester, which will start to become due once the new ITPAC campus becomes operational, subject to the provisions of the lease agreement. The lease agreement is for an initial term of 20 years, starting on the date the new ITPAC campus becomes operational, and is renewable for an additional 20 years subject to the provisions of the lease agreement.

 

On October 30, 2019, RVL entered into a lease agreement with IPTAN, pursuant to which RVL agreed to lease to IPTAN the new IPTAN medical campus, currently under construction by RVL in the city of Santa Inês, State of Maranhão. The lease agreement is for a monthly amount equal to (i) up to June 2020, R$12 and (ii) after June 2020 and until March 2024, 6.5% of the monthly net revenue of IPTAN assessed during the prior semester, in each case adjustable in accordance with the provisions of the lease agreement. The lease agreement is for an initial term of 20 years counted from the conclusion of the construction works, and may be renewable for an additional 20 years subject to the provisions of the lease agreement.

 

The lease payments in connection with the leases agreements with RVL totaled R$10,417 in the year ended December 31, 2019. In the years ended December 31, 2018 and 2017, the lease expenses in connection with the leases agreements with RVL totaled R$9,655 and R$9,264, respectively.

 

Lease agreement with UNIVAÇO Patrimonial Ltda.

 

On July 14, 2016, UNIVAÇO Patrimonial Ltda., an entity controlled by the shareholder Nicolau Carvalho Esteves and of which Ms. Rosângela Esteves is the chief executive officer, entered into a lease agreement with UNIVAÇO, a subsidiary of Afya Brazil, pursuant to which UNIVAÇO Patrimonial Ltda. agreed to lease the UNIVAÇO campus to UNIVAÇO, located in the city of Ipatinga, State of Minas Gerais. The lease agreement is adjustable in accordance with the provisions of the lease agreement. The lease agreement is for an initial term of 20 years, and is renewable for an additional 20 years subject to the provisions of the lease agreement.The lease payments in connection with this lease agreement totaled R$2,816 in the year ended December 31, 2019. In the years ended December 31, 2018 and 2017, the lease expenses in connection with this lease agreement totaled R$2,625 and R$2,549, respectively.

 

F-46

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

 

Lease agreement with IESVAP Patrimonial Ltda.

 

On April 25, 2018, IESVAP Patrimonial Ltda., an entity controlled by the shareholder Nicolau Carvalho Esteves and of which Mr. Renato Esteves is an executive officer, entered into a lease agreement with IESVAP, a subsidiary of Afya Brazil, pursuant to which IESVAP Patrimonial Ltda. agreed to lease the IESVAP campus to IESVAP located in the city of Parnaíba, State of Piauí. The lease agreement is for an amount equal to 7.5% of the monthly net revenue of IESVAP during the prior fiscal year. The lease agreement is for an initial term of 20 years, and is renewable for an additional 20 years subject to the provisions of the lease agreement. The lease payments in connection with this lease agreement totaled R$2,609 in the year ended December 31, 2019. In the year ended December 31, 2018, the lease expenses in connection with this lease agreement totaled R$1,274.

 

Key management personnel compensation

 

Key management personnel compensation included in the Company’s consolidated statement of income comprised the following:

 

  2019   2018   2017
           
Short-term employee benefits 4,947   2,681   2,103
Share-based compensation plans 13,893   2,161   -
  18,840   4,842   2,103

 

Compensation of the Company’s key management includes short-term employee benefits comprised by salaries, labor and social charges, and other ordinary short-term employee benefits. The amounts disclosed in the table are the amounts recognized as an expense in general and administrative expenses during the reporting period related to key management personnel.

 

The executive officers participate in share-based compensation plans described in Note 16 (b).

 

F-47

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

10Investment in associate

 

In connection with the corporate reorganization, described in Note 1 regarding the merger with BR Health, the Company acquired a 30% interest in UEPC, a medical school located in the Federal District, that offers higher education and post-graduate courses, both in person and long-distance learning. The Company’s interest in UEPC is accounted for using the equity method. The following table illustrates the summarized financial information of the Company’s investment in UEPC:

 

   December 31, 2019
    
Current assets   26,762 
Non-current assets   77,031 
Current liabilities   (29,328)
Non-current liabilities   (66,294)
Equity   8,171 
Company’s share in equity – 30%   2,451 
Goodwill   43,183 
Carrying amount of the investment   45,634 

 

Net revenue   85,816 
Cost of services   (39,459)
General and administrative expenses   (29,476)
Finance result   (4,121)
Income before income taxes   12,760 
Income taxes expenses   (2,275)
Net income for the period (March 29 to December 31, 2019)   10,485 
Company’s share of profit from March 29 to June 18, 2019 (15%)   780 
Company’s share of profit from June 19 to December 31, 2019 (30%)   1,582 
Company’s share of profit for the period (March 29 to December 31, 2019)   2,362 
      

 

    
   December 31, 2019
Opening balance   —   
Acquisition of minority interest (15%) in March 2019   24,458 
Acquisition of additional minority interest (15%) in June 2019   24,457 
Dividends receivable (included in Other assets)   (5,643)
Share of profit from March 29 to December 31, 2019   2,362 
Closing balance   45,634 

 

The Company tests at least annually the recoverability of the carrying amount of goodwill and there was no impairment for this goodwill.

 

F-48

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

11Property and equipment

 

Cost  Machinery and equipment  Lands  Vehicles  Furniture and fixtures  IT equipment  Library books  Laboratories and clinics  Leasehold improvements  Construction in progress  Total
As of January 1, 2017   13,384    —      111    6,267    4,643    8,737    —      745    1,187    35,074 
Additions   6,767    —      9    2,090    1,857    1,279    —      6,356    —      18,358 
Disposals   (16)   —      —      —      (6)   —      —      (7)   —      (29)
As of December 31, 2017   20,135    —      120    8,357    6,494    10,016    —      7,094    1,187    53,403 
Additions   3,226    2,770    —      1,023    1,728    949    —      1,940    7,918    19,554 
Transfers   —      —      —      —      —      —      —      2,271    (2,271)   —   
Business combinations   7,142    —      62    2,517    2,021    1,873    597    577    3,902    18,691 
As of December 31, 2018   30,503    2,770    182    11,897    10,243    12,838    597    11,882    10,736    91,648 
Additions   9,838    4,235    422    6,976    4,241    1,205    34    4,488    25,525    56,964 
Disposals   —      —      —      —      (525)   —      —      —      —      (525)
Business combinations   3,988    —      103    2,565    2,035    4,096    418    14,541    470    28,216 
As of December 31, 2019   44,329    7,005    707    21,438    15,994    18,139    1,049    30,911    36,731    176,303 
                                                   
Depreciation                                                  
As of January 1, 2017   (6,464)   —      (14)   (2,884)   (2,994)   (5,258)   —      (3)   —      (17,617)
Depreciation   (1,352)   —      (35)   (565)   (482)   (754)   —      (136)   —      (3,324)
Disposals   6    —      —      —      4    —      —      3    —      13 
As of December 31, 2017   (7,810)   —      (49)   (3,449)   (3,472)   (6,012)   —      (136)   —      (20,928)
Depreciation   (1,886)   —      (10)   (812)   (1,017)   (1,003)   (27)   (202)   —      (4,957)
As of December 31, 2018   (9,696)   —      (59)   (4,261)   (4,489)   (7,015)   (27)   (338)   —      (25,885)
Depreciation   (4,097)   —      —      (1,629)   (2,495)   (1,648)   (359)   (1,317)   —      (11,545)
Disposals   —      —      —      —      447    —      —      —      —      447 
As of December 31, 2019   (13,793)   —      (59)   (5,890)   (6,537)   (8,663)   (386)   (1,655)   —      (36,983)
                                                   
Net book value                                                  
As of December 31, 2019   30,536    7,005    648    15,548    9,457    9,476    663    29,256    36,731    139,320 
As of December 31, 2018   20,807    2,770    123    7,636    5,754    5,823    570    11,544    10,736    65,763 

 

The Company assesses, at each reporting date, whether there is an indication that a property and equipment asset may be impaired. If any indication exists, the Company estimates the asset’s recoverable amount. There were no indications of impairment of property and equipment as of and for the years ended December 31, 2019, 2018 and 2017.

 

F-49

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

12Intangible assets and goodwill

 

   Goodwill  Licenses with indefinite useful life  Trademark  Customer relationships  Software  Education content  Educational platform and software in progress  Total
                         
Cost                        
As of January 1, 2017   —      —      —      —      2,345    —      —      2,345 
Additions   —      —      —      —      4,288    —      —      4,288 
As of December 31, 2017   —      —      —      —      6,633    —      —      6,633 
Additions   —      —      —      —      1,301    —      1,752    3,053 
Business combinations   169,535    445,616    —      63,303    354    —      —      678,808 
As of December 31, 2018   169,535    445,616    —      63,303    8,288    —      1,752    688,494 
Additions (i) (ii)   4,030    108,000    —      —      1,101    —      9,644    122,775 
Business combinations   285,844    150,156    32,111    62,110    —      17,305    2,845    550,371 
As of December 31, 2019   459,409    703,772    32,111    125,413    9,389    17,305    14,241    1,361,640 
                                         
Amortization                                        
As of January 1, 2017   —      —      —      —      (1,205)   —      —      (1,205)
Amortization   —      —      —      —      (699)   —      —      (699)
As of December 31, 2017   —      —      —      —      (1,904)   —      —      (1,904)
Amortization   —      —      —      (2,945)   (1,176)   —      —      (4,121)
As of December 31, 2018   —      —      —      (2,945)   (3,080)   —      —      (6,025)
Amortization   —      —      (1,150)   (34,927)   (1,456)   (4,876)   (868)   (43,277)
As of December 31, 2019   —      —      (1,150)   (37,872)   (4,536)   (4,876)   (868)   (49,302)
                                         
Net book value                                        
As of December 31, 2019   459,409    703,772    30,961    87,541    4,853    12,429    13,373    1,312,338 
As of December 31, 2018   169,535    445,616    —      60,358    5,208    —      1,752    682,469 

 

(i) The amount of R$4,030 added to goodwill relates to adjustments during the measurement period of the business combination of IESP in respect to amounts to be included as part of the purchase price allocation at acquisition date mainly related to impairment of receivables.

 

(ii) On August 13, 2019, Afya Brazil entered into a purchase agreement with the shareholders of IPEC for the acquisition of 100% of IPEC. IPEC was a non-operational postsecondary education institution with governmental authorization to offer on-campus post-secondary undergraduate courses in medicine in the State of Pará, that commenced its operation in September 2019. Prior to the acquisition date, IPEC has no significant assets and liabilities. The purchase price of R$ 108,000 is comprised of: i) R$ 54,000 paid in cash on the acquisition date; ii) R$ 54,000 is payable in two equal instalments of R$ 27,000 payable annually from August 13, 2020 to August 13, 2021, and adjusted by the CDI rate.

 

Licenses with indefinite useful life include intangible assets acquired through business combinations. The licenses for medicine and other courses granted by the Ministry of Education (“MEC”) to the companies acquired have no expiration date and the Company has determined that these assets have indefinite useful lives.

 

For impairment testing goodwill and licenses with indefinite useful lives acquired through business combinations are allocated to CGUs.

 

The Company performed its annual impairment test on December 31, 2019 and 2018.

 

The Company tests at least annually the recoverability of the carrying amount of goodwill and licenses with indefinite useful lives for each CGU. The process of estimating these values involves the use of assumptions, judgments and estimates of future cash flows that represent the Company's best estimate.

 

There was no impairment for goodwill and licenses with indefinite useful lives as of December 31, 2019 and 2018.

 

As a result of the recent acquisitions during 2019 and 2018, the carrying amounts of certain CGUs, which includes the carrying amounts of goodwill and licenses with indefinite useful lives, are approximate to their value in use.

 

The carrying amounts of goodwill and licenses with indefinite useful life by CGU and their value in use and the discount rates used for the impairment assessment as of December 31, 2019 and 2018 was:

 

F-50

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

   Carrying amount
CGU  Goodwill  Licenses with indefinite useful life  CGU
                   
   2019  2018  2019  2018  2019  2018
IPTAN   17,446    17,446    57,214    57,214    110,224    100,679 
IESVAP   27,956    27,956    81,366    81,366    119,129    114,974 
CCSI   4,664    4,664    56,737    56,737    68,354    68,691 
IESP   73,838    69,808    179,693    179,693    251,364    270,895 
FADEP   49,661    49,661    70,606    70,606    133,996    132,865 
Medcel and CBBW*   139,294    —      —      —      213,881    —   
FASA   58,903    —      150,156    —      227,271    —   
IPEMED   87,647    —      —      —      106,924    —   
IPEC   —      —      108,000    —      106,964    —   
                               

*Refers to Guardaya which owned 100% of Medcel and CBBW that are considered a single CGU.

 

The main assumptions used by the Company to determine the value in use of the CGUs were:

 

Student enrollment – refer to the number of students that are currently enrolled in each CGU.

 

Tuition fees – is the monthly fee charged to students.

 

Occupancy rate – the occupancy rate of the medical schools is the ratio of the number of students effectively enrolled divided by the regulatory capacity in a given period.

 

Regulatory capacity – the regulatory capacity is defined by the number of medical schools seats available per year awarded by MEC, multiplied by the number of years of operations since the seats were awarded.

 

Faculty – refer to the cost with faculty in the CGU, which means the amount paid to teachers and doctors.

 

Discount rates: discount rates represent the current market assessment of the risks specific to the CGU being tested. The pre-tax discount rate applied to cash flow projections is 12.60% in 2019 and a range between 17.82% to 23.60% in 2018.

 

Significant estimate: impact of possible changes in key assumptions

 

An increase of 1,000 basis points in management’s estimated discount rate applied to the cash flow projections of each CGU for the year ended December 31, 2019 (13.6% instead of 12.6%), would have not resulted in the recognition of an impairment of goodwill. The Company also performed sensitivity analisys for other kay assumptios like net revenues, inflation and cost of services. A decrease of 2,000 basis points on estimated net revenues, an increase of 2,000 basis points on estimated costs of services or as increase or decrease of 10,000 basis points on estimated inflation would have not resulted in the recognition of an impairment of goodwill.

 

F-51

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

Other intangible assets

 

Intangible assets, other than goodwill and licenses with indefinite useful lives, are valued separately for each acquisition and are amortized during each useful life. The useful lives and methods of amortization of other intangibles are reviewed at each financial year end and adjusted prospectively, if appropriate.

 

The estimated useful lives of intangible assets are as follows:

 

   
Customer relationships – medicine 6 years
Customer relationships – other courses 4.5 years
Software license 5 years
Education content 3 years
Trademark 19 - 20 years

 

For the years ended December 31, 2019 and 2018, there were no indicatives that the Company’s intangible assets with finite useful lives might be impaired.

 

13Financial assets and financial liabilities

 

13.1 Financial assets

 

Financial assets  2019  2018
At amortized cost      
Cash and cash equivalents   943,209    62,260 
Restricted cash   16,841    18,810 
Trade receivables   135,240    63,680 
Related parties   —      1,598 
Total   1,095,290    146,348 
Current   1,083,436    120,705 
Non-current   11,854    25,643 
           
Derivatives not designated as hedging instruments          
Cross-currency interest rate swaps   —      1,219 
Total   —      1,219 
Current   —      556 
Non-current   —      663 

 

Debt instruments at amortized cost include trade receivables and receivables from related parties. Financial assets at amortized cost also include cash and cash equivalents and restricted cash.

 

Derivatives not designated as hedging instruments reflect the positive change in fair value of cross-currency interest rate swaps that are not designated in hedge relationships, but are intended to mitigate the foreign currency risk for the loan denominated in Euros.

 

F-52

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

 

13.2 Financial liabilities

 

Financial liabilities  2019  2018
At amortized cost      
Trade payables   17,628    8,104 
Loans and financing   60,357    77,829 
Lease liabilities   284,515    —   
Accounts payable to selling shareholders   300,237    177,730 
Advances from customers   36,860    13,737 
Total   699,597    277,400 
Current   262,671    137,509 
Non-current   436,926    139,891 
Derivatives not designated as hedging instruments      
Cross-currency interest rate swaps   757    —   
Total   757    —   
Current   757    —   
Non-current   —      —   

 

13.2.1 Loans and financing

 

Financial institution  Currency  Interest rate  Maturity  2019  2018
                
Itaú Unibanco S.A.  Euro  1.01% p.y.   2020    52,959    77,829 
Itaú Unibanco S.A.  Brazilian real  1.22% a 1.26% p.m.   2020    648    —   
FINEP  Brazilian real  TJLP p.y.   2027    6,750    —   
               60,357    77,829 
Current              53,607    26,800 
Non-current              6,750    51,029 

 

On July 23, 2019, Medcel entered into a loan of R$ 16,153 with Financiadora de Estudos e Projetos (“FINEP”), a governmental agency focused on financing investments on R&D, which has an interest rate based on TJLP (Long term interest rate), 2019 and maturity in 2027. The first tranche of R$ 6,734 was drawdown in October, 2019 in order to develop the Medical web series. There is no financial covenant related to this agreement. The loan is guaranteed by bank warranty in the amount of R$ 6,734.

 

On November 16, 2018, Afya Brazil entered into a euro-denominated loan agreement with Itaú Unibanco S.A. in the amount of R$74,980 (equivalent to €17,500 thousand). The loan accrues interest at 1.01% per year and is repayable in three equal installments on November 18, 2019, May 18, 2020 and November 12, 2020. The loan agreement contains a financial covenant requiring Afya Brazil to maintain a Net Debt to EBITDA ratio less or equal to: 2.2x during 2018 and 2019 and 1.8x in 2020. The Company is in compliance with the financial ratio at December 31, 2019. The loan is guaranteed by financial investments in the amount of R$ 14,788 as of December 31, 2019 (R$18,810 as of December 31, 2018), as disclosed in Note 7.

 

F-53

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

On November 21, 2018, Afya Brazil entered into cross-currency interest rate swaps in order to mitigate the foreign exchange exposure related to a loan denominated in Euros. The swap agreements are comprised of derivative assets to swap the foreign exchange exposure (Euros to Brazilian real) and derivative liabilities for the interest rate swap (1.01% p.y. to 128% of CDI). The swap agreements have three maturities on November 18, 2019, May 18, 2020 and November 12, 2020. The table below summarizes the notional and fair value amounts of the swap agreements as of December 31, 2019 and 2018.

 

      Fair value
Cross-currency interest rate swap agreements  Principal amount (notional)  2019 

2018

          
Asset position: Euros + 1.01% p.y.   49,165    53,045    78,813 
Liability position: 128% of CDI   (49,165)   (53,802)   (77,594)
Net position – assets (liabilities)   —     (757)   1,219 
Current assets (liabilities)       (757)   556 
Noncurrent assets (liabilities)       —      663 

 

13.2.2 Leases

 

The Company adopted IFRS 16 using the modified retrospective method of adoption with the date of initial application of January 1, 2019. The Company has lease contracts for properties. The maturity of the lease contracts generally have lease terms between 5 and 30 years. There are no sublease and variable payments in-substance lease agreements in the period.

 

Set out below are the carrying amounts of right-of-use assets and lease liabilities and the movements during the period:

 

   Right-of-use assets  Lease liabilities
As at January 1, 2019   212,360    212,360 
Additions   19,100    19,100 
Business combinations   61,145    61,365 
Depreciation expense   (18,330)   —   
Interest expense   —      31,469 
Payments of lease liabilities   —      (39,779)
As at December 31, 2019   274,275    284,515 
Current   —      22,693 
Non-current   274,275    261,822 

 

The Company recognized lease expense from short-term leases and low-value assets of R$ 4,494 for the year ended December 31, 2019.

 

F-54

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

 

13.2.3 Accounts payable to selling shareholders

 

   2019  2018
-      
Acquisition of CCSI (a)   —      8,990 
Acquisition of IESP (b)   75,450    115,656 
Acquisition of FADEP (c)   18,745    53,084 
Acquisition of FASA (d)   105,306    —   
Acquisition of IPEMED (e)   45,646    —   
Acquisition of IPEC (f)   55,090    —   
    300,237    177,730 
Current   131,883    88,868 
Non-current   168,354    88,862 

 

   2019  2018
       
Opening balance   177,730    —   
Cash flows   (92,688)   —   
Acquisition of IPEC   54,000    —   
Interest   17,977    1,687 
Business combinations   144,538    176,043 
Compensation of legal proceedings disbursement   (1,320)   —   
Closing balance   300,237    177,730 

 

(a)On May 30, 2018, Afya Brazil acquired 60% of CCSI and the amount payable is adjusted by the IGP-M inflation rate and was settled in December 2019.

 

(b)On November 27, 2018, Afya Brazil acquired 80% of IESP and the amounts of (i) R$8,906 is payable in February 2019, and (ii) R$106,200 is payable in three equal installments of R$35,400 , each adjusted by the CDI rate through the payment date. The first installment was paid in November 2019 and the remaining two installments are due by the end of the second and third year from the transaction closing date.

 

(c)On December 5, 2018, Afya Brazil acquired 100% of FADEP and the amount of R$52,846 is payable in three equal installments of R$17,615, each adjusted by the SELIC rate through the payment date and due semiannually from the transaction closing date. The first installment was paid in June 2019, the second installment was paid in December 2019, and the last installment is due in June 2020.

 

(d)On April 3, 2019, Afya Brazil acquired 90% of FASA and R$ 39,695 is payable in April 2020; R$ 29,770 is payable in April 2021; and R$ 29,770 is payable in April 2022, adjusted by the IPCA rate + 4.1% per year.

 

(e)On May 9, 2019, Afya Brazil acquired 100% of IPEMED and R$ 45,303 is payable in five equal installments of R$ 9,061, adjusted by the CDI rate, and due annually in February 2020, 2021, 2022, 2023 and 2024.

 

(f)On August 13, 2019, Afya Brazil acquired 100% of IPEC and R$54,000 was paid in cash on the transaction closing date, and (ii) R$54,000 is payable in two equal installments, adjusted by the CDI rate, and due annually at the end of the first and the second year from the transaction closing date.

 

F-55

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

 

13.3 Fair values

 

The table below is a comparison of the carrying amounts and fair values of the Company’s financial instruments, other than those carrying amounts that are reasonable approximation of fair values:

 

   2019  2018
   Carrying amount  Fair value  Carrying amount  Fair value
Financial assets            
Restricted cash   16,841    16,841    18,810    18,810 
Trade receivables (non-current)   9,801    9,801    5,235    5,235 
Derivatives   —      —      1,219    1,219 
Total   26,642    26,642    25,264    25,264 
                     
Financial liabilities                    
Loans and financing   60,357    60,443    77,829    78,813 
Lease liabilities   284,515    284,515    —      —   
Accounts payable to selling shareholders   300,237    300,237    177,730    177,730 
Derivatives   757    757    —      —   
Total   645,866    645,952    255,559    256,543 
                     

 

The Company assessed that the fair values of cash and cash equivalents, restricted cash, trade receivables, other assets, trade payables, advances from customers and other liabilities approximate their carrying amounts largely due to the short-term maturities of these instruments.

 

Derivatives not designated as hedging instruments are recorded at fair value.

 

The fair value of interest-bearing borrowings and loans are determined by using the DCF method using discount rate that reflects the issuer’s borrowing rate as at the end of the reporting period. The own non-performance risk at December 31, 2019 was assessed to be insignificant.

 

13.4.Financial instruments risk management objectives and policies

 

The Company’s principal financial liabilities, other than derivatives, comprise loans and financing, accounts payable to selling shareholders, trade payables and advances from customers. The main purpose of these financial liabilities is to finance the Company’s operations. The Company’s principal financial assets include trade receivables, cash and cash equivalents and financial investments classified as restricted cash that derive directly from its operations. The Company has also entered into derivative transactions to protect its exposure to foreign currency risk.

 

The Company is exposed to market risk, credit risk and liquidity risk. The Company monitors market, credit and operational risks in line with the objectives in capital management and counts with the support, monitoring and oversight of the Board of Directors in decisions related to capital management and its alignment with the objectives and risks. The Company’s policy is that no trading of derivatives for speculative purposes may be undertaken. The Board of Directors reviews and agrees policies for managing each of these risks, which are summarized below.

 

F-56

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

 

13.4.1 Market risk

 

Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. The Company’s exposure to market risk is related to interest rate risk and foreign currency risk.

 

The sensitivity analysis in the following sections relate to the position as at December 31, 2019.

 

(i)Interest rate risk

 

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company’s exposure to the risk of changes in market interest rates relates primarily to the Company’s cash equivalents and financial investments classified as restricted cash with floating interest rates and accounts payable to selling shareholders.

 

Sensitivity analysis

 

The following table demonstrates the sensitivity to a reasonably possible change in the current interest rates on cash equivalents, restricted cash, loans and financing and derivatives and accounts payable to selling shareholders. With all variables held constant, the Company’s income before income taxes is affected through the impact on floating interest rate, as follows:

 

        Increase / decrease in basis points
  Balance as of 12/31/2019

Index – % per year

Base rate

 

+75

 

-75

 

+150

 

-150

 

               
Cash equivalents 930,117 99.22% CDI 41,529 6,976 (6,976) 13,952 (13,952)
Restricted cash 16,841 96.96% CDI 735 126 (126) 253 (253)
Swap – Liability Position (49,165) 128% CDI 2,832 (369) 369 (737) 737
Accounts payable to selling shareholders (75,450) CDI 3,395 (566) 566 (1,132) 1,132
Accounts payable to selling shareholders (45,646) CDI 2,113 (352) 352 (704) 704
Accounts payable to selling shareholders (55,090) CDI 2,479 (413) 413 (826) 826
Loans and financing (6,750) TJLP p.y. 388 (51) 51 (101) 101
Accounts payable to selling shareholders (18,745) SELIC 844 (141) 141 (281) 281
Accounts payable to selling shareholders (105,306) IPCA+4.1% 8,856 (790) 790 (1,580) 1,580

 

(ii)Foreign currency risk

 

Foreign currency risk is the risk that the fair value or future cash flows of an exposure will fluctuate because of changes in foreign exchange rates. The Company’s exposure to the risk of changes in foreign exchange rates relates to the loan denominated in Euros in the amount of R$52,959 as of December 31, 2019 (December 31, 2018: R$77,829) and cash and cash equivalents denominated in U.S. dollars in the amount of R$2,529 as of December 31, 2019.

 

The Company manages its foreign currency risk by entering in cross-currency interest rate swap agreement to mitigate its exposure to the loan denominated in Euros with the same notional amount and loan’s maturities.

 

F-57

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

 

Foreign currency sensitivity

 

The following table demonstrates the sensitivity in the Company’s income before income taxes of a 10% change in the Euro exchange rate (R$4.439 to Euro 1.00) as of December 31, 2019, with all other variables held constant.

 

    Exposure    +10%    -10%
As of December 31, 2019               
Cash and cash equivalents   2,529    253    (253)
Loans and financing   (52,959)   (5,296)   5,296 
    (50,430)   (5,043)   5,043 

 

The cross-currency interest rate swaps mitigates the effects of foreign exchange rates on the loan denominated in Euros.

 

13.4.2 Credit risk

 

Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. The Company is exposed to credit risk from its operating activities (primarily trade receivables) and from its financing activities, including cash and cash equivalents and restricted cash.

 

Customer credit risk is managed by the Company based on the established policy, procedures and control relating to customer credit risk management. Oustanding customer receivables are regularly monitored. See Note 8 for additional information on the Company’s trade receivables.

 

Credit risk from balances with banks and financial institutions is management by the Company’s treasury department in accordance with the Company’s policy. Investments of surplus funds are made only with approved counterparties and within limits assigned to each counterparty.

 

The Company’s maximum exposure to credit risk for the components of the statement of financial position at December 31, 2019 and 2018 is the carrying amounts of its financial assets.

 

13.4.3 Liquidity risk

 

The Company’s Management has responsibility for monitor liquidity risk. In order to achieve the Company’s objective, Management regularly reviews the risk and maintains appropriate reserves, including bank credit facilities with first tier financial institutions. Management also continuously monitors projected and actual cash flows and the combination of the maturity profiles of the financial assets and liabilities.

 

The main requirements for financial resources used by the Company arise from the need to make payments for suppliers, operating expenses, labor and social obligations, loans and financing and accounts payable to selling shareholders.

 

F-58

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

The tables below summarize the maturity profile of the Company’s financial liabilities based on contractual undiscounted amounts:

 

As of December 31, 2019  Less than 1 year  1 to 3 years  3 to 5 years  More than 5 years  Total
Trade payables   17,628    —      —      —      17,628 
Loans and financing   54,507    3,537    2,517    1,926    62,487 
Lease liabilities   44,139    81,326    76,013    502,831    704,309 
Accounts payable to selling shareholders   137,608    182,535    12,072    —      332,215 
Advances from customers   36,860    —      —      —      36,860 
Derivatives   757    —      —      —      757 
    291,499    267,398    90,602    504,757    1,154,256 

F-59

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

13.5 Changes In liabilities arising from financing activities

 

   January 1, 2019  Payments  Addition  Interest  Foreign exchange movement  Business combination  Other  December 31, 2019
Loans and financing   77,829    (75,093)   7,383    6,025    1,126    43,087    —      60,357 
Lease liabilities   212,360    (39,779)   19,100    31,469    —      61,365    —      284,515 
Dividends payable   4,107    (51,812)   51,812    —      —      —      (4,107)   —   
Total   294,296    (166,684)   78,295    37,494    1,126    104,452    (4,107)   344,872 

 

   January 1, 2018  Payments  Addition  Interest  Foreign exchange movement  Business combination  Other  December 31, 2018
Loans and financing   3,823    (6,492)   74,980    2,821    2,697    —      —      77,829 
Related parties   106    (106)   —      —      —      —      —      —   
Dividends payable   14,888    (5,845)   —      —      —      —      (4,936)   4,107 
Total   18,817    (12,443)   74,980    2,821    2,697    —      (4,936)   81,936 

 

   January 1, 2017  Payments  Addition  Interest  Foreign exchange movement  Business combination  Other  December 31, 2017
Loans and financing   4,944    (1,135)   —      —      —      —      14    3,823 
Related parties   590    (484)   —      —      —      —      —      106 
Dividends payable   4,107    (2,506)   —      —      —      —      13,290    14,888 
Total   9,641    (4,125)   —      —      —      —      13,304    18,817 
                                         

F-60

Afya Limited

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

14Fair value measurement

 

The following table provides the fair value measurement hierarchy of the Company’s assets and liabilities as of December 31, 2019 and 2018.

 

   Fair value measurement
   Total  Quoted prices in active markets (Level 1)  Significant observable inputs (Level 2)  Significant unobservable inputs (Level 3)
December 31, 2019            
Liabilities measured at fair value:            
Derivative financial liabilities            
Cross-currency interest rate swaps   (757)   —      (757)   —   
Assets for which fair values are disclosed
                    
Trade receivable (non-current)   9,801    —      9,801    —   
Restricted Cash   16,841    —      16,841    —   
Liabilities for which fair values are disclosed                    
Loans and financing   (60,443)   —      (60,443)   —   
Lease liabilities   (284,515)   —      (284,515)   —   
Accounts payable to selling shareholders   (300,237)   —      (300,237)   —   
                     
December 31, 2018                    
Assets measured at fair value:                    
Derivative financial assets                    
Cross-currency interest rate swaps   1,219    —      1,219    —   
Assets for which fair values are disclosed                    
Trade Receivables (non-current)