2.	Basis of preparation

2.1.

Statement of compliance and authorization of financial statements

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

The consolidated financial statements have been prepared under the historical cost convention, except when otherwise indicated. The summary of significant accounting policies used in the preparation of these financial statements is set out in note 4.

The preparation of the financial statements requires the use of estimates and assumptions which may affect the application of accounting policies and reported amounts of assets, liabilities revenues and expenses. Although our management periodically reviews these assumptions and judgments, the actual results could differ from these estimates. For further information on accounting estimates, see note 5.

The annual consolidated financial statements were approved and authorized for issue by the Company’s Board of Directors in a meeting held on February 27, 2019.

2.2.

Functional and presentation currency

The functional currency of Petrobras and all of its Brazilian subsidiaries is the Brazilian Real. The functional currency of most of the Petrobras entities that operate outside Brazil is the U.S. dollar.

Petrobras has selected the U.S. dollar as its presentation currency to facilitate a more direct comparison to other oil and gas companies. The financial statements have been translated from the functional currency (Brazilian real) into the presentation currency (U.S. dollar). All assets and liabilities are translated into U.S. dollars at the closing exchange rate at the date of the financial statements; income and expenses, as well as cash flows are translated into U.S. dollars using the average exchange rates prevailing during the period. All exchange differences arising from the translation of the consolidated financial statements from the functional currency into the presentation currency are recognized as cumulative translation adjustments (CTA) within accumulated other comprehensive income in the consolidated statements of changes in shareholders’ equity.


Brazilian Real x U.S. Dollar	Quarterly average exchange rate		Period-end exchange rate
Dec 2018		3.81		3.87
Sep 2018		3.95		4.00
Jun 2018		3.61		3.86
Mar 2018		3.24		3.32
Dec 2017		3.25		3.31
Sep 2017		3.16		3.17
Jun 2017		3.22		3.31
Mar 2017		3.15		3.17
Dec 2016		3.29		3.26
Sep 2016		3.25		3.25
Jun 2016		3.51		3.21
Mar 2016		3.91		3.56

2.3.

Changes in accounting polices

IFRS 9, IFRS 15 and IFRIC 22 have been effective since January 1, 2018. Accordingly, the Company changed, in 2018, accounting policies related to financial instruments, revenue recognition and transactions that include the receipt or payment of advance consideration in a foreign currency.

2.3.1.

IFRS 9 - Financial instruments

IFRS 9 establishes, among others things, new requirements for classification and measurement of financial assets, measurement and recognition of impairment of financial assets, changes in the terms of financial assets and liabilities, hedge accounting and disclosure.

As permitted by IFRS 9, the company did not restate prior periods with respect to classification and measurement (including impairment and modification of financial assets and liabilities) changes. Differences in the carrying amounts of financial assets and financial liabilities resulting from the adoption of IFRS 9 were recognized at January 1, 2018 in retained earnings within equity.

The new hedge accounting requirements were applied prospectively. The cash flow hedge relationships of highly probable future exports designated under IAS 39 were regarded as continuing hedging relationships under IFRS 9, since they also qualify for hedge accounting in accordance with the new standard.

Information on the consolidated impacts at January 1, 2018 is presented below:


Item of Consolidated Statement of Financial Position	Balance at 12.31.2017			Adjustment by initial application of IFRS 9			Note			Balance at 01.01.2018
Current assets
Trade and other receivables		4,972			(103	)		2.3.1	b		4,869
Non-current assets
Trade and other receivables		5,175			(19	)		2.3.1	b		5,156
Deferred income taxes		3,438			122						3,560
Others		3,084			(23	)		2.3.1	b		3,061
Current liabilities
Finance debt		7,001			1			2.3.1	a		7,002
Others		2,508			(7	)		2.3.1	a		2,501
Non-current liabilities
Finance debt		102,045			241			2.3.1	a		102,286
Equity
Accumulated other comprehensive (deficit)		(81,422	)		(20	)		2.3.1	c		(81,442	)
Retained earnings					(222	)					(222	)
Non-controlling interests		1,700			(15	)					1,685

a) Modification of contractual cash flows

When the contractual cash flows of a financial liability measured at amortized cost are renegotiated or modified and this change is not substantial, its gross carrying amount will reflect the discounted present value of its cash flows under the new terms using the original effective interest rate. The difference between the book value immediately prior to such modification and the new gross carrying amount is recognized as gain or loss in the statement of income.

b) Impairment of financial assets

IFRS 9 replaced the incurred loss model stated in IAS 39 by the expected credit loss model for the recognition of impairment on financial assets measured at amortized cost, including lease receivables, and on financial assets measured at fair value through other comprehensive income.

c) Classification and measurement of financial assets

This new standard established 3 categories in which financial assets are generally classified: Amortized cost, Fair value through other comprehensive income and Fair value through profit or loss. The classification of a financial asset is based on the business model in which assets are managed and on their contractual cash flow characteristics.

The following table presents comparative information of marketable securities between the former classification and measurement in accordance with IAS 39 and the current requirements following the effectiveness of IFRS 9:


	Carrying amount according to IAS 39 at December 31, 2017
Classification according to IAS 39	In Brazil		Abroad		Total
Trading securities		1,067		—		1,067
Available-for-sale securities		153		609		762
Held-to-maturity securities		120		—		120

		1,340		609		1,949


	Carrying amount according to IFRS 9 at January 1, 2018
Classification according to IFRS 9	In Brazil		Abroad		Total
Fair value through profit or loss		1,276		—		1,276
Fair value through other comprehensive income		13		609		622
Amortised cost		51		—		51

		1,340		609		1,949

Information about accounting policies, key estimates and judgments related to financial instruments is presented in notes 4 and 5.

2.3.2.

Revenue from Contracts with Customers

For the purposes of the transition requirements, the Company applied IFRS 15 retrospectively with the cumulative effect of its application recognized at its effective date within retained earnings. However, the changes arising from the adoption of IFRS 15 only affected the way certain revenues from contracts with customers are disclosed within the statement of income and did not affect net income. Accordingly, there were no impacts within retained earnings (equity).

The following table presents the impacts of adoption of this standard in 2018:


				Initial application of IFRS 15
	2018			Agent			Breakage			Others			Amount without effects of initial application of IFRS 15 - 2018
Sales revenues		95,584			2,560			(273	)		(24	)		97,847
Cost of sales		(61,517	)		(2,560	)		20			—			(64,057	)

Gross profit		34,067			—			(253	)		(24	)		33,790

Income and expenses		(16,635	)		—			253			24			(16,358	)

Income before finance income (expense), results in equity-accounted investments and income taxes		17,432			—			—			—			17,432

The Company acting as an agent

In accordance with accounting policies at December 31, 2017, the Company was regarded as the principal in the sale of biodiesel. Therefore, the revenues from these sales, cost of the products sold and sales expenses were presented separately in the statement of income. However, under the new standard’s requirements, the Company acts as an agent because it does not obtain control of goods or services provided by another party before it is transferred to the customer. From January 1, 2018, revenues from these sales have been presented in the statement of income net of their cost of sales and sales expenses.

Non-exercised right income (breakage)

In accordance with accounting policies at December 31, 2017, the Company regarded the income from rights not exercised by customers in certain take or pay and ship or pay contracts as penalties revenue and presented it as other income and expenses in the statement of income. However, according to the new standard’s requirements, the Company has accounted for and presented its income from rights not exercised by customers as sales revenues in the statement of income, as from January 1, 2018.

Information about accounting policies related to revenue from contract with customers is presented in note 4.

2.3.3.

IFRIC 22 Foreign Currency Transactions and Advance Consideration

Based on the transition provisions of IFRIC 22, the Company has applied the new requirements prospectively from January 1, 2018. IFRIC 22 clarifies that the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it) is the date on which an entity initially recognizes the non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration.