UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 6-K

 

 

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16

UNDER THE SECURITIES EXCHANGE ACT OF 1934

March 16, 2017

Commission File Number 1-14728

 

 

LATAM Airlines Group S.A.

(Translation of Registrant’s Name Into English)

 

 

Presidente Riesco 5711, 20th floor

Las Condes

Santiago, Chile

(Address of principal executive offices)

 

 

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

Form 20-F   x              Form 40-F   ¨

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

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

 

 

 

 

LATAM AIRLINES GROUP S.A. AND SUBSIDIARIES

 

CONSOLIDATED FINANCIAL STATEMENTS

 

DECEMBER 31, 2016

 

CONTENTS

 

Consolidated Statement of Financial Position
Consolidated Statement of Income by Function
Consolidated Statement of Comprehensive Income
Consolidated Statement of Changes in Equity
Consolidated Statement of Cash Flows - Direct Method
Notes to the Consolidated Financial Statements

 

CLP - CHILEAN PESO
ARS - ARGENTINE PESO
US$ - united states dollar
THUS$ - THOUSANDS OF UNITED STATES DOLLARS
COP - COLOMBIAN PESO
brl/R$ - braZILIAN REAL
thr$ - Thousands of Brazilian reaL
MXN - MEXICAN PESO
VEF - STRONG Bolivar

 

 

 

 

 

REPORT OF INDEPENDENT AUDITORS

(Free translation from the original in Spanish)

 

Santiago, March 15, 2017

 

To the Board of Directors and Shareholders

Latam Airlines Group S.A.

 

We have audited the accompanying consolidated financial statements of Latam Airlines Group S.A. and subsidiaries, which comprise the consolidated statements of financial position as at December 31, 2016 and 2015 and the related statements of income, comprehensive income, changes in equity and cash flows for the years then ended, and the corresponding notes to the consolidated financial statements.

 

Management’s responsibility for the consolidated financial statements

 

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with the International Financial Reporting Standards (IFRS). This responsibility includes the design, implementation and maintenance of a relevant internal control for the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditor’s responsibility

 

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Chilean generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements 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 entity’s internal control. As a consequence we do not express that kind of opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

 

 

 

 

 

Santiago, March 15, 2017

Latam Airlines Group S.A.

2

 

Opinion

 

In our opinion, the consolidated financial statements present fairly, in all material respects the financial position of Latam Airlines Group S.A. and subsidiaries as at December 31, 2016 and 2015, and the results of operations and cash flows for the years then ended in accordance with the International Financial Reporting Standards (IFRS).

 

/s/ Jonathan Yeomans Gibbons /s/ PricewaterhouseCoopers
Jonathan Yeomans Gibbons  
RUT: 13.473.972-K  

 

 

 

 

Contents of the notes to the consolidated financial statements of LATAM Airlines Group S.A. and Subsidiaries.

 

Notes Page
   
1 - General information 1
2 - Summary of significant accounting policies 5
2.1. Basis of Preparation 5
2.2. Basis of Consolidation 9
2.3. Foreign currency transactions 10
2.4. Property, plant and equipment 11
2.5. Intangible assets other than goodwill 11
2.6. Goodwill 12
2.7. Borrowing costs 12
2.8. Losses for impairment of non-financial assets 12
2.9. Financial assets 13
2.10. Derivative financial instruments and hedging activities 13
2.11. Inventories 15
2.12. Trade and other accounts receivable 15
2.13. Cash and cash equivalents 15
2.14. Capital 15
2.15. Trade and other accounts payables 15
2.16. Interest-bearing loans 16
2.17. Current and deferred taxes 16
2.18. Employee benefits 16
2.19. Provisions 17
2.20. Revenue recognition 17
2.21. Leases 18
2.22. Non-current assets (or disposal groups) classified as held for sale 18
2.23. Maintenance 18
2.24. Environmental costs 19
3 - Financial risk management 19
3.1. Financial risk factors 19
3.2. Capital risk management 33
3.3. Estimates of fair value 33
4 - Accounting estimates and judgments 36
5 - Segmental information 39
6 - Cash and cash equivalents 41
7 - Financial instruments 43
7.1. Financial instruments by category 43
7.2. Financial instruments by currency 45
8 - Trade, other accounts receivable and non-current accounts receivable 46
9 - Accounts receivable from/payable to related entities 49
10 - Inventories 50
11 - Other financial assets 51
12 - Other non-financial assets 52
13 - Non-current assets and disposal group classified as held for sale 53
14 - Investments in subsidiaries 54

 

 

 

 

15 - Intangible assets other than goodwill 57
16 - Goodwill 58
17 - Property, plant and equipment 60
18 - Current and deferred tax 66
19 - Other financial liabilities 72
20 - Trade and other accounts payables 79
21 - Other provisions 81
22 - Other non-financial liabilities 83
23 - Employee benefits 84
24 - Accounts payable, non-current 86
25 - Equity 86
26 - Revenue 91
27 - Costs and expenses by nature 92
28 - Other income, by function 93
29 - Foreign currency and exchange rate differences 94
30 - Earnings per share 102
31 - Contingencies 103
32 - Commitments 111
33 - Transactions with related parties 116
34 - Share based payments 117
35 - Statement of cash flows 121
36 - The environment 122
37 - Events subsequent to the date of the financial statements 123

 

 

 

 

LATAM AIRLINES GROUP S.A. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

 

ASSETS                
        As of     As of  
        December 31,     December 31,  
    Note   2016     2015  
        ThUS$     ThUS$  
                 
Current assets                    
Cash and cash equivalents   6 - 7     949,327       753,497  
Other financial assets   7 - 11     712,828       651,348  
Other non-financial assets   12     212,242       330,016  
Trade and other accounts receivable   7 - 8     1,107,889       796,974  
Accounts receivable from related entities   7 - 9     554       183  
Inventories   10     241,363       224,908  
Tax assets   18     65,377       64,015  
                     
Total current assets other than non-current assets (or disposal groups) classified as held for sale or as held for distribution to owners         3,289,580       2,820,941  
                     
Non-current assets (or disposal groups) classified as held for sale or as held for distribution to owners   13     337,195       1,960  
                     
Total current assets         3,626,775       2,822,901  
                     
Non-current assets                    
Other financial assets   7 - 11     102,125       89,458  
Other non-financial assets   12     237,344       235,463  
Accounts receivable   7 - 8     8,254       10,715  
Intangible assets other than goodwill   15     1,610,313       1,321,425  
Goodwill   16     2,710,382       2,280,575  
Property, plant and equipment   17     10,498,149       10,938,657  
Tax assets   18     20,272       25,629  
Deferred tax assets   18     384,580       376,595  
Total non-current assets         15,571,419       15,278,517  
Total assets         19,198,194       18,101,418  

 

The accompanying Notes 1 to 37 form an integral part of these consolidated financial statements.

 

 

 

 

LATAM AIRLINES GROUP S.A. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

 

LIABILITIES AND EQUITY                
        As of     As of  
        December 31,     December 31,  
LIABILITIES   Note   2016     2015  
        ThUS$     ThUS$  
Current liabilities                    
Other financial liabilities   7 - 19     1,839,528       1,644,235  
Trade and other accounts payables   7 - 20     1,593,068       1,483,957  
Accounts payable to related entities   7 - 9     269       447  
Other provisions   21     2,643       2,922  
Tax liabilities   18     14,286       19,378  
Other non-financial liabilities   22     2,762,245       2,490,033  
                     
          6,212,039       5,640,972  
Liabilities included in disposal groups classified as held for sale         10,152       -  
                     
Total current liabilities         6,222,191       5,640,972  
Non-current liabilities                    
Other financial liabilities   7 - 19     6,796,952       7,532,385  
Accounts payable   7 - 24     359,391       417,050  
Other provisions   21     422,494       424,497  
Deferred tax liabilities   18     915,759       811,565  
Employee benefits   23     82,322       65,271  
Other non-financial liabilities   22     213,781       272,130  
Total non-current liabilities         8,790,699       9,522,898  
Total liabilities         15,012,890       15,163,870  
                     
EQUITY                    
Share capital   25     3,149,564       2,545,705  
Retained earnings   25     366,404       317,950  
Treasury Shares   25     (178 )     (178 )
Other reserves         580,870       (6,942 )
Parent's ownership interest         4,096,660       2,856,535  
Non-controlling interest   14     88,644       81,013  
Total equity         4,185,304       2,937,548  
Total liabilities and equity         19,198,194       18,101,418  

 

The accompanying Notes 1 to 37 form an integral part of these consolidated financial statements.

 

 

 

 

LATAM AIRLINES GROUP S.A. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF INCOME BY FUNCTION

 

        For the period ended  
        December 31,  
    Note   2016     2015  
        ThUS$     ThUS$  
                 
Revenue   26     8,988,340       9,740,045  
Cost of sales         (6,967,037 )     (7,636,709 )
Gross margin         2,021,303       2,103,336  
Other income   28     538,748       385,781  
Distribution costs         (747,426 )     (783,304 )
Administrative expenses         (872,954 )     (878,006 )
Other expenses         (373,738 )     (323,987 )
Other gains/(losses)         (72,634 )     (55,280 )
Income from operation activities         493,299       448,540  
Financial income         74,949       75,080  
Financial costs   27     (416,336 )     (413,357 )
Share of profit of investments accounted for using the equity method         -       37  
Foreign exchange gains/(losses)   29     121,651       (467,896 )
Result of indexation units         311       481  
Income (loss) before taxes         273,874       (357,115 )
Income (loss) tax expense / benefit   18     (163,204 )     178,383  
                     
NET INCOME (LOSS) FOR THE PERIOD         110,670       (178,732 )
Income (loss) attributable to owners of the parent         69,220       (219,274 )
Income (loss) attributable to non-controlling interest   14     41,450       40,542  
                     
Net income (loss) for the year         110,670       (178,732 )
                     
EARNINGS PER SHARE                    
Basic earnings (losses) per share (US$)   30     0.12665       (0.40193 )
Diluted earnings (losses) per share (US$)   30     0.12665       (0.40193 )

 

The accompanying Notes 1 to 37 form an integral part of these consolidated financial statements.

 

 

 

 

LATAM AIRLINES GROUP S.A. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 

        For the period ended  
        December 31,  
    Note   2016     2015  
        ThUS$     ThUS$  
NET INCOME (LOSS)         110,670       (178,732 )
Components of other comprehensive income that will not be reclassified to income before taxes                    
Other comprehensive income, before taxes, gains (losses) by new measurements on defined benefit plans   25     (3,105 )     (14,631 )
Total other comprehensive income that will not be reclassified to income before taxes         (3,105 )     (14,631 )
Components of other comprehensive income that will be reclassified to income before taxes                    
Currency translation differences                    
Gains (losses) on currency translation, before tax   29     494,362       (1,409,439 )
Other comprehensive income, before taxes, currency translation differences         494,362       (1,409,439 )
Cash flow hedges                    
Gains (losses) on cash flow hedges before taxes   19     127,390       80,387  
Other comprehensive income (losses), before taxes, cash flow hedges         127,390       80,387  
Total other comprehensive income that will be reclassified to income before taxes         621,752       (1,329,052 )
Other components of other comprehensive income (loss), before taxes         618,647       (1,343,683 )
Income tax relating to other comprehensive income that will not be reclassified to income                    
Income tax relating to new measurements on defined benefit plans   18     921       3,911  
Accumulate income tax relating to other comprehensive income that will not be reclassified to income         921       3,911  
Income tax relating to other comprehensive income that will be reclassified to income                    
Income tax related to cash flow hedges in other comprehensive income         (34,695 )     (21,103 )
Income taxes related to components of other comprehensive income that will be reclassified to income         (34,695 )     (21,103 )
Total Other comprehensive income         584,873       (1,360,875 )
Total comprehensive income (loss)         695,543       (1,539,607 )
Comprehensive income (loss) attributable to owners of the parent         648,539       (1,551,331 )
Comprehensive income (loss) attributable to non-controlling interests         47,004       11,724  
TOAL COMPREHENSIVE INCOME (LOSS)         695,543       (1,539,607 )

 

The accompanying Notes 1 to 37 form an integral part of these consolidated financial statements.

 

 

 

 

LATAM AIRLINES GROUP S.A. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

 

        Attributable to owners of the parent              
                    Change in other reserves                          
                                Actuarial gains or                                            
                    Currency     Cash flow     losses on defined     Shares based     Other     Total           Parent's     Non-        
        Share     Treasury     translation     hedging     benefit plans     payments     sundry     other     Retained     ownership     controlling     Total  
    Note   capital     shares     reserve     reserve     reserve     reserve     reserve     reserve     earnings     interest     interest     equity  
        ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$  
                                                                             
Equity as of January 1, 2016         2,545,705       (178 )     (2,576,041 )     (90,510 )     (10,717 )     35,647       2,634,679       (6,942 )     317,950       2,856,535       81,013       2,937,548  
Total increase (decrease) inequity                                                                                                    
Comprehensive income                                                                                                    
Gain (losses)   25     -       -       -       -       -       -       -       -       69,220       69,220       41,450       110,670  
Other comprehensive income         -       -       489,486       92,016       (2,183 )     -               579,319       -       579,319       5,554       584,873  
Total comprehensive income         -       -       489,486       92,016       (2,183 )     -       -       579,319       69,220       648,539       47,004       695,543  
Transactions with shareholders                                                                                                    
Equity issue   25-34     608,496       -       -       -       -       -       -       -       -       608,496       -       608,496  
Dividens   25     -       -       -       -       -       -       -       -       (20,766 )     (20,766 )     -       (20,766 )
Increase (decrease) through transfers and other changes, equity   25-34     (4,637 )     -       -       -       -       2,891       5,602       8,493       -       3,856       (39,373 )     (35,517 )
Total transactions with shareholders         603,859       -       -       -       -       2,891       5,602       8,493       (20,766 )     591,586       (39,373 )     552,213  
                                                                                                     
Closing balance as of December 31, 2016         3,149,564       (178 )     (2,086,555 )     1,506       (12,900 )     38,538       2,640,281       580,870       366,404       4,096,660       88,644       4,185,304  

 

The accompanying Notes 1 to 37 form an integral part of these consolidated financial statements.

 

 

 

 

LATAM AIRLINES GROUP S.A. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

 

        Attributable to owners of the parent              
                    Change in other reserves                          
                                Actuarial gains or                                            
                    Currency     Cash flow     losses on defined     Shares based     Other     Total           Parent's     Non-        
        Share     Treasury     translation     hedging     benefit plans     payments     sundry     other     Retained     ownership     controlling     Total  
    Note   capital     shares     reserve     reserve     reserve     reserve     reserve     reserve     earnings     interest     interest     equity  
        ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$  
                                                                             
Equity as of January 1, 2015         2,545,705       (178 )     (1,193,871 )     (151,340 )     -       29,642       2,635,748       1,320,179       536,190       4,401,896       101,799       4,503,695  
Total increase (decrease) inequity                                                                                                    
Comprehensive income                                                                                                    
Gain (losses)   25     -       -       -       -       -       -       -       -       (219,274 )     (219,274 )     40,542       (178,732 )
Other comprehensive income         -       -       (1,382,170 )     60,830       (10,717 )     -               (1,332,057 )     -       (1,332,057 )     (28,818 )     (1,360,875 )
Total comprehensive income         -       -       (1,382,170 )     60,830       (10,717 )     -       -       (1,332,057 )     (219,274 )     (1,551,331 )     11,724       (1,539,607 )
Transactions with shareholders                                                                                                    
Increase (decrease) through transfers and other changes, equity   25-34     -       -       -       -       -       6,005       (1,069 )     4,936       1,034       5,970       (32,510 )     (26,540 )
Total transactions with shareholders         -       -       -       -       -       6,005       (1,069 )     4,936       1,034       5,970       (32,510 )     (26,540 )
                                                                                                     
Closing balance as of December 31,2015         2,545,705       (178 )     (2,576,041 )     (90,510 )     (10,717 )     35,647       2,634,679       (6,942 )     317,950       2,856,535       81,013       2,937,548  

 

The accompanying Notes 1 to 37 form an integral part of these consolidated financial statements.

 

 

 

 

LATAM AIRLINES GROUP S.A. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF CASH FLOWS DIRECT – METHOD

 

        For the periods ended  
        December 31,  
    Note   2016     2015  
        ThUS$     ThUS$  
Cash flows from operating activities                    
Cash collection from operating activities                    
Proceeds from sales of goods and services         9,918,589       11,372,397  
Other cash receipts from operating activities         70,359       88,237  
Payments for operating activities                    
Payments to suppliers for goods and services         (6,756,121 )     (7,029,582 )
Payments to and on behalf of employees         (1,820,279 )     (2,165,184 )
Other payments for operating activities         (162,839 )     (351,177 )
Interest received         11,242       43,374  
Income taxes refunded (paid)         (59,556 )     (57,963 )
Other cash inflows (outflows)   35     (209,269 )     (184,627 )
Net cash flows from operating activities         992,126       1,715,475  
Cash flows used in investing activities                    
Other cash receipts from sales of equity or debt instruments of other entities         2,969,731       519,460  
Other payments to acquire equity or debt instruments of other entities         (2,706,733 )     (704,115 )
Amounts raised from sale of property, plant and equipment         76,084       57,117  
Purchases of property, plant and equipment         (694,370 )     (1,569,749 )
Amounts raised from sale of intangible assets         1       91  
Purchases of intangible assets         (88,587 )     (52,449 )
Other cash inflows (outflows)   35     843       10,576  
Net cash flow from (used in) investing activities         (443,031 )     (1,739,069 )
Cash flows from (used in) financing activities                    
Amounts raised from issuance of shares         608,496       -  
Amounts raised from long-term loans         1,820,016       1,791,484  
Amounts raised from short-term loans         279,593       205,000  
Loans repayments         (2,121,130 )     (1,263,793 )
Payments of finance lease liabilities         (314,580 )     (342,614 )
Dividends paid   35     (41,223 )     (35,032 )
Interest paid         (398,288 )     (383,648 )
Other cash inflows (outflows)   35     (229,163 )     (99,757 )
Net cash flows from (used in) financing activities         (396,279 )     (128,360 )
Net increase (decrease) in cash and cash equivalents before effect of exchanges rate change         152,816       (151,954 )
Effects of variation in the exchange rate on cash and cash equivalents         43,014       (83,945 )
Net increase (decrease) in cash and cash equivalents         195,830       (235,899 )
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD   35     753,497       989,396  
CASH AND CASH EQUIVALENTS AT END OF PERIOD   6     949,327       753,497  

 

The accompanying Notes 1 to 37 form an integral part of these consolidated financial statements.

 

 

 

 

LATAM AIRLINES GROUP S.A. AND SUBSIDIARIES

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

AS OF DECEMBER 31, 2016

 

NOTE 1 - GENERAL INFORMATION

 

LATAM Airlines Group S.A. (the “Company”) is a public company registered with the Chilean Superintendency of Securities and Insurance (SVS), under No.306, whose shares are quoted in Chile on the Stock Brokers - Stock Exchange (Valparaíso) - the Chilean Electronic Stock Exchange and the Santiago Stock Exchange; it is also quoted in the United States of America on the New York Stock Exchange (“NYSE”) in New York in the form of American Depositary Receipts (“ADRs”).

 

Its principal business is passenger and cargo air transportation, both in the domestic markets of Chile, Peru, Argentina, Colombia, Ecuador and Brazil and in a developed series of regional and international routes in America, Europe and Oceania. These businesses are performed directly or through its subsidiaries in different countries. In addition, the Company has subsidiaries operating in the freight business in Mexico, Brazil and Colombia.

 

The Company is located in Santiago, Chile, at Avenida Américo Vespucio Sur No. 901, commune of Renca.

 

Corporate Governance practices of the Company are set in accordance with Securities Market Law the Corporations Law and its regulations, and the regulations of the SVS and the laws and regulations of the United States of America and the U.S. Securities and Exchange Commission (“SEC”) of that country, with respect to the issuance of ADRs.

 

On July 18, 2016, LATAM received the approval by Comissão de Valores Mobiliários (“CVM”) for a discontinuation of Brazilian LATAM depositary receipts-BDRS level III ("BDRs"), supported by common shares of the Company and, consequently, our registration of the foreign issuer. On May 24, 2016, the Company reported as an Essential Fact the maturity date May 23, 2016 deadline for holders of BDRs to express their option to keep the shares and the blockade by BM&FBOVESPA with the same date of the respective balances of shares of the holders of BDRs who chose to adhere to the procedure for sale of shares through the procedure called Sale Facility and assigned for this purpose a theoretical value of sales in the Santiago Stock Exchange. On June 9, 2016, the Company reported that BTG Pactual Chile S.A. Stockbrokers ("BTG Pactual Chile"), a chilean institution contracted by the Company, made the sale on the Santiago Stock Exchange of the shares of the respective holders who adhered to Sale Facility procedure.

 

As of December 31, 2015, the Company's subscribed and paid capital was represented by 545,558,101 commons shares, without par value. On August 18, 2016, the Company held an extraordinary shareholders' meeting in which it was approved to increase the capital by issuing 61,316,424 shares of payment, all of them commons shares, without par value. As of December 31, 2016, 60,849,592 shares, equivalent to this increase, had been placed, so at that date the number of shares subscribed and paid by the Company amounted to 606,407,693 shares.

 

 

 

 

At December 31, 2016, the Company's capital stock is represented by 608,374,525 shares, all common shares, without par value, which is divided into: (a) the 606,407,693 subscribed and paid shares mentioned above; And (b) 1,966,832 shares pending of subscription and payment, of which: (i) 1,500,000 shares are allocated to compensation stock option plan; And (ii) 466,832 correspond to the balance of shares pending of placement of the last capital increase.

 

It should be noted that the Company's capital stock was expressed in 613,164,243 shares, all ordinary shares, without nominal value. However, on December 21, 2016, the deadline for the subscription and payment of 4,789,718 shares that were also destined to compensation plans for the workers expired, so the Company's capital stock was fully reduced to the already mentioned 608.374.525 shares.

 

The Board of the Company is composed of nine members who are elected every two years by the ordinary shareholders ' meeting. The Board meets in regular monthly sessions and in extraordinary sessions as the corporate needs demand. Of the nine board members, three form part of its Directors’ Committee which fulfills both the role foreseen in the Corporations Law and the functions of the Audit Committee required by the Sarbanes Oxley Law of the United States of America and the respective regulations of the SEC.

 

The majority shareholder of the Company is the Cueto Group, which through Costa Verde Aeronáutica S.A., Costa Verde Aeronáutica SpA, Costa Verde Aeronáutica Tres SpA, Inversiones Nueva Costa Verde Aeronáutica Limitada, Inversiones Priesca Dos y Cía. Ltda., Inversiones Caravia Dos y Cía. Ltda., Inversiones El Fano Dos y Cía. Ltda., Inversiones La Espasa Dos S.A., Inversiones, Inversiones La Espasa Dos y Cía. Ltda. and Inversiones Mineras del Cantábrico S.A. owns 28.27% of the shares issued by the Company, and therefore is the controlling shareholder of the Company in accordance with the provisions of the letter b) of Article 97 and Article 99 of the Securities Market Law, given that there is a decisive influence on its administration.

 

As of December 31, 2016, the Company had a total of 1,566 registered shareholders. At that date approximately 4.69 % of the Company’s share capital was in the form of ADRs.

 

For the period ended December 31, 2016, the Company had an average of 48,336 employees, ending this period with a total of 45,916 employees, spread over 8,010 Administrative employees, 4,895 in Maintenance, 15,924 in Operations, 8,970 in Cabin Crew, 3,882 in Controls Crew, and 4,235 in Sales.

 

2

 

 

The main subsidiaries included in these consolidated financial statements are as follows:

 

a) Participation rate

 

                As December 31, 2016     As December 31, 2015  
        Country   Functional                                    
Tax No.   Company   of origin   Currency   Direct     Indirect     Total     Direct     Indirect     Total  
                %     %     %     %     %     %  
96.518.860-6   Latam Travel Chile S.A. and Subsidary (*)   Chile   US$     99.9900       0.0100       100.0000       99.9900       0.0100       100.0000  
96.763.900-1   Inmobiliaria Aeronáutica S.A.   Chile   US$     99.0100       0.9900       100.0000       99.0100       0.9900       100.0000  
96.969.680-0   Lan Pax Group S.A. and Subsidiaries   Chile   US$     99.8361       0.1639       100.0000       99.8361       0.1639       100.0000  
Foreign   Lan Perú S.A.   Peru   US$     49.0000       21.0000       70.0000       49.0000       21.0000       70.0000  
Foreign   Lan Chile Investments Limited and Subsidiary   Cayman Insland   US$     0.0000       0.0000       0.0000       99.9900       0.0100       100.0000  
93.383.000-4   Lan Cargo S.A.   Chile   US$     99.8939       0.0041       99.8980       99.8939       0.0041       99.8980  
Foreign   Connecta Corporation   U.S.A.   US$     0.0000       100.0000       100.0000       0.0000       100.0000       100.0000  
Foreign   Prime Airport Services Inc. and Subsidary   U.S.A.   US$     0.0000       100.0000       100.0000       0.0000       100.0000       100.0000  
96.951.280-7   Transporte Aéreo S.A.   Chile   US$     0.0000       100.0000       100.0000       0.0000       100.0000       100.0000  
Foreign   Aircraft International Leasing Limited   U.S.A.   US$     0.0000       0.0000       0.0000       0.0000       100.0000       100.0000  
96.631.520-2   Fast Air Almacenes de Carga S.A.   Chile   CLP     0.0000       100.0000       100.0000       0.0000       100.0000       100.0000  
Foreign   Laser Cargo S.R.L.   Argentina   ARS     0.0000       100.0000       100.0000       0.0000       100.0000       100.0000  
Foreign   Lan Cargo Overseas Limited and Subsidiaries   Bahamas   US$     0.0000       100.0000       100.0000       0.0000       100.0000       100.0000  
96.969.690-8   Lan Cargo Inversiones S.A. and Subsidary   Chile   US$     0.0000       100.0000       100.0000       0.0000       100.0000       100.0000  
96.575.810-0   Inversiones Lan S.A. and Subsidiaries   Chile   US$     99.7100       0.2900       100.0000       99.7100       0.2900       100.0000  
59.068.920-3   Technical Trainning LATAM S.A.   Chile   CLP     99.8300       0.1700       100.0000       99.8300       0.1700       100.0000  
Foreign   TAM S.A. and Subsidiaries (**)   Brazil   BRL     63.0901       36.9099       100.0000       63.0901       36.9099       100.0000  

 

(*) Lantours Division de Servicios Terrestres S.A. changes its name to Latam Travel Chile S.A.

 

(**) As of December 31, 2016, indirect ownership participation on TAM S.A and subsidiaries is from Holdco I S.A., LATAM is entitled to 99,9983% of the economic rights and 49% of the rights politicians product of provisional measure No. 714 of the Brazilian government that allows foreign capital to have up to 49% of the property.

 

Thus, since April 2016, LATAM Airlines Group S.A. owns 901 voting shares of Holdco I S.A., equivalent to 49% of the total shares with voting rights of said company and TEP Chile S.A. owns 938 voting shares of Holdco I S.A., equivalent to 51% of the total voting shares of that company.

 

3

 

 

b) Statement of financial position

 

        Statement of financial position     Net Income  
                    For the periods ended  
                    December 31,  
        As of December 31, 2016     As of December 31, 2015     2016     2015  
Tax No.   Company   Assets     Liabilities     Equity     Assets     Liabilities     Equity     Gain /(loss)  
        ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$  
                                                     
96.518.860-6   Latam Travel Chile S.A. and Subsidary (*)     5,468       2,727       2,741       5,613       5,522       91       2,650       2,341  
96.763.900-1   Inmobiliaria Aeronáutica S.A.     36,756       8,843       27,913       39,302       14,832       24,470       3,443       1,404  
96.969.680-0   Lan Pax Group S.A. and Subsidiaries (**)     475,763       1,045,761       (561,472 )     519,663       1,049,232       (521,907 )     (36,331 )     (35,187 )
Foreign   Lan Perú S.A.     306,111       294,912       11,199       255,691       240,938       14,753       (2,164 )     5,068  
Foreign Foreign   Lan Chile Investments Limited and Subsidiary (**)     -       -       -       2,015       13       2,002       23       (13 )
93.383.000-4   Lan Cargo S.A.     480,908       239,728       241,180       483,033       217,037       265,966       (24,813 )     (74,408 )
Foreign   Connecta Corporation     31,981       23,525       8,456       37,070       38,298       (1,228 )     9,684       194  
Foreign   Prime Airport Services Inc. and Subsidary (**)     7,385       11,294       (3,909 )     6,683       11,180       (4,497 )     588       279  
96.951.280-7   Transporte Aéreo S.A.     340,940       124,805       216,135       331,117       122,666       208,451       8,206       5,878  
Foreign   Aircraft International Leasing Limited     -       -       -       -       4       (4 )     9       (4 )
96.631.520-2   Fast Air Almacenes de Carga S.A.     10,023       3,645       6,378       8,985       4,641       4,344       1,717       1,811  
Foreign   Laser Cargo S.R.L.     21       32       (11 )     27       39       (12 )     (1 )     69  
Foreign   Lan Cargo Overseas Limited and Subsidiaries (**)     54,092       35,178       15,737       62,406       43,759       15,563       176       3,344  
96.969.690-8   Lan Cargo Inversiones S.A. and Subsidary (**)     80,644       95,747       (13,506 )     54,179       68,220       (12,601 )     (910 )     113  
96.575.810-0   Inversiones Lan S.A. and Subsidiaries (**)     10,971       6,452       4,452       16,512       14,676       1,828       2,549       2,772  
59.068.920-3   Technical Trainning LATAM S.A.     1,745       284       1,461       1,527       266       1,261       73       (72 )
Foreign   TAM S.A. and Subsidiaries (**)     5,287,286       4,710,308       495,562       4,969,553       4,199,223       423,190       2,107       (183,581 )

 

(*) Lantours Division de Servicios Terrestres S.A. changes its name to Latam Travel Chile S.A.

 

(**) The Equity reported corresponds to Equity attributable to owners of the parent, does not include Non-controlling interest.

 

Additionally, we have proceeded to consolidate the following special purpose entities: 1. JOL (Japanese Operating Lease) created in order to finance the purchase of certain aircraft; 2. Chercán Leasing Limited created to finance the pre-delivery payments on aircraft; 3. Guanay Finance Limited created to issue a bond collateralized with future credit card receivables; 4. Private investment funds and 5. Avoceta Leasing Limited created to finance the pre-delivery payments on aircraft. These companies have been consolidated as required by IFRS 10.

 

All the entities controlled have been included in the consolidation.

 

Changes in the scope of consolidation between January 1, 2015 and December 31, 2016, are detailed below:

 

(1) Incorporation or acquisition of companies

 

- On October 2015, Rampas Airport Services S.A., subsidiary of Lan Pax Group S.A. increases its capital and paid in the amount of ThUS$ 6,000 by issuing new shares, changing the property of the company as follows: Lan Pax Group S.A. increased its share to 99.99738%, Inversiones Lan S.A. decreased its stake to 0.00002% and Aerolane Líneas Aéreas Nacionales del Ecuador S.A. acquires stake for 0.0026%.

 

4

 

 

- On January 2016 it was registered at the Public Registry of Commerce, the Increase in Share Capital and statutory modification for the purpose of creating a new class of shares of Lan Argentina S.A., subsidiary of Lan Pax Group S.A., for a total of 90,000,000 Class "C" shares registered non-endorsable and non-voting. Lan Pax Group S.A. participated in this capital increase, changing its ownership to 4.87%, consequently, the indirect participation of LATAM Airlines Group S.A. increases to 95.85660%

 

- On April 1, 2016, Multiplus Corretora de Seguros Ltda. was created, the ownership of which corresponds to 99.99% of Multiplus S.A. direct subsidiary of TAM S.A.

 

- During period 2016, Inversiones LAN S.A., subsidiary of LATAM Airlines Group S.A., acquired 4,767 shares of Aerovías de Integración Regional Aires S.A. a non-controlling shareholder, equivalent to 0.0914%, consequently, the indirect participation of LATAM Airlines Group S.A. increases to 99.19061%

 

(2) Dissolution of companies

 

- In July 2015, the Company Ladeco Cargo S.A., subsidiary of Lan Cargo S.A., was dissolved.

 

- During the period 2016, Lan Chile Investments Limited, subsidiary of LATAM Airlines S.A.; and Aircraft International Leasing Limited, subsidiary of Lan Cargo S.A., were dissolved.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The following describes the principal accounting policies adopted in the preparation of these consolidated financial statements.

 

2.1. Basis of Preparation

 

The consolidated financial statements of LATAM Airlines Group S.A. for the period ended December 31, 2016, have been prepared in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (“IASB”) incorporated therein and with the interpretations issued by the International Financial Reporting Standards Interpretations Committee (IFRIC).

 

On October 17, 2014, the SVS issued Circular No. 856, instructing the audited entities to record in the year 2014, against equity the differences in assets and liabilities for deferred taxes produced by direct effect of the increase in the rate of First class taxes introduced by Law No. 20,780, which, considering that such treatment differs from those established by IAS 12, and, therefore, the preparation framework represented a change And presentation of financial information that had been adopted up to that date.

 

Considering that what was expressed in the previous paragraph represented a specific and temporary diversion of IFRS, starting in 2016 and in accordance with paragraph 4A of IFRS 1, the Company has decided to retroactively apply IFRS, in accordance with IAS 8 "Accounting policies, changes in accounting estimates and errors" as if it had never failed to apply such IFRS.

 

5

 

 

As mentioned in the previous paragraph does not modify any of the accounts presented in the statements of financial position as of December 31, 2016 and 2015, as well as at December 31, 2015 and 2014, as expressed in paragraph 40A of IAS 1 "Presentation of Financial Statements", it is not necessary to present the statement of financial position as of January 1, 2015 (third column).

 

The consolidated financial statements have been prepared under the historic-cost criterion, although modified by the valuation at fair value of certain financial instruments.

 

The preparation of the consolidated financial statements in accordance with IFRS requires the use of certain critical accounting estimates. It also requires management to use its judgment in applying the Company’s accounting policies. Note 4 shows the areas that imply a greater degree of judgment or complexity or the areas where the assumptions and estimates are significant to the consolidated financial statements.

 

During 2016 the Company recorded out of period adjustments resulting in an aggregate net decrease of US$ 18.2 million to "Net income (loss) for the period" for the year ended December 31, 2016. These adjustments include US$ 39.5 million (loss) resulting from an account reconciliation process initiated after the Company's afiliate TAM S.A. and its subsidiaries completed the implementation of the SAP system. A further US$ 11.0 million (loss) reflect adjustments related to foreign exchange differences, also relating to the Company's subsidiaries in Brazil. The balance of US$ 32.3 million (gain) includes principally the adjustment of unclaimed fees for expired tickets for the Company and its affiliates outside Brazil. Management of TAM S.A. has concluded that the out of period adjustments that have been identified are material to the 2015 financial statements of TAM S.A., which should therefore require a restatement in Brazil. However, Management of LATAM has evaluated the impact of all out of period adjustments, both individually and in the aggregate, and concluded that due to their relative size and to qualitative factors they are not material to the annual consolidated financial statements for 2016 of Latam Airlines Group S.A. or to any previously reported consolidated financial statements, therefore no restatement or revision is necessary.

 

(a)        Accounting pronouncements with implementation effective from January 1, 2016:

 

(i)        Standards and amendments   Date of issue   Mandatory
Application:
Annual periods
beginning on or after
         
Amendment to IFRS 11: Joint arrangements.   May 2014   01/01/2016
         
Amendment to IAS 16: Property, plant and equipment, and IAS 38: Intangible assets.   May 2014   01/01/2016
         
Amendment to IAS 27: Separate financial statements.   August 2014   01/01/2016
         
Amendment IAS 1: Presentation of Financial Statements.   December 2014   01/01/2016
         
Amendment to IFRS 10: Consolidated financial statements, IFRS 12: Disclosure of interests in other entities and IAS 28: Investments in associates and joint ventures.   December 2014   01/01/2016

 

6

 

 

(ii)        Improvements   Date of issue   Mandatory
Application:
Annual periods
beginning on or after
         
Improvements to International Financial Reporting Standards (2012-2014 cycle ): IFRS 5 Non-current assets held for sale and discontinued operations; IFRS 7 Financial instruments: Disclosures; IAS 19 Employee benefits and IAS 34 Interim financial reporting.   September 2014   01/01/2016

 

The application of standards, amendments, interpretations and improvements had no material impact on the consolidated financial statements of the Company.

 

(b)        Accounting pronouncements not yet in force for financial years beginning on January 1, 2016 and which has not been effected early adoption

 

(i)       Standards and amendments   Date of issue   Mandatory
Application:
Annual periods
beginning on or after
         
Amendment to IAS 7: Statement of Cash Flows.   January 2016   01/01/2017
         
Amendment to IAS 12: Income Taxes.   January 2016   01/01/2017
         
IFRS 9: Financial instruments.   December 2009   01/01/2018
         
Amendment to IFRS 9: Financial instruments.   November 2013   01/01/2018
         
IFRS 15: Revenue from contracts with customers (1).   May 2014   01/01/2018
         
Amendment to IFRS 15: Revenue from contracts with customers.   April 2016   01/01/2018
         
Amendment to IFRS 2: Share-based payments   June 2016   01/01/2018
         
Amendment to IFRS 4: Insurance contracts.   September 2016   01/01/2018
         
Amendment to IAS 40: Investment property   December 2016   01/01/2018
         
IFRS 16: Leases (2).   January 2016   01/01/2019
         
Amendment to IFRS 10: Consolidated financial statements and IAS 28 Investments in associates and joint ventures.   September 2014   To be determined

 

7

 

 

(ii)       Improvements   Date of issue   Mandatory
Application:
Annual periods
beginning on or after
         
Improvements to International Financial Reporting Standards. (cycle 2012-2014) IFRS 1: First-time adoption of international financial reporting standards; IFRS 12 Disclosure of interests in other entities and IAS 28 investments in associates and joint ventures.   December 2016   01/01/2017
(improvements
IFRS 12)
         
(iii)       Interpretations       01/01/2018
(improvements
IFRS 1 and IAS 28)
         
IFRIC 22: Foreign currency transactions and advance consideration   December 2016   01/01/2018

 

The Company’s management believes that the adoption of the standards, amendments and interpretations described above but not yet effective would not have a significant impact on the Company’s consolidated financial statements in the year of their first application, except for IFRS 15 and IFRS 16:

 

(1) IFRS 15 Revenue from Contracts with Customers supersedes actual standard for revenue recognition that actually uses the Company, as IAS 18 Revenue and IFRIC 13 Customer Loyalty Programmes. The core principle of IFRS 15 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This standards supersedes IFRS 15 supersedes, IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfers of Assets from Customers; and SIC-31 Revenue - Barter Transactions Involving Advertising Services.

 

We are currently evaluating how the adoption of the revenue recognition standard will impact our Consolidated Financial Statements. Interpretations are on-going and could have a significant impact on our implementation. We currently believe the adoption will not have a significant impact on passenger and cargo revenue recognition. However, the impact in revenue and liability for frequent flyer program are still being analyzed.

 

(2)The IFRS 16 Leases add important changes in the accounting for lessees by introducing a similar treatment to financial leases for all operating leases with a term of more than 12 months. This mean, in general terms, that an asset should be recognized for the right to use the underlying leased assets and a liability representing its present value of payments associate to the agreement. Monthly leases payments will be replace by the asset depreciation and a financial cost in the income statement.

 

8

 

 

We are currently evaluating how the adoption of the leases recognition standard will impact our Consolidated Financial Statements. Interpretations are on-going and could have a material impact on our implementation. Currently, we expect that the adoption of the new lease standard will have a material impact on our consolidated balance sheet due to the recognition of right-of-use assets and lease liabilities principally for certain leases currently accounted for as operating leases.

 

LATAM Airlines Group S.A. and subsidiaries are still assessing these standard to determinate the effect on their Financial Statements, covenants and other financial indicators.

 

2.2. Basis of Consolidation

 

(a) Subsidiaries

 

Subsidiaries are all the entities (including special-purpose entities) over which the Company has the power to control the financial and operating policies, which are generally accompanied by a holding of more than half of the voting rights. In evaluating whether the Company controls another entity, the existence and effect of potential voting rights that are currently exercisable or convertible at the date of the consolidated financial statements are considered. The subsidiaries are consolidated from the date on which control is passed to the Company and they are excluded from the consolidation on the date they cease to be so controlled. The results and flows are incorporated from the date of acquisition.

Balances, transactions and unrealized gains on transactions between the Company’s entities are eliminated. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment loss of the asset transferred. When necessary in order to ensure uniformity with the policies adopted by the Company, the accounting policies of the subsidiaries are modified.

 

To account for and identify the financial information to be revealed when carrying out a business combination, such as the acquisition of an entity by the Company, shall apply the acquisition method provided for in IFRS 3: Business combination.

 

(b) Transactions with non-controlling interests

 

The Company applies the policy of considering transactions with non-controlling interests, when not related to loss of control, as equity transactions without an effect on income.

 

(c) Sales of subsidiaries

 

When a subsidiary is sold and a percentage of participation is not retained, the Company derecognizes assets and liabilities of the subsidiary, the non-controlling and other components of equity related to the subsidiary. Any gain or loss resulting from the loss of control is recognized in the consolidated income statement in Other gains (losses).

 

If LATAM Airlines Group S.A. and Subsidiaries retain an ownership of participation in the sold subsidiary, and does not represent control, this is recognized at fair value on the date that control is lost, the amounts previously recognized in Other comprehensive income are accounted as if the Company had disposed directly from the assets and related liabilities, which can cause these amounts are reclassified to profit or loss. The percentage retained valued at fair value is subsequently accounted using the equity method.

 

9

 

 

(d) Investees or associates

 

Investees or associates are all entities over which LATAM Airlines Group S.A. and Subsidiaries have significant influence but have no control. This usually arises from holding between 20% and 50% of the voting rights. Investments in associates are booked using the equity method and are initially recognized at their cost.

 

2.3. Foreign currency transactions

 

(a) Presentation and functional currencies

 

The items included in the financial statements of each of the entities of LATAM Airlines Group S.A. and Subsidiaries are valued using the currency of the main economic environment in which the entity operates (the functional currency). The functional currency of LATAM Airlines Group S.A. is the United States dollar which is also the presentation currency of the consolidated financial statements of LATAM Airlines Group S.A. and Subsidiaries.

 

(b) Transactions and balances

 

Foreign currency transactions are translated to the functional currency using the exchange rates on the transaction dates. Foreign currency gains and losses resulting from the liquidation of these transactions and from the translation at the closing exchange rates of the monetary assets and liabilities denominated in foreign currency are shown in the consolidated statement of income by function except when deferred in Other comprehensive income as qualifying cash flow hedges.

 

(c) Group entities

 

The results and financial position of all the Group entities (none of which has the currency of a hyper-inflationary economy) that have a functional currency other than the presentation currency are translated to the presentation currency as follows:

 

(i)          Assets and liabilities of each consolidated statement of financial position presented are translated at the closing exchange rate on the consolidated statement of financial position date;

 

(ii)         The revenues and expenses of each income statement account are translated at the exchange rates prevailing on the transaction dates, and

 

(iii)        All the resultant exchange differences by conversion are shown as a separate component in Other comprehensive income.

 

The exchange rates used correspond to those fixed in the country where the subsidiary is located, whose functional currency is different to the U.S. dollar.

 

Adjustments to the Goodwill and fair value arising from the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and are translated at the closing exchange rate or period informed.

 

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2.4. Property, plant and equipment

 

The land of LATAM Airlines Group S.A. and Subsidiaries is recognized at cost less any accumulated impairment loss. The rest of the Property, plant and equipment are registered, initially and subsequently, at historic cost less the corresponding depreciation and any impairment loss.

 

The amounts of advance payments to aircraft manufacturers are capitalized by the Company under Construction in progress until receipt of the aircraft.

 

Subsequent costs (replacement of components, improvements, extensions, etc.) are included in the value of the initial asset or shown as a separate asset only when it is probable that the future economic benefits associated with the elements of Property, plant and equipment are going to flow to the Company and the cost of the element can be determined reliably. The value of the component replaced is written off in the books at the time of replacement. The rest of the repairs and maintenance are charged to the results of the year in which they are incurred.

 

Depreciation of Property, plant and equipment is calculated using the straight-line method over their estimated technical useful lives; except in the case of certain technical components which are depreciated on the basis of cycles and hours flown.

The residual value and useful life of assets are reviewed, and adjusted if necessary, once per year.

 

When the carrying amount of an asset is higher than its estimated recoverable amount, its value is reduced immediately to its recoverable amount (Note 2.8).

 

Losses and gains on the sale of Property, plant and equipment are calculated by comparing the compensation with the book value and are included in the consolidated statement of income.

 

2.5. Intangible assets other than goodwill

 

(a) Airport slots and Loyalty program

 

Airport slots and the Coalition and Loyalty program are intangible assets of indefinite useful life and are subject to impairment tests annually as an integral part of each CGU, in accordance with the premises that are applicable, included as follows:

 

Airport slots – Air transport CGU

Loyalty program – Coalition and loyalty program Multiplus CGU

(See Note 16)

 

The airport slots correspond to an administrative authorization to carry out operations of arrival and departure of aircraft at a specific airport, within a specified period.

 

The Loyalty program corresponds to the system of accumulation and redemption of points that has developed Multiplus S.A., subsidiary of TAM S.A.

 

The Brands, airport Slots and Loyalty program were recognized in fair values determined in accordance with IFRS 3, as a consequence of the business combination with TAM and Subsidiaries.

 

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(b) Computer software

 

Licenses for computer software acquired are capitalized on the basis of the costs incurred in acquiring them and preparing them for using the specific software. These costs are amortized over their estimated useful lives, for which the Company has been defined useful lives between 3 and 10 years.

 

Expenses related to the development or maintenance of computer software which do not qualify for capitalization, are shown as an expense when incurred. The personnel costs and others costs directly related to the production of unique and identifiable computer software controlled by the Company, are shown as intangible Assets others than Goodwill when they have met all the criteria for capitalization.

 

(c) Brands

 

The Brands were acquired in the business combination with TAM S.A. And Subsidiaries and recognized at fair value under IFRS. During the year 2016, the estimated useful life of the brands change from an indefinite useful life to a five-year period, the period in which the value of the brands will be amortized (See Note 15).

 

2.6. Goodwill

 

Goodwill represents the excess of acquisition cost over the fair value of the Company’s participation in the net identifiable assets of the subsidiary or associate on the acquisition date. Goodwill related to acquisition of subsidiaries is not amortized but tested for impairment annually or each time that there is evidence of impairment. Gains and losses on the sale of an entity include the book amount of the goodwill related to the entity sold.

 

2.7. Borrowing costs

 

Interest costs incurred for the construction of any qualified asset are capitalized over the time necessary for completing and preparing the asset for its intended use. Other interest costs are recognized in the consolidated income statement when they are accrued.

 

2.8. Losses for impairment of non-financial assets

 

Intangible assets that have an indefinite useful life, and developing IT projects, are not subject to amortization and are subject to annual testing for impairment. Assets subject to amortization are subjected to impairment tests whenever any event or change in circumstances indicates that the book value of the assets may not be recoverable. An impairment loss is recorded when the book value is greater than the recoverable amount. The recoverable amount of an asset is the higher of its fair value less costs to sell and its value in use. In evaluating the impairment, the assets are grouped at the lowest level for which cash flows are separately identifiable (CGUs). Non-financial assets other than goodwill that have suffered an impairment loss are reviewed if there are indicators of reverse losses at each reporting date.

 

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2.9. Financial assets

 

The Company classifies its financial instruments in the following categories: financial assets at fair value through profit and loss and loans and receivables. The classification depends on the purpose for which the financial instruments were acquired. Management determines the classification of its financial instruments at the time of initial recognition, which occurs on the date of transaction.

 

(a) Financial assets at fair value through profit and loss

 

Financial assets at fair value through profit and loss are financial instruments held for trading and those which have been designated at fair value through profit or loss in their initial classification. A financial asset is classified in this category if acquired mainly for the purpose of being sold in the near future or when these assets are managed and measured using fair value. Derivatives are also classified as held for trading unless they are designated as hedges. The financial assets in this category and have been designated initial recognition through profit or loss, are classified as Cash and cash equivalents and Other current financial assets and those designated as instruments held for trading are classified as Other current and non-current financial assets.

 

(b) Loans and receivables

 

Loans and receivables are non-derivative financial instruments with fixed or determinable payments not traded on an active market. These items are classified in current assets except for those with maturity over 12 months from the date of the consolidated statement of financial position, which are classified as non-current assets. Loans and receivables are included in trade and other accounts receivable in the consolidated statement of financial position (Note 2.12).

 

The regular purchases and sales of financial assets are recognized on the trade date – the date on which the Group commits to purchase or sell the asset. Investments are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or losses are initially recognized at fair value, and transaction costs are expensed in the income statement. Financial assets are derecognized when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership.

 

The financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables are subsequently carried at amortized cost using the effective interest rate method.

At the date of each consolidated statement of financial position, the Company assesses if there is objective evidence that a financial asset or group of financial assets may have suffered an impairment loss.

 

2.10. Derivative financial instruments and hedging activities

 

Derivatives are booked initially at fair value on the date the derivative contracts are signed and later they continue to be valued at their fair value. The method for booking the resultant loss or gain depends on whether the derivative has been designated as a hedging instrument and if so, the nature of the item hedged. The Company designates certain derivatives as:

 

(a)         Hedge of the fair value of recognized assets (fair value hedge);

 

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(b)         Hedge of an identified risk associated with a recognized liability or an expected highly- Probable transaction (cash-flow hedge), or

 

(c)         Derivatives that do not qualify for hedge accounting.

 

The Company documents, at the inception of each transaction, the relationship between the hedging instrument and the hedged item, as well as its objectives for managing risk and the strategy for carrying out various hedging transactions. The Company also documents its assessment, both at the beginning and on an ongoing basis, as to whether the derivatives used in the hedging transactions are highly effective in offsetting the changes in the fair value or cash flows of the items being hedged.

 

The total fair value of the hedging derivatives is booked as Other non-current financial asset or liability if the remaining maturity of the item hedged is over 12 months, and as an other current financial asset or liability if the remaining term of the item hedged is less than 12 months.
Derivatives not booked as hedges are classified as Other financial assets or liabilities.

 

(a) Fair value hedges

 

Changes in the fair value of designated derivatives that qualify as fair value hedges are shown in the consolidated statement of income, together with any change in the fair value of the asset or liability hedged that is attributable to the risk being hedged.

 

(b) Cash flow hedges

 

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is shown in the statement of other comprehensive income. The loss or gain relating to the ineffective portion is recognized immediately in the consolidated statement of income under Other gains (losses). Amounts accumulated in equity are reclassified to profit or loss in the periods when the hedged item affects profit or loss.

 

In case of variable interest-rate hedges, the amounts recognized in the statement of Other comprehensive income are reclassified to results within financial costs at the same time the associated debts accrue interest.

 

For fuel price hedges, the amounts shown in the statement of Other comprehensive income are reclassified to results under the line item Cost of sales to the extent that the fuel subject to the hedge is used.

 

For foreign currency hedges, the amounts recognized in the statement of Other comprehensive income are reclassified to income as deferred revenue resulting from the use of points, are recognized as Income.

 

When hedging instruments mature or are sold or when they do not meet the requirements to be accounted for as hedges, any gain or loss accumulated in the statement of Other comprehensive income until that moment remains in the statement of other comprehensive income and is reclassified to the consolidated statement of income when the hedged transaction is finally recognized. When it is expected that the hedged transaction is no longer going to occur, the gain or loss accumulated in the statement of other comprehensive income is taken immediately to the consolidated statement of income as “Other gains (losses)”.

 

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(c) Derivatives not booked as a hedge

 

The changes in fair value of any derivative instrument that is not booked as a hedge are shown immediately in the consolidated statement of income in “Other gains (losses)”.

 

2.11. Inventories

 

Inventories, detailed in Note 10, are shown at the lower of cost and their net realizable value. The cost is determined on the basis of the weighted average cost method (WAC). The net realizable value is the estimated selling price in the normal course of business, less estimated costs necessary to make the sale.

 

2.12. Trade and other accounts receivable

 

Trade accounts receivable are shown initially at their fair value and later at their amortized cost in accordance with the effective interest rate method, less the allowance for impairment losses. An allowance for impairment loss of trade accounts receivable is made when there is objective evidence that the Company will not be able to recover all the amounts due according to the original terms of the accounts receivable.

 

The existence of significant financial difficulties on the part of the debtor, the probability that the debtor is entering bankruptcy or financial reorganization and the default or delay in making payments are considered indicators that the receivable has been impaired. The amount of the provision is the difference between the book value of the assets and the present value of the estimated future cash flows, discounted at the original effective interest rate. The book value of the asset is reduced by the amount of the allowance and the loss is shown in the consolidated statement of income in Cost of sales. When an account receivable is written off, it is charged to the allowance account for accounts receivable.

 

2.13. Cash and cash equivalents

 

Cash and cash equivalents include cash and bank balances, time deposits in financial institutions, and other short-term and highly liquid investments.

 

2.14. Capital

 

The common shares are classified as net equity.

 

Incremental costs directly attributable to the issuance of new shares or options are shown in net equity as a deduction from the proceeds received from the placement of shares.

 

2.15. Trade and other accounts payables

 

Trade payables and other accounts payable are initially recognized at fair value and subsequently at amortized cost.

 

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2.16. Interest-bearing loans

 

Financial liabilities are shown initially at their fair value, net of the costs incurred in the transaction. Later, these financial liabilities are valued at their amortized cost; any difference between the proceeds obtained (net of the necessary arrangement| costs) and the repayment value, is shown in the consolidated statement of income during the term of the debt, according to the effective interest rate method.

 

Financial liabilities are classified in current and non-current liabilities according to the contractual payment dates of the nominal principal.

 

2.17. Current and deferred taxes

 

The expense by current tax is comprised of income and deferred taxes.

 

The charge for current tax is calculated based on tax laws in force on the date of statement of financial position, in the countries in which the subsidiaries and associates operate and generate taxable income.

 

Deferred taxes are calculated using the liability method, on the temporary differences arising between the tax bases of assets and liabilities and their book values. However, if the temporary differences arise from the initial recognition of a liability or an asset in a transaction different from a business combination that at the time of the transaction does not affect the accounting result or the tax gain or loss, they are not booked. The deferred tax is determined using the tax rates (and laws) that have been enacted or substantially enacted at the consolidated financial statements close, and are expected to apply when the related deferred tax asset is realized or the deferred tax liability discharged.

 

Deferred tax assets are recognized when it is probable that there will be sufficient future tax earnings with which to compensate the temporary differences.

 

The tax (current and deferred) is recognized in income by function, unless it relates to an item recognized in Other comprehensive income, directly in equity or from business combination. In that case the tax is also recognized in Other comprehensive income, directly in income by function or goodwill, respectively.

 

2.18. Employee benefits

 

(a) Personnel vacations

 

The Company recognizes the expense for personnel vacations on an accrual basis.

 

(b) Share-based compensation

 

The compensation plans implemented based on the shares of the Company are recognized in the consolidated financial statements in accordance with IFRS 2: Share-based payments, for plans based on the granting of options, the effect of fair value is recorded in equity with a charge to remuneration in a linear manner between the date of grant of said options and the date on which they become irrevocable, for the plans considered as cash settled award the fair value, updated as of the closing date of each reporting period, is recorded as a liability with charge to remuneration.

 

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(c) Post-employment and other long-term benefits

 

Provisions are made for these obligations by applying the method of the projected unit credit method, and taking into account estimates of future permanence, mortality rates and future wage increases determined on the basis of actuarial calculations. The discount rates are determined by reference to market interest-rate curves. Actuarial gains or losses are shown in other comprehensive income.

 

(d) Incentives

 

The Company has an annual incentives plan for its personnel for compliance with objectives and individual contribution to the results. The incentives eventually granted consist of a given number or portion of monthly remuneration and the provision is made on the basis of the amount estimated for distribution.

 

2.19. Provisions

 

Provisions are recognized when:

 

(i) The Company has a present legal or implicit obligation as a result of past events;

 

(ii) I t is probable that payment is going to be necessary to settle an obligation; and

 

(iii) T he amount has been reliably estimated .

 

2.20. Revenue recognition

 

Revenues include the fair value of the proceeds received or to be received on sales of goods and rendering services in the ordinary course of the Company’s business. R evenues are shown net of refunds, rebates and discounts.

 

(a) Rendering of services

 

(i) Passenger and cargo transport

 

The Company shows revenue from the transportation of passengers and cargo once the service has been provided.

 

Consistent with the foregoing, the Company presents the deferred revenues, generated by anticipated sale of flight tickets and freight services, in heading Other non - financial liabilities in the Statement of Financial Position.

 

(ii) Frequent flyer program

 

The Company currently has a frequent flyer programs, whose objective is customer loyalty through the delivery of kilometers or points fly whenever the programs holders make certain flights, use the services of entities registered with the program or make purchases with an associated credit card. The kilometers or points earned can be exchanged for flight tickets or other services of associated entities.

 

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The consolidated financial statements include liabilities for this concept (deferred income), according to the estimate of the valuation established for the kilometers or points accumulated pending use at that date, in accordance with IFRIC 13: Customer loyalty programs.

 

(iii) Other revenues

 

The Company records revenues for other services when these have been provided.

 

(b) Dividend income

 

Dividend income is booked when the right to receive the payment is established.

 

2.21. Leases

 

(a) When the Company is the lessee – financial lease

 

The Company leases certain Property, plant and equipment in which it has substantially all the risk and benefits deriving from the ownership; they are therefore classified as financial leases. Financial leases are initially recorded at the lower of the fair value of the asset leased and the present value of the minimum lease payments.

 

Every lease payment is separated between the liability component and the financial expenses so as to obtain a constant interest rate over the outstanding amount of the debt. The corresponding leasing obligations, net of financial charges, are included in Other financial liabilities. The element of interest in the financial cost is charged to the consolidated statement of income over the lease period so that it produces a constant periodic rate of interest on the remaining balance of the liability for each year. The asset acquired under a financial lease is depreciated over its useful life and is included in Property, plant and equipment.

 

(b) When the Company is the lessee – operating lease

 

Leases, in which the lessor retains an important part of the risks and benefits deriving from ownership, are classified as operating leases. Payments with respect to operating leases (net of any incentive received from the lessor) are charged in the consolidated statement of income on a straight-line basis over the term of the lease.

 

2.22. Non-current assets or disposal groups classified as held for sale

 

Non-current assets (or disposal groups) classified as assets held for sale are shown at the lesser of their book value and the fair value less costs to sell.

 

2.23. Maintenance

 

The costs incurred for scheduled heavy maintenance of the aircraft’s fuselage and engines are capitalized and depreciated until the next maintenance. The depreciation rate is determined on technical grounds, according to the use of the aircraft expressed in terms of cycles and flight hours.

 

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In case of own aircraft or under financial leases, these maintenance cost are capitalized as Property, plant and equipment, while in the case of aircraft under operating leases, a liability is accrued based on the use of the main components is recognized, since a contractual obligation with the lessor to return the aircraft on agreed terms of maintenance levels exists. These are recognized as Cost of sales.

 

Additionally, some leases establish the obligation of the lessee to make deposits to the lessor as a guarantee of compliance with the maintenance and return conditions. These deposits, often called maintenance reserves, accumulate until a major maintenance is performed, once made, the recovery is requested to the lessor. At the end of the contract period, there is comparison between the reserves that have been paid and required return conditions, and compensation between the parties are made if applicable.

 

The unscheduled maintenance of aircraft and engines, as well as minor maintenance, are charged to results as incurred.

 

2.24. Environmental costs

 

Disbursements related to environmental protection are charged to results when incurred.

 

NOTE 3 - FINANCIAL RISK MANAGEMENT

 

3.1. Financial risk factors

 

The Company is exposed to different financial risks: (a) market risk, (b) credit risk, and (c) liquidity risk. The program overall risk management of the Company aims to minimize the adverse effects of financial risks affecting the company.

 

(a) Market risk

 

Due to the nature of its operations, the Company is exposed to market factors such as: (i) fuel-price risk, (ii) exchange -rate risk, and (iii) interest -rate risk.

 

The Company has developed policies and procedures for managing market risk, which aim to identify, quantify, monitor and mitigate the adverse effects of changes in market factors mentioned above.

 

For this, the Administration monitors the evolution of price levels and rates, and quantifies their risk exposures (Value at Risk), and develops and implements hedging strategies.

 

(i) Fuel-price risk:

 

Exposition:

 

For the execution of its operations the Company purchases a fuel called Jet Fuel grade 54 USGC, which is subject to the fluctuations of international fuel prices.

 

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Mitigation:

 

To cover the risk exposure fuel, the Company operates with derivative instruments (swaps and options) whose underlying assets may be different from Jet Fuel, being possible use West Texas Intermediate (“WTI”) crude, Brent (“BRENT”) crude and distillate Heating Oil (“HO”), which have a high correlation with Jet Fuel and are highly liquid.

 

Fuel Hedging Results:

 

During the period ended at December 31, 2016, the Company recognized losses of US$ 48.0 million on fuel derivative. During the same period of 2015, the Company recognized losses of US$ 239.4 million for the same reason.

 

At December 31, 2016, the market value of its fuel positions amounted to US$ 8.1 million (positive). At December 31, 2015, this market value was US$ 56.4 million (negative).

 

The following tables show the level of hedge for different periods:

 

Positions as of December 31, 2016 (*)   Maturities  
    Q117     Q217     Total  
Percentage of the hedge of expected consumption value     21 %     16 %     18 %

 

(*) The volume shown in the table considers all the hedging instruments (swaps and options).

 

Positions as of December 31, 2015 (*)   Maturities  
    Q116     Q216     Q316     Q416     Total  
Percentage of the hedge of expected consumption value     63 %     27 %     27 %     11 %     32 %

 

(*) The volume shown in the table considers all the hedging instruments (swaps and options).

 

Sensitivity analysis

 

A drop in fuel price positively affects the Company through a reduction in costs. However, also negatively affects contracted positions as these are acquired to protect the Company against the risk of a rise in price. The policy therefore is to maintain a hedge-free percentage in order to be competitive in the event of a drop in price.

 

The current hedge positions they are booked as cash flow hedge contracts, so a variation in the fuel price has an impact on the Company’s net equity.

 

The following table shows the sensitivity analysis of the financial instruments according to reasonable changes in the fuel price and their effect on equity. The term of the projection was defined until the end of the last current fuel hedge contract, being the last business day of the last quarter of 2017.

 

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The calculations were made considering a parallel movement of US$ 5 per barrel in the curve of the BRENT and JET crude futures benchmark price at the end of September 2016 and the end of December, 2015.

 

      Positions as of December 31, 2016     Positions as of December 31, 2015  
Benchmark price     effect on equity     effect on equity  
(US$ per barrel)     (millions of US$)     (millions of US$)  
               
   +5        +3.12       +5.41  
  -5       -4.78       -2.78  

 

Given the fuel hedge structure during the year 2016, which considers a hedge-free portion, a vertical fall by 5 dollars in the JET benchmark price (the monthly daily average), would have meant an impact of approximately US$ 116.3 million in the cost of total fuel consumption for the same period. For the year 2016, a vertical rise by 5 dollars in the JET benchmark price (the monthly daily average) would have meant an impact of approximately US$ 114.5 million of increased fuel costs.

 

(ii) Foreign exchange rate risk:

 

Exposition:

 

The functional and presentation currency of the Financial Statements of the Parent Company is the United States dollar, so the risk of Transactional exchange rate and Conversion arises mainly from its own operating activities of the business, strategic and accounting of the Company are denominated in a different currency than the functional currency.

 

LATAM Subsidiaries are also exposed to currency risk that impacts the consolidated results of the Company.

 

Most currency exposure of LATAM comes from the concentration of business in Brazil, which are mostly denominated in Brazilian Real (BRL), being actively managed by the company.

 

Additionally, the company manages the economic exposure to operating revenues in Pound Sterling (GBP).

 

In lower concentrations the Company is therefore exposed to fluctuations in others currencies, such as: Euro, Australian Dollar, Colombian Peso, Chilean Peso, Argentine Peso, Paraguayan Guaraní, Mexican Peso, Peruvian Sol and New Zealand Dollar.

 

Mitigation :

 

The Company mitigates currency risk exposures by contracting derivative instruments or through natural hedges or execution of internal operations.

 

FX Hedging Results :

 

With the aim of reducing exposure to exchange rate risk on operating cash flows in 2016 and 2017, and secure the operating margin, LATAM and TAM conduct hedging through FX derivatives.

 

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At December 31, 2016, the market value of its FX positions amounted to US$ 1.1 million (negative). At end of December 2015 the market value was of US$ 8.0 million (positive).

 

During the period ended at December 31, 2016 the Company recognized losses of US$ 40.3 million on hedging FX. During the same period of 2015 the Company recognized gains of US$ 19.0 million on hedging FX.

 

At end of December 2016, the Company has contracted FX derivatives for US$ 60 million to BRL and US$ 10 million to GBP. At end of December 2015, the Company had contracted FX for US$ 270 million to BRL, US$ 30 million to EUR and US$ 15 million to GBP.

 

Sensitivity analysis:

 

A depreciation of exchange rate R$/ US$ and US$/GBP, affects negatively the Company for a rise of its costs in US$, however, it also affects positively the value of contracted derivate positions.

 

The FX derivatives are registered for as hedges of cash flow, therefore, a variation in the exchange rate has an impact on the market value of derivatives, whose changes impact on the Company’s net equity.

 

The following table presents the sensitivity of derivative FX Forward instruments agrees with reasonable changes to exchange rate and its effect on equity. The projection term was defined until the end of the last current contract hedge, being the last business day of the first quarter of 2017:

 

Appreciation (depreciation)*     Effect at December 31, 2016     Effect at December 31, 2015  
of  R$ /GBP     Millions of US$     Millions of US$  
               
  -10 %     -1.02       -21.28  
  +10 %     +3.44        +16.71  

 

In the case of TAM S.A. which operates with the Brazilian Real as its functional currency, a large proportion of the company’s assets liabilities are expressed in United States Dollars. Therefore, this subsidiary’s profit and loss varies when its financial assets and liabilities, and its accounts receivable listed in dollars are converted to Brazilian Reals. This impact on profit and loss is consolidated in the Company.

 

In order to reduce the volatility on the financial statements of the Company caused by rises and falls in the R$/US$ exchange rate, the Company has contracted hedging derivatives has conducted transactions for to reduce the net US$ liabilities held by TAM S.A.

 

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The following table shows the variation of financial performance to appreciate or depreciate 10% exchange rate R$/US$:

 

Appreciation (depreciation)*     Effect at December 31, 2016     Effect at December 31, 2015  
of R$/US$     Millons of US$     Millons of US$  
               
  -10 %     +119.2       +67.6  
  +10 %     -119.2       -67.6  

 

(*) Appreciation (depreciation) of US$ regard to the covered currencies.

 

Effects of exchange rate derivatives in the Financial Statements

 

The profit or losses caused by changes in the fair value of hedging instruments are segregated between intrinsic value and temporary value. The intrinsic value is the actual percentage of cash flow covered, initially shown in equity and later transferred to income, while the hedge transaction is recorded in income. The temporary value corresponds to the ineffective portion of cash flow hedge which is recognized in the financial results of the Company (Note 19).

 

Due to the functional currency of TAM S.A. and Subsidiaries is the Brazilian real, the Company presents the effects of the exchange rate fluctuations in Other comprehensive income by converting the Statement of financial position and Income statement of TAM S.A. and Subsidiaries from their functional currency to the U.S. dollar, which is the presentation currency of the consolidated financial statement of LATAM Airlines Group S.A. and Subsidiaries. The Goodwill generated in the Business combination is recognized as an asset of TAM S.A. and Subsidiaries in Brazilian real whose conversion to U.S. dollar also produces effects in Other comprehensive income.

 

The following table shows the change in Other comprehensive income recognized in Total equity in the case of appreciate or depreciate 10% the exchange rate R$/US$:

 

Appreciation (depreciation)     Effect at December 31, 2016     Effect at December 31, 2015  
of R$/US$     Millions of US$     Millions of US$  
               
  -10 %     +351.04       +296.41  
  +10 %     -287.22       -242.52  

 

(iii) Interest -rate risk:

 

Exposition:

 

The Company is exposed to fluctuations in interest rates affecting the markets future cash flows of the assets, and current and future financial liabilities.

 

The Company is exposed in one portion to the variations of London Inter-Bank Offer Rate (“LIBOR”) and other interest rates of less relevance are Brazilian Interbank Deposit Certificate ("ILC"), and the Interest Rate Term of Brazil ("TJLP").

 

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Mitigation :

 

In order to reduce the risk of an eventual rise in interest rates, the Company has signed interest-rate swap and call option contracts. Currently a 63% (71% at December 31, 2015) of the debt is fixed to fluctuations in interest rate.

 

Rate Hedging Results :

 

At December 31, 2016, the market value of the positions of interest rate derivatives amounted to US$ 17.2 million (negative). At end of December 2015 this market value was US$ 39.8 million (negative).

 

Sensitivity analysis:

 

The following table shows the sensitivity of changes in financial obligations that are not hedged against interest-rate variations. These changes are considered reasonably possible, based on current market conditions each date.

 

Increase (decrease)   Positions as of December 31, 2016     Positions as of December 31, 2015  
futures curve   effect on profit or loss before tax     effect on profit or loss before tax  
in libor 3 months   (millions of US$)     (millions of US$)  
             
+100 basis points     -32.16       -26.70  
-100 basis points     +32.16       +26.70  

 

Much of the current rate derivatives are registered for as hedges of cash flow, therefore, a variation in the exchange rate has an impact on the market value of derivatives, whose changes impact on the Company’s net equity.

 

The calculations were made increasing (decreasing) vertically 100 basis points of the three-month Libor futures curve, being both reasonably possible scenarios according to historical market conditions.

 

Increase (decrease)   Positions as of December 31, 2016     Positions as of December 31, 2015  
futures curve   effect on equity     effect on equity  
in libor 3 months   (millions of US$)     (millions of US$)  
             
+100  basis points     +3.93       +8.71  
-100   basis points     -4.03       -9.02  

 

The assumptions of sensitivity calculation must assume that forward curves of interest rates do not necessarily reflect the real value of the compensation flows. Moreover, the structure of interest rates is dynamic over time.

 

During the periods presented, the Company has no registered amounts by ineffectiveness in consolidated statement of income for this kind of hedging.

 

24

 

 

(b) Credit risk

 

Credit risk occurs when the counterparty to a financial agreement or instrument fails to discharge an obligation due or financial instrument, leading to a loss in market value of a financial instrument (only financial assets, not liabilities).

 

The Company is exposed to credit risk due to its operative and financial activities, including deposits with banks and financial institutions, investments in other kinds of instruments, exchange-rate transactions and the contracting of derivative instruments or options.

 

To reduce the credit risk associated with operational activities, the Company has established credit limits to abridge the exposure of their debtors which are monitored permanently (mainly in case of operational activities in Brazil with travel agents).

 

As a way to mitigate credit risk related to financial activities, the Company requires that the counterparty to the financial activities remain at least investment grade by major Risk Assessment Agencies. Additionally the company has established maximum limits for investments which are monitored regularly.

 

(i) Financial activities

 

Cash surpluses that remain after the financing of assets necessary for the operation are invested according to credit limits approved by the Company’s Board, mainly in time deposits with different financial institutions, private investment funds, short-term mutual funds, and easily-liquidated corporate and sovereign bonds with short remaining maturities. These investments are booked as Cash and cash equivalents and Other current financial assets.

 

In order to reduce counterparty risk and to ensure that the risk assumed is known and managed by the Company, investments are diversified among different banking institutions (both local and international). The Company evaluates the credit standing of each counterparty and the levels of investment, based on (i) their credit rating, (ii) the equity size of the counterparty, and (iii) investment limits according to the Company’s level of liquidity. According to these three parameters, the Company chooses the most restrictive parameter of the previous three and based on this, establishes limits for operations with each counterparty.

 

The Company has no guarantees to mitigate this exposure.

 

(ii) Operational activities

 

The Company has four large sales “clusters”: travel agencies, cargo agents, airlines and credit-card administrators. The first three are governed by International Air Transport Association, international (“IATA”) organization comprising most of the airlines that represent over 90% of scheduled commercial traffic and one of its main objectives is to regulate the financial transactions between airlines and travel agents and cargo. When an agency or airline does not pay their debt, they are excluded from operating with IATA’s member airlines. In the case of credit-card administrators, they are fully guaranteed by 100% by the issuing institutions.

 

The exposure consists of the term granted, which fluctuates between 1 and 45 days.

 

25

 

 

One of the tools the Company uses for reducing credit risk is to participate in global entities related to the industry, such as IATA, Business Sales Processing (“BSP”), Cargo Account Settlement Systems (“CASS”), IATA Clearing House (“ICH”) and banks (credit cards). These institutions fulfill the role of collectors and distributors between airlines and travel and cargo agencies. In the case of the Clearing House, it acts as an offsetting entity between airlines for the services provided between them. A reduction in term and implementation of guarantees has been achieved through these entities. Currently the sales invoicing of TAM Linhas Aéreas S.A. related with travel agents and cargo agents for domestic transportation in Brazil is done directly by TAM Linhas Aéreas S.A.

 

Credit quality of financial assets

 

The external credit evaluation system used by the Company is provided by IATA. Internal systems are also used for particular evaluations or specific markets based on trade reports available on the local market. The internal classification system is complementary to the external one, i.e. for agencies or airlines not members of IATA, the internal demands are greater.

 

To reduce the credit risk associated with operational activities, the Company has established credit limits to abridge the exposure of their debtors which are monitored permanently (mainly in case of operational activities of TAM Linhas Aéreas S.A. with travel agents).The bad-debt rate in the principal countries where the Company has a presence is insignificant.

 

(c) Liquidity risk

 

Liquidity risk represents the risk that the Company has no sufficient funds to meet its obligations.

 

Because of the cyclical nature of the business, the operation, and its investment and financing needs related to the acquisition of new aircraft and renewal of its fleet, plus the financing needs, the Company requires liquid funds, defined as cash and cash equivalents plus other short term financial assets, to meet its payment obligations.

 

The liquid funds, the future cash generation and the capacity to obtain additional funding, through bond issuance and banking loans, will allow the Company to obtain sufficient alternatives to face its investment and financing future commitments.

 

The liquid funds balance as of December 31, 2016 is US$ 1,486 million (US$ 1,360 million at December 31, 2015), invested in short term instruments through financial high credit rating levels entities.

 

In addition to the liquid funds, the Company has access to short term credit line. As of December 31, 2016, LATAM has working capital credit lines with multiple banks and additionally has a US$ 325 million undrawn committed credit line (US$ 130 million at December 31, 2015).

 

26

 

 

Class of liability for the analysis of liquidity risk ordered by date of maturity as of December 31, 2016

Debtor: LATAM Airlines Group S.A. and Subsidiaries, Tax No. 89.862.200-2 Chile.

 

                      More than     More than     More than                                    
                Up to     90 days     one to     three to     More than                              
        Creditor       90     to one     three     five     five           Nominal         Effective     Nominal  
Tax No.   Creditor   country   Currency   days     year     years     years     years     Total     value     Amortization   rate     rate  
                ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$         %     %  
                                                                       
Loans to exporters                                                                                    
                                                                                         
97.032.000-8   BBVA   Chile   US$     75,212       -       -       -       -       75,212       75,000     At Expiration     1.85       1.85  
97.032.000-8   BBVA   Chile   UF     -       52,675       -       -       -       52,675       50,381     At Expiration     5.23       4.43  
97.036.000-K   SANTANDER   Chile   US$     30,193       -       -       -       -       30,193       30,000     At Expiration     2.39       2.39  
97.030.000-7   ESTADO   Chile   US$     40,191       -       -       -       -       40,191       40,000     At Expiration     1.91       1.91  
97.003.000-K   BANCO DO BRASIL   Chile   US$     72,151       -       -       -       -       72,151       70,000     At Expiration     3.08       3.08  
97.951.000-4   HSBC   Chile   US$     12,054       -       -       -       -       12,054       12,000     At Expiration     1.79       1.79  
                                                                                         
Obligations with the public                                                                                    
                                                                                         
97.023.000-9   CORPBANCA   Chile   UF     20,808       61,112       63,188       16,529       -       161,637       153,355     Quarterly     4.06       4.06  
0-E   BLADEX   U.S.A.   US$     -       14,579       31,949       -       -       46,528       42,500     Semiannual     5.14       5.14  
0-E   DVB BANK SE   U.S.A.   US$     145       199       28,911       -       -       29,255       28,911     Quarterly     1.86       1.86  
97.036.000-K   SANTANDER   Chile   US$     1,497       4,308       160,556       -       -       166,361       158,194     Quarterly     3.55       3.55  
                                                                                         
Obligations with the public                                                                                    
                                                                                         
0-E   BANK OF NEW YORK   U.S.A.   US$     -       36,250       72,500       518,125       -       626,875       500,000     At Expiration     7.77       7.25  
                                                                                         
Guaranteed obligations                                                                                    
                                                                                         
0-E   CREDIT AGRICOLE   France   US$     11,728       30,916       65,008       33,062       3,760       144,474       138,417     Quarterly     2.21       1.81  
0-E   BNP PARIBAS   U.S.A.   US$     13,805       56,324       142,178       141,965       376,894       731,166       628,118     Quarterly     2.97       2.96  
0-E   WELLS FARGO   U.S.A.   US$     35,896       107,830       287,878       288,338       411,076       1,131,018       1,056,345     Quarterly     2.37       1.68  
0-E   WILMINGTON TRUST COMPANY   U.S.A.   US$     25,833       79,043       206,952       200,674       733,080       1,245,582       967,336     Quarterly     4.25       4.25  
0-E   CITIBANK   U.S.A.   US$     20,224       61,020       164,077       166,165       184,053       595,539       548,168     Quarterly     2.72       1.96  
97.036.000-K   SANTANDER   Chile   US$     5,857       17,697       47,519       48,024       26,448       145,545       138,574     Quarterly     1.98       1.44  
0-E   BTMU   U.S.A.   US$     3,163       9,568       25,752       26,117       27,270       91,870       85,990     Quarterly     2.31       1.72  
0-E   APPLE BANK   U.S.A.   US$     1,551       4,712       12,693       12,891       13,857       45,704       42,754     Quarterly     2.29       1.69  
0-E   US BANK   U.S.A.   US$     18,563       55,592       147,357       146,045       230,747       598,304       532,608     Quarterly     3.99       2.81  
0-E   DEUTSCHE BANK   U.S.A.   US$     6,147       18,599       31,640       31,833       48,197       136,416       117,263     Quarterly     3.86       3.86  
0-E   NATIXIS   France   US$     14,779       44,826       116,809       96,087       206,036       478,537       422,851     Quarterly     2.60       2.57  
0-E   PK AirFinance   U.S.A.   US$     2,265       6,980       19,836       25,610       3,153       57,844       54,787     Monthly     2.40       2.40  
0-E   KFW IPEX-BANK   Germany   US$     2,503       7,587       18,772       9,178       -       38,040       36,191     Quarterly     2.55       2.55  
0-E   AIRBUS FINANCIAL   U.S.A.   US$     1,982       5,972       16,056       7,766       -       31,776       30,199     Monthly     2.49       2.49  
0-E   INVESTEC   England   US$     1,880       10,703       25,369       25,569       23,880       87,401       72,202     Semiannual     5.67       5.67  
                                                                                         
Other guaranteed obligations                                                                                    
                                                                                         
0-E   CREDIT AGRICOLE   France   US$     1,501       4,892       268,922       -       -       275,315       256,860     At Expiration     2.85       2.85  
                                                                                         
Financial leases                                                                                    
                                                                                         
0-E   ING   U.S.A.   US$     5,889       17,671       34,067       12,134       -       69,761       63,698     Quarterly     5.62       4.96  
0-E   CREDIT AGRICOLE   France   US$     1,788       5,457       -       -       -       7,245       7,157     Quarterly     1.85       1.85  
0-E   CITIBANK   U.S.A.   US$     6,083       18,250       48,667       14,262       -       87,262       78,249     Quarterly     6.40       5.67  
0-E   PEFCO   U.S.A.   US$     17,558       50,593       67,095       3,899       -       139,145       130,811     Quarterly     5.39       4.79  
0-E   BNP PARIBAS   U.S.A.   US$     13,744       41,508       79,165       22,474       -       156,891       149,119     Quarterly     3.69       3.26  
0-E   WELLS FARGO   U.S.A.   US$     5,591       16,751       44,615       44,514       1,880       113,351       103,326     Quarterly     3.98       3.54  
0-E   DVB BANK SE   U.S.A.   US$     4,773       9,541       -       -       -       14,314       14,127     Quarterly     2.57       2.57  
0-E   RRPF ENGINE   England   US$     -       -       8,248       8,248       12,716       29,212       25,274     Monthly     2.35       2.35  
                                                                                         
Other loans                                                                                    
                                                                                         
0-E   BOEING   U.S.A.   US$     163       320       26,214       -       -       26,697       26,214     At Expiration     2.35       2.35  
0-E   CITIBANK (*)   U.S.A.   US$     25,802       77,795       207,001       103,341       -       413,939       370,389     Quarterly     6.00       6.00  
                                                                                         
Hedging derivatives                                                                                    
                                                                                         
-   OTHERS   -   US$     7,364       15,479       7,846       -       -       30,689       -     -     0.00       0.00  
                                                                                         
     Total             508,683       944,749       2,476,840       2,002,850       2,303,047       8,236,169       7,257,368                      

 

(*) Securitized bond with the future flows from the sales with credit card in United States and Canada.

 

27

 

 

Class of liability for the analysis of liquidity risk ordered by date of maturity as of December 31, 2016

Debtor: TAM S.A. and Subsidiaries, Tax No. 02.012.862/0001-60, Brazil.

 

                      More than     More than     More than                                    
                Up to     90 days     one to     three to     More than                              
        Creditor       90     to one     three     five     five           Nominal         Effective     Nominal  
Tax No.   Creditor   country   Currency   days     year     years     years     years     Total     value     Amortization   rate     rate  
                ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$         %     %  
                                                                       
Bank loans                                                                                    
                                                                                         
0-E   NEDERLANDSCHE                                                                                    
    CREDIETVERZEKERING MAATSCHAPPIJ   Holland   US$     179       493       1,315       1,314       54       3,355       2,882     Monthly     6.01       6.01  
0-E   CITIBANK   U.S.A.   US$     1,528       203,150       -       -       -       204,678       200,000     At Expiration     3.39       3.14  
                                                                                         
Obligation with the public                                                                                    
                                                                                         
0-E   THE BANK OF NEW YORK   U.S.A.   US$     -       352,938       83,750       562,813       -       999,501       800,000     At Expiration     8.17       8.00  
                                                                                         
Financial leases                                                                                    
                                                                                         
0-E   AFS INVESTMENT IX LLC   U.S.A.   US$     2,733       7,698       20,522       8,548       -       39,501       35,448     Monthly     1.25       1.25  
0-E   DVB BANK SE   U.S.A.   US$     120       165       -       -       -       285       282     Monthly     2.50       2.50  
0-E                                                                                        
    GENERAL ELECTRIC CAPITAL CORPORATION   U.S.A.   US$     3,852       5,098       -       -       -       8,950       8,846     Monthly     2.30       2.30  
0-E   KFW IPEX-BANK   Germany   US$     592       1,552       -       -       -       2,144       2,123     Monthly/Quarterly     2.80       2.80  
0-E   NATIXIS   France   US$     4,290       7,837       22,834       40,968       41,834       117,763       107,443     Quarterly/Semiannual     4.90       4.90  
0-E   WACAPOU LEASING S.A.   Luxemburg   US$     833       2,385       6,457       6,542       -       16,217       14,754     Quarterly     3.00       3.00  
0-E   SOCIÉTÉ GÉNÉRALE  MILAN BRANCH   Italy   US$     11,875       32,116       85,995       171,553       -       301,539       279,335     Quarterly     4.18       4.11  
0-E   BANCO IBM S.A   Brazil   BRL     380       1,161       35       -       -       1,576       1,031     Monthly     13.63       13.63  
0-E   HP FINANCIAL SERVICE   Brazil   BRL     225       -       -       -       -       225       222     Monthly     10.02       10.02  
0-E   SOCIÉTÉ GÉNÉRALE   France   BRL     146       465       176       -       -       787       519     Monthly     13.63       13.63  
                                                                                         
     Total             26,753       615,058       221,084       791,738       41,888       1,696,521       1,452,885                      

 

28

 

 

Class of liability for the analysis of liquidity risk ordered by date of maturity as of December 31, 2016

Debtor: LATAM Airlines Group S.A. and Subsidiaries, Tax No. 89.862.200-2, Chile.

 

                      More than     More than     More than                                    
                Up to     90 days     one to     three to     More than                              
        Creditor       90     to one     three     five     five           Nominal         Effective     Nominal  
Tax No.   Creditor   country   Currency   days     year     years     years     years     Total     value     Amortization   rate     rate  
                ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$         %     %  
                                                                       
Trade and other accounts payables                                                                                    
                                                                                         
-   OTHERS   OTHERS   US$     549,897       21,215       -       -       -       571,112       571,112     -     -       -  
            CLP     48,842       (30 )     -       -       -       48,812       48,812     -     -       -  
            BRL     346,037       27       -       -       -       346,064       346,064     -     -       -  
            Other currencies     140,471       11,467       -       -       -       151,938       151,938     -     -       -  
Accounts payable to related parties currents                                                                                    
0-E   Consultoría Administrativa Profesional S.A. de C.V.   Mexico   MXN     170       -       -       -       -       170       170     -     -       -  
78.997.060-2   Viajes Falabella Ltda.   Chile   CLP     46       -       -       -       -       46       46     -     -       -  
0-E   TAM Aviação Executiva e Taxi Aéreo S.A.   Brazil   BRL     28       -       -       -       -       28       28     -     -       -  
65.216.000-K   Comunidad Mujer   Chile   CLP     13       -       -       -       -       13       13     -     -       -  
78.591.370-1   Bethia S.A. y Filiales   Chile   CLP     6       -       -       -       -       6       6     -     -       -  
79.773.440-3   Transportes San Felipe S:A.   Chile   CLP     4       -       -       -       -       4       4     -     -       -  
0-E   Inversora Aeronáutica Argentina   Argentina   US$     2       -       -       -       -       2       2     -     -       -  
                                                                                         
     Total             1,085,516       32,679       -       -       -       1,118,195       1,118,195                      
                                                                                         
     Total  consolidated             1,620,952       1,592,486       2,697,924       2,794,588       2,344,935       11,050,885       9,828,448                      

 

29

 

 

Class of liability for the analysis of liquidity risk ordered by date of maturity as of December 31, 2015

Debtor: LATAM Airlines Group S.A. and Subsidiaries, Tax No. 89.862.200-2 Chile.

 

                      More than     More than     More than                                    
                Up to     90 days     one to     three to     More than                              
        Creditor       90     to one     three     five     five           Nominal         Effective     Nominal  
Tax No.   Creditor   country   Currency   days     year     years     years     years     Total     value     Amortization   rate     rate  
                ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$         %     %  
                                                                       
Loans to exporters                                                                                    
                                                                                         
97.032.000-8   BBVA   Chile   US$     100,253       -       -       -       -       100,253       100,000     At Expiration     1.00       1.00  
97.036.000-K   SANTANDER   Chile   US$     100,363       -       -       -       -       100,363       100,000     At Expiration     1.44       1.44  
97.030.000-7   ESTADO   Chile   US$     55,172       -       -       -       -       55,172       55,000     At Expiration     1.05       1.05  
97.004.000-5   BANCO DE CHILE   Chile   US$     50,059       -       -       -       -       50,059       50,000     At Expiration     1.42       1.42  
97.003.000-K   BANCO DO BRASIL   Chile   US$     70,133       -       -       -       -       70,133       70,000     At Expiration     1.18       1.18  
97.951.000-4   HSBC   Chile   US$     12,020       -       -       -       -       12,020       12,000     At Expiration     0.66       0.66  
                                                                                         
Bank loans                                                                                        
                                                                                         
97.023.000-9   CORPBANCA   Chile   UF     19,873       58,407       112,252       35,953       -       226,485       211,135     Quarterly     4.18       4.18  
0-E   BANCO BLADEX   U.S.A.   US$     -       9,702       30,526       15,514       -       55,742       50,000     Semiannual     4.58       4.58  
0-E   DVB BANK SE   U.S.A.   US$     146       430       154,061       -       -       154,637       153,514     Quarterly     1.67       1.67  
97.036.000-K   SANTANDER   Chile   US$     1,053       -       226,712       -       -       227,765       226,712     Quarterly     2.24       2.24  
                                                                                         
Obligations with the public                                                                                    
                                                                                         
0-E   BANK OF NEW YORK   U.S.A.   US$     -       36,250       72,500       554,375       -       663,125       500,000     At Expiration     7.77       7.25  
                                                                                         
Guaranteed obligations                                                                                    
                                                                                         
0-E   CREDIT AGRICOLE   Francia   US$     31,813       92,167       210,541       55,381       12,677       402,579       389,027     Quarterly     1.83       1.66  
0-E   BNP PARIBAS   U.S.A.   US$     9,899       29,975       82,094       83,427       148,904       354,299       319,397     Quarterly     2.29       2.22  
0-E   WELLS FARGO   U.S.A.   US$     35,636       106,990       285,967       286,959       554,616       1,270,168       1,180,751     Quarterly     2.27       1.57  
0-E   WILMINGTON TRUST   U.S.A.   US$     6,110       69,232       135,334       133,363       539,019       883,058       675,696     Quarterly     4.25       4.25  
0-E   CITIBANK   U.S.A.   US$     19,478       58,741       158,957       162,459       266,273       665,908       617,002     Quarterly     2.40       1.64  
97.036.000-K   SANTANDER   Chile   US$     5,585       16,848       45,653       46,740       50,124       164,950       159,669     Quarterly     1.47       0.93  
0-E   BTMU   U.S.A.   US$     2,992       9,035       24,541       25,214       39,930       101,712       96,954     Quarterly     1.82       1.22  
0-E   APPLE BANK   U.S.A.   US$     1,471       4,445       12,079       12,431       20,099       50,525       48,142     Quarterly     1.72       1.12  
0-E   US BANK   U.S.A.   US$     18,643       55,824       147,994       146,709       303,600       672,770       591,039     Quarterly     3.99       2.81  
0-E   DEUTSCHE BANK   U.S.A.   US$     5,923       17,881       39,185       30,729       63,268       156,986       136,698     Quarterly     3.40       3.40  
0-E   NATIXIS   France   US$     13,740       41,730       115,026       100,617       249,194       520,307       469,423     Quarterly     2.08       2.05  
0-E   HSBC   U.S.A.   US$     1,590       4,790       12,908       13,112       25,175       57,575       53,583     Quarterly     2.40       1.59  
0-E   PK AirFinance   U.S.A.   US$     2,172       6,675       18,928       20,812       18,104       66,691       62,514     Monthly     2.04       2.04  
0-E   KFW IPEX-BANK   Germany   US$     728       2,232       5,684       4,131       1,658       14,433       13,593     Quarterly     2.45       2.45  
                                                                                         
Other guaranteed obligations                                                                                    
                                                                                         
0-E   DVB BANK SE   U.S.A.   US$     8,225       24,695       -       -       -       32,920       32,492     Quarterly     2.32       2.32  
                                                                                         
Financial leases                                                                                    
                                                                                         
0-E   ING   U.S.A.   US$     9,214       26,054       41,527       28,234       -       105,029       94,998     Quarterly     5.13       4.57  
0-E   CREDIT AGRICOLE   France   US$     1,711       5,236       7,216       -       -       14,163       13,955     Quarterly     1.28       1.28  
0-E   CITIBANK   U.S.A.   US$     6,083       18,250       48,667       38,596       -       111,596       97,383     Quarterly     6.40       5.67  
0-E   PEFCO   U.S.A.   US$     17,556       52,674       115,934       23,211       -       209,375       192,914     Quarterly     5.37       4.77  
0-E   BNP PARIBAS   U.S.A.   US$     11,368       34,292       86,206       31,782       -       163,648       153,107     Quarterly     4.08       3.64  
0-E   WELLS FARGO   U.S.A.   US$     5,594       16,768       44,663       44,565       24,125       135,715       121,628     Quarterly     3.98       3.54  
0-E   DVB BANK SE   U.S.A.   US$     4,732       14,225       14,269       -       -       33,226       32,567     Quarterly     2.06       2.06  
0-E   BANC OF AMERICA   U.S.A.   US$     703       2,756       -       -       -       3,459       2,770     Monthly     1.41       1.41  
                                                                                         
Other loans                                                                                        
                                                                                         
0-E   BOEING   U.S.A.   US$     655       533       151,362       -       -       152,550       151,362     At Expiration     1.80       1.80  
0-E   CITIBANK (*)   U.S.A.   US$     25,820       77,850       207,190       206,749       -       517,609       450,000     Quarterly     6.00       6.00  
                                                                                         
Hedging derivatives                                                                                    
                                                                                         
-   OTROS   -   US$     12,232       33,061       40,986       3,688       16       89,983       85,653     -     0.00       0.00  
                                                                                         
     Total             668,745       927,748       2,648,962       2,104,751       2,316,782       8,666,988       7,770,678                      

 

(*) Securitized bond with the future flows from the sales with credit card in United States and Canada.

 

30

 

 

Class of liability for the analysis of liquidity risk ordered by date of maturity as of December 31, 2015

Debtor: TAM S.A. and Subsidiaries, Tax No. 02.012.862/0001-60, Brazil.

 

                      More than     More than     More than                                    
                Up to     90 days     one to     three to     More than                              
        Creditor       90     to one     three     five     five           Nominal         Effective     Nominal  
Tax No.   Creditor   country   Currency   days     year     years     years     years     Total     value     Amortization   rate     rate  
                ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$         %     %  
Bank loans                                                                  
                                                                                         
0-E   NEDERLANDSCHE                                                                                    
    CREDIETVERZEKERING MAATSCHAPPIJ   Holland   US$     181       493       1,315       1,314       712       4,015       3,353     Monthly     6.01       6.01  
                                                                                         
Obligation with the public                                                                                    
                                                                                         
0-E   BANK OF NEW YORK   U.S.A.   US$     440       65,321       397,785       86,590       521,727       1,071,863       800,000     At Expiration     8.17       8.00  
                                                                                         
Financial leases                                                                                    
                                                                                         
0-E   AFS INVESTMENT IX LLC   U.S.A.   US$     2,771       7,700       20,527       18,808       -       49,806       43,505     Monthly     1.25       1.25  
0-E   AIRBUS FINANCIAL   U.S.A.   US$     3,715       11,054       21,830       15,730       -       52,329       49,995     Monthly     1.43       1.43  
0-E   CREDIT AGRICOLE -CIB   France   US$     4,542       -       -       -       -       4,542       4,500     Quarterly/Semiannual     3.25       3.25  
0-E   DVB BANK SE   U.S.A.   US$     123       361       284       -       -       768       755     Monthly     1.64       1.64  
0-E   GENERAL ELECTRIC CAPITAL CORPORATION   U.S.A.   US$     3,834       11,437       9,050       -       -       24,321       23,761     Monthly     1.25       1.25  
0-E   KFW IPEX-BANK   Germany   US$     3,345       6,879       15,973       12,429       -       38,626       36,899     Monthly/Quarterly     1.72       1.72  
0-E   NATIXIS   France   US$     4,338       7,812       22,635       23,030       70,925       128,740       115,020     Quarterly/Semiannual     3.85       3.85  
0-E   PK AIRFINANCE US, INC.   U.S.A.   US$     1,428       21,992       -       -       -       23,420       23,045     Monthly     1.75       1.75  
0-E   WACAPOU LEASING S.A.   Luxemburg   US$     520       1,386       3,198       14,567       -       19,671       18,368     Quarterly     2.00       2.00  
0-E   SOCIÉTÉ GÉNÉRALE  MILAN BRANCH   Italy   US$     11,993       31,874       85,695       214,612       -       344,174       312,486     Quarterly     3.63       3.55  
0-E   BANCO IBM S.A   Brazil   BRL     267       846       1,230       -       -       2,343       1,728     Monthly     14.14       14.14  
0-E   HP FINANCIAL SERVICE   Brazil   BRL     188       564       188       -       -       940       882     Monthly     10.02       10.02  
0-E   SOCIÉTÉ GÉNÉRALE   France   BRL     104       330       626       -       -       1,060       775     Monthly     14.14       14.14  
                                                                                         
     Total             37,789       168,049       580,336       387,080       593,364       1,766,618       1,435,072                      

 

31

 

 

Class of liability for the analysis of liquidity risk ordered by date of maturity as of December 31, 2015

Debtor: LATAM Airlines Group S.A. and Subsidiaries, Tax No. 89.862.200-2, Chile.

 

                      More than     More than     More than                                      
                Up to     90 days     one to     three to     More than                                
        Creditor       90     to one     three     five     five           Nominal           Effective     Nominal  
Tax No.   Creditor   country   Currency   days     year     years     years     years     Total     value     Amortization     rate     rate  
                ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$           %     %  
                                                                         
Trade and other accounts payables                                                                                        
-   OTHERS   OTHERS   US$     442,320       14,369       -       -       -       456,689       456,689       -       -       -  
            CLP     39,823       114       -       -       -       39,937       39,937       -       -       -  
            BRL     301,569       16       -       -       -       301,585       301,585       -       -       -  
            Others currencies     218,347       9,016       -       -       -       227,363       227,363       -       -       -  
                                                                                             
Accounts payable to related parties currents                                                                                        
65.216.000-K   COMUNIDAD MUJER   Chile   CLP     10       -       -       -       -       10       10       -       -       -  
78.591.370-1   BETHIA S.A. Y FILIALES   Chile   CLP     5       -       -       -       -       5       5       -       -       -  
78.997.060-2   Viajes Falabella Ltda.   Chile   CLP     68                                       68       68       -       -       -  
0-E   Consultoría Administrativa Profesional   Mexico   MXN     342       -       -       -       -       342       342       -       -       -  
0-E   INVERSORA AERONÁUTICA ARGENTINA   Argentina   US$     22       -       -       -       -       22       22       -       -       -  
                                                                                             
     Total             1,002,506       23,515       -       -       -       1,026,021       1,026,021                          
                                                                                             
     Total  consolidated             1,709,040       1,119,312       3,229,298       2,491,831       2,910,146       11,459,627       10,231,771                          

 

32

 

 

The Company has fuel, interest rate and exchange rate hedging strategies involving derivatives contracts with different financial institutions. The Company has margin facilities with each financial institution in order to regulate the mutual exposure produced by changes in the market valuation of the derivatives.

 

At the end of 2015, the Company provided US$ 49.6 million in derivative margin guarantees, for cash and stand-by letters of credit. At December 31, 2016, the Company had provided US$ 30.2 million in guarantees for Cash and cash equivalent and stand-by letters of credit. The decrease was due at: i) maturity of hedge contracts, ii) acquire of new fuel purchase contracts, and iii) changes in fuel prices, exchange rate and interest rates.

 

3.2. Capital risk management

 

The Company’s objectives, with respect to the management of capital, are (i) to comply with the restrictions of minimum equity and (ii) to maintain an optimal capital structure.

 

The Company monitors its contractual obligations and the regulatory limitations in the different countries where the entities of the group are domiciled to assure they meet the limit of minimum net equity, where the most restrictive limitation is to maintain a positive net equity.

 

Additionally, the Company periodically monitors the short and long term cash flow projections to assure the Company has adequate sources of funding to generate the cash requirement to face its investment and funding future commitments.

 

The Company international credit rating is the consequence of the Company capacity to face its long terms financing commitments. As of December 31, 2016 the Company has an international long term credit rating of BB- with negative outlook by Standard & Poor’s, a B+ rating with negative outlook by Fitch Ratings and a B1 rating with stable outlook by Moody’s.

 

3.3. Estimates of fair value.

 

At December 31, 2016, the Company maintained financial instruments that should be recorded at fair value. These are grouped into two categories:

 

1. Hedge Instruments:

 

This category includes the following instruments:

 

- Interest rate derivative contracts,

 

- Fuel derivative contracts,

 

- Currency derivative contracts.

 

33

 

 

2. Financial Investments:

 

This category includes the following instruments:

 

- Investments in short-term Mutual Funds (cash equivalent),

 

- Private investment funds.

 

The Company has classified the fair value measurement using a hierarchy that reflects the level of information used in the assessment. This hierarchy consists of 3 levels (I) fair value based on quoted prices in active markets for identical assets or liabilities, (II) fair value calculated through valuation methods based on inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) and (III) fair value based on inputs for the asset or liability that are not based on observable market data.

 

The fair value of financial instruments traded in active markets, such as investments acquired for trading, is based on quoted market prices at the close of the period using the current price of the buyer. The fair value of financial assets not traded in active markets (derivative contracts) is determined using valuation techniques that maximize use of available market information. Valuation techniques generally used by the Company are quoted market prices of similar instruments and / or estimating the present value of future cash flows using forward price curves of the market at period end.

 

The following table shows the classification of financial instruments at fair value, depending on the level of information used in the assessment:

 

    As of December 31, 2016     As of December 31, 2015  
          Fair value measurements using values           Fair value measurements using values  
          considered as           considered as  
    Fair value     Level I     Level II     Level III     Fair value     Level I     Level II     Level III  
    ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$  
                                                 
Assets                                                                
Cash and cash equivalents     15,522       15,522       -       -       26,600       26,600       -       -  
Short-term mutual funds     15,522       15,522       -       -       26,600       26,600       -       -  
                                                                 
Other financial assets, current     548,402       536,991       11,411       -       622,963       606,385       16,578       -  
Fair value of fuel derivatives     10,088       -       10,088       -       6,293       -       6,293       -  
Fair value of foreign currency derivatives     1,259       -       1,259       -       9,888       -       9,888       -  
Interest accrued since the last payment date of Cross Currency Swap     64       -       64       -       397       -       397       -  
Private investment funds     536,991       536,991       -       -       448,810       448,810       -       -  
Domestic and foreign bonds     -       -       -       -       157,575       157,575       -       -  
                                                                 
Liabilities                                                                
Other financial liabilities, current     24,881       -       24,881       -       134,089       -       134,089       -  
Fair value of interest rate derivatives     9,579       -       9,579       -       33,518       -       33,518       -  
Fair value of fuel derivatives     -       -       -       -       39,818               39,818          
Fair value of foreign currency derivatives     13,155       -       13,155       -       56,424       -       56,424       -  
Interest accrued since the last payment date of Currency Swap     2,147       -       2,147       -       4,329       -       4,329       -  
Interest rate derivatives not recognized as a hedge     -       -       -       -       -               -          
                                                                 
Other financial liabilities, non current     6,679       -       6,679       -       16,128       -       16,128       -  
Fair value of interest rate derivatives     6,679       -       6,679       -       16,128       -       16,128       -  

 

34

 

 

Additionally, at December 31, 2016, the Company has financial instruments which are not recorded at fair value. In order to meet the disclosure requirements of fair values, the Company has valued these instruments as shown in the table below:

 

    As of  December 31, 2016     As of  December 31, 2015  
    Book     Fair     Book     Fair  
    value     value     value     value  
    ThUS$     ThUS$     ThUS$     ThUS$  
             
Cash and cash equivalents     933,805       933,805       726,897       726,897  
Cash on hand     8,630       8,630       10,656       10,656  
Bank balance     255,746       255,746       255,421       255,421  
Overnight     295,060       295,060       267,764       267,764  
Time deposits     374,369       374,369       193,056       193,056  
Other financial assets, current     164,426       164,426       28,385       28,385  
Other financial assets     164,426       164,426       28,385       28,385  
                                 
Trade and other accounts receivable current     1,107,889       1,107,889       796,974       796,974  
Accounts receivable from related entities     554       554       183       183  
Other financial assets, non current     102,125       102,125       89,458       89,458  
Accounts receivable     8,254       8,254       10,715       10,715  
                                 
Other financial liabilities, current     1,814,647       2,022,290       1,510,146       1,873,552  
Trade and other accounts payables     1,593,068       1,593,068       1,483,957       1,483,957  
Accounts payable to related entities     269       269       447       447  
Other financial liabilities, non current     6,790,273       6,970,375       7,516,257       7,382,221  
Accounts payable, non-current     359,391       359,391       417,050       417,050  

 

The book values of accounts receivable and payable are assumed to approximate their fair values, due to their short-term nature. In the case of cash on hand, bank balances, overnight, time deposits and accounts payable, non-current, fair value approximates their carrying values.

 

The fair value of Other financial liabilities is estimated by discounting the future contractual cash flows at the current market interest rate for similar financial instruments (Level II). In the case of Other financial assets, the valuation was performed according to market prices at period end.

 

35

 

 

NOTE 4 - ACCOUNTING ESTIMATES AND JUDGMENTS

 

The Company has used estimates to value and record certain assets, liabilities, revenue, expenditure, and commitments. Basically, these estimates relate to:

 

(a)        Evaluation of possible losses through impairment of goodwill and intangible assets with an indefinite useful life.

 

As of December 31, 2016 goodwill amounted to ThUS$ 2,710,382 (ThUS$ 2,280,575 at December 31, 2015), while intangible assets with an indefinite useful life comprised airport slots for ThUS$ 978,849 (ThUS$ 816,987 at December 31, 2015), Loyalty Program for ThUS$ 326,262 (ThUS$ 272,312 at December 31, 2015) and Trademarks (*) for ThUS$ 52.981 at December 31, 2015.

 

At least once per year the Company verifies whether goodwill and intangible assets with an indefinite useful life have suffered any losses through impairment. For the purposes of this evaluation, the Company has identified two cash-generating units (CGUs): “Air transport” and “Multiplus loyalty and coalition program.” The book value of goodwill assigned to each CGU as of December 31, 2016, amounted to ThUS$ 2,176,634 and ThUS$ 533,748 (ThUS$ 1,835,088 and ThUS$ 445,487 at December 31, 2015), which included intangible assets with undefined useful life:

 

    Air Transport
CGU 		    Coalition and loyalty
Program Multiplus CGU 		 
    As of     As of     As of     As of  
    December 31,     December 31,     December 31,     December 31,  
    2016     2015     2016     2015  
    ThUS$     ThUS$     ThUS$     ThUS$  
                         
Airport Slots     978,849       816,987       -       -  
Trade marks (*)     -       52,981       -       -  
Loyalty program     -       -       326,262       272,312  

 

(*) At December 31, 2016, the Company has changed the estimated useful life of the brands from an indefinite useful life to a five-year period (See Note 15).

 

The recoverable value of these cash-generating units (CGUs) has been determined based on calculations of their value in use. The principal assumptions used by the management include: growth rate, exchange rate, discount rate, fuel prices, and other economic assumptions. The estimation of these assumptions requires significant judgment by the management, as these variables feature inherent uncertainty; however, the assumptions used are consistent with Company’s internal planning. Therefore, management evaluates and updates the estimates on an annual basis, in light of conditions that affect these variables. The mainly assumptions used as well as, the corresponding sensitivity analyses are showed in Note 16.

 

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(b)        Useful life, residual value, and impairment of property, plant, and equipment

 

The depreciation of assets is calculated based on the linear model, except for certain technical components depreciated on cycles and hours flown. These useful lives are reviewed on an annual basis according with the Company’s future economic benefits associated with them.

 

Changes in circumstances such as: technological advances, business model, planned use of assets or capital strategy may render the useful life different to the lifespan estimated. When it is determined that the useful life of property, plant, and equipment must be reduced, as may occur in line with changes in planned usage of assets, the difference between the net book value and estimated recoverable value is depreciated, in accordance with the revised remaining useful life.

 

Residual values are estimated in accordance with the market value that these assets will have at the end of their useful life. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, once a year. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (note 2.8).

 

(c)        Recoverability of deferred tax assets

 

Deferred taxes are calculated in accordance with the liability method, applied over temporary differences that arise between the fiscal based of assets and liabilities, and their book value. Deferred tax assets for tax losses are recognized to the extent that the realization of the related tax benefit through future taxable profits is probable. The Company makes tax and financial projections to evaluate the realization of deferred tax asset over the course of time. Additionally, these projections are ensured to be consistent with those used to measure other long term assets. As of December 31, 2016 the company recognized deferred tax assets amounting to ThUS$ 384,580 (ThUS$ 376,595 at December 31, 2015), and had ceased to recognize deferred tax assets for tax losses amounting to ThUS$ 115,801 (ThUS$ 15,513 at December 31, 2015) (Note 18).

 

(d)        Air tickets sold that are not actually used.

 

The Company advance sales of tickets as deferred revenue. Revenue from ticket sales is recognized in the income statement when the service is provided or when the tickets expires unused, reducing the corresponding deferred revenue. The Company evaluates monthly the probability that tickets expiry unused, based on the history of used tickets. Changes in the exchange probability would have an impact our revenue in the year in which the change occurs and in future years. As of December 31, 2016, deferred revenue associated with air tickets sold amounted to ThUS$ 1,535,229 (ThUS$ 1,223,886 as of December 31, 2015). An hypothetical change of 1% in passenger behavior regarding to the ticket usage, - that is, if during the next six months after sells probability of used were 89% rather than 90%, as we consider, it would lead to a change in the expiry period from six to seven months, which, as of December 31, 2016, would have an impact of up to ThUS$ 20,000.

 

(e)        Valuation of loyalty points and kilometers granted to loyalty program members, pending usage.

 

37

 

 

As of December 31, 2016 and December 31, 2015, the Company operated the following loyalty programs: LATAM Pass, LATAM Fidelidade and Multiplus, with the objective of enhancing customer loyalty by offering points or kilometers (see Note 22).

 

When kilometers and points are redeemed for products and services other than the services provided by the Company, revenue is recognized immediately; when they are redeemed for air tickets on airlines from to LATAM Airlines Group S.A. and subsidiaries, revenue is deferred until the transport service is provided or the corresponding tickets expired.

 

Deferred revenue from loyalty programs at the closing date corresponds to the valuation of points and kilometers granted to loyalty program members, pending of use, and the probability to be redeemed.

 

According to IFRIC-13, kilometers and points value that the Company estimate are not likely to be redeemed (“breakage”), they recognize the associated value proportionally during the period in which the remaining kilometers or points are expected to be redeemed. The Company uses statistical models to estimate the breakage, based on historical redemption patterns Changes in the breakage would have a significant impact on our revenue in the year in which the change occurs and in future years.

 

As of December 31, 2016, deferred revenue associated with the LATAM Pass loyalty program amounted to ThUS$ 896,190 (ThUS$ 973,264 at December 31, 2015). As of December 31, 2016 a hypothetical change of 1% in the probability of usage would result in an impact of approximately ThUS$ 30,632 and ThUS$ 30,000 at the same period of 2015. Meanwhile, deferred revenue associated with the LATAM Fidelidade and Multiplus loyalty programs amounted to ThUS$ 392,107 (ThUS$ 452,264 at December 31, 2015). As of December 31, 2016 a hypothetical change of 2% in the probability of usage would result in an impact of approximately ThUS$ 14,639 and ThUS$ 11,755 at the same period of 2015.

 

The fair value of kilometers is determined by the Company based in its best estimate of the price at which they have been sold in the past. As of December 31, 2016 a hypothetical change of 1% in the fair value of the unused kilometers would result in an impact of approximately ThUS$ 8,400 and ThUS$ 8,800 at the same period of 2015.

 

(f)        Provisions needs, and their valuation when required

 

Known contingencies are recognized when: the Company has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated. The Company applies professional judgment, experience, and knowledge to use available information to determine these values, in light of the specific characteristics of known risks. This process facilitates the early assessment and valuation of potential risks in individual cases or in the development of contingent eventualities.

 

(g)       Investment in subsidiary (TAM)

 

The management has applied its judgment in determining that LATAM Airlines Group S.A. controls TAM S.A. and Subsidiaries, for accounting purposes, and has therefore consolidated the financial statements.

 

38

 

 

The grounds for this decision are that LATAM issued ordinary shares in exchange for the majority of circulating ordinary and preferential shares in TAM, except for those TAM shareholders who did not accept the exchange, which were subject to a squeeze out, entitling LATAM to substantially all economic benefits generated by the LATAM Group, and thus exposing it to substantially all risks relating to the operations of TAM. This exchange aligns the economic interests of LATAM and all of its shareholders, including the controlling shareholders of TAM, thus insuring that the shareholders and directors of TAM shall have no incentive to exercise their rights in a manner that would be beneficial to TAM but detrimental to LATAM. Furthermore, all significant actions necessary of the operation of the airlines require votes in favor by the controlling shareholders of both LATAM and TAM.

 

Since the integration of LAN and TAM operations, the most critical airline operations in Brazil have been managed by the CEO of TAM while global activities have been managed by the CEO of LATAM, who is in charge of the operation of the LATAM Group as a whole and reports to the LATAM Board.

 

The CEO of LATAM also evaluates the performance of LATAM Group executives and, together with the LATAM Board, determines compensation. Although Brazilian law currently imposes restrictions on the percentages of voting rights that may be held by foreign investors, LATAM believes that the economic basis of these agreements meets the requirements of accounting standards in force, and that the consolidation of the operations of LAN and LATAM is appropriate.

 

These estimates were made based on the best information available relating to the matters analyzed.

 

In any case, it is possible that events that may take place in the future could lead to their modification in future reporting periods, which would be made in a prospective manner.

 

NOTE 5 - SEGMENTAL INFORMATION

 

The Company has determined that it has two operating segments: the air transportation business and the coalition and loyalty program Multiplus.

 

The Air transport segment corresponds to the route network for air transport and it is based on the way that the business is run and managed, according to the centralized nature of its operations, the ability to open and close routes and reallocate resources (aircraft, crew, staff, etc..) within the network, which is a functional relationship between all of them, making them inseparable. This segment definition is the most common level used by the global airline industry.

 

The segment of loyalty coalition called Multiplus, unlike LATAM Pass and LATAM Fidelidade, is a frequent flyer programs which operate as a unilateral system of loyalty that offers a flexible coalition system, interrelated among its members, with 16.5 million of members, along with being a regulated entity with a separately business and not directly related to air transport.

 

39

 

 

For the periods ended         Coalition and              
    Air     loyalty program              
    transportation     Multiplus     Eliminations     Consolidated  
    At December 31,     At December 31,     At December 31,     At December 31,  
    2016     2015     2016     2015     2016     2015     2016     2015  
    ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$  
                                                 
Income from ordinary activities from external customers (*)     8,587,772       9,278,041       400,568       462,004       -       -       8,988,340       9,740,045  
LAN passenger     4,104,348       4,241,918       -       -       -       -       4,104,348       4,241,918  
TAM passenger     3,372,799       3,706,692       400,568       462,004       -       -       3,773,367       4,168,696  
Freight     1,110,625       1,329,431       -       -       -       -       1,110,625       1,329,431  
Income from ordinary activities from transactions with other operating segments     400,568       462,004       65,969       67,826       (466,537 )     (529,830 )     -       -  
Other operating income     364,551       230,823       174,197       154,958       -       -       538,748       385,781  
Interest income     27,287       21,818       58,380       63,647       (10,718 )     (10,385 )     74,949       75,080  
Interest expense     (427,054 )     (423,742 )     -       -       10,718       10,385       (416,336 )     (413,357 )
Total net interest expense     (399,767 )     (401,924 )     58,380       63,647       -       -       (341,387 )     (338,277 )
Depreciation and amortization     (952,285 )     (923,311 )     (8,043 )     (11,095 )     -       -       (960,328 )     (934,406 )
Material non-cash items other than depreciation and amortization     10,069       (507,921 )     (991 )     1,893       -       -       9,078       (506,028 )
Disposal of fixed assets and inventory losses     (82,734 )     (20,932 )     -       -       -       -       (82,734 )     (20,932 )
Doubtful accounts     (29,674 )     (18,292 )     (476 )     611       -       -       (30,150 )     (17,681 )
Exchange differences     122,129       (469,178 )     (478 )     1,282       -       -       121,651       (467,896 )
Result of indexation units     348       481       (37 )     -       -       -       311       481  
Income (loss) atributable to owners of the parents     (83,653 )     (356,039 )     152,873       136,765       -       -       69,220       (219,274 )
Participation of the entity in  the income of associates     -       37       -       -       -       -       -       37  
Expenses for income tax     (92,476 )     249,090       (70,728 )     (70,707 )     -       -       (163,204 )     178,383  
Segment profit / (loss)     (42,203 )     (315,497 )     152,873       136,765       -       -       110,670       (178,732 )
Assets of segment     17,805,749       16,924,200       1,400,432       1,182,111       (7,987 )     (4,893 )     19,198,194       18,101,418  
Amount of non-current asset additions     1,481,090       1,492,281       -       -       -       -       1,481,090       1,492,281  
Property, plant and equipment     1,390,730       1,439,057       -       -       -       -       1,390,730       1,439,057  
Intangibles other than goodwill     90,360       53,224       -       -       -       -       90,360       53,224  
Segment liabilities     14,469,505       14,700,072       572,065       490,076       (28,680 )     (26,278 )     15,012,890       15,163,870  
Purchase of non-monetary assets of segment     782,957       1,622,198       -       -       -       -       782,957       1,622,198  

 

(*)  The Company does not have any interest revenue that should be recognized as income from ordinary activities by interest.

 

40

 

 

The Company’s revenues by geographic area are as follows:

 

    For the period ended  
    At December 31,  
    2016     2015  
    ThUS$     ThUS$  
             
Peru     627,215       681,340  
Argentina     1,030,973       979,324  
U.S.A.     933,130       1,025,475  
Europe     714,436       723,062  
Colombia     343,001       353,007  
Brazil     2,974,234       3,464,297  
Ecuador     198,171       238,500  
Chili     1,512,570       1,575,519  
Asia Pacific and rest of Latin America     654,610       699,521  
Income from ordinary activities     8,988,340       9,740,045  
Other operating income     538,748       385,781  

 

The Company allocates revenues by geographic area based on the point of sale of the passenger ticket or cargo. Assets are composed primarily of aircraft and aeronautical equipment, which are used throughout the different countries, so it is not possible to assign a geographic area.

 

The Company has no customers that individually represent more than 10% of sales.

 

NOTE 6 - CASH AND CASH EQUIVALENTS

 

    As of     As of  
    December 31,     December 31,  
    2016     2015  
    ThUS$     ThUS$  
             
Cash on hand     8,630       10,656  
Bank balances     255,746       255,421  
Overnight     295,060       267,764  
Total Cash     559,436       533,841  
                 
Cash equivalents                
Time deposits     374,369       193,056  
Mutual funds     15,522       26,600  
Total cash equivalents     389,891       219,656  
Total cash and cash equivalents     949,327       753,497  

 

41

 

 

Cash and cash equivalents are denominated in the following currencies:

 

    As of     As of  
  December 31,     December 31,  
Currency   2016     2015  
    ThUS$     ThUS$  
             
Argentine peso     7,871       18,733  
Brazilian real     97,401       106,219  
Chilean peso     30,758       17,978  
Colombian peso     4,336       14,601  
Euro     1,695       10,663  
US Dollar     780,124       564,214  
Strong bolivar (*)     61       2,986  
Other currencies     27,081       18,103  
Total     949,327       753,497  

 

(*)       At December 31, 2015, the Company reflected an exchange rate loss of ThUS$ 40,968 consequence change in the SICAD rate of Venezuela (13.5 VEF/US$) at the SIMADI rate equivalent to 198.70 VEF/US$.

 

As of December 31, 2016, the DICOM rate, which replaces SIMADI (February 2016), and to this date is 673.76 VEF/US$, Applied to cash and cash equivalents in VEF, represented a balance of ThUS$ 61 (ThUS$ 2,986 at December 31, 2015)

 

42

 

 

NOTE 7 - FINANCIAL INSTRUMENTS

 

7.1.       Financial instruments by category

 

As of December 31, 2016

 

                      Initial  designation        
  Loans           Held     as fair value        
    and     Hedge     for     through        
Assets   receivables     derivatives     trading     profit and loss     Total  
    ThUS$     ThUS$     ThUS$     ThUS$     ThUS$  
                               
Cash and cash equivalents     933,805       -       -       15,522       949,327  
Other financial assets, current (*)     164,426       11,411       -       536,991       712,828  
Trade and others accounts receivable, current     1,107,889       -       -       -       1,107,889  
Accounts receivable from related entities, current     554       -       -       -       554  
Other financial assets, non current (*)     101,603       -       522       -       102,125  
Accounts receivable, non current     8,254       -       -       -       8,254  
Total     2,316,531       11,411       522       552,513       2,880,977  

 

  Other     Held        
    financial     Hedge        
Liabilities   liabilities     derivatives     Total  
    ThUS$     ThUS$     ThUS$  
                   
Other liabilities, current     1,814,647       24,881       1,839,528  
Trade and others accounts payable, current     1,593,068       -       1,593,068  
Accounts payable to related entities, current     269       -       269  
Other financial liabilities, non-current     6,790,273       6,679       6,796,952  
Accounts payable, non-current     359,391       -       359,391  
Total     10,557,648       31,560       10,589,208  

 

(*) The value presented as initial designation as fair value through profit and loss, corresponds mainly to private investment funds; and loans and receivables corresponds to guarantees given.

 

43

 

 

As of December 31, 2015

 

                      Initial  designation        
  Loans           Held     as fair value        
    and     Hedge     for     through        
Assets   receivables     derivatives     trading     profit and loss     Total  
    ThUS$     ThUS$     ThUS$     ThUS$     ThUS$  
                               
Cash and cash equivalents     726,897       -       -       26,600       753,497  
Other financial assets, current (*)     28,385       16,578       157,575       448,810       651,348  
Trade and others accounts receivable, current     796,974       -       -       -       796,974  
Accounts receivable from related entities, current     183       -       -       -       183  
Other financial assets, non current (*)     88,820       -       638       -       89,458  
Accounts receivable, non current     10,715       -       -       -       10,715  
Total     1,651,974       16,578       158,213       475,410       2,302,175  

 

  Other     Held        
    financial     Hedge        
Liabilities   liabilities     derivatives     Total  
    ThUS$     ThUS$     ThUS$  
                   
Other liabilities, current   1,510,146     134,089     1,644,235  
Trade and others accounts payable, current     1,483,957       -       1,483,957  
Accounts payable to related entities, current     447       -       447  
Other financial liabilities, non-current     7,516,257       16,128       7,532,385  
Accounts payable, non-current     417,050       -       417,050  
Total     10,927,857       150,217       11,078,074  

 

(*)      The value presented as initial designation as fair value through profit and loss, corresponds mainly to private investment funds; and loans and receivables corresponds to guarantees given.

 

44

 

 

7.2.       Financial instruments by currency

 

a)         Assets

 

    As of     As of  
    December 31,     December 31,  
    2016     2015  
    ThUS$     ThUS$  
             
Cash and cash equivalents     949,327       753,497  
Argentine peso     7,871       18,733  
Brazilian real     97,401       106,219  
Chilean peso     30,758       17,978  
Colombian peso     4,336       14,601  
Euro     1,695       10,663  
US Dollar     780,124       564,214  
Strong bolivar     61       2,986  
Other currencies     27,081       18,103  
                 
Other financial assets (current and non-current)     814,953       740,806  
Argentine peso     337       157,281  
Brazilian real     686,501       449,934  
Chilean peso     668       640  
Colombian peso     1,023       1,670  
Euro     6,966       614  
US Dollar     117,346       128,620  
Strong bolivar     76       22  
Other currencies     2,036       2,025  
                 
Trade and other accounts receivable, current     1,107,889       796,974  
Argentine peso     82,770       71,438  
Brazilian real     551,260       191,037  
Chilean peso     92,791       57,755  
Colombian peso     16,454       13,208  
Euro     21,923       30,006  
US Dollar     312,394       344,153  
Strong bolivar     43       7,225  
Other currencies (*)     30,254       82,152  
                 
Accounts receivable, non-current     8,254       10,715  
Brazilian real     4       521  
Chilean peso     8,250       5,041  
US Dollar     -       5,000  
Other currencies (*)     -       153  
                 
Accounts receivable from related entities, current     554       183  
Brazilian real     -       2  
Chilean peso     554       181  
                 
Total assets     2,880,977       2,302,175  
Argentine peso     90,978       247,452  
Brazilian real     1,335,166       747,713  
Chilean peso     133,021       81,595  
Colombian peso     21,813       29,479  
Euro     30,584       41,283  
US Dollar     1,209,864       1,041,987  
Strong bolivar     180       10,233  
Other currencies     59,371       102,433  

 

(*)       See the composition of the others currencies in Note 8 Trade, other accounts receivable and non-current accounts receivable.

 

b)         Liabilities

Liabilities information is detailed in the table within Note 3 Financial risk management.

 

45

 

 

NOTE 8 - TRADE AND OTHER ACCOUNTS RECEIVABLE CURRENT, AND NON-CURRENT ACCOUNTS RECEIVABLE

 

    As of     As of  
    December 31,     December 31,  
    2016     2015  
    ThUS$     ThUS$  
             
Trade accounts receivable     1,022,933       685,733  
Other accounts receivable     170,264       182,028  
Total trade and other accounts receivable     1,193,197       867,761  
Less: Allowance for impairment loss     (77,054 )     (60,072 )
Total net trade and  accounts receivable     1,116,143       807,689  
Less: non-current portion – accounts receivable     (8,254 )     (10,715 )
Trade and other accounts receivable, current     1,107,889       796,974  

 

The fair value of trade and other accounts receivable does not differ significantly from the book value.

 

The maturity of these accounts at the end of each period is as follows:

 

    As of     As of  
    December 31,     December 31,  
    2016     2015  
    ThUS$     ThUS$  
             
Fully performing     896,040       577,902  
Matured accounts receivable, but not impaired                
Expired from 1 to 90 days     38,969       28,717  
Expired from 91 to 180 days     9,303       10,995  
More than 180 days overdue (*)     1,567       8,047  
Total matured accounts receivable, but not impaired     49,839       47,759  
Matured accounts receivable and impaired                
Judicial,  pre-judicial collection and protested documents     34,909       24,304  
Debtor under pre-judicial collection process and  portfolio sensitization     42,145       35,768  
Total matured accounts receivable and impaired     77,054       60,072  
Total     1,022,933       685,733  

 

(*) Value of this segment corresponds primarily to accounts receivable that were evaluated in their ability to recover, therefore not requiring a provision.

 

46

 

 

Currency balances that make up the Trade and other accounts receivable and non-current accounts receivable are the following:

 

    As of     As of  
    December 31,     December 31,  
Currency   2016     2015  
    ThUS$     ThUS$  
             
Argentine Peso     82,770       71,438  
Brazilian Real     551,264       191,558  
Chilean Peso     101,041       62,796  
Colombian peso     16,454       13,208  
Euro     21,923       30,006  
US Dollar     312,394       349,153  
Strong bolivar     43       7,225  
Other currency (*)     30,254       82,305  
Total     1,116,143       807,689  

 

(*) Other currencies                
Australian Dollar     5,487       26,185  
Chinese Yuan     271       4,282  
Danish Krone     151       164  
Pound Sterling     3,904       7,228  
Indian Rupee     303       3,070  
Japanese Yen     2,601       4,343  
Norwegian Kroner     184       221  
Swiss Franc     1,512       1,919  
Korean Won     4,241       4,462  
New Taiwanese Dollar     662       3,690  
Other currencies     10,938       26,741  
Total     30,254       82,305  

 

The Company records allowances when there is evidence of impairment of trade receivables. The criteria used to determine that there is objective evidence of impairment losses are the maturity of the portfolio, specific acts of damage (default) and specific market signals.

 

Maturity   Impairment  
Judicial and pre-judicial collection assets     100 %
Over 1 year     100 %
Between 6 and 12 months     50 %

 

47

 

 

Movement in the allowance for impairment loss of Trade and other accounts receivables are the following:

 

    Opening           (Increase)     Closing  
    balance     Write-offs     Decrease     balance  
Periods   ThUS$     ThUS$     ThUS$     ThUS$  
                         
From January 1 to December  31, 2015     (71,042 )     10,120       850       (60,072 )
From January 1 to December  31, 2016     (60,072 )     20,910       (37,892 )     (77,054 )

 

Once pre-judicial and judicial collection efforts are exhausted, the assets are written off against the allowance. The Company only uses the allowance method rather than direct write-off, to ensure control.

 

Historic and current re-negotiations are not relevant and the policy is to analyze case by case in order to classify them according to the existence of risk, determining whether it is appropriate to re-classify accounts to pre-judicial recovery. If such re-classification is justified, an allowance is made for the account, whether overdue or falling due.

 

The maximum credit-risk exposure at the date of presentation of the information is the fair value of each one of the categories of accounts receivable indicated above.

 

    As of December 31, 2016     As of December 31, 2015  
    Gross  exposure     Gross     Exposure net     Gross  exposure     Gross     Exposure net  
    according to     impaired     of risk     according to     Impaired     of risk  
    balance     exposure     concentrations     balance     exposure     concentrations  
    ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$  
                                     
Trade accounts receivable     1,022,933       (77,054 )     945,879       685,733       (60,072 )     625,661  
Other accounts receivable     170,264       -       170,264       182,028       -       182,028  

 

There are no relevant guarantees covering credit risk and these are valued when they are settled; no materially significant direct guarantees exist. Existing guarantees, if appropriate, are made through IATA.

 

48

 

 

NOTE 9 - ACCOUNTS RECEIVABLE FROM/PAYABLE TO RELATED ENTITIES

 

(a)       Accounts Receivable

 

                    As of     As of  
            Country       December 31,     December 31,  
Tax No.   Related party   Relationship   of origin   Currency   2016     2016  
                    ThUS$     ThUS$  
                             
78.591.370-1   Bethia S.A. and Subsidiaries   Related director   Chile   CLP     538       167  
87.752.000-5   Granja Marina Tornagaleones S.A.   Common shareholder   Chile   CLP     14       14  
96.810.370-9   Inversiones Costa Verde Ltda. y CPA.   Controller    Chile    CLP     2       -  
Foreign   TAM Aviação Executiva e Taxi Aéreo S.A.   Related director    Brazil    BRL     -       2  
    Total current assets                 554       183  

 

(b)       Accounts payable

 

                    As of     As of  
            Country       December 31,     December 31,  
Tax No.   Related party   Relationship   of origin   Currency   2016     2015  
                    ThUS$     ThUS$  
                             
Foreign   Consultoría Administrativa Profesional S.A. de C.V.   Associate   Mexico   MXN     170       342  
65.216.000-K   Viajes Falabella Ltda.   Related director   Chile   CLP     46       68  
79.773.440-3   TAM Aviação Executiva e Taxi Aéreo S.A.   Related director   Brazil   BRL     28       -  
65.216.000-K   Comunidad Mujer   Related director   Chile   CLP     13       10  
78.591.370-1   Bethia S.A. and Subsidiaries   Related director   Chile   CLP     6       5  
79.773.440-3   Transportes San Felipe S.A   Common property   Chile   CLP     4       -  
Foreign   Inversora Aeronaútica Argentina   Related director   Argentina   US$     2       22  
    Total current liabilities                 269       447  

 

Transactions between related parties have been carried out on free-trade conditions between interested and duly-informed parties. The transaction times are between 30 and 45 days, and the nature of settlement of the transactions is monetary.

 

49

 

 

NOTE 10 - INVENTORIES

 

The composition of Inventories is as follows:

 

    As of     As of  
    December 31,     December 31,  
    2016     2015  
    ThUS$     ThUS$  
             
Technical stock     191,864       192,930  
Non-technical stock     49,499       31,978  
Total     241,363       224,908  

 

The items included in this heading are spare parts and materials that will be used mainly in consumption in in-flight and maintenance services provided to the Company and third parties, which are valued at average cost, net of provision for obsolescence, as per the following detail:

 

    As of     As of  
    December 31,     December 31,  
    2016     2015  
    ThUS$     ThUS$  
             
Provision for obsolescence Technical stock     31,647       13,303  
Provision for obsolescenceNon-technical stock     3,429       2,589  
Total     35,076       15,892  

 

As of December 31, 2016, the Company recorded ThUS$ 167,365 (ThUS$ 160,030 at December 31, 2015) within the income statement, mainly due to in-flight consumption and maintenance, which forms part of Cost of sales.

 

50

 

   

NOTE 11 - OTHER FINANCIAL ASSETS

 

The composition of Other financial assets is as follows:

 

    Current Assets     Non-current assets     Total Assets  
    As of     As of     As of     As of     As of     As of  
    December 31,     December 31,     December 31,     December 31,     December 31,     December 31,  
    2016     2015     2016     2015     2016     2015  
    ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$  
                                     
(a)   Other financial assets                                                
                                                 
Private investment funds     536,991       448,810       -       -       536,991       448,810  
Deposits in guarantee (aircraft)     16,819       16,532       56,846       58,483       73,665       75,015  
Guarantees for margins of derivatives     939       4,456       -       -       939       4,456  
Other investments     -       -       522       638       522       638  
Domestic and foreign bonds     -       157,575       -       -       -       157,575  
Other guarantees given     140,733       6,160       44,757       30,337       185,490       36,497  
Other     5,935       1,237       -       -       5,935       1,237  
                                                 
Subtotal of other financial assets     701,417       634,770       102,125       89,458       803,542       724,228  
                                                 
                                                 
(b)   Hedging assets                                                
                                                 
Interest accrued since the last payment date  of Cross currency swap     64       397       -       -       64       397  
Fair value of foreign currency derivatives (*)     1,259       9,888       -       -       1,259       9,888  
Fair value of fuel price derivatives     10,088       6,293       -       -       10,088       6,293  
                                                 
Subtotal of hedging assets     11,411       16,578       -       -       11,411       16,578  
                                                 
Total Other Financial Assets     712,828       651,348       102,125       89,458       814,953       740,806  

 

(*) The foreign currency derivatives correspond to forward and combination of options.

 

The types of derivative hedging contracts maintained by the Company at the end of each period are described in Note 19.

 

51

 

 

NOTE 12 - OTHER NON-FINANCIAL ASSETS

 

The composition of Other non-financial assets is as follows:

 

    Current assets     Non-current assets     Total Assets  
    As of     As of     As of     As of     As of     As of  
    December 31,     December 31,     December 31,     December 31,     December 31,     December 31,  
    2016     2015     2016     2015     2016     2015  
    ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$  
                                     
(a)  Advance payments                                                
                                                 
Aircraft leases     37,560       33,305       14,065       22,569       51,625       55,874  
Aircraft insurance and other     14,717       12,408       -       -       14,717       12,408  
Others     4,521       16,256       1,573       33,781       6,094       50,037  
Subtotal advance payments     56,798       61,969       15,638       56,350       72,436       118,319  
                                                 
(b)  Other assets                                                
                                                 
Aircraft maintenance reserve (*)     51,576       99,112       90,175       64,366       141,751       163,478  
Sales tax     102,351       158,134       40,232       45,061       142,583       203,195  
Other taxes     500       4,295       -       -       500       4,295  
Contributions to Société Internationale  de Télécommunications Aéronautiques ("SITA")     406       505       591       547       997       1,052  
Judicial deposits     -       -       90,604       67,980       90,604       67,980  
Others     611       6,001       104       1,159       715       7,160  
Subtotal other assets     155,444       268,047       221,706       179,113       377,150       447,160  
Total Other Non - Financial Assets     212,242       330,016       237,344       235,463       449,586       565,479  

 

(*) Aircraft maintenance reserves reflect prepayment deposits made by the group to lessors of certain aircraft under operating lease agreements in order to ensure that funds are available to support the scheduled heavy maintenance of the aircraft.

 

These amounts are calculated based on performance measures, such as flight hours or cycles, are paid periodically (usually monthly) and are contractually required to be repaid to the lessee upon the completion of the required maintenance of the leased aircraft. At the end of the lease term, any unused maintenance reserves are either returned to the Company in cash or used to offset amounts that we may owe the lessor as a maintenance adjustment.

 

In some cases (five lease agreements), if the maintenance cost incurred by LATAM is less than the corresponding maintenance reserves, the lessor is entitled to retain those excess amounts at the time the heavy maintenance is performed. The Company periodically reviews its maintenance reserves for each of its leased aircraft to ensure that they will be recovered, and recognizes an expense if any such amounts are less than probable of being returned. Since the acquisition of TAM in June 2012, the cost of aircraft maintenance has been higher than the related maintenance reserves for all aircraft.

 

As of December 31, 2016, LATAM had ThUS$ 141,751 in maintenance reserves (ThUS$ 163,478 at December 31, 2015), corresponding to two aircraft with contracts that establish periodic payments and whose expiration date is in 2017 and 21 aircraft that maintains remaining balances, which will be liquidated in the next maintenance or return.

 

Aircraft maintenance reserves are classified as current or non-current depending on the dates when the related maintenance is expected to be performed (Note 2.23)

 

52

 

 

NOTE 13 - NON-CURRENT ASSETS AND DISPOSAL GROUP CLASSIFIED AS HELD FOR SALE

 

Non-current assets and in disposal groups held for sale at December 31, 2016 and December 31, 2015 are detailed below:

 

    As of     As of  
    December 31,     December 31,  
    2016     2015  
    ThUS$     ThUS$  
             
Current assets                
                 
Aircraft     281,158       263  
Engines and rotables     29,083       1,697  
Other assets     26,954       -  
Total     337,195       1,960  
                 
Current liabilities                
Other liabilities     10,152       -  
Total     10,152       -  

 

The balances are presented at the lower of book value and fair value less cost to sell. The fair value of these assets were determined based on quoted prices in active markets for similar assets or liabilities. This is a level II measurement as per the fair value hierarchy set out in note 3.3 (2). There were no transfers between levels for recurring fair value measurements during the year.

 

(a) Assets reclassified from Property, plant and equipment to Non-current assets or groups of assets for disposal classified as held for sale

 

In the period ended December 31, 2016, two Airbus A319 aircraft, two Airbus A320 aircraft, six Airbus A330 aircraft, two Boeing 777 aircraft, eight A330 spare engines, A330 rotables and two buildings were reclassified from Property, plant and equipment to Non-current assets or groups of assets for disposal classified as held for sale.

 

During the period ended December 31, 2016, two Airbus A319 aircraft, one Airbus A320 aircraft and two Airbus A330 aircraft were sold. Additionally an A330 spare engine and D200 rotables were sold.

 

As a result, an adjustment of US $ 55 million was recorded to write down these assets to their net

 

53

 

 

The detail of fleet classified as non-current assets or groups of assets for disposal classified as held for sale is the following:

 

    As of     As of  
    December 31,     December 31,  
Aircraft   2016     2015  
             
Boeing 777 Freighter     2 (*)     -  
Airbus A330-200     4       -  
Airbus A320-200     1       -  
ATR42-300     1       1  
                 
Total     8       1  

 

(*) One aircraft leased to DHL.

 

NOTE 14 - INVESTMENTS IN SUBSIDIARIES"

 

(a) Investments in subsidiaries

 

The Company has investments in companies recognized as investments in subsidiaries. All the companies defined as subsidiaries have been consolidated within the financial statements of LATAM Airlines Group S.A. and Subsidiaries. The consolidation also includes special-purpose entities.

 

Detail of significant subsidiaries and summarized financial information:

 

            Ownership  
            As of     As of  
    Country of   Functional   December 31,     December 31,  
Name of significant subsidiary   incorporation   currency   2016     2015  
            %     %  
                     
Lan Perú S.A.   Peru   US$     70.00000       70.00000  
Lan Cargo S.A.   Chile   US$     99.89803       99.89803  
Lan Argentina S.A.   Argentina   ARS     95.85660       94.99055  
Transporte Aéreo S.A.   Chile   US$     99.89804       99.89804  
Aerolane Líneas Aéreas Nacionales del Ecuador S.A.   Ecuador   US$     100.00000       100.00000  
Aerovías de Integración Regional, AIRES S.A.   Colombia   COP     99.19056       99.01646  
TAM S.A.   Brazil   BRL     99.99938       99.99938  

 

The consolidated subsidiaries do not have significant restrictions for transferring funds to controller.

 

54

 

 

Summary financial information of significant subsidiaries

 

          Results for the period  
    Statement of financial position as of December 31, 2016     ended December 31, 2016  
    Total     Current     Non-current     Total     Current     Non-current           Net  
Name of significant subsidiary   Assets     Assets     Assets     Liabilities     Liabilities     Liabilities     Revenue     Income  
    ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$  
                                                 
Lan Perú S.A.     306,111       283,691       22,420       294,912       293,602       1,310       967,787       (2,164 )
Lan Cargo S.A.     480,908       144,309       336,599       239,728       211,395       28,333       266,296       (24,813 )
Lan Argentina S.A.     216,331       194,306       22,025       200,172       197,330       2,842       371,896       (29,572 )
Transporte Aéreo S.A.     340,940       36,986       303,954       124,805       59,668       65,137       297,247       8,206  
Aerolane Líneas Aéreas Nacionales del Ecuador S.A.     89,667       56,064       33,603       81,101       75,985       5,116       219,676       (1,281 )
Aerovías de Integración Regional,                                                                
AIRES S.A.     129,734       55,132       74,602       85,288       74,160       11,128       277,503       (13,675 )
TAM S.A. (*)     5,287,286       1,794,189       3,493,097       4,710,308       2,837,620       1,872,688       4,145,951       2,107  

 

          Results for the period  
    Statement of financial position as of December 31, 2015     ended December 31, 2015  
    Total     Current     Non-current     Total     Current     Non-current           Net  
Name of significant subsidiary   Assets     Assets     Assets     Liabilities     Liabilities     Liabilities     Revenue     Income  
    ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$  
                                                 
Lan Perú S.A.     255,691       232,547       23,144       240,938       239,521       1,417       1,078,992       5,068  
Lan Cargo S.A.     483,033       159,294       323,739       217,037       147,423       69,614       278,117       (74,408 )
Lan Argentina S.A.     195,756       180,558       15,198       170,384       168,126       2,258       443,317       9,432  
Transporte Aéreo S.A.     331,117       41,756       289,361       122,666       44,495       78,171       324,464       5,878  
Aerolane Líneas Aéreas Nacionales del Ecuador S.A.     126,001       80,641       45,360       116,153       111,245       4,908       246,402       (1,278 )
Aerovías de Integración Regional,                                                                
AIRES S.A.     130,039       62,937       67,102       75,003       64,829       10,174       291,354       (34,079 )
TAM S.A. (*)     4,711,316       1,350,377       3,360,939       4,199,223       1,963,400       2,235,823       4,597,611       (183,812 )

 

(*) Corresond to consolidated information of TAM S.A. and Subsidiaries.

 

55

 

 

(b) Non-controlling interest

 

            As of     As of     As of     As of  
        Country   December 31,     December 31,     December 31,     December 31,  
Equity   Tax No.   of origin   2016     2015     2016     2015  
            %     %     ThUS$     ThUS$  
                                 
Lan Perú S.A   0-E   Peru     30.00000       30.00000       3,360       4,426  
Lan Cargo S.A. and Subsidiaries   93.383.000-4   Chile     0.10196       0.10605       957       974  
Promotora Aérea Latinoamericana S.A. and Subsidiaries   0-E   Mexico     51.00000       51.00000       3,162       3,084  
Inversora Cordillera S.A. and Subsidiaries   0-E   Argentina     0.70422       0.70422       515       (1,386 )
Lan Argentina S.A.   0-E   Argentina     0.13440       1.00000       (311 )     29  
Americonsult de Guatemala S.A.   0-E   Guatemala     1.00000       1.00000       1       5  
Americonsult Costa Rica S.A.   0-E   Costa Rica     1.00000       1.00000       12       12  
Linea Aérea Carguera de Colombiana S.A.   0-E   Colombia     10.00000       10.00000       (905 )     (811 )
Aerolíneas Regionales de Integración Aires S.A.   0-E   Colombia     0.80944       0.98307       436       540  
Transportes Aereos del Mercosur S.A.   0-E   Paraguay     5.02000       5.02000       1,104       1,256  
Multiplus S.A.   0-E   Brazil     27.26000       27.26000       80,313       72,884  
Total                             88,644       81,013  

 

            As of     As of     For the period ended  
        Country   December 31,     December 31,     December 31,  
Incomes   Tax No.   of origin   2016     2015     2016     2015  
            %     %     ThUS$     ThUS$  
                                 
Lan Perú S.A   0-E   Peru     30.00000       30.00000       (649 )     1,521  
Lan Cargo S.A. and Subsidiaries   93.383.000-4   Chile     0.10196       0.10605       (7 )     (69 )
Promotora Aerea Latinoamericana S.A. and Subsidiaries   0-E   Mexico     51.00000       51.00000       96       1,349  
Inversora Cordillera S.A. and Subsidiaries   0-E   Argentina     0.70422       0.70422       364       281  
Lan Argentina S.A.   0-E   Argentina     0.13440       1.00000       77       61  
Americonsult de Guatemala S.A.   0-E   Guatemala     1.00000       1.00000       (4 )     1  
Americonsult Costa Rica S.A.   0-E   Costa Rica     1.00000       1.00000       -       5  
Linea Aérea Carguera de Colombiana S.A.   0-E   Colombia     10.00000       10.00000       (106 )     14  
Aerolíneas Regionales de Integración Aires S.A.   0-E   Colombia     0.80944       0.98307       (140 )     (335 )
Transportes Aereos del Mercosur S.A.   0-E   Paraguay     5.02000       5.02000       146       431  
Multiplus S.A.   0-E   Brazil     27.26000       27.26000       41,673       37,283  
Total                             41,450       40,542  

 

56

 

 

NOTE 15 - INTANGIBLE ASSETS OTHER THAN GOODWILL

 

The details of intangible assets are as follows:

 

    Classes of intangible assets     Classes of intangible assets  
    (net)     (gross)  
    As of     As of     As of     As of  
    December 31,     December 31,     December 31,     December 31,  
    2016     2015     2016     2015  
    ThUS$     ThUS$     ThUS$     ThUS$  
Airport slots     978,849       816,987       978,849       816,987  
Loyalty program     326,262       272,312       326,262       272,312  
Computer software     157,016       104,258       419,652       324,043  
Developing software     91,053       74,887       91,053       74,887  
Trademarks (1)     57,133       52,981       63,730       52,981  
Other assets     -       -       808       808  
Total     1,610,313       1,321,425       1,880,354       1,542,018  

 

Movement in Intangible assets other than goodwill:

 

    Computer                 Trademarks     Other        
    software     Developing     Airport     and loyalty     assets        
    Net     software     slots (2)     program (1) (2)     Net     Total  
    ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$  
                                     
Opening balance as of January 1, 2015     126,797       74,050       1,201,028       478,204       -       1,880,079  
Additions     4,954       48,270       -       -       -       53,224  
Withdrawals     (4,612 )     (162 )     -       (1 )     -       (4,775 )
Transfer software     28,726       (30,426 )     -       -       -       (1,700 )
Foreing exchange     (14,871 )     (16,845 )     (384,041 )     (152,910 )     -       (568,667 )
Amortization     (36,736 )     -       -       -       -       (36,736 )
Closing balance as of December 31, 2015     104,258       74,887       816,987       325,293       -       1,321,425  
                                                 
Opening balance as of January 1, 2016     104,258       74,887       816,987       325,293       -       1,321,425  
Additions     6,688       83,672       -       -       -       90,360  
Withdrawals     (736 )     (191 )     -       -       -       (927 )
Transfer software     85,029       (74,376 )     -       -       -       10,653  
Foreing exchange     5,689       7,061       161,862       64,447       -       239,059  
Amortization     (43,912 )     -       -       (6,345 )     -       (50,257 )
Closing balance as of December 31, 2016     157,016       91,053       978,849       383,395       -       1,610,313  

 

(1) After the extensive integration work following the combination between LAN and TAM, during which there has been solid progress in the homologation of the optimization processes of its air connections, in addition to the restructuring and modernization of the fleet of aircraft, the Company has resolved adopt a unique name and identity, and announce that the brand of the group will be LATAM ", which would unite all companies under a single image.

 

Given the above, we have proceeded to review the brands useful life, concluding that these should go from an indefinite to defined useful life. The estimated new useful life is 5 years, equivalent to the period for finishing all the image changes necessary.

 

(2) See Note 2.5

 

57

 

 

The amortization of the period is shown in the consolidated statement of income in administrative expenses. The accumulated amortization of computer programs as of December 31, 2016 amounts to ThUS$ 270,041 (ThUS$ 220,593 at December 31, 2015).

 

NOTE 16 – GOODWILL

 

The Goodwill amount at December 31, 2016 is ThUS$ 2,710,382 (ThUS$ 2,280,575 at December 31, 2015). Movement of Goodwill separated by CGU it includes the following:

 

          Coalition        
Movement of Goodwill, separated by CGU:         and loyalty        
    Air     program        
    Transport     Multiplus     Total  
    ThUS$     ThUS$     ThUS$  
                   
Opening balance as of January 1, 2015     2,658,503       654,898       3,313,401  
Increase (decrease) due to exchange rate differences     (823,415 )     (209,411 )     (1,032,826 )
Closing balance as of December 31, 2015     1,835,088       445,487       2,280,575  
Opening balance as of January 1, 2016     1,835,088       445,487       2,280,575  
Increase (decrease) due to exchange rate differences     341,813       88,261       430,074  
Others     (267 )     -       (267 )
Closing balance as of December 31, 2016     2,176,634       533,748       2,710,382  

 

The Company has two cash- generating units (CGUs), “Air transportation” and, “Coalition and loyalty program Multiplus”. The CGU "Air transport" considers the transport of passengers and cargo, both in the domestic markets of Chile, Peru, Argentina, Colombia, Ecuador and Brazil, and in a developed series of regional and international routes in America, Europe and Oceania, while the CGU "Coalition and loyalty program Multiplus” works with an integrated network associated companies in Brazil.

 

The recoverable amounts of cash-generating units have been determined based on value-in-use calculations. These calculations require the use of expected cash flows, 5 years after tax, which are based on the budget approved by the Board. Cash flows beyond the budget period are extrapolated using the estimated growth rates, which do not exceed the average rates of long-term growth.

 

Management establish rates for annual growth, discount, inflation and exchange for each cash generating, as well as fuel prices, based on their key assumptions. The annual growth rate is based on past performance and management's expectations over market developments in each country where it operates. The discount rates used are in American Dollars for the CGU "Air transportation" and Brazilian Reals for CGU "Program coalition loyalty Multiplus", both of them before tax and reflect specific risks related to each country where the Company operates. Inflation and exchange rates are based on available data for each country and the information provided by the Central Bank of each country, and the fuel price is determined based on estimated production levels, competitive environment market in which they operate and its business strategy.

 

58

 

 

As of December 31, 2016 the recoverable values were determined using the following assumptions presented below:

 

        Air transportation   Coalition and loyalty
        CGU   program Multiplus CGU (2)
Annual growth rate (Terminal)   %   1.0 - 2.0   4.0 - 5.0
Exchange rate (1)   R$/US$   3.9 - 4.4   3.9 - 4.4
Discount rate based on the weighted average cost of capital (WACC)   %   8.27 - 9.27   -
Discount rate based on cost of equity (Ke)   %   -   12.3 - 13.3
Fuel Price from futures price curves commodities markets   US$/barril   61-76   -

 

(1) In line with the expectations of the Central Bank of Brazil

(2) The flow, as well as annual growth rte and discount, are denominated in real.

 

The result of the impairment test, which includes a sensitivity analysis of the main variables, showed that the estimated recoverable amount is higher than carrying value of the book value of net assets allocated to the cash generating unit, and therefore impairment was not detected.

 

CGU´s are sensitive to rates for annual growth, discount and exchanges rates. The sensitivity analysis included the individual impact of changes in estimates critical in determining the recoverable amounts, namely:

 

                Decrease  
    Increase     Increase     Minimum  
    Maximum     Maximum     terminal  
    WACC     Ke     growth rate  
    %     %     %  
Air transportation CGU     9.27       -       1.0  
Coalition and loyalty program Multiplus CGU     -       13.3       4.0  

 

In none of the previous cases impairment in the cash- generating unit was presented.

 

59

 

NOTE 17 - PROPERTY, PLANT AND EQUIPMENT

 

The composition by category of Property, plant and equipment is as follows:

 

    Gross Book Value     Acumulated depreciation     Net Book Value  
    As of     As of     As of     As of     As of     As of  
    December 31,     December 31,     December 31,     December 31,     December 31,     December 31,  
    2016     2015     2016     2015     2016     2015  
    ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$  
                                     
Construction in progress (*)     470,065       1,142,812       -       -       470,065       1,142,812  
Land     50,148       45,313       -       -       50,148       45,313  
Buildings     190,771       131,816       (60,552 )     (40,325 )     130,219       91,491  
Plant and equipment     10,099,587       9,683,764       (2,350,045 )     (2,392,463 )     7,749,542       7,291,301  
Own aircraft     9,436,684       9,118,396       (2,123,025 )     (2,198,682 )     7,313,659       6,919,714  
Other (**)     662,903       565,368       (227,020 )     (193,781 )     435,883       371,587  
Machinery     39,246       36,569       (26,821 )     (21,220 )     12,425       15,349  
Information technology equipment     163,695       154,093       (123,981 )     (110,204 )     39,714       43,889  
Fixed installations and accessories     178,363       179,026       (94,451 )     (90,068 )     83,912       88,958  
Motor vehicles     96,808       99,997       (67,855 )     (64,047 )     28,953       35,950  
Leasehold improvements     192,100       124,307       (87,559 )     (70,219 )     104,541       54,088  
Other property, plants and equipment     3,005,981       3,279,902       (1,177,351 )     (1,150,396 )     1,828,630       2,129,506  
Financial leasing aircraft     2,905,556       3,151,405       (1,152,190 )     (1,120,682 )     1,753,366       2,030,723  
Other     100,425       128,497       (25,161 )     (29,714 )     75,264       98,783  
Total     14,486,764       14,877,599       (3,988,615 )     (3,938,942 )     10,498,149       10,938,657  

 

(*) It includes pre-delivery payments to aircraft manufacturers for ThUS$ 434,250 (ThUS$ 1,016,007 as of December 31, 2015)

 

(**) Mainly considers rotable and tools.

 

60

 

 

(a) Movement in the different categories of Property, plant and equipment:

 

                                                    Other        
                            Information     Fixed                 property,     Property,  
                      Plant and     technology     installations     Motor     Leasehold     plant and     Plant and  
    Construction           Buildings     equipment     equipment     & accessories     vehicles     improvements     equipment     equipment  
    in progress     Land     net     net     net     net     net     net     net     net  
    ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$  
                                                             
Opening balance as of January 1, 2015     937,279       57,988       167,006       6,954,089       51,009       43,783       1,965       56,523       2,503,434       10,773,076  
Additions     39,711       -       439       1,304,199       15,322       1,692       280       13,188       64,226       1,439,057  
Disposals     -       -       (500 )     (76,675) (1)       (27 )     -       (8 )     -       (11 )     (77,221 )
Retirements     (1,262 )     -       (956 )     (38,240 )     (104 )     (476 )     (4 )     -       (8,902 )     (49,944 )
Depreciation expenses     -       -       (7,161 )     (521,688 )     (16,196 )     (11,649 )     (378 )     (13,973 )     (174,474 )     (745,519 )
Foreing exchange     (932 )     (11,786 )     (18,248 )     (129,933 )     (6,126 )     (13,269 )     (638 )     (1,659 )     (252,709 )     (435,300 )
Other increases (decreases)     168,016       (889 )     (49,089 )     (150,677 )     11       68,877       308       9       (2,058 )     34,508  
Changes, total     205,533       (12,675 )     (75,515 )     386,986       (7,120 )     45,175       (440 )     (2,435 )     (373,928 )     165,581  
Closing balance as of December 31, 2015     1,142,812       45,313       91,491       7,341,075       43,889       88,958       1,525       54,088       2,129,506       10,938,657  
Opening balance as of January 1, 2016     1,142,812       45,313       91,491       7,341,075       43,889       88,958       1,525       54,088       2,129,506       10,938,657  
Additions     14,481       -       272       1,301,093       7,392       292       6       54,181       13,013       1,390,730  
Disposals     -       -       -       (16,918) (2)       (59 )     -       (32 )     -       (2,972 )     (19,981 )
Retirements     (284 )     -       (68 )     (39,816 )     (55 )     (1,258 )     -       -       (2,604 )     (44,085 )
Depreciation expenses     -       -       (6,234 )     (562,131 )     (14,909 )     (13,664 )     (293 )     (23,283 )     (124,038 )     (744,552 )
Foreing exchange     5,081       4,835       2,538       51,770       2,924       9,384       223       2,849       93,383       172,987  
Other increases (decreases)     (692,025 )     -       42,220       (285,198) (3)       532       200       (384 )     16,706       (277,658 )     (1,195,607 )
Changes, total     (672,747 )     4,835       38,728       448,800       (4,175 )     (5,046 )     (480 )     50,453       (300,876 )     (440,508 )
Closing balance as of December 31, 2016     470,065       50,148       130,219       7,789,875       39,714       83,912       1,045       104,541       1,828,630       10,498,149  

 

(1) During the first half of 2015 three Airbus A340 aircraft were sold.

During the second half of 2015 seven Dash-200 aircraft were sold.

During the second half of 2015 two Airbus A319 aircraft were sold.

(2) During the first quarter of 2016 one Airbus A330 aircraft were sold.
(3) During 2016 two Airbus A319 aircraft, two Airbus A320 aircraft, six Airbus A330 and two Boeing 777 aircraft were reclassified to non-current assets and disposal group classified as held for sale (See Note 13).

 

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(b) Composition of the fleet:

 

        Aircraft included              
        in Property,     Operating     Total  
        plant and equipment     leases     fleet  
        As of     As of     As of     As of     As of     As of  
        December 31,     December 31,     December 31,     December 31,     December 31,     December 31,  
Aircraft   Model   2016     2015     2016     2015     2016     2015  
                                         
Boeing 767   300ER     34       34       3       4       37       38  
Boeing 767   300F     8 (1)     8 (1)     3       3       11 (1)     11 (1)
Boeing 777   300ER     4       4       6       6       10       10  
Boeing 777   Freighter     -       2 (2)     2       2       2       4 (2)
Boeing 787   800     6       6       4       4       10       10  
Boeing 787   900     4       3       8       4       12       7  
Airbus A319   100     36       38       12       12       48       50  
Airbus A320   200     93       95       53       59       146       154  
Airbus A320   NEO     1       -       1       -       2       -  
Airbus A321   200     30       26       17       10       47       36  
Airbus A330   200     -       8       -       2       -       10  
Airbus A350   900     5       1       2       -       7       1  
Total         221       225       111       106       332       331  

 

(1) Three aircraft leased to FEDEX

(2) One aircraft leased to DHL

 

(c) Method used for the depreciation of Property, plant and equipment:

 

    Method   Useful life (years)
        minimum   maximum
Buildings   Straight line without residual value   20   50
Plant and equipment   Straight line with residual value of 20% in the short-haul fleet and 36% in the long-haul fleet. (*)   5   23
Information technology equipment   Straight line without residual value   5   10
Fixed installations and accessories   Straight line without residual value   10   10
Motor vehicle   Straight line without residual value   10   10
Leasehold improvements   Straight line without residual value   5   5
             
Other property, plant and equipment   Straight line with residual value of 20% in the short-haul fleet and 36% in the long-haul fleet. (*)   10   23

 

(*)         Except for the Boeing 767 300ER and Boeing 767 300F fleets which consider a lower residual value due to the extension of their useful life to 22 and 23 years respectively. Additionally certain technical components, which are depreciated based on the basis of cycles and flight hours.

 

The aircraft with remarketing clause (**) under modality of financial leasing, which are depreciated according to the duration of their contracts, between 12 and 18 years. Its residual values ​​ are estimated according to market value at the end of such contracts.

 

(**)      Aircraft with remarketing clause are those that are required to sell at the end of the contract.

 

The depreciation charged to income in the period, which is included in the consolidated statement of income, amounts to ThUS$ 744,552 (ThUS$ 745,519 at December 31, 2015). Depreciation charges for the year are recognized in Cost of sales and administrative expenses in the consolidated statement of income.

 

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(d) Additional information regarding Property, plant and equipment:

 

(i) Property, plant and equipment pledged as guarantee:

 

In the period ended December 31, 2016, direct guarantees by five Airbus A319-100 aircraft, two Airbus A320-200 aircraft, one Airbus A320 NEO aircraft, four Airbus A321-200 aircraft, four Airbus A350-900 aircraft and one Boeing 787-9 aircraft were added.

 

Description of Property, plant and equipment pledged as guarantee:

 

            As of     As of  
            December 31,     December 31,  
            2016     2015  
Creditor of   Assets       Existing     Book     Existing     Book  
guarantee   committed   Fleet   Debt     Value     Debt     Value  
            ThUS$     ThUS$     ThUS$     ThUS$  
                                 
Wilmington   Aircraft and engines   Airbus A321 / A350     596,224       722,979       374,619       478,667  
Trust Company       Boeing 767     811,723       1,164,364       907,356       1,220,541  
        Boeing 787     739,031       899,445       712,059       834,567  
                                         
Banco Santander S.A.   Aircraft and engines   Airbus A319     50,671       91,889       58,527       95,387  
        Airbus A320     462,950       709,788       524,682       749,192  
        Airbus A321     32,853       44,227       36,334       45,380  
                                         
BNP Paribas   Aircraft and engines   Airbus A319     134,346       228,384       154,828       229,798  
        Airbus A320     128,173       181,838       145,506       192,957  
Credit Agricole   Aircraft and engines   Airbus A319     26,014       37,389       37,755       84,129  
        Airbus A320     71,794       144,157       115,339       214,726  
        Airbus A321     40,609        93,110       50,591       97,257  
              -                       -  
JP Morgan   Aircraft and engines   Boeing 777     -       -       215,265       263,366  
Wells Fargo   Aircraft and engines   Airbus A320     252,428       333,419       279,478       348,271  
Bank of Utah   Aircraft and engines   Airbus A320 / A350     670,826       709,280       240,094       312,573  
Natixis   Aircraft and engines   Airbus A320     45,748       66,738       56,223       81,355  
        Airbus A321     377,104       514,625       413,201       542,594  
                                         
Citibank N. A.   Aircraft and engines   Airbus A320     111,243       166,370       127,135       172,918  
        Airbus A321     42,867       70,166       49,464       73,122  
HSBC   Aircraft and engines   Airbus A320     -       -       53,583       64,241  
KfW IPEX-Bank   Aircraft and engines   Airbus A319     7,494       6,360       -       -  
        Airbus A320     28,696       36,066       13,593       16,838  
Airbus Financial Services   Aircraft and engines   Airbus A319     30,199       33,823       -       -  
PK AirFinance US, Inc.   Aircraft and engines   Airbus A320     54,786       46,341       62,514       48,691  
Banco BBVA   Land and buildings         50,381       69,498       -       -  
Total direct guarantee             4,766,160       6,370,256       4,628,146       6,166,570  

 

The amounts of existing debt are presented at nominal value. Book value corresponds to the carrying value of the goods provided as guarantees.

 

Additionally, there are indirect guarantees related to assets recorded in Property, plant and equipment whose total debt at December 31, 2016 amounted to ThUS$ 913,494 (ThUS$ 1,311,088 at December 31, 2015). The book value of assets with indirect guarantees as of December 31, 2016 amounts to ThUS$ 1,740,815 (ThUS$ 2,001,605 as of December 31, 2015).

 

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(ii) Commitments and others

 

Fully depreciated assets and commitments for future purchases are as follows:

 

    As of     As of  
    December 31,     December 31,  
    2016     2015  
    ThUS$     ThUS$  
             
Gross book value of fully depreciated property,  plant and equipment still in use     116,386       129,766  
                 
Commitments for the acquisition of aircraft (*)     15,100,000       19,800,000  

 

(*) Acording to the manufacturer’s price list.

 

Purchase commitment of aircraft

 

    Year of delivery        
Manufacturer   2017     2018     2019     2020     2021     2022     Total  
Airbus S.A.S.     5       16       14       16       21       2       74  
A320-NEO     5       5       8       8       8       -       34  
A321     -       1       -       -       -       -       1  
A321-NEO     -       6       2       6       5       -       19  
A350-1000     -       -       2       2       8       2       14  
A350-900     -       4       2       -       -       -       6  
The Boeing Company     1       -       6       2       2       -       11  
Boeing 777     -       -       2       -       -       -       2  
Boeing 787-9     1       -       4       2       2       -       9  
Total     6       16       20       18       23       2       85  

 

In April 2015 the change of eight Boeing 787-8 aircraft for eight Boeing 787-8 aircraft was signed.

 

In September 2015 the change of six Airbus A350-900 aircraft for six Airbus A350-1000 aircraft was signed. Additionally, in November 2015 the change of six Airbus A350-900 aircraft to six Airbus A350-1000 aircraft was signed. In April 2016 the change of four Airbus A320 NEO aircraft to four Airbus A321 NEO aircraft was signed. In August 2016 a cancellation of 12 Airbus A320 NEO aircraft and the change of two Airbus A350-900 to two Airbus A350-1000 were signed.

 

As of December 31, 2016, as a result of the different aircraft purchase agreements signed with Airbus S.A.S., 54 aircraft Airbus A320 family, with deliveries between 2017 and 2021, and 20 Airbus aircraft A350 family with deliveries between 2017 and 2022 remain to be received.

 

The approximate amount is ThUS$ 12,400,000, according to the manufacturer’s price list. Additionally, the Company has valid purchase options for 4 Airbus A350 aircraft.

 

In May 2016 the change of four Boeing 787-8 aircraft for four Boeing 787-9 aircraft was signed.

 

As of December 31, 2016, and as a result of different aircraft purchase contracts signed with The Boeing Company, a total of nine Boeing 787 Dreamliner aircraft, with delivery dates between 2017 and 2021, and two Boeing 777 with delivery expected for 2019 remain to be received.

 

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The approximate amount, according to the manufacturer's price list, is ThUS$ 2,700,000.

 

(iii) Capitalized interest costs with respect to Property, plant and equipment.

 

        For the periods ended  
        December 31,  
        2016     2015  
Average rate of capitalization of capitalized interest costs   %     3.54       2.79  
Costs of capitalized interest   ThUS$     (696 )     22,551  

 

(iv) Financial leases

 

The detail of the main financial leases is as follows:

 

            As of     As of  
            December 31,     December 31,  
Lessor   Aircraft   Model   2016     2015  
Agonandra Statutory Trust   Airbus A320   200     -       2  
Becacina Leasing LLC   Boeing 767   300ER     1       1  
Caiquen Leasing LLC   Boeing 767   300F     1       1  
Cernicalo Leasing LLC   Boeing 767   300F     2       2  
Chirihue Leasing Trust   Boeing 767   300F     -       2  
Cisne Leasing LLC   Boeing 767   300ER     2       2  
Codorniz Leasing Limited   Airbus A319   100     2       2  
Conure Leasing Limited   Airbus A320   200     2       2  
Flamenco Leasing LLC   Boeing 767   300ER     1       1  
FLYAFI 1 S.R.L.   Boeing 777   300ER     1       1  
FLYAFI 2 S.R.L.   Boeing 777   300ER     1       1  
FLYAFI 3 S.R.L.   Boeing 777   300ER     1       1  
Forderum Holding B.V. (GECAS)   Airbus A320   200     -       2  
Garza Leasing LLC   Boeing 767   300ER     1       1  
General Electric Capital Corporation   Airbus A330   200     3       3  
Intraelo BETA Corpotation (KFW)   Airbus A320   200     1       1  
Juliana Leasing Limited   Airbus A320   200     -       2  
Loica Leasing Limited   Airbus A319   100     2       2  
Loica Leasing Limited   Airbus A320   200     2       2  
Mirlo Leasing LLC   Boeing 767   300ER     1       1  
NBB Rio de Janeiro Lease CO and Brasilia Lease LLC (BBAM)   Airbus A320   200     1       1  
NBB São Paulo Lease CO. Limited (BBAM)   Airbus A321   200     1       1  
Osprey Leasing Limited   Airbus A319   100     8       8  
Petrel Leasing LLC   Boeing 767   300ER     1       1  
Pilpilen Leasing Limited   Airbus A320   200     4       4  
Pochard Leasing LLC   Boeing 767   300ER     2       2  
Quetro Leasing LLC   Boeing 767   300ER     3       3  
SG Infraestructure Italia S.R.L.   Boeing 777   300ER     1       1  
SL Alcyone LTD (Showa)   Airbus A320   200     1       1  
TMF Interlease Aviation B.V.   Airbus A330   200     -       1  
TMF Interlease Aviation II B.V.   Airbus A319   100     -       5  
TMF Interlease Aviation II B.V.   Airbus A320   200     -       2  
Tricahue Leasing LLC   Boeing 767   300ER     3       3  
Wacapou Leasing S.A   Airbus A320   200     1       1  
Total             50       66  

 

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Financial leasing contracts where the Company acts as the lessee of aircrafts establish duration between 12 and 18 year terms and semi-annual, quarterly and monthly payments of obligations.

 

Additionally, the lessee will have the obligation to contract and maintain active the insurance coverage for the aircrafts, perform maintenance on the aircrafts and update the airworthiness certificates at their own cost.

 

Fixed assets acquired under financial leases are classified as Other property, plant and equipment. As of December 31, 2016 the Company had fifty aircrafts (sixty six aircraft as of December 31, 2015).

 

As of December 31, 2016, as a result of the transfer plan fleet of TAM Linhas Aéreas S.A. to LATAM Airlines Group S.A., the Company declined its number of aircraft leasing in five Airbus A319-100, eight Airbus A320-200 and one Airbus A330-200 aircraft.

 

The book value of assets under financial leases as of December 31, 2016 amounts to ThUS$ 1,753,366 (ThUS$ 2,030,723 at December 31, 2015).

 

The minimum payments under financial leases are as follows:

 

    As of December 31, 2016     As of December 31, 2015  
    Gross           Present     Gross           Present  
    Value     Interest     Value     Value     Interest     Value  
    ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$  
                                     
No later than one year     285,168       (32,365 )     252,803       360,862       (47,492 )     313,370  
Between one and five years     704,822       (43,146 )     661,676       1,003,237       (75,363 )     927,874  
Over five years     43,713       (120 )     43,593       95,050       (1,406 )     93,644  
Total     1,033,703       (75,631 )     958,072       1,459,149       (124,261 )     1,334,888  

 

NOTE 18 - CURRENT AND DEFERRED TAXES

 

In the period ended December 31, 2016, the income tax provision was calculated for such period, applying the rate of 24% for the business year 2016, in accordance with the Law No. 20,780 published in the Official Journal of the Republic of Chile on September 29, 2014.

 

Among the main changes is the progressive increase of the First Category Tax which will reach 27% in 2018 if the "Partially Integrated Taxation System" is chosen. Alternatively, if the Company chooses the "Attributed Income Taxation System" the top rate would reach 25% in 2017.

 

As LATAM Airlines Group S.A. is a public company, by default it must choose the "Partially Integrated Taxation System"(*), unless a future Extraordinary Meeting of Shareholders of the Company agrees, by a minimum of 2/3 of the votes, to choose the "Attributed Income Taxation System"(*). This decision was taken in the last quarter of 2016.

 

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On February 8, 2016, an amendment to the abovementioned Law was issued (as Law 20,899) stating, as its main amendments, that Companies such Latam Airlines Group S.A. had to mandatorily choose the "Partially Integrated Taxation System"(*) and could not elect to use the other system.

 

Assets and deferred tax liabilities are offset if there is a legal right to offset the assets and liabilities, always correspond to the same entity and tax authority.

 

(*) The Partially Integrated Taxation System is based on the taxation by the perception of profits and the Attributed Income Taxation System is based on the taxation by the accrual of profits.

 

(a) Current taxes

 

(a.1) The composition of the current tax assets is the following:

 

    Current assets     Non-current assets     Total assets  
    As of     As of     As of     As of     As of     As of  
    December 31,     December 31,     December 31,     December 31,     December 31,     December 31,  
    2016     2015     2016     2015     2016     2015  
    ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$  
                                     
Provisional monthly payments (advances)     43,821       43,935       -       -       43,821       43,935  
Other recoverable credits     21,556       20,080       20,272       25,629       41,828       45,709  
Total assets by current tax     65,377       64,015       20,272       25,629       85,649       89,644  

 

(a.2) The composition of the current tax liabilities are as follows:

 

    Current liabilities     Non-current liabilities     Total liabilities  
    As of     As of     As of     As of     As of     As of  
    December 31,     December 31,     December 31,     December 31,     December 31,     December 31,  
    2016     2015     2016     2015     2016     2015  
    ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$  
                                     
Income tax provision     9,632       19,001       -       -       9,632       19,001  
Additional tax provision     4,654       377       -       -       4,654       377  
Total liabilities by current tax     14,286       19,378       -       -       14,286       19,378  

 

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(b) Deferred taxes

 

The balances of deferred tax are the following:

 

    Assets     Liabilities  
    As of     As of     As of     As of  
Concept   December 31,     December 31,     December 31,     December 31,  
    2016     2015     2016     2015  
    ThUS$     ThUS$     ThUS$     ThUS$  
                         
Depreciation     11,735       (14,243 )     1,387,760       1,116,748  
Leased assets     (35,922 )     (25,299 )     203,836       226,003  
Amortization     (15,820 )     (5,748 )     61,660       65,416  
Provisions     222,253       210,992       (59,096 )     (167,545 )
Revaluation of financial instruments     -       709       (3,223 )     (7,575 )
Tax losses     202,536       212,067       (1,126,200 )     (797,715 )
Intangibles     -       -       430,705       364,314  
Others     (202 )     (1,883 )     20,317       11,919  
Total     384,580       376,595       915,759       811,565  

 

The balance of deferred tax assets and liabilities are composed primarily of temporary differences to be reversed in the long term.

 

Movements of Deferred tax assets and liabilities

 

(a) From January 1 to December 31, 2015

 

    Opening     Recognized in     Recognized in     Exchange           Ending  
    balance     consolidated     comprehensive     rate           balance  
    Assets/(liabilities)     income     income     variation     Others     Asset (liability)  
    ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$  
                                     
Depreciation     (871,640 )     (267,891 )     -       8,540       -       (1,130,991 )
Leased assets     (185,775 )     (73,330 )     -       7,803       -       (251,302 )
Amortization     (160,100 )     84,330       -       4,606       -       (71,164 )
Provisions     351,077       150,362       3,911       (126,813 )     -       378,537  
Revaluation of financial instruments     12,806       19,760       (21,103 )     (3,179 )     -       8,284  
Tax losses (*)     722,749       320,397       -       (33,364 )     -       1,009,782  
Intangibles     (523,275 )     (8,362 )     -       167,323       -       (364,314 )
Others     9,587       45,638       -       (62,182 )     (6,845 )     (13,802 )
Total     (644,571 )     270,904       (17,192 )     (37,266 )     (6,845 )     (434,970 )

 

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(b) From January 1 to December 31, 2016

 

    Opening     Recognized in     Recognized in     Exchange           Ending  
    balance     consolidated     comprehensive     rate           balance  
    Assets/(liabilities)     income     income     variation     Others     Asset (liability)  
    ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$  
                                     
Depreciation     (1,130,991 )     (241,435 )     -       (3,599 )     -       (1,376,025 )
Leased assets     (251,302 )     14,833       -       (3,289 )     -       (239,758 )
Amortization     (71,164 )     (4,375 )     -       (1,941 )     -       (77,480 )
Provisions     378,537       (149,969 )     921       53,448       (1,568 )     281,369  
Revaluation of financial instruments     8,284       28,294       (34,695 )     1,340       -       3,223  
Tax losses (*)     1,009,782       304,892       -       14,062       -       1,328,736  
Intangibles     (364,314 )     4,131       -       (70,522 )     -       (430,705 )
Others     (13,802 )     (30,185 )     -       22,234       1,214       (20,539 )
Total     (434,970 )     (73,814 )     (33,774 )     11,733       (354 )     (531,179 )

 

Deferred tax assets not recognized:

 

    As of     As of  
    December 31,     December 31,  
    2016     2015  
    ThUS$     ThUS$  
             
Tax losses     115,801       15,513  
Total Deferred tax assets not recognized     115,801       15,513  

 

Deferred tax assets on tax loss, are recognized to the extent that it is likely probable the realization of future tax benefit By the above at December 31, 2016, the Company has not recognized deferred tax assets of ThUS$ 115,801 (ThUS$ 15,513 at December 31, 2015) according with a loss of ThUS$ 340,591 (ThUS$ 45,628 at December 31, 2015).

 

69

 

 

Deferred tax expense and current income taxes:

 

    For the period ended  
    December 31,  
    2016     2015  
    ThUS$     ThUS$  
             
Current tax expense                
Current tax expense     87,307       92,916  
Adjustment to previous period’s current tax     2,083       (395 )
Total current tax expense, net     89,390       92,521  
                 
Deferred tax expense                
Deferred expense for taxes related to the creation and reversal of temporary differences     73,814       (270,904 )
Total deferred tax expense, net     73,814       (270,904 )
Income tax expense     163,204       (178,383 )

 

Composition of income tax expense (income):

 

    For the period ended  
    December 31,  
    2016     2015  
    ThUS$     ThUS$  
             
Current tax expense, net, foreign     80,600       89,460  
Current tax expense, net, Chile     8,790       3,061  
Total current tax expense, net     89,390       92,521  
                 
Deferred tax expense, net, foreign     119,175       (280,445 )
Deferred tax expense, net, Chile     (45,361 )     9,541  
Deferred tax expense, net, total     73,814       (270,904 )
Income tax expense     163,204       (178,383 )

 

70

 

  

Profit before tax by the legal tax rate in Chile (24% and 22.5% at December 31, 2016 and 2015, respectively)

 

    For the period ended     For the period ended  
    December 31,     December 31,  
    2016     2015     2016     2015  
    ThUS$     ThUS$     %     %  
                         
Tax expense using the legal rate (*)     65,449       (89,472 )     24.00       22.50  
Tax effect of rates in other jurisdictions     16,333       (21,803 )     5.99       5.48  
Tax effect of non-taxable operating revenues     (62,419 )     (106,381 )     (22.89 )     26.75  
Tax effect of disallowable expenses     132,469       38,677       48.58       (9.73 )
Other increases (decreases) in legal tax charge     11,372       596       4.17       (0.15 )
Total adjustments to tax expense using the legal rate     97,755       (88,911 )     35.85       22.35  
Tax expense using the effective rate     163,204       (178,383 )     59.85       44.85  

 

(*) On September 29, 2014, Law No. 20,780 "Amendment to the system of income taxation and introduces various adjustments in the tax system." was published in the Official Journal of the Republic of Chile. Within major tax reforms that this law contains, the First- Category Tax rate is gradually modified from 2014 to 2018 and should be declared and paid in tax year 2015.

 

Thus, at December 31, 2016 the Company presents the reconciliation of income tax expense and legal tax rate considering the rate increase.

  

Deferred taxes related to items charged to net equity:

 

    For the period ended  
    December 31,  
    2016     2015  
    ThUS$     ThUS$  
             
Aggregate deferred taxation of components of other comprehensive income     (33,774 )     (17,192 )
Aggregate deferred taxation related to items charged to net equity     (807 )     (992 )

 

71

 

 

NOTE 19 - OTHER FINANCIAL LIABILITIES

 

The composition of Other financial liabilities is as follows:

 

    As of     As of  
    December 31,     December 31,  
    2016     2015  
    ThUS$     ThUS$  
             
Current            
(a) Interest bearing loans     1,814,647       1,510,146  
(b) Hedge derivatives     24,881       134,089  
Total current     1,839,528       1,644,235  
Non-current                
(a) Interest bearing loans     6,790,273       7,516,257  
(b) Hedge derivatives     6,679       16,128  
Total non-current     6,796,952       7,532,385  

 

(a) Interest bearing loans

 

Obligations with credit institutions and debt instruments:

 

    As of     As of  
    December 31,     December 31,  
    2016     2015  
    ThUS$     ThUS$  
             
Current            
Loans to exporters     278,164       387,409  
Bank loans (1)     290,810       80,188  
Guaranteed obligations     578,014       591,148  
Other guaranteed obligations     1,908       32,513  
Subtotal bank loans     1,148,896       1,091,258  
Obligation with the public     312,043       10,999  
Financial leases     268,040       324,859  
Other loans     85,668       83,030  
Total current     1,814,647       1,510,146  
Non-current                
Bank loans     294,477       564,128  
Guaranteed obligations     4,180,538       4,122,995  
Other guaranteed obligations     254,512       -  
Subtotal bank loans     4,729,527       4,687,123  
Obligation with the public (2)     997,302       1,294,882  
Financial leases     754,321       1,015,779  
Other loans     309,123       518,473  
Total non-current     6,790,273       7,516,257  
Total obligations with financial institutions     8,604,920       9,026,403  

 

72

 

 

(1) On September 29, 2016 TAM Linhas Aéreas S.A. obtained financing for US $ 200 million, guaranteed with 18% of the shares of Multiplus S.A., percentage adjustable depending on the shares price. Additionally, TAM obtained a Cross Currency Swap for the same amount and period, in order to convert the commitment currency from US$ to BRL.

 

(2) On June 9, 2015 LATAM Airlines Group S.A. has issued and placed on the international market under Rule 144-A and Regulation S of the securities laws of the United States of America, unsecured long-term bonds in the amount of US$ 500,000,000, maturing 2020, interest rate of 7.25% per annum.

 

As reported in the Essential Matter of May 20 and June 5, 2015, the Issuance and placement of the Bonds 144-A shall be: (i) finance the repurchase, conversion and redemption of secured long-term bonds issued by the company TAM Capital 2 Inc., under Rule 144-A and Regulation S of the securities laws of the United States of America, maturing 2020; (ii) in the event there is any remnant fund other general corporate purposes. The aforementioned bonds TAM Capital 2 Inc. were redeemed in whole (US$ 300,000,000) through a process of exchange for new bonds dated June 9, 2015 and then the remaining bonds were redeemed by running the prepay dated June 18, 2015.

 

All interest-bearing liabilities are recorded using the effective interest rate method. Under IFRS, the effective interest rate for loans with a fixed interest rate does not vary throughout the loan, while in the case of loans with variable interest rates, the effective rate changes on each date of reprising of the loan.

 

Currency balances that make the interest bearing loans:

 

    As of     As of  
    December 31,     December 31,  
Currency   2016     2015  
  ThUS$     ThUS$  
             
Brazilian real     1,253       3,387  
Chilean peso (U.F.)     203,194       210,423  
US Dollar     8,400,473       8,812,593  
Total     8,604,920       9,026,403  

 

73

 

 

Interest-bearing loans due in installments to December 31, 2016

Debtor: LATAM Airlines Group S.A. and Subsidiaries, Tax No. 89.862.200-2, Chile.

 

                Nominal values     Accounting values                  
                      More than     More than     More than                       More than     More than     More than                              
                Up to     90 days     one to     three to     More than     Total     Up to     90 days     one to     three to     More than     Total                  
        Creditor       90     to one     three     five     five     nominal     90     to one     three     five     five     accounting         Effective     Nominal  
Tax No.   Creditor   country   Currency   days     year     years     years     years     value     days     year     years     years     years     value     Amortization   rate     rate  
                ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$         %     %  
                                                                                                     
Loans to exporters                                                                                        
97.032.000-8   BBVA   Chile   US$     75,000       -       -       -       -       75,000       75,234       -       -       -       -       75,234     At Expiration     1.85       1.85  
97.032.000-8   BBVA   Chile   UF     -       50,381       -       -       -       50,381       -       50,324       -       -       -       50,324     At Expiration     5.23       4.43  
97.036.000-K   SANTANDER   Chile   US$     30,000       -       -       -       -       30,000       30,183       -       -       -       -       30,183     At Expiration     2.39       2.39  
97.030.000-7   ESTADO   Chile   US$     40,000       -       -       -       -       40,000       40,098       -       -       -       -       40,098     At Expiration     1.91       1.91  
97.003.000-K   BANCO DO BRASIL   Chile   US$     70,000       -       -       -       -       70,000       70,323       -       -       -       -       70,323     At Expiration     3.08       3.08  
97.951.000-4   HSBC   Chile   US$     12,000       -       -       -       -       12,000       12,002       -       -       -       -       12,002     At Expiration     1.79       1.79  
Bank loans                                                                                        
97.023.000-9   CORPBANCA   Chile   UF     19,229       57,686       60,186       16,254       -       153,355       19,819       57,686       59,176       16,189       -       152,870     Quarterly     4.06       4.06  
0-E   BLADEX   U.S.A.   US$     -       12,500       30,000       -       -       42,500       -       12,667       29,625       -       -       42,292     Semiannual     5.14       5.14  
0-E   DVB BANK SE   U.S.A.   US$     -       -       28,911       -       -       28,911       3       -       28,911       -       -       28,914     Quarterly     1.86       1.86  
97.036.000-K   SANTANDER   Chile   US$     -       -       158,194       -       -       158,194       542       -       158,194       -       -       158,736     Quarterly     3.55       3.55  
Obligations with the public                                                                                        
0-E   BANK OF NEW YORK   U.S.A.   US$     -       -       -       500,000       -       500,000       2,291       -       -       489,885       -       492,176     At Expiration     7.77       7.25  
Guaranteed obligations                                                                                        
0-E   CREDIT AGRICOLE   France   US$     11,073       29,252       62,209       32,172       3,711       138,417       11,454       29,252       60,781       31,221       3,631       136,339     Quarterly     2.21       1.81  
0-E   BNP PARIBAS   U.S.A.   US$     10,496       42,401       111,962       118,181       345,078       628,118       12,792       43,023       108,271       116,067       341,481       621,634     Quarterly     2.97       2.96  
0-E   WELLS FARGO   U.S.A.   US$     31,448       95,186       260,112       269,512       400,087       1,056,345       35,211       95,186       233,012       257,387       391,253       1,012,049     Quarterly     2.37       1.68  
0-E   WILMINGTON TRUST   U.S.A.   US$     15,554       49,236       135,254       140,848       626,444       967,336       20,997       49,236       130,792       138,455       622,153       961,633     Quarterly     4.25       4.25  
0-E   CITIBANK   U.S.A.   US$     17,495       53,162       146,932       154,774       175,805       548,168       19,059       53,162       138,257       150,891       172,087       533,456     Quarterly     2.72       1.96  
97.036.000-K   SANTANDER   Chile   US$     5,347       16,204       44,472       46,386       26,165       138,574       5,680       16,204       42,707       45,815       26,063       136,469     Quarterly     1.98       1.44  
0-E   BTMU   U.S.A.   US$     2,787       8,470       23,393       24,635       26,705       85,990       3,001       8,470       22,132       24,149       26,519       84,271     Quarterly     2.31       1.72  
0-E   APPLE BANK   U.S.A.   US$     1,364       4,167       11,516       12,146       13,561       42,754       1,538       4,166       10,889       11,902       13,464       41,959     Quarterly     2.29       1.69  
0-E   US BANK   U.S.A.   US$     14,817       44,958       123,705       129,462       219,666       532,608       17,298       44,958       104,709       120,509       211,895       499,369     Quarterly     3.99       2.81  
0-E   DEUTSCHE BANK   U.S.A.   US$     4,992       15,365       24,725       26,984       45,197       117,263       5,570       15,365       24,023       26,515       44,522       115,995     Quarterly     3.86       3.86  
0-E   NATIXIS   France   US$     12,289       37,388       98,873       82,066       192,235       422,851       13,038       37,388       97,469       81,130       190,048       419,073     Quarterly     2.60       2.57  
0-E   PK AIRFINANCE   U.S.A.   US$     2,018       6,268       18,413       24,944       3,144       54,787       2,071       6,269       18,412       24,944       3,144       54,840     Monthly     2.40       2.40  
0-E   KFW IPEX-BANK   Germany   US$     2,288       7,015       17,869       9,019       -       36,191       2,319       7,015       17,869       9,019       -       36,222     Quarterly     2.55       2.55  
0-E   AIRBUS FINANCIAL   U.S.A.   US$     1,797       5,476       15,262       7,664       -       30,199       1,841       5,477       15,261       7,664       -       30,243     Monthly     2.49       2.49  
0-E   INVESTEC   England   US$     1,298       7,526       19,290       21,667       22,421       72,202       1,771       7,733       18,533       21,368       22,309       71,714     Semiannual     5.67       5.67  
-   SWAP Aviones llegados   -   US$     403       1,067       1,658       158       -       3,286       403       1,067       1,658       158       -       3,286     Quarterly     -       -  
Other guaranteed obligations                                                                                        
0-E   CREDIT AGRICOLE   France   US$     -       -       256,860       -       -       256,860       1,908       -       254,512       -       -       256,420     Quarterly     2.85       2.85  
Financial leases                                                                                        
0-E   ING   U.S.A.   US$     5,089       15,653       31,151       11,805       -       63,698       5,641       15,652       30,577       11,771       -       63,641     Quarterly     5.62       4.96  
0-E   CREDIT AGRICOLE   France   US$     1,754       5,403       -       -       -       7,157       1,780       5,403       -       -       -       7,183     Quarterly     1.85       1.85  
0-E   CITIBANK   U.S.A.   US$     4,956       15,312       44,177       13,804       -       78,249       5,622       15,312       43,413       13,762       -       78,109     Quarterly     6.40       5.67  
0-E   PEFCO   U.S.A.   US$     15,979       47,048       63,957       3,827       -       130,811       16,852       47,048       63,072       3,819       -       130,791     Quarterly     5.39       4.79  
0-E   BNP PARIBAS   U.S.A.   US$     12,520       38,494       75,958       22,147       -       149,119       13,122       38,494       74,776       22,079       -       148,471     Quarterly     3.69       3.26  
0-E   WELLS FARGO   U.S.A.   US$     4,678       14,261       39,862       42,663       1,862       103,326       5,018       14,260       38,834       42,430       1,861       102,403     Quarterly     3.98       3.54  
0-E   DVB BANK SE   U.S.A.   US$     4,680       9,447       -       -       -       14,127       4,713       9,448       -       -       -       14,161     Quarterly     2.57       2.57  
0-E   RRP ENGINE   England   US$     -       -       6,402       6,955       11,917       25,274       -       -       6,402       6,955       11,917       25,274     Monthly     2.35       2.35  
Other loans                                                                                        
0-E   BOEING   U.S.A.   US$     -       -       26,214       -       -       26,214       185       -       26,214       -       -       26,399     At Expiration     2.35       2.35  
0-E   CITIBANK (*)   U.S.A.   US$     20,555       63,942       184,866       101,026       -       370,389       21,541       63,942       182,043       100,866       -       368,392     Quarterly     6.00       6.00  
     Total             451,906       753,268       2,122,383       1,819,099       2,113,998       7,260,654       480,920       754,207       2,040,524       1,774,950       2,082,347       7,132,948                      

 

(*) Securitized bond with the future flows from the sales with credit card in United States and Canada.

 

74

 


Interest-bearing loans due in installments to December 31, 2016

Debtor: TAM S.A. and Subsidiaries, Tax No. 02.012.862/0001-60, Brazil.

 

                Nominal values     Accounting values                  
                      More than     More than     More than                     More than     More than     More than                              
                Up to     90 days     one to     three to     More than   Total     Up to     90 days     one to     three to     More than     Total                  
        Creditor       90     to one     three     five     five   nominal     90     to one     three     five     five     accounting         Effective     Nominal  
Tax No.   Creditor   country   Currency   days     year     years     years     years   value     days     year     years     years     years     value     Amortization   rate     rate  
                ThUS$     ThUS$     ThUS$     ThUS$     ThUS$   ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$         %     %  
                                                                                                   
Bank loans                                                                                    
0-E   NEDERLANDSCHE                                                                                                                        
    CREDIETVERZEKERING MAATSCHAPPIJ   Holland   US$     122       378       1,094       1,234     54     2,882       137       378       1,094       1,233       55       2,897     Monthly     6.01       6.01  
0-E   CITIBANK   U.S.A   US$     -       200,000       -       -     -     200,000       (151 )     199,729       -       -       -       199,578     At Expiration     3.39       3.14  
Obligation with the public                                                                                    
0-E   THE BANK OF NEW YORK   U.S.A   US$     -       300,000       -       500,000     -     800,000       8,173       301,579       4,119       503,298       -       817,169     At Expiration     8.17       8.00  
Financial leases                                                                                    
0-E   AFS INVESTMENT IX LLC   U.S.A   US$     2,086       6,437       18,556       8,369     -     35,448       2,253       6,437       18,556       8,369       -       35,615     Monthly     1.25       1.25  
0-E   DVB BANK SE   U.S.A   US$     118       164       -       -     -     282       119       164       -       -       -       283     Monthly     2.50       2.50  
0-E   GENERAL ELECTRIC CAPITAL CORPORATION   U.S.A   US$     3,771       5,075       -       -     -     8,846       3,794       5,075       -       -       -       8,869     Monthly     2.30       2.30  
0-E   KFW IPEX-BANK   Germany   US$     579       1,544       -       -     -     2,123       583       1,544       -       -       -       2,127     Monthly/Quarterly     2.80       2.80  
0-E   NATIXIS   France   US$     2,675       5,732       18,485       38,820     41,731     107,443       3,533       5,732       18,485       38,820       41,731       108,301     Quarterly/Semiannual     4.90       4.90  
0-E   WACAPOU LEASING S.A.   Luxemburg   US$     668       2,038       5,768       6,280     -     14,754       709       2,038       5,768       6,280       -       14,795     Quarterly     3.00       3.00  
0-E   SOCIÉTÉ GÉNÉRALE MILAN BRANCH   Italy   US$     8,547       26,275       74,783       169,730     -     279,335       9,779       26,275       74,783       169,730       -       280,567     Quarterly     4.18       4.11  
0-E   BANCO IBM S.A   Brazil   BRL     260       749       22       -     -     1,031       260       749       21       -       -       1,030     Monthly     13.63       13.63  
0-E   HP FINANCIAL SERVICE   Brazil   BRL     222       -       -       -     -     222       222       -       -       -       -       222     Monthly     10.02       10.02  
0-E   SOCIETE GENERALE   France   BRL     102       307       110       -     -     519       102       307       110       -       -       519     Monthly     13.63       13.63  
                                                                                                                             
    Total             19,150       548,699       118,818       724,433     41,785     1,452,885       29,513       550,007       122,936       727,730       41,786       1,471,972                      
                                                                                                                             
    Total consolidated             471,056       1,301,967       2,241,201       2,543,532     2,155,783     8,713,539       510,433       1,304,214       2,163,460       2,502,680       2,124,133       8,604,920                      

 

75

 

 

Interest-bearing loans due in installments to December 31, 2015

Debtor: LATAM Airlines Group S.A. and Subsidiaries, Tax No. 89.862.200-2, Chile.

 

                Nominal values     Accounting values                  
                      More than     More than     More than                       More than     More than     More than                              
                Up to     90 days     one to     three to     More than     Total     Up to     90 days     one to     three to     More than     Total                  
        Creditor       90     to one     three     five     five     nominal     90     to one     three     five     five     accounting         Effective     Nominal  
Tax No.   Creditor   country   Currency   days     year     years     years     years     value     days     year     years     years     years     value     Amortization   rate     rate  
                ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$         %     %  
                                                                                                     
Loans to exporters                                                                                        
97.032.000-8   BBVA   Chile   US$     100,000       -       -       -       -       100,000       100,183       -       -       -       -       100,183     At Expiration     1.00       1.00  
97.036.000-K   SANTANDER   Chile   US$     100,000       -       -       -       -       100,000       100,067       -       -       -       -       100,067     At Expiration     1.44       1.44  
97.030.000-7   ESTADO   Chile   US$     55,000       -       -       -       -       55,000       55,088       -       -       -       -       55,088     At Expiration     1.05       1.05  
97.004.000-5   CHILE   Chile   US$     50,000       -       -       -       -       50,000       50,006       -       -       -       -       50,006     At Expiration     1.42       1.42  
97,003,000-K   BANCO DO BRASIL   Chile   US$     70,000       -       -       -       -       70,000       70,051       -       -       -       -       70,051     At Expiration     1.18       1.18  
97.951.000-4   HSBC   Chile   US$     12,000       -       -       -       -       12,000       12,014       -       -       -       -       12,014     At Expiration     0.66       0.66  
Bank loans                                                                                        
97.023.000-9   CORPBANCA   Chile   UF     17,631       52,893       105,837       34,774       -       211,135       18,510       52,892       104,385       34,635       -       210,422     Quarterly     4.18       4.18  
0-E   BLADEX   U.S.A.   US$     -       7,500       27,500       15,000       -       50,000       134       7,500       27,125       14,875       -       49,634     Semiannual     4.58       4.58  
0-E   DVB BANK SE   U.S.A.   US$     -       -       153,514       -       -       153,514       14       -       153,514       -       -       153,528     Quarterly     1.67       1.67  
97.036.000-K   SANTANDER   Chile   US$     -       -       226,712       -       -       226,712       650       -       226,712       -       -       227,362     Quarterly     2.24       2.24  
Obligations with the public                                                                                        
0-E   BANK OF YORK   U.S.A.   US$     -       -       -       500,000       -       500,000       2,383       -       -       486,962       -       489,345     At Expiration     7.77       7.25  
Guaranteed obligations                                                                                        
0-E   CREDIT AGRICOLE   France   US$     29,633       88,188       204,722       54,074       12,410       389,027       30,447       88,189       203,286       54,074       12,410       388,406     Quarterly     1.83       1.66  
0-E   BNP PARIBAS   U.S.A.   US$     8,162       25,012       70,785       75,028       140,410       319,397       9,243       25,012       70,335       74,917       140,407       319,914     Quarterly     2.29       2.22  
0-E   WELLS FARGO   U.S.A.   US$     30,895       93,511       255,536       264,770       536,039       1,180,751       34,933       93,511       227,704       252,054       525,257       1,133,459     Quarterly     2.27       1.57  
0-E   WILMINGTON TRUST   U.S.A.   US$     -       48,264       85,183       90,694       451,555       675,696       5,691       48,263       81,867       88,977       448,016       672,814     Quarterly     4.25       4.25  
0-E   CITIBANK   U.S.A.   US$     17,042       51,792       143,168       150,792       254,208       617,002       18,545       51,792       133,740       146,362       249,406       599,845     Quarterly     2.40       1.64  
97.036.000-K   SANTANDER   Chile   US$     5,233       15,862       43,552       45,416       49,606       159,669       5,514       15,862       41,434       44,599       49,281       156,690     Quarterly     1.47       0.93  
0-E   BTMU   U.S.A.   US$     2,714       8,250       22,801       24,007       39,182       96,954       2,897       8,250       21,336       23,376       38,789       94,648     Quarterly     1.82       1.22  
0-E   APPLE BANK   U.S.A.   US$     1,333       4,055       11,211       11,828       19,715       48,142       1,478       4,056       10,483       11,513       19,515       47,045     Quarterly     1.72       1.12  
0-E   US BANK   U.S.A.   US$     14,483       43,948       120,924       126,550       285,134       591,039       17,232       43,948       102,607       117,968       277,195       558,950     Quarterly     3.99       2.81  
0-E   DEUTSCHE BANK   U.S.A.   US$     4,767       14,667       32,449       25,826       58,989       136,698       5,342       14,666       32,448       25,826       58,989       137,271     Quarterly     3.40       3.40  
0-E   NATIXIS   France   US$     11,698       35,914       97,434       83,289       241,088       469,423       12,351       35,914       97,434       83,289       241,088       470,076     Quarterly     2.08       2.05  
0-E   HSBC   U.S.A.   US$     1,374       4,180       11,533       12,112       24,384       53,583       1,504       4,180       11,533       12,112       24,384       53,713     Quarterly     2.40       1.59  
0-E   PK AIRFINANCE   U.S.A.   US$     1,882       5,846       17,171       19,744       17,871       62,514       1,937       5,846       17,171       19,744       17,871       62,569     Monthly     2.04       2.04  
0-E   KFW IPEX-BANK   Germany   US$     653       2,028       5,314       3,958       1,640       13,593       655       2,028       5,314       3,958       1,640       13,595     Quarterly     2.45       2.45  
-   SWAP Aviones llegados   -   US$     502       1,360       2,521       765       -       5,148       502       1,360       2,521       765       -       5,148     Quarterly     -       -  
Other guaranteed obligations                                                                                        
0-E   DVB BANK SE   U.S.A.   US$     8,054       24,438       -       -       -       32,492       8,075       24,438       -       -       -       32,513     Quarterly     2.32       2.32  
Financial leases                                                                                        
0-E   ING   U.S.A.   US$     8,108       23,191       36,868       26,831       -       94,998       8,894       23,191       36,066       26,682       -       94,833     Quarterly     5.13       4.57  
0-E   CREDIT AGRICOLE   France   US$     1,666       5,131       7,158       -       -       13,955       1,700       5,131       7,158       -       -       13,989     Quarterly     1.28       1.28  
0-E   CITIBANK   U.S.A.   US$     4,687       14,447       41,726       36,523       -       97,383       5,509       14,447       40,684       36,330       -       96,970     Quarterly     6.40       5.67  
0-E   PEFCO   U.S.A.   US$     15,246       46,858       108,403       22,407       -       192,914       16,536       46,858       106,757       22,324       -       192,475     Quarterly     5.37       4.77  
0-E   BNP PARIBAS   U.S.A.   US$     9,956       30,678       81,373       31,100       -       153,107       10,494       30,678       79,983       30,958       -       152,113     Quarterly     4.08       3.64  
0-E   WELLS FARGO   U.S.A.   US$     4,519       13,784       38,531       41,238       23,556       121,628       4,919       13,784       37,247       40,819       23,486       120,255     Quarterly     3.98       3.54  
0-E   DVB BANK SE   U.S.A.   US$     4,567       13,873       14,127       -       -       32,567       4,625       13,873       14,127       -       -       32,625     Quarterly     2.06       2.06  
0-E   BANC OF AMERICA   U.S.A.   US$     674       2,096       -       -       -       2,770       676       2,096       -       -       -       2,772     Monthly     1.41       1.41  
Other loans                                                                                        
0-E   BOEING   U.S.A.   US$     -       -       151,362       -       -       151,362       2,294       -       151,363       -       -       153,657     At Expiration     1.80       1.80  
0-E   CITIBANK (*)   U.S.A.   US$     19,361       60,251       174,178       196,210       -       450,000       20,485       60,251       174,178       192,932       -       447,846     Quarterly     6.00       6.00  
    Total             611,840       738,017       2,291,593       1,892,936       2,155,787       7,690,173       641,578       738,016       2,218,512       1,846,051       2,127,734       7,571,891                      

 

(*) Securitized bond with the future flows from the sales with credit card in United States and Canada.

 

76

 

 

Interest-bearing loans due in installments to December 31, 2015

Debtor: TAM S.A. and Subsidiaries, Tax No. 02.012.862/0001-60, Brazil.

 

                Nominal values     Accounting values                  
                      More than     More than     More than                       More than     More than     More than                              
                Up to     90 days     one to     three to     More than     Total     Up to     90 days     one to     three to     More than     Total                  
        Creditor       90     to one     three     five     five     nominal     90     to one     three     five     five     accounting         Effective     Nominal  
Tax No.   Creditor   country   Currency   days     year     years     years     years     value     days     year     years     years     years     value     Amortization   rate     rate  
                ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$         %     %  
                                                                                                     
Bank loans                                                                                        
0-E   NEDERLANDSCHE                                                                                                                            
    CREDIETVERZEKERING MAATSCHAPPIJ   Holland   US$     115       356       1,031       1,162       689       3,353       132       356       1,031       1,162       689       3,370     Monthly     6.01       6.01  
Obligations with the public                                                                                        
0-E   THE BANK OF NEW YORK   U.S.A.   US$     -       -       300,000       -       500,000       800,000       7,506       1,110       301,722       5,171       501,027       816,536     At Expiration     8.17       8.00  
Financial leases                                                                                        
0-E   AFS INVESTMENT IX LLC   U.S.A.   US$     1,972       6,085       17,540       17,908       -       43,505       2,176       6,085       17,540       17,908       -       43,709     Monthly     1.25       1.25  
0-E   AIRBUS FINANCIAL   U.S.A.   US$     3,370       10,397       20,812       15,416       -       49,995       3,461       10,396       20,813       15,416       -       50,086     Monthly     1.43       1.43  
0-E   CREDIT AGRICOLE-CIB   U.S.A.   US$     4,500       -       -       -       -       4,500       4,528       -       -       -       -       4,528     Quarterly     3.25       3.25  
0-E   DVB BANK SE   U.S.A.   US$     118       355       282       -       -       755       120       355       282       -       -       757     Monthly     1.64       1.64  
0-E   GENERAL ELECTRIC CAPITAL CORPORATION   U.S.A.   US$     3,654       11,137       8,970       -       -       23,761       3,697       11,137       8,970       -       -       23,804     Monthly     1.25       1.25  
0-E   KFW IPEX-BANK   Germany   US$     3,097       6,401       15,186       12,215       -       36,899       3,163       6,401       15,186       12,215       -       36,965     Monthly/Quarterly     1.72       1.72  
0-E   NATIXIS   France   US$     2,505       5,387       17,359       19,682       70,087       115,020       3,476       5,387       17,360       19,682       70,088       115,993     Quarterly/Semiannual     3.85       3.85  
0-E   PK AIRFINANCE US, INC.   U.S.A.   US$     1,276       21,769       -       -       -       23,045       1,316       21,769       -       -       -       23,085     Monthly     1.75       1.75  
0-E   WACAPOU LEASING S.A.   Luxemburg   US$     383       1,101       2,617       14,267       -       18,368       418       1,101       2,617       14,267       -       18,403     Quarterly     2.00       2.00  
0-E   SOCIÉTÉ GÉNÉRALE MILAN BRANCH   Italy   US$     8,148       25,003       71,311       208,024       -       312,486       9,552       25,003       71,311       208,024       -       313,890     Quarterly     3.63       3.55  
0-E   BANCO IBM S.A   Brazil   BRL     217       651       860       -       -       1,728       217       651       860       -       -       1,728     Monthly     14.14       14.14  
0-E   HP FINANCIAL SERVICE   Brazil   BRL     168       529       185       -       -       882       169       529       185       -       -       883     Monthly     10.02       10.02  
0-E   SOCIETE GENERALE   France   BRL     85       256       434       -       -       775       85       256       434       -       -       775     Monthly     14.14       14.14  
                                                                                                                                 
    Total             29,608       89,427       456,587       288,674       570,776       1,435,072       40,016       90,536       458,311       293,845       571,804       1,454,512                      
                                                                                                                                 
    Total consolidated             641,448       827,444       2,748,180       2,181,610       2,726,563       9,125,245       681,594       828,552       2,676,823       2,139,896       2,699,538       9,026,403                      
77

 

 

(b) Hedge derivatives

 

    Current liabilities     Non-current liabilities     Total hedge
derivatives 		 
    As of     As of     As of     As of     As of     As of  
    December 31,     December 31,     December 31,     December 31,     December 31,     December 31,  
    2016     2015     2016     2015     2016     2015  
    ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$  
                                     
Accrued interest from the last date of interest rate swap     2,148       4,329       -       -       2,148       4,329  
Fair value of interest rate derivatives     9,578       33,518       6,679       16,128       16,257       49,646  
Fair value of fuel derivatives     -       56,424       -       -       -       56,424  
Fair value of foreign currency derivatives     13,155       39,818       -       -       13,155       39,818  
Total hedge derivatives     24,881       134,089       6,679       16,128       31,560       150,217  

 

The foreign currency derivatives exchanges are FX forward and cross currency swap.

 

Hedging operation

 

The fair values of net assets/ (liabilities), by type of derivative, of the contracts held as hedging instruments are presented below:

 

    As of     As of  
    December 31,     December 31,  
    2016     2015  
    ThUS$     ThUS$  
                 
Cross currency swaps (CCS) (1)     (12,286 )     (49,311 )
Interest rate swaps (2)     (16,926 )     (44,085 )
Fuel options (3)     10,088       (50,131 )
Currency forward - options US$/GBP$ (4)     618       7,432  
Currency forward - options US$/EUR$ (4)     109       1,438  
Currency options R$/US$ (4)     (1,752 )     933  
Currency options CLP/US$ (4)     -       85  

 

(1) Covers the significant variations in cash flows associated with market risk implicit in the changes in the 3-month LIBOR interest rate and the exchange rate US$/UF and US$/BRL of bank loans. These contracts are recorded as cash flow hedges and fair value.
(2) Covers the significant variations in cash flows associated with market risk implicit in the increases in the 3 months LIBOR interest rates for long-term loans incurred in the acquisition of aircraft and bank loans. These contracts are recorded as cash flow hedges.
(3) Covers significant variations in cash flows associated with market risk implicit in the changes in the price of future fuel purchases. These contracts are recorded as cash flow hedges.
(4) Covers the foreign exchange risk exposure of operating cash flows caused mainly by fluctuations in the exchange rate R$/US$ and US$/GBP. These contracts are recorded as cash flow hedges.

 

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During the periods presented, the Company only maintains cash flow hedges and fair value (in the case of CCS). In the case of fuel hedges, the cash flows subject to such hedges will impact results in the next six months from the consolidated statement of financial position date, meanwhile in the case of interest rate hedging, the hedges will impact results over the life of the related loans, which are valid initially for 12 years. The hedges on investments will impact results continuously throughout the life of the investment, while the cash flows occur at the maturity of the investment. In the case of currency hedges through a CCS, are generated two types of hedge accounting, a cash flow component by US$/UF and US$/BRL, and other fair value by US$ floating rate component.

 

During the periods presented, no hedging operations of future highly probable transaction that have not been realized have occurred.

 

Since none of the coverage resulted in the recognition of a non-financial asset, no portion of the result of the derivatives recognized in equity was transferred to the initial value of such assets.

 

The amounts recognized in comprehensive income during the period and transferred from net equity to income are as follows:

 

    For the period ended  
    December 31,  
    2016     2015  
    ThUS$     ThUS$  
             
Debit (credit) recognized in comprehensive income during the period     127,390       80,387  
Debit (credit) transferred from net equity to income during the period     (113,403 )     (151,244 )

 

NOTE 20 - TRADE AND OTHER ACCOUNTS PAYABLES

 

The composition of Trade and other accounts payables is as follows:

 

    As of     As of  
    December 31,     December 31,  
    2016     2015  
    ThUS$     ThUS$  
             
Current                
(a) Trade and other accounts payables     1,117,926       1,025,574  
(b) Accrued liabilities at the reporting date     475,142       458,383  
Total trade and other accounts payables     1,593,068       1,483,957  

 

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(a) Trade and other accounts payable:

 

    As of     As of  
    December 31,     December 31,  
    2016     2015  
    ThUS$     ThUS$  
             
Trade creditors     868,833       758,783  
Leasing obligation     10,446       18,784  
Other accounts payable     238,647       248,007  
Total     1,117,926       1,025,574  

 

The details of Trade and other accounts payables are as follows:

 

    As of     As of  
    December 31,     December 31,  
    2016     2015  
    ThUS$     ThUS$  
             
Aircraft Fuel     188,276       148,612  
Boarding Fee     149,880       175,900  
Airport charges and overflight     90,327       94,139  
Handling and ground handling     87,406       88,629  
Other personnel expenses     81,632       72,591  
Professional services and advisory     79,270       63,302  
Land services     74,260       80,387  
Marketing     61,053       45,997  
Services on board     44,589       32,993  
Leases, maintenance and IT services     44,287       25,558  
Suppliers' technical purchases     40,305       52,160  
Crew     29,074       23,834  
Maintenance     25,962       18,573  
Achievement of goals     17,801       15,386  
Distribution system     15,710       17,531  
Airlines     13,264       3,890  
Aircraft and engines leasing     10,446       19,146  
Aviation insurance     7,694       7,655  
Communications     7,500       6,731  
SEC agreement (*)     4,719       -  
Others     44,471       32,560  
Total trade and other accounts payables     1,117,926       1,025,574  

 

(*) Provision made for payments of fines, on July 25, 2016 LATAM reached agreements with the U.S. Department of Justice ("DOJ") U.S. and the Securities and Exchange Commission ("SEC") both authorities of the United States of America, in force as of this date, regarding the investigation on payments by LAN Airlines S.A. made in 2006-2007 to a consultant who advised on the resolution of labor matters in Argentina. The amount to the SEC agreement is ThUS$ 6,744 plus interests of ThUS$ 2,694.

 

As of December 31, the balance payable to the SEC is ThUS $ 4,719.

 

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(b) Liabilities accrued:

 

    As of     As of  
    December 31,     December 31,  
    2016     2015  
    ThUS$     ThUS$  
             
Aircraft and engine maintenance     244,949       246,454  
Accrued personnel expenses     113,785       108,058  
Accounts payable to personnel (*)     89,523       81,368  
Others accrued liabilities     26,885       22,503  
Total accrued liabilities     475,142       458,383  

 

(*) Profits and bonds participation (Note 23 letter b)

 

NOTE 21 - OTHER PROVISIONS

 

Other provisions:

 

    Current liabilities     Non-current liabilities     Total Liabilities  
    As of     As of     As of     As of     As of     As of  
    December 31,     December 31,     December 31,     December 31,     December 31,     December 31,  
    2016     2015     2016     2015     2016     2015  
    ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$  
                                     
Provision for contingencies (1)                                                
Tax contingencies     1,425       1,297       313,064       350,418       314,489       351,715  
Civil contingencies     993       1,476       56,413       37,555       57,406       39,031  
Labor contingencies     225       149       29,307       15,648       29,532       15,797  
Other     -       -       15,046       11,910       15,046       11,910  
Provision for European                                                
Commision investigation (2)     -       -       8,664       8,966       8,664       8,966  
Total other provisions (3)     2,643       2,922       422,494       424,497       425,137       427,419  

 

(1) Provisions for contingencies:

 

The tax contingencies correspond to litigation and tax criteria related to the tax treatment applicable to direct and indirect taxes, which are found in both administrative and judicial stage.

 

The civil contingencies correspond to different demands of civil order filed against the company.

 

The labor contingencies correspond to different demands of labor order filed against the company.

 

The Provisions are recognized in the consolidated income statement in administrative expenses or tax expenses, as appropriate.

 

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(2) Provision made for proceedings brought by the European Commission for possible breaches of free competition in the freight market.

 

(3) Total other provision at December 31, 2016, and at December 31, 2015, include the fair value correspond to those contingencies from the business combination with TAM S.A and subsidiaries, with a probability of loss under 50%, which are not provided for the normal application of IFRS enforcement and that only must be recognized in the context of a business combination in accordance with IFRS 3.

 

Movement of provisions:

 

          European        
    Legal     Commission        
    claims (1)     Investigation (2)     Total  
    ThUS$     ThUS$     ThUS$  
                   
Opening balance as of January 1, 2015     705,552       9,999       715,551  
Increase in provisions     54,675       -       54,675  
Provision used     (19,522 )     -       (19,522 )
Difference by subsidiaries conversion     (220,266 )     -       (220,266 )
Reversal of provision     (100,740 )     -       (100,740 )
Exchange difference     (1,246 )     (1,033 )     (2,279 )
Closing balance as of December 31, 2015     418,453       8,966       427,419  
                         
Opening balance as of January 1, 2016     418,453       8,966       427,419  
Increase in provisions     141,797       -       141,797  
Provision used     (21,997 )     -       (21,997 )
Difference by subsidiaries conversion     79,396       -       79,396  
Reversal of provision     (201,425 )     -       (201,425 )
Exchange difference     249       (302 )     (53 )
Closing balance as of December 31, 2016     416,473       8,664       425,137  

 

(1) The accumulated balance includes US$ 115 million as judicial deposit granted as guarantee, related to the “Fundo Aeroviário” (FA). This deposit was made with the purpose of suspending the application of the tax credit. The company is discussing over the Tribunal the constitutionality about the requirement made by FA in a legal action. Initially it was covered by the effects of a precautionary measure, meaning that, the company was not the obligation to collect the tax as long as there no judicial decision in this regard. However, the decision taken by a judge in the first instance was publicized in an unfavorable published, reversing the precautionary measure. As the legal claim is still in progress (TAM appealed this first decision), the company needed to make the judicial deposit for the suspension of the enforceability of the tax credit; it deposit was classified in this category deducting the existing provision for that purpose. Finally, if the final decision is favorable to the company, the deposit already made will return to TAM. On the other hand, if the tribunal confirms the first decision, such deposit will be converted in a definitive payment in favor of the Brazilian Government. The procedural stage at December 31, 2016 is disclosed in Note 31 in the case role N° 2001.51.01.012530-0.

 

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(2) European Commission Provision:

 

This provision was established because of the investigation brought by the Directorate General for Competition of the European Commission against more than 25 cargo airlines, including Lan Cargo S.A., as part of a global investigation that began in December 2007 regarding possible unfair competition on the air cargo market. This was a joint investigation done by the European and U.S.A. authorities. The global investigation concluded when Lan Cargo S.A. and its subsidiary, Aerolíneas Brasileiras S.A. (“ABSA”) signed a Plea Agreement with the U.S.A. Department of Justice. The General Direction of Competition it imposed fines totaling € 799,445,000 (seven hundred and ninety nine million four hundred and forty-five thousand Euros) for infringement of European Union regulations on free competition against eleven (11) airlines, among which you can find LATAM A irlines Group S.A. and Lan Cargo S.A. Jointly, LATAM Airlines Group S.A. and Lan Cargo S.A., have been fined in the amount of € 8,220,000 (eight million two hundred twenty thousand Euros) for said infractions, which was provisioned in the financial statements of LATAM Airlines Group S.A. On January 24, 2011, LATAM Airlines Group S.A. and Lan Cargo S.A. appealed the decision before the Court of Justice of the European Union. On December 16, 2015 The European Commission does not appeal the sentence, but can issue a new decision correcting the failures specified in the Judgment and it has a period of 5 years which is fulfilled in 2021 the Court European resolved the appeal and annulled the European Commission. The procedural stage at December 31, 2016 is disclosed in Note 31, in (ii) lawsuits received by Latam Airlines Group S.A. and Subsidiaries.

 

NOTE 22 - OTHER NON-FINANCIAL LIABILITIES

 

    Current liabilities     Non-current liabilities     Total Liabilities  
    As of     As of     As of     As of     As of     As of  
    December 31,     December 31,     December 31,     December 31,     December 31,     December 31,  
    2016     2015     2016     2015     2016     2015  
    ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$  
                                     
Deferred revenues  (*)     2,655,086       2,423,703       213,781       272,130       2,868,867       2,695,833  
Sales tax     19,402       10,379       -       -       19,402       10,379  
Retentions     45,542       33,125       -       -       45,542       33,125  
Others taxes     7,465       11,211       -       -       7,465       11,211  
Dividends     25,518       3,980       -       -       25,518       3,980  
Other sundry liabilities     9,232       7,635       -       -       9,232       7,635  
Total other non-financial liabilities     2,762,245       2,490,033       213,781       272,130       2,976,026       2,762,163  

 

(*) Note 2.20.

 

The balance comprises, mainly, deferred income by services not yet rendered and programs such as: LATAM Pass, LATAM Fidelidade y Multiplus:

 

LATAM Pass is the frequent flyer program created by LAN to reward the preference and loyalty of its customers with many benefits and privileges, by the accumulation of kilometers that can be exchanged for free flying tickets or a wide range of products and services. Customers accumulate LATAM Pass kilometers every time they fly with LAN, TAM, in companies that are members of one world® and other airlines associated with the program, as well as when they buy on the stores or use the services of a vast network of companies that have an agreement with the program around the world.

 

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Thinking on people who travel constantly, TAM created the program LATAM Fidelidade, in order to improve the passenger attention and give recognition to those who choose the company. By using this program, customers accumulate points in a variety of programs loyalty in a single account and can redeem them at all TAM destinations and related airline companies, and even more, participate in the Red Multiplus Fidelidade.

 

Multiplus is a coalition of loyalty programs, aiming to operate activities of accumulation and redemption of points. This program has an integrated network by associates including hotels, financial institutions, retail companies, supermarkets, vehicle rentals and magazines, among many other partners from different segments.

 

NOTE 23 - EMPLOYEE BENEFITS

 

    As of     As of  
    December 31,     December 31,  
    2016     2015  
    ThUS$     ThUS$  
             
Retirements payments     49,680       42,117  
Resignation payments     10,097       8,858  
Other obligations     22,545       14,296  
Total liability for employee benefits     82,322       65,271  

 

(a) The movement in retirements and resignation payments and other obligations:

 

          Increase (decrease)                 Actuarial              
    Opening     current service     Benefits     Change     (gains)     Currency     Closing  
    balance     provision     paid     of model     losses     translation     balance  
    ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$  
From January 1 to December 31, 2015     74,102       (13,609 )     (3,824 )     -       14,631       (6,029 )     65,271  
From January 1 to December 31, 2016     65,271       19,900       (4,536 )     -       1,687       -       82,322  

 

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The principal assumptions used in the calculation to the provision in Chile are presented below:

 

    As of
    December 31,
Assumptions   2016   2015
         
Discount rate   4.54%   4.84%
Expected rate of salary increase   4.50%   4.50%
Rate of turnover   6.16%   6.16%
Mortality rate   RV-2009   RV-2009
Inflation rate   2.86%   2.92%
Retirement age of women   60   60
Retirement age of men   65   65

 

The discount rate is determined by reference to free risk 20 years Central Bank of Chile BCP bond. Mortality table RV – 2009, established by Chilean Superintendency of Securities and Insurance and inflation rate performance curve of Central Bank of Chile instruments long term BCU and BCP.

 

The obligation is determined based on the actuarial value of the accrued cost of the benefit and it is sensibility to main actuarial assumptions used for the calculation. The Following is a sensitivity analysis based on increased (decreased) on the discount rate, increased wages, rotation and inflation:

 

    Effect on the liability  
    As of     As of  
    December 31,     December 31,  
    2016     2015  
    ThUS$     ThUS$  
Discount rate                
Change in the accrued liability an closing for increase in 100 p.b.     (5,665 )     (4,669 )
Change in the accrued liability an closing for decrease of 100 p.b.     5,952       5,345  
                 
Rate of wage growth                
Change in the accrued liability an closing for increase in 100 p.b.     6,334       5,309  
Change in the accrued liability an closing for decrease of 100 p.b.     (5,644 )     (4,725 )

 

(b) The liability for short-term:

 

    As of     As of  
    December 31,     December 31,  
    2016     2015  
    ThUS$     ThUS$  
                 
Profit-sharing and bonuses (*)     89,523       81,368  

 

(*) Accounts payables to employees (Note 20 letter b)

 

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The participation in profits and bonuses correspond to an annual incentives plan for achievement of objectives.

 

(c) Employment expenses are detailed below:

 

    For the periods ended  
    December 31,  
    2016     2015  
    ThUS$     ThUS$  
Salaries and wages     1,549,402       1,631,320  
Short-term employee benefits     132,436       171,366  
Termination benefits     79,062       51,684  
Other personnel expenses     190,233       218,435  
Total     1,951,133       2,072,805  

 

NOTE 24 - ACCOUNTS PAYABLE, NON-CURRENT

 

    As of     As of  
    December 31,     December 31,  
    2016     2015  
    ThUS$     ThUS$  
             
Aircraft and engine maintenance     347,085       371,419  
Fleet financing (JOL)     -       35,042  
Provision for vacations and bonuses     12,080       10,365  
Other sundry liabilities     226       224  
Total accounts payable, non-current     359,391       417,050  

 

NOTE 25 - EQUITY

 

(a) Capital

 

The Company’s objective is to maintain an appropriate level of capitalization that enables it to ensure access to the financial markets for carrying out its medium and long-term objectives, optimizing the return for its shareholders and maintaining a solid financial position.

 

The Capital of the Company is managed and composed in the following form:

 

The paid capital of the Company at December 31, 2016 amounts to ThUS$ 3,149,564 (*) divided into 606,407,693 common stock of a same series (ThUS$ 2,545,705, divided into 545,547,819 shares as of December 31, 2015), a single series nominative, ordinary character with no par value. There are no special series of shares and no privileges. The form of its stock certificates and their issuance, exchange, disablement, loss, replacement and other similar circumstances, as well as the transfer of the shares, is governed by the provisions of Corporations Law and its regulations.

 

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(*) Include a deduction for issuance costs ThUS$ 4,793 and adjustment by 10,282 placement shares for ThUS$ 156.

 

(b) Subscribed and paid shares

 

As of December 31, 2015, the Company's subscribed and paid-in capital was represented by 545,558,101 shares, all common shares, without par value.

 

On August 18, 2016, the Company held an extraordinary meeting of shareholders in which it was approved to increase the capital by issuing 61,316,424 shares of payment, all ordinary shares, without par value. As of December 31, 2016, 60,849,592 shares had been placed against this increase, according to the following breakdown: (a) 30,499,685 shares subscribed and paid at the end of the preferred subscription period, which expired on, December 2016, raising the equivalent of US$ 304,996,850; And (b) 30,349,907 additional shares subscribed on December 28, 2016, earning the equivalent of US $ 303,499,070.

 

As a result of the last placement, as of December 31, 2016, the number Company shares subscribed and paid amounts to 606,407,693.

 

At December 31, 2016, the Company's capital stock is represented by 608,374,525 shares, all common shares, without no par value, which is divided into: (a) the 606,407,693 subscribed and paid shares mentioned above; And (b) 1,966,832 shares pending subscription and payment, of which: (i) 1,500,000 shares are allocated to compensation stock option plans; And (ii) 466,832 correspond to the balance of shares pending placement of the last capital increase.

 

It should be noted that during the year the Company's capital stock was expressed in 613,164,243 shares, all ordinary shares, without nominal value, that is, 551,847,819 shares already authorized at the beginning of the year and 61,316,424 shares authorized in the last Capital increase dated August 18, 2016. However, on December 21, 2016, the deadline for the subscription and payment of 4,789,718 shares that were destined to compensation plans for workers expired, so that the Company's capital stock was reduced to 608,374,525 shares.

 

The following table shows the movement of the authorized and fully paid shares described above:

 

Movement of authorized shares   Nro. Of  
    shares  
       
Autorized shares as of January 1, 2015     551,847,819  
No movement of autorized shares during 2015     -  
Authorized shares as of December 31, 2015     551,847,819  
         
Autorized shares as of January 1, 2016     551,847,819  
Increase capital approved at Extraordinary Shareholders meeting dated August 18, 2016     61,316,424  
Full capital decrease due to maturity of the subscription and payment period of the compensation plan 2011, December 21, 2016 (*)     (4,789,718 )
Authorized shares as of December 31, 2016     608,374,525  

 

(*) See Note 34 (a.1)

 

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Movement fully paid shares                  
    Movement              
    value     Cost of issuance        
increase (decrease) through transfers and other changes   of shares     and placement     Paid- in  
    No of     (1)     of shares (2)     Capital  
    shares     ThUS$     ThUS$     ThUS$  
                         
Paid shares as of January 1, 2015     545,547,819       2,552,066       (6,361 )     2,545,705  
No movement of paid shares  during 2015     -       -       -       -  
Paid shares as of December 31, 2015     545,547,819       2,552,066       (6,361 )     2,545,705  
                                 
Paid shares as of January 1, 2016     545,547,819       2,552,066       (6,361 )     2,545,705  
Placement capital increase                                
Approved at Extraordinary Shereholders meeting dated August 18, 2016     60,849,592       608,496       -       608,496  
Capital reserve     -       -       (4,793 )     (4,793 )
Increase (decrease) by transfers and other changes (4)     10,282       156       -       156  
Paid shares as of December 31, 2016     606,407,693 (3)     3,160,718       (11,154 )     3,149,564  

 

(1)        Amounts reported represent only those arising from the payment of the shares subscribed.

 

(2)        Decrease of capital by capitalization of reserves for cost of issuance and placement of shares established according to Extraordinary Shareholder´s Meetings, where such decreases were authorized.

 

(3)        At December 31, 2016, the difference between authorized shares and fully paid shares are 1,966,832 shares, of which 1,500,000 correspond to compensation plans for executives of LATAM Airlines Group S.A. and subsidiaries (see Note 34(a.1)) and 466,832 correspond to the shares issued and unsubscribed from the capital increase approved at the Extraordinary Shareholders' Meeting held on August 18, 2016.

 

(4)         In Janury 2014, these 10,282 shares were placed and charged to the Compensation plan 2011 (See Note 34 (a.1))

 

(c)        Treasury stock

 

At December 31, 2016, the Company held no treasury stock, the remaining of ThUS$ (178) corresponds to the difference between the amount paid for the shares and their book value, at the time of the full right decrease of the shares which held in its portfolio.

 

(d)         Reserve of share- based payments

 

Movement of Reserves of share- based payments:

 

88

 

 

          Stock                    
    Opening     option     Deferred     Net movement     Closing  
Periods   balance     plan     tax     of the period     balance  
    ThUS$     ThUS$     ThUS$     ThUS$     ThUS$  
                               
From January 1 to December 31, 2015     29,642       8,924       (2,919 )     6,005       35,647  
From January 1 to December 31, 2016     35,647       3,698       (807 )     2,891       38,538  

 

These reserves are related to the “Share-based payments” explained in Note 34.

 

(e) Other sundry reserves

 

Movement of Other sundry reserves:

  

    Opening     Legal     Closing  
Periods   balance     reserves     balance  
    ThUS$     ThUS$     ThUS$  
From January 1 to December 31, 2015     2,635,748       (1,069 )     2,634,679  
From January 1 to December 31, 2016     2,634,679       5,602       2,640,281  

 

Balance of Other sundry reserves comprises the following:

 

    As of     As of  
    December 31,     December 31,  
    2016     2015  
    ThUS$     ThUS$  
Higher value for TAM S.A. share exchange (1)     2,665,692       2,665,692  
Reserve for the adjustment to the value of fixed assets (2)     2,620       2,620  
Transactions with non-controlling interest (3)     (25,911 )     (25,891 )
Cost of issuance and placement of shares     9       (4,793 )
Others     (2,129 )     (2,949 )
Total     2,640,281       2,634,679  

 

(1) Corresponds to the difference in the shares value of TAM S.A. acquired (under subscriptions) by Sister Holdco S.A. and Holdco II S.A. (under the Exchange Offer), as stipulated in the Declaration of Posting of Merger by Absorption and the fair value of these exchange shares of LATAM Airlines Group S.A. at June 22, 2012.

 

(2) Corresponds to the technical revaluation of fixed assets authorized by the Superintendence of Securities and Insurance in 1979, in Circular N° 1529. The revaluation was optional and could be taken only once, the reserve is not distributable and can only be capitalized.

 

(3) The balance at December 31, 2016, correspond to the loss generated by the participation of Lan Pax Group S.A. and Inversiones Lan S.A. in the acquisition of shares of Aerovías de Integración Regional Aires of ThUS$ (3,480) and ThUS$ (20), respectively; the acquisition of TAM S.A. of the minority holding of Aerolinhas Brasileiras S.A. of ThUS$ (885) and the acquisition of minority interest of Aerolane S.A. by Lan Pax group S.A. through Holdco Ecuador S.A. for US$ (21,526).

 

89

 

 

(f) Reserves with effect in other comprehensive income.

 

Movement of Reserves with effect in other comprehensive income:

 

                Actuarial gain        
    Currency     Cash flow     or loss on defined        
    translation     hedging     benefit plans        
    reserve     reserve     reserve     Total  
    ThUS$     ThUS$     ThUS$     ThUS$  
Opening balance as of January 1, 2015     (1,193,871 )     (151,340 )     -       (1,345,211 )
Derivatives valuation gains (losses)     -       82,730       -       82,730  
Deferred tax     -       (21,900 )     -       (21,900 )
Actuarial reserves by employee benefit plans     -       -       (14,627 )     (14,627 )
Deferred tax actuarial IAS by employee benefit plans     -       -       3,910       3,910  
Difference by subsidiaries conversion     (1,382,170 )     -       -       (1,382,170 )
Closing balance as of December 31, 2015     (2,576,041 )     (90,510 )     (10,717 )     (2,677,268 )
                                 
Opening balance as of January 1, 2016     (2,576,041 )     (90,510 )     (10,717 )     (2,677,268 )
Derivatives valuation gains (losses)     -       126,360       -       126,360  
Deferred tax     -       (34,344 )     -       (34,344 )
Actuarial reserves by employee benefit plans     -       -       (3,104 )     (3,104 )
Deferred tax actuarial IAS by employee benefit plans     -       -       921       921  
Difference by subsidiaries conversion     489,486       -       -       489,486  
Closing balance as of December 31, 2016     (2,086,555 )     1,506       (12,900 )     (2,097,949 )

 

(f.1) Currency translation reserve

 

These originate from exchange differences arising from the translation of any investment in foreign entities (or Chilean investment with a functional currency different to that of the parent), and from loans and other instruments in foreign currency designated as hedges for such investments. When the investment (all or part) is sold or disposed and loss of control occurs, these reserves are shown in the consolidated statement of income as part of the loss or gain on the sale or disposal. If the sale does not involve loss of control, these reserves are transferred to non-controlling interests.

 

90

 

 

(f.2) Cash flow hedging reserve

 

These originate from the fair value valuation at the end of each period of the outstanding derivative contracts that have been defined as cash flow hedges. When these contracts expire, these reserves should be adjusted and the corresponding results recognized.

 

(g) Retained earnings

 

Movement of Retained earnings:

 

          Result               Other  
    Opening     for the           increase     Closing  
Periods   balance     period     Dividends     (decreases)     balance  
    ThUS$     ThUS$     ThUS$     ThUS$     ThUS$  
From January 1 to December 31, 2015     536,190       (219,274 )     -       1,034       317,950  
From January 1 to December 31, 2016     317,950       69,220       (20,766 )     -       366,404  

 

(h) Dividends per share

  

    Minimum mandatory     Final dividend  
    dividend     dividend  
Description of dividend   2016     2015  
             
Date of dividend     12/31/2016       12-31-2015  
Amount of the dividend (ThUS$)     20,766       -  
Number of shares among which the dividend is distributed     606,407,693       545,547,819  
Dividend per share (US$)     0.0342       -  

 

As of December 31, 2016 and 2015, the Company has not been paid dividends.

 

NOTE 26 - REVENUE

 

The detail of revenues is as follows:

 

    For the periods ended  
    December 31,  
    2016     2015  
    ThUS$     ThUS$  
             
Passengers LAN     4,104,348       4,241,918  
Passengers TAM     3,773,367       4,168,696  
Cargo     1,110,625       1,329,431  
Total     8,988,340       9,740,045  

 

91

 

 

NOTE 27 - COSTS AND EXPENSES BY NATURE

 

(a) Costs and operating expenses

 

The main operating costs and administrative expenses are detailed below:

 

    For the periods ended  
    December 31,  
    2016     2015  
    ThUS$     ThUS$  
Aircraft fuel     2,056,643       2,651,067  
Other rentals and landing fees     1,077,407       1,109,826  
Aircraft rentals     568,979       525,134  
Aircraft maintenance     366,153       437,235  
Comissions     269,296       302,774  
Passenger services     286,621       295,439  
Other operating expenses     1,424,595       1,293,320  
Total     6,049,694       6,614,795  

 

(b) Depreciation and amortization

 

Depreciation and amortization are detailed below:

 

    For the period ended  
    December 31,  
    2016     2015  
    ThUS$     ThUS$  
Depreciation (*)     910,071       897,670  
Amortization     50,257       36,736  
Total     960,328       934,406  

 

(*) Include the depreciation of Property, plant and equipment and the maintenance cost of aircraft held under operating leases. The amount of maintenance cost included within the depreciation line item at December 31, 2016 is ThUS$ 345,651 and ThUS$ 345,192 for the same period of 2015.

 

(c) Personnel expenses

 

The costs for personnel expenses are disclosed in Note 23 liability for employee benefits.

 

(d) Financial costs

 

The detail of financial costs is as follows:

 

92

 

 

    For the period ended  
    December 31,  
    2016     2015  
    ThUS$     ThUS$  
Bank loan interest     352,405       331,511  
Financial leases     32,573       42,855  
Other financial instruments     31,358       38,991  
Total     416,336       413,357  

 

Costs and expenses by nature presented in this note plus the Employee expenses disclosed in Note 23, are equivalent to the sum of cost of sales, distribution costs, administrative expenses, other expenses and financing costs presented in the consolidated statement of income by function.

 

(e) Restructuring Costs

 

As part of the ongoing process of reviewing its fleet plan, in December 2015 the company recognized a negative impact on results of US$ 80 million before tax associated with the output of the rest of the A330 fleet, including engines and technical materials is recognized. These expenses are recognized at “Other Gain and Loses” of the Consolidated Statement of Income by Function.

 

NOTE 28 - OTHER INCOME, BY FUNCTION

 

Other income by function is as follows:

 

    For the period ended  
    December 31,  
    2016     2015  
    ThUS$     ThUS$  
             
Coalition and loyalty program Multiplus     174,197       154,958  
Tours     133,575       113,225  
Aircraft leasing     65,011       46,547  
Customs and warehousing     24,548       25,457  
Maintenance     17,090       11,669  
Duty free     11,141       16,408  
Other miscellaneous income     113,186       17,517  
Total     538,748       385,781  

 

93

 

 

NOTE 29 - FOREIGN CURRENCY AND EXCHANGE RATE DIFFERENCES

 

The functional currency of LATAM Airlines Group S.A. is the US dollar, also it has subsidiaries whose functional currency is different to the US dollar, such as the Chilean peso, Argentine peso, Colombian peso and Brazilian real.

 

The functional currency is defined as the currency of the primary economic environment in which an entity operates and in each entity and all other currencies are defined as foreign currency.

 

Considering the above, the balances by currency mentioned in this note correspond to the sum of foreign currency of each of the entities that make LATAM Airlines Group S.A. and Subsidiaries.

 

(a) Foreign currency

 

The foreign currency detail of balances of monetary items in current and non-current assets is as follows:

 

    As of     As of  
Current assets   December 31,     December 31,  
    2016     2015  
    ThUS$     ThUS$  
             
Cash and cash equivalents     201,416       182,089  
Argentine peso     4,438       11,611  
Brazilian real     9,705       8,810  
Chilean peso     30,221       17,739  
Colombian peso     1,137       1,829  
Euro     1,695       10,663  
U.S. dollar     128,694       112,422  
Strong bolivar     61       2,986  
Other currency     25,465       16,029  
                 
Other financial assets, current     14,573       124,042  
Argentine peso     12       108,592  
Brazilian real     734       1,263  
Chilean peso     585       563  
Colombian peso     -       1,167  
U.S. dollar     12,879       12,128  
Strong bolivar     76       22  
Other currency     287       307  

 

94

 

 

    As of     As of  
Current assets   December 31,     December 31,  
    2016     2015  
    ThUS$     ThUS$  
             
Other non - financial assets, current     107,789       126,130  
Argentine peso     16,086       14,719  
Brazilian real     20,158       15,387  
Chilean peso     1,619       10,265  
Colombian peso     713       486  
Euro     1,563       1,983  
U.S. dollar     50,157       61,577  
Strong bolivar     3       -  
Other currency     17,490       21,713  
                 
Trade and other accounts receivable, current     251,204       247,229  
Argentine peso     54,356       30,563  
Brazilian real     30,675       11,136  
Chilean peso     90,482       55,169  
Colombian peso     9,720       1,195  
Euro     21,923       30,006  
U.S. dollar     14,086       29,937  
Strong bolivar     43       7,225  
Other currency     29,919       81,998  
                 
Accounts receivable from related entities, current     554       181  
Chilean peso     554       181  
                 
Tax current assets     28,198       22,717  
Argentine peso     1,798       2,371  
Brazilian real     2,462       5  
Chilean peso     6,333       3,615  
Colombian peso     1,418       1,275  
Euro     273       14  
U.S. dollar     177       1,394  
Peruvian sol     14,387       12,572  
Other currency     1,350       1,471  
                 
Total current assets     603,734       702,388  
Argentine peso     76,690       167,856  
Brazilian real     63,734       36,601  
Chilean peso     129,794       87,532  
Colombian peso     12,988       5,952  
Euro     25,454       42,666  
U.S. Dollar     205,993       217,458  
Strong bolivar     183       10,233  
Other currency     88,898       134,090  

 

95

 

 

    As of     As of  
Non-current assets   December 31,     December 31,  
    2016     2015  
    ThUS$     ThUS$  
             
Other financial assets, non-current     26,772       20,767  
Argentine peso     -       22  
Brazilian real     2,769       1,478  
Chilean peso     83       77  
Colombian peso     285       162  
Euro     6,966       614  
U.S. dollar     14,920       16,696  
Other currency     1,749       1,718  
                 
Other non - financial assets, non-current     19,069       60,215  
Argentine peso     142       169  
Brazilian real     6,029       4,454  
U.S. dollar     8,309       50,108  
Other currency     4,589       5,484  
                 
Accounts receivable, non-current     7,356       9,404  
Chilean peso     7,356       4,251  
U.S. dollar     -       5,000  
Other currency     -       153  
                 
Deferred tax assets     2,110       2,632  
Colombian peso     117       336  
Other currency     1,993       2,296  
                 
Total  non-current assets     55,307       93,018  
Argentine peso     142       191  
Brazilian real     8,798       5,932  
Chilean peso     7,439       4,328  
Colombian peso     402       498  
Euro     6,966       614  
U.S. dollar     23,229       71,804  
Other currency     8,331       9,651  

 

96

 

 

The foreign currency detail of balances of monetary items in current liabilities and non-current is as follows:

 

    Up to 90 days     91 days to 1 year  
    As of     As of     As of     As of  
Current liabilities   December 31,     December 31,     December 31,     December 31,  
    2016     2015     2016     2015  
    ThUS$     ThUS$     ThUS$     ThUS$  
                         
Other financial liabilities, current     287,175       94,199       455,086       141,992  
Chilean peso     55,962       54,655       108,010       52,892  
U.S. dollar     231,213       39,544       347,076 (*)     89,100  
                                 
Trade and other accounts payables, current     585,149       482,402       16,097       14,981  
Argentine peso     20,838       20,772       907       2,072  
Brazilian real     40,740       37,572       27       16  
Chilean peso     60,701       40,219       12,255       10,951  
Colombian peso     9,049       5,271       578       155  
Euro     23,445       5,275       5       618  
U.S. dollar     374,431       310,565       962       839  
Strong bolivar     761       2,627       -       -  
Peruvian sol     33,701       28,293       1,093       87  
Mexican peso     1,535       15,248       -       225  
Pound sterling     1,769       7,819       246       -  
Uruguayan peso     6,899       6,005       -       -  
Other currency     11,280       2,736       24       18  
                                 
Accounts payable to related entities, current     220       447       -       -  
Chilean peso     23       83       -       -  
U.S. dollar     8       22       -       -  
Other currency     189       342       -       -  
                                 
Other provisions, current     -       -       511       457  
Chilean peso     -       -       28       21  
Other currency     -       -       483       436  
                                 
Tax liabilities, current     (145 )     36       2,442       9,037  
Argentine peso     -       -       2,501       9,036  
Brazilian real     (3 )     -       -       -  
Chilean peso     -       -       (25 )     -  
U.S. dollar     -       27       -       -  
Other currency     (142 )     9       (34 )     1  

 

97

 

 

    Up to 90 days     91 days to 1 year  
    As of     As of     As of     As of  
Current liabilities   December 31,     December 31,     December 31,     December 31,  
    2016     2015     2016     2015  
    ThUS$     ThUS$     ThUS$     ThUS$  
                         
Other non-financial liabilities, current     33,439       40,432       -       -  
Argentine peso     13,463       (2,387 )     -       -  
Brazilian real     430       4,297       -       -  
Chilean peso     14,999       32,228       -       -  
Colombian peso     578       145       -       -  
Euro     168       2,706       -       -  
U.S. dollar     684       (3,238 )     -       -  
Strong bolivar     2       2,490       -       -  
Other currency     3,115       4,191       -       -  
                                 
Total current liabilities     905,838       617,516       474,136       166,467  
Argentine peso     34,301       18,385       3,408       11,108  
Brazilian real     41,167       41,869       27       16  
Chilean peso     131,685       127,185       120,268       63,864  
Colombian peso     9,627       5,416       578       155  
Euro     23,613       7,981       5       618  
U.S. dollar     606,336       346,920       348,038       89,939  
Strong bolivar     763       5,117       -       -  
Other currency     58,346       64,643       1,812       767  

 

(*) See Note 19.a (2)

 

98

 

 

    More than 1 to 3 years     More than 3 to 5 years     More than 5 years  
    As of     As of     As of     As of     As of     As of  
Non-current liabilities   December 31,     December 31,     December 31,     December 31,     December 31,     December 31,  
    2016     2015     2016     2015     2016     2015  
    ThUS$     ThUS$     ThUS$     ThUS$     ThUS$     ThUS$  
Other financial liabilities, non-current     178,793       561,217       747,218       328,480       41,785       571,804  
Chilean peso     59,177       104,385       16,189       34,635       -       -  
U.S. dollar     119,616       456,832       731,029       293,845       41,785       571,804  
                                                 
Accounts payable, non-current     195,333       239,029       268       168       28       8  
Chilean peso     10,178       8,058       268       168       28       8  
U.S. dollar     183,904       229,005       -       -       -       -  
Other currency     1,251       1,966       -       -       -       -  
                                                 
Other provisions, non-current     39,513       27,780       -       -       -       -  
Argentine peso     635       797       -       -       -       -  
Brazillian real     23,541       11,009       -       -       -       -  
Chilean peso     38       -       -       -       -       -  
Colombian peso     569       198       -       -       -       -  
Euro     8,664       8,966       -       -       -       -  
U.S. dollar     6,066       6,810       -       -       -       -  
                                                 
Provisions for employees benefits, non-current     68,774       56,306       -       -       -       -  
Brazilian real     28       -       -       -       -       -  
Chilean peso     68,380       56,306       -       -       -       -  
U.S. dollar     366       -       -       -       -       -  
                                                 
Other non-financial liabilities, non-current     3       -       -       -       -       -  
Colombian peso     3       -       -       -       -       -  
                                                 
Total non-current liabilities     482,416       884,332       747,486       328,648       41,813       571,812  
Argentine peso     635       797       -       -       -       -  
Brazilian real     23,569       11,009       -       -       -       -  
Chilean peso     137,773       168,749       16,457       34,803       28       8  
Colombian peso     572       198       -       -       -       -  
Euro     8,664       8,966       -       -       -       -  
U.S. dollar     309,952       692,647       731,029       293,845       41,785       571,804  
Other currency     1,251       1,966       -       -       -       -  

 

99

 

 

    As of     As of  
General summary of foreign currency:   December 31,     December 31,  
    2016     2015  
    ThUS$     ThUS$  
             
Total assets     659,041       795,406  
Argentine peso     76,832       168,047  
Brazilian real     72,532       42,533  
Chilean peso     137,233       91,860  
Colombian peso     13,390       6,450  
Euro     32,420       43,280  
U.S. dollar     229,222       289,262  
Strong bolivar     183       10,233  
Other currency     97,229       143,741  
                 
Total liabilities     2,651,689       2,568,775  
Argentine peso     38,344       30,290  
Brazilian real     64,763       52,894  
Chilean peso     406,211       394,609  
Colombian peso     10,777       5,769  
Euro     32,282       17,565  
U.S. dollar     2,037,140       1,995,155  
Strong bolivar     763       5,117  
Other currency     61,409       67,376  
                 
Net position                
Argentine peso     38,488       137,757  
Brazilian real     7,769       (10,361 )
Chilean peso     (268,978 )     (302,749 )
Colombian peso     2,613       681  
Euro     138       25,715  
U.S. dollar     (1,807,918 )     (1,705,893 )
Strong bolivar     (580 )     5,116  
Other currency     35,820       76,365  

 

100

 

 

(b) Exchange differences

 

Exchange differences recognized in the income statement, except for financial instruments measured at fair value through profit or loss, for the period ended December 31, 2016 and 2015, generated a debit of ThUS$ 121,651 and a charge ThUS$ 467,896, respectively.

 

Exchange differences recognized in equity as reserves for currency translation differences for the period ended December 31, 2016 and 2015, represented a debit of ThUS$ 494,362 and a charge ThUS$ 1,409,439, respectively.

 

The following shows the current exchange rates for the U.S. dollar, on the dates indicated:

  

    As of December 31,  
    2016     2015     2014  
Argentine peso     15.84       12.97       8.55  
Brazilian real     3.25       3.98       2.66  
Chilean peso     669.47       710.16       606.75  
Colombian peso     3,000.25       3,183.00       2,389.50  
Euro     0.95       0.92       0.82  
Strong bolivar     673.76       198.70       12.00  
Australian dollar     1.38       1.37       1.22  
Boliviano     6.86       6.85       6.86  
Mexican peso     20.63       17.34       14.74  
New Zealand dollar     1.44       1.46       1.28  
Peruvian Sol     3.35       3.41       2.99  
Uruguayan peso     29.28       29.88       24.25  

 

101

 

 

NOTE 30 - EARNINGS / (LOSS) PER SHARE

 

    For the period ended  
    December 31,  
    2016     2015  
Basic earnings / (loss) per share                
                 
Earnings / (loss) attributable to owners of the parent (ThUS$)     69,220       (219,274 )
                 
Weighted average number of shares, basic     546,559,599       545,547,819  
                 
Basic earnings / (loss) per share (US$)     0.12665       (0.40193 )

 

    For the period ended  
    December 31,  
    2016     2015  
Diluted earnings / (loss) per share                
                 
Earnings / (loss) attributable to owners of the parent (ThUS$)     69,220       (219,274 )
                 
Weighted average number of shares, basic     546,559,599       545,547,819  
                 
Weighted average number of shares, diluted     546,559,599       545,547,819  
                 
Diluted earnings / (loss) per share (US$)     0.12665       (0.40193 )

 

In the calculation of diluted earnings per share have not been considered the compensation plan disclosed in Note 33 (a.1), because the average market price is lower than the price of options.

 

102

 

 

 

NOTE 31 – CONTINGENCIES

 

I. Lawsuits

 

1) Lawsuits filed by LATAM Airlines Group S.A. and Subsidiaries

 

Company   Court   Case Number   Origin   Stage of trial  

Amounts

Committed (*)

                    ThUS$
                     

Atlantic Aviation Investments

LLC (AAI).

  Supreme Court of the State of New York County of New York.   07-6022920   Atlantic Aviation Investments LLC. ("AAI"), an indirect subsidiary LATAM Airlines Group S.A., incorporated under the laws of the State of Delaware, sued in August 29 th , 2007  Varig Logistics S.A. ("Variglog") for non-payment of four documented loans in credit agreements governed by New York law. These contracts establish the acceleration of the loans in the event of sale of the original debtor, VRG Linhas Aéreas S.A.   In implementation stage in Switzerland, the conviction stated that Variglog should pay the principal, interest and costs in favor of AAI. It keeps the embargo of Variglog funds in Switzerland with AAI. In Brazil a Settlement Agreement was signed and it is awaiting for approval from the Bankruptcy Court of that country and Variglog has asked Switzerland to recognize the judgment that declared the state of judicial recovery and subsequent bankruptcy.  

17,100

Plus interests

and costs

                     
Lan Argentina S.A.   National Administrative Court.   36337/13   ORSNA Resolution No. 123 which directs Lan Argentina to vacate the hangar located in the Airport named Aeroparque Metropolitano Jorge Newberry, Argentina.  

On February 25, 2016, Lan Argentina S.A. and ORSNA informed the Court of their decision to put an end to the lawsuit and guarantee use of the hangar by Lan. The parties agreed to maintain the precautionary measure in effect allowing Lan to use the hangar indefinitely until the parties reach a final agreement. The court agreed, so the precautionary measure was extended indefinitely. Resolution 112/2016 of the National Airport Regulatory Agency (ORSNA) was published on December 30, 2016, which terminated the hangar dispute. This latest resolution repealed the previous resolution, 123/16, that ordered vacation of the LAN hangar at AEP.

Consequently, the legal structure created by the ORSNA through the 2012 Resolution was left without any effect in 2016. Apart from the matter now having been resolved both materially and judicially, this resolution puts a definitive end to the hangar dispute.

  -0-

 

103

 

 

2) Lawsuits received by LATAM Airlines Group S.A. and Subsidiaries

 

Company   Court   Case Number   Origin   Stage of trial  

Amounts

Committed (*)

                    ThUS$  
                     
LATAM Airlines Group S.A. y Lan Cargo S.A.   European Commission.   -   Investigation of alleged infringements to free competition of cargo airlines, especially fuel surcharge. On December 26 th , 2007, the General Directorate  for Competition of the European Commission notified Lan Cargo S.A. and LATAM Airlines Group S.A. the instruction process against twenty five cargo airlines, including Lan Cargo S.A., for alleged breaches of competition in the air cargo market in Europe, especially the alleged fixed fuel surcharge and freight.  

On April 14 th , 2008, the notification of the European Commission was replied. The appeal was filed on              January 24, 2011.

On May 11, 2015, we attended a hearing at which we petitioned for the vacation of the Decision based on discrepancies in the Decision between the operating section, which mentions four infringements (depending on the routes involved) but refers to LATAM in only one of those four routes; and the ruling section (which mentions one single conjoint infraction).

On November 9 th , 2010, the General Directorate for Competition of the European Commission notified Lan Cargo S.A. and LATAM Airlines Group S.A. the imposition of a fine in the amount of THUS$ 8,664. (8.220.000 Euros)

This fine is being appealed by Lan Cargo S.A. and LATAM Airlines Group S.A. On December 16, 2015, the European Court of Justice revoked the Commission’s decision because of discrepancies. The European Commission did not appeal the resolution, but rather confirmed, on May 20, 2016, that it will issue a new decision curing the rulings specified in the Decision. It has a period of 5 years to do this, or until 2021.

  8,664

 

104

 

 

Company   Court   Case Number   Origin   Stage of trial  

Amounts

Committed (*)

                    ThUS$
                     
Lan Cargo S.A. y LATAM Airlines Group S.A.   In the High Court of Justice Chancery División (England) Ovre Romerike District Court (Norway)  y Directie Juridische Zaken Afdeling Ceveil Recht (Netherlands) , Cologne Regional Court (Landgerich Köln Germany).   -  

Lawsuits filed against European airlines by users of freight services in private lawsuits as a result of the investigation into alleged breaches of competition of cargo airlines, especially fuel surcharge. Lan Cargo S.A. and LATAM Airlines Group S.A., have been sued in court proceedings directly and/or in third party, based in England, Norway, the Netherlands and Germany.

 

  Cases are in the uncovering evidence stage.   -0-
                     
Aerolinhas Brasileiras S.A.   Federal Justice.   0008285-53.2015.403.6105  

An action seeking to quash a decision and petioning for early protection in order to obgain a revocation of the penalty imposed by the Brazilian Competition Authority (CADE) in the investigation of cargo airlines alleged fair trade violations, in particular the fuel surcharge.

 

  This action was filed by presenting a guaranty – policy – in order to suspend the effects of the CADE’s decision regarding the payment of the following fines:  (i) ABSA: ThUS$10,438; (ii) Norberto Jochmann: ThUS$201; (iii) Hernan Merino: ThUS$ 102; (iv) Felipe Meyer :ThUS$ 102. The action also deals with the affirmative obligation required by the CADE consisting of the duty to publish the condemnation in a widely circulating newspaper.  This obligation had also been stayed by the court of federal justice in this process.  Awaiting CADE’s statement.    10,438
                     

Aerolinhas Brasileiras S.A.

 

 

Federal Justice.

 

 

0001872-58.2014.4.03.6105

 

  An annulment action with a motion for preliminary injunction, was filed on 28/02/2014, in order to cancel tax debts of PIS, CONFINS, IPI and II, connected with the administrative process 10831.005704/2006.43.   We have been waiting since August 21, 2015 for a statement by Serasa on TAM’s letter of indemnity and a statement by the Union. The statement was authenticated  on January 29, 2016. A petition on evidence and replications were filed on June 20, 2016.   11,140

 

105

 

 

Company   Court   Case Number   Origin   Stage of trial  

Amounts

Committed (*)

                    ThUS$
                     
Tam Linhas Aéreas S.A.   Department of Federal Revenue of  Brazil   19515.722556/2012-21   Alleged irregularities in the SAT payments for the periods 01/2009 to 13/2009.   A judgment by the Administrative Council of Tax Appeals (CARF) has been pending since February 27, 2015.   2,151
                     
Tam Linhas Aéreas S.A.  

Department of Federal Revenue of Brazil

  19515.721155/2014-15   Alleged irregularities in the SAT payments for the periods 01/2010 to 13/2010.   A decision was rendered in favor of Tam Linhas Aéreas S.A. on August 22, 2016.  The Attorney General has said it will not appeal.   25,515
                     
Tam Linhas Aéreas S.A.   Department of Federal Revenue of Brazil  

19515.720476/2015-83

 

  Alleged irregularities in the SAT payments for the periods 01/2011 to 12/2012   A judgment by CARF is pending since April 12, 2016.   52,414
                     
Tam  Linhas Aéreas S.A.   Court of the Second Region.   2001.51.01.012530-0   Ordinary judicial action brought for the purpose of declaring the nonexistence of legal relationship obligating the company to collect the Air Fund.  

Unfavorable court decision in first instance. Currently expecting the ruling on the appeal filed by the company.

In order to suspend chargeability of Tax Credit a Guaranty Deposit to the Court was delivered for MUS$115.

The court decision requesting that the Expert make all clarifications requested by the parties in a period of 30 days was published on March 29, 2016. The plaintiffs’ submitted a petition on June 21, 2016 requesting acceptance of the opinion of their consultant and an urgent ruling on the dispute. No amount additional to the deposit that has already been made is required if this case is lost.

 

  115,265
                     
Tam Linhas Aéreas S.A.   Administrative Council of Tax Appeals  

19.515.002963/2009-12, 19515.722555/2012-86, 19515.721154/2014-71, 19515.720475/2015-39

 

  Collection of contributions to the Aviation Fund for the periods from 01/2004 to 12/2004, from 12/2006 to 12/2008, from 01/2009 to 12/2010, and from 01/2011 to 10/2012.   A judgment is pending by CARF since February 5, 2016.   65,788

 

106

 

 

Company   Court   Case Number   Origin   Stage of trial  

Amounts

Committed (*)

                    ThUS$
                     

Tam Linhas

Aéreas S.A.

  Internal Revenue Service of Brazil.   16643.000087/2009-36  

This is an administrative proceeding arising from an infraction notice issued on 15.12.2009, by which the authority aims to request social contribution on net income (CSL) on base periods 2004 to 2007, due to the deduction of expenses related to suspended taxes.

 

  The appeal filed by the company was dismissed in 2010. In 2012 the voluntary appeal was also dismissed. Consequently, the special appeal filed by the company awaits judgment of admissibility, since 2012.  

22,225

 

Tam Linhas

Aéreas S.A.

  Internal Revenue Service of Brazil.   10880.725950/2011-05   Compensation credits of the Social Integration Program (PIS) and Contribution for Social Security Financing (COFINS) Declared on DCOMPs.  

The objection ( manifestação de inconformidade ) filed by the company was rejected, which is why the voluntary appeal was filed. The case was assigned to the 1st Ordinary Group of Brazil’s Administrative Council of Tax Appeals (CARF) on June 8, 2015. TAM’s appeal was included in the CARF session held August 25, 2016.

 

  43,341
Aerovías de Integración Regional, AIRES S.A.   United States  Court of Appeals for the Eleventh Circuit, Florida, U.S.A.   2013-20319 CA 01  

The July 30 th , 2012 LAN COLOMBIA AIRLINES initiated a legal process in Colombia against Regional One INC and Volvo Aero Services LLC, to declare that these companies are civilly liable for moral and material damages caused to LAN COLOMBIA AIRLINES arising from breach of contractual obligations of the aircraft HK-4107.

The June 20 th , 2013 AIRES SA And / Or LAN AIRLINES COLOMBIA was notified of the lawsuit filed in U.S. for Regional One INC and Dash 224 LLC for damages caused by the aircraft HK-4107 arguing failure of LAN COLOMBIA AIRLINES customs duty to obtain import declaration when the aircraft in April 2010 entered Colombia for maintenance required by Regional One.

 

 

 

This case is being heard by the 45th Civil Court of the Bogota Circuit. In an interim decree issued August 16, 2016, the hearing under article 101 was set for February 2, 2017, this hearing was postponed at request of the parties and the Judge must resolve on a new date. When a reconciliation will be attempted, facts of the case will be set, the parties will conduct depositions and evidence will be decreed.

The Federal Court of the State of Florida decided on March 26, 2016 to approve Lan Colombia Airlines’s request to suspend the proceedings in the USA until the claim under way in Colombia is decided. The U.S. Court judge also closed the case administratively. The Federal Court of Appeal ratified the case closing in the U.S.A. on April 1, 2015. On October 1, 2015, Regional One petitioned that the U.S. court reopen the case. Lan Colombia Airlines presented its arguments and the Court sustained them on August 23, 2016, ratifying the closing of the case in the United States, so it continues to be closed.

  12,443

 

107

 

 

Company   Court   Case Number   Origin   Stage of trial  

Amounts

Committed (*)

                    ThUS$
                     

Tam Linhas

Aéreas S.A.

  Internal Revenue Service of Brazil   10880.722.355/2014-52  

On August 19th , 2014 the Federal Tax Service issued a notice of violation stating that compensation credits Program (PIS) and the Contribution for the Financing of Social Security COFINS by TAM are not directly related to the activity of air transport.

 

  An administrative objection was filed on September 17th, 2014. A first-instance ruling was rendered on June 1, 2016 that was partially favorable.  The separate fine was revoked. A voluntary appeal was filed on June 30, 2016, which is pending a decision by CARF.   53,967

 

Tam Viagens S.A.

 

 

 

Department of Finance to the municipality of São Paulo.

 

 

67.168.795 / 67.168.833 / 67.168.884 / 67.168.906 / 67.168.914 / 67.168.965

 

 

 

A claim was filed alleging infraction and seeking a fine because of a deficient basis for calculation of the service tax (ISS) because the company supposedly made incorrect deductions.

 

 

We received notice of the petition on December 22, 2015. The objection was filed on January 19, 2016. The company was notified on November 23, 2016 of the decision that partially sustained the interim infringement ruling. An ordinary appeal was filed on December 19, 2016 before the Municipal Tax Council of Sao Paulo and a judgment is pending.

 

 

89,624

 

Tam Linhas Aéreas S.A.

 

 

 

Labor Court of São Paulo.

 

 

 

0001734-78.2014.5.02.0045

 

 

 

Action filed by the Ministry of Labor, which requires compliance with legislation on breaks, extra hours and others.

 

 

Early stage. Eventually could affect the operations and control of working hours of employees. The company won in the first instance, but an appeal by the Union is expected.

 

 

16,211

                     
TAM S.A.   Conselho Administrativo de Recursos Fiscais.  

13855.720077/2014-02

 

 

Notice of an alleged infringement presented by Secretaria da Receita Federal do Brasil requiring the payment of IRPJ and CSLL, taxes related to the income earned by TAM on March, 2011, in relation of the reduction of the statute capital of Multiplus S.A. 

  On January 12, 2014, it was filed an appeal against the object of the notice of infringement. Currently, the company is waiting for the court judgment regarding the appeal filed in the Conselho Administrativo de Recursos Fiscais (CARF) The case will be put into the system again for re-assignment for hearing and reporting because of the departure of Eduardo de Andrade, a CARF council member.  

104,423

 

 

108

 

 


Company 		  Court  

Case Number

 

  Origin   Stage of trial  

Amounts

Committed (*)

                    ThUS$
                     
Tam Linhas Aereas S.A.  

1° Civil Court of Comarca of Bauru/SP.

 

  0049304-37.2009.8.26.0071/1   That action is filed by the current complainants against the defendant, TAM Linhas Aéreas S / A, for receiving compensation for material and moral damages suffered as a result of an accident with one of its aircraft, which landed on adjacent lands to the Bauru airport, impacting the vehicle of Ms. Savi Gisele Marie de Seixas Pinto and William Savi de Seixas Pinto, causing their death. The first was the wife and mother of the complainants and the second, son and brother, respectively.  

Currently under the enforcement phase of the sentence. ThUS$4.770 in cash was deposited in guarantee. A procedural agreement was made for 23 million reals (ThUS$7,057) on September 23, 2016.

 

  7,057
                     

Aerolinhas Brasileiras S.A.

 

 

Labor Court of Campinas.

 

 

0010498-37.2014.5.15.0095

 

  Lawsuit filed by the National Union of aeronauts, requiring weekly rest payment   (DSR) scheduled stopovers, displacement and moral damage.  

An agreement for ThUS$2,732 was reached with the Union on August 2, 2016. Payment is now being made.

 

  16.365
                     
TAM Linhas Aéreas S.A.   Sao Paulo Labor Court, Sao Paulo   0000009-45.2016.5.02.090  

The Ministry of Labor filed an action seeking that the company adapt the ergonomics and comfort of seats.

 

  The case will be closed next month because the Ministry of Labor withdrew its complaint.   15,917

 

- In order to deal with any financial obligations arising from legal proceedings in effect at December 31, 2016, whether civil, tax, or labor, LATAM Airlines Group S.A. and Subsidiaries, has made provisions, which are included in Other non-current provisions that are disclosed in Note 21.

 

- The Company has not disclosed the individual probability of success for each contingency in order to not negatively affect its outcome.

 

(*) The Company has reported the amounts involved only for the lawsuits for which a reliable estimation can be made of the financial impacts and of the possibility of any recovery, pursuant to Paragraph 86 of IAS 37 Provisions, Contingent Liabilities and Contingent Assets.

 

109

 

 

II. Governmental Investigations.

 

1) On July 25, 2016, LATAM reached agreements with the U.S. Department of Justice (“DOJ”) and the U.S. Securities and Exchange Commission (“SEC”) regarding the investigation of payments for US$1,150,000 by Lan Airlines S.A. in 2006-2007 to a consultant advising it in the resolution of labor matters in Argentina.

 

The purpose of the investigation was to determine whether these payments violated the U.S. Foreign Corrupt Practices Act (“FCPA”) that: (i) forbids bribery of foreign government authorities in order to obtain a commercial advantage; and (ii) requires the companies that must abide by the FCPA to keep appropriate accounting records and implant an adequate internal control system. The FCPA is applicable to LATAM because of its ADR program in effect on the U.S. securities market.

 

After an exhaustive investigation, the DOJ and SEC concluded that there was no violation of the bribery provisions of the FCPA, which is consistent with the results of LATAM’s internal investigation. However, the DOJ and SEC consider that LAN accounted for these payments incorrectly and, consequently, infringed the part of the FCPA requiring companies to keep accurate accounting records. These authorities also consider that LAN’s internal controls in 2006-2007 were weak, so LAN would have also violated the provisions in the FCPA requiring it to maintain an adequate internal control system.

 

The agreements signed, included the following:

 

(a)    The agreement with the DOJ involves: (i) entering into a Deferred Prosecution Agreement (“DPA”), which is a public contract under which the DOJ files public charges alleging an infringement of the FCPA accounting regulations. LATAM is not obligated to answer these charges, the DOJ will not pursue them for a period of 3 years, and the DOJ will dismiss the charges after expiration of that 3-year period provided LATAM complies with all terms of the DPA. In exchange, LATAM admitted events described in the DOJ charges for infringement to the FCPA rules on accounting records and agreed to pay the negotiated fine explained below and abide by other terms stipulated in the agreement; (ii) clauses in which LATAM admits that the payments to the consultant in Argentina were incorrectly accounted for and that at the time those payments were made (2006-2007), it did not have adequate internal controls in place; (iii) LATAM’s agreement to have an outside consultant monitor, evaluate and report to the DOJ on the effectiveness of LATAM’s compliance program for a period of 27 months; and LATAM’s agreement to continue evaluating and reporting directly to the DOJ on the effectiveness of its compliance program for a period of 9 months after the consultant’s work concludes; and (iv) paying a fine estimated to total approximately ThUS$ 12,750.

 

(b)    The agreement with the SEC involves: (i) accepting a Cease and Desist Order, which is an administrative resolution of the SEC closing the investigation, in which LATAM will accept certain obligations and statements of fact that are described in the document; (ii) accepting the same obligations regarding the consultant mentioned above; and (iii) paying the sum of ThUS$ 6,744, plus interest of ThUS$ 2,694.

 

110

 

 

As at December 31, 2016, a balance of ThUS$ 4,719 was payable to the SEC, as reported in Note 20 - Trade payables and other payables.

 

2) LATAM Airlines Ecuador was given notice on August 26, 2016 of an investigation of LATAM Airlines Ecuador and two other airlines begun, at its own initiative, by one of the Investigative Departments of the Ecuadoran Market Power Control Commission, limited to alleged signs of conscious parallelism in relation to specific fares on one domestic route in Ecuador from August 2012 to February 2013. The Investigative Department had 180 days (due February 21, 2017) extendable for another 180 days, to resolve on whether to close the investigation or file charges against two or more of the parties involved, only event in which a process will be opened. On February 21, 2017, the period of 180 days was extended for another 180 days requesting additional information. LATAM Airlines Ecuador is cooperating with the authority and has hired a law firm and an economist expert in the subject to advise the company during this process.

 

3) LATAM received two Information Requests from the Central-North Metropolitan Region Prosecutor’s Office, one on October 25, 2016 and the other on November 11, 2016, requesting information relating to the investigation of payments made by Lan Airlines S.A. to a consultant advising it on the solution to labor matters in Argentina in the years 2006-2007. The information requested in both Requests has been provided.

 

NOTE 32 - COMMITMENTS

 

(a) Loan covenants

 

With respect to various loans signed by the Company for the financing of Boeing 767, 767F, 777F and 787 aircraft, which carry the guarantee of the United States Export–Import Bank, limits have been set on some of the Company’s financial indicators on a consolidated basis. Moreover, and related to these same contracts, restrictions are also in place on the Company’s management in terms of its ownership and disposal of assets.

 

The Company and its subsidiaries do not maintain financial credit contracts with banks in Chile that indicate some limits on financial indicators of the Company or its subsidiaries.

 

On March 30, 2016, LATAM structured a Revolving Credit Facility granted by with aircraft, engines, spare parts and supplies for a total amount available of US$ 325 million, this line includes restrictions minimum liquidity level as the consolidated company and individual level as for companies LATAM Airlines Group S.A. and TAM Linhas Aereas S.A.

 

At December 31, 2016, the Company is in compliance with all indicators detailed above.

 

111

 

 

(b) Commitments under operating leases as lessee

 

Details of the main operating leases are as follows:

 

        As of     As of  
        December 31,     December 31,  
Lessor   Aircraft   2016     2015  
                 
Aircraft 76B-26329 Inc.   Boeing 767     1       1  
Aircraft 76B-27615 Inc.   Boeing 767     1       1  
Aircraft 76B-28206 Inc.   Boeing 767     1       1  
Aviación Centaurus, A.I.E.   Airbus A319     3       3  
Aviación Centaurus, A.I.E.   Airbus A321     1       1  
Aviación Real A.I.E.   Airbus A319     1       1  
Aviación Real A.I.E.   Airbus A320     1       1  
Aviación Tritón A.I.E.   Airbus A319     3       3  
Avolon Aerospace AOE 19 Limited   Airbus A320     1       1  
Avolon Aerospace AOE 20 Limited   Airbus A320     1       1  
Avolon Aerospace AOE 6 Limited   Airbus A320     1       1  
Avolon Aerospace AOE 62 Limited   Boeing 777     1       1  
AWAS 5125 Trust   Airbus A320     -       1  
AWAS 5178 Limited   Airbus A320     -       1  
AWAS 5234 Trust   Airbus A320     1       1  
Baker & Spice Aviation Limited   Airbus A320     1       1  
Bank of America   Airbus A321     2       3  
CIT Aerospace International   Airbus A320     2       2  
ECAF I 1215 DAC   Airbus A320     1       1  
ECAF I 2838 DAC   Airbus A320     1       1  
ECAF I 40589 DAC   Boeing 777     1       1  
Eden Irish Aircr Leasing MSN 1459   Airbus A320     1       1  
GECAS Sverige Aircraft Leasing Worldwide AB   Airbus A320     1       3  
GFL Aircraft Leasing Netherlands B.V.   Airbus A320     1       1  
IC Airlease One Limited   Airbus A321     1       -  
International Lease Finance Corporation   Boeing 767     -       1  
JSA Aircraft 38484, LLC   Boeing 787     1       1  
JSA Aircraft 7126, LLC   Airbus A320     1       -  
JSA Aircraft 7128, LLC   Airbus A321     1       -  
JSA Aircraft 7239, LLC   Airbus A321     1       -  
JSA Aircraft 7298, LLC   Airbus A321     1       -  
Macquarie Aerospace Finance 5125-2 Trust   Airbus A320     1       -  
Macquarie Aerospace Finance 5178 Limited   Airbus A320     1       -  
Magix Airlease Limited   Airbus A320     1       2  
MASL Sweden (1) AB   Airbus A320     -       1  
MASL Sweden (2) AB   Airbus A320     -       1  

 

112

 

 

        As of     As of  
        December 31,     December 31,  
Lessor   Aircraft   2016     2015  
                     
MASL Sweden (7) AB   Airbus A320     -       1  
MASL Sweden (8) AB   Airbus A320     1       1  
Merlin Aviation Leasing (Ireland) 18 Limited   Airbus A320     1       -  
NBB Cuckoo Co., Ltd   Airbus A321     1       1  
NBB Grosbeak Co., Ltd   Airbus A321     1       1  
NBB Redstart Co. Ltd   Airbus A321     1       -  
NBB-6658 Lease Partnership   Airbus A321     1       1  
NBB-6670 Lease Partnership   Airbus A321     1       1  
Orix Aviation Systems Limited   Airbus A320     5       2  
PAAL Aquila Company Limited   Airbus A321     2       -  
PAAL Gemini Company Limited   Airbus A321     1       -  
SASOF II (J) Aviation Ireland Limited   Airbus A319     1       1  
Shenton Aircraft Leasing Limited   Airbus A320     1       1  
SKY HIGH V LEASING COMPANY LIMITED   Airbus A320     -       1  
Sky High XXIV Leasing Company Limited   Airbus A320     5       5  
Sky High XXV Leasing Company Limited   Airbus A320     2       2  
SMBC Aviation Capital Limited   Airbus A320     6       7  
SMBC Aviation Capital Limited   Airbus A321     2       2  
Sunflower Aircraft Leasing Limited   Airbus A320     -       2  
TC-CIT Aviation Ireland Limited   Airbus A320     1       1  
Volito Aviation August 2007 AB   Airbus A320     2       2  
Volito Aviation November 2006 AB   Airbus A320     2       2  
Volito November 2006 AB   Airbus A320     2       2  
Wells Fargo Bank North National Association   Airbus A319     3       3  
Wells Fargo Bank North National Association   Airbus A320     2       2  
Wells Fargo Bank Northwest National Association   Airbus A320     7       7  
Wells Fargo Bank Northwest National Association   Airbus A330     -       2  
Wells Fargo Bank Northwest National Association   Boeing 767     3       3  
Wells Fargo Bank Northwest National Association   Boeing 777     6       6  
Wells Fargo Bank Northwest National Association   Boeing 787     11       7  
Wells Fargo Bank Northwest National Association   Airbus A350     2       -  
Wilmington Trust Company   Airbus A319     1       1  
Total         111       106  

 

The rentals are shown in results for the period for which they are incurred.

 

113

 

 

The minimum future lease payments not yet payable are the following:

 

    As of     As of  
    December 31,     December 31,  
    2016     2015  
    ThUS$     ThUS$  
             
No later than one year     533,319       513,748  
Between one and five years     1,459,362       1,281,454  
Over five years     1,262,509       858,095  
Total     3,255,190       2,653,297  

 

The minimum lease payments charged to income are the following:

 

    For the period ended  
    December 31,  
    2016     2015  
    ThUS$     ThUS$  
             
Minimum operating lease payments     568,979       525,134  
Total     568,979       525,134  

 

In the first quarter of 2015, two Boeing 787-9 aircraft were leased for a period of twelve years each. On the other hand, two Airbus A320-200 aircraft were returned. In the second quarter of 2015, two Airbus A321-200 aircraft and one Boeing 787-9 aircraft were leased for a period of twelve years each. On the other hand, one Airbus A320-200 aircraft and two Airbus A330-200 aircraft were returned. In the third quarter of 2015, five Airbus A321-200 aircraft and one Boeing 787-9 aircraft were leased for a period of twelve years each. On the other hand, one Airbus A330-200 aircraft was returned. In the fourth quarter of 2015, one Airbus A330-200 aircraft was returned.

 

In the first quarter of 2016, two Boeing 787-9 aircraft were leased for a period of twelve years each. On the other hand and one Airbus A320-200 aircraft was returned. In the second quarter of 2016, three Airbus A321-200 aircraft were leased for a period of ten years each and two Boeing 787-9 aircraft were leased for a period of twelve years each. On the other hand, one Airbus A320-200 aircraft and one Boeing 767-300ER aircraft were returned. In the third quarter of 2016, three Airbus A321-200 aircraft and one Airbus A320- NEO aircraft were leased for a period of ten years each, and one Airbus A350-900 aircraft was leased for a period of twelve years. On the other hand and one Airbus A320-200 aircraft was returned. In the fourth quarter of 2016, one Airbus A350-900 aircraft was leased for a period of twelve years and one Airbus A321-200 aircraft was leased for a period of ten years. On the other hand, three Airbus A320-200 aircraft and two Airbus A330-200 aircraft were returned.

 

The operating lease agreements signed by the Company and its subsidiaries state that maintenance of the aircraft should be done according to the manufacturer’s technical instructions and within the margins agreed in the leasing agreements, a cost that must be assumed by the lessee. The lessee should also contract insurance for each aircraft to cover associated risks and the amounts of these assets. Regarding rental payments, these are unrestricted and may not be netted against other accounts receivable or payable between the lessor and lessee.

 

114

 

 

At December 31, 2016 the Company has existing letters of credit related to operating leasing as follows:

 

            Value     Release
Creditor Guarantee   Debtor   Type   ThUS$     date
GE Capital Aviation Services Limited   Lan Cargo S.A.   Two letter of credit     7,530     Sep 17, 2017
Wells Fargo Bank North N.A.   Lan Cargo S.A.   One letter of credit     5,000     May 25, 2017
Bank of America   LATAM Airlines Group S.A.   Three letter of credit     1,044     Jul 2, 2017
Engine Lease Finance Corporation   LATAM Airlines Group S.A.   One letter of credit     4,750     Oct 8, 2017
GE Capital Aviation Services Ltd.   LATAM Airlines Group S.A.   Eight letter of credit     34,665     Feb 7, 2017
International Lease Finance Corp   LATAM Airlines Group S.A.   Three letter of credit     1,450     Feb 4, 2017
ORIX Aviation Systems Limited   LATAM Airlines Group S.A.   One letter of credit     3,255     Aug 31, 2017
SMBC Aviation Capital Ltd.   LATAM Airlines Group S.A.   Two letter of credit     13,569     Aug 14, 2017
Wells Fargo Bank   LATAM Airlines Group S.A.   Nine letter of credit     15,160     Feb 8, 2017
CIT Aerospace International   Tam Linhas Aéreas S.A.   One letter of credit     6,000     Oct 25, 2017
RBS Aerospace Limited   Tam Linhas Aéreas S.A.   One letter of credit     13,096     Jan 29, 2017
Wells Fargo Bank North N.A.   Tam Linhas Aéreas S.A.   One letter of credit     5,500     Jul 14, 2017
              111,019      

 

(c) Other commitments

 

At December 31, 2016 the Company has existing letters of credit, certificates of deposits and warranty insurance policies as follows:

 

            Value     Release
Creditor Guarantee   Debtor   Type   ThUS$     date
                   
Servicio Nacional de Aduana del Ecuador   Líneas Aéreas Nacionales del Ecuador S.A.   Four letter of credit     1,705     Aug 5, 2017
Corporación Peruana de Aeropuertos y Aviación Comercial   Lan Perú S.A.   Six letter of credit     3,813     Jan 31, 2017
Lima Airport Partners S.R.L.   Lan Perú S.A.   Twenty two letter of credit     3,805     Mar 3, 2017
Superintendencia Nacional de Aduanas y de Administración Tributaria   Lan Perú S.A.   Four letter of credit     33,500     Mar 20, 2017
Aena Aeropuertos S.A.   LATAM Airlines Group S.A.   Four letter of credit     2,014     Nov 15, 2017
American Alternative Insurance Corporation   LATAM Airlines Group S.A.   Six letter of credit     3,490     Apr 5, 2017
Deutsche Bank A.G.   LATAM Airlines Group S.A.   One letter of credit     30,000     Mar 31, 2017
Dirección General de Aeronáutica Civil   LATAM Airlines Group S.A.   Fifty two letter of credit     18,477     Jan 31, 2017
Empresa Pública de Hidrocarburos del Ecuador EP Petroecuador   LATAM Airlines Group S.A.   One letter of credit     5,500     Jun 17, 2017
JP Morgan Chase   LATAM Airlines Group S.A.   One letter of credit     10,000     Jun 17, 2017
Metropolitan Dade County   LATAM Airlines Group S.A.   Ten letter of credit     2,553     Mar 13, 2017
The Royal Bank of Scotland plc   LATAM Airlines Group S.A.   One letter of credit     5,000     May 20, 2017
4ª Vara Mista de Bayeux   Tam Linhas Aéreas S.A.   One insurance policies guarantee     1,060     Mar 25, 2021
6ª Vara Federal da Subseção   Tam Linhas Aéreas S.A.   Two insurance policies guarantee     24,969     Jan 4, 2018
8ª Vara Federal da Subseção de Campinas SP   Tam Linhas Aéreas S.A.   One insurance policies guarantee     12,894     May 19, 2020
Conselho Administrativo de Conselhos Federais   Tam Linhas Aéreas S.A.   One insurance policies guarantee     6,704     Oct 20, 2021
Fundação de Proteão de Defesa do Consumidor Procon   Tam Linhas Aéreas S.A.   Two insurance policies guarantee     3,276     Jan 21, 2021
União Federal Vara Comarca de DF   Tam Linhas Aéreas S.A.   Two insurance policies guarantee     2,696     Nov 9, 2020
União Federal Vara Comarca de SP   Tam Linhas Aéreas S.A.   One insurance policies guarantee     19,557     Feb 22, 2021
              191,013      

 

115

 

 

NOTE 33 - TRANSACTIONS WITH RELATED PARTIES

 

(a) Details of transactions with related parties as follows:

 

                        Transaction amount
        Nature of       Nature of       with related parties
        relationship with   Country   related parties       As of December 31,
Tax No.   Related party   related parties   of origin   transactions   Currency   2016     2015  
                        ThUS$     ThUS$  
96.810.370-9   Inversiones Costa Verde Ltda. y CPA.   Related  director   Chile   Tickets sales   CLP     6       15  
                                     
65.216.000-K   Comunidad Mujer   Related  director   Chile   Services provided for advertising   CLP     (12 )     (10 )
                Tickets sales   CLP     9       2  
                                     
78.591.370-1   Bethia S.A and subsidiaries   Related  director   Chile   Services received of cargo transport   CLP     (394 )     (259 )
                Services received from National and International Courier   CLP     (285 )     (227 )
                Services provided of cargo transport   CLP     192       30  
                                     
65.216.000-K   Viajes Falabella Ltda.   Related  director   Chile   Sales commissions   CLP     (727 )     (50 )
                                     
79.773.440-3   Transportes San Felipe S.A   Related  director   Chile   Services received of transfer of passengers   CLP     (84 )     (127 )
                Tickets sales   CLP     3       7  
                                     
87.752.000-5   Granja Marina Tornagaleones S.A.   Common shareholder   Chile   Tickets sales   CLP     76       117  
                                     
Foreign   Consultoría Administrativa Profesional S.A. de C.V.   Associate   Mexico   Professional counseling services received   MXN     (2,563 )     (1,191 )
                                     
Foreign   Inversora Aeronáutica Argentina   Related  director   Argentina   Leases as lessor   ARS     (264 )     (269 )
                Revenue billboard advertising maintaining   US$     -       1  
                                     
Foreign   TAM Aviação Executiva                                
    e Taxi Aéreo S/A   Related  director   Brazil   Services provided by sale of tickets   BRL     2       2  
                Services proviived of cargo transport   BRL     (122 )     (63 )
                Services received at airports   BRL     7       5  

 

116

 

 

The balances of Accounts receivable and accounts payable to related parties are disclosed in Note 9.

 

Transactions between related parties have been carried out on free-trade conditions between interested and duly-informed parties.

 

(b) Compensation of key management

 

The Company has defined for these purposes that key management personnel are the executives who define the Company’s policies and major guidelines and who directly affect the results of the business, considering the levels of Vice-Presidents, Chief Executives and Directors (Senior).

 

    For the period ended  
    December 31,  
    2016     2015  
    ThUS$     ThUS$  
             
Remuneration     16,514       17,185  
Management fees     556       547  
Non-monetary benefits     778       864  
Short-term benefits     23,459       19,814  
Share-based payments     8,085       10,811  
Total     49,392       49,221  

 

NOTE 34 - SHARE-BASED PAYMENTS

 

(a) Compensation plan for increase of capital

 

Compensation plans implemented by providing options for the subscription and payment of shares that have been granted by LATAM Airlines Group S.A. to employees of the Company and its subsidiaries, are recognized in the financial statements in accordance with the provisions of IFRS 2 "Share-based Payment”, showing the effect of the fair value of the options granted under compensation in linear between the date of grant of such options and the date on which these irrevocable.

 

(a.1) Compensation plan 2011

 

On December 21, 2016, the subscription and payment period of the 4,800,000 shares corresponding to the compensation plan approved at the Extraordinary Shareholders' Meeting held on December 21, 2011, expired.

 

Of the total shares allocated to the 2011 Compensation Plan, only 10,282 shares were subscribed and paid, having been placed on the market in January 2014. In view of the above, at the expiration date, the 2011 Compensation Plan had a balance of 4,789,718 shares pending of subscription and payment, which was deducted from the authorized capital of the Company.

 

117

 

 

    Number  
    of share  
    options  
       
Share options in agreements of share- based payments, as of January 1, 2015     4,202,000  
Share options granted     406,000  
Share options cancelled     (90,000 )
Share options in agreements of share- based payments, as of December 31, 2015     4,518,000  
         
Share options in agreements of share- based payments, as of January 1, 2016     4,518,000  
Executives resign options (*)     (4,172,000 )
Share options expired     (346,000 )
Share options in agreements of share- based payments, as of December 31, 2016     -  

 

These options was valued and recorded at fair value at the grant date, determined by the "Black-Scholes-Merton”. The effect on income to December 2016 corresponds to ThUS$ 2,989 (ThUS$ 10,811 at December 31, 2015).

 

(a.2) Compensation plan 2013

 

At the Extraordinary Shareholders’ Meeting held on June 11, 2013, the Company’s shareholders approved motions including increasing corporate equity, of which 1,500,000 shares were allocated to compensation plans for employees of the Company and its subsidiaries, in conformity with the stipulations established in Article 24 of the Corporations Law. With regard to this compensation, a defined date for implementation does not exist.

 

(b) Compensation plan 2016-2018

 

The company implemented a retention plan long-term for executives, which lasts until December 2018, with a vesting period between October 2018 and March 2019, which consists of an extraordinary bonus whose calculation formula is based on the variation the value to experience the action of LATAM Airlines Group S.A. for a period of time.

 

This benefit is recognized in accordance with the provisions of IFRS 2 "Share-based Payments" and has been considered as cash settled award and therefore recorded at fair value as a liability, which is updated to the closing date of each financial statement with effect on profit or loss.

 

    Unit bases
granted 		 
Units bases,        
balance at December 31, 2016     4,719,720  

 

118

 

 

The fair value has been determined on the basis of the best estimate of the future value of the Company share multiplied by the number of units granted bases.

 

At December 31, 2016, the carrying amount of ThUS$ 4,442, is classified under "Administrative expenses" in the Consolidated Statement of Income by Function.

 

(c) Subsidiaries compensation plans

 

(c.1) Stock Options

 

TAM Linhas Aereas S.A. and Multiplus S.A., both subsidiaries of TAM S.A., have outstanding stock options at December 31, 2016, which amounted to 96,675 shares and 394,698 shares, respectively (at December 31, 2015, the distribution of outstanding stock options amounted to 394,698 for Multiplus S.A. and 96,675 shares TAM Linhas Aéreas S.A.).

 

TAM Linhas Aéreas S.A.

 

    4th Grant        
Description   05/28/2010     Total  
Outstanding option number as December 31, 2015     96,675       96,675  
Outstanding option number as December 31, 2016     96,675       96,675  

 

Multiplus S.A.

 

                4nd Extraordinary        
    3rd Grant     4th Grant     Grant        
Description   03/21/2012     04/03/2013     11/20/2013     Total  
Outstanding option number as December 31, 2015     102,621       255,995       159,891       518,507  
Outstanding option number as December 31, 2016     84,249       173,399       137,050       394,698  

 

The Options of TAM Linhas Aéreas S.A., under the plan's terms, are divided into three equal parts and employees can run a third of its options after three, four and five years respectively, as long as they remain employees of the company. The agreed term of the options is seven years.

 

For Multiplus S.A., the plan's terms provide that the options granted to the usual prizes are divided into three equal parts and employees may exercise one-third of their two, three and four, options respectively, as long as they keep being employees of the company. The agreed term of the options is seven years after the grant of the option. The first extraordinary granting was divided into two equal parts, and only half of the options may be exercised after three years and half after four years. The second extraordinary granting was also divided into two equal parts, which may be exercised after one and two years respectively.

 

Both companies have an option that contains a "service condition" in which the exercise of options depends exclusively on the delivery services by employees during a predetermined period. Terminated employees will be required to meet certain preconditions in order to maintain their right to the options.

 

119

 

 

The acquisition of the share's rights, in both companies is as follows:

 

    Number of shares     Number of shares  
    Accrued options     Non accrued options  
    As of     As of     As of     As of  
    December 31,     December 31,     December 31,     December 31,  
Company   2016     2015     2016     2015  
TAM Linhas Aéreas S.A.     -       -       96,675       96,675  
Multiplus S.A.     -       -       394,698       518,507  

 

In accordance with IFRS 2 - Share-based payments, the fair value of the option must be recalculated and recorded as a liability of the Company once payment is made in cash (cash-settled). The fair value of these options was calculated using the “Black-Scholes-Merton” method, where the cases were updated with information LATAM Airlines Group S.A. There is no value recorded in liabilities and in income at December 31, 2016 (at December 31, 2015 not exist value recorded in liabilities and in incomes).

 

(c.2) Payments based on restricted stock

 

In May of 2014 the Management Council of Multiplus S.A. approved a plan to grant restricted stock, a total of 91,103 ordinary, registered book entry securities with no face value, issued by the Company to beneficiaries.

 

The quantity of restricted stock units was calculated based on employees’ expected remunerations divided by the average price of shares in Multiplus S.A. traded on the BM&F Bovespa exchange in the month prior to issue, April of 2014. This benefits plan will only grant beneficiaries the right to the restricted stock when the following conditions have been met:

 

a.          Compliance with the performance goal defined by this Council as return on Capital Invested.

 

b.          The Beneficiary must remain as an administrator or employee of the Company for the period running from the date of issue to the following dates described, in order to obtain rights over the following fractions: (i) 1/3 (one third) after the 2nd year from the issue date; (ii) 1/3 (one third) after the 3rd year from the issue date; (iii) 1/3 (one third) after the 4th year from the issue date.

 

120

 

 

Number shares in circulation

 

                      Not acquired due        
    Opening                 to breach of employment     Closing  
    balance     Granted     Exercised     retention conditions     balance  
From January 1                                        
to December 31, 2015     91,103       119,731       -       (34,924 )     175,910  
From January 1                                        
to December 31, 2016     175,910       138,282       (15,811 )     (60,525 )     237,856  

 

NOTE 35 - STATEMENT OF CASH FLOWS

 

(a)          The Company has done significant non-cash transactions mainly with financial leases, which are detailed in Note 17 letter (d), additional information in numeral (iv) Financial leases.

 

(b)          Other inflows (outflows) of cash:

 

    For the periods ended  
    December 31,  
    2016     2015  
    ThUS$     ThUS$  
Guarantees     (51,559 )     (2,125 )
Fuel hedge     (50,029 )     (243,587 )
Currency hedge     (39,534 )     1,802  
Court deposits     (33,635 )     (6,314 )
Change reservation systems     -       11,000  
DOJ fine     (12,750 )     -  
Tax paid on bank transaction     (10,668 )     (7,176 )
Fuel derivatives premiums     (6,840 )     (20,932 )
SEC agreement     (4,719 )     -  
Bank commissions, taxes paid and other     (769 )     (5,137 )
Hedging margin guarantees     1,184       87,842  
Others     50       -  
Total Other inflows (outflows) Operation flow     (209,269 )     (184,627 )
                 
Recovery loans convertible into shares     8,896       20,000  
Certificate of bank deposits     -       3,497  
Tax paid on bank transaction     (3,716 )     (12,921 )
Others     (4,337 )     -  
Total Other inflows (outflows) Investment flow     843       10,576  
                 
Aircraft Financing advances     (125,149 )     (28,144 )
Loan guarantee     (74,186 )     -  
Settlement of derivative contracts     (29,828 )     (35,891 )
Credit card loan manager     -       3,227  
Early redemption of bonds TAM 2020     -       (15,328 )
Guarantees bonds emission     -       (26,111 )
Others     -       2,490  
Total Other inflows (outflows) Financing flow     (229,163 )     (99,757 )

 

 

121

 

 

(c) Dividends:

 

    For the periods ended  
    December 31,  
    2016     2015  
    ThUS$     ThUS$  
             
Multiplus S.A     (40,823 )     (34,632 )
Lan Perú S.A     (400 )     (400 )
Total dividends paid (*)     (41,223 )     (35,032 )

 

(*) Dividends paid to minority shareholders

 

NOTE 36 - THE ENVIRONMENT

 

LATAM Airlines Group S.A. manages environmental issues at the corporate level, centralized in Environmental Management. There is a commitment to the highest level to monitor the company and minimize their impact on the environment, where continuous improvement and contribute to the solution of global climate change problems, generating added value to the company and the region, are the pillars of his administration.

 

One function of Environmental Management, in conjunction with the various areas of the Company, is to ensure environmental compliance, implementing a management system and environmental programs that meet the increasingly demanding requirements globally; well as continuous improvement programs in their internal processes that generate environmental and economic benefits and to join the currently completed.

 

The Environment Strategy LATAM Airlines Group S.A. is called Climate Change Strategy and it is based on the aim of being a world leader in Climate Change and Eco-efficiency, which is implemented under the following pillars:

 

i. Carbon Footprint
ii. Eco-Efficiency
iii. Sustainable Alternative Energy
iv. Standards and Certifications

 

For 2016, were established the following topics:

 

1. Advance in the implementation of an Environmental Management System;
2. Manage the Carbon Footprint of our emissions by ground operations;
3. Corporate Risk Management;
4. Corporate strategy to meet the global target of aviation to have a carbon neutral growth by 2020.

 

Thus, during 2016, we have worked in the following initiatives:

 

- Advance in the implementation of an Environmental Management System for main operations of the Company, with an emphasis on Santiago. It is highlighted that the company during 2016 has recertified a certified management system, under ISO 14.001 at its facility in Miami.

 

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- Certification of stage 2 of IATA Environmental Assestment (IEnvA), the most advanced of this certification, been the third airline in the world to achieve this certification.
- Preparation of the environmental chapter for reporting sustainability of the Company, to measure progress on environmental issues.
- Answer to the Dow Jones Sustainability Index 2016 questionnaire, which the company responds annually.
- Measurement and external verification of the Corporate Carbon Footprint.

 

It is highlighted that in the 2016 LATAM Airlines Group maintained its selection in the index Dow Jones Sustainability in the global category, being the only two airlines that belong to this select group.

 

NOTE 37 - EVENTS SUBSEQUENT TO THE DATE OF THE FINANCIAL STATEMENTS

 

On January 18, 2017, the Company was notified of a civil suit filed by Inversiones Ranco Tres S.A., represented by Mr. Jorge Enrique Said Yarur against LATAM Airlines Group S.A., for supposed non-compliance of contractual obligations from the social contract of the Company, as well as the directors Ramón Eblen Kadiz, Jorge Awad Mehech, Juan Jose Cueto Plaza and main executives of the Company, Enrique Cueto Plaza and Ignacio Cueto Plaza, for the supposed noncompliance of their duties as directors and main executives of the Company. LATAM has hired specialist lawyers to answer the lawsuit. On March 10, 2017, the Court rejected the dilatory exceptions presented by LATAM.

 

On March 8th, 2017, LATAM received a third Requirement of Information from the Central-North Metropolitan Region Prosecutor’s Office requesting information relating to the investigation of payments made by Lan Airlines S.A. to a consultant advising it on the solution to labor matters in Argentina in the years 2006-2007.

 

Subsequent at December 31, 2016 until the date of issuance of these financial statements, there is no knowledge of financial facts or otherwise, that could significantly affect the balances or interpretation thereof.

 

LATAM Airlines Group S.A. and Subsidiaries’ consolidated financial statements as at December 31, 2016, have been approved by the Board of Director’s in an extraordinary meeting held on March 15, 2017.

 

 

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SIGNATURES

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

 

Date: March 16, 2017     LATAM AIRLINES GROUP S.A.
    By:  

/s/ Enrique Cueto

    Name:   Enrique Cueto
    Title:   Latam Airlines Group CEO

 

 

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