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13 Financial assets and financial liabilities
 12 Months Ended
Dec. 31, 2019
Financial Assets And Financial Liabilities  
Financial assets and financial liabilities

13       Financial 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.

 

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.

 

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.

 

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.

 

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.

 

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.

  

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 mitigate 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. Outstanding 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.

  

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

  

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