EXHIBIT 99.3

 

 

Report on review of interim condensed
consolidated financial statements

To the Board of Directors and Shareholders

XP Inc.

Introduction

We have reviewed the accompanying interim condensed consolidated balance sheets of XP Inc. as at September 30, 2020 and the related interim condensed consolidated statements of income and of comprehensive income for the quarter and nine-month period then ended, and the interim condensed consolidated statements of changes in equity and cash flows for the nine-month period then ended, and a summary of significant accounting policies and other explanatory notes.

Management is responsible for the preparation and presentation of these interim condensed consolidated financial statements in accordance with International Accounting Standard (IAS) 34 - Interim Financial Reporting issued by the International Accounting Standards Board (IASB). Our responsibility is to express a conclusion on these interim condensed consolidated financial statements based on our review.

Scope of review

We conducted our review in accordance with Brazilian and International Standards on Reviews of Interim Financial Information (NBC TR 2410 - Review of Interim Financial Information Performed by the Independent Auditor of the Entity, and ISRE 2410 - Review of Interim Financial Information Performed by the Independent Auditor of the Entity, respectively). A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Brazilian and International Standards on Auditing and consequently did not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the accompanying interim condensed consolidated financial statements referred to above are not prepared, in all material respects, in accordance with IAS 34.

São Paulo, November 06, 2020     

/s/ PricewaterhouseCoopers

PricewaterhouseCoopers

Auditores Independentes 

CRC 2SP000160/O-5

Tatiana Fernandes Kagohara Gueorguiev

Contador CRC 1SP245281/O-6

PricewaterhouseCoopers, Av. Francisco Matarazzo 1400, Torre Torino, São Paulo, SP, Brasil 05001-903, Caixa Postal 61005, www.pwc.com/br

XP Inc. and its subsidiaries Unaudited interim condensed consolidated balance sheets As of September 30, 2020 and December 31, 2019 In thousands of Brazilian Reais  

	Note		September 30, 2020		December 31, 2019
Cash				642,491		109,922
Financial assets				84,432,999		41,888,778
Fair value through profit or loss				51,850,286		26,528,396
Securities		4		38,701,519		22,443,392
Derivative financial instruments		5		13,148,767		4,085,004
Fair value through other comprehensive income				9,588,773		2,616,118
Securities		4		9,588,773		2,616,118
Evaluated at amortized cost				22,993,940		12,744,264
Securities		4		1,366,038		2,266,971
Securities purchased under agreements to resell		3		18,243,688		9,490,090
Securities trading and intermediation		9		1,483,507		504,983
Accounts receivable				251,194		462,029
Loan operations		7		1,369,234		386
Other financial assets				280,279		19,805
Other assets				1,484,110		643,619
Recoverable taxes				170,066		243,320
Rights-of-use assets		11		182,014		227,478
Prepaid expenses		8		1,090,998		89,684
Other				41,032		83,137
Deferred tax assets		18		378,726		284,533
Investments in associates and joint ventures		10		696,742		-
Property and equipment		11		94,756		142,464
Goodwill and Intangible assets		11		669,534		553,452
Total assets				88,399,358		43,622,768

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

2

XP Inc. and its subsidiaries Unaudited interim condensed consolidated balance sheets As of September 30, 2020 and December 31, 2019 In thousands of Brazilian Reais  

	Note		September 30, 2020		December 31, 2019
Financial liabilities				69,388,840		31,842,054
Fair value through profit or loss				13,841,366		5,250,943
Securities		4		1,111,770		2,021,707
Derivative financial instruments		5		12,729,596		3,229,236
Evaluated at amortized cost				55,547,474		26,591,111
Securities sold under repurchase agreements		3		35,253,928		15,638,407
Securities trading and intermediation		9		15,159,711		9,114,546
Deposits		12		1,626,709		70,195
Structured operations certificates		13		1,142,457		19,474
Accounts payables				655,117		266,813
Borrowings and lease liabilities		14		511,981		637,484
Debentures		15		338,693		835,230
Other financial liabilities		16		858,878		8,962
Other liabilities				10,298,861		4,619,623
Social and statutory obligations				379,696		492,723
Taxes and social security obligations				234,652		345,331
Private pension liabilities		17		9,649,322		3,759,090
Provisions and contingent liabilities		21		16,020		15,193
Other				19,171		7,286
Deferred tax liabilities		18		41,074		5,132
Total liabilities				79,728,775		36,466,809
Equity attributable to owners of the Parent company				8,669,470		7,153,396
Issued capital				23		23
Capital reserve				7,021,993		6,943,446
Other comprehensive income				171,841		209,927
Retained earnings				1,475,613		-
Non-controlling interest				1,113		2,563
Total equity		19		8,670,583		7,155,959
Total liabilities and equity				88,399,358		43,622,768

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

3 

XP Inc. and its subsidiaries Unaudited interim condensed consolidated statements of income and of comprehensive income For the nine and three month periods ended September 30, 2020 and 2019 In thousands of Brazilian Reais, except earnings per share  

			Nine months period ended September 30,						Three months period ended September 30,
	Note		2020			2019			2020			2019
Net revenue from services rendered		22(a)		3,493,231			2,341,100			1,277,745			944,038
Net income from financial instruments at amortized cost and at fair value through other comprehensive income		22(b)		298,585			204,023			189,527			26,513
Net income from financial instruments  at fair value through profit or loss		22(b)		1,964,691			891,390			633,465			385,373
Total revenue and income				5,756,507			3,436,513			2,100,737			1,355,924
Operating costs		23		(1,864,062	)		(1,118,967	)		(706,020	)		(444,958	)
Selling expenses		24		(94,367	)		(82,419	)		(38,322	)		(30,104	)
Administrative expenses		24		(2,077,587	)		(1,294,039	)		(809,596	)		(481,605	)
Other operating income (expenses), net		25		84,986			118,487			97,801			7,358
Interest expense on debt				(46,385	)		(62,631	)		(11,585	)		(24,481	)
Share of profit or (loss) in joint ventures and associates		10		(564	)		-			(564	)		-
Income before income tax				1,758,528			996,944			632,451			382,134
Income tax expense		18		(279,427	)		(297,646	)		(91,167	)		(121,336	)
Net income for the period				1,479,101			699,298			541,284			260,798
Other comprehensive income
Items that can be subsequently reclassified to income
Foreign exchange variation of investees located abroad				76,575			12,126			6,900			15,191
Gains (losses) on net investment hedge		6		(80,370	)		(11,829	)		(7,531	)		(13,911	)
Changes in the fair value of financial assets at fair value through other comprehensive income				(33,914	)		986			(45,072	)		(8,118	)
Other comprehensive income (loss) for the period, net of tax				(37,709	)		1,283			(45,703	)		(6,838	)
Total comprehensive income for the period				1,441,392			700,581			495,581			253,960
Net income attributable to:
Owners of the Parent company				1,475,613			692,011			540,434			257,814
Non-controlling interest				3,488			7,287			850			2,984
Total comprehensive income attributable to:
Owners of the Parent company				1,437,904			693,294			494,731			250,976
Non-controlling interest				3,488			7,287			850			2,984
Earnings per share from total income attributable to the ordinary equity holders of  the company
Basic earnings per share		27		2.6742			1.3589			0.9794			0.5063
Diluted earnings per share		27		2.6534			1.3589			0.9710			0.5063

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

4 

XP Inc. and its subsidiaries Unaudited interim condensed consolidated statements of changes in equity For the nine months ended September 30, 2020 and 2019 In thousands of Brazilian Reais  

			Attributable to owners of the Parent
					Capital reserve
	Notes		Issued Capital		Additional paid-in capital		Other Reserves		Other comprehensive income			Retained Earnings		Total			Non-Controlling interest			Total Equity
Balances at December 31, 2018				21		927,895		947,696		209,165			-		2,084,777			6,935			2,091,712
Comprehensive income for the period
Net income for the period				-		-		-		-			692,011		692,011			7,287			699,298
Other comprehensive income, net				-		-		-		1,283			-		1,283			-			1,283
Transactions with shareholders - contributions and distributions
Gain (loss) in changes in interest of subsidiaries, net				-		-		-		210			-		210			(1,439	)		(1,229	)
Allocations of the net income for the period
Dividends distributed				-		-		-		-			-		-			(9,193	)		(9,193	)
Balances at September 30, 2019				21		927,895		947,696		210,658			692,011		2,778,281			3,590			2,781,871
Balances at December 31, 2019				23		5,409,895		1,533,551		209,927			-		7,153,396			2,563			7,155,959
Comprehensive income for the period
Net income for the period				-		-		-		-			1.475,613		1,475,613			3,488			1,479,101
Other comprehensive income, net				-		-		-		(37,709	)		-		(37,709	)		-			(37,709	)
Transactions with shareholders - contributions and distributions
Share based incentive plan		26		-		-		78,547		-			-		78,547			(10	)		78,537
Gain (loss) in changes in interest of subsidiaries, net				-		-		-		(377	)		-		(377	)		1,208			831
Allocations of the net income for the period
Dividends distributed				-		-		-		-			-		-			(6,136	)		(6,136	)
Balances at September, 2020				23		5,409,895		1,612,098		171,841			1,475,613		8,669,470			1,113			8,670,583

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

5 

XP Inc. and its subsidiaries Unaudited interim condensed consolidated statements of cash flows For the nine months ended September 30, 2020 and 2019 In thousands of Brazilian Reais  

			Nine months ended September 30,
	Note		2020			2019
Operating activities
Income before income tax				1,758,528			996,944
Adjustments to reconcile income before income taxes
Depreciation of property and equipment and right-of-use assets		11		52,972			38,409
Amortization of intangible assets		11		52,928			23,992
Loss on impairment and write-off of property, equipment, intangible assets and leases, net		11		61,888			7,606
Income from share in the net income of associates and joint ventures and other investments				562			-
Expected credit losses on accounts receivable, loan operations and other financial assets				38,171			6,318
(Reversal of) Provision for contingencies, net		21		(53	)		(2,207	)
Net foreign exchange differences				2,981			571
Share based plan				78,537			-
Interest accrued				47,529			64,099
Changes in assets and liabilities
Securities (assets and liabilities)				(23,926,297	)		(11,018,501	)
Derivative financial instruments (assets and liabilities)				314,825			390,880
Securities trading and intermediation (assets and liabilities)				5,066,641			1,986,946
Securities purchased (sold) under resale (repurchase) agreements				10,861,923			6,094,987
Accounts receivable				178,152			(34,217	)
Loan operations				(1,375,823	)		-
Prepaid expenses				(1,001,314	)		(142	)
Other assets and other financial assets				(216,882	)		20,583
Structured operations certificates				1,122,983			-
Accounts payable				387,120			72,928
Deposits				1,556,514			-
Social and statutory obligations				(113,027	)		23,878
Tax and social security obligations				(262,915	)		6,930
Private pension liabilities				5,890,232			1,705,647
Other liabilities and other financial liabilities				341,273			5,628
Cash from operations				917,448			391,279
Income tax paid				(48,097	)		(355,410	)
Contingencies paid		21		(592	)		(1,062	)
Interest paid		31		(62,015	)		(16,386	)
Net cash flows from operating activities				806,744			18,421
Investing activities
Acquisition of intangible assets		11		(79,127	)		(39,974	)
Acquisition of property and equipment		11		(40,011	)		(43,749	)
Acquisition of subsidiaries, net of cash acquired		11		(55,741	)		-
Investment in associates and joint ventures				(204,960	)		-
Net cash flows used in investing activities				(379,839	)		(83,723	)
Financing activities
Payments of borrowings and lease liabilities		31		(130,798	)		(101,047	)
Payment of debentures		31		(400,000	)		-
Repurchase of debentures		31		(64,717	)		-
Proceeds of debentures				-			400,000
Transactions with non-controlling interests				831			(1,229	)
Dividends paid to non-controlling interests				(6,136	)		(9,193	)
Net cash flows from (used in) financing activities				(600,820	)		288,531
Net increase in cash and cash equivalents				(173,915	)		223,230
Cash and cash equivalents at the beginning of the period				887,796			626,863
Effects of exchange rate changes on cash and cash equivalents				33,814			(4,116	)
Cash and cash equivalents at the end of the period				747,695			845,977
Cash				642,491			70,483
Securities purchased under agreements to resell		3		-			684,964
Interbank certificate deposits		4		105,204			90,530

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

6 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of September 30, 2020 In thousands of Brazilian Reais, unless otherwise stated  

1. Operations

XP Inc. (the “Company”) is a Cayman Island exempted company with limited liability, incorporated on August 29, 2019. The registered office of the Company is Ugland House, 121 South Church Street in George Town, Grand Cayman. The Company’s principal executive office is located in the city of São Paulo, Brazil.

XP Inc. is a holding company controlled by XP Controle Participações S.A., which holds 53.38% of voting rights and whose is ultimately controlled by a group of individuals.

XP Inc. and its subsidiaries (collectively, the “Company”, “Group” or “XP Group”) is a leading, technology-driven financial services platform and a trusted provider of low-fee financial products and services in Brazil. XP Group are principally engaged in providing its customers, represented by individuals and legal entities in Brazil and abroad, various financial products, services, digital content and financial advisory services, mainly acting as broker-dealer, including securities brokerage, private pension plans, commercial and investment banking products such as loan operations, transactions in the foreign exchange markets and deposits, through our brands that reach clients directly and through network of Independent Financial Advisers (“IFAs”).

On November 29, 2019, the Group carried out a corporate reorganization in order to prepare the structure to the Initial Public Offering of its shares. As result, the capital contributed by the shareholders on XP Investimentos S.A. were transferred and incorporated on XP Inc. Therefore the shareholders have a direct stake on XP Inc. which controls XP Investimentos S.A. and the other operating companies of the Group.

On November 30, 2019, the Company carried out a reverse share split of 4:1. As a result, the share capital represented by 2,036,988,542 shares decreased to 509,247,136 shares. The reverse share split has been applied retrospectively to all figures in the historical financial statements regarding number of shares (Note 27) and per share data as if the reverse share split had been in effect for all periods presented.

1.1 Initial Public Offering (“IPO”) and resulting transactions

On December 13, 2019, the Company completed its Initial Public Offering (“IPO”), offering 72,510,641 of Class A common shares, of which 42,553,192 new shares were offered by the Company and the remaining 29,957,449 shares were offered by selling shareholders. Additionally, the underwriters executed an option to purchase 10,876,596 additional Class A common shares at the initial public offering price which resulted in a total of 83,387,237 Class A common shares sold.

The initial offering price per Class A common share was US$ 27.00, resulting in gross proceeds of US$ 1,148,936 thousand (or R$4,705,803) to XP Inc, deducting R$200,977 thousand as underwriting discounts and commissions. Additionally, the Company incurred in R$44,726 thousand regarding other offering expenses, of which R$21,902 thousand was recognized directly in income statements and an amount of R$22,824 in equity as transaction costs.

The shares offered and sold in the IPO were registered under the Securities Act of 1933, as amended, pursuant to the Company’s Registration Statement on Form F-1 (Registration N° 333-234719), which was declared effective by the Securities and Exchange Commission on December 10, 2019. The common shares began trading on the Nasdaq Global Select Market (“NASDAQ-GS”) on December 11, 2019 under the symbol “XP”.

7 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of September 30, 2020 In thousands of Brazilian Reais, unless otherwise stated  

1.2 Follow-on public offering

On July 1, 2020, XP Inc. concluded an underwritten public offering of 22,465,733 Class A common shares offered by General Atlantic (XP) Bermuda, L.P. and XP Controle Participações S.A. (“selling shareholders”) at a public offering price of US$42.50 per share, including the full exercise of the underwriters’ option to purchase an additional 2,930,313 Class A common shares from the selling shareholders. The Company did not receive any proceeds from the sale of Class A common shares by the selling shareholders and there were no changes in the Company’s control structure as a result of such transaction.

These unaudited interim condensed consolidated financial statements as of September 30, 2020 and for the three and nine month periods ended September 30, 2020 were approved by the Board of Director’s meeting on November 6, 2020.

2. Basis of preparation of the financial statements and changes to the Group’s accounting policies

a) Basis of preparation of the unaudited interim condensed consolidated financial statements

The unaudited interim condensed consolidated financial statements as of September 30, 2020 and for the three and nine months period ended September, 2020 and 2019 have been prepared in accordance with IAS 34 Interim Financial Reporting as issued by the International Accounting Standards Board (“IASB”).

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

The unaudited interim condensed consolidated financial statements do not include all the information and disclosures required in the annual financial statements and should be read in conjunction with the Group’s annual consolidated financial statements as of December 31, 2019. The list of notes that were not apresented in this unaudited interim condensed is presented below:

Note to financial statements of December 31, 2019	Description
3.	Summary of significant accounting policies
4.	Significant estimated and judgements
5.	Group structure
10.	Accounts receivable
11.	Recoverable taxes
19.	Social and Statutory obligations
20.	Tax and social security obligations
24. (a)	Key-person management compensation
33. (b) to (f)	Management of financial risks and financial instruments

The accounting policies adopted are consistent with those of the previous financial year and corresponding interim reporting period, except for the new accounting policies adopted for the current interim reporting period, see Note 2 (c).

The unaudited interim condensed consolidated financial statements are presented in Brazilian reais (“R$”), which is the Group’s presentation currency and all amounts disclosed in the financial statements and notes have been rounded off to the nearest thousand currency units unless otherwise stated.

8 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of September 30, 2020 In thousands of Brazilian Reais, unless otherwise stated  

b) New standards, interpretations and amendments not yet adopted

The accounting policies adopted in the preparation of the unaudited interim condensed consolidated financial statements are consistent with those followed in the preparation of the Group’s consolidated financial statements for the year ended December 31, 2019.

Certain new accounting standards and interpretations have been published ,which include Amendments to IFRS 3: Definition of a Business; Amendments to IFRS 7, IFRS 9 and IAS 39: Interest Rate Benchmark Reform; and Amendments to IAS 1 and IAS 8: Definition of Material; and Conceptual Framework for Financial Reporting issued on March 29, 2018, that are not mandatory for the period ended September 30, 2020, and have not been early adopted by the group. These standards are not expected to have a material impact on the entity in the current or future financial statements periods and on foreseeable future transactions.

c) New accounting policies adopted by the Group

Derivative financial instruments and hedging activities

In compliance with IFRS 9, as of September 30, 2020, the Group designated certain derivatives as fair value hedges for protection of the exposure of Fixed-Income carried out through structured operations certificates. The following accounting policy is adopted for theses fair value hedges:

For the derivative financial instruments that are designated and qualify as fair value hedges, the following policies apply:

a) the gain or loss resulting from the fair value appreciation or depreciation of the hedging instrument at fair value should be recorded in profit or loss; and

b) the gain or loss resulting from fair value appreciation or depreciation of the hedged item, that is attributable to the effective portion of the hedged item should adjust the carrying amount of the hedged item, which will be recorded in profit or loss.

If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the effective interest method is used is amortized to profit or loss over the remaining period until maturity, using a recalculated effective interest rate.

d) Basis of consolidation

There were no changes since December 31, 2019 in the accounting practices adopted for consolidation of the Company’s direct and indirect interests in its subsidiaries for the purposes of these unaudited interim condensed consolidated financial statements, except for the following items:

				% of Group’s interest (i)
Entity name	Country of incorporation		Principal activities	September 30,2020			December 31, 2019
Indirectly controlled
XP Allocation Asset Management Ltda. (ii)		Brazil	Asset management		99.97	%		-
Track Índices Consultoria Ltda. (ii)		Brazil	Index Provider		100.00	%		-
XP Eventos Ltda. (ii)		Brazil	Media and Events		99.00	%		-
Carteira Online Controle de Investimentos Ltda.-ME (iii)		Brazil	Investment consolidation platform		99.99	%		-
Antecipa S.A. (iii)		Brazil	Receivables Financing Market		100.00	%		-

9 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of September 30, 2020 In thousands of Brazilian Reais, unless otherwise stated  

Consolidated investments funds
NIMROD Fundo de Investimento Multimercado Crédito Privado Investimento no Exterior (ii)	Brazil	Investment fund	100.00	%	-
XP High Yield Fund SP (ii)	Cayman	Investment fund	100.00	%	-
XP International Fund SPC (ii)	Cayman	Investment fund	100.00	%	-
Spatha Fundo de Investimento Multimercado Crédito Privado Investimento no Exterior (iv)	Brazil	Investment fund	-		100.00	%
Balista Debentures Incentivadas Fundo de Investimento Multimercado Crédito Privado  (iv)	Brazil	Investment fund	-		100.00	%

(i) The percentage of participation represents the Group’s interest in total capital and voting capital of its subsidiaries.

(ii) New subsidiaries and investment funds commenced operations in the period.

(iii) New subsidiaries acquired in the period.

(iv) Investiments funds closed during the period.

e) Interests in associates and joint ventures

i. Associates

Associates are companies in which the investor has a significant influence but does not hold control. Investments in these companies are initially recognized at cost of acquisition and subsequently accounted for using the equity method. Investments in associates and joint ventures include the goodwill identified upon acquisition, net of any cumulative impairment loss.

ii. Joint ventures

The Group has joint venture whereby the parties that have joint control of the arrangement have rights to the net assets.

iii. Equity method

Under the equity method of accounting, the investments are initially recognised at cost and adjusted thereafter to recognise the Group’s share of the post-acquisition profits or losses of the investee in profit or loss, and the Group’s share of movements in other comprehensive income of the investee in other comprehensive income. Dividends received or receivable from associates and joint ventures are recognised as a reduction in the carrying amount of the investment.

Unrealised gains on transactions between the Group and its associates and joint ventures are eliminated to the extent of the Group’s interest in these entities. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of equity-accounted investees have been changed where necessary to ensure consistency with the policies adopted by the Group.

If its interest in the associates and joint ventures decreases, but the Group retains significant influence or joint control, only the proportional amount of the previously recognized amounts in Other comprehensive income is reclassified in Income, when appropriate.

10 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of September 30, 2020 In thousands of Brazilian Reais, unless otherwise stated  

f) Business acquisitions

The acquisitions of Fliper and Antecipa were recently completed and the allocation of the purchase price to acquired assets, including goodwill, and assumed liabilities is still preliminary pending receipt of the final fair value valuations of the acquired assets and assumed liabilities as of the closing date of the transaction. For the concluded acquisitions, the total consideration paid is R$83,925, being: i) R$55,741 paid in cash, ii) R$14,000 payable in three consecutives annual installments from 2020 to 2022 adjusted by the Interbank Certificates of Deposit (“CDI”) rate and iii) R$14,183 as a fair value of the contingent consideration.

These acquisitions are not considered material for XP Inc. interim financial statements.The preliminary purchase prices were mostly allocated to goodwill, representing the value of expected synergies arising from the acquisition.

Carteira Online Controle de Investimentos Ltda.-ME (“Fliper”)

On June 5, 2020, the Group entered into an agreement, to acquire 100% of total share capital Fliper, an automated investment consolidation platform that offers its users connectivity and tools to perform intuitive and intelligent financial self-management. The transaction allows XP Inc. to offer its customers additional resources to manage their investments, as the open banking trend continues to accelerate in Brazil. On July 13, 2020, the acquisition was concluded, through approval of Central Bank (BACEN).

Antecipa S.A. (“Antecipa”)

On June 29, 2020, the Group entered into an agreement, through its for the acquisition of 100% of total share capital of Antecipa , a digital platform for the financing of receivables.Antecipa's central objective is to offer an efficient alternative for companies to optimize cash flow management. For the Group, the acquisition represents an opportunity to further expand its product range and reinforce the company’s presence in the Small to Medium Enterprise (SME) and corporate segments in Brazil, similar to XP’s transformational initiatives across the Retail, High-Income and Private Market channels. On September 1, 2020, acquisition was consummated, through approval of Central Bank (BACEN).

DM10 Corretora de Seguros e Assessoria Ltda. (“DM10”)

On June 9, 2020, the Group entered into an agreement to acquire of 100% of total share capital of DM10, a marketplace that connects hundreds of independent distributors with Life Insurance and Pension Plan products, adding value through technology and education. With the transaction, the Group enhances its distribution network in the insurance division. This transaction is expected to close in the fourth quarter of 2020.

g) Segment reporting

In reviewing the operational performance of the Group and allocating resources, the chief operating decision maker of the Group (“CODM”), who is the Group’s Chief Executive Officer (“CEO”) and the Board of Directors (“BoD”), represented by statutory directors holders of ordinary shares of the immediate parent of the Company, reviews selected items of the statement of income and of comprehensive income.

The CODM considers the whole Group as a single operating and reportable segment, monitoring operations, making decisions on fund allocation and evaluating performance based on a single operating segment. The CODM reviews relevant financial data on a combined basis for all subsidiaries and joint ventures.

11 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of September 30, 2020 In thousands of Brazilian Reais, unless otherwise stated  

Disaggregated information is only reviewed at the revenue level (Note 22), with no corresponding detail at any margin or profitability levels.

The Group’s revenue, results and assets for this one reportable segment can be determined by reference to the unaudited interim condensed consolidated statements of income and of comprehensive income and unaudited interim condensed consolidated balance sheet.

See Note 22 (c) for a breakdown of total revenue and income and selected assets by geographic location

h) Impacts related COVID-19 in the current period

Starting from January 2020, it was reported that a novel strain of coronavirus, later named COVID-19, spread worldwide. The current pandemic has negatively impacted the global, national and regional economies and disrupted supply chains and otherwise reduce international trade and business activity. The Group has reviewed its exposure to economic-related and market volatility, which could negatively impact the value of a certain class of financial instruments however has not identified relevant impact to the financial performance or position of the group as of September, 2020. The company has sufficient headroom to enable it to comply with its covenants on its existing borrowings and sufficient working capital and undrawn financing facilities to service its operating activities and ongoing investments.

Although the Group have not identified relevant impacts to its financial performance as at September 30, 2020, the Group is monitoring COVID-19 effects on its business, which are still uncertain and will depend on the severity of the coronavirus and the actions to contain or treat its impact, among others.

As a consequence of this pandemic, most of the Group’s employees is working from home. Based on thorough assessments about the well-being and performance of our workforce, management announced on September 11, 2020, the permanent and company-wide adoption of the home-office model.

i) Estimates

The preparation of unaudited interim condensed consolidated financial statements of the Group requires management to make judgments and estimates and to adopt assumptions that affect the amounts presented referring to revenues, expenses, assets and liabilities at the reporting date. Actual results may differ from these estimates.

In preparing these unaudited interim condensed consolidated financial statements, the significant judgements and estimates made by management in applying the Group’s accounting policies and the key sources of estimation uncertainty were the same as those that are set the consolidated financial statements for the year ended December 31, 2019.

3. Securities purchased (sold) under resale (repurchase) agreements

a) Securities purchased under agreements to resell

	September 30, 2020		December 31, 2019
Available portfolio		1,883,825		971,991
National Treasury Notes (NTNs)		1,639,174		771,099
Financial Treasury Bills (LFTs)		-		195,980
National Treasury Bills (LTNs)		244,651		4,912

12 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of September 30, 2020 In thousands of Brazilian Reais, unless otherwise stated  

Collateral held	16,359,863	8,518,099
National Treasury Bills (LTNs)	397,275	1,764,410
National Treasury Notes (NTNs)	15,962,588	6,753,689
Total	18,243,688	9,490,090

Investments in purchase and sale commitments backed by sovereign debt securities refer to transactions involving the purchase of sovereign debt securities with a commitment to sale originated in the subsidiary XP CCTVM and in exclusive funds and were carried out at an average fixed rate of 1.92% p.a. (December 31, 2019 – 4.63% p.a.).

As of September 30, 2020 no amounts (December 31, 2019 - R$ 654,057) from the total amount of available portfolio is being presented as cash equivalents in the statements of cash flows.

b) Securities sold under repurchase agreements

	September 30, 2020		December 31, 2019
National Treasury Bills (LTNs)		12,682,922		5,653,994
National Treasury Notes (NTNs)		22,571,006		8,533,113
Financial Treasury Bills (LFTs)		-		1,451,300
Total		35,253,928		15,638,407

As of September 30, 2020, securities sold under repurchase agreements were agreed with average interest rates of 1.89% p.a. (December 31, 2019 – 4.48% p.a.), with assets pledged as collateral.

4. Securities

a) Securities classified at fair value through profit and loss and at fair value through other comprehensive income

	September 30, 2020				December 31, 2019
	Gross carrying amount		Fair value		Gross carrying amount		Fair Value
Financial assets
At fair value through profit and loss		38,569,036		38,701,519		22,332,936		22,443,392
Agribusiness receivables certificates		179,155		177,095		598,085		589,525
Bank deposit certificates (i)		368,845		370,385		244,071		246,827
Brazilian government bonds		25,239,874		25,280,046		15,404,300		15,494,046
Certificate of real estate receivable		126,791		124,056		75,922		75,123
Debentures		1,034,742		1,018,893		885,344		885,068
Financial credit bills		82,439		82,683		98,068		106,759
Investment funds (ii)		7,656,488		7,656,266		3,047,198		3,047,198
United States government bonds		666,870		702,869		-		-
Real estate credit bill		1,632		1,651		1,282		1,300
Stocks issued by public-held company		2,546,996		2,546,996		1,562,965		1,562,965
Structured operations certificate		410,022		470,652		237,112		256,381
Others (iii)		255,182		269,927		178,589		178,200
At fair value through other comprehensive income		9,637,582		9,588,773		2,608,325		2,616,118
National treasury bill		9,637,582		9,588,773		2,608,325		2,616,118

13 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of September 30, 2020 In thousands of Brazilian Reais, unless otherwise stated  

(i) Bank deposit certificates include R$ 105,204 (December 31, 2019 – R$123,817) is being presented as cash equivalents in the statements of cash flows.

(ii) Investments funds include R$ 7,230,918 (December 31, 2019 – R$ 3,759,090) amounts related to Specially Constituted Investment Fund (“FIE”) as presented in Note 17.

(iii) Mainly related to bonds issued and traded overseas.

b) Securities evaluated at amortized cost

	September 30, 2020				December 31, 2019
	Gross carrying amount		Book Value		Gross carrying amount		Book Value
Financial assets
At amortized cost		1,366,038		1,366,038		2,266,971		2,266,971
Bonds		1,366,038		1,366,038		2,266,971		2,266,971

c) Securities on the financial liabilities classified at fair value through profit or loss

	September 30, 2020				December 31, 2019
	Gross carrying amount		Book value		Gross carrying amount		Book Value
Financial liabilities
At fair value through profit or loss		1,111,770		1,111,770		2,021,707		2,021,707
Securities		1,111,770		1,111,770		2,021,707		2,021,707

d) Securities classified by maturity

			Assets				Liabilities
	September 30, 2020		December 31, 2019		September 30, 2020		December 31, 2019
Financial assets
At fair value through P&L and at OCI
Current		22,696,712		9,804,819		1,111,770		2,021,707
Non-stated maturity		10,466,704		4,999,333		1,111,770		2,021,707
Up to 3 months		644,886		257,544		-		-
From 3 to 12 months		11,585,122		4,547,942		-		-
Non-current		25,593,580		15,254,691		-		-
After one year		25,593,580		15,254,691		-		-
Evaluated at amortized cost
Current		1,366,038		2,266,971		-		-
Up to 3 months		194,334		807,218		-		-
From 3 to 12 months		1,171,704		1,459,753		-		-
Total		49,656,330		27,326,481		1,111,770		2,021,707

14 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of September 30, 2020 In thousands of Brazilian Reais, unless otherwise stated  

5. Derivative financial instruments

The Group trades derivative financial instruments with various counterparties to manage its overall exposures (interest rate, foreign currency and fair value of financial instruments) and to assist its customers in managing their own exposures.

Below is the composition of the derivative financial instruments portfolio (assets and liabilities) by type of instrument, stated fair value and by maturity:

	September 30, 2020
	Notional		Fair Value		%		Up to 3 months		From 3 to 12 months		Above 12 months
Assets
Options		602,159,341		6,602,467		50		1,649,905		229,791		4,722,771
Swap contracts		16,819,387		637,693		5		38,784		156,750		442,159
Forward contracts		14,566,817		5,901,156		45		5,651,129		161,202		88,825
Future contracts		22,282,253		7,451		-		7,451		-		-
Total		655,827,798		13,148,767		100		7,347,269		547,743		5,253,755
Liabilities
Options		574,319,779		6,524,516		52		1,372,572		153,207		4,998,737
Swap contracts		5,517,378		693,187		5		75,816		170,932		446,439
Forward contracts		10,248,842		5,492,148		43		5,458,963		13,058		20,127
Future contracts		20,343,451		19,745		-		19,745		-		-
Total		610,429,450		12,729,596		100		6,927,096		337,197		5,465,303

	December 31, 2019
	Notional		Fair Value		%		Up to 3 months		From 3 to 12 months		Above 12 months
Assets
Options		498,484,022		2,742,035		67		1,837,073		577,177		327,785
Swap contracts		3,955,473		1,133,768		27		10,418		700,668		422,682
Forward contracts		1,857,542		187,392		5		159,163		28,175		54
Future contracts		15,920,584		21,809		1		21,809		-		-
Total		520,217,621		4,085,004		100		2,028,463		1,306,020		750,521
Liabilities
Options		488,482,756		2,741,592		85		1,745,532		637,393		358,667
Swap contracts		3,420,857		485,164		14		15,838		40,687		428,639
Forward contracts		164,209		2,480		1		1,693		325		462
Total		492,067,822		3,229,236		100		1,763,063		678,405		787,768

15 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of September 30, 2020 In thousands of Brazilian Reais, unless otherwise stated  

6. Hedge accounting

The Group has two types of hedge relationships: hedge of net investment in foreign operations and fair value hedge.

For hedge accounting purposes, the risk factors measured by the Group are:

· Interest Rate: Risk of volatility in transactions subject to interest rate variations;

· Currency: Risk of volatility in transactions subject to foreign exchange variation.

The structure of risk limits is extended to the risk factor level, where specific limits aim at improving the monitoring and understanding processes, as well as avoiding concentration of these risks.

The structures designed for interest rate and exchange rate categories take into account total risk when there are compatible hedging instruments. In certain cases, management may decide to hedge a risk for the risk factor term and limit of the hedging instrument.

a) Hedge of net investment in foreign operations

In the nine month period ended September 30, 2020 and in the year ended December 31, 2019, the objective for the Group was to hedge the risk generated by the US$ variation from investments in our subsidiaries in the United States, XP Holdings International and XP Advisors Inc.

The Group has entered into forward contracts to protect against changes in future cash flows and exchange rate variation of net investments in foreign operations known as Non Deliverable Forward (“NDF”) contracts.

The Group undertakes risk management through the economic relationship between hedge instruments and hedged item, in which it is expected that these instruments will move in opposite directions, in the same proportions, with the aim of neutralizing the risk factors.

	Hedged item				Hedge instrument
	Book Value
Strategies		Assets	Liabilities	Variation in value recognized in Other comprehensive income		Nominal value	Variation in the amounts used to calculate hedge ineffectiveness
September 30, 2020
Foreign exchange risk
Hedge of net investment in foreign operations		224,539	-	70,882		395,977	(80,370	)
Total		224,539	-	70,882		395,977	(80,370	)
December 31, 2019
Foreign exchange risk
Hedge of net investment in foreign operations		186,412	-	5,946		248,896	(7,133	)
Total		186,412	-	5,946		248,896	(7,133	)

16 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of September 30, 2020 In thousands of Brazilian Reais, unless otherwise stated  

For the period ended of September 30, 2020, there was no ineffectiveness in relation to the foreign net investment hedge.

b) Fair value hedge

The fair value hedging strategy of the Group consists of hedging the exposure of Fixed-Income securities carried out through structured operations certificates.

The market risk hedge strategy involves avoiding temporary fluctuations in earnings arising from changes in the interest rate market in Reais. Once this risk is offset, the Group seeks to index the portfolio to the CDI, through the use of derivatives (DI1 Futuro).

The hedge is contracted in order to neutralize the total exposure to the market risk of the fixed-income funding portfolio, excluding the portion of the fixed-income compensation represented by the credit spread of Banco XP S.A, seeking to obtain the closest match deadlines and volumes as possible.

The effects of hedge accounting on the financial position and performance of the Group are presented below:

	Hedged item				Hedge instrument
	Book Value
Strategies		Assets	Liabilities	Variation in value recognized in income		Nominal value	Variation in the amounts used to calculate hedge ineffectiveness
September 30, 2020
Interest rate risk
Hedge of fixed-income securities		-	1,142,457	51,787		1,159,250	(51,361	)
Total		-	1,142,457	51,787		1,159,250	(51,361	)

For the period ended of September 30, 2020, there was no ineffectiveness in relation to the fair value hedge.

							September 30, 2020
		Book value (i)
Hedge Instruments	Notional amount		Assets	Liabilities	Variation in fair value used to calculate hedge ineffectiveness			Hedge ineffectiveness recognized in income
Interest rate risk
Futures	1,159,250		-	1,142,457	(51,361	)		427

(i) Amounts recorded under Derivatives.

The table below presents, for each strategy, the notional amount and the fair value adjustments of hedge instruments and the book value of the hedged item:

	September 30, 2020							December 31, 2019
	Hedge instruments				Hedge item			Hedge instruments			Hedge item
Strategies		Notional amount	Fair value adjustments			Book value			Notional amount	Fair value adjustments		Book value
Hedge of Fair Value		1,159,250	51,787			(51,361	)		-	-		-
Hedge of net investment in foreign operations		395,977	(80,370	)		(80,370	)		248,896	5,946		(7,133	)
Total		1,555,227	(28,583	)		(131,731	)		248,896	5,946		(7,133	)

17 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of September 30, 2020 In thousands of Brazilian Reais, unless otherwise stated  

The table below shows the breakdown by maturity of the hedging strategies:

	September 30, 2020
	0-1 year			1-2 years			2-3 years			3-4 years			4-5 years			5-10 years			Total
Hedge of Fair Value		(2	)		(14	)		(563	)		-			(30,698	)		(20,084	)		(51,361	)
Hedge of net investment in foreign operations		(8,732	)		-			-			(30,284	)		(41,354	)		-			(80,370	)
Total		(8,734	)		(14	)		(563	)		(30,284	)		(72,052	)		(20,084	)		(131,731	)

	December 31, 2019
	0-1 year		1-2 years	2-3 years	3-4 years		4-5 years		5-10 years	Total
Hedge of Fair Value	-		-	-	-		-		-	-
Hedge of net investment in foreign operations	(198	)	-	-	(2,932	)	(4,003	)	-	(7,133	)
Total	(198	)	-	-	(2,932	)	(4,003	)	-	(7,133	)

7. Loan operations

Following are the breakdown of the carrying amount of loan operations by class, sector of debtor, maturity and concentration:

Loans by type	September 30, 2020			December 31, 2019
Retail
Pledged asset loan		947,449			388
Credit card		8,061			-
Corporate
Pledged asset loan		316,412			-
Non-pledged loan		104,368			-
Total Loans operations		1,376,290			388
Expected Credit Loss		(7,056	)		(2	)
Total loans operations, net of Expected Loss		1,369,234			386

By maturity	September 30, 2020		December 31, 2019
Due in 3 months or less		68,783		388
Due after 3 months through 12 months		287,720		-
Due after 12 months		1,019,786		-
Total Loans operations		1,376,289		388

XP Inc offers several loan products through Banco XP to its customers. The loan products offered to its customers are: (i) "Limite Express": loans fully collaterized by customers’ investments on XP platform and (ii)

18 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of September 30, 2020 In thousands of Brazilian Reais, unless otherwise stated  

"COE Alavancado": credit product strictly related to investments in structured notes, in which the borrower is able to operate leveraged, retaining the structured note itself as guarantee for the loan.

XP Inc uses client’s investments as collaterals to reduce potential losses and protect against credit risk exposure by managing these collaterals so that they are always sufficient, legally enforceable (effective) and viable, XP monitors the value of the collaterals. The Credit Risk Management provides subsidies to define strategies as risk appetite, to establish limits, including exposure analysis and trends as well as the effectiveness of the credit policy.

As of September 30, 2020, these two products together represented 94% (December 31, 2019: nil) of the Company's credit portfolio. The expected credit loss amounting to R$ 7,056 corresponds to approximately 0.5% of the total credit portfolio as of September 30, 2020 (December 31, 2019: nil).

The loans operations have an high credit quality and the Group often uses risk mitigation measures, primarily through client’s investments as collaterals, which explains the low provision ratio. As of September 30, 2020, the loans and expected credit loss are classified as stage 1 in accordance with IFRS 9.

This classification is periodically reassessed as provided for in XP Inc.'s credit risk policy.

8. Prepaid expenses

	September 30, 2020		December 31, 2019
Commissions and premiums paid in advance (a)		1,035,869		49,233
Marketing expenses		8,110		9,678
Services paid in advance		1,124		2,043
Other expenses paid in advance		45,895		28,730
Total		1,090,998		89,684
Current		461,304		56,605
Non-current		629,694		33,079

(a) Mostly comprised by long term investment programs implemented by XP CCTVM through its network of IFAs. These commissions and premiums paid are recognized at the signing date of each contract and are amortized in the statement of income of the Company, linearly, according to the investment term period.

9. Securities trading and intermediation (receivable and payable)

Represented by operations at B3 on behalf of and on account of third parties, with liquidation operating cycle between D+1 and D+3.

	September 30, 2020		December 31, 2019
Cash and settlement records		378,727		13,823
Debtors pending settlement		967,599		477,646
Other		137,181		13,514
Total Assets		1,483,507		504,983
Cash and settlement records		378,030		474,759
Creditors pending settlement		14,781,681		8,639,787
Total Liabilities		15,159,711		9,114,546

19 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of September 30, 2020 In thousands of Brazilian Reais, unless otherwise stated  

10. Investments in associates and joint ventures

Set out below are the associates and joint venture of the Group as of September 30, 2020. The entities listed below have share capital consisting solely of ordinary shares, which are held directly by the Group. The country of incorporation or registration is also their principal place of business, and the proportion of ownership interest is the same as the proportion of voting rights held.

Name of entity	% of ownership interest			Nature of relationship	Measurement method	Equity			Carrying amount
Du Agro Holdings S.A.		49	%	Joint Venture (1)	Equity method		479			235
VPL Gestão Patrimonial e Participações S.A.		49	%	Associate (2)	Equity method		150,000			74,851
O Primo Rico Mídia, Educacional e Participações Ltda.		20	%	Associate (3)	Equity method		(520	)		(105	)
Total equity-accounted investments							149,959			74,981

(1) On June 23, 2020, the Company acquired a 49% interest in DuAgro Holdings S.A. (“DuAgro”), a joint venture involved in the agribusiness. DuAgro is an integrated platform that utilizes technology to finance the purchase of agricultural inputs. The focus is on small- and medium-sized producers.

(2) On September 8, 2020, the Company entered into an agreement to hold a 49.9% minority stake of the total share capital of VPL Gestão Patrimonial e Participações S.A..With this transaction XP Inc. is complementing the existing offering to ultra-high-net-worth individual in the Wealth Management segment.

(3) O Primo Rico is a company focused on digital content services, including developing and selling financial education courses and online events.

Entity	December 31, 2019		Acquisition/Equity		Equity in earnings			Other comprehensive income			Goodwill (i)		September 30, 2020
VPL Gestão Patrimonial e Participações S.A.		-		74,851		-			-			621,248		696,099
Du Agro Holdings S.A.		-		572		(337	)		-			408		643
O Primo Rico (ii)		-		242		(227	)		(120	)		-		(105	)
Total		-		75,665		(564	)		(120	)		621,656		696,637

(i) Related to the acquisitions of associates and joint ventures. As of September 30, 2020 the goodwill recognized is preliminary and includes the value of expected synergies arising from the investments.

(ii) As of September 30, 2020 the entity presented a negative net equity. The amounts related to the negative net equity are recognized in Other liabilities.

11. Property, equipment, goodwill, intangible assets and lease

a) Changes in the period

	Property and			Goodwill and intangible
	equipment			assets
As of January 1, 2019		99,127			504,915
Additions		43,749			39,974
Write-offs		(7,550	)		(56	)
Depreciation / Amortization in the period		(15,174	)		(23,992	)
As of September 30, 2019		120,152			520,841
Cost		165,314			604,298
Accumulated depreciation / amortization		(45,162	)		(83,457	)
As of January 1, 2020		142,464			553,452
Additions		40,011			79,127

20 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of September 30, 2020 In thousands of Brazilian Reais, unless otherwise stated  

Business combination (Note 2(f))	-		83,925
Write-offs (i)	(61,967	)	(185	)
Transfers	(6,143	)	6,143
Depreciation / Amortization in the period	(19,609	)	(52,928	)
As of September 30, 2020	94,756		669,534
Cost	196,081		767,878
Accumulated depreciation / amortization	(101,325	)	(98,344	)

(i) As previously mentioned on Note 2(h), as a result of the COVID-19 pandemic, the Group decided to implement a permanent remote work model, which has resulted in initiatives to reduce some of its offices in the city of São Paulo. During the third quarter of 2020, the Company concluded its analysis and wrote-off the corresponding properties and equipments of these offices. Some of these amounts was previously classified as impaired considering that the Conmpany was in the early stages of the assessment.

b) Impairment test for goodwill

Given the interdependency of cash flows and the merger of business practices, all Group’s entities are considered a single cash generating units (“CGU”) and, therefore, goodwill impairment test is performed at the single operating level. Therefore, the carrying amount considered for the impairment test represents the Company’s equity.

The Group performs its annual impairment test in December and when circumstances indicates that the carrying value may be impaired. The Group’s impairment tests are based on value-in-use calculations. The key assumptions used to determine the recoverable amount for the cash generating unit were disclosed in the annual consolidated financial statements for the year ended December 31, 2019. As of September 30, 2020, there were no indicators of a potential impairment of goodwill.

c) Leases

Set out below, are the carrying amounts of the Group’s right-of-use assets and lease liabilities and the movements during the period.

	Right-of-use assets			Lease liabilities
As of January 1, 2019		133,870			148,494
Additions (i)		104,487			105,694
Depreciation expense		(23,235	)		-
Interest expense		-			12,447
Effects of exchange rate		6,259			6,460
Payment of lease liabilities		-			(26,194	)
As of September 30, 2019		221,381			246,901
Current		-			28,970
Non-current		221,381			217,931
As of January 1, 2020		227,478			255,406
Additions (i)		45,377			45,129
Depreciation expense		(33,363	)		-
Write-offs (ii)		(78,321	)		(78,322	)
Interest expense		-			15,648
Revaluation (iii)		(9,115	)		(10,050	)
Impairment, net		264			-
Effects of exchange rate		29,694			32,675
Payment of lease liabilities		-			(45,903	)

21 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of September 30, 2020 In thousands of Brazilian Reais, unless otherwise stated  

As of September 30, 2020	182,014	214,583
Current	-	31,566
Non-current	182,014	183,017

(i) Additions to right-of-use assets in the period include prepayments to lessors and accrued liabilities.

(ii) As previously mentioned on Note 2(h), as a result of the COVID-19 pandemic, the Group decided to implement a permanent remote work model, which has resulted in initiatives to reduce some of its offices in the city of São Paulo. As consequence the Group has recorded the corresponding write-off of the right-of-use and lease liabilities related to the early termination of the leasing contracts.

(iii) Revaluation of discount rate that represent the current market assessment.

The Group recognized rent expense from short-term leases and low-value assets of R$ 1,523 for the period ended September 30, 2020. The total rent expense of R$ 7,853, include other expenses related to leased offices such as condominium.

Depreciation and amortization expense have been charged in the following line items of consolidated statement of income:

	Nine months period ended September 30,				Three months period ended September 30,
	2020		2019		2020		2019
Property and equipment
Depreciation in the period		19,609		15,174		6,616		5,298
Leases
Depreciation in the period		33,363		23,235		10,313		8,796
Intangible assets
Amortization in the period		52,928		23,992		19,451		9,361
		105,900		62,401		36,380		23,455

12. Deposits

	September 30, 2020		December 31, 2019
Demands deposits		40,310		70,190
Time deposits		1,586,399		4
Total		1,626,709		70,194
Current		997,285		70,194
Non-Current		629,424		-

Maturity – As of September 30, 2020
Class	Within 30 days		From 31 to 60 days		From 61 to 90 days		From 91 to 180 days		From 181 to 360 days		After 360 days		Total
Demand deposits		40,310		-		-		-		-		-		40,310
Time deposits		-		-		141,895		34,544		780,536		629,424		1,586,399
Total		40,310		-		141,895		34,544		780,536		629,424		1,626,709

22 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of September 30, 2020 In thousands of Brazilian Reais, unless otherwise stated  

Maturity – As of December 31, 2019
Class	Within 30 days		From 31 to 60 days		From 61 to 90 days		From 91 to 180 days		From 180 to 366 days		After 360 days		Total
Demand deposits		70,190		-		-		-		-		-		70,190
Time deposits		4		-		-		-		-		-		4
Total		70,194		-		-		-		-		-		70,194

13. Structured operations certificates

	September 30, 2020		December 31, 2019
Maturity
From 91 to 180 days		1,918		-
After 360 days		1,140,539		19,474
Total		1,142,457		19,474
Current		1,918		-
Non-Current		1,140,539		19,474

14. Borrowings and lease liabilities

	Interest rate %	Maturity		September 30, 2020		December 31, 2019
Bank borrowings – domestic (i)	113% of CDI(*)		March 2021		21,292		52,668
Related parties					21,292		52,668
Financial institution (ii)	CDI (*)+ 0.774%		April 2023		276,106		329,410
Third parties					276,106		329,410
Total borrowings					297,398		382,078
Lease liabilities					214,583		255,406
Total borrowings and lease liabilities					511,981		637,484
Current					61,226		116,450
Non-current					450,755		521,034

(*) Brazilian Interbank Offering Rate (CDI)

(i) Loan agreement with Itaú Unibanco with maturity on March 8, 2021, payable in 36 monthly installments.

(ii) Loan agreement entered into on March 28, 2018 with the International Finance Corporation (IFC). The principal amount is due on the maturity date and accrued interests payable at every six months.

All the obligations above contain financial covenants, which comply with certain performance conditions. The Group has complied with these covenants throughout the reporting period (Note 30 (b)).

23 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of September 30, 2020 In thousands of Brazilian Reais, unless otherwise stated  

15. Debentures

On May 15, 2019 and September 28, 2018, the Company issued Debentures, non-convertible into shares, in the amount of R$ 800,000, with the objective of funding the Group’s working capital and treasury investments. As of September 30, 2020, the total balance is comprised of the following issuances:

Issuance	Quantity Issued (units)		Annual rate	Issuance date	Maturity date	Unit value at issuance	Unit value at period-end	Book  value
1 st		400,000	108.0% CDI	9/28/2018	9/28/2020	R$ 1,000.00	R$1,108.56		-
2 nd		400,000	107.5% CDI	5/15/2019	5/15/2022	R$ 1,000.00	R$1,009.05		338,693
Total		800,000							338,693

	September 30, 2020			December 31, 2019
Principal		400,000			800,000
Interest		23,746			47,127
Payments		(20,336	)		(11,897	)
Repurchase (a)		(64,717	)		-
Total		338,693			835,230
Current		-			435,230
Non-current		338,693			400,000

(a) As of September 30, 2020 the Group repurchased 65,611 units of the second series of non-convertible debentures.

The principal amount and accrued interest payable related to the first issuance are due on the maturity date, while for the second issuance, 50% of the principal amount is due on May 15, 2021 and the remaining balance on the maturity date, and accrued interest payable every 12 months from the issuance date. There were no interest amounts paid in the period ended of September 30, 2020.

On September 28, 2020 the first series of non-convertible debentures was fully prepaid in the amount of R$ 432,793, which includes principal and interest.

Debentures are subject to financial covenants, which comply with certain performance conditions. The Group has complied with these covenants throughout the reporting period (Note 30(b)).

16. Other financial liabilities

	September 30, 2020		December 31, 2019
Foreign exchange portfolio		249,394		8,962
Contingent consideration (i)		462,000		-
Financial bills (ii)		16,311		-
Credit cards operations (ii)		8,294		-
Others (iii)		122,879		-
Total		858,878		8,962
Current		380,567		8,962
Non-current		478,311		-

24 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of September 30, 2020 In thousands of Brazilian Reais, unless otherwise stated  

(i) Contractual contingent considerations mostly associated to the investment acquisition of VPL, as described in Note 10. The maturity of the total contingent consideration payment is up to 6 years and the contractual maximum amount payable is R$653,222 (the minimum amount is zero).

(ii) Related to operations of Banco XP S.A.

(iii) Include R$58,526 payable through our acquisitions (Note 2(f)) and investments in associates and joint ventures.

17. Private pension liabilities

As of September 30, 2020, active plans are principally accumulation of financial resources through products PGBL and VGBL structured in the form of variable contribution, for the purpose of granting participants with returns based on the accumulated capital in the form of monthly withdraws for a certain term or temporary monthly withdraws.

In this respect, such financial products represent investment contracts that have the legal form of private pension plans, but which do not transfer insurance risk to the Group. Therefore, contributions received from participants are accounted for as liabilities and balance consists of the balance of the participant in the linked Specially Constituted Investment Fund (“FIE”) at the reporting date (Note 4 (a)).

Changes in the period:

	Nine months period ended September 30,
	2020			2019
As of January 1		3,759,090			16,059
Contributions received		984,816			211,396
Transfer with third party plans		5,087,561			1,466,444
Redemptions paid		(162,218	)		(7,911	)
Gain (loss) from FIE		(19,927	)		35,718
As of September 30		9,649,322			1,721,706

18. Income tax

a) Deferred income tax

Deferred tax assets (DTA) and deferred tax liabilities (DTL) are comprised of the main following components:

	Balance Sheet
	September 30, 2020		December 31, 2019
Tax losses carryforwards	38,616		17,146
Goodwill on business combinations (i)	28,430		22,303
Provisions for IFAs’ commissions	72,222		68,041
Revaluations of financial assets at fair value	(9,993	)	25,259
Expected losses (ii)	20,578		5,666
Financial instruments taxed on redemption	(18	)	-
Profit sharing plan	79,727		141,136
Net gain on hedge instruments	32,927		(36,384	)

25 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of September 30, 2020 In thousands of Brazilian Reais, unless otherwise stated  

Share based plan	47,824		2,950
Other provisions	27,339		33,284
Total	337,652		279,401
Deferred tax assets	378,726		284,533
Deferred tax liabilities	(41,074	)	(5,132	)

	Net change in the nine months period ended September 30,					Net change in the three months period ended September 30,
		2020		2019			2020		2019
Tax losses carryforwards		21,470		(41,725	)		24,769		(7,064	)
Goodwill on business combinations (i)		6,127		(25,845	)		(5,861	)	(8,153	)
Provisions for IFAs’ commissions		4,181		21,103			1,718		7,698
Revaluations of financial assets at fair value		(35,252	)	(9,374	)		3,513		(1,178	)
Expected losses (ii)		14,912		1,563			4,248		1,411
Financial instruments taxed on redemption		(18	)	(11,637	)		(18	)	(18,980	)
Profit sharing plan		(61,409	)	76,105			(97,272	)	(38,295	)
Net gain (loss) on hedge instruments		69,311		(1,885	)		5,805		3,675
Share based plan		44,874		-			17,533		-
Other provisions		(5,945	)	5,142			(17,750	)	239
Total		58,251		13,447			(63,315	)	(60,647	)

(i) For tax purposes, goodwill is amortized over 5 years on a straight-line basis when the entity acquired is sold or merged into another entity.

(ii) Include expected credit loss on accounts receivable, loan operations and other financial assets.

The changes in the net deferred tax were recognized as follows:

	Nine months period ended September 30,
	2020			2019
As of January 1		279,401			140,400
Foreign exchange variations		22,721			21,883
Charges to statement of income		(28,561	)		(8,564	)
Tax relating to components of other comprehensive income		64,091			128
As of September 30		337,652			153,847

Unrecognized deferred taxes

Deferred tax assets are recognized for tax losses to the extent that the realization of the related tax benefit against future taxable profits is probable. The Group did not recognize deferred tax assets of R$ 20,610 (September 30, 2019 - R$ 18,731) mainly in respect of losses from subsidiaries overseas and that can be carried forward and used against future taxable income. A deferred tax asset was not recorded as taxable income is not expected.

b) Income tax expense reconciliation

The tax on the Group's pre-tax profit differs from the theoretical amount that would arise using the weighted average tax rate applicable to profits of the consolidated entities. The following is a reconciliation of income

26 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of September 30, 2020 In thousands of Brazilian Reais, unless otherwise stated  

tax expense to profit (loss) for the year, calculated by applying the combined Brazilian statutory rates at 34% for the period ended September 30:

	Nine months period						Three months period
	ended September 30,						ended September 30,
	2020			2019			2020			2019
Income before taxes		1,758,528			996,944			632,451			382,134
Combined tax rate in Brazil (i)		34	%		34	%		34	%		34	%
Tax expense at the combined rate		597,900			338,961			215,034			129,926
Income (loss) from entities not subject to taxation		(11,358	)		(8,228	)		(2,630	)		(3,659	)
Effects from entities taxed at different rates		36,792			16,208			17,630			7,170
Effects from entities taxed at different taxation regimes (ii)		(285,529	)		(24,816	)		(111,061	)		(9,138	)
Intercompany transactions with different taxation		(46,775	)		(27,989	)		(19,645	)		(5,711	)
Tax incentives		(2,491	)		(2,220	)		(4,521	)		(2,220	)
Non deductible expenses (non-taxable income), net		(12,693	)		8,687			(3,434	)		4,310
Others		3,581			(2,957	)		(206	)		658
Total		279,427			297,646			91,167			121,336
Effective tax rate		15.89	%		29.86	%		14.41	%		31.75	%
Current		250,866			306,210			(6,732	)		49,189
Deferred		28,561			(8,564	)		97,899			72,147
Total expense		279,427			297,646			91,167			121,336

(i) Considering that XP Inc. is domiciled in Cayman and there is no income tax in that jurisdiction, the combined tax rate of 34% demonstrated above is the current rate applied to XP Investimentos S.A. which is the holding company of all operating entities of XP Inc. in Brazil.

(ii) Certain eligible subsidiaries adopted the PPM tax regime and the effect of the presumed profit of subsidiaries represents the difference between the taxation based on this method and the amount that would be due based on the statutory rate applied to the taxable profit of the subsidiaries. Additionally, some entities and investment funds adopt different taxation regimes according to the applicable rules in their jurisdictions.

Other comprehensive income

The tax (charge)/credit relating to components of other comprehensive income is as follows:

	Before tax			(Charge) / Credit			After tax
Foreign exchange variation of investees located abroad		12,126			-			12,126
Gains (losses) on net investment hedge		(17,591	)		5,762			(11,829	)
Changes in the fair value of financial assets at fair value		1,494			(508	)		986
As of September 30, 2019		(3,971	)		5,254			1,283
Foreign exchange variation of investees located abroad		76,575			-			76,575
Gains (losses) on net investment hedge		(121,772	)		41,402			(80,370	)
Changes in the fair value of financial assets at fair value		(56,603	)		22,689			(33,914	)
As of September 30, 2020		(101,800	)		64,091			(37,709	)

27 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of September 30, 2020 In thousands of Brazilian Reais, unless otherwise stated  

19. Equity

(a) Issued capital

The Company has an authorized share capital of US$ 35 thousand, corresponding to 3,500,000,000 authorized shares with a par value of US$ 0,00001 each of which:

· 2,000,000,000 shares are designated as Class A common shares and issued; and

· 1,000,000,000 shares are designated as Class B common shares and issued.

The remaining 500,000,000 authorized but unissued shares are presently undesignated and may be issued by XP Inc. Board of Directors as common shares of any class or as shares with preferred, deferred or other special rights or restrictions. Therefore, the Company is authorized to increase capital up to this limit, subject to approval of the Board of Directors.

As of September 30, 2020 and December 31, 2019, the Company have US$ 23 thousand of issued capital which were represented by 354,181,346 Class A common shares and 197,618,980 Class B common shares. In the IPO that took place on December 11, 2019, the Company issued 83,387,238 new Class A common shares, with a corresponding increased of US$ 2 in the issued capital of the Company.

(b) Additional paid-in capital and capital reserve

In December 2019, immediately prior the completion of the IPO, the Company had 257,456,251,558 Class A common shares and 251,790,558 Class B common shares of its authorized share capital issued. Class A and Class B common shares.

At the Board of Directors meetings on November 30, 2019, the Company’s shareholders approved a reverse share split of 4:1 (four for one) for an initial consideration to IPO with a conversion of 2,036,988,542 into 509,247,134 shares. On the same event shareholders also approved the conversion of 30,807,911 Class B common shares of the Company into Class A common shares.

In December 2019, as a result of the completion of the IPO describe in Note 1.1, 42,553,192 new Class A common shares were issued.

As mentioned in Note 26, the Board of Directors approved on December 2019 a share based long-term incentive plan, which the maximum number of shares should not exceed 5% of the issued and outstanding shares. As of September 30, 2020, the Company has 3,759,867 (December 31, 2019 – 1,921,669) restricted share units (“RSUs”) and 2,190,377 (December 31, 2019 – 2,190,377) performance restricted units (“PSUs”) to be issued at the vesting date.

The additional paid-in capital refers to the difference between the purchase price that the shareholders pay for the shares and their par value. Under Cayman Law, the amount in this type of account may be applied by the Company to pay distributions or dividends to members, pay up unissued shares to be issued as fully paid, for redemptions and repurchases of own shares, for writing off preliminary expenses, recognized expenses, commissions or for other reasons. All distributions are subject to the Cayman Solvency Test which addresses the Company’s ability to pay debts as they fall due in the natural course of business.

28 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of September 30, 2020 In thousands of Brazilian Reais, unless otherwise stated  

(c) Dividends distribution

The Group has not adopted a dividend policy with respect to future distributions of dividends. The amount of any distributions will depend on many factors such as the Company's results of operations, financial condition, cash requirements, prospects and other factors deemed relevant by XP Inc. board of directors and, where applicable, the shareholders.

The proposal and payment of dividends recorded in the Company's financial statements, subject to the approval of the shareholders in General Meetings.

For the nine months period ended September 30, 2020, the Company has not declared and paid dividends to the shareholders.

(d) Other comprehensive income

Increases or decreases in value attributed to assets and liabilities are classified as equity valuation adjustments, while not being computed in the income for the period in accordance with the accrual basis as a result of their valuation at fair value.

20. Related party transactions

The main transactions carried with related parties, under commutative conditions, including interest rates, terms and guarantees, and period-end balances arising from such transactions are as follows:

	Assets/(Liabilities)						Revenue/(Expenses)
							Nine months period ended September 30,						Three months period ended September 30,
Relation and transaction	September 30, 2020			December 31, 2019			2020			2019			2020			2019
Shareholders with significant influence		(3,891,015	)		(732,420	)		(36,541	)		(14,905	)		(13,509	)		(18,863	)
Securities		105,100			123,813			9,154			7,279			1,895			2,915
Securities purchased under agreements to resell		14,999			196,009			3,557			-			650			-
Accounts receivable		10,178			594			233			-			(163	)		(2,270	)
Securities sold under repurchase agreements		(4,000,000	)		(1,000,168	)		(48,243	)		(18,313	)		(15,514	)		(18,313	)
Borrowings		(21,292	)		(52,668	)		(1,242	)		(3,871	)		(377	)		(1,195	)

Mostly represent transactions with Itaú Unibanco who became a shareholder of the Company in 2018 and since than a related party. Transactions with related parties also includes transactions among the Company and its subsidiaries in the ordinary course of operations include services rendered such as: (i) education, consulting and business advisory; (ii) financial advisory and financial consulting in general; (iii) management of resources and portfolio management; (iv) information technology and data processing; and (v) insurance. The effects of these transactions have been eliminated and do not have effects on the unaudited interim condensed consolidated financial statements.

21. Provisions and contingent liabilities

The Company and its subsidiaries are party to judicial and administrative litigations before various courts and government bodies, arising from the ordinary course of operations, involving tax, civil and labor matters and

29 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of September 30, 2020 In thousands of Brazilian Reais, unless otherwise stated  

other issues. Periodically, Management evaluates the tax, civil and labor and risks, based on legal, economic and tax supporting data, in order to classify the risks as probable, possible or remote, in accordance with the chances of them occurring and being settled, taking into consideration, case by case, the analyses prepared by external and internal legal advisors.

	September 30, 2020		December 31, 2019
Tax contingencies		10,062		9,878
Civil contingencies		3,660		2,673
Labor contingencies		2,298		2,642
Total provision		16,020		15,193
Judicial deposits (i)		10,168		18,403

(i) There are circumstances in which the Group is questioning the legitimacy of certain litigations or claims filed against it. As a result, either because of a judicial order or based on the strategy adopted by management, the Group might be required to secure part or the whole amount in question by means of judicial deposits, without this being characterized as the settlement of the liability. These amounts are classified as “Other assets” on the consolidated balance sheets and referred above for information.

Changes in the provision during the period

	Nine months period ended September 30,						Three months period ended September 30,
	2020			2019			2020			2019
At the beginning of period		15,193			17,474			15,479			17,171
Monetary correction		1,472			1,499			499			809
Provision accrued		912			1,726			333			1,657
Provision reversed		(965	)		(3,933	)		(78	)		(3,931	)
Payments		(592	)		(1,062	)		(213	)		(2	)
At the end of period		16,020			15,704			16,020			15,704

Nature of claims

a) Tax

As of September 30, 2020, the Group has claims classified as probable risk of loss in the amount of R$ 10,062 (December 31, 2019 - R$ 9,878), regarding social contributions on revenue (PIS and COFINS), questioning the definition of the calculation base of revenues to pay correctly. This proceeding was pending the expert technical report following the decision of the second instance court to grant the right to provide evidence and send the proceeding back to the lower court. These lawsuits are supported by court deposits in its entirety.

b) Civil

The majority of the civil claims involve matters that are normal and specific to the business, and refer to demands for indemnity primarily due to: (i) financial losses in the stock market; (ii) portfolio management; and (iii) alleged losses generated from the liquidation of costumers assets in portfolio due to margin cause and/or negative balance. As of September 30, 2020, there were 58 civil claims for which the likelihood of loss has been classified as probable, in the amount of R$ 3,660 (December 31, 2019 - R$ 2,673). An amount of R$ 112 was deposited in court as of September 30, 2020 (December 31, 2019 – R$ 9,744).

30 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of September 30, 2020 In thousands of Brazilian Reais, unless otherwise stated  

c) Labor

Labor claims to which the Group is party primarily concern: (i) the existence (or otherwise) of a working relationship between the Group and IFAs; and (ii) severance payment of former employees. As of September 30, 2020, the Company and its subsidiaries are the defendants in approximately 9 cases involving labor matters for which the likelihood of loss has been classified as probable, in the amount of R$ 2,298 (December 31, 2019 - R$ 2,642).

Contingent liabilities - probability of loss classified as possible

In addition to the provisions constituted, the Company and its subsidiaries have several labor, civil and tax contingencies in progress, in which they are the defendants, and the likelihood of loss, based on the opinions of the internal and external legal advisors, is considered possible. These contingencies are not recorded as provisions. As of September 30 2020, for claims classified as possible loss the estimated risk is approximately R$ 191,941 (December 31, 2019 - R$ 153,951).

Below is summarized these possible claims by nature:

	September 30,2020		December 31, 2019
Tax (i)		70,700		69,386
Civil (ii)		114,669		81,414
Labor		6,572		3,151
Total		191,941		153,951

(i) In December 2019, the Group was notified by tax authorities for a requirement of social security contributions due to employee profit sharing payments related to the calendar year 2015, allegedly in violation of Brazilian Law 10,101/00. Currently, the first appeal was denied by the first administrative level of the Revenue Service Office. The Group will provide the ordinary appeal to Administrative Council of Tax Appeals (“CARF”). There are other favorable CARF precedents on the subject and the Group obtained legal opinions that support the Group’s defense and current practice.

(ii) The Group is defendant in 592 civil claims by customers and investment agents, mainly related to portfolio management, risk rating, copyrights and contract termination. The total amount represents the collective maximum value to which the Group is exposed based on the claims’ amounts monetarily restated.

22. Total revenue and income

a) Net revenue from services rendered

Revenue from contracts with customers derives mostly from services rendered and fees charged at daily transactions from customers, therefore mostly recognized at a point in time. Disaggregation of revenue by major service lines are as follows:

	Nine months period ended September 30,				Three months period ended September 30,
	2020		2019		2020		2019
Major service lines
Brokerage commission		1,595,435		935,998		547,862		349,554
Securities placement		922,057		693,198		388,283		328,224
Management fees		809,024		591,591		274,353		207,070
Insurance brokerage fee		74,299		69,367		17,624		27,344

31 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of September 30, 2020 In thousands of Brazilian Reais, unless otherwise stated  

Educational services	95,627		75,037		25,474		32,782
Other services	334,470		212,874		155,063		85,388
Gross revenue from services rendered	3,830,912		2,578,065		1,408,659		1,030,362
(-) Sales taxes and contributions on services (i)	(337,681	)	(236,965	)	(130,914	)	(86,324	)
	3,493,231		2,341,100		1,277,745		944,038

(i) Mostly related to taxes on services (ISS) and contributions on revenue (PIS and COFINS).

b) Net income from financial instruments

	Nine months period ended September 30,						Three months period ended September 30,
	2020			2019			2020			2019
Net income from financial instruments at fair value through profit or loss		2,007,466			913,110			647,076			395,838
Net income from financial instruments measured at amortized cost and at fair value through other comprehensive income		303,388			204,023			189,527			26,513
Total income from financial instruments		2,310,854			1,117,133			836,603			422,351
(-) Taxes and contributions on financial income		(47,578	)		(21,720	)		(13,611	)		(10,465	)
		2,263,276			1,095,413			822,992			411,886

c) Disaggregation by geographic location

Breakdown of total net revenue and income and selected assets by geographic location:

	Nine months period ended September 30,				Three months period ended September 30,
	2020		2019		2020		2019
Brazil		5,156,387		3,207,076		1,721,542		1,273,565
United States		570,738		205,830		368,524		74,917
Europe		29,382		23,607		10,671		7,442
Net revenue and income		5,756,507		3,436,513		2,100,737		1,355,924

	September 30, 2020		December 31, 2019
Brazil		1,175,503		1,208,737
United States		375,565		224,244
Europe		29,634		16,476
Selected assets(i)		1,580,702		1,449,457

(i) Selected assets are total assets of the Group, less: cash, financial assets and deferred tax assets and are presented by geographic location.

None of the customers represented more than 10% of Group’s revenues for the periods presented.

32 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of September 30, 2020 In thousands of Brazilian Reais, unless otherwise stated  

23. Operating costs

	Nine months period ended September 30,				Three months period ended September 30,
	2020		2019		2020		2019
Commission and incentive costs		1,442,670		877,502		549,249		353,825
Operating losses and provisions		65,584		14,825		16,984		7,344
Clearing house fees		240,806		141,251		104,922		54,796
Other costs (a)		115,003		85,389		34,865		28,993
Total		1,864,063		1,118,967		706,020		444,958

(a) Other cost include third parties'services and other costs.

24. Operating expenses by nature

	Nine months period ended September 30,				Three months period ended September 30,
	2020		2019		2020		2019
Selling Expenses (a)		94,367		82,419		38,322		30,104
Administrative expenses		2,077,587		1,294,039		809,596		481,605
Personnel expenses		1,484,596		859,653		577,614		291,485
Compensation		565,640		256,323		203,419		107,474
Employee profit-sharing and bonus		566,353		466,219		240,763		127,591
Executives profit-sharing		156,988		50,230		52,662		20,415
Other personnel expenses (b)		195,615		86,881		80,770		36,005
Other taxes expenses		26,193		29,699		9,907		11,419
Depreciation of property and equipment and right-of-use assets		52,972		38,409		16,928		14,094
Amortization of intangible assets		52,928		23,992		19,451		9,361
Data processing		212,074		124,260		89,018		49,775
Technical services		66,284		39,560		25,563		13,102
Third parties' services		116,086		112,571		43,663		65,854
Other administrative expenses (c)		66,454		65,895		27,452		26,515
Total		2,171,954		1,376,458		847,918		511,709

(a) Selling expenses refers to advertising and publicity.

(b) Other personnel expenses include benefits, social charges and others.

(c) Other administrative expenses include rent, communication and travel expenses, legal and judicial and other expenses.

25. Other operating income (expenses), net

	Nine months period ended September 30,				Three months period ended September 30,
	2020		2019		2020		2019
Other operating income		273,809		152,674		196,445		18,588
Revenue from incentives from Tesouro Direto, B3 and Others (a)		258,306		52,069		190,900		13,020
Other operating income (b)		15,503		100,605		5,545		5,568

33 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of September 30, 2020 In thousands of Brazilian Reais, unless otherwise stated  

Other operating expenses	(188,823	)	(34,187	)	(98,644	)	(11,230	)
Legal, administrative proceedings and agreement with customers	(43,844	)	(3,503	)	(36,262	)	(1,790	)
Losses on write-off and disposal of assets	(59,216	)	(6,583	)	(29,809	)	(48	)
Charity	(40,512	)	(5,917	)	(13,668	)	(1,842	)
Other operating expenses (c)	(45,251	)	(18,184	)	(18,905	)	(7,550	)
Total	84,986		118,487		97,801		7,358

(a) Includes incentives received from third parties, mainly due to the joint development of retail products, and also the association of such entities with the XP ecosystem.

(b) Other operating income include recovery of charges and expenses, reversal of operating provisions, interest received on tax and others.

(c) Other operating expenses include fines and penalties, association and regulatory fees and other expenses.

26. Share-based plan

a) Share-based Plan

The establishment of the Plan was approved by the Board of Director’s meeting on December 6, 2019 and the first grant of RSUs and PSUs was on December 10, 2019.

Under the Restricted Stock Unit plan, stocks are awarded at no cost to the recipient upon their grant date. RSUs are granted semi-annually, their vesting conditions are service related and they vest at a rate of 20% after three years, 20% after four years, and 60% after five years. After the vesting periods, common shares will be issued to the recipients. For the PSUs, the vesting is the following: (i) 33% will vest on the third year after the grant, (ii) 33% will vest on the fourth year after the grant and (iii) 34% will vest on the fifth year after the grant date.

Under the Performance Share Unit, stocks are awarded at no cost to eligible participants and their vesting conditions are based on five-year period metrics and also based on the total shareholder return (TSR), including share price growth, dividends and capital returns.

If an eligible participant ceases to be employed by the Company, within the vesting period, the rights will be forfeited, except in limited circumstances that are approved by the board on a case-by-case basis.

Once the PSUs are vested, the shares of common stock that are delivered must be held for an additional one-year period, typically for a total combined vesting and holding period of six years from the grant date.

b) Fair value of shares granted

Estimating fair value for share-based payment transactions requires determination of the most appropriate valuation model and underlying assumptions, which depends on the terms and conditions of the grant and the information available at the grant date.

The Company uses certain methodologies to estimate fair value which include the following:

• Estimation of fair value based on equity transactions with third parties close to the grant date; and

• Other valuation techniques including share pricing models such as Monte Carlo.

34 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of September 30, 2020 In thousands of Brazilian Reais, unless otherwise stated  

These estimates also require determination of the most appropriate inputs to the valuation models including assumptions regarding the expected life of a share-based payment or appreciation right, expected volatility of the price of the Group’s shares and expected dividend yield.

c) Outstanding shares granted and valuation inputs

The maximum number of shares available for issuance under the share-based plan shall not exceed 5% of the issued and outstanding shares. As of September 30, 2020, the outstanding number of Company reserved under the plans were 5,950,244 (December 31, 2019 - 4,112,046) including 3,759,867 RSUs (December 31, 2019 - 1,921,669) and 2,190,377 PSUs (December 31, 2019 - 2,190,377).

For the nine and three months period ended September 2020 , total compensation expense of both plans were R$113,464 and R$44,352, including R$34,917 and R$12,578 of tax provisions and does not include any tax benefits on total share-based compensation expense once, as this expense is not deductible for tax purposes. The tax benefits will be perceived when the shares are converted into common shares.

The original weighted-average grant-date fair value of RSU and PSU shares was US$27 and US$ 34.56 respectively. In May 2020, the Company decided to update the measurement condition of its PSU shares, replacing the TSR measurement from US Dollars (US$) to Brazilian Reais (R$), being therefore subject to exchange variation. The weighted-average grant-date fair value of PSU shares for the updated plan was US$52.41. The incremental fair value will be recognised as an expense over the period from the modification date to the end of the vesting period. All other conditions of the PSU shares plan has not been modified. The average grant date fair value in the period was US$ 45,92.

During the nine months period ended September 30, 2020, there were 298,750 forfeited RSUs, 1,934,000 RSUs shares granted and no exercised, expired or vested.

27. Earnings per share (basic and diluted)

The Company implemented a four-to-one reverse share split (or consolidation), effective as of November 30, 2019. The quantity of shares of the comparative periods were adjusted to give effect to this transaction.

The following table reflects the net income and share data used in the basic and diluted earnings per share (“EPS”) calculations:

	Nine months period ended September 30,				Three months period ended September 30,
	2020		2019		2020		2019
Net income		1,475,613		692,011		540,434		257,814
Basic weighted average quantity of shares (a)		551,800		509,247		551,800		509,247
Basic earnings per share - R$		2.6742		1.3589		0.9794		0.5063
Share-based incentive program		4,323		-		4,774		-
Diluted weighted average quantity of shares		556,574		509,247		556,574		509,247
Diluted earnings per share - R$		2.6534		1.3589		0.9710		0.5063

(a) Thousands of shares.

28. Determination of fair value

The Group measures financial instruments such as certain financial investments and derivatives at fair value at each balance sheet date.

35 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of September 30, 2020 In thousands of Brazilian Reais, unless otherwise stated  

Level 1: The fair value of financial instruments traded in active markets is based on quoted market prices at the end of the reporting period. The financial instruments included in the level 1 consist mainly in public financial instruments and financial instruments negotiated on active markets (i.e. Stock Exchanges).

Level 2: The fair value of financial instruments that are not traded in active markets is determined using valuation techniques, which maximize the use of observable market data and rely as little as possible on entity-specific estimates. If all significant inputs required to fair value as instrument are directly or indirectly observable, the instrument is included in level 2. The financial instruments classified as level 2 are composed mainly from private financial instruments and financial instruments negotiated in a secondary market.

Level 3: If one or more of the significant inputs is unobservable, the instrument is included in level 3. This is the case for unlisted equity securities.

Specific valuation techniques used to value financial instruments include:

• Financial assets (other than derivatives) - The fair value of securities is determined by reference to their closing prices on the date of presentation of the consolidated financial statements. If there is no market price, fair value is estimated based on the present value of future cash flows discounted using the observable rates and market rates on the date of presentation.

• Swap – These operations swap cash flow based on the comparison of profitability between two indexers. Thus, the agent assumes both positions – put in one indexer and call on another.

• Forward - at the market quotation value, and the installments receivable or payable are prefixed to a future date, adjusted to present value, based on market rates published at B3.

• Futures – Foreign exchange rates, prices of shares and commodities are commitments to buy or sell a financial instrument at a future date, at a contracted price or yield and may be settled in cash or through delivery. Daily cash settlements of price movements are made for all instruments.

• Options - option contracts give the purchaser the right to buy the instrument at a fixed price negotiated at a future date. Those who acquire the right must pay a premium to the seller. This premium is not the price of the instrument, but only an amount paid to have the option (possibility) to buy or sell the instrument at a future date for a previously agreed price.

• Other financial assets and liabilities - Fair value, which is determined for disclosure purposes, is calculated based on the present value of the principal and future cash flows, discounted using the observable rates and market rates on the date the financial statements are presented.

• Loans– Fair value is determined through the present value of expected future cash flows discounted using the observable rates and market rates on the date the financial statements are presented.

• Contingent consideration: Fair value of the contingent consideration liability related to acquisitions is estimated by applying the income approach and discounting the expected future payments to selling shareholders under the terms of the purchase and sale agreements.

Below are the Group financial assets and liabilities by level within the fair value hierarchy. The Group assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels:

36 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of September 30, 2020 In thousands of Brazilian Reais, unless otherwise stated  

	September 30, 2020
	Level 1		Level 2		Level 3		Fair Value		Book Value
Financial Assets
Financial assets at Fair value through profit or loss
Securities		35,825,631		2,875,888		-		38,701,519		38,701,519
Derivative financial instruments		7,451		13,141,316		-		13,148,767		13,148,767
Fair value through other comprehensive income
Securities		9,588,773		-		-		9,588,773		9,588,773
Evaluated at amortized cost
Securities		-		1,371,040		-		1,371,040		1,366,038
Securities purchased under agreements to resell		-		18,229,920		-		18,229,920		18,243,688
Securities trading and intermediation		-		1,483,507		-		1,483,507		1,483,507
Accounts receivable		-		251,194		-		251,194		251,194
Loan operations		-		1,392,375		-		1,392,375		1,369,234
Other financial assets		-		280,279		-		280,279		280,279
Financial liabilities
Fair value through profit or loss
Securities loaned		1,111,770		-		-		1,111,770		1,111,770
Derivative financial instruments		19,745		12,709,851		-		12,729,596		12,729,596
Evaluated at amortized cost
Securities sold under repurchase agreements		-		35,192,715		-		35,192,715		35,253,928
Securities trading and intermediation		-		15,159,711		-		15,159,711		15,159,711
Deposits		-		1,573,958		-		1,573,958		1,626,709
Structured operations certificates		-		1,142,457		-		1,142,457		1,142,457
Borrowings and lease liabilities		-		565,723		-		565,723		511,981
Debentures		-		331,981		-		331,981		338,693
Accounts payables		-		655,117		-		655,117		655,117
Other financial liabilities		-		396,878		462,000		858,878		858,878
		46,553,370		106,753,910		462,000		153,769,280		153,821,839

	December 31, 2019
	Level 1		Level 2		Fair Value		Book Value
Financial Assets
Financial assets at Fair value through profit or loss
Securities		20,277,031		2,166,361		22,443,392		22,443,392
Derivative financial instruments		21,809		4,063,195		4,085,004		4,085,004
Fair value through other comprehensive income
Securities		2,616,118		-		2,616,118		2,616,118
Evaluated at amortized cost
Securities		-		3,914,923		3,914,923		2,266,971
Securities purchased under agreements to resell		-		9,490,090		9,490,090		9,490,090
Securities trading and intermediation		-		504,983		504,983		504,983
Accounts receivable		-		462,029		462,029		462,029
Loan operations		-		386		386		386
Other financial assets		-		19,805		19,805		19,805
Financial liabilities
Fair value through profit or loss
Securities loaned		2,021,707		-		2,021,707		2,021,707
Derivative financial instruments		-		3,229,236		3,229,236		3,229,236
Evaluated at amortized cost
Securities sold under repurchase agreements		-		15,638,407		15,638,407		15,638,407
Securities trading and intermediation		-		9,114,546		9,114,546		9,114,546
Borrowings and lease liabilities		-		633,781		633,781		637,484

37 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of September 30, 2020 In thousands of Brazilian Reais, unless otherwise stated  

Debentures	-	836,001	836,001	835,230
Accounts payables	-	266,813	266,813	266,813
Structured operations certificates	-	19,474	19,474	19,474
Other financial liabilities	-	79,127	79,127	79,157
	24,936,665	50,439,157	75,375,822	72,979,125

As of September 30, 2020, the total contingent consideration liability is reported at fair value and is dependent on the profitability of the acquired associate (VPL) and businesses (Flipper and Antecipa) is classified within Level 3 of the fair value hierarchy. The contigent consideration liability represents the maximum amount payable under the purchase and sale agreements discounted using a weighted average rate of 8.9% p.a. Change in the discount rate by 100 bps would increase/decrease the fair value by R$22,500. The change in the fair value in the contingent consideration between the acquisition date and September 30, 2020 was not material.

Transfers into and out of fair value hierarchy levels are analysed at the end of each consolidated financial statements. As of September 30, 2020 the Group had no transfers between Level 2 and Level 3.

29. Management of financial risks and financial instruments

The Group’s activities are exposed to a variety of financial risks: credit risk, liquidity risk, market risk (including currency risk, interest rate risk and price risk), and operating risk. The Group’s overall risk management structure focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Group’s financial performance. The Group uses derivative financial instruments to mitigate certain risk exposures. It is the Group’s policy that no trading in derivatives for speculative purposes may be undertaken.

Management has overall responsibility for establishing and supervising the risk management structure of the Group. Risk Management is under a separated structure from business areas, reporting directly to senior management, to ensure exemption of conflict of interest, and segregation of functions appropriate to good corporate governance and market practices.

The risk management policies of the Group are established to identify and analyze the risks faced, to set appropriate risk limits and controls, and to monitor risks and adherence to the limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and in the activities of the Group. The Group, through its training and management standards and procedures, developed a disciplined and constructive control environment within which all its employees are aware of their duties and obligations.

Regarding one specific subsidiary XP CCTVM, the organizational structure is based on the recommendations proposed by the Basel Accord, in which procedures, policies and methodology are formalized consistent with risk tolerance and with the business strategy and the various risks inherent to the operations and/or processes, including market, liquidity, credit and operating risks. The Group seek to follow the same risk management practices as those applying to all companies.

Such risk management processes are also related to going concern management procedures, mainly in terms of formulating impact analyses, business continuity plans, contingency plans, backup plans and crisis management.

The unaudited interim condensed consolidated financial statements do not include all financial risk management information and disclosures required in the annual financial statements; they should be read in conjunction with the Group’s annual financial statements as of December 31, 2019. There have been no changes in the risk management department or in any risk management policies since the year-end.

38 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of September 30, 2020 In thousands of Brazilian Reais, unless otherwise stated  

30. Capital Management

The Group’s objectives when managing capital are to safeguard their ability to continue as a going concern, so that they can continue to provide returns for shareholders and benefits for other stakeholders, and maintain an optimal capital structure to reduce the cost of capital, In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.

The Group also monitors capital on the basis of the net debt and the gearing ratio. Net debt is calculated as total debt (including borrowings, lease liabilities and debentures as shown in the consolidated balance sheet) less cash and cash equivalent (including cash, Securities purchased under agreements to resell and certificate deposits as shown in the consolidated statement of cash flows). The gearing ratio corresponds to the net debt expressed as a percentage of total capital.

The net debt and corresponding gearing ratios as of September 30, 2020 and December 31, 2019 were as follows:

	September 30, 2020			December 31, 2019
Borrowings and lease liabilities		511,981			637,484
Debentures		338,693			835,230
Total debt		850,674			1,472,714
Cash		(642,491	)		(109,922	)
Securities purchased under agreements to resell		-			(654,057	)
Certificate deposits (Securities)		(105,204	)		(123,817	)
Net debt		102,979			584,918
Total equity		8,669,470			7,153,396
Total capital		8,772,449			7,738,313
Gearing ratio %		1.17	%		7.56	%

a) Minimum capital requirements

Although capital is managed considering the consolidated position, certain subsidiaries are subject to minimum capital requirement from local regulators.

The subsidiary XP CCTVM, leader of the Prudential Conglomerate (which includes Banco XP), under BACEN regulation regime, is required to maintain a minimum capital and follow aspects from the Basel Accord, with the current strategy of maintaining its capital 1% above the minimum capital requirement.

The subsidiary XP Vida e Previdência operates in Private Pension Business and is oversight by the SUSEP, being required to present Adjusted Shareholders' Equity (PLA) equal to or greater than the Minimum Required Capital (“CMR”) and Venture Capital Liquidity (“CR”), CMR is equivalent to the highest value between base capital and venture capital.

At September 30, 2020 the subsidiaries XP CCTVM, Banco XP and XP Vida e Previdência were in compliance with all capital requirements.

39 

XP Inc. and its subsidiaries Notes to unaudited interim condensed consolidated financial statements As of September 30, 2020 In thousands of Brazilian Reais, unless otherwise stated  

There is no requirement for compliance with a minimum capital for the other Group companies.

b) Financial covenants

In relation to the long-term debt contracts, including multilateral instruments, recorded within “Borrowing and lease liabilities” and “Debentures” (Notes 14 and 15), the Group is required to comply with certain performance conditions, such as profitability and efficiency indexes.

As of September 30, 2020, the contracts under financial covenants corresponds to the amount of R$ 636,091 (December 31, 2019 – R$ 1,217,308). The Group has complied with these covenants throughout the reporting period.

Eventual failure of the Group to comply with such covenants may be considered as breach of contract and, as a result, considered for early settlement of related obligations.

31. Cash flow information

(i) Debt reconciliation

	Borrowings			lease liabilities			Debentures			Total
Total debt as of January 1, 2019		469,609			148,494			406,538			1,024,641
Acquisitions / Issuance		-			105,694			400,000			505,694
Payments		(74,853	)		(26,194	)		-			(101,047	)
Net foreign exchange differences		-			6,460			-			6,460
Interest accrued		20,869			12,447			29,284			62,600
Interest paid		(16,386	)		-			-			(16,386	)
Total debt as of September 30, 2019		399,239			246,901			835,822			1,481,962
Total debt as of January 1, 2020		382,078			255,406			835,230			1,472,714
Acquisitions / Issuance		-			45,129			-			45,129
Write-off		-			(78,322	)		-			(78,322	)
Payments		(84,895	)		(45,903	)		(400,000	)		(530,798	)
Repurchase (Note 15)		-			-			(64,717	)		(64,717	)
Revaluation (Note 11(c))		-			(10,050	)		-			(10,050	)
Net foreign exchange differences		-			32,675			-			32,675
Interest accrued		10,281			15,648			20,128			46,057
Interest paid		(10,067	)		-			(51,948	)		(62,015	)
Total debt as of September 30, 2020		297,397			214,583			338,693			850,673

(ii) Non-cash investing and financing activities

Non-cash investing and financing activities disclosed in other notes are: (i) related to business acquisitions through accounts payables and contingent consideration – see note 2(f) – 28,183, and (ii) related to Acquisition of investment in associates through accounts payables and contingent consideration – see note 10 – 492,800.

40