UNITED STATES

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549

 

FORM 6-K

 

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

 

For the month of March, 2022

 


 

Commission File Number: 001-38714

 

STONECO LTD.

(Exact name of registrant as specified in its charter)

 

4th Floor, Harbour Place 

103 South Church Street, P.O. Box 10240 

Grand Cayman, KY1-1002, Cayman Islands 

+55 (11) 3004-9680 

(Address of principal executive office)

 

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

 

Form 20-F

X

  Form 40-F

 

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

 

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

 

 

 

SIGNATURE

 

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

 

    StoneCo Ltd.
     
     
      By: /s/ Thiago dos Santos Piau
        Name: Thiago dos Santos Piau
        Title: Chief Executive Officer

 

Date: March 17, 2022

 

 

 

EXHIBIT INDEX

 

Exhibit No. Description
99.1 StoneCo Ltd. Financial Statements dated December 31, 2021

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Financial Statements

 

StoneCo Ltd.

 

December 31, 2021 and 2020 and the three years ended December 31, 2021, with report of Independent Registered Public Accounting Firm

 

 

 

 

 

 

 

Report of Independent Registered Public Accounting Firm

 

To the Shareholders and the Board of Directors of

StoneCo Ltd.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of StoneCo Ltd. (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of profit or loss, other comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board - IASB.

 

Basis for Opinion

 

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

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical audit matters

 

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

 

F-1

 

Revenue from transaction activities and other services, subscription services and equipment rental and financial income

 

Description of the Matter

 

As discussed in note 3.14 to the consolidated financial statements, the Company recognizes revenues as each performance obligation is satisfied in accordance with IFRS 15. Total revenue from transaction activities and other services totaled R$ 1,626,853, while revenue from subscription services and equipment rental totaled R$ 1,071,932 and financial income related to discount fees for the prepayments to the client and financial income related to credit offered to the clients totaled R$ 1,877,683.

 

Auditing the Company’s revenue from transaction activities and other services, subscription services and equipment rental and financial income is complex, since such activities are processed through a complex information technology environment and multiple different contractual arrangements and determining the performance obligations and the timing of revenue recognition under those contractual arrangements was complex and required significant auditor judgment. Management also applies significant judgment to determine the projections and underlying assumptions to estimate the future cash flows of credit offered to clients, which are accounted for as loans designated at fair value through profit or loss with its related fair value results being recorded as financial income.

 

How We Addressed the matter in Our Audit

 

We obtained an understanding, evaluated the design and tested the operating effectiveness of the controls over revenue recognition arising from transaction activities, subscription services and equipment rental and financial income with discount fees for the prepayments to the clients and financial income related to the interests and fair value of credit offered to the clients. For example, we involved our Information Technology personnel to assist us in testing the relevant controls over the information systems that are important to the initiation, recording and classification of revenue transactions.

 

To test revenue from transaction activities, subscription services and equipment rental, our audit procedures included, among others: obtaining copies of customer contracts and comparing terms and conditions with the Company’s evaluation of the related performance obligations; testing the mathematical accuracy of the Company’s calculation of the amount of revenue to be recognized as a percentage of total transaction value and testing the collection of cash for the transactions.

 

To test financial income, we performed audit procedures to test the fair value of loans designated at fair value through profit or loss including, among others, evaluation of the underlying assumptions and projections considered as well as the involvement of our valuation specialists to assist in the evaluation of methodologies and fair value model used by management; and we tested the mathematical accuracy of the Company’s calculations.

 

We also assessed the Company’s related disclosures in respect to its revenue from transaction activities and other services, subscription services and equipment rental and financial income in note 22 to the consolidated financial statements.

 

Business Combinations

 

Description of the Matter

 

As discussed in note 29.1.1 to the consolidated financial statements, the Company completed five acquisitions throughout 2021, including the acquisition of LINX S.A. which consideration transferred amounted to R$ 6,737,900, all accounted for as business

 

 

F-2

 

 

 

combinations. The Company determined the fair value of net assets acquired and estimated contingent consideration, when applicable, using valuation models and assumptions about future business performance (including growth rates, market share and technology evolution curves), market conditions and interest rates. Those assumptions are subject to significant estimation uncertainty.

 

Auditing the Company’s business combinations is complex due to the significant estimation uncertainty related to the assumptions used by management in determining the fair value of net assets acquired and liabilities assumed, including contingent consideration when applicable. Management projections and underlying assumptions are forward looking and could be affected by future economic events and market conditions.

 

How We Addressed the matter in Our Audit

 

We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company accounting process for business combinations. For example, we tested controls over the identification, recognition and measurement of the fair value of assets acquired and liabilities assumed and tested controls over management assumptions.

 

To test the fair value of the net assets acquired and liabilities assumed, our audit procedures included, among others, evaluating the Company's financial information forecast model and testing the significant assumptions used in such model; testing the completeness and accuracy of the underlying data; comparing the significant assumptions to historical actual results (where applicable); comparing significant assumptions to market and economic trends and to the assumptions used to value similar assets in past acquisitions; comparing significant assumptions against industry benchmarks; involving our valuation specialists to assist in the evaluation of methodologies and models used by management and evaluating those models against the respective purchase agreements. We also assessed the Company’s related disclosures in respect to its business combinations in note 29.1.1 to the consolidated financial statements.

 

Linx Goodwill Impairment assessment

 

Description of the Matter

 

As discussed in note 12.2 to the consolidated financial statements, as of December 31, 2021 the Company's goodwill related to Linx S.A. (“Linx”) business combination amounted R$ 5,037,584. The Company performs goodwill impairment testing at the cash generating unit level annually or more frequently if a change in circumstances or the occurrence of events indicates that a potential impairment exists.

 

Auditing Company’s Linx goodwill impairment test was complex and highly judgmental due to the significant estimation required to determine the fair value of the cash generating unit utilizing a discounted cash flows model. In particular, the fair value estimate was sensitive to significant assumptions, such as changes in the weighted-average cost of capital, revenue growth rate and terminal value and business synergies, which are affected by expectations about future market or economic conditions, particularly those in emerging markets.

 

F-3

 

 

 

How We Addressed the matter in Our Audit

 

We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s goodwill impairment process, including controls over management’s review of the significant assumptions described above along with the completeness and accuracy of the data used in the fair value estimates.

 

To test the management estimated fair value of cash generating unit, we performed audit procedures that included, among others, assessing valuation methodologies used by the Company, involving our valuation specialists to assist in testing the significant assumptions discussed above, and testing the completeness and accuracy of the underlying data used by the Company in its analyses. For example, we compared the significant assumptions used by management to current industry, market and economic trends and evaluated whether changes to the Company’s business model, customer base and product mix would affect the significant assumptions. We assessed the historical accuracy of management’s estimates and performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the cash generating units that would result from changes in the assumptions.

 

 

 

/s/ ERNST & YOUNG Auditores Independentes S.S.

 

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

 

São Paulo, Brazil

March 17, 2022

 

F-4

 

 

 

StoneCo Ltd.

 

Consolidated statement of financial position

As of December 31, 2021 and 2020

(In thousands of Brazilian Reais)

 

   Notes  2021  2020
Assets         
Current assets         
Cash and cash equivalents  5   4,495,645    2,446,990 
Short-term investments  6   1,993,037    8,128,058 
Financial assets from banking solution  26.6   2,346,474    714,907 
Accounts receivable from card issuers  7   19,286,590    16,307,155 
Trade accounts receivable  8   886,126    1,415,850 
Recoverable taxes  9   230,558    56,365 
Prepaid expenses      169,555    67,658 
Derivative financial instruments  2 / 26.5   219,324    43,103 
Other assets      332,864    94,738 
       29,960,173    29,274,824 
Non-current assets             
Trade accounts receivable   8   59,595    382,106 
Receivables from related parties  18.2   4,720    7,200 
Deferred tax assets  10.2   431,755    138,697 
Prepaid expenses      214,092    51,164 
Other assets       141,693    85,571 
Long-term investments  6   1,238,476    - 
Investment in associates      66,454    51,982 
Property and equipment  11   1,569,520    717,234 
Intangible assets  12   8,370,313    1,039,886 
       12,096,618    2,473,840 
              
Total assets      42,056,791    31,748,664 
              

 

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

 

F-5

 

 

 

StoneCo Ltd.

 

Consolidated statement of financial position

As of December 31, 2021 and 2020

(In thousands of Brazilian Reais)

 

   Notes  2021  2020
Liabilities and equity         
Current liabilities         
Deposits from banking customers  26.6   2,201,861    900,454 
Accounts payable to clients  13   15,723,331    8,848,038 
Trade accounts payable  14   372,547    180,491 
Loans and financing  17   2,578,755    1,184,737 
Obligations to FIDC quota holders  17   1,294,806    1,960,121 
Labor and social security liabilities  15   273,347    173,103 
Taxes payable  16   176,453    106,835 
Derivative financial instruments   26.5   23,244    16,233 
Other liabilities      145,501    10,369 
       22,789,845    13,380,381 
Non-current liabilities             
Accounts payable to clients   13   3,172    - 
Loans and financing   17   3,556,460    524,363 
Obligations to FIDC quota holders   17   932,368    2,414,429 
Deferred tax liabilities  10.2   617,445    61,086 
Provision for contingencies  19   181,849    10,150 
Labor and social security liabilities   15   32,749    81,258 
Other liabilities       348,457    284,972 
       5,672,500    3,376,258 
              
Total liabilities      28,462,345    16,756,639 
              
              
Equity             
Issued capital  20.1   76    75 
Capital reserve  20.2   14,516,767    13,479,722 
Treasury shares  20.3   (1,065,184)   (76,360)
Other comprehensive income      (35,792)   (5,002)
Retained earnings      96,214    1,455,027 
Equity attributable to owners of the parent      13,512,081    14,853,462 
Non-controlling interests      82,365    138,563 
Total equity      13,594,446    14,992,025 
              
Total liabilities and equity      42,056,791    31,748,664 

 

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

 

F-6

 

StoneCo Ltd.

 

Consolidated statement of profit or loss

Years ended December 31, 2021, 2020 and 2019

(In thousands of Brazilian Reais, unless otherwise stated)

 

   Notes  2021  2020  2019
             
Net revenue from transaction activities and other services  22   1,626,853    1,144,086    770,276 
Net revenue from subscription services and equipment rental  22   1,071,932    388,033    331,565 
Financial income  22   1,877,683    1,647,017    1,287,760 
Other financial income  22   247,293    140,687    186,367 
Total revenue and income      4,823,761    3,319,823    2,575,968 
                   
Cost of services      (1,713,828)   (769,946)   (426,961)
Administrative expenses      (813,341)   (392,476)   (285,788)
Selling expenses      (1,012,544)   (505,902)   (360,612)
Financial expenses, net      (1,269,058)   (339,844)   (353,451)
Mark-to-market on equity securities designated at FVPL      (1,264,213)   -    - 
Other income (expenses), net      (185,894)   (177,056)   (57,691)
   23   (6,258,878)   (2,185,224)   (1,484,503)
                   
Loss on investment in associates      (10,437)   (6,937)   (810)
Profit (loss) before income taxes      (1,445,554)   1,127,662    1,090,655 
                   
Current income tax and social contribution  10.1   (171,621)   (216,886)   (217,228)
Deferred income tax and social contribution  10.1   239,827    (73,330)   (69,232)
Net income (loss) for the year      (1,377,348)   837,446    804,195 
                   
Net income (loss) attributable to:                  
Owners of the parent      (1,358,813)   854,071    803,232 
Non-controlling interests      (18,535)   (16,625)   963 
Net income (loss) for the year      (1,377,348)   837,446    804,195 
Earnings (loss) per share                  
Basic earnings (loss) per share for the year attributable to owners of the parent (in Brazilian Reais)  21   (R$ 4.40)    R$ 2.95    R$ 2.90 
Diluted earnings (loss) per share for the year attributable to owners of the parent (in Brazilian Reais)  21   (R$ 4.40)    R$ 2.91    R$ 2.85 

 

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

 

F-7

 

 

StoneCo Ltd.

 

Consolidated statement of other comprehensive income

Years ended December 31, 2021, 2020 and 2019

(In thousands of Brazilian Reais, unless otherwise stated)

 

   Notes  2021  2020  2019
             
Net income (loss) for the year      (1,377,348)   837,446    804,195 
Other comprehensive income                  
                   
Other comprehensive income (loss) that may be reclassified to profit or loss in subsequent periods (net of tax):                  
                   
Changes in the fair value of accounts receivable from card issuers at fair value through other comprehensive income      (200,084)   28,726    (15,062)
Changes in the fair value of listed securities at fair value through other comprehensive income      -    -    (1)
Exchange differences on translation of foreign operations      4,651    (410)   - 
Changes in the fair value of cash flow hedge - bonds hedge  26.6   (54,144)   -    - 
Unrealized loss on cash flow hedge - highly probable future imports  26.5(b)   1,512    (1,512)   - 
                   
Other comprehensive income (loss) that will not be reclassified to profit or loss in subsequent periods (net of tax):                  
                   
Effects IAS 29 in hyperinflationary economies      2,481    -    - 
Changes in the fair value of equity instruments designated at fair value through other comprehensive income  6(b)   216,466    40,336    (938)
Other comprehensive income (loss) for the year, net of tax      (29,118)   67,140    (16,001)
                   
Total comprehensive income (loss) for the year, net of tax      (1,406,466)   904,586    788,194 
                   
Total comprehensive income (loss) attributable to:                  
Owners of the parent       (1,389,603)   921,404    787,231 
Non-controlling interests       (16,863)   (16,818)   963 
Total comprehensive income (loss) for the year, net of tax      (1,406,466)   904,586    788,194 

 

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

 

F-8

 

StoneCo Ltd.

 

Consolidated statement of changes in equity

Years ended December 31, 2021, 2020 and 2019

(In thousands of Brazilian Reais)

 

      Attributable to owners of the parent      
         Capital reserve                  
   Notes  Issued capital  Additional paid-in capital  Transactions among shareholders  Special reserve  Other reserves  Total  Treasury shares  Other compre-
hensive income
  Retained earnings  Total  Non-controlling interest  Total
Balance as of December 31, 2018      62    5,440,047    (223,676)   -    135,502    5,351,873    -    (56,334)   (202,276)   5,093,325    (334)   5,092,991 
Net income for the year      -    -    -    -    -    -    -    -    803,232    803,232    963    804,195 
Other comprehensive income for the year      -    -    -    -    -    -    -    (16,001)   -    (16,001)   -    (16,001)
Total comprehensive income      -    -    -    -    -    -    -    (16,001)   803,232    787,231    963    788,194 
Repurchase of shares      -    -    -    -    -    -    (90)   -    -    (90)   -    (90)
Share-based payments      -    -    -    -    30,786    30,786    -    -    -    30,786    1    30,787 
Deferred tax benefit of tax deductible goodwill from purchased noncontrolling interests      -    -    -    61,127    -    61,127    -    -    -    61,127    -    61,127 
Dividends paid      -    -    -    -    -    -    -    -    -    -    (4)   (4)
Balance as of December 31, 2019      62    5,440,047    (223,676)   61,127    166,288    5,443,786    (90)   (72,335)   600,956    5,972,379    626    5,973,005 
Net income for the year      -    -    -    -    -    -    -    -    854,071    854,071    (16,625)   837,446 
Other comprehensive income (loss) for the year      -    -    -    -    -    -    -    67,333    -    67,333    (193)   67,140 
Total comprehensive income      -    -    -    -    -    -    -    67,333    854,071    921,404    (16,818)   904,586 
Capital increase      13    7,872,541    -    -    -    7,872,541    -    -    -    7,872,554    -    7,872,554 
Transaction costs      -    (39,964)   -    -    -    (39,964)   -    -    -    (39,964)   -    (39,964)
Share-based payments      -    -    -    -    31,296    31,296    -    -    -    31,296    212    31,508 
Issuance of shares for business acquisition      -    34,961    -    -    -    34,961    -    -    -    34,961    -    34,961 
Repurchase and cancelation of shares      -    -    -    -    (91)   (91)   -    -    -    (91)   -    (91)
Repurchase of shares      -    -    -    -    -    -    (76,270)   -    -    (76,270)   -    (76,270)
Cash proceeds from noncontrolling interest      -    -    135,055    -    -    135,055    -    -    -    135,055    95,843    230,898 
Dilution non-controlling interest      -    -    2,138    -    -    2,138    -    -    -    2,138    (2,138)   - 
Non-controlling interests arising on a business combination      -    -    -    -    -    -    -    -    -    -    61,720    61,720 
Others      -    -    -    -    -    -    -    -    -    -    22    22 
Dividends paid      -    -    -    -    -    -    -    -    -    -    (904)   (904)
Balance as of December 31, 2020      75    13,307,585    (86,483)   61,127    197,493    13,479,722    (76,360)   (5,002)   1,455,027    14,853,462    138,563    14,992,025 
Net income (loss) for the year      -    -    -    -    -    -    -    -    (1,358,813)   (1,358,813)   (18,535)   (1,377,348)
Other comprehensive income for the year      -    -    -    -    -    -    -    (30,790)   -    (30,790)   1,672    (29,118)
Total comprehensive income      -    -    -    -    -    -    -    (30,790)   (1,358,813)   (1,389,603)   (16,863)   (1,406,466)
Repurchase of shares  20.3   -    -    -    -    -    -    (988,824)   -    -    (988,824)   -    (988,824)
Issuance of shares for purchased non-controlling interests  27   1    517,740    (209,330)   -    -    308,410    -    -    -    308,411    (77,911)   230,500 
Issuance of shares for business combination  20.2   -    -    619,362    -    -    619,362    -    -    -    619,362    -    619,362 
Non-controlling interests arising on a business combination  27   -    -    -    -    -    -    -    -    -    -    41,843    41,843 
Share-based payments      -    -    -    -    133,121    133,121    -    -    -    133,121    33    133,154 
Transaction costs from subsidiaries      -    -    (23,848)   -    -    (23,848)   -    -    -    (23,848)   -    (23,848)
Sale of subsidiary  27   -    -    -    -    -    -    -    -    -    -    (1,219)   (1,219)
Dividends paid      -    -    -    -    -    -    -    -    -    -    (2,967)   (2,967)
Cash proceeds from non-controlling interest      -    -    -    -    -    -    -    -    -    -    893    893 
Others      -    -    -    -    -    -    -    -    -    -    (7)   (7)
Balance as of December 31, 2021      76    13,825,325    299,701    61,127    330,614    14,516,767    (1,065,184)   (35,792)   96,214    13,512,081    82,365    13,594,446 

 

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

 

F-9

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

 

   Notes  2021  2020  2019
Operating activities            
Net income (loss) for the year      (1,377,348)   837,446    804,195 
Adjustments to reconcile net income (loss) for the year to net cash flows:                  
Depreciation and amortization  11.1   507,369    256,294    163,396 
Deferred income tax and social contribution  10.1   (239,827)   73,330    69,232 
Loss on investment in associates      10,437    6,937    810 
Interest, monetary and exchange variations, net      (735,125)   (283,899)   110,744 
Provision for contingencies  19   4,263    2,259    9,420 
Share-based payments expense      133,154    31,508    30,787 
Allowance for expected credit losses      71,972    35,632    33,926 
Loss on disposal of property, equipment and intangible assets  28   136,104    52,658    14,639 
Effect of applying hyperinflation      2,040    -    - 
Loss on sale of subsidiary      12,746    -    - 
Fair value adjustment in financial instruments at FVPL      2,570,418    (12,461)   (17,446)
Fair value adjustment in derivatives      104,979    (5,758)   (12,099)
Remeasurement of previously held interest in subsidiary acquired  29.1.3   (15,848)   (2,992)   - 
Working capital adjustments:                  
Accounts receivable from card issuers      (2,993,411)   (2,081,945)   (4,779,467)
Receivables from related parties      1,050    8,688    (1,132)
Recoverable taxes      (238,127)   (18,624)   (67,791)
Prepaid expenses      (260,090)   (106,359)   2,603 
Trade accounts receivable, banking solutions and other assets      244,181    (1,362,356)   (284,982)
Accounts payable to clients      4,276,349    1,379,099    245,866 
Taxes payable      247,399    270,014    238,967 
Labor and social security liabilities      (37,373)   109,953    39,713 
Provision for contingencies      (10,180)   (2,193)   (1,098)
Trade accounts payable and other liabilities      40,768    31,790    (3,434)
Interest paid      (299,666)   (177,589)   (268,453)
Interest income received, net of costs      1,578,870    1,172,781    1,191,136 
Income tax paid      (128,202)   (157,729)   (171,313)
Net cash (used in) / provided by in operating activities      3,606,902    56,484    (2,651,781)
                   
Investing activities                  
Purchases of property and equipment      (1,082,990)   (372,138)   (333,568)
Purchases and development of intangible assets      (215,681)   (82,965)   (66,381)
Acquisition of subsidiary, net of cash acquired      (4,737,410)   (247,429)   - 
Sale of subsidiary, net of cash disposed of      (36)   -    - 
Proceeds from (acquisition of) short-term investments, net      5,370,958    (5,069,142)   (21,930)
Acquisition of equity securities      (2,480,003)   -    - 
Disposal of short- and long-term investments – equity securities      209,324    -    - 
Proceeds from the disposal of non-current assets      100    7,127    1,104 
Acquisition of interest in associates      (41,459)   (44,424)   (16,789)
Net cash used in investing activities      (2,977,197)   (5,808,971)   (437,564)
                   
Financing activities                  
Proceeds from borrowings  17   11,700,297    3,996,820    2,958,838 
Payment of borrowings      (7,252,226)   (5,381,130)   (801,849)
Payment to FIDC quota holders      (2,767,552)   (2,059,500)   - 
Proceeds from FIDC quota holders  17   584,191    2,716,138    1,640,000 
Payment of leases  17   (83,610)   (41,373)   (38,023)
Capital increase, net of transaction costs      -    7,832,590    - 
Repurchase of shares  20.3   (988,824)   (76,361)   (90)
Acquisition of non-controlling interests      (1,265)   (1,012)   (923)
Transaction with non-controlling interests  20.3   230,500    -    - 
Dividends paid to non-controlling interests      (2,967)   (904)   (4)
Cash proceeds from non-controlling interest  27   893    230,898    - 
Net cash provided by financing activities      1,419,437    7,216,166    3,757,949 
                   
Effect of foreign exchange on cash and cash equivalents      (487)   14,969    1,809 
Change in cash and cash equivalents      2,048,655    1,478,648    670,413 
                   
Cash and cash equivalents at beginning of year  5   2,446,990    968,342    297,929 
Cash and cash equivalents at end of year  5   4,495,645    2,446,990    968,342 
Change in cash and cash equivalents      2,048,655    1,478,648    670,413 

 

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

 

F-10

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

1.Operations

 

StoneCo Ltd. (the “Company”), is a Cayman Islands exempted company with limited liability, incorporated on March 11, 2014. The registered office of the Company is located at 4th Floor, Harbour Place 103 South Church Street.

 

The Company is controlled by HR Holdings, LLC, which owns 57.6% of voting power, whose ultimates parents are an investment fund, the VCK Investment Fund Limited SAC A, and a trust duly organized, the Old Bridges Trust, each one owned by the co-founders of the Company. The individual Company’s shares are publicly traded on Nasdaq (STNE) and depositary receipts (BDRs) representing the Company´s shares are traded on the São Paulo exchange (B3 under the ticker STOC31).

 

The Company and its subsidiaries (collectively, the “Group”) are principally engaged in providing financial technology services and software solutions to clients allowing them to conduct electronic commerce seamlessly across in-store, online, and mobile channels and helping them better manage their businesses, become more productive and sell more - both online and offline.

 

The consolidated financial statements were approved by the Audit Committee on a meeting held on March 16, 2022.

 

1.1.2019 Follow-on

 

On April 1, 2019 the Company filed a follow-on prospectus, declared effective by the Securities and Exchange Commission (“SEC”) on April 2, 2019, in which selling shareholders offered 19,500,000 Class A common shares of the Company. The Company did not offer any Class A common shares and did not receive any proceeds from the sale of this shares.

 

1.2.2020 Follow-on

 

On August 12, 2020, the Company filed a follow-on prospectus offering 31,481,250 of its Class A common shares, of a par value of US$0.000079365 per share, including the full exercise of the underwriters’ option to purchase 4,106,250 additional shares (“Offering”).

 

The Offering price was US$ 47.50 per Class A common share, resulting in gross proceeds of US$ 1,495,359 thousand. The Company received net proceeds of US$ 1,464,702 thousand (or R$ 7,872,554), after deducting US$ 30,657 thousand in underwriting discounts and commissions. Additionally, the Company incurred in US$ 7,278 thousand (or R$ 39,964) regarding other offering expenses.

 

The shares offered and sold in the Offering were registered under the Securities Act of 1933, as amended, pursuant to the Company’s Registration Statement on Form F-3 (Registration No. 333-244404), which was declared effective by the Securities and Exchange Commission on August 17, 2020.

 

The Company used the net proceeds from the Offering to finance the acquisition of Linx S.A (Note 1.3), and to pay related fees and expenses, as well as for general corporate purposes.

 

1.3.Linx acquisition

 

On November 17, 2020, Linx S.A. (“Linx”) held an Extraordinary General Meeting that approved the business combination between STNE Participações S.A. (“STNE Par”), that holds the software investments business of the Group, and Linx, a leading provider of retail management software in Brazil. The transaction was unanimously approved by the Brazilian Antitrust Authority (“CADE”) on June 16, 2021, with no restrictions, and was completed on July 01, 2021.

 

Pursuant to the terms and subject to the conditions set forth in the Association Agreement and its amendments, each Linx share issued and outstanding immediately prior to the consummation of the transaction was automatically contributed to the Group in exchange for one newly issued redeemable STNE Par Class A Preferred Share and one newly issued redeemable STNE Par Class B Preferred Share. Immediately thereafter, each STNE Par Class A Preferred Share was redeemed for a cash payment of R$ 33.5229 updated proportionally according to the CDI rate variation from February 11, 2021 until the date of the effective payment, and each STNE Par Class B Preferred Share was redeemed for 0.0126730 BDR (Brazilian Depositary Receipt) Level1 (“StoneCo BDR”), admitted to trading on B3, and credited to the shareholders’ account on July 01, 2021, provided that each 1 (one) StoneCo BDR corresponded to 1 (one) StoneCo Class A Share (the “Base Exchange Ratio”). The Base Exchange Ratio was calculated on a fully diluted basis, assuming a number of fully diluted shares of Linx of 178,361,138 on the transaction consummation date and represented a total consideration of R$ 37.78 for each Linx share.

 

F-11

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

The redemption mentioned above was adjusted by a Linx’s intermediary dividend payment, approved on June 16, 2021, based on the accumulated profits of fiscal years prior to 2020, as evidenced in its balance sheet as of December 31, 2020, in the amount of R$ 100,000 (one hundred million reais), corresponding to R$ 0.5636918 per share. On the date of the dividend approval, the Group already had Linx’s shares classified as Short-term investments, so it received an amount of R$ 20,129 as dividends, recognized in Other income (expenses), net.

 

For further information, see Note 29.

 

2.Group information

 

2.1.Subsidiaries

  

The consolidated financial statements of the Group include the following subsidiaries and structured entities:

 

        % Group's equity interest
Entity name   Principal activities   December 31, 2021   December 31, 2020
Stone Instituição de  Pagamento S.A. (“Stone Pagamentos”)   Merchant acquiring   100.00   100.00
MNLT S.A. (“MNLT”)   Merchant acquiring   100.00   100.00
Pagar.me Instituição de  Pagamento S.A. (“Pagar.me”)   Merchant acquiring   100.00   100.00
PDCA S.A. (“PDCA”) (Note 27 (a))   Merchant acquiring   100.00   67.00
Linx Pay Meios de Pagamento Ltda. (“Linx Pay”) (b)   Merchant acquiring   100.00   -
Stone Sociedade de Crédito Direto S.A. (“Stone SCD”)   Financial services   100.00   100.00
TAG Tecnologia para o Sistema Financeiro S.A. (“TAG”)   Financial assets register   100.00   100.00
MAV Participações S.A.   Technology services   100.00   100.00
MLabs Software S.A. (“MLabs”) (Note 29.2)   Technology services   51.50   51.50
Equals S.A. (“Equals”)   Technology services   100.00   100.00
Questor Sistemas S.A (“Questor”) (Note 29.2)   Technology services   50.00   50.00
Sponte Informática S.A (“Sponte”) (Note 29.2)   Technology services   90.00   90.00
SimplesVet Tecnologia S.A. (“SimplesVet”) (Note 29.1)   Technology services   50.00   -
VHSYS Sistema de Gestão S.A. (“VHSYS”) (Note 29.1)   Technology services   50.00   -
Trampolin Pagamentos S.A. (“Trampolin”) (Note 29.1)   Technology services   100.00   -
Mundipagg Tecnologia em Pagamentos S.A. (“Mundipagg”) (c)   Technology services   -   99.70
Linked Gourmet Soluções para Restaurantes S.A. (“Linked”) (a)   Technology services   -   58.10
Linx S.A. (“Linx”) (Note 29.1)   Technology services   100.00   -
Linx Sistemas e Consultoria Ltda. (b)   Technology services   100.00   -
Linx Telecomunicações Ltda. (b)   Technology services   100.00   -
Napse S.R.L. (“Napse Group”) (b)   Technology services   100.00   -
Sociedad Ingenería de Sistemas Napse I.T. de Chile Limitada (“Napse Group”) (b)   Technology services   100.00   -
Synthesis IT Peru S.A.C. (“Napse Group”) (b)   Technology services   100.00   -
Synthesis Holding LLC. (“Napse Group”) (b)   Technology services   100.00   -
Synthesis US LLC (“Napse Group”) (b)   Technology services   100.00   -
Retail Americas Sociedad de Responsabilidad Limitada de Capital Variable (“Napse Group”) (b)   Technology services   100.00   -
Synthesis IT de México Sociedad de Responsabilidad Limitada de Capital Variable (“Napse Group”) (b)   Technology services   100.00   -
Mercadapp Soluções em Software Ltda (b) (d)   Technology services   100.00   -
Hiper Software S.A. (b)   Technology services   100.00   -
Creditinfo Jamaica Ltd (“Creditinfo Caribbean”) (Note 29.2)   Credit bureau services   53.05   53.05
Creditinfo Guyana Inc (“Creditinfo Caribbean”) (Note 29.2)   Credit bureau services   53.05   53.05
Creditadvice Barbados Ltd (“Creditinfo Caribbean”) (Note 29.2)   Credit bureau services   53.05   53.05

 

F-12

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

 

 

        % Group's equity interest
Entity name   Principal activities   December 31, 2021   December 31, 2020
Buy4 Processamento de Pagamentos S.A. (“Buy4”)   Processing card transactions   100.00   100.00
Buy4 Sub LLC   Processing card transactions   100.00   100.00
Vitta Corretora de Seguros Ltda. (“Vitta Group”)   Brokers services   100.00   100.00
Stone Seguros S.A. (“Stone Seguros”)   Insurance services   100.00   100.00
Vitta Tecnologia em Saúde S.A. (“Vitta Group”)   Health services   100.00   100.00
Vitta Serviços em Saúde Ltda. (“Vitta Group”)   Health services   100.00   100.00
Vitta Saúde Administradora em Benefícios Ltda. (“Vitta Group”)   Health services   100.00   100.00
StoneCo Pagamentos UK Ltd. (e)   Service provider   100.00   -
Stone Logística Ltda.   Logistic services   100.00   100.00
Collact Serviços Digitais Ltda. (“Collact”) (Note 29.1) (f)   Customer relationship management   100.00   -
Stone Franchising Ltda.   Franchising management   100.00   99.99
Cappta S.A. (“Cappta”)   Electronic fund transfer   58.48   56.73
Ametista Serviços Digitais Ltda. (b)   Electronic fund transfer   100.00   -
Esmeralda Serviços Digitais Ltda. (b)   Electronic fund transfer   100.00   -
Diamante Serviços Digitais Ltda. (b)   Electronic fund transfer   100.00   -
Safira Serviços Digitais Ltda. (b)   Electronic fund transfer   100.00   -
TAPSO FIDC (“FIDC TAPSO”)   Investment fund   100.00   100.00
TAPSO FIDC  II (“FIDC TAPSO II”)   Investment fund   100.00   -
FIDC Bancos Emissores de Cartão de Crédito - Stone II (“FIDC AR II”)   Investment fund   100.00   100.00
FIDC Bancos Emissores de Cartão de Crédito - Stone III (“FIDC AR III”)   Investment fund   100.00   100.00
SOMA FIDC (“FIDC SOMA”)   Investment fund   100.00   100.00
SOMA III FIDC (“FIDC SOMA III”)   Investment fund   100.00   100.00
STONECO EXCLUSIVO FIC FIM (“FIC FIM STONECO”)   Investment fund   100.00   100.00
Retail Renda Fixa Crédito Privado Fundo de Investimento (“Retail Renda Fixa”) (b)   Investment fund   100.00   -
MPB Capital LLC   Investment company   100.00   100.00
DLP Capital LLC   Holding company   100.00   100.00
DLP Par Participações S.A. (“DLP Par”)   Holding company   100.00   100.00
STNE Participações S.A.   Holding company   100.00   100.00
STNE Participações em Tecnologia S.A.   Holding company   100.00   100.00
VittaPar LLC. (“Vitta Group”)   Holding company   100.00   100.00
StoneCo CI Ltd   Holding company   53.05   53.05

 

(a)On June 28, 2021, the Group sold all of the 4,205,115 Linked Gourmet’s shares held by it, representing 58.10% of the total and voting capital shareholding, for the total price of R$ 1, thus withdrawing from Linked’s shareholders. The Group derecognized all Linked’s assets and liabilities, including goodwill at acquisition and non-controlling interests in the subsidiary, resulting in R$ 12,746 of losses with the disposal.

 

F-13

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

(b)Linx’s subsidiaries acquired by the Group through business combination with Linx (see details in Note 29.1).

(c)Mundipagg was merged into Pagar.me on September 1, 2021.

(d)Mercadapp was merged into Linx Sistemas on January 1st, 2022.

(e)On February 3, 2021, StoneCo Pagamentos UK Ltd was formed to provide technical risk management services to StoneCo's group companies.

(f)Collact was merged into Stone Pagamentos on January 1st, 2022.

 

The Group holds options to acquire additional interests in some of its subsidiaries. Each of the options has been evaluated in accordance with pre-determined formulas and R$ 9,044 (2020 – R$ nil) were recorded in the consolidated statement of financial position as an asset under Derivative financial instruments.

 

2.2.Associates

 

        % Groups's equity interest
Entity name   Principal activities   December 31, 2021   December 31, 2020
Alpha-Logo Serviços de Informática S.A. (“Tablet Cloud”)   Technology services   25.00   25.00
Trinks Serviços de Internet S.A. (“Trinks”)   Technology services   19.90   19.90
APP Sistemas S.A. (“APP”) (a)   Technology services   20.00   -
VHSYS Sistema de Gestão S.A. ("VHSYS") (d)   Technology services   -     33.33  
Collact Serviços Digitais Ltda. (“Collact”) (b)   Custom relationship management   -   25.00
Delivery Much Tecnologia S.A. (“Delivery Much”) (c)   Food delivery marketplace   29.50   22.64

 

(a)On August 20, 2021, the Group acquired a 20% interest in APP, a private company based in the State of São Paulo, Brazil, for R$ 1,641 through a loan agreement conversion. APP develops software directed to hotel segment, with which the Company expects to obtain synergies in its services to clients. The Group also holds an option to acquire an additional interest in the period from 2 to 3 years counted from the date of the initial acquisition, which will allow the Group to acquire an additional 30% interest in APP.

 

(b)On August 17, 2021, the Group obtained the control of Collact through a step acquisition, which started on February 6, 2019, with the acquisition of 25% additional interest. For more details, see Note 29.1.

 

(c)On February 23, 2021, the Group acquired additional 6.85% interest in Delivery Much through capital increase of R$ 34,998. The initial acquisition occurred in 2020.

 

(d)On April 1, 2021, the Group obtained the control of VHSYS through a step acquisition, which started on June 4, 2019, with the acquisition of 33.33% interest. For more details, see Note 29.1.

 

The Group holds options to acquire additional interests in some of its associates. Each of the options has been evaluated in accordance with pre-determined formulas and no amounts in 2021 were recorded (2020 – R$ 7,220) in the consolidated statement of financial position as an asset under Derivative financial instruments.

 

3.Significant accounting policies

 

3.1.Basis of preparation

 

The consolidated financial statements of the Group have been prepared in accordance with the International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).

 

The consolidated financial statements have been prepared on a historical cost basis, except for some short and long-term investments, accounts receivable from card issuers, some trade accounts receivable, derivative financial instruments and other liabilities related to contingent consideration and provision of contingencies under business combinations that have been measured at fair value. The consolidated financial statements are presented in Brazilian reais (“R$”), and all values are rounded to the nearest thousand (R$ 000), except when otherwise indicated.

 

F-14

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

  

3.2.Basis of consolidation

 

The consolidated financial statements comprise the financial statements of the Company and its subsidiaries. Control is achieved when the Group:

 

has power over the investee (i.e., existing rights that give it the current ability to direct the relevant activities of the investee);

 

is exposed, or has rights, to variable returns from its involvement with the investee; and

 

has the ability to use its power to affect its returns.

 

Generally, there is a presumption that a majority of voting rights results in control. To support this presumption and when the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including:

 

the contractual arrangement(s) with the other vote holders of the investee;

 

rights arising from other contractual arrangements; and

 

the Group’s voting rights and potential voting rights.

 

The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated financial statements from the date the Group obtains control until the date the Group ceases to control the subsidiary.

 

Profit or loss and each component of other comprehensive income (“OCI”) are attributed to the equity holders of the parent of the Group and to the non-controlling interests, even if this results in the non-controlling interests having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group’s accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation.

 

A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction, in the reserve for “Transactions among shareholders”.

 

The Note 2.1 presents the list of the subsidiaries which is consolidated by the Company.

 

3.2.1.Consolidation of a structured entity

 

Usually, the controlling of an investee is determined by the voting or similar rights of the investor. In some cases, the voting or similar rights of the investor on the investee is not the decisive factor to characterize the control. An entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity is denominated as a structured entity. Frequently, the voting rights on structured entities relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements. In such cases, an investor’s consideration of the purpose and design of the investee shall also include consideration of the risks to which the investee was designed to be exposed, the risks it was designed to pass on to the parties involved with the investee and whether the investor is exposed to some or all of those risks.

 

Based on the contractual terms, the Group identified that some investments meet the definition of a structured entity under IFRS 10 – Consolidated Financial Statements and that controls these investments. See Note 4.7 for further details.

 

F-15

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

3.3.Segment information

 

The information by segment is prepared and disclosed based on internal reports made available to Chief Executive Officer (“CEO”) and the Board of Directors (“BoD”), who are chief operating decision-maker (“CODM”) of the Group. The group presents two reportable segments, StoneCo and Linx, for further details the information is available in Note 30.

 

3.4.Cash and cash equivalents

 

Cash and cash equivalents in the statement of financial position comprise cash at banks and short-term deposits with a maturity of three months or less, which are subject to an insignificant risk of changes in value, and readily convertible into cash.

 

3.5.Foreign currency translation

 

3.5.1.Financial statements in foreign currencies

 

The Group’s consolidated financial statements are presented in Brazilian reais (“R$”), which is the Company’s functional currency.

 

For each entity, the Group determines its functional currency. Items included in the financial statements of each entity are measured using that functional currency. The functional currency for the majority of the Company’s subsidiaries is also the Brazilian real, except for Creditinfo Caribbean and Napse Group, which have their financial statements translated into Brazilian reais using (i) the exchange rates at the reporting date for assets and liabilities, (ii) an average exchange rate for profit or loss for each month, and (iii) the exchange rate at the transaction date for equity transactions. Exchange gains and losses arising from translating are recorded in OCI.

 

3.5.2.Transactions in foreign currencies

 

Transactions in foreign currencies are initially recorded by the Group’s entities in their functional currency at the spot rate at the date the transaction first qualifies for recognition.

 

Monetary assets and liabilities denominated in foreign currencies are translated into each functional currency using the exchange rates prevailing at the reporting date. Exchange gains and losses arising from the settlement of transactions and from the translation of monetary assets and liabilities denominated in foreign currency are recognized in the statement of profit or loss. These mostly arise from transactions carried out by clients with credit and debit cards issued by foreign card issuers and from the translation of the Group’s financial instruments denominated in foreign currencies.

 

3.6.Financial instruments

 

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

 

3.6.1.Financial assets

 

3.6.1.1.Initial recognition and measurement

 

Financial assets are classified at initial recognition, and subsequently measured at amortized cost, fair value through other comprehensive income (“FVOCI”), or fair value through profit or loss (“FVPL”).

 

The classification of financial assets at initial recognition depends on the financial asset’s contractual cash flow characteristics and the Group’s business model for managing them. Except for trade receivables that do not contain a significant financing component or for which the Group has applied the practical expedient, the Group initially measures a financial asset at its fair value plus transactions costs, in the case of a financial asset not at FVPL. Trade receivables that do not contain a significant financing component or for which the Group has applied the practical expedient are measured at the transaction price determined under IFRS 15 – Revenue from Contracts with Customers.

 

F-16

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

  

For a financial asset to be classified and measured at amortized cost or FVOCI, it needs to give rise to cash flows that are solely payments of principal and interest (“SPPI”) on the principal amount outstanding. This assessment is referred to as the SPPI test and is performed at an instrument level. Financial assets with cash flows that are not SPPI are classified and measured at FVPL, irrespective of the business model.

 

The Group’s business model for managing financial assets refers to how it manages its financial assets in order to generate cash flows. The business model determines whether cash flows will result from collecting contractual cash flows, selling the financial assets, or both. Financial assets classified and measured at amortized cost are held within a business model with the objective to hold financial assets in order to collect contractual cash flows while financial assets classified and measured at FVOCI are held within a business model with the objective of both, holding to collect contractual cash flows and selling.

 

Financial assets at FVPL include financial assets held for trading, financial assets designated upon initial recognition at FVPL, or financial assets mandatorily required to be measured at fair value. Financial assets are classified as held for trading if they are acquired for the purpose of selling or repurchasing in the near term. Derivatives, including separated embedded derivatives, are also classified as held for trading unless they are designated as effective hedging instruments. Notwithstanding the criteria for debt instruments to be classified at amortized cost or at FVOCI, as described above, debt instruments may be designated at FVPL on initial recognition if doing so eliminates, or significantly reduces, an accounting mismatch.

 

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

 

3.6.1.2.Subsequent measurement

 

For purposes of subsequent measurement, financial assets are classified in four categories:

 

Financial assets at amortized cost (debt instruments);

 

Financial assets at FVOCI with recycling of cumulative gains and losses (debt instruments);

 

Financial assets at FVOCI with no recycling of cumulative gains and losses upon derecognition (equity instruments); or

 

Financial assets at FVPL.

 

3.6.1.2.1.Financial assets at amortized cost (debt instruments)

 

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

 

The Group’s financial assets at amortized cost includes trade accounts receivable, other assets, loans to customers included in Trade accounts receivable originated from July 01, 2021 and receivables from related parties.

 

3.6.1.2.2.Financial assets at FVOCI (debt instruments)

 

For debt instruments at FVOCI, interest income, foreign exchange revaluation and impairment losses or reversals are recognized in the statement of profit or loss and similarly to financial assets measured at amortized cost. The remaining fair value changes are recognized in OCI. Upon derecognition, the cumulative fair value change recognized in OCI is recycled to profit or loss. This category is the most relevant to the Group and includes a single financial asset, which is accounts receivable from card issuers.

 

F-17

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

3.6.1.2.3.Financial assets at FVOCI (equity instruments)

 

Upon initial recognition, the Group can elect to classify irrevocably its equity investments as equity instruments designated at FVOCI when they meet the definition of equity under IAS 32 – Financial Instruments: Presentation and are not held for trading. The classification is determined on an instrument-by-instrument basis.

 

Gains and losses on these financial assets are never recycled to profit or loss. Dividends are recognized as other income in the statement of profit or loss when the right of payment has been established, except when the Group benefits from such proceeds as a recovery of part of the cost of the financial asset, in which case, such gains are recorded in OCI. Equity instruments designated at FVOCI are not subject to impairment assessment.

 

The Group elected to classify irrevocably some of their equity investments under this category, included in long-term investments.

 

3.6.1.2.4.Financial assets at FVPL

 

Financial assets at FVPL are carried in the statement of financial position at fair value with net changes in fair value recognized in the statement of profit or loss.

 

This category includes (i) bonds, investment funds and some equity investments under short-term investments and long-term investments, which the Group had not irrevocably elected to classify at FVOCI, (ii) derivative financial instruments, and (iii) loans to customers included in Trade accounts receivable originated until June 30, 2021 which the Group has irrevocably elected to classify as FVPL.

 

3.6.1.3.Derecognition

 

A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognized of the consolidated statement of financial position when:

 

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

 

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

 

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

 

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

 

The derecognition of a financial asset by the Group occurs manly in the definitive assignment of Accounts receivable from card issuers to third parties without substantial retention of risks and benefits of the assigned financial asset and without continuing involvement. The difference between the consideration received by the Group for the financial asset and its carrying amount is recognized under ¨Financial expenses, net¨.

 

3.6.1.4.Impairment of financial assets

 

The Group recognizes an allowance for expected credit losses (“ECLs”) for all debt instruments measured at amortized cost or FVOCI. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Group expects to receive, discounted at an approximation of the original effective interest rate. The expected cash flows will include cash flows from the sale of collateral held or other credit enhancements that are integral to the contractual terms.

 

F-18

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

The Group applies a simplified approach in calculating ECLs, therefore, the Group does not track changes in credit risk, but instead recognizes a loss allowance based on lifetime ECLs, provision matrix and days past due at each reporting date.

 

The Group applies a simplified approach on both Accounts receivable from card issuers and Trade accounts receivable. Accounts receivable from card issuers are considered contract assets that have a maturity of one year or less.

 

3.6.2.Financial liabilities

 

3.6.2.1.Initial recognition and measurement

 

Financial liabilities are classified, at initial recognition, as financial liabilities at FVPL, amortized cost or as derivatives designated as hedging instruments in an effective hedge, as appropriate.

 

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

 

The Group’s financial liabilities include accounts payable to clients, trade and other liabilities, loans and financing, and derivative financial instruments.

 

3.6.2.2.Subsequent measurement

 

The measurement of financial liabilities depends on their classification, as described as follows.

 

3.6.2.2.1.Financial liabilities at FVPL

 

Financial liabilities at FVPL include financial liabilities held for trading and financial liabilities designated upon initial recognition as at FVPL.

 

Financial liabilities are classified as held for trading if they are incurred for the purpose of repurchasing in the near term. This category also includes derivative financial instruments entered by the Group that are not designated as hedging instruments in hedge relationships as defined by IFRS 9 – Financial Instruments. Separated embedded derivatives are also classified as held for trading unless they are designated as effective hedging instruments.

 

Gains or losses on liabilities held for trading are recognized in the statement of profit or loss.

 

Financial liabilities designated upon initial recognition at FVPL are designated at the initial date of recognition, and only if the criteria in IFRS 9 are satisfied. This category includes derivative financial instruments and contingent consideration included in other liabilities.

 

3.6.2.2.2.Financial liabilities at amortized cost

 

After initial recognition, financial liabilities classified in this category are subsequently measured at amortized cost using the EIR method. Gains and losses are recognized in profit or loss when the liabilities are derecognized as well as through the EIR amortization process.

 

Amortized cost is calculated by considering any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortization is included as finance costs in the statement of profit or loss.

 

This category includes all financial liabilities, except derivative financial instruments and contingent consideration included in other liabilities. This category is the most relevant to the Group.

 

F-19

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

3.6.2.3.Derecognition

 

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

 

3.6.3.Fair value of financial instruments

 

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

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:

 

·In the principal market for the asset or liability; or

 

·In the absence of a principal market, in the most advantageous market for the asset or liability.

 

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

 

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

 

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

 

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

 

The Group uses the following hierarchy to determine and disclose the fair value of financial instruments through measurement technique:

 
• Level I - quoted prices in active markets for identical assets or liabilities;

• Level II - other techniques for which all inputs that have a significant effect on the recorded fair value are observable, either directly or indirectly; and

• Level III - techniques using inputs that have a significant effect on the recorded fair value that are not based on observable market data. 

 

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

 

3.6.4.Offsetting of financial instruments

 

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

 

3.6.5.Derivative financial instruments

 

From time to time, the Group uses derivative financial instruments, such as non-deliverable forward currency contracts to hedge its foreign currency risks. Derivative financial instruments are initially recognized at fair value on the date on which a derivative contract is entered and are subsequently remeasured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative.

 

F-20

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

Some of the Group’s derivative financial instruments are used as cash flow hedge accounting instruments. The effective portion of gains or losses arising from changes in the fair value of these derivatives are usually recognized in equity, in “Other comprehensive income”. The ineffective portion is recognized in the statement of profit or loss, in “Financial expenses, net”.

 

If the hedged item is a highly probable forecast transaction (see Note 26.5) and this transaction materializes, resulting in the recognition of a non-financial asset, the amount that has been accumulated in the cash flow hedge reserve shall be directly included in the carrying amount of the related non-financial asset. If this transaction does not materialize, the amount that has been accumulated in the cash flow hedge reserve is immediately recognized in the statement of profit or loss, in “Financial expenses, net”.

 

If the hedged item is a financial instrument measured at amortized cost (Note 26.6) using the EIR method the amount accumulated in the cash flow hedge reserve is reclassified to profit or loss when the hedged cash flows impact the income statement. The method applied by the Group to reclassify the amounts is as follows: (i) the accrual interest portion of the derivative is also measured by the EIR method and recognized in the statement of profit or loss, in “Financial expenses, net”, following the hedged item accrual; and (ii) the remaining amounts related to fair value of hedging instrument is a temporal effect recognized in OCI at each reporting date, ultimately being recognized in profit or loss on the liquidation of the hedging instrument.

 

3.7.Leases

 

The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at the inception date. In the event that fulfillment of the arrangement is dependent on the use of specific assets or the arrangement transfers a right to use the asset, such assets are defined as a lease transaction.

 

3.7.1.Group as lessee

 

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

 

3.7.1.1.Right-of-use assets

 

The Group recognizes right-of-use assets at the commencement date of the lease (i.e., the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognized, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Right-of-use assets are depreciated on a straight-line basis over the shorter of the lease term and the estimated useful lives of the assets. The estimated useful lives for the right-of-use assets are as follows:

 

  Estimated useful
lives (years)
Offices 1-10
Vehicles 1-3
Equipment 2-10
Software 2-5

 

If ownership of the leased asset transfers to the Group at the end of the lease term or the cost reflects the exercise of a purchase option, depreciation is calculated using the estimated useful life of the asset. The right-of-use assets are also subject to impairment.

 

F-21

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

3.7.1.2.Lease liabilities

 

At the commencement date of the lease, the Group recognizes under “Loans and financing” lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in-substance fixed payments) less any lease incentives receivable and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Group and payments of penalties for terminating a lease, if the lease term reflects the Group exercising the option to terminate. The variable lease payments are recognized as expense in the period on which the event or condition that triggers the payment occurs.

 

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

 

3.7.1.3.Short-term leases and leases of low-value assets

 

The Group applies the short-term lease recognition exemption to its short-term leases of offices, Pin Pads & POS (Point of Sale), software, vehicles and other equipment (contracts that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). It also applies the low-value assets recognition exemption to leases of office equipment that are considered of low value (below US$ 5,000, as recommended by IASB). Lease payments on short-term leases and leases of low-value assets are recognized as expense on a straight-line basis over the lease term.

 

3.7.2.Group as lessor

 

Leases in which the Group does not transfer substantially all the risks and rewards incidental to ownership of an asset are classified as operating leases. Rental income arising is accounted for on a straight-line basis over the lease terms and is included in revenue in the statement of profit or loss due to its operating nature. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognized over the lease term on the same basis as rental income. Contingent rents are recognized as revenue in the period in which they are earned.

 

The Group has cancelable month-to-month lease contracts of Pin Pads & POS to third parties (clients). The leased assets are included in “Property and equipment” in the consolidated statement of financial position and are depreciated over their expected useful lives on a straight-line basis. Income from operating leases (net of any incentives given to the lessee) is recognized on a straight-line basis over the lease term in “Net revenue from subscription services and equipment rental” in the consolidated statement of profit or loss.

 

3.8.Property and equipment

 

All property and equipment are stated at historical cost less accumulated depreciation and impairment losses, if any. Historical cost includes expenditures that are directly attributable to the acquisition of the items and, if applicable, net of tax credits. Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item is material and can be measured reliably. All other repairs and maintenance expenditures are charged to profit or loss during the period in which they are incurred. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets. The estimated useful lives for the Property and equipment are as follows:

 

F-22

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

  Estimated useful
lives (years)
 
Pin Pads & POS 5
IT equipment 3-10
Facilities 3-14
Property 34
Furniture and fixtures 3-10
Machinery and equipment 5-14
Vehicles and airplanes 2-10

 

Assets’ residual values, useful lives and methods of depreciation are reviewed at each reporting date and adjusted prospectively, if appropriate. Gains and losses on disposals or derecognition are determined by comparing the disposal proceeds (if any) with the carrying amount and are recognized in profit or loss. The Group also derecognizes under ¨Disposal of property and equipment¨ Pin Pads & POS held by customers that are not being used in the last 180 or 360 days, depending on the category of customer. In 2021 the useful life was reviewed and there was no change, as described in Note 4.2.

 

3.9.Intangible assets, other than goodwill

 

3.9.1.Software and development costs – initial recognition

 

Certain direct development costs associated with internally developed software and software enhancements of the Group’s technology platform are capitalized. Capitalized costs, which occur post determination by management of technical feasibility, include external services and internal payroll costs. These costs are recorded as intangible assets along the development phase. Research and pre-feasibility development costs, as well as maintenance and training costs, are charged to profit or loss when incurred.

 

3.9.2.Other intangible assets – initial recognition

 

Separately acquired intangible assets are measured at cost on initial recognition. The cost of intangible assets acquired in a business combination corresponds to their fair value at the acquisition date.

 

3.9.3.Subsequent recognition

 

The useful lives of intangible assets are assessed as finite or indefinite. As of December 31, 2021 the Group holds only trademarks and patents and goodwill as indefinite life intangible assets. Intangible assets with finite useful lives are amortized over their estimated useful lives on a straight-line basis. Intangible assets with indefinite lives are not amortized. In both cases the intangible asset is tested for impairment whenever there is an indication that their carrying amount may not be recovered. For intangible assets with indefinite live, the impairment test is annually mandatory.

 

The carrying amount of an intangible asset is composed by their cost net of accumulated amortization and any impairment losses recognized.

 

The useful life and the method of amortization for intangible assets with finite lives are reviewed at least at the end of each fiscal year or when a change in the use pattern of the asset is identified. Changes in estimated useful lives or expected consumption of future economic benefits embodied in the assets are considered to modify the amortization period or method, as appropriate, and treated as changes in accounting estimates, with prospective effects.

 

The amortization of intangible assets with definite lives is recognized in profit or loss in the expense category consistent with the use of intangible assets. The useful lives for the intangible assets are shown below: 

 

F-23

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

  Estimate useful
life (years)
 
Software 3-10
Customer relationship 2-34.5
Trademarks and patents 7-20
Non-compete agreement                          5
Licenses                       1-5

 

Gains and losses resulting from the disposal or derecognition of intangible assets are measured as the difference between the net disposal proceeds (if any) and their carrying amount and are recognized in profit or loss. In 2021 the useful life was reviewed and there was no change, as described in Note 4.2.

 

3.10.Impairment of non-financial assets

 

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

 

In determining fair value less costs of disposal, recent market transactions are considered. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded companies or other available fair value indicators.

 

In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

 

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

 

3.10.1.Additional considerations about impairment on goodwill

 

Goodwill comprises the value of expected synergies and other benefits from combining the assets and activities of the business acquired with those of the Group. The goodwill is allocated to each of the acquirer’s CGU, or groups of CGUs, that is expected to benefit from the synergies of the business combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those CGU or groups of CGUs.

 

The Group tests whether goodwill has suffered any impairment on an annual basis, ever at December 31 of each year, and when circumstances indicate that the goodwill carrying amount may be impaired. Impairment losses relating to goodwill cannot be reversed in future periods. See Note 12.2 for a discussion of the model and key assumptions.

 

3.10.2.Additional considerations about impairment on other non-financial assets

 

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

 

F-24

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

3.11.Provisions

 

Provisions for legal claims (labor, civil and tax) are recognized when (i) the Group has a present obligation (legal or constructive) as a result of a past event; (ii) it is probable that an outflow of resources will be required to settle the obligation; and (iii) the amount has been reliably estimated.

 

If there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognized even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.

 

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to the passage of time is recognized as Financial expenses, net.

 

Where the Group expects some or all of a provision to be reimbursed, for example, under an insurance contract, the reimbursement is recognized as a separate asset, but only when the reimbursement is virtually certain.

 

The expense relating to a provision is presented in the statement of profit or loss net of any reimbursement.

 

3.12.Prepaid expenses

 

Prepaid expenses are recognized as an asset in the statement of financial position. These expenditures include, but not limited to, prepaid software licenses, certain consulting services, insurance premiums and prepaid marketing expenses.

 

The amount recognized as asset in the statement of financial position is charged to the statement of profit or loss along the time in which the economic benefits associate with the prepayment flow to the entity.

 

As of December 31, 2021, the total is mainly represented by prepaid media to the Globo group in the amount of R$ 294,953. Under the terms of the agreement the amount is available to place media until 2025.

 

3.13.Taxes

 

3.13.1.Current income and social contribution taxes

 

Income taxes are comprised mainly of taxation over operations in Brazil, related to Corporate Income Tax (“IRPJ”) and Social Contribution on Net Profit (“CSLL”) on income on the Group’s Brazilian entities. According to Brazilian tax law, income taxes and social contribution are assessed and paid by each legal entity and not on a consolidated basis.

 

Current tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the reporting date in the countries where the Group operates and generates taxable income. The Brazilian entities of the Group record a monthly provision for IRPJ (25%) and CSLL (9%), on an accrual basis, paying taxes based on the monthly estimate.

 

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

 

Cayman Islands laws currently levy no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty or withholding tax applicable to the Company or to any holder of ordinary shares.

 

3.13.2.Deferred income and social contribution taxes

 

Deferred income tax and social contribution are recognized, using the liability method, on temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements. However, deferred taxes are not accounted for if they arise from initial recognition of goodwill or an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss.

 

F-25

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

Deferred tax assets are recognized only to the extent it is probable that future taxable profit will be available against which the temporary differences and/or tax losses can be utilized. In accordance with the Brazilian tax legislation, loss carryforwards can be used to offset up to 30% of taxable profit for the year and do not expire.

 

Deferred tax is provided on temporary differences arising on investments in subsidiaries, except for a deferred tax liability where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.

 

The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are re-assessed at each reporting date and are recognized to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered.

 

Deferred tax assets and liabilities are presented net in the statement of financial position when there is a legally enforceable right and the intention to offset them upon the calculation of current taxes, generally when related to the same legal entity and the same jurisdiction. Accordingly, deferred tax assets and liabilities in different entities or in different countries are generally presented separately, and not on a net basis.

 

3.13.3.Sales taxes

 

Revenues, expenses and assets are recognized net of sales tax, except:

 

When the sales taxes incurred on the purchase of goods or services are not recoverable from tax authorities, in which case the sales taxes are recognized as part of the cost of acquiring the asset or expense item, as applicable;

 

When the amounts receivable or payable are stated with the amount of sales taxes included.

 

The net amount of sales taxes, recoverable or payable to the tax authority, is included as part of receivables or payables in the statement of financial position, and net of corresponding revenue or cost / expense, in the statement of profit or loss.

 

Sales revenues in Brazil are subject to taxes and contributions, at the following statutory rates: 

 

  Rate
  Transaction
activities
and other
services
 
Subscription
services and
equipment
rental
 
Financial
income
Contribution on gross revenue for social integration program (“PIS”) (a) 1.65% 0.65% - 1.65 % 0.65 %
Contribution on gross revenue for social security financing (“COFINS”) (a) 7.60% 3.00% - 7.60 % 4.00 %
Taxes on service (“ISS”) (b) 2.00% - 5.00% — 
Social security levied on gross revenue (“INSS”) (c) 4.50%

 

(a)PIS and COFINS are contributions levied by the Brazilian Federal government on gross revenues. These amounts are invoiced to and collected from the Group’s customers and recognized as deductions to gross revenue (Note 22) against tax liabilities, as we are acting as tax withholding agents on behalf of the tax authorities. PIS and COFINS paid on certain purchases may be claimed back as tax credits to offset PIS and COFINS payable. These amounts are recognized as Recoverable taxes (Note 9) and are offset on a monthly basis against Taxes payable (Note 16) and presented net, as the amounts are due to the same tax authority.

 

(b)ISS is a tax levied by municipalities on revenues from the provision of services. ISS tax is added to amounts invoiced to the Group’s customers for the services the Group renders. These are recognized as deductions to gross revenue (Note 22) against tax liabilities, as the Group acts as agent collecting these taxes on behalf of municipal governments. The rates may vary from 2.00% to 5.00%. The ISS stated in the table is applicable to the city of São Paulo and refers to the rate most commonly levied on the Group’s operations.

 

F-26

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

(c)INSS is a social security charge levied on wages paid to employees. The subsidiaries Linx Sistemas, Equals, Hiper, Cappta, Vitta Tecnologia em Saúde S.A and Questor pay INSS at a rate of 4.50% on gross revenue due to the benefits this regime offers compared with social security tax on payroll.

 

3.14.Revenue and income

 

3.14.1.Revenue from contracts with clients

 

Revenue is recognized when the Group has transferred control of the services to the clients, in an amount that reflects the consideration the Group expects to collect in exchange for those services. The Group has generally concluded that it is the principal in its revenue arrangements, because it typically controls the services before transferring them to the client. The Group applies the following five steps:

 

1. Identification of the contract with a client

 

2. Identification of the performance obligations in the contract

 

3. Determination of the transaction price

 

4. Allocation of the transaction price to the performance obligations in the contract

 

5. Recognition of revenue when or as the entity satisfies a performance obligation

 

 

Revenue is recognized net of taxes collected from clients, which are subsequently remitted to governmental authorities.

 

The revenue from contracts with clients of the Company is presented as follows.

 

3.14.1.1. Transaction activities and other services

 

The Group’s core performance obligations are to provide electronic payment processing services including the capture, transmission, processing and settlement of transactions carried out using credit, debit and voucher cards, as well as fees for other services. The Group’s promise to its clients is to perform an unknown or unspecified quantity of tasks and the consideration received is contingent upon the clients’ use (i.e., number of payment transactions processed, number of cards on file, etc.); as such, the total transaction price is variable. The Group allocates the variable fees charged to the day in which it has the contractual right to bill its clients, therefore revenue is recognized at a point in time.

 

Revenue from transaction activities is recognized net of interchange fees retained by card issuers and assessment fees paid to payment scheme networks, which are pass-through charges collected on their behalf, as the Group does not bear the significant risks and rewards of the authorization, processing and settlement services provided by the payment scheme networks and card issuers.

 

The Group is an agent in the authorization, processing and settlement of payment transactions as it does not bear the significant risks and rewards of those services as follows:

 

The Group facilitates the acquisition of payment information and management of the client relationship, it is not primarily responsible for the authorization, processing and settlement services performed by payment schemes networks and card issuers;

 

The Group has no latitude to establish the assessment and interchange fees, which are set by the payment scheme networks. The Group generally has the right to increase its client discount rate to protect its net commission when interchange and assessment fees are increased by payment schemes networks;

 

The Group does not collect the interchange fee that is retained by the card issuer and effectively acts as a clearing house in collecting and remitting assessment fees and payment settlements on behalf of payment scheme networks and clients; and

 

The Group does not bear credit risk of the cardholder (i.e., the client’s customer). It does bear credit risk from the card issuer for the payment settlement and assessment fees. Card issuers are qualified by the payment scheme networks and are generally high credit quality financial institutions. Receivables can be considered to be collateralized by the cardholder’s invoice settlement proceeds. As such, the Group’s exposure to credit risk is generally low.

 

F-27

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated

 

Other services mainly comprises:

 

i)Membership fee charged from customers of specific products for which there is not a recurring fee charged for the use of Pin Pads & POS. The revenue is recognized at agreement inception, which is the moment when all risks and benefits of the transaction are transferred to the customer and the Company obtains the contractual rights related to fee;

 

ii)Fee charged from customers due to services related to banking money-in volumes (transfers received under TED, Pix and “boleto” products and interchange represented by fees of transactions from other networks processed on credit and debit card issued by Stone), and money-out volumes (transfers made under products as Pix Out, wire transfers, bill payments, boletos paid, withdrawals, recharge and others transactions). The revenue is recognized at each transactions date.

 

3.14.1.2.Subscription services and Equipment rental

 

The Group provides (i) subscription services, such as reconciliation, business automatization solutions, services to provide the client with the right of use of software in a cloud-based infrastructure provided by the Company and its subsidiaries or by a third-party, or even based on the client’s own internal infrastructure, where the client has no right to end the contract and become the owner of the software or use in its IT infrastructure or a third-party’s infrastructure, and revenues related to technological support, helpdesk, equipment rental, software hosting service, payment for the use of tools and support teams located at the clients besides connectivity services, (ii) non-recurring services, that involves implementation services, including personalization, training, software licenses and other services, (iii) revenue from royalties of software licenses, and (iv) operating leases of electronic capture equipment to clients.

 

The Group’s subscription services generally consist of services sold as part of a new or existing agreement or sold as a separate service. The Group’s subscription services may or may not be considered distinct based on the nature of the services being provided. Subscription service fees are charged as a fixed monthly fee, and the related revenue is recognized over time as control is transferred to the client, either as the subscription services are performed or as the services from a combined performance obligation are transferred to the client (over the term of the related transaction and processing agreement).

 

The Group’s non-recurring revenues are recognized in proportion to the stage of completion of the service, and revenue from royalties are recognized when (i) it is determined when all risks and rewards of the license are transferred upon the availability of the software and (ii) the amount may be reliably measured, and it is likely that any expected future economic benefits will be generated on behalf of the Company and its subsidiaries.

 

The Group accounts for equipment rental as a separate performance obligation and recognizes the revenue at its standalone selling price, considering that rental is charged as a fixed monthly fee. Revenue is recognized on a straight-line basis over the contractual lease term, beginning when the client obtains control of the equipment lease. The Group does not manufacture equipment, but purchases equipment from third-party vendors.

 

3.14.1.3.Contracts with multiple performance obligations

 

The Group’s contracts with its clients can consist of multiple performance obligations and the Group accounts for individual performance obligations separately if they are distinct. When equipment or services are bundled in an agreement with a client, the components are separated using the relative stand-alone selling price of the components which is based on the Group’s customary pricing for each element in separate transactions or expected cost plus a margin. In limited situations, the relative stand-alone selling price for an element that cannot be assessed on one of the previous basis, revenue is first allocated to the element where relative stand-alone selling price has been established and the residual amount would be allocated to the element with no relative stand-alone selling price.

 

F-28

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

  

3.14.1.4.Costs to obtain and fulfill a contract

 

The Group incurs in certain costs to obtain and fulfill a contract that are capitalized at the inception of the transaction. The cost comprises mainly commission to sellers in order to obtain a contract and logistic costs to fulfill a contract. The asset recognized is amortized on a straight-line basis over the expected life of merchants. As of December 31, 2021, the Group had a carrying amount of R$ 215,663 (2020 – R$ 90,832) recognized under Other assets and R$ 101,008 (2020 – R$ 36,737) as amortization recognized in the statement of profit or loss.

 

3.14.2.Financial income

 

Comprised mainly of:

 

(i)discount fees charged for the prepayment to clients of their installment receivables from us. The discount is measured by the difference between the original amount payable to the client, net of commissions and fees charged, and the prepaid amount. Revenue is recognized once the client has elected for the receivable to be prepaid;

 

(ii)interest income on loans; and

 

(iii)fair value adjustment on loans to customers included in Trade accounts receivable and designated at FVPL until June 30, 2021.

 

3.14.3.Other financial income

 

Mainly comprised of interest generated by short-term investments, indexed to fixed and floating rates.

 

3.15.Financial expenses, net

 

Financial expenses, net, includes costs on the sale of receivables to banks and interest expense on borrowings, interest to fund FIDC quota holders, and other debt structures, foreign currency gains and losses on cash balances denominated in foreign currencies, bank service fees and gains and losses on derivative foreign currency swaps.

 

3.16.Employee benefits

 

3.16.1.Short-term obligations

 

Liabilities in connection with short-term employee benefits are measured on a non-discounted basis and are expensed as the related service is provided.

 

The liability is recognized for the expected amount to be paid under the plans of cash bonus or short-term profit sharing if the Group has a legal or constructive obligation of paying this amount due to past service provided by employees and the obligation may be reliably estimated.

 

3.16.2.Share-based payments

 

The Group has equity settled share-based payment plans, under which the management commits shares to employees and non-employees in exchange for services.

 

F-29

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

 

3.16.2.1.Equity settled transactions

 

The cost of equity-settled transactions with employees is measured using their fair value at the date they are granted. The cost is expensed together with a corresponding increase in equity over the period in which the service and, where applicable, the performance conditions are fulfilled (the vesting period). The cumulative expense recognized for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Group’s best estimate of the number of equity instruments that will ultimately vest. The expense or credit in the statement of profit or loss for a period represents the movement in cumulative expense recognized as at the beginning and end of that period.

 

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

 

The dilutive effect of outstanding options is reflected as additional share dilution in the computation of diluted earnings per share. See Note 21.

 

3.16.3.Profit-sharing and bonus plans

 

The Group recognizes a liability and an expense for bonuses and profit-sharing based on a formula that takes into consideration the profit attributable to the Company’s shareholders after certain adjustments. The Group recognizes a provision where contractually obliged or where there is a past practice that has created a constructive obligation.

 

3.17.Current and non-current classification

 

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

 

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

 

held primarily for the purpose of trading;

 

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

 

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

 

All other assets are classified as non-current.

 

A liability is current when it is:

 

expected to be settled in the normal operating cycle;

 

held primarily for the purpose of trading;

 

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

 

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

 

The Group classifies all other liabilities as non-current.

 

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

 

3.18.Business combinations and goodwill

 

Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, including assets given, equity instruments issued, and liabilities incurred or assumed at the date of exchange, which is measured at acquisition date fair value, and the amount of any non-controlling interests in the acquiree. For each business combination, the Group elects whether to measure non-controlling interests in the acquiree at fair value or on the basis of its proportionate share in the identifiable net assets of the acquiree. Costs directly attributable to the acquisition are expensed as incurred.

 

F-30

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

The assets acquired and liabilities assumed are measured at fair value, classified, and allocated according to the contractual terms, economic circumstances, and relevant conditions as at the acquisition date. The Group identifies and measures the assets acquired and liabilities assumed by the value obtained in preliminary assessments at the acquisition date. The Group has up to 12 months after each of the acquisitions to conclude the assessment and contracts a specialized independent consultancy to prepare an assessment report to the assets acquired and liabilities assumed at fair value. When the works are completed by the independent consultancy, the Company recognizes the difference between the preliminary amounts and the final amounts related to the acquisition on its statement of financial position and statement of profit or loss, as appropriated.

 

Subsequent to the initial recognition of Property and equipment and Intangible assets identified, the Company accounts the depreciation and amortization by the method and useful lives defined at the initial recognition based on the preliminary assessments until the final assessments are available.

 

Contingent liabilities recognized as of acquisition date are measured at fair value. Subsequently, until the liability is settled, cancelled or expires, they are recognized at the higher of the amount initially recognized or the amount that would be recognized under IAS 37.

 

Any contingent consideration to be transferred by the acquirer will be recognized at fair value on acquisition date. Subsequent changes in the fair value of the contingent consideration treated as an asset or liability should be recognized in profit or loss. In order to evaluate the contingent consideration, the Group considers different probabilities of scenarios and discounted future contractual cash flows at the interest rates available in the market for similar financial instruments.

 

Goodwill is measured as the excess of the aggregate of the consideration transferred and the amount recognized for non-controlling interests and any previous interest held over the fair value of net assets acquired. If the fair value of net assets acquired is in excess of the aggregate consideration transferred, the Group re-assesses whether it has correctly identified all assets acquired and all liabilities assumed and reviews the procedures used to measure the amounts to be recognized at the acquisition date. If the reassessment still results in an excess of the fair value of net assets acquired over the aggregate consideration transferred, then the gain is recognized in profit or loss. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill indefinite useful life intangible assets recognized under business combination are tested for impairment at least annually at December 31 or whenever there is an indication that it may be impaired (see Notes 3.10.1 and 12.2 for more details).

 

3.19.Investment in associates

 

An associate is an entity over which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but does not have control, or joint control over those policies.

 

The considerations made in determining significant influence are similar to those necessary to determine control over subsidiaries. The Group’s investments in its associate are accounted for using the equity method.

 

Under the equity method, the investment in an associate is initially recognized at cost. The carrying amount of the investment is adjusted to recognize changes in the Group’s share of net assets of the associate since the acquisition date. Goodwill relating to the associate is included in the carrying amount of the investment and is not tested for impairment separately.

 

The statement of profit or loss reflects the Group’s share of the results of operations of the associate. Any change in OCI of those investees is presented as part of the Group’s OCI. In addition, when there has been a change recognized directly in the equity of the associate, the Group recognizes its share of any changes, when applicable, in the statement of changes in equity. Unrealized gains and losses resulting from transactions between the Group and the associate are eliminated to the extent of the interest in the associate.

 

F-31

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

The aggregate of the Group’s share of profit or loss of an associate is shown on the face of the statement of profit or loss outside operating profit and represents profit or loss after tax and noncontrolling interests in the subsidiaries of the associate.

 

The financial statements of the associate are prepared for the same reporting period as the Group. When necessary, adjustments are made to bring the accounting policies in line with those of the Group.

 

After application of the equity method, the Group determines whether it is necessary to recognize an impairment loss on its investment in its associate. At each reporting date, the Group determines whether there is objective evidence that the investment in the associate is impaired. If there is such evidence, the Group calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value, and then recognizes the loss within share of profit of an associate in the statement of profit or loss.

 

In case of loss of significant influence over the associate, the Group measures and recognizes any retained investment at its fair value. Any difference between the carrying amount of the associate upon loss of significant influence and the fair value of the retained investment and proceeds from disposal is recognized in profit or loss.

 

None of the investments in associates presented significant restrictions on transferring resources in the form of cash dividends or repayment of obligations, during the periods reported.

 

The Note 2 presents the list of the Group’s associates.

 

3.20.IAS 29 Accounting and reporting standard in highly hyperinflationary economy

 

Considering that the inflation accumulated in the past three years in Argentina was higher than 100%, the adoption of the accounting and reporting standard in hyperinflationary economy (IAS 29) is mandatory to the subsidiary Napse S.R.L., located in Argentina.

 

Pursuant to IAS 29, non-cash assets and liabilities, the shareholders’ equity and the statement of income of subsidiaries that operate in hyperinflationary economies are adjusted by the change in the general purchasing power of the currency, applying a general price index.

 

The financial statements of an entity whose functional currency is the currency of a hyperinflationary economy, whether they are based on the historical or current cost approach, should be expressed in terms of the current measurement unit at the balance sheet date.

 

IAS 29 is applicable after Linx acquisition, as stated in Notes 1.3 and 29 of the financial statements.

 

3.21.Deferred revenue

 

As a result of the Linx acquisition, the Group records deferred revenue related to hours contracted by clients for rendering of services. Revenue is recognized after provision of service. In case billed amounts exceed services rendered plus recognized revenue, the difference is stated in the balance sheet as deferred revenue and presented in the statement of financial position as deferred revenue under “Other liabilities”.

 

Also, the Group records deferred revenue related to services paid by the clients but to be executed in the future from the conclusion of the contract with the client. The amount related to services paid by the client but to be executed in the future is recognized in the statement of financial position as deferred revenue under “Other liabilities”.

 

The amount recognized as deferred revenue in the statement of financial position is recycled to the statement of profit or loss along the time in which the promised services are executed.

 

F-32

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

3.22.New standards and amendments to standards and interpretations

 

3.22.1.New standards and amendments to standards and interpretations adopted

 

Several amendments and interpretations apply for the first time in 2021, but do not have impact on the consolidated financial statements of the Group. The Group has not early adopted any standards, interpretations or amendments that have been issued but are not yet effective. The analysis of the application of the amendments to standards and interpretations to the Group are discussed below.

 

3.22.1.1.Amendment to IFRS 16 – extension of the practical expedient applied to COVID-19 related rent concessions

 

In May 2020, the IASB published an amendment to IFRS 16 that provided an optional practical expedient for lessees from assessing whether a rent concession related to COVID-19 is a lease modification. On 31 March 2021, the IASB published an additional amendment to extend the date of the practical expedient from 30 June 2021 to 30 June 2022.

 

The Group has adopted the amendments on its effective date, April 1, 2021 and had no material impacts recognized in its financial statements.

 

3.22.1.2.Interest amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 phase 2

 

Reform of the Reference Interest Rate with treatment of changes in cash flows, hedge accounting requirements and disclosures.

 

In August 2020, the IASB published Interest Rate Benchmark Reform – Phase 2, Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16. With publication of the phase two amendments, the IASB has completed its work in response to IBOR reform. The amendments provide temporary reliefs which address the financial reporting effects when an interbank offered rate (IBOR) is replaced with an alternative nearly risk-free interest rate (RFR).

 

The Group has evaluated the content of this pronouncement and does not expect to have a significant impact on its financial statements.

 

3.22.2.New standards and amendments to standards and interpretations not yet adopted

 

The new and amended standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Group’s financial statements are presented below. The Group intends to adopt these new and amended standards and interpretations, if applicable, when they become effective.

 

3.22.2.1.Amendments to IAS 1: classification of liabilities as current or non-current

 

In January 2020, the IASB issued amendments to paragraphs 69 to 76 of IAS 1 to specify the requirements for classifying liabilities as current or non-current. The amendments clarify:

 

·What is meant by a right to defer settlement;

 

·That a right to defer must exist at the end of the reporting period;

 

·That classification is unaffected by the likelihood that an entity will exercise its deferral right;

 

·That only if an embedded derivative in a convertible liability is itself an equity instrument would the terms of a liability not impact its classification.

 

F-33

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

The amendments are effective for annual reporting periods beginning on or after January 1, 2023 and must be applied retrospectively. The Group is assessing the impact that the amendments will have on current practice and does not expect to have any impact on the Group’s consolidated financial statements on this apply.

 

3.22.2.2.Reference to the conceptual framework – amendments to IFRS 3

 

In May 2020, the IASB issued Amendments to IFRS 3 Business Combinations Reference to the Conceptual Framework. The amendments are intended to replace a reference to the Framework for the Preparation and Presentation of Financial Statements, issued in 1989, with a reference to the Conceptual Framework for Financial Reporting issued in March 2018 without significantly changing its requirements.

 

The Board also added an exception to the recognition principle of IFRS 3 to avoid the issue of potential ‘day 2’ gains or losses arising for liabilities and contingent liabilities that would be within the scope of IAS 37 – Provisions, Contingent Liabilities and Contingent Assets or IFRIC 21 – Levies, if incurred separately.

 

At the same time, the Board decided to clarify existing guidance in IFRS 3 for contingent assets that would not be affected by replacing the reference to the Framework for the Preparation and Presentation of Financial Statements.

 

The amendments are effective for annual reporting periods beginning on or after January 1, 2022 and apply prospectively. The Group does not expect to have any impact on the Group’s consolidated financial statements on this apply.

 

3.22.2.3.Onerous contracts – costs of fulfilling a contract – amendments to IAS 37

 

In May 2020, the IASB issued amendments to IAS 37 to specify which costs an entity needs to include when assessing whether a contract is onerous or loss-making.

 

The amendments apply a “directly related cost approach”. The costs that relate directly to a contract to provide goods or services include both incremental costs and an allocation of costs directly related to contract activities. General and administrative costs do not relate directly to a contract and are excluded unless they are explicitly chargeable to the counterparty under the contract.

 

The amendments are effective for annual reporting periods beginning on or after January 1, 2022. The Group is assessing the impact that the amendments will have on current practice and does not expect to have any impact on the Group’s consolidated financial statements on this apply.

 

3.22.2.4.IFRS 9 – Financial instruments – fees in the ‘10 per cent’ test for derecognition of financial liabilities

 

As part of its 2018-2020 annual improvements to IFRS standards process the IASB issued amendment to IFRS 9. The amendment clarifies the fees that an entity includes when assessing whether the terms of a new or modified financial liability are substantially different from the terms of the original financial liability. These fees include only those paid or received between the borrower and the lender, including fees paid or received by either the borrower or lender on the other’s behalf. An entity applies the amendment to financial liabilities that are modified or exchanged on or after the beginning of the annual reporting period in which the entity first applies the amendment.

 

The amendment is effective for annual reporting periods beginning on or after January 1, 2022 with earlier adoption permitted. The Group will apply the amendments to financial liabilities that are modified or exchanged on or after the beginning of the annual reporting period in which the entity first applies the amendment. The Group does not expect to have a material impact on its consolidated financial statements by applying these amendments.

 

 

F-34

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

 

3.22.2.5.Amendment to IAS 12 – deferred tax related to assets and liabilities arising from a single transaction

 

These amendments require companies to recognize deferred tax on transactions that, on initial recognition give rise to equal amounts of taxable and deductible temporary differences.

 

In May 2021, the Board issued amendments to IAS 12, which narrow the scope of the initial recognition exception under IAS 12, so that it no longer applies to transactions that give rise to equal taxable and deductible temporary differences.

 

The amendments are effective for annual reporting periods beginning on or after January 1, 2023. The Group will apply the amendments for applicable transactions, on or after the beginning of the annual reporting period in which the entity first applies the amendment. The Group does not expect to have any impact on its consolidated financial statements by applying these amendments.

 

3.22.2.6.IFRS 17 – insurance contracts

 

This standard replaces IFRS 4, which currently permits a wide variety of practices in accounting for insurance contracts. IFRS 17 will fundamentally change the accounting by all entities that issue insurance contracts and investment contracts with discretionary participation features.

 

The amendments are effective for annual reporting periods beginning on or after January 1, 2023. The Group is assessing the impact that the amendments will have on current practice and does not expect to have any impact on the Group’s consolidated financial statements on this apply.

 

3.22.2.7.Proceeds before intended use – amendments to IAS 16

 

The amendment prohibits entities from deducting from the cost of an item of property, plant and equipment (PP&E), any proceeds of the sale of items produced while bringing that asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Instead, an entity recognizes the proceeds from selling such items, and the costs of producing those items, in profit or loss.

 

The amendments are effective for annual reporting periods beginning on or after January 1, 2022. The Group does not expect to have any impact on the Group’s consolidated financial statements on this apply.

 

3.22.2.8.Narrow scope amendments to IAS 1, practice statement 2 and IAS 8

 

In February 2021, the Board issued amendments to IAS 1, IFRS Practice Statement 2 Making Materiality Judgements (the PS) and to IAS 8. The amendments aim to improve accounting policy disclosures and to help users of the financial statements to distinguish between changes in accounting estimates and changes in accounting policies.

 

The amendments are effective for annual reporting periods beginning on or after January 1, 2023. The Group does not expect to have any impact on the Group’s consolidated financial statements on this apply.

 

3.22.2.9.IAS 41 - Taxation in fair value measurements

 

The amendment removes the requirement in paragraph 22 of IAS 41 that entities exclude cash flows for taxation when measuring the fair value of assets within the scope of IAS 41.

 

The amendments are effective for annual reporting periods beginning on or after January 1, 2022. The IAS 41 is not applicable to the Group’s consolidated financial statements.

 

F-35

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

3.22.2.10.First-time adoption of international financial reporting standards

 

The amendment to IFRS 1 simplifies the application of IFRS 1 by a subsidiary that becomes a first-time adopter after its parent in relation to the measurement of cumulative translation differences using the amounts reported in the parent’s consolidated financial statements, based on the parent’s date of transition to IFRS if no adjustments were made for consolidation procedures and for the effects of the business combination in which the parent acquired the subsidiary.

 

The amendments are effective for annual reporting periods beginning on or after January 1, 2022. The Group will apply the amendments for applicable transactions, on or after the beginning of the annual reporting period in which the entity first applies the amendment. The Group does not expect to have a material impact on the its consolidated financial statements by applying these amendments.

 

4.Significant judgments, estimates and assumptions

 

The preparation of the financial statements of the Company and its subsidiaries 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 financial statement date. The effective results may differ from these estimates.

 

The judgements, estimates and assumptions are frequently revised, and any effects are recognized in the revision period and in any future affected periods. The objective of these revisions is mitigating the risk of matter differences between the estimative and effectives results in the future. Significant assumptions about sources of uncertainty in future estimates and other significant sources at the reporting date are described as follows.

 

4.1.Measurement of loss allowance for expected credit losses

 

4.1.1.Accounts receivable from card issuers

 

For Accounts receivable from card issuers, the Group uses a provision matrix to calculate ECLs. The provision rates are based on the internal credit rating that consider external information, such as ratings given by major rating agencies and forward-looking factors specific to the debtors and the economic environment.

 

4.1.2.Trade accounts receivable

 

The provision rates are based on days past due for groupings of various client segments that have similar loss patterns (i.e., by product type, customer type and rating, and coverage by letters of credit and other forms of credit insurance).

 

The provision is initially based on the Group’s historical observed default rates. The Group calibrates to adjust the historical credit loss experience with forward-looking information every year. For instance, if forecast economic conditions (i.e., gross domestic product) are expected to deteriorate over the next year which can lead to an increased number of defaults, the historical default rates are adjusted. At every reporting date, the historical observed default rates are updated and changes in the forward-looking estimates are analyzed.

 

The assessment of the correlation between historical observed default rates, forecast economic conditions and ECLs is a significant estimate. The amount of ECLs is sensitive to changes in circumstances and of forecast economic conditions. The Group’s historical credit loss experience and forecast of economic conditions may also not be representative of client’s actual default in the future. The information about the ECLs on the Group’s Accounts receivable from card issuers and Trade accounts receivable are disclosed in Notes 7 and 8 respectively.

 

4.2.Property and equipment and Intangible assets useful lives

 

Property and equipment and intangible assets include the preparation of estimates to determine the useful life for depreciation and amortization purposes. Useful life determination requires estimates in relation to the expected technological advances and alternative uses of assets. There is a significant element of judgment involved in making technological development assumptions, since the timing and nature of future technological advances are difficult to predict.

 

The Group evaluate the useful life of Property and equipment and Intangible assets and concluded that no change on the estimates of useful life and residual value of this assets was necessary for the period ended December 31, 2021.

 

4.3.Share-based payments

 

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.

 

F-36

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

The Group 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;

 

·    other valuation techniques including option pricing models such as Black-Scholes.

 

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

 

4.4.Impairment of non-financial assets

 

The Group assesses, at each reporting date, whether there is an indication that an asset may be impaired. If an indication was verified, the Group realize the impairment test. For the intangible assets with indefinite useful lives and goodwill, the Group tests these assets for impairment annually at the level of the CGU, in addition to when circumstances indicate that the carrying value may be impaired. Impairment exists when the carrying value of an asset or cash generating unit exceeds its recoverable amount, which is the higher of its fair value less costs to sell and its value in use.

 

The fair value less costs of disposal calculation is based on available data from binding sales transactions, conducted at arm’s length, for similar assets or observable market prices less incremental costs of disposing of the asset. The value in use calculation is based on a discounted cash flow (“DCF”) model. The cash flows are derived from the budget for the next five years and do not include restructuring activities that the Group is not yet committed to or significant future investments that will enhance the performance of the assets of the CGU being tested. The recoverable amount is sensitive to the discount rate used for the DCF model as well as the expected future cash-inflows and the growth rate used for extrapolation purposes. These estimates are most relevant to goodwill recognized by the Group. The key assumptions used to determine the recoverable amount for the different CGUs, including a sensitivity analysis, are disclosed and further explained in Note 12.

 

4.5.Deferred income tax and social contribution

 

Deferred tax assets are recognized for all unused tax losses to the extent that sufficient taxable profit will likely be available to allow the use of such losses. A significant judgment from management is required to determine the amount of deferred tax assets that can be recognized, based on the likely timing and level of future taxable profits, together with future tax planning strategies.

 

4.6.Provisions for contingencies

 

Provisions for the judicial and administrative proceedings are recorded when the risk of loss of administrative or judicial proceeding is considered probable and the amounts can be reliably measured, based on the nature, complexity and history of lawsuits and the opinion of legal counsel internal and external.

 

Provisions are made when the risk of loss of judicial or administrative proceedings is assessed as probable and the amounts involved can be measured with sufficient accuracy, based on best available information. They are fully or partially reversed when the obligations cease to exist or are reduced. Given the uncertainties arising from the proceedings, it is not practicable to determine the timing of any cash outflow.

 

F-37

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

4.7.Consolidation of structured entities

 

The Group considers the FIDC AR III, FIDC TAPSO, FIDC TAPSO II, FIDC SOMA, FIDC SOMA III and FIC FIM STONECO to be structured entities as defined by IFRS 10. The participation of the Group in each of them is stated as follows:

 

 

Subordinated quotas –

held by the Group

Senior and/or mezzanine quotas –

held by third parties

FIDC AR III Approximately 10% of the total outstanding quotas Approximately 90% of the total outstanding quotas
FIDC TAPSO Approximately 99% of the total outstanding quotas Approximately 1% of the total outstanding quotas
FIDC TAPSO II 100% of the total outstanding quotas None
FIDC SOMA 100% of the total outstanding quotas None
FIDC SOMA III 100% of the total outstanding quotas None

 

  Single class of quotas
FIC FIM STONECO 100% held by the Group
Retail Renda Fixa 100% held by the Group

 

The bylaws of these FIDCs and FIC FIM were established by us at their inception, and grant us significant decision-making authority over these entities. As sole holders of the subordinated quotas, the Group is entitled to the full residual value of the entities, if any, and thus the Group has the rights to their variable returns. During 2021, the structured entities FIDC SOMA IV and Santander Moving Tech RF Referenciado DI CP FI were closed.

 

In accordance with IFRS 10, the Group concluded it controls FIDC AR III, FIDC TAPSO, FIDC TAPSO II, FIDC SOMA, FIDC SOMA III, FIC FIM STONECO and Retail Renda Fixa, therefore, they are consolidated in the Group’s financial statements. The senior and mezzanine quotas, when applicable, are accounted for as a financial liability under “Obligations to FIDC quota holders” and the remuneration paid to senior and mezzanine quota holders is recorded as interest expense. See Note 17 for further details.

 

4.8.Fair value measurement of financial instruments

 

When the fair values of financial assets and financial liabilities recorded in the statement of financial position cannot be measured based on quoted prices in active markets, their fair value is measured using valuation techniques including the DCF model. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgement is required in establishing fair values. Judgements include considerations of inputs such as liquidity risk, credit risk and volatility. Changes in assumptions relating to these factors could affect the reported fair value of financial instruments.

 

4.9.Incremental borrowing rate estimate on leases

 

The Group cannot readily determine the interest rate implicit in the lease, therefore, it uses its incremental borrowing rate (“IBR”) to measure lease liabilities. The IBR is the rate of interest that the Group would have to pay to obtain a borrowing over a similar term, and with a similar security, for acquire an asset of a similar value to the right-of-use asset in a similar economic environment. The IBR therefore reflects what the Group ‘would have to pay’, which requires estimation when no observable rates are available (such as for subsidiaries that do not enter into financing transactions) or when they need to be adjusted to reflect the terms and conditions of the lease (for example, when leases are not in the subsidiary’s functional currency). The Group estimates the IBR using observable inputs (such as market interest rates) when available and is required to make certain entity-specific estimates (such as the subsidiary’s stand-alone credit rating).

 

F-38

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

4.10.Expected life of merchants estimate on equipment rental

 

The recognition of revenue from equipment rental includes the preparation of estimates to determine the expected life of merchants, with the objective to recognize revenue on a straight-line basis and as a fixed monthly fee. The estimates are related to the average time that the merchant will process the transactions with the Group.

 

4.11.Estimate of intangible assets, their useful life and contingent consideration on business combination

 

The process of accounting a business combination includes the use of (i) valuation techniques to determine the amounts of intangible assets identified, (ii) estimates to determine its useful life, and (iii) valuation techniques to estimate the contingent consideration included in the total consideration paid to acquire the companies. For more details about the application of these estimates on business combination, please refer to Note 29.

 

4.12.Trade accounts receivable carried at amortized cost

 

Financial assets are classified at initial recognition, and subsequently measured at amortized cost, fair value through other comprehensive income (“FVOCI”), or fair value through profit or loss (“FVPL”). The classification of financial assets at initial recognition depends on the financial asset’s contractual cash flow characteristics and the Company’s business model for managing them.

 

After Linx acquisition, the Group carries Linx Pay’s accounts receivable from card issuers at amortized cost.

 

4.12.1. Loans to customers originated from July 1st, 2021 carried at amortized cost

 

The classification of financial assets at initial recognition depends on the financial asset’s contractual cash flow characteristics and the Group’s business model for managing them.

 

For a financial asset to be classified and measured at amortized cost or FVOCI, it needs to give rise to cash flows that are solely payments of principal and interest (“SPPI”) on the principal amount outstanding. This assessment is referred to as the SPPI test and is performed at an instrument level. Financial assets with cash flows that are not SPPI are classified and measured at FVPL, irrespective of the business model.

 

The loans to customers originated from July 1, 2021, included in Trade accounts receivable, are held to collect payments of principal and interest and meet the SPPI test and as such are accounted for at amortized cost.

 

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

 

5.Cash and cash equivalents

 

   2021  2020
       
Denominated in R$   4,431,019    2,370,414 
Denominated in US$   64,593    76,576 
Denominated in other foreign currencies   33    - 
    4,495,645    2,446,990 

F-39

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

6.Short and Long-term investments

 

   Short-term  Long-term   
   Listed
securities
  Unlisted
securities
  Listed
securities
  Unlisted
securities
  Balance at 12/31/2021
  Bonds (a)   645,826    1,336,344    -    -    1,982,170 
  Equity securities (b)   -    -    1,215,791    22,685    1,238,476 
  Investment funds (c)   -    10,867    -    -    10,867 
    645,826    1,347,211    1,215,791    22,685    3,231,513 
                          
   Short-term  Long-term     
    Listed securities    Unlisted securities     Listed securities    Unlisted securities     Balance at 12/31/2020 
  Bonds (a)   675,599    6,464,154    -    -    7,139,753 
  Equity securities (b)   970,353    7,816    -    -    978,169 
  Investment funds (c)   -    10,136    -    -    10,136 
    1,645,952    6,482,106    -    -    8,128,058 

 

(a)Comprised of Brazilian Treasury Notes (“LFTs”), structured notes linked to LFTs and corporate bonds in the amount of R$ 344,032, R$ 1,336,344 and R$ 301,794 (2020 – R$ 465,538, R$ 6,463,986 and R$ 210,229) respectively, with maturities greater than three months, indexed to fixed and floating rates. As of December 31, 2021, bonds of listed companies are mainly indexed to fixed rates in USD and hedged to Brazilian reais using a cross-currency interest rate swap (Note 26.6). Liquidity risk is minimal.

 

(b)Comprised of ordinary shares of listed and unlisted entities. These assets are measured at fair value, and the Group elected asset by asset the recognition of the changes in fair value of the existing listed and unlisted equity instruments through profit or loss (“FVPL”) or other comprehensive income (“FVOCI”). Fair value of unlisted equity instruments as of December 31, 2021 was determined based on recent negotiations of the securities.

 

·Assets at FVPL:

 

On May 24, 2021, the Group signed a definitive investment agreement with Banco Inter S.A. (“Banco Inter”), a leading and fast-growing digital bank in Brazil which allowed the Group to invest up to R$ 2,480,003 in newly issued shares issued by Banco Inter, becoming a minority investor (limited to a 4.99% stake) of Banco Inter after the transaction (the “Investment”). As part of the Investment, the Group acquired the right of first refusal in the case of change of control of Banco Inter, for a period of six years and according to certain price thresholds; and the right to join the Board of Directors of Banco Inter with one seat out of nine. We understand that the investment does not allow us to have significant influence on Banco Inter, so the investment is classified as fair value through profit or loss.

 

The change in fair value of equity securities at FVPL for December 31, 2021 was a loss of R$ 1,264,213, which was recognized in the statement of profit or loss.

 

F-40

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

·Assets as FVOCI:

 

On December 31, 2021, comprised mainly of ordinary shares in entities that are not traded in an active market (December 31, 2020 - comprised mainly of listed Linx shares that subsequently upon the business combination are considered part of the consideration paid).

 

The change in fair value of equity securities at FVOCI for the year ended December 31, 2021 was R$ 216,466 (2020 – R$ 40,336 and 2019 – R$ (938)), which was recognized in other comprehensive income.

 

(c)Comprised of foreign investment fund shares.

 

Short-term investments are denominated in Brazilian reais and U.S. dollars.

 

7.Accounts receivable from card issuers

 

Accounts receivable are amounts due from card issuers and acquirers regarding the transactions of clients with card holders, performed in the ordinary course of business. Accounts receivable are generally due within 12 months, therefore are all classified as current.

 

   2021  2020
       
Accounts receivable from card issuers (a)   18,865,658    16,031,948 
Accounts receivable from other acquirers (b)   436,035    287,972 
Allowance for expected credit losses   (15,103)   (12,765)
    19,286,590    16,307,155 

 

(a)Accounts receivable from card issuers, net of interchange fees, as a result of processing transactions with clients.

 

(b)Accounts receivable from other acquirers related to PSP (Payment Service Provider) transactions.

 

As of December 31, 2021, R$ 2,363,476 of the total Accounts receivable from card issuers are held by FIDC AR III (December 31, 2020 — R$ 4,437,285 held by FIDC AR II and FIDC AR III). Accounts receivable held by FIDCs guarantee the obligations to FIDC quota holders. Accounts receivable from card issuers in the amount of R$ 451,618 (December 31, 2020 – R$450,217) guarantee the liability with debentures.

 

The movement in the allowance for expected credit losses of accounts receivable from card issuers is as follows:

 

   2021  2020
       
At January 1   12,765    7,236 
Charge for the year   8,820    6,626 
Reversal   (6,482)   (1,097)
At December 31   15,103    12,765 

 

Impairment and risk exposure

 

In addition to complying with the criteria and policies of card associations for accreditation, the Group has a specific policy setting guidelines and procedures for the accreditation and maintenance process of the clients. The Group records an allowance for expected credit losses of accounts receivable from card issuers based on an expected credit loss model covering

 

F-41

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

history of defaults and the expected nature and level of risk associated with receivables. See Notes 3.6.1.4 and 4.1.1 for further details.

 

Information about the credit quality of accounts receivable and the Group’s exposure to credit risk, foreign currency risk and interest rate risk can be found in Note 26.

 

8.Trade accounts receivable

 

Trade accounts receivables are amounts due from clients mainly related to loans designated at fair value through profit or loss (“FVPL”), equipment rental and other services.

 

   2021  2020
       
Loans designated at FVPL (a)   511,240    1,646,685 
Accounts receivable from subscription services   232,109    13,591 
Accounts receivable from equipment rental   159,771    113,446 
Allowance for expected credit losses   (80,418)   (32,463)
Chargeback   26,783    15,378 
Others trade accounts receivable   96,236    41,319 
           
    945,721    1,797,956 
           
Current   886,126    1,415,850 
Non-current   59,595    382,106 

 

(a)The Group has irrevocably elected to classify loans originated until June 30, 2021 at fair value with net changes recognized in the statement of profit or loss. The amount is held by FIDC SOMA and FIDC SOMA III. The Company changed its business model, and therefore, loans originated since July 1st, 2021 are valued at amortized cost, as disclosed in Note 4.12.1.

 

The Group records an allowance for expected credit losses of trade accounts receivable based on an expected credit loss model covering history of defaults and the expected nature and level of risk associated with receivables. See Notes 3.6.1.4 and 4.1.1 for further details.

 

The movement in the allowance for expected credit losses of trade accounts receivables is as follows:

 

   2021  2020
       
At January 1   32,463    23,656 
Business combination (a)   10,401    - 
Charge for the year   73,510    30,372 
Reversal   (3,876)   (269)
Write-off   (32,080)   (21,296)
At December 31   80,418    32,463 

 

(a) Refers to Linx acquisition (Note 29.1).

 

9.Recoverable taxes

 

   2021  2020
       
Withholding income tax on finance income (a)   86,340    22,276 
Income tax and social contribution   79,640    - 
Others withholding income tax   30,454    17,137 
Contributions over revenue (b)   25,532    14,922 
Other taxes   8,592    2,030 
    230,558    56,365 

F-42

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

(a)Refers to income taxes withheld on financial income which will be offset against future income tax payable.

 

(b)Refers to credits taken on contributions on gross revenue for social integration program (PIS) and social security (COFINS) to be offset in the following period against tax payables.

 

10.Income taxes

 

Income taxes are comprised of taxation over operations in Brazil and abroad, related to Corporate Income Tax (IRPJ) and Social Contribution on Net Profit (CSLL). According to Brazilian tax law, income taxes and social contribution are assessed and paid by legal entity and not on a consolidated basis.

 

10.1.Reconciliation of income tax expense

 

The following is a reconciliation of income tax expense to profit (loss) for the year, calculated by applying the combined Brazilian statutory rates at 34% for the years ended December 31, 2021, 2020 and 2019:

 

   2021  2020  2019
Profit (loss) before income taxes   (1,445,554)   1,127,662    1,090,655 
Brazilian statutory rate   34%   34%   34%
Tax benefit/(expense) at the statutory rate   491,488    (383,405)   (370,823)
                
Additions (exclusions):               
Mark-to-market on equity securities designated at FVPL   (429,832)   -    - 
Gain (loss) from entities not subject to the payment of income taxes   3,931    98,376    47,782 
Other permanent differences   4,325    (4,777)   6,039 
Equity pickup on associates   (3,548)   (2,359)   (275)
Unrecorded deferred taxes   (40,165)   (31,531)   (2,030)
Use of tax losses previously unrecorded   -    -    5,163 
Unrealized gain on previously held interest on acquisition   6,161    1,017    - 
Interest payments on net equity   5,933    12,276    10,102 
Previsouly unrecognized deferred income tax (temporary differences and tax losses)   22,492    -    - 
R&D Tax Benefits   4,688    13,107    8,188 
Other tax incentives   2,733    7,080    9,394 
Total income tax and social contribution benefit/(expense)   68,206    (290,216)   (286,460)
Effective tax rate   5%   26%   26%
                
Current income tax and social contribution   (171,621)   (216,886)   (217,228)
Deferred income tax and social contribution   239,827    (73,330)   (69,232)
Total income tax and social contribution benefit/(expense)   68,206    (290,216)   (286,460)

F-43

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

 

10.2. Changes in deferred income taxes

 

Net changes in deferred income taxes relate to the following:

 

   2021  2020
At January 1   77,611    182,094 
Assets at FVOCI   102,295    (14,020)
Additions arising from business combinations   (605,423)   (17,133)
Amounts recognized in income statement:          
Losses available for offsetting against future taxable income   160,287    (39,949)
Tax credit carryforward   (12,377)   51,063 
Tax deductible goodwill   (12,225)   (12,226)
Share-based compensation   8,457    6,535 
Temporary differences under FIDC   (3,020)   1,563 
Amortization of assets arising from business combinations   27,872    8,981 
Assets at FVPL   70,705    (69,357)
Technological innovation benefit   (3,061)   (5,968)
Others   3,189    (13,972)
At December 31   (185,690)   77,611 

 

10.3. Deferred income taxes by nature

 

Under Brazilian tax law, temporary differences and tax losses can be carried forward indefinitely, however the tax losses can only be used to offset up to 30% of taxable profit for the year.

 

   2021  2020
Losses available for offsetting against future taxable income   244,868    84,581 
Deferred tax on other temporary differences   73,618    85,995 
Assets at FVOCI   127,335    25,040 
Tax deductible goodwill   36,676    48,901 
Share-based compensation   41,150    32,693 
Temporary differences under FIDC   (69,556)   (66,536)
Deferred income taxes arising from business combinations   (616,665)   (39,113)
Assets at FVPL   (4,583)   (75,288)
Technological innovation benefit   (18,493)   (15,432)
Others   (40)   (3,230)
Deferred tax, net   (185,690)   77,611 

 

10.4. Unrecognized deferred taxes

 

The Group has accumulated tax loss carryforwards and other temporary differences in some subsidiaries in the amount of R$ 104,920 (December 31, 2020 – R$ 36,906) for which a deferred tax asset was not recognized and are available indefinitely for offsetting against future taxable profits of the companies in which the losses arose. Deferred tax assets have not been recognized with respect of these losses as they cannot be used to offset taxable profits between subsidiaries of the Group, and there is no other evidence of recoverability in the near future.

 

F-44

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

11.Property and equipment

 

11.1. Changes in Property and equipment

 

   Balance at 12/31/2020  Additions  Disposals
(a)
  Transfers  Effects of hyperinflation (IAS 29)  Business combination  Balance at 12/31/2021
Cost                                   
Pin Pads & POS   736,775    851,106    (107,555)   -    -    17,945    1,498,271 
IT equipment   128,244    78,139    (4,229)   (2,747)   -    47,136    246,543 
Facilities   40,524    14,011    (4,282)   2,818    (8)   37,123    90,186 
Machinery and equipment   18,242    1,496    (126)   2,683    30    3,451    25,776 
Furniture and fixtures   14,629    2,858    (819)   64    8    8,014    24,754 
Vehicles and airplane   16,261    30,594    (13,058)   -    43    9,746    43,586 
Construction in progress   81    20,197    (5,255)   (2,818)   -    1,873    14,078 
Right-of-use assets - equipment   -    536    (854)             4,947    4,629 
Right-of-use assets - vehicles   20,007    13,670    (2,130)   -    -    -    31,547 
Right-of-use assets - offices   126,571    73,506    (35,144)   -    -    73,396    238,329 
    1,101,334    1,086,113    (173,452)   -    73    203,631    2,217,699 
Depreciation                                   
Pin Pads & POS   (248,704)   (204,355)   14,713    -    -    -    (438,346)
IT equipment   (57,801)   (40,092)   2,340    -    -    -    (95,553)
Facilities   (17,180)   (9,306)   1,420    -    -    -    (25,066)
Machinery and equipment   (14,140)   (3,756)   35    -    -    -    (17,861)
Furniture and fixtures   (3,882)   (1,821)   187    -    -    -    (5,516)
Vehicles and airplane   (1,544)   (5,227)   4,273    -    -    -    (2,498)
Right-of-use assets - equipment   -    (505)   -    -    -    -    (505)
Right-of-use assets - Vehicles   (6,906)   (8,545)   1,264    -    -    -    (14,187)
Right-of-use assets - Offices   (33,943)   (37,023)   22,319    -    -    -    (48,647)
    (384,100)   (310,630)   46,551    -    -    -    (648,179)
                                    
Property and equipment, net   717,234    775,483    (126,901)   -    73    203,631    1,569,520 

 

(a)Includes Pin Pad & POS derecognized for not being used by customers after a period of time.

 

F-45

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

   Balance at 12/31/2019  Additions  Disposals  Transfers  Business combination  Balance at 12/31/2020
Cost                  
Pin Pads & POS   512,933    327,149    (66,131)   (37,176)   -    736,775 
IT equipment   91,656    35,642    (3,487)   -    4,433    128,244 
Facilities   22,742    5,680    (18)   10,635    1,485    40,524 
Machinery and equipment   16,671    983    (47)   -    635    18,242 
Furniture and fixtures   10,488    2,687    (110)   562    1,002    14,629 
Vehicles and airplane   90    16,033    -    -    138    16,261 
Construction in progress   1,020    10,280    (22)   (11,197)   -    81 
Right-of-use assets - vehicles   10,395    15,098    (5,486)   -    -    20,007 
Right-of-use assets - offices   104,891    37,042    (17,548)   -    2,186    126,571 
    770,886    450,594    (92,849)   (37,176)   9,879    1,101,334 
Depreciation                              
Pin Pads & POS   (141,297)   (119,310)   11,903    -    -    (248,704)
IT equipment   (35,700)   (21,362)   1,644    -    (2,383)   (57,801)
Facilities   (11,769)   (4,869)   6    -    (548)   (17,180)
Machinery and equipment   (9,114)   (4,630)   14    -    (410)   (14,140)
Furniture and fixtures   (2,161)   (1,408)   25    -    (338)   (3,882)
Vehicles and airplane   (57)   (1,363)   -    -    (124)   (1,544)
Right-of-use assets - vehicles   (3,882)   (8,256)   5,232    -    -    (6,906)
Right-of-use assets - offices   (18,299)   (24,137)   9,149    -    (656)   (33,943)
    (222,279)   (185,335)   27,973    -    (4,459)   (384,100)
                               
Property and equipment, net   548,607    265,259    (64,876)   (37,176)   5,420    717,234 

F-46

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

11.2. Depreciation and amortization charges

 

Depreciation and amortization expense has been charged in the following line items of the consolidated statement of profit or loss:

 

   2021  2020  2019
          
Cost of services   299,240    162,202    100,070 
General and administrative expenses   161,331    59,593    49,358 
Selling expenses   46,798    34,499    13,968 
Depreciation and Amortization charges   507,369    256,294    163,396 
Depreciation charge   310,630    185,335    125,749 
Amortization charge (Note 12.1)   196,739    70,959    37,647 
Depreciation and Amortization charges   507,369    256,294    163,396 

 

11.3. Impairment test

 

As of December 31, 2021, 2020 and 2019, there were no indicators of impairment of property and equipment. Property and equipment were tested for impairment at the CGU level in connection with intangible assets and investments in associates, as described in Note 12.2.

 

F-47

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

12.Intangible assets

 

12.1.Changes in Intangible assets

 

   Balance at 12/31/2020  Additions
(a)
  Disposals
(b)
  Transfers  Effects of hyperinflation
(IAS 29)
  Effects of changes in foreign exchange rates (IAS 21)  Business combination  Balance at 12/31/2021
Cost                        
Goodwill - acquisition of subsidiaries   654,044    349    (8,630)   -    -    46    5,070,034    5,715,843 
Customer relationship   155,101    2,150    -    -    -    (154)   1,491,973    1,649,070 
Trademark use right   12,491    -    -    -    -    -    -    12,491 
Trademarks and patents   3,728    1,549    (13)   -    -    -    227,718    232,982 
Software   204,649    204,316    (18,660)   25,167    368    (1,435)   540,381    954,786 
Licenses for use - payment arrangements   25,250    15,104    -    (3,669)   -    -    -    36,685 
Operating license   -    -    -    -    -    (352)   7,121    6,769 
Exclusivity right   38,827    -    -    -    -    -    (38,827)   - 
Software in progress   26,246    35,552    (8,910)   (21,498)   -    -    -    31,390 
Right-of-use assets - Software   66,837    5,626    -    -    -    -    -    72,463 
    1,187,173    264,646    (36,213)   -    368    (1,895)   7,298,400    8,712,479 
Amortization                                        
Customer relationship   (50,543)   (53,114)   -    -    -    104    -    (103,553)
Trademark use right   (12,491)   -    -    -    -    -    -    (12,491)
Trademarks and patents   (793)   2,741    -    -    -    -    -    1,948 
Software   (55,508)   (109,836)   1,212    (2,867)   -    266    -    (166,733)
Licenses for use - payment arrangements   (13,295)   (943)   -    2,867    -    -    -    (11,371)
Operating license   -    (5,790)   -    -    -    278    -    (5,512)
Exclusivity right   (647)   647    -    -    -    -    -    - 
Right-of-use assets - Software   (14,010)   (30,444)   -    -    -    -    -    (44,454)
    (147,287)   (196,739)   1,212    -    -    648    -    (342,166)
                                         
Intangible assets, net   1,039,886    67,907    (35,001)   -    368    (1,247)   7,298,400    8,370,313 

 

(a)Of the total software additions, R$ 11,271 refers to Nodis asset acquisition (Note 29.3). The estimated useful life is 10 years.

(b)Of the total disposals, R$ 2,407 refers to the sale of Linked (Note 2.1 (a)).

 

F-48

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

   Balance at 12/31/2019  Additions  Disposals  Transfers  Business combination  Balance at 12/31/2020
Cost                  
Goodwill - acquisition of subsidiaries   143,194    -    -    -    510,850    654,044 
Customer relationship   99,368    4,300    -    -    51,433    155,101 
Trademark use right   12,491    -    -    -    -    12,491 
Trademarks and patents   1,732    7    -    -    1,989    3,728 
Software   134,612    37,477    (11,899)   27,561    16,898    204,649 
Licenses for use - payment arrangements   11,518    9,035    -    -    4,697    25,250 
Operating license   -    -    -    -    -    - 
Exclusivity right   -    -    -    -    38,827    38,827 
Software in progress   20,032    32,654    (190)   (27,561)   1,311    26,246 
Right-of-use assets - software   37,513    66,837    (37,513)   -    -    66,837 
    460,460    150,310    (49,602)   -    626,005    1,187,173 
Amortization                              
Customer relationship   (37,093)   (13,450)   -    -    -    (50,543)
Trademark use right   (12,491)   -    -    -    -    (12,491)
Trademarks and patents   (448)   (345)   -    -    -    (793)
Software   (26,515)   (34,099)   9,438    -    (4,332)   (55,508)
Licenses for use - payment arrangements   (6,046)   (4,240)   -    -    (3,009)   (13,295)
Operating license   -    -    -    -    -    - 
Exclusivity right   -    (647)   -    -    -    (647)
Right-of-use assets - software   (4,168)   (18,178)   8,336    -    -    (14,010)
    (86,761)   (70,959)   17,774    -    (7,341)   (147,287)
                               
Intangible assets, net   373,699    79,351    (31,828)   -    618,664    1,039,886 

F-49

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

12.2.Impairment test

 

As of December 31, 2021, and 2020, there were no indicators of impairment of finite-life intangible assets.

 

The Group performs its impairment testing for goodwill by testing the impairment of the CGU (or group of CGUs) that contains goodwill. On December 31, 2021, the Group has six different CGU’s, defined considering whether cash flows of one CGU are largely independent of other CGUs. The table below presents a description of the GCU’s:

 

CGU Goodwill allocated Indefinite useful-life intangible assets allocated Description
CGU 1 – Linx Group 5,037,584 214,579 This CGU comprise all the companies acquired in the business combination with Linx. The Group considers that these companies represent a stand-alone separate business, as well have synergies in infrastructure, development, and commercial design.
CGU 2 – Technology enterprises 203,009 6,637 In this CGU are included the technology companies that aim to provide new offers to customers related to the technology platform of the Group. This CGU includes operating companies and their respective holding companies.
CGU 3 –  Questor 16,726 5,734 This CGU comprises only Questor, which is considered by the Group as a technology enterprise, but without synergies and correlated business with the companies included in the CGU 2. Due to that, is treated as a separate CGU.
CGU 4 – Creditinfo Caribbean 24,179 - Due to the specificity of credit bureau services provided by the Creditinfo Caribbean and its independence of the other Group’s companies, Creditinfo Caribbean is considered a separate CGU.
CGU 5 – Financial assets register - - This CGU comprises only TAG, which activity is related to financial assets registration. Due to the specific service provided by this company and its independence of the other Group’s companies, the Group considers TAG as a separate CGU.
CGU 6 – Financial solutions 434,342 14,481 Companies related to financial solutions are included in this CGU. The Group considers these companies as a CGU due the integrated financial solutions provided by them, as capture, processing, transmission, and financial liquidation of transactions with debit and credit card, among other services. This CGU includes operating companies and their respective holding companies.

F-50

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

The Group performed its annual impairment test as of December 31, 2021 and 2020 which did not result in the need to recognize impairment losses on the carrying amount of any of the CGUs.

 

The recoverable amount of the Group’s CGUs as of December 31, 2021 and 2020 has been determined based on a value in use calculation using cash flow projections from financial budgets approved by senior management covering a period from 5 to 10 years depending on the characteristics of each CGU.

 

The key assumptions used in value in use calculation are as follows:

 

·Average free cash flow to equity between five and ten years for the forecasted period. The use of a ten-year period for the CGU Linx Group results mainly from the fact that some of the software offerings for specific segments are at their initial stages of operations within high growth markets and that operational synergies are expected by the Group.

 

·Average annual growth rate over the five to ten-year forecast period, based on past performance and management’s expectations of market development and on current industry trends and including long-term inflation forecasts.

 

·Considered a pre-tax discount rate applied to cash flow between 10.5% and 18.0% (2020 – 10.5%), based on long-term interest rate, country risk premium, industry adjusted beta and other variables.

 

·Considered a perpetuity growth rate between 4.3% and 6.5% (2020 – 5.0%), based on long-term local inflation and real growth.

 

The Group carried out a sensitivity analysis of the impairment test considering four independent scenarios of key assumptions deterioration, as described below:

 

·an increase of 100 basis points in pre-tax discount rate;

 

·a decrease of 10.0% in the value of the free cash flow to equity for all projected years;

 

·a decrease of 50 basis points in perpetuity rate applied after the last year of projected cash flow;

 

·a decrease of 10.0% in the value of the expected synergies originated in the business combination with Linx for all projected years.

 

The impairment test would not result in an impairment loss on any of the CGUs carrying amounts in any of the four independent scenarios described above.

 

13.Accounts payable to clients

 

Accounts payable to clients represent amounts due to accredited clients related to credit and debit card transactions, net of interchange fees retained by card issuers and assessment fees paid to payment scheme networks as well as the Group’s net merchant discount rate fees which are collected by the Group as an agent.

 

14.Trade accounts payable

 

   2021  2020
       
Domestic trade accounts payable   369,876    178,050 
Foreign suppliers   1,718    156 
Other   953    2,285 
    372,547    180,491 

 

Accounts payable are unsecured and the average payment term is 95 days. The carrying amount of accounts payable is close to fair value, due to their short-term nature.

 

F-51

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

15.Labor and social security liabilities

 

   2021  2020
       
Accrued annual payments and related social charges   210,957    142,552 
Labor liabilities and related social charges   95,139    111,809 
Total labor and social security liabilities   306,096    254,361 
Current   273,347    173,103 
Non-current   32,749    81,258 

 

16.Taxes payable

 

   2021  2020
       
Income tax (IRPJ and CSLL) (a)   107,014    55,794 
Contributions over revenue (PIS and COFINS) (b)   26,392    23,502 
Withholding income tax (c)   22,640    12,021 
Taxes on services (ISS) (d)   8,449    8,635 
Withholding taxes from services taken (e)   6,362    5,969 
Social security levied on gross revenue (INSS) (f)   564    503 
Other taxes and contributions   5,032    411 
    176,453    106,835 

 

(a)The expense for current income tax is recognized in the statement of profit or loss under "Income tax and social contribution" against tax payable. For some entities in the Group, advances for the payment of income tax expense is recognized during the tax year and are recognized as an asset under Recoverable taxes (Note 9).

 

(b)PIS and COFINS are invoiced to and collected from the Group’s customers and recognized as deductions to gross revenue against tax liabilities, as the Group acts as agent collecting these taxes on behalf of the Brazilian federal government.

 

(c)For some entities in the Group, advances for the payment of income tax expense is recognized during the tax year and are recognized as an asset under Recoverable taxes (Note 9).

 

(d)ISS is recognized as deductions to gross revenue against tax liabilities, as the Group acts as agent collecting these taxes on behalf of municipal governments.

 

(e)Amount relative to PIS, COFINS, IRPJ and CSLL, withheld from suppliers and paid by the Group on their behalf. These amounts are recognized as a tax liability, with no impact to the statement of profit or loss.

 

(f)The entities Linx Sistemas, Equals, Hiper, Cappta, Vitta Tecnologia em Saúde S.A and Questor pay an INSS rate of 4.50% on gross revenue due to the benefits this regime offers to technology companies compared with social security tax on payroll.

 

F-52

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

17.Loans and financing and Obligations to FIDC quota holders

 

17.1.Composition of loans and financing and obligations to FIDC quota holders

 

   Average annual interest rate %  Maturity  Current portion  Non-current portion  Balance at 12/31/2021
                
Obligations to FIDC AR quota holders (17.3.1)  CDI Rate* + 1.50%  Aug/23   1,273,675    932,368    2,206,043 
Obligations to FIDC TAPSO quota holders (17.3.2)  CDI Rate* + 1.50%  Mar/22   21,131    -    21,131 
Obligations to FIDC quota holders         1,294,806    932,368    2,227,174 
                      
Leases (Note 17.3.4)  105.7% to 151.8% of CDI Rate*  Jan/22 to Jun/29   66,531    206,924    273,455 
Bonds (Note 17.3.5)  CDI Rate* + 3.15%  Jun/28   4,592    2,760,018    2,764,610 
Bank borrowings (Note 17.3.6)  CDI + 0.75% a.a. to
 
CDI + 1.50% a.a.
  Three to eighteen months   2,108,123    589,518    2,697,641 
Debentures (Note 17.3.8)  109.0% of CDI Rate*  Jul/22   399,509    -    399,509 
Loans and financing         2,578,755    3,556,460    6,135,215 
                      
   Average annual interest rate %  Maturity   Current portion    Non-current portion    Balance at 12/31/2020 
                      
Obligations to FIDC AR quota holders (Note 17.3.1)  106.0% of CDI Rate* /
CDI Rate* + 1.50%
  Jun/21, Aug/23   1,939,645    2,174,670    4,114,315 
Obligations to FIDC TAPSO quota holders (Note 17.3.2)  CDI Rate* + 1.15%  Mar/21   20,476    -    20,476 
Obligations to FIDC SOMA quota holders (Note 17.3.3)  CDI Rate* + 4.0% to 7.0%  Dec/23   -    239,759    239,759 
Obligations to FIDC quota holders         1,960,121    2,414,429    4,374,550 
                      
Leases (Note 17.3.4)  105.7% - 151.8% of CDI Rate*  Jan/21 to Jun/29   48,856    126,005    174,861 
Bank borrowings (Note 17.3.6)  CDI  Rate*  +  0.68% to 1.20%  Jan/21 to Mar/21   390,830    -    390,830 
Loans with private entities (Note 17.3.7)  109.8% of CDI Rate*  Sep/21   745,051    -    745,051 
Debentures (Note 17.3.8)  109.0% of CDI Rate*  Jul/22   -    398,358    398,358 
Loans and financing         1,184,737    524,363    1,709,100 

 

*“CDI Rate” means the Brazilian interbank deposit (Certificado de Depósito Interbancário) rate, which is an average of interbank overnight rates in Brazil, the average rate of 2021 was 4.42% (2020 – 2.76%).

 

F-53

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

17.2.Changes in loans and financing and obligations to FIDC quota holders

 

   Balance at 12/31/2020  Additions  Disposals  Payment  Business Combination  Changes in Exchange Rates  Interest  Balance at 12/31/2021
                         
Obligations to FIDC AR quota holders (Note 17.3.1)   4,114,315    -    -    (2,064,720)   -    -    156,448    2,206,043 
Obligations to FIDC TAPSO quota holders (Note 17.3.2)   20,476    -    -    (708)   -    -    1,363    21,131 
Obligations to FIDC SOMA quota holders (Note 17.3.3)   239,759    584,191    -    (864,747)   -    -    40,797    - 
Leases (Note 17.3.4)   174,861    92,802    (14,474)   (83,610)   88,879    62    14,935    273,455 
Bonds (Note 17.3.5)   -    2,477,408    -    (55,497)   -    282,580    60,119    2,764,610 
Bank borrowings (Note 17.3.6)   390,830    9,222,889    -    (7,294,101)   258,797    -    119,226    2,697,641 
Loans with private entities (Note 17.3.7)   745,051    -    -    (770,372)   -    -    25,321    - 
Debentures (Note 17.3.8)   398,358    -    -    (17,596)   -    -    18,747    399,509 
    6,083,650    12,377,290    (14,474)   (11,151,351)   347,676    282,642    436,956    8,362,389 
                                         

 

   Balance at 12/31/2019  Additions  Disposals  Payment  Business
Combination
  Interest  Balance at 12/31/2020
                      
Obligations to FIDC AR quota holders (Note 17.3.1)   3,690,542    2,476,906    -    (2,169,073)   -    115,940    4,114,315 
Obligations to FIDC TAPSO quota holders (Note 17.3.2)   20,352    -    -    (514)   -    638    20,476 
Obligations to FIDC SOMA III quota holders (Note 17.3.3)   -    239,232    -    -    -    527    239,759 
Leases (Note 17.3.4)   124,758    118,977    (36,919)   (41,373)   1,592    7,826    174,861 
Bank borrowings (Note 17.3.6)   1,777,083    3,996,820    -    (5,422,211)   -    39,138    390,830 
Loans with private entities (Note 17.3.7)   738,456    -    -    (17,652)   -    24,247    745,051 
Debentures (Note 17.3.8)   394,997    -    -    (8,769)   -    12,130    398,358 
    6,746,188    6,831,935    (36,919)   (7,659,592)   1,592    200,446    6,083,650 

F-54

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

17.3.Description of loans and financing and obligations to FIDC quota holders

 

In the ordinary course of the business, the company funds its prepayment business through a mix of own cash, debt and receivables sales.

 

17.3.1Obligations to FIDC AR quota holders

 

In June 2019, the fourth series of senior quotas was issued, with an amount of up to R$ 1,620,000, and maturity in 2021. They were issued for 24 months, with a grace period of 18 months to repay the principal amount. During the grace period, the payment of interest will be made every six months. After this period, the amortization of the principal and the payment of interest will be monthly. The benchmark return rate is 106.0% of the CDI rate.

 

In August 2020, the first series of FIDC AR III senior quotas was issued, with an amount of up to R$ 2,500,000, and maturity in 2023. They were issued for 36 months, with a grace period of 15 months to repay the principal amount. During the grace period, the payment of interest will be made every three months. After this period, the amortization of the principal and the payment of interest will be every three months. The benchmark return rate is CDI + 1.5% per year.

 

Payments mainly refer to the amortization of the principal and the payment of interest of the third series of FIDC AR II.

 

17.3.2Obligations to FIDC TAPSO quota holders

 

In October 2019, the Group raised a total of R$ 20,000, by issuing six-month mezzanine quotas of the FIDC TAPSO to an institutional investor. The mezzanine quotas had a benchmark return rate of 115.0% of the CDI rate per year and, at the end of the six months, they would have been fully redeemed. However, in March 2020 the Group negotiated an amendment of the contract to postpone the payment date of the principal to March 2021, with a new benchmark return rate of CDI + 1.15% per year.

 

In March 2021, the Group negotiated an amendment of the contract to postpone the payment date of the principal to March 2022 and the benchmark return rate became 100% of the CDI + 1.50% per year.

 

17.3.3Obligations to FIDC SOMA quota holders

 

In December 2020, the Group completed the issuance of R$ 580,000 of FIDC SOMA III quotas senior and mezzanine, raising R$ 493,000 in third-party capital for its credit solution, of which R$ 246,500 were received in 2020 (R$ 239,232 net of the offering transaction costs, which would be amortized over the course of the series) and R$ 246,500 (with a monetary restatement of R$ 1,434) were received in the first quarter of 2021. FIDC SOMA III is structured with senior and mezzanine quotas held by institutional investors for a 36-month period, while Stone Pagamentos holds the subordinated quotas. The senior quotas reached R$ 348,000 with a benchmark return rate of CDI + 4.0% per year. The mezzanine quotas reached R$ 145,000 and the benchmark return rate is CDI + 7.0% per year.

 

The total issuance of SOMA IV to third party investors was R$ 340,000 (R$ 336,257 net of the offering transaction costs, which would be amortized over the course of the series).

 

In the fourth quarter of 2021, the Group liquidated SOMA III and SOMA IV senior and mezzanine quotas.

 

17.3.4Leases

 

The Group has lease contracts for various items of offices, vehicles and software in its operations. The Group’s obligations under its leases are secured by the lessor’s title to the leased assets. Generally, the Group is restricted from assigning and subleasing the leased assets.

 

F-55

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

17.3.5Bonds

 

In June 2021, the Group issued its inaugural dollar bonds, raising USD 500 million in 7-year notes with a final yield of 3.95%. The total issuance was R$ 2,510,350 (R$ 2,477,408 net of the offering transaction costs, which will be amortized over the course of the debt).

 

17.3.6Bank borrowings

 

During 2020 and 2021 the Group increased its options of financial funding by issuing CCBs (Bank Credit Notes). The principal and the interests of this type of loan are paid at maturity, which is between three to eighteen months. The proceeds of these loans were used mainly for the prepayment of receivables. As of December 31, 2021, the outstanding was R$ 2,697,641.

 

17.3.7Loans with private entities

 

On October 1, 2018, the Group entered into an agreement with SRC Companhia Securitizadora de Créditos Financeiros (“SRC”). The transaction was a revolving loan, whose benchmark return rate was 103.0% of the CDI Rate and had a maturity of 12 months. Accounts receivables from card issuers were used as collateral, in the equivalent amount of 106% of loan balance.

 

In October 2019 the Group renewed this loan contract for another two years, with a benchmark return rate equivalent to 109.8% of the CDI rate.

 

In 2021, loans with private entities that were collateralized by financial assets were settled through the definitive transfer of the risks and rewards of ownership related financial assets. Therefore, both the financial liability and the related financial asset, recognized in “Accounts receivable from card issuers”, were written off in the statement of financial position.

 

17.3.8Debentures

 

On June 12, 2019 Stone Pagamentos approved the issuance of simple, secured and non-convertible debentures, sole series, for public distribution, with restricted distribution efforts, as amended, in the total amount of up to R$ 400,000, received between June and July, maturing in 2022. The Debentures are secured by Stone Pagamentos’ accounts receivable from card issuers and bear interest at a rate of 109.0% of the CDI rate.

 

The Group is compliant with all borrowing limits or covenants (where applicable) on any of its borrowing facilities.

 

18.Transactions with related parties

 

Related parties comprise the Group’s parent companies, shareholders, key management personnel and any businesses which are controlled, directly or indirectly by the shareholders and directors over which they exercise significant management influence. Related party transactions are entered in the normal course of business at prices and terms approved by the Group’s management.

 

F-56

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

18.1.  Transactions with related parties

 

The following transactions were carried out with related parties:

 

   2021  2020  2019
Sales of services         
Associates (legal and administrative services) (a)   23    11    11 
Entity controlled management personnel (b)   10    -    - 
    33    11    11 
Purchases of goods and services               
Entity controlled management personnel (c)   (1,531)   (16,652)   (10,029)
Associates (transaction services) (d)   (1,119)   (2,032)   (451)
Service provider (e)   (440)   -    - 
    (3,090)   (18,684)   (10,480)

 

(a)Related to services provided to VHSYS.

 

(b)Related to changes in exchange rates with travel services reimbursed to VCK Investment Fund, companies owned by related parties.

 

(c)Related to consulting and management services with Genova Consultoria e Participações Ltda., and travel services reimbursed to Zurich Consultoria e Participações Ltda and VCK Investment Fund, companies owned by related parties.

 

(d)Related mainly to expenses paid to Collact in the period from January to June 2021 and VHSYS from January to March 2021 due to new customers acquisition.

 

(e)Related to strategic consulting for data science with LAMPS Desenvolvimento Ltda, company owned by related parties.

 

Services provided to related parties include legal and administrative services provided under normal trade terms and reimbursement of other expenses incurred in their respect.

 

As of December 31, 2021, some officers and directors were subscribed to the Group’s banking solution. The total amount recognized in Deposits from banking customers is R$ 36 (December 31, 2020 – R$ 33).

 

18.2.  Year-end balances

 

The following balances are outstanding at the end of the reporting period in relation to transactions with related parties:

 

   2021  2020
       
Loans to management personnel   4,663    4,149 
Convertible loans   57    3,051 
Receivables from related parties   4,720    7,200 

 

As of December 31, 2021, there is no allowance for expected credit losses on related parties’ receivables. No guarantees were provided or received in relation to any accounts receivable or payable involving related parties.

 

The Group has outstanding loans with certain management personnel. The loans are payable in three to seven years from the date of issuance and accrue interest according to the National Consumer Price Index, the Brazilian Inter-Bank Rate or Libor plus an additional spread.

 

F-57

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

18.3.  Key management personnel compensation

 

Management includes executive officers and members of board of directors of the Group and compensation consists of fixed compensation, profit sharing and benefits plus any correlating social or labor charges and or provisions for such charges. Compensation expenses are recognized in profit or loss of the Group. For the years ended December 31, 2021 and 2020, compensation expense was as follows:

 

   2021  2020
Short-term benefits   13,621    15,202 
Share-based payments (Note 25)   29,332    32,305 
    42,953    47,507 

 

19.Provision for contingencies

 

The Group companies are party to labor, civil and tax litigation in progress, which are being addressed at the administrative and judicial levels, as well recognize risks of their activities that may require the recording of provisions.

 

19.1.Probable losses, provided for in the statement of financial position

 

The provisions for probable losses arising from these matters are estimated and periodically adjusted by management, supported by the opinion of its external legal advisors. The amount, nature and the movement of the liabilities is summarized as follows:

 

   Civil  Labor  Tax  Total
Balance at December 31, 2019   8,876    688    -    9,564 
Additions   3,567    409    -    3,976 
Reversals   (1,389)   (328)   -    (1,717)
Interests   481    39    -    520 
Payments   (1,963)   (230)   -    (2,193)
Balance at December 31, 2020   9,572    578    -    10,150 
Additions   12,376    6,090    184    18,650 
Reversals   (4,773)   (8,249)   (1,365)   (14,387)
Interests   1,847    402    4,068    6,317 
Payments   (9,318)   (58)   (804)   (10,180)
Business combination (a)   5,906    17,620    147,773    171,299 
Balance at December 31, 2021   15,610    16,383    149,856    181,849 

 

(a)As part of the Linx acquisition we have recorded an amount of R$ 164,259 related to civil, labor and tax legal suits of the PPA Linx contingency and R$ 7,040 related to tax contingencies of Questor.

 

Under business combination rules, the Company recognized a provision for tax treatments adopted when calculating income tax and social contribution on net income. The provision recorded as of December 31, 2021 regarding tax matters on business acquired from Linx Sistemas represents R$ 82,012.

 

F-58

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

19.2. Possible losses, not provided for in the statement of financial position

 

The Group has the following civil and labor litigation involving risks of loss assessed by management as possible, based on the evaluation of the legal advisors, for which no provision was recognized:

 

   2021  2020
Civil   130,908    46,169 
Labor   62,299    15,024 
Tax   30,324    - 
Total   223,531    61,193 

 

The nature of the civil, labor and tax litigations is summarized as follows:

 

·The Group is part of two lawsuits filed by a financial institution against merchants accredited to Stone. In the lawsuits, Stone was requested to abstain from prepaying receivables related to any credits from the accredited merchants, originating from credit and debit cards, in addition to having been requested that the amounts arising from the transactions be paid at the bank's domicile of the financial institution claiming the action. Due to the lack of effective involvement of the company in the merits of the case, the provision is for possible loss in the total amount of R$ 12,579 as of December 31, 2021 (R$ 10,835 as of December 31, 2020).

 

·The Group is party of a series of lawsuits brought by merchants characterized as customers of a sub-acquirer previously served by Stone. This sub-acquirer had difficulties in settling the funds of debit and credit transactions carried out by the aforementioned establishments and the total amount of possible loss of the actions in which Stone was called, on December 31, 2021 was R$ 8,186 (R$ 1,255 on December 31, 2020).

 

·The Group is party to a collection lawsuits filed by a commercial partner, responsible for part of the capture and indication of commercial establishments to be accredited, with exclusivity, to the MNLT and Stone system, which was ended by the Group. The amount considered as a possible loss is R$ 9,728 (R$ 103 as of December 31, 2020).

 

·The Group is also a party to a lawsuit filed by a financial institution victim of fraud. It requests the retention and repatriation of amounts possibly spuriously transacted through the Company's payment systems. The amount considered as a possible loss is R$ 6,249 as of December 31, 2021 (R$ 5,631 as of December 31, 2020).

 

·The Group is party to lawsuits connected with its operation. The demands are related to (i) risk analysis and retention of receivables, (ii) risk analysis related to the payment account operation, (iii) credit concession operation by SCD, (iv) disputed transactions through credit card (Chargebacks). The total amount involved in those lawsuits and considered as a possible loss is R$ 35,088 as of December 31, 2021 (R$ 7,939 as of December 31, 2020).

 

·In the labor courts, the Group can be, sued in two cases: (i) actions by former employees and (ii) actions by former employees of outsourced companies, contracted by Stone. In these lawsuits, we have two recurring requests: placement in a different job category and payment of overtime. The total amount involved in those lawsuits and considered as a possible loss is R$ 23,756 for which the risk of loss is possible as of December 31, 2021 (R$ 10,335 as of December 31, 2020). There are no individual representative case.

 

·As of December 31, 2021, the Company has a dispute against a market participant from register of receivables regarding amounts charged considered undue by the Group. The amounts recognized by the Company were R$ 1,185, recorded as probable contingencies, and there is an amount as a possible loss of R$ 27,203 that the company understands to be a possible loss.

 

 

F-59

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

·Action for annulment of tax debits regarding the tax assessment assessed by the State Treasury Attorney's office on the understanding that the Company would have carried out lease of equipment and data center spaces from January 2014 to December 2015, on the grounds that the operations would have the nature of services of telecommunications and therefore would be subject to ICMS tax at the rate of 25% and a fine equivalent to 50% of the updated tax amount for failure to issue ancillary obligations tax. As of December 31, 2021, the updated amount recorded as probable loss is R$ 21,934, and the amount of R$ 27,376 is considered as a possible loss (contingency arising from Linx´s acquisition).

 

19.3. Judicial deposits

 

For certain contingencies, the Group has made judicial deposits, which are legal reserves the Group is required to make by the Brazilian courts as security for any damages or settlements the Group may be required to pay as a result of litigation.

 

The amount of the judicial deposits as of December 31, 2021 is R$ 14,887 (2020 - R$ 20,448), which are included in Other assets in the non-current assets.

 

20.Equity

 

20.1.  Authorized capital

 

The Company has an authorized share capital of USD 50 thousand, corresponding to 630,000,000 authorized shares with a par value of USD 0.000079365 each. Therefore, the Company is authorized to increase capital up to this limit, subject to approval of the Board of Directors. The liability of each member is limited to the amount from time to time unpaid on such member’s shares.

 

20.2.  Subscribed and paid-in capital and capital reserve

 

The Articles of Association provide that at any time when there are Class A common shares being issued, Class B common shares may only be issued pursuant to: (a) a share split, subdivision or similar transaction or as contemplated in the Articles of Association; or (b) a business combination involving the issuance of Class B common shares as full or partial consideration. A business combination, as defined in the Articles of Association, would include, amongst other things, a statutory amalgamation, merger, consolidation, arrangement or other reorganization.

 

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.

 

Below are the issuances and repurchases of shares during 2021 and 2020:

 

   Number of shares
   Class A  Class B  Total
At December 31, 2019   178,688,584    98,678,252    277,366,836 
                
Business combination (a)   203,378    -    203,378 
2020 Follow on (b)   31,481,250    -    31,481,250 
Vested awards (c)   210,378    -    210,378 
Conversions   46,895,550    (46,895,550)   - 
                
At December 31, 2020   257,479,140    51,782,702    309,261,842 
                
                
Issuance (d) (e) (f)   3,132,970    -    3,132,970 
Conversions   5,741,517    (5,741,517)   - 
Vested awards (g)   136,436    -    136,436 
                
At December 31, 2021   266,490,063    46,041,185    312,531,248 

F-60

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

As of December 31, 2021, and 2020, all issued shares were paid in full.

 

(a)On May 29, 2020, the Company issued 203,378 shares as payment to acquire 100% interest in Vitta Group.

 

(b)As mentioned in Note 1.2, on August 12, 2020, the Company filed a follow-on prospectus offering 31,481,250 of its Class A common.

 

(c)In 2020, the Company has accelerated 302,243 RSUs, of which 210,378 shares were delivered through the issuance of shares, 2,735 shares were delivered through the delivery of treasury shares and the remaining was paid as withholding income tax. Additionally the Company has repurchased and cancelled 7,595 shares under the incentive shares plan.

 

(d)On January 28, 2021, the Group has fully acquired the non-controlling interest in PDCA held by Bellver Fundo de Investimento Multimercado Crédito Privado Investimento no Exterior (“Bellver”). The transaction was made by a purchase and sale of shares, where Bellver agreed to acquire 1,313,066 STNE shares by a payment being part in cash in the amount of R$ 230,500 and part by the delivering of their PDCA shares. The number of STNE shares delivered to Bellver was based on STNE volume-weighted average trading price of the 30 days preceding the signing of a memorandum of understanding (“MOU”) between the parties on December 8th, 2020.

 

(e)On June 16, 2021, Brazilian Antitrust Authority (“CADE”) approved, without restrictions, a business combination between the Group and Linx S.A. (“Linx”) which was completed on July 01, 2021. Pursuant to the terms and subject to the conditions set forth in the Association Agreement and its amendments, each Linx share issued and outstanding immediately prior to the consummation of the transaction was automatically contributed to the Group in exchange for one newly issued redeemable STNE Par Class A Preferred Share and one newly issued redeemable STNE Par Class B Preferred Share. To complete the transaction 1,817,428 StoneCo shares were issued and bought by STNE Par in the amount of R$ 618,514.

 

(f)On July 5, 2021, the Group acquired 100.0% interest in Nodis Tecnologia S.A. (“Nodis”), through the issuance of 2,476 shares in the amount of R$ 849.

 

(g)As described in Note 25, the Company has accelerated 136,826 RSUs, of which 99,198 shares were delivered to the beneficiaries through the issuance of shares, and the remaining was paid as withholding income tax. Additionally, 37,238 Class A common shares were issued to our founder shareholders, as anti-dilutive shares.

 

F-61

 

StoneCo Ltd.

 

Notes to consolidated financial statements

December 31, 2021, 2020 and 2019 

(In thousands of Brazilian Reais, unless otherwise stated)

 

20.3.  Treasury shares

 

Own equity instruments that are reacquired (treasury shares) are recognized at cost and deducted from equity. No gain or loss is recognized in profit or loss on the purchase, sale, issue or cancellation of the Group’s own equity instruments. Any difference between the carrying amount and the consideration, if reissued, is recognized in equity.

 

On May 13, 2019, the Company announced the adoption of its share repurchase program in an aggregate amount of up to US$ 200 million (the “Repurchase Program”). The Repurchase Program went into effect in the second quarter of 2019 and does not have a fixed expiration date. The Repurchase Program may be executed in compliance with Rule 10b-18 under the Exchange Act.

 

In 2021, 3,067,378 Class A common shares were repurchased on the former program, for the amount of R$ 988,824 (in 2020 – 528,335 Class A common shares were repurchased for R$ 76,270). No Class A common shares were repurchased on the new Repurchase Program.

 

In December 2021, the Company holds 3,599,848 (December 2020 - 532,470) Class A common shares in treasury.

 

21.Earnings (loss) per share

 

Basic earnings (loss) per share is calculated by dividing net income (loss) for the year attributed to the owners of the parent by the weighted average number of ordinary shares outstanding during the year.

 

The numerator of the Earnings per Share (“EPS”) calculation is adjusted to allocate undistributed earnings as if all earnings for the period had been distributed. In determining the numerator of basic EPS, earnings attributable to the Group is allocated as follows:

 

   2021  2020  2019
          
Net income (loss) attributable to Owners of the Parent   (1,358,813)   854,071    803,232 
Numerator of basic and diluted EPS   (1,358,813)   854,071    803,232 

 

As of December 31, 2