TAM S.A. 6-K 2008
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
REPORT OF FOREIGN ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF THE
SECURITIES EXCHANGE ACT OF 1934
THROUGH November 10, 2008(Commission File No. 1-32826)
(Exact name of Registrant as specified in its Charter)
Av. Jurandir, 856 Lote 4, 1° andar
04072-000 São Paulo, São Paulo
Federative Republic of Brazil
(Address of Regristrant's principal executive offices)
Indicate by check mark whether the registrant files or will file
annual reports under cover Form 20-F or Form 40-F.
Form 20-F ___X___ Form 40-F ______
Indicate by check mark whether the registrant by furnishing the
If "Yes" is marked, indicated below the file number assigned to the
registrant in connection with Rule 12g3-2(b):
TAM S.A. and
Interim condensed consolidated financial information
Report of Independent Accountants on Limited Reviews
To the Board of Directors and Stockholders
São Paulo, November 10, 2008.
Carlos Alberto de Sousa
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
*On 2008 consolidated amounts is included
financial derivative instruments registed at fair value (Note 26 (a)
The accompanying notes are an integral part of these consolidated financial statements.
TAM S.A. ("TAM'' or "Company'') was incorporated on May 17, 1997, to invest in companies which carry out air transportation activities. The Company holds ownership interest in TAM Linhas Aéreas S.A. ("TLA''), a company that operates in the transportation of passengers and cargo in Brazil and on international routes, and in Transportes Aéreos del Mercosur S.A. ("Mercosur''), an airline headquartered in Asuncion, Paraguay, which operates in Paraguay, Argentina, Brazil, Chile, Uruguay and Bolivia.
In April 2007, two wholly-owned finance subsidiaries of TLA were constituted, namely TAM Capital Inc. (TAM Capital) and TAM Financial Services 1 Limited (TAM Financial 1), and in October, 2007 TAM Financial Services 2 Limited (TAM Financial 2) was constituted. These subsidiaries are headquartered in the Cayman Islands, and their main activities involve aircraft acquisition and financing. Debt issued by these wholly-owned companies is wholly and unconditionally guaranteed by TAM.
The Company also controls TP Participações Ltda. (TP Participações), whose corporate purpose is holding ownership interests in other companies. This Company did not record transactions during the period.
TLA consolidates the financial statements of Fidelidade Viagens e Turismo Ltda. (Fidelidade), whose exclusive corporate purpose is to carry out the activities of a travel and tourism agency, under the name TAM Viagens.
2 Presentation of the interim financial information
The quarterly information was approved by the management in November 7, 2008.
The consolidated interim financial information were prepared in accordance to the accounting practices adopted in Brazil, pursuant to the Corporate Law and to the rules set forth by the Brazilian Securities Commission (CVM), including CVM Instruction 469/08.
In the preparation of the present interim financial information it is necessary to make estimates to account for certain assets, liabilities and other transactions. The Company's present interim financial information includes therefore estimates relating to the selection of the useful lives of property, plant and equipment, the allowances necessary for contingent liabilities, the establishment of allowances for income tax and other similar items. The actual results may differ from these estimates. The Company and its subsidiaries review the estimates and assumptions at least once a year.
The Company also utilizes the chart of accounts issued by the Civil Aviation National Agency (Agência Nacional de Aviação Civil, or "ANAC'').
The quarterly information was prepared in accordance with CVM Resolution 488/05 and the pronouncement of the Brazilian Institute of Independent Auditors (IBRACON) NPC 27 Financial Statements Presentation and Disclosure, which has been approved by CVM.
The main accounting practices adopted in the preparation of the consolidated interim financial information are as follows:
(a) Determination of results of operation
Results of operations are determined on an accruals accrual basis of accounting. Revenue is recognized as follows:
i. air transportation revenues (passengers and cargo) are recognized when
transportation services are rendered;
iv. other operating revenues represented by fees arising from alterations to flight reservations, sub-lease of aircraft and other services are recognized when the service is provided. Other operating revenues also includes revenue from partnerships with the Fidelity program for frequent flyers ("TAM Loyalty Program'') which is recognized when the points are issued to participants.
Interest income is recognized on a pro rata basis, taking into account the principal outstanding and rates in effect up to maturity or the date of the financial statements.
(b) Foreign currency
Foreign currency items included in the financial statements are first measured by using the currency that best reflects the relevance and business substance of the underlying events and circumstances (measurement currency). In the Companys financial statements, foreign currency items are stated in Reais (R$), which is the Companys measurement currency.
Foreign currency transactions are translated from measurement currencies at the exchange rates ruling on the transaction date. Asset and liability balances are translated at the exchange rate on the balance sheet dates. Exchange gains and losses on the settlement of such transactions and the translation of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement.
(c) Current and long-term receivables
Cash and banks are stated at cost. Financial investments comprise short-term, highly liquid investments and are stated at cost plus accrued earnings up to the balance sheet date.
Customer accounts receivable are stated at the original sale amount, less provision for doubtful accounts. Management record such provisions at amounts considered sufficient to meet probable losses on the realization of credits.
Inventories, consisting mainly of parts and materials to be used in maintenance and repair services, are stated at the average acquisition cost, which is lower than the replacement cost and net of provisions for the depreciation of obsolete items.
Other current and non-current assets are stated at their net realizable values.
(d) Permanent assets
Property, plant and equipment
to income) in excess of depreciation based on the original cost is transferred from the revaluation reserve to retained earnings.
Depreciation is calculated on a straight-line basis to reduce the cost or revalued amount of individual assets to their residual values, at the rates mentioned in Note 10. Land is not depreciated.
When the book value of an asset is higher than is estimated recoverable value, it is decreased to recoverable value.
Gains and losses on disposals are determined by comparing the sale amounts and the book values and are recorded in non-operating results. When revalued assets are sold, the amounts included in the revaluation reserve are transferred to retained earnings.
Maintenance expenditures for engines are accounted for under the built-in overhaul method. Under this method, the direct costs related to parts to be replaced during maintenance are recorded as separate components within property, plant and equipment and are capitalized and depreciated over their useful life which is defined as the period through to the next scheduled maintenance. Maintenance expenditures incurred in relation to other assets which are not included within property, plant and equipment, such as those contracted under operating leases, are expensed as the maintenance is incurred. This accounting treatment is based on Technical Interpretation 01/2006 issued by Ibracon.
Expenses related to the development or maintenance of software are recognized as expenses as they are incurred. Expenses directly related to identifiable and unique software, controlled by the Company and which will probably generate economic benefits greater than their costs for over one year, are recognized as intangible assets. Direct expenses refer to costs with software development companies, and the appropriate portion of the correlated general expenses.
Expenses resulting in the improvement or expansion of software performance beyond original specifications are added to the software original cost. Such expenses that are recognized as assets are amortized using the straight-line method over their useful lives, over a term no longer than 3 years.
Impairment of permanent assets
Property, plant and equipment and other non-current assets, including intangible assets, are reviewed for impairment whenever events or changing circumstances suggest that their book value may not be recoverable. Impairment losses are recognized as the excess of the asset book value over its recoverable value, or selling price. For impairment determination purposes assets are grouped at the lowest level for which cash flows can be separately identified.
Provisions are recognized when the Company has a legal or constituted obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are recorded considering the best estimates of the risk specific to the liability at the moment.
(f) Advanced ticket sales
Advanced ticket sales represent the liability related to tickets sold and not yet used. Such amounts are recognized as income when the service is actually rendered or when the tickets expire.
(g) Benefits to employees
TLA sponsored three private pension plans, offering defined benefits and defined contribution. On November 21, 2006, the Supplementary Pension Secretary ("SPC") approved the migration of the participants in these plans to a new plan of the free benefits type ("PGBL"). The Company makes contribution to this plan on a contractual or voluntary basis and is not required to make additional payments. The actuarial assets relating to employees who remained in the defined benefit plan were transferred to a third party financial institution, as described in Note 24 (a).
A liability is recognized as employees' profit sharing when certain performance targets are accomplished (Note 24 (b)).
(h) Income tax and social contribution
Income tax and social contribution, for the current period and deferred, are calculated based on 15%, plus an additional 10% on taxable income exceeding R$ 240 for income tax and 9% on taxable income for social contribution on net income, and consider the offsetting of tax losses and social contribution negative basis, limited to 30% of taxable profit.
Deferred taxes resulting from tax loss, social contribution negative basis, and temporary differences were constituted in conformity with CVM Instruction no. 371 of June 27, 2002, and consider the profitability history and the expected future taxable income generation based on a technical feasibility study, which is revised by TAM every year.
(i) Leases agreements
i Financial leases: when a lease contract for an asset related to the TLA operations contains a bargain purchase option for TLA, the original cost of the leased asset is recorded as "Property, plant & equipment" against "Leases payable", recorded in current and long-term liabilities, it is rewied annually.
ii Simple operating leases: refers to leases without a bargain purchase option clause. Liabilities and the respective expenses of this type of lease are recorded when incurred, as "Cost of services rendered".
Loans obtained are initially recorded upon receipt of funds, net of transaction costs. Subsequently, they are stated at amortized cost, that is, including charges and interest on a pro rata basis, net of repayments made.
Non-convertible debentures and senior notes are recorded similarly to loans.
(k) TAM Loyalty Program
The Company sponsors a program (TAM Loyalty Program) to award frequent flyers, whereby points are accumulated when flying TAM or partner airline companies, or when making purchases using the TAM Loyalty Program credit card, or using the services and products of commercial partners.
Revenues resulting from the TAM Loyalty Program partnerships, from credit cards, hotels, car rental and others are recorded when the points are issued to the participants. The other revenues from the Loyalty Program resulting from partnerships are recorded when they are received.
(l) Current and long-term liabilities
Current and long-term liabilities are stated at the known or estimated amounts including, where applicable, accrued interest indexation charges and exchange rate variations to the date of the financial statements.
(m) Financial derivative instruments
TLA contracts operations involving financial derivative instruments with the objective of mitigating exposure to interest rate risk, exchange rate risk and fuel prices volatility. These risks are managed by the definition of operating strategies and the establishment of internal control systems.
TLA records these financial instruments on a marked-to-market (MTM) basis, and unrealized gains and losses are taken directly to income.
Common and non-redeemable preferred shares are classified in stockholders' equity.
(o) Capital and revenue reserves
Capital reserves include donations of assets and cash, including the premium on the issuance of shares.
The legal reserve corresponds to 5% of net income for the year, up to the limit of 20% of capital stock, as established by Law 6,404/76.
The balance of revenue reserve refers to the retention of the remaining balance of retained earnings to meet the requirements of business growth set out in the investment plan, in accordance with the capital budget proposed by the Company management, subject to the approval of the Stockholders' Meeting, pursuant to article 196 of the Brazilian Corporate Law.
(p) Consolidated interim financial information
The consolidated interim financial information includes the financial information of TAM S.A. and its direct and indirect subsidiaries, as listed below:
The same accounting practices were applied for all consolidated companies, as consistent with those applied in the preceding period.
(*) The financial statements of TLA, which were used as the basis for consolidation, consider the balances of its consolidated subsidiaries Fidelidade, TAM Capital, TAM Financial 1 and TAM Financial 2.
Among the main consolidation procedures are the following:
i. The Company consolidated its exclusive investment funds in its financial statements, as required by CVM instruction 408/2004 and the income from these funds is recognized in the "Financial income" item as set out in Note 3; and
ii. The stockholders' equity of the companies headquartered abroad (Mercosur, TAM Capital, TAM Financial 1 and TAM Financial 2) ware translated into reais at the exchange rate in effect on the date of the financial statements', pursuant to Pronouncement XXV of IBRACON, as approved by CVM Deliberation 28/86.
(q) Changes in the Brazilian Corporate Law
Law 11,638, enacted on December 28, 2007, alters and revokes certain provisions of Law 6,404/76 (the Brazilian Corporation Law) and introduces new ones. The Law is mainly intended to harmonize accounting practices adopted in Brazil with the international accounting standards issued by the International Accounting Standard Board ("IASB").
The changes are effective for the period beginning on January 1°, 2008.
On May 2, 2008, CVM issued Instruction 469/08 and, on May 7, 2008, the Explanatory Note associated with this instruction, setting forth guidelines for the treatment of certain aspects of accounting information which were amended by Law 11,638. The instruction and related explanatory note address the following aspects:
The application of accounting practices set out in Law 11,638/07 is optional for Quarterly Information (ITR), but mandatory for financial statements for years ending December 31, 2008. However, publicly-held corporations that do not, the fully apply, of Law 11,638 are required to disclose a note to the ITR with a description of changes which may impact the year-end financial statements. All companies are required to apply the determinations of CVM Instruction 498/08, even if they have chosen to recognize the effects of Law 11,638/07 only at the end of the fiscal year.
Based on management's best understanding and on accounting pronouncements published so far, the changes introduced by Law 11,638/07, that to require immediate implementation, according to CVM Instruction 469 and related explanatory notes and that will have a material impact on the Company quarterly information for the three and nine month periods ended September 30, 2008 and financial statements for the year ending December 31, 2008 are:
The Company already discloses a cash flow statement on a quarterly and annual basis.
The requirement to record in property, plant and equipment all rights to tangible assets intended or used to maintain the corporation or its activities, including those arising from arrangements which transfer the benefits, risks and control over these assets (e.g. financial lease). Management understands that this change will have the most significant impact on TAM S.A.'s financial statements for fiscal year, as all aircrafts used by TLA are leased from third parties and, until December 31, 2007, the accounting treatment used was to record as operating lease those contracts which transfer to TLA or grant it the option of transferring ownership upon termination of the related contracts. Considering that CVM is yet to issue rules and procedures on this matter, it was not possible to accurately estimate the impacts on the quarterly information for the three and nine month periods ended September 30, 2008. However, TAM S.A. already discloses, on a quarterly and annual basis, a summary of the
main differences between accounting practices adopted in Brazil and accounting practices generally accepted in the United States ("U.S. GAAP"). If the standards and rules issued by the CVM do not result in a different effect of U.S. GAAP the adjustments made for information regarding the leases on September 30, 2008 and 2007 would be as follows:
The net effect on the result of the nine months period ended 2008 would be significantly impacted by the appreciation of the dollar by about R$ 274,465 (loss) (09.30.2007 - R$ 335,889 (gain)).
The accounts named Prepayment of aircraft, Prepayment of maintenance and Deposits in guarantee are linked to investments in the acquisition and commercial leasing of aircraft and parts, and as such will be likewise reviewed during the year, considering the standards to be issued by CVM and the specific contractual terms.
Introduction of the concept of adjustment to present value of long-term, and material short-term, assets and liabilities transactions. It should be pointed out that CVM, in a note disclosed ("Instruction 469/08"), understands that the application of this concept by publicly-held companies regulated by it depends on the issue of a specific standard or explicit reference in some other standard, to outline its scope and set out the assumptions required for its use, to follow international standards. Based on market information available at this time, for the purposes of ITRs at September 30, 2008 and 2007, the Company calculated the adjustment to present value of long-term, as well as material short-term assets and liabilities transactions. The net amount of fair value of this asset and liability operations included in the estimate for the nine months ended September 30, 2008 is an income of R$ 270 (September 30, 2007 - expense R$ 594) that was not considered relevant and the Company did not recorded this adjustment.
The Company will maintain the existing balances in revaluation reserves until their effective realization.
With respect to share-based compensation, the Company has for some time now presented a note on this matter in its quarterly information and financial statements. See Note 20 (g).
It is management's understanding believe that other matters addressed in CVM Instruction 469 and the related explanatory note had no significant impacts on the financial statements of TAM.
The law 11,638 also introduced other changes, in addition to instruction 469 of the CVM, as below:
Possibility of maintaining separate book-keeping of transactions to comply with the tax law, and subsequently make the required adjustments for conformity with the accounting practices.
Creation of a new account - intangible assets, including goodwill, for balance sheet presentation purposes. This account will record rights to intangible assets intended or used to maintain the Company activities, including acquired goodwill. This procedure is adopted by the Company.
Different concept used to record deferred charges. Deferred charges comprise pre-operating expenses and restructuring expenditures which will effectively contribute to increasing the profitability of the corporation in
more than one fiscal year and which are not merely reductions in costs or increases in operating efficiency. This procedure is adopted by the Company.
The Company is required to periodically analyze the recoverability of property, plant and equipment, intangible assets and deferred charges to ensure that: (i) the estimated impairment loss should be recorded as a result of a decision to discontinue activities relating to those assets, or if it is proven that operations will not generate sufficient results to recover the carrying value of the assets; and (ii) the criteria used to determine the estimated economic useful lives and to calculate depreciation, depletion and amortization should be reviewed and adjusted, if necessary. This matter is ruled by CVM Resolution 527, of January 1, 2007. This procedure is adopted by the Company.
Creation of a new account market value adjustments in net equity, to permit (i) recognition of certain valuations of assets at market values, of specific financial instruments; (ii) recognition directly in net equity, whenever required by an accounting pronouncement; and (iii) adjustments to market value of assets and liabilities, as a result of a merger or amalgamation transaction between unrelated parties and involving the effective transfer of control.
Requirement that assets and liabilities of a company to be absorbed, arising from a merger, amalgamation or split- off transactions between unrelated parties and involving the effective transfer of control, be recorded at their market value.
As these changes were recently enacted and the application of some of them still depends on regulations to be issued by the competent bodies, management is currently reviewing all the effects that these amendments could bring on its financial statements.
(r) New Accounting Standard
CVM Resolution 534 issued January 29, 2008
A new Brazilian GAAP standard (CVM Resolution 534 issued January 29, 2008) will be applicable for the annual financial statements as of December 2008 but not for the quarterly financial information published prior to this date. The group will be required to define the functional currency of all the individual group entities and translate their financial statements into the presentation currency, the real, using the exchange rate on the transaction date for changes in shareholders equity. The exchange difference resulting from translating balance sheet items at the closing exchange rate and other shareholder equity movements at the average rate, will be taken to separate account within shareholders' equity, the cumulative translation account, instead of the income statement used currently used.
Management understands that this new standard will impact its translation of the Mercosur financial statements and bring it in line with the current treatment in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"), as described in note 28(d) ii.
CVM Resolution 550 issued October 17, 2008
On October 17, 2008 a new Brazilian GAAP Standard was issued (CVM Resolution 550) extending the need for disclosure of financial derivative instruments (Note 26).
3 Financial investments
Fixed income securities which comprise the investment fund portfolio are, for the most part, associated with derivative instruments whose return is converted into the benchmark rate (DI - Interbank Deposit rate) Note 26.
4 Customer accounts receivable
(a) Composition of balances
*The Company considered for the purpose of this allowance, all the amounts overdue for more than 180 days, except for the amounts that have guarantees.
(b) Changes in the allowance for doubtful accounts
(a) Composition of balances
"Other inventories" is mainly composed of uniforms, stationary and catering items.
(b) Change in the provision for inventory losses
6 Taxes recoverable
Non-current balance is included within "other- accounts receivable".
7 Advances to aircraft manufacturers and for aircraft maintenance
At September 30, 2008, as part of the Company's long term aircraft acquisition plan, advances were made to aircraft manufacturers in the amount of R$ 1,071,813 (December 31, 2007 - R$ 969,555), equivalent to US$ 559,898 thousand (December 31, 2007 - US$ 547,369 thousand). Of this total, R$ 803,417 (December 31, 2007 - R$ 864,440) relates to aircraft with delivery scheduled for the next twelve months.
The amounts are classified as advances, since TLA, at the moment of disbursement, have not defined the type of the lease agreement (operating or finance lease).
At September 30, 2008 for repairs to structures, engines or landing gears of the aircraft, contractual pre-payments were made in the amount of R$ 307,475 (December 31, 2007 - R$ 119,633), equivalent to US$ 160,620 thousand (December 31, 2007 - US$ 67,540 thousand).
As part of the aircraft leasing contracts, certain leases require that advances to the lessor for aircraft maintenance are deposited in a restricted bank account, in the name of the lessor, from which the lessor may make withdrawals if the required aircraft maintenance is not completed. Once TLA performs the required aircraft maintenance under its normal aircraft maintenance program the entire balance of the restricted advances are remitted back to it. As TLA performs maintenance for all of the aircraft under the normal aircraft maintenance program, the Company estimates all advances will be released from the restricted bank account. There are no advances made to maintenance providers.
8 Deposits in guarantee
Deposits and collaterals relating to the lease of aircraft and engines are denominated in U.S. dollars, plus any interest that may vary according to the London Interbank Offered Rate ("LIBOR''), and a spread of 1% per annum. The terms for redemption are defined in the lease contracts. At September 30, 2008 the balance of deposits was R$ 120,506 (December 31, 2007 - R$ 161,488).
9 Related-party transactions
For the three and nine month periods ended September 30, 2008, TLA received from Táxi Aéreo Marília S.A. ("Marília"), a company under common control, R$ 34 and R$ 117 (September 30, 2007 - R$ 178 and R$ 730), as reimbursement for the use of its infra-structure being mainly the importation areas and human resources. This amount was credited to "cost of services rendered". TAM Marília and TAM have common indirect stockholders.
On May 11, 2007, TLA and TAM Marília agreed to share the utilization of a hangar located by the Congonhas airport, for a period of 10 years. TLA paid R$ 15,500 upfront to TAM Marília and is entitled to use the facilities and the infra-structure of the hangar, providing the same cargo services, as those previously provided in the cargo terminal. The total amount was established based on valuation reports performed by independent companies, reflecting the economic premium obtained by the use of such a location in TLA cargo activities. The amount recognized in earnings as a deferral of such costs on September 30, 2008 amounted to R$ 1,162 (September 30, 2007 - R$ 387).
The Company and its subsidiaries signed a contract in March, 2005 with TAM Milor Táxi Aéreo, Representações, Marcas e Patentes S.A. ("TAM Milor") for the right to use the "TAM" brand. This contract is valid for a term identical to the current passenger air transport concession of TLA and establishes a monthly fee, adjusted annually by IGPM, totalling R$ 3,904 and R$ 11,512 for the three and nine month periods ended September 30, 2008 (September 30, 2007 - R$ 3,602 and R$ 10,728), recorded as "Administrative expenses".
10 Property, plant and equipment
(a) Composition of balances
Flight equipment includes engines and spare parts. During the quarter ended September 30, 2008, the flight equipment acquisitions included a capital lease of Boeing 777. Other is mainly composed of furniture, vehicles and improvements carried at the São Carlos Technology Center.
Construction in progress is mainly composed of improvements carried out at the São Carlos Technology Center, and the assembly of parts required for aircraft remodeling.
Properties and improvements of the subsidiary TLA have been mortgaged as guarantees for loans (Note 11) in the amount of R$ 110,499 (December 31, 2007 R$ 110,499).
(b) Revaluation (Note 20 (e))
In 2006, the subsidiary TLA recorded a revaluation of aircraft engines and properties that resulted in an increase in stockholders equity of R$ 9,541 (R$ 7,332 less the provision for income tax and social contribution, pursuant to CVM Deliberation 273/98). The revaluation was based on the then fair market value of the assets. When applicable, new estimates of useful lives of these items were determined.
In compliance with the practices adopted by the Company, on November 30, 2007 Mercosur evaluated its aircraft engines and property, based on appraisal reports prepared by independent experts. This evaluation resulted in a decrease in the stockholders equity of R$ 832, with a net effect in TAM of R$ 790. The evaluation was based on the current replacement value of the assets in their current state of use.
As required by CVM Deliberation 183/95, the amount of the revaluation reserve realized of R$ 649 and 2,066 was appropriated to the Retained earnings for the three and nine month periods ended September 30, 2008 (September 30, 2007 R$ 739 and R$ 2,985).
11 Short and long-term debt
FINIMP Import Financing, FINEM Government Agency for Machinery and Equipment Financing. TJLP Long-term Interest Rate and CDI Interbank Deposit Certificate.
Non-current maturities are as follows:
On May 21, 2007 TAM entered into a loan agreement with Calyon Bank and other banks to finance up to US$ 330.9 million of pre-delivery payment operations (pre-delivery payment PDP) made to Boeing for the delivery of four Boeing 777-300ER aircraft with firm purchase orders and delivery scheduled for 2008. As at September 30, 2008, the balance of this loan is R$ 476,082 (December 31, 2007 R$ 516,725).
On December 28, 2007, TAM entered into a loan agreement with bank BNP Paribas to finance up to US$ 117.1 million of pre-delivery payments for thirty Airbus aircrafts contracted with the French manufacturer with firm purchase orders and deliveries scheduled between 2008 to 2010. As at September 30, 2008, the balance of this loan was R$ 134,414 (December 31, 2007 R$ 105,009).
In 2005, TAM signed a loan agreement under the FINIMP program, obtaining funds mostly from Unibanco and Banco do Brasil to finance imports of aircraft engines and parts up to a sum of US$ 8,805, with maturities until December 2008. In 2006, the Company raised US$ 37,885 from Unibanco, maturing in July 2009. In 2008, for the same purpose, US$ 16,325 was obtained from Unibanco, HSBC and Itaú, maturing in September 2010. As at September 30, 2008 the balance of this type of financing amounts to R$ 126,696 (December 31, 2007 R$ 84,883).
The Company is subject to certain obligations under loan agreements, such as compliance with certain financial indices, limits on the issue of financial debt, and priority in the repayment of loans. As at September 30, 2008, the Company complied with all such covenants.
12 Leases Payable
The lease obligations above are secured by letters of guarantee issued by the Company and deposits in guarantee.
Non-current maturities are as follows:
(a) Operating leases
TLA has obligations arising under aircraft lease contracts of the simple operating type. The amounts corresponding to these lease commitments are not reflected in the balance sheet because the agreements do not include purchase options for the aircraft subject to the lease agreements by TLA or any related party. Leased aircraft include: 17 Airbus A319, 78 Airbus A320, 3 Airbus A321, 12 Airbus A330, 2 Airbus A340, 2 MD-11, 3 Boeing 767 and 1 Boeing 777 (December 31, 2007 10 Fokker 100, 15 Airbus A319, 70 Airbus A320, 3 Airbus A321, 12 Airbus A330, 2 Airbus A340 e 3 MD-11). These agreements have an average term of 121 months and are denominated in U.S. dollars plus LIBOR. The leasing expense,
recognized in the consolidated statement of income in Costs of services rendered, was R$ 209,089 and R$ 614,750 for the three and nine month periods ended September 30, 2008 (September 30, 2007 R$ 220,153 and R$ 625,312), equivalent to US$ 109,225 thousand and US$ 321,136 thousand (September 30, 2007 US$ 114,801 and US$ 312,235 thousand).
For most of the operations the Company has given letters of guarantee issued by the Company or deposits in guarantee.
In addition, to meet the payment conditions established by contract promissory notes, guaranteed by TAM were issued, totaling US$ 46,785 thousand as at September 30, 2008 (December 31,2007 US$ 49,222 thousand).
Future disbursements due on these agreements (expressed for the purpose of convenience in U.S. dollars, as at the balance sheet exchange rates) are as follows:
Future disbursements due each year are as follows:
(b) Commitments for future aircraft leases
Since 1998, TLA has firm orders to purchase new Airbus aircraft. The remaining one were delivered in September 2008.
In 2005, the Company executed an amendment to the contract with Airbus for the firm order of 20 Airbus A320, the remaining 9 of which are to be delivered by 2010, with an option for 20 more of the same aircraft family (including A319, A320 and A321).
In 2006 the Company finalized the contract to acquire a further 37 Airbus aircraft (31 aircraft narrow body family A320 and 6 A330) for delivery by 2012. The options of the contract in 2005 were transferred to 2006.
On June 28, 2007, the Company also executed a Memorandum of Understanding for the purchase of 22 Airbus A350XWB models 800 and 900, with 10 more options for delivery between 2013 and 2018.
Additionally, the Company confirmed the exercise of four options for Airbus A330, two of which will be delivered in 2010, and the other two in 2011, related to the agreement signed at the end of 2006.
In 2007, TLA executed a 6-year operational leasing agreement with Air Canada for 2 Airbus A340 500, which were delivered in the last quarter of 2007.
In 2006, the Company contracted the purchase of 4 Boeing 777-300ER with the option of 4 more of the same aircraft, exercised in 2007. The Company now has eight firm orders contracted with Boeing for this type of aircraft, for the delivery of four in 2008, one of them was already delivered, with the remaining four due to be delivered in 2012.
The Company and the Boeing also executed a short-term leasing agreement for 3 aircraft MD-11, operating until the delivery of the 4 Boeing 777-300ER in 2008.
In 2008, the Company and Boeing entered into a leasing agreement maturing in 2014, for 4 Boeing 767 aircraft, of which three were delivered by the third quarter and the remaining one will be delivered by the end of 2008.
14 Reorganization of the Fokker 100 Fleet
Pursuant to the agreement to return the Fokker 100 fleet, on December 19, 2003, TLA cancelled 19 lease agreements then outstanding, of which ten were finance leases and nine were operating leases.
As a result, TLA agreed to pay a contractual rescission penalty in 30 consecutive quarterly installments, between April 2004 and July 2011 in the principal amount of R$ 94,188. The Company issued letters of guarantee as security.
TLA also renegotiated the rescheduled overdue instalments for the original amount of R$ 49,599.
These aircraft, as of the date of the referred agreement up to their actual redelivery, are contracted under the ordinary operating leasing model.
On September 30, 2008, the total value of the commitment was R$ 47,566 (December 31, 2007 R$ 53,024), equivalent to US$ 24,848 thousand (December 31, 2007 US$ 29,935 thousand), R$ 14,842 of which (December 31, 2007 R$ 11,501) is classified in current liabilities.
Non-current maturities are as follows:
15 Advance ticket sales
At September 30, 2008, the balance recorded as advance ticket sales in the amount of R$ 829,747 (December 31, 2007 R$ 791,546), is represented by 2,726,921 (December 31, 2007 2,698,341) tickets sold but not yet used.
16 Provision for contingencies and judicial deposits (a) Contingent Liabilities
Management of the Company and its subsidiaries recorded provisions for contingencies in all cases where loss to the Company is deemed probable, as judged by the Companys external legal counsel.
As at September 30, 2008 and December 31, 2007, the value of provisions and corresponding judicial deposits recognized are as follows:
i. Corresponds to the discussion of the constitutionality of the increase in the tax base of the PIS and the increase in the contribution and basis of calculation of COFINS, introduced under Law n° 9,718/98. Judicial deposits were made for certain months, and for the others TLA is supported by judicial measures. These amounts, net of judicial deposits, are updated based on the SELIC rate.
On November 9, 2005, the full bench of the Federal Supreme Court ruled that the increase in the tax base was unconstitutional. During the first quarter of 2007 the Company was successful in obtaining a favorable ruling in one process and reversed the related provision for the amount of R$ 7,560, of which R$ 3,496 was recorded to reduce administrative expenses and R$ 4,064 recorded to reduce financial expenses. As at September 30, 2008, 5 lawsuits were yet to be finally judged.
ii Corresponds to the collection of 1% on the amount of fares of all tickets sold for regular domestic routes. TLA management, based on the opinion of its external legal counsel, is contesting the constitutionality of this collection, and non-payment is supported by a judicial order, confirmed in the first and second judged.
iii. Corresponds to the collection of 2.5% on the monthly payroll for private social welfare and professional training entities. TLA management, based on the opinion of its external legal counsel, is contesting the constitutionality of this collection, and the non-payment is supported by a judicial order.
The Company and its subsidiaries are involved parties in other judicial contingencies involving fiscal, labor and civil claims in the amount of R$ 631,771 as at September 30, 2008 (December 31, 2007 - R$ 423,125). Based on the opinion of its external legal counsel, the Company believes that the probability of loss for all of these claims is possible and no provision has been recorded for these amounts.
The changes in provision for contingencies and tax obligations under judicial dispute are summarized as follows:
i On December 17, 2001 the Federal Supreme Court ruled that domestic and international air passenger transportation revenue, as well as international air cargo transportation revenue were no longer subject to ICMS.
However, based on this ruling, ICMS taxation on domestic air cargo transportation revenue is still due. On September 30, 2008, the provision maintained by the Company totaled R$ 6,073 (September 30, 2007 R$ 8,198), recorded in Taxes and tariffs payable. On September 30, 2008, the installments due in more than one year totaled R$ 109 (September 30, 2007 R$ 146), classified within Other accounts payable.
ii. Collection of certain ICMS payments made from May, 1989 to May, 1994 were later ruled to have been unconstitutional. TLA has filled several suits, in different states of the country, to claim the amount paid in excess. The Company will recognize the credits, estimated at approximately R$ 55,000 (not reviewed) and their final restatement, at such time as the financial recovery of this right has been confirmed by court decisions at last resort.
(c) Contingent assets
i. Indemnification for losses on regulated fares
TLA filed a lawsuit against the Federal Government pleading indemnity for economic-financial unbalance in its air transportation concession agreement for fare insufficiency. The unbalance purpose of that cause took place in the period from 1988 to 1993, when the fares were regulated by the Federal Government, under the argument that the economic balance of the concession had been broken.
In April 1998, the lawsuit was ruled in the Companys favor by the Federal Justice, and an indemnity of R$ 245 million (not reviewed was determined based on a calculation made by an expert. This amount is subject to interest on arrears as of September 1993, and monetary restatement as of November 1994. The First Panel of the Higher Court of Justice accepted the special appeal filed by TLA determining that the Federal Court of Appeals judge the merit of the appeal without intervention from the Public Attorneys Office.
Management has not recognized in the financial statements any amount for this indemnity and will do so only when the lawsuit is judged in its final instance.
ii. Additional airport tariffs ("ATAERO")
At 2001, TLA filed a claim addressing the legality of the additional airport tariffs ("ATAERO"), which are 50% on the tariff amount. On September 30, 2008, the amount under discussion totaled approximately R$ 608,493 (December 31, 2007 - R$ 525,716), not recognized in the financial statements.
The Company and TLA are subject to certain obligations under the debenture contracts, such as compliance with certain financial indices, limits on the issuance of financial debt, and priority in the repayment of debentures. At September 30, 2008 and December 31, 2007, all these covenants were complied with.
On July 7, 2006 the Board of Directors approved the issue for public distribution of book-entry nominative, non-convertible debentures with no security guarantee or preference but with a guarantee for provided by TLA.
The debentures have a face value of R$ 10 and a term of six years, with repayment in three successive, equal, annual payments the first of which falls due on August 1, 2010.
Interest is to be paid every six months at a rate equivalent to 104.5% of the CDI as calculated and published by CETIP - the custodian and liquidation chamber. The effective interest rate was 14.4% as of September 30, 2008 (December 31, 2007.- 11.7%)
At the Extraordinary General Meeting held on April 7, 2003 the shareholders approved the private issuance of non-convertible, nominative debentures, without the issuance of warrants or certificates, with a face value of R$ 100.00 (one hundred reais) each, totaling three series. Each series falls due 60 months as from the subscription date. The debentures were totally settled on second quarter of 2008.
Debentures are guaranteed by a pledge of credit rights, and interest is incurred at 4.75% per annum plus Long-Term Interest Rate (TJLP). The effective interest rate was 11.0 % at September 30, 2008 and December 31, 2007.
The credit rights correspond to accounts receivable from travel agents and held at Banco Itaú, on each 24th day of the month, in amounts considered sufficient to settle the monthly installments that were liquidated in the second quarter of 2008.
18 Senior notes
On April 25, 2007, TAM Capital concluded the offer of senior notes in the total amount of US$ 300 million with interest of 7.375% p.a., paid half-yearly and with final or sole maturity in 2017, by means of a transaction abroad exempt from CVM filing. The Company registered the securities with the Securities and Exchange Commission ("SEC") on October 30, 2007.
At September 30, 2008, this liability amounted to R$ 592,526 (December 31, 2007 - R$ 538,466), equal to US$ 309,526 thousand (December 31, 2007 - US$ 303,995 thousand), of which interest of R$ 18,236 (December 31, 2007 - R$ 7,076) is classified in current assets.
19 Income tax and social contribution
(a) Reconciliation of income tax and social contribution benefit (expense)
The above table reflects the Company, TLA and Fidelidade, since Mercosur, as prescribed by the legislation of the country where it operates, is subject to income tax directly on gross sales.
(b) Composition of deferred income tax and social contribution assets
The temporary differences are basically related to contingency provisions, allowance for doubtful accounts and exchange variations.
Deferred tax assets resulting from tax loss, social contribution negative bases, and temporary differences were constituted in conformity with CVM Instruction 371 as of June 27, 2002, and consider the profitability history and the expected future taxable income generation based on a technical feasibility study.
(c) Deferred income tax and social contribution tax liabilities
As prescribed by CVM Deliberation 273/98, the revaluation reserve as at September 30, 2008 arising from aircraft engines and buildings is not of deferred income tax and social contribution charges of R$ 49,821 (December 31, 2007 - R$ 50,861).
20 Shareholders equity
(a) Authorized capital
At September 30, 2008 and December 31, 2007, the authorized capital was R$ 1,200,000 and can be increased by means of the issuance of common or preferred shares, upon resolution of the Board of Directors.
At September 30, 2008, is comprised of 150,585,147 shares (31.12.2007 - 150,585,147), of which 50,195,049 (December 31, 2007 - 59,791,955) are common shares and 100,390,098 (December 31,2007 - 90,793,192) are preferred shares. At the Extraordinary Stockholders' Meeting held on September 19, 2008 was approved the conversion of 9,596,906 common shares into preferred shares.
Common shares confer the right to vote in general meetings.
The preferred shares do not have the right to vote in general meetings, except in relation to certain matters while the Company is listed in Level 2 of BOVESPA. However, they have priority in the distribution of dividends, and in capital reimbursement, without any premium, in the event the Company is liquidated and the right to participate, under the same terms as the common shares, in the distribution of any benefits to the stockholders.
The Company has a BOVESPA Level 2 requirement to maintain a free float of 25% of its shares. Since August, 2007 the float has been 53.85% (unaudited).
(c) Treasury stocks
The Board of Directors, at a meeting held on January 30, 2008, in accordance with CVM Instructions 10/80 and 268/97, approved a new program to repurchase Company shares to be kept in treasury or subsequently cancelled or sold, with no capital reduction. Under the program, up to four million (4,000,000) preferred shares will be repurchased.
Changes in treasury stocks:
Shares sold relate to the executive compensation plan approved at the Extraordinary Shareholders Meeting of May 16, 2005.
The market value of shares is R$ 36(reais) for preferred shares on September 30, 2008.
The negative goodwill from the sale of shares were accounted on "Retained earnings" on the amount of R$ 2,899.
(d) Capital reserve - share premium account
The premium on the subscription of shares represents the difference between the fair value of the net equity and the nominal amount of the capital increase.
(e) Revaluation reserve (Note 10 (b))
The amount realized in proportion to the depreciation of prior period revaluations transferred to retained earnings for the three and nine month periods ended September 30, 2008, amounted to R$ 649 and R$ 2,066 (September 30, 2007 - R$ 739 and R$ 2,985). Of the total reserve, R$ 30,099 (December 31, 2007 - R$ 33,034) corresponds to the revaluation of land, which will only be realized upon sale.
In accordance with CVM Instruction n° 197/93, the deferred tax charges on the revaluation reserve, which at September 30, 2008 amounted to R$ 49,821 (December 31, 2007 - R$ 50,861), are recognized in the statement of operations to the extent that the reserve is realized.
(f) Retained profit reserve
In accordance with article 196 of Corporation Law it is required that the balance of net income after dividend distribution and other statutory appropriations is transferred to this reserve in order to finance the Companys capital budget for 2008 and working capital requirements. Future investments include the leasing of additional aircraft.
(g) Stock Option Plan
At the Extraordinary Stockholders' Meeting held on May 16, 2005, the shareholders approved the Companys Stock Option Plan for Directors and employees. The Board of Directors is responsible for the management of this plan.
The Board of Directors made available under this plan 1,735,316 preferred shares relating to the 1st, 2nd, and 3rd grant, and 230,000 preferred shares relating to the special grant as follows:
In accordance with the rules of the Companys Stock Option Plan, and in conformity with the Extraordinary Stockholders Meeting held on May 16, 2005, the maximum share-dilution limit for the shareholders has been set at 2% (two percent). At the meeting of the Board of Directors held on August 29, 2007, the advanced exercise of 21,806 call options for purchase of preferred shares with no par value was authorized, of which 16,140 shares referred to the first grant, and 5,666 shares to the second grant, at issuance prices of R$ 15.21 and R$ 44.38 per share respectively. In both grants, the exercise price is restated by the IGPM, from the granting date up to the date of the financial statements. On November 30, 2007 these shares were subscribed.
Changes are summarized as follows:
In conformity with the accounting practices adopted in Brazil, the Company does not record stock options as remuneration expense. Had the Company recorded them as such based on the fair value of the options on the granting date, the expense in the period recorded under "Personnel expenses" would have decreased by R$739 as of September, 2008 (September 30, 2007 - R$ (3,487)) and shareholders equity would have decreased by R$ 13,577 (December 31, 2007 - R$ (17,349)).
21 Analyses of Gross Sales
The Company analyses its gross sales information by type of service rendered and geographic area as follows:
(a) By type of service rendered
( b) By region
22 Main costs and expenses
(a) Three month periods ended September 30:
(b) Nine month periods ended September 30:
23 Financial income and expense
*West Texas Intermediate - a type of crude oil often used as a pricing benchmark
24 Employee benefits
(a) Supplementary pension plan
In the past, TLA sponsored three pension benefit supplementation plans, called TAM Prev Plan I offering defined benefits, and TAM Prev Plans II and III, offering defined contribution. On November 21, 2006, the Supplementary Pension Secretary (SPC) approved the migration of pension plans I, II and II to a new type of free benefits plan (PGBL) managed by an independent institution. Plan I participants were given the option to transfer to a benefit generating plan (FGB) with guaranteed benefits on retirement.
On September 30, 2007, the Company and Bradesco Vida e Previdência entered into an agreement through which the value of the continual benefits to the 5 remaining participants of Plan I will be maintained with the same conditions of the previous plan, and the risk inherent to the payment of benefits is the sole responsibility of Bradesco Vida e Previdência S.A..
All other participants previously migrated to PGBL.
(b) Profit sharing
The Companys Management will pay a share of its profits in case it reaches certain performance indicators established according to the annual budget. Consequently, Management recorded as Salaries and payroll charges, related to the exercise ended September 30, 2008, the provision for payment of this benefit in the amount of R$ 26,762 (December 31, 2007 R$ 36,140).
25 Insurance coverage
The Companys subsidiaries contract insurance coverage for amounts above the minimum mandatory levels that they deem necessary for the coverage of occasional accidents, in view of the nature of their assets and operational risks. On September 30, 2008, based on the aircraft fleets of TLA and Mercosur, the insurance coverage for aviation activities (including both aircraft and civil liabilities) provided for maximum indemnification of US$ 1.5 billion.
The Brazilian Government, through Law 10,744 of October 9, 2003, and Decree n° 5,035 of April 5, 2004, has committed to cover civil liability damages payable to third parties that the Company may be required to pay as a result of war or terrorist attack. This Law provides that the maximum liability of the Brazilian Government in respect of such matters is an amount in Reais equivalent to US$1 billion.
The Company maintains adequate insurance for risks which are expected to cover any liabilities generated by the accident on July 17, 2007, of an Airbus A320 aircraft, considering the agreements already made with and paid to the victims families by the insurance company. As of September 30, 2008, some 86 indemnifications were paid to families of the victims and others are under negotiation with the Companys insurance firm. Management understands that the insurance coverage of these liabilities is adequate to cover all related costs. The Company believes that it will not incur additional or unexpected expenses outside the scope of the insurance agreement which would be TAMs direct responsibility.
The subsidiaries also maintain insurance coverage that provides for indemnification in respect of expenses arising from theft, fire, flooding, electrical damage or other similar events affecting our equipment, facilities, vehicles or other property.
26 Financial instruments
In accordance with its established policy the Company enters into transactions involving derivative financial instruments in order to reduce the exposure to its main risks of exchange fluctuations on its revenue and changes in fuel prices. In addition, temporary cash surpluses are applied in line with group treasury policies, which are continuously reviewed, seeking to keep in line with the market and maximize returns with the lower possible risks.
Such instruments are managed using predefined policies which take into account the liquidity, profitability and risk/return of each position. The control policy consists in the ongoing monitoring of the contracted rates against market rates, as well as computations made by independent consultants, and regular presentation of the situation to Corporate Committees. All derivative transactions carried out by the Company and its subsidiaries have hedging purposes; no derivative transactions are carried out for speculative purposes.
The Companys cash generation is substantially invested in its exclusive investment funds. All funds follow a consistent investment policy, with defined caps for market, credit and liquidity risks.
i. Risk of the price of fuel
The price of aviation fuel (QAV) is one of the most significant market risk components for airlines. In Brazil, the QAV price ex-refinery is set by Petrobras, based on international prices. TLA hedges against QAV price fluctuations by means of derivative instruments based on crude oil (WTI type). Such choice is supported by studies evidencing that QAV hedge based on WTI is highly efficient, in addition to the high liquidity of WTI derivatives. At present, all financial instruments are contracted on the over-the-counter market and do not require deposits of guarantees or margin calls. All counterparties are rated as low credit risk by the major rating agencies (Standard & Poors, Fitch, and Moodys).
Fuel represented for the three and nine month periods ended September 30, 2008 40.4% and 39.6% (September 30, 2007 33.1% and 32.8%), respectively of the costs of services rended plus operational expenses (Note 22).
At September 30, 2008, the Company had options to buy fuel, with maturity up to October 2010, which were equivalent to approximately 10,180 thousand barrels (December 31, 2007 5,500 thousand barrels with various maturities up to November 2008), representing 56% of next twelve months. Fair value (MTM) registered as other assets is R$ 14,107 (December 31,2007 R$ 62,155). Fair value of these derivatives registered as other accounts payable is R$ 223,442. The period effect on the income statement is disclosed in Note 23.
All WTI derivative transactions are contracted for hedging purposes. As TAM does not have 100% of its consumption hedged, any QAV price increases will not be fully offset by positive adjustments arising from derivatives; similarly, any negative adjustments in derivatives will be more than offset by a reduction in QAV expenditures.
The maturity date payments of the derivatives contracts, has the following distribution, per year:
*Ratings are expressed both in global terms and amounts are in Brazilian currency.
ii. Foreign exchange rate risk
This risk is associated with the potential foreign exchange fluctuations, thus affecting expenses or income in foreign currency and the assets or liabilities balance of contracts denominated in foreign currencies. The risk is partly mitigated because the subsidiaries have activities abroad and revenues from these transactions are earned in foreign currency. The current hedge contracting policy is designed as a protection against the percentage of net cash mismatches in other currencies in subsequent periods.
The Company and its subsidiaries may contract derivative instrument transactions, aiming solely at hedging its exposure to foreign currencies arising from the acquisition of fuel oil, engine maintenance services from manufacturers, and financing contracts to expand/maintain their operating activities. As at September 30, 2008, the Company recorded only one USD 3 million notional position, maturing on 10/26/2008.
iii. Interest rate risk
This risk arises from possible losses (or gains) as a result of fluctuations of the interest rates to which the liabilities and assets of the Company and its subsidiaries are linked.
To minimize possible impacts from interest rate volatility, the Company and its subsidiaries adopt a policy of diversification, alternating between contracting fixed and variable rates (such as LIBOR and CDI), and periodically renegotiating contracts, in order to adapt them to current market conditions.
iv Credit risk
Credit risk arises from the possibility of the Company and its subsidiaries not recovering amounts receivable from services provided to consumers and/or travel agencies, or from credits held by financial institutions generated by financial investment operations.
To reduce this risk the Company has adopted the practice of establishing credit limits and permanently monitoring its receivable balances (mainly with travel agencies). With respect to financial investments the Company only invests with institutions with low credit risk as evaluated by rating agencies. In addition, each institution has a maximum limit for investments, as determined by the Company's Risk Committee.
(b) Financial Investments
Financial Investments are represented by funds applied in quotas of various types of investment funds and/or in multimarket investment funds with the objective of obtaining an interest yield in excess of the Brazilian interbank interest rate also known as CDI.
TLA, Mercosur, TAM Capital, TAM Financial 1, TAM Financial 2 and TP Participações are non-public companies and, therefore, there is no information readily available to evaluate their fair market values.
(d) Fair market value of financial instruments
The fair market value of financial instruments as of September 30, 2008 is based on the result of the maturities or the frequent adjustments to the prices of these instruments, as follows:
The fair market value of short and long-term debt, when applicable, was determined by applying the current interest rate available for operations with similar conditions and remaining maturities. Debentures and Bonds have quoted prices in active markets. The fair value of the others derivatives instruments is closer to the book value.
27 TAM Loyalty Program
At September 30, 2008, the TAM Loyalty Program had 3,044,378 (December 31, 2007 2,400,632) (unaudited) one-way domestic trip tickets earned by its clients but not redeemed. The TLA currently records the incremental costs when awards are earned. For the three and nine month periods ended September 30, 2008, 598,661 and 1,374,630 (September 30, 2007 272,483 and 717,402) free tickets were granted and used by our clients.
The provision for incremental costs of points earned under the Loyalty Program for the year ended September 30, 2008 was approximately R$ 41,348 (December 31, 2007 - R$ 20,614) as recorded within Other liabilities. The basis of the calculation of the incremental costs accrual is an estimative of the ticket redemptions by others airlines companies, quantity of points accumulated, tickets redeemed estimation for expired points, non-redeemed accumulated points and valued by the incremental costs of in-flight service, fuel, insurance and boarding pass.
The points earned by our clients through the TAM Loyalty Program are valid for two years for the redemption as tickets. This limit any growth in the liability from the program, which has tended to stabilize in relation to the number of passengers transported.
28 Summary of the Main Differences between Brazilian GAAP and U.S. GAAP
(a) Presentation of financial information and functional currency
The Company has elected to use the consolidated financial statements prepared in accordance with Brazilian generally accepted accounting principles (Brazilian GAAP) as its primary financial statements, for the purposes of filling according to U.S. Securities Act of 1934.
In addition, the Company has elected Brazilian Reais as both functional and reporting currencies. A summary of main differences between Brazilian GAAP and those generally accepted in United States (U.S. GAAP), applicable to the Company, have been disclosed below.
(b) Supplementary inflation restatement in 1996 and 1997 for U.S. GAAP
Brazilian GAAP discontinued inflation accounting effective January 1, 1996, Brazilian GAAP statements included indexation adjustments which partially accounted for the effects of inflation on property, plant and equipment, investments, deferred charges (together, denominated Permanent Assets) and stockholders' equity, and reported the net charge or credit in the statement of operations. However, under U.S. GAAP Brazil ceased to be treated as a highly inflationary economy only from January 1, 1998. Therefore the financial information for purposes of U.S. GAAP include additional inflation restatement adjustments in 1996 and 1997, made by applying the General Price Index - Internal Availability (IGP-DI) to the Companys permanent assets and stockholders' equity. The IGP-DI index increased by 9.3% in 1996 and by 7.5% in 1997.
For purposes of the reconciliation there is no longer a difference in stockholders equity according to U.S. GAAP since December 31, 2007, due to the additional inflation restatement adjustments, net of depreciation. These amounts generate differences in depreciation charges of R$ 17 and R$ 51 for the three and nine month periods ended September 30, 2007.
(c) Property, plant and equipment
i. Revaluation of property, plant and equipment
Brazilian GAAP permits the revaluation of assets. The revaluation increment, net of deferred tax effects after 1991, is credited to a reserve account in stockholders' equity. Depreciation of the revaluation increments is charged to income and an offsetting amount is transferred from the revaluation reserve in stockholders' equity to retained earnings as the related assets are depreciated or upon disposal.
Under U.S. GAAP, revaluation of property, plant and equipment is not accepted and the revaluation increments and related deferred tax effects have therefore been eliminated in order to present property, plant and equipment at historical cost less accumulated depreciation. Accordingly, the depreciation expense on revaluation has also been reversed in the statement of operations.
For the purposes of the reconciliation, under U.S. GAAP the revaluation reserve was reversed, net of depreciation and deferred tax effects, totaling R$ 133,068 at September 30, 2008 (December 31, 2007 - R$ 135,134). In the statement of operations, these effects totaled R$ 649 and R$ 2,066 for the three and nine month periods ended September 30, 2008 (September 30, 2007 - R$ 739 and R$ 2,982).
ii. Capital Lease agreements
Brazilian GAAP does not have a specific requirement on accounting for leases and TAM recognizes as financial leases only contracts where the lessee has a bargain purchase option for the asset. All other leases are treated as operating leases.
Under U.S. GAAP, Statement of Financial Accounting Standards ("SFAS") n° 13 "Accounting for Leases" defines financial leases as those leases that meet at least one of the following criteria:
Additionally, on renegotiation of lease terms, regardless as to whether the lessor is changed, the new lease is maintained as a financing lease by the lessee if under the amended lease terms, the lease would have been classified a finance lease either initially or at the renegotiation date.
At September 30, 2008, TAM had 52 aircraft recorded as operating leases under Brazilian GAAP (Airbus A319 11 units, Airbus A320 23 units; Airbus A330 10 units, Airbus A321- 3 units, Airbus A340 2 units and Boeing 767 3 units), which, considering the rule set out above, were considered as financing leases under U.S. GAAP because the present value of the minimum payments of these contracts exceed 90% of the fair value of the asset leased.
Under U.S. GAAP, the acquisition cost of these aircraft and the related liability at the inception of the lease contract, totaling, at September 30, 2008 R$ 5,008,136, has been recorded in the balance sheet, while accumulated depreciation at September 30, 2008 amounts to R$ 870,276. The asset is being depreciated over the estimated useful life of 25 years for the aircraft Airbus A319, Airbus A320 and Fokker 100, 30 years for the aircraft Airbus A330 and A340.
The obligations are recorded in short and long-term liabilities, including accrued interest and foreign exchange gains or losses. Depreciation expense on these aircraft recognized in the U.S. GAAP interim financial information totaled R$ 50,437 and R$ 135,802, for the three and nine month periods ended September 30, 2008 (September 30, 2007 R$ 35,551 and R$ 103,444).
Foreign exchange gains (losses) on financial lease payables totaled R$ (553,756) and R$ (274,464) for the three and nine month periods ended September 30, 2008 (September 30, 2007 R$ 106,485 and R$ 335,889). Interest expenses on the financial lease obligation of these aircraft totaled R$ 31,128 and R$ 90,973, for the three and nine month periods ended September 30, 2008 (September 30, 2007 R$ 32,798 and R$ 102,214).
The operating lease expense recognized under Brazilian GAAP for these aircraft were reversed during all periods and totaled R$ 100,702 and R$ 283,915 for the three and nine month periods ended September 30, 2008 (September 30, 2007 R$ 95,682 and R$ 273,838.
For reconciliation purposes, the amounts of leases adjusted against stockholders equity totaled R$ 885,419 at September 30, 2008 (December 31, 2007 R$ 1,102,745).
Considering the aforementioned adjustments, the lease obligations under U.S. GAAP totaled:
The lease obligations above are secured by letters of guarantee issued by the Company.
Long-term amounts mature as follows:
Under Brazilian GAAP, companies are required to determine if operating income is sufficient to absorb the depreciation or amortization of long-lived assets in order to assess potential asset impairment. In the event such operating income is insufficient to recover the depreciation, the assets, or groups of assets, are written-down to recoverable values, preferably based on the projected discounted cash flows of future operations. In the event of a planned substitution of assets prior to the end of the original estimated useful life of the asset, depreciation of such assets is accelerated to ensure the asset is depreciated according to estimated net realizable value at the estimated date of substitution.
Under U.S. GAAP, SFAS n° 144 Accounting for the Impairment or Disposal of Long-lived Assets, requires companies to evaluate the carrying value of long-lived assets to be held and used, and for long-lived assets to be disposed of, when events and circumstances require such a review. The carrying value of long-lived assets is considered impaired when the anticipated undiscounted cash flow, representing the lowest level for which identifiable cash flow is less than their carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the assets or discounted cash flows generated by the assets.
In the case of TAM, there were no impairment indicators and, therefore, no differences between U.S. GAAP and Brazilian GAAP related to impairment provision criteria were recorded for the periods presented.
iv. Gains on sale-leaseback
Brazilian GAAP does not have specific requirements on sale-leaseback transactions. All gains or losses arising from sale-leaseback transactions were recognized at the time of the transaction.
Under U.S. GAAP, SFAS n° 28, "Accounting for Sales with Leaseback", establishes a sale-leaseback as a single financing transaction in which any profit or loss on the sale shall be deferred and amortized by the seller, who becomes the lease, in proportion to rental payments over the period of time the asset is expected to be used. This is obligatory even where the sale-lease-back transaction is considered legally perfect in the companys country of origin.
The amortization of gains on sale-leaseback transactions appropriated in the statement of operations for the three and nine month periods ended September 30, 2008, as Financial income (expenses), net totaled R$ 4,285 and R$ 12,860 (September 30, 2007 R$ 4,288 and R$ 12,863) and as Other operating expenses, net totaled R$ 3,734 and R$ 11,200 (September 30, 2007 R$ 3,733 and R$ 11,200).
For reconciliation of gains on sale-leaseback purposes, the effects in stockholders at September 30, 2008 totaled R$ 155,464 (December 31, 2007 R$ 179,526).
(i) In August 2001, TAM entered into an agreement which resulted in the termination of a financial lease for three Airbus A330 aircraft with one lessor and a new lease agreement, under operating lease provisions, with a different lessor for the same aircraft. For Brazilian GAAP purposes, TAM recognized a net gain of R$ 319,073 during 2001. This gain is being amortized over the period of the new lease contract, of which final liquidation is planned to be in August 2013.
(ii) In April 2003, TAM entered into an agreement which resulted in the termination of a financial lease agreement for four Airbus A320 aircraft with one lessor and a new lease agreement, under operating lease provisions, with a different lessor for the same aircraft. For Brazilian GAAP purposes, TAM did not recognize any gain, as this contract had already been recorded as an operating lease. Under U.S. GAAP, this transaction generated a deferred gain of R$ 54,957, as this contract was registered as a financial lease. This gain is being amortized in accordance with the operating lease contract, of which final liquidation is estimated to be in March 2013.
The transactions summarized above were considered to be a modification of the provisions of the original contract under U.S. GAAP.
According to recently issued SFAS n° 145 "Rescission of FASB Statements n° 4, 44 and 64, Amendment of FASB Statement n° 13 and Technical Corrections", if the change in the lease provisions gives rise to a new agreement classified as an operating lease, the transaction shall be accounted for under the sale-leaseback requirements in accordance with paragraphs 2 and 3 of SFAS n° 28, mentioned above.
(d) Business combinations
Under Brazilian GAAP, goodwill arises from the difference between the amount paid and the book value of the net assets acquired. This goodwill is normally attributed to the market value of assets acquired or justified based on expectation of future profitability and is amortized over the remaining useful lives of the assets or up to 10 years. Negative goodwill arises under Brazilian GAAP when the book value of assets acquired exceeds the purchase consideration; negative goodwill is not generally amortized.
Under U.S. GAAP, fair values are assigned to acquired assets and liabilities in business combinations, including intangible assets and unallocated goodwill, applicable to each specific transaction. Upon the adoption of SFAS n° 142, Goodwill and Other Intangible Assets, as from January 1, 2002 goodwill is no longer amortized but, instead, is assigned to an entity's reporting units and tested for impairment at least annually. Additionally, according to U.S. GAAP, goodwill generated in transactions between entities under common control should not be recorded but, instead, the difference between amounts paid and book values of net assets acquired should be recorded as a capital contribution or distribution.
The differences related to the Brazilian GAAP applicable to TAM derive mainly from (i) non-amortization of goodwill as from January 1, 2002 and (ii) non-recognition of negative goodwill arising from transactions of companies under common control, (Note 28 (d) (ii) below).
For Brazilian GAAP, goodwill was fully amortized at December 31, 2007; negative goodwill at September 30, 2008 was R$ 11,099 (December 31, 2007 - R$ 11,099).
For reconciliation purposes, amortization of goodwill has been reversed as from January 1, 2002, totaling R$ 179 and R$ 358 in the statement of operations for the three and nine month periods ended September 30, 2007. In stockholders equity, for reconciliation purposes these effects totaled R$ 9,680 at September 30, 2008 (December 31, 2007 R$ 9,680).
ii. Common control and negative goodwill Mercosur
For Brazilian GAAP purposes, TAM Mercosur was acquired and consolidated by the Company in September 2003 through an exchange of shares.
For U.S. GAAP purposes, Mercosur has been considered under common control since 1996, because Mercosur has the same controlling stockholders as TAM and therefore, it was consolidated retroactively for all periods presented. The effects of the retroactive consolidation in the changes in stockholders equity have been recorded as additional paid-in capital.
Additionally, in this transaction, the negative goodwill for Brazilian GAAP purposes was generated by the difference between book value and the amount paid in the transaction for the acquisition of Mercosur. As this transaction was considered to be between entities under common control, for U.S. GAAP purposes the difference between the amount paid and the book value of Mercosur was recognized in stockholders equity as a capital contribution.
Also, for Brazilian GAAP purposes, the effects of the exchange variation on this subsidiarys stockholders equity are distributed among the lines of the statement of operations. For U.S. GAAP purposes, the effect of this exchange variation was recognized in stockholders equity in cumulative translation adjustments, in accordance with SFAS n° 52, Foreign Currency Translation.
For reconciliation purposes, the effects described above totaled R$ (2,186) and R$ (5,217) for the three and nine month periods ended September 30, 2008 (September, 30, 2007 R$ 1,859 and R$ 4,233), respectively and R$ 11,828 in stockholders equity at September 30, 2008 (December 31, 2007 R$ 11,828).
(e) Pension and other post-retirement benefits
In determining the pension and other post-retirement benefit obligations for Brazilian GAAP purposes, NPC No. 26 is effective for financial statements ended from December 31, 2002. As permitted by the Standard, the transitional effect (being the difference between the plan net assets and the projected benefit obligation ("PBO") at that date will be taken to income over five years.
Under U.S. GAAP, SFAS No. 87, "Employers Accounting for Pensions", is effective for fiscal years beginning after 1988. As from such date, when an initial transition obligation determined based on an actuarial valuation was booked, actuarial gains and losses, as well as unexpected variations in plan assets and the PBO and the effects of amendments, settlements and other events, have been recognized in accordance with this standard and therefore results in deferral differences. Until 1997, these amounts were treated as non-monetary items and indexed by the inflation, U.S. GAAP also requires the recognition of an additional minimum liability.
Although the calculation of the sufficiency of the funded status has been the same since December 31, 2001 differences arise in (i) actuarial gains and losses, as initially there is no gain or actuarial loss on December 31, 2001, and (ii) recognition of the initial transition obligation and (iii) minimum liability, according to U.S. GAAP.
On November 21, 2006, the Supplementary Pension Plan Secretariat (the SPC) approved the proposal to migrate participants from the TAM Prev I, II and III to a PGBL, a defined contribution plan. During 2006 43 employers accepted the migration, therefore they had the recognition of "settlement". At September 30, 2007, there are still 5 participants which have not transferred into the PGBL. As the migration of the employees to PGBL represents an irrevocable action, relieving the Company of primary responsibility for the pension obligation eliminates the risks related to the obligation and assets of the plan. The participants transferred have been accounted in accordance with SFAS no. 88, "Employers Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits. The settlement for the remaining 5 participants was reached on September 30, 2007.
For purposes of the reconciliation, there is no longer a difference in stockholders equity according to U.S. GAAP since December 31, 2007. The appropriated effects in the statements of operations for the three and nine month periods ended September 30, 2007 totaled R$ 91 and R$ 273.
(f) Recognition of revenue Revenue in the Loyalty Program Partners
Under Brazilian GAAP, revenues related to partnership with the Loyalty Program for frequent flyers are recorded when the points are issued to participants.
Under U.S. GAAP, as from 2005, the Company has been recognizing revenue earned from selling points into two components. The first component represents the revenue for air transportation sold, valued at current market rate of the expected air transportation, based on the average tariff it charges for the related average domestic trip during the period. Based on the Companys historical analysis of the use of these points, they are expected to be used over a six month period.
The second revenue component represents the services deemed to have been provided associated with operating the program, which is being recognized when the points are sold.
For reconciliation purposes, the Company deferred revenue for the three and nine month periods ended September 30, 2008 totaling R$ 13,240 and R$ 43,320 (September 30, 2007 R$ 3,246 and R$ 12,516). The effect on stockholders equity at September 30, 2008 amounted to R$ 93,380 (December 31, 2007 R$ 50,060).
(g) Stock options plan
Under Brazilian GAAP stock options neither generate expense nor capital reserve charges under the accrual method of accounting, and instead are recognized only when exercised as the amount of the exercise price paid.
Under U.S. GAAP, SFAS Statement 123R Share Based Payments, requires the measurement and recording of the cost of employee services in exchange for awards of equity instruments based on the grant-date fair value of those awards (with limited exceptions). Awards granted with other than market conditions shall be classified as liabilities. That cost will be recognized over the period during which the employee is required to provide the service in exchange for the award. No compensation cost is recognized for equity instruments for which employees do not render the requisite service. SFAS n° 123R requires entities to initially measure the cost of employee services received in exchange for an award of liability instruments based on its current fair value. Changes in fair value during the requisite service period will be recognized as compensation cost over that period. The grant date fair value and the fair value of each reporting period of employee share options are estimated using the Black-Scholes option-pricing model. As described in further details below, the Company has granted options to certain employees to purchase stock at prices below market. The market value of the options granted will be recognized for U.S. GAAP purposes as expense over the period in which the services are rendered. The fair value of the options classified as liability award will be reassessed each reporting date.
At the Extraordinary Stockholders' Meeting held on May 16, 2005, the stockholders approved that a maximum of up to 2% of outstanding shares could be used for share options to be granted to employees by the Board of Directors.
Changes are summarized as follows:
Under the terms of the Plan, the options granted are divided into three equal amounts and employees may exercise one third of their options after three, four and five years, respectively, if still employed by the Company at that time. The options have a contractual term of 7 years. No outstanding options were exercisable as of September 31, 2008. Those previously exercised were the result of anticipated retirement. The weighted-average intrinsic value of the stock options exercised was R$15.20 at September 30, 2008.
The options contain a service condition for which exercisability of such options depends exclusively on the rendering of a defined period of services by the employee. The dismissed employees have the obligation to satisfy conditions in order to maintain their options right. At each reporting period the fair value of the options granted are remeasured as well as the compensation cost and recognized for the options awarded.
Stock options were granted initially with an exercise price of R$ 14.40, R$ 43.48, R$ 39.67 and R$ 38.36, per share, for the for the 1st, 2nd, 3rd grant and special grant. The exercise price is adjusted by the IGPM (General Price Index), from the award date up to the date of the financial statements.
The Company accounts for the Plan in accordance with FASB Statement n° 123R Share Based Payments. Accordingly, as the options are classified as liability awards, compensation cost has been recognized based on the fair value of the options at each reporting date. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:
The risk-free rate for periods within the contractual life of the option is based on the Brazilian Treasury yield curve in effect at the balance sheet date. Expected volatilities are based on historical volatility calculated using TAMs traded stock. The expected term used is based on the weighted average remaining contractual life.
At September 30, 2008, the fair value of the stock options granted was R$ 23.32, R$ 12.72, R$ 17.02 and R$ 5.53, respectively, for the 1st, 2nd, 3rd grant and special grant per share resulting in a total fair value of options granted of R$ 11,237, R$ 2,899, R$ 12,963 and R$ 1,272 for the 1st, 2nd, 3rd and special grant. The total compensation cost related to nonvested options not yet recognized as of September 30, 2008 amounted to R$19,898 (December 31, 2007 - R$ 33,711)
For U.S. GAAP purposes, the Company recorded income (expenses) of R$ (5,392) and R$ 739 for the three and nine month periods ended September 30, 2008 (September 30, 2007 R$ (2,222) and R$ 3,487), with a corresponding credit/debit to liabilities. This adjustment has no impact for purposes of deferred income tax and social contribution. The accumulated effect within liabilities and shareholders equity at September 30, 2008 was R$ 13,577 (December 31, 2007 - R$ 17,349).
The Black-Scholes option pricing model has been adopted by on fair valuing such traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in managements opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
Under Brazilian GAAP, through December 31, 2005 the Company recorded
maintenance expenses as incurred. As from January 1, 2006, in accordance with
Technical Interpretation of IBRACON 01/2006, the Company changed its accounting
policy under Brazilian GAAP to the built-in overhaul method for owned engines
and engines under capital lease arrangements. In aircraft under operating lease,
the Company continues to expense maintenance as incurred.
For reconciliation purposes, the Company reversed the effects caused by the change in accounting policy under Brazilian GAAP in 2006. Accordingly, capitalized maintenance costs amounting to R$ 15,445 and the depreciation expenses recorded amounting to R$ 6,752 was reversed from stockholders equity.
For reconciliation purposes, the Company for the three and nine month periods ended September 30, 2008 was reversed depreciation expenses amounted to R$ 1,398 and R$ 4,713 (September 30, 2007 (R$ 1,073) and R$ 1,202), respectively. The accumulated effect on stockholders equity at September 30, 2008 amounted to R$ (7,875) (December 31, 2007 R$ (12,588)).
(i) Earnings per share
Under Brazilian GAAP, net income (loss) per share is calculated on the number of shares outstanding at the balance sheet date. Information is disclosed per lot of one thousand shares because, generally, this is the minimum number of shares that can be traded on the Brazilian stock exchanges.
Under U.S. GAAP, since the preferred and common stockholders have different voting and liquidation rights, basic and diluted earnings per share have been calculated using the "two-class" method, pursuant to SFAS No. 128, "Earnings per Share", which provides computation, presentation and disclosure requirements for earnings per share.
The "two-class" method is an earnings allocation formula that determines earnings per share for preferred and common stock according to the dividends to be paid as required by the Company's by-laws and participation rights in undistributed earnings. Basic earnings per common share is computed by dividing net income by the weighted-average number of common and preferred shares outstanding during the period. Earnings may be capitalized, used to absorb losses or otherwise appropriated; consequently, such earnings would no longer be available to be paid as dividends. Therefore, no assurance can be given that preferred stockholders will receive distributed earnings.
EITF 03-6 "Participating Securities and the Two Í Class Method under FASB Statement No. 128'' limits loss allocation only to participating securities which have (1) the right to profit sharing in the Company, and (2) an objective and determinable contractual obligation for participation in the Company's losses. As preferred shares do not have a determinable contractual obligation for participation in the Company's losses, no losses are allocated to them.
(j) Comprehensive income
Under Brazilian GAAP, the concept of comprehensive income is not recognized.
Under U.S. GAAP, SFAS n° 130, "Reporting Comprehensive Income", requires the disclosure of comprehensive income. Comprehensive income is comprised of net income/loss and "other comprehensive income" that include charges or credits directly to equity which are not the result of transactions with owners. In the case of TAM, components of comprehensive income are its net income or loss, changes in additional minimum pension liability (SFAS n° 158) and cumulative translation adjustments (Note 28 (q) (iii)).
(k) Deferred income tax and social contribution
Under Brazilian GAAP, deferred income tax recorded in assets represents the estimated amount to be recovered.
Under U.S. GAAP, deferred taxes on all temporary tax differences are accrued. Deferred tax assets and liabilities are classified as current or long term, according to the classification of the asset or liability that originates from the temporary difference. Deferred income tax assets and liabilities in the same tax jurisdiction are offset and are not presented at the net value.
In addition, for the purpose of reconciliation to U.S. GAAP, the benefits (expenses) of income tax related to U.S. GAAP adjustments were recognized.
Together, these adjustments amounted to R$ 183,546 and R$ 80,438 for the three and nine month periods ended September 30, 2008 (September 30, 2007 R$ (45,583) and R$ (140,436)), respectively in the statements of operations. The aggregate net deferred tax assets reflected in the shareholder's equity at September 30, 2008 was R$ (213,868) (December 31, 2007 R$ (294,306). There were no valuation allowances in any of the period presented.
On January 1, 2007, the Company adopted Financial Accounting Standards Board Interpretation n° 48 Accounting for Uncertainty in Income Taxes (FIN 48). This interpretation prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on derecognition, measurement, classification, interest and penalties.
As a result of the adoption of this interpretation, there has been no impact on the Companys financial statements.
The Company files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. The Companys income tax returns, tax and accounting records are subject to review by tax authorities for 5 to 6 years.
TAM Mercosur, as prescribed by the legislation of its country of origin is subject to income tax directly on gross sales and
carrying value are recognizing in the financial statements.
(l) Dividends and interest in own capital
Under Brazilian GAAP, the Company recorded the amount of R$ 72,093 as dividends and interest on capital to be paid to its stockholders.
For U.S. GAAP purpose, the amount of R$ 40,564 relating to the amounts accrued in excess of the minimum mandatory dividend have been reversed for reconciliation purposes. As a result of final approval on dividends declared as of December 31, 2007, by the Board of Directors in April 2008, that portion of dividends declared that represents the excess over the minimum mandatory dividend has been reversed for U.S. GAAP reconciliation purposes.
(m) Classification of statement of operations line items
Under Brazilian GAAP, the classification of certain income and expense items is presented differently from U.S. GAAP. The consolidated statement of operations under Brazilian GAAP has therefore been reclassified to present a condensed consolidated statement of operations in accordance with U.S. GAAP (Note 28 (q) (ii)). The reclassifications, other than those disclosed above, are summarized as follows:
(n) Classification of balance sheet line items
Under Brazilian GAAP, the classification of certain balance sheet items is presented differently from U.S. GAAP. The Company recast the consolidated balance sheet prepared in accordance with BR GAAP to present a condensed consolidated balance sheet in accordance with U.S. GAAP (Note 28 (q)). The reclassifications, other than those disclosed above, are summarized as follows:
(o) Classification of cash flow items
Under Brazilian GAAP, the classification of certain cash flow items is presented differently from U.S. GAAP. The Company recast the consolidated cash flow statement in accordance with BR GAAP to present a condensed consolidated balance sheet in accordance with U.S. GAAP (Note 28 (q)). In addition to the difference in the definition of cash and cash equivalents disclosed above under 28 (q). Classification of Balance Sheet items, the reclassifications are summarized as follows:
(p) Reconciliation of the differences between BR GAAP and U.S. GAAP
i. Net income
ii. Stockholders equity
(q) Condensed consolidated financial statements under U.S. GAAP
Based on the reconciliation items and description above, the condensed consolidated balance sheet, condensed consolidated statement of operations and condensed statement of changes in stockholders equity of TAM and condensed consolidated statement of cash flow, under U.S. GAAP, are as follows:
i. Consolidated balance sheets under U.S. GAAP:
(ii) Consolidated statements of operations under U.S. GAAP
(iii) Condensed statement of stockholders equity movement under U.S. GAAP
(iv) Consolidated statement of cash flow under U.S. GAAP
(r) Business segments
Under BR GAAP, no separate segment reporting is required.
Under U.S. GAAP, SFAS 131 Disclosures about Segments of an Enterprise and Related Information defines operating segments as components of an enterprise for which separate financial information is available and evaluated regularly for assessing segment performance and allocating resources to segments. Measures of profit or loss, total assets and other related information are required to be disclosed for each operating segment. In addition, this standard requires the annual disclosure of information concerning revenues derived from the enterprises products or services, countries in which revenues or assets are generated and major customers.
SFAS 131 requires that segment data be presented in the U.S. GAAP financial statements in accordance with the internal information that is used by management for operating decision making, including allocation of resources among segments, and segment performance. This information results from the statutory accounting records kept under BR GAAP. The Company top management analyses its recurring daily business in a single reportable segment as an air transportation enterprise.
(s) Additional disclosure Advertising expenses
Advertising and publicity expenses totaled R$ 22,217 and R$ 73,135 for the three and nine month periods ended September 30, 2008 (September 30, 2007 R$ 13,271 and R$ 39,200), and are classified as selling and marketing expenses.
(t) Fair Value measurement within financial statements
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 157 Fair Value Measurements (SFAS 157). SFAS 157 introduces a framework for measuring fair value and expands requirements for disclosure about fair value measurement of assets and liabilities. The Company has adopted SFAS 157 as from January 1, 2008.
Under U.S. GAAP, paragraph 67 of Concepts Statement No.5 - Recognition and Measurement in Financial Statements, issued by FASB, describes five measurement attributes used in financial statements under current financial accounting principles, for which some of them are detailed approaches in Concepts Statement No. 7 Using Cash Flow Information and Present Value in Accounting Measurements.
In addition, SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
SFAS 157 establishes a fair value hierarchy which requires an entity to maximize the use of observable variables and minimize the use of unobservable variables when measuring fair value. The standard describes three levels of computation that may be used to measure fair value:
Level 1 Quoted prices in active markets for identical assets or liabilities method;
Level 2 Observable variables are fair valued by using either present value or expected present value methods deterministic model;
Level 3 Mostly known as hybrid methodology by applying both deterministic and probabilistic models. Observable and unobservable variables are determined and computed by using either estimated cash flow or expected cash flow methods. Unobservable variables that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities are determined on probabilistically path basis.
All types of marketable securities outstanding as of September 30, 2008 (trading as well as derivatives) were marked-to-market by applying level 2 approaching model, which considers prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities on assumptions made in cash flow estimate, by using present value techniques, for which gain or losses were properly accounted for.
In February, 2007, the FASB issued FAS 159 "The Fair Value Option for Financial Assets and Financial Liabilities" including an amendment of FASB Statement 115 "Accounting for Certain Investments in Debt and Equity Securities", which permits the Company to choose to measure many financial instruments and certain other items at fair value. The Company decided not to use the fresh-start method of accounting on the fair value measurement for financial assets and liabilities, however fair value amounts were disclosed in Note 26, for which the level 1 approaching model was adopted to disclose fair values of senior notes and debentures.
(u) Recently issued accounting pronouncements
As of December 2007, the Financial Accounting Standards Board (FASB) issued SFAS 141R Business Combinations, revised which replaces FASB Statement 141, Commercial Combination. This Statement retains the fundamental requirements in Statement 141 that the purchase method is used for all business combinations. This Statement applies to all business combinations for which the acquisition date is on or after the first annual reporting period starting as of or after December 15, 2008, for which earlier adoption is prohibited. The effective date of this Statement is the same as that of FASB Statement 160, Non-controlling Interests in Consolidated Financial Statements.
As of December 2007, the Financial Accounting Standards Board (FASB) issued SFAS 160, Non-controlling Interests in Consolidated Financial Statements an amendment of ARB 51, which states that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity which shall be reported as equity in the consolidated financial statements. This Statement is effective for fiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited. This Statement shall be applied prospectively as of the beginning of the fiscal year in which this Statement is initially applied, except for the presentation and disclosure requirements. The Company has been evaluating the impact on its financial statements as a result of adopting both SFAS 141 (R) and SFAS 160.
In March 2008, the FASB issued SFAS No. 161, Disclosure about Derivative Instruments and Hedging Activities - an amendment of SFAS 133. This Statement changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entitys financial position, financial performance, and cash flows. This Statement is effective as of the beginning of an entitys fiscal year that begins after December 15, 2008, with early adoption encouraged. The Company has been evaluating the impact on its financial statements as a result of adopting SFAS 161.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. SFAS 162 provides entities to be responsible for selecting its accounting principles for the preparation of financial statements that are presented in conformity with GAAP. This Statement will be effective 60 days following the approval by the Public Company Accounting Oversight Board PCAOB. The Company does not expect a significant impact on its financial statements as a result of adoption of this standard.
* * *
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.
Date: November 10, 2008
This press release may contain forward-looking statements. These statements are statements that are not historical facts, and are based on management's current view and estimates offuture economic circumstances, industry conditions, company performance and financial results. The words "anticipates", "believes", "estimates", "expects", "plans" and similar expressions, as they relate to the company, are intended to identify forward-looking statements. Statements regarding the declaration or payment of dividends, the implementation of principal operating and financing strategies and capital expenditure plans, the direction of future operations and the factors or trends affecting financial condition, liquidity or results of operations are examples of forward-looking statements. Such statements reflect the current views of management and are subject to a number of risks and uncertainties. There is no guarantee that the expected events, trends or results will actually occur. The statements are based on many assumptions and factors, including general economic and market conditions, industry conditions, and operating factors. Any changes in such assumptions or factors could cause actual results to differ materially from current expectations.