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Natura : Financial Statements in International Standards (4Q 2019)

03/06/2020 | 04:38am EST

NATURA &CO HOLDING S.A.

Individual and Consolidated Financial Statements for the year ended December 31, 2019 and Independent Auditor's Report

KPMG Auditores Independentes

Rua Arquiteto Olavo Redig de Campos, 105, 6º andar - Torre A 04711-904 - São Paulo/SP - Brasil

Caixa Postal 79518 - CEP 04707-970 - São Paulo/SP - Brasil Telefone +55 (11) 3940-1500

kpmg.com.br

Independent Auditor's Report on the Individual and Consolidated Financial Statements - Free translation

To the Shareholders of

Natura & Co Holding S.A.

São Paulo - SP

Opinion

We have audited the individual and consolidated financial statements of Natura & Co Holding S.A. ("the Company"), identified as Company and Consolidated, respectively, which comprise the statement of financial position as of December 31, 2019 and the respective statements of profit or loss and other comprehensive income, changes in equity, cash flows for the period from 21 January to 31 December 2019 for the Company and for the year then ended for the Consolidated, the corresponding notes, comprising significant accounting policies and other explanatory information.

In our opinion, the accompanying financial statements present fairly, in all material respects, the, individual and consolidated financial position, of the Natura & Co Holding S.A. as of December 31, 2019, and its individual and consolidated financial performance and cash flows for the period from 21 January to 31 December 2019 and for the year then ended, respectively, in accordance with Accounting Practices Adopted in Brazil and with International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board (IASB).

Basis for Opinion

We conducted our audit in accordance with Brazilian and International Standards on Auditing. Our responsibilities under those standards are further described in the Auditors' Responsibilities for the Audit of the Company and Consolidated Financial Statements section of our report. We are independent of the Company and its subsidiaries in accordance with the ethical requirements that are relevant to our audit included in the Accountant Professional Code of Ethics ("Código de Ética Profissional do Contador") and in the professional standards issued by the Brazilian Federal Accounting Council ("Conselho Federal de Contabilidade") and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

KPMG Auditores Independentes, uma sociedade simples brasileira e firma- membro da rede KPMG de firmas-membro independentes e afiliadas à KPMG International Cooperative ("KPMG International"), uma entidade suíça.

KPMG Auditores Independentes, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity.

2

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the individual and consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Recoverable value of goodwill and other intangible with indefinite useful life from the acquisition of The Body Shop International Limited

See Note16to the individual and consolidated financial statements.

The key audit matter

How the matter was addressed in our audit

The Company maintains in its financial position

Our audit procedures performed with the

relevant amounts related to the acquisition of

assistance of our corporate finance specialists

The Body Shop including goodwill and

included, but were not limited to:

intangibles with indefinite useful lives. The

• Analyses of cash flow projections to determine

determination of the recoverable amount

resulting from this acquisition involves

the recoverable amount, as well as the

uncertainties related to assumptions and

assumptions used in their preparation, such as

estimates that have a significant risk of resulting

discount and growth rates;

in a material misstatement to the accounting

• Comparison of the assumptions with market

balances. The calculation of the recoverable

amount is based on the discounted cash flow

information taking into our knowledge about the

method, considering the fair value less cost of

Company and the industry in which it operates.

disposal, which derives from the projected

Carrying out a sensitivity analysis of the main

financial information for the next five years,

assumptions used in the model adopted by the

according to the operating segment, and the

Company, as well as an analysis of current

projections consider the perspectives for their

performance in comparison to the projected

operating market, the estimates of future

financial information from the previous year.

investments and working capital, in addition to

We evaluated whether the disclosures made in

other economic factors. The amount is sensitive

to the discount rate used in the discounted cash

the individual and consolidated financial

flow methodology, as well as to the growth

statements consider relevant information.

rates. Accordingly, this matter was considered

Based on the audit procedures summarized

to be significant for our audit.

above, we consider acceptable the balances of

goodwill and other intangibles with indefinite

useful life of the businesses acquisition

mentioned above, with regards to their

recoverability, in the context of the individual

and consolidated financial statements taken as

a whole, for the period / year ended December

31, 2019.

KPMG Auditores Independentes, uma sociedade simples brasileira e firma- membro da rede KPMG de firmas-membro independentes e afiliadas à KPMG International Cooperative ("KPMG International"), uma entidade suíça.

KPMG Auditores Independentes, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity.

3

Disclosure of subsequent event related to the acquisition of Avon Products Inc. - Identification and measurement of intangibles

See Note 35to the individual and consolidated financial statements.

The key audit matter

How the matter was addressed in our audit

On January 3, 2020, the Company acquired the

Our audit procedures performed with the

control of Avon Products Inc. whose activity is

assistance of our valuation specialists included,

the commercialization of cosmetic products

but were not limited to:

under the "Avon" brand, substantially, through

• Analysed the relevant documents related to

the direct sale model. Although the allocation

this transaction and the methodologies used by

of the purchase price disclosed in the

the Company in the process to identify and

subsequent event note has been determined

measure the intangibles, based on our

on a preliminary basis, we consider that the

knowledge of the industry and markets in which

estimates associated with the identification and

the acquired entity operates.

measurement of intangible assets, involve

relevant judgments in the calculation of their

• Analysed the databases used in the respective

fair value. Accordingly, we consider the

measurement and compared the main

disclosure of the subsequent event on the

assumptions applied in the projections to the

acquisition of Avon Products Inc., with regard

historical data information of the acquired entity

to the identification and measurement of

and / or with market data.

intangibles, significant for our audit.

• Carried out an evaluation of the competence,

objectivity and technical capacity of the external

specialists hired by the Company involved in this

matter.

We also evaluated whether the disclosures

made in the individual and consolidated

financial statements consider relevant

information.

Based on the audit procedures summarized

above, we consider acceptable the

identification and measurement of the

intangible assets that comprise the disclosure

of the business acquisition in the context of the

individual and consolidated financial statements

taken as a whole, for the period / year ended

December 31, 2019.

Other matters

Statements of value added

The individual and consolidated statements of value added (DVA) for the period ended from January 21, 2019 to December 31, 2019 and for the Company and for the period ended December 31, 2019 for the Consolidated, prepared under the responsibility of the Company's management, and presented herein as supplementary information for IFRS purposes, have been subject to audit procedures jointly performed with the audit of the Company's financial statements. In order to form our opinion, we assessed whether those statements are reconciled with the financial statements and accounting records, as applicable, and whether their format and contents are in accordance with criteria determined in the Technical Pronouncement 09 (CPC 09)

KPMG Auditores Independentes, uma sociedade simples brasileira e firma- membro da rede KPMG de firmas-membro independentes e afiliadas à KPMG International Cooperative ("KPMG International"), uma entidade suíça.

KPMG Auditores Independentes, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity.

4

  • Statement of Value Added issued by the Committee for Accounting Pronouncements (CPC). In our opinion, the statements of value added have been fairly prepared, in all material respects, in accordance with the criteria determined by the aforementioned Technical Pronouncement, and are consistent with the overall individual and consolidated financial statements.

Other information accompanying the individual and consolidated financial statements and the auditor's report

Management is responsible for the other information comprising the management report.

Our opinion on the individual and consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.

In connection with our audit of the individual and consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the individual and consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact.

Responsibilities of Management and Those Charged with Governance for the Individual and Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the individual and consolidated financial statements in accordance with Accounting Practices Adopted in Brazil and with International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board (IASB) and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the individual and consolidated financial statements, management is responsible for assessing the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company and subsidiaries or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Company's and subsidiaries financial reporting process.

Auditors' Responsibilities for the Audit of the Individual and Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the individual and consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors' report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Brazilian and international standards on auditing will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

As part of an audit in accordance with Brazilian and international standards on auditing, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

  • Identify and assess the risks of material misstatement of the individual and consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is

KPMG Auditores Independentes, uma sociedade simples brasileira e firma- membro da rede KPMG de firmas-membro independentes e afiliadas à KPMG International Cooperative ("KPMG International"), uma entidade suíça.

KPMG Auditores Independentes, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity.

5

higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

  • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's and its subsidiaries internal control.
  • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
  • Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company's and its subsidiaries ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors' report to the related disclosures in the individual and consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors' report. However, future events or conditions may cause the Company and subsidiaries to cease to continue as a going concern.
  • Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the individual and consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
  • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the individual and consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditors' report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

São Paulo, March 05, 2020

KPMG Auditores Independentes

CRC 2SP014428/O-6

KPMG Auditores Independentes CRC 2SP014428/O-6

Original report in Portuguese signed by Rogério Hernandez Garcia Accountant CRC1SP213431/O-5

KPMG Auditores Independentes, uma sociedade simples brasileira e firma- membro da rede KPMG de firmas-membro independentes e afiliadas à KPMG International Cooperative ("KPMG International"), uma entidade suíça.

KPMG Auditores Independentes, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity.

6

NATURA &CO HOLDING S.A.

BALANCE SHEET AT DECEMBER 31, 2019 AND DECEMBER 31, 2018 (All amounts in thousands of Brazilian reais - R$)

ASSETS

CURRENT ASSETS

Cash and cash equivalents Securities

Trade receivables

Trade receivables - related parties Inventories

Recoverable taxes

Income tax and social contribution Other current assets

Total current assets

NON-CURRENT ASSETS

Recoverable taxes

Income tax and social contribution Deferred income tax and social contribution Judicial deposits

Derivative financial instruments Securities

Other non-current assets Total long-term assets

Investments

Property, plant and equipment

Intangible assets

Right of use

Total non-current assets

Note

Company

Consolidated

2019

2018

2019

2018

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT

6

2,380,800

-

4,513,582

1,215,048

Loans, financing and debentures

7

669,769

-

1,025,845

1,215,377

Lease

8

-

-

1,685,764

1,691,581

Trade payables and forfait operations

31.1

-

-

-

-

Trade payables - related parties

9

-

-

1,430,550

1,364,672

Payroll, profit sharing and social charges

10

-

-

395,640

379,253

Tax liabilities

5

-

113,478

326,803

Income tax and social contribution

13

-

-

265,198

263,025

Dividends and interest on shareholders' equity payable

3,050,574

-

9,430,057

6,455,759

Derivative financial instruments

Provision for tax, civil and labor risks

Other current liabilities

Total current liabilities

10

-

-

409,214

368,640

NON-CURRENT

-

-

334,671

-

Loans, financing and debentures

11.a)

-

-

374,448

398,400

Lease

12

-

-

337,255

333,577

Tax liabilities

4.2

-

-

737,378

584,308

Deferred income tax and social contribution

7

-

-

7,402

-

Provision for tax, civil and labor risks

13

-

-

83,836

51,606

Other non-current liabilities

-

-

2,284,204

1,736,531

Total non-current liabilities

14

3,392,677

-

-

-

SHAREHOLDERS' EQUITY

15

-

-

1,773,889

2,236,714

Capital stock

16

-

-

5,076,501

4,950,545

Treasury shares

17

-

-

2,619,861

-

Capital reserves

Retained earnings

3,392,677

-

11,754,455

8,923,790

Proposed additional dividend

Losses on capital transaction

Equity valuation adjustment

Total shareholders' equity

Note

Company

Consolidated

2019

2018

2019

2018

18

2,883,382

-

3,354,355

1,113,095

17

-

-

542,088

68,764

19

-

-

1,829,756

1,736,791

31.1

-

-

-

-

-

-

560,376

574,381

20

1,050

-

320,890

310,093

196,474

-

388,238

183,030

23.b)

-

-

95,873

152,979

4.2

-

-

11,806

69,189

21

-

-

18,650

20,389

22

-

-

396,391

338,170

3,080,906

-

7,518,423

4,566,881

18

-

-

7,432,019

6,881,050

17

-

-

1,975,477

377,471

20

-

-

122,569

165,326

11.a)

-

-

450,561

431,534

21

-

-

201,416

241,418

22

-

-

121,702

141,767

-

-

10,303,744

8,238,566

1,485,436

-

1,485,436

427,073

23.c)

-

-

-

(19,408)

1,302,990

-

1,302,990

329,330

23.e)

(149,020)

-

(149,020)

1,437,015

-

-

-

-

(92,066)

-

(92,066)

(92,066)

815,005

-

815,005

492,158

3,362,345

-

3,362,345

2,574,102

TOTAL ASSETS

6,443,251

-

21,184,512

15,379,549TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

6,443,251

-

21,184,512

15,379,549

* The notes are an integral part of the financial statements

7

NATURA &CO HOLDING S.A.

STATEMENT OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018

(All amounts in thousands of Brazilian reais - R$, except for earnings per share in the period)

Note

Company

Consolidated

2019

2018

2019

2018

NET REVENUE

25

-

-

14,444,690

13,397,419

Cost of products sold

26

-

-

(4,033,454)

(3,782,843)

GROSS PROFIT

-

-

10,411,236

9,614,576

OPERATING (EXPENSES) INCOME

Selling, Marketing and Logistics expenses

26

-

-

(6,395,586)

(5,828,713)

Administrative, R&D, IT and Project expenses

26

-

-

(2,405,576)

(2,251,341)

Impairment losses on trade receivables

-

-

(209,515)

(237,884)

Equity in subsidiaries

14

89,332

-

-

-

Other operating income (expenses), net

29

-

-

(49,311)

(39,945)

OPERATING PROFIT BEFORE FINANCIAL RESULT

89,332

-

1,351,248

1,256,693

Financial income

28

8,161

-

1,955,784

2,056,421

Financial expenses

28

(48,611)

-

(2,795,874)

(2,639,709)

Taxes on Company formation

(206,592)

-

(206,592)

-

PROFIT BEFORE INCOME TAX AND

SOCIAL CONTRIBUTION

(157,710)

-

304,566

673,405

Income tax and social contribution

11.b)

10,118

-

(149,099)

(125,026)

NET INCOME FOR THE YEAR

(147,592)

-

155,467

548,379

EARNINGS PER SHARE IN THE YEAR -R$

Basic

30.1.

(1.8600)

-

0.1796

0.6335

Diluted

30.2.

(1.6873)

-

0.1779

0.6324

* The notes are an integral part of the financial statements

8

NATURA &CO HOLDING S.A.

STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 (All amounts in thousands of Brazilian reais - R$)

Note

Company

Consolidated

2019

2018

2019

2018

NET INCOME FOR THE PERIOD

(147,592)

-

155,467

548,379

Other comprehensive income to be reclassified to profit or loss in subsequent periods:

Gain from translation of financial statements of subsidiaries abroad

14

(73,268)

-

244,100

483,212

Exchange rate effect on the translation from hyperinflationary economy

14

-

-

17,666

(19,074)

Gain (loss) from cash flow hedge operations

4.2

-

-

107,337

(45,202)

Tax effects on gain (loss) from cash flow hedge operations

-

-

(36,768)

15,384

Equity income (loss) from cash flow hedge operation

(15,769)

-

-

-

Equity in tax effects on gain (loss) from cash flow hedge operations

(203)

-

-

-

Other comprehensive income not reclassified to profit or loss in subsequent periods:

Actuarial gain (loss)

22

-

-

(14,374)

(7,030)

Tax effects on acturial gain (loss)

22

-

-

4,887

11,532

Equity in actuarial loss

22

(9,731)

-

-

-

Equity in tax effects on acturial gain (loss)

22

4,548

-

-

-

Comprehensive income for the year, net of tax effects

(242,015)

-

478,315

987,201

* The notes are an integral part of the financial statements

9

NATURA &CO HOLDING S.A.

STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018

(All amounts in thousands of Brazilian reais - R$)

Negative

Equity

goodwill on

valuation

capital

adjustments

Capital reserves

transactions

Tax incentive

Profit reserves

Result from

Surplus on

Additional

operations

Other

Total

Treasury

Special

reserve

Retained

Note

Capital stock

issue/sale of

paid-in

with non-

comprehensi

shareholders'

shares

reserve

Subsidy for

Tax

Profit

earnings

shares

capital

Legal

controlling

ve income

equity

investments

incentives

retention

shareholders

BALANCES AT DECEMBER 31, 2017

427,073

(32,544)

75,588

-

17,378

62,755

18,650

20,957

1,083,619

-

(92,066)

53,336

1,634,746

Net income for the period

-

-

-

-

-

-

-

-

-

548,379

-

-

548,379

Exchange rate effect on the translation from hyperinflationary economy

-

-

-

-

-

-

-

-

-

-

-

(19,074)

(19,074)

Other comprehensive income (loss)

-

-

-

-

-

-

-

-

-

-

-

457,896

457,896

Total comprehensive income (loss) for the year

-

-

-

-

-

-

-

-

-

548,379

-

438,822

987,201

Changes in stock option plans and restricted shares:

Provision for stock option plans and restricted shares

27.1

-

-

-

-

-

52,543

-

-

-

-

-

-

52,543

Exercise of stock option plans and restricted shares

-

13,136

(3,372)

-

-

(8,697)

-

-

-

-

-

-

1,067

Changes in tax incentive reserves

-

-

-

-

(17,378)

-

-

17,378

-

-

-

-

-

Dividends declared and not distributed yet (minimum mandatory)

23.b)

-

-

-

-

-

-

-

-

-

(56,661)

-

-

(56,661)

Interest on capital declared and not distributed yet (minimum mandatory)

23.b)

-

-

-

-

-

-

-

-

-

(111,449)

-

-

(111,449)

Retained earnings reserve

23.b)

-

-

-

-

-

-

-

-

336,532

(336,532)

-

-

-

Recording of tax incentive reserve

23.b)

-

-

-

-

-

-

-

43,737

-

(43,737)

-

-

-

Effect from adjustment to hyperinflationary economy

-

-

-

-

-

150,513

-

-

(83,858)

-

-

-

66,655

BALANCES AT DECEMBER 31, 2018

427,073

(19,408)

72,216

-

-

257,114

18,650

82,072

1,336,293

-

(92,066)

492,158

2,574,102

Net income for the period

-

-

-

-

-

-

-

-

-

392,391

-

-

392,391

Exchange rate effect on the translation from hyperinflationary economy

-

-

-

-

-

-

-

-

-

-

-

17,665

17,665

Other comprehensive income (loss)

-

-

-

-

-

-

-

-

-

-

-

305,182

305,182

Total comprehensive income (loss) for the year

-

-

-

-

-

-

-

-

-

392,391

-

322,848

715,239

Capital increase

23.a)

52,673

-

-

-

-

-

-

-

-

-

-

-

52,673

Changes in stock option plans and restricted shares:

Provision for stock option plans and restricted shares

27.1

-

-

-

-

-

104,078

-

-

-

-

-

-

104,078

Exercise of stock option plans and restricted shares

-

15,615

16,156

-

-

(34,333)

-

-

-

-

-

-

(2,562)

Cancellation of shares - RCA 16.12.19 - Protocol and convention of incorporation

-

3,793

(3,793)

-

-

-

-

-

-

-

-

-

-

Dividends declared and not distributed yet (exceeding the minimum mandatory)

23.b)

-

-

-

-

-

-

-

-

-

-

-

-

-

Interest on capital declared and not distributed yet (minimum mandatory)

23.b)

-

-

-

-

-

-

-

-

-

(110,671)

-

-

(110,671)

Retained earnings reserve

23.b)

-

-

-

-

-

-

-

-

206,268

(206,268)

-

-

-

Recording of tax incentive reserve

23.b)

-

-

-

-

-

-

-

75,452

-

(75,452)

-

-

-

Effect from adjustment to hyperinflationary economy

-

-

-

-

-

61,870

-

-

(2,052)

-

-

-

59,818

AGE 17.09.2019 - Capitalization of part of the balance of the Profit Reserve account

1,242,165

-

-

-

-

-

-

-

(1,242,165)

-

-

-

-

BALANCES AT DECEMBER 31, 2019 NATURA COSMÉTICOS S.A.

1,721,911

-

84,579

-

-

388,729

18,650

157,524

298,344

-

(92,066)

815,006

3,392,677

Predecessor adjustments (Note 1)

(236,475)

-

1,011,819

206,592

-

(388,729)

(18,650)

(157,524)

(299,772)

(147,592)

-

-

(30,331)

BALANCES AT DECEMBER 31, 2019 NATURA HOLDING S.A.

1,485,436

-

1,096,398

206,592

-

-

-

-

(1,428)

(147,592)

(92,066)

815,006

3,362,346

* The notes are an integral part of the financial statements

10

NATURA &CO HOLDING S.A.

STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 (All amounts in thousands of Brazilian reais - R$)

Negative

goodwill on

Equity valuation

Capital reserves

capital

adjustments

transactions

Profit

Result from

reserves

Treasury

Surplus on

Special

Appropriation

operations

Other

Non-

Total

Capital stock

issue/sale of

with non-

comprehensive

controlling

shareholders'

shares

reserve

Retained

of earnings

shares

controlling

income

interests

equity

earnings

shareholders

COMPANY FORMATION ON JANUARY 21, 2019

-

-

-

-

-

-

-

-

-

-

Capital subscription through general meeting occurred in november 13, 2019

495,393

-

650,601

826,368

-

-

-

-

1,317,526

3,289,888

Capitalization of reserve through general meeting occurred in november 13, 2019

619,776

-

-

(619,776)

-

-

-

-

-

-

Net income of Natura Cosméticos attributed to non-controlling interests

-

-

-

-

-

-

-

-

(216,512)

(216,512)

Capital Subscription through Board meeting occurred in december 17, 2019

370,267

-

730,747

-

-

-

-

-

(1,101,014)

-

Effect of change in interest in subsidiary

-

-

(284,950)

-

-

-

-

-

-

(284,950)

Total comprehensive income (loss) for the year

-

-

-

-

-

-

-

815,006

-

815,006

Net income of non controlling interests

-

-

-

-

-

-

(92,066)

-

-

(92,066)

Net income of the year

-

-

-

-

-

(147,592)

-

-

-

(147,592)

Adjustment effect of hyperinflationary economy

-

-

-

-

(1,428)

-

-

-

-

(1,428)

BALANCE AS OF DECEMBER 31, 2019

1,485,436

-

1,096,398

206,592

(1,428)

(147,592)

(92,066)

815,006

-

3,362,346

* The notes are an integral part of the financial statements

11

NATURA &CO HOLDING S.A.

STATEMENT OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 (All amounts in thousands of Brazilian reais - R$)

Note

Company

Consolidated

2019

2018

2019

2018

CASH FLOW FROM OPERATING ACTIVITIES

Net income for the period

(147,592)

-

155,467

548,379

Adjustments to reconcile net income for the period with net cash generated by operating activities:

Depreciation and amortization

16 e 17

-

-

1,117,416

589,911

Interest on investments and securities

26

-

-

(78,414)

(129,296)

Provision (reversal of provision) arising from swap and forward derivative contracts

-

-

(38,703)

(543,398)

Provision (reversal of provision) for tax, civil and labor risks

21

-

-

(24,509)

40,193

Inflation adjustment of escrow deposits

-

-

(13,352)

(13,780)

Inflation adjustment of contingencies

-

-

9,758

4,346

Income tax and social contribution

11.b)

(10,118)

-

149,099

125,026

Taxes on Company formation

206,592

-

206,592

-

Result from sale and write-off of property, plan and equipment and intangible assets

15

-

-

34,518

16,057

Equity in subsidiaries

14

(89,332)

-

-

-

Interest and exchange variation on leases

16

-

-

127,398

52,011

Interest and exchange rate variation on borrowings and financing

17

4,345

-

582,519

1,187,869

Restatement and exchange rate variation on other assets and liabilities

-

-

5,764

(3,535)

Provision (reversal of provision) for losses from property, plant and equipment and intangible assets

15

-

-

3,541

8,516

Provision (reversal of provision) for stock option plans and restricted shares

-

-

59,232

40,376

Effective losses and provision for losses with trade receivables, net of reversals

8

-

-

209,505

(237,884)

Provision (reversal of provision) for inventory losses, net

9

-

-

147,140

22,743

Provision (reversal of provision) for post-employment health care plan and carbon credit

22 e 22.a)

-

-

19,969

(34,914)

Gain on acquisition of registered warrants

-

-

-

-

Effect from hyperinflationary economy

-

-

51,659

45,198

Other provisions (reversals)

-

-

(134,212)

(173,009)

(36,106)

-

2,590,386

1,544,809

(INCREASE) DECREASE IN ASSETS

Trade receivables

-

-

(212,812)

60,309

Inventories

-

-

(194,698)

(112,331)

Recoverable taxes

-

-

(6,369)

84,982

Other assets

-

-

(56,440)

(67,864)

Subtotal

-

-

(470,319)

(34,904)

(INCREASE) DECREASE IN LIABILITIES

Domestic and foreign trade payables

-

-

117,080

158,978

Payroll, profit sharing and social charges, net

-

-

(15,855)

215,412

Tax liabilities

1,050

-

91,520

(23,105)

Other liabilities

-

-

21,204

(52,247)

Subtotal

1,050

-

213,949

299,038

CASH GENERATED BY OPERATING ACTIVITIES

(35,056)

-

2,334,017

1,808,943

OTHER CASH FLOWS FROM OPERATING ACTIVITIES

Recovery (payment) of income tax and social contribution

(5)

-

(321,262)

(269,966)

Accruals (payments) of judicial deposits

-

-

9,674

(364)

Payments related to tax, civil and labor lawsuits

21

-

-

(27,179)

(36,464)

Payments due to settlement of derivative operations

-

-

(66,420)

(30,967)

Interest paid on lease

16

-

-

(134,579)

(22,691)

Payment of interest on borrowings, financing and debentures

17

-

-

(493,895)

(604,224)

NET CASH GENERATED BY (USED IN) OPERATING ACTIVITIES

(35,061)

-

1,300,356

844,267

CASH FLOW FROM INVESTING ACTIVITIES

Cash from merger of subsidiary

-

-

-

-

Additions of property, plant and equipment and intangible assets

15

-

-

(586,395)

(485,016)

Proceeds from sale of property, plant and equipment and intangible assets

-

-

22,682

6,641

Investment in securities

(669,769)

-

(7,161,530)

(8,483,684)

Redemption of securities

-

-

7,345,389

9,187,748

Redemption of interest on investments and securities

-

-

65,504

163,407

Receipts of dividends from subsidiaries

-

-

-

-

Capital increase in subsidiaries

14

-

-

-

-

NET CASH PROVIDED BY INVESTING ACTIVITIES

(669,769)

-

(314,350)

389,096

CASH FLOW FROM FINANCING ACTIVITIES

Amortization of lease - principal

16

-

-

(497,905)

(46,241)

Amortization of loans, financing and debentures - principal

17

(20,962)

-

(2,643,575)

(6,552,249)

New loans, financing and debentures

17

2,900,000

-

5,346,145

5,015,278

Acquisition of treasury shares, net of option strike price received

-

-

(2,562)

1,067

Payment of dividends and interest on capital for the previous year

23.b)

-

-

(152,938)

(201,652)

Receipts (payments) to settle derivative operations

-

-

3,992

32,401

Receipt by exercised stock options

27.1

-

-

52,673

-

Capital increase

27.1

206,592

-

206,592

-

NET CASH USED IN FINANCING ACTIVITIES

3,085,630

-

2,312,422

(1,751,396)

Effect of exchange variation on cash and cash equivalents

-

-

106

39,950

DECREASE IN CASH AND CASH EQUIVALENTS

2,380,800

-

3,298,534

(478,083)

Opening balance of cash and cash equivalents

6

-

-

1,215,048

1,693,131

Closing balance of cash and cash equivalents

6

2,380,800

-

4,513,582

1,215,048

DECREASE IN CASH AND CASH EQUIVALENTS

2,380,800

-

3,298,534

(478,083)

* The notes are an integral part of the financial statements

12

NATURA &CO HOLDING S.A.

STATEMENT OF VALUE ADDED

FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018 (All amounts in thousands of Brazilian reais - R$)

Note

Company

Consolidated

2019

2018

2019

2018

INCOME

-

-

18,474,068

17,005,145

Sale of goods, products and services

-

-

18,342,780

17,086,189

Provision for doubtful accounts, net of reversals

8

-

-

21,247

(11,689)

Other operating expenses, net

-

-

110,041

(69,355)

INPUTS ACQUIRED FROM THIRD PARTIES

-

-

(10,776,149)

(10,002,306)

Cost of products sold and services

-

-

(5,413,253)

(4,960,201)

Materials, electricity, outsourced services and others

-

-

(5,362,896)

(5,042,105)

GROSS VALUE ADDED

-

-

7,697,919

7,002,839

RETENTIONS

-

-

(1,117,416)

(589,911)

Depreciation and amortization

15 e 16

-

-

(1,117,416)

(589,911)

VALUE ADDED PRODUCED BY THE COMPANY

-

-

6,580,503

6,412,928

TRANSFERRED VALUE ADDED

97,493

-

1,955,784

2,056,421

Equity in subsidiaries

14

89,332

-

-

-

Financial income - including inflation adjustments and exchange rate variations

28

8,161

-

1,955,784

2,056,421

TOTAL VALUE ADDED TO DISTRIBUTE

97,493

-

8,536,287

8,469,349

DISTRIBUTION OF VALUE ADDED

97,493

-

8,536,287

100%

8,469,349

100%

Payroll and social charges

-

-

3,010,938

34%

2,813,413

33%

Taxes, fees and contributions

196,474

-

2,545,969

30%

2,414,119

29%

Financial expenses and rentals

48,611

-

2,823,913

33%

2,693,438

32%

Dividends

-

-

-

56,661

Interest on equity

-

-

110,671

111,449

Retained earnings

(147,592)

-

44,796

1%

380,269

4%

* The notes are an integral part of the financial statements

13

CONTENTS

1.

GENERAL INFORMATION ............................................................................................................................

15

2.

MANAGEMENT STATEMENT AND BASIS OF PRESENTATION OF THE FINANCIAL STATEMENTS...................

16

3.

SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES ...............................................................................

17

4.

CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS............................................................................

36

5.

FINANCIAL RISK MANAGEMENT .................................................................................................................

38

6.

CASH AND CASH EQUIVALENT ....................................................................................................................

45

7.

SHORT-TERMINVESTMENTS.......................................................................................................................

45

8.

TRADE RECEIVABLES ...................................................................................................................................

46

9.

INVENTORIES..............................................................................................................................................

47

10.

RECOVERABLE TAXES..................................................................................................................................

47

11.

INCOME TAX AND SOCIAL CONTRIBUTION .................................................................................................

48

12.

JUDICIAL DEPOSITS.....................................................................................................................................

50

13.

OTHER CURRENT ANDNON-CURRENTASSETS............................................................................................

51

14.

INVESTMENTS ............................................................................................................................................

51

15.

PROPERTY, PLANT AND EQUIPMENT ..........................................................................................................

52

16.

INTANGIBLES ..............................................................................................................................................

54

17.

RIGHT OF USE AND LEASE...........................................................................................................................

57

18.

BORROWINGS, FINANCING AND DEBENTURES ...........................................................................................

59

19.

TRADE PAYABLES AND FORFAIT OPERATIONS ............................................................................................

63

20.

TAX PAYABLES ............................................................................................................................................

63

21.

PROVISION FOR TAX, CIVIL AND LABOR RISKS............................................................................................

64

22.

OTHER LIABILITIES ......................................................................................................................................

66

23.

SHAREHOLDER'S EQUITY ............................................................................................................................

67

24.

SEGMENT INFORMATION ...........................................................................................................................

68

25.

NET REVENUE .............................................................................................................................................

70

26.

OPERATING EXPENSES AND COST OF SALES ...............................................................................................

70

27.

EMPLOYEE BENEFITS ..................................................................................................................................

71

28.

FINANCIAL INCOME (EXPENSES) .................................................................................................................

74

29.

OTHER OPERATING INCOME (EXPENSES), NET............................................................................................

75

30.

EARNINGS PER SHARE ................................................................................................................................

75

31.

RELATED-PARTYTRANSACTIONS ................................................................................................................

76

32.

COMMITMENTS..........................................................................................................................................

77

33.

INSURANCE ................................................................................................................................................

78

34.

ADDITIONAL STATEMENTS OF CASH FLOWS...............................................................................................

78

35.

SUBSEQUENT EVENTS.................................................................................................................................

78

36.

APPROVAL OF FINANCIAL STATEMENTS .....................................................................................................

80

14

A free translation from Portuguese into English of Individual and Consolidated Financial Statements prepared in Brazilian currency in accordance with accounting practices adopted in Brazil and in accordance with International Financial Reporting Standards (IFRS), issued by International Accounting Standards Board - IASB)

NATURA &CO HOLDING S.A.

NOTES TO THE INDIVIDUAL AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2019

(Amounts in thousands of Brazilian reais - R$, unless otherwise stated)

1. GENERAL INFORMATION

NATURA &CO HOLDING S.A. ("Natura &Co" or "Company"), previously called Natura Holding S.A., was incorporated on January 21, 2019, with the purpose of holding interest in other companies, as partner or shareholder, in Brazil or abroad ("holding company"). The purpose of the Company is to manage shareholding interest in companies that perform their main activities in the cosmetics, fragrances and personal hygiene sector, through the development of manufacturing, distribution and commercialization of its products. The Company's main brand is "Natura", followed by the English brand "The Body Shop" and the Australian brand "Aesop". In addition to using the retail market, e-commerce, B2B and franchises as product sales channels, its subsidiaries are highlighted by the direct sales channel, carried out mainly by the consultants from Natura and The Body Shop brands.

The Company is a publicly-traded corporation, domiciled in São Paulo, registered in the special trading segment called "Novo Mercado" in the B3 S.A. - Brasil, Bolsa, Balcão (B3), under the ticker "NTCO3." After several restructuring activities during the acquisition process of Avon Products, Inc. ("Avon"), the Company became the holding company of the Natura group and, since December 2019, hold 100% of the shares of Natura Cosméticos S.A. ("Natura"). On January 6, 2020, the Company started to trade its shares on the New York Stock Exchange ("NYSE"), under the ticker "NTCO".

The Company was incorporated as part of a corporate restructuring process started by Natura, on May 22, 2019, with the purpose of concluding the merger of Avon Products, Inc ("Avon") through a share merger and swap process between Avon and the Company, resulting in the business combination ("Operation").Corporate restructuring to acquire the control of Avon Products, Inc.

a) Corporate restructuring to acquire the control of Avon Products, Inc

On May 22, 2019, the Company's current subsidiary Natura announced the acquisition of Avon (NYSE: AVP), in a share swap agreement, creating the world's fourth largest exclusive beauty group by uniting companies strongly committed to generating positive social impact.

The Operation involved a series of corporate acts, as shown below:

Preparatory Step - Capitalization of Profits

On September 17, 2019, Natura called and held an extraordinary shareholders' meeting in which Natura shareholders approved the capitalization of earnings reserves in the amount of R$1,242,165, with bonus share distribution to Natura shareholders at amount equal to one Natura bonus share for each Natura share held.

Step 1 - Contribution from Founders

On November 13, 2019, Natura shareholders who signed the Voting and Support Agreement of Natura Founders ("Founders"), or who signed adhesion to this agreement, contributed to Natura &Co a number of shares corresponding to approximately 57.3%, of Natura capital ("Contribution from Founders") in the amount of R$1,145,994, of which R$495,393 as capital payment and R$650,601 as capital reserve. Additionally, the Founders made a contribution in cash of R$206,592 for the Company to pay the corporate income tax that may be calculated on the special equity reserve classified jointly with capital reserves to be registered as a result of Founders' Contribution, in exchange for Company shares.

Step 2 - Merger of Shares of Natura Cosméticos

All Natura Cosméticos shares not previous held by Natura &Co Holding until step 2, were merged into Natura &Co Holding, and Natura Cosméticos became a wholly owned subsidiary of Natura &Co ("Share Merger" and, jointly with Founders' Contribution, "Natura Restructuring"). The decision was taken through extraordinary shareholders' meeting held on November 13, 2019, and the Share Merger was consummated on December 17, 2019, in the amount of R$1,101,013, of which R$370,266 as capital payment and R$730,747 as capital reserve, as per material fact notices disclosed by Natura &Co. Natura is no longer listed on B3, but it is still registered under B Category at CVM. Within the context of extraordinary shareholders' meeting for the Share Merger, Natura

15

established a Special Independent Committee to negotiate the share exchange rate in accordance with CVM Guideline Report 35/2008.

2. MANAGEMENT STATEMENT AND BASIS OF PRESENTATION OF THE FINANCIAL STATEMENTS

The individual and consolidated financial statements were prepared in accordance with the International Financial Reporting Standards ("IFRS"), issued by the International Accounting Standards Board" ("IASB"), and interpretations issued by the International Financial Reporting Interpretations Committee ("IFRIC"), introduced in Brazil through the Accounting Pronouncements Committee of Brazil ("CPC") and its interpretations ("ICPC") and technical guidelines ("OCPC"), approved by the Securities and Exchange Commission of Brazil ("CVM").

The Company's individual and consolidated financial statements are expressed in thousands of Brazilian reais ("R$"), and the amounts expressed in other currencies, whenever necessary, are also disclosed in thousands. The items disclosed in other currencies are duly identified, whenever applicable.

Management confirms that all relevant information in the financial statements, and only them, are being disclosed, and they correspond to those used in the development of its business management activities.

  1. Basis of presentation of Company's consolidated financial statements before the corporate restructuring
    (Note 1a)

Business combinations between companies under common control have not yet been specifically addressed by accounting practices adopted in Brazil ("CPCs") and the international financial reporting standards ("IFRS"). Therefore, in accordance with paragraph 11 of IAS 8/CPC 23 - Accounting Policies, Changes in Accounting Estimates and Errors, Management considered the requirements and Pronouncements, Interpretations and Guidelines that address similar and related matters.

IFRS 3 / CPC 15(R1) - Business Combination is the pronouncement addressing business combinations, it clearly excludes from its scope the business combinations between entities under common control and, therefore, cannot be applied in this case.

As an alternative, complying with paragraphs 10 and 11 of IAS 8/CPC 23, where there is a lack of guidelines of the Conceptual Structure for Preparation and Presentation of Financial Statements, the Management may also consider the most recent technical positions assumed by other accounting regulation agencies using a conceptual structure similar to that of the CPC to develop accounting pronouncements, or, other accounting literature and practices generally accepted in the industry, to the extent that they do not show conflict with the sources provided for in paragraph 11 of IAS 8 / CPC 23.

The predecessor basis of accounting is an accounting alternative and is in line with the accounting practices of other countries, such as the accounting practices generally accepted in the United States and United Kingdom ("USGAAP" and "UKGAAP", respectively), which allow the use of this practice in corporate restructuring and other operations between entities under common control. Therefore, Management elected the predecessor method the accounting practice that best represents the operation and provides the investor with the most significant information.

The adoption of the predecessor basis of accounting, as well as its application in a retroactive manner , represents a change in accounting practice as provided for in paragraph 29 of IAS 8/CPC 23. As such, these effects are being presented for all comparative periods.

On December 31, 2019, the Company holds 100% of Natura shares and, therefore, for comparison purposes, the amounts presented in the year ended December 31, 2018 refer to Natura.

The Company's financial statements, with the adoption of the predecessor basis of accounting, were prepared to reflect:

  • the historical results of operations and financial position of Natura Cosméticos and the Company, in a combined basis;
  • the effects from initial merger of Natura by the Company, which represent its accounting information for the investment in Natura Cosméticos; and
  • thenon-controlling interest in the Company, which was determined based on the proportional interest in identifiable equity and net income.

The individual financial statements include entries to reflect the equity in the investee Natura while the Consolidated financial statements were prepared considering that Natura was controlled by the Company since January 1, 2019.

16

b) Basis of presentation of the individual financial statements of the Controller at December 31, 2019

The Company, which individually is the parent company of Natura, has limited transactions since its establishment, and its main transactions include the corporate restructuring referred to in Note 1. Accordingly, its main result originates from recognizing equity in the earnings (losses) of Natura. The predecessor basis of accounting does not apply to individual financial statements, therefore, to comply with the regulatory requirements imposed to the individual Company ("Parent Company"), its accounting presentation for the fiscal year ended December 31, 2019 is shown in the Notes below.

  1. Reconciliation of Company's individual results and Company's consolidated results

Net loss for the year - Natura &Co Holding - Parent Company

Natura Cosméticos results - Consolidated up to November 13, 2019

Natura Cosméticos results - Consolidated from November 14, 2019 to November 30, 2019 Natura Cosméticos results - Consolidated from November 30, 2019 to December 17, 2019 Natura Cosméticos results - Consolidated from December 18, 2019 to December 31, 2019

(+) Consolidated net income of Natura Cosméticos

Equity in the earnings or loss - Nov. 14 to Dec. 17, 2019 - participation of 57.3% Equity in the earnings or loss - Dec. 18 to Dec. 31, 2019 - participation of 100%

(-) Equity in the earnings or losses

  1. Net income for the year - Natura &Co Holding - Consolidated
  1. Reconciliation of the Company and Natura's shareholders' equity

Company

Natura

Capital stock (a)

1,485,435

1,721,911

Surplus on issue/sale of shares (b)

1,096,398

84,579

Special reserve (a)

206,592

-

Additional paid-in capital (b)

-

388,729

Profit reserves - Legal (b)

-

18,650

Profit reserves - Tax incentives (b)

-

157,524

Profit reserve - retention (c)

(1,428)

298,344

Retained losses (c)

(147,592)

-

(147,592)

228,415

81,998

92,516

(10,537)

392,391

99,869

(10,537)

(89,332)

155,467

Predecessor adjustments

(236,476)

1,011,819

206,592

(388,729)

(18,650)

(157,524)

(299,772)

(147,592)

  1. The acts for the Company formation acts resulted in a Share Capital of R$ 1,485,435 and a statutory reserve, called special reserve, of R$ 206,592. Considering that capital contributed by the controlling shareholders was measured based on the Natura's equity on November 13, 2019, and later, by the other shareholders, on December 17, 2019, the mathematical calculation showed a difference of R$ 236,476 to adjustment the Capital in December 31, 2019, reflected in the corresponding large social groups on December 31, 2019.
  2. The balance of other comprehensive income reflects Natura figures, since there are recyclable items for the statement of income in the future, when applicable. The remaining AdditionalPaid-in Capital reserve, Legal Profit reserve, Tax Incentives and Proposed Additional Dividend are not applicable in the Company, so they were adjusted and added to the initial capital contribution balance. The adjustment of R $ 1,011,819 recorded in the "Surplus on issue/sale of shares" corresponds to the mathematical calculation to reflect this movement.
  3. Retained earnings and profit reserve - retention, reflect the Company operation during the period.

3. SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES

The main accounting practices applied in the preparation of these financial statements are defined below. These practices have been applied consistently in all the years presented with the exception of the accounting practices presented in note 3.29, which were adopted as from the year started on January 1, 2019.

3.1 Basis of preparation

The financial statements have been prepared in accordance with the International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and accounting practices adopted in Brazil which include those established in the Brazilian Corporate Law as well as the Pronouncements, Instructions and Interpretations issued by the Accounting Pronouncements Committee (CPC) and approved by the Brazilian Securities and Exchange Commission (CVM).

17

All relevant information specific to these financial statements, and only such information, is presented, which corresponds to that used by Management in its administration of Natura &Co.

3.2 Foreign currency conversion Functional currency

Items included in the financial statements of the Company and each of its the subsidiaries included in the consolidated financial statements are measured using the currency of the main economic environment in which the companies operate ("functional currency").

3.2.1 Transactions and balances using currency that differ from the functional currency

Foreign-denominated transactions are translated into the Company' functional currency - Brazilian reais (R$) - at the exchange rates prevailing on the dates of the transactions. Balance sheet accounts are translated at the exchange rates prevailing at the end of the reporting period. Foreign exchange gains and losses arising on the settlement of such transactions and the translation of monetary assets and monetary liabilities denominated in foreign currency are recognized in profit or loss, in line items "Financial income" and "Financial expenses".

The financial statements are presented in Brazilian reais (R$), which corresponds to the Company's presentation currency.

In the preparation of the consolidated financial statements, the statements of income and of cash flows and all changes in assets and liabilities of foreign subsidiaries, whose functional currency is the local currency in the respective countries where they operate, are converted into Brazilian real at the average monthly exchange rate nearest to the effective exchange rate on the date of the corresponding transactions. The balance sheet is translated into Brazilian real at the exchange rates at the reporting date. This translation calculation is different for Natura Cosméticos S.A. - Argentina, which became a hyperinflationary economy as of July 1, 2018 (Note 3.2.1.a) in which the balance sheet is converted into Brazilian real at the exchange rates at the date of the year reporting period.

The effects from variations in the exchange rate arising from these conversions are stated under "Other comprehensive income" in the statements of comprehensive income and in shareholders' equity.

a) Hyperinflationary economy

Starting from July 2018, Argentina has been considered a hyperinflationary economy and as per CPC 42 - Contabilidade e Evidenciação em Economia Altamente Inflacionária (IAS 29 - Financial Reporting in Hyperinflationary Economies), the non-monetary assets and liabilities, equity items and the statement of income of the subsidiary Natura Cosmetics S.A. - Argentina ("Natura Argentina"), whose functional currency is the Argentinean peso, are being adjusted so that the figures are reported in the monetary measurement unit at the end of the reporting period, which considers the effects measured by the Consumer Price Index ("IPC") in Argentina starting January 1, 2017 and Argentina's Domestic Retail Price Index ("IPIM") up to December 31, 2016. Consequently, as required by CPC 42 / IAS 29, the operating results of the subsidiary Natura Argentina must be disclosed as highly inflationary starting from July 1, 2018 (start of the period in which a hyperinflationary scenario was identified).

Non-monetary assets and liabilities booked at historical cost and equity items of Natura Argentina were adjusted for inflation based on the aforementioned indices. The effects of hyperinflation resulting from changes in the overall purchasing power (i) were presented in equity up to December 31, 2017; and (ii) are presented in the statement of income starting January 1, 2018. The statement of income is adjusted at the end of each reporting period based on the variation in the general price index.

The net effect of inflation adjustment in 2019 on (i) non-monetary assets and liabilities; (ii) items in shareholders' equity; and (iii) statement of income was presented in a specific account for hyperinflation in the financial result (see note 28).

To convert the accounting balances of the subsidiary Natura Argentina, to the reporting currency (Brazilian real - R$) used in the individual and consolidated financial statements of the Company, the following procedures required by CPC 02(R2) - Efeitos das mudanças nas taxas de câmbio e conversão de demonstrações contábeis (IAS

21 - The effects of changes in foreign exchange rates) were adopted:

  • the amounts related to assets, liabilities and equity items were converted at the exchange rate on the reporting date (0.06732 Argentinean peso for each Brazilian real in December 2019); and

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  • revenues and expenses in the year were converted at the exchange rate on the reporting date (0.06732 Argentinean peso for each Brazilian real in December 2019), instead of the average exchange rate of the period, which is used to convert currencies innon-hyperinflationary economies.

Cumulative inflation, as measured by the IPC index, for the fiscal year ended December 31, 2019 was 54.5% (47.99% at December 31, 2018).

In the fiscal year ended December 31, 2019, the application of CPC 42 / IAS 29 resulted in: (i) a negative impact on the financial result of R$13,947 (R$25,066 at December 31, 2018); and (ii) a negative impact on net income for the year of R$68,940 (R$64,271 at December 31, 2018).

The conversion of statement of income at the exchange rate on the reporting date, instead of average monthly exchange rate of the year, resulted in a positive impact on other comprehensive income for the fiscal year ended December 31, 2019 of R$17,666 (R$19,074 on December 31, 2018).

3.3 Consolidation

a) Investments in subsidiaries

The Company controls an entity when it is exposed to, or has rights to, the variable returns arising from its involvement with the entity and when it has the power to affect these returns by exerting its power over the entity. The financial statements of subsidiaries are included in the consolidated financial statements as from the date on which the Company obtained control until the date of loss of control. The Company holds interests only in subsidiaries.

Investments in subsidiaries are accounted for by the equity method of accounting. The financial statements of subsidiaries are prepared as of the same reporting date of the Company. Adjustments are made, if necessary, to conform their accounting practices to those adopted by the Company.

Under the equity method of accounting, the share attributable to the Company of the profit or loss for the period of such investments is accounted for in the statement of income, in line item "Equity in subsidiaries". All intragroup balances, revenues, expenses and unrealized gains and losses arising from intragroup transactions are completely eliminated. The other comprehensive income of subsidiaries is recorded directly in the Company's shareholders' equity, in line item "Other comprehensive income".

Below is the list of Company's subsidiaries on December 31, 2019 and 2018:

Interest in capital - %

2019

2018

Direct Interest:

Natura Cosméticos S.A.

100.00

-

Nectarine Merger Sub I, Inc. - United States

100.00

-

Via Nectarine Merger Sub I, Inc.

Nectarine Merger Sub II, Inc. - United States

100.00

-

Indirect Interest:

Indústria e Comércio de Cosméticos Natura Ltda. - Brazil

99.99

99.99

Natura Comercial Ltda. - Brazil

99.99

99.99

Natura Biosphera Franqueadora Ltda. - Brazil

99.99

99.99

Natura Cosméticos S.A. - Chile

99.99

99.99

Natura Cosméticos C.A. - Venezuela

99.99

99.99

Natura Cosméticos S.A. - Peru

99.99

99.99

Natura Cosméticos S.A. - Argentina

99.99

99.99

Natura Cosméticos y Servicios de México, S.A. de C.V.

99.99

99.99

Natura Cosméticos de México, S.A. de C.V.

99.99

99.99

Natura Distribuidora de México, S.A. de C.V.

99.99

99.99

Natura Cosméticos Ltda. - Colombia

99.99

99.99

Natura Cosméticos España S.L. - Spain

100.00

100.00

Natura (Brasil) International B.V. - Netherlands

100.00

100.00

Natura Brazil Pty Ltd. - Australia

100.00

100.00

Natura Cosmetics Asia Pacific Pte. Ltd. - Singapore

100.00

-

Fundo de Investimento Essencial - Brazil

100.00

100.00

Via Indústria e Comércio de Cosméticos Natura Ltda.:

Natura Logística e Serviços Ltda. - Brazil

99,99

99,99

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Via Natura (Brazil) International B.V. - Netherlands:

Natura Europa SAS - France

100.00

100.00

Natura Brasil Inc. - USA - Delaware

100.00

100.00

The Body Shop International Limited - United Kingdom

100.00

100.00

Via Brasil Inc. - USA - Delaware

Natura International Inc. - USA - New York

100.00

100.00

Via The Body Shop International Limited

G A Holdings (Guernsey) Limited - United Kingdom

100.00

100.00

G A Holdings (1979) Limited - United Kingdom

100.00

100.00

The Body Shop Worldwide Limited - United Kingdom

100.00

100.00

The Body Shop Global Travel Retail Limited - United Kingdom

100.00

100.00

The Millennium Luxembourg Sarl Administration Company Limited- United

-

100.00

Kingdom

The Body Shop Beteiligungs-Gmbh - Germany

100.00

100.00

The Body Shop Gmbh - Austria

100.00

100.00

The Body Shop Benelux B.V. - Netherlands

100.00

100.00

The Body Shop Service B.V. - Netherlands

100.00

100.00

The Body Shop Svenska Ab - Sweden

100.00

100.00

The Body Shop Luxembourg Sarl - Luxemburg

100.00

100.00

The Body Shop Monaco Sarl

100.00

100.00

The Body Shop Cosmetics Ireland Limited

100.00

-

The Body Shop S.A.U - Spain

100.00

100.00

The Body Shop Portugal, S.A.

100.00

100.00

The Body Shop (Singapore) Pte Limited - Singapore

100.00

100.00

The Body Shop International (Asia Pacific) Pte Limited

100.00

100.00

The Body Shop (Malaysia) Sdn.Bhd - Malaysia

100.00

100.00

The Body Shop Hong Kong Limited - Hong Kong

100.00

100.00

The Body Shop Australia Limited - Australia

100.00

100.00

Buth-Na-Bodhaige Inc.

100.00

100.00

The Body Shop Canada Limited - Canada

100.00

100.00

The Body Shop Brasil Indústria E Comércio De Cosméticos Ltda.

99.99

99.99

The Body Shop Brasil Franquias Ltda. - Brazil

99.99

99.99

The Body Shop Chile - Chile

99.99

99.99

Via The Body Shop Worldwide Limited

The Body Shop (France) Sarl

100.00

100.00

B.S. Danmark A/S - Denmark

100.00

100.00

Via The Body Shop Beteiligungs GmbH - Germany

The Body Shop Germany GmbH

100.00

100.00

Via The Body Shop Benelux B.V. - Netherlands

The Body Shop Belgium B.V (Netherlands Return) - Netherlands

100.00

99.99

The Body Shop Belgium B.V (Belgium Branch) - Netherlands

-

99.99

Via The Body Shop Hong Kong Limited - Hong Kong

Mighty Ocean Company Limited - Hong Kong

100.00

100.00

Via Mighty Ocean Company Limited - Hong Kong

Hsb Hair, Skin And Bath Products Company Limited - Macau

100.00

100.00

Via Buth-Na-Bodhaige Inc.

Aramara S. De R.L. De C.V. - Mexico

100.00

100.00

Cimarrones S.A. De C.V. - Mexico

99.99

99.99

TBS Air I, LLC - USA

-

74.00

TBS Air II, LLC - USA

-

85.00

TBS Air III, LLC - USA

70.00

70.00

Via Natura Brazil Pty Ltd.:

Natura Cosmetics Australia Pty Ltd. - Australia

100.00

100.00

Via Natura Cosmetics Australia Pty Ltd. - Australia:

Emeis Holdings Pty Ltd - Australia

100.00

100.00

Via Emeis Holdings Pty Ltd - Australia

Emeis Cosmetics Pty Ltd - Australia

100.00

100.00

Emeis Trading Pty Ltd - Australia

100.00

100.00

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Aesop Retail Pty Ltd - Australia

100.00

100.00

Aesop Japan Kabushiki Kaisha - Japan

100.00

100.00

Aesop Singapore Pte. Ltd. - Singapore

100.00

100.00

Aesop Hong Kong Limited - Hong Kong

100.00

100.00

Aesop USA, Inc. - USA

100.00

100.00

Aesop UK Limited - United Kingdom

100.00

100.00

Aesop New Zeland Limited - New Zeland

100.00

100.00

Aesop Brasil Comercio de Cosmeticos Ltda. - Brazil

99.99

99.99

Aesop Foundation Limited - Australia

100.00

100.00

Via Emeis Cosmetics Pty Ltd - Australia

Emeis Cosmetics Pty Ltd (Korea Branch)

100.00

100.00

Via Aesop Hong Kong Limited - Hong Kong

Aesop Macau Sociedade Unipessoal Limitada (Macau)

100.00

100.00

Via Aesop Singapore Pte. Ltd. - Singapore

Aesop Taiwan Cosmetics Company Limited - Taiwan

100.00

100.00

Aesop Malaysia Sdn. Bhd. - Malaysia

100.00

100.00

Aesop Korea Yuhan Hoesa - Korea

100.00

100.00

Via Aesop USA, Inc. - USA

Aesop Canada, Inc. - Canada

100.00

99.99

Via Aesop UK Limited - United Kingdom

Aesop Switzerland AG - Switzerland

100.00

100.00

Aesop Germany GmbH - Germany

100.00

100.00

Aesop Sweden AB - Sweden

100.00

100.00

Aesop Norway AS - Norway

100.00

100.00

Aesop Italy SARL - Italy

100.00

100.00

Aesop Denmark ApS - Denmark

100.00

100.00

Aesop Austria GmbH - Austria

100.00

100.00

Aesop Belgium - Belgium

100.00

100.00

and Aesop France SARL - France

100.00

100.00

Aesop Netherlands B.V (Netherlands)

100.00

-

The consolidated financial statements have been prepared based on the financial statements as of the same date and consistent with the Company' accounting practices. Investments in subsidiaries arising from intercompany operations have been eliminated proportionately to the investor's interests in the subsidiaries' shareholders' equity and net income or loss, intergroup balances and transactions and unrealized profits, net of taxes.

The operations of the direct and indirect subsidiaries are as follows:

  • Natura Cosméticos S.A.: it is apublicly-traded corporation, established under the laws of the Federative Republic of Brazil on June 6, 1993, for an indefinite term. Founded in 1969 in São Paulo, Brazil, it is one of the world's ten largest direct selling companies. Under the Natura brand, most products are made of materials from natural sources, developed with ingredients extracted from Brazil's biodiversity and mainly distributed through direct selling by independent Natura consultants. It also sells through e-commerce and an expanded own store chain, composed of 43 stores in Brazil and 9 stores abroad (in the USA, France, Argentina and Chile), 256 franchise stores, as well as presence in approximately 3,500 drugstores on June 30, 2019.
  • Indústria e Comércio de Cosméticos Natura Ltda.: engaged primarily in the production and sale of Natura products to Natura Cosméticos S.A. - Brazil, Natura Cosméticos S.A. - Chile, Natura Cosméticos S.A. - Peru, Natura Cosméticos S.A. - Argentina, Natura Cosméticos Ltda. - Colombia, Natura Europa SAS - France, and Natura Cosméticos de Mexico S.A. de C.V and Natura International Inc. - USA.
  • Natura Comercial Ltda.: engaged in the retail sale of cosmetics, fragrances in general and toiletries, through sales in the retail market.
  • Natura Biosphera Franqueadora Ltda. (previously Natura Cosmetics and Services Ltda.): engaged in trading, including by electronic means, of products from Natura brand.
  • Natura Cosméticos S.A. - Chile, Natura Cosméticos S.A. - Peru, Natura Cosméticos S.A. - Argentina, Natura Cosméticos Ltda. - Colombia and Natura Distribuidora de Mexico, S.A. de C.V.: their activities are an extension of the activities conducted by the parent company Natura Cosméticos S.A. - Brazil.
  • Natura Cosmetics Asia Pacific Pte. Ltd - Singapore: company established in 2019, not operational yet.

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  • Natura Cosméticos CA. - Venezuela: the company is in the process of closing and there are no material investments, transactions or balances in its accounting records.
  • Natura Inovação e Tecnologia de Produtos Ltda.: engaged in product and technology development and market research. Merged with the Company and lawfully terminated on November 1, 2018, with its operations, rights and obligations taken over by the Company.
  • Natura Cosméticos y Servicios de Mexico, S.A. de C.V.: engaged in the provision of administrative and logistics services to companies Natura Cosméticos de Mexico, S.A. de C.V. e Natura Distribuidora de Mexico, S.A. de C.V..
  • Natura Cosméticos de Mexico, S.A. de C.V.: engaged in the import and sale of cosmetics, fragrances in general, and hygiene products to Natura Distribuidora de Mexico, S.A. de C.V.
  • Natura Cosméticos España S.L.: activities are suspended. In case activity is resumed, it will carry out the same activities as the Company.
  • Natura (Brazil) International B.V - Netherlands: holding of Natura Europe SAS - France, Natura Brazil Inc., Natura International Inc. and The Body Shop International Limited.
  • Natura Logística e Serviços Ltda.: engaged in picking, packing and mailing services, logistics consulting, human resources management and human resources training.
  • Natura Brasil Inc.: holding company of Natura International Inc.
  • Natura International Inc - USA: engaged in capturing trends in design, fashion and technology, transforming them into ideas, concepts and prototypes.
  • Natura Europa SAS - France: engaged primarily in the purchase, sale, import, export and distribution of cosmetics, fragrances, and toiletries
  • Natura Brazil Pty Ltd - holding of Natura Cosmetics Australia Pty Ltd operations.
  • Natura Cosmetics Australia Pty Ltd - holding of Emeis Holdings Pty Ltd.
  • Emeis Holdings Pty Ltda and its subsidiaries: engaged primarily in the manufacture and marketing of premium cosmetics, operating under the brand "Aesop," with products sold in retail stores and own stores. During 2019, the subsidiary "Aesop Netherlands B.V (Netherlands)" was incorporated.
  • The Body Shop International Limited and its subsidiaries: engaged primarily in the development, distribution and sale of cosmetics under the brand "The Body Shop," with products sold through a chain of own stores,e-commerce, direct selling and franchises. During 2019, the subsidiary "The Body Shop Cosmetics Ireland Limited" was incorporated. In the same period, the following subsidiaries were closed: The Millennium
    Luxembourg Sarl Administration Company Limited-United Kingdom; The Body Shop Belgium B.V (Belgium Branch) - Netherlands; TBS Air I, LLC - USA; TBS Air II, LLC - USA.
  • Fundo de Investimento Essencial: refers to theprivate-creditfixed-income funds.
  1. Business combinations

Business combinations with unrelated third parties are accounted for by applying the acquisition method when control is transferred to the Company. The consideration transferred is in general measured at fair value, as well as the identifiable net assets acquired. Any goodwill arising from the transaction is tested annually for impairment. Gains from a bargain purchase are recognized immediately in profit or loss. Acquisition-related costs are recorded in profit or loss as incurred, except for costs related to the issue of debt or equity instruments.

The consideration transferred does not include amounts related to the payment of pre-existing relationships. These amounts generally are recognized in profit or loss for the year.

In a business combination involving entities or business under common control, in which all of the combining entities or business are ultimately controlled by the same party or parties both before and after the business combination, and that control is not transitory, the Company applies the predecessor accounting method (Note 2a).

c) Ownership interest of non-controlling shareholders

The Company opted to measure any ownership interest of non-controlling shareholders initially by the proportionate interest held in the identifiable net assets of the acquired entity on the acquisition date.

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Changes in the Company's interest in a subsidiary that do not result in loss of control are recorded as transactions under shareholders' equity.

3.4 Financial Instruments

The Company adopted CPC 48 / IFRS 9 - Financial Statements in replacement to IAS 39 - Financial Instruments: Recognition and Measurement on January 1, 2018. The changes made in the Company's accounting policies are described below, as well as their impacts on the financial statements.

3.4.1 Classification of financial assets

CPC 48 / IFRS 9 contains an approach to classify and measure financial assets with the three main classification categories: measured at amortized cost, at fair value through other comprehensive income ("FVOCI") and at fair value through profit or loss ("FVPL"). The standard eliminates the following existing categories under IAS 39: held to maturity, held for trading, borrowings and receivables, and available for sale.

The classification of financial assets at initial recognition depends on the characteristics of the contractual cash flows of the financial asset and Company's business model for the management of these financial assets. Except for trade receivables that do not contain a significant financing component or to which the Company has been applied the practical expedient, the Company initially measures a financial asset at its fair value plus transaction costs, in the case of financial asset not measured at fair value through profit or loss.

A financial asset is measured at amortized cost if it meets the following conditions and is not designated for measurement at fair value through profit or loss:

  • is maintained within a business model whose objective is to keep financial assets to receive contractual cash flows; and
  • its contractual terms generate, on specific dates, cash flows that are relative only to the payment of principal and interest on the outstanding principal amount.

A financial asset is measured at fair value through other comprehensive income if it meets the following condition and is not designated for measurement at fair value through profit or loss:

  • its contractual terms generate, on specific dates, cash flows that are not only the payment of principal and interest on the outstanding principal amount.

All financial assets not classified as measured at their amortized cost or at fair value through other comprehensive income are classified as at fair value through profit or loss.

Assessment of the business model

The Company evaluates the objective of the business model in which the financial asset is maintained in the portfolio, because it reflects the best way in which the business is managed, and information is provided to the Management. The information considered includes:

  • the policies and objectives determined for the portfolio and how these policies actually work. These include the issue of knowing whether Management strategy focuses on obtaining contractual interest income, maintaining a certain interest rate profile, the correspondence between the duration of financial assets and the duration of the corresponding liabilities or expected cash disbursements, or realizations of the cash flows through the sale of assets;
  • how the performance of the portfolio is assessed and reported to the Management of the Company;
  • the risks that affect the performance of the business model (and the financial asset maintained in that business model) and how those risks are managed;
  • how business managers are remunerated - for example, if the remuneration is based on the fair value of the assets managed or on the contractual cash flows obtained; and
  • the frequency, volume and time of sale of financial assets in previous years, the reasons for such sale and their expectations of future sales.

Transfers of financial assets to third parties in transactions that do not qualify for derecognition are not deemed sales, consistent with the continuous recognition of the Company's assets.

Financial assets held for trading or managed with performance assessed based on their fair value are measured at fair value through profit or loss.

23

Assessment of whether contractual cash flows are only payments of principal and interest

To assess contractual cash flows, the "principal" is defined as the fair value of the financial asset upon initial recognition. "Interest" is defined as consideration for the value of money in time and for the credit risk associated with the principal outstanding over a certain period of time and for other risks and basic costs of loans (for example, liquidity risk and administrative costs), as well as profit margin.

The Company considers the contractual terms of the instrument to assess whether the contractual cash flows are only payments of principal and interest. This includes an assessment of whether the financial asset contains a contractual term that could change the moment or amount of contractual cash flows in such a way that it would not meet this condition. When conducting such assessment, the Company takes into account:

  • contingent events that change the amount or timing of the cash flows;
  • terms that could adjust the contractual rate, including variable rates;
  • the prepayment and extension of terms; and
  • terms that limit the access of the Company to cash flows from specific assets (for example, based on the performance of an asset).

The purchases or sales of financial assets requiring the delivery of assets within certain period established by regulation or market convention (regular negotiations) are recognized on the negotiation date, that is, the date in which the Company commits to purchase or sell the asset.

  1. Subsequent measurement

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

  • Financial assets at amortized cost (debt instrument);
  • Financial assets at fair value through other comprehensive income with reclassification of accumulated gains and losses (debt instruments);
  • Financial assets at fair value through other comprehensive income, without reclassification of accumulated gains and losses upon their derecognition (equity instruments); and
  • Financial assets at fair value through profit or loss.

Financial assets at amortized cost (debt instruments)

Financial assets at amortized cost are subsequently measured using the effective interest method and are subject to impairment loss. Gains or losses are recognized in profit or loss when the asset is written off, modified or presents impairment loss.

Financial assets at fair value through other comprehensive income (debt instruments)

For debt instruments at fair value through other comprehensive income, the interest revenue, exchange revaluation and losses or reversals of impairment loss are recognized in the statement of income and calculated at the same manner for financial assets measured at amortized cost. The remaining changes in fair value are recognized in other comprehensive income, upon the derecognition, the accrued fair value change recognized in other comprehensive income is reclassified to profit or loss.

Financial assets at fair value through other comprehensive income (financial instruments)

Upon initial recognition, the Company may opt irrevocably to classify its equity instruments at fair value through other comprehensive income when they meet the definition of equity under CPC 39 - Financial instruments: Presentation and are not held for trading. The classification is determined by considering each instrument specifically. Gains and losses on these financial assets are never classified to profit or loss Dividends are recognized with other revenues in the statement of income when the right to the payment is established, except when the Company benefits from these payments as recovery of part of the cost of the financial asset, if these gains are registered in other comprehensive income. Equity instruments at fair value through other comprehensive income are not subject to impairment test.

Financial assets at fair value through profit or loss

Financial assets at fair value through profit or loss are presented in the statement of financial position through fair value, with net variations of fair value recognized in the statement of income. This category includes derivative instruments and listed equity investments, which the Company has not classified irrevocably at fair value through

24

other comprehensive income. Dividends on listed equity investments are recognized as other revenue in the statement of income when the right to the payment is established.

  1. Offsetting financial instruments

Financial assets and financial liabilities are offset and the net amount is presented in the balance sheet when there is a legally enforceable right to set off recognized amounts and the intent to either settle them on a net basis, or to recognize the asset and settle the liability simultaneously.

  1. Derecognition(write-off) of financial instruments

A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognized when the rights to receive cash flows from the asset have expired; the Company transfers its rights or risk to receive cash flows of the asset or has assumed an obligation to pay the full amount of received cash flows, without significant delay to a third party under an on lending agreement, and (i) the Company transfers substantially all risks and benefits of the asset, or (ii) the Company neither transferred nor retained substantially all risks and benefits of the asset, but transferred the control of asset.

When the Company transfer its rights to receive cash flows of an asset or execute an on-lending agreement, it evaluates if, and at which extent, it retained the risks and benefits of ownership. When the Company neither transfers or retains substantially all risks and benefits of the asset, nor transferred the control over the asset, the Company continues to recognize the asset transferred to the extent of its continued involvement. In this case, the Company also recognizes an associated liability. The asset transferred is measured at the lowest between: (i) the value of the asset; and (ii) the maximum amount of consideration received that the entity may be obliged to refund (guarantee amount).

The Company derecognizes a financial liability when its contractual obligation is withdrawn, canceled or expires.

3.4.2 Derivative instruments

Derivative instruments transactions contracted by the Group consist of swaps and non-deliverable forwards (NDF's) intended exclusively to hedge against the foreign exchange risks related to balance sheet positions, acquisitions of inputs and property, plant and equipment, projected exports and projected foreign-denominated cash outflows for capital increases in foreign subsidiaries.

They are measured at fair value, and changes in fair value are recognized through profit or loss, except when they are designated as cash flow hedges, to which changes in fair value are recorded in "Other comprehensive income" within shareholders' equity.

The fair value of derivative instruments is measured by the treasury departments of the Group based on information on each contracted transaction and related market inputs at the end of the reporting period, such as interest rates and exchange coupon.

Hedge accounting

After Management's evaluation, the Company concluded that all existing hedge relationships are currently designated in effective hedge relationships and still qualify for hedge accounting under CPC 48 / IFRS 9, because the new standard did not change the general principles of how an entity accounts for effective hedges.

When an entity applies CPC 48 / IFRS 9 for the first time, it can determine whether its accounting policy will continue to apply the hedge accounting requirements of CPC 38 / IAS 39 instead of the requirements of chapter 6 of CPC 48 / IFRS 9.

Given the results of the analyses and the decision to not adopt CPC 48 / IFRS 9 specifically for hedge accounting, the Company maintains its current accounting practices based on CPC 38 / IAS 39, as mentioned in Note 3.4 above, being affected only by the new disclosure requirements starting January 1, 2018, as presented in Note 5.2.

Cash Flow hedge

Consists in providing hedge against variation in cash flows attributable to a specific risk related to a known asset or liability or a highly probable forecast transaction and that may affect profit or loss.

The effective portion of changes in fair value of derivative instruments that is designated and qualified as cash flow hedge is recognized in other comprehensive income and accumulated in "Gain (loss) from cash flow hedge operations" and "tax effect on gain (loss) from cash flow hedge operations." In a "cash flow hedge", the effective portion of gain or loss from the hedge instrument is recognized directly in equity in other comprehensive income, while the ineffective portion of hedge is immediately recognized in financial income (expenses).

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For the years ended December 31, 2019 and 2018, the Company used derivative financial instruments, applying "cash flow hedge accounting" and, as disclosed in Note 5.2, for hedge against the risk of change in exchange rates related to loans in foreign currency and purchase and sale transactions in foreign currency and intercompany loan operations that: (i) are highly related to the changes in the market value of the hedged item, both at the beginning as well as during contract term (effectiveness between 80% and 125%); (ii) have documentation of the operation, hedged risk, risk management process and methodology used in assessing effectiveness; and (iii) are considered effective to reduce the risk related to the exposure to be hedged. It allows the application of the hedge accounting methodology, with effect from measurement of their fair value on shareholders' equity and from their realization on profit or loss in the heading related to the hedged item.

Hedge accounting is discontinued when the Company cancels the hedge relationship, the hedge instrument matures or is sold, revoked or executed, or no longer qualifies to hedge accounting. Any gains or losses recognized in other comprehensive income and accumulated in shareholders' equity as of a certain date remain in equity and are recognized when the forecast transaction is eventually recognized in profit or loss.

If a planned transaction results in the subsequent recognition of a non-financial asset or liability, the cumulative gain or loss in other comprehensive income is reclassified to profit or loss during the same year for which the non- financial asset acquired or non-financial liability assumed affects the profit or loss. For example, when the non- financial asset is depreciated or sold.

Conversely, if a planned transaction results in the subsequent recognition of a financial asset or liability, the cumulative gain or loss in other comprehensive income is reclassified to profit or loss during the same period for which the financial asset acquired or financial liability assumed affects the profit or loss. For example, when financial income or expense is recognized.

When the forecast transaction is no longer expected, cumulative gains or losses deferred in equity are immediately recognized in profit or loss.

The Company assesses, along with the hedge term, the effectiveness of its derivative financial instruments, as well as changes in their fair value.

For the years ended December 31, 2019 and 2018, there were no losses related to the ineffective portion recognized in profit or loss for the year.

The fair values of derivative financial instruments are disclosed in note 5.2.

In addition, it should be mentioned that, during the years ended December 31, 2019 and 2018, the Company did not enter into transactions related to hedge of fair value or hedge of net investment.

3.4.3 Financial liabilities

Financial liabilities are classified, upon initial recognition, as financial liabilities at fair value through profit or loss, financial liabilities at amortized cost or as derivatives designated as hedge instruments in an effective hedge, as applicable.

All financial liabilities are initially measured at fair value, more or less, in the event of financial liability not designated at fair value through profit or loss, the transaction costs that are directly attributable to the issuance of financial liability.

The Company's financial liabilities include borrowings, financing and debentures (note 18), derivative financial instruments (nota 5) and trade payables and forfeit operations (note 19).

Subsequent measurement

For the purposes of subsequent measurement, financial liabilities are classified into two categories:

  • Financial liabilities at fair value through profit or loss; and
  • Financial liabilities at amortized cost.

Financial liabilities at fair value through profit or loss

Financial liabilities at fair value through profit or loss include financial liabilities for trading and financial liabilities designated upon initial recognition at fair value through profit or loss. They are classified as held for trading if incurred for purposes of repurchase in the short term. This category also includes derivative instruments contracted by the Company that are not designated as hedge instruments in hedge relations defined by CPC 48. Separate embedded derivatives are also classified as held for trading, unless they are designated as effective hedging instruments.

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Gains and losses on liabilities held for trading are recognized in the statement of income.

Financial liabilities designated upon initial recognition at fair value through profit or loss are designated on the initial recognition date, and only if the criteria provided for in CPC 48 were met.

Financial liabilities at amortized cost (borrowings and financing)

After initial recognition, borrowings and financing contracted and granted subject to interest are subsequently measured at amortized cost, using the effective interest method. Gains and losses are recognized in profit or loss when liabilities are written off, as well as through the process of amortizing to effective interest rate. Gains and losses are recognized in profit or loss when liabilities are written off, as well as through the process of amortizing to effective interest rate.

Amortized cost is calculated taking into consideration any negative goodwill or goodwill on acquisition and rates or costs that are integral part of the effective interest method. The amortization at the effective interest method is included as financial expense in the statement of income.

This category generally applies to borrowings and financing granted and contracted, subject to interest.

Derecognition

A financial liability is written off when the obligation over the liability is extinct, i.e., when the obligation set forth in the agreement is settled, cancelled or expires. When an existing financial liability is replaced for another liability of the same lender under substantially different terms, or the terms of an existing liability are substantially modified, this swap or modification is addressed as derecognition of the original liability and recognition of a new liability. The difference in respective accounting amounts is recognized in the statement of income.

  1. Cash and cash equivalents
    Cash equivalents are held for the purpose of meeting short term commitments, rather than for investment or other purposes. Cash and cash equivalents includes cash, bank deposits and short-term investments redeemable within up to 90 days from the investment date, highly liquid or convertible to a known cash amount and subject to immaterial change in value, which are recorded at cost plus income earned through the end of the reporting period and do not exceed their fair or realizable values.
  2. Payables and provision for doubtful accounts
    Trade receivables are accounted at their nominal amount, less the provision for doubtful accounts, which is estimated based on calculating the risk of loss in each aging list group, considering the different risks in accordance with the collection's operation.
  3. Inventories
    Carried at the lower of average cost of purchase or production and net realizable value. Details are disclosed in note 9.
    The Company considers the following when determining its provision for inventory losses: discontinued products, products with slow turnover, expired products or products nearing the expiration date and products that do not meet quality standards, recorded as "Cost of products sold".
  4. Carbon Credits - Carbon Neutral Program
    In 2007, the Company assumed with its employees, customers, suppliers and shareholders a commitment to be a Carbon Neutral company, which is to neutralize their emissions of Greenhouse Gas - GHG, in its complete production chain, from extraction of raw materials to post- consumption. This commitment, which currently refers only to operations under the Natura brand, is not a legal obligation, since Brazil does not have a reduction target, despite being a signatory to the Kyoto Protocol. For this reason, it is considered a constructive obligation under CPC 25 / IAS 37 - Provisions, Contingent Liabilities and Contingent Assets, which requires the recognition of a provision in the financial statements if it is subject to disbursement and measurable.
    The liability is estimated through annually audited inventories of carbon emissions and measured based on the market price for the acquisition of licenses for neutralization. On December 31, 2019, the balance recorded in the caption "Other provisions" (see note 22), refers to the total carbon emissions during the period of 2007 to 2019 that have not yet been offset by corresponding projects and therefore no execution of the certificate of carbon.

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According to its beliefs and principles, the Company elected to make some purchases of carbon credits by investing in projects with environmental benefits arising from the voluntary market. Thus, the costs will generate carbon credits after completion or maturation of these projects.

During these years, these expenses were recorded at fair value as "other current assets" and "other current assets" (see note 13).

Upon effective delivery of the related carbon credit certificates to the Company, the obligation of being Carbon Neutral is effectively fulfilled; therefore, the balances of assets are offset against those of liabilities.

The difference between the carrying amounts of assets and liabilities at December 31, 2019 refers to the amount of cash disbursed in advance for investments in ongoing projects and, for this reason, not yet available for neutralization of emissions and offset of liability.

  1. Current and deferred income tax and social contribution
    Except for subsidiaries abroad, which observe the tax rates valid in the respective countries in which they are located, in Brazil, they include the corporate income tax ("IRPJ") and the social contribution on net income ("CSLL"), which are calculated based on taxable income, by applying the 15% rate plus additional of 10% on taxable income exceeding R$240 for IRPJ and 9% for CSLL and considers the offset of tax losses and tax loss carryforwards, limited to 30% of taxable income. Taxable income reflects profit before taxes adjusted by non-taxable and non- deductible items (both temporary and permanent items).
    Deferred taxes represent tax debits and credits on temporary differences between tax base and accounting base of assets and liabilities on accrued tax losses. Deferred tax and contribution assets and liabilities are classified as
    "non-current" as required by CPC 32 (IAS 12) - Income taxes. When the Company's internal studies indicate that the future use of tax credits is not probable, a provision for loss is recorded.
    Deferred tax assets and liabilities are offset if there is a legal feasible right to offset tax liabilities as tax assets, and if they are related to taxes registered by the same tax authority under the same taxable entity. Thus, for presentation purposes, tax asset and liability balances are disclosed separately.
    Deferred tax assets and liabilities must be measured at current rates expected to be applicable in the period in which the asset is realized or the liability is settled, and reflect the uncertainty related to income tax, if any.
  2. Property, plant and equipment
    Property, plant and equipment is measured at cost of acquisition or construction, plus interest capitalized during construction period, when applicable, for the case of a qualifying assets, and reduced by accumulated depreciation and impairment losses, if applicable. The useful lives of the assets are reviewed annually.
    Rights in tangible assets intended for the maintenance of Group's activities, arising out of finance leases, are recorded as if they were a financed acquisition, with a property, plant and equipment and a financing liability being recognized at the inception of each transaction, the assets also being subject to depreciation calculated over the estimated useful lives of the respective assets or over the contract term, when the financial lease has no purchase option.
    Land is not depreciated. Depreciation of the other assets is calculated under the straight-line method to distribute their cost over their useful lives, as mentioned in Note 15.
    Gains and losses on disposals are calculated by comparing the proceeds from the sale with the carrying amount and are recognized in profit or loss under "Other Operating Income (Expenses), Net".
  3. Intangible assets
    1. Software

Licenses of software and enterprise management systems acquired are capitalized and amortized according to the useful lives described in note 16 and maintenance costs are recognized as expenses when incurred.

System acquisition and implementation costs are capitalized as intangible assets when the asset is identified, when there is evidence that future economic benefits will flow into the entity and when the asset is controlled by the Company, taking into consideration its economic and technologic viability. The amounts incurred on software development recognized as assets are amortized under the straight-line method over its estimated useful life. The expenditures related to software maintenance are expensed when incurred.

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b) Trademarks and patents

Separately acquired trademarks and patents are stated at their historic cost. Trademarks and patents acquired in a business combination are recognized at fair value on the acquisition date. For trademarks and patents with definite useful lives, amortization is calculated on a straight-line basis at the annual rates described in note 16.

c) Relationship with retail clients, franchisees and sub-franchisees

Relationships with retail clients, franchisees and sub-franchisees acquired in business combinations are recognized at fair value on the acquisition date and their amortization is calculated on a straight-line basis, based on rates shown in note 16.

d) Key money with defined useful life

Goodwill with defined useful life is recorded at the acquisition cost and amortized on a straight-line basis during the rental period, as shown in note 16.

e) Intangible assets with indefinite useful lives

Intangible assets with indefinite useful lives held by the Company refer mainly to trademarks and goodwill due to expectations of future economic benefits arising from transactions involving business transactions, and tradeable key money.

These assets are not amortized but are tested annually for losses due to impairment either individually or at the level of the cash generating unit (or groups of cash generation units). The assessment of indefinite life is reviewed annually to determine whether this assessment continues to be supportable. Otherwise, the change in useful life from indefinite to finite is made on a prospective basis.

Gains and losses arising from derecognition of an intangible asset are measured as the difference between the net from the sale and the carrying amount of the asset and are recognized in profit or loss upon disposal of the asset under "Other Operating Income (Expenses), Net".

3.12 Impairment assessment

The assets' carrying amount is annually evaluated to identify evidences of impairment, or also significant events or changes in circumstances that indicate the carrying value of an asset may not be recoverable. When applicable, an impairment loss is recognized if the carrying amount of an asset exceeds its recoverable amount

For impairment assessment purposes, assets are grouped at the lowest levels for which there are independent cash flows (cash-generating units, or CGUs).

The assets of the Group are initially grouped into operating segments, which follows a logic based on its Corporate Governance structure. Within the operating segments, assets are grouped into cash generating units as follows:

Operating Segment

Identification of CGUs

Natura Brazil

Direct selling

Individual stores

Natura LATAM

Argentina

Chile

Peru

Mexico

Colombia

Natura Others

France

USA

Aesop

Individual stores

The Body Shop

Individual stores

The recoverable amount of an asset or cash-generating unit is determined as being the higher of the value in use of the asset and the fair value less costs of disposal. In the estimation of the value in use of the asset, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects the weighted average cost of capital for the company in which it operates the cash-generating unit. The fair value net of costs of sale is measured based on the preparation of the discounted cash flow at its present value, using a discount rate before taxes that reflects the company's weighted average cost of capital in which the generating cash unit operates, including assumptions for the stores expansion and investments, as well as the respective revenues that will be generated as a result of this expansion, considering the assumptions that other market participants would use when pricing the assets or liabilities.

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  1. Product research and development expenses
    The Company's accounting practice includes recording its product research and development costs, when incurred, as expenses for the period, since due to the high innovation index and product turnover in its sales portfolio, it is impracticable to meet all aspects required in IAS 38/CPC 04 - Intangible Assets for capitalizing the amounts.
  2. Leases
    Up to December 31, 2018, the Company classified lease classification at the inception of the contract. Leases where the Company was a lessor and retained substantially all the risks and rewards incidental to ownership were classified as operating leases. Lease payments under an operating lease were recognized as an expense on a straight-line basis over the lease term. Leases where the Group retains substantially all the risks and rewards incidental to ownership were classified as finance leases. These leases were capitalized in balance sheet at the commencement of the lease term at the lower amount of the fair value of leased asset and the present value of minimum lease payments. Each lease installment was apportioned between liabilities and the finance charges so as to permit obtaining a constant effective interest rate on the outstanding liability. The corresponding obligations, less the finance charge, were classified in current liabilities and non-current liabilities, according to the lease term. Property, plant and equipment items acquired through finance leases were depreciated over their useful lives, or over the lease term, when it is shorter and has no purchase option.
    On January 1, 2019, the Company applied CPC 06(R2) / IFRS16, approved by the Securities and Exchange
    Commission of Brazil ("CVM") in December 2017, which introduced one sole lease model, replacing the concept of classifying between operating and finance lease, which was applied by the Company up to December 31, 2018. The impact of this new standard is detailed in Note 3.29.
  3. Borrowing costs
    Borrowing costs attributable to the acquisition, construction or production of a qualifying asset that necessarily requires a significant effort to be ready for its intended use or sale are capitalized as part of the cost of the corresponding asset. All other borrowing costs are expensed in the period they are incurred. Borrowing costs consist of interest and other costs incurred by an entity related to a loan.
  4. Trade payables and forfeit operations
    These are initially recognized at their nominal amounts, plus interest, inflation adjustments and exchange rate differences through the end of the reporting period, when applicable.
  5. Provisions for risks
    Provisions are recognized when the Company has a legal or constructive obligation as a result of past events, and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and its value can be measured with sufficient reliability. Provisions are quantified at the present value of the expected outflow of resources embodying economic benefits to settle the obligations using the appropriate discount rate, according to related risks.
    The provisions for tax, civil, and labor risks are adjusted for inflation through the end of the reporting period to cover probable losses, based on the nature of the risk and the opinion of the Company's legal counsel.
    Contingent assets are not recognized by the Company and are only disclosed, in case of probable receipt of economic benefits. If it is practically certain that economic benefits will be received, the asset and the corresponding gain are recorded in the Financial Statements of the year corresponding to the change in estimate.
  6. Borrowings, financing and debentures
    Initially recognized at fair value of proceeds received less transaction costs in applicable cases, plus charges, interest, inflation adjustments and exchange rate differences as provided for in agreements, incurred through the end of the reporting period, as shown in note 18.
  7. Employee benefits

3.19.1 Short-term benefits

The obligations of short-term benefits for employees are recognized as personnel expenses as the corresponding service is rendered. The liability is recognized at the amount of the expected payment if the Company has a legal

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or constructive obligation to pay the amount due to services rendered by an employee in the past and the obligation can be reliably estimated.

3.19.2 Profit sharing

The Company recognizes a liability and an expense for profit sharing based on criteria that it considers the profit attributable to its shareholders after certain adjustments and which is tied to the achievement of specific operational goals and objectives established and approved in the beginning of each fiscal year.

3.19.3 Long-term incentive program

The Company made available until June 2019 to eligible executives of its subsidiary Emeis Holdings Pty Ltd. a long- term incentive program, based on criteria linked to specific operational goals and objectives established at the beginning of the relationship between the parties, being such obligation recorded as a liability and remeasured with effect on profit or loss.

3.19.3 Defined post-employment healthcare benefit

The actuarial liability for the healthcare plan of the Company and its subsidiaries refers to a post-employment benefit plan to current and former employees who made fixed contributions for funding the healthcare plan up to April 30, 2010, when the healthcare plan design was changed and fixed contributions were eliminated. Those who contributed to the plan for ten years or more are ensured the right to remain as a beneficiary for an indefinite term (lifetime), and those who contributed for a period of less than ten years are ensured the right to remain as a beneficiary at the rate of one year for each year in which fixed contributions were made. This group of current employees, in the event of termination of employment relationship, may opt to remain in the plan in accordance with applicable legislation, thereby assuming the payment of the monthly plan fee charged by the healthcare plan operators. However, this monthly plan fee does not necessarily represent the total cost of the user, which is borne by the Company through payment of the excess cost, as an additional benefit.

The costs associated with this benefit are recognized under the accrual method of accounting as a defined-benefitpost-employment benefit plan using the projected unit credit method.

The current service cost and accrued interest on the present value of the liability are recognized in the Income Statement and the actuarial gains and losses generated by the remeasurement of the liability due to changes in actuarial assumptions are recognized as Other Comprehensive Income. In case of changes or reductions in the plan, the effects of the cost of past services are recognized in the Income Statement on the date of occurrence.

3.20 Share-based payment

The Company's executives are granted the following stock option plans, settled exclusively with its own shares:

  • Stock option plan;
  • Restricted stock plan; and
  • Strategy acceleration program.

The plans are measured at fair value at the grant date. In determining the fair value, the Company uses an adequate valuation method, details of which are disclosed in Note 27.1.

The cost of transactions settled with equity instruments is recognized, together with a corresponding increase in shareholders' equity under the heading "Additional paid-in capital", throughout the period in which the service conditions are fulfilled, ending on the date on which the employee acquires the full right to the award (acquisition date). The cumulative expense recognized for equity instruments transactions settled on each base date up to the acquisition date reflects the extent to which the vesting period has transpired and the Company' best estimate of the number of equity instruments to be acquired. The expense or credit in the statement of income of the period is recorded under the heading "Administrative expenses".

For the stock option plan and the strategy-acceleration program, despite the expiration of the term for exercise, the recognized expense is not reversed since the right has been acquired by executives.

When an award of equity instruments settlement is cancelled (except when the cancellation occurs due to loss of right over the equity instrument for not fulfilling the grants conditions), it is treated as if it had been acquired on the date of cancellation, and any expense not recognized is registered immediately. This includes any award for which Company or the counterparty have the option not to fulfill the non-acquisition obligation. All cancellations of transactions settled with equity securities are treated in the same way.

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The dilution effect of options granted is reflected as additional share dilution in the calculation of diluted earnings per share (Note 30.2).

  1. Dividends and interest on capital
    The proposed distribution of dividends and interest on capital made by Management included in the portion equivalent to the mandatory minimum dividends is recognized in line item "Other payables" in current liabilities, as it is considered as a legal obligation provided for by the Company's bylaws; however, the portion of dividends exceeding minimum dividends declared by management after the reporting period but before the authorization date for issuance of these financial statements is recognized in line item "Proposed additional dividends."
    For corporate and accounting purposes, interest on capital is stated as allocation of income directly in shareholders' equity.
  2. Treasury shares
    The Company's own equity instruments which are reacquired (Treasury shares) are recognized at acquisition cost and deducted from shareholders ' equity. No gain or loss is recognized in profit or loss on the purchase, sale, issue or cancellation of the Company's own equity instruments.
  3. Government grants and assistance - Exploration profit
    Government subsidies and assistance for investments are recognized when there is reasonable assurance that the entity complied with the conditions established by the government agency granting the subsidy. They are recognized as income or expense deduction in profit or loss for the fruition period of the benefit and, subsequently, are allocated to tax incentive reserve under equity.
    The subsidiary Indústria e Comércio de Cosméticos Natura Ltda. has projects located in areas under operation of the Amazonia Development Superintendence ("SUDAM"), whose activity is classified as priority economic activity, entitling to the tax benefit of reducing 75% of taxable income, calculated based on the profit from exploration of the respective region.
    Natura has projects located in the states of Bahia and Minas Gerais. These Federative Units have internal legislation including decrees that authorize the granting of tax incentives, under the presumptive credit modality, to companies that invest in them. Natura has complied with the requirements and, through a Special regime, obtained authority to apply said tax incentives.
  4. Segment reporting
    Information per operating segment is consistent with the internal report provided to the chief operating decision maker on operational matters.
    The main decision-making body of the Company, which is responsible for defining the allocation of resources to the operating segments is the Board of Directors of the Company, which is advised by the Group's Operations Committee ("GOC"), the Audit, Risk Management and Finances Committee, the People and Corporate
    Development Committee, the Strategic Committee and the Corporate Governance Committee ("Committees").
    The GOC , which includes the CEOs of Natura, The Body Shop and Aesop, in addition to representatives of key business areas (Finance, Human Resources, Business Strategy and Development, Legal, Innovation and Sustainability, Operations and Corporate Governance), is responsible, among other things, for monitoring the implementation of short- and long-term strategies and making recommendations to the Board of Directors regarding the management of the Group, from the viewpoint of results, allocation of resources among business units, cash flow and talent management.
  5. Revenue from contracts with customers
    On January 1, 2018, the Company adopted CPC 47 / IFRS 15, approved by the Securities Commission of Brazil ("CVM") in December 2016, using the cumulative effect method (without practical expedients), which establishes a model of five steps applicable to revenue from a contract with a customer, irrespective of the type of revenue transaction or industry. As a result of the implementation of CPC 47 / IFRS 15, the Company reviewed its accounting practices related to the identification of performance obligations, such as recognition for performance related to Natura Consultants, events and conventions aimed at encouraging and congratulating the best Natura Consultants, and other obligations, as shown below:

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Performance obligation

Nature, fixation of transaction price and the moment when

performance obligation is fulfilled

a) Direct sales

Revenue from sales is generated by sales to Natura Consultants (our

customers) based on the fair value of consideration

received/receivable, excluding discounts, rebates and taxes or charges

on sales. Revenue from sales is recognized when the performance

obligation is fulfilled, i.e., when the promised product is physically

delivered and the Natura Consultant obtains control over this product.

Revenue from sales is generated and accrued initially in the sales

subsidiary ledger of the Company from the moment when the dispatch

slip is issued in the customers' name. However, since revenues are

recorded only when the final delivery of products effectively occurs,

the Company registers a provision to eliminate the amount of revenue

related to products dispatched and not received by Natura Consultants

on each reporting date.

b) Direct sales - Additional

The Company charges its customers (Natura Consultants) additional

charges and penalties for late

charges and penalties for late payments in the settlement of sales

payments

receivable. Due to the level of uncertainty in receiving these amounts

(variable consideration), the Company recognizes revenue from

additional charges and penalties for late payments only upon receipt of

amounts.

c) Retail sales

At Emeis Holding Pty Ltd, Natura Comercial Ltda., Natura Europa SAS -

France, Natura International Inc. and The Body Shop International

Limited, which operate in the retail market, sales revenue is measured

based on the fair value of consideration received/receivable, excluding

discounts, rebates and taxes or charges on sales. This sales revenue is

recognized when the performance obligation is fulfilled, i.e., when the

promised product is physically transferred, and the consumer obtains

control over this product.

d) Loyalty program (Points

The Company offers points campaign (loyalty program), in which

campaign)

customers accumulate points while buying the Company's products to

be exchanged (redeemed) for products in the future. Measurement of

points is based on their expected cost, plus a margin. The amount

allocated to the loyalty program is deferred and the revenue is

recognized upon redemption of the points accumulated by Natura

Consultants or when it is no longer probable that the points will be

redeemed.

e) Program for recognition of

The Company has performance recognition programs, in which it

Natura Consultants' performance

awards Natura Consultants based on achievement of targets and

objectives. The Company believes that this performance recognition

program has a high value and hence is considered a performance

obligation. Measurement of performance recognition programs is

based on their expected cost, plus a margin. The amount allocated to

performance recognition programs is deferred and revenue is

recognized when awards are delivered to Natura Consultants.

f) Events

The Company organizes events to encourage and recognize the best

Natura Consultants. The Company believes that these events are of

high value for Natura Consultants and create expectations among them

to participate in them. Thus, the Company believes that these events

are characterized as performance obligations. Measurement of events

is based on their expected cost, plus a margin. The amount allocated to

events is deferred and the revenue is recognized when the event is

held.

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g) Franchises (Courses, training

Upon execution of the agreement, the Company charges from

and consulting / Outfit and

franchisees a fixed amount, part of which is allocated to courses,

inauguration)

training and consulting to prepare the franchisees to sell products

under Natura brand. The other part refers to outfit (specific products

to be used at the franchisee store) and inauguration (opening event of

franchisee's store). The Company believes that these items represent a

material right and, for such, they were considered performance

obligations. Measurement is based on the market value of these items,

which are initially recognized as deferred revenue. When the

franchisee's store is opened, this deferred revenue is allocated to profit

or loss for the year.

h) Franchisees (Advertisement

Upon the execution of the agreement, the Company charges from

program)

franchisees a fixed amount, a part of which is for the advertisement

fund (monthly delivery of showcases). The Company believes that this

item represents a material right and, for such, it was considered a

performance obligation. Measurement is based on the market value of

this item, which is initially recognized as deferred revenue. This

revenue is deferred and allocated to profit or loss for the year upon the

delivery of showcases to the franchisees.

i) Franchises (Brand use right)

Upon the execution of the agreement, the Company charges from

franchisees a fixed amount, part of which is for the use of the "Natura"

brand. The Company believes that this item represents a material right

and, for such, it was considered a performance obligation.

Measurement is based on residual value, i.e., the remaining value after

excluding the market value of courses, training and consulting services,

outfit and inauguration, and the Advertisement Fund. This amount is

initially recognized as deferred revenue. This deferred revenue is

allocated to profit or loss, on a straight-line basis, over the term of the

franchise agreement.

j) Incentives related to "free-of-

The Company grants incentives related to "free-of-charge" products

charge" products and

and promotional gifts for its customers (Natura Consultants and/or end

promotional gifts

consumers). Since it is considered a material right, the Company

recognizes this item as a performance obligation. Considering that the

delivery of products and the realization of performance obligation of

delivering "free-of-charge" products or promotional gifts occur at the

same time, the Company concluded that an allocation of prices and

monitoring these two performance obligations separately are not

applicable. Thus, revenue is recognized when the physical transfer of

the product occurs, and the customer obtains control over this product.

3.26 Financial income and expenses

The Company's financial income and expenses comprise:

  • Interest revenue and expenses;
  • Dividends revenue;
  • Dividends of preferred shares issued classified as financial liability;
  • Net gains/losses from financial assets measured at fair value through profit or loss;
  • Net gains/losses from exchange variation on financial assets and liabilities;
  • Net gains/losses from hedge instruments recognized in profit or loss; and
  • Reclassifications of net gains previously recognized in other comprehensive income.

Interest income and expenses are recognized as profit or loss through the effective tax rate method.

Revenue from dividends is recognized in profit or loss on the date the Company's right to receive the payment is established.

The Company classifies interest received and dividends and interest on capital received as cash flows from investing activities.

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  1. Statement of value added
    The purpose of this statement is to disclose the wealth created by the Company and its distribution during a certain reporting period, and is presented by the Company, as required by the Brazilian Corporate Law, as an integral part of its individual financial statements, and as supplemental information of the consolidated financial statements, since this statement is not required by IFRS.
    The statement of value added was prepared using information obtained in the same accounting records used to prepare the financial statements and pursuant to the provisions of CPC 09 - Statement of Value Added. The first part of this statement includes the wealth created by the Company, represented by revenue (gross sales revenue, including taxes levied thereon, other income, and the effects of the allowance for doubtful accounts), inputs acquired from third parties (cost of sales and purchase of materials, electricity, and services from third parties, including taxes levied at the time of the acquisition, the effects of impairment losses, and depreciation and amortization), and the value added received from third parties (equity in subsidiaries, financial income, and other income). The second part of the statement of value added presents the distribution of wealth among personnel, taxes, fees and contributions, lenders and lessors, and shareholders.
  2. New standards and interpretations and amendments to standards not yet adopted
    The standards, amendments and interpretations issued, but not yet adopted, up to the date of issuance of the Company's financial statements are presented below. The Company intends to adopt these standards, if applicable, when they become effective.
    • CPC 15 (R1) / IFRS 3 - Business Combinations - whenever applicable, the Company adopts this accounting standard, but the alterations in this standard, since they are not effective for the year ended, were not adopted;
    • CPC23/IAS 8 - Accounting policies, changes in accounting estimates and errors and CPC26/IAS 1 - Presentation of financial statements - the Company adopts these accounting standards for the fiscal year ended December 31, 2019, but the alterations in these standards, since they are not effective for the year ended, were not adopted; and
    • Alterations in references to the conceptual structure in IFRS - the Company adopts the CPC / IFRS conceptual standard. However, since these alterations are not effective yet, they were not adopted.
  3. New standards, amendments and interpretations of standards adopted for the first time for the period starting on January 1, 2019
    CPC 06(R2) / IFRS 16 - Lease Operations
    On January 1, 2019, the Company adopted CPC 06(R2) / IFRS 16, approved by the Securities and Exchange
    Commission of Brazil ("CVM") in December 2017, which introduces a single lease model, replacing the concept of classifying leases as operating and financial leases. The main purpose is to define if there is lease in agreements or if the agreement is for the provision of service. After defining this, if an agreement contains a lease, it must be booked under assets, to be depreciated in liability and recording financial charges.
    The lease is present in an agreement if it includes both the following conditions:
    • An identifiable asset explicitly or implicitly specified. In this case, the supplier does not have the practice of replacing the asset, or such replacement would not bring any economic benefit to the supplier.
    • The right to control the use of the asset over the duration of the agreement. In this case, the Company must have the authority to take decisions on the use of the asset and the capacity to obtain substantially all economic benefits for the use of the asset.

CPC 06(R2) / IFRS 16 includes two practical expedients from recognition for tenants that were applied by the Company and its subsidiaries upon the fist-time adoption at January 1, 2019: leases of low-value assets and short- term leases, i.e., lease terms of 12 months or less.

The Company and its subsidiaries opted for the simplified modified retrospective transition approach, without the restatement of comparison periods, adopting the following criteria for first-time recognition and measurement of assets and liabilities:

  • Recognition of lease liabilities on thefirst-time adoption date for leases previously classified as operating leases. Lease liabilities were measured at present value of the remaining lease payments, discounted based

35

on the incremental interest rates on loans, grouped by nature of the asset, region and contractual period; and

  • Recognition ofright-of-use assets on the first-time adoption date for leases previously classified as operating leases. The right-of-use asset is measured at the equivalent amount of the lease liability, adjusted by the value of any early or accrued lease payments related to the lease that has been recognized in the balance sheet immediately before the first-time adoption date.

The following charts show the impacts of first-time adoption of CPC 06 (R2) / IFRS 16 on the financial statements as of January 1, 2019.

Right-of-use assets on January 1, 2019

Right of use the asset (classified as operating leasing as of December 31, 2018) PIS and COFINS on lease agreements

(=) Total initial adoption

  1. Fair value adjustment of lease agreements identified in the business combination carried out in the acquisition of The Body Shop, as noted 22 g)
    (=) Total initial adoption of the right-of-use asset (Note 17) Transfer of fixed assets recognized through financial leasing
    Intangible asset transfer (fair value recognized in business combination + key money)
    (=) Total transfer

Any initial direct costs incurred by the lessee, and lease payments made less any lease incentives received

Right-of-use assets on January 1, 2019

Lease liabilities on January 1, 2019

Present value of leases agreements classified as operational as of December 31, 2018 PIS and COFINS on lease agreements

Recognition practical expedients:

(-)Short-term lease and low-value assets

(=) Total initial adoption

  1. Lease classified and recognized as finance lease as of December 31, 2018.
    Lease liabilities on January 1, 2019

Consolidated

1,902,545

47,194

1,949,739

(25,843)

1,923,896

481,235

150,374

631,609

(55,831)

2,555,505

Consolidated

1,965,655

47,194

(63,110)

1,949,739

411,373

2,361,112

The Company evaluated whether there were indicators of impairment in its right-of-use assets at the transition date and there were no indicators of impairment.

All movements during the year ended 2019 related to CPC 06(R2) / IFRS 16 is presented in the note 17.

The following interpretation of standard was also adopted for the first-time starting January 1, 2019; however, it did not have significant effects on Company's financial statements:

  • ICPC 22 / IFRIC 23 - Uncertainty over Income Tax Treatments: This interpretation clarifies how to apply the recognition and measurement requirements in CPC 32 - Tributos sobre o Lucro (IAS 12 - Income Taxes) (CPC 32 / IAS 12), when there is uncertainty over income tax treatment. In such a circumstance, an entity shall recognize and measure its current or deferred tax assets or liabilities, applying the requirements of CPC 32 / IAS 12 based on taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates, determined applying this interpretation.

4. CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS

The preparation of the individual and consolidated financial statements requires management to make certain judgments and use assumptions and estimates based on experience and other factors considered relevant, which affect the values of assets and liabilities and which may present results that differ from actual results.

The significant judgments made by the Company are related to the recognition of revenue and leasing.

The areas that require a higher level of judgment and have greater complexity, as well as the areas in which assumptions and estimates are significant for the financial statements, are disclosed below.

36

  1. Income tax, social contribution and other taxes
    The Company recognizes deferred assets and liabilities based on the differences between the book value presented in the financial statements and the tax base of assets and liabilities, using the rates in force. The Company regularly reviews deferred tax assets in terms of the possibility of recovery, considering the historical profit generated and the projected future taxable profit, according to a technical feasibility study, reflecting the uncertainties related to its calculation, if any.
  2. Provision for tax, civil, and labor risks
    The Company is a party to several legal and administrative proceedings as described in note 22. Provisions are recorded for tax, civil and labor risks related to lawsuits that represent probable and estimated losses with a certain degree of certainty. The assessment of the likelihood of loss includes the assessment of the available evidence, the hierarchy of laws, the available jurisprudence, the most recent court decisions and their relevance in the legal system, as well as the assessment of legal counsel.
  3. Post-employmenthealthcare plan
    The current amount of the post-employment healthcare plan is contingent to a series of factors determined based on actuarial calculations, based on a series of financial and demographic assumptions, such as the discount rate, medical inflation and percentage of adhesion to the plan, which are disclosed in note 22).
  4. Stock option plan, restricted share plan and strategy acceleration program
    The stock option plan, restricted share plan and strategy acceleration program are measured at fair value at the grant date and the expense is recognized in profit or loss during the vesting period against "Additional paid-in capital" in shareholders' equity. At the balance sheet dates, Management reviews the estimates as to the number of stock options/restricted shares and, where applicable, recognizes the effect arising from this review in profit or loss for period against shareholders' equity. The assumptions and models used to estimate the fair value of the stock option plan, restricted share plan and strategy acceleration program are disclosed in Note 27.1.
  5. Impairment loss
    An impairment loss exists when the carrying amount of an asset or cash-generating unit exceeds its recoverable amount, which is the higher of fair value less cost of disposal and value in use. Fair value less costs of disposal is calculated based on information available about similar assets sold or market prices less additional costs to dispose of the asset.
    Value in use is calculated based on the discounted cash flow model. Cash flows derive from a budget prepared for the following five to ten years, according to the operating segment, and their projections consider the market's expectations for operations, estimated investments and working capital, as well as other economic factors. The value in use is sensitive to the discount rate used under the discounted cash flow method, as well as the growth rate and perpetuity used for extrapolation purposes.
    Details on this subject are presented in Note 16.
  6. Trade receivables and provision for expected credit losses
    The provision for expected losses on accounts receivable from customers is estimated based on the weighting of the risk of loss for each group in the "aging list", considering the different risks according to the collection operation. The characteristics of the Company's accounts receivable are:
    • Insignificant financial component;
    • Receivables portfolio without complexity; and
    • Low credit risk.

The Company adopted the simplified approach to expected credit loss, which consists of recognizing the expected credit loss over the total useful life of the asset. The methodology for determining the provision for losses on accounts receivable from customers, adopted by the Company until December 31, 2017, was the "aging list" model, in which the provision was calculated based on the historical loss. A range estimate was used using the weighted average of losses for the last 6 months. The calculation also considered a segregation of Natura Consultants by length of relationship, and a division between renegotiated and non-renegotiated securities. In addition, the Company concluded that the macroeconomic indices have no significant impact on its provision estimates. To corroborate this understanding, the Company prepared some correlation analyzes between the indices that could potentially have some influence in the sector and its history of losses with customers, such as

37

Gross Domestic Product - GDP, Unemployment Index, Broad National Consumer Price Index - IPCA and referential rate of the Special Settlement and Custody System - SELIC.

After analyzing the Company's management, it was concluded that the methodology already practiced by the Company is in line with the expected losses model and, therefore, the initial adoption of CPC 48 / IFRS 9 as of January 1, 2018 did not present any relevant impacts in measuring the provision for expected credit losses with accounts receivable from customers.

4.7 Provision for inventory losses

The provision for inventory losses is estimated using methodology for including discontinued products, products with slow turnover, products expired or nearing expiration and products that do not meet quality standards. The results of provisions are stated in Note 9.

5. FINANCIAL RISK MANAGEMENT

5.1 General considerations and policies

Risks and financial instruments are managed through the definition of policies and strategies and implementation of control systems, defined by the Company's Treasury Committee and approved by the Board of Directors. The compliance of the position in financial instruments, including derivatives, in relation to these policies, is presented and assessed on a monthly basis by the Company's Treasury Committee and subsequently submitted to the analysis of the Audit Committee, the Executive Committee and the Board of Directors.

Risk management of Natura operations (Brazil, Latam, Netherlands, USA and France) is performed by the Company's general treasury function, which is also responsible for approving the short-term investments and loan transactions. Risk management of the subsidiaries Aesop and The Body Shop is conducted by the local treasury departments, subject to monitoring and approval by the Company's Central Treasury.

Below are presented the carrying amounts and fair values of the Company's financial instruments as of December

31, 2019 and December 31, 2018:

Carrying amount

Fair value

Company

Note

Classification by category

Fair value

2019

2018

2019

2018

hierarchy

Financial assets

Cash and cash equivalent

Fair value through

Cash and banks

6

profit or loss

Level 2

2,173,100

-

2,173,100

-

Certificate of bank deposits

Amortized cost

Level 2

207,699

-

207,699

-

2,380,799

-

2,380,799

-

Short-term investments

Fair value through

Exclusive investment funds

7

profit or loss

Level 2

669,769

-

669,769

-

Financial liabilities

Issue of debts in domestic currency

18

Amortized cost

Level 2

(2,883,382)

-

(2,883,382)

-

Carrying amount

Fair value

Consolidated

Note

Classification by category

Fair value

2019

2018

2019

2018

hierarchy

Financial assets

Cash and cash equivalent

Fair value through

Cash and banks

6

profit or loss

Level 2

3,110,220

823,656

3,110,220

823,656

Certificate of bank deposits

Amortized cost

Level 2

211,261

1,274

211,261

1,274

Fair value through

Certificate of bank deposits

profit or loss

Level 2

-

46,067

-

46,067

Fair value through

Repurchase operations

profit or loss

Level 2

1,192,101

344,051

1,192,101

344,051

4,513,582

1,215,048

4,513,582

1,125,048

Short term investments

Fair value through

Government bonds

7

profit or loss

Level 2

221,900

402,895

221,900

402,895

Fair value through

Financial letter

profit or loss

Level 2

374,690

574,310

374,690

574,310

38

Fair value through

Loan investment fund

profit or loss

Level 2

407,928

210,971

407,928

210,971

Fair value through

Dynamo Beauty Ventures Ltd fund

profit or loss

Level 2

7,402

-

7,402

-

Fair value through

Certificate of Bank deposits

profit or loss

Level 2

21,327

27,201

21,327

27,201

1,033,247

1,215,377

1,033,247

1,215,377

Trade receivables

8

Amortized cost

Level 2

1,685,764

1,691,581

1,685,764

1,691,581

"Financial" and "operating"

Fair value - Hedge

derivatives "

instrument

Level 2

737,378

578,289

737,378

578,289

"Financial" and "operating"

Fair value through

derivatives "

profit or loss

Level 2

-

6,019

-

6,019

737,378

584,308

737,378

584,308

Financial liabilities

Issue of debts in domestic currency

18

Amortized cost

Level 2

(7,266,853)

(4,771,511)

(7,300,082)

(4,962,723)

BNDES/Finep loans

Amortized cost

Level 2

(145,590)

(209,737)

(145,590)

(209,737)

Issue of debts in foreign currency

Amortized cost

Level 2

(3,373,930)

(3,012,897)

(3,541,541)

(3,294,875)

(10,786,373)

(7,994,145)

(10,987,213)

(8,467,335)

Lease liabilities

Amortized cost

Level 2

-

(446,235)

-

(446,235)

"Financial" and "operating"

Fair value - Hedge

derivatives

instrument

Level 2

(10,158)

(69,189)

(10,158)

(69,189)

"Financial" and "operating"

Fair value through

(1,648)

(1,648)

derivatives

profit or loss

Level 2

(11,806)

(69,189)

(11,806)

(69,189)

Trade payables, forfeit operations

and related parties

19

Amortized cost

Level 2

(1,829,756)

(1,736,791)

(1,829,756)

(1,736,791)

5.2 Financial risk factors

The activities of the Group expose it to several financial risks: market risk (including currency and interest risks), credit risk and liquidity risk. The Company's overall risk management program is focused on the unpredictability of financial markets and seeks to minimize potential adverse effects on the financial performance, using derivatives to protect certain risk exposures.

a) Market risk

The Company and the subsidiaries are exposed to market risks arising from their business activities. These risks mainly comprise possible fluctuations in exchange and interest rates.

One of the subjects currently in discussion in the international market, which could affect the operations of The Body Shop International Limited, is the withdrawal of the United Kingdom from the European Union, better known as Brexit. Despite many uncertainties on the outcome of the negotiations, the Management has been monitoring its impacts, as well as studying and taking measures to mitigate the negative effects that may arise from it. One of these measures was the installation of a new distribution center in Continental Europe, which aims to mitigate Brexit risks and help The Body Shop in implementing logistic improvements in order to reduce average days of store supply, in line with more comprehensive business transformation goals.

To hedge the current balance sheet positions of the Company and the subsidiaries against market risks, the following derivative instruments are used and consist of the balances in the following table, as of December 31,

2019 and December 31, 2018:

Fair value (Level 2)

Description

Consolidated

2019

2018

Financial derivatives

727,068

512,365

Operational derivatives

(1,496)

2,754

Total

725,572

515,119

39

The characteristics of these instruments and the risks which they are linked are described below.

b) Foreign exchange risk

The Company and the subsidiaries are exposed to the foreign exchange risk arising from financial instruments denominated in currencies different from their functional currencies. To reduce this exposure, Natura Cosméticos implemented policies to hedge against the foreign exchange risk that establish exposure limits linked to this risk.

The treasury area's procedures defined based on the current policy include monthly projection and assessment of the Company and the subsidiaries foreign exchange exposure, on which management's decision-making is based.

The Company's exchange rate hedging policy considers the values of foreign currency receivables and payables balances of commitments already made and recorded in the financial information from the operations, as well as future cash flows, with an average of six months, still not recorded in the balance sheet.

The Body Shop has a specific foreign exchange hedging policy that covers foreign currency loans among the group companies, as well as future purchase and sale operations of goods, for a maximum period of 12 months.

As of December 31, 2019, and December 31, 2018, the Company and the subsidiaries are primarily exposed to the risk of fluctuation of the US dollar, euro and pound sterling. In order to hedge foreign exchange exposures in relation to foreign currency, the Company and the subsidiaries enter into transactions with derivative financial instruments such as "swap" and forward purchase of currency denominated ("Non-Deliverable Forwards - NDF"). Pursuant to the Foreign Exchange Protection Policy, the operating derivatives contracted by the Company must limit the loss related to the exchange devaluation in relation to the net income projected for the current year, given a certain estimate of exchange rate devaluation against the US dollar in cash flow projections exposed to this currency. This limitation defines the ceiling or maximum exchange exposure permitted to the Group in relation to the US dollar and Euro.

As of December 31, 2019, borrowings, financing and debentures, individual and consolidated balance sheets include accounts denominated in foreign currency which expose the Company to foreign exchange risks, in the aggregate, represent net liabilities of R$ 3,381,960 (R$3,012,897 as of December 31, 2018).

i) Derivatives to hedge foreign Exchange rate risk

The Company classifies derivatives into "financial" and "operational". "Financial" derivatives include swaps or forwards contracted to hedge against the foreign exchange risk associated with foreign-currency-denominated borrowings, financing and intercompany loans, "operational" derivatives include derivatives contracted to hedge against the foreign exchange risk on the business's operating cash flows.

Outstanding swap contracts, with maturities between January 2020 and February 2023 were entered into the counterparties represented by Bank of America (0.2%), HSBC (26.2%), Citibank (21.2%), Bradesco (26.2%) and Itaú BBA (26.2%). Currency forward contracts against the pound sterling mature within 12 months and were executed with counterparties represented by HSBC and Santander. Swap agreements in Mexican pesos and Chilean pesos have maturities of up to 6 months and were executed with the other party represented by HSBC. On December 31, 2019, the balances of financial derivatives were:

Financial derivatives

Consolidated

Principal (notional)

Accrual value

Fair value

Gain (loss) from fair

amount

value adjustment

Description

2019

2018

2019

2018

2019

2018

2019

2018

Swap contracts (a):

Asset position:

Long position - U.S. dollar

2,664,001

2,381,918

3,416,707

3,038,908

3,729,691

3,295,032

312,984

256,124

Liability position:

CDI floating rate:

Short position in CDI

2,664,001

2,381,918

2,754,595

2,478,623

3,002,623

2,779,720

248,028

301,097

Swap contracts (a):

Asset position:

Long position - U.S. dollar

-

58,606

-

56,633

-

57,346

-

713

40

Liability position:

CDI floating rate:

Short position in CDI

-

58,606

-

59,525

-

60,293

-

768

Total net derivative financial

instruments

-

-

662,112

557,393

727,068

512,365

64,956

(45,028)

  1. Financial swap operations consist of exchanging the exchange variation for a correction related to: a percentage of the variation of the Interbank Deposit Certificate -post-fixed CDI - in the case of Brazil.

The notional amount represents the amounts of the contracted derivatives. Fair value refers to the value of outstanding contracted derivatives recognized in balance sheets.

For derivatives maintained by the Company and the subsidiaries as of December 31, 2019 and December 31, 2018, due to the fact contracts are directly entered into with the financial institutions and not through B3, there are no margin calls deposited as guarantee of the related transactions.

Operational derivative - Consolidated

On December 31, 2019, the Company holds forward derivative instruments with HSBC and Santander in order to hedge against exchange rate risk on import and export operations of the subsidiary The Body Shop in foreign currencies against the pound sterling and U.S. dollar.

These derivatives are measured at fair value, with gains and losses recognized in the group of costs of products sold and are broken down as follows:

Description

Principal (notional) amount

Fair value

2019

2018

2019

2018

Net position - GBP and USD

200,896

-

(2,008)

-

Forward contracts

1,302,869

1,773,810

512

2,754

Total derivative instruments, net

1,503,765

1,773,810

(1,496)

2,754

Sensitivity analysis

For the sensitivity analysis of the risk of foreign exchange rate exposure, the Company's Management understands it is necessary to consider in addition to the assets and liabilities, with exposure to the fluctuation of exchange rates recorded in the balance sheet, the value of the fair value of the financial instruments contracted by the Company for the protection of certain exposures as of December 31, 2019 and 2018, as shown in the following table:

Loans and financing registered in Brazil in foreign currency (*) Receivables registered in Brazil in foreign currency Accounts payable registered in Brazil in foreign currencies Value of the financial derivatives

Net asset exposure

  1. Excluding transaction costs.

Consolidated

20192018

(3,381,959) (3,039,064)

10,007 10,058

(10,543) (11,006)

3,729,691 3,295,032

347,196 255,020

This analysis considers only financial assets and liabilities registered in Brazil in foreign currency, since exposure to exchange variation in other countries is close to zero due to the strength of currencies and the effectiveness of their derivatives and considers that all other variables, especially interest rates, remain constant and ignore any impact from forecasted purchases and sales.

The tables below show the loss that would have been recognized in the subsequent period, assuming that the current net foreign exchange exposure remains static, based on the following scenarios:

Consolidated

Description

Risk

Probable scenario

Scenario II

Scenario III

Net exposure

Dollar decrease

158

(115,521)

(346,880)

The probable scenario considers future US dollar rates for 90 days. According to quotations obtained at B3 on the expected maturity dates of financial instruments with foreign exchange exposure, it is R $ 4.03 / US $ 1.00. Scenarios II and III consider a drop in the US dollar of 25% (R $ 3.02 / US $ 1.00) and 50% (R $ 2.02 / US $ 1.00), respectively. Probable scenarios II and III are being presented in compliance with CVM Instruction 475/08.

41

Management uses the probable scenario in the assessment of possible changes in the exchange rate and presents the referred scenario in compliance with IFRS 7 / CPC 40 - Financial Instruments: Disclosures.

The Group does not use derivative financial instruments for speculative purposes.

Derivative instruments designated for hedge accounting

The Company performed formal designation of its operations subject to hedge accounting for derivative financial instruments for hedging loans denominated in foreign currency of Natura Cosméticos S.A. and Natura Distribuidora de México, S.A. de C.V., and operating cash flows resulting from the purchase and sale denominated in foreign currency of The Body Shop, documenting:

  • The hedge relationship;
  • The Company's objective and risk management strategy in taking out the hedge transaction;
  • Identification of the financial instrument;
  • The hedged item or hedge transaction;
  • The nature of the risk to be hedged;
  • Description of the hedge relationship;
  • The statement of correlation between hedge and hedged item, where applicable; and
  • The prospective statement of hedge effectiveness.

The positions of derivative financial instruments designated as outstanding cash flow hedge on December 31,

2019 as set out below:

Cash flow hedge instrument - Consolidated

Others comprehensive

income

Accumulated

Gain in the 9-

Hedged

Notional

Notional

Accrual

Fair

contract gain

month

item

currency

value

value

value (a)

(loss)

period

Currency Swap - US$/R$

Currency

BRL

2,664,001

662,112

727,068

64,956

109,523

Forward contract

Currency

GBP

1,038,538

625

152

(473)

(2,245)

Currency Swap - MXN/R$

Currency

MXN

-

-

-

-

59

  1. The method used by the Company to determine fair value consists in calculating the future value based on the contracted conditions and determines present value based on market accrual extracted from B 3.

The changes in cash flow hedge reserve booked under other comprehensive income are shown below:

Consolidated

Cash flow hedge balance as of December 31, 2018

(27,840)

Change in the fair value of hedge instrument recognized in other comprehensive income

107,337

Tax effects on fair value of hedge instrument

(36,768)

Cash flow hedge balance as of December 31, 2019

42,729

The Company designates as cash flow hedge derivative financial instruments used to offset variations from exposure to exchange rate, in the market value of contracted debts not in the functional currency.

On December 31, 2019, the consolidated position of instruments designated as cash flow hedge totaled R$ 3,702,539 (three billion, seven hundred and two million, five hundred and thirty nine thousand reais), of notional amount which R $ 2,664,001 is hedged against Reais and £ 194,957 (R $ 1,038,538) is hedged against Pounds Sterling, as shown in the Cash Flow Hedge Instrument - Consolidated.

c) Interest rate risk

The interest rate risk arises from financial investments and short and long-term loans and financing. Financial instruments issued at variable rates expose the Company and its subsidiaries to the risk of cash flows associated with the interest rate. Financial instruments issued at the prefixed rates expose the Company and its subsidiaries to the fair value risk associated with the interest rate.

The Company's cash flow risk associated with the interest rate arises from investments and short- and long-term loans and financing issued at floating rates. The Company's Management adopts the policy of maintaining its rates

42

of exposure to asset and liability interest rates pegged to floating rates, Short-term investments are adjusted by the Interbank Deposit Rate (CDI) whereas borrowings and financing are adjusted based on the Long-term Interest Rate (TJLP), CDI and fixed rates, according to the contracts made with the related financial institutions, and trading securities with investors in this market.

Sensitivity analysis

On December 31, 2019, there are loans and financing denominated in foreign currency and issued at fixed rates under contract "swap ", changing the interest over the liability to CDI fluctuation. The Company is, therefore, exposed to CDI fluctuation. The following table presents the exposure to interest rate risks of transactions pegged to CDI, including derivative transactions (loans and financing were considered at their full amounts, since 97% of them are linked to CDI rate):

Total borrowings and financing - in local currency (note 18) Operations in foreign currency with derivatives pegged to CDI (a) Short-term investments (notes 5 and 6)

Net exposure

Company Consolidated

(2,883,382) (7,404,414)

  • (3,381,959)
    877,469 2,429,207

(2,005,913) (8,357,166)

  1. This refers to transactions involving CDI-backed derivatives to hedge the loans and financing arrangements raised in foreign currency in Brazil.

The sensitivity analysis considers the exposure of borrowings and financing, net of short-term investments, pegged to the CDI rate (notes 6 and 7).

The tables below set out projected incremental loss that will be recognized in income statement for the following year, assuming that the current net liability exposure will remain unaltered and the following scenarios:

Company

Risk

Probable

Scenario II

Scenario III

Description

scenario

Net liability

Rate increase

1,003

(20,811)

(42,626)

Consolidated

Risk

Probable

Scenario II

Scenario III

Description

scenario

Net liability

Rate increase

4,179

(86,706)

(177,590)

The probable scenario considers future interest rates obtained at B3 for the maturity dates of the financial instruments exposed to interest rate risks. Scenarios II and III consider an increase in the interest rate of 25% (5.4% per year) and 50% (6.5% per year), respectively, over the CDI rate of 4.35% per year (probably scenario).

d) Credit risk

Credit risk refers to risk of a counterparty not complying with its contract obligations, which would result in financial losses for the Company. The Group's sales are made to a high number of Natura's Consultants and this risk is managed through a credit granting process. The result of this management is reflected in the 'Provision for doubtful accounts' under "Trade receivables", as explained in note 8.

The Company is also subject to credit risks related to financial instruments contracted for the management of its business, primarily represented by cash and cash equivalents, short-term investments and derivative instruments.

The Company believes that the credit risk of transactions with financial institutions is low, as these are considered by the Management as prime banks.

The policy for Short-term Investments adopted by the Company's Management establishes the financial institutions with which the Group can do business and defines fund allocation limits and the amounts that may be invested in each of these financial institutions.

e) Liquidity risk

Effectively managing liquidity risk implies to maintain enough cash and marketable securities, funds available through credit facilities used and the ability to settle market positions.

Management monitors the Group's consolidated liquidity level considering the expected cash flows against unused credit facilities, as shown in the following table:

43

Company

Consolidated

2019

2018

2019

2018

Total current assets

3,050,574

-

9,430,057

6,455,759

Total current liabilities

(3,080,906)

-

(7,518,423)

(4,566,881)

Total net working capital

(30,332)

-

1,911,634

1,888,878

At December 31, 2019, the carrying amounts of financial liabilities, measured at amortized cost considering interest payments at a floating rate and the value of debt securities reflecting the forward market interest rates on the reporting date may be changed as floating interest rates change. Their respective maturities are shown below:

Company

Less than

One to five

Over five

Total expected

Interest to

Carrying

one year

years

years

cash flow

be accrued

amount

Borrowings, financing and

debentures

3,063,119

-

-

3,063,119

(179,737)

2,883,382

Consolidated

Less than

One to five

Over five

Total expected

Interest to

Carrying

one year

years

years

cash flow

be accrued

amount

Borrowings, financing and

3,745,157

-

14,160,816

debentures

10,415,659

(3,374,443)

10,786,373

Lease

657,483

1,988,671

443,492

3,089,646

(572,081)

2,517,565

Payables to related parties,

trade payables and forfait

1,829,756

-

-

1,829,756

-

1,829,756

operations

The Company also has the following credit line:

  • Up to seventy million British pounds (£70 million), with no guarantee, that can be withdrawn in installments to meetshort-term financing needs of The Body Shop International Limited. This credit line is valid through March 2021 and is renewed automatically at the discretion of The Body Shop International Limited. Interest will be paid based according to LIBOR or EURIBOR + 2.0% p.a.
  • Up to one hundred fifty million reais (R$150,000) in an unsecured credit line, which can be withdrawn in installments to meet theshort-term financing needs of Natura Cosméticos S.A. This credit line is valid until January 2020. Interest would be paid at the CDI rate + 1.25% p.a.

As of December 31, 2019, the Company had not drawn down on these available credit lines.

5.3 Capital management

The Company's objectives in managing its capital are to ensure that the Company is continuously capable of offering return to its shareholders and benefits to other stakeholders to maintain an optimal capital structure to reduce this capital cost.

The Company monitors capital based on the financial leverage ratios. This ratio corresponds to the net debt divided by the total equity. The net debt corresponds to total borrowings and financings (including short- and long-term borrowings, as shown in the consolidated balance sheet), deducted from cash and cash equivalents and short-term investments (except for "Crer para Ver" funds).

a) Fair Value Estimate

Financial instruments that are measured at fair value at the end of the reporting period as prescribed by CPC 46 / IFRS 13 - Fair Value Measurement follow the hierarchy below:

  • Level 1: Evaluation based on prices quoted (unadjusted) in active markets for identical assets or liabilities. A market is considered active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions on anarm's-length basis;
  • Level 2: Used for financial instruments that are not traded in active markets (for example,over-the-counter derivatives) and whose fair value is determined using valuation techniques that, in addition to the quoted prices, included in Level 1, use other inputs adopted by the market for assets or liabilities, whether directly (i.e. prices) or indirectly (i.e. derived from prices); and

44

  • Level 3: Inputs for assets or liabilities that are not based on the data adopted by the market (i.e. unobservable inputs).

As of December 31, 2019, and December 31, 2018, the measurement of Group's derivatives falls under the Level 2 characteristics and there were no changes in levels in the period. The fair value of exchange rate derivatives (swap and forwards) is determined based on the exchange rate at the end of the reporting period, with the resulting amount being discounted to present value.

  1. Fair values of financial instruments measured at amortized cost (Level 2)Short-terminvestments

The carrying amounts of the short-term investments in Certificates of Bank Deposits measured at amortized cost approximate their fair values as transactions are conducted at floating interest rates.

Borrowings, financing and debentures

The carrying amounts of borrowings, financing and debentures are measured at their amortized cost and disclosed at fair value.

Trade receivables and payables

It is estimated that the carrying amounts of trade receivables and trade payables approximate their fair values in view of the short term of the transactions conducted.

The Group does not maintain any guarantees for past-due receivables and payables.

6. CASH AND CASH EQUIVALENT

Company

Consolidated

2019

2018

2019

2018

Cash and banks

2,173,101

-

3,110,220

823,656

Certificate of Bank Deposits (a)

207,699

-

211,261

47,341

Repurchase agreements (b)

-

-

1,192,101

344,051

2,380,800

-

4,513,582

1,215,048

a)On December 31, 2019, investments in Certificate of Bank Deposits are remunerated at an average rate of 106.9% of CDI (101.0% of CDI as of December 31, 2018) with daily maturities redeemable with the issuer itself, without significant loss of value.

b)Repurchase agreements are securities issued by banks with a commitment by the bank to repurchase the securities, and by the client to resell the security, at a defined rate of interest and within a predetermined term, which are backed by public or private securities (depending on the bank) and are registered with the CETIP. On December 31, 2019, repurchase operations are remunerated at an average rate of 99.9% of CDI (100.0% of the CDI on December 31, 2018).

7. SHORT-TERM INVESTMENTS

Company

Consolidated

2019

2018

2019

2018

Exclusive investment funds

669,769

-

-

-

Loan investment funds

-

-

407,928

210,971

Certificate of Bank Deposits (a)

-

-

21,327

27,201

Treasury bills

-

-

374,690

574,310

Government bonds (LFT)

-

-

221,900

402,895

Dynamo Beauty Ventures Ltd. Fund (b)

-

-

7,402

-

669,769

-

1,033,247

1,215,377

Current

669,769

-

1,025,845

1,215,377

Non-current

-

-

7,402

-

  1. The balance on December 31, 2019, related to the "Crer para Ver" line within the exclusive fund is R$38,018 (R$26,829 on December 31, 2018).
  2. Natura Cosméticos S.A. became member of a new venture capital vehicle - the Dynamo Beauty Ventures (DBV) fund - whose mission is to identify and invest in emerging brands in cosmetics andwell-being segments, the focus on Europe and the USA, acquiring non-controlling interest in companies with tremendous growth potential and innovative business models in the long term.

45

The Company concentrates most of investments in an exclusive investment fund. On December 31, 2019 the companies Natura &Co Holding S.A., Natura Cosméticos S.A., Natura Logística e Serviços Ltda, Indústria e Comércio de Cosméticos Natura Ltda., Natura Comercial Ltda., Natura Biosphera Franqueadora Ltda. and Instituto Natura have interest in shares of the Fund Essential Investment.

The value of the shares held by the Company is disclosed under "Investment Fund Exclusive" in the Company financial statements. The financial information of the Investment Fund, which the group has an exclusive interest (100 % of the shares), were consolidated, except for the shares of Instituto Natura, and the values of their portfolio were segregated by type of investment and classified as cash equivalents or short term investments, according to the accounting practices adopted by Natura Cosméticos.

The Essential is a Private Credit Multimarket Investment Fund managed, administrated and by custody of Itaú Unibanco Asset Management. Eligible assets in the portfolio are: government securities, CDBs, financial letters and repurchase agreements. There is no grace period for redemption of shares that may be redeemed at any time.

Breakdown of the exclusive fund portfolio on December 31, 2019 and December 31, 2018 is as follows:

2019

2018

Certificates of deposit

21,327

73,268

Repurchase agreements

1,192,101

344,051

Treasury bills

374,690

574,310

Government bonds (LFT)

221,900

402,895

1,810,018

1,394,524

8. TRADE RECEIVABLES

Consolidated

2019

2018

Trade receivables

1,793,759

1,820,823

Provision for doubtful accounts

(107,995)

(129,242)

1,685,764

1,691,581

The balance of trade receivables in Consolidated is basically denominated in Brazilian reais, and approximately 68% of the outstanding balance as of December 31, 2019 (73% as of December 31, 2018), refers to real- denominated transactions. The remaining balance is denominated in several currencies and refers to sales by foreign subsidiaries.

Maximum exposure to credit risk at the reporting date is the carrying amount of each aging range, net of the provision for doubtful accounts, as shown in the aging list below:

Consolidated

2019

2018

Current

1,501,958

1,491,773

Past due:

Up to 30 days

142,069

139,680

31 to 60 days

36,466

45,981

61 to 90 days

27,789

34,207

91 to 180 days

85,477

109,182

Provision for doubtful accounts

(107,995)

(129,242)

1,685,764

1,691,581

8.1 Changes in the provision for doubtful accounts

The changes in the provision for doubtful accounts for the period ended December 31, 2019 are as follows:

Consolidated

Balance at December 31, 2017

(117,553)

Additions

(237,884)

Write-offs (a)

228,495

Exchange variation

(2,300)

Balance at December 31, 2018

(129,242)

Additions

(209,515)

Write-offs (a)

232,034

Exchange variation

(1,272)

Balance at December 31, 2019

(107,995)

46

  1. Refers to accounts overdue for more than 180 days which are written off when the Company has no expectation of recovering the trade receivable and sales of customer portfolio.

8.2 Aging list of trade receivables and provision for doubtful accounts

The following table shows trade receivables by exposure to doubtful accounts on December 31, 2019:

Consolidated

Trade receivables

Provision for

doubtful accounts

Current

1,501,958

(38,060)

Past due:

Up to 30 days

142,069

(14,311)

31 to 60 days

36,466

(6,663)

61 to 90 days

27,789

(6,333)

91 to 180 days

85,477

(42,628)

1,793,759

(107,995)

9. INVENTORIES

Consolidated

2019

2018

Finished products

1,253,145

1,209,975

Raw materials and packaging

253,063

215,813

Ancillary material

82,228

95,168

Work in progress

27,346

21,984

Provision for losses

(185,232)

(178,268)

1,430,550

1,364,672

9.1 Changes in the provision for inventory losses

The changes in the provision for inventory losses for the year ended December 31, 2019 are as follows:

Consolidated

Balance at December 31, 2017

(160,010)

Additions, net (a)

(180,084)

Write-offs (b)

157,341

Exchange Variation

4,485

Balance at December 31, 2018

(178,268)

Additions, net (a)

(147,140)

Write-offs (b)

136,431

Exchange Variation

3,745

Balance at December 31, 2019

(185,232)

  1. Refer to the recognition of net provision for losses due to discontinuation, expiration and quality, to cover expected losses on the realization of inventories, pursuant to the Group's policy.

b)Consist of write-offs of products discarded by the Group.

10. RECOVERABLE TAXES

Consolidated

2019

2018

ICMS on purchase of goods (a)

434,832

420,835

Taxes on purchase of goods - subsidiaries abroad

39,475

42,198

Other taxes - foreign subsidiaries

1,825

112

ICMS on purchases of fixed assets

10,628

9,098

PIS and COFINS on purchases of fixed assets (b)

3,826

42,175

PIS and COFINS on purchase of goods(c)

280,087

194,382

Withholding PIS, COFINS and CSLL

2,378

2,085

IPI recoverable (d)

30,190

35,770

Others

1,613

1,238

804,854

747,893

Current

395,640

379,253

Non-current

409,214

368,640

47

a)Accumulated Brazilian tax on the circulation of goods, interstate and intercity transportations and communication services (ICMS) tax credits were mainly generated from the purchases, which tax rate is higher than average sales rates and by increase exports.

b)Brazilian tax for the Integration Program Tax on Revenue (PIS) and Social Security Funding Tax on Revenue (COFINS).

  1. Credits recognition related to the exclusion of the ICMS on the basis of calculation of PIS and COFINS, whose definition occurred during the financial year 2019 and credit arising from the calculation process forsingle-phase products.

d)Tax on Manufactured Products (IPI).

11. INCOME TAX AND SOCIAL CONTRIBUTION

  1. Deferred
    Deferred Corporate Income Tax (IRPJ) and Social Contribution on Net Income (CSLL) result from temporary differences in the Group. The balance of deferred taxes on tax losses and tax loss carryforwards was also recognized in certain subsidiaries and the Company.
    The amounts are as follows:
    1. Breakdown of deferred income tax and social contribution - Assets:

Consolidated

2019

2018

Tax loss carryforwards and negative basis of social contribution tax

193,566

235,302

Allowance for doubtful accounts

51,151

28,215

Allowance for losses on inventories

50,593

47,509

Provision for tax, civil and labor contingencies (note 21)

53,377

68,305

Effect of changes in fair value of derivative instruments, including hedge

accounting transactions (note 5.2.)

(247,163)

(177,212)

Provision for ICMS - ST (note 21)

24,659

41,129

Allowances for losses on advances to suppliers

898

2,789

Accrued benefits sharing and partnerships

17,483

14,590

Provision for profit sharing

54,427

77,912

Adjustment to useful life of assets

(118,632)

(128,367)

Provision carbon credits

8,297

4,208

Profit not realized in inventories

32,899

25,604

Provision for losses - property and intangible assets

(4,509)

9,048

INSS with Suspended Liability (note 21)

17,757

14,250

Lease

22,268

14,325

Other temporary differences (a)

60,886

55,694

Post-employment healthcare plan

33,589

26,827

Fair value of identifiable net assets in business combinations of Emeis

Holdings Pty Ltd

(24,516)

(24,912)

Stock option plan

112,095

39,950

Others expenses provision

35,323

23,234

Total

374,448

398,400

Deferred income tax and social contribution assets

769,268

728,892

Deferred income tax and social contribution liabilities

(394,820)

(330,492)

Income tax and social contribution

374,448

398,400

  1. Refers to (i) the recognition of a provision to comply withaccrual-basis accounting, reflecting the actual expenses incurred in the period, but without the issue of invoices by suppliers, and (ii) deferred revenues.

Management makes an assessment of the possibility of offsetting deferred income tax assets and deferred income tax liabilities according to each jurisdiction. As a result, there is only one income tax liability position for The Body Shop International Limited.

ii) Breakdown of deferred income tax and social contribution -Liabilities:

Consolidated

2019

2018

Fair value of identifiable net assets in business combination (a)

450,561

431,534

a)The balance includes deferred income tax liability on the fair value of net identifiable assets in the acquisition of The Body Shop International Limited

48

Management's expectation is that tax credits will be realized as follows:

Consolidated

2020

444,258

2021

146,624

2022

83,635

2023

36,050

2024

14,963

2025 onwards

43,737

769,267

With respect to tax credits on tax loss carryforwards and temporary differences, on the foreign subsidiaries listed below are not fully recorded due to the history of lack of taxable profit and taxable profit projections for the coming fiscal years.

As of December 31, 2019, and December 31, 2018, the amounts of tax losses on these subsidiaries are shown as follows:

Tax Loss

2019

2018

Natura (France e USA)

449,378

382,971

Aesop (Substantially by operations in the US, Germany and Brazil)

46,381

47,659

The Body Shop (Operations in the US, France and Brazil)

384,757

406,556

880,516

837,186

b) Reconciliation of income tax and social contribution:

Company

Consolidated

2019

2018

2019

2018

Income / (loss) After income tax and social

contribution

(157,710)

-

304,566

-

Taxes on Company formation(c)

206,592

206,592

-

Income / (loss) before income tax and social

contribution

48,882

-

511,158

637,405

Income tax and social contribution at the rate of 34%

(16,620)

-

(173,794)

(228,958)

Benefit of expenses with research and technological

innovation - Law nº 11.196 / 05 (a)

-

-

19,228

-

Tax incentives

-

-

12,457

10,794

Subsidy for investments (b)

-

-

24,864

12,505

Equity in the earnings of subsidiaries (note 14)

30,373

-

-

-

Effect from differences of tax rates of entities abroad

-

-

26,907

14,077

Recognition of prior-year tax losses - USA and Mexico

-

-

-

70,065

Taxation of profits of subsidiaries abroad

-

-

(60,305)

(12,694)

Unrecognized tax loss in the year

(3,635)

-

(8,893)

(11,799)

Tax Benefits of interest on equity (IOE)

-

-

37,628

40,208

Income tax contingency in international operations

-

-

(13,120)

-

Post-employment healthcare plan

-

-

-

30,082

Exercise of stock options and restricted stock plans

-

-

9,697

-

Other permanent differences

-

-

(23,769)

(49,306)

Income tax and social contribution expenses

10,118

-

(149,099)

(125,026)

Income tax and social contribution - current

10,118

-

(94,781)

(182,324)

Income tax and social contribution - deferred

0

-

(54,319)

57,298

Effective Rate- %

(20,7)

-

29,2

18,6

  1. Refers to the tax benefit instituted by Law No. 11,196 / 05, which allows deduction directly in the calculation of income tax and the social contribution of the amount corresponding to 60% of the total expenses with research and technological innovation,

observing the rules established in that Law.

b)The Company has ICMS tax incentives resulting from its regular operations (Investment subsidizing).

  1. Tax on corporate formation resulted from the difference between the book value of Natura and the acquisition cost used for the purpose of contributing shares issued by Natura to the Company's capital stock (Note 23c). Management believes that, although the amount of the referred special equity reserve formed part of the taxable income for tax purposes in Brazil the nature of this amount is different from the nature of other sources of taxable income in scope of CPC 32 (IAS 12). The key differences are that
    (i) the Company has not generated any taxable profits and this tax is levied essentially on the equity increase that generates the special reserve for statutory purposes; (ii) the creation of the special reserve is, in substance, a reclassification matter; (iii) the tax is levied on the entity as a result of an additional equity increase from the contribution made in the Company; and (iv) future profits of the Company as well as future and historical profits of Natura will continue to be taxed in accordance with the tax

49

legislation. The tax on the Company's formation was recognized in the income statement and presented as "Taxes on Company formation".

The changes in deferred asset and liability income tax and social contribution for the period ended December 31,

2019 were as follows:

Asset

Liability

Consolidated

Consolidated

Balance at December 31, 2018

398,400

(431,534)

Effect on profit or loss

(67,136)

12,817

Reserve for grant of options and restricted shares

44,844

-

Effect on other comprehensive income

(31,881)

-

Exchange variation on other comprehensive income

30,221

(31,844)

Balance at December 31, 2019

374,448

(450,561)

12. JUDICIAL DEPOSITS

Represent the restricted assets of the Group related to amounts deposited and held by the courts until the litigation to which they are related is resolved.

The judicial deposits of the Group as of December 31, 2019 and December 31, 2018 are as follows:

Consolidated

2019

2018

Unaccrued tax lawsuits (a)

203,403

173,027

Accrued tax lawsuits (b) (note 20 and 21)

116,415

140,750

Unaccrued civil lawsuits

2,541

2,822

Accrued civil lawsuits (note 21)

426

649

Unaccrued labor lawsuits

8,683

6,991

Accrued labor lawsuits (note 21)

5,787

9,338

Total judicial deposits

337,255

333,577

a)The proceedings related to these judicial deposits basically refer to ICMS - ST, highlighted on note 20 (a) - contingent liability - possible risk of loss.

b)The lawsuits related to these judicial deposits basically refer to the sum of amounts disclosed in note 21, item (b) and the amount accrued as explained in the note 20.

Changes in the balances of escrow deposits for the period ended December 31, 2019 are presented below:

Consolidated

Balance at December 31, 2017

319,433

New deposits

19,691

Redemptions

(13,948)

Interests

13,780

Write-offs for expenses

(5,379)

Balance at December 31, 2018

333,577

New deposits

2,542

Redemptions

(7,556)

Interests

13,352

Write-offs for expenses

(4,660)

Balance at December 31, 2019

337,255

In addition to judicial deposits, the Company has contracted performance bonds for certain lawsuits. Details of these insurance policies are presented in note 33.

50

13. OTHER CURRENT AND NON-CURRENT ASSETS

Consolidated

2019

2018

Marketing and advertising advances

28,669

48,429

Supplier advances

102,225

76,707

Employee advances

13,983

12,965

Rent advances and guarantee deposits (a)

96,202

96,177

Prepaid insurance expenses

29,647

7,535

Customs broker advances - Import taxes

34,932

14,866

Assets held for sale

-

160

Carbon credits

3,508

10,317

Other

39,868

47,475

349,034

314,631

Current

265,198

263,025

Non-current

83,836

51,606

  1. Mainly related to: (i) advances of rental agreements that were not included in the initial measurement of lease liabilities / right-of-use of the subsidiary The Body Shop International Limited, in accordance with the exemptions on CPC 06 (R2) / IFRS 16; and (ii) security deposits for the rental of certain stores of the subsidiaries The Body Shop International Limited and Emeis Holdings Pty Ltd. which will be returned by the lessor at the end of the rental agreements.

14. INVESTMENTS

Company

2019

2018

Investments in subsidiaries

3,392,677

-

Information and changes in the balances for the period ended December 31, 2019:

Natura

Nectarine

Merger Sub I,

Cosméticos S.A.-Total

Inc. - United

Brasil

States

Percentage of interest

Shareholders' equity of subsidiaries

Share in shareholders' equity

Net income for the year of subsidiaries

Balances as of December 31, 2018

Equity in subsidiaries (note 2c)

Exchange variation and other adjustments in the conversion of investments of subsidiaries abroad

Effect of adjustment of hyperinflationary economy Gains / (Losses) on actuarial plan net of tax effects Effect on hedge accounting net of tax effects Contribution of the company to stock option plans granted to

executives of subsidiaries and other reserves, net of tax effects

Effect of change in interest in subsidiary Increase in capital

Balances as of December 31, 2019

100,00%

100,00%

3,392,677

-

3,392,677

3,392,677

-

3,392,677

392,391

-

392,391

-

-

-

89,332

-

89,332

(73,268)

-

(73,268)

(1,428)

-

(1,428)

(4,186)

-

(4,186)

36,423

-

36,423

(15,972)

-

(15,972)

519,090

519,090

2,842,686

-

2,842,686

3,392,677

-

3,392,677

51

15. PROPERTY, PLANT AND EQUIPMENT

Consolidated

Useful life

Other changes

Reversal of

including

range (in

2018

Additions

Write-offs

Transfers

2019

impairment

exchange

years)

variation

Cost Value:

Vehicles

2 to 5

78,072

12,463

(41,883)

-

99

(3,173)

45,578

Templates

3

203,814

1,499

(23,823)

-

10,874

192

192,556

Tools and accessories

3 to 20

8,161

314

(445)

-

3,910

34

11,974

Facilities

3 to 60

310,282

49

-

-

(1,534)

975

309,772

Machinery and accessories

3 to 15

819,919

9,563

(1,259)

-

54,336

(16,108)

866,451

Leasehold improvements (a)

2 to 20

577,217

46,869

(23,243)

(1,958)

20,645

(4,427)

615,103

Buildings

14 a 60

940,002

2,245

-

(887)

(555,221)

818

386,957

Furniture and fixture

2 to 25

362,817

40,118

(3,031)

(3,514)

16,978

(15,641)

397,727

Land

-

30,525

-

-

-

4,653

(21)

35,157

IT equipment

3 to 15

263,524

21,976

(3,902)

-

18,483

(2,853)

297,228

Projects in progress

-

103,463

204,107

(2,247)

-

(146,598)

(2,714)

156,011

Total cost

3,697,796

339,203

(99,833)

(6,359)

(573,375)

(42,918)

3,314,514

Depreciation value:

Vehicles

(31,784)

(15,832)

27,478

-

(7)

3,221

(16,924)

Templates

(191,501)

(8,314)

23,739

-

148

(10)

(175,938)

Tools and accessories

(2,954)

(687)

410

-

-

(24)

(3,255)

Facilities

(147,309)

(20,703)

-

-

1,234

(584)

(167,362)

Machinery and accessories

(379,050)

(56,617)

664

-

(7)

18,274

(416,736)

Leasehold improvements (a)

(217,167)

(90,281)

19,089

-

5,292

15,696

(267,371)

Buildings

(191,422)

(7,315)

(7)

-

96,565

394

(101,785)

Furniture and fixture

(138,078)

(78,988)

2,734

-

(184)

20,543

(193,973)

IT equipment

(161,817)

(44,606)

3,443

-

(936)

6,635

(197,281)

Total accrued depreciation

(1,461,082)

(323,343)

77,550

-

102,105

64,145

(1,540,625)

Net total

2,236,714

15,860

(22,283)

(6,359)

(471,270)

21,227

1,773,889

52

Consolidated

Useful life

Other changes

Reversal of

including

Cost Value:

range (in

2017

Additions

Write-offs

Transfers

2018

impairment

exchange

years)

variation

Vehicles

2 to 5

73,775

25,215

(20,835)

-

320

(403)

78,072

Templates

3

219,402

95

(23,925)

-

7,930

312

203,814

Tools and accessories

3 to 20

6,404

57

-

-

1,499

201

8,161

Facilities

3 to 60

297,943

3,961

(223)

-

2,108

6,493

310,282

Machinery and accessories

3 to 15

783,134

11,213

(433)

-

4,807

21,198

819,919

Leasehold improvements (a)

2 to 20

668,255

33,549

(9,477)

(128)

62,324

(177,306)

577,217

Buildings

14 to 60

965,596

440

(94)

57

9

(26,006)

940,002

Furniture and fixture

2 to 25

797,929

34,887

(585)

(2,896)

11,373

(477,891)

362,817

Land

-

30,525

-

-

-

-

-

30,525

IT equipment

3 to 15

294,401

24,488

(2,093)

582

18,460

(72,314)

263,524

Projects in progress

-

78,414

157,829

(3,214)

-

(132,542)

2,976

103,463

Total cost

4,215,778

291,734

(60,879)

(2,385)

(23,712)

(722,740)

3,697,796

Depreciation value:

Vehicles

(29,633)

(16,524)

14,065

-

10

298

(31,784)

Templates

(201,313)

(14,710)

24,567

-

4

(49)

(191,501)

Tools and accessories

(2,393)

(407)

-

-

-

(154)

(2,954)

Facilities

(128,540)

(17,333)

-

-

(1)

(1,435)

(147,309)

Machinery and accessories

(327,579)

(56,399)

257

-

-

4,671

(379,050)

Leasehold improvements (a)

(385,286)

(82,950)

7,867

-

529

242,673

(217,167)

Buildings

(158,801)

(43,092)

-

-

-

10,471

(191,422)

Furniture and fixture

(508,942)

(89,478)

458

-

269

459,615

(138,078)

IT equipment

(196,617)

(45,426)

2,061

-

239

77,926

(161,817)

Total accrued depreciation

(1,939,104)

(366,319)

49,275

-

1,050

794,016

(1,461,082)

Net total

2,276,674

(74,585)

(11,604)

(2,385)

(22,662)

71,276

2,236,714

53

16. INTANGIBLES

Consolidated

Useful life

Reversal

Other changes

including

range

2018

Additions

Write-offs

(provision) of

Transfers

2019

exchange

(years)

impairment

variation (f)

Cost value:

Software

2.5 to10

1,089,900

83,064

(546)

-

118,442

22,230

1,313,090

Trademarks and patents (Defined useful life)

25

111,801

-

-

-

(154)

5,158

116,805

Trademarks and patents (Indefinite useful life)

-

2,040,067

-

-

-

-

131,518

2,171,585

Goodwill Emeis Brazil Pty Ltd. (a)

-

96,867

-

-

-

-

3,370

100,237

Goodwill The Body Shop International Limited (b)

-

1,348,670

-

-

-

-

85,699

1,434,369

Goodwill acquisition of The Body Shop stores

-

1,456

-

-

-

-

-

1,456

Relationship with retail clients

10

1,740

-

-

-

-

247

1,987

Key money (indefinite useful life) (c)

-

102,310

-

-

-

(101,001)

16,492

17,801

Key money (Defined useful life) (d)

3 to18

48,888

-

-

2,818

(39,283)

24

12,447

Relationship with franchisees and sub franchisees (e)

15

590,588

-

(17,958)

-

(371)

30,699

602,958

Other intangible assets

2 to10

121,697

145,483

(1,133)

-

(146,364)

(9,395)

110,288

Total cost

5,553,984

228,547

(19,637)

2,818

(168,731)

286,042

5,883,023

Amortization value:

Software

(483,666)

(169,174)

6,817

-

270

(3,594)

(649,347)

Trademarks and patents

(37,898)

(4,330)

-

-

154

(2,034)

(44,108)

Key money

(2,835)

-

-

-

7,336

(6,698)

(2,197)

Relationship with retail clients

(1,149)

(194)

-

-

-

(596)

(1,939)

Relationship with franchisees and sub franchisees

(55,508)

(43,150)

-

-

371

2,515

(95,772)

Other intangible assets

(22,383)

(1,601)

585

-

261

9,979

(13,159)

Total accrued amortization

(603,439)

(218,449)

7,402

-

8,392

(428)

(806,522)

Net total

4,950,545

10,098

(12,235)

2,818

(160,339)

285,614

5,076,501

54

Consolidated

Useful life

Reversal

Other changes

including

range

2017

Additions

Write-offs

(provision) of

Transfers

2018

exchange

(years)

impairment

variation (f)

Cost value:

Software

2.5 to 10

1,104,603

189,969

(3,702)

90

8,299

(87,663)

1,211,597

Trademarks and patents (Defined useful life)

25

103,076

610

-

-

-

8,115

111,801

Trademarks and patents (Indefinite useful life)

-

1,833,790

-

-

-

-

206,277

2,040,067

Goodwill Emeis Brazil Pty Ltd. (a)

-

91,302

-

-

-

-

5,565

96,867

Goodwill The Body Shop International Limited (b)

-

1,177,377

-

-

-

-

171,293

1,348,670

Goodwill acquisition of The Body Shop stores

-

-

1,434

-

-

-

22

1,456

Relationship with retail clients

10

1,638

-

-

-

-

102

1,740

Key money (indefinite useful life) (c)

-

57,863

3,357

(2,169)

(4,236)

17,175

30,320

102,310

Key money (Defined useful life) (d)

3 to 18

95,733

4,709

(419)

(1,985)

(1,171)

(47,979)

48,888

Relationship with franchisees and sub franchisees (e)

15

586,059

-

-

-

-

4,529

590,588

Total Cost

5,051,443

200,079

(6,290)

(6,131)

24,303

290,580

5,553,984

Amortization value:

Software

(476,269)

(156,919)

1,419

-

(1,713)

127,430

(506,049)

Trademarks and patents

(9,686)

(13,403)

-

-

-

(14,809)

(37,898)

Key money

(26,128)

(10,089)

418

-

72

32,892

(2,835)

Relationship with retail clients

(503)

(589)

-

-

-

(57)

(1,149)

Relationship with franchisees and sub franchisees

(63,248)

(42,592)

-

-

-

50,332

(55,508)

Total accrued amortization

(575,834)

(223,592)

1,837

-

(1,641)

195,791

(603,439)

Net total

4,475,609

(23,513)

(4,453)

(6,131)

22,662

486,371

4,950,545

  1. Goodwill on Emeis Holdings Pty Ltd. acquisition, classified as future economic benefits from synergies. It does not have defined useful life and it is subject to annual impairment tests;
  2. Goodwill arising from the acquisition of The Body Shop, classified as future economic benefits from synergies. It does not have defined useful life and it is subject to annual impairment tests;
  3. Key money with an indefinite useful life refers to payments made to a former lessee for the right to rent the property in accordance with the lease agreement and which may be negotiated later with future lessees, in case the lease contract ends. This balance was considered as the scope of the lease standard (CPC 06 / IFRS 16), applicable from January 1, 2019 (note 3.29). The balance not reclassified to the Right to Use the asset, refers to contracts that the standard exempts on the initial date asshort-term contracts. The balance is not amortized and is subject to an annual impairment test;
  4. Key money with definite useful life refers to payments made to a former lessee for the right to rent the property in accordance with the lease agreement and which may not be negotiated or recovered later. This balance was considered as the scope of the lease standard (CPC 06 / IFRS 16), applicable from January 1, 2019 (note 3.29). The balance not reclassified to the Right to Use the asset, refers to contracts that the standard exempts on the initial date asshort-term contracts. The balance is amortized over the term of the contracts;
  5. The balance refers to identifiable intangible assets from relationship with The Body Shop franchisees andsub-franchisees (relationship where the franchisee owns all rights to operate within a territory) and sub-franchisees (relationship where a franchisee operate a single store within a market), with estimated useful life of 15 years. In 2019 there is a write-off related to agreements with sub-franchisees in Brazil; and
  6. Includes inflation adjustment of Natura Argentina.

55

a) Impairment testing of intangible assets as an indefinite useful life

Goodwill from the expected future profitability of acquired companies and intangibles assets with indefinite useful life was allocated to the CGU groups. In accordance with CPC 01 - Impairment of Assets (IAS 36 - Impairment of Assets), when a CGU or a group of CGUs have an intangible asset with indefinite useful life allocated, the Company must test it for impairment annually. CGU groups with intangible assets with indefinite useful life as of December 31, 2018 are presented bellows:

2019

Consolidated

CGU Group /

Trademarks and

Goodwill

Total

Operating Segment

patents

Aesop

-

100,238

100,238

The Body Shop

2,169,019

1,434,369

3,603,388

Others

2,566

-

2,566

Total

2,171,585

1,534,607

3,706,192

The main assumptions used to calculate the fair value less cost to sell on December 31, 2019 are presented below:

Aesop

The Body Shop

Measurement of impairment

value (fair value less cost of

Discounted cash flow

disposal)

Projected cash flow

Operating business cycle

Operating business cycle

(approximately 5 years) with

(approximately 5 years) with

perpetuity.

perpetuity.

Budgeted gross margin

Average of gross margin based on

Average of gross margin based on

history and projections for the

history and projections for the

following 5 years.

following 5 years.

Estimated costs

Costs based on historical data and market trends, optimization of retail

operations (renewal of the geographic presence of stores, revitalization of the

franchise network) and physical expansion with growth in market share.

Growth rate in perpetuity (*)

Constant growth of 2.5%.

Constant growth of 2.0%.

Discount rate

These cash flows were discounted using a discount rate after taxes of 11.52%

p.a. for The Body Shop and 12.34% p.a. for Aesop in real terms. The discount rate

was based on the weighted average cost of capital that reflects the specific risk

of each segment.

  1. Based on the inflation applicable to the host country of each segment, based on public information released by the International Monetary Fund.

The Company conducted a sensitivity analysis of (i) the discount rate and (ii) the growth rate in perpetuity, due to their potential impacts on cash flows. A 1 p.p. increase in the discount rate or a 1 p.p. decrease in the growth rate in perpetuity of the cash flow of each CGU group would not result in the need to recognize a loss. Based on the analyses conducted by Management, there was no need to record impairment losses for the balances of these assets in the year ended December 31, 2019.

56

17. RIGHT OF USE AND LEASE

(a) Right of use

Consolidated

Useful life

First-time adoption

Additions

Write-offs

Transfers (ii)

Others changes

2019

Cost Value:

in Years (i)

(Note 3.29)

Vehicles

3

-

40,069

(146)

-

95

40,018

Machinery and equipment

3 to 10

-

14,954

(40)

-

664

15,578

Facilities

3 to 10

103,945

187,294

-

481,235

12,426

784,900

IT equipment

10

-

279

-

-

4

283

Retail stores

3 to 10

1,819,951

416,250

(76,022)

150,374

39,824

2,350,377

Tools and accessories

3

2,650

-

-

153

2,803

Total cost

1,923,896

661,496

(76,208)

631,609

53,166

3,193,959

Depreciation value:

Vehicles

-

(8,083)

38

-

(64)

(8,109)

Machinery and equipment

-

(4,126)

-

-

(191)

(4,317)

Facilities

-

(95,734)

-

-

(1,456)

(97,190)

IT equipment

-

(209)

-

-

(5)

(214)

Retail stores

-

(466,590)

(2,968)

-

6,226

(463,332)

Tools and accessories

-

(882)

-

-

(54)

(936)

Total accrued depreciation

-

(575,624)

(2,930)

-

4,456

(574,098)

Net total

1,923,896

85,872

(79,138)

631,609

57,622

2,619,861

  1. The applied useful lives refer to agreements the Company is certain that it will use the underlying assets of the lease agreements in accordance with contractual conditions. On January 1, 2019, they corresponded to the remaining period of the agreements in force on the date of transition of the Lease standard, as per Note nº 3.15.
  2. Balances of Financial Lease recorded as Property, Plant and Equipment on December 31, 2018, of which R$481,235 at the consolidated, and balances of key money of retail stores, transferred from intangible assets, in the amount of R$150,374 at the consolidated.

57

Consolidated

Values recognized in the income statement during 2019

Financial expense on lease

134,579

Amortization of right of use

575,624

Appropriation in the result of variable lease installments not included in the measurement of

31,023

rental liabilities

Sublease revenue

(2,698)

Short-term rental expenses and low-value assets

126,067

Expenses related to leases

22,214

Total

886,809

Values recognized in the financing cash flow statement

Payment of leasing (principal)

497,905

Values recognized in the operating cash flow statement

Payment of leasing (interest)

134,579

Variable lease payments not included in the measurement of rental liabilities

11,199

Short-term lease payments and low-value assets

69,162

lease-related payments

26,460

Total

739,305

b) Lease

Consolidated

2019

2018

Current

542,088

68,764

Non-current

1,975,477

377,471

The following table shows the changes in the balance of leases for the year ended December 31, 2019:

Balance on December 31, 2018 (i) First-time adoption of CPC 06(R2) / IFRS 16 New agreements

Payment of leasing (principal) Payment of leasing (interest) Recognition of financial charges Write-offs (ii)

Translation effects (other comprehensive income)

Balance on December 31, 2019

Consolidated

446,235

1,949,739

627,889

(497,905)

(134,579)

134,579

(86,319)

77,926

2,517,565

  1. Refers to balances of Financial Lease, in accordance with standard IAS 17/CPC 06 - Leases, effective until December 31, 2018; and
  2. Mainly related to termination contracts related to lease of stores.

Maturities of the balance of non-current lease liabilities are shown below:

Consolidated

2019

2018

2021

374,746

86,638

2022

361,688

57,942

2023

358,274

55,422

2024 onwards

880,769

177,469

1,975,477

377,471

The table below shows the rates practiced, according to the deadlines:

Contracts maturity

Rate % p.a.

1 year

1.9

to

10.5

2 years

3.9

to

9.5

3 years

5.8

to

10.6

4 years

1.9

to

11.3

5 years

6.9

to

14.0

6 years

1.9

to

10.2

9 years

8.2

58

10 years

13.6

15 years

9.0

As described in note 3.29, the Company adopted the incremental borrowing rate as the discount rate for lease liabilities. As the Company's lease agreements are substantially contracts with payment indexed by inflationary indices and considering the disclosure suggestions published in CVM Circular Letter 02/19, the Company provides additional information on contracts characteristics, so the users of these financial statements can, at their discretion, make projections of future payment indexed by inflation for the period. Most of the lease liability (79%) refers to The Body Shop and Aesop operations whose contracts were signed substantially in developed economy countries. Therefore, for those countries, the potential effects of discounting are not significant given the historical low value of inflation in those countries.

Contractual Flow Payments - Consolidated

Maturity

Average

2020

2021

2022

2023

2024

2025

above

discount rate

2025

2020-2022

1.9% to 10.6%

566,802

32,692

8,946

-

-

-

-

2023-2025

1.9% to 11.3%

32,802

304,688

305,886

302,042

298,194

271,790

-

2026-2028

6.9% to 14.0%

69,488

74,145

78,169

83,769

90,725

98,267

661,521

2029-2031

1.9% to 10.2%

4,778

4,778

4,778

4,778

4,778

4,778

16,324

Total

673,870

416,303

397,779

390,589

393,697

374,835

677,845

Projected inflation1

3.40%

3.40%

3.40%

3.60%

3.60%

3.60%

3.80%

¹ Rates obtained through future DI x National Extended Consumer Price Index (IPCA) coupon quotes observed in B3, applied in contracts in Brazil.

18. BORROWINGS, FINANCING AND DEBENTURES

Company

Consolidated

2019

2018

2019

2018

Reference

Local Currency

Financing Agency for Studies and Projects

(FINEP)

-

-

101,988

135,618

A

Debentures (a)

-

-

4,251,231

4,680,665

B

BNDES

-

-

35,390

73,384

C

BNDES - FINAME

-

-

183

735

D

Working capital - Operation Peru

-

-

-

20,979

E

Working capital - Operation Mexico

-

-

31,802

10,017

F

Working capital - Operation Aesop

-

-

100,438

59,850

G

Promissory Notes

2,883,382

-

2,883,382

-

H

Total in local currency

2,883,382

-

7,404,414

4,981,248

Foreign Currency

BNDES

-

-

8,030

17,137

I

Export Credit note (NCE)

-

-

81,210

-

J

Notes

-

-

3,090,490

2,995,760

K

Resolution nº 4131/62

-

-

202,230

-

L

Total in foreign currency

-

-

3,381,960

3,012,897

Overall total

2,883,382

-

10,786,374

7,994,145

Current

2,883,382

-

3,354,355

1,113,095

Non-current

-

-

7,432,019

6,881,050

(a) Debentures

Current

-

-

246,017

934,359

Non-current

-

-

4,005,214

3,746,306

59

Reference

Currency

Maturity

Charges

Effective interest rate

Guarantees

Interest of 3.5% p.a. for the

3.5% p.a. for

Guarantee of Natura

A

Real

June 2023

installment maturing in June

installments with

Cosméticos S.A.

2023

expiration on June 2023

Interest of 109% to 112% of

109.5% - 113.1%

the CDI and 1.4% + CDI

(Interbank Deposit

CDI+1.15% - CDI+1.79%

Certificate), 1.75% + CDI,

B

Real

August 2024

1.00% + CDI and 1.15% + CDI,

None

maturing in March 2020,

September 2020, September

2021, September 2022 and

August 2024.

Brazilian long-term interest

TJLP + interest of 0.5%

Through

rate (TJLP) + interest of 0.5%

p.a. to 3.96% p.a. and

Bank-issued guarantee

C

Real

p.a. to 3.96% p.a. and fixed-

fixed-rate contracts of

September 2021

letter

rate contracts of 3.5% p.a. to

3.5% p.a. to 5% p.a. (PSI

5% p.a. (PSI) (b)

Interest of 4.5% p.a. +

Interest of 4.5% p.a. + TJLP for

TJLP for contracts up to

contracts up to 2012 and for

2012 and for contracts

Fiduciary sale,

contracts executed as of 2013

executed as of 2013

Through March

guarantee of Natura

D

Real

fixed rate of 3% p.a. (PSI) (b);

fixed rate of 3% p.a.

2021

Cosméticos S.A. and

Contracts in August 2014 in

(PSI) (b); Contracts in

promissory notes

May 2016 at fixed rate of 6%

August 2014 in May

p.a. to 10.5% p.a.

2016 at fixed rate of 6%

p.a. to 10.5% p.a.

E

Peruvian

July 2019

Interest of 3.99% p.a.

Interest of 3.99% p.a.

Guarantee of Natura

Sol

Cosméticos S.A.

Mexican

February 2021

Interest of 1.15% p.a. +

Guarantee of Natura

F

peso

and October

Interest of 1.15% p.a. + TIIE (c)

TIIE (c)

Cosméticos S.A.

2020

G

Australian

August 2021

USD Libor + interest of 0.92%

USD Libor + interest of

Bank-issued guarantee

dollar

p.a.

0.92% p.a.

letter

CDI + 3,11%

Real guarantee of

H

Real

December 2020

2.00% + CDI

shares alienated from

Natura Cosméticos S.A.

Interest of 1,8% p.a. a

Guarantee of Natura

I

Dollar

October 2020

Interest of 1,8% p.a. a 2,3%

2,3% p.a. + Brazilian

Cosméticos S.A. and

p.a. + Resolucion nº 635 (a)

Resolution 635

bank-issued guarantee

letter

J

Dollar

October 2020

Libor + interest 0.87% p.a. (a)

Libor + interest 0.87%

None

p.a.

K

Dollar

February 2023

Interest of 5.375% p.a. (a)

6,1%

None

Libor +interest 1.1%

Guarantee of the

p.a. (a)

subsidiary Indústria e

L

Dollar

May 2022

Libor +interest 1.1% p.a. (a)

Comércio de

Cosméticos Natura

Ltda.

  1. Loans and financing for which swap contracts (CDI) were entered into. These loans and financing are not being shown net of their derivatives;

b)PSI-Investment Support Program; and

c) TIIE-interest rate of interbank equilibrium Mexico.

Changes in the balances of borrowings, financings and debentures for the year ended December 31, 2019 are presented below:

Balance at December 31, 2018 New borrowings and financing Amortizations

Financial charges accrued Payment of financial charges Exchange variation (unrealized) Exchange variation (realized)

Translation effects (other comprehensive income)

Balance at December 31, 2019

Company Consolidated

  • 7,994,145

2,879,038 5,346,145

  • (2,643,575)

4,344494,422

  • (499,798)
  • 88,097
  • 5,903
  • 1,035
    2,883,382 10,786,374

60

a) Refers mainly reclassified leasing balances; and balances reclassified from government grants considering BNDES loans

Maturities of non-current borrowings, financing and debentures liabilities are as follows:

Consolidated

2019

2018

2020

-

1,372,755

2021

2,279,759

2,226,402

2022

527,596

324,257

2023 onwards

4,624,664

2,957,636

7,432,019

6,881,050

A description of the main bank loan and financing agreements as of December 31, 2019 is as follows:

a) Description on bank loans and financing

  1. Debentures
    On February 25, 2014, the Company conducted the 5th issue of unsecured, registered debentures, not convertible into shares, amounting to R$ 600,000. A total of 60,000 debentures were issued, of which 20,000 debentures allotted in the 1st series, due on February 24, 2017, in the amount of R$214,385 thousand, twenty thousand (20,000) debentures allocated in the 2nd series, due on February 25, 2018, and twenty thousand (20,000) debentures allocated in the 3rd series, due on February 25, 2019, with remuneration corresponding to 107.00%, 107.5% and 108% of the accumulated variation of the average daily Interbank Deposits - DI, respectively.
    On March 16, 2015, the Company carried out the 6th issue of registered, non-convertible and unsecured debentures of the Company, amounting to R$ 800,000. The issue consisted of 80,000 debentures, of which 40,000 were in the 1st series, maturing on March 16, 2018, twenty-five thousand (25,000) were in the 2nd series, maturing on March 16, 2019, and fifteen thousand (15,000) were in the 3rd series, maturing on March 16, 2020, remunerated at 107%, 108.25% and 109% respectively, of the accumulated variation of the average daily rate of Interbank Deposits (DI).
    On September 28, 2017, the Company carried out the 7th issue of registered, book-entry,non-convertible, unsecured debentures, in the total amount of R$ 2,600,000. A total of 260,000 debentures were issued, of which seventy-seven thousand and two hundred seventy-three (77,273) were allocated in the 1st series, with maturity on September 25, 2020, and one hundred eighty-two thousand and seven hundred twenty-seven (182,727) allocated in the 2nd series, with maturity on September 25, 2021, remunerated at CDI rate + 1.4% p.a. and CDI rate + 1.75% p.a., respectively.
    On February 16, 2018, the Company carried out the 8th issue of non-convertible and unsecured debentures, with personal guarantee, in a single series, for public distribution with restricted placement efforts, in accordance with
    CVM Instruction 476 of January 16, 2009 ("Issue", "Restricted Offering", "Debentures", "CVM Instruction 476", respectively), in the aggregate amount of R$1,400,000, whose proceeds will be used to settle the balance promissory notes. Compensatory interest was paid in three (3) installments, starting on the issue date, with the first payment on August 14, 2018 and other payments on February 14, 2019 and maturity date on August 14, 2019. On September 28, 2018, there was partial amortization of one billion reais (R$1,000,000) due to early maturity, early optional redemption and optional extraordinary amortization, established in the Indenture, and remuneration corresponding to 110% of accumulated variation of daily average rates of Interbank Deposits - DI. The debt balance of the 8th issue amounting to R$400,000 was settled on maturity date, that is, August 14, 2019.
    On September 21, 2018, the Company carried out the 9th issue of non-convertible unsecured debentures, with personal guarantee, in three series, for public distribution with restricted placement efforts, in accordance with
    CVM Instruction 476 of January 16, 2009 ("Issue", "Restricted Offering", "Debentures", "CVM Instruction 476", respectively), in the aggregate amount of R$1,000,000, used in the partial early amortization of R$1,000,000 related to the 8th issue. The issue consisted of 100,000 debentures, of which thirty-eight thousand and nine hundred four (38,904) were in the 1st series, maturing on September 21, 2020, thirty thousand and eight hundred thirty-one (30,831) were in the 2nd series, maturing on September 21, 2021, and thirty thousand and two hundred sixty-five (30,265) were in the 3rd series, maturing on September 21, 2022, and paying remuneration corresponding to 109.5%, 110.5% and 112%, respectively, of the cumulative variation of the average daily rates of Interbank Deposits (DI).
    On July 22, 2019, the Company carried out the 10th issue of non-convertible unsecured debentures in four series, for public distribution with restricted placement efforts, in accordance with CVM Instruction 476 of January 16,
    2009 ("Issue", "Restricted Offering", "Debentures" and "CVM Instruction 476", respectively), in the aggregate amount of R$1,576,450. A total of one hundred fifty-seven, six hundred forty-five (157,645) registered, book- entry, non-convertible and unsecured debentures were issued in four series, without the issue of provisory or

61

final certificates, at a nominal unit value of ten thousand reais (R$10,000), of which forty thousand (40,000) were in the 1st series, maturing on August 26, 2024, nine thousand, five hundred seventy (9,570) in the 2nd series, maturing on August 26, 2024, sixty-eight thousand, six hundred twenty-three (68,623) in the 3rd series, maturing on August 26, 2024, and thirty-nine thousand, four hundred fifty-two (39,452) in the 4th series, maturing on August 26, 2024, and paying remuneration corresponding to 100% of the cumulative variation of the average daily rates of Interbank Deposits (DI) plus 1% for the 1st series and 100% of the cumulative variation of the average daily rates of Interbank Deposits (DI) plus 1.15% for other series.

The funds from the 10th issue were used: 1st grade: full amortization of the 8th issue of debentures in the amount

of R$400,000, 2nd grade: partial amortization of the 3rd grade of the 6th issue in the amount of R$92,820, 3rd

grade: partial amortization of the 1st grade of the 7th issuance in the amount of R$664,090, 4th grade: partial amortization of the 1st grade of the 9th issue in the amount of R$382,960.

The appropriation of costs related to the issue of debentures in the year ended December 31, 2019 was R$4,760 (R$19,307 as of December 31, 2018), recorded on a monthly basis under financial expenses, in accordance with the effective interest rate method. Issue costs to appropriate totaled R$13,354 as of December 31, 2019 (R$8,986 as of December 31, 2018).

  1. Notes
    On February 1, 2018, a total of US$750 million was raised at a rate of 5.375% p.a. from maturing on February 1, 2023, with semiannual payments in February and August.
    The proceeds from the Notes issue were fully used to pay part of the liabilities of the Company arising from the 3rd issue of 74 commercial promissory notes, in a single series, in the amount R$3.7 billion, which were issued to finance the acquisition of The Body Shop International Limited.
    Simultaneously to the issue of the Notes in the international market, the Company contracted derivative instruments ("swaps") to eliminate from profit or loss the exchange variations arising from the exposures of the principal contracted and interest owed in accordance with the contractual maturities of the respective issue.
    The appropriation of costs related to the issue of Notes in the year ended December 31, 2019 was R$6,737 (R$5,364 on December 31, 2018), recorded on a monthly basis under financial expenses, in accordance with the effective interest rate method. Issue costs to appropriate totaled R$22,782 on December 31, 2019 (R$26,167 on December 31, 2018).
  2. Export Credit nota (NCE)
    On October 2, 2019, there was the funding of R$ 83.34 million, with the purpose of cash reinforcement, for working capital purposes, of Industria e Comércio de Cosméticos Natura Ltda. Said loan had been contracted for a period of one year, with maturity of interest quarterly and main final. The operation is linked to a perfect hedge at a cost of CDI + 0.60% p.a
    Concomitant with the issuance of Export Credit Note (NCE) in the international market, the Company contracted derivative financial instruments ("swaps") in order to eliminate exchange rate variations generated by the main interest due according to the contractual maturities of the respective issue.
  3. Resolution nº 4131/62
    The Company takes out Letter of Credit- Transfer of Funds Raised Abroad in foreign currency via Resolution 4,131/62 with financial institutions due to favorable rates under certain circumstances. The funds raised in this operation will be allocated to finance the company's working capital.
    On May 20, 2019, a total of US$50 million was raised at Libor + 1.1% p.a. + the exchange rate variation, with semiannual interest payments in May and November, and maturing on May 20, 2022.
  4. Promissory Notes
    On December 20, 2019, the 1st issue of Commercial Promissory Notes took place in two series, with R$2,200 million for the Commercial Notes of the first series, which were settled on January 14, 2020, and R$ 700 million for the Commercial Notes of the second series. The Commercial Notes were publicly distributed with restricted placement efforts, pursuant to CMV instruction No. 476 of January 16, 2009. The allocation of the resources of the first series was for the redemption of the Preferred Shares Series C, issued by the Avon. The allocation of the resources of the second series was for the payment of costs incurred in structuring the operation as well as cash reinforcement for eventual demands of the Company. Acquired.

62

The appropriation of costs related to the issuance of promissory notes in the year ended December 31, 2019 was R$11,135, recorded monthly under the financial expenses item according to the effective interest rate method. The balance of issuing costs to be settled as of December 31, 2019 is R$20,962.

  1. Contract CovenantsDebentures
    The Debentures clauses establish financial indicators arising from the quotient of the net treasury debt division by EBITDA of the last 12 months, which should be equal to or lower than that established. The Company complies with such clauses.

19. TRADE PAYABLES AND FORFAIT OPERATIONS

Consolidated

2019

2018

Domestic trade payables

1,581,759

1,511,576

Foreign trade payables (a)

105,073

80,714

1,686,832

1,592,290

Forfait operations (b)

142,924

144,501

1,829,756

1,736,791

a)Refer to imports mainly denominated in US dollar, euro and pound sterling.

b)The Group has entered into contracts with Banco Itaú Unibanco S.A. for structuring, together with its major suppliers, the so- called "forfait" operation, wherein suppliers transfer the right to receive their trade notes to the Bank, which, will become the creditor of the operation. This operation did not significantly change the previously agreed-upon terms, prices and conditions, and it does not affect the Company with financial charges practiced by the financial institution, on performing a thorough analysis of suppliers by category. As such, the Group discloses this operation under the heading Trade Payables and forfait operations.

20. TAX PAYABLES

Company

Consolidated

2019

2018

2019

2018

Ordinary ICMS

-

-

120,300

81,750

ICMS ST provision (a)

-

-

72,423

172,743

Taxes on invoicing - subsidiaries abroad

-

145,992

137,243

Social Security Tax (INSS) - suspension of the

enforceability

-

-

50,147

40,541

Withholding tax (IRRF)

987

48,593

36,971

Other taxes payable - foreign subsidiaries

-

-

1,180

2,717

PIS and COFINS payable

63

-

1,207

-

INSS and service tax (ISS) payable

-

3,218

3,454

Others

-

399

-

1,050

-

443,459

475,419

Judicial Deposits (note 12)

-

-

(62,356)

(63,557)

Current

1,050

-

320,890

310,093

Noncurrent

-

-

122,569

165,326

a)The Company has been discussing the illegality of changes in the state legislation for the payment of ICMS - ST. Part of the unpaid amount has been discussed in court by the Company and, in certain cases, the amounts have been deposited with the courts, as mentioned in Note 12.

63

21. PROVISION FOR TAX, CIVIL AND LABOR RISKS

The Group is party to tax, labor and civil lawsuits. Management believes, based on the opinion of its legal counsel, that the provision for tax, civil and labor risks are sufficient to cover potential losses. This provision is broken down as follows:

Consolidated

2019

2018

Tax

127,842

163,852

Civil

30,653

32,300

Labor

61,571

65,655

Total

220,066

261,807

Judicial deposits (note nº 12)

(60,272)

(87,180)

Current

18,650

20,389

Noncurrent

201,416

241,418

  1. Tax Risk
    As of December 31, 2019, the Company is party to approximately to 493 tax lawsuits (448 as of December 31, 2018) The balance deposited with the courts amounts to R$319,818 (R$313,777 as of December 31, 2018). Provisions are reviewed periodically based on the evolution of the lawsuits in order to reflect the best current estimate.
    The following table presents the changes in balances in year ended December 31, 2019:

Consolidated

Provisions

Deposits

Balance on December, 31,2017

196,006

(24,943)

Additions

81,435

(34,209)

Reversals

(47,076)

3,681

Payments

(16,659)

Offset

(29,741)

Transfer of tax liabilities

(20,056)

(20,268)

Inflation adjustment

(824)

(1,454)

Translation effects (other comprehensive income)

767

-

Balance on December 31, 2018

163,852

(77,193)

Additions

14,497

(5,317)

Reversals

(54,168)

30,957

Payments

(1,150)

-

Inflation adjustment

4,440

(2,506)

Translation effects (other comprehensive income)

371

-

Balance on December 31, 2019

127,842

(54,059)

  1. Civil risks
    As of December 31, 2019, the Company is party to approximately to 2,600 civil lawsuits (3,250 as of December 31,
    2018), of which 2,387 were filed by Natura's Consultants and consumers, most of which claiming compensation for damages. The balance deposited with the courts for the tax assessments notices above amounts to R$425 (R$649 as of December 31, 2018). Provisions are reviewed periodically based on the evolution of the lawsuits and the history of losses on civil claims in order to reflect the best current estimate.
    The following table presents the changes in balances in year ended December 31, 2019:

Consolidated

Provisions

Deposits

Balance on December 31, 2018

32,300

(649)

Additions

14,072

(357)

Reversals

(4,766)

579

Payments

(11,418)

-

Inflation adjustment

309

1

Translation effects (other comprehensive income)

156

-

Balance on December 31, 2019

30,653

(426)

64

  1. Labor risks
    As of December 31, 2019, the company is party to approximately 1,500 labor lawsuits filed by former employees and service providers (approximately 1,850 as of December 31, 2018), claiming the payment of severance amounts, possible occupational disease, salary premiums, overtime and other amounts due, as a result of joint liability, and discussion about the recognition of possible employment relationship. The provision is periodically reviewed based on the progress of lawsuits and history of losses on labor claims to reflect the best current estimate
    The following table presents the changes in balances in year ended December 31, 2019:

Consolidated

Provisions

Deposits

Balance on December 31, 2018

65,655

(9,338)

Additions

45,983

(2,411)

Reversals

(40,127)

6,282

Payments

(14,611)

-

Inflation adjustment

5,009

(320)

Translation effects (other comprehensive income)

(338)

-

Balance on December 31, 2019

61,571

(5,787)

  1. Contingent liabilities - possible losses
    The Company is party to tax, civil and labor proceedings for which no provision has been set up because they involve possible risk of loss as assessed by management and its legal advisors.
    On December 31, 2019, contingent liabilities comprise 544 cases (498 at December 31, 2018), the amounts of which are presented below:

Consolidated

2019

2018

Tax

3,503,392

3,265,543

Civil

61,532

63,910

Labor

77,295

115,240

Total contingent liabilities

3,642,219

3,444,693

Judicial deposits (note 12)

(136,258)

(100,754)

The main tax cases are the following:

  1. The Company is party to administrative and judicial proceedings questioning lawfulness of amendments to state legislation related toICMS-ST collection. On December 31, 2019, the amount being disputed was R$406,002 (R$321,772 on December 31, 2018) and R$114,819 was deposited with the courts (R$80,816 on December 31, 2018).
  2. Notices served by the Brazilian IRS claiming IPI debts arising from the tariff classification adopted by the subsidiary Indústria e Comércio de Cosméticos Natura Ltda. for certain products. A decision is expected at the administrative level. The total amount under dispute on December 31, 2019 is R$218,204 (R$209,714 as of December 31, 2018).
  3. Tax assessment issued by the São Paulo State Finance Department against the business unit branch of subsidiary Indústria e Comércio de Cosméticos Natura Ltda., seeking collection of State VAT (ICMS) under the tax substitution (ST), which was fully collected by the recipient of the goods, the company, his distributor establishment, Natura Cosméticos S.A. It is awaiting a decision. The total amount in dispute as of December 31, 2019 is R$521,903 (R$506,258 as of December 31, 2018).
  4. The Company and its subsidiary, Indústria e Comércio de Cosméticos Natura Ltda, in the operations in which it operates exclusively as a distributor, discuss judicially the condition brought by Decree No. 8.393/2015, which equated the industrial, for the purposes of incidence of the Tax on Industrialized Products - IPI, the interdependent wholesale establishments that sell products provided for in the said legal provision. The total amount under discussion on December 31, 2019 is R$389,017 (R$309,611 on December 31,2018),Irpj and CSLL infringement notices, on September 30, 2009 and August 30, 2013, which are intended to question the tax deductibility of the amortization of goodwill, resulting from the incorporation of shares of Natura Empreendimentos by Natura Participações S.A, and subsequent incorporation of both companies by Natura Cosméticos S,A, The Company is judicially discussing the legality of decisions that inferred injunction the embargoes of declarations submitted to discuss points crucial of the judgments which, by a majority of votes, denied provision to special appeals, maintaining the tax requirement, The total amount under discussion on

65

31 December 2019, which the Company considers as not likely its disbursement, is R$ 1,854,369, Of this amount, R$1,379,189 is classified as possible loss, and R$475,180 as remote loss,(R$1,336,927 as of December 31, 2018 with possibility of loss and R$459,686 with a remote probability of loss).

    1. The Company seeks to legally ensure the right to fruition of tax incentives related to research activities and development of technological innovation, without observance of the restrictions imposed by the regulation of the matter, in 2011, in apparent contrary to the law that disciplines the benefit. The amount under discussion on December 31, 2019 is R$ 170,320.
  1. Contingent assets
    The Company has outstanding lawsuits whose expectation of gain is probable according to the assessment of their legal advisors, but they are not registered in its Financial Statements until a favorable outcome is practically certain.
    The Company and its subsidiary Indústria e Comércio de Cosméticos Natura Ltda. claim the refund of the PIS and COFINS installments collected with the inclusion of ICMS in its calculation bases from March 2004 to March 2007. The amounts adjusted for inflation involved in reclamation claims not registered as of December 31, 2019, totaled R$26,933 (R$93,321 on December 31, 2018).
    The Company, based on the opinion of their legal advisors, observes CPC 25 / IAS 37 and CIRCULAR/CVM/SNC/SEP/nº 01/2019.

22. OTHER LIABILITIES

Consolidated

2019

2018

Post-employment healthcare plan

98,792

78,904

Carbon credit

4,519

3,222

Exclusivity contract (a)

5,400

7,800

Crer para Ver (b)

51,543

28,368

Deferred revenue from performance obligations with customers (c)

76,250

63,662

Provisions for sundry expenses (d)

156,895

170,294

Provisions for rentals (e)

26,568

28,966

Provisions for apportionment of benefits and partnerships payable

7,860

11,542

Long-term incentives (f)

3,022

8,855

Fair value of operating lease (g)

-

25,843

Provision for restructuring (h)

3,401

2,004

Provision for store renovation

15,997

6,107

Other provisions

67,846

44,370

Total

518,093

479,937

Current

396,391

338,170

Noncurrent

121,702

141,767

  1. Refers to the consideration of the exclusivity granted by the Company to a financial agent for the bank settlement service related to employees' payroll. It will be recognized in the statement of income on astraight-line basis over the contractual period since April 2017, on a straight-line basis over the contractual period due in March 2022;
  2. Social program contribution for developing the quality of education;
  3. Refers to deferral of revenue from performance obligations related topoints-based loyalty programs, sale of gift cards not yet converted into products, and programs and events to honor direct selling consultants;
  4. Refers to provisions for sundry expenses to comply with the accrual method;
  5. Refers to the (grace) period granted by lessors for the start of payment of rental of certain retail stores, for rental agreements that were not included in the initial measurement of lease liabilities /right-of-use of the subsidiary The Body Shop International Limited, in accordance with the exceptions permitted under CPC 06(R2) / IFRS 16;
  6. Refers to the variable compensation plans of the executives of the subsidiary Aesop;
  7. Refers to fair value adjustment of lease agreements identified in the business combination carried out in the acquisition of The Body Shop. These balances were eliminated as of January 1, 2019 with the implementation of CPC 06 (R2) / IFRS 16; and
  8. It is a provision for costs directly related to the plan for changes in organizational structure of The Body Shop, which is approved by the Management and was already implemented and announced to those affected by the restructuring.

Post-employment healthcare plan

Post-employment healthcare plan as detailed in explanatory note No. 3.20 d), The population of active employees eligible for the medical plan after shutdown is closed for new inclusions, On December 31, 2019 and 2018 respectively, the weighted average duration of the obligation is 20.8 and 16 years, and its actuarial calculation base evaluated:

66

  • 1,175 (2018: 1,247) active employees of the companies;
  • 477 (2018: 264) retired and dependent on companies,

The actuarial liabilities were calculated as of December 31, 2019 and 2018 considering the main assumptions below:

2019

2018

Discount rate

7.39%

9.17%

Initial rate of medical cost growth

7.17%

10.76%

Inflation rate

3.80%

4.00%

Final rate of medical cost growth

7.17%

5.04%

Growth rate of medical costs due to aging - costs

Por faixa etária

3.50%

1.54% to 4.5% p,a,

Growth rate of medical costs by aging -contributions

0.00%

0.00%

Percentage of adherence to the plan in retirement

87.00%

89.00%

Invalidity entry board

Mercer Disability

Wyatt 85 Class 1

General mortality board

AT-2000

RP2000

Formula

Turnover board

proportional to

T-9 service table

service time

The Maintenance of the initial level of growth in medical cost at 3.25% real and the reduction of the discount rate from 9.17% p.a to 7.54% p.a, generated R$ 29,660 loss.

Below we present the sensitivity analysis of the Medical Inflation Rate and the Discount Rate, if the behavior of such a rate increased or reduced by 1% and its respective effect on the balance (Present Value of the Obligation) calculated on actuarial liabilities ( keeping the other premises):

Rate

Chance

VPO

Discount rate

7.39%

1% increase

81,091

Discount rate

7.39%

1% decrease

122,270

Medical inflation

7.17%

1% increase

121,259

Medical inflation

7.17%

1% decrease

81,493

Below we present the movements of actuarial liabilities for the years ended December 31, 2019 and 2018:

Consolidated

2019

2018

Balance at the beginning of the year ended

(78,904)

(109,126)

Cost of the Company´s current service

(816)

(1,915)

Cost of interest

(7,125)

(9,100)

Cost of past services - change in plan

-

45,965

Expenses paid

2,427

2,354

Actuarial Gains (Losses) in other comprehensive results

(14,374)

(7,082)

Balance at the end of the year ended

(98,792)

(78,904)

23. SHAREHOLDER'S EQUITY

  1. Issued Capital
    As of December 31, 2019, the Company's share capital is 1,485,436, composed of 865,659 nominal common shares, with no nominal value.

67

The composition of this capital is demonstrated in the table below:

Date

Description

Number of shares

Value in R$

21/01/2019

Initial share capital

100

10

14/05/2019

Payment of capital

-

90

13/11/2019

Contribution of controlling shareholders in shares -

495,393,460

1,115,169,982

exchange of shares of Natura Cosméticos for the Company

16/12/2019

Contribution of cash controlling shareholders - purchase of

370,266,482

370,266,482

shares of minority shareholders of Natura Cosméticos S.A.

31/12/2019 Total share capital subscribed and paid-up

1,485,436,564

  1. Dividend and interest on equity payment policy
    The shareholders are entitled to receive every year a mandatory minimum dividend of 30% of net income, considering principally the following adjustments:
    • Increase in the amounts resulting from the reversal, in the period, of previously recognized reserves for contingencies.
    • Decrease in the amounts intended for the recognition, in the period, of the legal reserve and reserve for contingencies.
    • Whenever the amount of the minimum mandatory dividend exceeds the realized portion of net income for the year, management may propose, and the General Meeting approves, allocate the excess to the constitution of the unrealized profit reserve (article 197 of Law 6,404/76).

The management board may pay or credit interest on equity in accordance with applicable law.

  1. Capital reserve
    The Incorporation of Shares resulted in the issuance of Natura &Co shares by the total subscription price of R$ 1,101,013,735 corresponding to the amount attributed to Natura Cosmetics shares incorporated by Natura &Co. Of this total, the amount of R$370,266,482 was allocated to the share capital account and the rest, in the amount of R$730,478,428 was allocated to the Company's capital reserve. This incorporation of shares was approved at Natura &Co's by the Extraordinary Shareholders Meeting on November 13, 2019.
    Based on the Extraordinary General Meeting held on November 13, 2019, the controlling shareholders of Natura contributed shares issued by the Company of their own, corresponding to 57.3% of the capital of Natura for investment in the Company with the same corresponding interest of Natura, as well an additional cash amount of R$ 206,592, sufficient for the Company to pay the income tax due to the difference between the book value of Natura and the acquisition cost used for the purpose of contributing shares issued by Natura to the Company's capital stock. The recognition of this additional cash received was recorded as a special equity reserve.
    The capital reserve at December 31, 2019 is R$ 1,302,990.
  2. Equity valuation adjustment - Other comprehensive income
    The Company records in this account the effect of exchange rate variation on investments in foreign subsidiaries, including exchange variations in hyperinflationary economy, actuarial gains and losses from the retirees' healthcare plan result from cash flow hedge. For exchange rate variation, the accumulated effect will be reversed in profit or loss for the year as gain or loss only in the case of investment disposal or write-off. For actuarial gains and losses, the amounts will be recognized upon actuarial liability revaluation. The cash flow hedge transactions will be transferred to profit or loss for the year when an ineffective portion is identified and/or upon termination of the relationship.

24. SEGMENT INFORMATION

The determination of the Company's operating segments is based on its Corporate Governance structure, which divides the business into the following segments, for purposes of decision making and managerial analyses: Natura ("Natura Brazil Operation" and "Natura LATAM Operation", includes Corporate LATAM), Aesop (includes P&L of the Holdings Natura Brazil Pty Ltd. and Natura Cosmetics Australia Pty Ltd.), The Body Shop (operation of "The Body Shop" retail stores in all continents) and Natura (Brazil) International B.V. - the Netherlands) and Others (include P&L of Natura Europa SAS - France and Natura Brasil Inc. - USA).

In addition to the segment analysis, the Company's management also analyzes its revenues at various levels, mainly through the sales channels: direct sales, operations in the retail market, e-commerce, B2B and franchises. However, segregation by this type of operation is not yet considered significant for disclosures by Management.

68

Net revenue by segment is as follows in the year ended on December 31, 2019:

  • Natura Brazil Operation: 43.5%
  • Natura LATAM Operation: 18.8%
  • Aesop: 9.0%
  • The Body Shop: 28.6%
  • Others: 0.1%

The accounting practices for each segment are described in Note 3 of these annual financial statements of the Company for the year ended December 31, 2019.

Performance of the Company´s segments were assessed based on net operating revenue and net income for the year, excluding the effects from financial income and expenses, income and social contribution taxes, depreciation and amortization.

The tables below present summarized financial information for the segments and the geographic distribution of commercial operations of the Company as of December 31, 2019 and December 31, 2018.

a) Operating segments

2019

Reconciliation to profit (loss) for the year

Performance

Depreciation

Financial

Financial

Net income

Net revenue

assessed by

and

Income tax

income

expenses

(loss)

the Company

amortization

Natura Brazil

6,260,779

1,269,761

(282,597)

1,845,246

(2,536,542)

(89,901)

205,967

Natura LATAM

2,742,467

379,921

(60,918)

48,087

(70,237)

(70,992)

225,861

Natura others

9,086

(46,199)

(14,010)

-

(202)

-

(60,411)

Aesop

1,303,050

350,437

(186,657)

9,337

(34,392)

(47,768)

90,957

The Body Shop

4,129,308

783,145

(573,234)

44,953

(105,890)

(41,812)

107,162

Corporate expenses (a)

-

(268,401)

-

8,161

(48,611)

(105,218)

(414,069)

Consolidated

14,444,690

2,468,664

(1,117,416)

1,955,784

(2,795,874)

(355,691)

155,467

2018

Reconciliation to profit (loss) for the year

Performance

Depreciation

Financial

Financial

Net income

Net revenue

assessed by

and

Income tax

income

expenses

(loss)

the Company

amortization

Natura Brazil

6,022,207

1,184,932

(274,013)

1,915,511

(2,439,391)

(68,239)

318,800

Natura LATAM

2,415,717

327,493

(30,850)

13,885

(60,941)

(80,446)

169,141

Natura others

9,450

-31,931

(462)

-

-

-

(32,393)

Aesop

1,064,043

162,301

(67,019)

4,608

(2,243)

(36,005)

61,642

The Body Shop

3,886,002

305,848

(217,567)

122,417

(137,134)

24,971

98,535

Corporate expenses (a)

-

(102,039)

-

-

-

34,693

(67,346)

Consolidated

13,397,419

1,846,604

(589,911)

2,056,421

(2,639,709)

(125,026)

548,379

  1. Corporate expenses refer substantially to the expenses (i) related to the process of acquiring the control of Avon Products, Inc. and the corporate restructuring of the Company during the fiscal year 2019; (ii) of some administrative departments that provide services to all Group companies; and (iii) with the Group's Operational Committee (COG), which was established to support the Company's development, to determine and allocate funds and to identify synergies among companies controlled by the Company. These expenses were not allocated to any operating segment.

2019

2018

Non-current

Total assets

Current

Non-current

Non-current

Total assets

Current

Non-current

assets

liabilities

liabilities

assets

liabilities

liabilities

Natura Brazil

4,181,261

7,618,551

2,207,944

8,104,168

3,566,311

7,450,648

2,888,073

1,988,473

Natura LATAM

349,698

1,592,912

774,521

105,423

247,131

1,190,735

636,845

553,890

Natura others

12,161

18,126

8,591

1,558

13,329

27,869

5,205

22,664

Aesop

1,035,432

1,442,214

274,539

592,531

413,775

768,771

235,033

533,738

The Body Shop

6,175,903

7,462,135

1,171,922

1,500,065

4,683,244

5,941,526

801,725

5,139,801

Corporate

-

3,050,574

3,080,906

Consolidated

11,754,455

21,184,512

7,518,423

10,303,745

8,923,790

15,379,549

4,566,881

8,238,566

69

b) Net revenue and Non-current assets by geographic region

Net revenue

Net revenue

Non-current

Non-current

assets

assets

2019

2018

2019

2018

Asia

782,940

666,154

368,430

115,709

North America

1,750,957

919,826

981,673

272,296

South America

8,340,025

8,534,263

4,378,675

3,964,645

Brazil

6,324,227

6,082,896

4,197,258

3,704,613

Other

2,015,798

2,451,367

181,417

260,032

Europe

2,909,968